Untitled

• Competition Policy is delivered by Valentino Larcinese on February 10, 2025

Outline

• Introduction: scope of competition policy
• Competitive markets and consumer welfare in economic theory
• Competition analysis in practice
• Why competition policy matters for firms
• Policy developments: competition policy in digital markets and privacy concerns

Why Markets Require Regulation

• Markets need a strong legal infrastructure to function properly.
• Governments intervene in markets to address failures, focusing today on competition policy.
• Protection of property (including intellectual property)
• Contracts
• Judiciary

Scope of Competition (Antitrust) Policies

• Defining a framework for the markets to work as intended
• Enable free markets through pro-competitive policies like liberalizations and regulatory reforms.
• Upholding fair competition principles, primarily for consumers.
• Assessing the impact of M&A operations on competition.
• Investigating firm conduct like cartels and abuse of dominant positions.

Competition Law (EU) or Antitrust (US) Enforcement

• Regulatory action to defend market competition and increase welfare, primarily consumer welfare.
• Legal principles are broad, leading to disputes in specific cases and industries.
• The Sherman Act (1890) in the US considered the invention of competition policy, declaring contracts or combinations restraining trade illegal.
• Competition legal principles were included in the Treaty of Rome (1957)

Example: Railroads and Coal in Early 20th Century USA

• By 1900, a few railroads controlled the market for anthracite coal, with six firms owning 90% of resources.
• Railroads engaged in discriminatory conduct that Congress outlawed through the Interstate Commerce Act, controlling both tracks and coal.
• The 1906 Hepburn Act separated transportation and ownership functions, forbidding railroads from carrying goods they produced or had interest in.

Market Structure and Consumer Welfare

• Perfect competitive markets are deemed "efficient" at maximizing gains or "social surplus"
• Monopolized markets lead to higher prices, restricted output, and consumer surplus loss.

Why Competition Policy Matters for Consumers

• Competition policy can affect Herfindal Index of concentration (top 5 firms)
• Average Broadband monthly cost ($)

US vs EU Degree of Market Competition

• The US was once a model for free market capitalism and legal enforcement of competition.
• Deregulation of long-distance phone services (1984) after the antitrust case led to decline in price per minute.
• Since the 90s, competition has declined in key US markets, impacting consumers.
• Philippon (2019) estimates a 5% GDP loss ($21T) and $300/consumer loss due to lower degree of competition.
• EU economies initially had lower competitive intensity in the 80s & 90s.
• The EU benefitted later from increased competition through deregulation/privatizations and enforcement at the supranational level (EU commission).

Deregulation Example: Telecoms

• In France 2011 the government granted 3G licenses to an independent Internet service provider called Free.
• The new Free mobile triggered a 50% price drop in mobile service subscriptions.

OECD Economy-Wide Product Market Regulation Indicator in 2018

• An OECD indicator of market-friendly regulation

Should Competition Policy Only Care About Consumers?

• Competition policy relies on the "consumer welfare standard"
• Decisions should focus primarily on consumer welfare
• Total surplus (business profitability) is a secondary concern
• Question to debate, should competition policy also take profits into account?

Competition Policy in Practice

• Competition policy focuses on specific events (mergers, acquisitions) or conduct (cartels, dominant firm behavior, predatory pricing).
• The regulator must address market boundaries, competitiveness, and potential competition problems like high prices or poor service.
• Difficulties include strategic interactions in oligopolies, complex B2B supply chains, limited information.
• Counterfactual: Assessing outcomes against a benchmark as if the event didn't happen

Common Criticisms

• Focus on consumer welfare is too narrow
• Investigations aren't timely
• Evidence is hard to come by
• It may create uncertainties that are bad for business

Why Competition Policy Matters for Firms

• Impact on business operations
• Impact on corporate projects
• Impact on firms' finances
• Competition/Antitrust legal proceedings are lengthy (and costly), and subject to significant legal uncertainty

Impact on Business Operations

• December 2020: China's regulator investigated Alibaba for forcing merchants to sell exclusively on its platform
• This action led to 8% share drop
• Alibaba received a $2.8B fine in April 2021

Impact on Corporate Projects

• Regulators can change outcomes of M&A operations if it leads to less competition.
• Investigations are subject to political pressure and lobbying.

Impact on Firms' Finances

• EC Antitrust investigations of Google resulted in three fines, totaling EUR 8.25B in three years.
• Cartel fines in OECD countries reach EUR 6B/year.
• Competition law is important to corporate compliance.

Competition/Antitrust Legal Proceedings

• They are lengthy and subject to legal uncertainty
• Example, Intel incentivized clients through a variety of rebates.
• In 2005, an antitrust invesigation took place in Japan, which led to AMD suing Intel. Settled charges in 2009 in the US
• From 2007-2009 the European Commission carried out an investigation
• Intel appealed, but the ECJ decided against in 2017

Competition Policy and the Digital Economy

• Competition policy needs to adapt to digital markets
• More emphasis should be placed on non-price competition.
• Data collection practices give economic power to digital platforms imposing costs to the general public.
• Potential social and political costs include spreading fake news.
• Competition policy must address these issues.

Stigler Report on Digital Platforms (DPs), 2019

• DPs can end up as Monopolies
• Low marginal costs and distribution costs which has high distribution costs
• The belief that free product is necessarily good for consumers is false
• If you are'nt paying for a product, consider that you might be the product

Case Discussion: Facebook, WhatsApp, and Antitrust

• Why do think Facebook acquired Whatsapp?
• Do you think Facebook violated antitrust law?
• Should Meta be broken up?
• Can Antitrust enforcement solve privacy issue?

Takeaways

• Consumers benefit from competition: it results in lower prices, more innovation, and better quality.
• Current competition policy tries to ensure free markets in the interest of consumers
• The US was once the leader in antitrust enforcement and now Europe is more active.
• Prices of airplane tickets, phone subscriptions, etc are now higher in the US than in Europe.
• Competition policy has major consequences for business
• Data protection and privacy are critical issues in the digital age. Monopolization of digital networks can lead to increased privacy risk.