Competition Policy

Vital to Europe’s economic prosperity and future political governance

No point in having a single market if consumers can not choose from a range of suppliers on the basis of cost and quality

Competition Policy Competition and open markets put

companies under continual pressure to innovate, improve quality and keep prices low.

A strong competition policy is vital to ensuring that European firms remain among the World’s best- a target the EU set itself in March 2000 at the Lisbon European Council meeting to make the EU “the world’s most competitive and dynamic economy” by 2010.

Competition Policy Key Challenge:

EU has to make the leap to a knowledge-based economy by developing and sharing new technologies.

But the need to invest in R&D and achieve economies of scale is pushing many companies into cooperative arrangements or full mergers with their rivals.

Such deals may threaten competitiveness. Extremely difficult to evaluate the effect of such deals on competitiveness. Do they strengthen or weaken competition? Often times, the authorities use complex calculations but in the end their verdict often comes down to a subjective judgment.

The Spaak Report (1956) “ The Treaty (of Rome) should provide

the means to avoid situations in which monopoly practices block the fundamental objectives of the common market. In this regard, it is appropriate to prevent:

1. Market division by agreement among firms

2.Agreement to limit output and restrict technological progress

3. The absorption and domination of the market for a product by a single firm.

Single Market “Number of nations in which goods, capital and

currencies move freely across borders without tariffs and other restrictions.”

In 1985, cost increasing tariffs and market entry restrictions and controls were all abolished.

Resulting in: Better protection for consumers Growing competition between companies A wider range of products and services Faster and cheaper cross frontiers deliveries Greater mobility of labor Increasing economic convergence and cohesion

between different EU regions

Aims of EU Competition Policy

“Promoting competition” “Creating a deeper European

single market which transcends national boundaries”

What is Competition? It is a market situation where firms

bid for customers without restriction and hence for resources to satisfy their demand.

Can occur over price, quality, design etc.

Requirements of Competition

Multiple Firms Low barriers to entry and exit Minimal transport cost Perfect knowledge Free flow of factors of

production

Competition Policy aims to ensure:

Wider consumer choice Technological innovation Effective price competition

In an environment where: Companies compete rather than

collude Dominant companies do not abuse

their market power (by restricting entry)

Efficiencies are passed on to the final consumers in the form of lower prices and better products.

Main Components of EU Competition Policy

Antitrust and Cartels Merger Control Market Liberalization State Aid Control

Antitrust and Cartels

Article 81(1): prohibits agreements which prevent, restrict or distort competition as they are incompatible with the common market. (Franco-Japanese Ball Bearings Case (1972): The Japanese would raise their prices in Europe, collusive agreement. Also, see the 1993 Wood Pulp Case: US Firms, members of an export cartel, exchanged information on prices and other issues and producer prices were similar in different locations in violation 81(1))

Article 81(3):Exceptions if the agreements lead to better production, distribution and promotion of technological progress

Article 82: prohibits abuse of a dominant market position by one or more firms. E.g. Abuses may take the form of restricting output, price discrimination, and using dominant position in market to limit competition in another market (e.g. Microsoft bundling Windows with Media Player )

If Articles 81 and 82 are violated, a firm may end up paying fines amounting up to 10% of its annual turnover.

Limited Competition There are some industries in the

EU in which single European market does not yet exist. In these markets, the extent of actual and potential competition is limited.

There are barriers to contestability in energy supply, car retailing, telecommunications and postal services.

Anti-trust and Cartels Article 81 prohibits: price fixing and market sharing,

limit or control of production, markets, technical development or investment, discrimination, and collective boycotts.

The ban covers horizontal agreements between the firms in the same industry and vertical agreements between companies along the supply chain.

In 2001, The Commission imposed fines for anti-competitive behavior totaling almost $2 billion.

Not all inter-company arrangements are illegal, and the Commission may create block exemptions: e.g. exclusive relationship between carmakers and their official distributors.

Article 82: an anti-monopoly instrument. Whether a firm abuses its dominant position. Factors like firms’ market share, whether there are credible competitors, whether it has its own distribution network and whether it has favorable access to key sources of supply (e.g. raw materials)

Merger Control The 1989 Merger Control

Regulation: Deal with market structure.

The European Commission has to authority to vet mergers. May block a proposed merger entirely or permit a merger to go forward on altered terms.

Why Merge? A firm may reach a dominant position by

acquiring a competitor and this may benefit consumers in the form of lower prices, better products etc. (especially when economies of scale effects lead to cost reductions).

But the Commission may block mergers if mergers impede effective competition.

Firms need to get Commission approval before merging. This regulation applies to all transactions with a ‘Community dimension’, which in practice typically means those where the combine turnover of the companies exceeds 2.5 billion Euros.

Large companies outside the EU but generating at least 100 million euros in terms of annual business in the Community are also subject to the EU merger regulation.

Blocked Mergers 199 Airtours/First Choice Merger:

Takeover was blocked on the grounds that it would reduce competition in the UK travel operator market leading to excessive concentration (three big firms serving 85% of the market). “Collective Dominance”

BUT Boeing-McDonnell Douglas Merger went through!

GE-Honeywell Merger Oracle’s hostile bid for People Soft

Market Liberalization This policy was behind the

introduction of fresh competition in several monopolistic industries in recent years. E.g. The UK energy supply, telecommunications and postal services.

State Aid Control Control of state aid measures by

member states to ensure that such measures do not distort competition in the Single Market (e.g. the prohibition of a state grant designed to keep a loss-making firm in business,)

State aid for steel producers, the coal industry, farming and aviation-all of which are facing long-term structural problems and an uncertain future.