We all know that legal institutions are not omniscient and that some error is inevitable. We also all know that fact finding in competition cases is costly and that those costs can deter efficient conduct. Finally, we all know that there is a trade-off between cost and the risk of error -- a system that strives to eliminate all error would almost certainly be too costly to administer.
As we design the analytical frameworks and decision rules we will use to apply our competition laws, and especially as we try to incorporate the best economic learning into our decision-making, it is also important to remember that while technical economic discussion helps inform antitrust laws, those laws cannot precisely replicate the economists' views.
Unlike economics, law is an administrative system. Rules that embody every economic complexity and qualification may well prove counter-productive by, for example, discouraging legitimate price competition. The fifth principle grows out of the need to prevent competition enforcement from becoming politicized.
As an economy grows, and the stakes become ever larger, firms are naturally driven to seek protection and help from their governments. They can be expected to try to use the competition law as a weapon against their competitors. The best thing competition agencies can do to prevent competition enforcement decisions from becoming politicized is to make sure our decisions are soundly grounded in economic theory and fully supported by the empirical and factual evidence.
We must also ensure that our decision-making is transparent and fair, and that parties and complainants have an opportunity to provide their perspective before a final enforcement decision is reached. Sixth, competition officials, like doctors, should take a sort of Hippocratic oath: before intervening, we should be confident that our actions do not cause harm.
Competition authorities should be law enforcers, not industrial policy makers who try to move industries in a certain direction or dictate particular market results. Dictating industrial policy is not the proper role of a competition authority for a very good reason: the long-term and, in some industries, even the short-term predictive powers of competition enforcers are limited.
Over the course of my twenty-five-year career as an antitrust lawyer, I have been amazed over and over again at how markets evolve -- often in ways that even the most sophisticated of industry participants were unable to anticipate. In the United States, we have much more faith in the self-correcting nature of markets than we do in our own ability to predict their future course. The seventh principle is that we should work hard to ensure that the competition laws do not themselves become bureaucratic roadblocks to efficient transactions.
A vigorous, competitive, free-market economy produces a whole host of agreements and transactions every day. The vast majority are pro-competitive or, at worst, competitively neutral. We enforcement authorities should therefore continually take stock of our procedures to be sure that only those transactions that raise legitimate competitive concerns are delayed and that we are stopping only those that are truly anticompetitive.
Finally, competition agencies should be as flexible and dynamic as the industries with which they deal. We must make sure that competition law adapts to changes in technology and in the economy.
In particular, we should recognize that in our new, knowledge-based economy, competition in some markets is driven more by innovation than price. New-economy industries frequently require very large and risky upfront investments that will not be made without the promise of a substantial return.
Too much government interference will frustrate innovation and discourage efficient practices to the detriment of consumers worldwide. On the other hand, a totally hands-off approach could lead to high prices and frustrate the emergence of potentially superior technologies -- also to the detriment of consumers.
We need, therefore, to constantly be studying the dynamics of these markets and incorporating new learning about those dynamics into our enforcement decisions. Based on the principles I enumerated, I would like to take this opportunity to suggest -- respectfully and with humility -- some steps Japan might take to incorporate these principles even more fully into its competition policy regime:.
In order for the Japan Fair Trade Commission to be effective, it must have the full and unambiguous support of the Japanese Government.
Mixed messages from the government -- giving lip-service to the principles of competition while at the same time supporting dango or giving administrative guidance that is inconsistent with antimonopoly law or policy -- only confuses the public and the business community and undermines support for the JFTC. It is also important that the public have confidence that the JFTC will be able to perform its mission in an independent manner, free of political or bureaucratic influence.
For that reason, the proposals to change the status of the JFTC to that of an independent agency under the Cabinet are appropriate and I hope they will come to fruition in the coming Diet session. Competition law is an economics-based discipline. As I have discussed, it is very important for a competition agency to perform a careful economic analysis of the procompetitive and anticompetitive aspects of particular conduct before determining whether to challenge or approve that conduct.
A broad range of economic issues may need to be analyzed in such matters as merger reviews, monopolization cases, intellectual property licensing restrictions and even in collaborative ventures between competitors. The Antitrust Division has 55 Ph. D economists on our staff, who are thoroughly integrated into the work of our agency. By contrast, the JFTC counts very few graduate-level economists within its ranks.
In order for the JFTC to ensure that it is taking necessary enforcement actions against anticompetitive activities, and to ensure that it not taking misguided action against conduct that is on balance procompetitive or competitively neutral, it would be very helpful if the JFTC increased the number of graduate level economists on its staff. Antimonopoly Act violations are often difficult to uncover, since the activities are often undertaken in secret.
Competition agencies must have effective enforcement tools at their disposal if they are going to be able to do their jobs and if they are going to be able to keep ahead of the increasing sophistication of firms engaging in anticompetitive practices.
In particular, I think it is important that the JFTC have the most modern investigation and enforcement powers available to the competition authorities in other major countries. Such powers should include the authority to reduce or eliminate surcharges for firms that come forward voluntarily, criminal investigation authority for cases that are likely to be prosecuted criminally, and strong penalties for persons and enterprises that fail to comply with JFTC investigation orders or otherwise interfere with JFTC investigations.
As I discussed earlier, cartels can do significant damage to consumers and to the economy. The potential profits from cartels are a strong inducement for firms to engage in this illegal behavior, especially since it is very difficult for competition authorities to uncover secret cartel agreements.
For these reasons, penalties against firms must be very substantial if enterprises are to be deterred from engaging in unlawful cartels. Although the AMA provides for both administrative surcharges and criminal penalties, the potential penalties are still too modest to have a genuine deterrent effect and fall far short of the sanctions faced by cartel participants in the United States and other major jurisdictions such as the EU and Canada.
To remedy this situation, surcharge levels should be raised significantly. In addition, criminal charges should be brought much more frequently than is currently the case. The current practice of JFTC criminal accusations once every two or three years is unlikely to be predictable enough to contribute to the deterrence of these otherwise very profitable, and very harmful practices.
In conclusion, competition policy plays a key role in fostering dynamic markets and in stimulating economic growth. The international competitiveness of industries depends on access to inexpensive inputs, improvements in efficiency and productivity, and innovation, all of which competition promotes. A well-constructed competition law, backed up by a competition enforcement agency with strong powers, an economically sound enforcement policy, and a commitment to follow the principles I enumerated earlier, is therefore absolutely critical in order for free markets to deliver the economic growth they promise.
I am hopeful and optimistic that Japan will continue to make the changes in its competitive environment and in its Antimonopoly regime needed to bring the benefits of competition to Japanese consumers and the Japanese economy. Before I close let me say a word about the close cooperation that exists between the U. We have worked very closely together with both the JFTC and the Ministry of Justice in prosecuting some of the largest multinational cartels in history, cartels that cost consumers in the United States and Japan, and in many other countries, billions and billions of dollars.
We have also worked very closely with the JFTC in founding the new International Competition Network, which provides a vehicle for competition authorities around the world to work together both to enforce their competition laws more effectively and to build stronger competition cultures in their regions.
We have just completed our most successful bilateral ever, and we fully expect our working relationship will grow even closer in future years. These remarks reflect my personal views and not necessarily those of the Department.
I want to thank Stu Chemtob for his contributions to this paper and, of course, my assistance Gloria Jenkins. Any mistakes are, of course, my own. Michael E. See Michael E. However, when businesses operate in a healthy competitive market, consumers get to choose the best option available to meet their needs and price point. Fair competition means that businesses must make a strong case to each consumer, and convince them that their products or services are the superior choice.
This translates to more and better products and services that meet the diverse range of consumer tastes. In short, more variety, more features, higher quality and more value for consumers. As consumer preferences invariably shift, a competitive market will reflect these changes in the products and services it delivers. When markets only have one or very few sellers, consumers may not even realize what they are missing.
In a competitive market, new entrants or existing businesses continuously innovate and improve productivity to offer consumers better products and services at lower prices. Why competition matters Follow: Twitter Facebook LinkedIn YouTube Discover how competition drives our economy, helps Canada realize its full economic potential, and benefits consumers through lower prices, greater choice and increased levels of quality and innovation.
Competition can improve productivity in three ways: Efficient use of resources: firms facing intense competitive pressure are likely to use their labour and resources more efficiently than those facing slack competition; Innovation: competition encourages firms to innovate and invest in new products and processes to gain a competitive edge on their rivals; and Keep markets productive: healthy competition squeezes out lower-productivity firms and allows higher-productivity firms to thrive.
How competition is good for consumers Competition in the marketplace is good for Canadians. Although the economic crisis has prompted some policymakers to reconsider basic assumptions, the virtues of competition are not among them. Market competition, while harming some participants, often benefits society. But does competition always benefit society?
After outlining the virtues of competition, and discussing some well-accepted exceptions to competition law, this article addresses four scenarios where competition yields suboptimal results. Americans love to compete. Every US executive agency, for example, is legally required to have an advocate for competition. Competition advocacy is thriving internationally. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conductive to the preservation of our democratic political and social institutions.
But even were that premise open to question, the policy unequivocally laid down by the Act is competition. But, under one name or another, this idea is likely to resurface.
For example, two merging firms may well argue that ongoing competition will leave them with insufficient profits to make valuable and necessary investments to serve consumers. One could argue that the problem is not economic competition per se, but poor regulatory controls. This is a valid point. This article identifies the problem as competition itself, since under most theories of competition, markets characterized with low entry barriers and recent entry should not be prone to the market failures described herein.
The Ordoliberal, Austrian, Chicago, post-Chicago, Harvard, and Populist schools, for example, can disagree over how competition plays outs in markets, the proper antitrust goals, and the legal standards to effectuate the goals. But they unabashedly agree that competition itself is good. Antitrust policies and enforcement priorities can change with incoming administrations. Some policies that ostensibly restrict competition are justified for promoting competition. Intellectual property rights, for example, can restrict competition along some dimensions such as the use of a trade name.
But the belief is that intellectual property and antitrust policies, rather than conflict, complement one another in promoting innovation and competition. First, consumers can pay more for poorer quality products or services, and have fewer choices. Second, governmental or private restraints can raise exit costs and inhibit innovation. Competitors, challenged by new rivals or new forms of competition, may turn to regulators for help. Competitors may ask governmental agencies under the guise of consumer protection to prohibit or restrict certain pro-competitive activity, such as discounts to their clients.
They may enlist the government to increase trade barriers or for other protectionist measures. Finally, impeding competition can cause significant anti-democratic outcomes, like concentrated economic and political power, political instability, and corruption.
As the previous section discusses, competition, given its virtues, is the backbone of US economic policy. But competition, while often praised, is also criticized. Life would be more stressful if we competed for everything. Competition cannot always be preferred over cooperation. Cooperation is often more appealing and socially rewarding.
Social and religious norms exclude or curtail competition in many daily settings. Commuting to work, in theory, is not a competitive sport. Parents should not foster competition among their children for their affection. Nor do the mainstream religions endorse a deity who wants people to compete for His love. Antitrust norms do not translate easily in these social or religious settings.
Some goods and services are not subject to market competition. One example is human organs. This is not fixed. Markets once considered repugnant eg lending money for interest, life insurance for adults are no longer.
Markets that are repugnant today eg slavery , once were not. The US antitrust laws apply across most industries and to nearly all forms of business organizations. But the Court noted: Surely it cannot be said … that competition is of itself a national policy.
To do so would disregard not only those areas of economic activity so long committed to government monopoly as no longer to be thought open to competition, such as the post office, cf. It would most strikingly disregard areas where policy has shifted from one of prohibiting restraints on competition to one of providing relief from the rigors of competition, as has been true of railroads.
Some or all economic activity in various industries is expressly immunized from antitrust liability. Economic activity, even if not immunized, may fall outside the scope of the antitrust law.
But Sherman did not see: any reason for putting in temperance societies any more than churches or school-houses or any other kind of moral or educational associations that may be organized. Such an association is not in any sense a combination arrangement made to interfere with interstate commerce.
Just as athletic contests distinguish between fair and foul play, the law distinguishes between fair and unfair methods of competition. The law of unfair competition has developed as a kind of Marquis of Queensbury code for competitive infighting.
The antitrust community would debate over what constitutes fair and unfair methods of competition, but agree that not all methods of competition are desirable.
The community would likely tolerate price and service regulations in some industries eg natural monopolies where competition is not feasible. For most other commercial activity, however, competition on the merits is the presumed policy. As one American court observed: The Sherman Act, embodying as it does a preference for competition, has been since its enactment almost an economic constitution for our complex national economy.
A fair approach in the accommodation between the seemingly disparate goals of regulation and competition should be to assume that competition, and thus antitrust law, does operate unless clearly displaced. In condemning private and public anti-competitive restraints, competition officials and courts invariably prescribe competition as the cure.
But that is a function of market conditions, not competition itself. Competition itself cannot cause market failures. Economist Irving Fisher over a century ago examined two assumptions of any laissez-faire doctrine: first, each individual is the best judge of what subserves his own interest, and the motive of self-interest leads him to secure the maximum of well-being for himself; and, secondly, since society is merely the sum of individuals, the effort of each to secure the maximum of well-being for himself has as its necessary effect to secure thereby also the maximum of well-being for society as a whole.
Competition policy typically assumes that market participants can best judge what subserves their interests. Suboptimal competition can arise when firms compete in fostering and exploiting demand-driven biases or imperfect willpower. To illustrate, suppose many consumers share certain biases and limited willpower. Competition benefits society when firms compete to help consumers obtain or find solutions for their bounded rationality and willpower. Providing this information is another facet of competition—trust us, we will not exploit you.
The credit card industry provides one example. Some consumers do not understand the complex, opaque ways late fees and interest rates are calculated, and are overoptimistic on their ability and willpower to timely pay off the credit card purchases.
For other credit card competitors, exploiting consumer biases makes more sense than incurring the costs to debias. Alternatively, the debiased consumers do not remain with the helpful credit card company. Instead they switch to the remaining exploiting credit card firms, where they, along with the other sophisticated customers, benefit from the exploitation such as getting airline miles for their purchases, while not incurring any late fees.
This problem, of course, can arise under oligopolies or monopolies. But here entry and greater competition, as one recent survey found, can worsen, rather than improve, the situation: The most striking result of the literature so far is that increasing competition through fostering entry of more firms may not on its own always improve outcomes for consumers. Indeed competition may not help when there are at least some consumers who do not search properly or have difficulties judging quality and prices … In the presence of such consumers it is no longer clear that firms necessarily have an incentive to compete by offering better deals.
Rather, they can focus on exploiting biased consumers who are very likely to purchase from them regardless of price and quality. These effects can be made worse through firms' deliberate attempts to make price comparisons and search harder through complex pricing, shrouding, etc and obscure product quality.
The incentives to engage in such activities become more intense when there are more competitors. Second, after identifying these consumers, firms must be able to exploit them. But firms, like consumers, are also susceptible to biases and heuristics.
In competitive settings—such as auctions and bidding wars—overconfidence and passion may trump reason, leading participants to overpay for the purchased assets. If repeated biased decision-making is not punished, the problem is too little, rather than too much, competition. Given the cost of losing, it is also illogical to enter a bidding war. But if everyone believes this, no one bids—also illogical. If only one person bids, that person gets a bargain.
Once multiple bidders emerge, the second highest bidder fears having to pay and escalates the commitment. Bazerman and Moore analogize their experiment to merger contests. Competitors A and B, in their example, fear being competitively disadvantaged if the other acquires cheaply Company C, a key supplier or buyer. Firms A and B may rationally decide to enter the bidding contest. Both are better off if the other cannot acquire Company C, nonetheless neither can afford the other to acquire the firm.
Here clear antitrust standards can benefit the competitors. If they both know they cannot acquire Company C under the antitrust laws, neither will bid. Antitrust, while not always preventing the competitive escalation paradigm, can prevent overbidding in highly concentrated industries where market forces cannot punish firms that overbid. Suppose the first assumption Fisher identifies is satisfied—people aptly judge what serves their interest, which leads them to maximize their well-being.
One avoids the problem of behavioral exploitation and perhaps the competitive escalation paradigm. Competition benefits society when individual and group interests and incentives are aligned or at least do not conflict. Difficulties arise when individual interests and group interests diverge.
One area of suboptimal competition is where advantages and disadvantages are relative. Hockey players are another example. Hockey players prefer wearing helmets. But to secure a relative competitive advantage, one player chooses to play without a helmet.
The other players follow. None now have a competitive advantage from playing helmetless. Collectively the hockey players are worse off. A recent example is Wall Street traders who inject testosterone to obtain a competitive advantage. They and society are collectively worse off.
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