Presentation on theme: "Lecture 9: EU Competition Policy"— Presentation transcript:
1 Lecture 9: EU Competition Policy Based on: Sloman Chapters6.3 (Monopoly) and12.3 (Competition Policy)Swann Chapter 5 p
2 Market Size MattersEuropean leaders always viewed integration as compensating for the small size of European nations:implicit assumption: market size good for economic performance.Facts: integration associated with mergers, acquisitions, etc:in Europe and more generally, ‘globalisation’.
3 Facts M&A activity is high in EU. Much M&A is mergers within member state:about 55 per cent ‘domestic’remaining 45 per cent split between:one is non-EU firm (24 per cent),one firm was located in another EU nation (15 per cent)counterparty’s nationality was not identified (6 per cent).
4 Facts Distribution of M&A quite varied: Source: Baldwin and WyploszDistribution of M&A quite varied:Big-four: I,F,D share M&As much lower than share of the EU GDPI, F, D 36 per cent of the M&As, 59 per cent GDP (except UK)small members have disproportionate share of M&A.
5 FactsWhy M&A mostly within EU?Why UK’s share so large?non harmonised takeovers rules:some members have very restrictive takeover practices, makes M&As very difficultothers, UK, very liberal rules.Lack of harmonisation means restructuring effects vary impact by member states.
6 Economic Logic Verbally Liberalisation De-fragmentation Pro-competitive effect Industrial restructuring (M&A, etc.)RESULT: fewer, bigger, more efficient firms facing more effective competition from each other .
7 POLICIES TOWARDS MONOPOLIES AND OLIGOPOLIES Competition, monopoly and the public interestThe targets of policyabuse of monopoly power6
8 Monopoly and the public interest MCmonopolyAR = DMRQ
9 Monopoly and the public interest MCmonopolyACmonopolyP1AC1AR = DMRQ1Q
10 Monopoly and the public interest MCmonopolyACmonopolyP1AC1AR = DMRQ1Q
11 Why do we think Monopoly is bad? MCmonopolyACmonopolyP1AC1AR = DMRQ1Q
12 If we had perfect competition then P=MC, price is lowerand quantity is higherMCmonopolyACmonopolyP1PPCAC1AR = DMRQ1QPCQ
13 MCperfect competition But what if Perfect competitive firm is small and unable to exploit returns to scaleMCperfect competitionMCmonopolyPPCACmonopolyPMACMAR = DMRQPCQMQ
14 MCperfect competition But what if Perfect competitive firm is small and unable to exploit returns to scaleMCperfect competitionMCmonopolyPPCACmonopolyPMACMAR = DMRQPCQMQ
15 Winecon ExampleFor an alternative presentation of this story see:Perfect Competition and Monopoly ComparedIf you need to review Monopoly output decisions see:A Monopolist's Revenue
16 A DuopolyAR = DQMCmonopolyMRQ1P1If we have two firms instead of one, Divide up the demand Curve between themDDQMRDQDPDDDQMRDQDPD
17 PC V Monopoly v DuopolyUnder certain conditionsOutput of Monopoly is ½ of Perfect competitionOutput of Duopoly Firm is 1/3 of Perfect Competition, Industry output is 2/3 of PCOutput of Three firm Oligopoly is ¼ of Perfect Competition, Industry is ¾ of PCOutput of Four firm Oligopoly is 1/5 of Perfect Competition, Industry is 4/5 of PCSo moving closer to PC all the time.
18 WinEcon ExampleThis is the link to the full treatment of the Cournot Duopoly Model in WinEcon. This is not absolutely necessary for this module but if you are doing Principles it will provide a useful review of the issues.Cournot's Model of Duopoly
19 What does EU integration mean Could initially have lots of small firms in each country (High MC)Market integration (larger market) might allow exploitation of increasing returns to scaleSo might go from 10 in each country to 10 in EU overall.Question: Has monopoly power here risen or not?IN each country?In the EU?
20 SO If Scale MattersThere may also be a trade off between competition (zero supernormal profits)AND Cost savings due to scale effectsFirms need to be of some critical size to gain cost benefitsSO how big will they be, and how many of them will survive market liberalisation
21 Increase in varietySuppose 8 countries (UK, FR, GER, It, Sp, & Pol, Sweden, & Slovakia) have one car firm each before market is integrated and this firm dominates home market (due to restrictions).Control their Home market PLUS each controls 1/9 of remaining EU market.What happens after we integrate the EU car market.1. In each home market go from monopoly high P and ½ PC output) to lower P and 8/9So all home markets become more competitiveBut what else?
22 Fall in costs, price, increase in output and increase in variety available. So consumers gain on all fronts.Not necessarily popular vision of market integation- claim market integration leads to mergers and hence have less than original 8 firms.
23 Market-Concentrating Merger Literature Big, buys up small and closes it down,x41235678
25 Answer: Output and profits rise for all non-merging firms as market becomes more concentrated
26 Answer: Output and profits rise for all non-merging firms as market becomes more concentrated
27 Answer: Output and profits rise for all non-merging firms as market becomes more concentrated And after each merger each firm gets bigger - eventually new merger unprofitable
28 Globalisation / Big EU conglomerate story So here Market Integration results in less firms, lower output and higher pricesSo need competition policyBlock market concentrating mergersFirms will argue that mergers reduce costs rather increase concentration.But regulators are not inclined to believe
29 Problems with this Globalisation / Big EU conglomerate story Remember all rivals gains from your mergerWhy buy up rival if everyone else is going to benefitWhat should I do?Let other firms pay to buy rival – I wait and get the gains – mergers would never happenSo must believe that mergers are beneficial to ME - Must be cost synergies
30 Problems with this Globalisation / Big EU conglomerate story So must believe there are cost savingsEither through rationalizationOr improved processes.Technology Transfer Mergers
31 e.g. Technology Transfer Mergers VW purchased Skoda and Seat.VW Sharon/Seat Alhambra and many other VW/Audi/Skoda models identicalHonda & Rover- Early 90’sTelecommunications equipment
32 Technology Transfer Merger with Independent Divisions
33 Technology Transfer Merger Big, buys up or licenses small, and implements superior technology
34 Technology Transfer Merger What happens to non-merging firms?
35 Predator now twice as big, so output and profits of all non-merging firms must shrink.
36 Predator now twice as big, so output and profits of all non-merging firms must shrink.
37 Technology Transfer versus Market Concentrating Mergers Now 2 firms with best technologyFirms competing against each other (including new divisions) Output rises, prices fallCloser to Perfect competition resultPotentially all consumers and society gainsBut need to believe that technology/management processes are being transferred and that this is the motive for mergers.6
38 Competition Policy Concerns So EU is concerned about mergers and possibility of market concentrationConcerned about whether mergers really bring cost synergy benefitsCollusion is a real concern in Europe:dangers of collusion rise as the number of firms falls.EU is also concerned about ‘state aid’ to protect their own champions, e.g. Rover, Air France
39 EU policies on ‘State Aids’ 1957 Treaty of Rome bans state aid that provides firms with an unfair advantage and thus distorts competition.EU founders considered this so important that they empowered the Commission with enforcement.Commission also empowered to investigate mergers and allegations of collusion
40 Anti-Competitive Behaviour perfect collusion:firms coordinate prices and sales perfectlymax profit from market is monopoly price and salesperfect collusion is where firms charge monopoly price and split the sales among themselves.
41 Antitrust and cartels. The Commission tries: EU Competition PolicyTo prevent anti-competitive behavior, EU policy focuses on two main axes.Antitrust and cartels. The Commission tries:to eliminate behaviours that restrict competition (e.g. price-fixing arrangements and cartels)to eliminate abusive behaviour by firms that have a dominant position.
42 EU Competition PolicyMerger control. The Commission seeks:to block mergers that would create firms that would dominate the market.
43 POLICIES TOWARDS MONOPOLIES AND OLIGOPOLIES EU legislationArticle 85: restrictive practicesArticle 86: monopolies and mergers1990 merger control measurescurrent approach to merger controlassessing EU legislation6
44 POLICIES TOWARDS MONOPOLIES AND OLIGOPOLIES UK competition policythe OFT and the Competition Commissionrestrictive practices policyChapter 1 prohibitiontypes of anti-competitive behaviourpowers of the OFTmonopoly policyChapter 2 prohibitionmarket-share criterionmarket contestabilityanti-competitive practices7
45 POLICIES TOWARDS MONOPOLIES AND OLIGOPOLIES UK competition policy (cont.)merger policyrole of OFT and Competition Commissioncriteria for judgementAssessment of competition policyfocus on behaviour rather than market structureprohibition of certain practicestougher powers to identify secret collusion