The Role and Measurement of Quality in Competition Analysis

Competition policy is just as concerned with quality as it is with prices. While the importance of quality is undisputed and issues about quality are mentioned pervasively in competition agency guidelines and court decisions, there is no widely-agreed framework for analysing it which often renders its treatment superficial. There are a number of reasons why in practice, courts and competition authorities rarely analyse quality effects as rigorously as they analyse price effects. First, quality is a subjective concept and therefore much harder to define and measure than prices. In addition, microeconomic theory offers little help in predicting how changes in the level of competition in a market will affect quality and it is usually up to empirical analysis to determine how quality will change in response to varying degrees of competition in the context of particular markets. Given difficulties in terms of the evaluation of quality factors, particularly in quantitative assessment, competition agencies end up using qualitative tools such as customer surveys and interviews, to assess quality where necessary. While experience with the implementation of quantitative econometric techniques is rather limited, they may become more readily applicable and widely used in the future. At the level of competition enforcement, the role and use of quality is well established as a factor in defining the boundaries of the relevant market as well as in assessing the legality of horizontal and vertical restraints. In contrast, the role of quality effects in merger controls, and in particular, trading off between quality and price effects, remains to be one of the most vexatious – and still unresolved – issues.