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Objectives of Competition


Lesson 2
 Welfare of the industry (consumer surplus + producer
 Effects of price increases (the increase in profit may not
compensate the reductions of consumer surplus)
 Distributional issues are overlooked (it is possible to
operate redistribution schemes suche that both
producers and consumers are better off)
 Welfare from a dynamic point of view: future welfare
matters as wellEx. Fixed costs are already recovered
and P =MC leads to maximise welfare BUT firms would
not invest and innovations not introducedfuture
welfare is reduced
Consumer surplus
 Some standards seem to prerfer consumer surplus as the
objective of competition policy.
 In some cases (cartels) there may not be contrast with welfare
maximisation but in general we cannot exclude differences
 Consumers are dispersed and cannot lobby as firms (no
“countervailing power”) a reason to give more weight to
consumer surplus
 BUT it may not be wise to adopt consumer surplus as an
objective for many reasons: 1.It neglects firms gains and at
present consumers own firms through pension and investments
funds receive dividends and capital gains
 Literally maximising consumer surplus implies P=MC needs
to subsidize fixed cost regulation replace the market
Defence of smaller firms
 Antitrust policies were born to defend farmers and small firms
hurted by large trusts
 The defence of Small firms is not against welfare maximisation
if it is limited to protect them from the abuse of large firms to
balance financial and economic power
 On the contrary helping small firms to survivie when they are
not operating at efficient scale encourages inefficient allocation
of resources and keep high prices
 The EU states tha SME are more dynamic but the empirical
evidence is not conclusive
 It may be wise that competition agencies. Neglect agreements
and mergers among SME but systematically helping them is
not a rational choice
 SME are hurt by lack of infrastructure and imperfect markets
but these are matter for other public policies.
Promoting market integration (EU)
 A political objective not necessarily consistent
with welfare maximisation
 EU forbids price discrimination across markets
but such an argument has no economic
 Price discrimination in the car market (Italy
and BELGIUM) Pi > PB  to avoid
discrimination: PB < P < Pi- Italians are
better-off, Belgian are worse-off and what
about the profit? a priori the welfare effect is
Economic freedoom
 In specific cases there may be contrast
between economic freedoom and efficiency
 Most obvious case: vertical restraints resale-
price maintenance and territorial restraints
may be effcient as they stimulate the effort of
retailers or avoid setting prices above what is
optimal for the manufacturerbut they are
against economic freedoom
Fairness and equity
 Small shopkeepers V. large supermarket chains
 Supermarkets enjoy buyer power and sell at lower
prices than small shops forced to close-down
 Some argue this result is unfair and small shops be
protected  contrary to efficiency principlesif small
shops do not reach the minimum efficient scale should
accept lower profits or exit the market
 Fairness and efficiency not always are in contradiction: if
a chain store has large market share and charges prices
below cost (predatory pricing) to force small firms out of
the market this is bot unfair and reduces welfare once
competitors are eliminated the chain store start charging
monopoly prices
Strategic reasons: Industrial and
trade Policies
 C.P. may be strategically used to support National Champions
or to break-up foreign champions
 Lax competition policies in some Countries hide the aim of
allowing national firms go bigger to be successfull in
international competition
 Strategic trade policy may be hided behind competition laws
and their implementation
 Ex. US laws give exemptions to export-cartels: 1. if the only
purpose is to engage in export trade 2. do not restrain trade in
the US 3.do not restrain the trade of export competitors
 CP can be used to achieve protectionist goals: anti-dumping
laws in principle avoid foreign firms to sell below cost (often
they protect domestic firms from efficient foreign competitors)
 Industrial & trade policy: obstacle to CPSubsidies & State aid
Main features of EU Competition
 Art. 81 e Art.82 Treaty of the European Community
 Direct applicability: they are part of the law of member
Countries are enforeceable by National Courts
 Art.are enforced by the EC through the DG Comp. At the
national level by National Comp. Authorities.
 Jurisdiction against actions of the EC: Community level
Court of first instance & Court of Justice (appeal)
 At the national level Courts decide according to the
national systems against decisions of National
Competition Authorities
 It deals both with horizontal & vertical agremments but
from the economic point of view effects could be quite
 Horizontal agreements (with competitors) reduce
competition and welfare should be prohibited except
some cases (cooperative R&D agreements)
 Vertical agreements (manufacturer & retailer) may
enhance effciency and cause problems only when are
undertaken by firms enjoying market power
 Agreements need not be formal or written (concerted
practice is the word used…and leave space for
 Some sectors: agriculture, defence, transport..enjoy
block exemptions
 The list of abuses cannot be exhaustive
 More generally art.82 considers exploitative behaviour
(excessive prices) and exclusionary practices: predatory
pricing,exclusive dealing, refusal to supply
 Firstly it should be shown that a dominant position exists THEN
that the dominant firm has carried out an abusive behaviour
 Dominance relates to a case where a firm enjoys a very high
degree of market power but the jurisprudence made it clear
that even a firm with a market share of 40% may be a
dominant one
 European law does not punish the creation of a dominant
position, but just its abuse one does not want to punish firms
that have been more successfulincentives might be reduced
in this case