Fundamental difficulty underlying international harmonization of competition policies

Abstract

The international harmonization of competition policies is widely perceived as a prime area for international policy discussion. We demonstrate that this harmonization, unlike a general tariff reduction, cannot be guided by the principle of reciprocity. Towards this end, we build a two‐country partial equilibrium model with non‐tradable service sectors. The governments play a game in which they choose the degrees of competition in their respective service sectors. In a Nash equilibrium, one country chooses the perfectly competitive policy whereas the other country chooses an imperfectly competitive policy. This equilibrium cannot be transformed into the first‐best state by the principle of reciprocity.

A Two‐Country Game of Competition Policies

“…Because of the complexity of the model, this result is established by a local characterization around a distortion‐free equilibrium. It is possible to construct a much simpler partial‐equilibrium example of a similar asymmetric Nash equilibrium (see Yano and Honryo, 2011). For the same reason as Francois and Horn's result, however, that example cannot explain the difficulty in the harmonization of competition policies.…”