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?