Lecture 9: EU Competition
Policy
Based on: Sloman Chapters
6.3 (Monopoly) and
12.3 (Competition Policy)
Swann Chapter 5 p129-148
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’.
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).
Facts
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.
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.
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 .
POLICIES TOWARDS
MONOPOLIES AND OLIGOPOLIES
• Competition, monopoly and the public
interest
The targets of policy
abuse of monopoly power
Monopoly and the public interest
£
MCmonopoly
MR
AR = D
Q
Monopoly and the public interest
£
MCmonopoly
ACmonopoly
P1
AC1
MR
Q1
AR = D
Q
Monopoly and the public interest
£
MCmonopoly
ACmonopoly
P1
AC1
MR
Q1
AR = D
Q
Why do we think Monopoly is bad?
£
MCmonopoly
ACmonopoly
P1
AC1
MR
Q1
AR = D
Q
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
But what if Perfect competitive firm is small and
unable to exploit returns to scale
£
MCperfect competition
MCmonopoly
ACmonopoly
PPC
PM
ACM
MR
QPC
QM
AR = D
Q
But what if Perfect competitive firm is small and
unable to exploit returns to scale
£
MCperfect competition
MCmonopoly
ACmonopoly
PPC
PM
ACM
MR
QPC
QM
AR = D
Q
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
A Duopoly
£
If we have two
firms instead of
one, Divide up the
demand Curve
between them
MCmonopoly
P1
£
Q1
MR
AR = D
Q
PD
£
PD
MRD
QD
MRD
DD
Q
QD
DD
Q
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.
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
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?
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
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?
• 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.
Market-Concentrating Merger Literature
Big, buys up small and closes it down,
1
2
5
6
4
3
7
8
What happens to non-merging firms?
Answer: Output and profits rise for all nonmerging firms as market becomes more
concentrated
Answer: Output and profits rise for all nonmerging firms as market becomes more
concentrated
Answer: Output and profits rise for all nonmerging firms as market becomes more
concentrated
And after
each merger
each firm
gets bigger eventually
new merger
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
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
Problems with this
Globalisation / Big EU
conglomerate story
So must believe there are cost savings
Either through rationalization
Or improved processes.
Technology Transfer Mergers
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
Technology Transfer Merger
with Independent Divisions
Technology Transfer Merger
Big, buys up or licenses small, and
implements superior technology
Technology Transfer Merger
What happens to non-merging firms?
Predator now twice as big, so output and
profits of all non-merging firms must
shrink.
Predator now twice as big, so output and
profits of all non-merging firms must
shrink.
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.
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
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
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.
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.
EU Competition Policy
• Merger control. The Commission seeks:
– to block mergers that would create firms
that would dominate the market.
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
POLICIES TOWARDS
MONOPOLIES AND OLIGOPOLIES
• UK competition policy
– the OFT and the Competition Commission
– restrictive practices policy
 Chapter
 types
1 prohibition
of anti-competitive behaviour
 powers
of the OFT
– monopoly policy
 Chapter
2 prohibition
 market-share
 market
criterion
contestability
 anti-competitive
practices
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