Competition, Commitment, and Welfare Unknown - 1995

This book examines one of the classical issues in theoretical welfare economics in general, and in theoretical industrial organization in particular - namely, the welfare effects of increasing competition among firms. In the orthodox literature on welfare economics and industrial organization, the desirability of competition in terms of social welfare, an idea which can be traced back to Adam Smith, is widely accepted, resulting in the policy-relevant belief that by increasing competition we can always improve social welfare. However, this orthodox view is challenged by another piece of conventional wisdom which is widely held among industrial policy authorities as well as people in business. According to this view, the adage 'doing to excess is as bad as not doing enough' is applicable to the welfare effects of competition as well, and government intervention for the purpose of controlling the damage caused by 'excessive competition' is proper and justified. The author examines whether promoting competition is indeed welfare-improving, or whether there exists any systematic cause for excessive competition which can be identified in the standard framework of welfare economics. Two questions are posed in looking at these issues: Can competition ever be excessive in the welfare-theoretic sense? Can policy intervention in the name of keeping excessive competition under control be justified? Starting from an elementary model of oligopoly and introducing several complexities step by step, the author shows that, for a wide class of situations where economies of scale prevail, competition can certainly be excessive in the welfare-theoretic sense, but that regulation of competition may causeserious distortions of its own. The latter distortions, he argues, should be weighed against market distortions arising from excessive competition before prescribing a policy mix of competition and regulation. Those who are interested in the proper role of industrial and competition policies in the market economics will find these theoretical results both illuminating and suggestive.