Upstream Monopoly, Asymmetric Competition and Social Welfare: Mechanisms IV

Seeing the development of China’s SOEs in recent years, one who cares about the China’s reform would have a question that why the profit of a small proportion of SOEs of large or medium scale can be so huge while the majority of SOEs struggle in the swamp of deficit? From the perspective of “asymmetric competition”, this chapter answers the following questions: (1) Why some large and medium state-owned enterprises(SOEs) can earn exorbitant profits in recent years? (2) How the monopoly of SOEs harm economic growth and social welfare? (3) Why the private enterprises(PEs) can not grow rapidly? We find that the SOEs’ profitable condition is that the ratio of SOEs’ marginal cost to PEs’ marginal cost is small enough, which depends on the number of enterprises and ownership structure of market. The large and medium SOEs’ profit is equivalent to a kind of hidden subsidies. We also find that it is important for private enterprises growth and social welfare to introduce competition in upstream market.