On the welfare effects and political economy of competition-enhancing policies

Philippe Aghion, Mark Schankerman

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish
Pages (from-to)800-824
Number of pages25
JournalEconomic Journal
Volume114
Issue number498
DOIs
StatePublished - 1 Oct 2004
Externally publishedYes

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