12 January 2005 • Competition, Competition Policy and Economic Growth. Theoretical Foundations and Empirical Evidence for Austria • Michael Böheim

Since the mid-1990s, product market competition in Austrian has become markedly more vigorous, driven by "externally induced" competition-oriented structural reforms. In terms of product market regulation, Austria ranks in the middle range in international comparisons. As other smaller-scale economies, Austria shows an above-average market concentration.

Empirical evidence on liberalising network industries is rather mixed. While competition did have an impact on consumers in the telecom markets by way of substantial price reductions through the implementation of a regulatory regime that strengthens competition in services, the "liberalisation dividend" promised in the energy markets failed to reach the level suggested by the economic opportunities due to the growth of taxes and charges and high network fees that obstruct competition. Concentration processes in the form of mergers furthermore checked the emergence of functioning competition in the Austrian energy markets.

Faced with a changed framework, Austria enjoyed good progress in economic terms. However, in order to at least connect to the growth path of the 1990s – which has, however, recently shown clear signs of weakening – the implementation of more competition-oriented economic policy measures seems to be indicated. Given the highly concentrated market structures prevailing in Austria, there is – comparatively speaking – plenty of manoeuvring room for a growth-focused competition policy.

From the theoretical insights and empirical evidence available, some well-founded conclusions may be derived for competition policy in Austria:

First, competition policy should not be aimed at perfect competition per se. It should, however, be kept in mind that it is the rare exception that markets develop better if oligopolistic market structures are tolerated by referring to specific industry characteristics (technology, economies of scale and scope and entry barriers). Since "fine tuning" of oligopoly is a very difficult task – if not impossible at all – competition policy should generally steer away from it. If, however, oligopolistic market structures are indicated, both theoretical research and empirical evidence are clearly in favour of "wide oligopolies", i.e., markets with more than five independent competitors with relevant market share.

Second, competition policy has to take a dynamic approach, balancing both short-term and long-term effects. Thus, it is not a trivial problem of competition policy makers to cope with the situation when higher competition ex ante could lead to more concentration ex post.

Third, competition policy should concentrate on cases where monopoly positions have been achieved and maintained through excluding (potential) competitors restraining trade, or other anti-competitive measures. Market power that has been attained and is maintained through skill, foresight, and diligence without performing anti-competitive measures does not present an intervention scenario for competition policy.

Fourth, relatively dispersed markets are not the main target of competition policy enforcement. Competition policy tends to be applied to highly concentrated markets. Thus, the focus of competition policy should be on "quasi-monopoly" and "narrow oligopoly", i.e., markets with fewer than five independent competitors with relevant market share. Both game theory and empirical research proved that these market structures foster collusive and anti-competitive behaviour. Thus, in highly concentrated markets, the importance of antitrust policy does not only receive substantial socioeconomic favours, but also strong theoretical and empirical support.

And finally fifth, empirical research showed that negative effects of competition on innovation and growth only materialise at very high competition intensity levels. Consequently, the field of activity for growth-supporting competition policy measures seems to be rather wide. This is especially true for small open economies like Austria with some very high concentrated markets (quasi-monopolies, narrow oligopolies): in many cases market concentration and market power is not the economically justified outcome of outstanding corporate innovation activities but rather the result of misguided industrial and competition policy which neglected the effective control of mergers in the endeavour of promoting other policy goals (creating "Austrian national champions", safeguarding employment, etc.).

Vienna, 11 January 2005.

For further information, please refer to Michael Böheim, phone (1) 798 26 01, ext. 227, E-Mail-address Michael.Boeheim@wifo.ac.at For the full text of this article see the Internet under http://www.wifo.ac.at