Ex-post economic evaluation of competition policy in the EU
Ex-post evaluation will become more important as questions about the future of competition policy enforcement have moved to the mainstream of Europe’s policy debate. EU competition policy continues evolving as it adjusts to the new challenges associated with the globalisation and the digitalisation of the economy. Most urgently, it needs to deal with the immediate impact of the COVID-19 pandemic, in particular in the area of state aid. Within this context, EU competition policy faces pressures from different directions and ex-post economic evaluation should feed this debate with the necessary evidence.
On the one hand, there are pressures for a stronger enforcement of competition rules, as:
Globalisation and digitalisation have gone hand in hand – in the US and perhaps to a lesser extent in the EU – with a rising market concentration and increasing mark-ups for the top-decile firms (see Bajgar et al. 2019, Cavalleri et al. 2019, Diez et al. 2019, and the International Monetary Fund 2019). This trend may even have accelerated due to the COVID-19 crisis, as the internet giants have been able to benefit from the wider use of digital services and local competitors have exited the market.
There is an increased concern that ‘killer’ acquisitions of emerging competitors cement the dominant position of market leaders (Argentesi et al. 2020).
Antitrust rules might not be able to deal with structural risks for competition, because they only allow intervening ex-post, which tends to be too late in markets that are prone to tipping.
The greater flexibility in EU state aid control in response to the COVID-19 crisis has increased concerns about state ownership and the level playing field within the Single Market (Abate et al. 2020).
By contrast, there are other voices arguing that EU competition rules do not sufficiently take into account the global dimension and the technological characteristics of markets concerned. They claim that:
This has prevented the emergence of European champions able to successfully compete on world markets.
It led to a failure to ensure the autonomy of the EU for the supply of essential goods and services in times of crisis.
The system of state aid control, which is a unique feature of the EU governance structure, might act as a barrier to the competitiveness of European businesses because it creates ‘unfair’ conditions of competition vis-à-vis foreign companies benefitting from subsidies granted by third-country governments.
The European Commission needs to be more permissive in vetting state aid schemes and mergers to limit the economic damage of the COVID-19 pandemic and support the recovery.
Over the past couple of years, the European Commission has put forward new policy proposals aimed at tackling these new challenges for competition policy. In 2019, it launched a broad debate on competition policy for the digital era (Crémer et al. 2019). One of the ideas that is currently being considered in antitrust is to create a ‘New Competition Tool’, which would allow for an ex-ante assessment of market failures across a wide range of markets, including in the digital sector. Such assessment would permit the Commission to intervene before antitrust infractions occur (Vestager 2020). In merger control, the Commission is considering how globalisation and digitalisation affect market definition and thereby its assessment of competition in markets affected by the mergers proposed. In state aid, the European Commission (2020) issued a White Paper on foreign subsidies, which proposes further steps to tackle the distortive impact of foreign subsidies on the EU internal market.
Ex-post evaluation activities have developed in the area of competition policy
Within the context of the ongoing debate on the future of EU competition policy, competition authorities have become increasingly interested in understanding the impact of their activities on markets and consumers. The goal is to improve competition policy rules and decision-making practices and to get robust evidence on the effects of competition and competition policy for society as a whole. The ex-post economic evaluation of competition policy investigates the economic effects of competition policy enforcement and the underlying regulatory framework. The economic effects analysed include the impact of competition policy on prices, mark-ups, innovation, and ultimately, productivity, employment, and growth.
The Directorate-General for Competition of the European Commission has been particularly active in evaluating the impact of EU competition policy. The main lessons learnt from this experience are presented in a book that has recently been published by Wolters Kluwer (Ilzkovitz and Dierx 2020). The studies collected in this book – prepared by senior Commission officials and competition policy experts – summarise various ex-post evaluation studies initiated by the Directorate-General since 2014. They range from the ex-post evaluation of specific policy interventions in the areas of merger control, antitrust enforcement, and state aid control to the assessment of the broader impact of competition policy.
Ex-post economic evaluations complement traditional evaluation tools such as public consultations and court judgements
Traditionally, the European Commission has used public consultations to evaluate existing regulations and get feedback on its new proposals. In competition policy, court judgements play an important role as well, primarily to validate individual decisions in antitrust, state aid control, and merger control. However, they may also motivate the European Commission to review the relevant regulation to see if it is still fit for purpose. For example, the decision by the court to overturn three merger decisions around the turn of the century, added to the incentive for the European Commission to propose the ‘new’ Merger Regulation of 2004.
Both public consultations and court judgements are qualitative in nature. More recently, such qualitative evaluations have been complemented by quantitative evaluations that allow getting an idea about the size of the impact of competition policy interventions and – when using more sophisticated counterfactual impact evaluation techniques – identifying the causal effects of such interventions. Thus far, most of the empirical work has concentrated on merger and cartel decisions (Ilzkovitz and Dierx 2015). Within the context of the State Aid Modernisation,1 investigations of the effects of state aid have started to be carried out. A limited number of studies (including two studies in the above-mentioned book) have analysed the impact of competition policy interventions in abuse of dominance cases. At an aggregate level, model simulations have been carried out to assess the macroeconomic effects of EU competition policy.
Ex-post evaluations tend to confirm that competition policy is beneficial for consumers
The empirical work done to quantify the impact of EU competition policy interventions shows that these interventions are beneficial for European consumers. Two examples can illustrate this statement.
At the microeconomic level, ex-post evaluations of merger interventions have been carried out most frequently, both by competition authorities and academics. A meta-retrospective of 29 ex-post evaluation studies finds that mergers that have been unconditionally approved by competition authorities in the EU result in a price increase of 5% on average. Remedied mergers, on the contrary, are not followed by a price increase. This evidence suggests that in the EU, merger remedies have been effective in eliminating anticompetitive price effects.
At the macroeconomic level, model simulations indicate that the merger interventions and cartel prohibitions (including their deterrent effects) taken by the European Commission over the period 2012-2018 may lead to a 0.3% increase in GDP and a 0.2% increase in employment in the medium term (Ilzkovitz et al. 2020). Moreover, the overall price reduction associated with these decisions (including their spill-over price effect across industries) can reach 0.4%. This price reduction is significant in industries – such as motor vehicles, electronics, telecommunications, and financial services – that are important for the purchasing power of consumers and the competitiveness of the European economy. Finally, competition policy interventions have redistributive effects that benefit the poorest in society (Ilzkovitz and Dierx 2016).
Robust ex-post evaluations require good data, a combination of different methodologies, and an independent evaluation team
With the development of an evaluation culture in the EU, there is now broad agreement that the quality of competition policy rules and interventions can be improved through the ex-post evaluation of past practice. However, given their complexity, ex-post evaluation analyses still have to overcome several pitfalls. The access to good data is often a challenge and ideally, the collection of data for ex-post evaluation purposes should commence at the time of the decision. Useful data can be obtained from market participants. However, they may be reluctant to collect and release them, unless the competition authority has legal powers obliging them to cooperate. Therefore, if ex-post evaluation activities have to develop further, one could consider giving more legal powers to competition authorities to collect data for that purpose.
The choice of methodology depends on a number of factors, such as the objective of the evaluation, the nature of data available, the time devoted to the study, and the skills of the evaluation team. A combination of descriptive and quantitative evaluation methods increases the robustness of the results. For example, a descriptive analysis of market developments can be used to help formulate ex-ante assumptions to be tested with more robust quasi-experimental methods, such as the Difference-in-Differences approach. It is also important to recognise the limitations of the different methodologies, which needs to be properly taken into account when interpreting the results obtained. For example, the robustness of a Difference-in-Differences analysis depends on the suitability of the control group.
The selection of members of the evaluation team needs to be considered carefully. An optimal team includes both internal experts with good knowledge of the case being evaluated and external experts skilled in the application of state-of-the art methodologies. However, for the evaluation to be credible to the outside world, it should be conducted by an independent team of officials and academics, who have not been involved in the decision to be evaluated.
There is scope for a further development of ex-post evaluation activities
Despite recent progress with the ex-post evaluation of competition policy, gaps remain. For future work, we believe that efforts need to be concentrated in four main directions:
First, to expand the quantitative analysis of the effects of competition policy interventions addressing anticompetitive agreements (other than cartels) and the abuse of dominance. The challenge is twofold: first, to test the theory of harm and second, to define the counterfactual (Marrazzo et al. 2020). In recent years, the European Commission has taken a number of important decisions concerning anticompetitive agreements in the pharmaceutical sector and the abuse of dominance in digital markets. It would be interesting to carry out ex-post evaluations of these decisions, after sufficient time has passed for their effects to be observable.
Second, to widen the scope of the ex-post analysis by considering non-price effects. Most empirical work focus on the price effects of competition policy interventions because these effects are easier to quantify. Less is known about the effects of competition policy enforcement on other measures of market performance, such as innovation, quality, and diversity of products.
Third, to improve our knowledge about the size of the deterrent effects of competition policy interventions. Simple measurement based on surveys of companies and their legal advisors indicate that three to eight mergers are deterred per merger intervention by a competition authority and that five to 28 cartels are deterred for every cartel detected. However, these survey results suffer from sample selection bias. An alternative approach is to assume that the deterrent effects of competition policy interventions are felt primarily in the markets and sectors directly affected by such interventions (Ilzkovitz et al. 2020). Another approach is to rely on the rather more sophisticated statistical and theoretical modelling tools that have been recently been developed for assessing the deterrent effects of cartel prohibitions (Dierx et al. 2020).
Finally, to develop the work on the macroeconomic impact of competition policy. It is surprising that so little empirical analysis has been done in this area, at least in comparison with that of other policies affecting the conditions of competition, such as EU trade or internal market policies. This might be due to the difficulties associated with this type of analysis. In particular, it is not easy to measure the strength of competition policy and to make a link between the individual decisions taken by competition authorities and their macroeconomic impact. To make progress, a better collection and organisation of the data on competition policy interventions is essential.
Ex-post economic evaluations could contribute more to improving competition policy design and future decision-making
At present, ex-post evaluations of competition policy interventions are used more for advocacy purposes than for improving policy design and future decision-making. The reason is that it is difficult to generalise the results of ex-post evaluations of individual decisions, which by their nature are quite case-specific. Therefore, it would be useful to develop further ex-post analyses of larger case samples. For example, one could verify whether expectations about market entry at the time of merger decisions were ultimately realised. This type of analysis was successfully implemented by competition authorities in Canada, New Zealand, and the UK, allowing them to draw general lessons on how to improve the enforcement of merger control.
Similarly, while the State Aid Modernisation of 2012-2016 led to a burst of ex-post evaluations in the domain of state aid, it is not yet clear how the results of these evaluations will be used to improve future state aid schemes. In any event, these ex-post evaluations should contribute to improve our understanding of the impact of state aid on firm behaviour and competition (Papandropoulos et al. 2020). More broadly, one could consider conducting an ex-post evaluation of the costs and benefits of the EU state aid control system. On the one hand, this system is essential to avoid distortions of competition in the EU internal market. On the other hand, the absence of a state aid control in other large jurisdictions may create unfair conditions of competition for EU companies vis-à-vis competitors subsidised by governments of third countries. An ex-post evaluation of the effectiveness of the system of EU state aid control could contribute to having a better-informed debate on this difficult question.
Crémer, J, Y-A de Montjoye and H Schweitzer (2019), “Competition policy for the digital era”, Report prepared for the European Commission.
Dierx, A, F Ilzkovitz, Y Katsoulacos and D Ulph (2020), “The Deterrent Effects of Competition Policy”, in F Ilzkovitz and A Dierx (eds.), Ex post economic evaluation of competition policy: The EU experience, Wolters Kluwer.
European Commission (2012), “EU State Aid Modernisation (SAM)”, COM(2012) 209 final.
European Commission (2020), “White paper on levelling the playing field as regards foreign subsidies”, COM(2020) 253 final.
Havell, R, F Mariuzzo and P Ormosi (2020), “A review of Merger Decisions in the EU”, in F Ilzkovitz and A Dierx (eds.), Ex post economic evaluation of competition policy: The EU experience, Wolters Kluwer.
Ilzkovitz, F, M Cai, R Cardani, A Dierx and F Pericoli (2020), “The macroeconomic and sectoral impact of EU competition policy”, in F Ilzkovitz and A Dierx (eds.), Ex post economic evaluation of competition policy: The EU experience, Wolters Kluwer.
Ilzkovitz, F and A Dierx (2015), “Ex-post economic evaluation of competition policy enforcement: a review of the literature”, DG Competition staff paper, Publications Office of the European Union, June.
Ilzkovitz, F and A Dierx (2020), Ex post economic evaluation of competition policy: The EU experience, Wolters Kluwer.
International Monetary Fund (2019), “The rise of corporate market power and its macroeconomic effects”, in World Economic Outlook: Growth slowdown, precarious recovery, Washington, pp. 55-74.
Marrazzo, A, P Buccirossi and S Nava (2020), “The Telekomunikacja Polska antitrust case”, F Ilzkovitz and A Dierx (eds.), Ex post economic evaluation of competition policy: The EU experience, Wolters Kluwer.
Papandropoulos, P, R Peduzi and C Schmidt (2020), “The Role of Evaluation in the EU State Aid Control”, in F Ilzkovitz and A Dierx (eds.), Ex post economic evaluation of competition policy: The EU experience, Wolters Kluwer.
Vestager, M (2020), “Competition in a Digital Age: Changing Enforcement for Changing Times”, speech at the ASCOLA Annual Conference, 26 June.
1 The State Aid Modernisation took place between 2012 and 2014. Its main objective was to focus the EU State aid control on cases with the biggest impact on the internal market and to give more responsibility to member states on other cases. The counterpart of this decentralisation was the requirement that the EU member states conduct ex-post evaluations of large aid schemes themselves (European Commission 2012).