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Let the market decide !

par Cécile Philippe
mardi 28 février 2006.

Article published exclusively on the Institut économique Molinari’s website.

The European Court of first instance has upheld by a decision on 14 December 2005 the prohibition of a proposed merger between aircraft companies GE and Honeywell. The ban had been decided by the European Commission in July 2001 arguing that otherwise a dominant position would have been created.

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The European Court of first instance has upheld by a decision on 14 December 2005 the prohibition of a proposed merger between aircraft companies GE and Honeywell. The ban had been decided by the European Commission in July 2001 arguing that otherwise a dominant position would have been created. While the competition directorate-general can be relieved at this news, the situation is different for the consumer whose interest has not been taken seriously in this decision.

In the opinion of the Commission, the merger would have left GE-Honeywell with a dominant position in the markets for supply of avionics, non-avionics and corporate jet engines, as well as strengthening GE’s existing dominant position in jet engines for airliners and regional aircraft (Briefing paper IBL). In the words of the court, the decision was ‘vitiated by illegalities’ but these errors were not important enough to reject it.

Whatever might have been these illegalities, one thing only should have been strong enough to reject the EU’s decision, which is its inaccurate conception of competition. The European Commission considers indeed that the market has to be compared with an ideal described as the model of perfect competition.

According to this model, ‘true’ competition means that there are several competitors on the market and each of them is small in comparison with the size of the market under scrutiny. The notion of abuse of ‘dominant position’ follows directly from this description, as a company is susceptible to abuse its position if its market-share is considerable.

The notion of ‘dominant position’ however is not a rational criterion for policy decisions because it does not matter for competition that one counts one or a dozen competitors. Competition is not a question of observing many entrepreneurs producing the same good, but just of not prohibiting the entrance of potential competitors with legal barriers.

Companies decide to merge because it is hoped that it will create efficiencies. In the absence of legal barriers, a company’s efficiency and success is observed in its capacity to serve the consumer. In choosing or not the products made by the merged company, the consumer will decide if the merging was worthwhile or not. It is possible for a merger to harm the consumer and to be successful at the same time only if legal barriers forbid the consumers’ views to prevail. In such a case, the real answer is to abolish these barriers that made possible the merger in the first place.

What good economics tells us is that it can make very few valid statements about the optimal size of a firm and it cannot say if a merger will be more efficient than an individual firm. It follows that a model which decides how the market should look like is wrong. It cannot be a good guideline for policies and for that reason, the decision of the European Commission should have been overturned by the European Court of Justice.

In blocking the largest industrial merger ever attempted, the European Commission has impaired competition on the aircraft market in the name of a misunderstood consumer interest and efficiency. It is not the role of a regulatory institution to direct the way market restructures but to the consumer. He will reward the most efficient among the different companies.

Cécile Philippe, Director, Institut Economique Molinari




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