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 well  Ex. Fixed costs are already recovered and P =MC leads to maximise welfare BUT firms would not invest and innovations not introduced  future 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) P i > P B  to avoid discrimination: P B < P < P i -  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 manufacturer  but 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 principles  if 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 CP  Subsidies & 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 successful  incentives might be reduced in this case