Reinforcing each other: How the combination of European and domestic reforms increased competition in liberalized industries

Abstract

There is a consensus over Europe’s transformation into a highly competitive economy through a series of ambitious pro-competition reforms. However, both the European Commission and national actors have legislative authority over competition policies. Thus, who are the critical actors behind this legislative and economic transformation in this multi-level system? Focusing on the liberalization of state-owned industries and using a staggered difference-in-differences approach, the paper shows that the effectiveness of European directives in decreasing firm-level market power increased with the extent of preceding domestic pro-competition reforms. For every unit increase of the early domestic reform index, EU directives decrease market power in liberalized industries by an additional 7.8%. However, this effect is not significant in countries that did not reform their industries ex-ante. This finding contradicts the established view in the literature identifying the Commission as the dominant force driving this transformation, which implemented ambitious reforms by often overcoming the resistance of reluctant national governments. Instead, it is shown that the effectiveness of the Commission’s reforms depends on the support of domestic actors and compatible national institutions.