Central to competition policy and law is the acceptance that in competitive markets inefficient firms will not survive. They will incur higher costs than their rivals and so will be priced out of the market or they may not be supplying product of a quality or variety that consumers want. The exit of these firms enables resources to be reallocated to other firms that will better serve the market. Given this, only conduct that excludes or deters firms that are at least equally as efficient as the firm engaged in the conduct is likely to contravene competition law. However, an entrant into a market may be production inefficient even though once it becomes established it may be more efficient than incumbent firms because, for example, it has a better product or better technology. Conduct that caused the exit of that firm or even curtailed its ability to compete effectively could damage the competitive process
Markets that are not very competitive tend to be relatively inefficient. The lack of competition means that producers are able to restrict output and charge a price above the economic cost of production (which includes return to capital). If the unit cost of production decreases as output increases, this will be production inefficient. Additionally, a monopolist is likely to be x-inefficient. In addition, the higher prices mean that consumers lose some of the benefit of transacting in the market, that is, consumer surplus decreases. This is transferred to producers as economic rents/monopoly profits. In response to the higher prices some consumers will switch to other products which are cheaper but less preferred. The increased demand for these products causes those businesses to expand production. The result is that resources move from producing the products that consumers preferred to those that they prefer less – resources are inefficiently allocated. However, if a monopolist can perfectly price discriminate, charging each consumer their marginal willingness to pay, all consumers wiling to pay the marginal cost of supply will obtain supply and this outcome is allocatively efficient.
Dynamic efficiency is the engine of economic growth and is driven by innovation. Innovation may benefit consumers by making new products available that better meet consumer preferences, by making existing products safer, and by providing more variety for consumers. Consumers benefit from innovations that provide them with better products, although they may do so at a higher price (the higher price of new medical treatments). This identifies a tension between static efficiency which focuses on price and dynamic efficiency. In addition, the cost saving associated with technological improvements may not be passed on to consumers but it does represent an increase in total welfare. The tension here illustrates the debate concerning the measure of welfare against which the efficiency producing conduct is assessed.
Innovative distribution models, such as platform businesses, while clearly providing significant benefits for consumers, have raised concerns about increased market concentration with the dominance of mega-platforms such as Google and Facebook. The efficiencies available by the development of ecosystems around the original platform may raise barriers to entry, especially for suppliers of only part of the platform’s offering.
It is often said that competition policy promotes competition not for the sake of competition but because competition drives markets to be efficient and efficient markets increase economic welfare. However, if there are significant market failures this may not be the outcome. Indeed, conduct designed to overcome market failure and increase efficiency, such as the imposition of vertical restraints, may lessen competition. This creates another potential tension between competition policy and law and policies designed to increase efficiency and stimulate growth.
Under the influence of the Chicago School of economic thought, in the United States, antitrust authorities have tended to focus on promoting efficiency even if it has ani-competitive effects. Claims of efficiency benefits are used to justify conduct that is anti-competitive. Other jurisdictions are less permissive, generally balancing any pro-competitive effects from increased efficiency against associated anti-competitive effects. The detrimental effect on competition is offset by the saving in resources which increases total welfare.