EU Competition Policy

Elements

• Why a competition policy?• Why an EU competition

policy?• Objectives • Cases

Pro-competition arguments• Competition: low prices, high quantity• Monopoly: one firm has market control,

barriers to entry, price setting– However: existence of natural monopolies

• Oligopolies and cartels– Collusion and non-collusive strategic behavior

(Market demarcation? Price ceilings?)

• The problem of mergers: reducing number of competitors market dominance

AR = D

MC

MR

£

Q O Q1

P1

Monopoly

Comparison of perfect competition and monopoly

Comparison of perfect competition and monopoly

See Sloman and Wride, pp. 175-176

£

Q O

MC ( = supply under perfect competition)

Q1

MR

P1

P2

Q2

AR = D

Comparison withPerfect competition

Comparison of perfect competition and monopoly Comparison of perfect competition and monopoly

£

Q O Q1

MR

P1

MCmonopoly

AR = D

Comparison of perfect competition and monopoly Comparison of perfect competition and monopoly

O

£

Q

Ppc

Qpc

AR = D

Consumersurplus

Producersurplus

MC(= S under perfect competition)

a

Deadweight loss under monopoly

Perfectcompetition

See Sloman and Wride, p. 306

MRO

£

Q

Ppc

Qpc

AR = D

a

Qm

Pm

bConsumer

surplus

Producersurplus

Deadweightwelfare loss

MC(= S under perfect competition)

Deadweight loss under monopoly

Monopoly

Integration and Market Size• Europe as a whole versus small

size of European nations:– implicit assumption: market size good for economic performance.

• Facts: integration associated with mergers, acquisitions

Integration and competition• Larger market to compete for and

potential market power• New European focus of competition

policy: state aid, public procurement, regulated industries & state monopolies

In sum, EU rules against: restrictive practices, abuse of dominant positions, controls mergers

Positioning EU competition policy

• EU subsidiarity (each member state has its own legislation on the exercise of restrictive practices and the abuse of a dominant position within their own countries.)

• EU competition policy origins: for creating single market (against fragmentation), not pro-competition as in US

• Post May 2004 decentralization trend and focus on efficiency in EU

European Competition Policy

Article 81 of the EC Treaty1. The following shall be prohibited as

incompatible with the common market:

– all agreements between undertakings*, decisions by associations of undertakings and concerted practices* which may affect trade between Member States

*Undertaking• ‘‘U n d e r t a k i n g’U n d e r t a k i n g’ includes any

natural or legal person capable of carrying on commercial or economic activities relating to goods or services, irrespective of its legal status.

• i.e. a firm or business of any sort

Article 81–and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:

Article 81• a) directly or indirectly fix purchase

or selling prices or any other trading conditions;

• (b) limit or control production, markets, technical development, or investment;

• (c) share markets or sources of supply

Article 81• (d) apply dissimilar conditions to

equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

• i.e. treat customers differently by price discrimination

Article 81• (e) make the conclusion of contracts

subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

• e.g. tie-in sales - as a condition of acquiring one product another is required to be purchased

Article 81

+ 2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void.

Article 81• 3. The provisions of paragraph 1 may,

however, be declared inapplicable in the case of:

• any agreement which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, .....

Article 81

•The Commission has imposed heavy fines in cases of price-fixing and market-sharing, such as euro 218.8m on 8 steel makers operating a cartel.

Graphite electrode cartel• The European Commission today fined Germany's SGL

Carbon AG, UCAR International of the United States and six other companies a total of € 218.8 million for fixing the price and sharing the market for graphite electrodes, which are ceramic-moulded columns of graphite used primarily in the production of steel in electric furnaces. The Commission's decision comes after a thorough investigation, which established that the eight producers, which together account for the quasi totality of the production world-wide, operated a secret cartel during most of the 90s resulting in considerably higher prices than if the companies had competed against each other.

– Bruxelles, 18 July 2001

Graphite electrode cartel• Then Competition Commissioner Mario Monti said:• "This decision is a further signal that the Commission will

apply the full force of the law on hardcore cartels. The substantial fines imposed in this case are not only warranted in light of the particular gravity of the infringement, but also intend to dissuade companies from engaging in similar illegal practices in the future."

• "At the same time, by granting a very substantial reduction in the fine imposed on Showa Denko and significant reductions to several other companies the Commission shows that it takes proper account of companies' co-operation in uncovering cartels, which are the worst kind of violation of competition rules."

Steel cartels•The steel industry has been

subject to other investigations and fines, for example in 1999.

(see: EC fines steel cartel for market sharing)

*Concerted practice• ICI V Commission (dyestuffs case) 1972• Found several producers of dyestuffs

guilty of price fixing through concerted practices, based on:– similarity of the rate and timing of

price increase– instruction sent by parent companies

to subsidiaries– informal contacts between firms

ICI V Commission extract

• IT IS COMMON GROUND THAT FROM JANUARY 1964 TO OCTOBER 1967 THREE GENERAL AND UNIFORM INCREASES IN THE PRICES OF DYESTUFFS TOOK PLACE IN THE COMMUNITY

• BETWEEN 7 AND 20 JANUARY 1964, A UNIFORM INCREASE OF 15 PER CENT IN THE PRICES OF MOST DYES BASED ON ANILINE, WITH THE EXCEPTION OF CERTAIN CATEGORIES, TOOK PLACE IN ITALY, THE NETHERLANDS, BELGIUM AND LUXEMBOURG AND IN CERTAIN THIRD COUNTRIES .

• ON 1 JANUARY 1965 AN IDENTICAL INCREASE TOOK PLACE IN GERMANY .

• ON THE SAME DAY ALMOST ALL PRODUCERS IN ALL THE COUNTRIES OF THE COMMON MARKET EXCEPT FRANCE INTRODUCED A UNIFORM INCREASE OF 10 PER CENT ON THE PRICES OF DYES AND PIGMENTS EXCLUDED FROM THE INCREASE OF 1964 .

Concerted practiceDefined as:

‘a form of coordination between undertakings which, without having reached the stage where an agreement properly so-called has been concluded, knowingly substitutes practical cooperation between them for the risks of competition.’

Concerted practice• This definition has been elaborated

upon in subsequent cases:

• Suiker Unie v Commission 1975• ‘any direct or indirect contact ... the

effect whereof is to influence the conduct of the market...’

Concerted practice• Solvay /ICI v Commission (Soda-ash

case) stated that:

• ‘There are many forms and degrees of collusion and it does not require the making of a formal agreement. ... but each infers commitment from the other on the basis of conduct.’

Article 82 of the EC Treaty

• Any abuse by one or more undertakings of a *dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States.

Article 82Such abuse may, in particular, consist in:

• (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;

• (b) limiting production, markets or technical development to the prejudice of consumers;

Article 82

•(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

Article 82•(d) making the conclusion of

contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

*A dominant position?“...a position of economic strength enjoyed

by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers”

e.g.: Hoffman-La-Roche, 1979

Hoffmann-La Roche & Co. AG v Commission

• IN THAT DECISION THE COMMISSION FINDS THAT ROCHE HAS A DOMINANT POSITION WITHIN THE COMMON MARKET , WITHIN THE MEANING OF ARTICLE 86 OF THE TREATY , ON THE MARKETS IN VITAMINS A , B2 , (PANTOTHENIC ACID ), B6 , C, E AND H ( BIOTIN ) AND THAT IT HAS ABUSED THAT POSITION AND THEREBY INFRINGED THE SAID ARTICLE , BY CONCLUDING , FROM 1964 ONWARDS AND IN PARTICULAR DURING THE YEARS 1970 TO 1974 INCLUSIVE , WITH 22 PURCHASERS OF THESE VITAMINS AGREEMENTS WHICH CONTAIN AN OBLIGATION UPON PURCHASERS, OR BY THE GRANT OF FIDELITY REBATES OFFER THEM AN INCENTIVE, TO BUY ALL OR MOST OF THEIR REQUIREMENTS OF VITAMINS EXCLUSIVELY OR IN PREFERENCE FROM ROCHE.

What determines market dominance?

•The relevant product and geographic markets

•The structure of those markets

What determines market dominance?

In defining markets the Commission must examine:

• which products are substitutable for the product concerned

• the availability of alternatives for buyers and suppliers

The relevant market

•E.g.:–Competition Policy: Policy Approaches and the Relevant Market Defined

Market definition

Market definition as a cornerstone of EU Competition Policy

(Mario Monti, 5 October 2001)

Market definition• “Market definition is not an end it itself but a tool to

identify situations where there might be competition concerns. Our competitive analysis focuses on market power. We use market definition and market shares as an easily available proxy for the measurement of the market power enjoyed by firms. In effect, the main objective of defining a market is to identify the competitors of the undertakings concerned by a particular case that are capable of constraining their behaviour.”

What determines market dominance?

Has dominance been abused?

What constitutes abuse?• use of market power aimed at

eliminating a competitor• restricting a competitor’s activities• charging excessive prices

What determines market dominance?

• forcing customers to buy a range of products

• refusal to supply• acquiring or merging with a

competitor in order to reduce the number of competitors

What determines market dominance?

• charging below-cost prices in order to:– drive out a competitor– deter new entrants

• Known as *predatory pricing - see ECS/Akzo Chemie, 1985 case

*Predatory pricing

Predatory pricing can be defined as behaviour that involves four key components:

• (i) Forgoing profits in the short run by pursuing an aggressive pricing strategy; which

• (ii) reduces the profitability of a rival; in order

Predatory pricing

• (iii) to induce the exit of a rival or deter its expansion or expansion by other competitors; and

• (iv) as a consequence, secure increased market power and hence increased profits in the long-run.

Predatory pricing

• For a firm rationally to engage in predatory pricing, such behaviour must significantly reduce competition over the longer term, such that these costs can be recouped through increased market power and profitability.

Article 82 cases• Dunlop and its Benelux distributor

collaborated to prevent the purchase of sports goods in cheaper UK, to be resold in expensive Benelux.

• Calcium carbide and magnesium reagent producers* fixed prices and shared market, allocating customers and sharing information about them

Article 82 cases•United Brands 1976 = price

discrimination - Chiquita bananas

•Abuse of Dominance and Monopolisation: The Tetra Pak case

Impact on business• Managers need to have a greater

knowledge of competition rules

• Many large firms have implemented in-house compliance programmes

• Advice on establishing a compliance programme available

Mergers - the control of concentrations between undertakings

The merger regulationThe merger regulation - extracts:

• (1) Whereas, for the achievement of the aims of the Treaty establishing the European Economic Community, Article 3 (f) gives the Community the objective of instituting a system ensuring that competition in the common market is not distorted;

The merger regulation• (3) Whereas the dismantling of internal

frontiers is resulting and will continue to result in major corporate reorganizations in the Community, particularly in the form of concentrations*;

*A concentration arises where two or more previously independent undertakings merge

The merger regulation• (4) Whereas such a development

must be welcomed as being in line with the requirements of dynamic competition and capable of increasing the competitiveness of European industry, improving the conditions of growth and raising the standard of living in the Community;

The merger regulation

• (5) Whereas, however, it must be ensured that the process of reorganization does not result in lasting damage to competition;

The merger regulation• (14) Whereas this Regulation should

establish the principle that a concentration with a Community dimension* which creates or strengthens a position as a result of which effective competition in the common market or in a substantial part of it is significantly impeded is to be declared incompatible with the common market;

The merger regulation• (15) Whereas concentrations which, by

reason of the limited market share of the undertakings concerned, are not liable to impede effective competition may be presumed to be compatible with the common market; where the market share of the undertakings concerned does not exceed 25% either in the common market or in a substantial part of it;

*Community dimension A concentration has a Community dimension where:

• (a) the combined aggregate worldwide turnover of all the undertakings concerned is more than Euro 5 bn; and

Community dimension• (b) the aggregate Community-

wide turnover of each of at least two of the undertakings concerned is more than Euro 250 million.

New Merger Regulation (2004)

Test for assessment of mergers

• ‘A concentration which would significantly impede effective competition, in the common market or in a substantial part of it, in particular by the creation or strengthening of a dominant position, shall be declared incompatible with the common market.’

Appraisal of concentration The Commission takes into account:

• (a) the need to maintain and develop effective competition within the common market in view of:

• the structure of all the markets concerned

Appraisal of concentration

• and the actual or potential competition from undertakings located either within or outwith the Community;

Appraisal of concentration• (b) the market position of the

undertakings concerned and their economic and financial power,

• the alternatives available to suppliers and users,

• their access to supplies or markets• any legal or other barriers to entry,

Appraisal of concentration• supply and demand trends for the

relevant goods and services,• the interests of the intermediate and

ultimate consumers, and• the development of technical and

economic progress provided that it is to consumers’ advantage and does not form an obstacle to competition.

Authorisation of mergers• The Commission has prohibited few

mergers but the attitude appears to have hardened.

E.g. Commission prohibits Ryanair and Aer Lingus merger

• Imposes conditions on acquisition of Sanyo by Panasonic

Liberalisation• Article 3 of the EC Treaty : "activities of the

Community shall include (...) g) a system ensuring that competition in the internal market is not distorted".

• Article 86(3) of the EU Treaty entrusts the Commission with a specific surveillance duty "in the case of public undertakings and undertakings to which Member States grant special or exclusive rights".

Liberalisation• Liberalisation of utilities

– telecommunications, energy, transport, postal services.

• exception to rules when the latter would obstruct the provision of "services of general economic interest".

+ sectoral legislation

State Aid• Art 87 ‘any aid granted by a Member

State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market’

• Art 88/ Art 89

State Aid

• State aid must be notified, Commission decides.

• No discrimination between private and state-owned firms in procurement.

• No discrimination on grounds of nationality

State Aid• Exceptions allowed: social objectives,

development, disaster relief, the ‘Commission’s Temporary Framework’ (dealing with effects of credit crunch)

• E.g.:– UK crisis scheme for aid of up to

€500 000 per business authorised

Action to fight economic crisis• ‘In order to safeguard financial stability,

Member States have set up guarantee umbrellas, risk shields and recapitalisation measures for the financial sector with an overall volume of up to €3000 billion. Three new Commission Communications provide a clear framework setting out the conditions under which these unprecedented measures can be taken while preserving the integrity of the Single Market and avoiding harmful subsidy races between Member States.’

EC, 2009

Implication for businesses• Move away from arbitrary

protection of selected businesses• Targeting aid to public enterprises • The ‘market investor test’!• Prohibition of national subsidies• Independent sector regulators

actions

References• Baldwin and Wyplosz, ch. 6• Sloman and Wride, ‘Economics’, ch. 6, 11• El-Agraa, EU Competition Policy, Chapter 12

• Article 81• Article 82• Mergers (new regulation – 2004)• State Aid• Liberalisation