The Progressive Post

On the dangers of promoting scale in the name of competitiveness

Policy Analyst on Economy

An old buzzword is back in Brussels and European capitals: competitiveness. It also looks likely to become the main driver of the new Commission’s agenda. Preparatory conceptual work is already ongoing, with two flagship reports by Enrico Letta and Mario Draghi, commissioned to outline policy options for the single market and European competitiveness.

In this policy discussion, it would be helpful to be more precise about what we mean by competitiveness. Because the direction of some emerging policy proposals looks dangerous. There is a narrative that Europe needs to promote its own champions who, by acquiring scale, will be able to compete with American and Chinese rivals. Draghi’s speech in La Hulpe, to anticipate some of the findings of his report, was all about industrial consolidation to get scale and investment. Letta’s recently published report gives more space to public sector-led investment and also speaks about a single market that has to deliver for all citizens, but the core idea that expanding the European single market in telecoms, energy and transport is needed to achieve the necessary scale to be competitive is also a guiding theme: “By identifying the European one as the relevant market, we can finally enable market forces to drive consolidation and growth in scale”. Similar proposals about the need to increase scale and promote champions can be heard all over Brussels fora. There are definitely benefits from enhancing the integration of the European single market, but using it as a tool to help big companies become even bigger, as the preliminary plan outlined by Draghi seems to suggest, is a questionable proposition.

The argument used by proponents of the large scale is that bigger companies can offer lower prices to consumers due to economies of scale and that they promote innovation as they have the necessary resources for that. However, all these arguments have since long been proven wrong. The factual evidence shows that a monopolistic market structure dominated by several large players does not lead to enhanced competitiveness, and is not conducive to investment and innovation. This has been a basis for all competition regulation, and, indeed, is at the core of the European single market.

There is abundant evidence that big companies-monopolists prioritise profits to their shareholders over investment. 2021-23 saw a major upswing in share buy-backs, with S&P 500 companies buying back a record $923 billion in 2022 and $795 billion in 2023. The largest part of these buybacks in 2023 (38 per cent) was done by ICT and telecom companies, led by Apple ($84 billion) and Alphabet ($61,5 billion).

The quality of innovation by Big Tech is also questionable. For example, in How Big-Tech Barons Smash Innovationand How to Strike Back, Ariel Ezrachi and Maurice Stucke show that a large part of Big Tech innovation is not creating value, but extracting or destroying value. The more monopoly a company has, the more destructive its innovation is (see the chart). Big Tech is using its monopoly power to shape the supply and demand for tech innovation towards innovations which exploit and extract profits from users and exclude competitors, rather than ‘disruptive’ innovations. Due to their power, these companies end up dictating the direction of innovation.

A graph showing value and extracting value

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The effect of market concentration on prices is not beneficial either. For example, broadband internet prices in the US, compared to the top 10 countries out of 216 globally, are among the highest in the world, both in nominal and in terms of purchasing power parity (see statistics of the International Telecommunication Union). They exceed the prices in all European countries by far. The reason is that the US telecoms market is dominated by four big companies. Is this what we want in Europe?

One may ask: how do we combine competitiveness with competition? And the answer is that they go hand in hand: for competitiveness, you need more competition, not less. To have a competitive economy you need to foster innovation and know-how (skills). Joseph Stiglitz, for example, argues in his book People, Power, and Profits that “sustained productivity increases are based partly on investments in plants and equipment, but most importantly in knowledge, and in running our economy at full employment, ensuring that the resources we have are not wasted or simply sitting idly”. Ricardo Hausmann also shows the primacy of skills and know-how for economic development and competitiveness.

To increase innovation and know-how, industrial diversity and disruptive innovation must be supported. Therefore, the role of the industrial and competition policy is to support disruptive newcomers. The support for large incumbent companies can still be provided but should be accompanied by conditionality to make sure their activity serves the public interest (fair pricing, restrictions on share buy-back and dividends, protection of worker rights and others). A group of anti-monopoly organisations have just published a manifesto  Rebalancing Europe: A New Economic Agenda for Tackling Monopoly Power with proposals for how European competition policy should be reformed and enhanced to support competitiveness and innovation in the EU. Cristina Caffarra and Nathaniel Lane also put forward good arguments and ideas on the topic.

More fundamentally, we need to ask ourselves: for what precisely do we want to be competitive? The ultimate goal of any society is to provide welfare and individual and collective flourishing for its citizens (while not damaging the welfare of others). In what way does competitiveness help us achieve these goals? And what sense do we enshrine in ‘competitiveness’. Is it about producing the cheapest goods and getting larger market shares? Who needs this? Who profits from this? Competitiveness is a nice word, but we need to resist attempts to promote a monopolistic corporate agenda in disguise. 

Photo Credits: Shutterstock\ratlos

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