*We would like to thank the JIE Editor and three anonymous referees for their extremely helpful comments. Also, the participants of seminars at OFT, the Paris School of Economics, Toulouse School of Economics, CERGE-EI (Prague), Cyprus University, the University of St. Andrews and at the Conference on ‘Innovation and Competition in the New Economy,’ University of Milan, Bicocca (May 4–5, 2007) and the 3rd CRESSE Conference on ‘Competition Policy: Procedures, Institutions, IPRs,’ Anavyssos, Greece (4–5, July, 2008). We are particularly grateful to A. Fletcher, V. Korah, P. Rey, M. Salinger, D. Spector and F. Verboven for their suggestions and/or comments on earlier versions. Of course all errors, ambiguities and inaccuracies remain our responsibility. Some of the research in producing this paper was undertaken when both authors were visiting the ESRC Centre for Economic Learning and Social Evolution (ELSE) at University College London (March, 2007 and February, 2008) and the Toulouse School of Economics (November, 2007), whose hospitality we gratefully acknowledge.
ON OPTIMAL LEGAL STANDARDS FOR COMPETITION POLICY: A GENERAL WELFARE-BASED ANALYSIS†
Article first published online: 27 AUG 2009
© 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics
The Journal of Industrial Economics
Special Issue: CRESSE SYMPOSIUM ON COMPETITION POLICY: PROCEDURES, INSTITUTIONS AND INTELLECTUAL PROPERTY RIGHTS Edited by Yannis Katsoulacos and David Ulph
Volume 57, Issue 3, pages 410–437, September 2009
How to Cite
KATSOULACOS, Y. and ULPH, D. (2009), ON OPTIMAL LEGAL STANDARDS FOR COMPETITION POLICY: A GENERAL WELFARE-BASED ANALYSIS. The Journal of Industrial Economics, 57: 410–437. doi: 10.1111/j.1467-6451.2009.00393.x
- Issue published online: 27 AUG 2009
- Article first published online: 27 AUG 2009
We present a new welfare-based framework for optimally choosing legal standards (decision rules). We formalise the decision-theoretic considerations widely discussed in the existing literature by capturing the quality of the underlying analysis and information available to a regulatory authority, and we obtain a precise necessary and sufficient set of conditions for determining when an Economics or Effects-Based approach would be able to discriminate effectively between benign and harmful actions and consequently dominate per se as a decision-making procedure. We then show that in a full welfare-based approach, the choice between legal standards must additionally take into account, (i) indirect (deterrence) effects of the choice of standard on the behaviour of all firms when deciding whether or not to adopt a particular practice; and (ii) procedural effects of certain features of the administrative process in particular delays in reaching decisions; and the investigation of only a fraction of the actions taking place. We therefore derive necessary and sufficient conditions for adopting Discriminating Rules, as advocated by the Effects-Based approach. We also examine what type of Discriminating rule will be optimal under different conditions that characterise different business practices. We apply our framework to two recent landmark decisions – Microsoft vs. EU Commission (2007) and Leegin vs. PSKS (2007) – in which a change in legal standards has been proposed, and show that it can powerfully clarify and enhance the arguments deployed in these cases.