Competition policy

Although there had been legislation about competition in elizabethan England, modern competition policy had its origin in United States antitrust legislation of the late nineteenth century . Its introduction outside the United States began in Europe after the second world war, and it has since spread to most developed countries. Its early development was generally influenced by early antitrust practice, but subsequent intellectual and legal developments have brought about significant modifications.

There are uncertainties about the likely impact of competition policy upon the practice of business that arise from the fact that its operation requires the exercise of a considerable degree of expert judgement. Its legislative framework provides no more than a broad indication of the intentions of the policymakers who devised it, and it delegates to the authorities which it appoints, a wide range of discretion in their performance of the task of giving practical effect to those intentions. Also, its rationale is in some respects incomplete, leaving scope for a range of interpretations.

Rationale

It is generally accepted that the purpose of competition policy is to improve economic welfare (although some scholars have claimed that the founders of United States antitrust law were mainly motivated by a wish to limit the power of big business ). Its basis is a set of propositions that were put forward by economists in the nineteenth century. Those propositions are founded, however, on a highly simplified model of the economy and of the workings of firms within it; and even within that model, they are subject to important qualifications. (As is noted in the article on competition such qualifications arise from the existence of externalities and from the theory of the second best). However, subject to an occasional need to allow for those qualifications, there is a strong presumption that a reduction in barriers to competition will result in an improvement in the form of economic efficiency that is known to economists as allocative efficiency. Competition policy is not usually concerned only with the promotion of competition, however. In the pursuit of economic welfare, account may also to be taken of its effects upon productive efficiency.

Thus competition theory provides the intellectual foundation for competition policy but it does not provide all that is needed to build a serviceable structure upon that foundation. It does not lead to unequivocal prescriptions except where competition is the only question at issue - and even then the questions of externalities and of ‘the second-best’ may introduce qualifications. Where the issue of gains in productive efficiency also arises, other branches of economic theory must be called in aid. The difficulties which then arise stem not so much from the limitations of the available theory, as from the fact that quantification is then needed in order to draw up a balance between losses of allocative efficiency and gains of productive efficiency. The information requirements for that purpose tend to be demanding, and commercial accounting systems are seldom capable of providing the necessary inputs. In practical terms, therefore, the economic rationale for competition policy is incomplete and, at best, its implementation depends partly upon judgement rather than entirely upon analysis.