Saturday, January 19, 2019

Competition is not what it was

The competition authority must evolve on three points.


By Xavier Fontanet.


Blocking the Alstom-Siemens operation, as the European Commissioner for Competition wants to do, on the grounds that its local market shares are too strong, is a mistake. What is at stake is not only the decision, but also the concepts that underlie it.


Three evolutions are necessary today.

  • The first is to integrate in the reasoning the concept of the curve of experience. The producer with the highest market share benefits from lower costs than its competitors, and the average price of an industry is lower when it is concentrated, even if the leader makes larger margins. Let's fix it: prices will be 25% lower in a situation where the leader has 60% of a market, compared to that where all competitors are at 10%; and that even if the leader makes a margin of 25%.

  • The second is the scope of the competitive field. If, in the field of distribution, the market share must be measured at a local end (the city, or even the neighborhood), in the field of industrial production, the competitive field has spread to the continental level, even world. Restricting the territory to the country level can be a mistake.

  • Lastly, the acceleration of technological developments must be taken into account. In a world in upheaval, acquired positions are challenged faster and faster by new technologies (the online business against the hypermarket is one of the most visible cases now). Creative destruction makes domination take less and less time. That's why you have to be careful before preventing a concentration. Especially since, on other continents, the authorities generally favor the constitution of national champions to give them the financial means to conquer the world. Blocking the Alstom-Siemens operation will weaken both companies and European employment against American and Asian competitors. Always remember that to be a sustainable consumer, it is better to work for a solid producer.

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