Irish competition policy is a decade old. The Competition Act 1991 heralded the arrival of a "get tough" approach to anti-competitive practices among businesses. However, even after the implementation of amending legislation in 1996, the Competition Authority still lacked teeth. In response, Government set up the Competition and Merger Review Group with a view to bringing Irish application into line with international best practice.

The group's recommendations were key to the Competition Act 2002, which provides for increased criminal sanctions against undertakings (individuals as well as businesses) found to be in breach of the Act. The Act also proposes an "immunity" scheme, whereby a cartel member will be granted immunity from prosecution if he or she is the first to inform the authority.

The most important aspect of the new regime relates to control of mergers and acquisitions.

The new merger provisions will not come into effect until January 1st, 2003, whereas the rest of the Act will take effect from July 1st this year. Until the arrival of the new merger control regime, the authority will consult business leaders and others on the proposed new test ("substantial lessening of competition") of whether a merger or acquisition complies with competition principles.

Official investigations of mergers and acquisitions will be based purely on the grounds of competition and economics, which should be welcomed by business as well as those involved in the vetting process.

The Republic and Britain are the only states in the EU currently proposing to adopt the "competition test" - existing practice is based on whether the merger would lead to the creation or strengthening of a dominant position in the market (the "dominance test"). The competition test, which is applied in the US, Canada and Australia, constitutes a broader test than the dominance test. It will certainly be an improvement on the Republic's existing test, the vaguely defined "public interest test".

The benefits of increased competition are lower prices, greater choice for consumers (businesses as well as individuals) and enhanced innovation. The subtlety of competition policy arises from the fact these benefits can be difficult to discern in the short term. Over time, however, the benefits from improving the functioning of markets can be significant.

The most reliable piece of research in economic literature, estimating the welfare loss arising from monopoly power, is a 1978 Economic Journal paper by Keith Cowling and Dennis Mueller. As a proportion of gross corporate product, Cowling and Mueller estimate the welfare loss from monopoly power to be as high as 13.1 per cent for the US (1963-1966) and 7.2 per cent for Britain (1968-69).

Studies since Cowling and Mueller's paper have more or less confirmed these figures for other countries, as well as for Britain and the US. No such study has yet been undertaken for the Republic. An educated guess would suggest that monopoly power could be costing the Irish economy hundreds of millions of euro.

The essence of a competitive market is the ability for potential competitors to actually compete with the market's leading firms. Potential competitors are broadly defined: they can arise as new businesses, entrants from other industries or "dark horses" from within the ranks of the present market.

In a competitive market, no business, not even the market leader, is safe from competition. Incumbents are always looking over their shoulders because there are plenty of alert entrepreneurs on the prowl for market opportunities.

The main implication of this view is that industry leadership is a transitory phenomenon. A substantial amount of research has been undertaken in this area and the evidence indicates that the average duration of market leadership (being placed in any of the top three positions) is approximately 10 years. In high-tech markets, the pace of change is greater.

The corporate giants of today will not be leading their markets in the same way during the course of the next couple of decades - they may not even be competing.

The research has profound implications for the conduct of competition policy. One concerns the break-up of giant companies found to be dominant in their markets: why attempt to break-up a company like Microsoft when market forces would do the job more efficiently?

What does this imply about the Republic's new merger control regime? It implies that we ought to look beyond mere snapshots of markets, as tends to be the case under both the EU dominance test and Irish public interest merger test.

A wider and more dynamic view of competition is needed - a view that would examine the genesis of any market power and would identify all relevant competitors, potential as well as actual. Taking too narrow an approach would inevitably lead to inefficient practice and would, in turn, detract from competitiveness and economic performance.

The next few months could prove crucial in the long run as the State puts in place what ought to be a substantial improvement in its merger control regime.

Dr Patrick McCloughan is a senior economic consultant at Indecon International Economic Consultants, Dublin, who specialises in competition. The views expressed in this article are those of the author and do not necessarily reflect the views of Indecon.