Market Collusion and the Politics of Protection

This paper investigates the relationship between trade and competition policy within a model where market collusion and protectionist lobbying are themselves related. Collusion and lobbying are modeled as joint products of the same collective effort of firms. In equilibrium, firms cannot achieve greater cooperation in one dimension without reducing it in the other. A trade agreement that limits the effectiveness of lobbying may cause firms to increase market collusion, thereby increasing the domestic price. Thus international trade agreements may run counter to the goals of competition policy. On the other side, a more restrictive competition policy is shown to either reduce the domestic price or reduce import protection. Thus competition policy tends to promote trade policy goals. The reason is that restrictive competition policy undermines collusion at the source -- it decreases the per-firm benefit to collusion relative to the gains from deviating -- reducing firm cooperation in both dimensions