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The Single Market Review : SUBSERIES V: IMPACT ON COMPETITION AND SCALE EFFECTS Volume 3: Competition issues".;»7*<β**
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The S ¿riffle ¿Harteet Review
The Single Market Review series Subseries I — Impact on manufacturing Volume: 1 Food, drink and tobacco processing machinery
2 Pharmaceutical products 3 Textiles and clothing 4 Construction site equipment 5 Chemicals 6 Motor vehicles 7 Processed foodstuffs 8 Telecommunications equipment
Subseries II — Impact on services Volume: 1 Insurance
2 Air transport 3 Credit institutions and banking 4 Distribution 5 Road freight transport 6 Telecommunications: liberalized services 7 Advertising 8 Audio-visual services and production 9 Single information market 10 Single energy market 11 Transport networks
Subseries HI —Dismantling of barriers Volume: 1 Technical barriers to trade
2 Public procurement 3 Customs and fiscal formalities at frontiers 4 Industrial property rights 5 Capital market liberalization 6 Currency management costs
Subseries IV Volume: 1
2 3 4
- Impact on trade and investment Foreign direct investment Trade patterns inside the single market Trade creation and trade diversion External access to European markets
Subseries V — Impact on competition and scale effects Volume: 1 Price competition and price convergence
2 Intangible investments 3 Competition issues 4 Economies of scale
Subseries VI — Aggregate and regional impact Volume: 1 Regional growth and convergence
2 The cases of Greece, Spain, Ireland and Portugal 3 Trade, labour and capital flows: the less developed regions 4 Employment, trade and labour costs in manufacturing 5 Aggregate results of the single market programme
Results of the business survey
The Sirtgle ÆlcLrfcet Review
The Single Heview
S U B S E R I E S V : V O L U M E 3
This report is part of a series of 39 studies commissioned from independent consultants in the context of a major review of the Single Market. The 1996 Single Market Review responds to a 1992 Council of Ministers Resolution calling on the European Commission to present an overall analysis of the effectiveness of measures taken in creating the Single Market. This review, which assesses the progress made in implementing the Single Market Programme, was coordinated by the Directorate-General 'Internal Market and Financial Services' (DG XV) and the Directorate-General 'Economic and Financial Affairs' (DG II) of the European Commission.
This document was prepared for the European Commission
London Economics It does not, however, express the Commission's official views. Whilst every reasonable effort has been made to provide accurate information in regard to the subject matter covered, the Consultants are not responsible for any remaining errors. All recommendations are made by the Consultants for the purpose of discussion. Neither the Commission nor the Consultants accept liability for the consequences of actions taken on the basis of the information contained herein.
The European Commission would like to express thanks to the external experts and representatives of firms and industry bodies for their contribution to the 1996 Single Market Review, and to this report in particular.
© European Communities, 1997
No part of this book may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without written permission from the copyright holder.
Office for Official Publications of the European Communities 2 rue Mercier, L-2985 Luxembourg ISBN 92-827-8803-2 Catalogue number: C1-71-96-003-EN-C
Kogan Page . Earthscan 120 Pentonville Road, London NI 9JN ISBN 0 7494 2336 6
Table of contents
Table of contents
1.2.1. Sectoral indicators 3 1.2.2. Case study analysis 4
1.3. Analysis of competition issues 5 1.4. Policy conclusions 6
1.4.1. Trade policy and competition policy 6 1.4.2. Efficiency and integration objectives of competition policy 6 1.4.3. The role of the Commission 6
2. Introduction 9
2.1. Aim of the study 9 2.2. Method of analysis 10
2.2.1. Indicators of trends in integration 10 2.2.2. Case studies of the development of competition 10 2.2.3. Analysis of competition policy issues 11
2.3. Structure of report 12
Part I Integration and competition 13
3. The single market programme 15
3.1. The Treaty of Rome 15 3.2. The role of European competition policy in promoting integration 16 3.3. The single market programme and the Single European Act 17
3.3.1. Physical barriers 17 3.3.2. Technical barriers 18 3.3.3. Fiscal barriers 18
3.4. The expected impact of the single market programme 19 3.5. How does the single market programme affect competition? 19 3.6. Conclusions 21
4. Concepts of market integration and competition 23
4.1. Introduction 23
4.2. Integration and integration policy 23 4.2.1. What is'market integration'? 23 4.2.2. Why is market integration desirable? 24
4.3. The dimensions of market integration 27 4.3.1. Economic integration in product markets 2 8 4.3.2. Economic integration in input markets 29 4.3.3. Economic integration in product design and technology choices 30
4.4. Competition and efficiency 33 4.4.1. Competition and allocative efficiency 33 4.4.2. Competition and productive efficiency 34 4.4.3. Competition and dynamic efficiency 35
4.5. The behaviour of competing firms in the single market 37 4.5.1. Pro-competitive responses: meeting the new competitive conditions 37 4.5.2. The behaviour of national governments 41
5. Trends in integration and competition 43
5.1. Introduction 43 5.2. The sectoral impact of integration 44 5.3. Trade flows 46
5.3.1. Aggregate trade flows 46 5.3.2. Sectoral trade flows 48 5.3.3. Extra-EU and intra-EU trade effects 50
5.4. Price dispersion 50 5.4.1. Trends in price convergence 50
5.5. Price-cost margins 53 5.5.1. Analysis of price-cost margins 53 5.5.2. Average margins 54 5.5.3. Evolution of margins 56 5.5.4. Measuring the impact of the single market programme 58 5.5.5. Analysis of advertising and research intensive industries 60 5.5.6. Summary 61
5.6. Concentration 61 5.7. Conclusions 63
6. The evolution of competition in selected markets 65
6.1. Introduction 65 6.2. Trends in integration and competition in selected case studies 65
6.2.1. Evolution of trade patterns 65 6.2.2. Trends in price convergence 67 6.2.3. Summary 70
6.3. Integration and competition in the European soda ash industry 71 6.4. Trends in integration and competition in European beer markets 73
6.4.1. The basic economic drivers 73 6.4.2. Development of competition 73 6.4.3. The interaction of these drivers with competition policy 73 6.4.4. The interaction of these drivers and the single market 74
6.5. Trends in integration and competition in the European car market 75 6.5.1. Price differentials between EU markets 77
Table of contents
6.5.2. Changes in the structure of supply 79 6.6. Integration and competition in the European air travel markets 79
6.6.1. Entry strategies in the new European environment 82 6.6.2. Trends in joint ventures and mergers 83
6.7. Domestic appliances 86 6.8. Summary 87
Part II Competition issues 91
7. Geographic price discrimination 93
7.1. Introduction 93 7.2. Geographic price discrimination 94
7.2.1. Restrictions to arbritage and price distribution 94 7.2.2. Other practices supporting geographic price distribution 95
7.3. The welfare effects of price discrimination 96 7.3.1. Misallocated consumption 96 7.3.2. The output-expansion effect 98 7.3.3. The market-opening effect 98 7.3.4. The potential pro-competitive effect in oligopolies 98 7.3.5. The effect on entry 100 7.3.6. The effect on the sustainability of collusion 101 7.3.7. Summary 101
7.4. Competition treatment of restrictions to arbitrage 103 7.4.1. Discussion of available evidence 105 7.4.2. The case of cars 109 7.4.3. Competition treatment of other practices supporting geographic price
discrimination 110 7.5. The interaction between market integration and price discrimination 111 7.6. Conclusions 112
8. Barriers to entry and access restrictions in integrating markets 115
8.1. Introduction 115 8.2. Barriers to cross-border entry erected by firms 116 8.3. Restrictions of access to a complementary asset 117
8.3.1. Refusal to supply 117 8.3.2. Access pricing 120 8.3.3. Foreclosure through vertical restraints 121 8.3.4. The case of ice cream 123
8.4. Foreclosure through exclusionary pricing 128 8.4.1. Predatory pricing 128 8.4.2. Non-linear pricing 131
8.5. Institutional entry barriers and incumbents' behaviour 132 8.5.1. Dominance through regulation 13 3 8.5.2. Airport slots and traffic distribution rules 134
8.6. EU competition treatment of barriers to entry 136 8.6.1. Jurisdiction and procedure 136 8.6.2. The use of the'leverage' 137 8.6.3. Access to complementary assets 138
Competition issues
9. Market integration and collusion 145
9.1. Introduction 145 9.2. Selection of some relevant collusion cases since 1985 147 9.3. Factors affecting the likelihood of collusion 149
9.3.1. Sustainability of collusion 149 9.4. The impact of the single market on collusion 152
9.4.1. Pro-competitive effects: within-country collusion 153 9.4.2. New incentives to collude: cross-border collusion 154
9.5. The case of soda ash: an illustrative example of cross-border collusion 156 9.6. Competition policy against collusion 159
9.6.1. The problem of detection 160 9.6.2. Agreements facilitating collusion 162
9.7. Conclusion 164
10. Efficiency defences for cooperative agreements 165
10.1. Introduction 165 10.2. Empirical evidence on trends in cooperation 166 10.3. An economic analysis of efficiency defences 170
10.3.1. Efficiency gains from sharing or coordinating existing assets 172 10.3.2. Expansion into new geographical markets 173 10.3.3. Joint developments of a product or process 174 10.3.4. Summary 176
10.4. Case evidence for the efficiency defences 176 10.4.1. Sharing and coordinating existing assets 176 10.4.2. Entry into a new market 181 10.4.3. Research and development of new products/processes 183
10.5. Cooperation and market integration 186 10.6. Interfirm cooperation in EU competition law 189 10.7. Conclusions 192
11. Mergers 195
11.1. Introduction 195 11.2. Patterns of merger activity 196 11.3. Private incentives for merger 198
11.3.1. Market power incentives 198 11.3.2. Efficiency gains from mergers 199 11.3.3. Empirical evidence 200
11.4. The effects of integration on the incentives for merger 202 11.5. Mergers and joint ventures in the airline industry 204 11.6. The EU approach to mergers and market integration 206
11.6.1. Analysis of dominance 208 11.6.2. Assessment of cost savings 210 11.6.3. Market definition 211
11.7. Institutional implications of market integration for merger control 212 11.8. Summary and conclusion 213
Table of contents
12. State aid 215 12.1. Introduction 215 12.2. Trends in state aid 215 12.3. The economics of state aid 217
12.3.1. The reasons for granting state aid 217 12.3.2. Adverse effects of state aids 222
12.4. State aid and market integration 224 12.4.1. Effects of integration 224 12.4.2. Effects of state aid on market integration 225
12.5. State aid policy 227 12.5.1. EC Treaty 227 12.5.2. The market economy investor principle 228
12.6. The application of state aid policy 230 12.6.1. Capital market imperfections 231 12.6.2. Restructuring 232 12.6.3. Promotion of domestic industries 233
12.7. A case study: state aid to airlines 233 12.7.1. Economic reasons for state aid 235 12.7.2. State aid policy in the airline sector 236 12.7.3. Effectiveness of state aid policy in the airline sector 237
12.8. Conclusions 238
Part III Conclusions and policy recommendations 241
13. Conclusions on the evolution of competition in the single market 243
13.1. Introduction 243 13.1.1 Aggregate statistics on trade flows, firm performance and concentration 244 13.1.2. Sector-level data on prices, margins and trade flows 244 13.1.3. Theoretical analysis of potential anti-competitive responses 244 13.1.4. Case study analysis 245 13.1.5. Review of case law 245
13.2. General trends in integration and competition 245 13.3. Changes in competition conditions: sectoral trends in trade flows and price-cost
margins 247 13.4. Interaction of competition and integration in selected markets 249 13.5. The scope for further progress in integration 251 13.6. Measures preventing arbitrage 253 13.7. Access restrictions and other exclusionary practices 254
13.7.1. Restrictions of access to complementary assets 254 13.7.2. Foreclosure through exclusionary pricing 255 13.7.3. Institutional entry barriers 256
13.8. Collusion 256 13.9. Efficiency defences for cooperative agreements 257 13.10. Mergers 259 13.11. State aids 259 13.12. Summary conclusions 261
Competition issues
14.1. Introduction 263 14.2. Market integration, competition policy and trade policy 264 14.3. Restrictive practices 265
14.3.1. Collusion 265 14.3.2. Policy towards geographic price discrimination and parallel
import restrictions 267 14.3.3. Joint ventures and other cooperative agreements 269
14.4. Monopolies 272 14.4.1. Price discrimination 273 14.4.2. Access restrictions to essential facilities: refusal to supply 273 14.4.3. Vertical restraints as an access restriction 276 14.4.4. Tying of products for sale to consumers 277 14.4.5. Exclusionary pricing 279
14.5. Mergers 279 14.5.1. Efficiency defences 279 14.5.2. Institutional implications 280
14.6. State aids 281 14.7. Summary 282
Appendix A: NACE sectors included in the analysis of trade flows 285
Appendix B: NACE sectors included in the analysis of price-cost margins 287
Appendix C: Analysis of price-cost margins 291 C I . Data 291 C.2. Summary statistics 291 C 3. Cross-country differences in margins 294 C.4. Policy impact 295 C.5. Evolution of margins 295 C6. Preliminary analysis of margin definition Ml 296 C.7. Preliminary analysis of margin definition M2 300 C.8. Assessing policy impact 303
C.8.1. Relative effects on Buigues and non-Buigues sectors 307
Bibliography 311
Table 5.1. Table 5.2.
Table 5.3. Table 5.4. Table 5.5. Table 5.6. Table 5.7. Table 5.8. Table 5.9. Table 5.10.
Table 6.1. Table 6.2. Table 6.3.
Table 6.4. Table 6.5. Table 6.6. Table 6.7. Table 6.8.
Table 9.1.
Table 12.1. Table 12.2,
Table 12.3 Table 12.4
Effects of the single market programme 20
The industrial sectors most affected by the single market 46 Average trade share in the four big EU countries (all sectors except foodstuff, wood, paper, mineral products, steel, non-ferrous metals) 47 Measures of trade penetration for the manufacturing sector 48 Intra-EU trade creation (intra-EU imports as a percentage of demand) 48 Trade diversion (intra-EU imports as a percentage of all imports) 49 Extra-EU imports as a percentage of total demand 49 Cross-sectoral correlation of trade flows intra-EU and extra-EU (%) 50 Coefficients of price variation for selected groupings (prices incl. taxes) 53 Impact on price-cost margins 60 Changes in size and concentration by industry type 62
Intra-EU trade creation (intra-EU imports as a percentage of demand) 66 Trade diversion (intra-EU imports as a percentage of all imports) 67 Single market programme - technical measures that directly affected the car sector 76 Average price dispersion 1989-92 78 Single market programme policy measures affecting the air transport sector 81 Competition on scheduled routes 82 Important merger cases in European air transport 84 Summary of market studies 89
Soda ash - evolution of market shares in selected European markets (%) 158
Origin of the partners (%) 168 Purposes of collaboration by economic bloc (%) 168 Purposes of collaboration within Europe, by year 169
Merger activity in the EU (number of transactions) 197 Breakdown by Member State of the EU merger activity 1990-95 198 European mergers 1991 -94 207
State aid to the manufacturing sector in the EU 216 A comparison of the state aid granted by national states and Community expenditure 217 Overall state aid in the EU Member States, in percentage of GDP 217 Percentage breakdown of the decisions taken by the Commission on state aid 230 State aid to the manufacturing sector; percentage breakdown according to sector and function 231
Competition issues
Table 12.6. State aid to European airlines
Table 13.1. General trends in aggregate statistics Table 13.2. Impact on price-cost margins Table 13.3. Drivers of competition and integration
Table C I . Margin definition Ml across time and countries Table C.2. Ml by group and year Table C 3. M2 by group and year Table C.4. Cross-country variance in average margins by year Table C5 . Ml by group and year Table C.6. Group and year effects for margin definition Ml Table C.7. Fit of margin M2 to time dummies Table C.8. Group and year effects for margin definition M2 Table C.9. Coefficient estimates for alternative models of margins Table CIO. Estimated coefficients of relative impacts on Buigues sectors Table C. 11. Regression results using A/R classification
246 248 249
292 292 293 294 296 299 300 303 305 307 308
List of figures
List of figures
Figure 5.1. Coefficients of price variation for the EUR-12 52 Figure 5.2. Average margins 54 Figure 5.3. Cross-country variance of average margins 55 Figure 5.4. Evolution of margins (Ml) (controlling for country- and sector-specific
effects and cycle) 56 Figure 5.5. Buigues sectors relative to other sectors 57 Figure 5.6. Evolution of margins (M2) (controlling for country- and sector-specific
effects and cycle) 57 Figure 5.7. Buigues sectors relative to other sectors 58 Figure 5.8. Definition of policy variable 59
Figure 6.1. Coefficients of variation for beer 68 Figure 6.2. Coefficients of variation for motor vehicles 69 Figure 6.3. Coefficients of variation in the EUR-12 for telecommunications equipment 69 Figure 6.4. Coefficients of variation for washing machines and tumble-dryers 70
Competition issues
List of abbreviations BEUC Bureau Européen des Unions de Consommateurs CAÁ Civil Aviation Authority CCD Concentrations with a Community dimension CEPR Centre for Economie Policy Research CRS Computerized reservation system DoJ Department of Justice [USA] EAG Economists Advisory Group EC European Communities EC J European Court of Justice ECSC European Coal and Steel Community EEA European Economic Area EEC European Economic Community EU European Union FFP Frequent Flyer Programme GAO General Accounting Office (USA) GATT General Agreement on Tariffs and Trade IATA International Air Transport Association IPR Intellectual property rights JV Joint venture M&A Mergers and acquisitions MEIP Market Economy Investor Principle MMC Monopolies and Mergers Commission MPV Multi-purpose vehicle MTF Merger Task Force NIC Newly Industrialized Countries OJ Official Journal R&D Research and development RHT Reverse hooking tyre SEA Single European Act SME Small & medium-sized enterprises TOs Telecom operators UBC United Brands Corporation VAT Value added tax VER Voluntary Export Restraint
In preparation for the Intergovernmental Conference, the Commission commissioned a number of studies on the impact of the single market programme. Some studies focus on developments in specific industries, whereas others examine the wider economic impact. In this major study the Commission sought a wide-ranging examination of the competitive behaviour of firms faced with changes in market conditions, in particular those aspects of firm behaviour that may prevent the benefits arising from the single market being fully realized.
The research for this study was undertaken by three groups of consultants and academics based in London, Barcelona, Brussels and Berlin.
The project team consisted of a core group that was supported by two groups of advisers and collaborators:
London Economics: Cristina Caffarra, Robin Cohen, Pietro Crocioni, Tom Hoehn (project director), John Kay (main project adviser), Christian Koboldt, Aubrey Silberston (main project adviser);
Instituto de Análisis Económico/Fundación de Economía Analítica, Barcelona: Kai-Uwe Kühn, Carmen Matutes, Xavier Vives (main project adviser);
Fachhochschule für Wirtschaft, Berlin: Jürgen Müller, Georg Merdian;
Other collaborators: Daniel Maldoom, University College, Oxford; Robin Nuttall, Nuffield College, Oxford; Nick Owen, Department of Trade and Industry, London; Stefan Szymanski, Imperial College, London.
The final report was prepared by the editorial team consisting of Cristina Caffarra, Tom Hoehn, Kai-Uwe Kühn and Daniel Maldoom. The project director, Tom Hoehn, acted as general editor. Sub-editing and final collation of the document was done by Audrey Minton (London Economics).
A supplementary report, Competition Issues in the Single Market: Case Studies, London Economics [1996], contains the case studies that served as empirical background material for the analysis of various issues throughout this study. The case studies were the editorial responsibility of: Tom Hoehn (soda ash); Jürgen Müller (airlines); Nick Owen (cars); Stefan…