Did you know that most economies around the world operate to some degree by adopting free market principles? In free market economies, decisions about production, prices, investment, distribution, and so on are based on demand and supply signals with little to no government control or intervention. Does that mean there are no rules in a free market economy? It certainly does not. Such economies operate on the basis of competition between enterprises, and competition laws ensure that businesses play by the rules of the game. In this lecture, you will learn about the basic principles and rules of competition law. You will develop an understanding of why countries adopt competition laws, what competition laws aim to achieve, the types of practices that competition laws usually cover, and how competition rules are enforced. In an earlier lecture, you learned that competition between firms increases productivity, economic growth, and choice for customers. Competition enhances the efficiency of firms and ensures that markets deliver the best outcomes possible in terms of price, choice, quality, innovation, investment, and so on. Due to the correlation between competitive markets and faster economic growth, over 130 countries around the world have adopted competition laws and policies to protect market competition. There are no binding multilateral competition laws, but most countries around the world adopt similar rules in their national competition laws. Competition laws almost always includes prohibitions against cartels and against firms with market power for anti-competitive behavior as well as rules for revealing mergers and acquisitions based on their competitive effects. We will take a closer look at these prohibitions in a moment. Before that, it's worth mentioning that although legal texts differ across jurisdictions, most competition laws operate with an objective of ensuring that markets operate efficiently to deliver the best outcomes for consumers. This is usually referred to as the consumer welfare objective, meaning that the guiding principle of competition law and enforcement is whether a business practice under scrutiny makes consumers worse off in terms of higher prices, lower quality, less choice, and so on. It's also worth noting that the dominant methodology in modern competition law and enforcement is that of economic analysis. Economic concepts such as welfare, efficiency, supply and demand, marginal cost, and revenue are at the very heart of most competition rules. This means that without an economic assessment of the effects of a practice on the market, it's usually not possible to decide whether a given business conduct harms competition or infringes competition law. Competition laws are the backbone of a well-functioning economy and are therefore central also to digital governance because they set the rules of the game for businesses operating in digital markets, such as online platforms. Let's now turn to the contents of competition rules commonly found in different jurisdictions. Competition law applies to business practices of undertakings. Undertakings are entities engaged in any economic activity, such as companies. There are three main pillars on which competition law is built. The first pillar, almost universally adopted in all competition laws, is a prohibition of anti-competitive agreements and concerted practices that distort, restrict, or eliminate competition through a concurrence of wills between at least two undertakings. This prohibition is sometimes known as the prohibition against cartels. Anti-competitive agreements can be horizontal or vertical. Horizontal agreements take place between undertakings who are competitors, for example, between two competing shoe manufacturers. Vertical agreements take place between undertakings at different market levels who are usually not competitors, for example, between shoe manufacturers and shoe retailers. Agreements can be anti-competitive because they fix the prices of products or limit the quantity available or impose others' sale or supply conditions on downstream intermediaries, and so on. Did you know that in some jurisdictions, such as the United States, the United Kingdom, and Ireland, business people who fix prices can go to jail for this conduct? The second pillar of competition law is the prohibition of an anti-competitive, unilateral exercise of market power by an undertaking or a group of undertakings. Here, there is no need for an agreement, and it's the unilateral exercise of market power through which competition on the market is distorted. Market power refers to an undertaking's ability profitably to increase price above competitive levels or reduce output or innovation or lower quality on a given market for a significant period of time. For such a business practice to be profitable for the company engaging in it, it has to be the case that customers do not have sufficient alternatives to the products or services of the company in question. It's not always easy to establish market power, and we usually use economic analysis to look at market shares, the market position of competitors, barriers to entry, and countervailing buyer power to determine the existence of market power. Competition laws do not normally prohibit the existence or the acquisition of market power, but the use of market power to foreclose, distort or eliminate competition. This competition rule is usually known as the prohibition against the abuse of a dominant position, or monopolization. Examples of such abusive practices include excluding efficient competitors from the market by selling products below cost, a practice known as predatory pricing, or raising rival's costs by giving rebates and discounts to key customers. These are known as exclusionary practices. Some jurisdictions also prohibit exploited rebates, which in most practices, whereby an undertaking with market power harms the interests of its customers by, for example, charging unfair or excessive prices. The third pillar of competition law relates to acquisitions and mergers, whereby transactions that can lead to a substantial lessening of competition are subject to merger control rules. Whether a merger or acquisition is subject to merger control rules is usually determined by either the turnover or revenue of the parties involved, or the value of the merger or acquisition transaction, or a combination of both. Mergers and acquisitions that are found to lead to a significant impediment to effective competition. For example, those that will create a monopoly can be prohibited using merger control rule. Competition law is typically enforced by a designated authority usually called a competition authority, which decides on whether the law has been infringed and which can impose substantial fines for infringements. In some jurisdictions like the United States, such infringement decisions need to be taken by a judicial authority such as the court after the Competition Authority investigates the conduct. When an infringement is established, that also means that the companies must terminate the violating business practice. Other than the imposition of fines by authorities, infringements of competition law can lead to actions for damages, namely compensation by private parties who suffered a loss as a result of the infringement, for example, due to higher prices. In this lecture, you learned about the function of competition law in free-market economies, what competition law aims to achieve, and the rules that are commonly found in competition laws around the world, as well as how competition laws are enforced. In the next lecture, we'll discuss the challenges of applying competition law in multi-sided digital platform markets, and learn about some examples where companies such as Google have been fined billions of US dollars for infringing competition rules.
