Introduction

Regulation of the conditions under which firms compete is common in the majority of Western industrialised countries. Such regulation is intended to prevent or control, for example, explicit or tacit collusion among firms, mergers and acquisitions, vertical restraints and firms' pricing policies – in particular, whether firms can employ discriminatory pricing. The common rationale for these regulatory policies is that they are needed to protect consumers from the abuse of monopoly power by firms that supply them with goods and services.

The purpose of this chapter is to suggest that care should be exercised by anti-trust authorities in their design of policies intended to promote competition in the market place. We do not deny the underlying ‘raison d'être’ of competition policy but wish to suggest that a naive application of the idea that competition is always and everywhere desirable may have unforeseen and harmful effects. Our analysis can be summarised by the proposition that analysis of the effects of competition policy should not take industry structure as given. Policies that create too tough a competitive environment may result in perverse effects detrimental to consumer and social welfare because active anti-trust policy affects market structure through its impact on the medium- and long-run decisions of firms. The stronger are the structural effects of regulatory policy the more likely is it that blind adherence by the regulatory authorities to the benefits of competition will be misguided.

As a simple illustration, consider the case for cartel laws.