Lecture 4

• abuse of dominant position is an example of anticompetitive behaviour
• abuse of dominant position occurs when 1 firm has a much bigger market share than others
• a dominant position in itself is not a problem, as it may reflect superior products and efficiency
• a firms dominant position may allow firms to increase profits at the expense of consumers or suppliers, which is illegal under EU law
• an example of abuse of dominant position is that Microsoft refused to supply other companies information to communicate with its operating system
• the COMP curve illustrates the relationship between the markup and number of firms
• the COMP curve shows that imperfectly competitive firms charge a price that exceeds their marginal cost
• the BE curve shows how more firms will be able to survive if the price is far above the marginal cost
• the COMP curve is the competition curve
• the BE curve is the break-even curve
• the markup is the difference between price and cost, and a higher markup means more firms are able to survive, but more firms means the markup must reduce
• cartels are anticompetitive practices
• cartels increase the price of goods
• cartels cause a rip-off effect, and an inefficiency effect
• the rip-off effect refers to firms profiting at the expense of consumers
• the inefficiency effect refers to the reduction in quantity of goods consumed as a result of the higher price
• an example of a cartel is the 4 brewers (Heineken, Bavaria, etc) who worked together to increase prices
• the founders of the EU were aware of the risks that collusion and subsidisation would occur in the integration process, which could have reduced political support for the integration process
• The Treaty of Rome had broad restrictions on private and public policies that may distort competition
• the European Commission has the sole power to regulate the EUs competition policy
• Collusion among firms results in high prices and lower demand for production.
• Collusion among firms is illegal under EU law and is economically harmful
• European integration has involved a gradual reduction of trade barriers, however it is analysed as if it was instant, not gradual
• European Liberalisation is modelled more drastically than it was; taking a fully closed economy and making it completely open.
• European Liberalisation is modelled as having two identical nations, so when liberalisation occurs, the number of competitors doubles
• exclusive territories are a more common example of anticompetitive behaviour
• exclusive territories involves one company agreeing to sell only in its local market in exchange for foreign competitors to do the same
• exclusive territories allows big price differences for the same goods across countries within the market
• an example of exclusive territories is that Nintendo divided up the European Market and charged certain areas higher prices (UK was 65% cheaper than Germany)
• removing barriers to trade within the EU creates a 'pro-competitive effect', which puts pressure on profits and causes a period of 'merger mania'
• 'merger mania' results in a smaller number of firms that are larger
• when joining the single market, France experienced a reduction of price discrimination across markets 40% faster than before joining
• price discrimination involves the ability of firms to charge different prices in different places
• the implicit assumption is that market size is good for economic performance, and that bigger markets result in increased performance
• the assumption that larger markets are better was key rationale for European Economic Integration, as it will create a market the same size as the USA or China
• Within the Single Market, there are frictional barriers that separate national markets
• The impact of the UK leaving the EUs single market is an expected 15% reduction in imports and exports in the long run
• the impact of the UK leaving the EUs single market is reduction in productivity growth by 4%
• the impacts on the UK from leaving the EUs single market are due to increases in non-tariff (frictional) barriers between the EU and the UK
• merger control is an example of anticompetitive behaviour