Chapter 1 Overview Of Competition Law Notes
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Chapter 1 CHAPTER 1 - AN OVERVIEW OF EU COMPETITION LAW
Competition Policy; History of Competition Law; Introduction to the Structure of the EU Competition Rules
NOTES Abbreviation: CL - Competition Law Govs - governments Indvs - individuals Instt - institution
(a) CL- ensure the firm (undertakings) operating in the free market economy- do not restrict competition (b) A system of CL was provided for in the EC Treaty (Treaty of Rome). Art 3 EC - the activities of the EC included 'a system ensuing that competition in the internal market is not distorted'. This provision is not included in the body of either the Treaty on European Union (TEU) or the Treaty on the Functioning of the European Union (TFEU) which have governed the European Union since coming into force of the Treaty of Libson. Protocol 27 to TEU and TFEU recognizes that internal market includes a system ensuring that competition is not distorted. (c) Ordoliberalism (EU: Germany): ideas about CL which have been influential in the development of EU CL. (d) 3 central concepts used in CL: Market power, market definition and barriers to entry.
(a) CL- exists to protect competition in a free market economy. Policy and Law are distinguishable. (b) Competition policy -
the way in which gov take measures to promote the competitive market, structure and behaviour.
encompasses within it a system of CL (c) Law- implement competition policy by ensuring that firms operating in the marketplace do not act in a way that harms competition. (d) Former official of European Commission's Competition Directorate General -role of EU competition policy: " Competition policy must thus act on a number of fronts at the same time. 1. Must enforce CL whenever there are harmful effects on Europe's citizens/business.2. Screen proposed and existing legislation. 3. Help to shape global economic governance through promoting the convergence of substantive competition rules, strengthening competition regulation in the WTO. 4. Develop a competition culture in the society in which it operates. (e) Free market economy (FME)- an economic system which he allocation of resources is determined solely by supply and demand in free markets and is not directed by gov regulation. States adopt market economy on the basis of neoliberal economic theory - bring greatest benefits to society. (f) Basis of FME - competition btw firms, and competition is considered to deliver efficiency and consumer welfare. (g) Foundation of FME theory - work of Adam Smith in 18th century: thought that govs should remove the artificial obstacles to the operation of free markets (price controls), allow competition to flourish. Indvs pursuing their own self-interest competing in the market place would be led by the 'invisible and' to achieve the general good:
Every indiv necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting. He intends only his own gain, but lead by an invisible had to promote an end which is not his intention. By pursing his own interest, he promotes that of the society more effectually than when he really intends to promote it. (h) History
Market was shaken by Great Depression 1930s but recovered to become in latter part of the 20 th century the great organizing principle of western economies, exported around the world, particularly after the fall of the Communist regimes of the Soviet Union and eastern Europe which was celebrated as the triumph of free market capitalism over central planning.
Financial crisis (2007): failure of financial markets, not of the economy as a whole, though the effects of the financial failure have certainly been felt in the real. i.e non-financial economy. 'Invisible hand' does not apply to banks, but 'real-bills' doctrine which would lead to prudent lending policies.
1960s, financial economists developed theories - he efficient-market hypothesis and rational expectations theory which posited financial markets as rational, self-correcting organisms. Justifying his suggested restrictions on banks: Such regulations -considered as in some respects a violation of natural liberty. But these exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are restrained by the law of all gov, of the most free and most despotical. The adoption of a FME does not mean that every sector is left to unbridled competition. Govs should provide for certain public instt which indivs would have no interest in undertaking as they would not yield profit. Regulatory rules -necessary to deal with market imperfections: firms are likely to combine/collude in a way which is profitable to those firms but which works detriment of society as a whole: Winner dominates market, 'natural' monopolies exist on market. Terminology- US: Antitrust law; EU Commission: antitrust
The Market System (neo-classical economics perspective)
Supply, demand and market equilibrium ("market clearing")—the market clearing price for each good/service is the one at which consumer demand is fully satisfied and supply is exhausted.
The market clearing process is "efficient"—most socially beneficial allocation of resources—whereas government intervention in markets (e.g. regulation) is considered to be less efficient than the unencumbered market outcome.
2.1 The Concept of "Efficiency" a.
Basic Economic Concepts i.
Demand Curves and Consumer and Producer Surplus
Supplier might like to be able to charge each consumer his individual reservation price but it's not feasible. Must consider the relationship btw consumers' willingness to pay and the quantity which will be bought on the market as a whole. If only buyers with very high reservation prices are supplied, the quantity produced will be smaller than if buyers with lower reservation prices are supplied. If greater quantities are produced the price will have to fall incorporate buyers with lower reservation prices.
Elasticity of Demand (Own Price Elasticity)
Amount by which the quantity demanded increases as price reduces ( and vice versa) will depend on the market in question and the elasticity of demand for the product. Price elasticity of demand measures the sensitivity of the quantity demanded to the price. Demand -inelastic if an increase in price leads to a significant fall in demand; elastic if an increase in price leads to significant fall in demand. Price elasticity of demand is the percentage change in the quantity of a product demanded divided by the corresponding percentage change in its price. The result will be negative figure as the fall in demand will be expressed as a negative figure from the starting point. If demand for widgets falls by 2% as a result of a 1%
increase the change in demand will be expressed as 2%. The demand elasticity is then -2/1 (the price increase) which is -2. Elasticity falls as one moves down the demand curve, so that at higher prices demand is more elastic. The dividing line between elastic and inelastic demand at -1. Demand is elastic at a figure below, or more negative, than -1. It is inelastic between -1 and 0. In market where demand is inelastic shortages-> higher prices.
iii. Cross-elasticity of Demand
Elasticity of demand measures the relationship between the price of the product and the demand for it. In Contrast, cross price elasticity of demand measures how much the demand for one product (A) increases when the price of another (B) goes up. Measured by % change in the quantity demanded of product A divided by the percentage increase in the price of B. Cross-elasticity of demand is crucial to market definition. Cross price elasticity -> + if the price increase in B leads to an increase in demand for A suggest that A and B are substitute products. Eg. Brazil coffee shortage, though leading to an increase in the price of coffee, did not cause consumers to stop purchasing coffee and to purchase tea instead.-> indicated consumers did not consider tea as a substitute for coffee.
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