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Assessing the Economic Impact of Competition

Research report

Research report

The potential benefits of a competitive market environment for stimulating economic efficiency, innovation, greater productivity and economic growth are now widely recognised.  This is because greater competition sharpens incentives to cut costs, to innovate, and to improve productivity.

There has been more controversy regarding the impact of competition in developing countries, given their underdeveloped market conditions.  However, it is argued (e.g. Evenett, 2005) that the available empirical evidence largely supports the view that competition enhances the economic performance of developing countries.

However, there is still fairly limited evidence demonstrating the economic benefits of a competitive market environment in developing countries.  While studies of the impact of liberalisation sometimes provide evidence of the benefits of introducing competition in a particular market, such studies usually focus on one country, and look at the change in market outcomes (i.e. price, profitability etc.) over time, comparing that arising from state ownership and monopoly, to that generated by the newly liberalised market.

This is different to the approach that is used in this report, which utilises an innovative methodology to compare across countries the impact of competition and competition policy on performance in a particular market, and also focuses on more ‘normal’ product markets, i.e. without strong natural monopoly characteristics. 

By undertaking cross-country comparisons, this study thus addresses the following two research questions:

• How do different aspects of the policy framework (such as the existence of a competition authority, degree of state ownership, openness to trade etc.) affect the degree of competition present in a given product market?

• How does the degree of competition present in a given product market affect market outcomes such as prices, choice, innovation and exports?

Karen Ellis, Rohit Singh