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Competition policy in open economies

  • Aidan Hollis
  • Lasheng Yuan

What is the effect of national antitrust policies in a world with international trade? Traditionally, economic analysis of mergers has assumed a closed economy, which—as we show in this paper—may lead to errant policy in an open economy. We use a very simple model to highlight some key issues in optimal competition policy when trade is important, and compare the nationally optimal number of firms with the globally optimal number of firms in a free trade environment. We show that countries will choose a competition policy that is 'too strict' in the sense that they will prefer to have more firms than is globally optimal, implying that convergence in competition policy should generally lead to a reduction in the number of firms. We also examine the strategic interaction between domestic and foreign competition policy when there is free trade and show that small and large countries will react very differently to changes in the other's policies.

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Article provided by Taylor & Francis Journals in its journal International Economic Journal.

Volume (Year): 18 (2004)
Issue (Month): 2 ()
Pages: 179-193

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Handle: RePEc:taf:intecj:v:18:y:2004:i:2:p:179-193
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  1. Horn, Henrik & Levinsohn, James A, 2000. "Merger Policies And Trade Liberalization," CEPR Discussion Papers 2459, C.E.P.R. Discussion Papers.
  2. Barros, Pedro P. & Cabral, Luis, 1994. "Merger policy in open economies," European Economic Review, Elsevier, vol. 38(5), pages 1041-1055, May.
  3. Joseph Farrell and Carl Shapiro., 1988. "Horizontal Mergers: An Equilibrium Analysis," Economics Working Papers 8880, University of California at Berkeley.
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