Objectives of Competition
Policy
Lesson 2
Welfare
 Welfare of the industry (consumer surplus + producer
surplus)
 Effects of price increases (the increase in profit may not
compensate the reductions of consumer surplus)
 Distributional issues are overlooked (it is possible to
operate redistribution schemes suche that both
producers and consumers are better off)
 Welfare from a dynamic point of view: future welfare
matters as wellEx. Fixed costs are already recovered
and P =MC leads to maximise welfare BUT firms would
not invest and innovations not introducedfuture
welfare is reduced
Consumer surplus
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Some standards seem to prerfer consumer surplus as the
objective of competition policy.
In some cases (cartels) there may not be contrast with welfare
maximisation but in general we cannot exclude differences
Consumers are dispersed and cannot lobby as firms (no
“countervailing power”) a reason to give more weight to
consumer surplus
BUT it may not be wise to adopt consumer surplus as an
objective for many reasons: 1.It neglects firms gains and at
present consumers own firms through pension and investments
funds receive dividends and capital gains
Literally maximising consumer surplus implies P=MC needs
to subsidize fixed cost regulation replace the market
Defence of smaller firms
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Antitrust policies were born to defend farmers and small firms
hurted by large trusts
The defence of Small firms is not against welfare maximisation
if it is limited to protect them from the abuse of large firms to
balance financial and economic power
On the contrary helping small firms to survivie when they are
not operating at efficient scale encourages inefficient allocation
of resources and keep high prices
The EU states tha SME are more dynamic but the empirical
evidence is not conclusive
It may be wise that competition agencies. Neglect agreements
and mergers among SME but systematically helping them is
not a rational choice
SME are hurt by lack of infrastructure and imperfect markets
but these are matter for other public policies.
Promoting market integration (EU)
 A political objective not necessarily consistent
with welfare maximisation
 EU forbids price discrimination across markets
but such an argument has no economic
rationale
 Price discrimination in the car market (Italy
and BELGIUM) Pi > PB  to avoid
discrimination: PB < P < Pi- Italians are
better-off, Belgian are worse-off and what
about the profit? a priori the welfare effect is
ambigous
Economic freedoom
 In specific cases there may be contrast
between economic freedoom and efficiency
 Most obvious case: vertical restraints resaleprice maintenance and territorial restraints
may be effcient as they stimulate the effort of
retailers or avoid setting prices above what is
optimal for the manufacturerbut they are
against economic freedoom
Fairness and equity
 Small shopkeepers V. large supermarket chains
 Supermarkets enjoy buyer power and sell at lower
prices than small shops forced to close-down
 Some argue this result is unfair and small shops be
protected  contrary to efficiency principlesif small
shops do not reach the minimum efficient scale should
accept lower profits or exit the market
 Fairness and efficiency not always are in contradiction: if
a chain store has large market share and charges prices
below cost (predatory pricing) to force small firms out of
the market this is bot unfair and reduces welfare once
competitors are eliminated the chain store start charging
monopoly prices
Strategic reasons: Industrial and
trade Policies
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C.P. may be strategically used to support National Champions
or to break-up foreign champions
Lax competition policies in some Countries hide the aim of
allowing national firms go bigger to be successfull in
international competition
Strategic trade policy may be hided behind competition laws
and their implementation
Ex. US laws give exemptions to export-cartels: 1. if the only
purpose is to engage in export trade 2. do not restrain trade in
the US 3.do not restrain the trade of export competitors
CP can be used to achieve protectionist goals: anti-dumping
laws in principle avoid foreign firms to sell below cost (often
they protect domestic firms from efficient foreign competitors)
Industrial & trade policy: obstacle to CPSubsidies & State aid
Main features of EU Competition
law
 Art. 81 e Art.82 Treaty of the European Community
 Direct applicability: they are part of the law of member
Countries are enforeceable by National Courts
 Art.are enforced by the EC through the DG Comp. At the
national level by National Comp. Authorities.
 Jurisdiction against actions of the EC: Community level
Court of first instance & Court of Justice (appeal)
 At the national level Courts decide according to the
national systems against decisions of National
Competition Authorities
Art.81
 It deals both with horizontal & vertical agremments but
from the economic point of view effects could be quite
different
 Horizontal agreements (with competitors) reduce
competition and welfare should be prohibited except
some cases (cooperative R&D agreements)
 Vertical agreements (manufacturer & retailer) may
enhance effciency and cause problems only when are
undertaken by firms enjoying market power
 Agreements need not be formal or written (concerted
practice is the word used…and leave space for
interpretation..)
 Some sectors: agriculture, defence, transport..enjoy
block exemptions
Art.82
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The list of abuses cannot be exhaustive
More generally art.82 considers exploitative behaviour
(excessive prices) and exclusionary practices: predatory
pricing,exclusive dealing, refusal to supply
Firstly it should be shown that a dominant position exists THEN
that the dominant firm has carried out an abusive behaviour
Dominance relates to a case where a firm enjoys a very high
degree of market power but the jurisprudence made it clear
that even a firm with a market share of 40% may be a
dominant one
European law does not punish the creation of a dominant
position, but just its abuse one does not want to punish firms
that have been more successfulincentives might be reduced
in this case