In some circumstances market forces fail to preserve business competition and the benefits to consumers of that competition, says Russell Pittman, the Justice Department's competition policy chief. Such circumstances are common in developing countries, he says, where formerly state-run enterprises often dominate an industry and where managers in privatized sectors often prefer to cooperate than to compete. He says antitrust and competition policies need to be part of the legal infrastructure in all market-based economies. The views expressed are not necessarily those of the U.S. Department of Justice.

Competition is the force that most free-market economies rely on to make sure that businesses satisfy consumer wants and needs. When competition works, no government entity needs to dictate to businesses what products to produce or at what quantities, qualities, and prices: Competition dictates these matters to businesses directly.

What is competition? All it really means is that buyers have choices. These buyers, of course, may be other enterprises or individual consumers. Whether we consider an oil refinery buying crude oil, a chain of petrol stations buying petrol, or an individual driver needing to refill his tank, if these buyers have choices among different suppliers, it is much more likely that they will get high-quality products at reasonable prices.

How does competition work? The idea is fairly simple, really. We begin with two observations:

Businesses want to make money.

Consumers have money and want to spend it to satisfy their wants and needs.

We add three fundamental government policies:

Health and safety regulations, to ensure that products are not dangerous to consumers, workers, or the environment.

Protection against unfair or deceptive or "unscrupulous" competition, so that buyers really know what it is that they are buying.

Protection against monopolistic practices -- agreements among competitors to charge high prices, enterprise mergers that destroy competition, abuses of dominant positions in the marketplace -- to ensure that businesses really compete.

Then we stand out of the way and let competition in the market operate. In most markets, most of the time, this is just about all the government regulation necessary to ensure that buyers are well served.

How do we know that prices are not higher than they should be? Competition among suppliers to sell to customers will keep prices down. How do we know that costs are as low as they could be? If suppliers can sell to more buyers and earn more profits by taking actions to lower their costs, they will do so. How do we know that technological progress will be as high as it should be? Competition among firms forces them to be more progressive than their rivals to attract buyers. How do we know that product quality will be as high as it should be? If buyers want improvements in quality, sellers will try to discover this and make more money by satisfying the desires of buyers.

Noncompetitive Markets

Before I am accused of thinking like Dr. Pangloss -- the incurable optimist in Voltaire's Candide who thought that everything he saw demonstrated that we live in "the best of all possible worlds" -- let me acknowledge some blemishes in this portrait that I have been painting. Let's consider three of the most important.

First, there are some markets in which competition makes no economic sense. We don't want competing water companies digging parallel pipelines down residential streets so that individual consumers can have a choice among water providers. There are several sectors like this that are usually called "natural monopolies," where, as this term suggests, the benefits of competition are not worth the costs involved. These sectors are often either owned by or regulated by government as a result. It should be noted, however, that:

There are far fewer true natural monopolies than was once believed. For example, railroads have been commonly considered natural monopolies requiring heavy government regulation in many countries, but many commodity shippers are better protected by competition from truck and water carriers than by government regulation.

For those sectors that continue to require regulation, we've discovered that regulation may be much less intrusive and expensive than it used to be and still protect the public from monopoly abuses.

Second, one country cannot always support a competitive market in particular sectors by itself. Perhaps Costa Rica will never have three independent steel manufacturers, or Croatia three independent television manufacturers. For many products, however, imports can provide buyers with choices and keep local "monopolists" from taking advantage of their positions. Sometimes, especially for a small country, free trade is the best competition policy. (It is important to remember, however, that, for some products, imports cannot provide effective competition, and for the rest, government regulators may need to watch for actions by local enterprises that place competing importers at a disadvantage.)

Finally, as suggested above, business enterprises will often try to keep competition from working. They love to see competition when they are acting as buyers in the marketplace and seeking the best products and prices for themselves, and they will often cooperate with the competition authorities to protect such competition. But they tend to prefer an easier, more solitary existence when they are selling their own product to buyers. As British economist J.R. Hicks once noted, "The best of all monopoly profits is a quiet life." Thus they may try, for example, to:

Reach agreements with their closest competitors as to what prices will be charged, or who will sell to which customers, or who will sell in which territories.

Merge operations with their closest competitors.

Force exclusive contracts on their suppliers or distributors that protect their own dominant position in a particular market.

It is the job of the competition authorities to prevent these kinds of actions from taking place, so as to protect the choices of consumers and the unfettered operation of competition in a free market.

The Globalization of Competition Law

Most competition laws around the world are structured so as to prevent and prosecute exactly these three kinds of anti-competitive actions. In the United States, section 1 of the Sherman Act prohibits agreements among enterprises that would harm competition. Section 7 of the Clayton Act prohibits mergers or other combinations among enterprises that would significantly reduce competition. And Section 2 of the Sherman Act prohibits "monopolization" -- the attempt by a single enterprise to control a market through unfair practices.

A similar example from a very different country is the Romanian competition law, where article 5 prohibits agreements whose effect would be "the restriction, prevention or distortion of competition." Article 13 prohibits mergers "which, by setting up or consolidating a dominant position, cause or may cause" harm to competition. Article 6 prohibits "any misuse of a dominant position ... by resorting to anti-competitive deeds having as object or as effect the distortion of trade or prejudice for the consumers."

Those countries whose competition laws lack one of these three components have generally taken action to try to correct the situation. In the United States, one reason for the enactment of the Clayton Act in 1915 was to add merger enforcement to the bundle of responsibilities of the Justice Department. Argentina's competition law has no merger enforcement provisions, but there are currently amendments before the parliament to add them.

One of the most important changes in competition law enforcement in recent years has been the adjustments made for the gradual globalization of many markets. Just as in the United States more than 100 years ago the coming of the railroads turned many local and regional markets into national markets, the continuing lowering of transport costs in recent years -- along with the growing importance of products with very low transport costs relative to value -- has turned many national markets into world markets.

Competition law enforcers have taken this development into account in two principal ways. First, when examining whether a particular merger would significantly harm competition or whether an enterprise is truly in a dominant or monopolistic position, enforcers take into account all the economic choices facing buyers, whether these come from domestic producers or from imports. This, like other aspects of competition law investigations, requires an extensive inquiry into the real-world facts of a particular market. For example, the existence of a certain level of current sales in a market by importers may be no guarantee of the expansion of those sales to preserve competition if there are nontariff barriers to such expansion. An action that appears to harm competition in a domestic market may be clearly innocuous if international competition is taken into account.

Second, however, the fact that some markets have become international means that some actions that would not have affected competition in earlier years may suddenly become of enforcement concern. A merger of a foreign company with a domestic company may stifle actual or potential competition in ways that would not have been relevant a generation ago. (Good examples are the controversies surrounding the proposed joint ventures of Brahma with Miller Brewing and Antarctica with Anheuser-Busch in Brazil in 1997-98.) Markets that might have been cartelized by domestic companies a generation ago may now be cartelized by domestic and international companies. (Good examples are recent U.S. Department of Justice prosecutions of international cartels among producers of fax paper, agricultural chemicals, and plastic cutlery. See the Web site of the department's Antitrust Division at www.usdoj.gov/atr.) Enforcers who are insufficiently aware of the activities of foreign firms or who lack jurisdiction to respond to them may fail to protect their economies from significant competitive harm.

Developing Countries Need Competition Laws

Should developing countries devote scarce government resources to the enactment and enforcement of competition laws? It seems clear that the answer is yes, that such countries are as vulnerable to the kinds of anti-competitive actions described above as developed countries are. In fact, there are at least three reasons to believe that competition laws are especially important as developing countries liberalize their economies.

First, most developing countries -- especially but certainly not exclusively the post-socialist countries -- have economies filled with large enterprises that dominate particular industries, often because of government policies and practices of the past. As such enterprises are privatized, they will not welcome the emergence of competition to their products on the domestic market, and they may take actions designed to deter the import or distribution of such competing products. It will be up to the competition enforcers to block such actions, to ensure that the opening of borders to trade yields actual, effective competition on domestic markets.

Second, where economic liberalization has included some de-monopolization of large enterprises, there may be a tendency for the managers of the newly separated components of the old enterprise to cooperate rather than to compete in the marketplace. This cooperation may take the form of cartel agreements, and such agreements may be facilitated by the creation of industry associations whose membership consists of all the new components of the old enterprise. As with abusive behavior by dominant enterprises, if cartelization rather than competition is the result of liberalization, then many of the benefits of liberalization will not reach the citizenry. Competition authorities in a number of developing economies -- Hungary, Peru, and Poland among them -- have already faced the task of protecting buyers by breaking up these newly formed cartels.

The third reason is a related one. Much of the population of developing countries may face increased economic uncertainty as a result of liberalization. Perhaps the best response to such concerns is creation of an effective "social safety net" -- job training, publicly supported health care, unemployment benefits, and so on -- so that those who lose their jobs will be better able to find new ones and will not face dire poverty in the meantime. But a second response is the enactment, enforcement, and publication of a competition law, so that the population is aware that the coming of capitalism does not mean the abandonment of all rules and protections for small actors in the marketplace. It is probably not an exaggeration to state that, in some countries, the enactment of a competition law has been one prerequisite for the enactment of other liberalizing legislation.

New laws enacted in any country must fit into the legal, economic, and social contexts of that country; no one is (or should be) suggesting that either the Sherman and Clayton acts or articles 85 and 86 of the Treaty of Rome (the European Union's competition legislation) be transplanted root and branch into any and all foreign soils. Nevertheless, the experience so far strongly suggests that competition policy is one important component of the legal infrastructure that supports a competitive market economy.