Competition Policy in difficult economic times

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Competition Policy in difficult economic times
Trento, November 13, 2009

• Alessandra Tonazzi
• International Affairs
• Italian Competition Authority

The views expressed herein are those of the
author and should not be attributed to the
Italian Competition Authority
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Layout

• Competitive markets promote economic growth the
  benefits of competition
• The economic crisis
• Challenges to competition policy
• Competition policy responses

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The benefits of competition

• The benefits of competition and its contribution
  to growth have been recognized in years of
  economic prosperity
• Until the recent economic crisis we have
  witnessed a decade or more of confidence in the
  ability of competitive markets to deliver
  positive outcomes to consumers and the economy

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The benefits of competition

• Processes of privatization and liberalization
  have taken place in many countries
• Competition laws have been introduced in
  transition and developing economies
• In 1990 there where about 14 functioning
  antitrust authorities in the world
• by the end of the decade the number has grown to
  more than 100

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The benefits of competition

• Competition policy has an important role to play
  in improving the productivity and therefore the
  growth prospects of an economy
• Effective competition provides significant
  benefits for consumers through lower prices and
  better quality goods and services.
• When markets work well, firms thrive by meeting
  consumers needs better and more effectively than
  their competitors, through innovation, increased
  productivity and a lower cost base.

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The benefits of competition

• Competition provides strong incentives for firms
  to be more efficient than their rivals, reduce
  their costs and innovate, thereby helping raise
  productivity growth across the economy.
• Effective competition provides significant
  benefits for consumers through greater choice,
  lower prices, and better quality goods and
  services.

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The benefits of competition

• Economists agree that competition policy has an
  important role to play in improving the
  productivity of an economy, regardless of the
  position of that economy in the business cycle.
• Empirical evidence supports the proposition that
  competition is beneficial for the economy. A
  number of studies have quantified the gains of
  pro-competitive deregulation.

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The benefits of competition

• In one study, the Australian Productivity
  Commission found that the pro-competitive reforms
  to infrastructure in the early 1990s led to price
  changes that boosted Australias gross domestic
  product by 2.5 per cent, and the average
  households income by A7000 per annum.

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The benefits of competition

• The European Commission has found that the
  liberalization of the European telecoms markets
  from 1998 has brought more competition to the
  markets, and in turn brought major benefits to
  consumers in the form of lower prices and better
  services.
• The introduction of competition in the
  telecommunication markets led to an average
  decrease of 45 percent of the price businesses
  paid for international calls between 1998 and
  2003.
• (Commission Communication European Electronic
  Communications Regulation and Markets 2003)

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The benefits of competition

• Over the same period, the increased
  liberalization of the European aviation market
  increased flight frequency by 78 and lowered the
  cost of non-sale fares by 66.
• If trade between EU Member States was eliminated
  average productivity would fall by 13
  (Commission Communication, European
  Competitiveness Report, 2008).

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The benefits of competition

• Even in time of economic prosperity introducing
  competitive markets sometimes proved difficult
• Short term costs vs long term benefits
• Costs are concentrated (lobbies) and benefits are
  diffused (and disorganized)
• The economic crisis has worsened these factors

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The economic crisis

• Banking origins of the crisis
• Macroeconomic framework between 2001 and 2005
  abundance of liquidity and low interest rates
• Changes in banking sector major financial
  innovations, acquisitions of investment banks by
  traditional banks, expansion of offered financial
  services

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The crisis financial markets

• Development of new financial instruments
• Financialization of traditional bank loans
• originate to distribute model securization of
  bank loans and transformation into tradable
  assets

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The crisis financial markets

• Degeneration of the key features of financial
  markets
• Legislative and regulatory changes relaxing
  supervision on financial instruments
• Drastic rise in sub-prime mortgages and other
  high risk loans
• The explosion of the crisis increase in default
  rates rapidly expanding throughout global markets

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The expansion of the crisis

• From financial to industrial crisis
• Need for Government intervention in order to
  stabilize markets
• Bailouts and government supported consolidations
• Massive state-aid measures

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The situation after the financial crisis

• In 2009 most economies have faced recession
• Many firms face financial distress
• Financial markets still shaken and credit crunch
• High levels of unemployment
• Tight budgets due to the many State interventions
  into the economy

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Challenges for competition policy

• As the crisis has spread into and deepened in the
  real economy mergers and antitrust policy have
  come under pressure
• Principles of competitive markets have been put
  in question

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Challenges for competition policy

• Not only trust in financial markets but also in
  markets in general has been shaken
• Competition delivers its best market outcomes
  when it drives improved efficiency through new
  entry of efficient firms and exit of inefficient
  firms
• but this takes time. while short term
  objectives might prevail

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Challenges for competition policy

• Pressures to permit mergers that are manifestly
  anticompetitive in order to save troubled firms
  or create national champions
• Pressures to permit crisis or recession cartels
• Pressures to relax European Union rules on state
  aid

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The response of competition agencies

• Competition agencies have been aware of the
  changed general context
• But they have resisted to these pressures and
  stand firm on the importance of maintaining the
  competition rules and a policy of robust
  competition enforcement
• The crisis has not undermined the principle that
  competition brings prosperity

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Lessons from the Great Depression

• Suspension of antitrust enforcement (NIRA 1930s)
• Studies show that this contributed in deepening
  the crisis and delaying recovery (University of
  California Cole and Ohanianm, J. Pol. Econ.)
• The return to vigorous enforcement was a
  cornerstone of the New Deal

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Challenges for competition policy

• A well established competition regime should not
  require a lot of adjustment to cope with the
  challenges of the crisis
• Urgent situations processes may need to be
  streamlined and timelines adjusted
• Competition policy should focus on sectors that
  affect household expenditure to the greatest
  effect

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Reinforced efforts against cartels

• Cartels are arguably the most harmful type of
  competition infringement
• It would be unwise ton relax rules on cartels or
  pursue cartels less vigorously
• Any co-operation between firms should satisfy the
  criteria laid out in Article 81 (3)
• Arguments related to the economic crisis would
  not justify cartels

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and abuses of dominant position

• The other focus of enforcement action under
  antitrust rules is against unilateral conduct
  such as abuse of dominance
• Targeting an enforcement action against those
  infringement that cause the most harm to
  consumers
• Commission December 2008 adopted Guidance on
  enforcement priorities into exclusionary abuses

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Mergers and the crisis

• In assessing mergers that occur against the
  backdrop of the financial and economic crisis
  agencies have to maintain effective scrutiny
  under the competition tests laid out in merger
  regulation
• The purpose of the tests is to ensure that
  consumer welfare is preserved
• Short term financial stability
• Mid- to long term competitive market structures

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Mergers and the crisis

• Merger rules in general are an appropriate and
  sufficiently flexible tool for merger control
  enforcement in times of crisis
• Nationalization
• Remedies
• Rescue mergers failing firm defense

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Competition advocacy

• In a situation where confidence in markets may
  have decreased and where there is a greater
  chance of government intervention
• competition advocacy will have a greater role in
  ensuring that States measures take on board
  competition principles and do not create
  disproportionate restrictions of competition,
  which will harm the economy and make things worse
  for consumers