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

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  • Philippe Aghion
  • Mark Schankerman

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.

Suggested Citation

  • Philippe Aghion & Mark Schankerman, 2004. "On the welfare effects and political economy of competition-enhancing policies," Economic Journal, Royal Economic Society, vol. 114(498), pages 800-824, October.
    • Handle: RePEc:ecj:econjl:v:114:y:2004:i:498:p:800-824
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