On the Use of Competition Policy to Enhance the Effectiveness of Industrial Policy

Motivated by the observation that many countries with an active industrial policy also have a lax competition policy, this paper argues that restricting firm numbers may be a means of rendering industrial policy more effective. A simple model is set up in which a subsidy is desirable to correct a general externality but may induce over-entry. Restricting the number of firms then renders the subsidy policy more effective in correcting the externality problem.