This paper asks if consumers can possibly benefit from a policy limiting the market share of a dominant firm. In the near term the policy is bad for consumers because an output constraint on the dominant firm raises the current price. However, the policy stimulates investment in the competitive fringe sector. The policy might reduce the future price as the expanded fringe sector disciplines the future pricing behavior of the dominant firm. In such a case, however, the policy has a welfare trade-off for consumers: a cost in the current period and a benefit in the future period. This paper shows that the net effect on consumer welfare is negative in the leading case in which the dominant and fringe firms share the same technology. The analysis has applications for both domestic antitrust and international trade policies.
Bibliographical noteFunding Information:
*I am grateful to Ian Gale, Carsten Kowalczyk, Val Lambson, Leonard Weiss, and two referees for helpful comments on this work. Part of this work was conducted while I was supported by grant SES-9023435 from the National Science Foundation. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
- Dominant firm
- Market share limits
- Predatory pricing