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Optimal Competition: A Benchmark for Competition Policy

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  • Boone, Jan

Abstract

This Paper introduces optimal competition: the best form of competition in an industry that a competition authority can achieve (given the information constraint that it cannot observe firms’ efficiency levels). We show that the optimal competition outcome in an industry becomes more competitive as more money is spent in the industry, as the competition authority puts less weight on producer surplus and more weight on employment. The relation between competition and entry costs is U-shaped. Finally conditions are derived under which Cournot competition is too competitive compared to the optimal competition outcome.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3766.

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Date of creation: Feb 2003
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Handle: RePEc:cpr:ceprdp:3766

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Keywords: competition; competition policy; liberalization versus regulation; objectives of competition policy;

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References

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  1. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects Of Regulation And Deregulation In Goods And Labor Markets," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 879-907, August.
  2. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: An Inverted-U Relationship," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 701-728, May.
  3. Bolton, P. & Brodley, J.F. & Riordan, M.H., 1999. "Predatory Pricing: Strategic Theory and Legal Policy," Discussion Paper 1999-82, Tilburg University, Center for Economic Research.
  4. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919.
  5. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, December.
  6. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  7. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  8. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers.
  9. Boone, Jan, 2000. "Competition," CEPR Discussion Papers 2636, C.E.P.R. Discussion Papers.
  10. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-90, October.
  11. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-94, March.
  12. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
  13. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
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Cited by:
  1. Juan Luis Jiménez & Javier Campos, 2004. "Efectos de la descentralización de la política de defensa de la competencia," Documentos de trabajo conjunto ULL-ULPGC 2004-09, Facultad de Ciencias Económicas de la ULPGC.
  2. Boone, J. & Ours, J.C. van & Wiel, H.P. van der, 2007. "How (Not) to Measure Competition," Discussion Paper 2007-014, Tilburg University, Tilburg Law and Economic Center.

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