Introduction to Part VI: Theory of competition policy

So far in this book, our approach has been mostly positive: we have been concerned with describing and explaining the workings of imperfectly competitive markets. The first chapters helped us to understand what market power is, where it comes from and how it is exerted. In some specific situations, we also compared the outcome that results from the interaction among firms with the social surplus-maximizing outcome. Yet, such comparisons did not give rise to recommendations for a competition authority.

In this part of the book, we change our perspective and adopt a normative approach: now that we understand what is, we can express views about what ought to be, that is, we provide guidance for competition policy. To the extent that competition authorities follow the rules spelled out under this normative approach, this analysis is again helpful to address positive questions: it may help explain why firms choose certain actions when they foresee the reaction of competition authorities.

The basic postulate for competition policy is that competition is desirable as it is a fundamental force to deliver economic efficiency. The problem, as we have already noticed in the previous chapters, is that firms may be tempted to suppress competition as it makes their lives easier. It is thus necessary to edict and enforce a set of rules in order to maintain competition.