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Competition policy, Growth and Consumer Purchasing Power

The conference was held in Brussels on October 13 and featured further contributions from speakers such as Peter Bakker, CEO of TNT and Monique Goyens, the Director General of BEUC.

Read MEP Hökmarks intervention in its entirety below:

Commissioner, Ladies and Gentlemen, we are heading for an extremely formative period of the global economy and the European economy and it is in these times you really need to rub it in. I think an excellent point of competition and competition legislation, in a period as the current, is that competition provides us with stability to the instability; because competition in an open market economy means instability but the rules provide a stabile and level playing-field.

A lot of things will come out of this period of financial crisis. It is important to stay cool and stick to the fundamental rules; because what will come out of this period is that it is important to secure that the best ones can survive and not primarily the big ones or the less efficient ones and that is why application of competition rules is so important right now.

Regarding ’purchasing power’ we can see that in different countries consumers have different purchasing power depending on how markets function and how they react. Everyone wants competition until they get it and that is the rule that we all should remember.

If we take the example of IKEA: when it was launched first, the entire Swedish furniture industry reacted against it; they tried to block it, stop it, thought it was very unserious; they couldn’t deal with furniture that way because it was indecent; they were having too low prices, some said, and not good quality. But the fact is that today, this is a company which, like very many others, provides consumers with low, middle and high incomes with better opportunities to invest in their houses and apartments and have a better living.

In this sense, consumers tend to be rational in the long term if we provide them with a number of opportunities. And my point of departure when we are discussing competition is that: ’there is no right price existing, but without competition there exists only one price’. As soon as you have the presence of competition, every competitor knows that they need to consider that; just the presence of competition, even in another country, reduces your opportunity to have too high prices.

Competition does hinder price increases, but also, just by its pure existence, tends to mean a pressure down on prices. Most of us think that prices are too high anyway. So we will always be dissatisfied with that, and therefore there is a need for opening up for more competition. By the sole fact that it exists, competition does hinder prices developing upwards and does mean a reduction of prices. Competition also enhances new entrance of competitors, launching even lower prices something we can see in a number of different markets.

If we compare this approach to price regulation the difference is striking. Under price regulation, you can see that you get into an administrative process of negotiations, where politicians and business people negotiate. I remember well when I was at Unilever, at a time when we had price regulation on food in Sweden, that the finance director ´was about to present the price case of Unilever. Of course we did not start negotiation with the lower price. On the contrary, we started with the highest price and I remember one time he came back and said: ’I succeeded too well.’ So for half a year we had a higher price than our competitors because the authorities had believed him from the beginning. As soon as you start to negotiate with prices you give a direction, and, all prices tend to stick to the regulated levels and no one dares to lower prices because they know that authorities will soon decrease the prices even more. And if you show that you can decrease the prices too much you will only get the reduction of the margins; but you will not win the shares of the market because all competitors will also be forced to lower those prices. So you are deleting this mechanism of pushing the prices down.

When we discussed the postal issues earlier you were hesitant about more growth in the postal market. It might be true, I’m not an expert on that, I’m just recalling the fact that in Sweden, in the beginning of 90s, when we were advocating deregulation of the Swedish telecom market a lot of people said that it would not function, that you won’t be able to cope with different operators and it is an inefficient use of infrastructure. But we persisted saying that this will give lower prices and it will give better services; I sometimes tend to say we were wrong. Not in the sense that we didn’t get lower prices and better services, we did get that. But we were wrong in the sense that we didn’t really foresee the big change of the market, the nature and the logic of the market. Because we couldn’t see of course that totally new services and totally new ways of pricing would emerge from this. We saw the tremendous increase in ID phones and of course all along with the rise in use of the internet. Postal services, thus, have an enormous market for delivering all the things you can buy from the internet.

I’m not predicting anything at all because that is by nature extremely difficult, but the point is that competition is providing us with a challenge and with instability which we cannot forecast by extrapolating. New things will happen and the most important issue is to bring stability to the instability.

Furthermore, competition in relation to costs encourages the launching of cheaper products. It even forces competitors to reduce prices at more high-quality type products. But we also see that you can deliver things by being more efficient. Just look at the airlines: today we have airline fees that may be 10% of what they cost 10 years ago, and still, the airplanes are more or less the same, some of them are more modern hopefully. This is due to the change of the mechanism of pricing.

We can also observe these changes in the distribution. Not only because of the emergence of the internet market, but also because of a number of other markets. Lots of companies accept to have lower margins.

But then, we come to the really important thing with competition and low prices which is the market. When we talk about markets here, we talk about virtual markets in a more general economic sense. But I think all of you have noticed that competitors tend to like each other – they do not only tend to dislike each other, because they put up their shops in the same street. So you have some of the most well-known markets in specific districts of European cities where are gathered most of the jewellery retailers, fashion shops, etc, etc. When you have the competition of prices you also gain a new market.

Think about mobile phones we had some years ago. If you look back 15 years, if you had a mobile phone, it was overweighed of 15 kilos and they cost something around 20,000 or 15,000 €. So they were not very good, they were inefficient and of course there were not many other people you could phone to, except for the fixed lines. But price competition made it possible for more and more people to buy mobile phones, which gave the opportunity to mobile producers to invest in research and development. Now we have an extremely innovative phase of the mobile phone sector. You barely dare to buy a mobile phone because you know that in half a year there will exist an even better one; and this is a result of price competition because it made it possible to have mass market.

Conclusion: we should not stop where we are today. We should further work on opening up markets even more. As we are now going ahead regarding the postal market, I think we see the need to go further regarding the services market, because we have only made half of the step. As I see it, if we want Europe to be the most competitive knowledge economy of the world we need to increase competition in these areas and I talk about health care, research, studies, and a number of other things that we need. I talk about new steps regarding telecom, as we are discussing right now and the housing sector. Let’s remember that everyone wants competition till they get it. But before that, monopolies are like small crying children; no one really likes them, till you get it. And that is until you get it on your own.

We need to do what is uncomfortable for those outside this room and that is to create the instability with rules of stability, that is given by the rules of competition legislation.