I. Introduction
The consumer always strives to get the best product to the lowest possible price. If a company starts to produce worse products or charge higher prices, the consumer can buy equivalents of the product from another company for less or because the other companies product is better. What if the consumer has no choice but to purchase the expansive or bad quality product? To prevent this from happening the European Union has several competition laws. The executive power the Europeans Commission’s regulates the market.
This paper examines what economic principles are underlying the European Commission’s competition policy. First, it will explain competition policy. Second, the economic principles will be explained. Finally, the consequences of a non-competitive market and its effect to the consumer will be pointed out.
II. Body
In order to preserve competitive markets the European Commission prevents several anti-competitive behaviors: Agreements between companies that restrict competition (Cartels), abuse of a dominant position (Antitrust), mergers and state aid (European Commission, 2010). Cartels are groups of competing companies which agree on fixing prices, limiting production and allocating consumers. Antitrust is the abuse of its dominant position by a company by eliminating competition through various practices. Mergers are the combining of forces of two (or more) companies. This can bring benefits to the market as well as a reduction of competition. Mergers will benefit the market when it allows the new company to expand innovation. On the other hand, mergers can reduce competition in a market, usually by creating a large company with very dominant market share. State Aid are government interventions that can lead to a distortion in competition. Either by subsidies or tax breaks.
The European Commission constantly monitors markets and charges huge fines for companies when breaking the EU competition laws. Tomra for example, a Norwegian company in the reverse vending machines market, abused its dominant position in several countries through agreements with large retail companies which prevented other companies from entering the market. The European Commission imposed a fine of €24 million (EC, 2006).
The economic principle underlying the EU competition law is the perfect competitive market. According to Perloff (2009) in a perfect competitive market are many firms and consumers and no single firm or consumer is large enough to affect the market price. They are price takers. On the other hand, if a firm has enough market share to affect the market price, they are price setters. A price setter can affect the price by supplying less amounts of a product, which shifts the supply curve to the left in a supply and demand diagram, and therefore create a higher equilibrium price.
In order to