The Interaction Between Contract and Competition Law

This paper provides some economic perspectives on the interaction between contract law and competition (antitrust) law. First it surveys some relevant aspects of the literature and provides some specific examples relating to:(i) The theory and development of contract enforcement institutions(ii) Vertical contractual relationships between firms at different levels in the production and supply chain; and (iii) The role of contracts in enabling specialised investments to take place by limiting opportunism spreading risks and assigning property rights.Second it considers the lessons that developing countries may draw from this literature as they consider the sequencing of reforms relating to contract and competition law and the economic implications of the commitment of resources to developing Western-style legal frameworks in each area of law. Most contractual relationships raise questions about the balance between the efficiency gains from ex ante specification of rights and entitlements and the potential reduction in social welfare that may come from the exclusion of other parties from the relationship and the resources committed to it. By focusing only on the detriment side of the welfare ledger especially where the resources committed or the market shares of the contracting parties are large in the context of the relevant markets enforcement of competition law may sometimes reduce welfare by overturning or undermining contracts that have large efficiency benefits but nonetheless may have some lesser anti-competitive detriment. Further setting aside contracts on anti-competitive grounds that have been on foot for a significant term due to changed circumstances that were unforeseen at the time of contracting imposes external costs on the wider economy.