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How EU Markets Became More Competitive Than US Markets: A Study of Institutional Drift
 
Germán Gutiérrez, Thomas Philippon
 
 
Abstract:
Until the 1990's, US markets were more competitive than European markets. Today, European markets have lower concentration, lower excess profits, and lower regulatory barriers to entry. We document this surprising outcome and propose an explanation using a model of political support. Politicians care about consumer welfare but also enjoy retaining control over industrial policy. We show that politicians from different countries who set up a common regulator will make it more independent and more pro-competition than the national ones it replaces. Our comparative analysis of antitrust policy reveals strong support for this and other predictions of the model. European institutions are more independent than their American counterparts, and they enforce pro-competition policies more strongly than any individual country ever did. Countries with ex-ante weak institutions benefit more from the delegation of antitrust enforcement to the EU level. Our model also explains why political and lobbying expenditures have increased much more in America than in Europe, and using data across industries and across countries, we show that these expenditures explain the relative rise of concentration and market power in the US.