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
Comparison of perfect competition and
monopoly
£
MC
See Sloman and Wride,
pp. 175-176
Monopoly
P1
AR = D
MR
O
Q1
Q
Comparison of perfect competition and monopoly
£
MC ( = supply under
perfect competition)
Comparison with
Perfect competition
P1
P2
AR = D
MR
O
Q1
Q2
Q
Comparison of perfect competition and monopoly
£
MCmonopoly
P1
AR = D
MR
O
Q1
Q
Deadweight loss under monopoly
MC
£
(= S under perfect competition)
Perfect
competition
Consumer
surplus
Ppc
See Sloman and Wride,
p. 306
a
Producer
surplus
AR = D
O
Qpc
Q
Deadweight loss under monopoly
MC
£
(= S under perfect competition)
Monopoly
Pm
Ppc
Consumer
surplus
Deadweight
welfare loss
b
a
Producer
surplus
AR = D
MR
O
Qm
Qpc
Q
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 Treaty
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
*Undertaking
• ‘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 practice
Defined 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 82
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;
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 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 Communitywide 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