Competition policy in the 21st century: Size isn’t everything by John Springford
France and Germany have proposed laxer EU merger control to help European companies compete with Chinese firms. But competition has been waning within the EU, and stronger merger rules may be needed. In February, after the European Union had blocked a tie-up of Siemens and Alstom’s railway businesses, French and German finance ministers Bruno Le Maire and Olaf Scholz proposed that member-states gain the right to override European Commission merger decisions. Citing rising competition from Chinese companies, they also proposed that the Commission consider competition globally, not just in the European market, when making its decisions. The Franco-German ‘joint manifesto’ had some sensible suggestions for curtailing the distorting effects of China’s credit subsidies, and raising European investment in new technology. But Le Maire argued that Europe needed “true champions”, and that laxer EU merger control may be needed to ease their growth. This is not borne out by recent research. In our paper on regional divergence in Europe, ‘The big European sort? The diverging fortunes of Europe’s regions’, the CER and Bloomberg Economics found that the most profitable European firms are, if anything, more likely to be small and medium-sized companies than corporate titans. And there has been a growing gap between the most profitable firms and the rest. The divergence in profitability was stronger in the services sector than in manufacturing; and particularly strong in high-technology sectors, such as digital
technology, communications, pharmaceuticals and medical devices. In April, the IMF published research showing that corporate ‘mark-ups’ had risen by about 8 per cent in advanced economies between 2000 and 2015, and that smaller, high-technology companies’ mark-ups rose most. A mark-up is defined as the difference between a given product’s price and the cost of producing one extra unit of it. When prices are rising faster than costs, it is a sign that companies have greater market power: companies facing vigorous competition find it difficult to raise mark-ups, because their customers would switch to a cheaper product. Why might some companies, irrespective of size, be better able to raise prices and grow profits? The most likely answer is that ‘winnertakes-most’ dynamics have become increasingly important in recent years. Companies may have better technology for producing their goods and services, better management or better branding. But they may also benefit from ‘network effects’: Facebook and Google dominate the online advertising market because consumers and businesses seek the maximum number of eyeballs for their content, which encourages everyone to use the same platform. Smaller companies may dominate niche markets, providing components or software that are used by many consumers and