Industrial Policy:
-> DEF: Industrial policy is any policy that affects a subset of firms, firms’ activities and industries differentially from the remaining firstly defined. Any tax, subsidy, trade and other policy measure that affects only a limited and specific domain of a nation’s production system can be considered as an industrial policy intervention.
“Industrial Policy is a nation’s official total effort to influence sectoral development and thus, the national industrial portfolio”
(Bingham in Handbook of public policy, edited by B. Guy Peters and Jon Pierre, 2006, SAGE, p. 293).
“Any type of selective intervention or government policy that attempts to alter the structure of production toward sectors that are expected to offer better prospects for economic growth than would occur in the absence of such intervention, i.e., in the market equilibrium.”
(Pack and Saggi 2006).
“Industrial policy means the initiation and coordination of governmental initiatives to leverage upward the productivity and competitiveness of the whole economy and of particular industries in it.”
(Johnson 1984)
-> EXAMPLES:
- Support to young innovative companies
- (some elements of) Italian PNRR
- Sustainment to specific sectors (e.g. Automotive Industry)
- Import quota (or other trade restrictions) imposed by the Governement to protect the nation industry
- Government subsidy (or guaranteed low interest rate loan for buying new (eco-friendly) cars
- The set-up of a new public research center on autonomous self-driving car innovations in partnership with private operators.
Types:
-> There are different types:
- Offensive (support to specific industries able to play a major role on the global value chains, e.g. “smart specialization”) and Defensive (“protectionism”, “save losers” or “sunset industries”) policies, where defensive in the short-tem may become
- Horizontal vs. Vertical industrial policies:
- Different rationales: economics (e.g. market failures), social justice or avoidance of social problems (e.g. employment safeguard), national strategic aims (e.g. “national champions” policies), etc.
- Different outcomes:
- Political and lobbying influence,
- “Government failures” [apart from lobbying activities, i.e. often effectiveness of policies depends “on get the implementation details right”, and this may be tricky details]
-> Policy want to increase social welfare:
- Static efficiency: devided in allocative & productive efficiency
- Dynamic efficiency
-> Industrial Policy as offensive component is more & more conincident with its subset of Innovation Policy.
- Innovative activity are influenced by several forces, including competition policy, regulatory and law regimes, patent system (among others) all contribute to shape the interested dynamics.
-> Entrepreneurial talent can vary across different economic systems of different times, but not that much.
-> Insitutions are
- Formal (lawsm rules, regulation, written norms)
- Informal (culture, common habits, unwritten norms, tacit codes of conduct)
… and the way these two type of institutions interact, which set the rules of the game” in life for individuals (& entrepreneurs) …
-> Any industrial policy has to consider why it is implemented and the possible outcomes of this policy intervention.
Industrial (Innovation) Policy
-> Private firms (may) invest less than the social optimum, bcse
- Knowledge Spillovers
- Capital Market Imperfection
Knowledge Spillovers:
-> The primary output of R&D investements is the knowledge of how to make new goods & services. This knowledge is not rival-use by one firm: does not preclude its use by another. To extent that knowledge can not be approrpiated by the firm undertaking the investment and therefore such firms will be reluctant to ivest => underprovision of R&D investments in the economy.
=> Any formal/ informal mechanism to preotect innovation is only partialy efficient at the very best.
-> The underprovision of R&D is more severe for high-tech start-ups due to the higher relative costs in protecting innovation.
-> Young & Innovatinve Companies are unable to protect their innovation.
- They don’t have many resources-> Can’t access to patent process
- May lack those complementary assets necessary to exploit innovation.
Critique:
-> Existence of spillovers in research is generally accepted, documented on an empirical ground, even if obvious measurement problems exist (often localized).
Capital Market Imperfections:
-> Empirically analyses, generally confirm greater financial constraints suffered from R&D investments than other typology of investment.
-> Taxonomy:
- Fiscal Incentives to R&D:
- Grants to R&D:
- Innovative Entrepreneurship Policy:
Fiscal Incentives and Garants to R&D:
-> There are two broad typologies of R&D subsidies:
- Grants (selective)
- Fiscal Incentive (automatic)
-> Crowding-in vs Crowding-out issue:
- CROWDING-IN (additionality): public R&D subsidies increase private R&D expenditures
- NEUTRAL EFFECT: public R&D subsidies do not stimulate neither depress private R&D expenditures.
-> They increase overall R&D budget of thefirm => R&D projets are undertaken that would have not materialize in the absence of the subsidy.
-> Subsidy have to be financed (with taxes) => Benefits are uncertain.
- CROWDING-OUT: public subsidies substitute private funding and there is no (or few) undertaking of new R&D projects. Firms would have realized (many of) those projects even in the absence of the subsidy.
-> Two borad typologies of R&D Subsidies:
- Grants (“selective”)
- Fiscal Incentives (“automatic”)
-> Worldwide implementation of these schemes at various levels (supra-national, federal/national, regional/local) in the past, present and probably in the future.
-> 5.Public money are able to incentive private R&D.
- Can really change things
-> 6. After t+n+1, private company continue to invest more than they did before t.
Grants vs Tax Credits (automatic fiscal incentives):
-> To be successful a program must target marginal projects or those that face some types of constraint.
- These are not promising that they will be privately funded in absence of the program.
-> PROS: -> Selectivity
- Send funds where most needed (form a social pov)
- No complications to the tax system (vs financial incentives)
- No room for recipient firms to re-label as R&D activities that are not (vs fiscal)
-> CONS: -> Selectivity
- Possible errors & distorisions (main among others) bcse of their selectivity
- Public may be less competent than private (unable to “pick (future) winners”)
- Public may avoid risk: “Cherriy Picking“: we take the most beautiful one, to avoid the risk of wasting public money
-> Mattew Effect: it rains where it’s already wet.
Indirect Effect of Grants:
- STAMP OF APPROVAL: phenomenon where an endorsement, approval, or certification by a recognized authority or trusted entity increases the perceived value, credibility, and desirability of a product, service, or idea. This effect exorted by public measure open the ports for a
- Insensitive in the money involved
- Rely on the fact that there was a committee that was in charge that decided who was the winner and who was the loser.
Innovative Entrepreneurship Policy
-> Entrepreneurship policy ≠ Incresase entrepreneurship rate in the economic system.
- Put those that are more capable to be entrepreneur to be in the position to do it (qualitative vs quantitative)
-> Policy Major Entrepreneur: if the market is full, good entrepreneur are forced to stay out.
-> Deadweight and Substitution effects: if the selection process is the outcome of a Bayesian process of learning, a subsidy may be boh…
- Useless: the more efficient entrepreneur does not need it; while the less efficient one leaves the market once the subsidy ceases to be in operation. -> If this prevale => industrial policy supporting entry is affected by a deadweight component.
- Harmulf: less efficient entrepreneurs are given an artificial seedbed, while market competition would have introduced them to leave the market. -> If this prevale => substitution effect arises.
Competitive Selection Model:
-> Competitive MKT, each firsm is characterized by (: estimate of the value of own productivity, capability) => .
- Beggining of each period, firms decide whether to remain active or not.
- Active firms decide how much produce, choosing the quantity that maximize the profit:
-> 1° Order Condition: ,
-> Maximum Profit Levels:
-> Startup Acts: policy that try to sustain entry but also other aspect of entrepreneurial life (grow, when enter, when exit)
- Are increasing nowdays
- Italian Case: the Startup Act intended to spark the national innovation ecosystem
- Tageted Young Innovative Companies
- Requirements -> look lectures
📌For new high-tech firm, primary assets are the knowledge & skills of the founders. Any competitive advantage is likely to be based upon what the founders can do better than others.
Competition Policy:
-> Competition Authorities:
REGULATION: settled the rules of the games in advantage (the price and the nature of the service)
- FUNCTIONS:
- Identification of natural monopolies
- Impose conducts to firms so that competition (and its results) can be mimicked.
ANTI TRUST: (ex-post) punishment anti competitive behaviors.
- General target: Applietd to any economic system, not specific sector.
- FUNCTIONS:
- Punish anti-competitive behavior put in place by firms
- Prevent the formation of artificial dominant position in markets
REGULATION:
-> Agenda:
- Tariff Regulation – Theory (well-informed Regulator)
- From theory to Practice
- Regulation of Tariff Dynamics in Practice
The Regulative Framework:
-> Let’s summary some rules:
- Total cost function (fine): ;
-> We are in a natural monopoly condition
- Average Costs: ;
-> ;
- Marginal Cost (costant): ;
- Inverse linear demand curve: ;
1.MOS small relative to MRK:
-> The process begins with the average cost (AC) curve for a firm and the market demand (Market D).
-> Evaluation of MOS (Margin of Safety): is there a “Natural Monopoly”, MOS large relative to the D & competition withing the mkt is not possible?
- NO, MOS < MKT => Do not regulate; achieve “first best” (optimal situation); introduce competition for the market.
-> Examples: Motor carriers, water carriers.
- YES, MOS > MKT: Natural Monopoly, Proceed to the next evaluation.
2.Natural Monopoly:
-> Since we are in a Natural Monopoly evaluate the deadweight loss (DWL): in the “second best” (suboptimal compared to “first best”) is the scenario tolerable?
- NO, Large DWL: Regulate to achieve “first best” (or near) outcome.
-> Requires external subsidies, price discrimination, or nonlinear tariffs (multipart tariffs) to allow the firm to avoid a deficit and price efficiently.
- YES, Small DWL: Proceed to the next evaluation.
3.Possibility of Competition for the Market:
-> Determine if there can be competition for the market, through:
- Demsetz competition
- Contestable market
- Monopolistic competition (intermodal competition)
- NO => Regulate to achieve “second best” (or near) outcome (May avoid external subsidies and nonlinear tariffs).
- YES => Introduce competition for the market.
-> Examples: Railroads, pipelines, intermodal competition or Demsetz competition. Airlines: contestable market.
📌MOS: Minimum Optimal Scale
Methods for the 1° best solutions:
Subsidiaries
-> HP: pattern of consumption of the services is not constant through time:
- A second best solution is charged in period of peaks.
- A first best solution is charged off-peaks.
-> Individuals self select theirselves in the solution that they prefer.
-> EX: dishwashing, if u want to do it in the middle of the day
=> u pay a lot, while during the night u don’t pay too much.
Price Discrimination of 3°
-> HP: Regulator can find some exogenous indicator which is able to segment the market
- Type 1: high willingness to pay (h WTP)
-> Just they pay the fixed costs.
- Type 2: low willingness to pay for the service (l WTP)
Price Discrimination of 2°
-> The price discrimination can be done in two ways:
TT: Two part Tariff
-> DEF: Regulator fix the unit price (p) = MC (to the best price ). With a negative extra profit (green area). Fix access firms such that f = fixed costs/ # of users: => Everybody contribuite equally.
-> ;
-> Historically used in network businesses.
-> Difficult to create the partecipation constraints.
Peak-load pricing (Search pricing)
-> DEF: Regulator uses fiscality to make valuable, to the firm, remaining in the market.
Price Discrimination of 3°
-> HP: Regulator can find some exogenous indicator which is able to segment the market
- Type 1: high willingness to pay (h WTP)
-> Just they pay the fixed costs.
- Type 2: low willingness to pay for the service (l WTP)
Price Discrimination of 2°
-> The price discrimination can be done in two ways:
TT: Two part Tariff
-> DEF: Regulator fix the unit price (p) = MC (to the best price ). With a negative extra profit (green area). Fix access firms such that f = fixed costs/ # of users: => Everybody contribuite equally.
-> ;
-> Historically used in network businesses.
-> Difficult to create the partecipation constraints.
Peak-load pricing (Search pricing)
-> DEF: Regulator uses fiscality to make valuable, to the firm, remaining in the market.
-> Regulators aim to implementing a 2° best solution.
- Has to decides btw 3 possibles shapes of the AC curve (a, b, c) (the other curve in the picture is the Standard inverse lienar demand curve).
-> Regulator can not easyily identify in the correct manner the true AC curve. It has a natural tendency to over estimate costs (we are talking about regulating services, that are open to everyone) => Regulator would prefer c while b is the true one.
- The real 2° best solution is the one orange.
=> Implementing the incorrect 2° best solution the firm has an extraprofit equal to the green rectangle area. With the real one it has no => Firm has no interest in share the AC to the regulator to enjoy extra profit => Adverse Selection Problems, the more u lies the best it is.
-> Also estimated this costs it’s very difficlut.
=> For this regulated firms operate in both regulated and non regulated environment.
-> Improve the collecting cost activity to improve regulations.
The Moral Hazard Problem:
-> HP: regulator correctly identify the AC.
-> PROBLEM: regulator doesn’t know if it’s the AC of a efficient or inefficient firm.
- An efficient one would push down the AC curve. The regulated firm has no incentive to search this, bcse if the firm is efficient => the real AC would be lower and pushing down the p second solution it would have less profit.
-> HP: => Declining level of the caps:
-> Regulatory period generally is 3/4 years.
Procedure:
- At the beggining of the regulatory period: accounting analysis and costs’ estimation.
- Can be assumed that the cap is equal to the most recent price, or to costs measured on a sample of similar firms
- Or simply repead Cost Plus estimation
- Regulatory period definition (normally, 3-5 years)
- The length of the regulatory period allows the firm to keep gains from productive efficiency improvements and, hence, creates an incentive to adopt efficient behaviours.
- Weaker incentive at the end of the peirod: the firm knows that efficiency gains are short-lidved. This may lead to the so called Ratche effect: the firm, knowing regulator’s behaviour, slows down in its path towards efficiency as the end of the period approaches.
- Time Dynamics:
- Productive efficiency gains exceeding those predicted by the formula go to the firm
- The firm could also incur in losses if cost reduction occurs at a rate lower than X (this situation may turn out to be undesiderable for any party involved: regulated firm, regulator, citizens)
- Profit Sharing at the end of the regulatory period:
-> In the revision year, the new base is not equal to the costs the firm had over time
- The dependence price-cost is distributed to consumers and firm
- A percentage of this margin is included in the new base of the Cap, while the residual is left to the firm (in Italy usually a 50%-50% ruel is applied.
Social Welfare Effects:
- Productive Efficiency (➕) at the end of regulatory period, part of benefits are passed to consumers, part is a premium to the efficient behavior of the firm.
-> Incentives to cost reduction -> beneficial to consumers
- Allocative Efficiency (➖/➕):
- During the regulatory period costs are not measured.
- Prices are normally higher than a firm’s costs.
- Dynamic Efficiency: we have to distinct btw two kind of
investments
- Quality enhancing (➖) -> all focus is in reducing costs
- Cost reducing (➕)
-> Q: quality improvement of the provisions of the firm
- If regulator detect a quality improvemet in the services
=> + Q, regulater firm is able to infer higher price
- If regualtor detect a quality downgrade => – Q
- Low administrative costs comparede to Cost Plus.
-> DEF: describe the regulatory intensity over time:
- Monopoly: one firm that was
-> Given intensity of regulation. In case the monopoly firm was private => was regulated.
- Monopoly & Competition: open to competition.
-> Decreasing regulatory intensity.
-> Since new entrances were too small to compete => regulation had to impose to the incumbent to fix a cost.
- The access was regulated too.
- Competition: with the full competition there are still regulation, firms that seems to be new monopoly need to be regulated, but regulation decreased over and over.
UNBOUNDLING: separate the infrastractural stage from what is above and what is below.
- Incumbent can discriminate the new entrance not just through price, but also with quality for example.
-> TYPES: there are different level of unboundling
- OWNERSHIP: Company that is in charge with the infrastructural stage should have not any shareholding linkages with any company above and below. (Allocative)
- LEGAL: Companies have to be separated, but still may belong to the same group (shareholding linkages are possible)
- FUNCTIONAL: impose only that one company that should be not a separated (that operates in productional and infrastractural stages), has separated department, in ordr to present separated accounting document to the regulator.
-> Ex: telecommunication
- ACCOUNTINGN: imposition into the regulated firm has to present different accounting documents.
-> The same company work in all the stages (Productive: by not scorporating the incumbetn => it can better manage the infrastructral stages using scales of economy. W1e lose in term of allocative efficiency)
-> Ex: energy
-> Trade-off btw Allocative & Productive Efficiency. Allocative ->(1,2,3,4)-> Productive
-> Linkage with atitrust: UE take the antitrust reulation as ex-ante. DMA, Digital Market, recognised that some firms are having very much power (expecially in running platforms). Those platforms were recognised as Insential Facility.
GATE KEEPER: owner & manager of …. Facilities.
Antitrust Areas:
Ex-Ante:
- Agreements btw companies that restrict competition: Cartels or other unfair arrangements in which companies agree to avoid competing with each other and try to set their own rules (collusions 🔗cartel creation).
- Abuse of Dominant Position: a dominant player try to squeeze competitors out of the market (predatory pricing).
-> A major player tries to squeeze competitors out of the market: Predatory pricing
Ex-Post:
- Mergers & Acquisitions
Agreements btw Companies:
Collusion:
-> Firms decide to act like a monopoly and share the profit.
-> WHY: convenient, if cost structure is similar and there are no high coordination costs => colluding is more conveninent than competing.
📌Bandwagon Effects in high-technology industries: firms choose no competition, the most rational strategy
Collusion Sustainability:
-> ANTITRUST: collusion has to be checked if it’s sustainable over time:
-> FACTORS:
- 🔼 # of (identical/similar) firms, 🔼 costs => 🔼 difficulty to collude, but also deviate from this behavior.
- Probability that no external factors will occur to change the game (e.g. entry of new firms, obsolescence of the focal product).
- Frequency of interactions between firms (i.e. the number of times firms play the same game)
-> EXAMPLE:
-> There are 2 firms that
- No capacity constraints;
- Have a market
-> They collude in the price: ;
- There could be one of the firms that could se the price to one lower that the one settled before, gaining all profit, becoming a monopoly () => No sustainable collusive agreement
- Thus could lead to subsequent lower price till it’s set the price equal to costs, but’s irrational.
-> EXAMPLE 2: without changer:
| 1/2 | Cheat | Collude |
| Cheat | (1,1) | (3,0) |
| Collude | (0,3) | (2,2) |
- If the game is played only once, it is a prisoner’s dilemma type of game: NE is (1,1).
- Now suppose that the game is repeated an indefinite length of time and the probability the game will be played each time is 0 < p < 1. Also suppose that firms adopt a punishment strategy for deviation from the collusive agreement of a grim-type (“I collude until you collude, if you cheat once I will cheat forever”).
- A) If a firm cheat its payoff is: that is equal to
- B) If a firm colludes, its payoff is: that is equal to
- Both firms will collude if: >
- If «p» is high enough (so «no game changer» is at the horizon) firms will likely collude (or to better say the collusive agreement is sustainable).
N.B. if |p| < 1, we have that .
📌Digital increases frequency of interactions & enhance collusion posibilities
- Collusive allineament could be ease bcse competitors may easily observe the competitors behaves in term of pricing, and change the price easily and quikly.
-> Firms collude on price. In periods of…
- High demand => high incentive to deviate from the cartel (🔼profits at the expense of the other firms) => collusive price has to be reduced in order to reduce the incentive to deviate and make sustainable the cartel.
- Low Demand => Low Incentive to deviate from cartel (lower profits at the expenses of the other firms) => collusive price can be raised since incentive to deviate is low and the cartel is still sustainable.
-> COLLUSION TYPE:
- EXPLICIT: there are tangible document that firms are involved. Illegal but easily pursued by antitrust.
- Concreted action: there are no really document that are a proof, but eventual collusion involve some public announcement about pricing policy to influence competitors.
- TACIT: counscious parallelism, firms collude without any tangible proof. There are no proofs => it’s illegal in law, but legal in practice (can not be persecuted).
Abuse of the Dominant Position:
-> DEF: when a major player tries to squeeze competitors out of the market (predatory pricing)
-> a DP is never punished if not artificial
Example:
-> Suppose that demand is given by: P = 120 – Q and all firms have constant marginal cost of c = $80
-> Let one firm have innovation that lowers cost to cM = $20
-> This is a Drastic innovation. Why?
-> Marginal Revenue curve for monopolist is: MR = 120 – 2Q
-> If cM = $20, optimal monopoly output is: QM = 50 and PM = $70
-> Innovator can charge optimal monopoly price ($70) and still undercut rivals whose unit cost is $80
❓Sould the innovator being blocked bcse it will turn out into a monopolist?
-> We have to ask ourselfs:
❓Is there a Dominant Position?
-> Depend on the definition of a RELEVANT MARKET.
The Relevant Market:
-> DEF:
- RELEVANT PRODUCT MARKET: comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products’ characteristics, their prices and their intended use.
- RELEVANT GEOGRAPHIC MARKET: comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous.
…Deals with:
- Demand side substitutability (customers)
- Supply side substitutability (suppliers)
=> Practical determination is far from obvious and quite complicated!
-> There are different ways to define if a market is relevant or not. The following rely on smart but significant Non-Transitory Increase in Price:
SSNIP Test – Small but Significant Non-transitionri Increase in Price:
- Start with smallest possible market and ask if 5% price increase would be profitable for a hypothetical monopolist (market for bananas or market of concrete in the area x).
❓Would it gain somthing from this increase?
- If yes => relevant market.
- If not, then firm does not have sufficient market power to raise price.
- Next closest substitute is added to the relevant market & test repeated keeping constant the price for the closest substitute (market for bananas & kiwi or market for concrete in x&y).
-> Process continues until the point is reached where a hypothetical monopolist could profitably impose a 5% price increase keeping constant the price for all the closest substitutes (fruit market or market for concrete in x&y&z).
- Market then defined (fruit market/ market for concrete in x&y&z).
The Cellophane Fallacy:
-> Generally the “prevailing” price is the starting point to apply the SSNIP test, but this is not necessarily a competitive one.
-> If it is already the one of monopoly (i.e. the optimal solution for the monopolist), a 5% increase by definition is not profitable, [monopolist optimally sets a price in correspondence of an elastic part of the demand curve (remember the mark-up formula)].
- In this case “an increase in the current level of prices might induce customers to switch to other products that would not necessarily be substitutes under competitive conditions.
The Dominant Position:
❓Is there a Dominant Position?
-> FACTORS: these are the factors that define in practice the dominance
- Market share (generally above 40% in EU, 50% in USA)
- Length in time of that market share
- Differences in market shares with second competitors (High Herfindahl index)
The Abuse:
-> DEF: when a company exploit the dominant position to eliminate competition. In practice:
- PREDATORY PRICING: Depriving smaller competitors of customers by selling at artificially low prices they can’t compete with,
- Obstructing competitors in the market (or in another related market) by forcing consumers to buy a product which is artificially related to a more popular, in-demand product.
- Refusing to deal with certain customers or offering special discounts to customers who buy all or most of their supplies from the dominant company.
Surprise Predatory Price:
-> How practically define a Predatory Price:
- AREEDA-TURNER: firms with dominant position, fix the price below its marginal cost (MC of the firm)=> It’s predatory.
- RECOUPEMENT LOSS:
-> RECOUPMENT LOSS PRINCIPLE:
-> Idea: if Exit of competitors => principle
- ST: Short Term
- CT: extra profit
-> It should be documented by the antitrust.
- Proof of PREDATORY INTENT: since all measures are estimation, if we are able to demonstrate that the monopoly firm is doing predatory price => is better!
📌US: necessary all conditions, EU just one is sufficient
=> Price down is the only sure thing of the whole process!!!
- It’s good for welfare: with lower prices, customers buy, welfare increases.
=> There are different schools for antitrust implementation:
- Harvard vision (classical – standard): based on the bain and the S-C-P paradigm.
- Chicago Antitrust school: eccessive antitrust interventionism may end up harming rather than benefiting social (and in particular consumer) welfare (structure is never stable)
- New Brandeis Movement: “antimonopoly” position.
Chicago School:
-> It try to build comprehensive and inclusing way to analyze the market to say that, in many circumstances, it lead to harming.
-> AIM: diminishing the relevance of atitrust interventions.
=> Predatory Pricing is unlikely:
- Expensive: price reduction may also mean higher output to produce at very high costs, if MC curve is increasing.
- Acquisition can be a much less expensive way to eliminate a competitor
- If the prey exist easily => some others could also easily enter into the market.
=> Firms may refrain refrain from pricing aggressively so to avoid any risk of being accused (MC has to be estimated and one never knows how things turn out in legal courts).
-> Firms that are not capable enought ask the intervention of the antitrust to broke legs of the winner of the market, even if this was the winner for its capacity.
Rule of Reason vs Rule of Law:
- PROBLEM RoR: there are not clear guidelines on what is permitted and what is not.
-> Subjectivity, lack of transparency, little predictability to market players
- PROBLEM RoL: Risk of wrong decision in terms of welfare given the uncertaintes of the pprocess.
Merger Regulation:
-> DEF: control of the M&A activity.
- Ex-ante area of intervention.
- Antitrust should stop M&A which may jeopardize the competitive environment.
-> OUTPUTS:
- Consent of the M&A
- Stop of the M&A
- Intermediate: consent but only under the condition that the involved parties put in places some remedies
- Structural remedy: the two parts should divest some assets
- Behavioral remedy: the price for the product should be fixed for n years
-> Sometimes those remedies are imposed, some others the two parts propose them to the antitrust.
Process:
Consumer Welfare:
-> DEF CONSUMER WELFARE: refer just to the consumer welfare, not the total one:
- Consumer Welfare = Consumer Surplus
- Total Social Welfare = Consumer Surplus + Producer Surplus
Any merging activity that could bring allocative inefficiency is stopped despite of the extent of the gains in productive efficiency that may bring.
- MC1= MC2 bcse there are two firsm
- Standard linear demend curve descending.
- Price of the two firms is the same and is the competitive one. They realize that merging they could gain some productive efficiency => Can lower their MC. In the ex-ante situation we know that social welfare W = consumer welfare and is the greeen rectangle.
-> Producer surplus = 0
- Since there is the opportunity that they gain market power => they could increase the price at p’.
-> W’ = reduced consumer welfare + producer surplus (orange rectangle).
-> Antitrust autority interpret their mission is to put in the focus consumer surplus, rather than total social welfare surplus.
-> Often don’t apply the Williamson’s Welfare logic
=> in the POV of W the merge activity should take place, but…
=> The Antitrust never take part to it: consumer W ex-post is lower than consumer W ex-ante, for this the antitrust do not trade off productinve efficiency with allocative efficiency, do not allow the merger activity.
Horizontal Focus:
HORIZONTAL M: merger btw companies that operate same industry and are competitors (often)
- Ex: two smartphone manufacturers merge.
=> Productive Efficiency: increase due economies of scale, reduced duplication of efforts, henhancing innovation
=> Allocative Efficiency: decrease if the reduced competition results in higher prices and less choice for consumers.
VERTICAL or CONGLOMERATE M:merger btw companies at different stages of production process
- Ex: car manufacturer merges with a tire supplier
=> Productive Efficiency: increase by improving coordination, reducing transaction costs, ensuring more reliable supply of inputs.
=> Allocative Efficiency: are generally less likely to impede effective competition than horizontal mergers.
- Don’t entail the loss of direct competition between the merging firms in the same relevant market => the main source of anti-competitive effect in horizontal mergers is absent.
- Provide substantial scope for efficiencies.
Dimensions:
-> Mergers are scrutinized only if they involve sufficiently big actors (ex-ante & ex-post)
❓Is (ex-post) largeness automatically punished in horizontal mergers?
-> Not Really (rule of reason)
Dynamic Efficiency
-> Historically considerations of dynamic efficienc were not heavily factored into antitrust decisions.
- Literature has shown that competition may either increase or decrease innovation.
- Antitrust is better in identifying which circumstances are relevant.
- Antistrust generally has a cautious approach, limiting intervention to cases inwhich merging firms’ innovate product are close to commercialization.
-> ITOH, Innovation Theory Of Harm: eventual merger (without remedies) would lead to significant decrease in the innovation rate.
AI and Collusion:
-> Nowdays pricing algorithms rely on AI systems that are capable of autonomously learningn rules of conduct that achieve the goal.
- AI systems will discover profit-enhancing collusive pricing rules.
-> Firms declare themselves unaware of collusion while AI does not have a mind, a will, a consciousness => society lacks an effetive defense to stop algorithmic collusion.
- There can be no “meeting of minds” in the collusion between algorithms.
-> EU Commission declared that digital requires a specific attention with the recent issues of the Digital Market Act (DMA)
