Regulation Preliminaries PDF

Preliminaries Our running story 2 companies … sell “glints” … to a large mass of potential consumers ATREX BULVA 5 2. Regulation of competition A. S...

Preliminaries Our running story 2 companies … sell “glints” … to a large mass of potential consumers ATREX BULVA 5 2. Regulation of competition A. Should we merge into a single firm? DECISIONS WITH NEGATIVE B. Should we form a secret cartel? IMPACTS ON C. Should we try to maintain high prices? CONSUMERS UNDER THE SCRUTINY OF COMPETITION AUTHORITIES ATREX BULVA 6 What are we talking about? https://www.youtube.com/watch?v=pDoNWPhRlWY 7 Objectives Previous module Positive approach → Explain the workings of imperfectly competitive markets This module Normative approach → Guidance for competitive policy Basic postulate: Competition is desirable, as it promotes economic efficiency Problem: Firms might be tempted to reduce competition Consequence: Set of rules aiming at maintaining competition European competition law TFEU – Article 101: Prohibition of agreements that reduce competition TFEU – Article 102: Prohibition of dominant position abuses + Merger control + State aids control 8 Market definition How do we set the contours of the relevant market? Identify the closest substitutes to the product under review. How? Hypothetical monopoly test Relevant market = Smallest product group such that a hypothetical monopolist controlling that product group could profitably sustain a Small and Significant Non- transitory Increase in Prices (SSNIP) Start with the narrowest definition (A) Can a hypothetical monopoly on A sustain a SSNIP? Yes? STOP THERE: A is the relevant market A No? INCLUDE CLOSE SUBSTITUTES ® B B Can a hypothetical monopoly on B sustain a SSNIP? C Yes? STOP THERE: B is the relevant market No? INCLUDE MORE SUBSTITUTES ® C, etc. 9 How do we assess market power? Definition of market power Ability to raise price above the perfectly competitive level. Measure 1. Lerner index (or markup) Difference between price and marginal costs as a # − %′ != percentage of the price # Measure 1. Concentration indices Measures of the distribution of market shares. Define the market share of firm " as #! ≡ ('! ⁄()×100 Suppose there are - firms in the market Order them by decreasing market shares. !.-firm concentration ratio (. < -) '! = ( )" "#$ Herfindhal-Hirschman index % **' = ( )"& "#$ 10 https://www.higherrocked ucation.org/glossary-of- terms/herfindahl- hirschman-index-hhi- 11 What are mergers? Merger = Combination of 2 (or more) companies into a single entity Horizontal: Between competitors Vertical: Between companies at different stages of the supply chain Conglomerate: Between unrelated businesses Main effects Reduction of competition → Potential increase in prices Economic efficiencies → Potential decrease in prices + Dynamic (long-term) effects → Innovation, consumer choice 12 Mergers. Key statistics Merger and acquisition deals 54,750 M&A deals globally in 2023 Total value of $3.1 trillion in 2023 13 Merger control European Merger Guidelines: Key Principles Notification Mandatory for mergers with "Community dimension” Based on turnover thresholds of involved companies Combined worldwide turnover > €5 billion EU-wide turnover > €250 million for at least two firms Types of Decisions Clearance /Prohibition/ Clearance with “remedies” Clearance with “remedies” in the majority of cases Remedies Assessment Criteria Usually structural Market definition Merger partners divest assets (manufacturing facilities, Competitive effects personnel, intellectual property) Efficiencies Goal: Prevent a merger from harming consumers By strengthening competitors or facilitating entry 14 Use of HHI in merger guidelines Source: Perplexity. 15 EU and National Merger control https://op.europa.eu/webpub/eca/speci al-reports/eu-competition-24-2020/en/ 16 Cartels and their detection https://www.youtube.com/watch?v=JO2R4Yort-g https://www.youtube.com/watch?v=QNu9os_HyMA 17