Objectives of Competition Policy

While many objectives have been ascribed to competition policy in various jurisdictions over the past hundred years, certain major themes stand out. The most common of the objectives cited is the maintenance and promotion of the process of free competition, or the protection or promotion of ‘effective competition’. Effective competition is a market condition that exists when two or more firms, acting independently, contend for their business in a manner that ensures that the consumers will be offered the lowest price alternative or best technical design meeting its minimum needs. The concept of effective competition is not just concerned with the prices and costs – it relates also to the considerations of a broad range of factors such as the quality of products/services, the range of products/services that are available, efficiency, as well as incentives for innovation. One of the features of a market where there is effective competition is that no one firm would be able to change prices independently of the other firms. A firm cannot have a dominant position in a market at the same time as the market is considered to be effectively competitive.

4 See Nelson and winter (1982) for a detailed discussion.

The maintenance and promotion of free competition are seen as synonymous with preventing or countering unreasonable restraints on competition. The primary objective of the maintenance and promotion of effective competition was to counter private restrictions on competition. However, in some specific countries, the role of competition policy has expanded significantly to include lessening the adverse effects of government intervention in the market. Linked to the promotion of competition, improving access and opening markets by reducing barriers to entry through deregulation, privatisation, tariff reduction, or removal of quotas and licenses are also specified as objectives of competition policy in some countries. Competition authorities do not have a direct mandate over commercial, regulatory and privatisation policies but can wield influence favouring market-determined solutions. In some countries, competition authorities can analyse whether regulatory measures from the public sector will negatively affect competition and strive to have any measures that unreasonably limit competition amended or abolished.

Other commonly expressed objectives of competition policy are the prevention of abuses of market dominance⁵, the protection of consumers and the achievement of economic efficiency, which includes both allocative and dynamic efficiency through reduced production costs and technological change and innovation. Market dominance is the ability of a firm or group of firms to persistently hold the price above long-run average costs without thereby losing so many sales that the price level is unsustainable (Utton, 2003). The creation, exploitation and maintenance of market dominance are the main concern of antitrust laws and competition policies. Compared with the theoretical concept of monopoly in economics, the effects of which has been discussed in Section 3.1, market dominance is a more practical concept used in antitrust analysis. Great emphasis has thereby been put on the sources of market dominance. Hay and Vickers (1987) mentioned five factors that can lead to the acquisition of market dominance. Three of them, collusion, predatory practice and Merger and Acquisition (M&A) are directly amendable to control through competition policy. The others are government grant (in the form of licenses, patents, quotas and tariffs) and corporate advantages and efforts, the so-called ‘skill, foresight and industry’.⁶ Government grants and trade policy issues are the subject of policy controls but usually settled in a different arena rather than competition policy.

Recognising the strategic interdependence of their decisions may lead firms in markets with a limited number of competitors to collude, allowing them to keep prices up and market shares stable. The European Commission has considered this as ‘joint dominance’.⁷

The essence of market dominance is the ability to control the market in such a way that prices can persistently be raised above costs, leading to excessive profits; where this occurs the market will not allocate resource efficiently.⁸ The task of competition policy can be viewed as an attempt to remove the sources of that market failure or to prevent its emergence. The welfare losses from market dominance that competition policy tries to rectify are likely to be substantial, while this does not mean that all competition policy actions are correct and effective. The neo-Chicago School claimed that dominant firms

5 The term ‘market dominance’ and ‘market power’ can be used interchangeably.

6 Judge Learned Hand used the phrase ‘skill, foresight and industry’ in a famous US antirust case in the 1940s:

the United States vs. Aluminum Company of America (Alcoa).

7 The concept of joint dominance matches closely the concept of coordinated effects. It has been disputed for a long period of time whether the European Commission could have extended the concept of dominance to deal with a situation in which dominance was jointly held by two (or more) firms. The first case where the Commission used joint dominance was in Nestle/Perrier, in the French mineral water industry.

8 See Utton (2003) for a detailed discussion.

arise because of economies of scale and some superiority (such as management and innovation) which gives them supremacy in the competition. The dominance reflects efficient causes, which justify whatever the monopoly effects may impose. The speed with which unregulated markets are self-correcting in the face of market dominance is a very important issue that is directly related to the necessity of competition policy and has been at the centre of antitrust discussions. Are sources of market dominance likely to be ephemeral or persistent? In the former case, the inefficiencies are quickly eroded by the forces of market competition and it may be better to withhold direct policy intervention. In the latter case, knowledge of the source of market dominance should act as a guide to the effective antitrust remedy. This is as what Easterbrook (1984) pointed out: the central purpose of antitrust is to speed up the arrival of the long run.

The central practical problem lies in the interpretation and measurement of market dominance. Assessing market dominance qualitatively is a difficult procedure, requiring sophisticated information and complicated analysis. Given the importance of potential competition, as well as actual competition, and differences about what is needed to ensure competition based on industry characteristics, ideally a qualitative approach to determining dominance is appropriate (World Bank, 2002). In the early years of US antitrust, however, many important cases took essentially the simple position that the larger the market share the greater the market power. The empirical analysis of market structure as a screening device for possible antitrust action was largely based on static measures such as concentration ratios. More recently there has been much greater concern for the dynamics of market structure (see Subsection 4.3 for a detailed discussion).

Since the mid-1970s, the interests of consumers in lower prices and improved products became the central concern of competition policy in the United States.⁹ The US approach argued that ultimately the consumer interest should be paramount in competition policy and this can be best achieved by pursuing greater efficiency. Competition policy should not intervene as long as consumer interests are well served by efficient firms despite their size. However, competition policy should act in the case that large firms abuse their market dominance to exclude competitors in unreasonable manners. On the basis of the prevention of the abuse of market dominance, the promotion of economic efficiency and improvement of consumer welfare has been widely recognised as central aims of competition policy.

Thus the objectives of competition policy reflect different perspectives towards one core belief, ensuring the effective functioning of competition mechanism to gain economic efficiency so to protect the consumer by the means of preventing unreasonable restraints on competition imposed by private firms (and also possibly from the adverse effects of government intervention).

If the objective of competition policy is seen primarily in terms of maintenance and promotion of the competitive process as simply put in the beginning of the subsection, this may also be interpreted as ensuring the continued presence of existing firms who want the freedom to act in a competitive manner, even though it may damage the consumer interests.

9 Beginning in the mid-1970s, the US antitrust authority embarked upon a Chicago School revolution as Robert Bork, along with other antitrust scholars from Chicago University, became federal appellate judges. Over the next two decades, one doctrinal area after another in US antitrust was transformed; among them one key issue was to harmonise the new economic focus on efficiency and entry with the pre-existing legal rules that relied on concentration (Baker, 2002). Since the rise of the Chicago School, the presumption of harm from the increased concentration has declined dramatically. Accordingly, the 1982 Merger Guidelines departed from the 1968 Guidelines by emphasising the analysis of a transaction’s competitive effects rather than merely on market concentration.

By placing a greater emphasis on the competitive process rather than economic efficiency and consumer interests, competition authorities may give undue emphasis to the protection of competitors rather than to competition. Since the mid-1970s, a broad consensus has developed in the United States regarding the goal of US antitrust policy: to foster competitive markets and to control the abuse of market dominance, not to protect smaller firms from tough competition by larger ones. However, unless the competition authorities keep efficiency and consumer interest firmly in mind, they may serve the interests of weaker competitors, especially under the condition where a market is dominated by an efficient firm and complaint comes from smaller rivals.

In response to sociopolitical concerns various objectives of competition policy other than the promotion of economic efficiency and improvement of consumer welfare have been identified. These include integrating markets, protecting small businesses, preserving the free enterprise system and promoting economic development. In addition, it has been argued that competition policy must recognise the effects that the business practices such as M&As may have on employment and regional development. All these economic concerns are far beyond the traditional focus of competition policy on allocative efficiency.

Furthermore, some non-economic objectives, such as maintaining equity, fairness and honesty, have been ascribed to competition policy. The World Trade Organisation (WTO) (1999), for instance, listed the objectives of competition policy, which include: 1) the promotion of equity and fairness, 2) the promotion of opportunities for small and medium-sized business, 3) market integration, 4) the promotion of technological development, local production and employment, and 5) the protection of economic and political pluralism.

With regard to the objectives of competition, a spectrum of views has been expressed.

The two ends of the spectrum can be described in terms of economic and non-economic objectives. At one end is the view that the sole purpose of competition policy is to maximise economic efficiency. In this view, there is no room for sociopolitical criteria such as fairness and equity in the implementation of competition policy. The opposite view is that competition policy is based on multiple values that are neither easily quantified nor summarised to a single economic objective. In this view, some sociopolitical criteria such as fairness and equity are incorporated into the objectives of competition policy.

Associated objective are freedom of trade, freedom of choice and access to markets. A systematic summary of the objectives of competition policy is demonstrated in Table 3-1.

While the changing emphasis on various objectives and the pressure to increase the number of goals has been notable, the focus of competition policy has been increasingly economic efficiency in the industrialised countries.

Table 3-1 Objectives of competition policy General Objectives

Maintenance and promotion of competitive process

Prevent business practices that restrain competition (in order to maintain competitive process) Improving access and opening markets (in order to promote competitive process)

Examples:

‘For over six decades, the mission of the Antitrust Division has been to promote and protect the competitive process – and the American economy – through the enforcement of the antitrust laws’

– Antitrust Division, US Department of Justice (DOJ)

‘The Commission seeks to ensure that the nation's markets function competitively, and are vigorous, efficient, and free of undue restrictions.’

– Federal Trade Commission (FTC), the United States Economic Objectives

Efficiency related economic objectives – Static: low prices (economic welfare)

– Dynamic: technological change and innovation (long-run economic welfare)

Economic Development Other economic objectives – Protecting small business – Maintaining employment – Market integration

Effective competition

Non-economic Objectives Equity

Social welfare

Fairness (fair competition)

Freedom (of trade, choice and action) Pluralism (political as well as economic)

Fair competition