Free market competition provides everyone with the widest opportunities for business and produces the best allocation of resources. By so doing, competition improves efficiency in the use of factors of production. That conclusion has been accepted by the neo-classical economic theory as a truth. It has provided the intellectual backing for competition (anti-trust) policy. Therefore, the EU has its own rules for market behaviour. They refer to the restriction of competition, abuse of the dominant position and state aids. The importance of competition policy was enhanced by the Single Market Programme completed in 1992.
Competition policy is a mixture of two irreconcilable impulses. On the one hand, there is an argument for a concentration of business, which rationalizes production and which benefits from economies of scale. On the other hand, there is a case for anti-trust policy 1 which prevents monopolization and, through increased competition, increases welfare. The challenge for a government is to balance these two tendencies. It needs to keep the best parts of each of the two opposing tendencies, profit from a harmonious equilibrium between allocation and productive efficiency and employ competition policy as a tool for increasing the standard of living.
The discussion starts with the welfare effects of a monopoly, it continues with a consideration of the basic concepts of competition and market structure. A growing awareness of the beneficial influence of competition on innovation is considered in a separate section. As intra-industry trade absorbs a significant proportion of total trade (and influences competition), it is presented in a section of its own. Another section considers competition policy in the EU. The conclusion is that the 1992 Programme instigated a profound reorganization of competitive business structure. It remains to be seen if that would be enough to increase the competitiveness of the EU producers of goods and services on the domestic and international market.
In an ideally competitive market, the marginal revenue (MR) curve of a firm is flat (Figure 5.1). No firm can influence the market price. Each firm is a price taker. 2 Hence, the MR curve of every firm equals market price. In a simple model with linear demand, cost and revenue curves, respectively, the MR curve cuts the horizontal axis OQ (representing the quantity produced) at point E. At that point MR is zero. To the left of E on the horizontal axis, MR is positive and, moving from O to E, total