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The Effectiveness of Competition Policy An Econometric Assessment in Developed and Developing Countries

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"Title: The Effectiveness of Competition Policy: An Econometric Assessment in Developed and Developing Countries Author: Dr. Danilo Samà Abstract: The ultimate objective of the present paper is to empirically investigate the effectiveness of
  The Effectiveness of Competition Policy:An Econometric Assessmentin Developed and Developing Countries  ∗ Danilo Sam`a † LUISS “Guido Carli” University of Rome2013 Abstract The ultimate objective of the present paper is to empirically investigate the effectivenessof competition policy in developed and developing countries. Although its importanceis continuously increasing, the effectiveness of competition policy still seems to lack theattention that it would deserve. At the present state of art, the number of academic con-tributions that attempts to estimate its impact on relevant economic variables appearsvery limited, in particular for the less developed countries. However, an empirical litera-ture aimed at measuring in objective terms the effect of competition policy on economicgrowth is emerging, starting from narrow variables of interest, such as Gross DomesticProduct and Total Factor Productivity. As a result, the principal aim of the currentwork is to contribute to this branch of research, focusing on broader indicators of marketperformance, in order to understand whether the presence of an antitrust authority has asignificant impact, thus an effective utility, on the level of competition of a country. Keywords:  Competition Authorities, Competition Policy, Developed Countries, Devel-oping Countries, Economic Development, Economic Growth, Law & Economics, MarketConcentration, Market Efficiency, Market Performance, New Institutional Economics, Po-litical Economy. JEL Classification:  C21; C26; K21; L40 ∗ The present paper was prepared during a visiting period at the Toulouse School of Economics (France). Theauthor, who remains the only responsible for the views expressed, would like to thank Prof. Roberto Pardolesi,Prof. Giuseppe Ragusa, Prof. Paul Seabright, Prof. Priscila Souza and Dr. Giacomo Luchetta for the kindcomments and suggestions offered and Prof. Stefan Voigt for the access to the dataset hereby indicated as Voigt(2009). The dataset built for the purposes of the current work is available upon request. † Ph.D. Candidate and Researcher in Economic Analysis of Competition Law and Law & Economics LABResearch Fellow at LUISS “Guido Carli” University of Rome, Faculty of Economics, Viale Romania 32, 00197Rome (Italy) (E-Mail: - Web-Site:   This was one of the best things about Lennon and McCartney,the competitive element within the team. It was great. But hard to live with   . Paul McCartney 1 Research Proposal The ultimate objective of the present paper is to investigate empirically the effec-tiveness of competition policy in developed and developing countries. Although itsimportance is continuously increasing, competition policy still seems to lack theattention it would deserve. At the present state of art, the number of academiccontributions that attempts to estimate its impact on relevant economic variablesappears very limited, in particular for the less developed countries. However, anempirical literature aimed at measuring in objective terms the effect of competitionpolicy on economic growth is emerging, starting from narrow variables of interest,such as Gross Domestic Product (GDP) and Total Factor Productivity (TFP).As a result, the principal aim of the current work is to contribute to this branchof research, focusing on broader indicators of market performance, in order to un-derstand whether the presence of an antitrust authority has a significant impact,thus an effective utility, on the level of competition of a country. In other terms,the research question behind the current work is rather straightforward: is a com-petition authority active in a developed or developing country able to implementeffectively its primary role? If not, which are the institutional functions and powersthat should be strengthened?From a policy perspective, the aim of the present paper is also to comprehendwhether the enforcement of a competition policy regime in a developing countryhas the same beneficial effects on the intensity of competition usually claimed bythe most developed countries. At the same time, it may be understood whetherindustrial and institutional differences jeopardizes the effectiveness of a such tool of political economy, so much that in emerging countries it would be more worth toassign funds and priority to other tools of economic development.1  2 Literature Review According to the mainstream economic school of thought, competition is the criticalprocess for a market economy to ensure the optimal allocation of resources and thehighest level of social welfare. As it is common knowledge, in fact, competitive mar-kets enable consumers to purchase better products at lower prices and incentivizefirms to improve the quality of the goods and services offered. However, notwith-standing its natural benefits, the functioning of competition is not automatic butmust be sustained through an intervention by the state, which normally occurs withthe adoption of a competition legislation and the creation of a competition authoritypredisposed to the role of promoter of market democracy. Nevertheless, despite thegeneral consensus, at least from a theoretical standpoint, on the necessity of foster-ing competition in order to support economic efficiency and fairness on the markets,what appears extremely surprising is the almost absence of academic contributionstrying to assess empirically the effectiveness of competition policy. In the presentsection, therefore, we provide a brief and exhaustive overview of the rather few re-sults obtained in the empirical literature.Dutz and Vagliasindi (2000) 1 are the first to overtake the traditional and subjec-tive indicators typical of the previous literature, which was limited to an evaluationof the competition legislations as “in the books”. The authors, in fact, exploitingcross-sectional data and looking at the actual practice in 18 transition countries,measure the effectiveness of the different competition policy regimes according tothree criteria (i.e. 1. enforcement; 2. competition advocacy; 3. institutional effec-tiveness). The main result is a positive impact of competition policy on the intensityof competition, the latter as captured by an indicator of economy-wide enterprisemobility. However, the essential drawback of the study remains the low number of countries for which data are available.Krakowski (2005) 2 , after a regression analysis for a sample of 101 countries,reaches two main conclusions: firstly, the experience of the competition authorityand the institutional quality of the government explain a substantial part of the 1 Dutz, M.A., Vagliasindi, M. (2000),  Competition Policy Implementation in Transition Economies: An Empirical Assessment  , European Economic Review, Vol. 44, Elsevier, Amster-dam, The Netherlands, pp. 762-772. 2 Krakowski, M. (2005),  Competition Policy Works: The Effect of Competition Policy on the Intensity of Competition. An International Cross-Country Comparison  , Hamburg Institute of International Economics, Discussion Paper No. 332, Hamburg, Germany, pp. 1-18. 2  perception of the effectiveness of competition policy; secondly, the perceived effec-tiveness of competition policy and the size of the economy are of significant influenceon the perceived intensity of local competition, while the presence of an externalprotection policy seems to not have any impact.Kee and Hoekman (2007) 3 , analyzing a dataset of 42 countries and 18 industriesfrom 1981 to 1998 and controlling for the number of firms and imports, study theeffect of competition policy on a derived industry mark-up function of price overmarginal cost, which is taken as a proxy for the intensity of competition. Althoughno significant impact is found, the authors observe that market entry is facilitatedby the existence of a competition legislation, thus it has an indirect and positiveeffect on the level of domestic competition. The main drawback of the contributionis that it simply employs a binary variable indicating whether a competition policyregime is in force.Petersen (2013) 4 , using a dataset of 154 countries from 1960 to 2005, finds thatcompetition policy has a strong effect on the level of GDP after ten years, whilstthere is no relevant impact on the quality of democracy. Thus, economic decon-centration seems to not favor the transition to a democratic regime or to strengththe stability of an established democracy. The most plausible reason for this mightbe that competition policy is not designed to prevent economic concentration atconglomerate and national level (fact that, in turn, could promote democracy) butonly in particular and specific sectors. Also here, the main weakness of the study isthat the effect of competition policy is merely controlled for by a dummy variable.In the end, Buccirossi  et al.  (2013) 5 estimate the impact of competition policy onproductivity growth, analyzing a sample of 22 industries in 12 OECD countries from1995 to 2005. In order to measure the effectiveness of the different competition policyregimes, the authors construct, principally on the base of a tailored questionnaire,a set of Competition Policy Indicators (CPIs), assessing, for each country and each 3 Kee, H.L., Hoekman, B. (2007),  Imports, Entry and Competition Law as Market Disciplines  ,European Economic Review, Volume 51, Issue 4, Elsevier, Philidelphia, United States, pp. 831-858. 4 Petersen, N. (2013),  Antitrust Law and the Promotion of Democracy and Economic Growth  ,Journal of Competition Law & Economics, Vol. 9, Oxford University Press, Oxford, United King-dom, pp. 593-636. 5 Buccirossi, P., Ciari, L., Duso, T., Spagnolo, G., Vitale, C. (2013),  Competition Policy and Productivity Growth: An Empirical Essessment  , The Review of Economics and Statistics, Vol.95(4), MIT Press, Cambridge, United States, pp. 1324-1336. 3  year, the antitrust infringements (the Antitrust CPI), the merger control process (theMergers CPI), the institutional features (the Institutional CPI), the enforcementfeatures (the Enforcement CPI) and all the information on the competition policyregime in a jurisdiction (the Aggregate CPI). The main conclusion is essentially apositive and significant relationship between competition policy and TFP. Althoughthe only drawback of the contribution is the small size of the sample, exclusivelyrestricted to a part of the OECD countries, the methodology adopted as well asthe indicators built will certainly be very useful for future in-depth analyses andrefinements. 3 Dataset Description In the present paper, the empirical assessment has been divided into two main parts.The first part is dedicated to analyze developed and developing countries together,in order to obtain a general overview of the phenomenon studied, while the secondpart is devoted to examine exclusively developing countries, in order to understandwhether the adoption of a competition policy regime should be among the prioritiesin the political agenda of an emerging country. The main reason for this distinctionis to disentangle the effect of competition policy in such different contexts. Thiscomparison may provide a better picture of the impact, also because in developingcountries competition policy has been introduced only recently in comparison todeveloped countries (cf. Appendix A - Figure A.1 & A.2).Accordingly, the first group includes the majority of OECD countries (i.e. 28nations), whilst the second group includes all the developing countries for whichdata for the purposes of the current work are available (i.e. 51 nations). Hence,the total number of countries present in the sample is 79 (by 2008, 111 countrieshad enacted a competition legislation 6 ). The result is a cross-sectional dataset,created  ad hoc   merging several existing datasets, with 2008 as common referenceyear. At this stage, it is important to point out that in the empirical analysis atissue, in a broader sense, for competition policy we mean any national law whichpromotes market fairness by regulating anti-competitive conducts undertaken byfirms, while for competition authority we mean any institution which is predisposedto its enforcement and is not sector specific. 6 Papadopoulos, A.S. (2010),  The International Dimension of EU Competition Law and Policy  ,Cambridge University Press, Cambridge, United Kindom, p. 15. 4
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