COMPETITION POLICY: TOWARD A NEW APPROACH

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Abstract:

This article develops a new approach to competition policy based on recent theoretical progress: applying the new theory of market leadership, it tries to integrate the Chicago approach, which emphasized the importance of competition in constraining market leaders, and the post-Chicago approach, which has emphasized the strategic interaction between market leaders and competitors. While the former approach ignored strategic interactions and the asymmetric role of market leaders, the latter has ignored the role of endogenous entry, focusing only on the relationship between an incumbent and a competitor. The results emphasize the differences with the post-Chicago approach. The new theory implies that: 1) market leaders always adopt aggressive pricing strategies (set lower prices and hence have higher market shares) when entry is endogenously constrained: hence, under these conditions, a large market share for an industry leader is more likely to be a symptom of a competitive environment rather than of market power; 2) markets characterized by high fixed costs and constant variable costs generate absolute dominance by leaders facing endogenous entry: hence, under these conditions, even an apparently monopolistic market share may not be a reliable indication of market power; 3) aggressive introductory pricing, bundling strategies and over-investments in complementary markets are part of the natural competitive behaviour of leaders in markets where entry is endogenous: hence, under these conditions, these strategies are not likely to have an exclusionary purpose; 4) dominant firms invest more in R&D when threatened by competitive pressure, while they tend to stifle innovation in the absence of such pressure: hence, under these conditions, the persistence of a leadership position in high-tech sectors is consistent with effective dynamic competition for the market. An immediate application concerns the important case of Microsoft, which is the typical case of an aggressive leader constrained by endogenous entry: this, together with the network effects present in the software market, leads to low prices, resulting in a large market share, aggressive bundling strategies and high investments in R&D by the leader. The new approach is also used to examine current proposals for reform of EU policy against abuse of dominance (Article 82 of the EU Treaty).

Keywords: Bundling; Dominance; Market leaders; Microsoft

Document Type: Research Article

Publication date: April 1, 2006

More about this publication?
  • This scholarly, peer-reviewed publication of original articles and analysis of current developments in competition law is designed to complement and augment the existing literature with a special focus on European developments. Topics include:
    • Vertical and Conglomerate Mergers
    • Enlargement of the Union - the ramifications for Competition Policy
    • Unilateral and Coordinated Effects in Merger Control
    • Modernisation of European Competition law
    • Cartels and Leniency
    • Article 82- restatement or evolution?
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