The Economic Benefits of Having a Competition Policy at the EU Level - Report Example

The Economic Benefits of Having a Competition Policy at the EU Level There are following benefits to consumers of having a competition policy at the EU level. 1. The EU competition commission aims at opening up competition in areas which were controlled by State-run monopolies 2. It checks mergers and acquisitions if they tend to reduce competition and form monopolies. 3. It prevents those business practices that are likely to restrict competition. 4. It works toward removing financial support to companies by EU governments. 5. It brings international cooperation among other competition authorities to mitigate the detrimental effects of cartel and mergers taking place outside EU. Point wise details are as per the following. In the past, transport, telecommunications, postal services and energy were not open to competition. This resulted into the inefficiencies causing inferior and uneconomical services to the common masses. The objective of EU commission was to liberalize these sectors and let the competitive forces decide the quality of services. This helps consumers to have improved services at economical prices. More active players in a given sector bring novelty in the services developing more choices for the consumers. This helps become economy more competitive and consumer friendly. The glaring example is the low-cost airlines being operated in Europe after European Commission opened up the airline industry to competition. Not only services in airlines business are more economical but services have also improved manifold. Another example can be given in the telecommunication sector where EU opened up the sector in January, 1998. This has resulted into the savings of 13% and 23% in their bills on fixed telephones for residential and business users of Europe respectively between 1998 and 2003. These savings were more remarkable for international calls were average cost to OECD countries came down by 41% for all residential users. Thus, it is amply clear that EU commission has been instrumental in providing economical solution to the consumers with much improved services. Average monthly phone bill for national calls (EUR) (Source: Ninth report on the implementation of the telecommunications regulatory package, COM (2003) 715 final) Merging of large companies in the market place could create a monopoly for them pushing the prices of their products and jeopardizing the interests of consumers. The EU commission keeps a check on this and safeguards the interests of users so that large companies cannot take undue advantage of their large controlling market share in the business. Elf Aquitaine and TotalFina were the major players in the French petroleum market and their merger would have created a monopoly kind of situation controlling almost 60 percent of the service stations on French motorways. The merged entity would have become the largest supplier of liquid petroleum gas (LPG). This would have certainly pushed up the prices to harm the consumers. As a solution, Elf/TotalFina proposed to sell 70 service stations to competitors. On this consideration, EU commission allowed the conditional merger ensuring that consumers continue to get products at fair price. The EU has the right to investigate the mergers with a sole aim of community protection at large. The case of merger of pharmaceutical companies Pfizer and Pharmacia is worth enumerating, when commission noted that this may have an adverse impact on competition and consumers may not have sufficient choice on certain drugs. As a solution, merger companies proposed transferring some of the drugs to competitors that was agreed by EU commission protecting the interests of drug users. Similar was the case of merger of Sanofi and Synthélabo when two pharmaceutical companies sold off some of the products such as antibiotics, sedatives and vitamin drugs to competitors to take a clearance from EU commission for proposed merger between them. Thus, EU commission investigates all the large mergers, which may have adverse effect on the consumers. The EU commission thus, operates as a strict watch dog on the large companies trying to acquire business or proposing mergers. A free market is a necessity for fair play but sometimes it happens that in a free market companies in the similar business form a cartel and try to avoid competition. The antitrust laws enacted by EU commission come into force to protect the consumer interests when companies try to restrict the competition. In a cartel, two or more companies come together and divide the markets between them keeping prices artificially high. That is how they try to avoid the competition among themselves thus consumers are made to suffer paying high prices providing inferior services. This is the reason cartels are called illegal under EU law and commission may impose heavy fines on companies creating cartel. Due to these reasons, they are kept as a closely guarded secret and it is hard to find evidence to it. Then how does the commission control cartel? The commission has adopted a leniency policy for the company who passes on information on cartel formation to commission and the company will be saved from paying any fines on forming a cartel. This policy in fact prevents companies to indulge into practices of forming any cartelization. The example of such cartelization and subsequent fines was found in 2001 when EU commission fined eight companies for participation in cartels which were mainly to eliminate competition in vitamin sector. The fines charged were more than EUR 800 million. Another example is found in video games when Japanese company Nintendo colluded with seven of its distributors in Europe to maintain high prices across EU. The commission charged the fine of EUR 168 million on Nintendo and its distributors. Other than cartelization, sometimes large company tries to squeeze small companies out of the market. Dominant companies are those who have large share of the market and they have economic strength to act ignoring consumers and competitors. Abusing dominant position is considered illegal for the companies. Such abuses mainly consist of a. charging high prices to consumers b. charging such a low price to drive the competition out of the market c. making it almost impossible for competitor to enter the market d. employing discriminating behavior such as refusing to deal with certain customers or giving discounts to those who buy their complete product range or all supplies from them e. enforcing unusual conditions such as linking sale of one product with another. The commission fined Microsoft EUR 497 million for abusing its dominant position in the market for operating system of its personal computers business between 1998 and 2004. Microsoft controlled 95% market in the business of its windows operating system and it made the purchase of windows operating system conditional with the purchase of Windows media player. Thus, Microsoft made all PCs loaded with Windows media players and forcing all application developers and content providers to switch to Windows media players for its application. Consumers get fair price and quality services when companies operate on equal basis in a free market. At times, States provide aid to national industries using public resources. A company receiving government support and aid has undue advantage over competitors, which goes against the basic principle of free competition among the companies. The state aid de-motivates other companies to operate in the market to improve services and bringing novelty in the products as it will never have fair preposition in its product/services pricing. The EC Treaty prohibits any State aid unless it is necessary and for the purpose of general economic development. In 1990s, Dutch government granted aid to SCI Systems to establish a factory to assemble PCs of Hewlett-Packard. This was against the basic principle of providing equal level ground for all and such measures would end up in promoting regional areas and in the process richer states will constantly outbid the poorer ones. SCI returned the state aid amounting to EUR 1.7 million to Dutch government. The objective of the commission is to be seen in the larger context of consumer benefits promoting even ground for all to achieve efficiency in the operations. The sole aim of discouraging State aid is not to distort competition in the market place because consumer will be benefitted by free market and not through State aid as it is never a long term solution for the improved product quality or efficient services. International cooperation on competition policy becomes essential due to globalization and increasing number of cartels and acquisitions take place outside EU. It is obvious that such activities that take place at international level likely to create impact among the EU member countries. As cartel within the union harms consumers, in the same way cartels outside EU also affect the consumers within the union. Commission also examines such cartels that take place outside EU. The EU commission remains in constant touch with other competition commission and work in coordination with them. It functions with the underlying principle that the more close-knit cooperation prevails among the international competition authorities; more are the chance for consumers to have best deal in quality and prices by taking uniform action against companies forming cartels. Reference EU Competition Policy and the Consumer, 19 May 2011 http://ec.europa.eu/competition/antitrust/overview_en.html Read More