Competition law (or anti-trust law in the United States) is a type of law that promotes the maintenance of regular market competition by regulating anti-competitive conduct by companies that may jeopardize this. Competition/anti-trust law has three components to ensure it completes its goal:
- It prohibits agreements that restrict free trade and competition between businesses within the market.
- It bans abusive behaviour by a firm that dominates that particular market. This includes limiting anti-competitive practices that would lead to a firm becoming the dominant firm in the market.
- It supervises the mergers and acquisitions of large corporations that could potentially threaten the competitiveness in the current market
The main objectives of competition and anti-trust laws are typically to protect consumers from dominant market players and to allow free entry into the market by entrepreneurs.
In the United States, the Sherman Act of 1890 was the first anti-trust law which attempted to restrict competition of big market players by making them agree to certain market prices and outputs.
In Canada, the Act for the Prevention and Suppression of Combinations in restraint of Trade was passed in 1889 and is considered the first competition statute of the modern era.
The theories behind competition and anti-trust law comes from multiple economic perspectives:
- Classical Perspective states that anti-trust is unnecessary in competition because, according to laissez-faire, competition between firms is considered normal in the long-term economy. If a firm dominates as a result of its innovativeness or superior product, and if it attempts to take advantage of its monopoly position, it will create space for other firms to enter as a result. Classical theorists believe that governments should not interfere, rather, should allow the market to work itself.
- Neo-classical synthesis states that production and distribution of goods in a free market allows for maximizing of social welfare, with the assumption that firms can enter and exit the market freely, as well as compete. The idea is that competitive free markets allocate, deliver and produce effectively and efficiently without the help of the government.
Competition law does not make monopolizing a market illegal, rather, it prevents the dominant firms from abusing the power they have. These exclusionary practices include price exploitation, predatory pricing (dropping the price so far that smaller firms cannot cover costs and exit the market) and price discrimination (only offering certain prices to certain people).
In regards to mergers and acquisitions, competition law ensures that the economic power acquired by already-dominant firms isn't concentrated further by these firms merging or acquiring.
Intellectual property is another method of creating a monopoly and one that competition law awards special treatment and consideration. There is still question as to whether it is legal to acquire a monopolistic position through the accumulation of intellectual property rights. The competition law would have to determine whether the rights are given to the firm who has the ownership of the intellectual property or towards promoting competitiveness.