GEP Research Paper 99/03

An Economic Analysis of Extraterritoriality

Rod Falvey and Peter Lloyd

Abstract

Extraterritorial application of national laws are regarded as an infringement of national sovereignty and against the interests of the nations affected by these actions, who frequently oppose their enforcement as a consequence. This paper examines extraterritorial application of national competition laws, and identifies an additional issue. Extraterritorial action by national competition authorities acting alone and in pursuit of their national interests may not eliminate distortions in global markets. A model of mergers is constructed which shows that national authorities which veto mergers in other countries may act against the interests of the world as a whole. Thus extraterritorial action may not remedy the problems it addresses, even if it is enforceable.

Issued in April 1999.

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