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Barriers to Exit – SECRETARIAT – December 2019 OECD discussion

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This presentation by Patricia Bascunana-Ambros, OECD Competition Division, was made during the discussion “Barriers to exit” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/bte.

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Barriers to Exit – SECRETARIAT – December 2019 OECD discussion

  1. 1. Competition Committee Barriers to Exit in Competition Presentation by the Secretariat 4 December 2019 DAF / Competition Division- OECD
  2. 2. Barriers to Exit 2 Barriers to exit can be defined as obstacles that may force a firm to continue operating in a market as the economic costs of leaving might be higher than those incurred if it stays in the market. An indicator of barriers to exit is the decline in firm dynamism which has been steadily declining in many OECD countries. Figure 1. Average trends in job reallocation, entry and exit rates from 2000 to 2015
  3. 3. Labor related exit costs Sunk costs Regulatory exit requirements Government interventions (e.g. too-big-to- fail firms) Long-term contracts Bankruptcy regimes 3 Types of barriers to exit The point of interest with barriers to exit that have other policy goals is the extend of such barriers in the market, and more specifically, whether they are unnecessarily high.
  4. 4. 4 Impact on allocative efficiency, competition and innovation Overcapacity issues and wasteful wars of attrition Incentives for firms to consolidate or coordinate behaviour to survive Crisis cartels Merger control - Failing Firm Defense Barriers to exit weaken the market discipline mechanisms of the competitive process, which act to allocate resources to their most efficient use according to changing conditions. Impacts from barriers to exit Competitive distortions from government aid aimed to prevent exit Shifts the burden of structural adjustment to changing market conditions to other firms managing without aid Minimise competitive distortions while taking account of other policy goals Higher concentration Potential reduction of consumer welfare from higher prices Market investigation Impact on type of entry Deters efficient and innovative entry Competition enforcement and advocacy
  5. 5. • How competition authorities consider barriers to exit in their guidelines? Is there a need for greater transparency on how barriers to exit are analysed and assessed? • Competition enforcement policy can be also be under pressure to be more lenient, in particular during periods of distress, but this might not be the best long-term policy response? Competition enforcement policy as a potential barrier to exit? • How best can competition policy identify and reduce unnecessarily high barriers to exit – the role of advocating transparency of policy trade-offs, advising and collaborating with other government agencies. 5 Initial points for the discussion

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