Market Power and Competition Policy by Yannick Bormans

Competition policy vs.
Firms’ market power
8/12/2021 Dr. Yannick Bormans, Vives, KU Leuven

Competition policy
Based on the course “Economic Aspects of European
Integration” (Prof. dr. Abraham, KUL / Vlerick Business School)
Faculteit Economie - VIVES

US antitrust policy vs big tech
The Economist (Nov. 27th, 2021)
3/18 Faculteit Economie - VIVES

Introduction
Bsuccessful
companies
establishing grow national
EU Single
competition
Market governments
compete for
consolidation business
through M&A
and alliances
maintaining government
EU competition companies
support for
and state aid competition abuse their
domestic
dominant
policy position
companies
and FDI

Introduction
o EU competition policy has the objective of managing

competition in product markets through:
1. Anti-trust policy
• Prevent abuse of dominant positions
• Prevent cartels and other anti-competitive agreements
2. M&A control
• Prevent anti-competitive mergers and acquisitions (M&A)
3. State aid control within the EU
• Limit distortions to intra-EU competition and trade resulting
from national subsidies
• BUT allow subsidies when it is in common (i.e. EU) interest

Introduction
EU competition policy
• Treaty of Rome (1957) prohibited any action that prevents, restricts
or distorts competition in the common market and it puts the
Commission in charge of enforcing this.
• The Commission has considerable powers in this area:
- the Commission has the right to make on-site inspections without prior
warning;
- with a court order, the Commission can even inspect the homes of company
personnel;
- the Commission has the right to impose fines on firms found guilty of anti-
competitive conduct, with a maximum of 10% of the firm’s worldwide
turnover;
- when it comes to subsidies, the Commission has the power to force firms to
repay subsidies it deems to be illicit.

Introduction
o Who is in charge?
• national governments and EU Commission
• subsidiarity principle: EU Commission deals with larger and cross-border
cases
o Competition is based on the territorial principle, not on the

nationality of the companies involved
o Legal background for anti-trust and state aid policy: Treaty on the
Functioning of the EU (formerly Treaty of Rome)
• anticompetitive agreements: Art 101
• abuse of dominant positions: Art 102
• state aid policy: Art 107-109
o Legal background for Merger Policy: The Merger Regulation

Introduction
Why is Competition Policy Important for Business?
o Create “level-playing field”
o Competition authorities can hurt companies by:
• blocking M&A’s, imposing fines and ordering the repayment of subsidies
• negatively affecting the valuation of companies by financial markets
• involving the company in a long and expensive battle causing severe
reputational damage
o Companies should be prepared
• top managers should be aware of the basic rules of the game
• laywers of the companies should have an expertise in competition policy
• or/and the company should rely on specialized law firms

The rise of firms’ market power
(at least in the US, and practically not in the EU)

Introduction
o Competition forces firms to keep prices low, and in line

with their (marginal) costs: P = MC
o However, some firms become dominant enough to gain market power,
𝑃
i.e. they charge a markup: 𝜇 = with P > MC.
𝑀𝐶

Introduction
o Over the past decades, firms’ market power has

substantially increased in the US (De Loecker et al.,
2020) as well as at the global level (De Loecker and
Eeckhout, 2021).
o Concerns about the competition policy, but also about negative
macroeconomic effects (Syverson, 2019).
o Among others, this might be accompanied by a fall in investment rates
(Gutierrez & Philippon, 2017), declining business dynamism (Decker,
Haltiwanger, Jarmin & Miranda, 2017) and the fall in the labor share
(Autor, Dorn, Katz, Patterson & Van Reenen, 2020).

Introduction
Source: De Loecker et al. (2020)

Notes: Evolution of markups in the US

Introduction
Source: De Loecker & Eeckhout (2021)

Notes: Evolution of markups in a set of European countries

Linked to fall in labor share
De Loecker, Eeckhout & Unger (2020, QJE)

International decline in labor share

Link globalisation and labor share
Autor et al. (2020)

Link globalisation and labor share
Autor et al. (2020)

Link labor share and income inequality

Issues
o Measuring market power is not straightforward.
o It is often proxied by market concentration.
• More concentration Less competition  more market power 
higher profits
o Recent increase in market concentration, interpreted as
an increase of “superstar firms” (Autor et al., 2020),
• E.g.: Facebook, Amazon, Janssen Pharmaceutica, …
o and, linked to negative macroeconomic outcomes like:
• Decreasing competition, falling productivity, falling innovation and
increasing inequality, among others (OECD, 2021).
o Much of the research focused on the US, less is known
about the situation in Europe.

Price-cost margins ~ Markups
(like kilometres ~ miles)
𝑃 − 𝑀𝐶
𝜇=
Issues 𝜇=
1
𝑃
1−𝐵
o Although market concentration is a popular measure of

market power, it only holds under specific assumptions.
𝑃
o Therefore, the literature focuses on the estimation of markups: 𝜇 = 𝑀𝐶
as well as its long-term evolution.
o The increase in markups might indicate a rise in market power; it is a
good proxy for profits.
o However, a rise in markups can also be due to an

increase in fixed costs.
• This issue is often overlooked, or only partially accounted for, which
might lead to biased estimates of market power.
• Decompose margins into fixed costs and profits.

Results
Overview of the Belgian economy (1985-2014)
Source: VIVES Briefing 2020/03
Sales Variable Price-cost Fixed Profits

costs margin costs (EPR)
(PCM) (FCR)
Abraham, Bormans, Konings & Roeger (2020a).

Results Abraham, Bormans, Konings & Roeger (2020b).

Results Abraham, Bormans, Konings & Roeger (2020).

Broader discussion: EU vs. US

Broader discussion: EU vs. US

Cases
Based on the course “Economic Aspects of European
Integration” (Prof. dr. Abraham, KUL / Vlerick Business School)

1. Abuse of dominance

How would you react as a CEO if you are
confronted with several cases of abuse of
dominant positions?
Larry Page, Co-founded Google Margrethe Vestager, European Commissioner for

Competition
28
Google’s market position
• General internet search services

• Shares of > 90% in most EEA Member States.
• Licensable smart mobile operating systems
• Market share of > 95%
• App stores for the Android mobile operating system
• Google's Play Store, accounts for > 90% of apps
downloaded on Android devices.
29 http://europa.eu/rapid/press-release_IP-18-4581_en.htm
THREE MAJOR EU-GOOGLE DISPUTES
• EU Commission fined Google 2.8 bn € in 2017

• Google gives preferential treatment to its own price-comparison shopping service
over rival services.
• appeal of Google rejected by EU General Court
in November 2021
• EU Commission fines Google €4.34 billion in 2018
• Google illegally uses the Android operating system to bolster the use of its
search engine and other services on mobile devices
• EU General Court held hearings on Google’s appeal in September 2021
• The European Commission has opened a formal antitrust investigation in October
2021
• Google has violated EU competition rules by favouring its own online display
advertising technology services in the so called “ad tech” supply chain, to the
detriment of competing providers of advertising technology services, advertisers
and online publishers.
The “android” case
EUROPEAN COMMISSION PRESS RELEASE, Brussels, 18 July 2018
1. Google has required manufacturers to pre-install the Google

Search app and browser app (Chrome), as a condition for licensing
Google's app store (the Play Store)
Pre-installation can create a status quo bias
Percentage of search queries made via Google Search

Android devices Windows mobile
(Google Search and (Google Search and
Chrome pre-installed) Chrome are not pre-
installed)
> 95% < 25%
31
The main issues
EUROPEAN COMMISSION PRESS RELEASE, Brussels, 18 July 2018
2. Google made payments to certain large manufacturers and mobile

network operators on condition that they exclusively pre-installed the
Google Search app on their devices
3. Google has prevented manufacturers wishing to pre-install Google

apps from selling even a single smart mobile device running on
alternative versions of Android that were not approved by Google (so-
called "Android forks").
32
“Android has created more choice, not less.”
– Secundar Pichai CEO
https://www.blog.google/around-the-globe/google-
33 © Vlerick Business School europe/android-has-created-more-choice-not-less/
• Android phones compete with IOS phones
• Android provides a big choice to phone makers, mobile
network operators, app developers & consumers
• Different phones with one thing in common, the ability to
run the same applications
• Choice in numbers
• Typical phone: 40 apps pre-installed from multiple
developers
• Android user will install around 50 apps
• 2017: 94 Bn apps downloaded from Play app store
• Opera Mini & Firefox: each 100 Mio downloads
• UC Browser: > 500 Mio downloads
Google invested billions to
make Android what it is
today
Pre-installing
Google apps Android is offered
creates revenue for free
Lessons learnt: Anti-Trust Policy
Towards Dominant Positions
1. companies are not allowed to take advantage of a dominant position in EU markets
• companies are allowed to have a strong market position in the EU.
• they cannot use this position to engage in practices that limit competition at the expense of consumers
or competing companies.
• the European Commission and the national competition authorities are involved
• the European Commission has the final right to decide.
• the decisions of the European Commission can be challenged in the EU Court of Justice.
2. the European Commission follows a roadmap in evaluating dominant positions

• substantial fines are imposed on companies
• companies are forced to adjust their market strategy to comply with the decisions
3. EU policy towards dominant positions is influenced by the concerns about the growing
economic dominance of global “superstar” firms
4. EU anti-trust policy may have an impact on the EU relationship with its main trading partners

2. Anti-subsidy policy

How would you react as a CE0 if one
day an order lands on your desk to repay
13 BILLION EURO in back taxes?
Tim Cook, CEO Apple Margrethe Vestager, European Commissioner for

Competition
EU Tax Ruling is total political crap if I would only have to pay 0.005% of
my income in taxes, I would take
a closer look at my tax statement
38
TIME LINE OF THE EU-APPLE CASE
• June 11, 2014: EU Commission initiates investigation of two

tax ruling granted by Ireland to Apple
• August 30, 2016: EU Commission come to the conclusion
that Ireland granted undue tax benefits of up to 13 billion
euros to Apple. It ordered Apple to repay this amount +
interest payments.
• Apple launches an appeal against this ruling at the EU
General Court
• July 15, 2020: EU General Court annulled the decision of the
European Commission.
• September 25, 2020: EU Commission appeals the ruling of
the EU General court at the EU Court of Justice
sales of
products
Apple Sales
Apple customers International
and Apple taxes paid
in Europe, Africa
Operations in Ireland
and the Middle East
Europe Apple
in Ireland payed
tax ruling of 1991 and 2007 ≈0.005%
sale of total
revenues between Apple and Ireland
EU Profits
in taxes
most profits
in 2014
”Virtual”
Head Office no taxes paid
Compensation for
shared costs of Research
and Development
Global taxes paid
Headquarters
Apple in US
in the US
40
WHY IS EVERYONE MAD?
• Why is EU Commission mad?
• Why is Apple mad?
• Why is Ireland mad?
• Why is the US mad?
41
Lessons learnt: Anti-subsidy policy
1. subsidies to companies that distort competition in EU markets are not allowed
• EU member states are not allowed to grant such subsidies even if they want to
• European Commission has exclusive competence to decide on those cases
• the decisions of the European Commission can be challenged in the EU Court of Justice
2. the European Commission follows a roadmap in evaluating subsidy cases

• a broad definition of subsidies covering a variety of government support for companies
• the magnitude of the subsidy is determined as the benefit for the firm
• selectivity: the EU makes a distinction between different types of subsidies (horizontal subsidies,
regional subsidies, sectoral or firm-specific subsidies)
• assessment of the objective of the subsidy and the distortion of competition
3. EU anti-subsidy policy is influenced by the growing societal concern about low taxes paid by
large multinational companies
4. EU anti-subsidy policy may have an impact on the EU relationship with its main trading partners
42/58
3. M&A Control

New York Times (19/11/2018)
44/58
45/58
The Take-Over of Alstom rail business by Siemens
• Siemens,based in Germany, is • Alstom, based in France, is

active worldwide in several active worldwide in the rail
industrial areas with its mobility transport industry, offering a
division offering a broad wide range of transport solutions
portfolio of rolling stock, rail (from high-speed trains to
automation and signalling metros, trams and e-buses) and
solutions, rail electrification related services (maintenance
systems, road traffic technology, and modernisation), as well as
IT solutions, as well as other products dedicated to signalling
products and services concerning solutions, passengers and
the transportation of people and infrastructure, rail electrification
goods by rail and road. systems and digital mobility.
46
Notification
announcement
of the merger 8/06/2018
Phase 1: case subject to decision to move

European Commission to Phase 2 on
25 working days: can be
further
investigation? 13/07/2018
extended to 35 working days
Phase 2:
European Commision provisional
90 working days that can In-depth deadline
automatically be extended to
Investigation for decision
105 working days and to 125
18/02/2019
working days if all parties
involved agree
approval prohibition
Final Decision
European Commission
prohibition on 6/02/2019
conditional approval
Court Appeal court appeal

European Court of Justice of the decision 47
informal
announcement contacts
Notification and notification
of the merger
Phase 1: who is
case subject to in charge?
further
investigation? possible threat
to competition?
is there a creation actual

Phase 2: relevant market competition
or strengthening of
a dominant position?
potential
competition
48
The Relevant Market
• main criterium: substitution in demand and supply
• relevant product market: railroad business
- manufacturing of electrical equipment
- manufacturing of other transport equipment
- manufacturing of railway locomotives and rolling stock
- services related to land transportation
• relevant geographic market: European Economic Area
(EEA), that is the EU + Norway, Liechtenstein and
Iceland
• the competitive landscape in the rest of the world and
particularly China was considered in the investigation
49/58
Actual competition
• assessment of market shares: “traffic light approach” based on
horizontal merger guidelines, court rulings and case law state
 green light: combined market shares below 20% are usually not a problem
 red light: horizontal merger guidelines, court rulings and case law state
that very large market shares of 50% or more may in themselves be
evidence of the existence of a dominant market position
 orange light: market shares between 20 and 50% are a warning signal
• assessment of actual competition involves an analysis of the

degree of competition if the cross border acquisition or merger
goes through

DOMINANT POSITION IN THE SIEMENS-
ALSTOM CASE
51
informal
of the merger
Phase 1: who is
further
to competition?

or strengthening of
potential
competition
do benefits justify
distortion of Efficiency
competition? Defence
52
POTENTIAL COMPETITION AND GLOBAL
EUROPEAN COMPETITIVENESS
53
GLOBAL EUROPEAN CHAMPIONS
• the railroad equipment industry is a global industry where

European companies are competing against Chinese and US
companies
• the Chinese government view this as strategic industry in the
framework of their China 2025 policy
• the government actively subsidizes and supports Chinese companies
• foreign firms do not get access to the Chinese market
• in this industry scale matters
• Europe should actively support the creation of large European
champions: the prohibition of the Siemens-Alstom take-over does
exactly the opposite.
• This increases the risk that European companies will lose the
battle against global competitors in world markets and –
eventually- in the European market.
54/58
The response of the european
commission
• potential competition: there is no evidence that Chinese
companies will enter the European market
• the fat cat argument: a sufficient degree of competition in
EU markets keeps European companies sharp and
innovative. This is the best guarantee against the entry of
Chinese companies in European and world markets
• realisation of the single market: the size handicap of
European companies stems from the segmentation of
national markets. The full-fledged realization of a fully
integrated EU single market is a priority.
• Issues related to protectionist Chinese and US policies
should be addressed by EU global trade and investment
relations with its main trading partners. They are not solved
by reducing competition in European markets.

informal
of the merger
Phase 1: who is
further
to competition?

or strengthening of
potential
competition
do benefits justify
distortion of Efficiency
competition? Defence
do firms propose
changes to the deal? Remedies
56
are they accepted?
Remedies
• The remedies offered by the parties did not adequately address the Commission's
competition concerns. In particular:
• In mainline signalling systems, the remedy proposed was a complex mix of Siemens and
Alstom assets, with some assets transferred in whole or part, and others licensed or
copied. Businesses and production sites would had to be split, with personnel transferred
in some cases but not others. Moreover, the buyer of the assets would have had to
continue to be dependent on the merged entity for a number of licence and service
agreements. As a result, the proposed remedy did not consist of a stand-alone and
future proof business that a buyer could have used to effectively and independently
compete against the merged company.
• In very high-speed rolling stock, the parties offered to divest a train currently not capable
of running at very high speeds (Alstom's Pendolino), or, alternatively, a licence for
Siemens' Velaro very high-speed technology. The licence was subject to multiple
restrictive terms and carve-outs, which essentially would not have given the buyer
the ability and incentive to develop a competing very high-speed train in the first
place.
• The Commission sought the views of market participants about the proposed remedy. The
feedback was negative for both areas.
• This confirmed the Commission's view that the remedies offered by Siemens were not
enough to address the serious competition concerns and would not have been sufficient to
prevent higher prices and less choice for railway operators and infrastructure managers.

Lessons learnt: Cross-Border Mergers
and Acquisitions
1. companies face an investigation if their cross-border mergers and
acquisitions create a dominant position in EU markets
• companies are allowed to strenghten their market position through mergers
and acquisitions
• but may face an investigation if their action limit competition at the expense of
consumers or competing companies.
• the European Commission takes the decision in the larger cross-border cases.
• the decisions of the European Commission can be challenged in the EU Court
of Justice.
2. the European Commission follows a roadmap in evaluating mergers and

acquisions
3. EU policy towards mergers and acquisitions is controversial in several

member states and in the business community

Questions?
Contact
yannick.bormans@kuleuven.be

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Competition policy vs.

Firms’ market power

8/12/2021 Dr. Yannick Bormans, Vives, KU Leuven

Faculteit Economie - VIVES

The Economist (Nov. 27th, 2021)

3/18 Faculteit Economie - VIVES

4/58 Faculteit Economie - VIVES

o EU competition policy has the objective of managing

5/58 Faculteit Economie - VIVES

6/58 Faculteit Economie - VIVES

o Competition is based on the territorial principle, not on the

o Legal background for Merger Policy: The Merger Regulation

7/58 Faculteit Economie - VIVES

8/58 Faculteit Economie - VIVES

Faculteit Economie - VIVES

o Competition forces firms to keep prices low, and in line

10/58 Faculteit Economie - VIVES

o Over the past decades, firms’ market power has

11/58 Faculteit Economie - VIVES

Source: De Loecker et al. (2020)

12/58 Faculteit Economie - VIVES

Source: De Loecker & Eeckhout (2021)

13/58 Faculteit Economie - VIVES

De Loecker, Eeckhout & Unger (2020, QJE)

14/58 Faculteit Economie - VIVES

15/58 Faculteit Economie - VIVES

Autor et al. (2020)

16/58 Faculteit Economie - VIVES

Autor et al. (2020)

17/58 Faculteit Economie - VIVES

18/58 Faculteit Economie - VIVES

19/58 Faculteit Economie - VIVES

o Although market concentration is a popular measure of

o However, a rise in markups can also be due to an

• Decompose margins into fixed costs and profits.

20/58 Faculteit Economie - VIVES

Overview of the Belgian economy (1985-2014)

Source: VIVES Briefing 2020/03

Sales Variable Price-cost Fixed Profits

21/58 Faculteit Economie - VIVES

22/58 Faculteit Economie - VIVES

23/58 Faculteit Economie - VIVES

24/58 Faculteit Economie - VIVES

25/58 Faculteit Economie - VIVES

Faculteit Economie - VIVES

Faculteit Economie - VIVES

Larry Page, Co-founded Google Margrethe Vestager, European Commissioner for

• General internet search services

• EU Commission fined Google 2.8 bn € in 2017

1. Google has required manufacturers to pre-install the Google

Percentage of search queries made via Google Search

2. Google made payments to certain large manufacturers and mobile

3. Google has prevented manufacturers wishing to pre-install Google

2. the European Commission follows a roadmap in evaluating dominant positions

36/58 Faculteit Economie - VIVES

Faculteit Economie - VIVES

Tim Cook, CEO Apple Margrethe Vestager, European Commissioner for