Unformatted text preview: THE ECONOMICS OF EU COMPETITION POLICY
Dr. Aad van Mourik MARKET STRUCTURE: THE BASIC FORMS
® Perfect competition ® Monopolistic Competition ® Oligopoly
q Cournot q Bertrand q Stackelberg ® Monopoly PERFECT COMPETITION MONOPOLIES AND WELFARE
P G D ® Consumer surplus:
A ® -(PmPcAB) ® Producer surplus:
B AC=MC Pm Pc C ® +(PmPcAC) ® Net effect: ® -(ABC) E 0 Qm MR Qc D Q HARBERGER’S FINDINGS
® Disturbingly low losses found for US
® (0.1% of GDP) ® Other studies in 1950s-1970s also found Other small figures (0.3-0.5% of GDP) small ® More recent studies find slightly higher More figures figures X-INEFFICIENCY
P Pm B
deadweight loss ® Deadweight loss: ® -(ABC) ® X-inefficiency: ® -(CmCcDB)
C Cm Cc D E 0 Qm Qc Q Economies of scale
According to Williamson, According PcCECm would be saved costs due to scale econs costs ® Thus, one would have to compare (negative) ABC with this cost reduction before one would conclude that monopolies are harmful from a social welfare point of view
® Dominant firm with fringe competition
® ® P1 P2 P3 LACD LMCD A B MR ACF
® ® F does not have lowest AC does possible possible If F would attempt to challenge If D, the latter would cut prices to P3 P3 If EU competition policy would If force D to eliminate excessive prices, it would eliminate the moderate competition that exists exists Thus, is P1 just the result of Thus, mere dominance or should it be considered abuse of dominance? dominance? ECONOMIC INTEGRATION AND MONOPOLIES
P Pm C B E Dh D Dp G AC=MC Dim F Internal market Internal welfare: welfare: - (CDG) Domestic welfare: CS - (PmBEF)
Q 0 Qh
m Qcu MR PS + (PmCDF) Net: + (BCDE) So in sum: what is the justification for competition policy towards firms?
® ® ® ® ® ® Competition policy designed to promote market competition Competition as the best way to guarantee efficient outcomes as Based on static view of the costs of monopoly… … though costs could be outweighed by efficiency gains due to scale economies even in static framework due Monopoly encourages X-inefficiency and monopoly rents… … but may facilitate innovation and technical progress but Dynamic perspective – penalising efficient ‘winners’ in Dynamic competition might undermine firms’ willingness to compete competition And what is the rationale of EU involvement?
® Initially the competition rules served as a Initially complement to inter-state trade policy of reducing barriers reducing ® Member states have no incentive to act Member against national monopolies that primarily work internationally work Overview of EU competition policy
EU competition policy has five main strands
® ® ® ® ® control of restrictive practices (Art 81, previously 85) prevention of abuse of dominant position (Art 82, prev 86) merger control (1991 Merger Regulation) control of state aids to enterprises (Art. 87 & 88, prev 92 & control 93) 93) state treatment of public enterprises and companies with state exclusive rights (Art 86,, prev 90) exclusive Art. 81 (ex 85) Anti-collusion
® ® ® ® Prohibits restrictive practices (price fixing, market sharing, Prohibits restrictions on supply etc.) ... restrictions … but with block exemptions for certain categories of agreement (exclusive distribution (cars), exclusive purchasing (petrol stations, pubs) or on a case by case basis if agreement contributes to the production or distribution of product or to technical or economic progress. technical Criterion is not whether or not a formal agreement exists, but Criterion whether the practice of firms had the effect of limiting competition leaving them open to the charge of operating a concerted practice concerted An ‘efficiency defence’ can be offered in favour of a An restrictive agreement restrictive Art. 82 (ex 86) Abuse of a dominant position
® ® ® ® Bans the abuse of a dominant position (loyalty rebates, Bans price discrimination, refusal to supply) where it affects trade between member states trade Both the relevant market and the nature of dominance have Both to be defined, while the fact of abuse also has to be established. established. No efficiency defence, reasonable given that abusive No behaviour has negative or at best neutral effects. Art 86, unlike the US, provides no legal basis to divest Art monopolies. The EU may condemn abuse, and fine, but it cannot break up or regulate a dominant offender. cannot Merger control
® ® No rules included in Rome Treaty, attitude towards mergers prior to No 1990 Mergers Regulation based on general powers under Arts 85 and 86 86 ® Continental Can case established that if a merger was to lead to the Continental creation of a dominant position and a consequent restriction of competition, it could be classed as an abuse under Art 86. Court accepted the principle although it dismissed the Commission case on appeal on grounds that it had not demonstrated that competition had been sufficiently restricted. had ® Philip Morris case demonstrated that Art 85 could be applied Philip where a firm acquired an influential shareholding in a competitor where Powers perceived as weak in the light of the merger boom initiated by Powers the single market the The 1990 Mergers Regulation
® Mergers Regulation Mergers
® applies only to mergers with a Community dimension, with applies threshold criteria of size, impact on the EU market and EU competence competence In Phase 1, Commission determines whether there are any serious In doubts whether the merger will lead to creation or strengthening of a dominant position. dominant If Phase 2, a four month period to decide if a merger should be If permitted to proceed or not. permitted Virtually all mergers have been approved, though in some cases Virtually after negotiation and amendment after Thresholds reduced where mergers involve three or more member Thresholds states; supported by business as a one stop shop principle. states; Investigation of the role of vertical agreements where block Investigation exemptions shortly to expire. ® Implementation as a two stage process.
® ® ® ® Recent changes
® ® State aids: the economic arguments
® The principal economic justifications for State aid can be subsumed under the general heading of market failures. Nine main types of market failure are relevant to the analysis of State aids:
® ® ® ® ® public goods merit goods increasing returns to scale Externalities imperfect or asymmetric information ® ® ® ® institutional rigidities imperfect factor mobility subsidization of foreign competitors frictional problems of adjustment to changes in markets State aids and the internal market
® ® ® ® ® Any aid granted by a MS which distorts or threatens to distort Any competition by favouring certain undertakings or the production of certain goods is incompatible with a common market where it affects trade. trade. But certain aids are permitted, e.g. for promotion of development in But poorer regions, or areas where there has been economic disruption, or for sectoral development. MS must notify Commission of aids or any plan to provide aid. MS Commission reviews and can prohibit or modify aid. Commission in practice, major exemptions have been allowed for years in state aids in which heavily distort competition - equivalent to over 1 per cent of EU GDP. GDP. state aids are politicised in several ways and this reduces the state effectiveness of the surveillance in the EU regime. Public ownership and exclusive rights
® ® ® Treaty is neutral on the principle of ownership, however, a MS cannot Treaty ‘use’ a public enterprise to achieve public policy objectives in a way which distorts competition. which Commission has sought to define more clearly how governments fund Commission public enterprises – the rational investor principle. Problem of exclusive rights, where network industries or utilities are Problem given monopoly status in return for observing certain principle of conduct (universal service, uniform pricing). By definition, these must be regional or national monopolies and so violate principle of free movement in the internal market. free The EU also played an important role in liberalizing network industries Examples of network industries: 1. Electricity 2. Telecoms 3. Water 4. Gas 5. Railways Liberalization of Network Industries
Formerly: – State-owned (even the internet) State-owned – Vertically integrated Vertically – Monopolies Monopolies – Heavily regulated by governments Heavily Now: – Privately-owned Privately-owned – Vertically disintegrated Vertically – Open to competition Open – Re-regulated Re-regulated Public ownership: Why were stated-owned enterprises, municipal companies and government trading departments entrusted with running distribution networks in the 1st place? Desire to bring network externalities ® Lack of capital in private sector ® Wasteful competition ® Lack of compatibility between private systems ® To ensure social ownership of production ® To allow economic planning of key sectors ® To distribute income ® Because of the existence of natural monopoly
® What is a natural monopoly?
® A natural monopoly arises where it is natural cheaper for one firm to supply a portfolio of products or services than it is for two or more firms. more Where scale economies exist one firm is cheaper than two
Unit Cost C1 C 0 Q1 Q Quantity State ownership of Natural Monopoly is Good…Isn’t it?
® The state was seen, until recently, as the The best vehicle for ensuring efficient outcomes from NM provision. ® From societies’ point of view it would be inefficient to duplicate expensive networks. ...
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