DP3766 Optimal Competition: A Benchmark for Competition Policy

Author(s): Jan Boone
Publication Date: February 2003
Keyword(s): competition, competition policy, liberalization versus regulation, objectives of competition policy
JEL(s): D40, L40, L50
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3766

This Paper introduces optimal competition: the best form of competition in an industry that a competition authority can achieve (given the information constraint that it cannot observe firms? efficiency levels). We show that the optimal competition outcome in an industry becomes more competitive as more money is spent in the industry, as the competition authority puts less weight on producer surplus and more weight on employment. The relation between competition and entry costs is U-shaped. Finally conditions are derived under which Cournot competition is too competitive compared to the optimal competition outcome.