Objectives of Competition Policy

1. Objectives of Competition Policy Lesson 2

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

3. 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

4. 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.

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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