Competition Law and Economics

According to Phillip Williams, we should regulate competition to the extent that such regulation will enhance the efficiency of resource allocation. An efficient allocation occurs when the consumers are prepared to pay more for the resulting allocation than for any other allocation of resources. Competition law affects two types of efficiency, namely the productive efficiency and allocative efficiency. Productive efficiency assesses the cost of production. According to Dawson Report, it is achieved when minimum costs produced the optimum output through the best combination of labour, capital and technology.  Allocative efficiency assess whether the market allocates resources in accordance with their most valuable use. 

Rationale for Competition Law

According to the Dawson Report, while globalisation, new technology and market liberalisation are generally good for competition and consumer choices, they also bring about major attempts by business to defeat its competitive effects. Hence, a vigorous and effective competition law is required to prevent such attempts. 

The size of Australian population and industry means there is a tendency towards market structured characterised by a high degree of market concentration where a few players are more likely to possess the market power. Smaller population and markets means that there is less room for a large number of evenly matched firms in the market thus results in one or few firms face minimal external competition either locally or internationally. A small number of players may increase the opportunities for collusion so as to stifle competition. As a result, strong competition law is required to protect consumers and small businesses. 

Small business is an important element of Australian industry which accounts for more than 70% of growth in employment and contributes about 30% to GDP. Given the tendency towards concentrated market as discussed above, protection of a competitive small business sector is required. This is reflected in the high priority given by the government by strengthening the unconscionable conduct provision of the CCA so as to protect small business from unfair practices of larger business. 

While new technology generally liberates competition, it sometimes creates new monopolies and new sources of market power. As seem from the Microsoft case, both the regulator and the court took the view that some areas of new technology gives rise to significant accumulation of market power over a short period of time and the scope of large scale exploitation of consumers and anticompetitive conduct is very substantial with damages ensuing in a very short period of time. Thus, fast, strong and effective application of competition law is needed. 

Trade liberalisation needs to be complemented by a set of effective competition policy in order to preserve its beneficial effects. Falling of the trade barriers attract more market players but also set the scene for business in different countries to enter into international cartels to share markets, agree on prices or to avoid undue competition with another. Domestic local deregulations also brings about mergers which may have the effect of undoing the pro competitive effect of deregulation.