Competition Law Essay Example | Topics and Well Written Essays - 1500 words

Competition Law - Essay Example 2 Competition is a fundamental economics theory and the supposed benefits to be derived from the working of competition in the market underlies the importance of competition law or policy. Classical theories of competition held that competition is a form of reciprocal rivalry in the market and government intervention in the market was frowned upon.3 The existence of competition, it is expected, should result in the lower prices, greater efficiency in markets, better products and services, and a broader choice of products and services for customers.4 It has been argued that the above mentioned benefits of competition cannot be attained in a monopolistic market.5 Where perfect competition exists, producers will produce more as long as the cost of each additional unit of production (i.e. marginal cost) will result in a profit. However, one's decision not to produce beyond what is profitable will not affect the market as there are other producers in the market. Consequently, the existence of competition will result in resources being allocated to produce goods at prices consumers are willing to pay and at prices that producers are also willing produce and able to make profit. This results in allocative efficiency.6 When competition is allowed to operate, it is also expected that it will promote productive efficiency. The reasoning is that, producers aim at producing at the lowest reasonable cost in order to win customers and stay in the market. Productive efficiency allows resources to be used efficiently and this maximises social welfare. Where a monopoly exists, the monopolists is not pressurised by competitive forces to be efficient in its production. The inefficiency of the monopolists is thus passed on to the consumer resulting in consumer having to pay more for less quality goods than they would have if competition was allowed to operate.7 Where monopoly persists, the monopolist can also create an artificial shortage of goods in order to raise prices. In such instances, allocative efficiency and productive efficiency would not exist and the welfare of society is undermined.8 Consequently, in order for society to benefit from these welfare advantages of competition, competition law is instituted to regulate the working of the market against monopolistic tendencies. Government intervention into the through laws, policies and institutions are thus justified to the extent to which it prevents market failure and allows competition to function effectively so as to achieve the social welfare benefits of competition. One of the most eminent economists of the 20th century, Frederich von Hayek, stated that: "The functioning of competition not only requires adequate organization of certain institutions like money, markets, and channels of information - some of which can never be adequately provided by private enterprise - but it depends above all on the existence of an appropriate legal system, a legal system designed both to preserve competition and to make it operate as beneficially as possible."9 Within the European Community (EC) competition law/policy is considered one of the important pillars for the functioning of the internal market. The Commission and the European Court of Justice (ECJ) thus frown on any form of behaviour by undertakings that have as its cause of effect, the prevention of competition from operating. Article 81(1) EC thus prohibits: " all agreements between undertakings, decisions by associations of