7 ms·

The European System of Monopoly

24 points by null_object 5y ago

ggm 5y ago
Europe as a legal entity is young. It's still formative in many ways. As an economic union its dominated by a view that competitive scale demands Europe present larger entities to face the capital and market weight of China, America, India and Russia. In that model, a single unified steel enterprise, or Airbus, or regulated markets in telecommunications make perfect sense because they tend to quasi or real utility behaviour. If you want cheap steel for construction you need a single market to back it. If you fragment back to 20 competing steel producers the economy of scale is lost. This is a view of steel as a utility and the competition is about import export competitor not about intra union price competition. The legalism are pretty awful. You're hung by nation state courts, and pan European law, and jurisdiction in the contract outside Europe, and WTO. It's hardly light touch. I had the privilege of visiting the OECD once, and sat in on a meeting as an observer. It's sausage factory stuff. Remember "europe" as we see it was borne from the ashes of a war, over markets and growth and was borne to try and unify coal and steel. What followed is a function of time and circumstances. It's quite organic, unplanned in some ways: i think we see that in stuff like the European parliament divergences on privacy, and ipr against the secretariats view.
- AnthonyMouse 5y ago
  > If you fragment back to 20 competing steel producers the economy of scale is lost. This is basically untrue. Economies of scale are a major thing when you compare very small entities to medium sized entities. Suppose you have a five person company and a fixed expense of a hundred thousand dollars, e.g. for regulatory compliance. That expense is $20,000 per employee. Quite inefficient. A 50 person company with the same fixed expense is paying only $2000 per employee. Significant reduction. But by 5000 employees it's only $20 and the benefit of going from 5000 to 50,000 is insignificant. In many cases the benefit phases out entirely. If you have to build a factory which a small company only utilizes to 20% capacity, a medium company that can use it to 100% capacity is five times more efficient. But a large company can't use it to >100% capacity, they have to build multiple factories and stay at the same level of efficiency as the medium sized company. Moreover, monopolies get full of inefficiencies because they lack competitive pressure to eliminate waste. Having two dozen companies in an industry is often more efficient than having a thousand, but having two dozen companies is also generally more efficient than having only one.
  - ggm 5y ago
    You think Europe wants as telcos and isps as it has? I grant my argument was weak, but somewhere between two and ten is a sweetspot. Europe is 300m people and India is 1.2b and the effective competition in telephony is between 5 things. Hundreds of smaller players float around in this, but the scale here is with VSNL Bharti and Jio. Europe isn't that different.
    - AnthonyMouse 5y ago
      The economies of scale for last mile telecommunications tap out around the size of a city. They keep buying each other because expanding territory is the only way to gain customers, but buying the competition in the neighboring territory is more profitable than expanding into their territory to compete with them. (Tier 1 networks used for communications between cities, by contrast, aren't a natural monopoly.) The reason so many industries end up "between two and ten" is that that's the point when antitrust authorities start to reject additional mergers, not because there is any inherent advantage in having so few competitors. If anything that's few enough to start having trouble because they start colluding or using conscious parallelism to bring about de facto price fixing etc.
      - ggm 5y ago
        If we're in utility space, I really can't agree. The structural inefficiencies of driving to market delivering what becomes regulated anyway is huge. Internet interconnection is fragmented, competition is on quality and price but quality can drop below functional. In electricity supply, artificial capital investment gaming has overtaken social utility in bidding. Rail is another one, there is next to no viable UK competing trains, its a giant mess. These things are better done at scale and I think this is the regulatory European landscape. How many train making companies in Europe can compete to sell trains to Europe, as against China or India? The HH index seems to me to model effective competition amongst small numbers. I agree there is collusion but that's what the regulator is for, and Europe has many. Aldi East and West don't compete, but they do individually compete with other chains like carrefour. In Australia it is an apparent duopoly but there are four or maybe five competing supermarket chains and active price competition. Go into the supply chain behind them, its the same global brands and same trucking companies shipping goods and the same four diesel and petrol supply chains behind the trucks and the same four shipping companies doing logistics in boats. Europe is not going to be that different. Some things, having a hundred people do it isn't better. Maybe that's the pluralist mixed economy we need, and maybe that's why some age old national heavyweights have to be bought and amalgamated. Maybe the European airlines did need to combine, 30+ national carrier players was too many...
- Proven 5y ago
  That is completely clueless and outright wrong, but nicely illustrates how supposed economic wizards helped turned the EU into an economically hopeless region. > If you want cheap steel for construction you need a single market to back it. No, you let anyone sell to it. Maybe a company from India. Who cares. > If you fragment back to 20 competing steel producers the economy of scale is lost. Why would I care about the economy of scale? I'm not a steel company, I am a consumer. I want lower prices or better quality for the same price. > The legalism are pretty awful. You're hung by nation state courts, and pan European law, and jurisdiction in the contract outside Europe, and WTO. It's hardly light touch. In other words, more bureaucracy, higher taxes, less choice, higher prices. Conclusion: the EU is unnecessary.
wyager 5y ago
Mergers wouldn't be so desirable if there weren't various misguided "anti-trust" regulations providing artificial economies of scale. Two separate companies are not allowed to coordinate the prices of their products. We derogate this behavior as "price fixing". If the same company sells two different products, it is of course allowed to coordinate their prices. We have many rules such as this, where mergers give companies capabilities that we have artificially suppressed in their smaller, less monolithic competitors.
- satellite2 5y ago
  That's actually a fantastic and simple argument for why mergers should be blocked more often.
- AnthonyMouse 5y ago
  Price fixing is prohibited because it's catastrophic. What would the price of food be if all the farmers could collude to charge the profit-maximizing price? What would rents be if landlords could collude? Energy companies? Transportation companies? Monopoly utility companies generally have price regulations because otherwise the monopolist would charge the monopoly price. The monopoly price is inefficient because it results in significantly less production (because of the high price deterring consumption) than would take place in a competitive market. Allowing collusion across an industry is nothing more than bringing about an informal monopoly rather than a formal one.
  - wyager 5y ago
    > What would the price of food be if all the farmers could collude to charge the profit-maximizing price? I don’t know, what would the price of food be if unicorns were real? Who cares; this is not a realistic scenario. Defection is handsomely rewarded in almost any realistic market, outside of a few narrow cases that have extra physical constraints (e.g. power and water delivery).
    - AnthonyMouse 5y ago
      You're proposing for price fixing agreements to be legal, at which point companies could enter into a contract to fix prices and be able to sue each other for defection in court. But also, what you're describing is already what happens in more consolidated markets that can coordinate without formal contracts enforced by the government, because defection isn't profitable if you expect the incumbent competitors to respond in kind.
MomoXenosaga 5y ago
The EU is desperately scrambling to pivot to a new age of state capitalism. You can't beat the Chinese or Americans otherwise. Unfortunately the EU is religiously dedicated to free trade and open markets so it's an ugly process.

24 points by null_object 5y ago

ggm 5y ago

Europe as a legal entity is young. It's still formative in many ways. As an economic union its dominated by a view that competitive scale demands Europe present larger entities to face the capital and market weight of China, America, India and Russia. In that model, a single unified steel enterprise, or Airbus, or regulated markets in telecommunications make perfect sense because they tend to quasi or real utility behaviour. If you want cheap steel for construction you need a single market to back it. If you fragment back to 20 competing steel producers the economy of scale is lost. This is a view of steel as a utility and the competition is about import export competitor not about intra union price competition. The legalism are pretty awful. You're hung by nation state courts, and pan European law, and jurisdiction in the contract outside Europe, and WTO. It's hardly light touch. I had the privilege of visiting the OECD once, and sat in on a meeting as an observer. It's sausage factory stuff. Remember "europe" as we see it was borne from the ashes of a war, over markets and growth and was borne to try and unify coal and steel. What followed is a function of time and circumstances. It's quite organic, unplanned in some ways: i think we see that in stuff like the European parliament divergences on privacy, and ipr against the secretariats view.

AnthonyMouse 5y ago
> If you fragment back to 20 competing steel producers the economy of scale is lost. This is basically untrue. Economies of scale are a major thing when you compare very small entities to medium sized entities. Suppose you have a five person company and a fixed expense of a hundred thousand dollars, e.g. for regulatory compliance. That expense is $20,000 per employee. Quite inefficient. A 50 person company with the same fixed expense is paying only $2000 per employee. Significant reduction. But by 5000 employees it's only $20 and the benefit of going from 5000 to 50,000 is insignificant. In many cases the benefit phases out entirely. If you have to build a factory which a small company only utilizes to 20% capacity, a medium company that can use it to 100% capacity is five times more efficient. But a large company can't use it to >100% capacity, they have to build multiple factories and stay at the same level of efficiency as the medium sized company. Moreover, monopolies get full of inefficiencies because they lack competitive pressure to eliminate waste. Having two dozen companies in an industry is often more efficient than having a thousand, but having two dozen companies is also generally more efficient than having only one.
- ggm 5y ago
  You think Europe wants as telcos and isps as it has? I grant my argument was weak, but somewhere between two and ten is a sweetspot. Europe is 300m people and India is 1.2b and the effective competition in telephony is between 5 things. Hundreds of smaller players float around in this, but the scale here is with VSNL Bharti and Jio. Europe isn't that different.
  - AnthonyMouse 5y ago
    The economies of scale for last mile telecommunications tap out around the size of a city. They keep buying each other because expanding territory is the only way to gain customers, but buying the competition in the neighboring territory is more profitable than expanding into their territory to compete with them. (Tier 1 networks used for communications between cities, by contrast, aren't a natural monopoly.) The reason so many industries end up "between two and ten" is that that's the point when antitrust authorities start to reject additional mergers, not because there is any inherent advantage in having so few competitors. If anything that's few enough to start having trouble because they start colluding or using conscious parallelism to bring about de facto price fixing etc.
    - ggm 5y ago
      If we're in utility space, I really can't agree. The structural inefficiencies of driving to market delivering what becomes regulated anyway is huge. Internet interconnection is fragmented, competition is on quality and price but quality can drop below functional. In electricity supply, artificial capital investment gaming has overtaken social utility in bidding. Rail is another one, there is next to no viable UK competing trains, its a giant mess. These things are better done at scale and I think this is the regulatory European landscape. How many train making companies in Europe can compete to sell trains to Europe, as against China or India? The HH index seems to me to model effective competition amongst small numbers. I agree there is collusion but that's what the regulator is for, and Europe has many. Aldi East and West don't compete, but they do individually compete with other chains like carrefour. In Australia it is an apparent duopoly but there are four or maybe five competing supermarket chains and active price competition. Go into the supply chain behind them, its the same global brands and same trucking companies shipping goods and the same four diesel and petrol supply chains behind the trucks and the same four shipping companies doing logistics in boats. Europe is not going to be that different. Some things, having a hundred people do it isn't better. Maybe that's the pluralist mixed economy we need, and maybe that's why some age old national heavyweights have to be bought and amalgamated. Maybe the European airlines did need to combine, 30+ national carrier players was too many...
Proven 5y ago
That is completely clueless and outright wrong, but nicely illustrates how supposed economic wizards helped turned the EU into an economically hopeless region. > If you want cheap steel for construction you need a single market to back it. No, you let anyone sell to it. Maybe a company from India. Who cares. > If you fragment back to 20 competing steel producers the economy of scale is lost. Why would I care about the economy of scale? I'm not a steel company, I am a consumer. I want lower prices or better quality for the same price. > The legalism are pretty awful. You're hung by nation state courts, and pan European law, and jurisdiction in the contract outside Europe, and WTO. It's hardly light touch. In other words, more bureaucracy, higher taxes, less choice, higher prices. Conclusion: the EU is unnecessary.

wyager 5y ago

Mergers wouldn't be so desirable if there weren't various misguided "anti-trust" regulations providing artificial economies of scale. Two separate companies are not allowed to coordinate the prices of their products. We derogate this behavior as "price fixing". If the same company sells two different products, it is of course allowed to coordinate their prices. We have many rules such as this, where mergers give companies capabilities that we have artificially suppressed in their smaller, less monolithic competitors.

satellite2 5y ago
That's actually a fantastic and simple argument for why mergers should be blocked more often.
AnthonyMouse 5y ago
Price fixing is prohibited because it's catastrophic. What would the price of food be if all the farmers could collude to charge the profit-maximizing price? What would rents be if landlords could collude? Energy companies? Transportation companies? Monopoly utility companies generally have price regulations because otherwise the monopolist would charge the monopoly price. The monopoly price is inefficient because it results in significantly less production (because of the high price deterring consumption) than would take place in a competitive market. Allowing collusion across an industry is nothing more than bringing about an informal monopoly rather than a formal one.
- wyager 5y ago
  > What would the price of food be if all the farmers could collude to charge the profit-maximizing price? I don’t know, what would the price of food be if unicorns were real? Who cares; this is not a realistic scenario. Defection is handsomely rewarded in almost any realistic market, outside of a few narrow cases that have extra physical constraints (e.g. power and water delivery).
  - AnthonyMouse 5y ago
    You're proposing for price fixing agreements to be legal, at which point companies could enter into a contract to fix prices and be able to sue each other for defection in court. But also, what you're describing is already what happens in more consolidated markets that can coordinate without formal contracts enforced by the government, because defection isn't profitable if you expect the incumbent competitors to respond in kind.

MomoXenosaga 5y ago

The EU is desperately scrambling to pivot to a new age of state capitalism. You can't beat the Chinese or Americans otherwise. Unfortunately the EU is religiously dedicated to free trade and open markets so it's an ugly process.