ABSTRACT
A lawyer who has not studied economics [..] is very apt to become a public enemy.
(Justice Brandeis, 1916)
Competition law exists to protect the process of competition in a free market economy. In economic terms, a free market economy is relatively free from control by the central authorities and in such an economy the allocation of resources is determined by supply and demand. The basis of a free market refers to the situation where there is competition between firms, which helps to deliver efficiency, low prices and innovation and as a result brings the greatest benefits to society. There is a paradox here – competition law seeks to control and interfere with the freedom of conduct of firms in the cause of promoting the free play of competitive forces in the market. In order to understand the rationale behind the Merger Regulation of the EU, it is necessary to examine economic background. Economic analysis and application of economic theory has been increasingly applied beyond its traditional precincts of the marketplace and the economy. The economics of law deals with laws that regulate economic activity, those laws that control markets, industries and firms, and economic variables such as prices, costs, investment, profits and resource allocation generally.1 The economic approach to law is concerned with various areas of law, including competition law. Indeed, there are no doubts that competition law consists of two main cornerstones – law and economics. Clearly, the importance of economic analysis in competition cases is unquestionable. Thus, this chapter will discuss the economic approach towards competition law, namely merger control. Economics and law has been connected in the work of many classical economists, which will be briefly discussed in this chapter. The first part of this chapter reviews the traditional economic theories on competition, including the classical theory, the neo-classical theory, the Harvard school, the Chicago school, the post-Chicago school and the European school which provide useful information for competition policy and law. The second part will analyse the economic theories of mergers’
effects on competition. According to an economic standpoint, mergers have immediate effects on the market’s structure. First of all, they are about growth and/or they may offer the immediate freedom from the ‘nuisance’ of having to compete with each other, and may provide a ‘lazy’ way to the creation or strengthening of market power. In this case merger transactions may make market structure more concentrated. Competition authorities have a task to prohibit potentially anti-competitive merger transactions in order to prevent the creation of market power or the significant impediment of effective competition. Second, mergers are not always about the harm on competition. These transactions may help to realise efficiencies; for instance, they may present the chance to re-combine assets in more efficient ways and/or to replace poor management whose performance is inadequate or they can provide other allocative, productive and dynamic efficiencies which will be further discussed in this chapter. Thus, mergers may help to realise efficiencies and make the market more competitive. Markets differ in their size. Hence, the final part of this chapter focuses on the specific features of small market economies and evaluates the extent to which they require different merger control rules from an economic perspective.
