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Competition

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Discussion of the European Union’s competition policies

Since the turn of the century, Europe’s economic prosperity has rested upon the European Union’s competition policies and regulation of abusive market structures and anti-competitive behaviour. The last fifty years have illustrated that open markets foster innovation and efficiency, while delivering Europeans higher quality products and services at lower prices. This will ultimately lead to Europe’s economic growth, despite the possible infiltration of foreign low cost, low skill producing firms. Suggesting Europe’s future shift towards a knowledge based economy with a focus upon the development and sharing of new technologies (Bannerman, 2002). The following paper will examine the EU’s role and approach towards competition policy with a focus on the economic implications.

Abusive market structures and anti-competitive behaviour have been battled by the EU to preserve competition, fearing that cartels will exploit their pricing power to damage consumers. The magnitude of the damage is directly correlated to the elasticity of demand, where a strongly inelastic customer would suffer due to the unavailability of substitutes. Furthermore, anti-competitive market structures create barriers to entry through the ownership of resources, economies of scale, and predatory pricing that stunt future innovation and efficiency.

To ensure this competitive environment, the EU utilizes anti-trust laws, merger control, and state aid rules. According to the EU competitive policy report, in 2006 41 undertakings were fined a total €1846 million, illustrating the magnitude of dominant firms and cartels abusing power within the EU. Issuing fines exercises the EU’s anti-trust policy while providing monetary disincentives that are likely to dissolve dominant companies while reigniting competition, as operating as a cartel becomes to costly.

Likewise, merger control allows the EU to oversee and assess the effect of a merge, possibly through a joint venture, upon the market and competition. If a merger will create an overly dominant firm, the EU will prohibit the fusion of the two firms. A merge will allow a firm to develop economies of scale, creating barriers to entry that will stunt future innovation and efficiency. In the pharmaceutical industry mergers have been present due to the high cost of research for new drugs, estimated to be about $1 billion, however it is questionable whether a merge of this nature would foster competition or undermine it (Bannerman, 2002).

Lastly, state aid control is the EU’s supervision of government intervention to prevent the distortion of competitive markets and intra-community trade (EU, 2007). The abuse of state aid could result in an imbalanced market, where a state-backed firm would artificially rise as the dominant market leader annulling its competition, while not directly reflecting this position in the quality and price of their products and services. Despite receiving state aid, low-cost European airlines like Ryanair and EasyJet have been able to compete with American, state funded airlines that have been offered up to $15 billion (Bannerman, 14).

Over the past few the European Union has begun embracing several Free Trade Agreements, illustrating their move towards developing stronger competition (EurActiv, 2007). Using Free Trade polices empowers the European Union to utilize specialization and comparative advantage, adopt more competitive exports, and a greater variety of products of services. However, the European Union will become exposed to foreign competition that could undercut their prices or stunt infant industries.

In conclusion, the European Union’s economic prosperity and growth has been sustained through the application of competitive policies, allowing innovation and efficiency to develop, while providing high quality products and services at low costs.

References
Bannerman, E. (2002). The Future of EU Competition Policy. London: Freshfields Bruckhaus Deringer.
(2007, June 1). European Union Towards Free Trade Agreements. Euractiv.com, Retrieved Nov. 8, 2008, from http://www.euractiv.com/en/trade/european-union-policy-free-trade-agreements/article-164193
European Union. (2007). Report on Competition Policy (ISBN 978-92-79-06491-3 ed.). Beglium:

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