What is competition policy?

Competition policy (called “antitrust” in the US) is a legal toolbox for creating checks and balances in an economy, which is supposed to 1) create a fair playing field for a broad set of stakeholders, and 2) prevent extreme concentrations of private economic power.

The structure of the economy significantly determines the extent to which ordinary people experience freedom in their day-to-day lives, and whether they are equipped for democratic self-governance. Excessive concentrations of private power block democratic (and other) societies from realising their potential.

The idea of economic “checks and balances” echoes a principle used in the political sphere to prevent a king, dictator, or small group of oligarchs, from capturing political power. This is not just a comparison: concentrated economic power fuels the concentration of political power.

Competition law is the core element of competition policy. It is supposed to focus on creating fair market structures (such as by breaking up dominant firms into separate, collectively less threatening elements) and ensuring fair behaviour by market players.

Competition policy also encompasses regulations and guidelines created by government agencies to determine how competition laws will be enforced in practice. Even government agencies with seemingly unrelated missions – such as a financial regulator, or a labour ministry — have the power to advance competition policy goals through their own rules or procurement practices.

From local governments to international organisations, competition policy offers many different levers for rebalancing the economy in the public interest.

Unfortunately, competition policy in most countries has fallen under the spell of bad economic ideas which favour monopoly power. We seek to change this.

Frequently asked questions

The financial sector has a special relationship with monopoly power. It is both heavily monopolised, but it also acts as a monopolising force in other parts of the economy. This article lays out the various interconnections. How finance drives monopoly power.

 

Yes, monopolies are generally more corrupt than firms in genuinely competitive markets. They corrupt politics, they corrupt academic research, and they corrupt markets, for several reasons.

 

First, in truly competitive markets surplus profits may be ‘competed away’ to the minimum required to stay in business, as any surplus attracts new competitors into the market, for example, perhaps offering lower prices. Firms need to spend surplus profits on investing to innovate, to stay ahead of competitors. Monopolists, by contrast, can raise prices or squeeze suppliers or workers with relative impunity, potentially making immense surplus profits, with less worry that competitors can outdo them.

 

This usually gives monopolits far more surplus funds to invest than firms in competitive markets, available for corrupt activities. A lawyer who launched a class action suit against Facebook/Meta in the U.K, explained how pervasive it is.

 

“When I went around after I raised money for this litigation, to get any economists to help me on this case, I could get none. Because they all worked for the defendant [Facebook]. Nobody wanted to work for the claimant, i.e. for me. Big tech goes around, and they give them all a little bit of money every year, so they are conflicted in anything. It was next to impossible to get anybody to help.” [Click 1:41:45]

 

(See also: Big Tech’s Web of Influence in the EU – LobbyControl / Corporate Europe Observatory.)
Second, if a monopolist spends money on lobbying or corruption, the fruits of that ‘political investment’ will accrue largely to the monopolist, depending on how dominant they are. A firm in a competitive market, by contrast, may not benefit at all from lobbying, as any additional profits may well be competed away.

 

So in terms of greasing the wheels of politics with lobbying, bribery, sponsoring think tanks, and so on, monopolists have both more ability, and more incentive, to be corrupt.

But there is a third reason why monopolies are more corrupt: they corrupt markets. This happens in many ways. For example, Amazon hosts sellers on its platform, but it also sells its own products in competition with them, while harvesting massive data from its competitors, which it can use against them. So it has a massive, corrupting conflict of interest when hosting other firms on its platform, which it exploits. This is just one example.

 

No. At least, it shouldn’t – but the current ideology of competition law does create problems.

 

First, enforcing competition laws prevents firms from colluding to suppress environmentally friendly innovations.

 

Second, removing the narrow constraints imposed by price-focused ideology could allow regulators to consider other types of harms, including environmental harms. (Ideally, such considerations would be built into up-front market structure rules, rather than used to justify an expanded role for speculative economics).

 

Some targeted changes to competition laws might be appropriate to facilitate truly beneficial cooperation between firms on environmental goals. However, we must tread cautiously. Firms are strongly incentivised to exaggerate how much they are actually constrained by existing laws, hide their own culpability in the problems they claim coordination will solve (e.g. is fashion industry waste a form of price fixing?), and exploit well-intentioned loopholes to collude in undesirable ways in addition to beneficial ways.

 

Read more: Tackling Monopoly Power and the Climate Crisis – Together.

 

No. At least, it shouldn’t – but the current ideology of competition law and policy can create problems.

 

Most competition laws have longstanding exemptions for certain forms of labour coordination, particularly collective bargaining through unions. These exemptions served as a stepping stone for stronger labour laws that framed fair working conditions as positive rights. Competition law and labour law (as well as corporate law) establish rules about which stakeholders are allowed to coordinate with each other. When the goal of competition law is properly viewed as advancing fair competition to create a balanced economy, there is alignment with labour. Harms to workers could be recognised as competition law violations in some circumstances. In monopolised industries, workers have few employers to choose from, and suffer from suppressed wages and worse working conditions.

 

Although significant reform is needed (e.g. to protect gig workers), there is some foundational alignment between competition law and labour law that can be built upon.

 

Competition law comes most directly from US antitrust laws dating back to the late 1800s, but is also deeply rooted in England’s “moral economy” of the Middle Ages — when local communities developed practical norms to determine how farmers and merchants could interact fairly in physical marketplaces. Competition law was further shaped by the realisation that monopolistic industries in Germany and Japan fuelled the outbreak of World War II, and in Europe this was reflected in the treaties that led to today’s European Union.

 

Historically, competition law has targeted both the structure of markets, and the behaviour of players in those markets. Examining market structure involves looking at factors like the number of competitors in a market, whether there are overly dominant players, how market share is divided, whether a market is regional or national, and so on. The aim is generally to structure each market to ensure a fair and open competitive process, without attempting to predict specific outcomes (such as whether the acquisition of one grocer by another will raise or lower prices for consumers).

 

Competition law also prohibits a wide variety of specific behaviours, such as price-fixing, making agreements with competitors to carve up markets or to refuse dealing with certain suppliers, etc.

 

Over the past several decades, competition law took a radical, ideologically driven turn from its historical roots — see here. Regulators have also been slow to update their frameworks to spot old behaviours in new guises, such as algorithmic price-fixing. These failures have led to many abuses by dominant firms, and contributed to political crises in democratic countries.

 

To fix such problems, we need to restore competition law to its roots, and refresh it for the digital age.

 

“Consumer welfare” has become shorthand for a legal test called the “consumer welfare standard” that reduces the adjudication of potential competition law violations to a single question: would a merger or business practice raise prices for consumers?

 

The consumer welfare standard was devised by the US academic Robert Bork. He claimed, untruthfully, that older antitrust laws had been designed to help consumers. (In reality, they came from a much broader variety of motivations, such as protecting farmers and small rivals as well as consumers.) Bork’s work was part of a broader ideological effort to encourage judges to adopt “objective” economic reasoning to decide cases, known as the “law and economics” movement. Bork assumed that most monopolies become large and successful through internal “efficiencies” and speculated that monopolies would enjoy economies of scale and scope, and that the resulting “‘efficiencies” would trickled own to consumers. Bork also claimed, again untruthfully, that companies rarely engaged in anti-competitive practices such as predatory pricing. So, he argued, monopolies and monopolistic behaviour should be treated as benign or even desirable until proven otherwise on a case by case by case basis — rather than fostering healthy, competitive market structures up front.

 

This threw the burden of proof onto regulators, rather than monopolists. This made it very hard for regulators to stop monopolisation: speculative economics requires extensive time, financial resources, and expertise, and monopolists have the advantage over regulators on each of these dimensions. This is a recipe for underenforcement by design. There are rarely meaningful consequences for inaccurate predictions.

 

When, contrary to rosy predictions from mercenary experts, mergers actually result in higher prices and layoffs, those mergers are rarely undone. Worse, standards are not revised to prevent similar future mergers.

 

Having clear rules up front would prevent some undesirable mergers entirely, and reduce the complexity of adjudicating other cases. In other words, the best time to consider the impact on stakeholders is when crafting general rules for industries up front (“ex ante”), not late in the game in situations where monopolists can easily exploit power imbalances with regulators to develop clever excuses.

 

Further Reading
Sandeep Vaheesan, “The Profound Nonsense of Consumer Welfare Antitrust.” The Antitrust Bulletin 64.4 (2019): 479-494.

 

Ideally, our legal systems would prevent most monopolies from forming in the first place. Because competition laws have been chronically underenforced for decades, we must instead grapple with the challenging task of reigning in monopoly power across many industries at once.

 

In this context, breaking up firms after the fact is often the best solution. The longer concentration goes unchecked, the more it spreads to other areas of the economy as dominant firms leverage their market power to usurp new markets. Breakups typically yield swifter, more certain results than attempting to impose a series of escalating incremental punishments. They function as a keystone solution, which can be supplemented with targeted complimentary reforms such as strengthening privacy rights.

 

Breakups are especially essential where a monopolist’s business structure generates inherent conflicts of interest. For example, when Amazon runs an online marketplace for small suppliers, then launches a copycat Amazon brand that competes with those sellers, Amazon’s unfair data collection and search ranking practices are not simply behavioural violations, but inevitable consequences of a conflicted structure. Amazon’s marketplace and brands should be completely separate businesses.

 

Breaking up monopolies is also important to curtail systemic risks and reduce their power to harm democracy. Smaller firms engaged in healthy competition spend much less money on lobbying than monopolists do.

 

Implementing breakups is much more straightforward than policing behaviour, which is generally the alternative. There are thousands of corporate divestitures every year as part of routine corporate practice. Accordingly, many professionals already specialise in the legal, accounting, and data governance mechanics of implementing breakups. Breakups can be accomplished through undoing previous acquisitions, or separating business lines by functions or products. Once firms are split up, followup oversight can be quite limited. By contrast, ensuring that firms comply with behavioural remedies such as coding fairer ranking algorithms requires extensive regulatory resources on an ongoing basis.

 

Also, when regulators show that they are serious about breaking up firms, that creates a positive ripple effect. A credible threat of breakups encourages other monopolists to refrain from fully exploiting their monopoly power. Historically, breakups have led to unleashing disruptive inventions by giving new entrants an opportunity to thrive. Positive ripple effects are diminished if breakups are viewed as a rare, last resort.

 

Fines alone are not enough. First, in practice, fines are rarely large enough to offset the scale of potential profits from violations. Even when billion dollar fines set records in absolute amounts, they often represent a single digit percentage of a monopolist’s cash holdings. Stock prices sometimes rise when fines are announced, confirming that these are merely slaps on the wrist.

 

Second, any consequence tied to detecting behaviour is only effective if the behaviour is readily detectable. Regulators have limited insight into the day to day works of opaque, highly technical proprietary systems. Chasing down behavioural violations on a case-by-case basis requires extensive time and resources. Monopolies are incentivised to develop new strategies to evade detection, exploit every ambiguity in rules that attempt to regulate their behaviour, and lobby for reduced enforcement budgets.

 

Finally, breakups are not just the next rung in a series of escalating punishments, to be considered only after fines have failed—unlike fines, they are a solution that directly targets root causes. This is especially true where monopolies own multiple lines of business that generate conflicts of interest.

 

Unfortunately, yes. You wouldn’t build two railway networks side by side, to make the compete: nor would you build three parallel sets of water pipes in a country, for water consumers to choose from. Some things are ‘natural monopolies’. They need particular treatment.

 

Competition law grew up alongside another important legal framework: public utility law. This recognises that some industries are so resource-intensive to set up, or rely so heavily on network effects, that few competitors can emerge and operate sustainably. Unavoidable (“natural”) monopolies often provide vital public goods, such as water, electricity, rail transport, or telecoms. Since concentrated power cannot practically be dispersed in those industries (at least on a regional level), governments curb the abusive potential of that power through regulation instead. Public agencies set limits on rates and oversee other aspects of utility management.

 

Today’s economy is dominated by monopolistic conglomerates, built through hundreds of unchecked acquisitions. Some business lines involve platforms that cannot practically be broken up, and therefore should be regulated like public utilities. But other business lines– which are often unfairly subsidised by platform profits or even by governments– could be broken off to ensure fair competition in an open market. So in practice, a mixed approach will be appropriate in some sectors.