Do we need government intervention in the form of Competition Policy? If so, why? Issues: mergers,cartels,industry concentration and their impact on the competition in Europe and USA.

Essay by Witek February 2004

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The best known passage in Adam Smith's "Wealth of Nations" (1776) says: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices,". He also thought that "It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice." Nowadays competition authorities seem to think otherwise and, in recent years, decided to introduce tougher regulations against anti-competitive behaviour. Why does there always seem to be the need to regulate markets? Vast majority of economists agree that competition is the basic organising principle of our economic system and is crucial in ensuring increasingly higher living standards and faster economic growth. However, they are not so much in accord over how it should be done and to what extent government should interfere in order to secure efficient competitive market.

Questions to be raised include: could any competition policy be efficient? Does any government intervention disturb the laissez faire sufficiently to suffocate the free trade? Is the recent surge in merger activity the cause of collusion between firms? How do cartels form and must they necessarily be bad?

John Vickers, chairman of Britain's Office of Fair Trading (OFT) argues that the intention behind the competition policy is to bring out the best of laissez faire. An efficient competition policy would enable competitive market to become a better regulator than any regulation could be, and hence reduce the need for them. In order to achieve that, efforts to bust cartels in Europe have been increased. Typically, cartel members may agree on prices, output levels, discounts, credit terms, which customers they will supply, which areas they will supply and who should win a contract.