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Tutorial 6 – Economics of Competition law I
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Tutorial 6 – Economics of Competition law I What is competition law about?
The branch of law regulating the exercise of market power and abusive practices by
undertakings, and governments;
European Competition law forbids cartelization and abusive practices as being
incompatible with the common market insofar because it can affect trade between
Member States;
Besides abuse and cartelization also mergers are regulated.
What are the key terms?
Cartel: an (illegal) agreement between firms to coordinate their prices or production;
Abuse: firms in a dominant position can abuse that position in such a way as to exert
benefits from other market participants or to coerce them to behave in a certain way;
State aid: advantages that are given on a selective basis to undertakings by national
public authorities.
Assignment 11.2
What are the goals of competition policy?
o Economic integration
A goal specific for the EU context because it stimulates the creation of an internal
market with the four freedoms. It establishes a system of undistorted competition in
the internal market in order to attain the objectives as set out in art. 2 EC Treaty: more
expensive import and export is seen as undesirable in the EU. 1
But is this always efficient? Differences between MS will always be present, and the
fact that a product is sold under different prices in different Member States is only
logic given the fact that market conditions differ – but European courts haven’t always
looked at it this way.
United Distillers, 1983
Company based in the UK sold large amounts of whiskeys. It used a dual pricing
scheme: in the UK it sold crates to dealers under the condition that the whiskeys
would not be exported to the mainland. Otherwise the companies wouldn’t receive a
discount. This makes export more difficult and runs against the goal of market
integration. However, United Distillers had a defence based on efficiency: “we need
to protect our dealers on the mainland against freeriding, since we are trying to start
our own networks in the mainland that are not well-known yet. If the UK-retailers sell
below the market price in the Netherlands, France, etc. they freeride on their sales
network. Don’t worry about competition within our brands – but about competition
between brands.” Thus, vertical agreements can be efficient. The courts decided still
in favour of market integration. In the UK, prices of whiskey went up and in the
mainland some brands ceased to be promoted. Rather than creating more market
integration, the court created the adverse result (it was inefficient – prices went up).
This shows that the court chooses the goal that is most prominent at the moment, and
in the 1980’s that was economic integration.2
o Economic efficiency
o Consumer welfare
How is this different from efficiency?
1
The EU desires parallel trade in order to make consumers profit from this.
2
This is why the US has a more economically oriented antitrust enforcement – they didn’t have to worry about economic integration.
, o Other goals (Weishaar doesn’t discuss these): sustainability (washing machine case),
consumer protection, industrial policy, and protection of competitors.
Economists are not in favour – only
protect competitors if they are
important to consumers and produce
efficiently: more competition is
always better.
What is industrial policy?
Regulating certain sectors to, for example, protect jobs. By not enforcing competition
law strictly you can make inefficient companies disappear. Not enforcing it strictly by
allowing certain mergers it is usually deemed anticompetitive, but it can also make
your own companies more successful (merger French and German Siemens-Alston:
competition law prevailed; PostNL and Sandd merger where minister overruled
decision antimerger). This possibility may therefore be placed into the unfolding
discussion about creating an European Economic Government that appears to indulge
industrial policy objectives. The French President Sarkozy was quick to use the Greek
financial crisis and the threat for the Euro as an argument to push for stronger policy
based decision making. It should be emphasized that industrial policy is not easily
combined with 'undistorted competition' since it seeks to favour industrial sectors and
selected businesses.
Assignment 11.1
What are the effects of a monopoly?
The quantity offered and demanded (output) go down, and the price goes up, as the figures
show: a monopoly describes a market characterized by a single supplier and blockaded market
entry. As the sole supplier, monopoly’s output will have a bearing on the quantity demanded.
For every additional unit the monopolist wishes to sell, the market price must be lowered; this
is reflected in the downward sloping market demand curve. Hence the monopolist equates
marginal revenue, the change in total revenue per unit change in the quantity demanded, to the
marginal costs of production in order to maximize profits.
Why is competition important?
This has to do with the social-deadweight loss (normative question) goods are over- or
undervalued.
What efficiency concepts are central?
o Static efficiency: comparing different markets (perfect competition and monopolies)
Allocative: examines if those valuing a good most are able to attain it. It is
defined as the condition in which all possible gains from exchange are
realized and nobody can be made better off without making someone else
worse off (Pareto efficiency).
Productive: describes the maximizing of output for a given combination of
inputs. In contrast to this the wasting of production inputs in the process of
production is termed x-inefficiency3
o Dynamic efficiency: examines if an optimal degree of technological innovation is
achieved. In this context in particular Intellectual Property rights are important since
Competition law has a generally more static focus.
3
Monopolies are also inefficient because they become lazy. The lack of competition makes them not want to maximize their profits. This
obviously goes against the idea of rationality, according to economic models firms maximize their profits.
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