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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

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Eu competition policy

EU COMPETITION POLICY

REF: EU COMP POL TEACH

Update feb 08


Introduction
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
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
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
    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
    Economic analysis: review of BE-COMP diagram (note: you can use other theories)

    euros

    price

    Home market only

    Mark-up

    BE

    D

    BEFT

    E’

    1

    E’

    E’

    m'

    p’

    p’

    E”

    W

    E”

    E”

    p”

    p”

    A

    A

    mA

    pA

    AC

    COMP

    MC

    Number of firms

    n’

    n”

    2n’

    Sales

    per firm

    x”

    Total

    sales

    C’

    C”

    x’


    Review of be comp diagram
    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
    Anti-competitive behaviourCollusion 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

    BEFT

    G

    Perfect

    collusion

    mmono

    B

    pB

    E”

    Partial

    collusion

    p”

    A

    COMP

    Number of firms

    n=1

    n”

    nB

    2n’


    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

    BEFT

    G

    Perfect

    collusion

    mmono

    B

    pB

    E”

    Partial

    collusion

    p”

    A

    COMP

    Number of firms

    n=1

    n”

    nB

    2n’


    Economic effects

    The welfare loss of collusion (versus no collusion). collusion

    area

    Economic effects

    price

    Mark-up

    Demand curve

    BEFT

    pmono

    Perfect

    collusion

    mmono

    B

    B

    pB

    E”

    Partial

    collusion

    E”

    p”

    COMP

    Number of firms

    n=1

    n”

    nB

    Total

    sales

    CB


    • Exemptions collusion

      • ‘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
    Enforcement of art.81 collusion

    • 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
    ART. 82 MONOPOLIES, ABUSE OF DOMOINANCE collusion

    • Abuse of dominance that affects intra-EU 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) collusion

      • 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) collusion

      • 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
    MERGER REGULATION collusion

    • 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 collusion

    • 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.. collusion

      • 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
    ART.86 collusionPUBLIC 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



    Arts 87 89 state aid
    arts.87-89 STATE AID collusion

    • 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, collusion

    All restructuring forced on Home country

    All exit (restructuring) falls on Home firms

    Unfair

    Undermines political support for liberalisation

    What if only some countries subsidise?


    Recent competition cases
    RECENT COMPETITION CASES collusion

    • Premier League

    • Vitamin companies

    • Microsoft

    • Airlines

    • Others


    Other relevant theory
    Other relevant theory collusion

    • See handout


    Competition policy in future
    COMPETITION POLICY IN FUTURE collusion

    • Since 2000 moves to make more proactive

    • Trend: Commission harsher , cases overturned by ECJ

    • Feb05; proposed enabling harmed consumers/rivals to claim damages


    Conclusion
    CONCLUSION collusion

    • 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
    Questions to consider collusion

    • 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?


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