Competition Law and Oligopolistic Markets

Introduction

Subsequent to the Competition Act 1998, the regulation of anti-competitive practices is

still provided under competition policy in the UK even without the presence of market

dominance. This is on the basis that perhaps some of the unwelcome effects of oligopoly could

not be regulated if it is always essential for dominance to be ascertained first. Markets that are

oligopolistic may be exposed to collective market influence by reason of the structural situations

in the market even if not one dominant firm exists. Applying the powers provided under the Fair

Trading Act 1973 (FTA), the Competition Commission (CC) will still be capable to carry on

reviewing market structures as well as scale monopolies.

From the standpoint of the UK, the policies of the EU have not been effective in tackling

issues relating to oligopoly. The European Court of Justice (ECJ) has been unwilling to

recognize the use of a dominant position in oligopoly markets to groups of activities not

structurally connected (either financially or not), and because of complexities of differentiating

between the effects of implicit collusion or concerted practices and such other similar conduct

though non-collusive. It was pointed out in a DTI consultative paper 1 that the EC Treaty appears

ineffective when applied to non-collusive oligopoly.2 This implies that some undesirable effects

of a market dominated by just a few firms, in such way as price control or undue advertising,

may not be covered within the bounds of EU competition law if an agreement does not exist. On

these grounds, the UK Government turned down to amend UK competition law to conform to

Article 82 of the EC Treaty. The complicated provisions on monopoly that have been preserved

will cover comparable conduct by a group of activities regarded as anti-competitive but where

there is no indication of an agreement or collusion. The provisions on scale monopoly under the

Fair Trading Act is purposely retained to deal with conditions where a violation of the

1 DTI, Abuse of Market Power (London: Department of Trade and Industry 1992).
2 Article 82, EC Treaty
Competition Act has already been established, but where there is an existing possibility of

further abuse.3 The constructive remedies afforded by the scale monopoly powers could be the

only efficient way of curbing more abuses, although in the utility sectors the scope is more

extensive.

UK Competition Policy

While the moves by the Monopolies and Mergers Commission (MMC) toward oligopoly

or dominance have been parallel with the EU Commission, neither one has taken up a move to

ruling out monopolies. On the other hand, UK policy has afforded for restraint of the undesirable

outcomes of oligopoly as well as anti-competitive behavior by particular firms with none of the

essential evidence of dominance or collusion. It can be argued that such a deficiency in control

is a loophole in EU policy. Even though the sanctions under the Competition Act deal with

agreements and tacit collusions and dominant position abuse, these prohibitions do not readily

tackle similar conduct by parties in situations where there is no agreement. Hence, the

provisions on complex monopoly under the Fair Trading Act 1973 have been preserved to have

an effective means of control to this form of practice. On the whole, competition policy in the UK

maintains an interest to oligopoly or constructive questions that could be unconnected to

dominance abuse.4

The Competition Act has not decisively modified policy on affording an effective means

to regulate cases of mergers. Competition policy, from an economic standpoint, should be

involved with the short- and long-term increase of producer as well as consumer surplus.

Apparently, however, this has not been fundamentally reflected in merger regulation in the EU.

If a merger establishes or reinforces a dominant standing upon which effective competition

3 OFT (1999f), The Competition Act 1998: The Major Provisions, OFT 400, para. 13, (London:
Office of Fair Trading 1999).
4 D Hay, “Is More Like Europe Better? An Economic Evaluation of Recent Changes in UK
Competition Policy”, Applied Economics Discussion Paper Series no.204 (Oxford: Institute of
Economics and Statistics, University of Oxford 1998), 29.
would be essentially obstructed in the common market or an essential portion of it, 5 then it is

forbidden and if otherwise, then it is permitted. There is no efficiency defense within EU merger

law unlike in the UK, France, Germany, USA and several other countries. The potential

exception is a crisis cartel.6 In the UK, a broader interest and public concerns can be considered

when deciding a merger. Competition, however, is the only decisive factor in the EU. It is ironic

that it was primarily the UK that implemented this limited capacity in the course of negotiations

in 1989 that brought about the EU policy. There was concern in the UK that the European

Commission could possibly make use of broader public interest measures to take up industry

policy in Europe.7 The disparities in practices between the EU and the Office of Fair Trading

(OFT) can be clearer than real when making a ruling on the merits of a merger.

Oligopoly

Oligopoly is a kind of market formation that rests on the continuum between monopoly

and perfect competition. A market that is oligopolistic can be characterized as one where only a

few firms are principal players. With such small number, their identities are known by each other

and they know that the determination of the others on production and pricing affect them. They

are not just competitors but rivals as well.8 The consequence of this shared understanding may

result on some markets to implicit collusion among them. It could also result to explicit collusion.

These diverse market behaviors also generate problems for those who are charged with

formulating and implementing the rules on competition. Notably, several markets are

oligopolistic and given that these markets may also cause inefficiency in allocation and

5 Council Regulation (EEC) No.4064/89, Article 2(3).

6 Article 81, EC Treaty.
7 The government declared in August 1999 a merger policy review that included
suggestions to establish competition as the unmistakable main goal and concerning a
possible modification in the roles of the Director General of Fair Trading (DGFT) and the
Competition Commission. See DTI, Mergers: A Consultation Document on Proposals for
Reform (London: Department of Trade and Industry 1999).
8 C Graham, EU and UK Competition Law (Longmans, 2010).
production, they create a significant problem for those who regulate competition rules.9

The existence of oligopolies and monopolies is real. Monopolies may be formed

naturally or sustained by government sanction such as transport utilities markets. Seldom is

there an absolute monopoly beyond these situations. Nevertheless, other markets even though

not monopolized, may be under the dominance of one firm which possesses a vast market

share. Some other oligopolistic markets may be dominated by a few firms. Although in this kind

of market there may be a margin of smaller firms, they could display similar problems for

competition law such as those occurring in an oligopolistic market.10

In real situation, markets that are perfectly competitive almost never exist.11 To a certain

extent, the paradigm of perfect competition is simply just a paradigm. It is a practical basis since

is shows the concepts of production and allocation efficiency. But in the real world, markets do

not have all the attributes of perfect competition. Even if these markets did possess all the

features of perfect competition, the manner of competition would have a tendency to change the

situation. Goods, for instance, are hardly ever homogeneous. More accurately, market players

in a competitive environment will generally attempt to make their products different from their

competitions – through product or service quality improvements, image branding or value added

features. Moreover, it is very improbable that countless number of firms will be running at the

same levels of costs, and that manufacturers will not profit from economies of scale, and buyers

as well as sellers have complete information all over a diverse market. The situation could be

rather different, however, where markets are oligopolistic with just a very few firms in the

market.

Competition Law and the Trade-off between Efficiencies

9 Ibid.
10 DW Carlton and JM Perloff, Modern Industrial Organization (4th edn., Pearson Addison
Wesley 2005), 84.
11 Ibid.
 The issue of trade-off between efficiencies and the correlation involving efficiency and

the welfare of the consumer presents EC competition law with complex problems and brings up

the question of what is known as the defense of efficiency. A merger, for instance, could place

an activity in a situation of market influence, causing a loss of distributive efficiency and soaring

prices for consumers. It could also reduce costs and raise productive efficiency.12

Competition laws have been ineffective and have not continually sought the particular

objective of economic efficiency. Separate jurisdictions may have separate objectives, and

eventually could change their objectives. Even recognizing that the objective of competition law

is to attain allocation efficiency and increase the welfare of the consumer, there remains the

issue of whether this should be the only goal.

The application of competition rules to maintain competitive markets may attain

economic efficiency. It could also support the foundation of liberal democracy. The formation of

too much private power in an oligopolistic market will be generally prevented by competitive

markets.

The conservation of liberty upholds competitive markets and may achieve economic

efficiency in various markets. The aims, however, may be unfavorable in other instances.

Competition law which is intended at the diffusion of power (as an issue of principle) may

support small industries and aim to shield them from big ones. Rather than shielding

competition the inclination may rather be to apply the rules on competition to shield rivals. For

instance, competition law could be applied to shelter small companies from the efficient low

pricing of dominant firms, or to compel a dominant firm to grant accessibility to its controlled

resources to a smaller firm so that such smaller firm can be made to compete with the dominant

firm.13

12 RJ Van den Bergh and PD Camesasca, European Competition Law and Economics: A
Comparative Perspective (2nd edn., Sweet and Maxwell 2006), 31.
13 See The Grocery Market, the OFT’s reasons for making a reference to the Competition
Commission, OFT 845.
 There appears to be an agreement that competition law should be implemented and

used in the achievement of economic efficiency. There are various opinions, however, as to how

the rules on competition law can best attain this objective. Moreover, the scope to which laws on

competition should also be applied to achieve goals apart from efficiency – for instance,

competitor protection, employment, or the environment – is somewhat divisive. The

achievement of these other aims may support small businesses, individuals, or concerns of the

environment but at the detriment of consumer welfare.14 Favoring small businesses for the sake

of support at the disadvantage of more efficient competitors will be a drawback on the economy.

In the same way, the avoidance of a merger which would bring about efficiencies on the basis

that it could keep jobs in the interim could indicate that individual businesses are not able to

efficiently compete on the market over time. A decision to permit companies to enter into an

agreement that is anti-competitive within an industry that is notably in decline could guarantee

the survival of a company momentarily but could result in inefficiency.

The issue of what is involved in competition law should embrace, besides efficiency,

eventually a question of political choice.

U.S. Competition Law

It is not possible to make a case of competition law and not to include some allusion to

US law. This is because of the impact which US economists and legal practitioners have

influenced competition law concepts – working with respect to the US system.

The jurisdiction that primarily implemented an appropriate contemporary system of

competition law was the US.15 The Sherman Act was enacted by the US Congress in 1890 and

14 A good case in point regarding the strain involving a popular distrust of big and dominant
firms in addition to sentimentality over small firms on the one side, and a popular partiality
for low prices and more choices on the other side, can be observed in the UK debate on
supermarkets which concluded in the market inquiry in May 2006 of the grocery segment by
the OFT to the Competition Commission falling under section 131 of the Enterprise Act 2002.
15 M Furse, Competition Law of the EC and the UK (6th edn. OUP 2008).
it remains in effect.16 Phrases such as monopolize or unlawful restraints of trade were

expressed in the Sherman Act but were not given definitions.

The most accepted reason for the enactment of the Sherman Act is to prevent the

influence of the trusts. It had become common practice for holders of stocks in rival companies

to convey those stocks to trustees. These trustees then influenced the activities of those

competing companies and thus diminished competition among them. This is the reason it has

become identified as the antitrust law. The operations of the railroad firms caused special

concern. It has also been asserted, though, that the Sherman Act was no more than a

protectionist means conceded in diffusing the demands by small businesses, farmers, or by

those who wanted to curtail the movement of wealth from consumers to dominant businesses.17

The debate regarding the establishment of the US antitrust law is not simply concerning history.

It is significant when taking into account the present goal of that law and in the fight for the heart

of antitrust. It may incidentally appear that Congress passed the Sherman Act with no evident

policy supporting it and that only afterward that policy surfaced. It was contended that the

intentions of the legislators behind the 1890 Sherman Act are immaterial.18

US law has been broadened by the courts from one case after another. While EC law is

mainly enlarged by an administrative sanction. The EC Court take steps only to evaluate the

validity of the actions taken by the administrative authority. Notably, the Sherman Act prohibits

monopolization and making an attempt to monopolize.19 Hence, it differs remarkably from the

parallel provisions in EC law (Art. 82) which prohibits a dominant position’s abuse.

Pursuing the Goal of an Effective Competition Law

16 15 USC, 2 July 1890: the Sherman Act was enacted to protect trade and commerce from
illegal controls and monopolies. It was extended by subsequent statutes such as the 1914
Clayton Act, the 1914 Federal Trade Commission Act, the 1936 Robinson-Patman Act, the
1950 Celler-Kefauver Act, and the 1976 Hart-Scott-Rodino Antitrust Improvements Act.
17 ET Sullivan (ed.), The Political Economy of the Sherman Act (OUP 1991).
18 RA Posner, Antitrust Law (2nd edn., University of Chicago Press 2001), 24–6.
19 See Section 2, Sherman Act 1890.
 A crucial question that should be confronted by authorities is how the law on competition

must achieve its objectives. How competition rules are construed and applied will also be

essential to the achievement of those goals. It is not impossible to espouse a structure of

competition law which considers a formalistic prohibitory model derived from the supposition

that particular types of behaviors are detrimental. The UK took this stand in its legislation for

prohibitory trade practices,20 which has been superseded by the Competition Act 1998.

Particular types of agreements involving specific categories of parties are prohibited by the

legislation. The Act had no admission of the likelihood of investigation on the effect of

agreement to determine if these agreements did actually curb competition. The issue was

generally stripped intentionally of economic substance and the law relegated to some formal

propositions. Economic issues, therefore, have not been ruled upon by the Courts.21 The

obstinate consequence was a system which trapped a number of harmless and even

agreements that were pro-competitive. On the other hand, it permitted a number which were

gravely anti-competitive. The formalism and procedural problems have increased and the

present law is exceedingly complicated and imbued with inconsistencies and unresolved

issues.22

Conclusion

Competition law supports the means of the free market economy by regulating the

behavior of companies as they fight for dominance in the market. Competition law is reactive

since it does not direct businesses to merge or to be involved in particular agreements or how to

behave in accordance with economic policy. It only gets involved to preclude firms behaving in

such a manner that produces harm. As to how harm must be ascertained - by the impacts on

competitors, consumers, on the process of competition, on society in some wide-ranging

20 Restrictive Trade Practices Act (RTPA) 1976.
21 The former Restrictive Trade Practices Act was passed in 1956 yet and the Courts are not
inclined to rule on such matters.
22 R Whish, Competition Law (6th edn., LexisNexis 2008).
manner, or by a combination of any of these – is an issue of lingering argument and contention.

There is presently an agreement in conventional economics that systems of competition

law should be aimed at maximizing consumer welfare and effectiveness.23 EC competition law

has, in the past, endeavored to attain a more dispersed extent of objectives. The contention

regarding the goals of EC competition law is influenced by the reality that competition is just one

from among an array of rules by which the EC tries to fulfill the purpose outlined in the EC

Treaty. Presently, the position of the Competition Commission and the EC competition authority

is that competition rules should be aimed at the general welfare of consumers. However, EC

rules acknowledges that competition as a system should be protected since for this reason the

welfare of the consumers is being served.

BIBLIOGRAPHY

23 M Motta, Competition Policy (Cambridge University Press 2004), 18.

C Graham, EU and UK Competition Law (Longmans, 2010).

Council Regulation (EEC) No.4064/89, Article 2(3).

D Hay, “Is More Like Europe Better? An Economic Evaluation of Recent Changes in UK
Competition Policy”, Applied Economics Discussion Paper Series no.204 (Oxford:
Institute of Economics and Statistics, University of Oxford 1998), 29.

DTI, Abuse of Market Power (London: Department of Trade and Industry 1992).

DTI, Mergers: A Consultation Document on Proposals for Reform (London: Department of

Trade and Industry 1999).

DW Carlton and JM Perloff, Modern Industrial Organization (4th edn., Pearson Addison Wesley
2005), 84.

ET Sullivan (ed.), The Political Economy of the Sherman Act (OUP 1991).

M Furse, Competition Law of the EC and the UK (6th edn. OUP 2008).

M Motta, Competition Policy (Cambridge University Press 2004), 18.

OFT (1999f), The Competition Act 1998: The Major Provisions, OFT 400, para. 13, (London:
Office of Fair Trading 1999).

RA Posner, Antitrust Law (2nd edn., University of Chicago Press 2001), 24–6.

RJ Van den Bergh and PD Camesasca, European Competition Law and Economics: A
Comparative Perspective (2nd edn., Sweet and Maxwell 2006), 31.

R Whish, Competition Law (6th edn., LexisNexis 2008).