What are the proper objectives of competition policy?
What are the Proper Objectives of Competition Policy?
Competition policy promotes market competition by regulating anti-competitive behaviour undertaken by firms. The fundamental reason for competition policy is to allow the smooth functioning of the free market and the price mechanism, thus maximising economic welfare. As we have seen illustrated by the first theorem of welfare economics, competitive equilibrium in markets leads to Pareto efficient outcomes, at which the sum of producer surplus and consumer surplus is maximised- i.e. no firm or individual can be made better off without making somebody else worse off. This is conducive to maximising economic welfare. However, there appear to be other objectives that are taken into account by competition regulatory bodies, such as the protection of consumers, the defence of small firms, fighting inflation, and fairness. We will examine each of these objectives, taking into account whether they are consistent with the fundamental objective of economic welfare, and consequently decide if they are proper objectives of competition policy.
One objective that is commonly put forth with respect to competition policy is the protection of consumers. Often consumers are not able or willing to stand up for themselves given a particular market situation, such as a rise in price, because the effect of the price rise is spread over a significant number of them. Take a numerical example: there are two firms in the market for mobile phones in Scotland; between them, they sell approximately 4,000,000 phones a year. Each consumer purchases, at most, one phone in a given year, for the price of £200. If the firms were to lobby the government to regulate in such a way that the price increased by 10% (through, for example, allowing collusive price-fixing agreements, or protectionist policy), then the firms would increase their joint revenue, assuming little change in demand (one would expect the demand for mobile phones to be
Competition policy promotes market competition by regulating anti-competitive behaviour undertaken by firms. The fundamental reason for competition policy is to allow the smooth functioning of the free market and the price mechanism, thus maximising economic welfare. As we have seen illustrated by the first theorem of welfare economics, competitive equilibrium in markets leads to Pareto efficient outcomes, at which the sum of producer surplus and consumer surplus is maximised- i.e. no firm or individual can be made better off without making somebody else worse off. This is conducive to maximising economic welfare. However, there appear to be other objectives that are taken into account by competition regulatory bodies, such as the protection of consumers, the defence of small firms, fighting inflation, and fairness. We will examine each of these objectives, taking into account whether they are consistent with the fundamental objective of economic welfare, and consequently decide if they are proper objectives of competition policy.
One objective that is commonly put forth with respect to competition policy is the protection of consumers. Often consumers are not able or willing to stand up for themselves given a particular market situation, such as a rise in price, because the effect of the price rise is spread over a significant number of them. Take a numerical example: there are two firms in the market for mobile phones in Scotland; between them, they sell approximately 4,000,000 phones a year. Each consumer purchases, at most, one phone in a given year, for the price of £200. If the firms were to lobby the government to regulate in such a way that the price increased by 10% (through, for example, allowing collusive price-fixing agreements, or protectionist policy), then the firms would increase their joint revenue, assuming little change in demand (one would expect the demand for mobile phones to be