2005 Blog Archive for Dalibor Rohác
Link to 2006 Archive

	Why Do People Hate Big Companies?	28 DEC 2005
	Say "No" To The Common EU Tax	21 DEC 2005
	Another Antitrust Office Behaving Inappropriately	14 DEC 2005
	A Dispatch on Past Week's Competition Affairs	07 DEC 2005
	Mrs Merkel’s Bright Idea	30 NOV 2005
	Why state aid exists?	23 NOV 2005
	Privatising Slovak Airports: Antimonopoly Gets Into Way	16 NOV 2005
	The Microsoft case(s): Who has won?	09 NOV 2005
	Hands off the Premier League!	03 NOV 2005
	On two recent pamphlets by the Commission	26 OCT 2005
	Why can't we get rid of protectionism?	19 OCT 2005
	A Fund to fight effects of voluntary exchange	12 OCT 2005
	On Antitrust Policy in Innovative Industries	05 OCT 2005
	Subsidising innovation	28 SEP 2005
	Competition and broadcasting	21 SEP 2005
	EU regulators back at work!	14 SEP 2005
	Google- A New Evil Empire?	07 SEP 2005
	Competition and Productivity in Japan	23 AUG 2005
	Commission to find unexploited profit opportunities...	02 AUG 2005
	Is Political Competition a Good Thing?	28 JUL 2005
	Towards "less and better state aid"...	20 JUL 2005
	The EC to regulate the content of coolers	13 JUL 2005
	Antitrust comes to Singapore	06 JUL 2005
	When bundle sales raise consumers' welfare	29 JUN 2005
	Go, Tony, go!	23 JUN 2005
	The Polish Plumber Issue	15 JUN 2005
	Is France becoming a tax haven? No, but...	08 JUN 2005
	A Thought on Vertical Restraints	01 JUN 2005
	"We are waiting for the Microsoft people to do their homework."	26 MAY 2005
	Why counter-productive regulation survives?	18 MAY 2005
	Do Markets Without Competition Policy Converge to Monopoly?	11 MAY 2005
	Competition at any price	04 MAY 2005
	Free flights to Martinique!	27 APR 2005
	On the glumness of my postings	20 APR 2005
	EU Protectionism	13 APR 2005
	Another Trade War?	06 APR 2005
	Airbus subsidies not to be terminated?	30 MAR 2005
	Microsoft breaks EU antitrust rules. Again!	24 MAR 2005
	Neelie Kroes got it wrong	21 MAR 2005
	The Aviator and Rent-Seeking	09 MAR 2005
	French rail freight subsidies to be approved by the Commission	02 MAR 2005
	Bad Economics, Bad Law	23 FEB 2005
	European Constitution and Antitrust	16 FEB 2005
	The Return of Industrial Policy?	09 FEB 2005
	How Does Antitrust Work?	02 FEB 2005
	EU Against Tax Competition	26 JAN 2005
	Airbus subsidies to be terminated?	19 JAN 2005

Why Do People Hate Big Companies?
28 DEC 2005 - Where does anti-capitalist mentality come from? In a sense, this is a very Christmas question, as we all hear from all sides how large companies conspire to make profits out of a spiritual feast. So why do many of our fellow citizens hate companies and its executives, especially the big ones? This question is interesting because it can partly explain public support of antitrust legislation and its enforcement.

However, it is also a question which escapes a single explanation. Alesina and Fuchs-Schündeln find sound evidence that political preferences of Eastern Germans seem to be largely influenced by their communist heritage. That is, Eastern Germans seem to be much more pro-state and much less pro-capitalist than their Western counterparts which appear to be explained by the political institutions in which lived especially the older cohorts of the population. (This is not say that the Western German public would be particularly free-market or libertarian.)

In contrast, take the Americans. They are well-known to favour free markets and their outcomes and accept the winners of market competition, as they believe that it is a meritocratic process. But still, some of them have a resentment towards what they believe is an abuse of market power. (See The Very Bottom Line in current issue of the Economist.) It is not the wealth that frightens Americans but alleged existence of power. Hence once the Rockefeller’s Standard Oil become one of the most hated companies in the US, followed by big tobacco companies and more recently Microsoft took the place. It should be noticed however, that in the worst times of Microsoft, only 18 percent of Americans felt unfavourable about it according to the Gallup polls.

Yet it is not an exaggeration to say that most of our fellow men do fear large companies and it is mainly because they fear that the companies could exercise some degree of power over their lives. Which they can, by the way, but only if they use political power to do so. It should be explained to the general public that if there is competition – and lest businessmen collude with politicians – there is no reason to expect anything which would resemble the deplorable practices apprehended by antitrust agencies and the general public.
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Say "No" To The Common EU Tax
21 DEC 2005 - It is self-evident that the EU necessitates a profound reform. It needs to become what it once was and was it ought to be – a space of free trade and competition. The main reason for it is that it was competition among various jurisdictions and policies which lead to the economic miracle of Europe. Or as Gerard Radnitzky put it:

"The secret of [Europe's] success was the diversity required for evolutionary competition. It led to the taming of the state, to respect for private rights, which in turn led to growth and wealth. Europe's great luck was that a centralised power did not emerge."

Mr Barroso and a bunch of other European politicians may use the occasion to put forward the idea of a common EU tax – a further step towards a European superstate, as European People's Party politician gathered in Brussels suggested that the EU budget be more "independent" of national fiscal policies. The common tax idea should not go on unchallenged, for in its consequences it would be equally important as the EU constitution proposal.
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Another Antitrust Office Behaving Inappropriately
14 DEC 2005 - While the Commission have started investigating UK government scheme of paper recycling (see here), the Czech Antimonopoly Office imposed the highest fine in its history, amounting at CZK 205 million (€7.1million).

The Office fined the largest Czech fixed-line operator, Ceský Telecom, for uncompetitive price practices. Ceský Telecom had been offering free phone minutes bundled with usual phone services. This decision is truly bewildering. Can anyone expect a telecommunication company to offer free minutes which would not be bundled with other services?

Now, the Antimonopoly Office maintains that

"This (bundling) prevented CT clients from considering switching operators, because it was nearly impossible for customers to accurately compare CT's prices with those of alternative providers."

Another point deserves to be made about the Ceský Telecom case. I have already written about a different lawsuit against it in May this year. It is the seventh time that CT is being fined – more than any other company and I am unable to find in which way it harmed the customers. For me, this is just another example of how antitrust policy is designed to benefit the less successful competitors, not customers. Moreover, it supports my belief that antimonopoly offices tend to prosecute the same companies over and over mainly because it is bureaucratically convenient.
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A Dispatch on Past Week's Competition Affairs
07 DEC 2005 - What the past week in competition issues has been like? On the one hand, the commission fined producers of industrial plastic bags heavily for price fixing. The fine approaches €291 million and follows a series of raids in 2002 which found, among other things, a internal memo stating "It was subsequently decided to appoint a leader for each customer in order to coordinate the rise in prices" as the ultimate piece of evidence.

On the other hand, French Bouygues Telecom, which was recently fined by the French antimonopoly authority, complained that its competitor Orange has formed an alliance with T-Mobile of Germany, TIM of Italy, and the Spanish group Telefonica in order to push down roaming prices. What a misdeed!

Anyway, it seems to me that producers should avoid setting prices too high or too low. Preferably, following the logic of the EC they should perhaps not change them at all. Never. If there is competition, they are equal to marginal cost, so why change them in any direction?

This way of thinking is certainly diabolical and it opens way to practically unlimited involvement of the antitrust authority in any economic activity. But not to end on a dismal note, I would like to turn our readers’ attention to a nice piece of empirical research which was published by the NBER very recently. It shows that competition in education has substantial effects on quality of schools, even they remain public and the competition is far from being "perfect".
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Mrs Merkel’s Bright Idea
30 NOV 2005 - It is quite well-known that top German politicians are not as keen on tax competition as I am. It is for instance well-known that Gerhard Schroeder used to threaten Slovakia on several occasions. In contrast, Angela Merkel was once praising Slovak tax reform during her election campaign and, as I was informed, she even had a team of experts to evaluate the possibility of introducing a flat tax in Germany. However, people dynamically change opinions when moving along the corridors of power. Most recently, she has had but bitter words for countries engaged in lowering their corporate taxes.

However I cannot but applaud her latest proposal – Mrs Merkel asserts that poor countries with low corporate tax rates should receive less money from the EU budget. Yes they should and I do indeed hope that Slovakia does not receive any EU money at all! For this there is simple explanation based on the tenets of development economics. The more money a country gets, the more it is prone to get dependent on it. What is more, foreign aid diverts a country’s most productive factors of production into the sector of 'fund-raising' and thus contributes to retarding economic growth. This might appear to be pure theory, but I do live in the region and can see in my everyday life a true tragedy: the most talented and productive individuals of my generation – instead of performing truly productive activities – are engaged in raising money from EU funds and dream of careers at the EC.

Hence, unlike Slovak politicians, I endorse Mrs Merkel's plan to cut EU money destined for newcomers and I urge her to cut this amount to zero.
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Why state aid exists?
23 NOV 2005 - Why does state aid exist? What leads politicians to spend money carelessly for projects that are not profitable? Is because they simply err in their judgments or do not care at all about the outcomes?

Recent studies suggest this probably not the case. Whether you take the Concorde project or support to Crédit Lyonnais, MG Rover or Alsthom, in each case you have to face a relatively technologically advanced and prestigious sector and a well-publicised recipient of state aid.

These and many other examples of anecdotal evidence seem to confirm the idea (PDF) that state aid may actually be a form of signal which is made by the politicians to the electorate. In other words, funding – however wasteful – of projects can be a way to signal commitment to supplying public goods. Hence wasteful spending and distortion of market competition arises as a consequence of political accountability, as voters reward conspicuous spending because it signals effort made by a politician, even though it is associated with waste and market distortion.

What does it mean for those who cherish unhampered competition? It seems to suggest that we will not get rid of this kind of public spending in an easy way. Some even claim that a supra-national and unaccountable authority – such as the EC or the DG-Competition – is needed to restrain these practices. It is true that I applaud every time Ms Kroes says "no" to this or that subsidy. Nevertheless, I am afraid that the employees at the EC are well looking forward to public/political careers in their home countries and to demonstrate their diligence they are as much prone to perform wasteful "signalling" as distant as they are from their fellow citizens.
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Privatising Slovak Airports: Antimonopoly Gets in the Way
16 NOV 2005 - Bratislava airport is a very small one, with only a couple of airlines serving it. These include mainly low-cost airlines, such as Ryanair, SkyEurope and Smartwings. Hence most Slovaks flying even to European destinations use neighbouring Vienna Airport, some forty kilometres from Bratislava.

Bratislava airport - as well as Košice airport in the eastern part of Slovakia - are owned by the state and are currently for sale. One of the bidders is a consortium in which the Vienna Airport participates. Not surprisingly, the Slovak Antimonopoly Office has already objected to a possible takeover of the airport by the neighbouring Vienna Airport even before the interested parties could place their bids.

There are reasons why I react sceptically to these fears. On the one hand, it might be true that the proximity of Vienna makes the Slovak airport a possible competitor and it is not utter nonsense to imagine Austrians rushing to depart from Bratislava at bargain airfares with low fees. On the other hand, there are also sensible reasons why it might be a good thing for customers to have these two airports joined together.

First there are meteorological reasons. Weather in Bratislava is much less windy than in the neighbouring part of Austria, partly due to the Carpathian Mountains. Hence Bratislava might be a good place to land flights which would otherwise have to stay in the air until the weather in Vienna gets better. Second, in the airport industry there seem to be large economies of scale, hence having two very close airports offering the same destinations might not be the best solution from consumers’ perspective. Rather it would be reasonable to have two places operating different destinations and connected for instance by a fast rail link.

To be honest, I am not an expert in evaluating business opportunities related to the privatisation of Slovak airports. While the matter seems a bit more complicated than the usual issues related to competition policy, mainly because the freedom to enter the market of airport services is very limited, from my personal perspective the most important is that the airports get rid of state ownership as soon as possible. And in this respect the Antimonopoly Office risks complicating matters.
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The Microsoft case(s): Who has won?
09 NOV 2005 - The European Commission has just issued official statistics on the number of antitrust cases (pdf) dealt with during past year and the number appears rather scary to me: It is 473 or, if you wish, 13 since beginning of October.

In the meantime, a well-researched paper on the Microsoft case was published by the NBER. Unfortunately for us, it does deal so much with the bullying that Microsoft was subjected to in Europe, but rather with the lawsuits against Microsoft in the US. There were actually five major allegations against Microsoft under the Sherman Act and the lawsuits have been taking place since mid-nineties. As a mater of fact, I personally remember attending primary school when the first prosecutions had begun.

However that may be, at least three of the charges have been either reversed by a court of appeals or rejected at the district court level. In fact, the cases followed each other in this way: First it was alleged that Microsoft’s exclusive dealing contracts barred Netscape from the market (no violation of the Sherman Act found), then Microsoft’s inclusion of Internet Explorer in Windows was found to be an illegal tie. Third, there was a charge against Microsoft that it used its operating system monopoly to monopolise the browser market (no violation found). Fourth Microsoft was found guilty of maintaining a monopoly in operating systems (this charge being reversed by a court of appeals) and finally Microsoft’s alleged attempt to monopolise the browser market resulted to several inconclusive rulings. Hence it seems that Microsoft must have finally not been such an evil empire, certainly not in the sense many are prone to believe on the basis of how the media have been presenting these issues.

What is more, the authors of the paper - who are otherwise very cautious in making any strong conclusions about the cases - do note that even in the suits in which Microsoft was found violating the Sherman Act, it is very hard to find by what ways Microsoft could have harmed the interests of consumer.
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Hands off the Premier League!
03 NOV 2005 - I am not a particularly keen fan of football, yet I am aware that there are competitions around the world. And as my family members informed me, one of the most prestigious is the British Premier League. What is more, I have remarked that the more important football matches, including those of the Premier League, are broadcast on television.

Apparently, I was not the only one to notice it. So did Mrs Neelie Kroes. And as competition commissioner, she also noticed that there is only one television channel, the Sky Broadcasting Group, to broadcast the Premier League matches. What a shame!

"The Commission wants viewers and football fans to enjoy more choice and better value," says a statement issued by the Commission. Well of course, to have competition in the strict sense of perfect or almost perfect competition it would be preferable to have a large number of producers producing a homogenous product – that is a large number of broadcasters which would offer the same football matches at the same time. But is this the "more choice" what the Commission strives for? I do not think so.

It is true that the Premier League is a monopolist in the sense that it offers a unique product, non-replicable product. And it benefits of its position by selling the right to live broadcasting to just one company. But what is wrong about it? Football matches still do compete for viewers with almost everything that is broadcasted – including cricket matches, operas, soap operas and Sex and the City. And this is, I believe, the true sense of having "more choice."
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On two recent pamphlets by the Commission
26 OCT 2005 - From the perspective of an observer of EC competition policies, the past week has been an interesting one. For instance, a new brochure describing the importance of competition has been released and can be found here. In addition, an extensive paper on merger remedies was made public and is available on-line.

That makes a lot of interesting reading. The first document is extremely user-friendly, coloured, full of pictures and seems very trustworthy, at least to a gullible EU-citizen to whom it should be explained what important and brave things the Commission does for him or her. In the first place, the Competition Directorate-General protects him from companies abusing their market position. And what is meant by that?

"Dominant companies have the economic strength to act without having to take account of either their competitors or their consumers. This is why it is illegal for companies to abuse their dominant position. Such abuses may involve:

:: charging unreasonably high prices, which may exploit customers;

:: charging unrealistically low prices, which may be used to drive competitors out of a market or to make it more difficult for competitors to enter the market;

:: discriminating between trading partners, for example by refusing to deal with certain customers or by offering discounts only to those customers which obtain all or most of their supplies from the dominant company;

:: forcing unjustified trading conditions on trading partners, for example where a dominant company makes the sale of one product conditional on the sale of another product."

Hence, selling too high is bad, selling too low is bad, so is selling to people one wishes to at conditions one deems appropriate. I do not want to exaggerate but what else is it than subjection of property rights to discretion by the EC? There is no need to emphasize that the brochure contains much more of this "provocative" material.

My initial intention was to comment on the second document, the Merger Remedies Study. Provided that I have already exceeded by far the word limit which is imposed on these postings and given that the study is much longer, much more sophisticated and utterly unintelligible, I prefer to spare for next week.
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Why can't we get rid of protectionism?
19 OCT 2005 - Since the time of Smith, Ricardo and Turgot, it has been quite well known that foreign trade is beneficial for parties involved. In fact, even though economists are reputed for being in constant disagreement with each other, it would be very difficult to find a single one member of the profession who would be in favour of imposing tariffs, quotas and other barriers to trade. In the same manner, it is not surprising that pressure groups which benefit from protectionism do not cease to oppose free trade as strongly as they can, for it is a source of rent for them.

In contrast, what definitely is surprising is that most of our contemporaries, including the so-called intellectual elite still do not grasp the reasons why free trade is beneficial. As a result, the world is still not able to sort from the era of protectionism and various trade regimes.

This can be illustrated on recent discussions about opening-up of the EU by cutting distortionary subsidies. One could recall the French dissent on the issue and the blackmail by various agricultural associations, yet there is another thing which is for me even more disturbing. I feel concerned about the common consensus that free trade is something that should be negotiated and arrived at by compromising and discussing with everyone who might be concerned. This view was well summarized by the US President who said last week that he was prepared to abolish US trade tariffs if (and presumably only if) others did the same.

Why is it that the underlying meaning of such statements is that trade liberalization is a zero-sum game, or a prisoner’s dilemma? This remains a genuine puzzle for me, as I believe that it is almost trivial to assert that free trade is by definition beneficial even if introduced unilaterally. Ultimately, this fact communicates a lot about the economic thinking of most of our fellow men and the economic education they received..
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A Fund to fight effects of voluntary exchange
12 OCT 2005 - It is not a difficult task to find out what the attitudes of a majority of EU Commission members are toward free markets and competition. These attitudes are unveiled even when not dealing directly with antitrust policies. Yesterday, I heard the strange news about José Barroso proposing a fund to cope with effects of globalisation. The fund of € 7 bn should help all member states to cope with job losses.

There are many reasons for which this proposal is silly. First of all, how can redistribution stop unemployment? The answer is that it cannot. Moreover, it is precisely redistribution that promotes job losses. For every public fund needs money which are levied in taxes. And it is clear that taxation affects entrepreneurial activities and it might happen that the investment projects and business which would have otherwise broken even are no longer profitable when taxation is increased by even a little.

What is more important for me is the underlying philosophy of the proposal. "Brussels to press for fund to fight globalisation effects," says the EU Observer. Now what does it mean to be affected by globalisation? Well it essentially means to be engaged in voluntary exchange with individuals from all over the world. To the extent that voluntary extent always benefits the parties involved, the statement above is clearly nonsensical and contradicts the most fundamental tenets not only of economics but also of common sense logic.

Yet it might happen that third parties are affected by voluntary exchange in the way that they suffer from pecuniary externalities. Some firms may even close down and unemployment might occur. But it is still well-known that the only thing governments can do is to let these people find new jobs and new profitable businesses as soon as possible. And this can be done only by allowing them to compete freely and not by distorting their incentives by redistribution.
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On Antitrust Policy in Innovative Industries
05 OCT 2005 - While the new head of the Czech Antimonopoly Office has been trying to improve its appearance among the general public, I have found an interesting feature of antitrust policy in innovative industries. Actually, I have not found it by myself but rather have read works of those who have.

Anyway, it is true that in innovative industries there is usually a market leader which has – to borrow the language of antitrust regulators – a dominant position on the relevant market. In the eyes of some, this should justify a harsh regulation of its pricing and its behaviour towards consumers. A typical example might be the Microsoft case.

Leaving aside the question of what is a "relevant market" or "dominant position," one can ask what will be the effect of such regulation on the innovation rate in the industry.

On the one hand, by facilitating entry on the market for new firms and by disadvantaging Microsoft for instance by banning it from bundling its products, one can expect a rise in the number of competitors.

Yet I would rather subscribe to the following view:

"...firms engage in dynamic competition for the market – usually through research and development (R&D) to develop the ‘killer’ product, service, or feature that will confer market leadership and thus diminish or eliminate actual or potential rivals. Static price/output competition on the margin in the market is less important." (Evans, Schmalensee, 2001 [link here])

In addition, if the incumbent’s profits are systematically lowered by price regulation, this results in lowering the incentive to become a market leader and eventually in lowering the rate of innovation of the whole industry.
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Subsidising innovation
28 SEP 2005 - There is a common fallacy that consists of thinking that state aid which is directed towards supporting research and development is somewhat more efficient or desirable than the "ordinary" state aid. My impression is that this flawed idea can be found in the Commission’s recent document on innovation.

Although it correctly states that competition is the most important feature of innovative market, it concedes that state aid might be necessary to remedy a lack of innovation that is due to an eventual market failure. And by this failure one should understand a technological spill-over (externality) which would lead to an under-investment in innovation. It is commonly assumed that these spill-overs frequently occur in the area of R&D.

From my point of view, there is something to idea that technological innovation produces technological externalities. Yet I find completely flawed to use this argument to explain relative backwardness of the EU economy when compared to the US for instance. Take for instance this passage:

"The scale of market failures that hamper innovation may vary depending on the undertaking and the type of activities concerned. On the basis of past experience, the Vademecum set out three main principles: i) small and medium-sized enterprises are more affected than large firms; ii) market failures affect newly-established firms more (...)"

The generation of my parents can remember that the Communist regime in former Czechoslovakia used to foster innovation through different schemes - which would seem ridiculous from today’s perspective – as nomenklatura thought that increase in R&D would help to make the system more viable. For obvious reasons it did not work. In the same way, what we in Europe need right now are not subsidies for innovators but competition, pure and simple.
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Competition and broadcasting
21 SEP 2005 - As some readers might know, Slovakia is now encountering a political crisis. Its imminent cause was a scandal related to former minister of economy Pavol Rusko. Before being involved in politics, Mr Rusko had previously been owner and CEO of the leading Slovak TV channel, Markíza. It should be stressed that Mr Rusko entered Slovak politics as a keen promoter of classical liberalism. Upon his entry onto Slovak political stage, I had one or two brief conversations with him. What puzzled me the most was his belief that competition was a good and praiseworthy thing, except for … the broadcasting market. On the broadcasting market, he argued, there was only a limited amount of advertisement that could be sold and sustain TV channels. As a result, if a licence had been granted to one more television, the fixed amount of advertisement would have been divided between the competitors in such a way that neither of them would have turned profitable. His assertions were of course nonsensical and easy to rebut. But anyway, it is puzzling to see how ridiculous ideas some of our contemporaries have about competition in certain areas. To develop the example of broadcasting, the majority of general public, at least in Slovakia, take for granted that there are two public service channels and a three private ones that currently transmit their signals by terrestrial broadcasting to the whole of the country. And yet there is no reason, besides the interest of current licence-holders, to have the number of licences fixed at the number of three, nor to have two public channels in operation. I personally believe that there is no such thing as public broadcasting and even if there was – as Sir Alan Peacock suggests – it is clear neither of the Slovak public channels satisfies the criteria for delivering this service. What is more, the whole idea of frequency licences is at least contestable, as there might well be other and more efficient means of distributing scarce frequencies among alternative uses.
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EU regulators back at work!
14 SEP 2005 - After the fiasco of French and Dutch referenda, I was among those who wished that European politicians would start a period of reflection – or at least a pause in promoting the concept of an ever-closer Europe. In the same manner, I did hope that the regulatory activities of EU institutions would be moderated by a more or less obvious lack of their legitimacy. While it is too early to evaluate the former, it is now almost evident that I was wrong as far the latter is concerned.

What might have seemed as a halt to the inflation of legislation and regulation coming of Brussels was temporary and due uniquely to summer holidays. During the first September days I was struck for instance by the fact that MEPs had voted on a common EU standard protecting workers from over-exposure to sunlight. Fortunately enough, the European Parliament turned down the option that sunlight be included in the proposal of health and safety directive on optical radiation. As far as topics that are more relevant for this blog are concerned, one could highlight Commission’s meddling in affairs that should not be of their business, namely the investigation that the Commission has started concerning suspicious tax breaks in Sicily.

Not to exacerbate my criticism, I should say that I have praised one initiative from the part of the same Commission. To be precise, a recent report of the Commission calls for removing national regulation hampering competition in the sector of professional services. The report states that the Commission

"remains concerned that unnecessary regulation is inhibiting competition, harming the users of professional services – especially consumers. Professional services are an important sector of the EU economy in terms of both employment and GDP, and the availability of more varied and better professional services would increase demand, creating high-skill and high-paying jobs in the sector, and would also stimulate GDP growth."

That sounds fine. Nevertheless, I beg the learned reader to remain sceptical.
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Google- A New Evil Empire?
07 SEP 2005 - It is disconcerting to observe how pervasive incorrect views on competition are. Recently, a New York Times article informs about Google taking the place of Microsoft and becoming a new ‘evil empire.’ The authors assert that Google’s success is likely to lead to a situation of monopoly over the access to information.

I am astounded to be confronted with such a shallowness of thinking. How could possibly Google become a monopoly? On what market? How could one confuse that a firm is the market leader and that a firm is a monopoly? How could Google possibly abuse its dominant position? The article in fact attempts to provide an answer to the last question:

"Google is doing more damage to innovation in the [Silicon] Valley right now than Microsoft ever did," said Reid Hoffman, the founder of LinkedIn, a networking Web site. "It’s largely that they’re hiring up so many talented people and the fact they’re working on so many different things. It’s harder for start-ups to do interesting stuff right now."

I am definitely bewildered. For I frankly cannot understand how can hiring talented people and "doing many different things" be damaging to innovation and competition. It is of course detrimental to competitors and to incumbents who must try really hard to hire the right people and start doing something truly innovative to be better than Google. And this is, as I understand it, the very purpose of market competition.
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Competition and Productivity in Japan
23 AUG 2005 - A highly interesting piece of empirical research has come out of the NBER last week. Paper entitled Competition and Productivity in Japanese Manufacturing Industries by Yosuke Okada deals with… well, with competition and productivity in Japanese manufacturing industries. That is, the paper investigates what is the relation between the degree of competition (measured by price-cost margin) and productivity on panel data from Japan for years 1994-2000.

This kind of research is indeed interesting from the perspective of an economist who thinks that Japan’s troubles are due to a lack of competition. If it were true that the degree of competition in Japan has decreased in the long run (what I can neither confirm nor reject), than the study would confirm this claim, for Okada’s main finding is a negative relation between the price-cost margin and productivity.

Yet the paper is interesting from a different perspective as well. The author uses the price-cost margin as a measure of competition in an industry and states in the introduction that "traditional competition measures such as Herfindahl index and market share are misleading in certain business fields, because these measures are crucially dependent on the definition of the relevant market and tend to neglect potential as well as international competition."

The learned reader of this site certainly recognizes that this is exactly the same argument that Austrians have been trying to put forward for the past decades. It is of course the argument I personally adhere to and I feel heartened that it is being accepted by a wider community of economists. The remaining question is whether price-cost margin can do any better than market share or Herfindahl index. It does not seem so in the short run, for high cost margin can just be an indication of a profit opportunity being exploited by an alert and extraordinarily apt entrepreneur. Yet intuition tells us that on a competitive this high price-cost margin should tend to be arbitraged away in a somewhat longer run (that I would extremely cautious to define in quantitative terms). Hence in this setting price-cost margin seems to be an appropriate measure.
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Commission to find unexploited profit opportunities...
02 AUG 2005 - It is sometimes surprising to find out what kind of concerns bother the Commission. For instance, I would find it useless if a public institution monitored prices of a certain good on a territory only to find out that there are still existing price differentials. And I would think it derisory if the same public institution urged consumers to make use of these price differentials. This because I essentially believe that consumers are able to find bargains themselves and to make good use of them without any public body advising them to do so.

Interestingly enough, it is exactly this way of reasoning that lies beneath the Commission's recent report on car prices. The report contains data on car prices for the past year and it asserts that there still are substantial differences in prices.

"[P]rice differences for particular models between the cheapest and most expensive Member States can still be substantial. Of the 1878 price quotes in the report, 579 exceed by more than 20% the cheapest market in the EU. (...) Of the 10 top best selling cars in EU in 2004, the widest price difference is the euro zone is for the Fiat Punto, which costs almost 30% more in Germany than in Finland. This difference represents a potential saving of €2700 for the German consumer (including VAT) buying in Finland."

To be concrete, there might be essentially two reasons for these price differentials. Either there truly is an unexploited profit opportunity which would arbitrage the differential away (by importing cars from Finland to Germany for instance), or there exist costs that are prohibitive for this arbitrage.

While the report is probably harmless and might even do some good if used to dismantle legislative barriers for car trade within the EU (though I am not fully aware of their existence), I do not believe much in Commission's ability to discover profit opportunities and this kind of effort seems to me a bit useless.
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Is Political Competition a Good Thing?
28 JUL 2005 - It is obvious and it is one of the leitmotifs of this blog that competition among producers increases consumers’ welfare and, in contrast, a monopoly in production of a good is a bad thing. The thing that is a source of disagreement among economists is how "monopoly" and "competition" are to be recognized and how the desired state of affairs is to be attained.

It is much less clear what position should a free-market economist take when it comes to political competition. That is, is competition on a political market a good or rather a bad thing for the consumer of "public goods"? Some of the authors working in the free-market/libertarian tradition might have gone as far as to deny any virtues whatsoever that political competition could ever have (see here). Regardless of whether such an approach is warranted or not, one must agree that the discussion of the relationship between political processes and economic performance is an extremely complex and at the same time fascinating task. In this respect, I would like to turn readers’ attention to a very recent paper by Timothy Besley, Torsten Persson and Daniel Sturm. The authors present a two-period model with two sectors of the economy in which they demonstrate that political competition is indeed beneficial for economic performance. What is more, they find robust evidence in favour of their claims.
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Towards "less and better state aid"...
20 JUL 2005 - It should not go unnoticed that Mrs Kroes has recently proposed a reform of state aid and of the role the EC should play in it. The leitmotif of the action plan can be summarised by saying that the EU needs "less and better state aid."

The initiative is of course most welcome. We do indeed need less state aid and we do indeed need to change the current status quo which was aptly summarised by Mrs Kroes in the following way:

"The objectives of state aid discipline are not well known, and understanding them is not made any easier by the current rulebook. Over the years, an unnecessarily complicated set of rules, exemptions, and guidelines has evolved. Procedures have grown lengthy and cumbersome. "Brussels" has had to intervene in a rather strange range of cases, from individual swimming pools to lottery funding for the Brighton West Pier restoration. (…)Commission approval is often perceived as just one more bureaucratic hurdle to be jumped at the end, once the decision to grant aid has already been taken."

One problem of the action plan is of course included in the word "better" in the expression above. I personally believe that there are scarcely any means to say what is better and what is worse state aid, unless speaking about distortions that it brings about. If this is what the EC has in mind when speaking about "less and better" aid, then I would be prone to subscribe to it. Yet from my point of view, it would be completely sufficient to speak about "less" state aid solely.

The preceding remark seems to be a mere question of semantics when compared to the destiny which awaits the ambitious plan. As numerous action plans that have preceded it, the attempt towards "less and better aid" risks to boil down to an irrelevant initiative.
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The EC to regulate the content of coolers
13 JUL 2005 - When I was writing about bundling two weeks ago, I didn’t notice the very latest example of ill-advised concerns about it. Namely, at the end of June, the European Commission binded Coca Cola in a number of ways, including a ban on bundle sales. The Commission intentions were to "benefit consumers by improving competition in the markets for carbonated soft drinks in Europe."

The binding decision includes, among other things, a ban on exclusivity arrangements, a ban on rewarding Coca Cola’s customers for purchasing the same amount of the product as in the past and ban on bundling. Finally, if Coca Cola offers a free cooler to a retailer who does not possess any other cooler, Coca Cola will not be able to force him to use it solely for selling its products but the retailer will be free to use up 20 % of the cooler to sell other items.

There is of course a whole bunch of reasons why this decision is counterproductive and will not enhance competition. Essentially, the decision is based on a purely technical vision of competition that takes into account only the market shares and the number of competitors on given market. From my perspective, these variables are not the most relevant. The freedom to enter a given market is for me the criterion of whether the market is competitive or not, whatever the number of competitors. And it saddens me if an unrealistic model of competition serves as basis of further expansion of Commission’s powers.
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Antitrust comes to Singapore
06 JUL 2005 - On Wendesday, I am leaving for Singapore for a couple of weeks. I have been trying to learn as much as possible about the country which counted 1000 inhabitants when Sir Stamford Raffles landed on its shores in 1819 and which is now a vibrant and dynamic financial centre of South-East Asia.

Being a CNE Competition Blogger, the very first thing I looked for was of course the antitrust regulation. If Singapore is the most competitive nation in the region, it surely can be so only because of solid and enforceable antitrust regulations. This is at least what the more gullible might be tempted to suppose.

The truth is that Singapore had NO antitrust legislation (with the exception of rules regulating competition in specific sectors, like telecommunications and energy) until the 2004 Competition Act - a "generic" antitrust law - was passed. The Act created the Competition Commission of Singapore, charged with the enforcement of the Act’s provisions. The Commission has existed since 1st January 2005 and the competition policy provisions will come into force on 1st January 2006. In a way not completely dissimilar from antitrust laws in Europe or in the US, the Act will prohibit agreements between firms to fix prices, reduce the supply of goods, predatory pricing and mergers and acquisitions "which substantially lessen competition and have offsetting efficiencies."

Wow. Singapore is becoming a civilised country after all those years of savage monopolistic capitalism which has secured its citizens a GDP per capita higher than that in the EU-15.

My only wish for Singaporeans is that the Act is not enforced all too eagerly. Yet this hope is probably in vain in a country where smokers face a fine of SGD 1000 (USD 590) and where those in possession of more than 200 grams of marijuana are usually sentenced to death.
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When bundle sales raise consumers' welfare
29 JUN 2005 - Bundling is often viewed as a means of price discrimination. By tying two products together at lower price than the sum of initial prices of the two goods, the monopolist is able to discern consumers with a lower willingness to pay and make them pay for the two products that they would otherwise purchase.

As such, bundling was percieved essentialy as a feature of monopolistic markets. Although there is no way how to prove that bundling decreases consumers' welfare, it has usually been understood as an unwelcome signal that a given market is not fully comeptitive. To illustrate this, one could recall the ado about the Microsoft Media Player being a part of Windows.

Fortunately enough, an alternative approach to the issue exists. Recently, Barry Nalebuff proposed a model (PDF) in which bundling serves as a way of making the entry to the market more difficult. Hence, bundling would not be so much a tool of price discrimination as an entry barrier.

This finding in itself would not be that interesting, if Nalebuff’s model was not further developed by Timothy Brennan. The latter models an environment in which there are two monopolies on markets of different goods. Imagine for instance that there are two goods, A and B, both produced on monopolistic markets. Now if the producer of the good A starts to sell it bundled with the good B, he introduces competition on the market of the good B, resulting thus in a welfare gain for the consumer. Interesting, isn’t it?
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Go, Tony, go!
23 JUN 2005 - Hardly did I ever believe that I would pronounce a single word of praise concerning Mr Blair. Nevertheless, his position in the current EU row over the 2007-2013 framework budget is very appealing to me. With the exception of the Czech president Vaclav Klaus, Mr Blair emerges as the sole exception among European leaders who has resisted to the utterly false and monstrous idea that the EU needs a budget at all costs. Furthermore, his attempt to promote the idea of a need of reform for the Leviathan-like budget, including a cut in the agricultural subsidies, is most welcome.

From my perspective, the constitution and budget issues are interesting from an economist's perspective, because they have an immediate effect on the wealth and well-being of Europeans. And it is interesting for me to observe under which circumstances politicians will be forced to abandon distorting and wasteful spending, be it the CAP or the Structural Funds. Is major economic catastrophe needed to turn public opinion in favour of necessary reforms and give them literally no choice? This often seems to the case, yet I do hope this will not be the case of the EU. Sometimes a concatenation of fortunate events suffices to bring the right persons to the right places and to put forward a major economic reform, as in New Zealand or Estonia. What is important to note here is that Europe does not have any inherent need of a BUDGET or a CONSTITUTION. Only politicians, blinded by their ambitions, have this need. Sooner Europeans realise that Europe needs more competition and less public spending, lesser the costs.
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The Polish Plumber Issue
15 JUN 2005 - One of the disturbing things about the EU is that it has not been able to secure one of its main goals, namely the free movement of services. In the same time, the EU institutions have proved themselves willing (and able) to regulate a number of industries, promote "gender equality", fight "social exclusion" and do a number of different things which I do not welcome very much. However this may be, the fact that the service directive has not been implemented during more than 50 years of the Communities’ existence puts the EU institutions into a very bad light. This is because, from a consumer’s perspective, free movement and competition in the area of services is as crucial and as beneficial as free movement of goods and factors of production. Yet, German socialist rapporteur on the services bill, Ms Evelyn Gebhardt puts the problem in the following way:

"She said that a plurality of legal regimes covering services would confuse consumers and risks damaging established standards on social protection, health and environmental protection and the minimum wages."

In the same spirit, if one does not consider individuals completely unable to decide for themselves, he should not fear competition in the matters of social, health and environmental standards, not to mention minimum wage legislation. If all of these are so wonderful and necessary institutions, as Ms Gebhardt would like us to believe, they will surely withstand the test of competition that would be brought if the freedom of services were implemented.

Not being able to offer services freely in other countries of a Community that is based on the principle of a common market is a shameful thing. In my eyes, this freedom should be returned to Europeans with utmost urgence.
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Is France becoming a tax haven? No, but...
08 JUN 2005 - France seems to be the nation whose political representatives are opposing tax competition within the EU the most, needless to repeat that many of the French voters have cast their Nons à la constitution simply for their fear of relocation of French companies to more fiscally attractive countries in the east. So it comes for me as surprise that even the French are introducing tax breaks.

The tax scheme cleared by the Commission last week introduces reductions in corporate income tax, trade tax and property tax. These are restricted to companies taken over by a new firm and are sized according to the number of jobs created and the region in which the takeover takes place. In the least favoured regions, the aid is generalised, while elsewhere it is confined to small and medium enterprises only. From a classical liberal perspective, or even from the perspective of a student in economics, I see no particular reason for favouring take-overs over other business interactions and I see no particular virtue in "job-creation in lagging regions." Yet, whatever the reasons for it, a tax-break in France is something that should be most welcomed. Not only because tax competition is a good thing (as I argue here [PDF] in more detail) but mainly because the French tax burden is perceived by many as prohibitive to any economic activity.
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A Thought on Vertical Restraints
01 JUN 2005 - While everyone seems to be bothered by the ridiculous what-will-the-French-no-do-to-European-economy kind of concerns, I will offer today a few completely different thoughts. This month, the AEI hosted a seminar on antitrust policy and vertical restraints and some of the presentations were not utterly uninteresting. It should be noted, however, that someone who adopts a rather clear position on antitrust policy (as I and other contributors to this blog do) cannot really be surprised by any findings that illustrate either the dangers or the irrelevance of antitrust policies.

Turning to the AEI event, Luke Loeb of the Federal Trade Commission spoke about vertical agreements. To most of our fellow men they seem to be harmful, yet from my perspective this is true only in the context of unrealistically defined context of microeconomic theory of market structures. Interestingly enough, the evidence on restraining vertical agreements is quite the opposite of what one could have learned on a microeconomic course.

For instance, when the UK introduced "divorcement" of pubs and breweries, it resulted in higher beer prices for consumers. In the same manner, in the US prices of petrol are higher by 2.7 cents per gallon in those states where refiners are prevented from owning petrol stations. This does not prove in itself that banning vertical agreements is bad thing, yet it might serve as a good example of the counter-productivity of such endeavour.
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"We are waiting for the Microsoft people to do their homework."
26 MAY 2005 - Thus spoke Neelie Kroes (according to BBC). She had in mind that Microsoft should provide details of how it could bring its practices back in line with EU rules. On several occasions, the Commission expressed its dissatisfaction with Microsoft’s compliance with its rulings. As a result, Microsoft can be fined up to 5 per cent of its global turn-over for each day that it does not comply. I am a bit puzzled about all this, as I do not entirely understand what Microsoft is asked to do. It was ordered to offer a version of Windows without the Media Player, which it did. It is true that Microsoft was, in addition, ordered to disclose its core software code to competitors, which seems to me as a completely abhorrent request. If competition has a sense, it is that of making things better than one’s competitor. If the most successful are being punished by involuntarily losing their competitive advantages, then this meaning of competition disappears. Furthermore, if entrepreneurs are exposed to an environment of uncertainty induced by bureaucrats taking arbitrary decisions – as it is in the case of Microsoft – can one expect that the current EU stagnation be replaced by anything else than a decline?
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Why counter-productive regulation survives?
18 MAY 2005 - In a recent publication of the AEI-Brookings Centre for Regulatory Studies, Samuel Peltzman offers an answer. The publication is a transcript of speech given by professor Peltzman last year, in which he describes two ways how opulence, or economic growth if you wish, influences regulation in a twofold way. First, the government's intention to regulate a sphere of human activity conflicts with response of individuals and is therefore made ineffective. More importantly, opulence somewhat shields regulation. That is, as nations grow richer, many of otherwise abhorrent regulations seem more acceptable as they did before. Examples that he uses are the Food and Drug Administration (FDA) in the US and regulations of automobile safety.

In my eyes, this view is equally applicable on antitrust policies. Living in a world of relative abundance, punishing the most succesful entrepreneurs does not seem to most of our fellow men as a direct way to poverty and starvation. Yet this does not mean that it is not the case.

The conclusion of this analysis might be a bit ambiguous. On the one hand, it is of course a good thing that we are so wealthy that the existence of this or that regulation or policy is not a question of life and death for anyone. On the other hand, it suggests that harmful and inefficient regulations, including the antitrust policies, are here to stay.
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Do Markets Without Competition Policy Converge to Monopoly?
11 MAY 2005 - The answer to this question is crucial for pronouncing any judgement over the relevance of antitrust policies. For, if markets actually remain competitive without being supervised by competition authorities, then the slightest rationale for competition policy disappears.

A couple of years ago, in a setting of a dynamic dominant firm model with rational agents, endogenous mergers and constant returns to scale production, Gautam Gowrisankaran and Thomas J. Holmes tried to answer this question. Their approach was part of the economic literature internalising the merger processes and subscribed to an even older tradition of dynamic model with capital that is not industry-specific.

To be sure, such an approach is largely ignorant of the virtues of competition that most of us cherish (that is, competition as a process of discovery), yet Messrs Gowrisankaran and Holmes arrive at reasonable conclusions.

They say that if firms are forward-looking, if they face an elastic supply of capital and if the demand of their products is inelastic, then the industry will tend not to be monopolised, irrespectively of eventual presence or absence of competition policy. In addition, they underline that in their paper, monopoly and competition are steady states, which means that a competitive market cannot spontaneously develop into a monopolised one.
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Competition at any price
04 MAY 2005 - Frequently it happens that there is no need to review the EU Commission decisions to see the unwelcome effects of antimonopoly policies. For, in member states, we face virtually the same kind of reasoning – on a smaller scale, however.

Recently, three Czech telecom companies have complained about the country’s main fixed line provider, Cesky Telecom, for having offered the customers "unfair pricing programmes":

"Tele2 claimed that Cesky Telecom repeatedly violated the antimonopoly law by introducing pricing programs that enabled it to offer its clients a fixed number of minutes for free calls. Other players on the market could not come up with a similar offer because their interconnection agreements with Cesky Telecom prevented them from offering similar programs, said Petr Rusy, spokesman for another alternative telecom, Contactel. Lager of eTel said his company had also filed a lawsuit against Cesky Telecom for the same reason."

Now what about interests of the consumer? The latter does not seem to bother Czech bureaucrats too much, as they perhaps are a less influential pressure group than three telecom companies. Yet the most disturbing feature of this case is the general, yet ill-advised consensus that this was needed – for the good of the competition – whatever the costs for consumer may be.
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Free flights to Martinique!
27 APRIL 2005 - Once again, the Commission did what one might wish not to see it doing, as another irrational state aid scheme was authorised on 20 April.

This time it is a French programme of subsidising air carriers from metropolitan France to the Departements d’Outre Mer. The programme consists of two schemes, the first offering €250 for one return flight per person per year for all scheduled flights between Martinique and the metroplitan France. The second scheme is actually free (yes, FREE) air transport for students from Martinique studying in France or in the EU.

The Commission authorised this programme on the grounds that it is nondiscriminatory, as the aid will be given to passangers irrespective of which airline they take. Yet, it is easy to understand why this programme is indeed discriminatory – it actually discriminates against everyone that does not operate flights to Martinique. As a result, one can expect more flights to Martinique than otherwise and – as we live in a world of scarcity – less goods somewhere else. And what else is that than an open attack on market competition and free consumer choice?

A question remains whether the Commission should take action against decisions, albeit irrational, of a member state. And to be honest, I do not have the answer. It may perhaps be preferable to leave the French, and Germans and Czechs with their subsidies and aid schemes without creating a central institution charged with repealing them. Yet, once this institution exists, I would prefer to see it fighting against state aid and privileges than to see it prosecute entrepreneurs for its own sake.
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On the glumness of my postings
20 APR 2005 - My postings have been increasingly gloomy in recent weeks - pointing at diverse misconceptions in EU competition and trade policies and the pressure groups behind them. Reading last week's contribution by our learned colleague Mr Micklethwait , I was pleased - if it is appropriate to use this word in the present context - to learn that I am not the only one to stress the unfavourable phenomena I am witnessing. Thus I promised myself to offer the reader today a more general reflection on why I am so critical and pessimistic about EU competition and trade policies.

The reason is not just that they are aimed at serving particular interest groups or that they are being justified by erroneous economic theories. That is just one part of the story. We have been living in a world of antitrust policies for more than a century and should be somewhat immune against its absurdities. In this respect, EU competition policies are not new, nor are they particularly worse than policies that we know from history. Sometimes, we even see bright moments and observe commendable efforts to make less pretentious and more sensible policies.

The other part of the story that bothers me is the particular institutional environment that surrounds these policies and permits them to prosper. To be concrete, the fact that the relevant decisions are taken by unaccountable and largely anonymous bodies distant from most of my fellow men can be blamed to an extent for a largely mediocre quality of the policies. This being said, the prospects for getting rid of policies that are punishing the most successful simply for being the most successful are not particularly rosy. I know that I am repeating myself but I deem it is noteworthy to underline that if the constitution for Europe is ratified, the ill-advised principles of competition policy will rest in the most fundamental legal document we are likely to have in next couple of decades, the latter being an important source of pessimism not only for me.
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EU Protectionism
13 APR 2005 - Some fifty years ago, those who laid foundation of the present European Union aimed at creating a free trade area in Europe. Simple as this goal was, the European project has progressively begun to live a life of its own, forgetting the objective of its existence.

Nowadays the EU often behaves as an organisation maximising welfare of different pressure groups at the expense of the general public, including open protectionism. It should then come as no surprise that the Commission has introduced protectionist measures directed against textile imports from China. Says EU Observer:

"Speaking at a press conference, EU Trade Commissioner Peter Mandelson justified the move [towards safeguards against Chinese cloth imports] as the past regulations were "very general" and therefore unfit to address growing concerns over a reported rise in Chinese textile imports. Under the guidelines, safeguards can, in theory, be activated as early as in the end of June, if the problem is not mitigated, a Commission official said. The guidelines are designed to give "some degree of protection" to EU and other developing countries' textile industries, said the commissioner, allowing some breathing room while they adapt to the new market environment."

As one can see here, this case is more a result of successful lobbying than a manifestation of complete ignorance of the science economics by European officials.
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Another Trade War?
06 APR 2005 - The EU proposes a 15 percent duty on US exports to Europe (paper, farm goods, textiles and machinery) as a retaliation for America's failure to repeal the Byrd Amendment, which permits fines against foreign companies that are selling items too cheaply and to compensate American companies harmed by the "dumping." According to BBC:

"Last December a Japanese exporter to the US was fined $31.5m under the law. A federal jury awarded the money to Illinois-based Goss International after it successfully claimed the Japanese firm in question was selling printing presses at lower than cost price, i.e. dumping them on the US market."

Such a legislation is surely abhorrent (and illegal under the WTO law) but what about the EU reaction? What sense does it have to impose duties on US exports to Europe?

The immediate answer is that the measure will impose additional costs on US companies trading with the EU and will, to put in a childish way, punish Americans for having bad laws. Yet what should be seen in the first place is that the duty will harm European consumers, as they will find less US items at higher prices in shops. And to make this reflection complete, one is compelled not to omit those who will benefit from the measure - EU companies.

Hence, what might have seemed as a rightful reaction to injustice done by the US legislation now emerges, mildly said, as a conspiracy against general public - no matter what Mr Mandelson says.
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Airbus subsidies not to be terminated?
30 MAR 2005 - The case of Windows XP being now resolved, albeit in an utterly strange manner, let me turn to the issue I mentioned in my very first posting on this website – the Airbus subsidies. It now seems that my optimism was not completely warranted, for the dispute continues, and after the breakdown of talks between the US and the EU, the issue is going to be taken to the WTO.

The EU complains about states of Washington and Kansas having provided aid to Boeing, and Japanese partners of Boeing having enjoyed $1.5bn of soft loans repayable only in the case of commercial success. Yet it seems to me that both the US and the EU are equally guilty by subsidizing their respective industrial champions.

Nevertheless, the Airbus case is more interesting, particularly from the perspective of a European taxpayer. If, for instance, not more than 500 of the A380 are sold, Airbus’s parent company, the EADS, will not have to repay any of the $3.7bn of "repayable launch aid" it received. Even though the latter case does not seem now to be likely, such a hazardous approach towards public finance does not deserve much praise.

The Economist brings an extensive coverage of the issue here.
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Microsoft breaks EU antitrust rules. Again!
24 MAR 2005 - A couple of weeks ago, I mentioned Professor Tollison’s hypothesis that antitrust agencies might be prosecuting the same firms over and over again simply because it is bureaucratically easier to do so, than to collect information about other firms working in different industries. This seems to be the case of the European Commission and Microsoft, which is being bullied yet again. Says BBC:

"On the basis of market test results, we have serious doubts that Microsoft is complying with the interoperability remedy," EU competition spokesman Jonathan Todd said. (…) Companies that wanted to take out a licence would have to pay for an extensive one that also covered items they did not want. Another limitation was that developers of open source software, which compete with Microsoft in providing software for server computers, could not gain access to the protocols. But the biggest problem, said Mr Todd, was that: "It would appear that the level of royalties applied would be unjustified."

Now, would Mr Todd prefer that Microsoft – in addition to the 497m euro fine – shares his know-how with the rest of the world and offers its products for free? But if this is the case, what are incentives for trying to be the best on a given market?
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Neelie Kroes got it wrong
21 MAR 2005 - One can hardly contest that Mrs Kroes is a far better competition commissioner that any of her predecessors. Her intention to fight state aid and to wage war on "fat ducks" deserves praise and support. Nevertheless, to be tough on state aid without realizing that there is no point in bullying decent businesses is insufficient to be a good competition commissioner. Tough ain’t enough.

In a speech she gave on 10 March, Mrs Kroes has somewhat spoiled the so-far-very-good impression I had of her and her opinions. Meditate on this, for instance:

"[w]hen we break up cartels, it is to stop money being stolen from customers’ pockets. That when we prohibit mergers it is not out of some blind opposition to large companies. Our rules are very clear: in merger control size does not matter. What is pertinent is whether sound economic analysis proves that the merged entity will trample its competitors and ignore its customers. Such mergers are unacceptable and will be stopped, whether the companies concerned are large or small."

There is no such "consumer right" to pay a price equal to marginal costs and, as a matter of fact, scarcely anyone has ever paid such price. And if we took neoclassical microeconomic analysis too seriously, we would risk not appreciating the true nature and virtues of competition and seeing virtually every business as "trampling its competitors and ignoring its customers" as not behaving according to the model of perfect competition. Yet this is exactly what Mrs Kroes seems to do in her speech. Unfortunately, I am compelled to say.
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The Aviator and Rent-Seeking
09 MAR 2005 - Last week, I went to the cinema to see The Aviator. There is no point in saying that I enjoyed the film very much and have a lot of admiration for the brilliant construction of the plot and for the performance of actors themselves. It is truly a remarkable, moving picture and – what should be of interest for me – it has some interesting features even from the perspective of a free-market economist.

A part of the film is dedicated to the struggle of the main character, entrepreneur Howard Hughes, against an air transport bill proposed by corrupt Senator Brewster (played by Alan Alda). The purpose of the bill was to ban competition on transatlantic routes and to grant the monopoly to Pan Am (Howard Hughes being the owner of competing Trans World Airlines). It was most instructive to see the Senator explaining that the monopoly will benefit the customers in the first place, for the absence of competition will allow for price reductions. The true motives of Senator Brewster were of course pecuniar, as the bill itself had been written by Pan Am management and the senator had received various gifts and other expressions of gratitude from Pan Am.

This episode was, in my eyes, an outstanding illustration of how the process of rent-seeking works. It occurs frequently that a particular measure results from lobbying, if not through outright bribing of the decision makers. Hence a number of regulations we have are intended to benefit few at the expense of the unorganized majority. This actually reminds me of my last posting, in which I was writing about French subsidies for rail freight. One can suspect, here too, that Mr Barrot’s efforts have been not completely dissimilar to those of the Hon. Brewster.

Enough of these reflections: It was a good film and it should have heartened everyone who enjoys the creative-entrepreneur-praising literature in the Ayn Rand style.
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French rail freight subsidies to be approved by the Commission
02 MAR 2005 - If competition policies have a sense, it is that of dismantling indefensible privileges and practices that favor particular interest groups. In this regard, the area of transport should be of interest, particularly for French taxpayers. Ever since his appointment, Jacques Barrot, the EU Commissioner for Transport, has affirmed its support to a special treatment of railway freight. In his first interview as a commissioner, which Mr Barrot gave to the French magazine La vie du rail ("Railway Life") , he puts it this way: "It is necessary to restore the position that the railway freight deserves. (…) It remains to stimulate member states to finance these projects and to allocate, as demanded, 20 billion Euros to transeuropean rail systems in the 2007-2013 budget."

Bad Economics, Bad Law
23 FEB 2005 - Not much has happened since last week, as far as antitrust policies in the EU are concerned, with the notable exception of the viciously monopolistic Capitalist Ball, so aptly described by our learned colleague, Mr Micklethwait. Yet this may a good occasion to summarize main arguments against antitrust policies in general and to stop for a brief reflection on its consequences.

The economic arguments against it seems to be quite clear. By comparing the real world to the imaginary model of perfect competition, one can never arrive at reasonable assertions concerning the degree of "imperfection" of real-world competition. What is more, by using the perfect competition model as a yardstick, one fails to recognize crucial merits of competition in a world of dispersed knowledge and uncertainty.

There is more to the thing than just these observations, however. As Mr Levy points out, competition policies are not only bad economics, but bad law as well:

"Antitrust debases the idea of private property. Too often, government seeks to transform a company's private property into something that effectively belongs to the public, to be designed by government officials and sold on terms congenial to competitors. But if new technology is to be expropriated, future technology will not materialize. The goose is unlikely to continue laying golden eggs if those eggs are taken away.

Antitrust laws are fluid, non-objective and frequently retroactive. Because of murky statutes and conflicting case law, companies can never be sure what constitutes permissible behavior. Normal business practices - price discounts, product improvements and exclusive contracting - can somehow morph into an antitrust violation when examined by government antitrust regulators. Companies can be accused of monopoly price gouging for charging more than their competitors, or accused of predatory pricing for charging less, or accused of collusion for charg