Picture the 100 meters final in the Olympic Games. 30 meters before the end, Usain Bolt starts to slow down. With five meters to go, all the runners hold hands and cross the finish line at the very same time. This is sport without competition. A world where the 100 meters record will be far above 10 seconds and sport will not be fun to watch.
While this is easy to understand in the realm of sports, some European leaders have trouble applying the same logic to Europe´s industrial policy. Following the sports analogy, some will be happy if we cancel the European Championships all together and start sending one or two European hand-picked firms to compete internationally.
This would be clearly wrong. Any industrial policy that is really fit for the 21st century should have the promotion of competition at its core. This is fundamental because market competition in Europe is on the decline and has been for decades.
Market concentration is substantial in many service and manufacturing industries. For example, in Germany, the ten largest companies control 75% of the information and service activities. In Italy and Spain, the ten largest temporary employment agencies control 70% and 63% of the market. And the growth in market concentration has not passed unnoticed by incumbents. Businesses have been able to harness market power and raise their markups, at the expense of consumers. Many service sectors such as tourism, legal and accounting, or advertising show some of the highest margins across the EU. Over time, the auto industry, chemicals, and construction sectors have experienced the fastest growth in markups.
Regulatory barriers have a direct impact on competition. We estimate that regulatory restrictions lead to more market concentration and market power. Any change in competition policy should take account of the level of regulatory restrictiveness and market contestability in each sector. Otherwise, European Champions will squeeze every little drop of innovation, ingenuity and competition that is still left in Europe.
The evidence is clear and compelling. Competition is the true source of European competitiveness. If you are still unconvinced read our latest ECIPE Occasional Paper by Oscar Guinea and Fredrik Erixon.