RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTCP/W/127
7 June 1999
(99-2281)
Working Group on the Interaction
between Trade and Competition Policy
THE FUNDAMENTAL PRINCIPLES OF COMPETITION POLICY
Background Note by the Secretariat
1. This note has been prepared in response to a request made by the Group at the meeting which
took place on 19 and 20 April 1999,1 to provide a note setting out factual background on the
fundamental principles of competition policy.  It is  intended to assist in the Group's consideration of
the relevance of the fundamental WTO principles of national treatment, transparency, andmost-favoured-nation treatment to competition policy and vice versa (the first specific element
incorporated in the General Council's decision regarding the work of the Group in 1999 
2).  Following
the approach used in the earlier background note prepared by the Secretariat on the Fundamental
WTO Principles of National Treatment, Most-Favoured-Nation Treatment and Transparency,3 the
present note does not attempt to analyse the relevance of the principles discussed in it for trade policy.Rather, it is understood that this is a task for Members in the Working Group.
2. Following the approach that has been used in past discussions in the Group on related matters,
the term "competition policy" is considered, for the purposes of this note, to comprise the full range of
measures that may be used to promote competitive market structures and behaviour, including but not
limited to a comprehensive competition law dealing with anti-competitive practices of enterprises.
4
3. At the outset, it might be noted that, whereas the fundamental WTO principles that were the
subject of the earlier paper prepared for this item of the work programme of the Working Group wereidentified in that work programme and had been codified in multilateral law and jurisprudence
(namely that of the WTO), the same cannot be said for the fundamental principles of competition
policy.  There is one multilateral instrument which addresses principles relating to the control of
restrictive business practices, mainly from the perspective of ensuring that such practices do not
impede or negate the realization of the benefits of trade liberalization, particularly for the trade anddevelopment of developing countries.  This is the United Nations Set of Multilaterally Agreed
Equitable Principles and Rules for the Control of Restrictive Business Practices ("the Set") which was
adopted by the General Assembly of the United Nations on 5 December 1980 (Resolution 35/63).
The Set is of obvious interest for the Working Group and is summarized in Section II of this paper
and referred to elsewhere as appropriate.  For the rest, in selecting the principles on which to focus,the Secretariat has had to seek guidance from such diverse sources as observations made by Members
in meetings of the Working Group, guidelines, policy statements and analyses prepared by other
international organizations, national laws and guidelines, and academic analyses.
                                                     
1 WT/WGTCP/M/8 (to be issued).
2 WT/GC/M/32, p. 52.
3 WT/WGTCP/W/114.
4 WT/WGTCP/2, para 20; see also WT/WGTCP/M/3, para. 12.WT/WGTCP/W/127
Page 2
4. As mentioned above, in contrast to the situation regarding fundamental WTO principles, there
is no unified body of jurisprudence relating to the application of the fundamental principles of
competition law and policy at the multilateral level.  Rather, the jurisprudence that exists is developed
with reference to diverse national laws and policies.  Furthermore, it tends to be concerned with the
application of specific statutory elements or jurisprudential doctrines which embody, in varyingdegrees, the relevant principles, rather than with the application of the principles themselves.
Therefore, rather than attempting to trace systematic ally the application of the fundamental principles
of competition law and policy in the national jurisprudence of Members, the note, for the most part,
seeks to identify the relevant principles and to illu strate their application by reference to elements of
national laws and policies which embody the principles.
5. A word may be in order as to what is meant by a "fundamental principle" of competition
policy.  The term is not regarded as being synonymous with the elements of competition or antitrustlaw.
5  Rather, what has been identified in preparing this paper are principles of policy design and
application, including but not limited to objectives set out in national competition laws, whose impact
transcends specific statutory provisions and sectors, and is common to a broad range of jurisdictions
having competition policies.6
6. From this perspective, three general categories of principles have been identified in this note.
The first category concerns principles in the sense of the overriding goals or objectives of competition
policy (e.g., the promotion of economic efficiency and development, the promotion of consumer
welfare, or, possibly, other objectives).  These objectives serve as important guideposts for officials in
applying diverse aspects of related laws and policies.  The second category consists of more
operational principles of policy design and application.  Examples of principles in this category wouldinclude, for example, the promotion of market-opening  measures and the identification of situations in
which market power is likely to be exercised.  Another such principle would be the distinction that is
made in virtually all competition law systems between arrangements that are primarily horizontal in
nature (i.e., they involve restrictions on competiti on between firms that would otherwise be in direct
competition with each other) and arrangements which are primarily vertical in nature (i.e., they limitcompetition within an individual product production and distribution chain).  A third major category
of principles relates to the institutions and processes through which competition policy is applied.
7
An important example of a fundamental principle in this category would be adherence to due processin the application of competition law and policy.
7. It should be noted that, while the principles discussed in this paper would appear to be
common to a large number of jurisdictions having competition policies, it is not necessarily the case
that the principles are present in all jurisdictions havi ng such policies, at least in all respects.  Rather,
in some cases they are better understood as ideals which legislators and officials charged with
implementation strive to meet over time, taking into account other relevant goals, public policy
priorities and constraints.  This is similar, to an  extent, to the situation prevailing in regard to the
                                                     
5 In most jurisdictions having such laws, the basic elements of competition law would include a strict
prohibition of (horizontal) cartel agreements, a provisio n to address monopolization or abuses of a dominant
position, normally on a case-by-case basis, and (possibly but not necessarily) other provisions dealing with anti-
competitive vertical agreements, mergers and authorization for competition advocacy activities, in addition toprovisions relating to enforcement powers.  See World Bank and OECD (1999) and UNCTAD (1995).
6 Consistent with the approach that has been taken in the Group to date, in this note, the term
"competition policy" is considered to include, but not necessarily be limited to, competition law in the sense of acomprehensive statute addressing anti-competitive practices by enterprises.  WT/WGTCP/M/3, para. 12.
7 Recent work on "core principles" of competition policy (as distinct from "common standards and
approaches") at the OECD has focused on principles of this nature.  See OECD (1999).WT/WGTCP/W/127
Page 3
fundamental WTO principles of national treatment, most-favoured-nation treatment and transparency,
which are also subject to an element of progressivity in their application, in important respects.8
8. The structure of the paper is as follows.  Part I notes some observations that have been made
by Members relevant to the fundamental principles of competition law and policy in meetings of the
Working Group.  Part II outlines the contents of the United Nations Set.  Parts III, IV and V deal,respectively, with the three categories of fundamental principles of competition law and policy which
are set out above, namely fundamental principles in the sense of the objectives of competition law and
policy; operational principles of policy design a nd implementation; and institutional and procedural
principles that are considered important to the effective application of competition law and policy.
I. RELEVANT OBSERVATIONS BY MEMBERS
9. In the course of the various meetings of the Working Group, Members have made a number
of observations relevant to the fundamental prin ciples of competition policy.  In addition to
observations made with regard to Item I of the Ch ecklist of Issues Suggested for Study, which calls
for study of "the relationship of the objectives, principles, concepts, scope and instruments of trade
and competition policy to development and economic growth",
9 relevant comments have been made
with regard to the description of national competition regimes and other elements of the Group's work
programme.  In many cases, the comments made with regard to Item I of the Checklist wereconcerned with the general relationship between the trade and competition policy, rather than the
principles of competition policy per se .  Comments relevant to the principles that are discussed in
Parts III, IV and V of this paper are noted in those sections.  In addition, this section briefly notes
some main themes of Members' more general comments relevant to the fundamental principles of
competition policy.  These are broadly suggestive of the overall approach and categorization offundamental principles of competit ion policy which is developed below.
10. With regard to the objectives of competition policy, a number of Members have made the
point that these are essentially the same as those of trade liberalization – i.e., they relate to the
promotion of economic efficiency and consumer welfare.
10  A related point that has been made is that
both competition policy and trade policy can contribute directly to ensuring the effective equality ofcompetitive opportunities for Members in world markets – a consideration which is a fundamental
goal of the multilateral trading system as a whole.
11  It has been noted, as well, that a number of other
goals are reflected in the design and application of national competition policies, to varying degrees.
These include, for example, the promotion of opportunities for small- and medium-sized businesses,
market integration and (in some cases) industrial policy goals relating to local employment and other
matters.
11. With regard to the design and application of national competition policies, the point has been
made that competition policy is fundamentally concerned with identifying situations where market
power can be exercised, to the detriment of consumers.12  The relationship of this concern to the
analytical techniques of competition policy, including market definition, has been noted.13  T h e
                                                     
8 For example, under the GATS, the principle of national treatment is not a principle of general
application; rather, it has to be applied only to the extent that a specific commitment has been made andrecorded in national schedules that form part of the Agreement.  As is made clear in Article XIX of the GATS,
the scope of the schedules is to be progressively enlarged through successive rounds of trade negotiations with a
view to progressively higher levels of liberalization – in the same way that trade in goods has been progressivelyliberalized through successive tariff negotiations.
9 Checklist of Issues Suggested for Study, WT/WGTCP/2, Annex 1, Item I.
10 WT/WGTCP/M/2, para. 7; WT/WGTCP/M/3, para. 4.
11 WT/WGTCP/M/3, para. 4.
12 WT/WGTCP/M/3, para. 6.
13 WT/WGTCP/M/2, para. 22.WT/WGTCP/W/127
Page 4
distinction between horizontal and vertical relationships has also been stressed,14 as has the
importance of striking a balance between competition law enforcement and advocacy activities, and
the mutually-reinforcing nature of these activities.15  Another important point of emphasis has been on
the potential pro-and anti-competitive effects of economic regulation,16 and the need for coherence
between the roles of competition policy and regulation.17
12. With regard to questions of institutional design and process, the importance of adherence to
due process and the rule of law has been stressed on various occasions.18  In addition, the point has
been made that, at least in the case of some jurisdictions, competition law and policy already reflect,
and appear to be generally consistent with, the core WTO principles of national treatment, most-
favoured-nation treatment and transparency.19  The point has also been made that, in any
formalization of the link between competition policy and WTO principles, it may be necessary to
adapt the principles to the specific subject-matter and procedures of competition policy.20  T h e
important role that international cooperation can play in the effective application of competition law
and policy has also been stressed on a number of occasions.21
13. In the most recent meeting of the Working Group (on 19-20 April 1999), in addition to the
relevance of fundamental WTO principles to competition policy, observations were made by some
Members regarding principles of competition policy that might have relevance for trade policy.  Inthis regard, in its contribution (WT/WGTCP/W/118), Hong Kong, China referred to three "broad
principles" of competition policy, namely the promotion of open markets, non-discriminatory
conditions of competition and consumer welfare.
22  The European Community and its member States,
in their submission (WT/WGTCP/W/115), referred to three elements for consideration in future work
on the development of core principles of competition policy, namely:  adoption of a comprehensivecompetition law, administration and enforcement of the law and the rights of private parties, in
addition to a number of related elements and sub-elements.  This approach seeks to focus on those
aspects of competition law and policy which are considered to be more relevant for the multilateral
trading system, while fully recognizing the development dimension and differences in domestic legal
and institutional frameworks.
23  A submission by Japan (WT/WGTCP/W/119) referred to a
"competition-oriented principle" which is considered to constitute a fundamental concept of
competition law.  The submission indicates that this principle "is based on the idea of not obstructing
the market mechanism.  It implies prohibiting those anti-competitive practices that distort the market
mechanism (e.g. cartels, boycotts) and systems that relate to competition law and that restrict the
sectors or areas where the market mechanism is allowed to work (e.g. exemption systems)".
II. THE UNITED NATIONS SET OF MULTILATERALLY AGREED EQUITABLE
PRINCIPLES AND RULES FOR THE CONTROL OF RESTRICTIVE BUSINESSPRACTICES
14. The United Nations Set of 1980 contains principles and rules for the control of restrictive
business practices, which take the form of recommendations to States.  Its particular focus is on
practices that impede or negate the realization of benefits from international trade and thereby
economic and social development, particularly of developing countries.  It calls for appropriate action
                                                     
14 WT/WGTCP/M/3, para. 54.
15 WT/WGTCP/M/4, paras. 68-74.
16 WT/WGTCP/M/5, paras. 17-29.
17 WT/WGTCP/M/5, paras. 20 and 24.
18 See, e.g., WT/WGTCP/M/6, para. 63.
19 WT/WGTCP/M/3, para. 14.
20 WT/WGTCP/M/5, para. 78 and WT/WGTCP/M/8 (to be issued).
21 WT/WGTCP/M/4, para. 39 and WT/WGTCP/M/8 (to be issued).
22 WT/WGTCP/W/118, para. 7.
23 WT/WGTCP/W/115, pp. 12-13.WT/WGTCP/W/127
Page 5
to be taken at the national, regional and internati onal levels to eliminate, or effectively deal with,
restrictive business practices having such effects.  It calls on States to take into account in such action
the development, financial and trade needs of developing countries.  It contains principles and rules
calling on enterprises, including transnational corporations, to desist from horizontal restraints of
various types and the abuse or acquisition and a buse of a dominant position of market power.  It
further contains principles and rules directed at States, notably that States should, at the national level
or through regional groupings, adopt, improve and effectively enforce appropriate legislation and
implement judicial and administrative procedures for the control of restrictive business practices.  The
Set further seeks to encourage various forms of collaboration aimed at eliminating or effectively
dealing with restrictive business practices.24
III. THE GOALS OF COMPETITION POLICY
15. It is widely stated that the most basic goal of competition policy is to promote and maintain
healthy inter-firm rivalry in markets, wherever this is viable.25  This is achieved in two principal ways:
first, anti-competitive market structures and enterprise practices that impede competition can be
addressed through the application of a competition law and/or the use of pro-competitive regulation,
in appropriate cases; second, government measures that pose unnecessary obstacles to trade and
competition can be reduced or eliminated.
16. In addition to the broad objective of promoting healthy rivalry in the marketplace,
competition policy is often considered with reference to more specific economic goals, which guide
and may be referred to specifically in policy implementation.  Two such goals that would appear to
constitute fundamental principles of competition policy in many jurisdictions, in that they serve as
guideposts for officials in the application of diverse aspects of their respective laws and policies, are:(i) economic efficiency; and (ii) consumer welfare.
26  By advancing these objectives, competition
policy can also contribute to the overall process of economic development.27  In addition, a number of
other goals are embodied in national laws and policies , and can affect the application of such laws and
policies in various circumstances.
A. THE PROMOTION OF ECONOMIC EFFICIENCY
17. The goal of promoting economic efficiency is an explicit objective of competition policy in
many if not most jurisdictions with such policies.28  In fact, the concept of efficiency as it is applied in
competition law typically embraces three discrete aspects.  First, "allocative efficiency" is achieved
when society's scarce resources are allocated to produce the goods and services that are most desired
by consumers.  This requires that price be equal to the marginal costs of production and distribution
from the social point of view.  "Productive efficiency" is achieved when goods are produced using the
most cost-effective combination of productive resources available under existing technology.
                                                     
24 Further information on the Set, including its objectives, scope and means of application and core
provisions, can be found in a communication from UNCTAD to the Working Group (WT/WGTCP/W/17).
25 OECD and World Bank (1999) and UNCTAD (1995).  Policy makers recognize that competition
may not be viable in situations of "natural monopoly" (i.e., markets that are most efficiently supplied by a singlefirm).  In such markets, there may be a need for direct economic regulation of monopoly suppliers.  This matter
is discussed further in section IV, below.
26 The goals of efficiency and consumer welfare have been repeatedly emphasized in discussions in the
Working Group. WT/WGTCP/M/2, para. 7; WT/WGTCP/M/3, para. 4.  See also World Bank and OECD,supra , note 1 and UNCTAD (1995).  The goals of efficiency and consumer welfare are also emphasized in the
UNCTAD SET, Part A (Objectives).
27 See Part III(C), below.
28 WT/WGTCP/2, para. 22.  See also World Bank and OECD (1999); UNCTAD (1995); Graham and
Richardson, eds. (1996).WT/WGTCP/W/127
Page 6
"Dynamic efficiency" is achieved through an optimal rate of invention, development, and diffusion of
new products and production processes.29
B. PROMOTING THE WELFARE OF CONSUMERS
18. A goal that is widely viewed as a central purpose of competition policy and is used as the
leading overall guidepost for the application of competition law in a number of major jurisdictions isthat of consumer welfare.
30  Under this approach, a fundamental criterion for the application of such
policy to particular business arrangements is whether the arrangements in question have a detrimental
impact on the prices charged to and/or the array of choices available to consumers.31  E v e n  i n
jurisdictions where competition policy is also intended to serve other economic and social goals, the
promotion of consumer welfare is generally acknowledged to be an important or even a central goal
of such policy.  Where consumer welfare is treated as the pre-eminent goal of competition policy, this
approach would differ from a "pure" efficiency-based approach in that efficiencies would be givenweight to the extent that there is a reasonable expectation that their benefits would ultimately flow
through to consumers, and not be retained by producers.
32
C. PROMOTING ECONOMIC DEVELOPMENT
19. As has been discussed extensively in the Working Group33, competition policy should also
contribute to the process of economic development.  It can do this through various channels, includingby:
34  (i) promoting an efficient allocation of resources;  (ii) protecting the welfare of consumers;
(iii) preventing/addressing excessive concentration levels and resulting structural rigidities;
(iv) addressing anti-competitive practices of enterprises (including by multinational enterprises) that
have a trade dimension, and that may impact particularly on developing countries;  (v) increasing an
economy's ability to attract foreign investment and to maximize the benefits of such investment;(vi) reinforcing the benefits of privatization and regulatory reform/deregulation initiatives;  and
(vii) establishing an institutional focal point for the advocacy of pro-competitive policy reforms and a
competition culture.  The goal of promoting economic development is also emphasized in the United
Nations Set, a fundamental objective of which is "To ensure that restrictive business practices do not
impede or negate the realization of benefits that should arise from the liberalization of tariff and non-tariff barriers affecting world trade, particularly those affecting the trade and development of
developing countries".
35
D. OTHER GOALS OF COMPETITION POLICY
20. A number of other goals and objectives (explicit and implicit) figure in the application of
competition laws and policies of Members.  While it is questionable whether they are common to a
sufficiently wide range of jurisdictions or guide pol icy in a sufficiently systematic way to constitute
"fundamental principles" of competition policy, these goals can clearly be significant from thestandpoint of national laws, policies and enforcement authorities, and can have particular importance
depending on the economic and historical circumstances of individual jurisdictions.  Some of these
                                                     
29 Carlton and Perloff (1995).
30 World Bank and OECD (1999); Graham and Richardson, eds. (1996).
31 U.S., Department of Justice and Federal Trade Commission (1992; revised 1997).
32 Crampton (1995).
33 WT/WGTCP/W/80, "Synthesis paper on the relationship of trade and competition policy to
development and economic growth", and Minutes of the various Working Group meetings which are citedtherein.
34 Id.
35 United Nations (1980), Part A, "Objectives", para. 1.WT/WGTCP/W/127
Page 7
goals are as follows:36  (i) the promotion of equity and fairness;  (ii) the promotion of opportunities for
small and medium-sized businesses;  (iii) market integration;  (iv) the promotion of technological
development, local production and employment;  and (v) the protection of economic and political
pluralism.
IV. PRINCIPLES OF POLICY DESIGN AND APPLICATION
21. The second category of fundamental principles of competition policy that has been identified
in preparing this paper consists of more operational principles of policy design and application.
Again, such principles are selected on the basis that their impact transcends specific statutory
provisions and affects the design or application of competition law and policy in a systematic way, in
a broad range of jurisdictions.
A. PRESUMPTION IN FAVOUR OF COMPETITIVE MARKETS
22. A fundamental principle or premise that permeates the application of competition policy is the
belief that, in most circumstances, the free operation of competitive markets, undistorted by
government intervention, will generate economically and socially efficient outcomes.37  While
markets may not need to be perfectly competitive to  achieve these results, they need to be "workably
competitive".  Some of the characteristics of workably competitive markets to which the Group's
attention has been drawn are as follows:38  (i) a minimum level of economic development and a culture
of quality and competition;  (ii) regulatory mechanis ms that are constantly improved in the light of
widespread usage and practice;  (iii) freedom of prices and price formation through the free play of
competition (competitive mechanism of supply and demand).  This implies the presence of multiple
economic actors;  (iv) surveillance of market struct ures and anti-competitive practices, including cartels,
collusion, exclusive arrangements and abuse of dominant position;  (v) transparency and fairness oftransactions to ensure a certain degree of fluidity; (vi) freedom to enter and leave markets;  and (vii)
neutrality of the State in its dealings with economic agents.
23. The efficient operation of competitive markets can be affected by various kinds of market
failures which may necessitate some form of government intervention.
39  These include, inter alia :
(i) the problem of monopolies and other market struct ures and behaviour that enable "market power" to
be exercised40;  (ii) "externalities" such as environmental pollution;  and (iii) situations where economic
actors have asymetric information regarding product characteristics or other aspects of particular
transactions.  Each of these may have implications for competition policy.41
24. The presumption in favour of open and competitive markets has a number of aspects that give
rise to additional implications for competition policy.  First, as has been discussed extensively in the
Working Group, it highlights the relevance of trade and investment liberalization, privatization and
deregulation to competition policy objectives.42  Second, attention has been drawn to the
complementary relationship between competition law and pro-competitive regulation – while the
importance of competition advocacy activities in relation to aspects of regulation that go beyond what
                                                     
36 See the United Nations Set (1980); UNCTAD (1995); Graham and Richardson (1998) and World
Bank and OECD (1999).
37 World Bank and OECD (1999); Carlton and Perloff (1994) and Brander (1992).
38 Contribution of Morocco (WT/WGTCP/W/43).
39 Brander (1992), chapter 3.
40 As elaborated in Part IV(D), "market power" is a technical concept which refers to the ability of a
firm (or a group of firms acting jointly) to profitably maintain prices above competitive levels for a significantperiod of time.
41 See Part IV(C), below.
42 WT/WGTCP/2, paras. 19-31, 72-80, and 97-111.WT/WGTCP/W/127
Page 8
is necessary to respond to specific market failures has also been emphasized.43  Third, the importance
of various tools for the evaluation of possibilities for the exercise of market power is highlighted.
Lastly, the presumption in favour of competition provides the basis for the principle or maxim that
"competition policy protects competition, not competitors" – a principle that guides the application of
competition policy in a number of areas.  Each of these aspects is discussed further, below.
B. PROMOTION OF EXTERNAL AND INTERNAL MARKET -OPENING MEASURES
25. As noted, the presumption in favour of competitive markets highlights the direct relationship
of external and other market opening measures for competition policy objectives.  The points have
been made in the Working Group that trade liberali zation can impact positively on competition in two
principal ways:  (i) it can remove government-imposed barriers that affect directly the state of
competition in markets for goods and services;  and (ii) in doing so, it can make it more difficult for
private actors to implement arrangements that facilitate the exercise of market power, by expandingthe scope of the relevant geographic market and enhancing the role of foreign competition.
44  T h e
point has also been made that investment liberalization can have similar effects.  Privatization and
regulatory reform can also be instrumental in creat ing the structural conditions that are necessary for
healthy competition.  The relationship between competition policy and regulation is multi-faceted and
is the subject of the next subsection.
C. PROMOTION OF COMPETITION THROUGH PRO -COMPETITIVE REGULATION AND REGULATORY
REFORM
26. The discussion in the Working Group has drawn attention to three broad areas of interaction
between competition policy and economic regulation.  First, it has been pointed out that regulation
can play a pro-competitive role in addressing situations of market failure due to the existence of anatural monopoly.
45  In the view of some observers, regulation may be a more effective instrument
than competition law for addressing such situations, to the extent that they involve a requirement for
ongoing price monitoring and setting.46  Second, it has been suggested that sectoral regulation may
sometimes entail restrictions on entry and/or pricing in particular economic sectors that are not
justified by considerations of market failure.  Third, it has been pointed out in the Group that certainforms of regulation that, to a degree, might be considered necessary to respond to particular market
failures (e.g., health-related or other product standards and regulatory requirements) may, in some
cases, go beyond what is necessary to respond to such failures, and may, therefore, pose unnecessary
obstacles to trade and competition.  Identifying instances of such "excessive" technical requirements
and regulations can, it has been suggested in the Group,
47 make an important contribution to
promoting trade and competition.  The second and third areas of interaction between competition
policy and regulation are, it has been suggested in the Group, an appropriate focus for competitionpolicy, for example through advocacy activities, designed to promote the free and efficient operation
of market forces.
48
27. Recent work on regulatory reform at the OECD has led to the adoption of a number of
Recommendations relevant to the above concerns.49  A number of these reflect competition policy
principles.  The seven principal Recommendations call for OECD member governments to:  (i) adoptat the political level broad programmes of regulatory reform that establish clear objectives and
                                                     
43 See Part IV(C), below.
44 WT/WGTCP/W/2, para. 22.
45 WT/WGTCP/M/5, paragraphs 18, 22 and 23.  Natural monopolies are industries which are most
efficiently served by a single supplier.
46 Carlton and Perloff (1994).
47 WT/WGTCP/M/5, paras. 20 and 24.
48 WT/WGTCP/2, para. 109 and paras in Minutes cited therein.
49 OECD (1997).WT/WGTCP/W/127
Page 9
frameworks for implementation;  (ii)  review regulations systematically to ensure that they continue to
meet their intended objectives efficiently and effectively;  (iii) ensure that regulations and regulatory
processes are transparent, non-discriminatory and efficiently applied;  (iv) review and strengthen
where necessary the scope, effectiveness and enforcement of competition policy, by eliminating
sectoral gaps in coverage of competition law, unless evidence suggests that compelling publicinterests cannot be served in better ways, by ensuring vigorous enforcement of competition law where
collusive behaviour, abuse of dominant position, or anti-competitive mergers risk frustrating reform,
and by providing competition authorities with the authority and capacity to advocate reform;
(v) reform economic regulations in all sectors to stimulate competition, and eliminate them except
where clear evidence demonstrates that they are the best way to serve broad public interests, including
by placing a high priority on reviewing aspects of economic regulation that restrict entry, exit, pricing,
output, and normal commercial practices and forms of business organization;  (vi) eliminateunnecessary regulatory barriers to trade and investment by enhancing implementation of international
agreements and strengthening international principles, including  rules and principles to liberalize
trade and investment (such as transparency, non-discrimination, avoidance of unnecessary trade
restrictiveness, and attention to competition principles);  and (vii)  identify important linkages with
other policy objectives and develop policies to achieve those objectives in ways that support reform.
50
The complete text of the Recommendations is reprinted in Appendix I.
28. The OECD Recommendations parallel, in key respects, points that have been made by
Members in the Working Group.  In this regard, the important role that competition advocacy can
play in respect of regulatory policies and their impact on competition and trade has been widely
commented on in the Group.51  The Group was informed that such advocacy had acted as a catalyst
for pro-competitive reforms of regulatory regimes.  In addition, various suggestions have been made
for further work that might be undertaken on this matter.52
D. EVALUATION OF POSSIBILITIES FOR MARKET POWER TO BE EXERCISED
29. A core analytical principle of competition policy that is relevant both to regulatory framework
issues53 and the application of competition law54 is the evaluation of possibilities for market power to
be exercised.  The term "market power" is a technical concept which refers to the ability of a firm (or
a group of firms acting jointly) to profitably maintain  prices above competitive levels for a significant
period of time.  Concern over the ability of firms to  exercise market power follows directly from:  (i)
the effort to identify specific market failures;  and (ii) competition policy objectives relating to the
promotion of efficiency and consumer welfare (discussed in Part III above).  An explicit focus on the
scope for market power to be exercised is central to the analysis of mergers and strategic alliances in
most jurisdictions where such arrangements fall under competition policy.55  Typically, it also figures
prominently in the analysis of alleged instances of anti-competitive vertical restraints, abuses of a
                                                     
50 OECD (1997).
51 WT/WGTCP/M/5, paragraphs 19, 23, 25, 26 and 27.
52 One suggestion was that there was an urgent need for empirical research on the consequences for
trade and competition of unnecessary, poorly designed and discriminatory regulations.  Another was that the
Group should give further consideration to the ways in  which WTO disciplines attempted to address the trade
and competition effects of regulatory policies.  It has also been suggested that the Group should giveconsideration to developing a WTO guideline to provide for regular and systematic review of nationalregulatory policies in the light of competition policy principles.  The view was expressed that this would help toenhance the transparency and effectiveness of reform efforts and be a useful tool in promoting freer access tomarkets.  WT/WGTCP/M/5, paragraphs 20-24.
53 The above-noted OECD Recommendations indicate specifically that governments should "Promote
efficiency and the transition to effective competition where economic regulations continue to be needed because
of potential for abuse of market power".
54 World Bank and OECD (1999); Carlton and Perloff (1995); Brander (1992).
55 World Bank and OECD (1999).WT/WGTCP/W/127
Page 10
dominant position or monopolization, and other practices.  Factors that are associated with an ability
to exercise market power include a high degree of  market concentration, the existence of barriers to
entry and a lack of substitutes for a product supplied by firms whose conduct is under examination.  In
addition to higher than competitive prices, the exercise of market power can be manifested through
reduced quality of service or a lack of innovation in the relevant market(s).56
30. As has been pointed out in the Working Group, an important step in evaluating the scope for
the exercise of market power in many, if not most , competition law cases is the careful delineation of
the relevant product and geographic markets.57  In general, this involves identifying the range of close
substitutes for a product and the range of geographic space within which consumers can easily turn to
alternative suppliers of the product.  Relevant geographic markets in competition law cases can be
local, national, international or even global depending on the particular product under examination,
the nature of rivalry in the supply of the product, and the presence or absence of factors (e.g. transportcosts, tariffs or other measures) that prevent imports from counteracting the exercise of market power
domestically.
58  In addition to careful delineation of the relevant market, the evaluation of possibilities
for the exercise of market power will typically involve consideration of matters such as barriers to
entry by alternative suppliers, the nature of any cooperative arrangements among suppliers, and other
factors that may limit consumer choice.59
E. DISTINGUISHING BETWEEN HORIZONTAL AND VERTICAL RELATIONSHIPS
31. A basic principle of competition policy which is helpful in delineating possibilities for market
power to be exercised and which is used in diverse aspects of competition policy analysis is the
distinction between horizontal and vertical business arrangements.  Horizontal agreements or
arrangements refer to explicit or implicit arrangements between firms that would normally be incompetition with each other in the supply of similar products in a relevant market.  Vertical
arrangements refer to agreements between firms at different stages of the production and marketing
chain for an individual product or products.  This distinction is relevant to the assessment of both
inter-firm agreements and "structural" arrangements such as mergers and joint ventures.
32. The significance of this distinction is as follows.  Horizontal agreements, by their very nature,
are more likely than vertical arrangements to have a direct, negative impact on competition (and,
potentially, trade), and, therefore, to give rise to the exercise of market power.  This is particularly the
case in regard to "naked" horizontal agreements (i.e., cartels that fix prices or allocate markets among
firms that would otherwise be in direct competition with each other).  These arrangements serve no
purpose other than to enrich producers at the expense of consumers, and entail significant
"deadweight losses" in economic surplus.
60  Accordingly, in some jurisdictions, these arrangements
are treated as illegal " per se " (i.e., without the need for a detailed inquiry into their impact in the
relevant market(s)).  There is a growing degree of international agreement that naked or hard-core
cartels should be subject to strict prohibition under antitrust legislation.61  Reflecting this, in 1998, the
OECD adopted a recommendation calling for strict prohibition of such arrangements.62  T h e
importance of a clear prohibition of horizontal cartel arrangements is also noted in the United Nations
Set.63  Certain other types of horizontal arrangements (e.g., strategic alliances and joint ventures) may
or may not be harmful to competition depending on the specific nature of the individual arrangement
and the surrounding market circumstances.
                                                     
56 U.S., Department of Justice and Federal Trade Commission (1992; revised 1997) and Canada (1993).
57 World Bank and OECD (1999); Carlton and Perloff (1999).
58 World Bank and OECD (1999); see also WT/WGTCP/M/3.
59 World Bank and OECD (1999).
60 World Bank and OECD (1999).
61 World Bank and OECD (1999); see also OECD (1997).
62 OECD (1998).
63 United Nations Set (1980), Part D, paragraph 3.WT/WGTCP/W/127
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33. On the other hand, it is widely recognized that vertical market restraints (or vertical mergers)
frequently serve legitimate, pro-competitive purposes and pose a threat to competition only in a
minority of circumstances.  Consequently, it is important that such arrangements be judged on a case-
by-case or "rule of reason" basis, that takes account of both their potential benefits and their costs.64
F. PROTECTION OF COMPETITION AS A PROCESS RATHER THAN INDIVIDUAL COMPETITORS
34. A basic principle of competition policy that has been referred to on various occasions in the
Working Group is that "competition policy protects competition, not competitors".65  The principle
indicates that competition law normally will not concern itself with whether individual firms are
excluded from or driven out of a market, so long as the process  of competition in the market is not
significantly impaired.  The treatment of vertical market restraints provides a useful illustration of this
principle.  In this regard, the point has been made in the Working Group that, depending on the
particular fact situation and national law, it is possible that the use of vertical market restraints byfirms would be considered acceptable from the standpoint of competition policy, even where this has
the effect of excluding some individual (foreign or domestic) competitors, provided that the process of
rivalry within the market is not substantially constrained.
66
V. PRINCIPLES OF INSTITUTIONAL DESIGN AND PROCESS
35. As noted, a third major category of principles for the application of competition law and
policy relates to principles of institutional design and process.  Such principles have been emphasized
in, among other contexts, recent work on "core principles" of competition policy at the OECD,67 in
addition to meetings of the Working Group.  Some of the relevant principles are as follows:
A. ADHERENCE TO PRINCIPLES OF DUE PROCESS /NATURAL JUSTICE
36. The United Nations Set affirms that "States, in  their control of restrictive business practices,
should ensure treatment of enterprises which is fair, equitable, on the same basis to all enterprises, and
in accordance with established procedures of law."68  In a similar vein, recent work in the OECD
emphasizes the importance for the effective application of competition policy of adherence to the
principles of due process or "natural justice", as it is referred to in some jurisdictions.69  While there
are different formulations of this concept, it generally refers to the following of fair and equitableprocedures in administrative and judicial proceedings, including the right to be heard, the right to
petition competition authorities and seek explanations for inaction on specific matters, the availability
of judicial review for administrative decisions, rights of appeal to superior courts, and related
matters.
70  In addition, some observers consider that the right of firms to petition the courts directly in
cases of alleged competition law violations ("private actions") is an important aspect of due process.
As pointed out in the United Nations Set, ensuring careful treatment and due protection for
confidential information which may be provided to  authorities in the context of investigations is
another important element of due process.71
37. According to some formulations, the principles of due process may also require the
administration of competition law by independent enforcement authorities.  The degree of
                                                     
64 OECD and World Bank (1999);  UNCTAD (1995).
65 WT/WGTCP/2, para. 26.
66 WT/WGTCP/M/3, para. 7.
67 OECD (1999).
68 The Set, Part E, paragraph 3.
69 World Bank and OECD (1999).  As noted, this has been emphasized in various contributions in the
Working Group.  See WT/WGTCP/M/6, para. 63.
70 World Bank and OECD (1999).
71 The Set, Part E, paragraph 5.WT/WGTCP/W/127
Page 12
"independence" that is deemed appropriate may, however, be achieved by different countries in
different ways.  For example, some jurisdictions favour structurally separate and distinct
administrative agencies; in others, emphasis may be placed on guarantees of non-interference by
Ministers in individual enforcement proceedings.72  Finally, even more fundamental, in the view of
some Members, may be the question of adherence to the "rule of law" – i.e., the primacy of rules oversubjective decision-making processes in policy implementation.
73
B. OPTIMIZING THE SCOPE AND COVERAGE OF COMPETITION POLICY AND ENSURING COHERENCE
BETWEEN THE ROLES OF SUCH POLICY AND DIRECT ECONOMIC REGULATION
38. A principle of institutional design in the field of competition policy that has been referred to
on various occasions in the Working Group is that of maximizing the scope and coverage of such
policy across jurisdictions.74  This reflects a view that there are gains in policy coherence and
effectiveness that accrue from employing a consistent approach, to the full extent possible, acrossnational economies.  The benefits of a comprehensive approach to competition policy are also noted
in the United Nations Set,
75 and figure importantly in recent work on the interface of trade and
competition policy at the OECD.76  The suggestion has been made in the Working Group that
optimizing the scope of competition policy may necessitate review of existing exceptions and
exemptions from the application of such policy.  Beyond this, it has been suggested that, in some case,there may be benefits from efforts to achieve more explicit coordination between the roles of
competition law and sector-specific regulatory policies.
77  In this regard, it has also been pointed out
that the desired degree of coherence between competition policy and regulation may be achieved by
different jurisdictions in different ways.  An ongoing dialogue between competition officials and
sectoral regulators may be an important consideration in this regard.78
C. ADHERENCE TO NON -DISCRIMINATION AND TRANSPARENCY PRINCIPLES
39. An additional set of principles of institutional design whose importance has been emphasized
by Members in various meetings of the Working Group79 are the fundamental WTO principles of
national treatment, most-favoured-nation treatment and transparency.80  In meetings of the Working
Group, it has been suggested that, in many cases, the competition laws and policies of Membersalready embody these principles, to a considerable degree.
81  In the case of the national treatment and
most-favoured-nation treatment principles, this would appear to reflect the focus of competition
policy on protecting competition as a process, rather than particular competitors of any nationality.  In
the case of the principle of transparency, it reflects a recognition that publication of judicial and
administrative rulings and guidelines and other efforts to promote transparency and public
understanding contribute directly to the effectiveness of competition law and policy.82
Notwithstanding the inherent relevance of these principles, it has been suggested that there may be a
                                                     
72 World Trade Organization (1997).
73 WT/WGTCP/M/6, paragraph 63.
74 See OECD (1997) and OECD (1999).
75 United Nations (1980), preambular paragraphs.
76 OECD (1999).
77 Australia and New Zealand.
78 WT/WGTCP/M/6, para. 73.
79 WT/WGTCP/M/5, paragraph 78 and WT/WGTCP/M/8 (to be issued).
80 For an overview of these principles, see The Fundamental WTO Principles of National Treatment,
Most-Favoured-Nation Treatment and Transparency (WT/WGTCP/W/114).
81 WT/WGTCP/M/3, para. 14.
82 Comments of various representatives, reported in WT/WGTCP/M/8 (to be issued).WT/WGTCP/W/127
Page 13
need to formalize and adapt the application of the principles to the field of competition law and
policy, as was done for the fields of services and intellectual property in the Uruguay Round.83
D. INTERNATIONAL COOPERATION
40. An additional principle that has been emphasized in the discussions in the Working Group,
and is affirmed in the UNCTAD Set,84 in relevant OECD Recommendations85 and in various WTO
instruments86 is that of international cooperation in competition law enforcement.  As has been
pointed out in the Working Group,87 such cooperation may take many forms, including case-specific
assistance in the enforcement of competition laws , informal contacts to share publicly available
information on enforcement techniques, technical cooperation and training, and peer review and
information exchange processes to facilitate institution-building and enhance transparency.  A
growing body of experience involving countries with experience in this area tends to confirm the
benefits of such diverse approaches to cooperation in facilitating effective application of competitionlaws and policies.
88  The matter of approaches to promoting cooperation and communication among
Members, including in the field of technical cooperation, is a specific element of the Working Group's
work programme to receive consideration in 1999.89
                                                     
83 Comments of various Members, reported in WT/WGTCP/M/8 (to be issued).
84 UNCTAD SET, Part E, paragraphs (7), (8) and (9 ) and Part F, paragraph (4).  See also Part C,
paragraph 7, concerning the matter of preferential or differential treatment for developing countries.
85 OECD (1995).
86 Procedures for consultations and cooperation on anti-competitive practices are provided for under
each of the main agreements that make up the WTO Agreement, namely the GATT, the GATS and the TRIPSAgreements.  These procedures, and their limitations, are discussed in World Trade Organization (1997).
87 WT/WGTCP/M/8 (to be issued).
88 See WT/WGTCP/M/8 (to be issued) and UNCTAD (1999), which provides a useful survey of
experience in this area.
89 WT/GC/M/32, page 52.WT/WGTCP/W/127
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APPENDIX I
OECD Policy Recommendations on Regulatory Reform*
1. Adopt at the political level broad programmes of regulatory reform that establish clear
objectives and frameworks for implementation.
• Establish principles of "good regulation" to guide reform, drawing on the 1995 OECD
Recommendation on improving the Quality of Government Regulation. Good regulation
should: (i) be needed to serve clearly identified policy goals, and effective in achieving those
goals; (ii) have a sound legal basis; (iii) produce benefits that justify costs, considering the
distribution of effects across society; (iv) mi nimise costs and market distortions; (v) promote
innovation through market incentives and goal based approaches; (vi) be clear, simple, and
practical for users; (vii) be consistent with other regulations and policies; and (viii) be
compatible as far as possible with competition, trade and investment facilitating principles at
domestic and international levels.
• Create effective and credible mechanisms inside the government for managing and co-
ordinating regulation and its reform; avoid overlapping or duplicative responsibilities among
regulatory authorities and levels of government.
• Encourage reform at all levels of government and in private bodies such as standards setting
organisations.
2. Review regulations systematically to ensure that they continue to meet their intended
objectives efficiently and effectively.
• Review regulations (economic, social, and administrative) against the principles of good
regulation and from the point of view of the user rather than of the regulator. l Target reviewsat regulations where change will yield the highest and most visible benefits, particularly
regulations restricting competition and trade, and affecting enterprises, including SMEs.
• Review proposals for new regulations, as well as existing regulations.
• Integrate regulatory impact analysis into the development, review, and reform of regulations.
• Update regulations through automatic re view methods, such as sunsetting.
3. Ensure that regulations and regulatory processes are transparent, non-discriminatory
and efficiently applied.
• Ensure that reform goals and strategies are articulated clearly to the public.
• Consult with affected parties, whether domestic or foreign, while developing or reviewing
regulations, ensuring that the consultation itself is transparent.
• Create and update on a continuing basis public registries of regulations and business
formalities, or use other means of ensuring that domestic and foreign businesses can easily
identify all requirements applicable to them.
• Ensure that procedures for applying regulations are transparent, non-discriminatory, contain
an appeals process, and do not unduly delay business decisions.
                                                     
* Excepted from OECD, Summary Report on Reglatory Reform (1997).WT/WGTCP/W/127
Page 15
4. Review and strengthen where necessary the scope, effectiveness and enforcement of
competition policy.
• Eliminate sectoral gaps in coverage of competition law, unless evidence suggests that
compelling public interests cannot be served in better ways.
• Enforce competition law vigorously where collusive behaviour, abuse of dominant position,
or anticompetitive mergers risk frustrating reform.
• Provide competition authorities with the authority and capacity to advocate reform.
5. Reform economic regulations in all sectors to stimulate competition, and eliminate them
except where clear evidence demonstrates that th ey are the best way to serve broad public
interests.
• Review as a high priority those aspects of economic regulations that restrict entry, exit,
pricing, output, normal commercial practices and forms of business organisation.
• Promote efficiency and the transition to effective competition where economic regulations
continue to be needed because of potential for abuse of market power. In particular: (i)separate potentially competitive activities from regulated utility networks, and otherwise
restructure as needed to reduce the market power of incumbents; (ii) guarantee access to
essential network facilities to all market entrants on a transparent and non-discriminatory
basis; (iii) use price caps and other mechanisms to encourage efficiency gains when pricecontrols are needed during the transition to competition.
6. Eliminate unnecessary regulatory barriers to trade and investment by enhancing
implementation of international agreements and strengthening international principles.
• Implement, and work with other countries to strengthen, international rules and principles to
liberalize trade and investment (such as transparency, non-discrimination, avoidance of
unnecessary trade restrictiveness, and attention to competition principles), as contained in
WTO agreements, OECD recommendations and policy guidelines, and other agreements.
• Reduce as a priority matter those regulatory barriers to trade and investment arising from
divergent and duplicative requirements by countries.
• Develop and use whenever possible internationally harmonised standards as a basis for
domestic regulations, while collaborating with  other countries to review and improve
international standards to assure they continue  to achieve the intended policy goals efficiently
and effectively.
• Expand recognition of other countries' conformity assessment procedures and results through,
for example, mutual recognition agreements (MRAs) or other means.
7. Identify important linkages with other policy objectives and develop policies to achieve
those objectives in ways that support reform.
• Adapt as necessary prudential and other public policies in areas such as safety, health,
consumer protection, and energy security so that they remain effective, and as efficient as
possible within competitive market environments.
• Review non-regulatory policies, including subs idies, taxes, procurement policies, trade
instruments such as tariffs, and other su pport policies, and reform them where they
unnecessarily distort competition.WT/WGTCP/W/127
Page 16
• Ensure that programmes designed to ease the pot ential costs of regulatory reform are focused,
transitional, and facilitate, rather than delay, reform.
• Implement the full range of recommendations of the OECD Jobs Study to improve the
capacity of workers and enterprises to adjust and take advantage of new job and business
opportunities.WT/WGTCP/W/127
Page 17
REFERENCES*
1. Brander, James A. (1992).  Government Poli cy Toward Business (Toronto:  Butterworths).
2. Carlton, Dennis W. and Jeffrey M. Perloff (1994)  Modern Industrial Organization (Harper
Collins, second edition).
3. Crampton, Paul (1994).  "Alternative Approaches  to Competition Law:  Consumers' Surplus,
Total Welfare and Non-Efficiency Goals", World Competition, vol. 17, no. 3, March, pp. 55-86.
4. Graham, Edward M. and J. David Richar dson (1997).  Global Competition Policy
(Washington, D.C.:  Institute for International Economics).
5. OECD (1995).  Revised Recommendation of the OECD Council Concerning Cooperation
between Member Countries on Anti-competitive Practices Affecting International Trade
(C(95)130/Final).
6. OECD (1997).  Summary Report on Regulatory Reform, July.
7. OECD (1998).  Recommendation Concerning E ffective Action Against "Hard Core" Cartels
[C(98)35/Final].
8. OECD (1999).  Joint Group on Trade and Competit ion, Outline of (A) Core Principles and
Minimum Standards and (B) Bilateral and Multilateral Approaches
(COM/TD/DAFFE/CLP/(98)97/REV1).
9. United Nations (1980).  The Set of Multilaterally Agreed Equitable Principles and Rules for
the Control of Restrictive Business Practices (United Nations, Resolution 35/63, 5 December 1980).
10. UNCTAD (1995).  The basic objectives and main provisions of competition laws and polices
(UNCTAD/ITD/15).
11. UNCTAD (1999).  Experiences Gained So Far on International Cooperation in Competition
Policy Issues and the Mechanisms Used (TD/B/COM.2/CLP/11).
12. United States, Department of Justice and Fe deral Trade Commission (1992; revised 1997).
Horizontal Merger Guidelines.
13. World Bank and OECD (1999).  A Framewor k for the Design and Implementation of
Competition Law and Policy (Washington, D.C.).
14. World Trade Organization (1997).  "Special Study on Trade and Competition Policy", in
Annual Report for 1997, chapter IV.
__________
                                                     
* This list does not include the numerous documents of the WTO Working Group on the Interaction
between Trade and Competition Policy which are fully cited in the text.