Abstract This paper reconsiders the ownership allocation effect in bilateral monopoly under the production-circulation-consumption framework. We find that ownership has a significant impact on market performance or allocation efficiency. The equilibrium analysis shows that the presence of state-owned enterprises can internalize monopoly externalities, reduce or eliminate the double marginalization, and stabilize the market price and sales. The result provide a theoretical explanation why China at the beginning of reform and opening up in the circulation retained many state-owned enterprises and adopted progressive reform patterns. When the market is in serious imperfect competition, or some part of supply chain is in a monopoly state, reserving some state-owned enterprises or implementing strict supervision, can benefit the social welfare and protect the consumer interest. This paper also confirms some economist views that state-owned commercial enterprise can stabilize the market in China’s economic transition process.
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