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The EC Opts for Creative Destruction

Microsoft is just the first of several targets in the European Commission's efforts to create a fairer, more competitive playing field

The European Commission can look back on a truly remarkable week that is certain to write history in competition policy. First, Information Society Commissioner Viviane Reding announced she would tackle uncompetitive practices in the telecom sector by drawing up rules on how much mobile phone operators can charge for connecting calls to their networks. This, she said, was a response to the wide disparities in pricing that exist across the EU and which stymie efforts to create a level playing field and a common, competitive market.

Then, the European Court of First Instance rejected Microsoft's (MSFT) appeal against a past ruling and upheld a $613 million fine levied for Microsoft's alleged abuse of its dominant market position in Europe. Finally, Andris Piebalgs, the EU Energy Commissioner, introduced ambitious plans for increasing competition in Europe's heavily protected and overpriced energy markets. His energy liberalization package includes measures on ownership unbundling, national regulators, network cooperation, and transparency.

Customer-competition link

In all three cases, it has been interesting to observe the way some companies in the affected sectors try to justify their business practices by claiming their market-dominating positions are actually beneficial to consumers, the economy, and society at large. In essence, they argue that monopolies or oligopolies should be upheld or innovation will suffer, investments will stall, and the industry will go belly-up.

Where is the evidence for such claims? Who can honestly assert that monopolies have ever delivered on innovation, or that oligopolies have been sensitive to the needs of the customers they serve? We invite anyone who doubts the positive power of competition policy or market liberalization to return to the times of airline and telecommunications monopolies. These sectors also cried foul when the European Commission forced open their markets—ultimately benefiting consumers and providing opportunities for new market entrants. Anyone who doubts today the merit of competition policy should be forbidden from taking a flight on Ryanair or placing a call on Skype.

In a recent paper we explain the intricate, and positive, link between consumers and competition policy. Drawing on the McKinsey country studies of the 1990s, we demonstrate that consumer-oriented policies, and the productivity-enhancing effects they have through stimulating competition and innovation, are among the most important indicators of a country's economic wealth and long-term prosperity.

Slower pace of change

Indeed, research has shown that over time, a political and regulatory focus on consumers, rather than producers, appears to be the key determinant of a country's economic success, and accounts for much of the difference in wealth and prosperity as measured by gross domestic product (GDP) per capita between developed parts of the world, such as Europe, Japan, and the United States.

In addition to benefiting consumers, strong competition policy also favors new market entrants, innovative young companies, and entrepreneurs by facilitating market openings and commercial opportunities for nonincumbent economic actors. The importance of this creative destruction—of movement in the markets—cannot be overestimated, particularly in Europe, which has a poor track record of creating new, fast-growing companies able to challenge the power of the vested industry.

Not surprisingly, Europe's largest 25 companies all were founded before 1960, while in the United States eight of the 25 largest companies didn't exist then. And in general, European companies grow at a snail's pace compared with their peers across the Atlantic. Whereas on the Continent the average business employs five people, in the U.S. that number stands at 19.

Going back to the importance of consumers, it is their ability to vote with their feet and to make choices regarding their consumption that forces companies to stay on the ball, to pay attention to market trends, and to deliver top performance. That is why a focus on producers rather than consumers makes absolutely no sense—not politically because there are more consumers, i.e., voters, than producers, and not economically, because companies shielded from competition deliver consistently worse products and services. This applies across all industries.

Wake-up call

Economic evidence demonstrates that intense competition forces firms to increase productivity in order to generate profits and stay in business. The gains in productivity come both from increasing the value to the consumer of the goods and services produced and from decreasing the resources needed to produce the goods and services, thereby lowering their prices.

In an age of limited natural resources, and given Europe's rapidly ageing and even declining population, productivity will be vital to meeting the challenges of the future. But there is little incentive to increase productivity and innovation in companies and sectors that are shielded from competition. That is why business as usual is not an option.

Europe in general, and its consumers in particular, can no longer afford to subsidize under-performing, overcharging companies, let alone entire sectors that are so critical to long-term economic performance. And it is quite an irony that so often those who are most critical of the market will be the first to protect and give an easy ride to so many companies. For sure, the old boys' network is still alive and well in Europe, but reality has set in, thanks largely to the leadership from Brussels, which has delivered a much-needed wake-up call and shift in policy.

Europe doesn't need more monopolies, economic patriotism, or protection of economic incumbents; it needs a healthy dose of competition, empowered consumers, and a level playing field for new market entrants, entrepreneurs, and innovators. That's the only way to deliver on the growth and jobs agenda, and it's the politically smart response to Europe's consumers, who have too often been forced to pay excessive prices to protected providers.

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