Chapter 4 introduces the transactions cost approach to competition law. This chapter starts by reviewing the theory of hold-up and proposes that competition law exists to protect and promote relationship-specific sunk investment by trading partners. Market power is identified with the ability to engage in hold-up, and the harm from market power is the chilling effect on investment that arises when a trading partner fears hold-up. Exploitative behaviour is identified with an attempt to engage in hold-up.

Exclusionary behaviour is defined as the use of the threat of hold-up to change market structure or prevent entry. The use of vertical integration or contracts to prevent hold-up is discussed. The chapter concludes with a discussion of the implications of this approach for elements of competition law enforcement.