The Draghi report and competition policy

Former Italian prime minister Mario Draghi’s 9 September report on the future of European Union competitiveness contained a welcome development: a balanced chapter on competition that does not set competition enforcement against competitiveness. The report – a major input into the strategic direction that will be taken by the European Commission in the next five years – clearly explains why market competition must be protected and how to best utilise competition tools to achieve EU goals. It is packed with well-founded suggestions for EU competition policy that will allow it to contribute even more to productivity, innovation and resilience.

Innovation is a huge theme in the report and appears in the competition chapter also. Draghi’s exhortations to include innovation in merger evaluations, as it is already, will be useful for courts because innovation evidence is of a more qualitative nature. Draghi takes protection of innovation very seriously by laying out an approach to ensure competition enforcement does not accidentally harm innovation.

The first of ten competition-related proposals he makes suggests allowing merging firms that are non-dominant and face competition to justify their merger by proving it will increase innovation. Draghi is not naïve about the possible abuse of this new argument, calling for evidence on the innovation-enhancing effects of a merger that is “specific enough to limit the risk of compa­nies abusing this defence strategy, while still giving them the opportunity to justify their merger.” These points strike a nice balance.

In another proposal, Draghi offers a sophisticated take on the controversial idea of incorporating resilience into competition policy. Some resilience problems impact consumers directly through shortages, for example of critical medicines or chips in transportation products. This risk of high prices or shortage can already be incorporated into the existing framework for merger control and Draghi recommends doing this more often.

But some resilience problems are in the areas of security and defence, where a competition authority does not have the capability to assess or make trade-offs. Draghi thus proposes a separate agency that would provide input to the competition authority in these special cases, though he could have been clearer in laying out which factors can be handled through existing competition procedures and which by an outside body, and how the two should be balanced.

On state aid, the report is refreshing and creative. Draghi has said that state aid at the member state level should cease and be replaced by EU-level subsidies because they are less distorting and help deepen the single market. This is a long overdue point and exactly right. His report explains how EU funds could be used to combat problems that harm market functioning, whether insufficient R&D, coordination problems or lack of harmonisation of regulations. The EU already has a programme designed to subsidise frontier technologies (Important Projects of Common European Interest, IPCEI). By expanding this to a broader set of projects, Draghi explains how EU funds can deepen the single market and help firms achieve more scale.  

Sometimes competition is difficult to achieve because a market works most efficiently if there is one network or one standard, and this can result in a monopoly market structure. In this setting, competition can be achieved through interoperability – many firms can compete using the same network or standard (or possibly dataset). Another of Draghi’s proposals explains that in some cases firms must be made to open up their networks through regulation (such as the EU Digital Markets Act), or required to do so if they want access to EU subsidies. For example, if the EU is deploying public funds to help an industry, it can condition subsidies on interoperability in order to increase competition. A strength of Europe is that it is willing and able to regulate in this way. As more and more markets involve big data, digital standards and networks that can benefit all firms, EU regulation of openness and interoperability will be a competitive advantage. 

Draghi is also right in strongly backing more competition enforcement tools. He suggests a ‘New Competition Tool’ for investigations in four areas that lack enforcement today: markets that perform poorly because of tacit collusion by firms; market underperformance related to behavioural biases on the part of consumers; insufficient investment in the public good of resilience; and failures of past enforcement to repair a market. The first two areas are notoriously difficult for competition authorities to address. A tool to collect information only when the authority suspects one of these serious problems would balance the cost of the investigation with its benefits.

On competition, therefore, Draghi is mainly good if not excellent. He is not entirely consistent though. In a separate chapter on telecommunications, he criticises “remedies imposed upon attempts to consolidate the market into larger players” though such remedies protect consumers from cozy oligopolies and the high prices that follow an anticompetitive merger. On this issue, Draghi appears to complain about the very conduct – competition enforcement – that in the competition chapter he praises and wants to strengthen. The European Commission should take the principles articulated in the competition chapter to heart and implement Draghi’s recommendations.