Edited by Manfred Neumann and Jürgen Weigand
Chapter 4: Trade policy and competition policy: conflict vs. mutual support
Achieving allocative efficiency is a primary goal of both trade liberalization and competition policy. Efficient allocation of resources occurs when prices of goods reflect the marginal costs of production within a particular country, and when the prices of goods are also equated across countries. Trade liberalization generally targets the latter goal by reducing tariffs and other forms of barriers to the free flow of goods between countries. Competition policy, on the other hand, is primarily focused on limiting actions of firms that might restrict competition in the domestic market. By restricting these actions, the ability of firms to enjoy substantial markups above marginal costs is limited. The purpose of this chapter is to identify the linkages between trade policies and competition policies by examining a number of issues where these policies interact. Despite the similarity of the goals of these policies, the interactions between them vary substantially across these issues. For example, trade liberalization generally has the effect of reducing the markups of domestic firms when domestic firms are not colluding.
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