Professional Documents
Culture Documents
Competition Policy
Competition Policy
Lecture Notes
Lecture 1: Economic Aims of Competition Policy and How it Works
Competition efficiency; incentives for productivity / innovation.
Threats anti-competitive agreements (prohibited under Competition Act 1998, EC Article 81) / mergers
(Enterprise Act, 2002), abuse of market power (CA98, ECA82), government regulations, subsidies,
protectionist etc.
Horizontal agreements – hardcore (price fixing, market sharing, bid rigging etc. criminal offence in
UK) ; tacit collusion ; joint ventures.
Private gains if neither cheating nor detection – social losses. Privately bad if discovered and proved –
fines / damages / jail. Use leniency to alter into Prisonner’s Dilemma game.
Lecture 2: Mergers
Competition is lost between the firms, and others might compete less hard. May have a shift of (e.g.
Bertrand) competition. Tacit collusion might be easier with fewer firms.
Market definition – demand [and supply?] substitutability – product and geographic distinctions. US merger
guidelines- “relevant market” is a product or group of products and a geographical area in which a
hypothetical profit maximising firm would impose a small but significant and non-transitory increase in
price (SSNIP). Nestle/Perrier are mineral water and soft drinks in the same market (EC – no), but all
mineral waters are and France is the geographical market – together with BSN owned 80% of market – EC
required divesture.
Zero-one fallacy – substitutability is a matter of degree, not all or nothing.
Cellophane fallacy
Failure to assess supply side issues
Market shares, concentration measures.
Significant adverse shift?
Conditions of entry and expansion by rivals.
Mergers with high substitutability, low mark ups, and little marginal cost reduction are of most concern.
London Stock Exchange – competitive impact in UK. Were allowed subject to packages of structural and
behavioural remedies. Threat of competition quite low anyway, because network externalities mean rarely
split between trading venues – would not give rise to a significant loss of competition – but might provide
SLC because of vertical integration of other trading services. Remedies combined structural measures and
behavioural commitments
EC81 – exemptions if (1) improve production/distribution or promote technical or economic progress and
(2) consumers get fair share of benefits and (3) not dispensable and (4) no elimination of competition.
Chicago challenge – promote efficiency – remove double mark-ups (have vertical pricing externality
between complements – good by merging), overcome free-rider problems (e.g. test drives – horizontal
externalities – RPM or exclusive territories may help; exclusive dealing to avoid investment externality)
collusion risk is small, so should presume lawfulness.
VR remove secret dealings problem – will demand for cost because can not guarantee firm will not sell to
rivals at cost – exclusivity will benefit the private firm but harm the consumer.
Scale economies might allow exclusive contracts to be signed thus blocking threat from potential entrants,
as entrant needs substantial buyers to be viable buyers collectively do better with entrant but individually
better of signing up to incumbent. Externalities among buyers. Only important with scale economies and if
contracts block entrant from gaining enough buyers to reach these – loyalty inducing is not enough.
Vertical integration of one manufacturer and retailers in a two manufacturer, two retailer model increases
market power of M2 over R2, hence could raise R2’s costs
Ice creams and freezers case (Irish – HB exclusivity) – but ice creams need freezers – could be efficient to
supply them, but then free rider problems – exclusivity could protect pro-consumer investment. But in effect
means outlet exclusivity- might have been designed to exclude competitors from market.
Abuse – exclusionary / exploitative, price / non-price, predatory pricing, margin squeeze rebate and discount
policies, exclusive dealing, tying and bundling, refusal to supply.
Market power- ability to maintain price substantially above the competitive level
Competition on the merits – protect process of competition to offer good deals to the customers form
versus effects based approaches.
Guiding principles – profit sacrifice / no business sense ; exclusive of as-efficient rivals ; consumer harm.
Predatory pricing – low pricing to exclude rivals and then reap monopoly profits. Role for reputation effects,
signalling etc.
EC – if p < AVC then abuse; if AVC < p < ATC then only abuse if intent shown.
Tying (A can only be bought with B) and bundling (car bought with tyres). Can often be efficient (if best
way to meet consumer demand) but can also be anti-competitive (price discrimination)
Exclusion of competition – by using leverage from one market in another – making a competitor in the
bundled market exit and allowing monopolisation of both markets. Needs credible commitment to continue
bundling post entry, scale economies, imperfect competition, and non-complementary products
Maintenance of market power – if complementary – Chicago logic would welcome entrant in one sector if
more efficient, but could pose entry threat into original market. MICROSOFT – I/E bundled with Windows.
Tutorial Notes
Practices constituting market power; problems faced when suspected; remedies used
• Vertical externalities – buy out suppliers supplier.
• Horizontal overlaps
• Manipulation of barriers to entry
• Normally problems in proof. Are lower prices pro-competitive or barriers to entry?
• General Electric and Honeywell (2001) – GE buying out Hanover – would increase market share too
much.
• US vs. Microsoft – see separate reading.