The European Commission’s goal is to obtain a competitive, single/internal ‘free’ market across all of its member states. The main areas of the market regulation according to the European Commission’s competition policy are antitrust, avoiding dominant positions, cartels and mergers. This paper examines some of the economic principles fundamental to the European Commission’s approach and role concerning competition and market regulation.

In a competitive market it is assumed that firms are price takers, that there is a free entry, that there are many competitors and that the strategy is completely dependent on market price, rather than those of its rivals. If competition would not exist, there would not be any incentives to improve the quality of products.

First of all a cartel is one of the ways of clearly undermining the way the European Union wants its economy to function. This formal arrangement between firms can be about prices, quantities produced or a structured division of the market. This however can mostly only happen in oligopolies, “markets with only few firms and substantial barriers to entry”(Perloff, 2013). The result of a cartel is that the customer of the colluding firms will pay more for less quality and produces anti-competitive behaviour. The Commission’s role in this is that via a leniency policy it encourages firms that are involved to act as whistle-blower and as reward be excluded from any form of punishment(European Commission, 2011). This punishment comes in a fine of up to 10% of annual turnover.


Secondly there is the phenomenon market dominance, also called monopoly, that needs to be tackled. This is the case when a single firm or cooperation occupies nearly the entire market for a certain type of product. The firm is not a price taker but a price setter. In this case the free market doesn’t work because, even more extremely than with cartels, this leads to higher prices for essentially inferior products and no need to meet the demands of the costumers. This affects both customers and other companies as monopolies can refuse to sell vital parts to companies and because there is no affordable alternative this can make other companies collapse. EU law considers a "dominant" market if one of the firms has 38% market share.

The third aspect to be considered are mergers. Although these are definitely useful for firm efficiency leading to a more competitive market, they are commonly used to get around the rules and regulations about cartels and monopolies. Instead of colluding with the company, acquiring them seems like a good and easy solution around the problem, but this once again leads to the same results as in the previous two cases. The market share a firm gets when merging can exceed the amount that is considered to make a market anti-competitive. Once again, the firm has an enormous influence on the price, making it near to impossible for other companies to compete. If rivals would come with a much cheaper alternative, the market leader is able to lower the price significantly until the competitor pulls out and sequentially raises its price again. Thus being without any rivals, the prices are fully determined by the firm and any incentives to develop or benefit the customer are absent. This is therefore also regulated and the European Commission’s role consists of controlling proposed mergers, acquisitions and joint ventures and if necessary blocking them.

The fourth element is state aid(EU, 2010), whether direct or indirect, given by any type of government institution to companies. It is considered state aid when meeting 4 criteria: the flow of government funds, gaining an economic advantage, the preference of certain firms over others and affecting competition and trade in two or more member states. This competition policy is obtained within the EU or else the whole idea of a single market would be highly untrustworthy if states could just support who and what they favour.

To conclude, the EU’s approach to market regulation is one of a single and free market but regulated to a certain extend to ensure the competitiveness and fairness of markets within its member states. It therefore regulates cartels, monopolies, mergers and state aid where it sees fit in order to protect the costumer and the competitiveness of the internal market.

References

European Commission (2011). Fines for breaking EU Competition Law. Found at: http://ec.europa.eu/competition/cartels/overview/factsheet_fines_en.pdf

European Union (2008). Consolidated version of the Treaty on the Functioning of the European Union- Article 107. Official Journal of the European Union, C115, 91 Found at https://www.ecb.europa.eu/ecb/legal/pdf/fxac08115enc_002.pdf

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