German Competition Authorities Correcting Market Failures

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Table of Contents

Introduction
Correcting market failure
Facilitating competition
Conclusion
Recommendations
References

Introduction

In economic theory, market failure is the insufficiency by the free market to allocate goods and services, which is caused by individual pursuit. There are several factors that are linked with market failure. These factors are lack of competition in the markets, public goods, asymmetries in information, problems in principle agents and externalities. In Germany, it is the role of the competition authorities to correct market failures and facilitate competition (Griffiths & Wall 2011, p. 235-67).

Lack of competition is one of the factors that affect the market, and when there is poor competition in the market the result is market failure. It has been said that competition has effect on everybody in the market, which include the businesses, customers and the general economy. It is thus very important for the competition authorities in Germany to facilitate competition in the markets (George 2000, p. 70). The competition authorities in Germany include the federal cartel office, European commission and the federal network agency.

Correcting market failure

There are different views at to the causes of market failure. However, whichever the cause of market failure, the competitive authorities in Germany come in as bodies that correct it to boost competiveness (Steven 2007, p. 331-358). When significant market power is held by small group businesses as seen in the case of German Lufthansa airlines, allocation of resources becomes ineffective. On the other hand, the goods and services should not be public goods (Francis 1998, p. 351-79).

An effective market is that which has efficiency in the allocation of its resources. Failure to this results in market failure. The Germany competitive authorities strive and have an effective market where the values of the individuals are reflected by their own choices. In this kind of market, firms are able to maximize their profits through their own choices. In order to correct market failure, competitive authorities make sure that the exchange in the market is not affected by the individual businesses, and market exists for all goods and services. Having made sure that exchange prices at the market are not affected by the individual businesses and that are markets for all goods, there is competitive in the market, markets are complete and resources are efficiently allocated (Gregory, Kneebone, McKenzie & Row 2002, p. 157-58).

Uncompetitive mergers are blocked by the competitive authorities through the Germany European commission and FCO merger laws that regulate the way and conditions in which firms merge with each other. This is a competition law that controls the acquisition of market power by the firms on the free markets in the country. To regulate mergers and acquisition, competition laws are used to avoid the concentration of economic powers in a few parties (Piris 2010, P.12). This objective is achieved through prediction of the conditions of the potential market that would occur after the merger to find out whether the merger would hinder effective competition (Mankiw 2009, p. 10-12). The authorities therefore review the merger, dominance and block anti-competitive activities by businesses (Ronald 2007, p. 386-405). The policies have both antitrust policy, and policies to impact business behaviour, performance of the economy and the structure of the market (Rouse and Barrow 2008, p. 2-16).

Competitive laws put in place by the competitive FCO correct market failure by preventing misuse of markets power. The policies make sure that competitors increase to prevent a few firms from controlling the prices. The authority also makes sure that market transactions are not reduced by asymmetrical flow of information between the sellers and the buyers. To correct market failure further, the competitive authority enacts laws that will prevent negative externality like in the case where a firm causes costs to the society through its production. Policies are aimed at creating equal opportunities and redistribution of wealth to realize wealth distribution without having to alter markets (Joseph 1989, p. 197-203). More importantly, the authorities inform the public about competition issues for the public to act. Policies are well designed to interact effectively with trade, and enacted to reduce externalities by giving correct prices to the producers and consumers. The Germany European commission for example, ensure that trade measures is put in place to reduce negative externalities (John 2008, p. 1-9). Therefore, the competition authorities set rules within which the markets operate. The interest of the authority is on the outcomes of the market, and how the resources are distributed in the different firms in the market. The distribution of goods and services should benefit the wider society. All products in the market that cause negative effects to the market are discouraged.

The office of fair trade in Germany has a role in making consumers satisfied by the practices in the markets. To achieve this goal, it ensures that the companies are in a competitive environment openly. It tackles behaviors that are anticompetitive, and makes sure that the companies are not restricted from competing with each other. The FCO advises the government continually on what it needs to do when faced with competitive issues along side those of the consumers. There is an advocacy team whose role is to strengthen the relationship between the government and stakeholders, and make sure that there is sustained competition in the market and promote it (Kenneth 1999, p. 1-16).

European commission in Germany is an institution representing the interests of the European Union, and sets proposals to formulate European laws. This institution implements the policies and assesses them later. The European commission also controls merger through enforcement of regulations and prevents power abuse that may result from dominance position by Germany businesses. Germany is a European member state where European competition laws apply. In 2003 for example, the European Union commission determined the issues in the Germany economy (Peterson & Michael 2006, p. 152). Sometimes, in the Germany markets there could be illegal unilateral conducts described by the European commission. Such practices such as unfair purchase and other unfair trading activities are prevented. This is done to defend a very strong competition in the Germany markets. Abuse of market power is known to affect the Germany markets since it reduced the market competition. Through European commission, the policies are passed to ensure that competition is maintained in the single markets. In its role as a competitor regulator, the commission prevents antitrust, approves mergers and breaks up cartels (Posner 2001, p. 68).

The framework created by the authorities makes sure that the markets have fair and open competition. It sets rules and regulation that govern the conduct of each firm and individuals. The rules are therefore enforced to make sure that the market operates effectively. Firms are prevented from exploiting market power through a framework for competition and consumer laws. This further makes sure that there is protection for the consumers from unfair business practices in the market. There is proper regulation of the markets to protect the consumers through creation of effective regulations to generate positive outcomes.

The competitive laws put in place make sure that firms do not make anti competitive agreements. They also prevent the dominant firms from using their strengths to hinder the outcomes of the markets. For example, unlike the case of Lufthansa airlines, there are firms that enter into the market and charge higher than the competitive prices. Those mergers predicted to lessen competition are also prohibited by the laws. The consumer laws put in place makes sure that the consumers are free from scams and that abusive and bad practice does not exist to affect the consumers. The consumers have rights that guarantee them security from the acts of traders thereby making the traders to act honestly (Joseph 1998, p. 3-22).

Facilitating competition

The federal cartel office is responsible for regulating competition in Germany. To achieve the objective of maintaining competitiveness in the market, the body enforces competition law available in Germany. These laws maintain competition in the markets by making sure there are no anti competitive practices by the companies. The office scrutinizes the business practices always. The competitive laws are put in place to maintain competition in the markets with Germany.

Through competition, the firms improve their efficiency internally and reduce costs. This is very beneficial to the consumers since they are at a position to get the goods and services at a lower price. Through reduction of prices, more consumers are attracted making the firm gets access to a large market share. Competition makes firms get incentives and adopt new technologies thereby minimizing their costs.

Organizations invest in innovation through the provision of incentives brought about by competition. Through innovation, firms improve the quality of their products, which are either existing or even create new products that suits the needs and requirements of the consumers. A competitive economy also prevents inefficiency in management since as a result of competitive pressures the firms look for more efficient ways they can manage their businesses (Clark, 1990, 241-56).

The German federal cartel office (FCO) also makes sure that mergers are substantive, and will enhance competition in the market. For example, in July 2011, the FCO came up with a substantive merger control paper that would be used for consultations “Draft Guidance on Substantive Merger Control”. The FCO has shown very strong records in enforcement of control measures. The draft by the FCO guides on how the office will assess mergers. The new approach in the draft is more inclined to the analysis of the economy. The FCO focuses on whether the merger will bring about competition in the market (Richard 2003, p. 53-7).

In the draft guidance, the office had distinguished between the different mergers; vertical, horizontal and conglomerate mergers. The merger control is to make sure that competition is effectively controlled to protect the long-term interest of the consumers. When competition is controlled, competitors are also protected since mergers may affect the competition functioning. More specifically, the draft guidance favours vertical merger because they are less pronounced and do not affect competition since the competitors number is maintained.

In its role to maintain competition, FCO has for example started investigation into the contracts the corporate clients were offered by Lufthansa (a Germany leading airline), and whether these contracts has forced the clients to give out information on pricing of the competitors to get negotiated discounts. This was an anti competitive practice that the competitive authority had to investigate and put an end to for the Germany markets to remain competitive. The country’s largest airline wanted to introduce low pricing in the market to remain the only one in the market. The situation created in this scenario shows abuse of powers that Lufthansa had since it dominated the market. Their prices do not meet the standards of the available operating costs. The FCO had to come in and ban the low price strategy by Lufthansa. However, there was a guarantee of competition in the market since Germania and Lufthansa airline fought for the prices and clients, and customers benefited a lot (Cohen 2011).

The authority sets a framework followed by the market to influence the outcomes of the market, and competition in the market is protected to let consumers exercise their choices (MacKenzie 2002, p. 157-8). Hardcore cartels offences such as price fixing, limiting production and market allocations are protected by competition laws (Helm 2006, p. 169-185).

The federal network agency is also competition authority body in Germany that enforces rules and regulations that protect market powers from abuse. This authority is involved in telecommunication sector, the energy and railway, and the postal services sectors. This agency creates market economy and economic freedom in the country. In a market where there is abuse of market power, the economy of the country is at risk, and this needs to be controlled. To prevent this, the federal network agency takes into account the anti- cartel actions to make sure there is no full monopoly, and consumers are not manipulated. The agency regulates telecommunication markets, and manages the radio frequency spectrum in radio communication. The agency has set rules put in place in tendering of minute control reverse to facilitate the control reverse market access for the new entrants in the markets. This will make it flexible to gain access, and improve competition in turn. The agency wants to implement the new rules by December 2011 while other regulations that concern automatic activation of block offers will be done in 2012.

Competition policies are put in place with an aim of increasing efficiency in the allocation of resources, there by correcting market failure. Through the policies, the country specializes in the production of goods and services they have comparative advantage in. The competitive authorities cooperate with others in other countries to come to an understanding involving mergers from across borders where competition frameworks could be different.

The Germany government wants to achieve social and economic outcomes in markets through effective measures. This guarantees consumer protection. The Germany government has established agencies that are responsible in controlling market power for the country to grow economically. The country had focused on maximizing the welfare of people through competition to benefit the consumers.

Conclusion

Market failure has been prevented to allow efficient provision of goods and services as per the demands of the consumers. As previously discussed, there are factors that lead to market failure, and these factors are public goods, market power, externalities and problems in the dissemination of information on competition and consumer issues to the government and the general public. There is an agreement that free markets will not be responsible for the production of certain public goods and services since once a good has been produced, the general public benefits from it making it difficult for the individuals to pay for it. In adherence to the policies set, the wider cost of goods or services is not included in the cost of production of an individual firm, or in the individuals cost of consumption. For example, firms are not responsible for pollution and end up producing at the expense of the society. The information problems should be avoided by making the consumers certain about the products in the markets and their quality. The competitive authorities in Germany therefore empower the consumers in their decision-making about a product by for ensuring that goods are well labeled. The competition law present prevents the suppliers from abusing the market power to harm the consumers.

While correcting market failure, the competitive authority assesses the impact of the interventions on competition in the markets. It looks at whether the interventions put in place affect the likelihood of the entry or exit from the market. It also looks at how the interventions affect the competition directly through regulation of prices and products or indirectly by reducing firm’s incentives. Additionally the authority determines whether its intervention will affect the ability of the consumer to exercise choice. To attain its goal of increasing competition in the market, the competitive authority assesses its intervention strategies before it implements during the development of policies. This way the ultimate policies help the authority to realize their goal thereby benefiting everyone in the markets; the firms and the consumers.

Recommendations

The competitive authorities in Germany should enforce strict laws for the markets to better utilize the market powers without causing any harm to the consumers. The merging of firms should also be more assessed to only allow merging of businesses that will increase market competitiveness and consumer satisfaction. This will also manage the use of market powers. Continual dissemination of information to the government and consumers about the consumer and competition issues is fundamental in making sure that there will be correction of market failures, and lead to facilitation of competition in the markets. Always, it is important to assess an intervention to correct market failure and facilitate competition. This will allow for alternative options that will see to it that competition is not affected. Ways that influence the behavior of the consumers and instrument that change the behavior of the business should be considered by the policy makers. The effectiveness of an intervention to correct market failure and facilitate competition should be evaluated using progress checks done in a timely manner. It is important to be creative in finding other alternative interventions that will not restrict competitions like others.

References

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Cohen, A. (2011) Germany Launches Probe into Lufthansa Corporate Contracts. Web.

Francis, M. (1998) The Anatomy of Market Failure. Quarterly Journal of Economics, 72(3) pp. 351-379.

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Helm, D. (2006) Regulatory Reform, Capture, and the Regulatory Burden. Oxford Review of Economic Policy 22(2):169-185.

John, O. (2008) Market failure. The new Palgrave dictionary of economics, 2, 1-9.

Joseph, E. (1998) The Private Uses of Public Interests: Incentives and Institutions. Journal of Economic Perspectives, 12(2), 3-22

Joseph, E. (1989) Markets, Market Failures, and Development. American Economic Review, 79(2), 197-203.

Kenneth, J. (1999) The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Non-market Allocations. Analysis and Evaluation of Public Expenditures: The PPP System, Washington, D.C., Joint Economic Committee of Congress. PDF reprint.

MacKenzie, D. (2002) The market of failure myth. Ludwig von Mises Institute.

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Ronald, H. (2007) The nature of the film. Economica, 4 (16), 386–405.

Rouse, A and Barrow, F. (2008) School Vouchers: Recent Findings and Unanswered Questions. Economic Perspectives, 32(3), 2-16.

Steven, G. (2007) The Hesitant Hand: Mill, Sidgwick, and the Evolution of the Theory of Market Failure. History of Political Economy, 39(3), 131-358.

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