Information Security Culture

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Part Two Firms and enforcing competition
law Dr. Simon J. Evenett 2 and 3 April 2004
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Organisation of this part of the course

• What is competition law?
• Firms and cartel enforcement.
• Firms and merger review regimes.
• Recent international initiatives on competition
  law and policy.

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What is competition law?
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Terminology

• Need to differentiate between the objectives and
  instruments of a policy or law.
• Need to differentiate between competition law,
  competition policy, and other state measures.
• Definitions are importantto clarify what is and
  what is not being talked about.

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Instruments of competition law and competition
policy

• The instruments of competition law are
  competition advocacy and five specific measures
  that relate to certain strategies of firms (see
  next slide).
• The instruments of competition policy are any
  state measure that affects the intensity of
  competition in a nations markets.
• Competition law instruments are also competition
  policy instruments, but the opposite is not true.

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Competition law and Competition policy

• Rules on inter-firm agreements (horizontal,
  vertical, and on current and future products).
• Rules on exercise of market power (individually
  or jointly).
• Rules on predatory pricing and related acts.

• Competition law.
• Barriers to entry.
• Trade policies.
• FDI policies.
• Deregulation policies.
• Price controls.
• Privatisation measures.

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Potential anti-competitive effects of corporate
practices
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Objectives of competition law and policy

• Essentially the same.
• Objectives stated in terms of intermediate
  objectives, including
• Maintenance of competitive process (or promotion
  of effective competition).
• Ensuring economic freedoms such as that to trade
  and of choice.
• Efficiency (principally dynamic efficiency).
• Underlying these intermediate objectives are
  views about the relationship between competition
  and desired goals, such as economic growth.

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Key causal links

• Greater inter-firm rivalry tends to promote short
  term (static) welfare and long term economic
  growth (through spurring innovation and
  productivity growth.)
• But there are important sectoral exceptions
  associated with
• Natural monopolies (old style telecoms).
• Network externalities (new style telecoms).
• Confidence-related spillovers (banking).

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Firms and cartel enforcement.
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Types of cartel

• Price fixing.
• Quantity setting.
• Allocating market shares.
• Bid-rigging.
• Cartels are typically secret conspiracies.
• Domestic versus cross-border in effects and in
  membership.

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Economics of cartelisation

• The incentive to cartelise raise prices further
  above marginal costs.
• Best possible outcome for the conspirators
  prices at level set by a joint monopoly.
• Overcoming the internal incentive problem
• Threats of price wars.
• Credibility of threats.
• Stiglers hypothesis.

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Sanctions for cartelisation
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Effects of cartels on prices

• Graphical evidence from extracts from Beatriz
  Bozas powerpoint presentation (circulated to
  class.)
• International vitamins cartel.

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The international vitamins cartel

• Worldwide cartel, 1989-1999.
• US Federal authorities took action in 1999.
• US fines exceeded 900 million EU fines of a
  similar magnitude.
• How large were the overcharges? For 90 countries,
  the total estimated overcharges during the 1990s
  was just under 2.75bn.

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Vitamins cartel targeted nations without active
cartel enforcement
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International cartels prosecuted since 1993

• Prevalence (at least) 39 cartels.
• Diverse membership 31 economies (including 8
  developing economies).
• Duration 24 cartels lasted at least 4 years.
• Overcharges on imports are not just the only
  adverse effect on national economies.
• Exports are reduced too.
• Technology transfer slowed down also.

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Effectiveness of national cartel enforcement

• Recall that cartels are often secret conspiracies
  that involve a written agreement between firms.
• Political will and independence of the
  competition agency.
• Nature and strength of sanctions provided by law.
• Ease of information acquisition about the cartel.
• Search powers of enforcement body.
• Hidden evidence abroad.
• Leniency programmes.

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Effectiveness of national cartel enforcement in a
global economy

• Key is to identify spillovers across borders.
• Adequacy of sanctions from a global point of
  view.
• Deterrence and multi-market contact.
• Empagran case in the USA (extra-territoriality.)
• Information sharing by competition enforcement
  agencies and rules on confidential business
  information.
• Relationship to leniency programmes.
• There are good reasons for believing that the
  deterrents to cartelisation are too weak.

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Three international initiatives on cartel
enforcement

• United Nations Conference on Trade and
  Development.
• The UN Set in 1980.
• Non-binding.
• Cover more than cartels.
• Proposals for multilateral disciplines on hard
  core cartels.
• See later in the presentation.
• OECD Recommendation on Hard Core Cartels.

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OECD Recommendation on Hard Core Cartels

• Adopted in 1998 and non-binding in nature.
• Acknowledged a common interest in prosecuting
  cartels.
• Recommends that OECD nations
• Adopt effective sanctions to deter cartels.
• Adopt enforcement procedures and institutions
  with powers adequate to detect and remedy
  hardcore cartels.
• Encouraged non-OECD nations to join the
  initiative.
• Protection of confidential business information.
• Subject to plenty of monitoring and comment.

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Implications for business

• Many policymakers are taking cartelisation much
  more seriously. Sanctions are getting tougher.
• Businesses need to establish internal procedures
  to ensure that managers are not price-fixing etc.
• Firms involved in a cartel must weigh the risks
  to them from leniency programmes. Can such firms
  be sure their cartel conspirators wont move
  first?
• When buying another firm it is important to
  carefully check whether they are involved in a
  cartel. Acquiring potentially sizeable legal
  liabilities.

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Firms and merger review regimes
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Focus on cross-border mergers and acquisitions

• Definition.
• Types
• Horizontal.
• Vertical.
• Conglomerate.
• Financing
• Cash.
• Bonds.
• Stock.

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Motivations for cross-border MA

• To enhance market power.
• To secure cost efficiencies.
• Economies of scale and scope.
• Cheapest means to enter a new market.
• Alternatives.
• Competing in global markets requires greater
  capital needs.
• Motivations imply that no clear-cut predictions
  of the effects of mergers are possible.

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Cross border MA wave of the late 1990s

• Began 1995 and peaked in 2000.
• More firms participated than in Anglo-US wave at
  the end of the 1980s.
• Reasons for the wave
• Privatisation, deregulation, fewer restrictions
  on foreign ownership.
• Cheap cost of capital to finance acquisitions and
  share swaps.
• Widespread view that global scale was needed to
  compete effectively.

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Cross border MA since 1995
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Multi-jurisdictional merger review

• Almost every major jurisdiction has a merger
  review procedure.
• Reviews differ in type
• Pre- versus post-notification.
• Mandatory versus optional.
• Reviews by sectoral regulators too.
• Example PriceWaterhouse and Coopers merger in
  1997.

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In what ways can merger reviews affect a firms
interests? Merger reviews can

• Lead to the completion of a proposed transaction
  being prevented.
• Even if a proposed transaction is allowed,
• Each reviewing competition agency may seek
  divestitures.
• Each reviewing competition agency may seek
  behavioural remedies.
• There can be a substantial time delay, legal
  expenses, and uncertainty.
• How can firms manage this risk?

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A comparison of US and EC merger review rules
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EC merger review procedure

• Pre-notification.
• Phase I preliminary investigation.
• Phase II extensive investigation.
• Statement of objections.
• Oral hearing.
• Decision by European Commission.
• Judicial review
• Court of First Instance (fast track procedure).
• European Court of Justice (slow).

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Disagreements between competition agencies over
merger reviews

• Need not be fatal to a transaction.
• Disputes between the EC and US.
• GE-Honeywell (2001).
• Boeing-McDonnell Douglas (1997).
• Role of rival firms differs across jurisdictions.
• Discussions of convergence of merger review
  techniques.
• Role of judicial review in EC and changes to
  European Commission merger reviews.

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Strategic matters raised by merger reviews

• Re-evaluating the decision to buy or merge.
• Risks associated with the review (outcomes, time
  of the most senior executives.)
• Value in waiting for divestitures.
• Re-evaluating the price paid for another firm.
• What is the firm worth after an adverse merger
  review?
• Competition expertise is needed at valuation
  stage.
• Contingency of financing.
• Skeletons in the cupboard previous
  anti-competitive acts of acquired firm or
  potential merger partner.

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Strategic matters raised by merger reviews

• Options available to fight a rivals proposed
  merger or acquisition
• Take advantage of the ability to supply
  information to the EC.
• Mobilise other rival firms.
• Tie up rival in red tape for a considerable
  period of time.
• Add to vulnerability of CEO, whose prestige will
  be hurt if the merger/acquisition fails.

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Recent international initiatives on competition
law and policy
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Relevant international fora

• UNCTADInter-govermental Group of Experts,
  capacity building.
• OECDCompetition Committee, Joint Trade-Comp
  Committee, capacity building.
• International Competition Network
  (ICN)established several working groups on
  competition advocacy, capacity building, mergers.
• WTOwhere the major action was in 2001-3.

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WTO deliberations since 1996

• Singapore Ministerial Declaration.
• Doha Development Declaration.
• Paragraph 23.
• Paragraph 24.
• Paragraph 25.
• What was to be decided in Cancun?
• Cancun decision and 15 December 2003.
• Subsequent developments and the Zeollick letter.

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The changing nature of the debate at the WTO
1996-2003

• Market Access ?Minimum Standards.
• Pre-1999 Competition policy matters were seen
  primarily in terms of their effects on market
  access.
• 1999 Main proponent of MFC (the EC) shifts
  position to advocate minimum standards of
  competition law and practice.

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Assessing proposals for an MFC approach taken
here

• Identify key actors in debate.
• Describe what is proposedand what is not being
  proposed.
• Discuss economic case for each element of
  proposed MFC.
• Discuss coherence of entire MFC.
• Describe and assess criticisms of proposed MFC.

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Proposals for a MFC

• Who are the proponents?
• What do they want?

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Proponents of a MFC

• EC.
• Canada.
• Australia.
• Japan.
• Korea.
• Switzerland.
• Note These countries did not agree on each and
  every component of a MFC.

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Opponents and skeptics of a MFC

• Malaysia (consistent opponent).
• India (skeptic and then outright opponent).
• Like Minded Group.
• Hong Kong, China (consistent opponent).
• United States (became more vocal in opposition
  over time).
• US DOJ, US FTC, and American Bar Association.

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What did the proponents want?

• A ban on hard core cartels that is enforced.
• A commitment to adhere to core principles in
  national competition law and practice.
• Provisions to foster voluntary cooperation.
• Progressive reinforcement of competition law and
  institutions in developing countries.

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What did the proponents want?

• A ban on hard core cartels that is enforced.
• A commitment to adhere to core principles in
  national competition law and practice.
• Not all the proponents wanted was hard law.

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For better or for worse, what was not being
proposed in the MFC?

• The creation of a supra-national competition
  enforcement agency.
• The harmonisation of national competition law to
  a single model.
• A ban on state-run cartels, like OPEC.
• A requirement to create a new enforcement agency.

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For better or for worse, what was not being
proposed in the MFC?

• A requirement to enact any competition law other
  than a cartel law.
• A requirement to abandon pro-development
  objectives of competition law.
• A requirement to abandon existing exemptions etc
  from national law.
• Measures to prevent the creation of national
  champions.

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For better or for worse, what was not being
proposed in the MFC?

• A requirement to enact any competition law other
  than a cartel law.
• A requirement to abandon pro-development
  objectives of competition law.
• A requirement to abandon existing exemptions,
  exclusions, etc from national law.

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What was the economic case for the MFC?

• Case for minimum standards for national cartel
  law was based on two cross-border spillovers of
  enforcement actions taken to date
• Active enforcement announcements and breaking up
  of international cartels.
• No or under-enforcement creates safe havens for
  cartels.
• Evidence.

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What was the economic case for the MFC
(continued)?

• Case for voluntary cooperation modalities best
  practices, expertise with enforcement, and (down
  the road) maybe information exchange.
• All increase likelihood of effective enforcement
  and deterrent value of national laws.

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What was the economic case for the MFC
(continued)?

• Case for core principles balance new rules on
  firm behaviour with assurances of
  non-discriminatory treatment by authorities.
• Reduces downside for investment. Evidence?
• Case for strengthening institutions in developing
  countries to meet new obligations on them and to
  reduce implementation costs.

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Coherence of proposals for a multilateral
framework
Hard core cartels
Core principles Transparency Procedural
fairness Non-discrimination
Voluntary cooperation
Technical assistance and capacity building
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Coherence of proposals for a multilateral
framework
Hard core cartels
Core principles Transparency Procedural
fairness Non-discrimination
Voluntary cooperation
Technical assistance and capacity building
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Coherence of proposals for a multilateral
framework
Hard core cartels
Core principles Transparency Procedural
fairness Non-discrimination
Voluntary cooperation
Technical assistance and capacity building
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Coherence of proposals for a multilateral
framework
Hard core cartels
Core principles Transparency Procedural
fairness Non-discrimination
Voluntary cooperation
Technical assistance and capacity building
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Coherence of proposals for a multilateral
framework
Hard core cartels
Core principles Transparency Procedural
fairness Non-discrimination
Voluntary cooperation
Technical assistance and capacity building
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What case was made against the MFC?

• Concerns about scope of proposed measures
• Not rigorous enough measures against
  international cartels (Thailand).
• Should include other anti-competitive practices
  (Kuwait, UNCTAD).
• Should be focused on hard core cartels only
  (India?).

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What case was made against the MFC?

• Concerns about effects of proposed measures.
• Constrain policy space and industrial policy
  (Many developing countries.)
• Implementation costs (DC plus World Bank).
• Concerns about forum (the WTO).
• Issue linkage and who sits at the table (USA).
• Dispute settlement (USA and DCs).
• Scope of negotiations (DCs).

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Concerns about scope

• Key issue what is the motive for international
  collective action?
• Cross-border spillovers
• Identification.
• Solution.
• Binding disciplines?
• Political economyis there an active supporter in
  each major jurisdiction?

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Concerns about effects

• On industrial policy
• To what extent has constraining competition and
  discrimination been central to industrial policy
  in DCs?
• Optimality of interventions.
• On implementation costs
• Identification and estimates of costs and
  benefits.

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Concerns about forum (WTO)

• Issue linkage
• Complementarities between trade and competition
  policy.
• Purity of competition law enforcement.
• Dispute settlement expertise and commitment
  problem.
• Negotiations commitment problem.
• Generic nature of most of these concerns.

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Fallout since Cancun retrenchment across many
fora

• WTO future of Working Group
• Soft-law approaches?
• Plurilateral negotiations?
• OECD future of Joint Committee.
• UNCTAD UNCTAD XI and future of capacity
  building.
• FTAA prospects for competition law chapter.

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Summary What can we learn about international
initiatives on competition law and policy?

• There was an economic case for the limited MFC
  that was proposed.
• The coherent criticisms focused more on the WTO
  as a forum.
• Failure to launch negotiations at Cancun is
  having considerable effects on international
  discussions on competition law and policy.

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Closing remarks.

• Thank you for listening.
• Please send any comments about these lectures and
  the reading materials to me at sevenett_at_mindspring
  .com
• All comments are gratefully received.