Abstract
Market or industry concentration are among the most widely used indicators of competition, which in turn affects market outcomes, and notably prices: based on this premise, chapter 2 aims at assessing the role of concentration in explaining observed differences in prices across Member States in specific sectors of economic activity. We note, indeed, that, after more than 50 years of governmental efforts to create a single European market, a surprisingly large number of products exhibit a relevant degree of price heterogeneity across countries in the EU. Such price differences are not an indication that the single market policy has not worked, but rather they suggest that many factors that affect prices vary across Member States. These factors include differences in costs, taxes, regulation and – most importantly for the present study – the degree of competition (which in this chapter is proxied by various indicators of market concentration).
The influence of market concentration on prices is generally confirmed by the theoretical and empirical literature: several studies suggest that an increase in concentration is associated with higher prices, other things being equal. The literature, however, also warns that simple correlations between price and concentration are not sufficient to establish a compelling causal relationship between the two, and that more sophisticated empirical analyses would be warranted for this purpose.
To explore the role of various sources of outcome variation (whether price or quality) across Member States – and, notably, to investigate the role that concentration plays in determining them – we select six sectors of economic activity for further examination: mobile telecom, airlines, beer, mortgages, modern consumer retail and cement. These sectors, which include both business-to-consumer and business-to-business activities, were selected due to their relevance to the economy and because they are characterized by relevant price differences across Member States. For mobile telecoms and airlines, we perform original empirical analyses that allow to infer a causal effect of market concentration on prices and other outcomes. For the remaining sectors, we carry out a qualitative comparison of prices and their main determinants across Member States. In general, we find that concentration seems to have an important role in explaining price differences, even considering the other potential sources of heterogeneity in outcomes.
We investigate the impact of concentration on both price and investment in the mobile telecom services sector. Our results point to a strong, positive relationship between prices and market concentration. Prices in the US are considerably higher to those prevailing in the EU, where the number of Mobile Network Operators (MNOs) – suppliers that own their network – is much higher relative to market size. More generally, markets with more MNOs tend to exhibit lower prices, after adjusting for other differences; in particular, we find that an increase in HHI by 1,000 causes an increase in prices by 11-18%. The role of operators without their own physical networks – so-called Mobile Virtual Network Operators (MVNOs) – seems to be negligible for explaining price differences, even though these operators do tend to offer lower prices than their rival MNOs: the reason may be that MVNOs do not compete with MNOs for the same customers. When looking at the relationship between investment and concentration, we do not find that higher concentration leads to higher levels of investment; further, differently than for prices, MVNOs seem to play a meaningful role in fostering investment in mobile telecommunications.
For airlines, the analyses performed suggest that, in line with the literature, market structure has a strong impact on prices, which we find to be substantially higher in markets that are more concentrated. This finding is confirmed both by a panel regression analysis on a comprehensive dataset of European as well as US routes, and by an event study that exploits the exit of the market of a prominent European airline, Air Berlin, to identify the causal impact of market concentration on prices. In the latter analysis we find that the increase in concentration in many routes caused by Air Berlin’s exit was accompanied by an immediate jump in price levels of about 19.4%, that was only mitigated over the years as new competitors began to serve the relevant routes.
For beer, mortgages, modern consumer retail and cement, we identify a subset of EU countries and analyse price differences across them, as well as differences in the relevant price determinants, including concentration. We find that differences between the lowest and highest prices, among those observed in our samples, are around 66% for beer, 37% for mortgages, 38% for modern consumer retail and 80% for cement. Overall, we find that cost differences do not seem to fully justify the observed price differences between countries; that regulation may be a contributing factor; and that concentration may determine part of the observed differences. Specifically for each sector, we find that:
▪ for beer, prices observed in Germany are 66% lower compared to other countries in our sample, and the German beer market exhibits a much lower degree of concentration;
▪ for mortgages, more concentrated markets tend to have higher mortgage rates, with rates differing by as much as 0.71 percentage points, though different risk levels across countries may also account for some of these differences;
▪ for modern consumer retail (essentially, supermarkets) there is a tendency to find higher prices in countries with more concentration, although the extent to which our analyses are able to capture all the relevant sources of price differences is limited by the complexities of these markets;
▪ for cement, higher prices seem to be associated with higher regional concentration levels and, possibly, national regulatory standards.
Despite our efforts to select samples of countries that guarantee a good coverage in terms of geographical and size distribution, we acknowledge that the results of the four studies described above may still be sensitive to country selection. More generally, we emphasize that, due to the lack of causal analysis (for beer, mortgages, modern consumer retail and cement), much care is needed to avoid over-interpreting the associated results. On balance, however, economic theory, prior empirical work and our own analyses support the idea that, all other things being equal, higher market concentration is associated with higher prices. To the extent that our findings are generalisable across other industries, they confirm that the trends of rising concentration described in chapter 1 of this study should be a reason for concern.
The influence of market concentration on prices is generally confirmed by the theoretical and empirical literature: several studies suggest that an increase in concentration is associated with higher prices, other things being equal. The literature, however, also warns that simple correlations between price and concentration are not sufficient to establish a compelling causal relationship between the two, and that more sophisticated empirical analyses would be warranted for this purpose.
To explore the role of various sources of outcome variation (whether price or quality) across Member States – and, notably, to investigate the role that concentration plays in determining them – we select six sectors of economic activity for further examination: mobile telecom, airlines, beer, mortgages, modern consumer retail and cement. These sectors, which include both business-to-consumer and business-to-business activities, were selected due to their relevance to the economy and because they are characterized by relevant price differences across Member States. For mobile telecoms and airlines, we perform original empirical analyses that allow to infer a causal effect of market concentration on prices and other outcomes. For the remaining sectors, we carry out a qualitative comparison of prices and their main determinants across Member States. In general, we find that concentration seems to have an important role in explaining price differences, even considering the other potential sources of heterogeneity in outcomes.
We investigate the impact of concentration on both price and investment in the mobile telecom services sector. Our results point to a strong, positive relationship between prices and market concentration. Prices in the US are considerably higher to those prevailing in the EU, where the number of Mobile Network Operators (MNOs) – suppliers that own their network – is much higher relative to market size. More generally, markets with more MNOs tend to exhibit lower prices, after adjusting for other differences; in particular, we find that an increase in HHI by 1,000 causes an increase in prices by 11-18%. The role of operators without their own physical networks – so-called Mobile Virtual Network Operators (MVNOs) – seems to be negligible for explaining price differences, even though these operators do tend to offer lower prices than their rival MNOs: the reason may be that MVNOs do not compete with MNOs for the same customers. When looking at the relationship between investment and concentration, we do not find that higher concentration leads to higher levels of investment; further, differently than for prices, MVNOs seem to play a meaningful role in fostering investment in mobile telecommunications.
For airlines, the analyses performed suggest that, in line with the literature, market structure has a strong impact on prices, which we find to be substantially higher in markets that are more concentrated. This finding is confirmed both by a panel regression analysis on a comprehensive dataset of European as well as US routes, and by an event study that exploits the exit of the market of a prominent European airline, Air Berlin, to identify the causal impact of market concentration on prices. In the latter analysis we find that the increase in concentration in many routes caused by Air Berlin’s exit was accompanied by an immediate jump in price levels of about 19.4%, that was only mitigated over the years as new competitors began to serve the relevant routes.
For beer, mortgages, modern consumer retail and cement, we identify a subset of EU countries and analyse price differences across them, as well as differences in the relevant price determinants, including concentration. We find that differences between the lowest and highest prices, among those observed in our samples, are around 66% for beer, 37% for mortgages, 38% for modern consumer retail and 80% for cement. Overall, we find that cost differences do not seem to fully justify the observed price differences between countries; that regulation may be a contributing factor; and that concentration may determine part of the observed differences. Specifically for each sector, we find that:
▪ for beer, prices observed in Germany are 66% lower compared to other countries in our sample, and the German beer market exhibits a much lower degree of concentration;
▪ for mortgages, more concentrated markets tend to have higher mortgage rates, with rates differing by as much as 0.71 percentage points, though different risk levels across countries may also account for some of these differences;
▪ for modern consumer retail (essentially, supermarkets) there is a tendency to find higher prices in countries with more concentration, although the extent to which our analyses are able to capture all the relevant sources of price differences is limited by the complexities of these markets;
▪ for cement, higher prices seem to be associated with higher regional concentration levels and, possibly, national regulatory standards.
Despite our efforts to select samples of countries that guarantee a good coverage in terms of geographical and size distribution, we acknowledge that the results of the four studies described above may still be sensitive to country selection. More generally, we emphasize that, due to the lack of causal analysis (for beer, mortgages, modern consumer retail and cement), much care is needed to avoid over-interpreting the associated results. On balance, however, economic theory, prior empirical work and our own analyses support the idea that, all other things being equal, higher market concentration is associated with higher prices. To the extent that our findings are generalisable across other industries, they confirm that the trends of rising concentration described in chapter 1 of this study should be a reason for concern.
Original language | English |
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Title of host publication | Exploring Aspects of the State of Competition in the EU |
Editors | Salvatore Nava, Tomaso Duso, Livia De Simone, Elana Salomone |
Place of Publication | Brussels |
Publisher | European Commission |
Chapter | 2 |
Pages | 69-158 |
Number of pages | 90 |
ISBN (Electronic) | 978-92-68-12058-3 |
DOIs | |
Publication status | Published - 1 Jul 2024 |