W1 L1:
What is Competition?
Competition, in competition law, is competition for resources
The market is a mechanism to allocate resources to those who demonstrate their need is
greatest
- Buyers compete to demonstrate to the seller that they need the resource more than others
- They demonstrate that through the pricing mechanism
Think of an auction as a simple example of how buyers compete for a resource
‘The basic problem of anti-trust is the definition of the public policy criteria which balance the
value of co-operation against the benefits of competition. This is as perennial a problem as it is
elusive. Nor can it be answered in absolute terms.’
Friedmann, Law in a Changing Society, (London, Penguin, 2nd ed, 1972) p 308.
‘A humbug based on economic ignorance and incompetence’
Oliver Wendel Holmes on the Sherman Act, (1894) 8 Harv LR 1.
Perfect competition
A theoretical state in which competition produces optimum economic performance
Perfect competition, requires:
- a homogeneous product
- infinite numbers of buyers and sellers
- free entry into and exit from the market
- perfect communication and full information
- rational buying and selling decisions.
Allocative and productive efficiency will maximise societal wealth.
Monopoly
The theoretical opposite of perfect competition, resulting in poor performance
A Monopoly requires:
- Only one producer of the product
- significant barriers to entry.
By restricting output a monopolist reduces allocative efficiency and productive efficiency.
The models we are about to discuss are traditional models of static price competition
Contemporary competition policy recognises the problems with those models.
“Competition Officials recognize the importance of dynamic competition for our nation’s
long-term economic growth, but antitrust has ossified around static price competition”
ME Stukce, ‘Reconsidering Competition’, 119.
, Competition Law 319
Homo Economicus
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our
dinner, but from their regard to their own self-interest. We address ourselves not to their
humanity but to their self-love, and never talk to them of our own necessities, but of their
advantages”
Adam Smith, An Inquiry into the Nature & Causes of the Wealth of Nations (1776, Vol 1),
Chapter 2, 2.
Demand Curve (D): How much of
the product consumers demand at
different prices. As price falls
consumers wish to buy more and the
curve slopes downward
Marginal Cost Curve (MC): as the
price of production increases the
marginal cost (of supply) increases
with each extra unit of production
and slopes upward
A producer will expand production,
increase quantity, until producing an
extra unit will not generate profit:
- until cost exceeds the price.
- production, and price, will
reach equilibrium where MC
intersects D.
Each producer is a ‘price taker’ and
will expand production as far as they
can, but no one producer can
influence overall demand, or
therefore price.
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