Competition Policy in a Simple General Equilibrium Model

Abstract

Most industrial organization research, including applications to competition policy, undertakes partial equilibrium analysis in a single sector, often with a fixed number of firms. For welfare analysis, this approach is valid only if the rest of the economy is perfectly competitive, an assumption far from reality. This article examines competition policy in a simple, multisector, general equilibrium model with free entry and exit, allowing for differing distortions in each sector. Flows between sectors readily reverse standard prescriptions. But such results may be partially offset or overturned yet again when incorporating free entry and exit. Analysis of efficiencies also changes qualitatively.