3.Competition Policy

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3.Competition Policy

• Carmo Seabra, Spring 2007

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3. Competition Policy

• Summary
• 3.1. Competition Policy in the EU
• .Single dominance abuse of market power (Art 82)
• .Colective Dominance (Art 81) collusion mergers
• .Leveraged Dominance
• .State Aids (Art s87-89)
• .Mergers
• 3.2. Competition Policy in Portugal
• 3.3. Competition Issues

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3. Competition issues

• 3.3. Competition Issues
• 3.3.1. Identification of the relevant market
• 3.3.2. Measures of Market Power Market shares
  Lerner Indices Critical shares HHI
• 3.3.3. Competitive problems
• Horizontal coordination or collusion
• Horizontal mergers unilateral and coordinated
  effects
• Vertical integration and vertical restrictions
• Predation Price discrimination Non-price
  monopolisation and other abusive practices

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3. Competition issues

• Predation margin squeeze tests
• Price discrimination
• Non-price monopolisation and other abusive
  practices Stategic investment Bundling and
  tying Incompatibility refusal to supply
  Raising rivals costs

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3.1.Competition Policy in the EU

• Most European countries did not have a tradition
  of enforcing competition with anri-trust laws
  hence, in most countries competition law and
  policy has been stongly influenced by the EU
  competition policy.
• According to the European Commission The first
  objective of competition policy is the
  maintenance of competitive markets. Competition
  policy serves as an instrument to encourage
  industrial efficiency, the optimal allocation of
  resources, technical progress and the flexibility
  to adjust to a changing environment ...

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3.1.Competition Policy in the EU

• Objectives of European competition policy
• Promotion of a level playing field (competitive
  conditions)
• Protection of consumers
• Maximization of consumers surplus
• The basic principle is a de minimis approach the
  European Commission intervenes only once certain
  thresholds, in terms of the dimension of the
  undertakings involved or of the size of the
  operations, are attained below those limits
  competition policy is a competence of national
  authorities and courts.

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3.1.Competition Policy in the EU

• Competition Policy on the Treaty of Paris
• In the Treaty of Paris, which in 1951 created the
  European Coal and Steel Community, there were
  some pro-competitive measures the treaty
  prohibited trade barriers as well as price
  discrimination and other practices capable of
  distorting competition
• Arts 65 and 66 of the Treaty of Paris led to arts
  81 and 82 of the Treaty of Amsterdam, almost
  literally.
• The Treaty of Paris also dealt with mergers and
  concentrations, an issue that was not
  contemplated in the Treaty of Rome

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3.1.Competition Policy in the EU

• Present EC Competition Law includes
• Arts 81 to 89 of the Treaty of the EC, which
  deal with behavioural competitive issues,
• Art 81 concerns collusive behaviour or joint
  dominance
• Art 82 sanctions abuse of dominant position or
  single dominance
• Art 87 concerns state aids
• Arts 83 to 85 and 87-88 complete the
  pro-competitive dispositions.
• Mergers Guideline, which adresses structural
  competitive problems, were issued only in 1989,
  (Regulation 4064/89 )and reviewed in 2004 with
  the publication of Council Regulation (EC) No
  139/2004, of 20 January 2004, on the control of
  concentrations between undertakings

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3.1.Competition Policy in the EU

• Article 81(1) (former article 85)
• prohibits All agreements between undertakings,
  decisions by associations of undertakings and
  concerted practices which may affect trade
  between Member States and which have as their
  objective or effect the prevention, restriction
  or distortion of competition within the common
  market ()
• Agreements need not be written or formal to be
  prohibited tacit collusion is also forbidden

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3.1.Competition Policy in the EU

• The concept of undertaking, (supplier or buyer)
  concerns connected firms. (Regulation 2790/99,
  art 11).
• Firms are considered connected if one of them
• Has more than 50 of the votes on the other
• Has the power to designate more than 50 of the
  board
• Has the power to conduct the other

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3.1.Competition Policy in the EU

• Article 81
• This article covers both horizontal and vertical
  agreements
• Economic rationale and consequences of these
  different agreements are quite distinct vertical
  agreement will often enhance efficiency.
• Regulation 2790/1999 - set a block exemption for
  vertical restraints (time limited), subject to a
  market share criterion (30 of the suppliers or
  buyers relevant market) and to a blacklist of
  forbidden practices.

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3.1.Competition Policy in the EU

• Article 81
• On vertical agreements, the practices that may
  have anti-competitive effects are
• resale price maintenance,
• territorial restraints
• exclusive supply
• On horizontal practices, it covers both explicit
  and implicit (tacit) agreements
• The difficult problem with the application of
  art 81 is to distinguish tacit agreements from
  parallel behaviour (natural, independent,
  decisions). Example the evolution of prices of
  mobile operators

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3.1.Competition Policy in the EU

• Article 81
• A difficult problem faced by competition policy
  is that, when the number of suppliers in a
  market is small, independent behaviour of
  producers may lead an oligopoly market to
  outcomes that closely approximate the results of
  collusion. Hence, collusion even if it exists,
  may be very difficult to prove.
• Hence competition policy towards mergers is very
  important. The increased profitability associated
  with a merger must be proved to be due to
  increased efficiency, and not to increased market
  power

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3.1.Competition Policy in the EU

• Article 81
• Some sectors have been given exemptions from art
  81 agriculture, defence and transports
• Since 2004 there is a directly applicable
  exception system the prior authorization on
  agreements over research and development was
  replaced by an ex-post control.
• National Competition Authorities and Judges can
  also give exemptions under art 81(3)

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3.1.Competition Policy in the EU

• Article 82
• Concerns single dominance which has been
  interpreted as meaning a considerable market
  power
• 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 in so far as
  it may affect trade between Member States.
• examples include excess pricing, restricting
  output, price discrimination, predatory pricing,
  market foreclosure, tying (variable proportions),
  bunddling (fixed proportions) etc
• Notice that a dominant position must be proved to
  exist for such practices to be forbidden

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3.1.Competition Policy in the EU

• Article 82
• The dominant position () relates to 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
• Article 82 does not prohibit dominant positions
  per se, but only its abuse
• It does not state what is a dominant position
  the exact content of the concept has been stated
  on the positions of Competition Authorities and
  courts

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3.1.Competition Policy in the EU

• Article 82
• In economic terms, the notion of dominant
  position cincides with the notion of market power
• In quantitative terms, legal practice varies
  across countries, but shows that dominance is
  usually accepted if a firm has 40 of market
  share. Market shares lower than 25 are
  unanimously considered as compatible with
  competition, and between these two limits it must
  be investigated
• To establish dominance, a careful identification
  of the relevant product and geographic markets is
  required

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3.1.Competition Policy in the EU

• Article 82
• The abuse of dominant position, was chracterized,
  in the Hoffman - La Roche case as a
  behaviour which, through recourse to methods
  different from those which condition normal
  competition (...) has the effect of hindering the
  maintenance of the degree of competition still
  existing in the market or the growth of that
  competition

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3.1.Competition Policy in the EU

• Council Regulation (EC) No 1/2003 deals with the
  application of articles 81 and 82
• abolishes the practice of notifying vertical
  business agreements to the Commission
• Reverses the onus of proof, and clarifies the
  articulation between national and community
  competition authorities and courts
• The new rules came into force on the 1 st of May
  2004

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3.1.Competition Policy in the EU Mergers

• Regulation of Mergers
• The regulation of mergers intends to prevent
  harmful conduct of firms by limiting the market
  structure that may be in its origin
• Before the Mergers Regulation 4064/89 was issued,
  mergers were dealt with art 81
• The basic principle is A concentration which
  creates or strengthens a dominant position as a
  result of which effective competition would be
  significantly impeded in the Common Market or in
  a substantial part of it shall be declared
  incompatible with the Common Market

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3.1.Competition Policy in the EU Mergers

• Regulation of Mergers
• Mergers must be authorized prior to their
  occurrence. This is an ex-ante control the
  purpose is to avoid the potentially high costs
  of having the firms to break-up later, in case
  an ex-post control led to the desapproval of the
  operation. In this respect, competition policy
  looks like regulation
• Mergers above a certain threshold must be
  notified, and reviewed by the European
  Commission,
• The Eupean Commission has a Merger Task Force,
  whose task is to analyse mergers
• The Commission may either allow the merger
  operation, prohibit it, or impose conditions (the
  so-called remedies) for a yes.

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3.1.Competition Policy in the EU Mergers

• Regulation of Mergers
• In the past several different decisions taken by
  the Commission have been later reversed in
  Courts. Hence the process to analyse mergers has
  been reviewed recently.
• In 2001 a Green Paper on the Review of this issue
  was issued, COM(2001) 745/6 - 11.12.2001
• The process culminated with the publication of
  Council Regulation (EC) No 139/2004, of 20
  January 2004, on the control of concentrations
  between undertakings

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3.1.Competition Policy in the EU Mergers

• Regulation of Mergers
• Regulation (EC) No 139/2004
• It applies to significant structural changes,
  whose impact goes beyond the national borders of
  any member state, that is, have a community
  dimension.
• The basic principle is one-stop shop system
  (multiple notifications increase uncertainty,
  effort and costs and may lead to conflicting
  assessments).
• This Regulation will be revised by the Council by
  1 July 2009

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3.1.Competition Policy in the EU Mergers

• Regulation of Mergers
• Regulation (EC) No 139/2004
• it aims at creating more "checks and balances" in
  the system
• it sets higher standards of proof for competition
  authorities
• It sets processes of hearing firms along the
  process
• According to it the European Commission
  intervenes when the aggregate turnover of the
  undertakings involved on the operation exceed
  certain thresholds, and independently of whether
  their headquarter is in a Community country

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3.1.Competition Policy in the EU Mergers

• Regulation of Mergers Regulation (EC) No
  139/2004
• The condition for an operation to fall under
  European commission jurisdiction are the
  following
• (a) the combined worldwide turnover of all firms
  involved is more than 2500 million
• (b) in each of at least 3 countries of EU, the
  combined turnover of all firms is more than 100
  million
• (c ) in each of at least 3 countries , the
  turnover of each of at least two firms is more
  than 25 million each
• (d) the EU-wide turnover of each of at least
  two of these firms exceeeds 100 million
• Unless 2/3 of the turnover of each firm occurs
  in a single country (then the national authority
  decides)

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3.1.Competition Policy in the EU Mergers

• The analysis of the Mergers Task Force is
  conducted in two phases, with strict time limits
• A screening phase 4 weeks (Y or doubts)
• An in-depth investigation that results in Y, N, Y
  but,
• Concentration occurs where there is a change of
  control, ie the acquisition, whether by purchase
  of securities or assets, by contract or by any
  other means, of direct or indirect control of the
  whole or parts of one or more undertakings (art
  3)
• Control means the capacity to exercise decisive
  influence on an undertaking
• Creation of joint-ventures constitute a
  concentration

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3.1.Competition Policy in the EU Mergers

• Notice that
• the threshold for intervention by the Commission
  are set in absolute terms and not in shares
  difficulty of measuring the dimension of the
  relevant markets in world terms
• Concentration equals acquisition of capacity to
  control an undertaking it does not require that
  an actual acquisition takes place
• control is not necessarily implied by an
  acquisition at a moment in time, Lafarge bought
  Cimpor but did not acquire the correspondent
  voting rights...

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3.1.Competition Policy in the EU Mergers

• Remember the operation of acquisition of PT by
  Sonae SGPS what are the limits of the parties
  involved? Is it a national or a community
  operation?
• Buyer everything under the same control
• Seller only the object of acquisition
• Example the acquisition of PT SGPS by Sonae SGPS
• Sonae.com is held by Sonae, which in turn belongs
  (70) to a holding held by BA. The aggregate
  turnover of all firms held by this holding must
  be computed
• On the sellers side PT SGPS has no single
  holder, the largest owner being Telefonica, with
  9,83. Hence only the turnover of PT SGPS is
  relevant

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3.1.Competition Policy in the EU Other
Provisions of the EC Treaty

• Arts 86, 87 and 88 of the Treaty deal with
  actions of Member Sates towards the business
  sector
• Art 86 states that EC Competition Policy applies
  to public enterprises and to private enterprises
  that are given specific missions by a Member
  State
• Art 87(1) prohibits state aid to business, if it
  distorts competition. There are exceptions stated
  in art 87(3), for aid that promotes regional
  development or other specified types of
  development

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3.1.Enforcment of EC Competition Policy

• EC Competition Policy is enforced by the
  Commission
• Violations of art 81 and 82 may lead to fines up
  to 10 of annual turnover as well as order to
  stop the anticompetitive behaviour
• Decisions of the European Commission may be
  appealed to the Court of First Instance and to
  the European Court of Justice
• Commissionss Leniency Notice members of
  collusive agreements may have their fines reduced
  from 10 to 100, depending on the nature and
  usefulness of their cooperation with the
  Commission

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3.1.EU Competition Policy Summary

• Single dominance abuse of market power (art 82)
• Colective Dominance
• collusion (Article 81)
• Mergers (Mergers Guidelines Regulation (EC) No
  139/2004 )
• Leveraged Dominance
• State Aids (Art 87-89)

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3.1.EU Competition Policy Summary

• The purpose of Competition Policy it to promote
  the conditions for effective competition to hold
• Deviations to effective competition can be due to
  several factors
• horizontal restrictions - cartels
• vertical restrictions (contracts)
• mergers (horizontal and vertical)
• Barriers to entry
• High switching costs
• Bundling and tying

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3.2.Competition policy in Portugal

• Like most European countries, Portugal does not
  have a tradition of enforcment of competition
  policy
• In fact, under the corporative regime (before
  the revolution of 1974), the concern of economic
  authorities was the potential for excessive
  competition instead of the lack of sufficient
  competition
• Hence, between 1926 and 1974 industries were
  organized around Guilds (corporações), whose aim
  was the promotion of cooperation (instead of
  competition) between members

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3.2.Competition policy in Portugal

• This objective was clearly established on the
  Constitution of 1933. In fact, art 34 said that
• The State promotes the development and formation
  of the Corporative Economy. The Corporative
  Economy seeks to avoid that its members engage in
  undisciplined competition, which is contrary to
  societys and their own objectives. Instead, it
  aims that they cooperate as members of the same
  community

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3.2.Competition policy in Portugal

• After the Revolution of April 1974, this
  generalyzed mistrust on the capacity of market
  mechanisms to achieve efficiency and equity
  became even stronger
• 1974 Revolution It is the State responsibility
  to eliminate and prevent the formation of private
  monopolies through nationalization and other
  means, as well as to repress the abuses of
  economic power and all practices which are
  detrimental to the public interest
• Accordingly, a vague of nationalizations took
  place, affecting a large number of markets and
  extensive price controls were set Government
  started to directly control production and
  distribution of most goods and services

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3.2.Competition policy in Portugal

• In particular, the financial system was
  nationalized banks and insurance companies
  became state-owned and controlled, (and through
  them a very large share of the production units).
• The lack of confidence on the potential of
  competition to lead to good outcomes is very
  pervasive in the portuguese economy fot
  instance, business bankrupty has never been seen
  as a natural outcome of markets. This feeling
  crosses the whole society and political spectrum

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3.2.Competition policy in Portugal

• Instead of market mechanisms, most economic
  agents still consider that any difficulty should
  be solved by Governmentt intervention (usually,
  restricting competition or subsidizing
  production)
• And, even now, the focus of economic authorities
  and opinion-makers remains on the improvement of
  competitiveness rather than on creating
  conditions for or on enforcing competition
• The rationale for this position is the idea that
  Portugal is too small for firms to be able to
  exercise market power

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3.2.Competition policy in Portugal

• With the integration in the EEC, competition
  policy started to adapt
• in 1983, the first competition act, Decree-Law
  422/83, was approved
• This followed closely the EC competition rules
• This law was firstly revised in 1993, by Decree
  Law 371/93
• In 2003, Lei da Concorrência, nº 18/2003 de 11 de
  Junho was issued and the new Competition
  Authority was created
• This Competition Authority is intended to be
  independant from both the operators and the
  government several institutional mechanisms
  pursue this aim

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3.2.Competition policy in Portugal

• examples of institutional details aimed at
  promoting the effective independence of the
  authority
• the board is appointed by the government, but
  cannot be changed (unless under very extreme
  situations, like illness)
• the period of the mandate does not coincide with
  the government's life
• Members of the board cannot be reappointed
• When leaving the authority, members of the board
  are prohibited from working to any undertakings
  with which they were involved while in charge
• The board is accountable before the Parliement
• The Competition Authority has both investigation
  and decision powers

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3.2.Competition Policy in Portugal

• Objectives
• Enforce effective competition on the market
• Guarantee equal opportunities for market players
• The law states that Consumers should receive a
  fair share of gains pointing to consumers
  welfare as the welfare standard
• However, it says that economic balance should
  be pursued, suggesting that firms are to be taken
  in consideration
• The objectives stated by the Competition
  authority are
• the efficient working of markets
• the promotion of a high level of technological
  progress
• the pursuit of the highest benefits for
  consumers

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3.2.Competition policy in Portugal

• Activities prohibited under this legal framework
  are
• Agreements between firms
• Concerted practices
• Abuses of dominant position
• Abuse of economic dependence
• State aid
• Competition law is to be applied to all sectors
  of economic activity, and to state-owned
  companies and concessionaires of public services,
  too
• The analysis of mergers follows closely the
  European framework there are two phases, first
  screening and second in-depth investigation

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3.2.Competition policy in Portugal

• Sanctions have increased substantially and can
  now amount to 10 of annual turnover. However,
  criminal law remains non-applicable (the only
  exception in the EU is Ireland)
• delays in implementing decisions by the authority
  can be sanctioned up to 5 of daily turnover, and
  for the number of days in delay
• A set of transparency procedures were
  introduced, like the obligation of the
  Competition Authority to announce its decisions
  in newspapers, whenever deemed relevant
• The decisions of the authority may be appealed to
  Tribunal do Comércio and to the Ministry (a
  specificity of portuguese law).

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3.2.Competition Policy in Portugal

• This capacity has been recently used by Brisa,
  who appealed to the Ministry for a reversal of a
  decision of the Competition Authority and saw its
  pretention deferred.
• like in art 81 of the Treaty, agreements between
  undertakings that prevent, distort or restrict
  competition in the national market or part of it
  are prohibited by the Competition Law
• as no formal contract is needed for an agreement
  to be found, agreements and concerted practices
  are equivalent
• Notice that agreements must be distinguished from
  parallel behaviour

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3.2.Competition Policy in Portugal

• Price fixing is strictly forbidden
• Price fixing covers
• explicit cartels, (10 milling firms were
  condemned to pay 9 million euros on 2006)
• uniform prices adopted by associations,
  (Associação dos Agentes de Navegação, an
  association that joined 80 of the suppliers, was
  considered guilty of fixing maximum prices,
  distorting competition with that practice. The
  Associação was fined in 196 thousand euros in
  2006)

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3.2.Competition Policy in Portugal

• collusive bidding in public contracts (5 firms of
  the pharmaceutical industry werer prooved guilty
  of setting common prices on public bidding for a
  product in 22 hospitals. They were fined in 16
  millhion euros. Two of the condemned firms
  benefited from leniency measures)
• Price information agreements conducive to common
  price setting (but information exchanges are a
  delicate matter) tho professional organizations,
  the Ordem dos Dentistas and the Ordem dos
  Veterinários were fined because of setting
  minimum prices (on the web page...)

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3.2.Competition policy in Portugal

• From an economic point of view, agreements
  (explicit collusion and concerted practices) and
  tacit collusion are the same
• Other types of agreements
• Geographic division of markets (cements...)
• Product division of markets (in public
  bidding...)
• Output restrictions (to make price rise)
• Other prohibited anti competitive practices are
  vertical restraints in April 2006 Nestlé was
  comdemned to pay a fine of 1 Million euros due to
  open-ended (in time) exclusive contracts with
  cafés, restaurants and hotels

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3.2.Competition policy in Portugal

• Notice that information exchange is not an
  anticompetitive conduct in itself. In fact, in
  general it may be welfare improving, increasing
  information of consumers and promoting choice
  thus increasing competition, making the market
  transparent.
• The problem is that it may facilitate collusion
  among firms, harming competition
• The details of the information exchange must be
  analysed in order to find out whether it intends
  to prevent, distort or restrict competition in
  the market

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3.2.Mergers

• Only large transactions are covered by the
  Competition Law
• Large means either in market share (30) or
  size (above a certain threshold - 150 million
  euros, and at least two firms have turnover above
  2 million euros)
• No explicit efficiency defence, ( international
  competitiveness promotion?)
• Both allocative efficiency gains (static
  efficiency) and dynamic efficiency gains (faster
  innovation) may be considered
• A concentration does not require an acquisition