THE PURPOSE OF COMPETITION LAW

INTRODUCTION

The essay explores the foundations of competition law. Starting from the “Wealth of Nations” by Adam
Smith, the free market economy has affected the way competition law has been implemented. Thus
efficiency and welfare were set as main goals of competition law but other objectives, such as the
preservation of liberty and dispersal of economic power, are nowadays taken into account. These goals
reflect the debate between Chicago School and ordoliberalism. A particular attention will be given to EU law
whose objective is the creation of a common market.

1. The roots of competition law: a free market economy

The starting point of analysis is found in a free market economy. The strong belief in such economy has
affected the way competition law has been implemented. It is a system where resources are allocated on the
basis of supply and demand and no public intervention is set. Thus competition between firms is the
constitutive element of free market economy in order to reach efficiency and welfare.

The very roots of competition law are found in Adam Smith: competition can lead to economic prosperity in
the measure how governments remove obstacles to the operation of free markets. The pursuing of self-
interest leads to efficiency: therefore, whenever an individual acts in the market in order to pursue its own
interest, the sum of individual interests will lead to the prosperity of the society. Thus public interest does not
need to be set: “the invisible hand” will guide economic actors and the interest of the society will be reached
more effectually than when they really indent to promote it. 1

However, the adoption of a free market economy does not mean rules affecting competition cannot be
established. Indeed governments can set rules of both intervention and control for reasons of public policy.
Thus competition laws seek to control and interfere with the freedom of conduct of firms in order to promote
competition. That might seem ironic but in the competition context regulatory rules are necessary to deal
with market imperfections and failures 2 such as fixing prices and the abuse of dominant position. Moreover,
monopoly has to be avoided: competition does not exist whether only one prevails over the market and fix

1
Adam Smith, The Wealth of Nations, 1776 reprinted Peguin 1999
2
Alison Jones and Brenda Sufrin, EU Competition Law, Fifth Edition, 2014 Oxford University Press, p. 3
prices maximizing his profit at a lower level of output 3. In these cases competition law aims to restrain such
behaviors.

Therefore, it is interest of a democratic society not to have concentration of market power in few subjects
and competition policy is expected to inhibit this concentration. In conclusion, if a firm is not able to
compete, it will collapse producing inefficiency while the first purpose of a free market economy is to reach
efficiency. 4

2. The promotion of total welfare and consumer welfare as main goals for competition law

Efficiency and welfare are main objectives of competition law in the measure how efficiency is reached
whenever welfare is maximized5. However, there are two different concepts of welfare: social welfare is the
sum of producer surplus and consumer surplus; consumer welfare corresponds to consumer surplus. When
competition policy has consumer welfare as goal, it aims to transfer this surplus from producers to
consumers. However, prohibiting conducts and transactions which reduce consumer welfare may not allow
efficiency gains which maximize social welfare. 6 Indeed there are several cases where allocative efficiency
may require a trade-off between different types of efficiencies which may have an effect on the relationship
between producer and consumer surplus7.

Moreover, further goals can be established. It should be borne in mind antitrust law was neither invented by
the technicians of commercial law nor by economist themselves but by scholars trying to find a solution of a
problem for democracy: when a company or a firm emerges in the market, this is expression of the
fundamental freedom of individuals but this leads to a problem when a concentration of private power is set.
The exercise of such freedoms is the basis of principles of liberal democracy but this cannot become an
imposition on others. Indeed competitive markets generally preclude the creation of excessive private power.
Power is recognized in the public sphere whether they are legitimated by law; while in the private sphere it
does not go beyond the limited prerogatives allowed within the firms and its owners 8. This conception of the
value of competition law as exercise of a fundamental freedom is central in new economic debates and its
preservation can lead to efficiency in certain contexts.

In conclusion, there is a general consensus at present among economists, competition lawyers and policy-
makers that competition law should be adopted and applied in pursuance of economic efficiency and welfare.
However, there is a huge debate whether the appropriate welfare standard is social welfare or consumer
welfare. As far as the other objectives are concerned, this remains a live issue which has gained a particular
3
Jeffrey Church and Roger Ware, Industrial Organization – A strategic approach, 2000 Irwin McGraw Hill, p.29
4
Andrew Scott, Encyclopedia of Competition Law, Volume 1, 2008 London Sweet & Maxwell, p.1013
5
Alison Jones and Brenda Sufrin, EU Competition Law, 2014 Oxford University Press, p. 4
6
Pinar Hakman, The concept of abuse in EU competition law, 2012 Hart Publishing, p.37
7
R.J. Van den Bergh and P.D. Camesasca, European Competition Law and Economics: A comparative Perspective,
2006 Sweet & Maxwell, p.29
8
Giuliano Amato, Antitrust and the Bounds of Power, 1997 Hart Publishing, p.2-3
focus after the recent economic crisis 9. Thus, which value competition law is pursuing, there is the feeling
that this is a matter of political choice which both scholars and EU competition law are discussing about.

3. The theoretical debate: the Chicago school and the rule of ordoliberalism

The development of competition policy has seen reliance on economic theory. In this regard, the Chicago
school set foundations of competition analysis as rigorously theoretical. This consists in the pursuit of
efficiency by which is meant allocative efficiency and this should be the sole goal of competition law 10. The
school does not pay attention to small businesses and the identity of winners and losers is irrelevant as long
as efficiency is achieved. 11 Indeed, the consumer welfare corresponds to the wealth of the nation and to what
is it usually called social welfare 12. Still in recent times Richard Posner strongly criticized the view that
would use competition laws to promote goals other than efficiency and the promotion of interests of small
businesses. This is a political issue and economic analysis should avoid focusing 13.

To this rigorous economical conception of competition law is criticized by ordoliberalism which is not a
purely economic theory but a philosophy which gained importance in the post-war context. 14 The basis is the
liberalist human tradition: indeed competition is necessary to economic well-being and economic freedom is
necessary for political freedom. It advocates an economic constitution whereby competition and economic
freedom are embedded into the law; thus, competition law should create and protect the conditions of
competition. It is evident that competition becomes a value in itself: thus it achieves to limit the power of
individual players in order to create an economy built on small business. Ordoliberalism prizes the freedom
of all citizens to be able to enter and to compete on markets. This will lead to economic efficiency and
consumer welfare as purpose of competition law.

4. EU Competition Law: the single market and the economic integration

As far as EU law is concerned, the objective has been the creation of a common market since the Treaty of
Rome. A common market means an area where direct and indirect barriers to trade between Member States
are removed and a common import and export policy. There are many objectives which competition law can
pursue but when EU is at stake, competition law is expected to contribute to achieve the aim of the Union at
first. Therefore, the great question becomes what objective competition law pursues. As this regard, a
distinction need to be establish: there are ultimate goals which are social welfare, consumer welfare or

9
Alison Jones and Brenda Sufrin, EU Competition Law, 2014 Oxford University Press, p. 18
10
Herbert Hovenkamp, Antitrust Policy after Chicago, 1985 Univ.Mich. LR 213, p.226-229
11
Alison Jones and Brenda Sufrin, EU Competition Law, 2014 Oxford University Press, p. 23
12
Robert Borke, The Antitrust Paradox: A policy at war with itself, 1978 Basic Books reprinted with a new
introduction and epilogue in 1993, p.90-91
13
Richard Posner, Antitrust Law, second edition 2001, University of Chicago Press, p.25
14
Alison Jones and Brenda Sufrin, EU Competition Law, 2014 Oxford University Press, p. 34
economic freedom and intermediate goals which are the maintenance of an effective competitive structure or
the protection of the process of competition in order to reach that ultimate objective 15. In this regard, the
Treaties clearly recognize that “the removing of existing obstacles calls for concerted action in order to
guarantee steady, balanced trade and fair competition”.16 All these goals are reached through economic
integration aiming to the final objective of political unification 17.

The economic and political environment has changed in recent years and competition policy rules have been
forced to a constant process of adaptation. However, the travaux préparatoires of ECC competition
provisions show how ordoliberalism goals are not embedded in the rules. Thus the interpretation is left to the
Commission, which supports a consumer welfare standard, and the CJEU, which embraces a broader view of
the objectives.

The new articles 2 and 3 of TEU have more to do with social values than purely economic objectives. Indeed
Europe is an area of peace and stability, freedom and democracy and thus competition policy is a means of
strengthening market economy and enhancing its efficiency 18. Art 3 is very important because it introduces
the principle of undistorted competition fundamental to set any competition rule 19 and the CJEU considers it
as an instrument for the interpretation of such rules 20. The continuing importance of the single market goal
has been stressed in GlaxoSmithKnline: the CJEU confirmed that the Treaty’s objective is to achieve the
integration of national markets through the establishment of a single market 21.

Considering that art 101 (3) demands a fair share of efficiency gains resulting from anti-competitive
agreements which must be passed on to consumers, it is clear the Commission has chosen consumer welfare
rather than social welfare. There are three reasons beyond this choice: firstly, consumer welfare can easier be
applied; secondly, it is more political acceptable as way of arguing for an economic approach to competition
law; thirdly, it is a politically acceptable way to disguise a non-interventionist agenda 22.

Summing up, as far as EU law is concerned, both the Commission and CJEU are ambiguous to set a
hierarchy of objectives in EU competition law. Indeed, EU is a living body which is ready to change in order
to answer to new challenges affecting European integration: this evolution is particularly crucial when
competition law is at stake.

CONCLUSION

15
Alison Jones and Brenda Sufrin, EU Competition Law, 2014 Oxford University Press, p. 35
16
Preamble of the Treaty of Rome founding ECC, now appearing in the Preamble of the TFEU
17
Ioannis Lianos, The new goals of competition law, 2013 CLES Working Paper Series 3/2013, p.14
18
Joaquìn Almunia, 2010 Mandate statement as new Competition Commissioner.
19
Case C-6/72, Europemballage & Continental Can v. Commission [1973].
20
Case C-52/09, Konkurrensverket v. TeliaSonera Sverige AB [2011], § 20-22.
21
Case C-501/06, GlaxoSmithKline Services Unlimited v. Commission [2009], §52-69
22
Renato Nazzini, The Foundations of European Competition Law, The objectives and principles of art 102, 2011
Oxford University Press, p.44-45
Competition law is a tool for Governments to set rules of intervention and control for reasons of public
policy. Thus competition laws seek to control and interfere with the conduct of firms in order to promote
competition. Efficiency, welfare and economic freedom are objectives of competition law. In EU law, they
are reconsidered in the light of the creation of a common market. Nowadays two views coexist among the
European Institutions: the Commission is in favor of consumer welfare while the CJEU admits a broader
view without establishing any hierarchy between objectives.