Workable Competition - Economic and Legal Approaches to Competition

The basic reason for considering the economic and legal definitions of competition is to clarify economic concepts that may be of use in establishing legal control of market forces. As a first approximation, a concept of competition must be developed that is workable or effective, even though it may not be exactly pure. Since the underlying philosophy of the free enterprise system recognizes that competition is desirable in order to assure efficiency, lower prices, and increased production, the idea behind workable or effective competition is to set up a model that will give the public the benefit of industrial rivalry even though there may be deviations from the norm of pure competition. In a sense, this amounts to an "economic Rule of Reason"--reasonable competition that is effective or workable.

Workable or effective competition still would not allow any one seller or group acting in concert to have the power to choose a level of profits by manipulating output and subsequent prices. The influence of rival sellers or potential entrants will operate as a check on his actions if he should attempt to exert price jurisdiction. Rivals must be free to compete for the custom of the buyers through price and nonprice competition; no seller may have the power to limit the freedom of his rivals, nor may he hamper freedom of entry into the industry.

The controlling element in workable competition is the mutual self-interest of the rivals. Each competitor attempts to promote his own economic self-interest through such inducements as price, quality, and service. The ultimate test of effective competition is in the performance. In the long run, effective competition tends to equalize profits throughout the economy. This impact of effective competition on profits and capital formation is one of its most important functions.

To decide what is workable competition, the courts and economists have looked for certain characteristics. Previously, we said that there must be a sufficient number of sellers to allow independent rivalry. Not only must the number of sellers be considered but also the relative size and strength of each. Relative freedom of entry is another controlling element, but this should not imply that the size of minimum investment capital cannot act as a deterrent. There must be genuine independence in rivalry.

A paucity of sellers need not necessarily lead to mutual interdependence of actions, but it tends to go in that direction. Predatory preclusive tactics must not be present. In general, however, predatory competition is less likely to prevail where numbers are large. The organization of the market and the nature of competitive forces also influence the possible effects of workable competition. Buyers should be aware of the market's boundary in spite of seller efforts at product differentiation. The essence of effective competition is for rivals to meet each other's price and nonprice competition. Whatever price discrimination exists must not be of a predatory nature.

Workable or effective competition is not identical with the idea of pure or perfect competition, although some of the identifying elements are similar. The latter requires a higher degree of absolute correspondence between models and practice, such as complete mobility, precision in substitutions, negligible influences, and perfect knowledge. In some respects, the theoretical economic analysis offers a framework in which effective competition may be studied.