#5312 - Introduction To Competition Law - Competition Law

Introduction to Competition Law

Competition Law LLM

[Author]

The Market System (neo-classical economics perspective) 3

1. The Concept of “Efficiency” 3

Static Efficiency 3

Dynamic Efficiency 3

2. Perfect Competition 3

3. Monopoly 4

Is monopoly always a bad thing? 4

4. Oligopoly 4

5. Challenges to the Neo-Classical Model 5

The Structure and Aims of the Competition Laws 5

1. US Law: Sherman Act of 1890 5

2. The Objectives of the Sherman Act 6

Harvard School 6

Chicago School 6

Post-Chicago 6

Convergence Neo-Harvard and Neo-Chicago 6

3. EU Competition Law: History and Objectives 7

The Role of Ordoliberalism 7

The role of efficiency 8

Competition Policy

Competition law is about regulating markets, so we need to know about markets. The production and distribution of goods and services to consumers constitutes the market. We assume firms are profit maximising, so they will take actions accordingly. Prices are constituted by supply and demand within the market. Supply and Demand are both usually somewhat ‘elastic’, which means that they vary with price. In a well-function competitive market, we’ll reach a competitive equilibrium, where supply and demand interact. Everything is sold, and no one wants to buy anything more at the market price – this is efficient – the best allocation of society’s resources, according to Adam Smith’s Wealth of Nations. However, there are some assumptions – that firms act selfishly to maximise their individual utility, for example, and some structural factor assumptions, such as a lack of externalities. For our purposes, we also assume competition – we require competition and competitive markets.

Efficiency is an economic concept, which has come into the realm of competition law, so is now a competition law concept too. It has normative force too.

This is the element that is focussed on most – about the distribution of resources in a market – this is a measure of consumer surplus (the difference between the consumer’s value and the price paid that accrues to the consumer, and society) and producer surplus (profit = price – cost). Static efficiency seeks to maximise these surpluses, though they conflict. Efficiency is unconcerned with distribution, see the debate between Posner and Dworkin for the jurisprudential aspect of efficiency – is efficiency a normative value?

Allocative efficiency involves matching production to consumer demand and productive efficiency measures avoidance of wastage of resources.

Most Law and Economics focuses on static efficiency, but dynamic efficiency is increasingly important. It is concerned with progress and development – it is quite an elusive concept as it is so abstract. R+D is used as a proxy for Dynamic Efficiency, along with numbers of patents etc. Schumpeter’s creative destruction shows the idea of dynamic efficiency – cycle of monopoly market new monopoly with development.

We know that one of the assumptions of the working of the market system is that markets are competitive. Competition means that no firm can raise prices above the equilibrium price – no-one has market power. The invisible hand works within the market, leading to a competitive equilibrium. We need a large number of buyers and sellers (atomised buyers and sellers), perfect information about the numbers of buyers and sellers, and about price, no barriers to entry, and a homogenous product. Further, the quantity of goods or services trade by a single buyer or seller is so small compared to the total that changes in these quantities leave market prices unaffected. This means all actors are price-takers. This will be Pareto-efficient. At a technical level, the competitive price is equal to “marginal cost,” meaning the cost that the firm incurs to produce a single additional unit of the product (in practice, including a reasonable rate of return on capital).

Monopoly describes a market where a single seller has sufficient market power to alter unilaterally the market price, either by increasing output to drive down prices, or by reducing output to create scarcity and drive up prices. Either way, the firm will work at its profit-maximising point, regardless of whether that is better for the market or the consumer. When compared with competition, the primary effects of monopoly are reduced output, higher prices and a transfer of income from consumers to producers (while producer welfare tends to be maximised, there may be allocative inefficiency). Although this situation could still efficient if total wealth is maximised, in monopoly markets there is typically also a deadweight loss, whereby some of the benefits that would have accrued to consumers in a competitive market fail to transfer to the monopolist and are lost to society. Part of the consumer surplus transfers to the monopolist, but some of it vanishes – this is the social cost of a monopoly. Other disadvantages include a lack of progress, as monopolists have ‘a quiet life’ with no competition. Moreover, the struggle by producers to achieve a monopoly, in anticipation of the supra-competitive returns that follow if and then the position is achieved, may generate “rents” that are also a cost of monopoly (expenditure by firms in an effort to acquire greater economic opportunities)—e.g. Kreuger (1974). If these resources are spent on R+D, that’s okay, but there may be other expenditure, which will be lost to society (e.g. doing down competitors).

No, it can be beneficial – there is a slightly ambiguous relationship between dynamic efficiency and market concentration. 2 views: Schumpeter argues that monopolies will encourage innovation. Kenneth Arrow argues that monopolists have diminished incentives to innovate, and prefer to rest on their laurels. The problem with the Arrow viewpoint is that producers are motivated by the desire to have a monopoly. Thus, we want people to strive to get a monopoly, but never actually get one.

There is also an inverted U-Shape relationship between intensity of competition and innovation (need incentives, but also resources to innovate)

Natural monopoly: where production of the total output of the good or service by a single producer minimises total cost (subadditivity). Examples of this are typical utilities like fixed line telecommunications networks, such as gas, electricity, rail, and water. Monopoly may be unavoidable and actually efficient—but the monopolist still lacks competitive pressures. As a result, we tend to have regulators in natural monopoly markets. There have been a lot of cases in recent years in natural monopoly markets, particularly in Germany, and in energy markets.

Monopoly has been described as a self-destructive phenomenon (e.g. by the Chicago School)—monopoly markets self-correct. This is because the high prices incentivise other producers to enter the market. As demand remains the same, and supply increases, prices fall, and the market becomes more competitive. But there might be durable barriers to entry (structural (sunk costs), legal (licences), behavioural (main focus in the competition law course – anticompetitive business practices)).

An intermediate theory between perfect competition and monopoly—arises in concentrated markets where there are only a few sellers, who recognise their substantial interdependence, so that each seller takes into account the reactions of rivals when making pricing and output decisions.

It is assumed that oligopoly markets are less competitive—because oligopolists know that aggressive competition will lead to a price war and cancel out all gains—but oligopoly doesn’t fit well into the established categories of anticompetitive behaviour. Hard to police using Art 102, but we can fudge Art 101 in order to get something approximating an agreement, even though its basically an unspoken agreement.

There are several critiques of the neo-classical mode. Political philosophy-based critiques, from Marx to Michael Sandel, stress that it does not fit with some models of political philosophy thought. Behavioural Economics, on the other hand, stresses the irrationality of behaviour within markets by economic actors.

Theories of perfect competition and monopoly are extremes, and in general, neither is found in real market situations. Instead, we aim for “workable competition” or “effective competition” (J.M Clark), being the best imperfect competition that is achievable in a particular market. The theory of second-best says that we need to work towards the best we can get, not the ideal.

In 1890, Alfred Marshall publishes a very influential work, which basically introduces the idea of competition economics. Interestingly, there was basically nothing on competition economics when the Sherman Act was passed in 1890. In the aftermath of the American Civil War, and the expansion of the railways, there is the emergence of massive amounts of wealth disparity because of the huge centres of industry compared to the agrarian communities. The prices paid for their produce was too low, and the prices they were quoted for their capital (rope, tools etc) were too high. We saw the trust problem – they worked together, and raised their prices to better control their prices, basically forming cartels.

However, there were lots of problems with the cartels – they could be taken down by...