1. Lecture 9: EU Competition Policy
Based on: Sloman Chapters
6.3 (Monopoly) and
12.3 (Competition Policy)
Swann Chapter 5 p

2. Market Size Matters
European 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 Wyplosz
Distribution of M&A quite varied:
Big-four: I,F,D share M&As much lower than share of the EU GDP
I, F, D 36 per cent of the M&As, 59 per cent GDP (except UK)
small members have disproportionate share of M&A.

5. Facts
Why 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 difficult
others, 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 interest
The targets of policy
abuse of monopoly power 6

8. Monopoly and the public interest
MCmonopoly
AR = D MR Q

9. Monopoly and the public interest
MCmonopoly
ACmonopoly P1
AC1
AR = D MR Q1 Q

10. Monopoly and the public interest
MCmonopoly
ACmonopoly P1
AC1
AR = D MR Q1 Q

11. Why do we think Monopoly is bad?
MCmonopoly
ACmonopoly P1
AC1
AR = D MR Q1 Q

12. If we had perfect competition then P=MC,
price is lower
and quantity is higher
MCmonopoly
ACmonopoly P1
PPC
AC1
AR = D MR Q1
QPC Q

13. MCperfect competition
But what if Perfect competitive firm is small and unable to exploit returns to scale
MCperfect competition
MCmonopoly
PPC
ACmonopoly PM
ACM
AR = D MR
QPC QM Q

14. MCperfect competition
But what if Perfect competitive firm is small and unable to exploit returns to scale
MCperfect competition
MCmonopoly
PPC
ACmonopoly PM
ACM
AR = D MR
QPC QM Q

15. Winecon Example
For an alternative presentation of this story see:
Perfect Competition and Monopoly Compared
If you need to review Monopoly output decisions see:
A Monopolist's Revenue

16. A Duopoly
AR = D Q
MCmonopoly MR Q1 P1
If we have two firms instead of one, Divide up the demand Curve between them DD Q
MRD QD PD DD Q
MRD QD PD

17. PC V Monopoly v Duopoly
Under certain conditions
Output of Monopoly is ½ of Perfect competition
Output of Duopoly Firm is 1/3 of Perfect Competition, Industry output is 2/3 of PC
Output of Three firm Oligopoly is ¼ of Perfect Competition, Industry is ¾ of PC
Output of Four firm Oligopoly is 1/5 of Perfect Competition, Industry is 4/5 of PC
So moving closer to PC all the time.

18. WinEcon Example
This 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 scale
So 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 Matters
There may also be a trade off between competition (zero supernormal profits)
AND Cost savings due to scale effects
Firms need to be of some critical size to gain cost benefits
SO how big will they be, and how many of them will survive market liberalisation

21. Increase in variety
Suppose 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 8/9
So all home markets become more competitive
But 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, x 4 1 2 3 5 6 7 8

24. What happens to non-merging firms?

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 prices
So need competition policy
Block market concentrating mergers
Firms 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 merger
Why buy up rival if everyone else is going to benefit
What should I do?
Let other firms pay to buy rival – I wait and get the gains – mergers would never happen
So 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 savings
Either through rationalization
Or 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 identical
Honda & Rover- Early 90’s
Telecommunications 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 technology
Firms competing against each other (including new divisions) Output rises, prices fall
Closer to Perfect competition result
Potentially all consumers and society gains
But 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 concentration
Concerned about whether mergers really bring cost synergy benefits
Collusion 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 perfectly
max profit from market is monopoly price and sales
perfect collusion is where firms charge monopoly price and split the sales among themselves.

41. Antitrust and cartels. The Commission tries:
EU Competition Policy
To 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 Policy
Merger control. The Commission seeks:
to block mergers that would create firms that would dominate the market.

43. POLICIES TOWARDS MONOPOLIES AND OLIGOPOLIES
EU legislation
Article 85: restrictive practices
Article 86: monopolies and mergers
1990 merger control measures
current approach to merger control
assessing EU legislation 6

44. POLICIES TOWARDS MONOPOLIES AND OLIGOPOLIES
UK competition policy
the OFT and the Competition Commission
restrictive practices policy
Chapter 1 prohibition
types of anti-competitive behaviour
powers of the OFT
monopoly policy
Chapter 2 prohibition
market-share criterion
market contestability
anti-competitive practices 7

45. POLICIES TOWARDS MONOPOLIES AND OLIGOPOLIES
UK competition policy (cont.)
merger policy
role of OFT and Competition Commission
criteria for judgement
Assessment of competition policy
focus on behaviour rather than market structure
prohibition of certain practices
tougher powers to identify secret collusion