Competition Policy at Universität zu Köln

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Three cases of competition policy

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Ryanair - Air Lingus 2007, 2013

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Perspectives of competition policy
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Recap consumer vs. total surplus

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Scope of the course

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State aid vs. competition policy

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Market definition
Dimensions
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Exemplary flashcards for Competition Policy at the Universität zu Köln on StudySmarter:

Welfare theorems
Recap

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Microsoft 2004

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Monopolization and Abuse of Dominance

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French Mobile 2006
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Historical view on competition
Germany and US

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Exemplary flashcards for Competition Policy at the Universität zu Köln on StudySmarter:

Competition Policy

Three cases of competition policy
  • Monopolization/ market power abuse
  • Cartelization
  • Merger control

Competition Policy

Ryanair - Air Lingus 2007, 2013
  • 2006: EU Commission blocked share take over by Ryanair (€1.5bn)
  • 2008: €748mn bid refused
  • 2012: EU Commission blocked €700mn bid 

  • Irish destination hold up to 80/87% by joint companies
  • Dominant and monopolist on most of the routes
  • Consumer choice may be limited, positive price effect of monopoly expected

Competition Policy

Perspectives of competition policy
  • Business
    • Avoid sanctions: cost for fines, prison due to fraud
    • Protect yourself: make use of antitrust authorities in case of unfair competition
    • New business opportunities: divestitures as acquisition opportunities
  • Consumer
    • Protection: no extensive prices, e.g. electricity prices for industry companies due to German integrated electricity concerns
    • Broader procurement opportunities, options: improve variety and encourage innovation
  • Social
    • Economics: efficient competitive equilibria (cf. welfare theorems), but competition only for efficiency?
    • Politics: Political (due to economic) power may undermine democracy (Ordoliberalism WWII)
    • Ethics: fairness (of outcomes and competition rule set), inequalities justified by competitive markets?, 

Competition Policy

Recap consumer vs. total surplus

• There are obvious examples where the consumer surplus can be very small while the allocation is efficient (example: perfect price discrimination of a monopolist). • Using consumer surplus instead of total surplus might reflect a specific social welfare function, namely, one in which more emphasis is put on “consumers” than on “firms” • This is not, however, good economics:  Firms are owned by somebody – namely, consumers  Reducing firm profits thus makes (some) consumers worse of (because they get less dividend and therefore can consume less)  Consumers can consume a product (e.g. broadband) and suffer from too high prices and at the same time benefit from it (if they hold shares of DTAG) • Thus, distributional effects of favoring consumer surplus are not clear as such (although one suspects that those holding shares are those with above average wealth – i.e. favoring consumer surplus might favor low wealth consumers in the end). • Some economists argue that in most applications it does not make a big difference whether to use consumer or producer surplus, since usually both move in the same direction in practice and thus yield the same policy recommendation.

Competition Policy

Scope of the course
  1. Economic perspective
  2. Implications for social welfare
  3. Competition should not be restricted to the cost of reducing social surplus

Competition Policy

State aid vs. competition policy
  • State aid (any form of advantages by public authorities) generally prohibited unless for reasons of general economic development
    • Decided and executed by governments
  • Competition policy
    • governmental regulatory on market participants

Competition Policy

Market definition
Dimensions
  • Product market
    • Product of interest and its substitutes
    • What is not substitutable?
      • Demand-side substitution: consumers would consider switching
      • Supply-side substitution: similar technology, input factors so that supply can
        increase
  • Geographic market
    • location of
      • supplier: multiple competing firms, outlets in the same area
      • customer: similar, aggregated customers with similar purchasing interest and options
  • Temporal dimension
    • Seasonality, peak & peak-off services
    • e.g. commuters and leisure travellers in trains or planes

Competition Policy

Welfare theorems
Recap
  1. Walrasian equilibrium always Pareto-optimal
    • Competitive equilibrium is efficient
    • Utility non-satiated, firms and consumers price takers, symmetric information (only weak assumptions on preferences necessary)
  2. Every Pareto-optimal equilibrium can be achieved by competition
    • Allocative efficiency can be separated from distributive issues
    • Stronger preference assumptions necessary (+convex), technology convex (non-increasing returns to scale) + requirements from above

Competition Policy

Microsoft 2004
  • Media Player strictly bound to Windows
  • Restrict interoperability between Windows and Non-Windows work group servers
  • Due to market power in OS market
    • Competitive advantage over media player competitors
    • Advantage in work group server market

  • No bundle offers or discounts
  • Disclosure of interface documentation

Competition Policy

Monopolization and Abuse of Dominance
  • Predation
    • Predatory pricing (US Coffee market, EU chemicals)
    • Using market power to monopolize markets (Google Android apps, Google search -> shopping)
  • Vertical restraints
    1. Retail price maintenance (Buchpreisbindung)
    2. Secondary markets (Kodak photo copiers and equipment)
    3. Exclusive contracts (Langnese Schöller Ice cream)

Competition Policy

French Mobile 2006
  • 3 companies cartelizing to fix market shares and limit customer competition
  • Exchange of confidential data and presidential agreements confirmed

Competition Policy

Historical view on competition
Germany and US
  • Zünfte, Gilden (crafts and guilds) fixed prices and quantities to avoid competition and market entry
  • Cartels: Until mid 20's century to enhance synergies and industrial growth and market stability
  • After WWII: allies weaken industry
  • 1957 GWB: Competition protecting laws
  • 1973: Merger control

  • US - 60 years

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