Antitrust in Open Economies

• Published date: 01 April 2007
• Date: 01 April 2007
• Pages: 463-483
• DOI: https://doi.org/10.1016/S0573-8555(06)82018-3
• Author: Joseph Francois,Henrik Horn

CHAPTER 18

Antitrust in Open Economies1

Joseph Francoisaand Henrik Hornb

aTinbergenInstitute, Rotterdam, and CEPR, London

bResearch Institute of Industrial Economics, Stockholm, and CEPR, London

Abstract

We examine antitrust rules in a two county general equilibrium trade model,

contrasting national and multilateral (cooperative) determination of competition

policy, exploring the properties of the policy equilibrium. It is not imperfect

competition, but variation in competitive stance between sectors that matters for

trading partners. Beggar-thy-neighbor competition policies relate to countries’

comparative advantages, and hurt the factor intensively used, or specific to, the

imperfectly competitive sector. Theyalso create a competitive advantage for ex-

port firms. FDI can be pro-competitive in this context, reducing the scope for

beggar-thy-neighbor policies and reducing the gains from a multilateral compe-

tition agreement.

Keywords: antitrust policy,competition policy, merger policy, trade and imper-

fect competition, FDI

JEL classifications: L4, F12, F3

18.1. Introduction

The prospect of a multilateral agreement on antitrust, with far reaching conse-

quences for national policy regimes, has sparked a nascent literature, including

Graham and Richardson (1997),Head and Ries (1997),Horn and Levinsohn

(2001), and Rysman (2001). While this literature addresses pertinent issues, it

has a major weakness in that it builds on partial equilibrium frameworks. It

thus implicitly assumes that the industry under study is the only industry with

problems with competition, and furthermore, that this sector is sufficiently small

1This chapter benefits from comments at a CEPR workshop on international competition policy

in Madrid and at a European Trade Study Group (ETSG) conference in Glasgow. It builds on a set

of earlier papers, including Francois and Horn (1988).

CONTRIBUTIONS TO ECONOMIC ANALYSIS © 2007 ELSEVIER B.V.

VOLUME 282 ISSN: 0573-8555 ALL RIGHTS RESERVED

DOI: 10.1016/S0573-8555(06)82018-3

464 J. Francois and H. Horn

relative to the rest of the economy to leave all factor prices unaffected by any

competition policy intervention. This literature is consequently in effect con-

cerned with the implications of discretionary policy interventions, rather than

with the effects of competition rules that are meant to be applied to a range of

industries and circumstances.2

The reliance on a partial equilibrium framework may be appropriate when the

concern is with a regulatory problem in a particular sector. But when the focus

is on the establishment of a general competition policy stance, such as when

formulating merger guidelines, it is clearly much less adequate. In particular, the

exercise of international competition policy will typically affect broad swathes

of the economies of the countries involvedand is thus likely to have strong cross-

sectoral ramifications. The purpose of this chapter is to examine some aspects of

an international competition policy agreement in a framework that takes account

of such ramifications. This will allow us to relate strategic and distributional

aspects of competition policy to basic trade theoretic concepts like comparative

advantage and terms-of-trade manipulation.

A general equilibrium approach (whether or not it addresses open economy

issues) generally offers a very different perspective on competition policy com-

pared to one based on the partial equilibrium assumptions. The conflict is no

longer between the “surpluses” of consumers and producers, or of different pro-

ducers, but between the real incomes of different factor owners. Even under a

consumer welfare standard, optimal policy may look very different when tak-

ing into account general equilibrium ramifications of competition policy. The

general equilibrium approach also yields more interesting building blocks for

examining political economy aspects of competition policy, by providing richer

modeling of the determinants of income distribution. A second aim of this chap-

ter is therefore to remind industrial organization analysts of the type of effects of

competition policy that their traditional approach misses. While the focus here

is on an international competition policy issue, several of the type of general

equilibrium effects that the analysis highlights are likely to be at play also in

a closed economy context. It seems to us that when addressing issues such as

the appropriate general stance vis-a-vis collusion or merger, as opposed to the

2Exceptions are Auquier and Caves (1979),andFrancois and Horn (1998). The general equilib-

rium implications of monopoly were also recognized in the early antitrust literature. The rule of

proportionality, proposed in the 1930s, targeted variations in markups across sectors. (See Kahn,

1935;Lerner, 1934,andRobinson, 1934.) In the modern antitrust literature, however, this is little

more than a footnote. There is also, of course, a huge literature on the impact of market structures on

trade policy in partial and general equilibrium. Traditionally, the general equilibrium branch of the

theory of trade under imperfect competition emphasizes monopolistic competition, while firm-level

interactions are modeled in partial equilibrium. (See Eaton and Grossman, 1986 and the papers col-

lected in Grossman, 1992). While the older literature on trade and oligopoly is mostly focused on

the partial equilibrium case (Markusen and Venables,1988) a recent set of papers by Neary (2003) is

focused on developing trade theory with oligopoly for the general equilibrium case. While the body

of work is substantial, policy space in this literature covers trade policy,and not competition policy.