Under the headline “Protecting competition in a changing world“, the European Commission has examined the development of competition over the last 25 years. The report is meant to provide a basis for the further development of competition law and to contribute insights for enforcers and policymakers. Here are some key takeaways and an outlook.
The 200-page report deals with two key questions: How and why the conditions of competition in the EU have evolved during the last 25 years, and why (effective) competition matters for broader economic outcomes.
Key indicators of competition in the EU
The basis for capturing competition in the report involved a combination of different factors, e.g., concentration, markups, profits, entry and exit rates. The main findings are the following:
- Average industry concentration increased over the 2000-2019 period (the concentration was measured by the „CR4“, meaning the concentration ratio of the four leading firms).
- Concentration seems to have particularly increased in already more concentrated sectors.
- The level of industry concentration varies between countries in Europe. While industry concentration rises in most European countries (e.g. Norway and Finland), it is more stable in others (e.g. Italy and Germany).
- The majority of consumer-facing markets were found to have a high concentration, in particular in the food and energy sector. Still, the average concentration level in consumer-facing markets is lower compared to the U.S.
- The level of business dynamism seems to have decreased. The report observes a trend that the top 4 firms remain constant (so called „entrenchment rate“). Additional factors for decreasing business dynamism are a decline in the European job reallocation rate and a decrease in the number of market entries.
- Average markups have increased by 7%. Since profits have risen as well, the increased markups are taken as an indicator of rising market power and not merely a reflection of rising fixed costs.
Drivers of the evolution of competition
The report finds structural and institutional drivers for how competition has developed:
- The main structural drivers are the rise of investments in proprietary IT solutions and data (due to the digitalisation of the economy); the rise of other intangible investments, such as R&D, patents or brand advertising; globalisation (since the number of suppliers and potential customers increases and the outsourcing of production rises); and, to a more limited extent, rising M&A activity (e.g. killer acquisitions).
- The main institutional drivers are changes of regulatory barriers to entry and expansion and – weaker or stronger – competition enforcement.
Why competition matters
Finally, the report looks at the role of competition:
- Concentration may be an important factor for prices – next to regulation or consumer preferences. E.g., prices for beer in Belgium and France, countries with high concentration at producer level, are more than 150 % higher than in neighbouring Germany – a country with low concentration. Germans knew it all along: Germany is a just a better place for beer lovers…
- Competition in a domestic market is not just a driver of a company’s competitiveness within that market, but also important for its success on export markets.
Effects of the report
The Commission’s remit has expanded in recent years and there is a clear trend towards stronger regulation (also see here). To name just a few, there are:
- the DMA, a regime to regulate gatekeepers on digital platforms (see here),
- the ever-increasing importance of foreign investment control proceedings,
- the FSR, a tool to examine the effects of foreign subsidies (we blogged about it here and here), and
- the extended referral practice under Art. 22 EUMR (Illumina/Grail), for now allowing the Commission to review transactions that are otherwise not notifiable in the EU (see here).
The Commission considers the results of the report as a confirmation of its approach. As Executive Vice-President and Competition Commissioner Vestager put it: „What the report shows is that we had the right instincts. Consumers in Europe have benefitted from enforcement at the EU and at the national level. Many sectors in the EU have seen less significant increases in markup and concentration than elsewhere in the world. There are many reasons for that. Effective competition enforcement has played a role. And so have pro-competitive regulations.“
So, if anything, the report is likely to lead to more intervention and more scrutiny. But we will of course also have to see who the next Competition Commissioner will be and how he/she will view things.
Photo by Matthew Henry on Unsplash
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