Optimal Competition Policy in a Model of Vertical Production Chain

Abstract

The recent work of [6] and [8] has demonstrated that a country can increase its own utility, at a cost of its trading partner, by suppressing competition in that country’s market for nontradables. In other words, for a large country, suppression of competition can serve as a beggar-thy-neighbor policy similar to the imposition of a tariff. Since the end of the World War II, as represented by the series of GATT rounds, many countries have made continuous efforts to reduce existing tariff rates. As a result, remaining tariff rates in developed countries have become minimal. At the same time, a focus of international economic issues has shifted to non-tariff trade barriers. In particular, many policy makers have come to realize that the organization of a country’s internal markets, or in other words a country’s domestic competition policy, can serve as a trade impediment.1 In order to analyze the effect of such a policy, [6] and [8] develop general equilibrium models of vertical production chain, which can render the terms of trade effect of a change in the non-tradable sector tractable.