EU COMPETITION POLICY
REF: EU COMP POL TEACH
Update feb 08
INTRODUCTION
• Driven by Treaty of Rome (art.3)
– ..”ensuring that competition in a common
market is not distorted”
• Implemented through rules, incl:
– Anti-competitive behaviour & abuse of
monopoly power
• arts. 81 & 82 in Amsterdam Treaty (previously
85 & 86 in ToR)
– Merger Policy
• arts 86 & 87
EU’s role
• Exclusive competency of EU; Commission
controls (important policy!)
• Look at justification for putting competition
policy at the EU level
– Spillovers (negative effects of one Member’s
subsidies on other Members’ industry)
– Need belief in ‘fair play’ if integration is to maintain
its political support
• Note: recent ‘protectionist’ tendency of Member States to
prevent foreign takeovers
• Policy not consistently applied
• Block exemptions exist
Economic rationale
• Free market v correction of market failure
arguments
• SEM: 2 possible responses to new
competitive environment
• firms act in competitive manner
• firms react defensively
• See Pelkmans J, ‘European Integration’,or
Baldwin & Wyplosz (on reading list) to focus
on economic aspects. See ‘Competition
Policy & the Consumer’ (Eur Commission) for
an update on policy
ART.81ANTI-COMPETITIVE
AGREEMENTS
• Prohibited: intra firm agreements that distort
intra EU trade and prevent, restrict or distort
competition
– Eg. Sotherby’s & Christies (2002)
–
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/02/1585&format=HTML&aged=0
&language=EN&guiLanguage=en
• Horizontal co-operation
– eg. Woodpulp case (1993),Nintendo(2002) – exclusive
territories
–
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/02/1584&format=HTML&aged=0
&language=EN&guiLanguage=en
• Vertical co-operation – read up
• Cartels subject of many investigations incl
– English Premier League
– 8 Vitamin companies
• Explicit prohibitions incl.
– price fixing
– output fixing
– market sharing agreements (eg sugar cartel
1970s)
– tied contracts
• Covers foreign firms if intra-EU trade
affected
• Costs incl.
– Economic inefficiency
– conflict SEM
Economic analysis: review of BE-COMP
diagram (note: you can use other theories)
euros
price
Home market only
Mark-up
BE
D
BE
p’
p”
E’
E’
p’
E”
p”
W
m'
E’
A
1
E”
E”
pA
mA
A
AC
COMP
MC
x’ x”
Sales
per firm
FT
n’
C’ C”
Total
sales
n”
2n’
Number
of firms
review of BE-COMP diagram
• COMP curve is for ‘normal’, non-collusive
competition
– Firms do not coordinate prices or sales.
• Bigger, fewer, more efficient firms facing
more effective competition
• Speed of adjustment
– Slow (E’ – A – E’’) eg. European airlines
– Fast (E’ – E’’) eg. Eur banking sector
• Welfare: gain = area W
Anti-competitive behaviour
Collusion in the BE-COMP diagram
• Collusion a concern in Europe
– dangers of collusion rise as the number of
firms falls
• Extreme is ‘perfect collusion’
– Firms coordinate prices and sales perfectly
– Max profit from market is monopoly price & Q
– Firms charge monopoly price and split the
sales among themselves
•
•
Perfect collusion line
horizontal, assumes
mark-up constant,
regardless of no. of firms
IF all firms charge
monopoly mark-up
– 2n’ firms can stay in
business (point G)
•
Perfect collusion unlikely,
thus partial collusion
Mark-up
G
mmono
pB
p”
BEFT
Perfect
collusion
B
E”
Partial
collusion
A
COMP
n=1 n” nB
2n’
Number of
firms
•
Partial collusion mark-up
between that of perfect &
no collusion
– LR equilibrium point B
•
2n’ is too high for all firms
to break even
– Industrial consolidation, but
only to nB (Point B),not n”
as in competitive market
•
Prices higher, pB> p”,
smaller firms, higher
average cost, stops
benefit of integration
Mark-up
G
mmono
pB
p”
BEFT
Perfect
collusion
B
E”
Partial
collusion
A
COMP
n=1 n” nB
2n’
Number of
firms
Economic effects
The welfare loss of collusion (versus no collusion).
area
price
Mark-up
Demand curve
pmono
pB
BEFT
Perfect
collusion
mmono
B
B
E”
E”
p”
Partial
collusion
COMP
n=1 n” nB
CB
Total
sales
Number of
firms
• Exemptions
– ‘negative clearance: improves
production/distribution of goods or
promotes technical or economic progress if consumers benefit & no elimination of
competition
• Commission has considerable discretion
– block exemptions
– SMEs
• Competition policy v competitiveness
Enforcement of art.81
• Little used upto 1962
• If Commission find against agreement
– firms usually agree to end or modify
agreement
– Com. Issue formal decision
– fines upto 10% turnover of each firm
• particularly heavy for cartels
– Examples
• Co-operation may be beneficial
– co-operation & R&D (See Hansen &
Nielsen)
ART. 82 MONOPOLIES,
ABUSE OF DOMOINANCE
• Abuse of dominance that affects intraEU trade
– Eg Microsoft & media player (2003-04)
• Economic analysis (see Pelkmans)
• 3 elements
– has to be dominant position (not illegal)
– abuse is illegal
– possibility of affecting intra-EU trade
• Relatively few cases (compared to
art.81)
– Defining market difficult
• Continental Can case 1971
• Factors other than market share important
– Abuse of dominance incl.
• unfair pricing
• limiting markets
• tied contracts
– Tetra Pack (Swiss co.)
– Astra Zenica (2005)
• Fined 60m euros for misuse of patents
– Delay entry of generics
– Coca Cola (2005)
• New procedure to make policy more effective
• Investigation ended early when Coke made
commitments, which were made LEGALLY
BINDING. Coke end practices
– Exclusivity agreements
– Rebates for targets & reserving shelf space
– Use strong brands to sell weaker ones
• Within EU, Norway & Iceland!!!
MERGER REGULATION
• ToR contained no specific powers to
control mergers
– covered under existing articles to a degree
– not adequate
– Commission proposed merger legislation
after Continental Can case, but…….
– Merger Regulation in force 1990
• Merger prohibited if creates or
strengthens dominant position which
impairs competition
• Covers horizontal,vertical, conglomerate
mergers
• Economic analysis (See Pelkmans,
Baldwin & Wyplosz & Hansen &
Nielsen)
• Mergers & SEM
– EU ‘Level playing field’
– Ensure SEM gains not eroded by
defensive mergers
• Thresholds
– 3 points
– Opposition from some States
• Criticisms incl..
– few fully investigated
– few banned
• ATR / De Havilland
– 8% to full proceedings
– Unlike art.81 no trade off with other
aspects of performance
– High thresholds excl. high concentration in
specialist markets, eg. Reed & Elsevier
merger
– State intervention, eg national security
ART.86
PUBLIC ENTERPRISES
• No anti-competitive behaviour
• Little done until late 1970s
• EU Directives re:
– financial transparency
– no discrimination in public procurement
• Extended to utilities
• SEM: Com. intensified policy in energy,
utilities,transport
• Difficult to implement
– resistance from States
arts.87-89 STATE AID
•
•
•
•
No trade-distorting aid
Economic Theory – see Baldwin & Wyplosz
Exceptions incl. Sectors like steel
Aid must be notified by States & authorised
by Com.
• Tougher stance since SEM
• More difficult to investigate
• Cases
– car industry
– airlines
What if only some countries
subsidise?
•
•
•
If partner subsidies its firms to break even,
All restructuring forced on Home country
All exit (restructuring) falls on Home firms
– Unfair
– Undermines political support for liberalisation
RECENT COMPETITION
CASES
•
•
•
•
•
Premier League
Vitamin companies
Microsoft
Airlines
Others
Other relevant theory
• See handout
COMPETITION POLICY IN
FUTURE
• Since 2000 moves to make more proactive
• Trend: Commission harsher , cases
overturned by ECJ
• Feb05; proposed enabling harmed
consumers/rivals to claim damages
CONCLUSION
• ToR framework has remained
• SEM
– more vigorous application of the rules
– extended scope, eg to telecoms
• ECJ has had a significant role
• Merger Regulation
• Com. Gained power over cross-border
mergers, where uncertainty existed before
• Some conflict
• States & Com.
• EU competitiveness v competition policy
• Future
Questions to consider
– What is competition policy? What is the
economic justification for competition
policy?
– Why is EU competition policy required
when individual States have their own
policies? To what extent is there a
conflict?
– Why is competition policy important? To
what extent is it compatible with the SEM?
– To what extent is EU competition policy
effective?