A New European Competition Policy for Growth Driven by Profitable Investments – The European Commission’s Policy In Light of the Modern Economic Growth Theories

Posted by Social Science Research Network

A New European Competition Policy for Growth Driven by Profitable Investments. The European Commission’s Policy In Light of the Modern Economic Growth Theories – Stephane Ciriani (Orange, Regulatory Affairs) and Marc Lebourges (France Telecom)

ABSTRACT: 2. The European competition authorities’ policy is to prevent exercise of market power whereas the purpose of US competition authorities is to maintain undertakings’ incentives to invest in order to gain market power.

The European Commission intervenes ex-ante through policies promoting market entry in order to prevent the formation of a market power likely to be exercised and relies on antitrust action to remove it ex-post. In their practical approach, the competition authorities ban mergers that bring market power arguing that intermediate and final consumers would face higher prices and lower innovation. They approve consolidations provided merged companies commit to transfer productive assets to direct competitors. They consider that temporary rents from investment and innovation efforts distort competition because they grant dominant positions and thus have to be tackled by the enactment of competition law. As the practical approach of competition authorities is to reach the maximum level of static competitive intensity, (where prices equal marginal production costs), their focus is on the upward price pressures that mergers would trigger in the short term.

The European competition authorities do not spontaneously consider the positive effects on investment and efficiency that could stem from a merger. They are skeptical about the arguments put forward by companies in support of these effects. Therefore, when evaluating mergers, the authorities do not consider the value that corporate investment in quality and quantity (stemming from higher expected profitability) can bring to the consumer. The same reasoning is applied to the analysis of abuse of dominant position. The appraisal of market dominance and of the exercise of market power by the European authorities might hamper the incentives of private companies to invest and innovate. The US competition authorities apply a different antitrust policy with regards to maintaining a competitive market structure. Contrary to the European competition authorities they do not consider that the dominant firm is liable for the competitive market structure or responsible for maintaining its competitors on the market. They give priority to returns on investment and incentives to invest over forcing companies to share their assets with their competitors to preserve static competition. They thus favor the growth of market players (hence to market power) over maintaining a perfectly competitive market structure.

The US competition authorities and policymakers consider market power in the form of mark-ups over competitive prices both a condition for returns on prior investment and a condition of future investments. As a result, they are more likely to foster incentives to invest and innovate, as investors do not necessarily expect both their assets and their returns to be transferred to competitors.

In Europe, the willingness of competition authorities to eliminate profit margins, to limit capital intensity favored by mergers, and to ban large companies from acquiring competitive advantages can deprive these companies of prospects which motivate their investments, as expectations regarding profitability become negative. This has an overall deterrent effect on investment and innovation, and in turn undermines economic growth in the European Union.