Antitrust versus industrial policies, entry and welfare

With Guy Meunier and Francisco Ruiz Aliseda, May 2015.
Revise and Resubmit to Journal of Industrial Economics

Abstract:
In industries with large sunk costs, the investment strategy of competing firms depends on the regulatory context. We consider ex-ante industrial policies in which the sunk cost may be either taxed or subsidized, and antitrust policies which could be either pro-competitive (leading to divestiture in case of high ex-post profitability) or lenient (allowing mergers in case of low ex-post profitability). Through a simple entry game we completely characterize the impact of these policies and examine their associated dynamic trade-offs between the timing of the investment, the ex-post benefits for the consumers, and the possible duplication of fixed costs. We find that merger policies are dominated by ex-ante industrial policies, whereas the latter are dominated by divestiture policies only under very special circumstances.

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