CAN CONSUMERS BENEFIT FROM A POLICY LIMITING THE MARKET SHARE OF A DOMINANT FIRM

This paper asks if consumers can possibly benefit from a policy limiti ng 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 r aises the current price. However, the policy stimulates investment in the competitive fringe sector. The policy might reduce the future pric e as the expanded fringe sector disciplines the future pricing behavio r of the dominant firm. In such a case, however, the policy has a welf are trade-off for consumers: a cost in the current period and a benefi t in the future period. This paper shows that the net effect on consum er welfare is negative in the leading case in which the dominant and f ringe firms share the same technology. The analysis has applications f or both domestic antitrust and international trade policies.