EU competition policy

1
EU competition policy

• Lecture objectives
• To explore the justification for competition
  policy, and especially EU competition policy
• To examine the powers of the EU to control the
  exercise of market power by firms
• To examine the powers of the EU to discipline
  government behaviour which might distort
  competitive advantage
• To summarise views on the implementation of EU
  competition policy to date.

2
Overview of EU competition policy

• EU competition policy has five main strands
• control of restrictive practices (Art 81, prev
  85)
• prevention of abuse of dominant position (Art 82,
  prev 86)
• merger control (1990 Merger Regulation)
• control of state aids to enterprises (Art. 87
  88, prev 92 93)
• state treatment of public enterprises and
  companies with exclusive rights (Art 86, prev 90)

3
What is the justification for competition policy
towards firms?

• Competition policy designed to promote market
  competition as the best way to guarantee
  efficient outcomes
• Based on static view of the costs of monopoly
• though costs could be outweighed by efficiency
  gains due to scale economies even in static
  framework
• Monopoly encourages X-inefficiency and monopoly
  rents
• but may facilitate innovation and technical
  progress
• Dynamic perspective penalising efficient
  winners in competition might undermine firms
  willingness to compete

4
Approaches to competition policy

• Ambiguities about the economic effects of large
  firm size lead to alternative approaches to
  competition policy
• Laissez faire view the market will ultimately
  discipline abuse of dominant power, so no need
  for policy
• Rules-based approach, as in the US - while
  advantage is certainty for firms of the legal
  environment, drawback is that it allows no
  defence of economic efficiency
• Discretionary case by case cost-benefit approach
  - leaves maximum flexibility but not easy in
  practice to assess the costs and benefits

5
Challenges for EU competition policy

• To protect consumers from anti-competitive
  practices
• To promote the working of the single market
• To encourage competitiveness and innovation in EU
  companies
• To integrate new EU members into the single
  market
• To develop international rules to cope with the
  globalisation of business
• To be accountable under due process of law

6
Art. 81 (ex 85) Anti-collusion

• Prohibits restrictive practices (price fixing,
  market sharing, restrictions on supply etc.) ...
• but with block exemptions for certain
  categories of agreement (exclusive distribution
  (cars), exclusive purchasing (petrol stations,
  pubs) or on a case by case basis if agreement
  contributes to the production or distribution of
  product or to technical or economic progress.
• Criterion is not whether or not a formal
  agreement exists, but whether the practice of
  firms had the effect of limiting competition
  leaving them open to the charge of operating a
  concerted practice
• An efficiency defence can be offered in favour
  of a restrictive agreement
• Regulation 17 under which Commission reviews
  agreements between firms for their
  anti-competitive effects and can provide a
  letter of comfort.

7
Art. 82 (ex 86) Abuse of a dominant position

• Bans the abuse of a dominant position (loyalty
  rebates, price discrimination, refusal to supply)
  designed to keep competitors out of the market.
• Both the relevant market and the nature of
  dominance have to be defined, while the fact of
  abuse also has to be established.
• No efficiency defence, reasonable given that
  abusive behaviour has negative or at best neutral
  effects.
• Art 86, unlike the US, provides no legal basis to
  divest monopolies. The EU may condemn abuse, and
  fine, but it cannot break up or regulate a
  dominant offender.

8
Merger control

• No rules included in Rome Treaty, attitude
  towards mergers prior to 1990 Mergers Regulation
  based on general powers under Arts 81 and 82
• Continental Can case established that if a merger
  was to lead to the creation of a dominant
  position and a consequent restriction of
  competition, it could be classed as an abuse
  under Art 82. Court accepted the principle
  although it dismissed the Commission case on
  appeal on grounds that it had not demonstrated
  that competition had been sufficiently
  restricted.
• Philip Morris case demonstrated that Art 81 could
  be applied where a firm acquired an influential
  shareholding in a competitor
• Powers perceived as weak in the light of the
  merger boom initiated by the single market
• Mergers per se can be good news for consumers but
  Commission seeks to block mergers that, by
  creating or strengthening a dominant position,
  impede effective competition. Hence system of
  merger approval.

9
The 1990 Mergers Regulation

• Mergers Regulation
• applies only to mergers with a Community
  dimension, with threshold criteria of size,
  impact on the EU market and EU competence
• Implementation as a two stage process.
• In Phase 1, Commission determines whether there
  are any serious doubts whether the merger will
  lead to creation or strengthening of a dominant
  position.
• If Phase 2, a four month period to decide if a
  merger should be permitted to proceed or not.
• Virtually all mergers have been approved, though
  in some cases after negotiation and amendment
• Recent changes
• Thresholds reduced where mergers involve three or
  more member states supported by business as a
  one stop shop principle

10
State aids and the internal market

• Articles 87 and 88 do not ban state aid per se,
  but target measures that give an unfair advantage
  to some firms and so distort competition within
  the EU.
• Any aid granted by a MS which distorts or
  threatens to distort competition by favouring
  certain undertakings or the production of certain
  goods is incompatible with a common market where
  it affects trade.
• But certain aids are permitted, e.g. for
  promotion of development in poorer regions, or
  areas where there has been economic disruption,
  or for sectoral development.

11
State aids

• MS must notify Commission of aids or any plan to
  provide aid. Commission reviews and can prohibit
  or modify aid.
• in practice, major exemptions have been allowed
  for years in state aids which heavily distort
  competition - equivalent to over 1 per cent of EU
  GDP.
• state aids are politicised in several ways and
  this reduces the effectiveness of the
  surveillance in the EU regime.
• Commission state aid scoreboard
• http//europa.eu.int/comm/competition/state_aid/sc
  oreboard/

12
Public ownership and exclusive rights

• Treaty is neutral on the principle of ownership,
  however, a MS cannot use a public enterprise to
  achieve public policy objectives in a way which
  distorts competition.
• Commission has sought to define more clearly how
  governments fund public enterprises the
  rational investor principle.
• Problem of exclusive rights, where network
  industries or utilities are given monopoly status
  in return for observing certain principle of
  conduct (universal service, uniform pricing). By
  definition, these must be regional or national
  monopolies and so violate principle of free
  movement in the internal market.

13
Evaluation and summary of EU competition policy
(1)

• Competition policy a balancing act -
• between pursuing competition and encouraging
  competitiveness of EU firms, between controlling
  state aids and continued provision of basic
  services
• Competition policy can easily stray into the area
  of industrial policy
• 1999 White Paper on Modernisation of Competition
  Rules
• Regulation 17 based on a centralised
  notification and authorisation procedure which
  diverts too much Commission resources into
  handling notifications of probably exempt
  business agreements and too few resources into
  real enforcement and cartel-busting
• proposed replacement (for Art 81 and 82) by a
  directly applicable exemption system, under which
  the national competition authorities and courts
  would have a closer involvement in detecting and
  punishing infringements of EU competition rules

14
Evaluation and summary of EU competition policy
(2)

• Business opposition to new proposals based on
  fears that it would lead to inconsistent
  interpretation of competition law in different
  member states
• EU Commission both judge and jury in its
  determination of anti-competitive behaviour
• Enforcement of rules on state aids still weak and
  politically sensitive