We consider the interaction of two countries regarding strategic choices on privatization policy in an international mixed market under an open economy. We demonstrate that the equilibrium degree of privatization depends not only on the relative efficiency of the state-owned enterprise, but also on trade policy. We show that, if the state-owned enterprise is relatively inefficient, the competitive optimal degree of privatization is lower in open competition than in closed competition. We also show that the international competitive equilibrium involves less privatization and a higher tariff, even though they are jointly suboptimal.
