Introduction to

Competition Law
 What is competition law?
• The importance of competition in an increasingly
innovative and globalised economy is clear.
• Vigorous competition between firms is the
lifeblood of strong and effective markets.
• Competition helps consumers get a good deal.
• It encourages firms to innovate by reducing slack,
putting downward pressure on costs and
providing incentives for the effective organisation
of production.
• As such, competition is a central driver for
productivity growth in the economy.
 Contd.

• Competition law provides the framework for

competitive activity.
• Competition law protects the process of
competition.
• Competition law is aimed at promoting or
maintaining market competition by regulating
anti-competitive conduct.
 Introduction to Competition Law

I. Historical development of competition law:

• History of Competition Law can be traced back
to 50th century Roman period enactment Lex
Julia de Annona, which prohibited profiteering
and joint action to influence corn trade.
• Under Diocletian, in 301 AD an ‘Edict on
Maximum Prices’ established a death penalty
for anyone violating a tariff system, for
example by buying up, concealing or
contriving the scarcity of everyday goods.
 Contd.
• The Roman Constitution of Zeno, promulgated in
483 AD, protected consumers against artificial
increases in the prices of all food stuffs, and hence
the artificial creation of scarcity. Zeno rescinded all
previously granted exclusive rights.
• After the promulgation of Zeno's Edict, there was
no fresh Roman legislation on the subject of
monopolies, and when finally, during the years 529
to 534 AD, Justinian codified the Roman law, he did
not more than incorporate Zeno's Edict and also
the earlier lex Julia de annona as the main props of
his legislation on the subject.
 Contd.

• When Justinian codified the Roman law, the days of the

Empire were drawing to a close and Europe soon slipped
into the Dark Ages.
• Legislation in England to control monopolies and
restrictive practices were in force well before the
Norman Conquest.
• "Foresteel" was one of the forfeitures that King Edward
the Confessor could carry out through England.
• Under Henry III, an Act was passed in 1266 to fix bread
and ale prices in correspondence with corn prices laid
down by the assizes.
 Contd.
• Under Henry III, an Act was passed in 1266 to fix bread and
ale prices in correspondence with corn prices laid down by
the assizes. Penalties for breach included amercements,
pillory and tumbrel.
• Under King Edward III, the Statute of Labourers of 1349 fixed
wages of artificers and workmen and decreed that foodstuffs
should be sold at reasonable prices. On top of existing
penalties, the statute stated that overcharging merchants
must pay the injured party double the sum they received.
• Examples of legislation in Europe include the constitutiones
juris metallici by Wenceslas II of Bohemia between 1283 and
1305, condemning combinations of ore traders increasing
prices
 Contd.
• The Municipal Statutes of Florence in 1322 and 1325 followed
Zeno's legislation against state monopolies; and under Emperor
Charles V in the Holy Roman Empire a law was passed "to prevent
losses resulting from monopolies and improper contracts which
many merchants and artisans made in the Netherlands.“
• In 1553 King Henry VIII reintroduced tariffs for foodstuffs,
designed to stabilise prices in the face of fluctuations in supply
from overseas.
• In 1561, a system of Industrial Monopoly Licences, similar to
modern patents had been introduced into England.
• But by the reign of Queen Elizabeth I, the system was reputedly
much abused and used merely to preserve privileges,
encouraging nothing new in the way of innovation or
manufacture.
 Contd.

• In the Case of Monopolies or Darcy v Allin the

plaintiff, an officer of the Queen’s household, had
been granted the sole right of making playing cards
and claimed damages for the defendant's
infringement of this right. The court found the
grant void and that three characteristics of
monopoly were (1) price increases (2) quality
decrease (3) the tendency to reduce artificers to
idleness and beggary.
• From King Charles I, through the civil war and to
King Charles II, monopolies continued, and were
considered especially useful for raising revenue.
 Contd.

• in 1682, in East India Company v Sandys it was

decided that exclusive rights to trade only
outside the realm were legitimate on the
grounds that only large and powerful concerns
could trade in the conditions prevailing
overseas.
• In 1710 to deal with high coal prices caused by
a Newcastle Coal Monopoly, the New Law was
passed.
 Competition Law and Common Law
• Common Law is one of the main bases of emergence
and crystallization of competition law.
• Common law basically deals with unfair competition
which is primarily comprised of torts that cause an
economic injury to a business, through a deceptive or
wrongful business practice.
• Earlier, courts used common law to protect
competition in the market.
• While adjudicating upon the validity of any anti-
competitive agreement, the court had to satisfy itself
that the person who had promised not to compete
would not become a charge on the community.
 Contd.
• The law of contracts and combinations in restraint of trade
was one of the few areas of the common law where the
courts expressly accommodated the nineteenth century
state’s economy.
• The English common law sought to protect the liberty of
people to practice their craft or trade.
• Competition Law rests on the basic set premises of doctrine
of restraint of trade.
• Restraint of trade is a common law doctrine relating to the
enforceability of contractual restrictions on freedom to
conduct business.
• Generally contracts in restraint of trade are void, as they are
contrary to public policy and public interest.
 Contd.

• Specifically, it relates to a situation in which a party

agrees with any other party to restrict his liberty in
the future to carry on trade with other persons not
parties to the contract in such manner as he chooses.
• Initially, every contract restraining trade was struck
down.
• In the early 17th century the concept of
reasonableness started coming into picture while
enforcing the doctrine.
• It became a primary consideration in the later 19 th
and 20th centuries.
 Contd.

• John Dyer’s case (1414) appears to be the first

recorded case of restraint of trade. John, the
Dyer, had sought to enforce a writ against a
colleague who had covenanted not to practise
the craft of dyeing in the same town as John
Dyer for half a year. The judge held that the
provision was against the common law ‘and by
God, if the plaintiff were here, he should go to
prison’.
 Contd.

• The common law has evolved to reflect

changing business conditions.
• In the early seventeenth century case of
Rogers v Parry (1613) it was held that a joiner
who promised not to trade from his house for
21 years could have this bond enforced
against him since the time and place was
certain. It was also held that a man cannot
bind himself to not use his trade generally.
 Contd.
• In the case of Horner vs. Graves (1831), it was
held, inter alia, that “whatever restraint is larger
than the necessary protection of the party, can
be of no benefit to either; it can be oppressive;
and if oppressive, it is in the eyes of law,
unreasonable. Whatever is injurious to the
interest of public is void on the grounds of
public policy”.
• In further due course of time the reasonableness
test became the overriding consideration in the
determining the validity of contracts.
 Contd.

• In Eldridge et al vs. Johnston, it was held that,

“a contract imposing a restraint on
competition must be reasonable with regard
to area and time if it is to be given effect to. A
promise is to be considered reasonable if is
not wider than is necessary for the protection
of the parties. And not injurious to public. If
the restraint imposed is greater than is
necessary for the protection of promise, it is in
valid”.
 Contd.

• Board of trade of Chicago vs. United States

(1917) based restraint of trade on rule of
reason test.
 Socialism and Competition Law
• Compatibility of socialism with any form of
competition.
• According to Proudhon, the necessary evil of
capitalism is that it gives monopoly on the means of
production to bankers and industrialist and so small
industrials were ousted from the market. In such a
competition, a genuine competition with presupposed
equality and freedom was impossible.
• Socialism would break the capitalist monopoly on the
means of production; it would restore to the
individual the tools of his labour; and thereby it would
restore the competition to its proper role.
 Contd.
• For Karl Marx competition is emulation for profit.
• Competition contains the seed of future
centralization, or rather, competition contains the
seed for future capital accumulation that is achieved
through “mergers and acquisitions”.
• On the other hand, Lenin adopted a more pragmatic
approach and advocated that socialism is not against
competition, it is in fact the first system to create an
opportunity for competition within the masses; to
include the majority of workers into a task within
which they shall be able to prove their best abilities.
 Classical and neo-classical Competition
• Classical and neo-classical competition differs in their
taxonomy and functioning.
• For classical economists competition meant both rivalry
and freedom from constraints. Competition itself was a
form of liberty.
• Just as one could give up some liberty by entering into a
contract, so also one could bargain away the right to
compete.
• Classical political economists were concerned expressly
with public policy, much more than their neo-classical
followers. They did rest their arguments in the spirit of
common law principles.
 Contd.

• For neo-classicists perfect competition is a state

of affairs in which price is driven to marginal cost
and firms are forced to minimize their costs
through innovation and growth to the optimal
size.
• Competition is a means to exercise free choice
between buyer and seller.
• It is the operation of individual self-interest
among the buyers and sellers of any article in
any market.
 Goals of Competition Law

• It is generally accepted that efficiency and

consumer welfare are the primary goals of
competition law.
• However, goals of competition are not only
economic but also non-economic.
• In broad terms, goals can be divided into:
classical goals and specific goals.
• classical goals can further be divided into
(a) Enhancement of efficiency in the market;
 Contd.
(b) Promoting consumer welfare;
(c) Avoidance of conglomeration of economic
power; and
(d) protection of smaller firms from anti-
competitive agreements.
• Specific Goal of the competition law is the
creation of single market, which helps in
bringing out lower prices, better consumer
welfare and liberty to sellers and buyers.
 Contd.

• Efficiency is all about maximum utilization and

best possible management of scarce resources
in a society. There are three types of
efficiency:
(a) Allocative efficiency;
(b) Productive efficiency; and
(c) dynamic efficiency
• Neo-classical Economic Theory
• Static Models of Oligopoly:
• (a) Cournot Model
• (b) Bertrand Model
• (c) Stackelberg Model
• Different Schools of Competition Analysis:
• (a) Harvard School of Thought (S-C-P Paradigm)
• (b) Chicago School of Thought
• Post-Chicago: Game Theory
• (a) Static Games (Prisoner’s Dilemma)
• (b) Repeated Games

• Development of competition law in United States

• Promotion of competition law in European Communities