Competition Policy Essay Example

Competition Policy

Outline of the Policy Area

Historically, international strategic alliances were entered into to gain access to foreign markets in order to sell existing products. Hence, early strategic alliances were primarily established by low-cost producers or the established divisions of second movers (imitators) as a way to improve operating efficiencies by expanding the market for existing products. These strategic alliances were based on the need for the home firm to hurdle protectionist barriers, utilize local marketing expertise and/or develop governmental contacts to deal with national regulations[1]. As increased globalization created greater competition, strategic alliances have also grown, especially in the first-mover domains of new product and technology creation[2]

            European policymakers recognized that there are strong synergies between competition and the universal service goal. Other things equal, effective competition exerts a downward pressure on the prices of products and services. Competition will increase the incentives for service providers to experiment with innovative pricing packages, such as discounts for Very low level users, to keep customers on the network and internalize part of the network externality. Where profitable demand exists, competitive service providers will expand service and, thus, reduce waiting lists. Last but not least, the differentiation of service offerings in a market environment can help to align service quality with consumer preferences. In all these cases, liberalization reduces the need for an explicitly defined universal service policy.

Although government regulations and influence have consistently been discussed as a part of the firm’s environment, the salience of government intervention increases significantly when firms engage in international business transactions. Developing relations with home and host country governments increases in importance as organizations seek to reduce some of the uncertainties connected with global trade. However, first movers and low-cost producers may be expected to react to this increased uncertainty in different ways. To be sure, all companies would be wise to cultivate good relations with both its home and the host governments where operations are located. What we are arguing is that given the company’s competitive strategy, management will focus more on the home or host government.

Majority of the EU legislation is concerned with regulating the Single Market to produce a ‘level playing field’ for companies operating across Europe. Competition policy is a major part of the legislation underpinning the single market and can be traced back to the treaty of Rome. It applies to all businesses operating in the EU. Responsibility for ensuring that the rules are followed lies with the commission[3], which has significant powers. Finding a breach of competition rules the Commission may impose fines, force changes to merger agreements and block state aid. Such decisions can be challenged in the European Court of Justice. EU competition policy is applied to the following cases:

Mergers and Takeovers

In the nineties the Commission trusted with controlling mergers and acquisitions that had the opportunities to check competition in the single market. This only applies to those companies that have a certain turnover size. The Commission has the authority to block mergers or to impose conditions to prevent the creation of a dominant position.

Abuse of Dominant Position

It is aimed at preventing companies like Thomson’s that have large market share from abusing position of strength by fixing prices at high levels or driving smaller companies out of the market by predatory pricing.

Anti Competitive Agreement between Companies

This aims to prevent companies like Thomson’s Travel selling similar services from co-operating to the detriment of their customers by operating price fixing cartels. Other forms of co-operation that are of benefit to customers are allowed.

State Aid

State aid is subject to analyse under competition policy. In many cases it is deemed justifiable when it serves to promote the economic development of disadvantage areas or to fund projects of common European interests. If the aid is deemed to be giving an industry an unfair advantage the Commission has the power to block or force the re-payment of such aid. Examples may be found in the case of state owned companies that are given subsidies that allow to compete unfairly with private sector rivals members states regional programmes also require clearance under state aid rules in order to avoid falling foul of the above provisions there are some measures in place[4]:

Notification of agreements and mergers- Companies contemplating mergers or other agreements that could effect competition in the EU can inform the Commission in advance to ensure their procedures do not shatter the rules.

Ground rules for state aids- The Commission is working to produce rules on sector by sector bases for those industries that have been receiving such aid e.g. car markers, airlines, and ship builders.

International implications- As a number of cases involve US companies operating in the EU, as well as EU companies operating in the US are being affected by US anti trust law and EU- US agreement has been drawn up and put into force.

Major Developments

            The European Union is characterised by the following four kinds of freedoms:

1) Movement of goods.

2) Movement of services.

3) Movement of people.

4) Movement of capital.

Below is a detailed description of how the EU has developed by the way of treaties, which are ‘The Treaty of Rome’, and ‘The Maastricht Treaty.’

Treaty of Rome

The next step in the evolution of the EU came in 1956, with the creation of the European Economic Community as a result of the signing of the Treaty of Rome. This involved the six countries giving up some their decision-making powers to the European Economic Community in relation to a number of areas of the economy. A common customs union was formed with a common external tariff to the Non-European nations.

Key dates in the development of the European Union:

·1957- the signing of the Treaty of Rome.

·1992- the creation of the Single market.

·1993- the Maastricht Treaty.

·1999- the creation of the euro.

(ANON, 2003)

Creation of the Single Market

In the mid of 1992, the SEA[5] created a European common market protected by a customs union and a common external tariff barrier. For member states the Single Market area now has become their ‘home market.’

The four main advantages of the creation of the common market were as follows:

1) Reductions in costs of productions because companies could sell into a much larger home market.

2) Improved efficiency of business, as it was forced to compete in this much larger marketplace.

3) New patterns of competition, which helped consumers.

4) New innovations processes and products coming on to the market as a result of increased business efficiency and competitiveness.

Maastricht Treaty

Over the years there has been increasing co-operation between member states with for example, the creation of the common fisheries policy and a joint environmental policy. Finally in 1993 the signing of the Maastricht Treaty[6], which heralded the creation of European Union, for example, is moving the range of co-operation on from simple economic relationships to new political and social relationships. Decision making in the European Union is divided between supranational European institutions and governments of the member states, which send ministers to the Council of Ministers. The Court of Justice serves the final decider in legal matters or disputes among EU institutions or between EU institutions and member states. The new areas added to existing treaties by Maastricht included a common foreign and security policy and a justice and home affairs policy.

In 2000, the development of a joint security force was prompted by the European Unions perceived failure to take action quickly enough, and on a sufficient enough scale, in the Kosovo crisis in 1999. Increasingly the European Parliament is beginning to take on more responsibility and this is likely to continue. The social chapter of the Maastricht Treaty is now beginning to have an increasing impact on business in this country, with the development of the minimum wage legislation and a working time directive limiting the number of hour’s people are allowed to work.

Creation of Euro

Another new development that will have a profound impact on business is this development of the single currency, the euro. European Monetary Union refers to the section of the Maastricht Treaty that provides for the creation of a monetary union between EU members. Individual currencies, such as the pound, the franc, the mark and the lira, have in effect ceased to exist and will be replaced by a single currency known as the euro.

Policy Debates

At the level of member states, universal service policies vary widely. In most countries, universal service obligations were not clearly defined during the period of public monopolies. Nevertheless, the incumbent careers frequently used the supposed high financial burden of these obligations as a strategic argument to delay liberalization. The new EU approach necessitated more explicit policies at the national level. The salient feature of national universal service models is a strong trust in market forces to expand access to telecommunications services. In addition, national regulatory authorities (NRAs) encourage suppliers to offer special discounted pricing schemes to low income and customers in rural areas. The closer look at the cost of universal service has revealed that, as a percentage of total operator revenues, the burden is less than had been claimed. Nine of the 15 member states (Austria, Belgium, Denmark, Finland, Germany, Luxembourg, the Netherlands, Sweden, and the United Kingdom) have decided that their market could be opened to competition without the need for an explicit universal service funding mechanism. Some of these nations have expressed the view that the costs involved do not constitute an unfair burden for the operators. Others have concluded that the magnitude of the problem does not justify the administrative costs of a universal service fund. Only France and Italy had established a universal service fund at the time of full liberalization.

Debates on Security

“A second part of reasons for enlargement relate to security. Enlargement of the EU has been presented as a means to project stability and enhance security. Whether the EU can be an effective provider of security for its members is still debated. As Stephan Kux observes”, “there is a paradox that the candidates seek integration into the EU security structures, while it is security that the EU cannot deliver at the moment.” (David, 1997)  The issue with expansion is whether the boundaries of membership does indeed enhance the level of security in general. Improving the security situation of some countries can come at the cost of imposing another arbitrary dividing line in Europe — the difficulty that has bedevilled discussions of NATO enlargement. [7]

EU Policies: A Broader View

Universal service policy is shaped at both the EU and the national levels. European policies: delineate the scope of services that can be included in a universal service funding program financed by market players, prescribe methods to determine the cost of universal service, and define the mechanisms for sharing these costs among market participants. Universal service is defined as a set of services, which should be made available to all users at an affordable price independent of their geographical location. The EU limits the services that its member states can finance through a universal service funding mechanism to a fixed public switched telephone line capable of providing voice telephony, fax group 3, and narrowband dial-up data communication service. Emergency services, operator assistance, directory services, and contributions to the deployment of public payphone service can also be included.

Member states are free to adopt a more ambitious definition of universal service but they cannot fund such programs from market participants. Rather, such measures would have to be financed like other social programs through general tax funds. Although the EU did not include advanced network services into its universal service mechanism it encourages its member states to do so in the future. In particular, member states should consider including ISDN into the universal service package once it has achieved a broader diffusion in the near future. In addition to this core universal service program, the EU and national governments pursue a plethora of initiatives to stimulate the demand for and applications of new information technologies.

Given the strong emphasis on liberalization, it is not surprising that the financial aspects of universal service obligations received detailed attention. To avoid a strategic gaming of the competitive process, especially by the incumbent operators, the Commission promulgated rules for the determination and recovery of these costs. The Commission properly recognizes that service providers benefit indirectly from an expansion of their networks. Thus, its rules only allow funding of the net costs of the universal service obligation. This amount is determined as the difference in costs between a service provider bound by the universal service obligation and a provider operating without it. Incremental revenues derived from the expansion of the network to new customers need to be deducted from the cost of universal service. Both costs and revenues must be based on forward-looking incremental concepts.

The EU allows member states to finance universal service obligations through either a universal service fund or a supplementary charge on interconnection prices. A universal service fund has the advantage that it can easily be designed in a competitively neutral fashion. For that purpose, the system would have to be structured like a value-added tax on telecommunications services. A levy on the interconnection price could, in theory, also be designed in a competitively neutral fashion. However, more detailed cost information than in a value-added tax model is needed. Moreover, the incumbent operators may have strong incentives to exaggerate the cost burden of universal service obligations. Supplementary charges can be implemented without the creation of a new administrative apparatus and, thus, save transaction costs of securing universal service. Thomas Kiessling and Yves Blondel mention the concern of member states with more advanced networks that a mandatory universal service fund would develop into another permanent transfer mechanism of subsidies to less advanced countries. Therefore, the EU could not agree on a common financing scheme for universal service and left the choice to the member states.

Applied Economic Concepts

In conclusion, it is a key element for the UK and EU competition authorities to lower the barriers of entries, so that the market is operating as close as possible in the perfect competition model, which is supposed to be the most allocatively and productively efficient structure. A monopolistic market structure has significant drawbacks, but in some specific markets where minimum efficient scale is very large compared with the market size, or some short run legal monopolies as incentives for innovation, monopoly may be a better choice to satisfy the general public to a greater extent. However, it has to be admitted that monopoly’s ability to serve public interest is not easy to become reality without strong incentives. As for perfect price discrimination, it is both hard to operate and highly controversial as consumers make up a much larger part of the public than producers. In reality, it is also obvious that after some monopolies were finished in the 1980s in the UK (Bannock, 2003, 76), those industries like telecommunications, gas supply and airways have become far more efficient than people could ever imagine before, which has benefited everybody. Just as indicated by Hayek, “The economic problem of society is a problem of the utilization of knowledge, and it is only through the process of competition that the facts will be discovered.” [8]

References

Almeida, P. and A. Phene. 2004. “Subsidiaries and Knowledge Creation: The Influence of the MNC and Host Country on Innovation.” Strategic Management Journal 25, Special Issues (8-9): 847-864.

ANON., 2003. “The European Union expands eastward” Radio Free Europe

ANON., Monday, 30 April, 2001 “The European Union” BBC

Bannock, G., Baxter, R. and Davis, E. The Penguin Dictionary of Economics 7th Edition, 2003, London, Penguin Books.

Ben Daniel, D.J. and A. H. Rosenbloom. 1990. The Handbook of International Mergers and Acquisitions. Englewood Cliffs

Cecchini, Paolo. “The European Challenge 1992: the Benefits of a Single Market”. Brookfield, VT: Wildwood House, 1988.

David L. (1997), The Why and How of EU Enlargement, retrieved from http://216.239.59.104/search?q=cache:DTf5bNaiwGgJ:www.iir.ubc.ca/pdffiles/webwp16.pdf, on 8th March, 2007

European Union, 2007, retrieved from http://www.nat.is/borgarferdireng/european_union.htm on 8th March, 2007

Grieco, Joseph. “The Maastricht Treaty, Economic and Monetary Union and the Neo-Realist Research Programme,” Review of International Studies, 21, 1, January 1995.

Hayek, F.A. “The use of knowledge in society”, in American Economic Review 35, pp. 519-530. 1945.

Michael J. Baker, 2000.”Marketing Strategy and Management”. 3rd ed. London: Macmillan Press Ltd.

NATO. “Study on NATO Enlargement,” 1995.

Nigel, April, 2001, financial support from the ESRC

Steven P. M, 2001, the European Union A Critical Guide. 1st published, London: Pluto Press, p.3-5

Ash A. & John T, (1995) Behind the Myth of European Union: Prospects for Cohesion, Routledge (UK)

[1] Bartlett, C. A. and S. Ghoshal. 1992. Transnational Management. Homewood, IL: Irwin.[2] Almeida, P. and A. Phene. 2004. “Subsidiaries and Knowledge Creation: The Influence of the MNC and Host Country on Innovation.” Strategic Management Journal 25, Special Issues (8-9): 847-864.[3] Steven P. M, 2001, The European Union A Critical Guide. 1st published, London: Pluto Press, p.3-5[4] Steven P. M, 2001, The European Union A Critical Guide. 1st published, London: Pluto Press, p.3-5[5] Single European Act[6] Grieco, Joseph. “The Maastricht Treaty, Economic and Monetary Union and the Neo-Realist Research Programme,” Review of International Studies, 21, 1, January 1995[7] NATO. “Study on NATO Enlargement,” 1995.

[8] Hayek, F.A. “The use of knowledge in society”, in American Economic Review 35, pp. 519-530. 1945.