Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

SMP

with 4 comments

During the WE, I read Pascal Lamy’s excellent note entitled “The Future of Europe in the New Global Economy“.

There are dozens of good points in this note.

In particular, I really liked Lamy’s rebuttal of the argument that European high salaries are the cause of our competitiveness deficit.

As he rightly argues, “when we look at salaries, we have to set them against worker productivity“. And on this, there is still a profound gap between the EU and other trade blocks like China and India.

Lamy, however, makes a more surprising point. He contends that in the global trade arena, EU firms should strive for what he calls “non-price competitiveness“.

So far, so good… But in his own words, non-price competitiveness covers:

those characteristics that cause a product to stand out positively among its competitors, regardless of price. In particular, it comprises know-how, quality and innovation, which allow a company to sell the same products as its competitors but at twice the price“.

And Lamy further adds, that non-price competitiveness has this good that it:

shields manufacturers from having to worry about fluctuating global prices and competitor attacks“.

In my own professional language, I call this “market power“.

So here’s a nut to crack: can market power be the way forward for the EU in terms of achieving a comparative advantage on the international trade scene?

Written by Nicolas Petit

8 October 2012 at 3:22 pm

4 Responses

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  1. What he’s talking about is market power, but only in the way that it exists in all real-world markets. Specifically, what he’s talking about is monopolistic competition, which is not normally considered an automatic matter of concern for competition authorities.

    Martin Holterman

    8 October 2012 at 3:50 pm

  2. I think a large part of this the idea that Europe should be being more creative, doing more branding, and generally generating intellectual property rights, which, by their nature, confer a certain degree of market power.

    He’s talking in such general terms that it’s hard to be sure, but I think that the other part of the idea is something like craftsmanship – the Europeans might be making the “same” product as everyone else, but the European model is more reliable by dint of having been made by a more skilled and specialised workforce. The European workforce doesn’t just make stuff more efficiently – it makes better stuff.

    I find this an attractive idea -suggesting as it does that things like long term job security and high salaries may actually be strengths rather than weaknesses – but I honestly haven’t a clue whether it’s the key to European competitiveness, or just a case of Lamy taking Audi’s marketing campaigns a bit too seriously.

    Pete

    8 October 2012 at 8:22 pm

  3. He is talking about product differentiation. The question is just how much product differentiation you (an NCA) will allow before you’ll make it another relevant market, always keeping in mind that differentiating your (a company) product is the only way a company can make profits (and that’s also why all companies have marketing divisions). And the chance to make big profits is what keeps enterpreneurs and therefore competition going. So if a company that suceeds in differentiating its products has to fear that NCAs will consider it market dominant, NCAs will kill what they ought to protect…

    Adrian Raass

    9 October 2012 at 9:09 am

  4. monopolistic competition? isn’t that a market structure with small firms relative to market size? each having very little market power?

    anyway, here’s my two cents with regards to your question:
    can market power be the way forward for the EU in terms of achieving a comparative advantage on the international trade scene?

    i think there’s a huge difference between market power and comparative advantage, and I hope i can clarify a little.

    market power is basically the ability to price fix, all firms have the autonomy to fix prices or output individually. that’s the essence of market power in econs, the more market power you have, the more power u have to price fix, i.e. the more price inelastic your demand, i.e. if you increase price, quantity demanded falls less than proportionately.

    of course, that’s still subject to other firms in the industry, i.e. the more firms selling similar products, the more price elastic, etc etc.

    having product differentiation gives a firm more market power, to lamy, that’s great.. for a firm, that’s great, because it makes a company’s revenue more resilient, especially to competitors’ price changes.

    to a large extent, this is “legitimate” competition? (in my opinion at least)

    so i don’t think that it’s market power being the way forward, but product differentiation (the bigger subset being non-price competition), assuming that the non price competition is innovation, r&d (Rather than superficial branding etc etc, or ADVERTISING.. which are also forms of non-price competition that actually contribute very little to economic welfare)

    product differentiation may be the way forward in the eu, especially if the EU finds it hard (structurally) to reduce costs, which of course can lead to PRICE competition.

    also the increased market power comes as a result… bcos of the non-price competition and differentiation, it’s a natural result even. but it doesn’t always automatically equate to increased market power, because the market is big, he’s talking abt an international trade situation?

    in fact, the increase in market power may be relatively confined, because of the other market players as well..

    I like to use the Apple/Samsung example to explain, especially in my city where every household has at least an iPhone. Apple spends tons of money differentiating their product, branding etc. The fact that their phone is at a premium, perhaps is evidence of their market power. But it doesn’t mean that their market power remains, cos Samsung with their own innovation is quickly grabbing my domestic market with their S3 Galaxy. Samsung’s market power is increasing, but to a large extent, it is confined by Apple’s dominance as well.. What results seems to be a race in terms of legitimate competition, in terms of who can create the better product (and whoever can price such that it is still desirable to consumers)…
    (sorry i focus a lot on the econs part.. cos i used to teach econs, but am now studying for my law degree and hoping to LLM in competition law)

    achieving a comparative advantage where comparative advantage needs to be differentiated from competitive advantage.. i don’t know.. i’m seeing comparative advantage from Ricardo’s point of view.
    Do you mean competitive?

    I think it’s a way to achieve competitive advantage, rather than comparative advantage, which is more of a “I produce at lower opportunity cost compared to you?” kind of argument….?

    in conclusion, i do believe that non-price competition is the way forward for the eu, especially if the eu finds it hard to cut costs of production. non-price competition esp in the form of product differentiation is usually argued as a fixed cost, which hopefully doesn’t affect marginal cost of production, hence leaves costs of production relatively the same. Non-price competition increases demand for the product and makes the demand good more price inelastic, and i think in the macroeconomic aspect of things, may be what is needed to boost export growth which can help the eu increase national income (hopefully!)

    it may lead to increased market power, but that’s not necessarily a bad thing, it’s only bad if they abuse that market power.. so it’s the abuse that should be curtailed rather than the market power itself.. there are significant economic benefits of having market power anyway, so the focus should be curtailing the abuse, i.e. illegitimate competition (if it can even be called competition, since it’s anti-competitive?)

    thanks for reading..

    christine

    11 October 2012 at 3:47 pm


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