On the Welfare Effects and Political Economy of Competition-Enhancing Policies

25 Pages Posted: 8 Oct 2004

See all articles by Philippe Aghion

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; 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)

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Abstract

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.

Suggested Citation

Aghion, Philippe and Schankerman, Mark A., On the Welfare Effects and Political Economy of Competition-Enhancing Policies. Economic Journal, Vol. 114, No. 498, pp. 800-824, October 2004. Available at SSRN: https://ssrn.com/abstract=597853

Philippe Aghion (Contact Author)

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mark A. Schankerman

London School of Economics and Political Science ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7518 (Phone)
+44 20 7831 1840 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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