Trade and competition policy

In exploring the relationship between trade policy and competition policy, it is useful at the outset to review briefl y the underlying economic theory on the welfare implications of monopoly, so that similarities and differences in the welfare frameworks that conventionally animate both trade policy and competition policy can be clearly kept in focus. 1 The concept of ‘market power’ or ‘monopoly power’ – these terms will be used interchangeably – drives most aspects of modern competition laws. Whether one is concerned with a single-fi rm monopoly, competitors colluding with a view to acting as if they were a monopoly, a fi rm seeking to predate on existing or potential rivals in order to exclude them from the market, restrictive vertical distribution arrangements, or a merger that may lead to a dominant position, in every case the focus is on the social welfare implications of excessive market power. In economic terms, market power basically means the ability to increase prices profi tably above (or reduce non-price dimensions of competition below) competitive levels by a nontrivial amount for an extended period of time. In order to establish whether any of the foregoing arrangements involve excessive market power, it is obviously necessary to defi ne one or more relevant product and geographic markets in which the fi rms in question are alleged to be exercising market power, which largely turns on demandside and supply-side substitution possibilities – an exercise that is central and problematic in most antitrust cases. 2 Whether market power in a market, once defi ned, can in fact be effectively exercised turns on factors such as whether incumbents’ market shares indicate a likelihood of unilateral abuse of dominance or explicit or tacit collusion and the scale of barriers to entry (including regulatory barriers, trade barriers, incumbents’ intellectual property rights, minimum viable scale of entry and the extent of entrants’ sunk costs, access to critical inputs and distribution channels, and customers’ switching costs).