Policy Briefing: The Impact of Competition Policy – What are the Known Unknowns?

BACKGROUND

Evaluations of competition policy are increasingly common and typically establish that the consumer benefits from detected cases easily outweigh the costs of competition authorities.

These assessments are often driven by data availability and only capture a small part of the total impact of competition policy because they sidestep the difficult issue of how to evaluate those cases that go unobserved because they are deterred. Assessments also ignore a second class of unobserved cases, those involving anti-competitive harm but which the competition authority fails to detect.

METHODOLOGY

The authors present a broader conceptual framework for the evaluation of competition policy which takes into account the deterred and undetected cases as well as those which are detected.

The analysis draws on stylised facts from existing academic and policy literatures, alongside what it is reasonable to infer from theory about what is not known, in particular, the nature of the underlying population of potential cases, and how samples are drawn from it, in the form of cases detected by the competition authority.

Numerical simulations are conducted within this framework.

KEY FINDINGS

The simulations suggest that, while the benefits of deterrence, especially for merger enforcement, are considerable, it is also likely that considerable harm may remain unremedied due to the non-detection of cartels.

Drawing on insights from economic theory, the authors argue that selection bias is likely to be substantial because the unobserved cases could well be those which are the most harmful. If so, the deterrence of anti-competitive mergers may have a much greater positive impact, but the effects of non-detected cartels may be more serious than is usually supposed.

FOR MORE INFORMATION

The full working paper 13-7 and more information about CCP and its research is available from our website: http://www.competitionpolicy.ac.uk

ABOUT THE AUTHORS

Peter Ormosi is a Lecturer in Norwich Business School and member of the ESRC Centre for Competition Policy

Stephen Davies is Professor of Economics in the School of Economics at UEA and member of the ESRC Centre for Competition Policy.

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