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COMPETITION POLICYECONOMICS OF PUBLIC POLICY – TIMOTHY WESSEL, JOHAN VAN DE VEN, GEORGE GAY
Table of Contents
◼ Definition & evolution◼ Benefits & costs◼ Where we are today◼ Implications◼ Case comparison ◼ Continued evolution
Definition
◼ According to the World Bank, competition policy means “open markets & level playing fields” that can lead to “prosperity and innovation” rather than “fewer choices & higher prices”
◼ Policies implemented to support ideals of perfect competition:◼ Large pool of buyers and sellers so that none can individually impact market◼ Lack of barriers to market entry & exit so resources remain mobile◼ Free exchange of relevant information to business decisions◼ Product homogeneity
◼ Enforcement institutions vary by region but relevant examples include the US DoJ, the US FTC, & the EU Directorate General on Competition ◼ Techniques: coalition-building, rule creation, education, investigation, legal action
BENEFITS & COSTS
Consumer Benefits◼ Lower prices◼ Greater choice◼ Higher quality
Consumer Costs◼ Diminished economies of scale◼ Innovation?
Business Benefits◼ Level playing field for all◼ Efficiency driver
Business Costs◼ Punishes “success” ◼ Innovation?◼ Prisoner’s dilemma
Trust Busting’ - 1900 to the 1970s
◼ Competition policy was born in response to the “Robber Baron” age with the Antitrust Movement in the late 1900s
◼ Led by Teddy Roosevelt & sympathetic Supreme Court
◼ Core regulations:◼ Sherman Antitrust Act, 1890 ◼ Federal Trade Commission Act, 1914◼ Clayton Act, 1914
◼ Notable antitrust decisions: ◼ Northern Securities vs US, 1904 ◼ Standard Oil Co. of New Jersey vs. US, 1911◼ US vs. American Tobacco Co, 1911
◼ Implementation of competition in Europe, Treaty of Rome, 1957
Consolidate to Compete - 1970s to 2010s ◼ Rise of foreign competition leads to Chicago School free-market theory on competition policy◼ Larger firms and increased consolidation necessary to compete in globalized economy◼ Economic Theory of Regulation (Stigler); idea of capture by interest groups & government ◼ Defang regulatory bodies in order to promote economies of scale and remove red tape ◼ But...
Source: US Census Bureau, Business Dynamics Statistics
Industry Concentration
◼ How many firms provide production in an industry?◼ Less firms producing more = more concentrated
◼Measures◼ Four firm concentration ratio
◼ Production of four largest firms◼ Herfindahl-Hirschman Index
◼ Squares market share of fifty largest firms◼ Ratios range from near 0 to 10,000◼ Justice Dept considers < 1500 competitive
◼ 1500-2500 moderately concentrated◼ > 2500 highly concentrated with mergers creating moves of 200 points raising antitrust concerns
◼ Limitations to Measures◼ Foreign Production - Ease of Entry - Elasticity of Demand - Imprecise Definitions◼ Concentration could be good for economic coordination
Increasing Concentration
Causes of Concentration
◼ Regulation serving as a barrier to entry◼ Can be reversed
◼Network Effects◼ More people using a product, the better the product becomes◼ Significant for tech giants but also normal retail◼ Internet and logistics improvement
◼ Information and goods moved faster◼ Shares of profits shift to largest in industry
EMERGING ISSUES
◼ Tech monopolies: comparing regional approaches◼National champions: anti-competition policy?
TECH MONOPOLIES: DEBATE
◼ World’s top 5 companies by market cap: Microsoft, Apple, Alphabet (Google), Amazon, and Facebook◼Dominant position? Google has 88% of search, Facebook & subsids. 77% of social, Amazon 74% of e-book◼NYT: “It is impossible to deny that Facebook, Google, and Amazon have stymied innovation on a broad scale◼ Responses:
◼ Bar M&A with other major tech companies (Snap or Spotify)◼ Regulate Google as a public utility◼ Remove Safe Harbor clause in 1998 Digital Millenium Copyright Act
◼ But: unending competition between Big 5◼All compete for advertising revenue, Amazon faces retail competititon from b&m sector, Apple no monopoly◼Vibrant start-up market: $20 billion IPO for Snap, Facebook trying to copycat - despites losses◼ Cloud computing price war
TECH MONOPOLIES: RESPONSES
US: USA vs. Apple cases finds that Apple fixed e-book prices, violation of Sherman Act. Case on app stores still in progress but likely to be thrown out.
EU: Raft of cases against Google - abuse of dominant positionRussia: Google cannot use dominant position in mobile OS market to block competitorsChina: Foreign companies with dominant position forced to license technology
NATIONAL CHAMPIONS: ANTI-COMPETITION POLICY?
❏ Received wisdom: competition helps new entrants, makes economy more dynamic, boosts wages, encourages movement of capital
❏ Some governments have moved against this logic❏ China: “National Champions” policy since 2004❏ Financial support for State-Owned Enterprises❏ Other supporters: Russia, France, Germany, UK - a truism?❏ Logic: advance national interest❏ Shanghai lawyer: “Chinese industrial policy is the lens through which anti-monopoly law is interpreted❏ Can there be a middle ground between national champions and competition policy?
THANKS! QUESTIONS?