EU Competition Policy

1. EU Competition Policy

2. Elements • Why a competition policy? • Why an EU competition policy? • Objectives • Cases

3. 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

4. MC AR = D MR Comparison of perfect competition and monopoly £ See Sloman and Wride, pp. 175-176 Monopoly P1 Q1 O Q

5. Comparison of perfect competition and monopoly P2 £ MC ( = supply under perfect competition) Comparison with Perfect competition P1 AR = D MR Q1 Q2 O Q

6. Comparison of perfect competition and monopoly £ MCmonopoly P1 AR = D MR O Q1 Q

7. Perfect competition a Ppc Qpc Deadweight loss undermonopoly MC (= S under perfect competition) £ Consumer surplus See Sloman and Wride, p. 306 Producer surplus AR = D O Q

8. Monopoly Deadweight welfare loss b Pm MR Qm Deadweight loss under monopoly MC (= S under perfect competition) £ Consumer surplus a Ppc Producer surplus AR = D O Qpc Q

9. 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

10. 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

11. 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

12. European CompetitionPolicy

13. 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

14. *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

15. 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:

16. 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

17. 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

18. 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

19. Article 81 + 2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void.

20. 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, .....

21. 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.

22. 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 graphiteelectrodes, 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

23. 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."

24. 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)

25. *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

26. 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 .

27. 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.’

28. Concerted practice • This definition has been elaborated upon in subsequent cases: • Suiker Unie v Commission1975 • ‘any direct or indirect contact ... the effect whereof is to influence the conduct of the market...’

29. 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.’

30. 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.

31. 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;

32. Article 82 • (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

33. 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.

34. *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

35. 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.

36. What determines market dominance? • The relevant product and geographic markets • The structure of those markets

37. 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

38. The relevant market • E.g.: • Competition Policy: Policy Approaches and the Relevant Market Defined

39. Market definition Market definition as a cornerstone of EU Competition Policy (Mario Monti, 5 October 2001)

40. 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.”

41. 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

42. 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

43. 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

44. *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

45. 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.

46. 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.

47. Article 82 cases • Dunlop and its Beneluxdistributor 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

48. Article 82 cases • United Brands 1976 = price discrimination - Chiquita bananas • Abuse of Dominance and Monopolisation: The Tetra Pak case

49. 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

50. 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;