CHAPTER 10

Notes

CHAPTER 10. MARKET COMPETITION–METHODOLOGY NOTE I. MOTIVATION There is substantial economic evidence that a fair level of market competition spurs economic growth by increasing industry and firm innovation and productivity, leading to better products, more and better jobs, and higher incomes.1 By affecting market entry and exit, competition stimulates product innovation and service quality, protects consumers, and forces market operators to provide their products and services at cost.2 But competition is rarely perfect. Markets fail either due to firms’ behaviors or government interventions. Market power—a firm’s ability to raise prices well above cost, offer a low-quality good or service, and drive out competition—must be kept in check.3 Governments have a wide range of tools to deter anticompetitive behaviors, promote market entry, ensure a fair level of competition, and reduce distortions created by market failures.4 Competition policy is the set of policies and laws that ensure that competition in the marketplace is not restricted in a way that reduces economic welfare.5 Crucial for the business environment and the economy, competition policy can help alleviate poverty and fost...