This Paper introduces optimal competition: the best form of competition in an industry that a competition authority can achieve (given the information constraint that it cannot observe firms’ efficiency levels). We show that the optimal competition outcome in an industry becomes more...

Empirical evidence strongly suggests that R&D increases a firm’s ‘absorptive capacity’ (its ability to absorb spillovers from other firms) as well as contributing directly to profitability. We explore the theoretical implications of this. We specify a general model of the absorptive...