On the Welfare Effects and Political Economy of Competition-Enhancing Policies
Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Mark A. Schankerman
London School of Economics and Political Science; Centre for Economic Policy Research (CEPR)
We analyse the welfare effects of policies that intensify product market competition, and the channels through which they operate. Using a circular model of horizontal product differentiation with asymmetric costs, we study the effects of increased price competition on market selection among incumbent firms, cost reduction effort, and entry of new firms. The model also generates an endogenous demand for competition-enhancing or retarding policies arising from cost heterogeneity, and we demonstrate the possibility of a 'low-competition' political economy trap. Simulations of the model illustrate that the selection effects we analyse, which traditional cost-benefit analysis is unlikely to capture, can be large.
Number of Pages in PDF File: 40
Keywords: product market competition, selection, cost reduction, entry
JEL Classification: 111, 112, 610, 621working papers series
Date posted: June 20, 2003
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