Objectives And Instruments Of Competition Law

Author:Damien Geradin
Profession:Professor of Law at the University of Liège and Director of the Global Competion Centre

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Competition is the best way to allocate resources and the most efficient means of providing technological and commercial innovation, as well as consumer satisfaction. In economic terms, perfectly competitive markets maximize consumer welfare by promoting allocative efficiency (making the goods consumers want in the quantities valued by society) and productive efficiency (producing goods at the lowest possible costs), as well as giving rise to dynamic efficiency (stimulating innovation and technological change) (Gellhorn and Kovacic 1994). Though competition is beneficial for society as a whole, firms have incentives to acquire market power, that is, to be in a position to influence prices and other factors determining business transactions (Bishop and Walker 1999). Market power can be acquired by a single firm or by several firms, which engage into collusive practices (Pepperkorn and Mehta 1999). When firms exercise market power, this leads to inefficient results.

This suggests that the purpose of competition law is to control market power in order to promote economic efficiency (World Bank and OECD 1998). It is, however, sometimes argued that competition law should pursue other goals than economic efficiency, such as, for instance, the protection of small businesses or employment or, as in the case of the EC, the promotion of market integration. It is also sometimes argued that the use of competition rules to preserve competitive markets may also contribute to upholding the foundations of liberal democracy, by precluding the creation of excessive private power (Amato, 1997). Many competition experts criticize this view on the ground that such objectives are ill-defined and loaded with subjective value judgments, and therefore may lead to inconsistency in the implementation of competition rules (World Bank and OECD, 1998). Moreover, there is a risk that implementation of such other objectives may lead to inefficiency. For instance, preventing a merger that would result in large cost savings and other efficiencies in order to save jobs in the short term will hurt consumer welfare (Jones and Sufrin, 2001). Competition is a tool to protect competition, but not to protect competitors.

Even if there is large consensus that the core objective of competition law is to achieve economic efficiency, there is little agreement on how competition rules can best achieve such efficiency. Competition law is strongly influenced by economic theory and different schools of Page 18 thought have emerged among economists about how competition rules should be implemented to promote economic efficiency. For instance, the so-called Harvard School, which emerged after the second World War, gave great importance to placing limits on the degree of concentration in industry, as concentration would lead to monopoly profits. 6 Competition law should thus concentrate on structural remedies. This approach was subsequently...

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