EU competition policy (A level Econ)
From WikiTextbook
‘EU competition policy applies only to inter-country trade, targeting the behaviour and conduct of firms that could frustrate the process of EU integration through trade in goods and services. It is an important feature of the development of the EU single market.’
source: www.europa.eu.int
Contents |
Aims
Competition policy aims to increase economic well being by;
- Promoting competition e.g. making product markets more flexible and dynamic.
- Creating a single market which transcends national barriers.
The following statement was given by the EU competition commission to illustrate the importance of this policy; ‘Competition in the marketplace is a simple and efficient means of guaranteeing consumers products and services of excellent quality at competitive prices. The best deal for customers emerges as a result of the contest between suppliers.’
This policy is important to the consumers as it ensures;
- Wider consumer choice
- Technological innovation
- Effective price competition
If achieved these aims contribute to consumer welfare and the competitiveness of the European industry.
Components
There are four main areas of action of European competition policy;
- Antitrust and Cartels-The elimination of agreements, which artificially restrict competition e.g. Price fixing agreements between competitors, and abuse by firms who hold a dominant position in the market. A firm holds a dominant position if its economic power enables it to operate on the market without taking into consideration the reaction of competitors or consumers. Since 1998 there have been many investigations into industries like airlines, beer, paper production and computer games.
- Merger Control-This controls alliance between firms that would result in the enlarged business dominating the market.
- Market liberalisation-This is the deregulation of markets and has, in recent years, allowed the introduction of new competition in several monopolistic industries. It means that consumer welfare is served by introducing competition into markets where there is a monopoly.
- State Aid Control-The control of state aid measures by member state governments to make sure that the measures taken do not distort competition e.g. the prohibition of a state grant made to allow a loss making firm stay in business even though it has not prospect of recovery.
Under the current European state aid rules a company can be rescued once but any restructuring aid offered must be approved as being part of a realistic and well informed plan to restore the firm’s long term viability.
Why does the EU have a competition policy?
The EU set up its competition policy to ensure that consumers benefited from competitive pricing, a wide range of goods and services on offer and technological innovation. It also aims to make markets more competitive if they currently are not so.
What is the Competition Policy?
There are four main areas the EU looks at: • Anti-trust and Cartels – introduced to make companies compete rather than collude, producing greater competitiveness. • Mergers – monitoring and investigating take-overs • Liberalisation – designed to make previously uncompetitive markets more competitive by introducing fresh competition. • State Aid – measures government action to ensure they do not distort competition
If a firm has gained its position of monopoly through it’s own effectiveness then the EU do not mind. Only when a firm uses its position to further weaken the industry and improve its own position will the EU get involved as it is deemed an anti-competitive practice. A firm can use many anti-competitive practices to improve its position: Predatory Pricing – A company will lower is price and drive out competition, before raising them higher when it has succeeded. It is illegal in the UK. Vertical Restraints – These include exclusive dealing, territorial exclusivity, quantity discounts and refusal to supply. Creation of artificial barriers to entry Collusive practices
Two companies which are continually looked at by the EU for their use of their dominant market position are Coca-Cola and Microsoft. Both have been hit with sanctions against them and have the threat of fines hanging over their heads if they do not comply with what they have been told. • Microsoft has been hit with record fines and has continually lost appeals to try to overturn those fines. • Coca-Cola have been forced to give up it’s restrictive practices and allow retailers to sell other soft drinks. It also has the threat of a 10% fine of it’s annual turnover if it fails to comply.
Cartels distort competition within a market place, and their existence often leads to higher prices and lower quality goods. They are therefore prohibited by the EU, and can be fined up to 10% of their annual worldwide turnover if their practices are deemed illegal and anti-competitive. However, any fines are not final, and they have the ability to appeal decisions. Either this is before the Court of First Instance, and then before the Court of Justice of the European Communities. These two courts are empowered to annul decisions in whole or to reduce or increase fines, where this is deemed appropriate. Since 2001 Europe has fined 31 cartels for a total exceeding €4 billion. These include both Michelin and Nintendo.
Mergers can be both horizontal and vertical. • A horizontal merger is not permitted whereby the firms agree to price fix in order to increase profit margins or whereby they agree to divide up the market into specified territories. • A vertical merger is not permitted whereby firms and suppliers agree to be the sole traders with each other to prevent other firms within their industry being competitive.
A merger is examined or monitored by the EU if their combined annual turnover worldwide exceeds €5 billion, or if the national authority’s for any country refers a merger case that it deems uncompetitive to the market place.
Once examined, the EU can decide to prohibit a merger should it be deemed that if it were to go ahead, it will have a negative effect on the EU economy. Otherwise it will go ahead with no restrictions. Certain mergers can be agreed conditionally, whereby they are allowed to go head but have to sell off some areas of their business or agree to licence any technology it has a control over to other firms in the market.
One of the main EU competition principles is to introduce added competition into markets which are currently monopoly. As it is often too expensive to create new networks for the new competition to use to compete with, the existing firms are forced to share their networks with their rivals. Some progress has been made in industries that were liberalised, particularly Air Travel and telecommunications, where the average price has dropped substantially since the markets were opened up for competition. Others sectors haven’t seen as big as these, but there does seem to be progress in certain markets.
State Aid is monitored because it rarely good for an economy – being detrimental to those firms rival to the receiver and just delaying the inevitable for the company on the receiving end. Under EU state aid rules a company can be saved once, only though if the aid is approved and designed to aid the company’s long-term prospects. Government aid to boost research and development, regional development and as help for small businesses are normally permitted as it will be beneficial.
Links
Useful Websites; [1] -European Commission [2] -A2 revision notes
Contributors
Sarah Foulger
