Government competition policies relating liberalization

Table of Contents

I. Definitions
1. Competition policy
2. Market Liberalization

II. The state’s role

III. Competition and Liberalization
1. Competition Policy in the United States of America
a Involved government agencies
b General principles of competition policy of the United States
2. Competition Policy in the European Union
3. Effects of antitrust and competition law on liberalization
a Overview
b Liberalization in the United States – how it works
c An example for liberalization: the U.S. telecommunication market
d Liberalization in the European Union – how it works

IV. Bibliography

I. Definitions

1. Competition policy

“Almost all market competitors are firms – business organizations (social groupings) that are, for the most part, internally cooperative, not competitive. Firms are the principal suppliers and buyers of most products and services, while consumers (households) generally buy only final goods (…). Typical market transactions involve competition among firms. Many of these firms, including subtypes such as labour unions, can legally own and exchange property and differentiate and isolate their legal liability as a group from the inability of their members.”^[1] The competitive-cooperative market system is controlled by formal social regulations we call competition policy. This term refers to the body of laws of a state which govern the extent, and ability, to which bodies can economically compete. They hence to restrict practises that can pull down market competition such as monopoly or cartel. Most nations have an own legal competition framework, and there is a general agreement on what is and what is not acceptable behaviour.^[2]

2. Market Liberalization

“In general, liberalization refers to a relaxation of previous government restrictions, usually in areas of social or economic policy. (…) Most often, the term is used to refer to economic liberalization, especially trade liberalization or capital market liberalization, policies often referred to as neoliberalism.^[3] One of the world’s most open trade ad investment regime is the one of the United States.^[4] However, a liberalized and deregulated market has to be supported by rules of the game to ensure competition.^[5] But although economic liberalization often is associated with privatization, the two can be quite separate processes. As an example, in the European Union the gas and electricity markets were liberalized a few years ago, instituting a system of competition; but some of the leading European energy companies (such as EDF or Vattenfall) remain partially or complete in public ownership.

“Liberalized and privatized public services may be dominated by just a big few big companies, particularly in sectors with high capital costs, or high sunk cost, such as water, gas and electricity. In some cases they may remain legal monopolies, at least for some part of the market”^[6] (i.e. parts of postal service in Germany a few years ago).

II. The state’s role

In a discussion about competition and liberalization the state’s and government’s interests have to be considered enough. As state has the power to define what the economical units are allowed to do in business life and the legal framework is defined by state’s institutions he is very important player in the game. The law represents state’s will. So first we have to learn about the wants of state to understand the legal framework that is discussed in this paper.

“The core problem of the economic organization of society are to determine what commodities shall be produced and in what quantities, how shall they be produced and for whom.”^[7] In most economies of the world that are organized as market economy the decision is made by the market players, especially by consumers that demand several products. The market, however, mostly is ruled more or less by the government. An important tool for regulation is competition policy. The general aim of competition policy is to guarantee efficient organized economic and efficient production (allocative, productive and dynamic).^[8] As economic analyses of common private business practises that might impede market entry often shows they have hidden efficiencies.^[9]“The logic of competition and antitrust law in the United States and the European Union is to guard against restrictions and impediments to competition that are not likely to be naturally corrected by competitive forces.”^[10]

The best means of guaranteeing fairness and efficiency for governments is to ensure that markets are as contestable as possible what means that new entry of any competitor (that can be a domestic or a foreign company) is as easy as possible.^[11] In consequence this means to avoid the creation of monopolies and to break existing ones. This leads to the second aspect of this paper: liberalization.

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^[1] Graham, Edward M. / Richardson, J. David (1997), page 6

^[2] See http://en.wikipedia.org/wiki/Competition_policy

^[3] http://en.wikipedia.org/wiki/Liberalization

^[4] See http://www.wto.org/english/tratop_e/tpr_e/tpl72_w.htm

^[5] See Raghavan, Chakravarthi, http://www.sunsonline.org/trade/process/during/10210093.htm

^[6] See http://en.wikipedia.org/wiki/Liberalization

^[7] Lesourne, J. / Sonnenschein, H. ed. (1990), page 1

^[8] See Economides, Nicholas (2004), http://www.stern.nyu.edu/networks and Graham, Edward M. / Richardson, David J. (1997), page VIII

^[9] Graham, Edward M. / Richardson, J. David (1997), page VII

^[10] Economides, Nicholas (2004), http://www.stern.nyu.edu/networks

^[11] Graham, Edward M. / Richardson, David J. (1997), page VIII