An Antitrust Counter-Revolution?

BARCELONA – The current global financial crisis has made evident the tremendous pressures to which competition policy is subject on both sides of the Atlantic. In particular, competition policy has suffered a setback mostly because of the distortional aid measures to financial intermediaries, as well as a suspension of merger rules to save institutions. Indeed, public provision of capital and other subsidies have made the playing field uneven, with weaker institutions ending up much better capitalized than healthier ones.

This is crucial in a sector like banking, where perceptions about the soundness of an institution are fundamental to its ability to compete. For example, Lloyds TSB took over the troubled HBOS, Britain’s largest mortgage lender, in a merger opposed by the country’s Office of Fair Trading, whereas it was barred from taking over Abbey National bank in 2001. In the United States, the investment banking business has been consolidated with the forced takeovers of Bear Stearns by JP Morgan and of Merrill Lynch by Bank of America. The result is very weak competition among the players left.

Competition policy was attuned to deal with individual crises, but a systemic crisis has almost broken its back. Not only in banking, but in other sectors as well – with automakers at the forefront – massive subsidies are keeping inefficient incumbents in place, limiting the growth of efficient firms or, perhaps even worse, preventing market entry by new firms. In the European Union, national governments maneuver in a subsidy race to shift the costs of capacity adjustment in the car industry to neighbors, as the case of Opel shows.

But consolidation to reduce perceived excess capacity in banking and the automotive sector may create long-term anti-competitive market structures. As long as those structures manage to keep new entrants out, market discipline will be suppressed and the consumer will suffer.