What, if any, is the difference between a competition policy and an industrial policy?

by paulali1989 (student)

University Degree Business and Administrative studies

In this assignment I will look to analyse and provide in-depth explanation into what is competition policy provide examples of this, I will also provide the same for industrial policy. The information will allow me to provide an in-depth conclusion between competition & industrial policy.

Competition policy I will look at the its aims and look into the EU’s competition and how it tries to increase market efficiencies & ensure a competitive market and the measures it does to ensure it achieves its aim’s and objectives which basically are to enhance efficiency by promoting or safeguarding competition. The five pillars of the pillar the EU’s competition policy is as follows.

Antitrust & cartels.
Merger Controls
Market Liberalisation
State aid control
International cooperation.

What are cartels how do they affect the economy? A cartel is a group of similar independent firms which come to an agreement to distort prices, the prices rise but this isn’t done as a reflection of supply, demand or quality. The cartels see an increase in profits and keep the same market share. This breaks EU competition law a break in this law can see firms hit with heavy fines from the European commission. Due to the difficult nature to prove this an incentive was brought forward for firms to come clean this is known as the “ leniency policy” the first company out of the cartel to come clean & providing evidence against other members . An example would be the vitamin cartels in 2001 eight companies where fined as they attempted to alleviate competition in the vitamins market. These companies where fined a combined total of EUR 800 million an astonishing fine which offers a disincentive for companies to partake in such activities in the future thus helping maintain a competitive market.

There are also anti-trust policies to make sure monopolies are market leaders do not abuse their power. Firms with strong market powers can engage in a manner which affects consumers & competitors. Charging unreasonable prices that will exploit the customers, just as dangerous are the firms who enjoy the benefits of economies of scale so are able to charge dangerously low prices, which in turn damages competitors forcing them out of the market and creating barrios to entry. An example of this would be Wal-Mart, in 2002 Wal-Mart was convicted of predatory pricing in Germany and just 6 years later it pulled out of the country entirely due to loss of reputation. There are other examples like discriminating between trading partners and forcing unjustified trading conditions on trading partners. Microsoft has been found guilty of both these crimes they withheld information from rival firms windows based PC’s went hand in hand with Microsoft rivals couldn’t compete fairly also fitting every single computer with windows media playing distorting competition.

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Mergers are when firms combine when firms combine there usually from the same sector. They ideally allow this new large firm to operate more efficiently as it enjoys greater economies of scale. The market then becomes more competitive through these efficiencies and consumers benefit from higher quality good with fairer prices. Mergers increased competition within the single European market and globalisation make it an attractive proposition, this leads to the perfect conditions for growth in the market & increased living standards. All this seems great so why are mergers examined? Mergers are examined because they can also lead to negative effects. If the mergers annual revenue of the combined companies exceeds specific thresholds this may be counterproductive to growth as a monopoly may have been formed. A merger like the one above that weakens competition & may lead to higher prices would be unlikely to be approved. The firms would then sell of parts of the business or license them out if they are truly committed to the merger. An example of this would be Unilever & Bestfood if the two were granted permission to merge with no sanctions than it would of reduced competition in the food markets which in turn would of lead to higher prices lowering people’s real wage. The companies then promised to sell EUR 1 billion of its business to competitors.

Opening up markets if key to competition policy this brings with it the advantages of liberal markets. EU member states enjoy liberal markets they can provide services & products from international competitors. This would usually mean a more efficient marker would be operating and consumers would benefit. Certain countries enjoy comparative advantage when producing goods the EU insures it enjoys a healthy export trade whilst lowering costs in its own member states. There are some firms which would be sceptical to this in the past, postal services, transport and energy companies many of these industries are nationalised, they enjoy a large market share also the government subsidises the companies meaning efficiency within the firm is usually poor, with a liberal market these companies may struggle to compete. An example of one huge benefit which has come from the freedom of choice would be low cost airlines. This has made Europe an incredible small place your summer holidays no longer take all year to save for, the increased competition in the airline industry has led to firms like Ryanair eating into BA once monopoly over the market.

State Aid is generally prohibited but there are certain conditions which allow for it these are some cases which don’t allow for it. An intervention by the state example would be tax reliefs, grants and holding of part or all of the company. The intervention has affected trade between member states thus distorting competition. When is state aid allowed? State aid is allowed when promoting small or medium sized enterprises, these starts up grants are key to providing local jobs. Research & development are key increasing productivity innovation in technology and medical treatments is what keeps western economies are the worlds powerhouse economies. Also when consumers interests put at risk like a bank on the brink of liquidation unable to release the customers savings it’s in the nations interest to save the bank.

International cooperation can the European Commission examine mergers & cartels outside the EU? Yes it can if it affects the interests of the EU member states. The reason it is able to operate outside the EU is because of its massive purchasing power, countries outside of the EU are not willing to lose their largest importers of their goods so they abide by EU competition law.

What exactly is industrial policy? Industrial policy is the government’s policy which attempts to encourage growth and development its aims are to offset externalities affecting production decisions by firms. Industrial policies are specific to individual sectors unlike horizontal policies like tightening credit, vertical policies are subsiding export policies. These are often labelled as interventionist and opposed to laissez-faire economics who believe in the invisible hand of the free market. Some of the key industries that industrial policies affects are a countries infrastructure insuring transport in the country is provided as a quality service, make sure the all regions of the nation are accessible, energy industries also are key to in infrastructure to ensure there is a plentiful supply of energy to power the nation’s population and industries. In the UK energy was provided by the state NIE is still N.I major energy provider but since the deregulation of the energy sector it no longer is the cheapest, with in the 5 years its grip will loosen if consumers had perfect knowledge the company would be forced to lower its prices. It was state owned and in turn suffers from the same problems all public sector firms suffer from inefficiency in productivity and production.

There are many different policies which make up governments industrial policy. Public policies, fiscal policies Fiscal policy is the attempt to influence the level of economic activity through changing taxation and government spending. Generally, fiscal policy is used by UK government to influence in aggregate demand in the economy. Thus, it can achieve 3 main economic objectives: price stability, full employment and economic growth , monetary policy which comes from the Bank of England whih provides interest rates it sets it accordingly to inflation it affects prices & costs in turn affecting production, imports and exports, trade policies and revenue and spending these are the main aspects. The combination of the these are to protect the market, there has been a rise in industrial policies since The Great Recession there has been large market failures resulting in loss of confidence in the economy. There has been an been EUR1.18 trillion spent on bailouts mostly to financial services.

Conclusion

Competition policy seems to be more about protecting competitors rather than consumers, The European standard for abuse seems to be more based on extensive analysis, focused on consumer welfare. However, the perception is that in Europe, the conduct focuses more on the effect on competitors than on competition that is on consumers. Article 82 states that ‘any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between states’. In Europe legal and economic analysis seems to be guided by the presumption that dominant firms will generally be successful in their exclusionary practices, will raise prices and therefore will end up harming consumers. Some of the main differences between the two policies would be there different approach to market activities. Competition policy ensures markets are competitive it ensures this is done by punishing collusive behaviour and abuses of market power. Industrial regulation restricts or removes competition in certain markets completely. On the outside looking in this surely couldn’t be the most rationale thing to do, surely it’s more feasible to have the lowest prices and increase peoples real wage.

Industrial Policy affects market sectors which affect the economic welfare of the nation. The health of a nation and its people surely needs to be regulated to put this to the chance of the privet sector in my eyes would be foolish, privet firms seek to maximise profits and consumer needs come second. The public sector is not infallible there has been cases of these companies abusing their market power. There infrastructure of the nation needs to be controlled by its government to release complete control leaves the nation vulnerable. It also tries to subsidize certain markets are in decline the government seek to fund them are counteract any market failures one example of that would have been the coalmine.

The main difference between the policies is really that the privet sectors main interest is profit maximising and cost effectiveness, the competition policy reflects this. It creates a market where it is able to do these fairly tackling issues such as cartels & monopolies these type of firms distort prices. Industrial action tackles a nation’s economic welfare and all the infrastructure surrounding it, it understands to leave the invisible hand of the markets to such important sectors would create too much uncertainty in such vital areas of the economy. It may not have the efficiencies of the private sector or the benefits of competition but tight regulation allows government to control these sectors funding them to make sure market failure doesn’t lead to the firm’s demise.