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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
slide6
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
slide10
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’

slide11
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).

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

slide13
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
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
ART. 82 MONOPOLIES, ABUSE OF DOMOINANCE
  • 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
slide16
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.)
slide17
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
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
slide19
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
slide20
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
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
slide22
Difficult to implement
    • resistance from States
arts 87 89 state aid
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

What if only some countries subsidise?
recent competition cases
RECENT COMPETITION CASES
  • Premier League
  • Vitamin companies
  • Microsoft
  • Airlines
  • Others
competition policy in future
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
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
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?
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