Competition Policy
Development, Objectives and the Law
This presentation is based on
Motta (2004), Competition Policy, Cambridge
University Press
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History
• Anti-trust Law in the USA
– Formation of trusts in the end of the 19th
century
– Technology: Dramatic improvement in
transportation and communication (railways,
telegraph lines, telephone services)
– Finance: Formation of stock and bond
markets
– Law: liberalization of state incorporation laws
– Economies of scale and scope
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• The organization of cartels and trusts
• Final consumers were hurt by higher
prices and some suppliers, such as
farmers and small industrial firms
• Farmers and small businesses had
enough political power and public
sympathy to lead to the creation of antitrust laws in many US states.
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• Sherman Act (1890)
– Section 1 prohibits contracts, combinations
and conspiracies which restrain trade and
prescribes impronment and fines for violators.
– Section 2 prohibits monopolisation, attempts
to monopolize and conspiracies to
monopolize any part of trade or commerce
among the several states or with foreign
nations
– During ist first decade of life, enforcement of
the Sherman Act was not very strict.
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• The Clayton Act
– The Sherman Act did not cover mergers
– The Clayton Act (1914) was introduced to
extend anti-trust legislation to cover mergers
capable of reducing competition
– The Clayton Act prohibits other practices:
• price discrimination, which lessens competition
• Interlocking directorates among rivals
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• Amendments
– The Robinson-Patman Act (1936) on price
discrimination
– The Celler-Kefauver Act (1950) on mergers,
by extending it to asset transactions
– Hart-Scott-Rodino Act (1960) gave powers to
the DOJ and FTC to review all mergers of
firms above a certain size threshold.
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European Union
• Two different levels of jurisdiction
– National
– Supra-national
• Many Eurupean countries have not hade
proper competition laws until very recently
• Treaty of Rome and its modifications
• Germany & UK have distinct traditions
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Germany
• Cartels as an instrument to control the instability
created by cut-throat competition and price
warfare
• Freedom of contracting: price agreements were
legal and enforceable in the courts
• Anti-cartel action was taken only in certain
extreme cases (complete monopoly)
• By 1905: 385 cartels, by 1923: 1500 cartels
• 1923 the first Cartel law was introduced as a
reaction to hyper-inflation (only registration)
• National champions
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• 1957: the first strict competition law
– Bundeskartellamt
• 1973: merger control
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UK
• The Profiteering Act of 1919
– To deal with excessive prices after WW1
• 1948: Monopolies and Restrictive Practices Act
– Motivated by full employment
• 1956: Restrictive Trade Practices Act
• 1965: Monopolies and Merger Act
• 1998: Competition Act
– Brought the UK law almost in line with the EU law
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Features
• Objectives were never clear
– „public interest“?
– The Secretary of State for Industry had
discretion on whether to accept or reject the
OFT recommendationsPolitics!
• Penalties and tools of enforcement were
missing until 1998
– Later, fines (up to 10% of sales) and search
power introduced
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European Union
• 1951: Treaty of Paris
– Which created the European Coal and Steel
Community (ECSC)
– Prohibits trade barriers, discriminatory and
other restrictive practices capable of distorting
competition among the six countries (France,
Germany, Italy, and the Benelux Countries)
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• Reasons:
– The desire of reducing the danger of German
power by making available to others essential
inputs such as coal and steel
– Trying to mimic the US principle of free
competition
– Competition was not an end in itself, but was
intended as a way to promote economic
progress and welfare of Europeans (objective
of the EC as stated by Article 2)
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• Today, the main objectives as enforced by
the EC are most probably
– Efficiency
– European market integration
– But also „social“ goals
– E.g., Ford/Volkswagen JV
– Creation of 5000 jobs in Portugal!
– No obvious efficiency gains
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Objectives of Competition Policy
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Total Surplus
Consumer Surplus
Defense of Smaller Firms
Promoting Market Integration
Economic Freedom
Fighting Inflation
Fairness & Equity
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Factors Affecting Competition
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Social Reasons
Political Reasons
Environmental Reasons
Strategic Reasons: Industrial and Trade
Policies
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Merger Policy in the EU
• Merger Regulation (1990)
• Articles 81 and 82 of the Treaty of the European
Communities
– Direct applicability, i.e., directly enforceable by
national courts
– DG Comp enforces these articles following the
directives of the commissioner responsible for
competition law
– CFI: Court of First Instance has since 1989
jurisdiction in all actions brought against the decisions
of the EC
– The European Court of Justice decides on appeal
actions brought against the judgements of the CFI
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Article 81
Horizontal and Vertical Agreements
(1) 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 and which have as their object or effect
the prevention, restriction or distortion of competition within the
common market, and in particular those which:
(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;
(d) apply dissimilar conditions to equivalent transactions with other trading
parties, thereby placing them at a competitive disadvantage;
(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
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such contracts.
2. Any agreements or decisions prohibited pursuant to this Article shall
be automatically void.
3. The provisions of paragraph 1 may, however, be declared
inapplicable in the case of:
— any agreement or category of agreements between undertakings;
— any decision or category of decisions by associations of
undertakings;
— any concerted practice or category of concerted practices,
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, and which does not:
(a) impose on the undertakings concerned restrictions which are not
indispensable to the attainment of these objectives;
(b) afford such undertakings the possibility of eliminating competition in
respect of a substantial part of the products in question.
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Problems
• H&V problematic
• Concerted action leaves space for
interpretations
• For different reasons sectors such as
agriculture, defence and transports have
been granted block exemptions from
Article 81
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Article 82 (ex Article 86)
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.
Such 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;
• (c) applying dissimilar conditions to equivalent transactions with other
trading parties, thereby placing them at a competitive disadvantage;
• (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.
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Mergers
• DG Comp Merger Task Force
• Strict deadlines
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Issues
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Dominance Test
Substantial Lessening of Competition Test
The treatment of efficiency gains
Remedies
• Market Definition
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