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

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  • Philippe Aghion
  • Mark Schankerman
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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. Copyright 2004 Royal Economic Society.

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    Bibliographic Info

    Article provided by Royal Economic Society in its journal The Economic Journal.

    Volume (Year): 114 (2004)
    Issue (Month): 498 (October)
    Pages: 800-824

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    Handle: RePEc:ecj:econjl:v:114:y:2004:i:498:p:800-824

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    Cited by:
    1. Gu, Yiquan & Wenzel, Tobias, 2012. "Transparency, entry, and productivity," Economics Letters, Elsevier, vol. 115(1), pages 7-10.
    2. Ela Glowicka, 2005. "Bailouts in a Common Market: A Strategic Approach," CIG Working Papers SP II 2005-20, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    3. Arghya Ghosh & Kieron Meagher, 2011. "The Political Economy of Infrastructure Investment: Competition, Collusion and Uncertainty," ANU Working Papers in Economics and Econometrics 2011-556, Australian National University, College of Business and Economics, School of Economics.

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