Efficiency Metrics for Competition Policy in Network Industries

Posted by D. Daniel Sokol

Timothy Tardiff addresses Efficiency Metrics for Competition Policy in Network Industries.

ABSTRACT: In evaluating competition and regulatory policies, economists typically emphasize the extent to which such policies promote economic efficiency. The outcome of such evaluations—particularly in network industries conducive to competitive inroads and technological change—may involve ascertaining whether short-run sacrifices of static efficiency (allocative and technical) are justified by long-run gains in dynamic efficiency. This determination is complicated by the fact that short-run sacrifices are frequently known and measureable, whereas long-run gains are uncertain and less easily measured. Although a growing number of economists—generally relying on the writings of Joseph Schumpeter—conclude that dynamic efficiency is of substantially greater importance in such tradeoffs, in many cases the conclusion is not based on specific measurements of the tradeoffs encountered in particular policies. This article presents a review of the economic arguments favoring (or perhaps opposing) the primacy of dynamic efficiency. On the basis of this review, an analytical framework based on adapting models typically used to evaluate market structure and performance (for example, Cournot models) is developed. This framework can be used to evaluate the static/dynamic efficiency tradeoffs of competition and regulatory policies.