Competition policy instruments: market liberalisation and international opening

The pursuit of Pareto efficiency is one of the foundations of competition policies. Competition policy can be implemented by liberalising markets and opening the economy to the rest of the world, introducing various forms of regulation and establishing public enterprises.

Some countries have used liberalisation and international opening as instruments of competition policy, although protectionism against foreign competition has been a more frequent occurrence for reasons of industrial policy or, as the political economy literature has often underscored, to effect a redistribution of income in favour of certain domestic industries or firms (and to the detriment, at least temporarily, of domestic consumers).

International opening can be a valid instrument to reduce the market power of firms in sectors that are effectively exposed to international competition and in the short term.

However, not all industries are exposed to international competition, even when there are no government-imposed barriers. While agricultural and non-agricultural raw materials and manufactures are normally traded internationally (tradables), most services are not (for example, hair cuts or aerobics lessons). International opening thus cannot work effectively to reduce market power in these sectors.

Even in tradable goods, the capacity of international opening to affect market power is often limited to the short term. The impact of international opening on competitive performance is almost always positive, but the passage of time often gives rise to the formation of oligopolies or even monopolies at the international level.