Commercial Law

2. The Economics of
Competition Law

Riccardo Ghetti
www.riccardoghetti.it
«To be everywhere is to be nowhere»

[Lucius Anneus Seneca, Letters from a Stoic, New York,

Penguin Classics, 1969, 33].
Commercial Law Module 2

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Commercial Law Module 2

Competition Intellectual
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Competition
Competition
Economics of Competition

1. Competition as invisible hand

2. Competition as a victim of its own success
3. Perfect competition is impossible
4. What is left of perfect competition?
5. What are the alternatives to perfect competition?
6. How much competition does in practice happen?
7. How should the law be interpreted?
8. What is the relationship between economics an competition law?
9. What characterises the legal approach?
10. What are the goals of competition law?
1. The invisible hand
1. The invisible hand
COMPETITION AS INVISIBLE HAND

- Adam Smith, The Wealth of Nations, 1776 —> competition as a

force driving self-seeking individuals unconsciously to serve the
general welfare.

“[each individual] generally, indeed, neither intends to promote the

public interest, nor knows how much he is promoting it. [...] he intends
only his own gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his intention”
[Smith, 1776, 127-128].

- Argument on the efficiency of free competition, a price-

determining force
1. The invisible hand

- Definition of efficiency: maximum result with minimum effort for

aggregate welfare

- Definition of competition: the effort of the individual seller to

undersell and of the individual buyer to outbid rivals in the
marketplace (VDB 17)

- Definition of freedom: without external restraint. But what is the

limit?
2. Victim of success
COMPETITION AS A VICTIM OF ITS OWN SUCCESS

else nobody will play

- What happens when one competitor actually wins?

- Example of market with a successful competitor

- Success of one competitor means the end of competition

- Need to correct this?

YES oo mu ch
…bu t not t
t
fre e marke
rw i se no
ot h e
3. Perfect comp. impossible

WHY IS PERFECT COMPETITION SAID TO BE IMPOSSIBLE?

- Homogeneous product
- All firms price takers
- Perfect competition requires:
- Price not depending on market share
- Perfect information (ppf)
- Pefect labour mobility
- No entry/exit costs

- Perfect competition is thus impossible not only because it

naturally tends to degenerate ex post (success of competitor)…

…but also because its main requirements do not exist in reality ex ante.
4. What’s left of PC?

WHAT IS LEFT OF PERFECT COMPETITION THEN?

- A general tendency

- A fluctuating state of affairs…

*
- …in need of constant redress (by what?)
5. Alternatives to PC

WHAT ARE THE ALTERNATIVES TO PERFECT COMPETITION?

- Monopoly

- Oligopoly

- Spectrum : where can we find real-world optimal competition level?

 Pareto-efficient
à Causes welfare loss

à
PERFECT
COMPETITION MONOPOLY

OLIGOPOLY

Balancing the needs of firms, consumers and

innovation
FIRMS
CONSUMERS

Competition

INNOVATION
6. How much C in practice?

*
HOW MUCH COMPETITION IN PRACTICE?

- Depends on…

…the law: the law as an instrument to regulate the market

- Why is the law necessary? Because competition is unstable

- How should law operate? Depends on the economic account of

competition a legislature accepts.
7. Legal interpretation
Horses have an even number of legs.
Behind they have two legs, and in front they have
fore-legs.
This makes six legs, which is certainly an odd
number of legs for a horse.
But the only number that is both even and odd is
infinity.
Therefore, horses have an infinite number of legs.
7. Legal interpretation

HOW SHOULD THE LAW BE INTERPRETED?

- Meaning of interpretation: hermeneutics

… in a transparent and verifiable way…

… in a legitimate way (the law tells you how to do it)…

… if the literal meaning is ambiguous, following the spirit of the

law, also construed as the will of the legislature
8. Econ. - c.law relationsihp
WHAT IS THE RELATIONSHIP BETWEEN ECONOMICS AND
COMPETITION LAW?

Competition as a price-determining force

à
- Classical theory à Smith
Competition as a market structure
à
- Neoclassical price theory à Formal models of PCOMP and MNPL

- Harvard à Structure-conduct-performance mechanism

à
Interventionist approach
V.
- Chicago à Reviving price theory
à
Laissez-faire
9. The legal approach

THE LEGAL APPROACH TO COMPETITION LAW

- Hermeneutics criticised: it’s the effects!

- The More Economic Approach (MEA)

10. Goals of competition law

GOALS OF COMPETITION LAW

- Restricting anti-competitive agreements

- Tackling abuse of substantial market powers

- Regulating concentrations

- Public restrictions on competition

+ possible objectives described in 1. Readings – The

Economics of Competition Law available on
virtuale.unibo.it
 Riccardo Ghetti

www.riccardoghetti.it

www.unibo.it