The Shaky Foundations of Competition Law

This paper examines the ideas behind competition law in New Zealand and offers a critical assessment of its practice. It is a policy paper aimed at lawyers and legal scholars. While the paper focuses on the NZ Commerce Act, it has general applicability. The purpose of competition law in New Zealand is "to promote competition in markets for the long-term benefit of consumers". (Commerce Act 1986, s 1A) In other words, it is believed that markets left to their own devices, without any regulation of prices, quantities, or structure, could (in some cases) be harmful to consumers. The risk for consumers is such that a regulatory body, the New Zealand Commerce Commission, is necessary to make sure that market participants always take into account the benefits to consumers in their decisions. This view rests on the idea that competition is a state of affairs that must be regulated and managed by the authorities because undesirable situations of monopoly can emerge all the time. The purpose of this paper is threefold: (a) to show that the Commerce Act rests on a mistaken view of competition; (b) to explain the nature of (true) competition, and (c) to expose the real face of competition law by showing that it cannot achieve the aim it is supposed to achieve (ie to correct market outcomes so as to make sure producers' decisions always benefit consumers). The paper briefly assesses important concepts used in competition law, such as "market definition," "market power," "lessening of competition," and "dynamic efficiency." It is argued that the problem assumed by competition law is only exacerbated by regulation. Regulators should take into account the entrepreneurial process (as theorized by Israel Kirzner and others) in their analysis of market situations. So while there may be situations where competition law may seem warranted, in fact there is no crime at the crime scene. While competition law aims to protect consumers, the danger is that it may affect the self-correcting properties of the market system (an outcome worse than the disease it tries to cure)