Competition Economics

Policy Paper No. 11

Author(s): Johan StennekPages: 44Published: February 22, 2007

Competition Economics Johan Stennek

Imagine that you are advising a client on a planned merger with one of their competitors. Informal communication with the competition authority reveals that they are worried that the merger will reduce competition and harm the consumers. There is a clear risk that the whole project will be stopped. How could you help your client? How would you go about predicting the effects of the merger? Will price go up, as the competition authority fears, or is it possible that the merger will lead to lower prices instead? How could anyone know the effects in advance, before the merger has taken place?

No one can know for sure. But, economics provides a “toolbox” to help you analyze this and many other issues determining the outcome of competition policy cases. There are theoretical models to help you understand what the most important aspects of the problem are. It could for instance be that the merger is likely to reduce the merging firms’ costs, and that lower costs may lead to lower prices, and therefore benefit the consumers. But how much will lower costs reduce prices? To answer such questions, there are empirical methods to help you quantify the effects. If you could demonstrate that a 10 percent reduction of costs would be sufficient for the price to fall, and that such a saving is likely to occur, your client would clearly have a much stronger case.

The purpose of paper is to illustrate the nature of economic analysis, primarily to future practitioners specializing in competition policy, but without any previous knowledge of economics. Some key economic concepts like competition and efficiency are introduced in section 2. This section also spells out the basic economic foundation for competition policy: what is it good for? The subsequent sections illustrate how economic analysis can be useful in competition policy, including the analysis of agreements between firms in sections 3, abuse of dominance in section 4 and mergers in section 5. The lecture concludes by pointing out some limitations of the current status of economics, in section 6.

Due to the time constraint – the course requires about four 90 minutes lectures – economic analysis will only be introduced by means of a few simple examples. The ambition is not to cover the whole area of competition economics and not to go very deep into any particular area either. Hopefully this lecture will improve your ability to communicate with the economists involved in the case. They may be hired as experts by your client, or work at the competition authority, or they may act as expert judges in the court. In any case, you will do a better job with some understanding of economic analysis.

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