Appendixes 2 and 3 are available on the Journal's website http://www.res.org.uk. We thank John Vickers for helpful discussions at an early stage of the research. We are grateful to two anonymous referees and the Editor, David de Meza, for very constructive comments on earlier drafts of this paper, and to Marco Schonborn and Josep Pigoan for research assistance.
On the welfare effects and political economy of competition-enhancing policies*
Version of Record online: 28 SEP 2004
The Economic Journal
Volume 114, Issue 498, pages 800–824, October 2004
How to Cite
Aghion, P. and Schankerman, M. (2004), On the welfare effects and political economy of competition-enhancing policies. The Economic Journal, 114: 800–824. doi: 10.1111/j.1468-0297.2004.00244.x
- Issue online: 28 SEP 2004
- Version of Record online: 28 SEP 2004
- Date of receipt of first submission: April 2002 Date of receipt of final typescript: November 2003
Vol. 120, Issue 542, F181, Version of Record online: 20 JAN 2010
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.