Government Intervention to Implement Competition Policy

Objectives

Governments intervene in the operation of a market based economy for a variety of different reasons.

In the case of competition law and policy, the main objectives of government intervention are to respond to market failures, to limit abuses of market power, and to improve economic efficiency. This Module will focus on competition laws and policies that are aimed at achieving those objectives.

Public intervention, however, can have other objectives. For example, a government may adopt rules and policies that limit the participation of foreign capital or companies in order to create or cultivate a domestic industry. Such intervention may deliberately limit competition and compromise economic efficiency in favour of other public interests.

There is a long history of government intervention to preserve and stimulate the operations of competitive markets. Many useful precedents for competition policy have developed in the U.S. where the term antitrust policy is used to refer to what is often called competition policy in other countries. This term "antitrust" comes from an old form of anti-competitive conduct once engaged in by the owners of different companies that had the power to jointly dominate a market (e.g. steel or rail transport). These owners delivered the majority of their shares to a central body, which would hold the shares "in trust" for the owners. The trust's control of the shares was then used to direct the actions of the different companies. The objectives of such joint direction included raising prices across the industry, restricting supply and otherwise acting to reduce competition.

Types of Government Intervention

Competition policy is generally applied through two different types of government intervention.

The first type is behavioural. In this type of intervention, a public authority attempts to modify the behaviour of a particular firm or group of firms through regulation of their behaviour. Price regulation is an example of behavioural intervention. Other examples include orders prohibiting collusive practices or agreements, and orders requiring interconnection of competitors' networks.

A second form of intervention is structural. Such intervention affects the market structure of the industry. For example, governments may intervene to prevent a merger of the two major telecom network operators in a market. Similarly, a dominant supplier might be required to separate its operations into distinct corporate entities, or to divest itself of lines of business entirely. The 1984 AT & T divestiture in the United States provides a well-known example of the latter.

Flexibility

Government intervention in markets generally requires flexibility and an ability to tailor rules and principles to specific circumstance. In some instances, competition rules can be formulated as outright prohibitions (for example, against price fixing agreements). In many situations, however, pro-competitive rules are formulated so that there is discretion in their application. For example, price discrimination is not always inappropriate; only anti-competitive or otherwise harmful forms of price discrimination are generally prohibited.

Competition policy is applied to curb abuses of market power and to prevent a powerful firm from forcing competitors out of the market. However there is a tension between the objective of protecting competition and the more problematic practice of protecting individual competitors. This tension is particularly evident in the regulation of the telecommunications industry during the transition period from the introduction of competition to the time competition becomes self-sustaining.

Competition policies generally have no iron-clad rules that must be rigorously applied in all circumstances. The policies must be applied flexibly to suit the circumstances of different markets.