Competition Policy in difficult economic times Alessandra Tonazzi International Affairs Italian Competition Authority The views expressed herein are those

Competition Policy in difficult Competition Policy in difficult economic times economic times

Alessandra TonazziInternational Affairs

Italian Competition Authority

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

Trento, November 13, 2009Trento, November 13, 2009

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Competitive markets promote economic growth: the benefits of competition

The economic crisis Challenges to competition policy Competition policy responses

The benefits of competitionThe 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


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


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.


Competition provides strong Competition provides strong incentives for firmsincentives for firms to be to be more more efficientefficient than their rivals, reduce their costs and than their rivals, reduce their costs and innovateinnovate, thereby helping raise productivity growth , thereby helping raise productivity growth across the economy. across the economy.

Effective competition provides significant Effective competition provides significant benefitsbenefits for for consumersconsumers through greater choice, lower prices, and through greater choice, lower prices, and better quality goods and services.better quality goods and services.


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.


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 Australia’s gross domestic product by 2.5 per cent, and the average household’s income by A$7000 per annum.


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)


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).

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

The economic crisisThe economic crisis

Banking origins of the crisisBanking origins of the crisis

Macroeconomic framework between 2001 Macroeconomic framework between 2001 and 2005: abundance of liquidity and low and 2005: abundance of liquidity and low interest ratesinterest rates

Changes in banking sector: major financial Changes in banking sector: major financial innovations, acquisitions of investment innovations, acquisitions of investment banks by traditional banks, expansion of banks by traditional banks, expansion of offered financial servicesoffered financial services

The crisis: financial markets

Development of new financial Development of new financial instrumentsinstruments

Financialization of traditional bank loansFinancialization of traditional bank loans

““originate to distribute model”: originate to distribute model”: securization of bank loans and securization of bank loans and transformation into tradable assetstransformation into tradable assets

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

The expansion of the crisis

From financial to industrial crisisFrom financial to industrial crisis

Need for Government intervention in Need for Government intervention in order to stabilize marketsorder to stabilize markets

Bailouts and government supported Bailouts and government supported consolidationsconsolidations

Massive state-aid measuresMassive state-aid measures

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

Challenges for competition policy

As the crisis has spread into and As the crisis has spread into and deepened in the real economy mergers deepened in the real economy mergers and antitrust policy have come under and antitrust policy have come under pressurepressure

Principles of competitive markets have been put in question


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


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

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

Lessons from the Great Depression

Suspension of antitrust enforcement (NIRA 1930’s)

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


A well established competition regime should not require a lot of adjustment to cope with the challenges of the crisis

1. Urgent situations: processes may need to be streamlined and timelines adjusted

2. Competition policy should focus on sectors that affect household expenditure to the greatest effect

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

…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

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

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

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

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Competition Policy in difficult economic times Alessandra Tonazzi International Affairs Italian Competition Authority The views expressed herein are those