Competition Policy at the Intensive and Extensive Margins in General Equilibrium

Abstract

This paper examines welfare effects of competition policies in a general equilibrium model in which perfectly competitive and oligopolistic industries coexist and compete for a common factor of production. We first show that increasing the number of oligopolistic firms raises welfare if the oligopolists' production technology exhibits non-increasing returns to scale. Then, we address another competition policy modeled by an increase in the portion of perfectly competitive industries, finding that this policy improves welfare if decreasing returns of the oligopolists' technology are strong enough. These results suggest that the degree of returns to scale plays a key role for welfare-enhancing competition policy.