Competition Policy

Competition policy

Lesson 1
Firms competing on market  lot of game theory (strategic interaction between firms)
It is also very close to industrial organization of firms

Market Definition and market power.
Microsoft case: it hold dominant position on operating systems (95% of non-apple computers) and the impact on internet browsers (Internet Explorer, Mozilla, …). Microsoft had a dominant position on the market, but need to define first the market. If narrow definition of the market, then small # firms, and easy to say a firm has a dominant position. In case of broad
Coca/Pepsi : Coca: soft drinks are all drinks also with H2O, so Coca had little dominant power. Pepsi: soft drinks are only soda (Coca-Pepsi style) and no H2O, and on this Coca had a dominant power.

Collusion
Sharing of information  forming cartel. Ex. Steel cartel (perfect collusive agreement) Firms reproduced exactly what theory of game theory prescribe.

Abuse of dominant position
Strategic behavior of firms. Very difficult in economics terms. It is a big topic.

Vertical relationships:
Ex. Producer-retailer. Lot of anti-competitive practices (price squeeze: high prices for resources that are essential input to produce a good)

Merger control
Why do we examine mergers, what are economic examples.
Ex. Online platforms: Euronex (meeting of buyers and sellers)

Objectives of competition policy
Still emerging debate on competition policy: should it be a protection of players? We are in liberal economy, so all players should be able to enter the market without any barriers, there should not be any collusion or cartels. If it is the goal of competition policy, then we have to assume, there are sectors that there are markets, where competition is not desirable: health sector. If HS is driven by competitive forces, then poor or very malade people, will be unable to pay the price for health. So, competition policy should also contribute to economic efficiency. Efficiency might also by protection of intellectual rights (licenses on innovation), but then there is a bias on the intellectual property side, because licenses create temporal monopolies and therefore there is a distortion of the market. Competition policy should therefore define the cross-line between competition and intellectual property rights.
Competition policy also protects consumers: consumer welfare takes into account the need for innovation, and protection of consumers.
Old fashion debate if competition policy should protect small firms: competition policy is fight against barriers to entry. So then allowing small firms to enter the market. Competition policy therefore allows effective (small and big) firms to enter the market.
What about fairness? Should it be included in competition policy objectives? No! Ex. Free mobile operator. Big firms (Orange, SFR) did not wanted Free to enter, big firms said Free will destroy employment. And really, when taken in general context, in short run, entry of Free destroyed employment of Orange and SFR, but in the long run, in created new ones. But it is also possible that more competitive markets destroy employment. There are a conflict (keep employment or keep monopoly?)  Completion policy is in conflict with other principles. But fairness, redistribution, protection of employment is not in hand of competition policy.
In Europe, competition policy goal is the surplus of consumer and consumer welfare. In US, competition policy is oriented towards economic efficiency.

Links and differences with other public policies Regulation vs. competition policy regulation (ex of FR agencies CRE, CSA: sectoral regulators) : build to open monopoly to competition. Ex. ARSEP: only one regulator (ART), there was a state monopoly of telecommunication (France Telecom) and law decided that this sector will be open to competition. Before, France Telecom was in a legal monopoly. ARSEP decided to issue telecommunication licenses to have more players. Regulators thus intervene on markets for which competition is not the natural functioning. Regulator also decide that i.e. new entrant can use incumbent network for a certain amount of $.
Other microeconomic policies can intergere with competition policy industrial policy : state decides whether or not to keep this or that industry in France

What competition policy does?
Ex Ante: merger control: 2 firms want to merge, but the merger is examined in order to determine the most probable outcome of the merger (it can by monopoly) and the possible monopoly can abuse its dominant position. And if there is no remedy to this abuse of dominant position after merger, then merge should be banned.
Possible solution: if you want to merge, OK, there will be efficiency benefits (bigger production, economies of scale), Competition authority is happy with the merger, but force the new merger to sell some parts of it, in order to limit the abuse of dominant position.
Casino vs. Monoprix
Casino and Galérie Lafayette :
Casino bought Monoprix and then it had 100% of food shops in Galérie Lafayette.
Competitive concern : would consumer still have a choice to choose between 2 different groceries shops. The answer is super difficult. How consumer shop (price, proximity, quality, …).
Competitive concern: not only end-buyer oriented, but also Casino+Monoprix have together a buyer power towards down-stream producers.
If the Casino-Monoprix merger had happen, then they would have a 100% market share in some cases in Paris.
Ex Post: Anti-competitive behaviors of the firms and controlled and sanctioned:
Collusion: wide range of behavior. Ex: professional organization competing on sharing information on prices, customers, objectives, plans for futures. In general on sharing strategy of a firm, that can be used by a competitor to adapt in a way or other to the competition.
Ex. Jon Dear case: producer of agriculture engines: JD publicly claimed where were bought some parts of its engines. And it is strategic information.
Cartel: if no punishment, cartel does not work: Cartel therefore requires a lot of observation of eventual deviation.
Abuses of dominant position: predation, discrimination, tying and bundling (health company has a patent on some drugs (legal monopoly) and offers a nice prices for hospitals for the drug, when hospital buys also other drugs on which there is a competition)

Tools of competition authorities
Competition authorities cannot regulate market in term of prices and quantities. Competition authority cannot force a company to charge higher/lower prices. CA can only see why prices are high or low.
Tools: sanction: (ex post, or ex ante – preventive) or injunctions to behave or not to behave according to a given behavior

Sanctions
All over Europe, harmonization of the same regime: ceiling of the sanction = 10% of the world wide turnover of the group to which the firm that is sanctioned belongs to.
In US, possible penal sanctions for managers! Not the case in Europe.
Sanction to the firm should reflect the size of damage, size of a firm, is it for a first time?

Other tools, other problems
One problem: lack of information on collusion/cartel. How to detect collusive behavior? Sometimes, it is obvious, sometimes it is not. Competition policy devotes to leniency programs = possible for a firm to come and to denounce cartel/collusion behavior and when firm come and denounce it, it will benefit from zero sanction. Leniency policy is very efficient.
Also possible that leniency gives incentives to create cartels, benefit from it for a while and then denounce the cartel and benefit from zero sanctions. So black side of the leniency policy is the incentive to form cartels.
Efficiency if competition policy: the need to devotion to cases that are the most harmful. So possible that small infringements can be let to occur.

Main features of European and French competition law
TFEU
Article 101: horizontal and vertical agreements
Article 102: abuse of dominant position
Merger regulation (last version 2004)

Some remarks on articles and merger regulation
Art 101: treats in same horizontal and vertical agreements, but both have diff effects on markets
Horizontal agreements have usually negative effect on market // ex. Tender offer for new building. If firms willing to win the tender agree that they will propose a certain price, then no competition. But if firms do not agree on price, than there is real competition on price, idea, etc.
Vertical agreements: producer and retailer: double marginalization problem (first margin taken by producer, then second margin taken by retailer), so for consumers, it is bad, because there is lot of margin to be paid. But if retailer and producer merge, then there is less margin and consumer benefits.
In general vertical agreements are benefic for consumers
“2 monopolies are worth then 1 monopoly” economics and lawyers fight whether vertical agreements are bad or not (for lawyers, agreement is agreement and should be punished; but for economics, it is different, because consumer may profit from vertical agreement) event agreements between competitors may be exempted (bloc exemptions): ex. R&D

Ex Ante article 101
Ex ante notifications and acceptance by the Commission abolished
Now agreements are examined ex post
National competition authorities can, based on EU law, an ex post exemption, which was not the case before
Art 102
Anticompetitive practices should be banned. There is a list of anti-competitive practices. But this approach of abuses of dominant position is based on law and it requires: first, define a dominant position, then identify the abuse from the list ex. bundling.
This is a very mechanical approach, but economics argue that bundling might also be benefic for consumers
This mechanical approach should be shifted to a more analyze based approach
Since 2008/9, EC accepted this new approach promoted by economists

Others sources of law: guidelines and soft law
In addition to EU and national competitive policy laws, there is a lot of soft law and guidelines. These guidelines change the competition policy more than the hard law (art 101 and 102).

Links: Merger regulation (last version 2004) Some remarks on articles and merger regulation