Heterogeneous switching costs and vertical mergers : cases for state intervention?

Abstract

Over the last months economic discussions have been as intense as rarely before, questioning the foundations of economic theory as well as practice. The financial and economic crisis has had a strong impact on economic discussion and how economics is generally perceived. The central question to be asked is, however, an old one. It concerns the 'division of labour' between the State and private enterprises. What can, what should be the task of the State, in particular to what extent should it intervene in a market economy? How much regulation is needed? Will the private objective of profit maximization on its own lead to the best economic outcome? These questions are far from being limited to financial markets. The role of the State is also at stake with respect to a fair distribution of economic benefits (and losses) within the society. This thesis deals with certain aspects of these old and currently much discussed issues. The first chapter concerns the effects on different groups of the population if a previously regulated market is opened up for competition. While the efficiency gains of enhanced competition are not put into questions in this framework, it is asked whether more vulnerable groups of the society could actually be left behind by an increase in competition. These questions are of particular relevance in the context of public utilities liberalization which has been high on the agenda of policy makers over the last two decades and where the European Commission has pushed its agenda in a decisive way. In contrast to the call for reduced State involvement and less regulation in public utilities, merger control has for long been an area where economists agreed on the need of an institutionalized public control mechanism in order to limit the exploitation of market power and monopolistic behaviour. This is in particular true for horizontal mergers. For vertical mergers, on the other hand, merger related efficiency gains are more clear-cut and they were therefore considered to have a likely more positive effect on welfare than horizontal mergers. The second chapter of this thesis deals with a particular case where a horizontal and a vertical aspect of a merger are combined and analyses its potential impact on prices. Taking a real case which was notified to the European Commission as a starting point, the question behind is obviously whether public authorities should intervene under such a scenario, which is particularly common in the energy sector, and prohibit the merger or whether it will have positive effects and should therefore be authorized. The question of the impact of vertical mergers is further pursued in the third chapter of this thesis which first outlines the theoretical evolution and general background of economists’ attitude towards vertical mergers. It also shows for the example of three cases how a particular public authority, the European Commission, has practically acted when vertical mergers were notified. The paper looks at how the effects of vertical mergers were assessed and whether the European Commission concluded that intervention was necessary due to a negative impact of the notified merger on competition. The cases all concern a public utility, namely the energy sector, an area where the Commission has indeed been pushing forward the objective of liberalization and deregulation, sometimes perhaps via instruments not originally designed for this objective. While making the case for less State activity in the energy sector, the Commission might have been over-active in its merger decisions in this field in order to attain its liberalization objectives. All three chapters of this thesis therefore deal with different aspects of State intervention or non-intervention into markets and its impact on the market players. Over the last year this issue has made it once again to the centre stage of economic discussion. However, independently of economic fashions, the business cycle, and political developments, the question of how much State intervention is needed and is most beneficial will always remain in the focus of economic analysis.