Competition Law

Rosa Greaves, rosa greaves, Rosa Greaves, rosa greaves

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9781138708464
• eBook ISBN: 9781351776943
• Topic: Law
• Subtopic: Financial Law
• Index: Law

This book was published in 2003. Competition/anti-trust law, as a separate body of law, is very much a creation of the 20th century and grew only in maturity in the latter half of that century. As developments in US anti-trust law have had, and continue to have, an important influence on the development of competition law in Europe and worldwide, articles have been selected for this collection from both sides of the Atlantic. The volume focuses on the following aspects: the objectives and nature of competition law, the scope of competition law, selected legal concepts and challenges in competition law, and the global application of competition law.

Part I

The Objectives and Nature of Competition Law

[1]

The Concept(s) of Competition

Sonya Margaret Willimsky

There are a number of concepts which underlie competition policy and which form the theoretical premise upon which regulatory provisions are based. This analysis seeks to offer a brief introduction to the main strands of thought in this area which make competition a political, legal and economic chameleon.

“Antitrust policy”, Robert Bork observed, “cannot be made rational until we are able to give a firm answer to one question: What is the point of the law—what are its goals?” The “battle for the soul of antitrust”, as Eleanor Fox once put it, continues. This analysis will elaborate on the theoretical premise of the concept of competition and consequently examine the approach taken by the Chicago School of Thought and the European Union. It will be demonstrated that competition has no single unifying objective and that there are a variety of objectives pursued in its name. As Sir Leon Brittan stated: “Indeed, it can be said that a positive competition policy should not be determined in isolation; it must be related to and integrated with economic, industrial and also social policy.”

Competition is the principal regulator of commercial forces in a capitalist market, presuming that individual competitors’ motivating force derives from the pursuit of self-interest. The struggle for superiority in the market place is defined by the objective to persuade consumers on grounds of quality and value to make a particular purchase.

Competition policy is deeply embedded in the way one views human nature and the role of society and the state. The liberal view of the state and man, driven by self-interest as the supreme motivating force, favoured a more classical model of competition. Posner, for example, clearly favoured the view of individuals as rational maximisers of wealth. To advocate a more regulatory and interventionist model would, according to this view, unnecessarily interfere with the proper quasi-Darwinist pursuit for superiority and the natural selection of the most efficient market participants. It is believed that only selection, as expressed through consumer choice, would lead to an equilibrium of demand and supply and hence further the interests of society as a whole. Adam Smith’s “invisible hand” as opposed to the very visible hand of the state would, according to this view, lead to the best overall solution.

Marxist social theory and the way human nature is perceived leads to the diametrically opposed view of competition. It would necessarily lead to a system whereby political and economic strands of thought would inevitably be closely intertwined with the perception of man as only one part of a greater web of society. Of course, it has to be remembered that even the crudest capitalist systems present a framework with a number of highly complex social, economic and political strata. However, the underlying value base is freedom as opposed to actual social equality and social justice and this general principle forms the foundations of commercial activity, assuming that the commercial and political ends are not separable. Experiments currently undertaken by China to combine a free or at least more liberal or open economy with a view of human nature which, ideologically, should be embedded in a restrictive, quasi-communist system, have to be observed with great interest.

It is generally accepted that competition policy may have important political goals and that an “unhealthy” (i.e. cartelised) economy may facilitate the establishment of totalitarian regimes. Hitler, for example, rose to power with the help of German cartels. In 1938, President Roosevelt stated: “The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself.”

The basic ideological premise about human nature also has to be viewed in context with the objectives of competition. “Perfect competition” is a goal in which economic recourses are allocated between different goods and services in exactly those quantities which reflect consumer demand, reflected in the price consumers are prepared to pay for goods. This basic utopian ideal is, of course, very difficult to attain and some would even question whether it would be desirable to pursue in any case.

There are, for example, sectors which ought to be “inefficient”, be it for economic reasons (for example agriculture) or for reasons of safety, such as transport. Sometimes, for R&D purposes, for instance, experts in a particular field have to be granted “time out” from the competitive race in order to develop new drugs, etc., in situations where the drive for efficiency would not allow for such an investment in terms of time and money.

Allocative efficiency is also a term which denotes a state of a market in which resources are allocated precisely in accordance with consumer demand. Pursuant to the neo-classical theory, it is presumed that under allocative efficiency, where competition is perfect, a producer will increase output to the point at which marginal cost and marginal revenue, the net addition to revenue of selling the last unit, coincide. Consequently, a reduction in his own output cannot affect the market price and so there would be no reason to limit it.

Productive efficiency is achieved when a producer is unable to sell above cost: if he did, he would lose customers. He would of course not sell below it, presuming that each producer wishes to maximise profits. If a producer were to charge above cost, other competitors would enter the market in the hope of undercutting the other competitors, charging below price and therefore acquiring a large market share. Eventually, the point will be reached where price and average cost of producing goods coincide, i.e. price would not rise above cost. The combined effect of allocative and productive efficiency is that society’s wealth is maximised.¹

“Workable competition” describes a system where the objectives set out above have not been attained, but a state of affairs has been reached which comes close to the “ideal”.

Chicago versus Brussels

The main schools of thought today in terms of competition policy are the Chicago and the Brussels school of thought. The Chicago school of thought developed in the 1950s and proclaims that economic efficiency should be the sole pursuit of the competitive process and antitrust policy should only seek to prevent the inefficient allocation of recourses. Sociopolitical considerations ought to be excluded from competition policy and a “pure” approach to the maximisation of efficiency taken. The Chicago model, for example, views practices such as predatory pricing, tie-ins or resale price maintenance not as anti-competitive but as beneficial to the consumer. This view was particularly popular in the Thatcher/Reagan era; a competition policy impregnated with socio-political considerations was in fact viewed as “uncritical sentimentality”. The main goal, as Ernest Gellhorn stated, for Chicago economists has to be “assuring a competitive economy”.

A comparative study between the two schools of thought may however only be embarked upon if the historical background is appreciated. The European Union is involved in an unprecedented, sui generis attempt to integrate a market of greatest political, economic, social and cultural diversity.

The E.U. pursues a policy which is to a far greater extent interventionist, with the fundamental, broad objective of market integration underlying all policy considerations. There are a number of Chicago arguments which the Commission firmly rejects, such as the Chicago view that very low predatory pricing is beneficial to consumers. The Commission is generally far more concerned about entry and expansion barriers and their potential to hinder intra-community trade.

E.U. policy is therefore not about efficiency per se, as Commissioner Sutherland stated: “Competition is […] not to be pursued for its own sake, but rather because it is an instrument for promoting a harmonious and balanced expansion, and an accelerated raising of standards of living.” He stated that the Commission’s approach is, on the one hand, flexible towards pro-competitive forms of co-operation between enterprises, such as R&D agreements. On the other hand, he added, restrictive measures aimed at hindering the realisation of a unified market will not be tolerated, but will be sanctioned with effective fines.

Brussels is consequently concerned with a more “balanced” view of competition. Small and medium-sized enterprises, for example, are shielded from the harsher elements of the markets, and the principle of “free competition” is deeply embedded in the Preamble to the Treaty of Rome. As Karel van Miert recently pointed out: “Competition, fiscal and social policy all belong together”.

It is also interesting to note that, for example, the Coase Theorem presumes that irrespective of legal provisions, the parties will always reach the same efficient result provided that the transaction costs are zero. According to this theory, competition policy as such, be it Chicago and Brussels, would be irrelevant provided that the parties are free to conduct their own affairs. Competition policy may therefore be not only irrelevant but also dangerous given that producers may seek to abandon markets altogether in order to avoid straitjackets in the economy.

Monopolies

Generally accepted both in the Chicago and in the Brussels school of thought is that monopolies are undesirable. A monopolist is, to an extent, immune from the forces of competition, a state of affairs which leads to allocative inefficiency, “dead-weight loss” and “x-inefficiency”.² A monopolist is able to increase price by reducing the volume of his own production and, since the aggregate output determines price via the relationship of supply and demand, increase his profits. This would lead to allocative inefficiency since he will reduce output and therefore output would be lower than it would have been within a framework of perfect competition. The firm furthermore becomes “x-inefficient” since productive efficiency will generally also be lower than it otherwise would have been, given that it is unlikely that costs will be held to the lowest possible level. Liebenstein, who coined the term, therefore referred to a situation in which resources are channelled to the right product, but in a less productive way than they would otherwise have been.

However, Schumpeter offered an interesting insight into how “big” might be “beautiful”. He demonstrated that there are dynamic advantages to monopolies. Aside from the aspect of the economics of integrated research, Schumpeter stated that ‘“within big units … (conscious) policy towards demand and taking a long-term view towards investment becomes possible.” Also, one may argue that the legitimate goal, almost the raison d’être of competition, is the struggle for market leadership and hence a dominant position in a market per se appears to demand appraisal rather than antitrust intervention!

A fundamental question in this context is of course always whether, when a particular market is examined more closely, there are any barriers to entry. If there are not, even a dominant position or oligopolistic structure does not necessarily have to be cause for concern.

Oligopolies

Professor Wish argued that:

The main argument against oligopoly is that the structural conditions of the market in which oligopolists operate are such that they will not compete on price and will have little incentive to compete in other ways; furthermore the theory of oligopolist interdependence asserts that they will be able to earn supra-competitive profits without entering into the type of collusive agreements generally proscribed by competition law.³

An oligopolistic market is one which is characterised by the presence of a small number of key players in the market. A structure which is typical in oligopolisti...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Acknowledgements
• Series Preface
• Introduction
• PART I THE OBJECTIVES AND NATURE OF COMPETITION LAW
• PART II THE SCOPE OF COMPETITION LAW
• PART III SELECTED LEGAL CONCEPTS AND CHALLENGES IN COMPETITION LAW
• PART IV COMPETITION LAW AND THE GLOBAL ECONOMY
• Name Index