The economic analysis of competition law focuses on efficiency, which includes three basic components: efficiency in production, allocation and innovation. Production efficiency is achieved by using the most effective combination of available resources, while innovation efficiency refers to the creation and diffusion of new products that increase social wealth. Allocative efficiency is obtained when goods are distributed to those who value them most, achieving Paretian efficiency.
Although it is assumed that the competitive process is the result of rivalry between firms seeking consumer acceptance of their products, firms do not compete as a direct rivalry of X against Y. Each company, once it acts in the market, seeks its strategies, actions, and innovations to solve some need at the lowest possible cost for the customer and with the highest possible utility itself. The most efficient companies will be able to dispense with the idea that they are competing against one another in particular since they are all competing for the same scarce customer resources, not necessarily against each other.
Thus, efficient outcomes benefit the consumer through lower prices and higher consumer surplus. The usual perspective of these laws and competition authorities is that restrictive practices, such as collusion and predatory pricing strategies, can limit competition and harm consumers. However, it is often the consumer who benefits most from the practices or, in the case of innovations, who prefers them, even if in the eyes of people with other preferences it seems an irrational choice.
I- Components of efficiency analysis
The three basic components of an economic efficiency analysis are:
- Efficiency in production.
- Allocative efficiency.
- Efficiency in innovation.
Each of these components plays a crucial role in promoting competitive markets and improving consumer welfare. Of course, often, due to the complexity of market interactions, the external analysis is made from a static perspective and, therefore, the results of the studies prevent us from seeing that these practices, which may be exclusionary or predatory, will be those that benefit the consumer and the dynamics of competition in the medium and long term.
II- Efficiency in production
Efficiency in production is achieved when goods are produced using the most effective combination of resources available under the existing technology. This means achieving the highest level of production with the lowest possible costs.
These practices not only optimize the use of resources, but also increase productivity and reduce operating costs.
III- Allocation efficiency
Allocative efficiency is obtained when the existing stock of goods and inputs is distributed to those buyers who value them most, generally through the price system. This concept is closely related to Paretian efficiency, a situation in which goods or resources cannot be reallocated to improve the conditions of some agent without harming another. An illustrative case of allocative efficiency is the use of artificial intelligence in the allocation of resources in manual manufacturing processes, as seen in the Pikokaizen case. This technology allows reducing delivery time and improving flexibility and proximity to markets (see case here).
IV- Efficiency in innovation
Efficiency in innovation, also known as dynamic efficiency, refers to the capacity of an economy to generate and disseminate new products that increase social wealth. This type of efficiency is fundamental for long-term economic growth, as it fosters the creation of innovative technologies and processes.
The most important (historical) examples of innovation that we could have in mind are John D. Rockefeller‘s breakthroughs in products and business practices. Although he was accused of anti-competitive practices for those same breakthroughs, the evidence indicates that his “great power” derived from constant low prices to the public and scientific innovations that allowed him to be profitable above his other competitors. For a better understanding of the Esso Standard case, please read this article.
V- The competitive process
Firms compete for the acceptance of their goods or services by consumers, since the greater the number of units they place on the market, the greater their share of revenues. Efficient outcomes, from the firm’s point of view, are linked to consumer welfare, since lower prices increase consumer surplus, i.e. the difference between the price a consumer is willing to pay and the price he pays.
VI- Structure-Behavior-Performance Paradigm (SBP)
The Structure-Conduct-Performance (SCP) paradigm holds that market structure (market concentration, entry conditions, and degree of product differentiation) determines firm behavior (price, research, investment, advertising, etc.), and this behavior in turn determines firm performance. This performance is reflected in variables such as the relationship between price and marginal cost, product range, innovation rate, profits, and distribution capacity.
VII- Restrictive competition practices
Restrictive competition practices can be divided into three basic groups:
1. Collusive practices: consist of an agreement between competitors to limit competition between them, which turns them into a monopoly. The three classic conducts that characterize a cartel are: monopolistic price fixing, restriction of production, and allocation of territories or groups of consumers.
2. Exclusionary practices: are those conducts that make it difficult for competitors to remain in the market or prevent the entry of new competitors. Among them:
- Predatory pricing.
- Exclusion of access to essential facilities.
- Loyalty discounts.
- Tying and tied sales: forcing customers to purchase an additional or complementary product along with the main product, making it difficult for competitors to enter the market for the complementary product.
- Refusal to supply.
3. Exploitative conduct: in competition matters, this refers to abusive practices carried out by a company that has a dominant position in the market. These practices are designed to exploit consumers or other market participants, taking advantage of their power to obtain excessive profits or impose unfair conditions. They include:
- Excessive prices.
- Unfair business terms: for example, a dominant firm might require exclusivity contracts that prevent suppliers from working with competitors.
- Price Discrimination.
- Limitation of Production.
Although these concepts seek to specify a framework for the application of competition sanctions, the degree of subjectivity in analyzing the data and forming conclusions may be biased by the type of ideology of the analyst, as well as the knowledge of economics and law that the law enforcer may have.
At this time, in the absence of regulations for Competition Law, we must begin to analyze our behaviors, communications, advertising and contracts to establish risk areas that must be corrected in the next 23 months, in order to be aligned with the legislation and future regulations on December 9, 2026, when the competition protection section of the law comes into force.