Abstract

This paper investigates the channels through which institutions may have an effect on market competition. The main result of the investigation is that there is a strong and robust relationship between institutions and market competition: economies with better institutions are much more likely to experience a high intensity of competition. However, once the effect of trade openness is controlled for, the effect of institutions on competition must be mediated through the effective enforcement of competition law. Taking the case of Bulgaria, if it were to improve its antitrust effectiveness from the level at the 25th percentile to the one at the 75th percentile of the distribution, then the maximum increase in market competition that would result is 0.57 percentage points. This implies that trade liberalization does not replace the competition regime, as markets are segmented by more than just trade barriers. The beneficial functioning of competition is not secured spontaneously but must be supported by competition laws.

JEL Classification: L40