Does a Tougher Competition Policy Reduce or Promote Investment?

Abstract

The question of how interventions from the Competition Authority (CA) affect investment is not a straightforward one: a tougher competition policy might, by reducing the ability to exert market power, either stimulate firms to invest more to counter the restrictions on their actions, or make firms invest less because of the reduced ability to have a return on investment.

This tension is illustrated using two models. In one model investment is own-cost-reducing whereas in the other investment is anti-competitive. Anti-competitive investments are defined as investments that increase competitors’ costs. In both models the optimal level of investment is reduced with a tougher competition policy. Furthermore, while in the case of an anti-competitive investment a tougher authority necessarily leads to lower prices, in the case of a cost-reducing investment the opposite may happen when the impact of the investment on cost is sufficiently high. Results for total welfare are ambiguous in the cost-reducing investment model, whereas in the anti-competitive investment model welfare unambiguously increases due to a tougher competition policy.

Keywords: Competition Policy, Investment, Welfare

JEL Classification: K20, L20, L40, L50.