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7 National Champions under Credit Rationing Christian Gollier and Bruno Jullien 7.1 Introduction Oligopoly pricing yields a deadweight loss for society. The policy implication is to maintain competitive market conditions, providing the rationale for strong European laws which have been implemented to prohibit national governments from protecting national firms. However, over the last few years, there has been a strong tendency for governments to adapt their industrial policy to encourage the emergence of national champions. These firms have strong monopoly power in their home market, despite the absence of any obvious natural monopoly argument. Air France provides a clear example of a national champion. The firm’s market share recently reached 96 percent in the French domestic market after a number of its rivals were eliminated. This is in contrast to the stiff competition that Air France faces abroad. Another French illustration is the case of Suez, Enel, and Gaz de France. The proposed takeover of Suez by Enel was promptly opposed by the French government whose counterproposal was a merger of Suez and Gaz de France to create a national champion in the energy sector. The result was to reduce competition in the French energy market. More generally, it has been observed that many European governments delay the opening of their home markets to foreign competition until the last possible moment. When a domestic firm charges monopoly prices at home, there are two effects. There is a monopoly profit for the firm. However, this is a transfer from consumers to shareholders that has no effect on welfare. There is also a deadweight loss owing to a wedge between the marginal production cost and the willingness to pay of the marginal consumer. This loss makes it socially desirable to promote more competition in 136 Christian Gollier and Bruno Jullien the market. The problem is radically transformed when the situation is a domestic firm extracting a monopoly rent on foreign markets. This is because the welfare of foreign citizens is not taken into account by the domestic government. In such a situation it is in the best interest of domestic residents to promote competition at home, and monopoly for their national champion abroad. Brander and Spencer (1985) have examined the strategic trade argument in favor of national champions. Promoting national champions could turn out to yield a negative-sum game and national welfare might rise at the expense of a greater loss for someone else. Domestic competition policy therefore tends to be too permissive toward mergers because it does not take into account the negative impact of less competition outside the country. The cases of Microsoft and Boeing are often invoked to illustrate this “transfer effect.” The emergence of Airbus as a competitor for Boeing has been beneficial for European residents through the transfer of some duopoly rents to European soil. Yet this calculation does not take into account any economic loss for Boeing or lost economies of scale within the new industry structure. Neither does it count the benefit for consumers around the world who paid lower prices, as explained by Neven and Seabright (1995). The puzzle we solve in this chapter is quite different. It concerns the observed willingness of some national governments to limit competition in their home markets. There are various possible explanations for this phenomenon. A standard, but flawed, explanation is based on domestic employment benefits. The flaw is that the monopoly power of national firms reduces output, and therefore demand for the factors of production, in particular labor. Another standard explanation is that the monopoly rent can, in part, be redistributed to public decision makers in charge of shaping the industrial policy. The explanation we present in this chapter is a different one. It is based on the observation that Air France has been able to expand abroad—and to extract extra profits from this expansion—through a mostly internal financing of these foreign investments and the merger with KLM. This self-financing of the airline’s expansion has been possible, at least in part, because of the existence of a large profit margin on domestic flights. However, there is a missing element to this explanation. If this foreign expansion is profitable, it must be explained why external financing is not possible. Our model is based on the well-established fact that firms face important constraints on their access to credit, which limits the ability [3.139.107.241] Project MUSE (2024-04-26 08:54 GMT...

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