Competition policy for the year 2000

Abstract

For over two centuries a central tenet of modern economics has been that the pursuit of self interest by individuals will result in the maximum public benefit, providing it takes place within appropriate institutional structure. No one knew better than the proponent of this view, Adam Smith, that there was also a dark side to the market. Left unsupervised, competitors will conspire to fix prices and engage in restrictive business practices. Smith would not have been surprised at the actions taken by Microsoft to hobble its competitor Netscape, especially if the two could not reach agreement to restrict competition in their common interest. He would also have noted that in a relatively short period of time Microsoft had arisen from infant status to challenge IBM, at one time itself considered to exercise undue market power and the object of antitrust attention. The challenge for the policymaker is to get the right balance in the market, enough freedom that entrepreneurs flourish, not enough that they engage in unfair trade practices. Rule-making for markets is similar to rules for football. Spectators are rewarded with entertaining play if the rivals are well matched and play according to the rules. Absent a referee and the game may turn into a brawl of benefit to neither players nor spectators. In recent years, economists supportive of the use of markets to allocate resources have gone out of their way to understand circumstances of market failure and to propose a range of remedies. At times they have been blind to the fact that their cures may be worse than the disease and too little attention has been given to the circumstances of government failure due to the ineffectiveness of policies. Often there has been disagreement over the proposed remedies. This has given economists a bad name. As the Economist (October 3, 1998, Survey of World Trade, 4) recently wrote, three sins of economists are "an inability to agree among themselves; stating the obvious; and giving bad advice." However, on the question of the appropriate institutional structure for competition policy there has been remarkable agreement that if unconstrained by some form of government legislation, markets may perform in ways leading to undesirable economic consequences. This conclusion is obvious to economists but not always to others and, in general, the advice on this subject has been good, although not all countries have chosen to follow it.