Feasibility Study on the Application of Computable General Equilibrium (CGE) Model to the Competition Policy

Abstract

The purpose of this study is to evaluate the impacts on Taiwan's macro-economy and major industries of competition policy using computable general equilibrium (CGE) analysis. Firstly, we establish a CGE model (base model) with the assumption of perfect competition. Next, following Abayasiri-Silva and Horridge (1997, 1999) we incorporate the assumption of incomplete competition into the base model. In the short run, the number of firms is fixed and pure profit may exist. However, in the long run pure profit does not exit due to free entry and exit. In this scenario the number of the firms is an endogenous variable. Firm-level and industry-level returns to scale are investigated. To allow the existence of pure profit we assume different pricing rules for firms. Three pricing rules are considered. They are competitive pricing rule, monopolistic pricing rule and Harris pricing rule.

We take upstream gasoline product market liberalization as an example to investigate the impacts of competition policy using our computable general equilibrium model. Simulation results show that upstream gasoline product market liberalization has brought significant benefits to the economy and petroleum refinery industry under all kinds of scenarios as stated above. This implies that results of competition policy administered by the Fair Trade Commission should be well acknowledged.

Our study demonstrated that computable general analysis is very useful for economy-wide impacts analysis of competition policy. However, CGE analysis may not be suitable for micro-analysis, for example, impacts analysis of merger of two firms due to the lack of disaggregated input-output tables compiled by the Directorate-General of Budget, Accounting and Statistics (DGBAS).