Article published on TechCentralStation on February 11, 2005.
« The Commission will not and cannot tolerate price fixing and market sharing. I will not allow companies to carve up the EU’s single market among themselves and deny customers the benefits to which they are entitled. » So said the EU’s competition commissioner, Neelie Kroes, in announcing her condemnation of Akzo Nobel, Arkema and Hoechst for mounting an illegal cartel and rigging markets for monochloroacetic acid, a chemical substance. These companies will have to pay fines totalling €217 million.
Commenting on the decision, Kroes also said « the fight against cartels will be one of my top priorities and companies that engage in cartels will be fined heavily. » In other words, the antitrust component of her mandate will be determined by the hard line views which had already been prevalent under Mario Monti, her predecessor.
Those supporting antitrust policies claim that negotiations and cartels between companies operating in the same market confers them « monopolistic power, » causing prejudice to consumer interests. Therefore, they believe, « consumer protection »requires the European Commission to intervene as the repressive organ, against the « predatory » actions of these firms.
Despite the obvious fact that this cooperative attitude has nothing to do with blatant assaults, they do not refrain from demanding punishments usually reserved for thieves. Specific legislation needs specific justifications. Here’s where the academically qualified economists take the stage. They have provided their employers a wide range of concepts, such as the theory of pure and perfect competition, monopolistic pricing and imperfect or monopolistic competition.
The commonly admitted idea about these construction models explaining interventionist competition policies is that the market’s more or less « monopolistic » configuration allows sellers to limit the amount of available goods and sell them at higher prices in comparison with the reality of the ideal world, characterized by pure and perfect competition. Cartels are thus to be sanctioned as they render such restrictions possible.
But this way of thinking often refuses to consider that the above mentioned scenario only occurs if the number of sellers is set. In a free-market world, people are free to enter a market or not – and that is what they do, as long as they do not encounter any legal hindrance. The implicit hypothesis of a static market configuration will not apply in that case.
By setting a fixed number of sellers, these models ignore the profound impact free market access has, in that cooperative attitudes, which do not offer consumers an advantage, create profit opportunities for new entrants. These new entrants can harm the cartel’s position by selling at a lower price, provided they detect the opportunities.
When they do not ignore this objection, the antitrust supporters resort to the following proposition: non-restricted market access is not sufficient, the entry and exit costs must also be low. As economist John Kay puts it, company A may react to company B’s market entry by « targeting company B’s potential customers so aggressively that the new entrant will not be able to successfully operate. »
However, competition void of entry or exit costs is simply absurd. It is the fear of making losses that causes a company’s entry problems. When losses occur, it means that the consumers’ most urgent needs have not been satisfied, because of improper allocation of the production factors. The factors’ allocation to the different production processes would be completely arbitrary if these costs were not operating. The fear of losses and the profit drive are precisely those elements that allow a reconciliation to take place between the entrepreneurs’ and consumers’ interests.
If Kroes is really concerned about consumer satisfaction, she should question the models on which her policies are based, and take into account the right conclusions of the economic theory regarding the social function of free enterprise. That is to say, in the consumer’s interest, she must recognize the capital importance of a price system, of profits and losses generated by the adherence to an agreement. There is no doubt whatsoever that a decision inspired by these ideas will call an end to the current witch hunt.
Cécile Philippe is Director-General of the Institut Économique Molinari, and Xavier Méra is an Associate researcher at the I.E.M.