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 wellEx. Fixed costs are already recovered and P =MC leads to maximise welfare BUT firms would not invest and innovations not introducedfuture welfare is reduced

Consumer surplus 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 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 resale-

price maintenance and territorial restraints may be effcient as they stimulate the effort of retailers or avoid setting prices above what is optimal for the manufacturerbut 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 principlesif 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 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 CPSubsidies & 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 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 successfulincentives might be reduced in this case