Topic 4 Controversies and regulatory regimes

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Topic 4 Controversies and regulatory regimes

• Globalisation and competition policies
• History of competition policy
• Dilemma of trade and competition policies
• Competition policy in the EU
• Policies for the future
• Essay 10 Globalisation and competition policies

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Globalisation and competition policies

• Readings
• BW, pp. 267-271.
• Scherer, F. M. (1994), Competition Policies for
  an Integrated World Economy, The Brookings
  Institution, Chapters 1 and 4.

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1. History of competition policy

• There were early attempts to have a transactional
  policy dealing some issues of competition
• In 1953 in the UN, 6 DCs and 4 LDCs produced a UN
  Draft Convention on restrictive competitive
  practices. It was not ratified by the US and
  others. Further attempts followed, within the UN
  and OECD.
• Marshall Plan for Europe (OECD) contained already
  provisions for coordinating competition policy.
• Some bilateral agreements (US with others)
  contained provisions for mutual consultation on
  restrictive business practices.
• Some bilateral agreements focus on communication
  concerning, and coordination of, enforcement
  actions affecting subjects of both parties. In
  1991, US and the EU signed a cooperation
  agreement.

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1. History of competition policy in the WTO

• Uruguay Round the work on competition policy
  issues ..originally took the form of specific
  responses to specific trade policy issues, rather
  than a look at broad picture. (WTO, p. 76)
• 1996 Working Group on the Interaction between
  Trade and Competition Policy (WGTCP)  was
  established.
• Objective of the WGTCP to study various aspects
  of trade and competition, with the participation
  of all WTO Members.

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1. History of competition policy in the WTO

• Under the Doha Ministerial Declaration (2001),
  the study work within the Working Group was
  focusing on the clarification of
• - core principles, including transparency,
  non-discrimination and procedural fairness
• - provisions on hardcore cartels
• - modalities for voluntary cooperation and
• - support for progressive reinforcement of
  competition institutions in developing
  countries through capacity building.
• The Working Group is currently inactive but the
  WTO still responds to national requests for
  technical assistance in this area for the benefit
  of interested WTO Members and countries seeking
  accession to the WTO.

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1. Competition policy in some IGOs    

• Most industrialized countries have national
  competition policies and there are some IGOs with
  explicit concerns on competition.
• European Union competition policy see below.
• Asia-Pacific Economic Cooperation (APEC)
  includes Competition Policy and Deregulation
  Group
• Free Trade Areas of Americas provisions on
  Competition Policy
• International Competition Network (ICN)
• OECD, includes entities concerned with,
• Trade, investment and competition
• Committee on Competition, Law and Policy
• Global Forum on Competition
• United Nations Conference on Trade and
  Development (UNCTAD)
• There are also some NGOs

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2. Dilemma of trade and competition policies

• Trade policy and competition policy have similar
  goals increase economic welfare and greater
  efficiency. But,
• Trade policy seeks to avoid strategic behaviour
  and secure cooperative behaviour among trading
  countries
• Competition policy promote non-cooperative
  behaviour among firms.
• This is because trade integration is good but
  at the same time increasing competition between
  firms, gives them an incentive for collusion to
  avoid painful restructuring.

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2. Dilemma of trade and competition policies

• The prisoners dilemma illustrates the incentive
  for collusion when firms and countries play
  strategically, Scherer, p.4-6.
• Slide 9 repeats the problem discussed in Annex
  2A before.
• Ass/ 2 countries in the world, A and B and only 2
  policy choices, free trade and protection.
  Governments know payoff matrix with certainty.
• Table shows that,
• Each government chooses protection if can take
  the other government choice as given.
• But if the two governments cooperate they choose
  free trade.
• Hence, both gain if they cooperate rather than
  act individually.

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2. Dilemma of trade and competition policies

• Trade policy - warfare payoff matrix

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2. Dilemma of trade and competition policies

• Slide 11 firms like countries find themselves in
  a prisoners dilemma.
• Ass/ one product is sold by 2 firms, X and Y,
  each facing only two strategies colluding,
  charging high prices or chisel undercutting the
  price of rival. Firms know payoff matrix with
  certainty.
• Table shows that,
• Each firm chooses to compete (cut prices) if it
  can take the other firm choice as given.
• But if the two firms cooperate they will avoid
  larger losses (or have higher profits) by
  collusion.
• Hence, both gain if they collude rather than act
  individually.

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2. Dilemma of trade and competition policies

• Competition policy - firms X and Y rivalry

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2. Dilemma of trade and competition policies

• Scherer, 1994, Chapter 4 surveys the experience
  of several countries regarding the implementation
  of competition policy. You should read at least
  the US early experience.
• So far, the only transactional experience is that
  of the EU. The Treaty of Rome prohibit
  anticompetitive behaviour. Details can be seen
  in BW, 2006, pp. 268, 269.
• We summarize them here.

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3. Competition Policy in the EU

• Exclusive competency of EU Commission controls
  whenever firms of different countries are
  involved. AdC exists everywhere and rules are the
  same as those of the EU as a whole.
• Justification for putting competition policy at
  the EU level.
• Spillovers (negative effects of one Members
  subsidies on other Members industry).
• Need belief in fair play if integration is to
  maintain its political support.
• Witness recent protectionist tendency of Member
  States to prevent foreign takeovers.

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3. EU Competition Policy aims

• To prevent anti-competitive behavior, EU policy
  focuses on two main axes
• Antitrust and cartels. The Commission tries
• Art. 81 (former 85) - to eliminate behaviours
  that restrict competition (e.g. price-fixing
  arrangements and cartels),
• Art. 82 (former 86) - to eliminate abusive
  behaviour by firms that have a dominant
  position.
• Merger control. The Commission seeks
• Regulation 139/2004 (consolidation of previous
  regulations)
• to block mergers that would create firms that
  would dominate the market.

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Example vitamin cartel in the EU

• In 2001, Commission fined 8 companies for
  cartelisation
• vitamins A, E, B1, B2, B5, B6, C, D3, Biotin,
  Folic acid, Beta Carotene and carotinoids
• The European vitamins market is worth almost a
  billion euros a year.
• The firms fixed prices, allocated sales quotas,
  agreed on and implemented price increases and
  issued price announcements according to agreed
  procedures.
• They set up a mechanism to monitor and enforce
  their agreements and participated in regular
  meetings to implement their plans.
• Formal structure with senior managers to ensure
  the functioning of the cartels the exchange of
  sales values, volumes of sales and pricing
  information on a quarterly or monthly basis at
  regular meetings, and the preparation, agreement
  and implementation and monitoring of an annual
  "budget" followed by the adjustment of actual
  sales achieved so as to comply with the quotas
  allocated.
• Hoffman-La Roche of Switzerland (cartel
  ringleader) received the largest fine (462m
  euros) BASF and Merck (Germany), Aventis SA
  (France), Solvay Pharmaceuticals (the
  Netherlands), Daiichi Pharmaceutical, Esai and
  Takeda Chemical Industries (Japan).
• Source BW (2006)

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3. Exclusive territories in the EU

• More common anti-competitive practice is
  exclusive territories.
• Nintendo example high prices in Germany vs UK.
• Germanys inelastic demand meant Nintendo wanted
  to charge a higher price than in UK.
• Normally Single Market limits this sort of price
  discrimination (arbitrage by firms).
• Nintendo implemented a system that prevented
  arbitrage within the EU (illegal).
• European Commission fined Nintendo and the 7
  distributors 168 million euros.

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4. Policies for the future?

• Scherer (1994) introduced several proposals for
  the WTO to deal with the effects on trade of
  anti-competitive behaviour that so far, were not
  agreed upon.
• Sir Leon Britton (EC Competition Commissioner,
  1992) was right when he stated an international
  body with powers to seek out and destroy cartels
  may come one day, but the international community
  is clearly not ready to contemplate this
  possibility yet., p. 91.