Question

When new European Union member countries join the EU they become subject to the European Union competition law--a law that regulates anticompetitive behavior and keeps markets within Europe more competitive (meaning firms have less market power). Using an AS-AD framework, briefly discuss the effect of the competition law on a country's decision to become an EU member country. Your (brief) discussion should include effects on the labor market as well as prices and output. You may find a graph or two helpful in keeping track of these effects.

Answer 1

Free competition is a key element of an open market economy. It stimulates economic performance and offers consumers a broader choice of better-quality products and services and at more competitive prices.

European Union competition policy ensures that competition is not distorted in the internal market by ensuring that similar rules apply to all companies operating within in it. Title VII, chapter 1 of the Treaty on the Functioning of the European Union lays down the basis for Community rules on competition.

State aid is prohibited under the Treaty, although exceptions exist because such aid may be justified by, for example, services of general economic interest. It must be demonstrated that they do not distort competition in such a way as to be contrary to the public interest.

European Union (EU) competition law protects consumer welfare by encouraging businesses to produce what the consumer wants, develop innovative products and services, and reduce prices.

In doing so, small and medium-sized businesses should get a fair chance to compete against larger businesses.

Competition behaviour

The competition law deals specifically with anti-competitive behaviour such as:

• Monopolies - EU anti-trust laws prevent a single business taking advantage of being the only, or strongest, business providing a service.
• Mergers - under mergers law in Europe businesses it must not reduce competition in that market sector when they merge.
• Cartels - EU cartels legislation prevent agreements between businesses in the same industry to be uncompetitive. For example, by agreeing to jointly raise prices.
• State aid - state aid and regional aid are allowed only under certain circumstances.

The Directorate General for Competition of the European Commission

The Directorate General for Competition of the European Commission enforces EU competition law in co-operation with the National Competition Authorities across member states. It can:

• investigate businesses and industries
• start court proceedings against member businesses and member states
• investigate business sectors
• fine businesses that are acting uncompetitively
• give its opinion on proposed mergers that have an effect within a number of member states

The Directorate also supports free competition across the EU by advising other directorates, holding public consultations, reporting on the state of competition in the EU and promoting best practice. It also helps countries wanting to join the EU to ensure their laws are aligned with European law.

Objectives

The fundamental objective of EU competition rules is to ensure the proper functioning of the internal market. Effective competition enables businesses to compete on equal terms across Member States, while putting them under pressure to strive continuously to offer the best possible products at the best possible prices for consumers. This, in turn, drives innovation and long-term economic growth. Competition policy is, thus, a key instrument for achieving a free and dynamic internal market and promoting general economic welfare. EU competition policy also applies to non-EU businesses that operate in the internal market.

Societal, economic, geopolitical and technological changes constantly pose new challenges to EU competition policy. Such new developments compel policymakers to assess whether the current competition policy toolbox still provides the effective tools to achieve its overarching objective or whether it needs to be adjusted. This process will form an important part of the work of the new European Commission, which took up its duties in December 2019. In particular, it has taken up the ambitious task of designing a new European industrial strategy and of advancing the review of the antitrust, mergers and State aid rules.

Competition Policy Tools

A. Comprehensive ban on anti-competitive agreements (Article 101 TFEU)

instead of competing with each other, companies agreed to reduce competition, this would distort the level playing field, and in turn, cause harm to consumers and other businesses.

B. Prohibition of abuse of a dominant position (Article 102 TFEU)

If a company that holds a position of strength (‘dominance’) in a particular market were to abuse that position (e.g. by charging customers excessively high prices), it would cause harm to consumers and competitors alike. This is why such a behaviour is prohibited under EU competition law. One of the most prominent cases of abuse of dominant position culminated in the 2004 Microsoft Decision.

The Commission found that Microsoft had abused its dominant position in PC operating systems by withholding critical interoperability information from its competitors, meaning that providers of rival operating systems were unable to compete effectively.

C. Merger control procedure

Mergers or acquisitions can be beneficial for companies and the economy as a whole, as they can create efficiencies, synergies and economies of scale. However, if they result in strengthening market power or increasing market concentration, they can also weaken competition. This is why certain mergers and acquisitions must be reviewed and may not be completed until authorisation is granted.

D. Prohibition of State aid (Article 107 TFEU)

Member States are required to notify the Commission of any planned State aid, unless it is covered by a general block exemption or the de minimis principle applies. The State aid measure can be implemented only if the Commission has granted approval. The Commission also has the power to recover incompatible State aid

E. Public services of general economic interest (SGEIs)

In some Member States, certain essential services (e.g. electricity, post, and rail transport) are still provided by public undertakings or undertakings controlled by public authorities. Such services are considered to be services of general economic interest (SGEIs) and are subjected to specific rules in the context of the EU State aid framework.

The causes of the ratchet effect are listed below. For several reasons businesses are reluctant to lower prices even when faced with lower aggregate demand.

a) Wage contracts often mean that businesses have to increase their costs even if AD decreases.

b) If businesses lower wages so that they can lower their prices, this may have an adverse effect on morale and productivity

c) If businesses lower wages so that they can lower their prices, they may lose some of best workers in which they have invested much in training

d) To lower their prices business would like to decrease their labor costs (wages), but they may not be able to because of the minimum wage laws.

e) Some firms may fear price wars meaning if they lower their price, then their competitors will match their price decrease or even lower their prices even more.

f) Finally, businesses may have monopoly power, giving them more control over their prices and they may choose to take smaller profits rather than lowering their prices.

Changes in AS and the Macroeconomic Issues

A decrease in AS would decrease output and raise the price level. This would result in more unemployment and more inflation. We call this inflation "cost-push" inflation. It is inflation caused by a decrease in AS.

Economic Growth

Increasing our POTENTIAL OUTPUT

Increasing Output

Increasing Real GDP per capita

(1) Increasing our POTENTIAL OUTPUT

This doesn't necessarily mean that the economy IS producing more, just that it CAN produce more. To achieve our new potential levels of output we also need full employment and productive efficiency.

AS-AD model INCREASING OUR POTENTIAL OUTPUT is represented by in INCREASE IN AS

economic growth is caused by:

1. more resources
2. better resources, or
3. better technology

An increase in AS is caused by:

1. a decrease in the price of resources
2. an increase in productivity
3. lower business taxes and government red tape

(2) Increasing Output (increasing real GDP)

The most commonly used definition of economic growth is simply producing more.

AD-AS model we could illustrate this type of growth (achieving our potential) by an increase in AD.

Demand-Management Policies

Definition: Policies design to shift the AD curve in order to reduce unemployment or to reduce inflation.

Tools -- Some of the determinants of AD can be manipulated by the government to achieve these goals