1. ECONOMIC APPROACHES TO COMPETITION LAW
Prof. Avv. Valerio Cosimo Romano

2. Introduction (1/2)
Since competition law came into existence in the US, the economic theories of competition have exercised a strong influence upon it.
On the contrary, at the early stages of EU competition law, economics had a negligible impact on European competition law, as EU competition rules and their application were largely driven by the goal of achieving market integration.
However, in mid-90s the EU competition law has been revised and the old-fashioned formalistic legal approach has been replaced by a “More Economic Approach” (EU Commission definition).

3. Introduction (2/2)
There is no such thing as “the” economic approach to competition law, which offers exact and authoritative answers to all kinds of competition law problems.
There are different economic approaches to competition law. The most important are:
Classical Economics;
The ordo-liberal School;
The Harvard School;
The Chicago School;
The Austrian School; and
Behavioral Antitrust.

4. I. Classical Economics (1/2)
Roots of the classical concept of competition date back to Adam Smith’s The Wealth of Nations (1776). With his work, Smith elevated competition to the level of a general organizing principle of economic society.
Classical economics treats competition as a dynamic concept, the essence of which is the effort of individual seller to undersell, or individual buyer to outbid, his rivals in the marketplace.
For Smith, competition is a force that leads self- seeking individuals unconsciously to serve the general welfare.

5. I. Classical Economics (2/2)
Smith’s invisible hand: market prices, which emerge in reaction to competitive forces. These forces oblige producers to accept lower prices in order to attract demand. Competition increases economic welfare. If producers ignore consumers demands of, they will be excluded form the market.
Smith stressed freedom of trade as a necessary condition for competition to work.
Smith: competition as a price-determining force and not as a market structure.

6. II. Ordo-liberal School (1/2)
Ordo-liberalism is the idea that a competitive market based on freedom and legally protected individual rights is preferable to a system of economic planning : a third way between capitalism (market economy) and socialism (command economy).
Primary goal of competition law is to protect competition as a system within which there is freedom of action on both the supply and demand side of the market.

7. II. Ordo-liberal School (2/2)
At the Foundation of European Economic Community (EEC) the German representatives managed to introduce ordo-liberal views in EEC competition policy.
As a result, Articles 85 and 86 of EEC Treaty (now articles 101 and 102 TFEU) aimed at the achievement of market integration through elimination of private trade barriers between the 6 original Member States (Italy, Luxembourg, Germany, France, Belgium and The Netherlands).
Up until today, the case law of the European Court of Justice is inspired by ordo-liberal ideas.

8. III. The Harvard School (1/3)
Harvard School: indicates the extensive literature on competition policy that constituted the dominant approach until the 1970s.
This school emphasizes research on causal relationships to predict possible results in real-life markets. The performances of specific industries are thus seen as dependent on the conduct of firms, which in turn is dependent on the industry under investigation.
This is known as the Structure-Conduct-Performance (SCP) paradigm, which emphasizes the direction of causality from structure to conduct and, from the latter, to performance.

9. III. The Harvard School (2/3)
The Harvard School discarded perfect competition and suggested the concept of “workable competition” as a blueprint for competition policy.
The SCP paradigm implies that:
Market performance (success of an industry in producing benefits for consumers) is dependent on sellers and buyers conduct.
Conduct is determined by the structure of the relevant market (number of buyers and sellers, barriers to entry etc.).
Structure of an industry depends on basic conditions on both the supply side and the demand side.

10. III. The Harvard School (3/3)
The principal tenets of the Harvard School are:
Perfect competition and monopoly models are to be supplemented with more realistic models of imperfect competition.
Investigation should be concentrated on industries or on groups of firms, rather than on individual agents.
The aim of antitrust law is workable competition and not perfect competition.
The appraisal of competitiveness of an activity shall be based on observation.
Large discretionary powers shall be conferred to competition authorities.

11. IV. The Chicago School (1/2)
Chicago School started in the 50’s but gained prominence in late 70’s.
It sought alternative explanations for practices observed in real markets.
Practices previously considered as anti-competitive (such as vertical restrictions) are economically rationalized. Productive and allocative efficiencies: the only objectives to be taken into account in interpreting and applying antitrust law.
Rejection of government intervention in the economy as long as possible. When markets generate inefficient outcomes (unlikely), government intervention is appropriate only if it improves economic efficiency.

12. IV. The Chicago School (2/2)
Harvard School: assigned a multitude of goals to competition law, providing the basis for an interventionist policy.
Chicago School acknowledges only one goal of antitrust law:
Pursuit of economic efficiency.
The purpose of antitrust law is to eliminate inefficiencies resulting from collusive price increases and output restrictions.
EU competition law and EU Commission practice remained largely unchanged during the antitrust revolution in the US.
Chicago views hardly affected EU competition law.

13. V. The Austrian School (1/2)
The Austrian School: advanced in its most extreme form the dynamic vision of competition. Austrian School posits that any interference by competition law must be avoided because of its potentially negative effects on the competitive incentive system.
Competition is seen as a process of continuous interaction between the entrepreneur and the environment: the entrepreneur (as market coordinator) makes the market.
Competitive process task: to find out the best products and production methods. No single economist, administrator or judge can answer the relevant questions of competition law better than the competitive process itself.

14. V. The Austrian School (2/2)
Competition is a process of spontaneous coordination and evolution and the freedom of competition is the guarantor of economic advantages.
This leads to the rejection of market performance tests: competition as a learning process is taken seriously.
At its extreme, it rejects both a prohibition against cartels and the control of abuses by firms in a dominant position because of their negative effects on the dynamic competitive process.

15. VI. Behavioral antitrust (1/2)
Behavior antitrust is the most recent stage in the evolution of economic approaches to competition law.
Classical economics assumes that firms and consumers are well-informed, rational agent who maximize profit or utility within given constraints.
Behavioral antitrust abandons the rationality assumption: rationality is not necessarily perfect and Individuals attempt to overcome the impossibility of collecting and digesting all available information through the extensive use of heuristics (rules of thumb) and other short-cuts.

16. VI. Behavioral Antitrust (2/2)
Deviations from rationality are caused by bounded willpower and bounded self-interest.
Bounded willpower: an individual systematically behaves against his or her preferences due to an over-valuation or under-valuation of present or future welfare benefits and costs.
Bounded self-interest: people also care about the well-being of others.
Behavioral antitrust aims to provide a better explanation of human behavior in the context of competition. However, the question whether more regulatory intervention in markets is needed still remains unanswered.