From Competition Theory to Competition Policy: Pugnacity or Complacency?
The fact that different schools of thought attach different meanings to the same word, “competition”, has obvious consequences at the policy level. As just a trivial but telling example, consider the case of a firm earning persistent and substantial extra-profits (that is, profits above its opportunity costs).
In the competition-as-market-structure scenario, such a situation is explained in an outright way by claiming that the firm under scrutiny is endowed with persistent and substantial market power. Such an explanation obviously entails a prima facie case for an aggressive antitrust action (even a divestiture) in order to restore the minimal conditions for perfect competition to obtain. On the contrary, in the neo-Austrian or evolutionary scenario, the above situation may be explained by claiming that the firm under scrutiny is a successful innovator with imitators constantly lagging behind. The latter explanation entails that an aggressive antitrust action is definitely unwarranted. In short, the origin of the liveliest debates as concerns competition policy may be traced back to the different notions of competition assumed by the participants in the debate.By drastically simplifying, it may be claimed that, at the normative level, an illuminating distinction is that introduced by Blaug between competition as an end state and competition as a process (Blaug 1997). Economists adopting the notion of competition as a process are usually very prudent before condemning as anti-competitive many of the current business practices:
When competition is analytically considered as a process, pure integration, mergers and acquisitions, cooperation and alliances may become integral parts of the normal functioning of competitive markets. These inter-firm relations which are perceived as collusion within the traditional vision of competition can be legitimated for some periods and for specific purposes.
(Krafft 2000: 1-2)As a consequence, these economists generally are distrustful towards active antitrust policies. Commenting on the puzzle noted by Stigler (1982), namely, the US economists’ lack of enthusiasm towards the Sherman Act, DiLorenzo and High claim:
There is no doubt that economists at the turn of the century looked upon competition as a process of enterprise and rivalry, and that they disapproved of antitrust law. These two views were not merely coincidental. Although viewing competition as rivalry does not necessitate opposition to antitrust law, it surely encourages such opposition. (DiLorenzo and High 1988: 432)
By contrast, economists adopting the end-state notion of competition and the related Pareto-optimality theorems are likely led to focus on the number and size of competitors in a given market as the two crucial variables which (together with entry barriers) determine the distance between the actual workings of the market under scrutiny and the ideal of perfect competition. As a consequence, these economists are generally much less reluctant to endorse active antitrust policies.
Provided that workable competition is assumed as the antitrust benchmark instead of perfect competition (Van den Bergh and Camesasca 2001: ch. 1.4), the structureconduct-performance approach to industrial organization theory, developed in the course of Mason’s seminar at Harvard, may be singled out as an obvious candidate for aggressive antitrust. At the opposite end of the spectrum stands the Chicago School of antitrust economics. As noted by Reder (1982), Chicago economists usually assume that “one may treat observed prices and quantities as good approximations to their long- run competitive equilibrium values” (1982: 12) and that “most of what appears to be monopoly is ephemeral, being eliminated by free entry” (ibid.: 15). Thus, within Chicago style of economics, standard (neoclassic) price theory happily coexists with a bold distrust towards active government intervention in market outcomes: only explicit price fixing and mergers to monopoly are worthy of serious antitrust concern (Posner 1979: 933).
In the extreme version of the Chicago school theory of markets, the theory of contestable markets (Baumol et al. 1982), even a single seller-market may be considered as competitive, provided that it is subject to the “hit and run” competition of external firms.An interesting though not yet fully acknowledged third way between Harvard pugnacity and Chicago complacency is represented by the German ordoliberalism, the so-called Freiburg school of Walter Eucken, Franz Bohm, Hans Grossmann-Doerth and Wilhelm Ropke, to mention just a few. Freiburg scholars thought that both laissez-faire and direct government intervention into market outcomes were wrong answers to the problem of creating and maintaining a competitive economy. Rather, they opted for a policy aimed at improving the existing economic order in an indirect way, through a deliberate reformulation of the rules of the game. Therefore, they approached antitrust issues as a problem of constitutional choice. The constitutional dimension of the Freiburg school represents an original and brilliant solution to the classical liberal dilemma of calling for government action to prevent the abuse of private market power while, at one and the same time, acknowledging that government action itself may heavily interfere with and overturn market processes (Giocoli 2009). (Gerber 1998, chapters 7 and 8 provide a fullscope analysis of the role played by German Ordoliberalism and social market economy into shaping European competition law and practice.)
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