2. THE HARVARD APPROACH

The Harvard Approach, although often vigorously attacked, is still the most influential approach guiding competition policy all over the world. Notwithstanding its sometimes-outdated appearance, some observers (e.g., Lopez 2001) claim that its adherents are not only alive but also well.

The approach can be traced back to John M. Clark’s (1940) programmatic paper in the American Economic Review. It belongs to the old tradition of industrial organisation (which has been superseded by the so-called New Industrial Organisation) in which general hypotheses were developed on the basis of single observations that were then generalised and empirically tested. This approach is also called “workable competition”, which indicates that some deviation from the model of perfect or pure competition is tolerated. Until today, the model of perfect competition has remained the textbook model that occupies many first chapters of many textbooks (see, e.g., the introductory chapter to Tirole 1988). The outcome of that model is a state of the world that cannot be improved upon without making at least one actor worse off. In that sense, it establishes a frame of reference with which the realised states of the world can be compared. The assumptions of the model are, however, wildly unrealistic and could never even be approximated in reality. As a matter of fact, it has been shown that marginal improvement towards the ideal can make things even worse (the so-called Second-Best Theorem; Lipsey/Lancaster 1956). The Harvard approach is an attempt to get to grips with the critique concerning the model of perfect competition, yet preventing to throw out the baby with the bath
water, namely not to give up some standard of reference that could be used in order to evaluate realised states of the world.