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Competition law theory

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Competition law theory is the field of economics and legal theory that aims to explain, criticise, and reform competition and antitrust law.

Historical perspectives

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Classical economists, such as Adam Smith and John Stuart Mill, were critical of monopolies and cartels.[1] Smith, in The Wealth of Nations (1776), argued that laws "ought not to facilitate" the creation of economic cartels but nonetheless believed that there was no way the law could intervene in a way "consistent with liberty and justice".[2] Mill, on the other hand, believed that the doctrine of restraint of trade was a justified form of government intervention as, although free trade allows for an ideal system for the distribution and pricing of resources, restraints on trade interfere with the ability of a market to engage in free trade and were a form of "evil".[3]

Later neoclassical theory espoused the theoretical model of a perfectly competitive market, which would necessarily deliver allocative and productive efficiencies under ideal conditions.[4] In other words, resource allocation under a perfectly competitive market would be Pareto efficient such that the long-run price is equal to the marginal cost of production, and economic surplus or 'welfare' is maximised. Production will also be Pareto efficient such that price equals the average costs of producing a good.[5] Joseph Schumpeter has also argued that perfect competition will further result in a third form of efficiency known as dynamic efficiency, which refers to a situation where innovation is continuously sustained in a state of "creative destruction".[6][7]

Mainstream neoclassical perspectives of monopoly hold that monopolistic firms are price-setters and will seek to maximise profits by reducing aggregate output and production below, and increasing prices above, levels at perfect competition. The total loss of consumer and producer surplus when compared to the perfect competition scenario is known as deadweight loss. Productive, dynamic, and X-inefficiencies may also arise due to the lower need for innovation and Pareto-optimal levels of production.[8]

Some laissez-faire theories, skeptical of government intervention, hold that competition law is largely unnecessary because of the nature of economic competition in markets because of creative destruction. Under such theories, where a firm achieves market dominance, it is because of superior skill or innovation, but where it tries to raise prices to take advantage of its monopoly position, it will usually create profitable opportunities for others to compete, such that the monopoly will eventually be eroded via market processes.[9][10][11]

Nonetheless, the majority of contemporary competition law scholars, and many neoclassical economists,[12] believe that government intervention is necessary where monopolies have been formed in order to restore economic efficiencies.[13]

Chicago school

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Robert Bork
Robert Bork argued that antitrust law was flawed

The "Chicago school" of economics, comprised largely of neoclassical economists and some lawyers affiliated with the University of Chicago, were highly influential in the development of modern antitrust theory and doctrine.[14] Leading Chicago antitrust economists include Aaron Director and Henry Calvert Simons;[15] leading antitrust lawyers in the Chicago tradition include Richard Posner and Robert Bork.[16][17]

Chicago school theorists believed in minimal state intervention, judicial restraint, and the operation of free markets.[18] Contrary to the prior decisions of the United States courts, Chicago theorists argued that heavy-handed state intervention would often be anticompetitive, whereas many of the anticompetitive practices previously disallowed by the courts actually promote competition.[14][19] The leading text on Chicago antitrust theory is Robert Bork's The Antitrust Paradox, which argued that the sole purpose of competition or antitrust law was to maximise total surplus, a doctrine which he termed the "consumer welfare standard".[20][21][22] Bork further argued that only a few acts should be prohibited, namely cartels that fix prices and divide markets, mergers that create monopolies, and dominant firms pricing predatorily, while allowing such practices as vertical agreements and price discrimination on the grounds that it did not harm consumers.[23]

The Chicago school was highly influential in the development of antitrust law in the United States courts,[14] including at the United States Supreme Court.[24] Subsequent academic and juridical consideration of the Chicago school has, however, been more critical of the movement.[25][26]

New Brandeis movement

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Modern movements away from the Chicago School include the New Brandeis movement.[21]

Economics

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The majority of economists, including industrial-organisation economists, as well as competition lawyers and voters, believe that government intervention in the form of competition law is necessary and desirable.[27] Laissez-faire theories that completely reject any state intervention in competition are considered heterodox.[11][28]

Contemporary economic developments have challenged conventional industrial organisation models and the efficacy of conventional competition law tools.[29][30][31] As a result, modern directions of competition law include new and increased focuses on information economics, digital economy, and platform economy, including considerations of enforcement speed, dynamic models of competition, competitive harms beyond the consumer, network effects, winner-take-all markets, market dominating firms, monopsony powers, transaction costs, non-monetary costs, value of information, and attention costs.[32][33]

Workable competition

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The majority of economists and competition lawyers regard perfect competition as either impossible or extremely rare in real-world conditions. Further, by the theory of the second best, which holds that if one optimality condition for perfect competition cannot be satisfied, the next-best competitive solution can be achieved by changing other variables away from the values that would otherwise have been optimal.[34]: 217 As such, competition law generally seeks to promote workable[35] or effective competition rather than perfect competition.[36][37]

Although there is no generally agreed-upon definition of workable or effective competition,[38][39] one definition, proposed by Jesse W Markham, proposes a criterion of there being "no clearly indicated change than can be effected through public policy measures that would result in greater social gains than social losses".[40] Practices are therefore regarded as anti-competitive if they significantly or unfairly distort effective competition.[41]

Empirical theories of effective competition characterise such markets by reference to multiple factors, such as low four-firm concentration ratios (typically below 40%), flexible pricing, low entry barriers, little collusion, and low rates of profit.[42][43] In reference to theories of perfect competition, competition in real-world markets can also be measured by either the elasticity of demand or the relative excess of price over marginal costs;[44] in a perfectly competitive market, price is perfectly elastic and equal to marginal cost.[45]

Market concentration and dominance

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Market concentration is closely related to and generally, although not always,[46][47] positively correlated with market competition.[43][48] Greater market concentration by a one or a few firms is generally regarded as undesirable because of the increased theoretical likelihood of collusion (and consequently supracompetitive profits)[48][49] and the inherently higher profits larger firms enjoy because of their greater efficiency.[50][51][52] Even where collusion is absent, game theoretic models predict higher prices and lower consumer surplus where market concentration is high, such as in cases of differentiated Bertrand competition[53] and Cournot competition.[54][55][56]

In most cases, high market concentration produces undesirable consequences such as reduced competition and higher prices.[57] Nonetheless, some theoretical models, most notably the creative destruction model of Joseph Schumpeter, have argued that market concentration is positively correlated with innovation. Kenneth Arrow, on the other hand, has argued that a greater market concentration will decrease incentive to innovate because a firm within a monopoly or monopolistic market would have already reached profit levels that greatly exceed costs. Recent empirical research has found that there is a U-shaped relationship between market concentration and innovation.[58][59][60]

Herfindahl–Hirschman index

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The Herfindahl–Hirschman index (HHI) is the most commonly used measure of market concentration in competition law and economics and is defined as the sum of the squares of the market share held by each market participant:

Where is the market share of firm i and N is the number of firms in the relevant market. In competition law, is typically expressed as a percentage, such that a market concentration level of less than 1000 is typically seen as low, whilst one of more than 1500 is regarded as excessive. is sometimes also expressed as a decimal, such that an HHI of 0 represents a perfectly competitive industry while an HHI of 1 represents a monopolised industry.[61][62]

Concentration ratios

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The concentration ratio (CR) is a measure of how concentrated a market is.[63] It is calculated by summing of the market shares of the n largest enterprises:[64]

where N is usually between 3 and 5. Generally speaking, a CR of less than 40% and a CR of more than 60% are regarded as modest and high levels of market concentration, respectively.[63]

Anti-competitive practices

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Barriers to entry

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In competition law, a barrier to entry is defined as a fixed cost incurred by a new entrant into an existing market, which delays or obstructs entry into the market, and that reduces relative social welfare. So-called "antitrust barriers to entry" are different from the concept of barriers to entry in other areas of economics, such as strategic management, which may emphasise other factors, such as the relative advantage of incumbents.[65][66] Examples of barriers to entry in competition law include: intellectual property rights (such as patents), economies of scale, existing regulations, network effects, and predatory pricing.[67][68]

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Across many jurisdictions, a broad principle of competition law that has been applied is the "consumer welfare standard", regards the impact of business practices on consumer welfare as an important if not decisive factor in determining whether to find against the business.[69] Despite its name, the consumer welfare standard, as originally expressed by conservative legal scholar Robert Bork, does not strictly aim to maximise consumer welfare but the welfare of both producers and consumers. The use of the consumer welfare standard as a decisive test for whether the law should intervene has been criticised for inappropriately restricting the scope of competition law to effects on prices to consumers instead of more broadly considering issues of fairness, efficiency, and justice. Today, most jurisdictions agree that the consumer welfare standard is not solely decisive in competition law cases but is one of a number of factors the courts should consider.[22]

Policy and political theory

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Anti-cartel enforcement is a key focus of competition law enforcement policy. In the United States the Antitrust Criminal Penalty Enhancement and Reform Act 2004 raised the maximum imprisonment term for price fixing from three to ten years, and the maximum fine from $10 million to $100 million.[70] In 2007 British Airways and Korean Air pleaded guilty to fixing cargo and passenger flight prices.[71]

These actions complement the private enforcement which has always been an important feature of United States antitrust law. The United States Supreme Court summarised why Congress allows punitive damages in Hawaii v. Standard Oil.[72]

"Every violation of the antitrust laws is a blow to the free-enterprise system envisaged by Congress. This system depends on strong competition for its health and vigor, and strong competition depends, in turn, on compliance with antitrust legislation. In enacting these laws, Congress had many means at its disposal to penalize violators. It could have, for example, required violators to compensate federal, state, and local governments for the estimated damage to their respective economies caused by the violations. But, this remedy was not selected. Instead, Congress chose to permit all persons to sue to recover three times their actual damages every time they were injured in their business or property by an antitrust violation."

In the EU, the Modernisation Regulation 1/2003 means that the European Commission is no longer the only body capable of public enforcement of European Community competition law. This was done in order to facilitate quicker resolution of competition-related inquiries. In 2005 the Commission issued a Green Paper on Damages actions for the breach of the EC antitrust rules,[73] which suggested ways of making private damages claims against cartels easier.[74]

Competition has been shown to be a significant predictor of productivity growth within nation states.[75]

See also

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Notes

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  1. ^ Smith (1776) Book I, Chapter 7, para 26
  2. ^ Smith (1776) Book I, Chapter 10, para 82
  3. ^ Mill On Liberty (1859) Chapter V, para 4
  4. ^ Hunt, Shelby (2000). A General Theory of Competition: Resources, Competences, Productivity, Economic Growth. California: SAGE Publications. doi:10.4135/9781452220321. ISBN 9780761917298.
  5. ^ Kenneth Galbraith, The New Industrial State (1967)
  6. ^ Joseph Schumpeter, The Process of Creative Destruction (1942)
  7. ^ Whish 2024, pp. 7–9.
  8. ^ Whish 2024, pp. 9–10.
  9. ^ Campbell R. McConnell, Stanley L. Brue. Economics: Principles, Problems, and Policies. McGraw-Hill Professional, 2005. pp. 601–02
  10. ^ Joseph Schumpeter, The Process of Creative Destruction (1942)
  11. ^ a b For a criticism of the libertarian view see Michael E. DeBow (2007) What's Wrong with Price Fixing: Responding to the New Critics of Antitrust, published by the Cato Institute Archived 2007-09-30 at the Wayback Machine
  12. ^ Cowen, Tyler; Tabarrok, Alex (2013). Modern Principles: Microeconomics (2nd ed.). New York: Worth Publishers. pp. 228–29. ISBN 978-1-4292-3999-8.
  13. ^ cf. Lipsey and Lancaster, "The General Theory of Second Best" (1956-7) 24 Rev Ec Stud 11-32
  14. ^ a b c Hovenkamp, Herbert (1985). "Antitrust Policy after Chicago". Michigan Law Review. 84 (2). Michigan Law Review, Vol. 84, No. 2: 213–284. doi:10.2307/1289065. JSTOR 1289065. S2CID 153691408.
  15. ^ Stigler, George J. (April 1974). "Henry Calvert Simons". The Journal of Law and Economics. 17 (1): 1–5. doi:10.1086/466780. ISSN 0022-2186. S2CID 154153451.
  16. ^ Posner, R. (2007). Economic Analysis of Law (7th ed.). Austin, TX: Wolters Kluwer Law & Business. ISBN 978-0-7355-6354-4.
  17. ^ Posner, R. (2001). Antitrust Law (2nd ed.). Chicago: University of Chicago Press. ISBN 978-0-226-67576-3.
  18. ^ Easterbrook, Frank (1984). "The Limits of Antitrust". Texas Law Review. 63: 1. ISSN 0040-4411.
  19. ^ Bork (1978), p. 405.
  20. ^ Bork, Robert H. (1978). The Antitrust Paradox. New York: Free Press. ISBN 978-0-465-00369-3.
  21. ^ a b Samuel, Leah; Morton, Fiona Scott; Morton, Leah Samuel and Fiona Scott (2022-02-16). "What Economists Mean When They Say "Consumer Welfare Standard"". ProMarket. Retrieved 2025-08-08.
  22. ^ a b Whish 2024, pp. 19–22.
  23. ^ Bork (1978), p. 406.
  24. ^ Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977); Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979); National Collegiate Athletic Assn. v. Board of Regents of Univ. of Okla., 468 U.S. 85 (1984); Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993); State Oil Co. v. Khan, 522 U.S. 3 (1997); Verizon v. Trinko, 540 U.S. 398 (2004); Leegin Creative Leather Products Inc. v. PSKS Inc., 551 U.S. ___ (2007).
  25. ^ Areeda, Phillip E., Hovenkamp, Herbert & Turner, Donald F., Antitrust Law: An Analysis of Antitrust Principles and their Application (New York, NY: Aspen Law & Business, 1978-)
  26. ^ See, e.g., Brooke Group v. Williamson, 509 U.S. 209 (1993).
  27. ^ Orth, Taylor (6 November 2023). "Most Americans oppose monopolies and support antitrust laws". YouGov. Retrieved 25 July 2025.
  28. ^ Dominic Armentaro "Antitrust: The Case for Repeal" (Ludwig Von Mises Institute 1986) and "The Case Against Antitrust" by Robert A. Levy (Cato Institute 2004)
  29. ^ Rochet, Jean-Charles; Tirole, Jean (2003). "Platform Competition in Two-Sided Markets". Journal of the European Economic Association. 1 (4): 990–1029. doi:10.1162/154247603322493212. ISSN 1542-4766.
  30. ^ Crémer, Jacques; De Montjoye, Yves-Alexandre; Schweitzer, Heike (2019). Competition policy for the digital era. Europäische Kommission. Luxembourg: Publications Office of the European Union. ISBN 978-92-76-01946-6.
  31. ^ Furman, J.; Coyle, D.; Fletcher, A.; McAuley, D.; Marsden, P. (2019). "Unlocking digital competition, Report of the Digital Competition Expert Panel". UK Government. HM Treasury. doi:10.17639/WJCS-JC14.
  32. ^ Cowan, Simon; Ormosi, Peter; Perkins, Joe (2024). "New directions in competition policy: an overview". Oxford Review of Economic Policy. 40 (4): 687–695. doi:10.1093/oxrep/graf001. ISSN 0266-903X. Retrieved 2026-03-30.
  33. ^ Newman, John M. (2015). "Antitrust in Zero-Price Markets: Foundations". University of Pennsylvania Law Review. 164 (1). The University of Pennsylvania Law Review: 149–206. ISSN 0041-9907. JSTOR 24752847. Retrieved 9 July 2025.
  34. ^ Lipsey, R. G.; Lancaster, Kelvin (1956). "The General Theory of Second Best". Review of Economic Studies. 24 (1): 11–32. doi:10.2307/2296233. JSTOR 2296233.
  35. ^ Clark, "Towards a Concept of Workable Competition" (1940) 30 Am Ec Rev p.241-256
  36. ^ Whish (2003) p.14
  37. ^ Phillips, Jr., Charles F. (1969) The Economics of Regulation: Theory and Practice in the Transportation and Public Utility Industries. Richard D. Irwin, Inc.
  38. ^ Sosnick, Stephen H. (1958) A Critique of Concepts of Workable Competition The Quarterly Journal of Economics pp. 380-423
  39. ^ Sosnick, Stephen H. (1968) Toward a Concrete Concept of Effective Competition American Journal of Agricultural Economics pp. 827-853
  40. ^ Markham, Jesse W. (1950). An Alternative Approach to the Concept of Workable Competition The American Economic Review p. 361
  41. ^ J. Gregory Sidak, The Deterrent Effect of Antitrust Enforcement, 89 J. POL. ECON. 429, 429 (1981).
  42. ^ Shepherd, William G. (1982). "Causes of Increased Competition in the U.S. Economy, 1939-1980". The Review of Economics and Statistics. 64 (4): 613–626. doi:10.2307/1923946. ISSN 0034-6535. JSTOR 1923946.
  43. ^ a b Brock, James W.; Obst, Norman P. (2009-03-01). "Market Concentration, Economic Welfare, and Antitrust Policy". Journal of Industry, Competition and Trade. 9 (1): 65–75. doi:10.1007/s10842-007-0026-6. ISSN 1573-7012. S2CID 154631137.
  44. ^ Stigler, George J. (1972). "Economic Competition and Political Competition". Public Choice. 13: 91–106. doi:10.1007/BF01718854. ISSN 0048-5829. JSTOR 30022685. S2CID 155060558.
  45. ^ Stigler, George J. (2008). "Competition". The New Palgrave Dictionary of Economics. London: Palgrave Macmillan: 1–9. doi:10.1057/978-1-349-95121-5_524-2. ISBN 978-1-349-95121-5.
  46. ^ Salinger, Michael (1990). "The Concentration-Margins Relationship Reconsidered" (PDF). Brookings Papers on Economic Activity. Microeconomics. 1990: 287–335. doi:10.2307/2534784. JSTOR 2534784.
  47. ^ Fonseca, Miguel A.; Normann, Hans-Theo (2008). "Mergers, Asymmetries and Collusion: Experimental Evidence". The Economic Journal. 118 (527): 387–400. doi:10.1111/j.1468-0297.2007.02126.x. JSTOR 20108803. S2CID 154378955.
  48. ^ a b Bain, Joe, S (1951). "Relation of Profit Rate to Industry Concentration: American Manufacturing, 1936-1940". The Quarterly Journal of Economics. 65 (3): 293–324. doi:10.2307/1882217. JSTOR 1882217.{{cite journal}}: CS1 maint: multiple names: authors list (link)
  49. ^ Rosenbaum, David I. (1994). "Efficiency v. Collusion: Evidence Cast in Cement". Review of Industrial Organization. 9 (4): 379–392. doi:10.1007/BF01029512. JSTOR 41798521. S2CID 153620070.
  50. ^ Demsetz, Harold (1973). "Industry Structure, Market Rivalry, and Public Policy". Journal of Law and Economics. 16 (1): 1–9. doi:10.1086/466752. JSTOR 724822. S2CID 154506488.
  51. ^ Martin, Stephen (1988). "Market Power and/or Efficiency?". The Review of Economics and Statistics. 70 (2): 331–335. doi:10.2307/1928318. JSTOR 1928318.
  52. ^ Collins, Norman R.; Preston, Lee E. (1969). "Price-Cost Margins and Industry Structure". The Review of Economics and Statistics. 51 (3): 271–286. doi:10.2307/1926562. JSTOR 1926562.
  53. ^ Marazzi, Mario (2021-01-29). "On the Fragility of Gains from Trade under Continuously Differentiated Bertrand Competition". Federal Reserve Board. Retrieved 2025-09-07.
  54. ^ Shapiro, Carl (1989). "Theories of oligopoly behavior". Handbook of Industrial Organization. 1. Elsevier: 329–414. doi:10.1016/S1573-448X(89)01009-5., quoted by de Bornier 1992.
  55. ^ Friedman, James W. (2000). "The legacy of Augustin Cournot". Cahiers d'économie politique. 37 (1): 31–46. doi:10.3406/cep.2000.1287. Retrieved December 13, 2022.
  56. ^ Fisher, Irving (1898). "Cournot and mathematical economics". The Quarterly Journal of Economics. 12 (2). Oxford University Press: 119–138. doi:10.2307/1882115. JSTOR 1882115.
  57. ^ Turner, Scott F.; Mitchell, Will; Bettis, Richard A. (2010). "Responding to Rivals and Complements: How Market Concentration Shapes Generational Product Innovation Strategy". Organization Science. 21 (4): 856. doi:10.1287/orsc.1090.0486. hdl:10161/4440.
  58. ^ Sonenshine, Ralph M. (2010). "The Stock Market's Valuation of R&D and Market Concentration in Horizontal Mergers". Review of Industrial Organization. 37 (2): 119–140. doi:10.1007/s11151-010-9262-8. JSTOR 41799483. S2CID 155085616.
  59. ^ Delbono, Flavio; Lambertini, Luca (2022). "Innovation and product market concentration: Schumpeter, arrow, and the inverted U-shape curve". Oxford Economic Papers. 74 (1): 297–311. doi:10.1093/oep/gpaa044. hdl:11585/831079.
  60. ^ Petit, Nicolas; Teece, David J. (2021). "Original Article Innovating Big Tech firms and competition policy: favoring dynamic over static competition". Industrial and Corporate Change. 30 (1168–1198). doi:10.1093/icc/dtab049. hdl:1814/74432.
  61. ^ Evans, Anthony J. (2014). Markets for Managers: A Managerial Economics Primer. John Wiley & Sons Ltd. p. 69.
  62. ^ "Herfindahl-Hirschman Index – United States Department of Justice". US Department of Justice. 25 June 2015. Retrieved 2022-11-09.
  63. ^ a b J. Gregory Sidak, "Evaluating Market Power Using Competitive Benchmark Prices Instead of the Hirschman-Herfindahl Index", 74 Antitrust L.J. 387, 387–388 (2007).
  64. ^ Besanko, David (2017-07-01). Economics of Strategy. Wiley. p. 162. ISBN 978-1-119-04231-0.
  65. ^ Wheelen, Thomas L.; Hunger, J. David (2011). Strategic Management and Business Policy (PDF). Pearson Education. p. 111. Retrieved 21 April 2023.
  66. ^ Porter, Michael E. (January 2008). "The Five Competitive Forces That Shape Strategy". Harvard Business Review. 86 (1): 78–137. PMID 18271320. Retrieved January 24, 2023.
  67. ^ Karakaya, Fahri; Stahl, Michael J. (April 1989). "Barriers to Entry and Market Entry Decisions in Consumer and Industrial Goods Markets". Journal of Marketing. 53 (2). Sage Publications: 80–91. doi:10.2307/1251415. JSTOR 1251415. Retrieved 2020-10-31.
  68. ^ McAfee, R. Preston; Mialon, Hugo M.; Williams, Michael A. (May 2004). "What Is a Barrier to Entry?" (PDF). American Economic Review. 94 (2): 461–465. doi:10.1257/0002828041302235. Retrieved January 24, 2023 – via California Institute of Technology.
  69. ^ Bork, Robert H. (1978). The Antitrust Paradox. New York: Free Press. ISBN 978-0-465-00369-3.
  70. ^ see generally, Pate (2004) at USDOJ
  71. ^ see, USDOJ Antitrust's press release Archived 2007-08-08 at the Wayback Machine and the court filing
  72. ^ Hawaii v. Standard Oil Co. of California 405 U.S. 251, 262 (1972)
  73. ^ Damages actions for the breach of the EC antitrust rules {SEC(2005) 1732} /* COM/2005/0672
  74. ^ see FAQ on the Green paper here
  75. ^ OECD. Factsheet on how competition policy affects macro-economic outcomes.

References

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Further reading

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  • Elhauge, Einer; Geradin, Damien (2007) Global Competition Law and Economics, ISBN 1-84113-465-1
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