Hypotheticals and Counterfactuals: The Economics of Competition Policy
23 January 2004
By Dr. Mark Williams with former NERA Director Dr. Jorge Padilla
In this article, NERA Director Dr. Mark Williams and Dr. Jorge Padilla discuss the growing importance of economics in modern competition policy. They argue that modern competition policy is no longer satisfied by a mere fact-finding exercise. Rather, an understanding of how markets work is needed to explain economic relationships, estimate effects on consumer welfare and extrapolate the hypothetical. In the course of this move towards understanding the true forces that underlie how competition works, the use of economics has emerged as the driving force behind modern competition policy.
Drs. Williams and Padilla explain that the primary need for economics arises from the fact that competition policy typically has to consider counterfactuals and hypothetical situations that are not directly observable. For example, in a merger inquiry the competition policy practitioner is required to assess the effect of the merger by comparing the situation that would result if the merger went ahead with the situation that would exist in the absence of the merger, and where the no-merger scenario is not necessarily a continuation of the pre-merger situation. Similarly, in a cartel investigation the relevant question is what would have happened "but for" the cartel. In such hypothetical situations, which are by their nature not directly observable, it is imperative to understand how markets work, so that the underlying economic relationships can be applied to the hypothetical situation.
In the article Williams and Padilla highlight two scenarios in which economic analysis is especially important in determining the relevant counterfactual: merger simulation work, and in assessing cartel damages and effects.
This chapter is an extract from The 2004 European Antitrust Review, a Global Competition Review special report.
