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Towards a competitive society?

The promotion of competition as a goal of economic policy

Agnar Sandmo


Introduction

The aim of competition policy is usually taken to be the achievement of efficient resource allocation through the promotion of effective competition. In fact, this is more or less a literal translation of the official objectives of the Norwegian Competition Authority according to the Competition Act of 1994. It is of considerable interest to note that it was not always like that. The Price Act of 1953, which provided the legal foundation for the Authority’s institutional predecessor, the Price Directorate, had among its aims the promotion of full employment, an efficient utilization of production possibilities and the achievement of an equitable distribution of income, and among its instruments the regulation of prices and dividends was accorded a degree of prominence at least equal to that of the promotion of competition. While the 1953 Act defined the objectives of the Price Directorate as being more or less equal to the goals of government policy in general, the new Act narrowed it down to the promotion of efficiency, while at the same time stating that the proper way to achieve this objective is to create conditions for effective competition.

It is probably fair to say that the new Act defines aims and objectives in a way which is much more congenial to economists who approach this area with a background in economic theory, but it also raises problems. Thus, by instructing the Competition Authority to abstract from distributional considerations, the new Act is based on some implicit assumptions about the separability of the goals of efficiency and equity which are not unproblematic. Moreover, by effectively excluding some parts of the market economy (e.g. agriculture and the labour market) from the scope of competition policy, the Act raises some fundamental questions about the justification for efficient markets in the rest of the economy. Basically, the question is whether the Competition Act represents a sensible policy of decentralization. In this chapter I propose to approach this question from the point of view of welfare economics, drawing in particular on the theory of the second best. Competition policy must fundamentally be judged in terms of its contribution to welfare, and the relationship between competition and welfare is one of the central concerns of welfare economics.

Before moving on to the substantial questions I should like to consider briefly the two central concepts used in the Norwegian Competition Act, namely, efficiency and competition. In a specific theoretical context the meaning of these terms is generally defined in a way which leaves little doubt about their precise content. However, theoretical concepts usually need a practical interpretation before they can be translated into the language of instruments and targets of economic policy.

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Competition Policy Analysis
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Figures ix
  • Tables x
  • List of Contributors xi
  • Preface xiii
  • Introduction 1
  • Notes 5
  • 1 - Towards a Competitive Society? 6
  • 2 - Competition Law and Policy 20
  • 3 - Competition Policy and Market Dynamics 35
  • 4 - Who Should Be Responsible for Competition Policy in Regulated Industries? 43
  • 5 - Implementation of Second-Best Solutions 65
  • 6 - Competition Policy with a Coasian Prior? 78
  • 7 - The Australian Competition Policy Reforms 87
  • 8 - Competition Policy in the Information Economy 109
  • Notes 130
  • 9 - Regulating Manufacturers and Their Exclusive Retailers 133
  • References 148
  • 10 - Deregulating Norwegian Airlines 150
  • 11 - Resource Allocation by a Competition Authority 165
  • 12 - European State Aid Policy 200
  • Index 239
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