Blog of Paul de Bijl: No competition? No champions.

On January 26, the Netherlands Authority for Consumers and Markets (ACM) published its State of the Market, a new, annual publication about the functioning of markets in the Netherlands. It sheds light on the broader context of ACM’s market oversight, thereby contributing to the policy debate, where economic, technological, and geopolitical developments are becoming more and more intertwined. In that context, see also the concerns voiced by Draghi (2024) and Wennink (2025) about Europe resp. the Netherlands lagging behind in innovation and productivity, as well as the discussion about European champions.

Competition and innovation are critical components of the competitiveness and resilience of the Netherlands and of Europe. What is the current state of competition? To answer that question, the State of the Market discusses: (i) the trends of competition indicators in the Netherlands in the 2011-2023 period (thanks to Statistics Netherlands/CBS and CompNet for the underlying data), and (ii) three current topics, which are private equity, cloud services, and the attention economy. This blog discusses the trends of competition as well as its importance for the emergence of European champions.

How do you measure competition?

Competition pushes businesses to do their best for buyers, by satisfying their needs, improving quality, and keeping prices low. It stimulates businesses to invest continuously in improving their offerings and methods. That, in turn, stimulates innovation and productivity, and, by extension, our welfare growth.

Competition takes places on the playing field where businesses compete for the same buyers. That playing field is called the relevant market, for example the market for catering services in a certain city (or its metro area). Competition at the national level cannot be captured at that level of detail, if only because of a lack of data. Moreover, markets are always in flux: innovations and new business models expand existing market delineations and also create new markets. Data about existing sectors cannot capture that dynamism. However, data is available for an insight into and about economic sectors. Such a macro perspective sheds light on sectoral trends, and helps in interpreting market trends within a sector.

Since competition cannot be captured by a single number, we use three common indicators: market concentration, business dynamism, and market outcomes.

1. Market concentration concerns the market structure in terms of the number of businesses and the distribution of sales volumes or turnover among them. In a concentrated market, a small number of businesses serves a large share of the market, and buyers have little to choose. We measure market concentration using the Herfindhahl Hirschman Index (HHI; the sum of squared market shares) and the concentration ratio of the four largest businesses (CR4; the sum of the four largest market shares), based on turnover.
2. Business dynamism means that less well-performing businesses lose market share to businesses that do better. We look at (i) entry and exit percentages of businesses; (ii) rank persistence, or the degree to which the largest businesses maintain their positions vis-à-vis challengers; and (iii) market share instability at the top. Dynamism is an indication of competition in terms of Schumpeter’s process of ‘creative destruction’.
3. Market outcomes measure the impact of competition on businesses. First, we use markups, which is the degree to which a price is higher than the marginal costs. High markups can be an indication of weak competition. Second, we use the Boone indicator, which measures how much a company’s profits respond to an increase in the cost differences between businesses. The idea is that higher competition intensity leads to a greater shift in profits from less-efficient to more-efficient businesses.

Findings

For the 2011-2023 period, the indicators reveal the following. Market concentration went up, which points to weaker competition. This increase seems to be primarily driven by a concentration increase in sectors that were already highly concentrated, which is reflected by an increase in the HHI and CR4 in the relevant sectors.

With regard to business dynamism, entry and exit percentages have declined. Rank persistence remained, on average, relatively stable, and went up for concentrated sectors. That means that the largest businesses in the most-concentrated sectors succeeded in maintaining their positions. Less business dynamism means that new businesses are less able to grow further, and that they knock incumbents off their thrones less often.

The market outcomes for businesses also paint an unfavorable picture. The average markup slightly went up, which is an indication of more market power. This seems to be primarily driven by increased markups in sectors where they had already been relatively high. The trend of the Boone indicator, too, points to lower competition intensity.

Collectively, the indicators point to a decrease in competition in the Netherlands, in the sense that, on average, the individual indicators moved in an unfavorable direction. Sectors with the highest concentration levels had the greatest increase in market concentration and the largest decrease in rank persistence, while sectors with the highest markups had the largest increase in markups.

These findings confirm the picture elsewhere in Europe. Interpretating them nevertheless calls for caution. None of the indicators offer certainty regarding the intensity of competition. Also, the indicators pertain to sectors instead of markets in terms of competition, and the data does not take into account import and export. However, since the indicators point in the same direction, and the picture resembles that in other countries, there is reason for concern regarding competition.

There is scaling, and then there is scaling

An oft-suggested solution (sometimes in the context of ‘European champions’) for stimulating competitiveness and innovation is scaling up. Would that require a more relaxed approach to concentration control? Not necessarily, because mergers that create or strengthen market power can actually harm investments, innovation, and productivity growth. At the same time, competition authorities need to have an open mind for mergers that are necessary for innovation and from which buyers can benefit. The European Commission is therefore working on a clarification of the guidelines for merger assessments. It will offer businesses that wish to merge for innovation reasons a better idea of what is needed for a convincing justification of such mergers.

Moreover, you can’t just claim either that a market suddenly is European instead of national. Such a statement requires an empirical justification instead of wishful thinking. The call in the Draghi report (2024) for defining relevant markets in telecoms on a European level rather than on a national level, for the benefit of scaling up, was unsurprisingly met with criticism from all sides. Various experts pointed out that the European telecom market is still fragmented along national borders.

It’s completely understandable that incumbents present markets as large as possible, since that usually increases the chance of mergers getting the green light. A part of the telecom sector thus regularly claims that a more-relaxed merger regime is necessary for investments in 5G and fiber-optic. However, data reveals that, over the past ten years, European telecom companies (both mobile and fixed) achieved, on average, positive returns, with one of the highest dividend-payout ratios on the stock market (with a dispersion in firm performance, which means not equally for all market participants). More specifically, empirical research does not point to a structurally underperforming return on capital employed (ROCE) compared with the weighted average cost of capital (WACC). The realized returns, on balance, do not stand in the way of investments. A more plausible hypothesis than the sector’s claim is that competition actually stimulates investments and innovation.

One route for scaling that fuels competitiveness therefore lies in expanding the markets in which competition takes place, by eliminating unnecessary barriers stemming from national sentiments or legislation. That calls for more European integration and for less rigid attachment to national champions, so that successful European businesses emerge through cross-border scaling. Businesses that compete on a European scale are also more likely to be competitive on a global scale.

Whether a merger is problematic thus depends on the situation at hand. If markets are fragmented, with a small number of national champions like in banking and telecoms, it is more likely that a domestic concentration hinders competition and innovation – which is different for cross-border mergers.

Another form of scaling lies in regional and European ecosystems around technological value chains, for example, the semi-conductor industry and quantum technology. If many businesses and newcomers join in, that also results in scale. It also increases the chances of technological breakthroughs. New ideas always build on existing knowledge, and the more companies try to innovate, the more knowledge disseminates, and the more new combinations become possible.

So you want to have champions? Expand the market instead of market power

The Draghi (2024) and Wennink (2025) reports established that Europe (and the Netherlands) is good at developing and applying knowledge, and at starting up businesses, but not at scaling them up. They make a case for favorable preconditions – rightfully so. Considering the findings in the State of the Market, it’s better to expand the market than to expand market power.

Just like in the Olympics: if you designate a player beforehand as champion, he will automatically get the gold medal. That means no world records or extraordinary performances. Yet, if more competitors compete, they will go all out for gold, silver, and bronze. It’s better to have multiple champions aiming for the top than to have one champion (or rather, no champion at all).

Paul de Bijl, Chief Economist of ACM