Competition Policy in Open Economies

What is the e®ect of national antitrust policies in a world with international trade? Traditionally, economic analysis of mergers has assumed a closed economy, which as we show in this paper, may lead to errant policy in an open economy. We use a very simple model to highlight some key issues in optimal competition policy when trade is important, and compare the nationally optimal number of ̄rms with the globally optimal number of ̄rms in a free trade environment. We show that countries will choose a competition policy that is \too strict" in the sense that they will prefer to have more ̄rms than is globally optimal, implying that convergence in competition policy should generally lead to a reduction in the number of ̄rms. We also examine the strategic interaction between domestic and foreign competition policy when there is free trade and show that small and large countries will react very di®erently to changes in the other's policies.