Competition Policy Lecture Slides PDF

Competition policy Valentino Larcinese February 10, 2025 Outline 1. Introduction: scope of competition policy 2. Competitive markets and consumer welfare in economic theory 3. Competition analysis in practice 4. Why does competition policy matter for firms? 5. Policy developments: compet...

Competition policy Valentino Larcinese February 10, 2025 Outline 1. Introduction: scope of competition policy 2. Competitive markets and consumer welfare in economic theory 3. Competition analysis in practice 4. Why does competition policy matter for firms? 5. Policy developments: competition policy in digital markets and privacy concerns 1. Introduction: scope of competition policy 2. Competitive markets and consumer welfare in economic theory 3. Competition analysis in practice 4. Why does competition policy matter for firms? 5. Policy developments: competition policy in digital markets and privacy concerns Why do markets require regulation? Markets require legal infrastructure: Protection of property (including intellectual property) Contracts Judiciary Governments may intervene for the sake of free markets: Fixing market failures Today: competition policy Scope of competition or antitrust policies Defining the framework for markets to work as intended (law) Enabling free markets through pro-competitive policies (liberalisations & regulatory reforms) Ensuring fair competition principles are upheld in practice, mostly in the interest of consumers (enforcement) Assessing the impact of M&A operations (change in market structure) on competition Investigating firm conduct such as cartels and abuse of dominant position Competition law (EU) or Antitrust (US) enforcement Regulatory action enforcing «competition law » legal principles, which were designed to defend market competition to increase welfare (primarily, consumer welfare). Legal principles are broad => application to specific cases & industries generates legal disputes Historically, competition policy was “invented” in the US with the Shearman Act (1890): “every contract, every combination in the form of trust of otherwise, in restraint of trade or commerce (…) is declared to be illegal. [not entirely accurate: Canada was first] In Europe, competition legal principles were included in the Treaty of Rome (1957) Example: railroads and coal in early 20th century USA From Lina Khan 2019 1. Introduction: scope of competition policy 2. Competitive markets and consumer welfare in economic theory 3. Competition analysis in practice 4. Why does competition policy matter for firms? 5. Policy developments: competition policy in digital markets and privacy concerns Market structure and consumer welfare Price & Markets refresher: Perfect competitive market are deemed “efficient”: maximize gains from trade, or “social surplus” By contrast, monopolized markets are characterized by higher prices, output restriction & loss of consumer surplus Perfect competitive market: Industry with market power Surplus transferred from consumers to producers MC L Why does competition policy matter for consumers? 66 38 30 US France South Korea Average Broadband monthly cost ($) Herfindal index of concentration (top 5 firms)  Illustration: US vs EU degree of market competition The US was once the poster child for free market capitalism and the legal enforcement of competition principles Deregulation of long-distance phone services (1984) after landmark antitrust case against Bell (AT&T) led to sharp decline in price/minute Since the 90s however, degree of competition has declined in key markets, at the expense of consumers Philippon (2019) estimates that the current lower degree of competition in the US represents a loss of 5% of GDP ($21T), and $300/consumer Illustration: US vs EU degree of market competition On the other hand, EU economies had a lower degree competitive intensity in the 80s & 90s. However they benefitted from increased competition brought by deregulation/privatisations and proactive competition enforcement at supranational level (EU commission) Deregulation example: telecoms France 2011: government grants 3G licences to independent Internet service provider Free => new Free mobile triggers a 50% price drop in mobile services 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 has relied heavily on the “consumer welfare standard”: competition policy decisions should primarily be concerned about consumer welfare In this setting, total surplus (and therefore business profitability) is a second priority concern Do you agree? Should competition policy also take profits into account? 1. Introduction: scope of competition policy 2. Competitive markets and consumer welfare in economic theory 3. Competition analysis in practice 4. Why does competition policy matter for firms? 5. Policy developments: competition policy in digital markets and privacy concerns  Competition policy in practice Often focussed on specific events (e.g. mergers and acquisitions) or conduct (firms setting up a cartel, dominant firm’s behaviour, predatory pricing…) Questions that the regulator/competition policy enforcer needs to address: What are the boundaries of the « market » ? In effect: what is the relevant set of products and services that can be seen as competing with each other? How competitive is this market/industry in relative terms, compared to others? How relevant? (Is it worth my time?) What is the potential competition problem ? (Prices are higher than they should? Quality of service is poor? There is little innovation?) How could it be fixed ? Difficulties Often oligopolies → strategic interactions Complex supply chains: most transactions are B2B vs B2C Limited information Requires assessing the market’s outcomes against a relevant benchmark, or “counterfactual”: what would the outcomes be in the absence of the event/behaviour of issue? Common criticisms Too narrowly focussed on consumer welfare Difficult to be timely: investigations often arise after the damage has been done Evidence is hard to come by It may create uncertainties not good for business 1. Introduction: scope of competition policy 2. Why does free competitive markets require regulation? 3. Competition analysis in practice 4. Why does competition policy matter for firms? 5. Policy developments: competition policy in digital markets and privacy concerns Why does competition policy matter for firms? 1. Impact on business operations December 2020: China’s market regulator announced antitrust investigation into Alibaba (suspected of practicing “pick one of the two”, i.e. forcing merchants to sell exclusively on its platform) Led to 8% share drop $2.8B fine in April 2021 https://on.ft.com/3rsbI8m  Why does competition policy matter for firms? EC stops Google from using its dominant position to promote Google Shopping services https://ec.europa.eu/commission/presscorner/detail/en/IP_19_1770  Why does competition policy matter for firms? 2. Impact on corporate projects Regulators can intervene and affect the outcomes of a M&A operations if they find that the concentration of the concerned businesses could lead to less competition These investigations and the potential interventions can be under political pressure and lobbying from governments, competitors, and the firms themselves Mergers: Commission prohibits Siemens-Alstom merger (europa.eu)  Why does competition policy matter for firms? 3. Impact on firms’ finances EC Antitrust investigations of Google: three fines, totalling EUR 8.25B in three years Cartel fines in OECD countries: EUR 6B/year Competition law is typically an integral part of corporate compliance trainings. From a corporate perspective, this matters because anti- competitive conduct can become huge liabilities https://www.oecd.org/daf/competition/oecd-competition-trends-2021-vol1.pdf  Why does competition policy matter for firms? 4. Competition/Antitrust legal proceedings are lengthy (and costly), and subject to significant legal uncertainty Example: Intel antitrust cases Intel: incentivized clients through a variety of rebates. Antitrust investigation in Japan – 2005. Following the investigation, AMD sued Intel, first in Japan and in the US. Settled charges in 2009 in the US European Commission investigation from 2007 to 2009 Intel appealed against the EC decision: ECJ decision in 2017 1. Introduction: scope of competition policy 2. Why does free competitive markets require regulation? 3. Competition analysis in practice 4. Why does competition policy matter for firms? 5. Policy developments: competition policy in digital markets and privacy concerns  Competition Policy and the Digital Economy Wide consensus that competition policy framework needs to evolve to better take into account the economics of digital markets and how they differ from the standard microeconomics textbook More emphasis on non-price characteristics of competition There has also been a recognition of the way data collection practices enables and reinforces the economic power of digital platforms. This imposes hidden costs to the general public. There are also potential social and political costs: easier to spread fake news etc How can competition policy address these issues? Stigler report on digital platforms (DPs), 2019 DPs tend to end up as monopolies Free is not necessarily good for consumers. There is nothing special about a price of zero Market power in ads may lead to monopolization in other markets Many online products are designed to be addictive, consolidating market power Case discussion: Facebook, Whatsapp and Antitrust Why did Facebook acquire Whatspp? Do you think Facebook violated antitrust law? Do you think Meta should be broken up? Can Antitrust enforcement solve privacy issue? If yes, how?  Takeaways Consumers typically benefit from competition: lower prices, more innovation, better quality… Competition policy tries to ensure free markets work in the interest of consumers The "Great Reversal": US used to be the pioneer/champion of anti-trust enforcement, now Europe is more active. Prices of several products (phone subscriptions, airplane tickets, etc) are now higher in the US than in Europe. In the 70s and 80s it was the opposite Competition policy has important consequences for business Among the new issues arising in the digital age, data protection and privacy are potentially of paramount importance. Monopolization of digital networks lead to increased privacy risk.