Economic Principles Underlying Eu Competition Policy Economics Essay

Introduction

Free competition is a key element of an open market economy. It has long been recognised that competition can lead to lower prices, better quality, more choice, innovation and better competitors in global markets (Benefits of competition policy, 2012). Besides that, competition also stimulates the European economic performance.

To prevent that companies reject the rules of free competition, the European Commission has been taken measures. They have developed a competition policy. This policy ensures that competition is not evaded in the different markets by ensuring that the formulated rules apply to all the companies that are operating within those markets (Competition, 2012). This paper highlights the most important aspects of the national and international competition policy.

National competition policy

One of the most important parts of the national competition policy is the antitrust law. The antitrust law consists of three main elements. First one is prohibiting agreements between businesses that reduce competition and free trade (Competition Law, 2012). The main cause of this reduction in competition and in free trade is the existence of cartels.

A cartel is an agreement between companies that restrict competition. It could be an agreement about prices, production, or an agreement to divide the market. The result of a cartel is that the clients of those companies will pay more for less quality.

The European Commission adopts between 5 & 10 cartel decisions per year (Fighting cartels, 2012). For example two years ago, the Commission discovered a cartel in LCD screens. They fined the cooperating companies for 649 million euro. Another example, discovered four days ago, is about Philips. The European Commission will later this month, place some heavy fines on inter alia Philips, LG Electronics and Samsung SDI. The Commission will do this due to price agreements for parts of televisions between those companies (EU gaat Philips beboeten om prijsafspraken, 2012).

To avoid the existing of cartels, the leniency policy has been created. The leniency policy offers companies involved in a cartel total immunity from fines or at least a reduction of fines when they self-report and hand over evidence. This policy proves very successful in fighting cartels (Leniency, 2012).

The second main element of the antitrust law is banning the abuse of a dominant position in a market. A major player tries to push competitors out of the market. When this happens, the major player can decide his own prices. This is, most of the time, beneficial for the company but detrimental to the customer.

The third main element of the antitrust law is supervising the mergers and acquisitions of large corporations, including some joint ventures. Mergers are allowed if they expand markets and benefit the customers. But unfortunately, this is not always the case. Some combinations of companies may reduce competition in a market. This usually happens by creating or strengthening a dominant player (Mergers, 2012). Whenever this happens, the mergers must be prohibited to protect businesses and consumers form higher prices or a smaller choice of products.

International competition policy

The most important parts of the international competition policy are liberalisation and the control of state aid to companies. Liberalisation means opening markets to competition. Liberalisation gives customers more choice, lower prices and better quality. An example is the liberalisation of the Italian postal services. New postal services were provided and therefore customers had more choices to choose from.

State aid is the government support a company obtains. It is an advantage over its competitors. The objective of state aid control is to ensure that government interventions do not disturb competition and trade inside the EU (State aid control, 2012).

Conclusion

So competition keeps both businesses and people on the edge. When competition does not exist, companies would not bother to make any effort anymore. The customer will probably buy the product anyway. To avoid this from happening, the European Commission came up with a policy. The main areas of the national competition policy are antitrust, avoiding dominant positions, cartels and mergers. The main areas of the international competition policy are liberalisation and state aid.

Because of the competition policy, we, as customers, can enjoy the open market economy for many more years. Besides that, there is more choice, the products are of a better quality, and last but not least, the prices are lower.