One of the fundamental tenets of a market economy is that when the “invisible hand” operates without any hindrance or guidance, the efficiency of activities and societal welfare will be maximized. Therefore, the necessity to preserve competition is one of the most important principles of a market economy.
When we look at any introductory economics textbook, we are likely to see markets classified as “perfectly competitive markets,” “oligopolistic markets,” and “monopolistic markets.” These books usually list the characteristics of perfectly competitive markets, including homogeneous products, free entry and exit from markets, a large number of buyers and sellers who cannot influence the price, no externalities, rational actors, full information, mobility of production factors, property rights, and economies of scale, among many other conditions. From this perspective, a “perfectly competitive market” that meets all these conditions can start to seem utopian. Nevertheless, these conditions serve as a benchmark for practitioners in real life.
However, as difficult as it is to meet the conditions of perfect competition, jumping to conclusions without thoroughly analyzing exceptional cases can lead to a regulatory trap. This article focuses on the “atomicity” condition, or the idea that buyers and sellers cannot influence prices independently.
One of the misconceptions in this regard is assuming that “multitude” is directly proportional to “competition” and “efficiency” without subjecting markets with numerous firms to a separate analysis.
This is exemplified well in the case of bread bakeries or intercity bus transportation: concerning bread production, modern bakeries capable of producing more than 200,000 loaves of bread a day are at one end of the scale, while “neighborhood bakeries” with capacities of around 10,000 loaves of bread are at the other. Focusing on these relatively small “neighborhood bakeries,” we encounter quite common events, such as “an apprentice who eventually opens their bakery very close to their master’s,” which contradicts the rational behavior assumption in economic theory. Consequently, many bakeries emerge close to each other, which, in reality, could drive their competitors to bankruptcy if they collectively met most of the demand. Due to factors like scale economies and the difficulty of exiting the market, bakeries tend to cut their capacity (limit supply) instead of engaging in price competition. Therefore, production that a single bakery could manage incurs unnecessary costs and fixed expenses, passed on to consumers due to restricted competition.
A similar situation is partly applicable to intercity bus companies. Because economies of scale are not achieved, occasionally, price wars can occur, prompting the relevant authority to resort to “minimum price” regulation to prevent exits from the market. In sum, the conclusion is that multitude doesn’t always translate to efficiency and competition. In fact, without considering other conditions, the multitude can even be a reason for restricting competition.
The second misconception related to this issue is automatically linking abundance to competition in the context of a “competition law violation.” As demonstrated in the previous paragraph, “multitude” can sometimes hinder achieving economic efficiency due to irrational behavior, the inability to benefit from economies of scale, and the assumption of market exit not working. However, contrary to this, it is often argued that the relationship between the number of firms and competition law violations is inverse, irrespective of the cause or manner. When looking at these arguments, it is suggested that in markets with many firms, it’s possible or meaningful to make anti-competitive agreements; even if such agreements were made, they would not be enforceable, so it is meaningless. Therefore, competition law practices in markets with many firms are futile. Nevertheless, no established magical number exists to alleviate competition law concerns.
In short, the risk of making “shortcuts” without considering other factors related to the market or actors is this: The number of actors in the market alone is not a sufficient and decisive factor in evaluation. For instance, in a market with hundreds of actors, if they do not possess similar sizes, technologies, and cost structures as required by the theory, and if limited actors hold a significant market share, production capacity, distribution network, and other elements sufficient to affect prices, it’s possible for these actors to engage in anti-competitive agreements, ignoring the rest, and implement them profitably.
The misconception that the number of actors in the market is directly proportional to competition and efficiency is, in fact, a structural problem that should be resolved at the level of competition policy rather than competition law, considering the problem’s complexity. In other words, while it’s reasonable to assume that interventions in competition law in this area will have limited impact, supporting these interventions with measures that enable actors in the relevant market to benefit from economies of scale is essential.
Contrary to the claims that anti-competitive agreements don’t make sense and have no effect in markets with an abundance of actors, it’s observed that the U.S. antitrust law has found an “economically efficient” solution, which is also reflected in EU and Turkish law. This solution is manifested through the concept known as “per se.”
One of the renowned figures of competition law, Thomas G. Krattenmaker, summarized the issue in a class: “The most fundamental economic difference between the ‘rule of reason’ and ‘per se’ concepts is in terms of transaction costs. Since the 1927 case of United States v. Trenton Potteries Co., courts have been saying the following: When the existence of an agreement among competitors – such as price fixing, output restriction, or market allocation – is proven, do not bother the court with details such as whether the established price or conduct is reasonable or whether it has been implemented, because an agreement made by competitors coming together in such a way – even if they reduce prices – does not benefit consumers.”
Indeed, in the EU and Turkey, agreements to restrain, disrupt, or obstruct competition are prohibited, regardless of the number of parties involved, their impact, or their applicability. However, when looking at the implementation, the EU has only transferred the “formalistic approach” from the US while leaving the “essence” or “principles” on the other side of the Atlantic! Therefore, such a “clumsy” adaptation led, to some extent in the EU and predominantly in Turkey, to a situation similar to the unexpected twist in a suspense novel, as illustrated below:
Let’s assume there is an allegation of price fixing about two particular bagel vendors on the street, where many other bagel resellers are present on the same street. Even though two of them fixing the price will not affect the market, the authority still needs to consider this complaint and conduct a preliminary investigation as per the law. If evidence is discovered confirming such a complaint, then the authority must proceed with a full investigation process until a penalty is imposed! Allocating limited resources of an authority for such a trivial case defies efficiencies and triggers huge debates among practitioners.
Within Article 101 of the EU Treaty, the concept of “restriction of competition” is drawn quite broadly, leading to excessive workload due to the abundance of cases. Therefore, the European Commission issued the “De Minimis Notice,” stating that in cases where rival companies engaged in a horizontal agreement that limits competition have a combined market share of less than 10%, it will not initiate investigations and impose fines on the matter. However, the Commission’s announcement has sometimes been misconstrued as implying “leniency towards violations by small firms.”
Yet, a careful reading of this notice reveals that it is primarily based on the requirement outlined in Article 101 of the EU Treaty, which states that “it must affect trade between Member States” (paragraph 1). Additionally, it considers the relevant market on a Community-wide basis for market share calculations (paragraph 10). Most importantly, regardless of market shares, it clearly emphasizes that direct or indirect (a) price-fixing of products sold to third parties, (b) restrictions on supply or sales, and (c) sharing of markets or customers among competitors are strictly prohibited (paragraph 11).
As a result, when it comes to basic violations of competition law, “multitude” and “smallness” do not constitute a defense. Regarding effectiveness, it is not always possible to say that combining “multitude” with “smallness” will result in the maximum benefit.
