A Fundamental Difficulty Underlying International Harmonization of Competition Policies

The international harmonization of competition policies is widely perceived as a prime area for international policy discussion. We demonstrate that this harmonization, unlike a general tariff reduction, cannot be guided by the principle of reciprocity. Towards this end, we build a two-country partial equilibrium model with non-tradable service sectors. The governments play a game in which they choose the degrees of competition in their respective service sectors. In a Nash equilibrium, one country chooses the perfectly competitive policy whereas the other country chooses an imperfectly competitive policy. This equilibrium cannot be transformed into the first best state by the principle of reciprocity.