Week 7: Lectures 13-14 - Competition Policy

Question 1

Briefly explain the M&A activity in the EU

Answer 1

• In the EU much M&A happens within member states with about 55% of all M&A being between domestic firms (same country)
• The remaining 45% is split as such: 24% is one non-EU firm, 15% where one firm was located in another EU nation and 6% where the counterparty’s nationality was not identified

Question 2

Why is competition policy needed?

Answer 2

• Large companies can be beneficial for the economy but sometimes firms try to limit competition
• Competition policy is needed in the EU as collusion might rise as the number of firms fall

Question 3

Explain the extreme of perfect collusion

Answer 3

Perfect collusion is an extreme where:
- Firms coordinate prices and sales perfectly
- Firms charge monopoly prices and split the sales among themselves

Question 4

Give some examples of cartels and collusion

Answer 4

• RBS and JP Morgan were fined for market manipulation in the UK
• Main sausage producers in Germany were fined for fixing prices of sausages for a decade

Question 5

Explain the concept of state aid within competition policy

Answer 5

Governments can be tempted to provide subsidies (state aid) to firms in trouble after integration which is unfair for competitors in other countries

Question 6

What 3 parts can the theory of collusion be broken down into?

Answer 6

1- Economic integration without collusion
2- Collusion
3- Mergers

Question 7

State all the assumptions made about the theory of economic integration without collusion

Answer 7

• Two identical countries and firms are also identical
• There is constant marginal cost, positive fixed cost and decreasing average cost
• There is perfect competition in the long run so free entry and exit of firms and firms make zero profits

Question 8

What two curves are used on the diagram to explain the theory of economic integration without collusion

Answer 8

• Competition curve (COMP) says that if there are more firms in the market, competition will force each firm to charge a lower mark-up. This curve is decreasing with the number of firms
• Break-even curve (BE) says that given the market size and fixed costs, more firms are able to survive if the price is above the marginal cost (if mark-up is high)