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Competition in the financial sector: the elephant and the blind Jaap May, 15 April 2004

Competition in the financial sector: the elephant and the blind Jaap May, 15 April 2004. The Monitor Financial Sector. MFS is a research co-operation between NMa’s Competition enforcement (cartels, abuse of dominant positions) and Merger control departments

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Competition in the financial sector: the elephant and the blind Jaap May, 15 April 2004

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  1. Competition in the financial sector: the elephant and the blindJaap May, 15 April 2004

  2. The Monitor Financial Sector • MFS is a research co-operation between NMa’s Competition enforcement (cartels, abuse of dominant positions) and Merger control departments • Funded by the Ministry of Finance, start in 2003 • Investigations aimed at identifying risk areas for competition: - starting point for enforcement of competition law (e.g. suspicion of a cartel) - support of supervision of concentrations

  3. Many studies, many conclusions • Investigators (examples) • Dijksterhuis e.a. (1995) • Swank (1995) • DG Competition (Lombard cartel, 1998) • Mojon (2000) • Corvoisier & Gropp (2001) • Bikker & Wesseling (2003) • Hassink & van Leuvenstein (2003) • Canoy e.a. (2003) What did they measure Indicators of sector dynamics Bresnahan-Lau estimate of market power Offence against competition law Speed of transmission (interest rate changes - commercial prices) Test for Cournot market structure Profitability indicators Price dispersion Description of market structures

  4. What can we measure (perspectives) Performance Structure Conduct Concentration Market share dynamics Consumer welfare Transparency & stability Observed behaviour Innovation Switching costs Price patterns Market power Entry barriers Cartel history X-inefficiency

  5. There is no “superior perspective” • Pro • easy to observe • decision making level (not ex-ante or ex-post) • modelling enables estimation of economic concepts • perspectives may be chosen according to one’s purposes • Contra • incentives may not materialise • conduct vs. intentions • distortions (e.g. cross- subsidising, regulation) • static vs. dynamic welfare • distortions (see above) • perspectives may lead to different conclusions Structure Conduct Performance General

  6. Our perspective: enforcement of Competition law The goal of Competition law: favourable performance NMa competition enforcement: focus on lack of competitive conduct (collusion or abuse of dominant positions) NMa merger control: focus on structures that support competition Monitor Financial Sector: anything that hints at either a lack of rivalry, or the existence of clearly favourable or unfavourable incentives --> structures, conduct and performance

  7. NMa “only” wants to know if competition is severely disabled + • Cartels • Abuse of dominant positions • Mergers that may cause or enhance dominant positions Competition _

  8. What do we need from economic science? Example of research that is not very useful to us: Estimation of market power in the insurance industry Example of research that is more useful to us: Analysis of market power in the individual fire insurance market, taking into account entry barriers, product differentiation and distribution characteristics (in order to check for alternative explanations of market power)

  9. Conclusion: “the multi blinds approach” Competition may have different meanings to different people, be aware of potential misunderstandings Define competition investigations on the basis of hypotheses about the market, with sufficient level of detail and combining several perspectives Measuring in relation to understanding

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