Competition Policy Between Competition Policy Between the United States and the United States and

European UnionEuropean Union

By Chad Carta, Colin Mead, Eric Luoma, By Chad Carta, Colin Mead, Eric Luoma, Pablo Vives, Bob Grannatt and Kim Pablo Vives, Bob Grannatt and Kim

WeedenWeeden

Legislation and Competition Legislation and Competition BackgroundBackground

Goal of governments Goal of governments has always focused on has always focused on competitioncompetition

Europe originally Europe originally believed in an believed in an economic-nationalist economic-nationalist approach approach (mercantilism)(mercantilism)

In 19In 19thth century, century, governments evolved governments evolved to endorse free tradeto endorse free trade

Important Competition Important Competition LegislationLegislation

The Sherman Antitrust Act, 1890The Sherman Antitrust Act, 1890

The Clayton Act, 1914The Clayton Act, 1914

The Federal Trade Commission Act, The Federal Trade Commission Act, 1914 1914

Goals of EU Competition Goals of EU Competition LegislationLegislation

Regulate natural monopoliesRegulate natural monopolies Suppress the emergence of new Suppress the emergence of new

monopolies by regulating mergers monopolies by regulating mergers and acquisitionsand acquisitions

Dissuade collusive and Dissuade collusive and anticompetitive behavioranticompetitive behavior

Promote integration within the market Promote integration within the market

Vertical and Horizontal Vertical and Horizontal CooperationCooperation

Vertical Cooperation Vertical Cooperation occurs when anti-competitive

agreements are made between manufactures and distributors

Horizontal CooperationHorizontal Cooperation prevents economic integration within

industries

Merger Control within EUMerger Control within EU

To prevent collective dominanceTo prevent collective dominance The prevention of state aid which is The prevention of state aid which is

rampant in the European Unionrampant in the European Union Emerging companies are Emerging companies are

occasionally subsidized, which is occasionally subsidized, which is anticompetitive and a significant anticompetitive and a significant problem for competition control problem for competition control policies policies

Microsoft Anti-trust CaseMicrosoft Anti-trust Case

Case Against MicrosoftCase Against Microsoft

EU has taken action against Microsoft EU has taken action against Microsoft for not allowing adequate competition for not allowing adequate competition within the computer industrywithin the computer industry

Microsoft’s bundling technique has Microsoft’s bundling technique has drawn criticism from competitors like drawn criticism from competitors like Nokia, IBM, Oracle, Real Networks and Nokia, IBM, Oracle, Real Networks and Red HatRed Hat

Microsoft’s DefenseMicrosoft’s Defense

Microsoft claims to be producing a superior Microsoft claims to be producing a superior product, which is able to incorporate a product, which is able to incorporate a variety of necessities for the consumervariety of necessities for the consumer

It uses these bundling techniques to It uses these bundling techniques to minimize costs for consumersminimize costs for consumers

The variety of Microsoft programs are The variety of Microsoft programs are compatible with other systems and compatible with other systems and external appliances like digital cameras or external appliances like digital cameras or Firefox explorer Firefox explorer

EU DecisionEU Decision

The EU found that Microsoft was unfairly The EU found that Microsoft was unfairly influencing competition with the industryinfluencing competition with the industry

First penalty, $600 million in fines to EU First penalty, $600 million in fines to EU and competitorsand competitors

Second penalty, Microsoft is now Second penalty, Microsoft is now required to sell a stripped down version required to sell a stripped down version of its Windows operating system that will of its Windows operating system that will not contain Windows media playernot contain Windows media player

Defense of the EU DecisionDefense of the EU Decision

This decision is a precedent for the EU This decision is a precedent for the EU and will have an impact on monopoly and will have an impact on monopoly activity in the futureactivity in the future

Now competitors will have an equal Now competitors will have an equal chance at winning over competitorschance at winning over competitors

Microsoft is still likely to retain its 90% Microsoft is still likely to retain its 90% market share, but this will allow market share, but this will allow customers to have more choice in their customers to have more choice in their productsproducts

BoeingBoeingvsvsAirbusAirbus

SubsidiesSubsidies

International Trade PolicyInternational Trade Policy

Anti-Trust LawAnti-Trust Law

History…History…

1916: Company created by William Boeing 1992: Produces 60% of commercial aircrafts in

world

HistoryHistory……• 1966: Created by pooled resources of 4 European

countries-Aerospatiale S.A. (France)-Aerospace PLC (Britain)-Messerschmitt, Boelkow, and Bloom

(Germany)-Construcciones Aeronauticas S.A. (Spain)

Background of DisputeBackground of Dispute--Part 1-Part 1-

Early 1990s: American companies switch to Airbus Better technology Lower prices New designs vs. Boeing’s modified old

designs

Background Behind DisputeBackground Behind Dispute - -Part 2-Part 2-

Airbus SubsidiesAirbus Subsidies ““Loans” from European governmentLoans” from European government No repayment timetableNo repayment timetable Financial information not publishedFinancial information not published Leads to strategic trade policyLeads to strategic trade policy

Targets domestic industry for subsidiesTargets domestic industry for subsidies Captures monopoly profits on foreign salesCaptures monopoly profits on foreign sales

Boeing SubsidiesBoeing Subsidies Contracts with US Government for military Contracts with US Government for military

aircraftsaircrafts No official government subsidiesNo official government subsidies Held bidding war for location of new U.S. plantHeld bidding war for location of new U.S. plant

Local subsidies from Washington StateLocal subsidies from Washington State Airbus claims this was illegalAirbus claims this was illegal

Market StrategiesMarket Strategies-European--European-

Frequent subsidiesFrequent subsidies R&D, declining industries, new industries, regional R&D, declining industries, new industries, regional

development, and export promotiondevelopment, and export promotion Equity infusions, non-program-specific operating loans, Equity infusions, non-program-specific operating loans,

R&D funding, and production subsidiesR&D funding, and production subsidies Focus on alliances and cooperative venturesFocus on alliances and cooperative ventures ““Loans”Loans”

Payback periodPayback period InterestInterest

-American--American- Free market economyFree market economy Government is mainly regulatoryGovernment is mainly regulatory

The SolutionsThe Solutions

1979: Civil Aircraft Code of the General Agreement on Tariffs and Trade (GATT)

Eliminates tariffs, prohibits licensing requirements, and bans discrimination

Parties ensure a “reasonable expectation of recoupment of all costs”

The SolutionThe Solution--Part 2-Part 2-

1992: Variable 30-1992: Variable 30-33% cap on 33% cap on government subsidies government subsidies (“Airbus Accord”)(“Airbus Accord”) Also requires financial Also requires financial

info to be publishedinfo to be published Boeing pulls out in Boeing pulls out in

2004; 2004; counteraccusation counteraccusation against Boeingagainst Boeing

Airbus subsidies are Airbus subsidies are legal under 1992 accordlegal under 1992 accord

The ImplicationsThe Implications

Subsidy RegulationSubsidy Regulation Greater competitionGreater competition Higher production costsHigher production costs

Increased air travel costsIncreased air travel costs

No Subsidy RegulationNo Subsidy Regulation Unfair advantages Unfair advantages

between companiesbetween companies Lower market prices for Lower market prices for

aircraftsaircrafts Greater chance of a Greater chance of a

monopolymonopoly

Oracle and PeopleSoft Oracle and PeopleSoft MergerMerger

In June of 2003, In June of 2003, Oracle launches a Oracle launches a hostile bid for hostile bid for software rival software rival PeopleSoftPeopleSoft

Reaction of the European Reaction of the European CommunityCommunity

The European Commission challenged the The European Commission challenged the merger because of its potential threat to merger because of its potential threat to competitioncompetition

The EAS supplier market consists of three The EAS supplier market consists of three major companies; SAP, Oracle, and major companies; SAP, Oracle, and Peoplesoft. The Commission was Peoplesoft. The Commission was concerned that the number of competitors concerned that the number of competitors being reduced from 3 to 2 would decrease being reduced from 3 to 2 would decrease competition and result in higher prices. competition and result in higher prices.

Merger ProceedingsMerger Proceedings

-Oracle argued that the merger would not -Oracle argued that the merger would not cause a decrease in competition for 2 main cause a decrease in competition for 2 main reasons:reasons:

1. German company SAP is the largest 1. German company SAP is the largest player player in the sector in the sector

2. Smaller EAS vendors such as Microsoft, 2. Smaller EAS vendors such as Microsoft, Lawson, Intentia, and QAD have won Lawson, Intentia, and QAD have won

bids bids for enterprise software projects for enterprise software projects contributing contributing to competition in the marketto competition in the market

The EU DecisionThe EU Decision

The European Commission analyzed The European Commission analyzed hundreds of bids launched by smaller hundreds of bids launched by smaller vendors and overall conditions in EAS vendors and overall conditions in EAS market. market.

The Commission approved Oracle’s bid for The Commission approved Oracle’s bid for Peoplesoft on the grounds that the merger Peoplesoft on the grounds that the merger would not create a dominant position for would not create a dominant position for Oracle, and competition in the common Oracle, and competition in the common market would not be impededmarket would not be impeded

General Electric Honeywell General Electric Honeywell MergerMerger

42 billion dollar deal 42 billion dollar deal largest proposed largest proposed takeover in historytakeover in history

Both American Both American based firmsbased firms

Reason behind Reason behind merger both firms merger both firms are leaders in the are leaders in the aerospace industryaerospace industry

Governmental RegulationGovernmental Regulation

Proposed Merger was approved by Proposed Merger was approved by U.S. Justice Department U.S. Justice Department

Needs approval by EU, if not Needs approval by EU, if not GE/Honeywell would be unable to do GE/Honeywell would be unable to do business in Europe’s single market business in Europe’s single market

July 3July 3rdrd 2001 EU blocks proposed 2001 EU blocks proposed merger between GE and Honeywellmerger between GE and Honeywell

What Killed the GE What Killed the GE Honeywell MergerHoneywell Merger

Area of contention: The strength of GE’s aerospace Area of contention: The strength of GE’s aerospace component after the merger. component after the merger.

Two Main Aerospace marketTwo Main Aerospace market Jet aircraft engines Jet aircraft engines Avionics and non-avionics Avionics and non-avionics

GE’s Vertical IntegrationGE’s Vertical Integration

GE’s size and enormous amount of GE’s size and enormous amount of resources provide the firm with resources provide the firm with benefits its competitors do not havebenefits its competitors do not have

Important components to GE’s Important components to GE’s dominance in the Aerospace industrydominance in the Aerospace industry GE CapitalGE Capital GE Capital Aviation Services (GECAS) GE Capital Aviation Services (GECAS)

Future RamificationsFuture Ramifications Set precedent for Set precedent for

future mergers future mergers

US and EU merger US and EU merger regulations differ regulations differ significantly significantly

EU not afraid to block EU not afraid to block mergers between to mergers between to American firmsAmerican firms

Ford/Volvo MergerFord/Volvo Merger

Ford Motor Co. Ford Motor Co. offers $6.45 billion offers $6.45 billion for Swedish based for Swedish based VolvoVolvo

Auto Sales (1997)Auto Sales (1997)

Ford- 6.9 millionFord- 6.9 million

Volvo- 400,000 Volvo- 400,000 million million

Anticipated Result of MergerAnticipated Result of Merger

Increase competition in luxury market by:Increase competition in luxury market by:

1) Ability to use Ford parts in Volvos1) Ability to use Ford parts in Volvos

2) Distribution of Volvos through Ford’s 2) Distribution of Volvos through Ford’s networksnetworks

EU and Market Share EU and Market Share ConcernsConcerns

Merger would increase Ford’s market shareMerger would increase Ford’s market share Passenger and large car sectors would go from Passenger and large car sectors would go from

approx. 15% to 20%approx. 15% to 20% Ford’s national market share would end up below Ford’s national market share would end up below

25% even after merger25% even after merger

EU DecisionEU Decision

Merger is endorsed Merger is endorsed by the EUby the EU

Ford’s market share Ford’s market share is marginal after is marginal after mergermerger

Dominance and lack Dominance and lack of competition is not of competition is not a factor in this casea factor in this case

The EndThe End