Economic analysis: an essential tool for effective competition - PowerPoint PPT Presentation

Economic analysis: an essential tool for effective competition policy Conference on Institution Building of the Competition Authorities in South- East Europe – Belgrade, June 2016 Gregor Langus Member of the Chief Competition Economist Team European Commission

Disclaimer • The views expressed in this presentation are personal , and do not necessarily represent those of DG Competition or of the European Commission… 2

The two problems of effective enforcement Identification Independence Public Conduct Government Effects Competition authority Positive Negative Parties Complainants Net effect 3

The two legs of competition economics – telling a credible and testable story Theory: • Identify the main issues of Conduct an otherwise too complex reality. • Identify the pro- and anti- competitive effects (against a likely counterfactual). Effects Circumstances Empirics / Econometrics: • Provide empirical content to Positive Negative relations identified in theory. • Allows for the balancing of Facts effects. Net effect 4

Economic analysis at the EC Quick and dirty Complaints Econ. lit. Candidate theories of harm (stories) Potential problems Read economic literature Own Quick facts Assumptions and caveats investigation Surviving Assess Write that Required evidence theory of harm Decision evidence story (story) 5 Bring the theory, empirics (facts) together Do econometrics

EC Example: econometrics – horizontal merger Two low cost airlines - merger Change in fare on entry route compared to Change in fare on benchmark route(s) "Difference-in-Differences" "Controlling for other factors" 6 6

Economics in young agencies Get well-trained economists. Integrate them with the case team. Own modelling is typically not necessary. Often it is enough to study the literature to identify possible theories of harm – and caveats. • Spell out assumptions. Explain what the counterfactual is. Check that the narrative is consistent with the incentives of the relevant firms. • Do the facts of the case fit the model/theory? Use of high-power econometrics often not needed. • Write a complete story and include caveats – all in plain language . Econometrics is resource-intensive – proceed cautiously. • Start early, issue clear and detailed data requests, engage with parties, customers and complainants. • Even simple econometrics must be executed and interpreted carefully. 7