Competition Law Notes - Introduction to Competition Law

The Objectives and Economics of Competition Law

What are the objectives of competition law?

Competition law is concerned with ensuring that firms operating in the free market economy do not restrict competition in a way that prevents the market from functioning optimally (J & S, p 1)

What do you understand by the approach to competition law represented: the Harvard School,

The Harvard school stresses the importance of the structure-conduct-performance as devised by Bain.

The structure of the market determines the firm’s conduct and that conduct determines market performance (efficiency, growth, performance).

Highly concentrated markets – lead to contraction of output and higher prices.

Interpreted consumer welfare as distrust of concentration of economic power – concern about market structure

View that barriers to entry are high

Chicago School

Members: Bork, Posner, Easterbrook Stigler (Academics, judges – late 70s and 80s from the University of Chicago)

Consumer welfare as Economic efficiency (allocative efficiency) should be the sole goal of competition law.

concentration itself should not be regulated – it could easily be the result of efficiencies – economies of scale – productive efficiencies

Small producers are just as removed by a rival on its way to monopoly through superior efficiency as by mergers\ or predation

See Hovenkamp summary p24 (J & S).

Belief that free market will correct itself without government interference.
Monopoly is self-correcting
Economies of scale are important
Business firms are profit maximisers – deference to their decision.
Only real barriers to entry are the government created ones. Merely because need large scale entry is not a barrier to entry – firms will enter the market if it is profitable to do so.

Antitrust should only intervene if inefficiency

Antitrust should only focus on cartel activity and mergers which would create a monopoly

Goal should be wealth maximisation. Need to look at both allocative and productive efficiency – trade-off.

Bork – aim is to improve allocative efficiency without impairing productive efficiency.

Chicago School judicial interpretations (US Supreme Court)

Continental TV v GTE Sylvania (1977)
Matsushita v Zenith Radio (1986)
Brooke v Brown & Williamson (1993)
State Oil v Khan (1997)
Verizon Communications v Trinko (2004)
Weyerhaeuser v Ross-Simmons Hardwood (2007)

Post-Chicago School

Reaction against the deregulatory approach of the Chicago School and the reasoning from pure economic theory

Focus on the application of theory to the facts of the individual case (does the theory work in this case?)

Focus on dynamic markets, game theory, strategic behaviour theories – does predatory pricing rarely occur as stated by the Chicago School or can predatory pricing be effective as a deterrent to new entry

Post-Chicago school judicial interpretations

Eastman Kodak v Image Technical Services (1992) (Sup Crt)
California Dental Association v FTC (1999) (Sup Crt)
US v Microsoft (2000) (Crt Appeals)

Ordoliberalism (Germany 1930s – University of Freiburg

‘Economic constitution’ whereby competition and economic freedom are embedded into the law. Competition – the process of rivalry is a value in itself

Protection of competitors, small and medium sized businesses from the excesses of firms with market power rather than a focus on outcomes such as economic efficiency

Combination of faith in the market – economic liberalism – economic freedom - and preference for private rather than government decision-making (Chicago school)
But also distrust of large amounts of economic power in private hands (deconcentration). The state is needed to resist the influence of private power.
There is a need to both control the state but also private power.

Are there any differences in approach to the objectives of competition law between the US and EU?

US heavily influence d by the Chicago School and focus on consumer welfare as economic efficiency as goal.

EC importance placed on integration goal. The original Art 2 of the EC Treaty states:

“The Community shall have as its task, by establishing a common market … to promote throughout the Community a harmonious development of economic activities, a continuous and balanced expansion, an increase in stability, an accelerated raising of the standard of living and closer relations between the States belonging to it”.

Art 2 has been amended by the Treaty of Amsterdam

It now reads: Article 2. (p 38 J & S)

The Community shall have as its task, by establishing a common market and an economic and monetary union and by implementing the common policies or activities referred to in Articles 3 and 3a, to promote throughout the Community a harmonious and balanced development of economic activities, sustainable and non-inflationary growth respecting the environment, a high degree of convergence of economic performance, a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States.

EC emphasis on the prevention of “effective competition”, distortion of competition and more structural approach – based on ordo-liberalism – control of structure influences outcomes.

But some recent changes in approach: “more Economic approach” and adoption of “consumer welfare” as the goal as seen in caselaw p 47 J & S eg. GlaxoSmith Kline and:

White Paper on Modernisation (April 1999)
Green Paper on Vertical Restraints (1996)
Guidelines on vertical restraints (2000)
Reform of Merger Regulation (2004)
Review of Article 82 (2005)

Are there ‘social-political’ or ‘non-efficiency’ objectives of competition law? What are the limits of competition law?

Some alternative goals of Competition Law:

income distribution: equity concerns
domestic ownership of business
fairness
environmental

Income distribution? Market power transfers wealth from consumers to producers but should this be a concern of competition law? Contrary view is that this can be alleviated through other forms of regulation: subsidies, tax etc

If there are multiple goals there are perceived difficulties in adjudication

Bork in the Antitrust Paradox

consumer welfare is the only goal consistent with the original intent of the Sherman Act.
consumer welfare as efficiency is the only administrative rule which will work. The introduction of other values gives rise to administrative impossibilities because social goals are unarticulated.

Limits of Competition Law

Public interest tests in media, banking mergers. The application of public policy goals other than competition (e.g Wouters)

Public services – services of general economic interest

What is meant by the “Modernization” of EC Competition Law?

Commission wanted to focus on cartels and mergers and wanted greater role taken in enforcement by member states.

White Paper on Modernisation April 1999

Abolition of the notification system – making all of art 81 directly applicable in national courts.

Regulation 1/2003 now replaces Reg 17

Question 5 (see powerpoints from lecture)

What special problems are posed for competition law by oligopoly markets?

Because only a few sellers all sellers recognise that they are largely interdependent. Therefore each seller accounts for its rivals reactions when setting output and prices. Oligopolies will not drop prices to gain market share because they expect the others will drop their prices immediately with similar price cuts and all sellers will end up with original market shares but at a lower price. Pricing decisions are determined not just by oligopolies’ cost but also estimate of rivals pricing strategies. Game theory is used to predict outcomes.

There are advantages to co-ordination on price – if they could collude they could raise price above a competitive level and earn monopoly profits.

But difficult to co-ordinate and it is illegal.

Often prices in oligopoly markets are similar – is this the result of collusion or how the market operates? Similar outcomes to collusion can often be achieved without express agreement.