Competition and Industrial Policies

1. The European Union: economics, policies and history 1st edition Chapter 15 Competition and Industrial Policies Susan Senior Nello

2. EU competition policy covers: • Antitrust measures, or the fight against cartels and restrictive practices (Article 81) and against dominant position (Article 82); • Mergers (Reg.4064/89 of 1989); and • State aids and regulated industries (Articles 86-88).

3. Monopoly and perfect competition • The simplest model of the non-competitive behaviour of a firm is that of monopoly. • A monopoly entails that there is only a single seller of the product, so the firm does not have to take into account the behaviour of other suppliers. • Perfect competition occurs where there are a large number of buyers and sellers, a homogeneous product, free entry of firms to the market, and perfect information.

4. The demand curve of a monopoly • As the monopoly is the only seller of the product, the demand curve of the firm and the demand curve of the industry are the same. • The industry demand curve faced by the monopolist will slope downwards. • The monopolist is a price maker. If the monopolist sets a higher price, less will be sold.

5. The demand curve of the monopolist Fig 15.1

6. The equilibrium of the monopolist Fig 15.2

7. A comparison of monopoly and perfect competition: Basic assumptions • An industry is initially assumed to be operating under perfect competition and then a monopoly is introduced. • The industry demand is assumed the same for the monopoly and the competitive industry.  The long run is considered, when firms have adjusted fully to each price.

8. A comparison of monopoly and perfect competition: Basic assumptions • The industry is assumed to operate under constant costs so the long-run marginal cost and average cost curves will coincide. • All competitive firms are equally efficient.

9. A comparison of monopoly and perfect competition Fig 15.3

10. A Cartel The aim of collusion or the formation of a cartel by firms in a competitive industry is to co-ordinate their activities in order to earn monopoly profits. However, there are inherent economic reasons why cartels are unstable and tend to break down: • Each firm has an incentive to cheat and expand output. • Members of the cartel may find it difficult to reach agreement. • Other firms may enter the industry.

11. Profit maximisation by a cartel Fig 15.4

12. Article 81 of the EC Treaty Collusive behaviour is considered contrary to consumer interests when it entails agreements to: • raise prices; • restrict output, markets, technical development or investment; • share markets or sources of supply; • apply dissimilar conditions to equivalent transactions with other trading parties; • make the conclusion of contracts subject to supplementary obligations.

13. Article 82 of the EC Treaty prohibits abuse of dominant position by one or more firms. Types of behaviour which are found to constitute such abuse are: • Restriction of output; • Price discrimination; • Applying dissimilar conditions to equivalent transactions with other trading parties; • Making the conclusion of contracts subject to supplementary obligations.

14. The May 2004 ‘modernisation package’ dealing with restrictive practices and dominant position • Routine notification of agreements and practices to the Commission for clearance is no longer required. Instead, companies will make their own assessment. • All agreements considered to have a net positive effect on the internal market are automatically valid. • This will free the competition authorities to tackle serious violations, in particular, the cases affecting cross-border trade.

15. The May 2004 ‘modernisation package’ • The Commission, national competition authorities and national courts are to share responsibility for enforcing EU antitrust rules. • A European Competition Network (ECN) has been set up. • A number of flanking measures have been introduced to ensure consistent application of the new antitrust rules throughout the EU. These include guidance on key features of the new system.

16. The 1989 Merger Control Regulation (Reg. 4064/89) • Gave the European Commission the authority to control mergers that met a specified size, and multi-nationality conditions, including mergers between non-EU businesses with substantial sales in the EU. • The worldwide threshold was a turnover of €5 billion, and the Community-wide threshold was €250 million. • Below these thresholds, the national authorities in the member states carried out merger control.

17. Merger control According to the 1989 Merger Control Regulation, a merger should be blocked if it led to a potentially abusive dominant position and, therefore, was likely to result in higher prices, more limited choice for consumers, and less innovation.

18. The new merger rules of May 2004 • Reinforced the one-stop shop concept; • extended the authority of the Commission to investigate all types of harmful scenarios resulting from a merger and not just cases of market dominance; • added flexibility to the investigation timeframes; • provided guidelines for the assessment of mergers;  adopted a set of best practices on merger investigations.

19. Regulated industries • Article 86 of the EC Treatycovers the monopoly rights granted by member states to private or public undertakings to perform services in sectors such as the postal service, energy, telecommunications and transport. • The Commission argues that these special rights should not go beyond what is necessary to provide the service, otherwise competition could be restricted.

20. State aids • Article 87 prohibits state aids to business if they distort competition, as this is incompatible with the common market. • State aid may take various forms, including subsidies, capital investment, tax breaks, and sales of assets at favourable prices.

21. Exceptions are allowed for state aid: • with a social character; • for natural disasters or exceptional occurrences; • for regional development; • to promote an important project of common EU interest; • to develop certain economic activities of certain areas; and • to promote culture and heritage conservation.

22. The theoretical basis of industrial policy • In general the aim of industrial policy is to increase competitiveness. • The Commission defines competitiveness as the ability of an economy to provide its population with high and rising standards of living, and high rates of employment on a sustainable basis.

23. Differing views of how industrial policy should operate include: • The market-oriented approach, which aims at removing the barriers to competition. • The selective, interventionist approach, which involves support for declining industries to avoid loss of jobs, and promotion of industries considered ‘key’ or strategic.

24. The evolution of EU industrial policy • During the 1960s Community industrial policy was based on a market-oriented approach, but in the 1970s and 1980s more selective intervention was used in favour of specific sectors. • Following the 1990 Bangermann Memorandum, the Community adopted a ‘horizontal’ approach to industrial policy.

25. The 1990 Bangermann Memorandum • A competitive position could be best be ensured by measures to control state aids, avoid abuse of dominant position and eliminate barriers to international trade. • The main responsibility lies with economic operators, but the Community could help to provide the necessary prerequisites for adjustment, including high level of educational attainment, social cohesion, and environmental protection.

26. The evolution of EU industrial Policy • The Maastricht Treaty gave the Community explicit responsibility for industrial policy for the first time. • Although the ‘horizontal’ approach continued to characterise Community industrial policy, the EU took measures aimed at the specific requirements of several sectors including steel, textiles and clothing, shipbuilding, the automobile industry and advanced technology industries.

27. Article 157 of the Nice Treaty To ensure competitiveness action is to be aimed at: • ‘Speeding up the adjustment of industry to structural changes, • encouraging an environment favourable to initiative and to the development of undertakings throughout the Community, particularly small and medium-sized undertakings,

28. Article 157 of the Nice Treaty • encouraging an environment favourable to co-operation between undertakings, • fostering better exploitation of the industrial potential of policies of innovation, research and technological development’.

29. The re-emergence of the old debate about promoting national and European champions? • For example, in May 2004 President Chirac and the then German Chancellor, Schroeder, called for‘the creation of the industrial champions of the Europe of tomorrow, of which France and Germany could build a certain number’. • A risk with such interventionist policies is that they tend to breed rent-seeking activities and politicisation of decisions and are difficult to justify on the basis of economic theory.