Introduction to competition law

Julija Jerneva

Application of EU Competition law

• EU consists of 27 Member States

• EU and three other countries are part of European Economic Area (EEA)

 

EU competition law applies to all countries in the EEA

Institutions

EU Institutions:

• European Commission

– enforces competition policy through directorate general (DG)

– Can launch surprise investigations at company premises

– Can require large mergers to be approved• EU Member States have their own competition laws and

authorities• Companies must comply with competition laws of EU and Member

States

What is competition law?

• Competition law exists to protect the process of competition in a free market economy

– A system where the allocation of resources is determined solely by supply and demand in free markets

• Competition wanted because of the market result it produces

– Efficiency– Low prices– Innovations

• Competition rules limits the freedom of the market players to protect the process of competition

Economic efficiency- main objective of competition policy

• Competition gives the best utilisation of scarce resources

– Perfect competition v monopoly

• Perfect competition– Pareto optimal use of resources

» None could be made better of without someone being made worse of

» Consumer welfare maximized

– Productive efficiency

» Constant pressure on costs

» Cost reductions is the only means whereby firms can stay in business and increase profits

• Monopoly– Leads to an inefficient allocation of resources

» Quantity supplied less the quantity which would be supplied in a competitive market

• Perfect competition, monopoly and competition in the real world

– Workable competition

”workable competition”• The ECJs concept of ”workable competition” related

to what competitin is inteded to achieve in the Community context

– Not one of the concepts of ”workable competition” found in economic theory» But influenced by the theory

• Concept of competition in the Merger Regulation compared:

– Prohibits concentrations creating or strengthening a dominant position ”as a result of which effective competition would be significantly impeded in the common market”

How to pursue the goals?

• Prevent agreements restrictive of competition– Horisontal agreements (Among competitors)– Vertical agreements (between parties at different levels of

the production or distribution chain)

• Control market power and its abuse

• Control oligopolistic markets

• Prevent mergers which lead to a concentration in market power

Overview of EU Competition Law

Aspects of primary importance to business:

• Article 101 TFEU makes illegal any agreement or concerted practice between undertakings that significantly restricts competition within EEA

• Article 102 TFEU makes it illegal for dominant company to abuse its dominant position in market

• Mergers

EU competition law deals with anti-competitive agreements between companies and unilateral conduct of individual companies with dominant position

Article 101 TFEU: Purpose and Rationale

Article 101 prohibits agreements that disrupt free-market principles and hinder competitiveness

 

Article 101 promotes independent decision-making over -

• Pricing

• Whether to sell in one country or several

Decisions should be based on desire to attract new customers and retain existing ones

 

Agreements that restrict two or more companies’ commercial options are likely to violate Article 101

Article 101(1) TFEU

• The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:

Article 101(1) TFEU

(a) directly or indirectly fix purchase or selling prices or any other trading conditions;

(b) limit or control production, markets, technical development, or investment;

(c) share markets or sources of supply;

(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

Article 101(2) TFEU

2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void.

Article 102 EC: Abuse of Market Dominance

Article 102 is a companion of Article 101

• Directed at unilateral conduct of companies dominant in their market

• Targets abuse of dominant position

Abuse of a dominant position: Anti-competitive business practice undertaken to maintain or increase market position

• Includes unfair pricing, restriction of production output, and imposing discriminatory terms on trading partners

 

Violations of Article 102 can result in serious fines and other penalties

Article 102 TFEU

• Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.

Article 102 TFEU

• Such abuse may, in particular, consist in:

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;

(b) limiting production, markets or technical development to the prejudice of consumers;

Article 102 TFEU

(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

Consequences of Non-Compliance

Non-compliance has serious consequences:

• Fines up to 10% of annual worldwide turnover

• Liability in damages under national law

• Voiding of contract

• Criminal liability

• Substantial expenditure of time and money

• Bad publicity

• Investigations by other competition authorities

The sources of EC competition law• The Treaty Articles• Regulations

– Merger regulation– Block exemptions

• Judgements– European Court of Justice– Court of First Instance

• Commission notices and guidelines• Commission decisions• Annual reports from the Commission• Other documents

Some basic concepts

• Market power

• Market definition

• Barriers to entry

• S-C-P paradigm

The concept of market power• Competition law concerned first and foremost with

the problems that occur when a firm or two or more firms possess market power

• A firm or firms that possess market power can enjoy some of the benefits available to the true monopolist

– Market power presents undertakings with the possibility of limiting output and raising price, which are clearly harmful to consumer welfare

Market Power

• Market Power is the ability of a firm or a group of firms in a market to profitably raise prices, reduce quality, or slow down innovation for a significant period of time compared to these outcomes in a competitive market

Analysis of Market Power

• Market structure approach / Indirect approach• Market definition• Market shares• Market concentration• Barriers to entry and expansion• Perception of market participants

• Competitive effects analysis / Direct approach• Predict post-merger price effects• Elasticity of demand

Relevant market definition

Commission Notice on the definition of relevant market for the purposes of Community competition law (also available in Latvian!)

Relevant product market

'A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use`

Relevant geographic market

'The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area`

Basic principles for market definition

Competitive constraints: demand substitutability supply substitutability potential competition

Demand substitution

starting from the type of products that the undertakings involved sell and the area in which they sell them,

additional products and areas will be included in, or excluded from, the market definition

depending on whether competition from these other products and areas affect or restrain sufficiently the pricing of the parties' products in the short term

SSNIP test

small but significant and non-transitory increase in price (SSNIP) hypothetical monopolist or cartel could profit from a price

increase of 5% for at least one year (assuming that "the terms of sale of all other products are constant)?

Demand substitution

Will the customers switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetical small (in the range 5 % to 10 %) but permanent relative price increase in the products and areas ?

Cellophane Fallacy

It may happen that using the SSNIP test one defines the relevant market too broadly, including products which are not substitutes

Du Pont (a cellophane producer) argued that cellophane was not a separate relevant market since it competed with flexible packaging materials such as aluminum foil, wax paper and polyethylene

Critical loss

Where demand elasticities cannot be estimated Defined as the maximum sales loss that could be sustained as a

result of the price increase without making the price increase unprofitable.

Where the likely loss of sales to the hypothetical monopolist (cartel) is less than the Critical Loss, then a 5% price increase would be profitable and the market is defined

Demand substitution example

Soft-drinks with flavour A vs those with flavour B? Price = 10 (12 after the increase) Sales = 1000 units (800 after the increase) Variable costs:

remaining at the same level Increase Decrease

If the increase in price produces too much consumer substitution which is not compensated by the increase in price nor the reduction in costs?

The "market" formed by this only product is not "worth monopolising" as an increase in prices would not be profitable

Supply substitution

suppliers are able to switch production to the relevant products and market them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices

Example: paper

Potential competition

conditions of entry Low barriers - potential competition will represent an effective

competitive constraint High barriers - potential competition is not likely to represent an

effective competitive constraint

Evidence – product dimension

Evidence of substitution in the recent past Views of customers and competitors Consumer preferences Barriers and costs associated with switching demand to potential

substitutes

Evidence – geographic dimension

Past evidence of diversion of orders to other areas Basic demand characteristics Views of customers and competitors Current geographic pattern of purchases Trade flows/pattern of shipments Barriers and switching costs associated to divert orders to

companies located in other areas

Barriers to entry

• Barriers to entry hinders the emergence of potential competition which would otherwise constrain the incumbent undertaking

• Crucial when determining market power– May have high market shares but no market power if

there are no barriers to entry

Analysing barriers to entry

• Market definition and entry by production substitutes

• Market conditions and historical entry

• Assessment of absolute cost advantages

• Assessment of strategic (first mover) advantages

• Vertical foreclosure and exclusion

• Predatory behaviour

• Assessment of entry impediments

S-C-P approach

• Structure (competitive, monopolistic, monopolistically competitive, or oligopolistic)

• - number of competitors, buyers, suppliers• - level of product standartisation• - barriers to entry• - scale economies, costs structures• Conduct (output decisions and pricing behavior, merger

policies, R&D, investment & advertising policies)• Performance of the industry (production efficiency and

profitability)

Article 101(1) – the elements

• The meaning of “undertaking”

• Forms of co-operation caught– The meaning of agreement– Decisions by associations of undertakings– Concerted practices

• “Object or effect the prevention, restriction or distortion of competition”

• Effect on trade between member states

• De minimis

The concept of an “undertaking”

• Article 101 (and 102) applies only to “undertakings”– Undertaking not defined in the EC Treaty

• ECJs definition of an undertaking:– “the concept of an undertaking encompasses every entity

engaged in an economic activity regardless of the legal status of the entity and the way in which it is financed”» Case 41/90, Höfner and Elsner v Macrotron, para 21

• “Every entity”– The legal form of the entity irrelevant

» All kind of companies» Persons

• Self employed• Not employees (Opinion of GA Jacobs, case C-67/96, Albany)

» Associations• “Associations of undertakings” directly caught• But can also be found to act as “undertakings”• Example: Co-operatives, P&I clubs• Exception: trade unions representing their members

– The entity’s engagement in “economic activity” decisive

• “Economic activity”– Any activity consisting in offering goods and services on

a given market» Wide definition

State bodies• Exercising official authority

– ECJ: Article 101 does not apply to agreements concluded by bodies “acting in their capacity as public authorities and undertakings entrusted with the provision of a public service” (case 30/87, Bodson)

– Includes tasks which are typical those of a public authority– Such tasks are not of an economic nature– Can to a certain extent be financed through fees of economic

contributions

• Engaging in economic activity– Will be regarded as an “undertaking”– How the public body is organised is not decisive

Some statistics

Ten Highest Cartel Fines Per Case Since 1969

Year Case name Amount in €

2008 Car Glass 1 383 896 000

2009 Gas 1 106 000 000

2007 Elevators and Escalators 992 312 200

2010 Airfreight 799 445 000

2001 Vitamins 790 515 000

2007 Gas Insulated Switchgear 750 712 500

2008 Candle Waxes 676 011 400

2010 LCD 648 925 000

2010 Bathroom fittings 622 250 782

2006 Butadiene Rubber/Emulsion Styrene Butadiene Rubber

519 050 000

Ten Highest Cartel Fines Per Company Since 1969

Year Case name Amount in €

2008 Saint Gobain (Car glass) 896.000.000

2009 E.ON (Gas) 553.000.000

2009 GDF Suez (Gas) 553.000.000

2001 F. Hoffmann-La Roche AG (Vitamins) 462.000.000

2007 Siemens AG (Gas insulated switchgear) 396.562.500

2008 Pilkington (Car glass) 370.000.000

2010 Ideal Standard (Bathroom fittings) 326.091.196

2007 ThyssenKrupp (Elevators and escalators) 319.779.900

2008 Sasol Ltd (Candle waxes) 318.200.000

2010 Air France / KLM (Airfreight) 310.080.000

Overview of Article 101 TFEU

§1 – The Prohibition Rule (+ examples)

Are prohibited as incompatible with the internal market:“all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market (…)”

§2 – The Rule of Nullity

“Any agreements or decisions prohibited pursuant to this Article shall be automatically null and void”

§3 – The Exception Rule

§1 may be declared inapplicable to agreements which:1. “contribute to improving the production or distribution of

goods or to promoting technical or economic progress,2. allow consumers a fair share of the resulting benefit,and which do not:3. impose on the undertakings concerned restrictions which

are not indispensable;4. afford such undertakings the possibility of eliminating

competition”

Basic structure of analysis of Art.101

• Agreements violating Article 101(1)

• and not capable of being exempted under Article 101(3)

• are null and void (Article 101(2))

Agreement: horizontal or vertical

Step one• Agreement?• Between undertakings?• Appreciable effect on trade?• Object or effect?

Step two• Derogations (Article 101 (3) TFEU)

• Rule of reason (incl. block exemptions)

Elements (step one)

1. “Agreements”

2. Between “undertakings”

3. Which have appreciable effect on intra-state trade

4. Which have as their object or effect the prevention, restriction or distortion of competition

Unilateral practices/behaviour

• Unilateral action NOT prohibited under Article 101

• Unilateral action is subject to rules of competition law only under Article 102 (abuse of dominance)

Mergers • Are “worse” than agreements”

• Joint ventures between the companies (depending on the level of integration):

• Analysed under the merger rules; or• Analysed under the Article 101 rules

Mergers Agreements

Eliminate competition Reduce competition (preserve at least some level of competition)

Leave permanent effect on the market

Leave temporary effects on the market

Agreements

The concept of an “agreement”• ”Agreement” widely construed

– It is sufficient if the undertakings in question should have expressed their joint intention to conduct themselves on the market in a specific way» Alignment of the competition parameters available to them

• “joint intention” a legally binding agreement not necessary– The form of no importance (oral, signed, unsigned)– “gentlemen’s agreements”– The agreement does not have to be exhaustive

» It is enough just to set the broad framework for the undertakings market conduct

• The engagement of the parties in the agreement– It is enough to be partly engaged in the collaboration

» Breach of contract regarding parts of the agreement

– Passive “members”– An excuse if an undertaking has been “forced” into a cartel?

• Collaboration through the establishment of a company (joint ventures)

“Decisions of undertakings”

• Collusion can take place through the medium of an association: Directly covered by art 101(1)

– Makes it possible to hold associations directly liable

• Association widely defined

• Decision every statement made with the object or effect of influencing the

commercial behaviour of the association’s members– Does not have to be binding (e g recommendations)

“Concerted practices” • A form of co-ordination where undertakings, without

concluding any sort of agreement or establishing a plan of action, knowingly substitute practical co-operation between them for the risks of competition

– This criteria avoids that situations where companies collaborate without any kind of agreement but only on the basis of a common understand falls outside article 101(1)

• It is contrary to the rules on competition for a producer to co-operate with his competitors, in any way whatsoever, in order to determine a co-operated way of action or to ensure its success by prior elimination of all uncertainty as to each others conduct regarding the essential elements of that action

– ECJ, case 48/69, ICI v Commission

Proving concerted practices

• Direct or indirect contact

• Meeting of minds or some kind of consensus– Exchange of information– Unilateral disclosure– Public announcements

• Subsequent behaviour in the market

• Indirect evidence of intention?

Can a concerted practice be inferred from circumstantial evidence alone?• A question of the use of economic evidence in

competition cases• Parallel market behaviour alone in itself not a

concerted practice• BUT: It may however amount to strong evidence of

such a practice if it leads to conditions of competition which do not correspond to the normal conditions of the market having regard to the nature of the products, the size and numbers of undertakings, and the volume of the said market power

– ECJ, case 48/69, ICI v Commission

• Oligopoly markets and economic evidence– Joint dominance

The distinction between “agreement” and “concerted practices”• Overlapping concepts

• No precise distinction– And no use for a precise distinction

• “Concerted practice” important mainly where the Commission or the Courts is forced to rely upon circumstantial evidence alone

Undertakings (market participants)

Competition law and math

Single economic unit doctrine• Two or more separate legal undertakings can be treated as on

undertaking– if the undertakings “form an economic unit within which the subsidiary

has no real freedom to determine its course of action on the market, and if the agreements or practices are concerned merely with the internal allocation of tasks as between the undertakings”» Case 30/87, Corinne Bodson

• Agreements between two undertakings within a single economic unit not regarded as an agreement “between” undertakings

– Escapes the prohibition in article 101(1)

• The rationale:– No freedom to take decisions regarding the market

conduct» Regarded as unilateral conduct» May be caught by article 102 if the undertaking has a dominant

market position

– Internal allocation of functions

• The other side of the coin:– If a subsidiary engages in anti competitive agreements

the mother company will also be regarded as part of the agreement

• The test of control– If a parent company owns more than 50% of the shares

in a subsidiary interdependency is presumed– Minority share holdings may also give control if combined

with specific rights attached to them– One large shareholder and many small– Joint control (50/50)

» Jointly controlled companies must belong to a single group of companies to be regarded as part of one economic unit

The parent company’s responsibility for infringements committed by subsidiary

• Case C-97/08 Akzo Nobel NV vs. Commission ”[W]here a parent company has a 100% shareholding in a subsidiary

which has infringed the Community competition rules (…) there is a rebuttable presumption that the parent company does in fact exercise a decisive influence over the conduct of its subsidiary (…) The Commission will be able to regard the parent company as jointly and severally liable for the payment of the fine imposed on its subsidiary”

100% (or close to) of shares in subsidiary gives rise to presumptionParent company must show that the subsidiary acted independently on

market – difficult (impossible?)! Maximum fine increases – 10% of group turnover If parent company has been involved in prior cartel – increase in fine Increased risk of being subject to specific increase for deterrence

Cross-border trade effect

Cross-border trade effect

• EU competition rules apply to practices which affect trade between Member States

• Impact «within the internal market» («effects» doctrine)• EU-based firms reach an anticompetitive agreement over

price/quantities on US markets – EU competition law is not applicable• Non-EU based firms reach an anticompetitive agreement over

price/quantities on EU markets – EU competition law is applicable

Cross-border trade effect

1. Must be appreciable2. Means decrease, increase or simply diversion of trade

Appreciable effect• The stronger the market position of the undertakings concerned,

the more likely it is that an agreement or practice capable of affecting trade between Member States can be held to do so appreciably

• BPB Industries and British Gypsum, Case T-65/89

• BUT: appreciability requirement was also fulfilled when the sales of the undertakings concerned accounted for about 5 % of the market

• Miller, Case 19/77

“Object” or “Effect”

• “The distinction between „infringements by object‟ and „infringements by effect‟ arises from the fact that certain forms of collusion between undertakings can be regarded, by their very nature, as being injurious to the proper functioning of normal competition”

• Competition Authority v BIDS and Barry Brothers, Case C-209/07

Object cases• The object-category consist of “obvious restrictions of

competition”• European Night Services v Commission, Joined cases T-374-375/94,

384/94

• The “object” rule can be described as a presumption rule: • if object is found, harmful effects on competition are presumed• certain types of agreements under normal market conditions always, or

almost always, restrict competition

Object cases

• Horizontal agreements:• fixing prices• sharing markets• limiting outputs

• Vertical agreements• Fixed and minimum resale price maintenance• Absolute territorial protection• Restrictions on passive sales• Other cases, listed in the “block exemptions”

Effects cases

• All cases, not falling within the “object box”

• Negative effects on competition within the relevant market are likely to occur when:

• the parties individually or jointly have or obtain some degree of market power and

• the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power.

Economics and competition

Economic theory usage

• How can the agreement hinder competition?

• Is collusion likely to occur on a given market?

• Is cooperation between competitors likely to succeed or fail? Will it be easy or difficult?

The prisoners’ dilemma

Prisoner A

Prisoner B

Remain silent Confess

Remain silent 0, 0 25, 15

Confess 15, 25 20, 20

Firm A

Firm B

Collude Cheat

Collude 20, 20 15, 22

Cheat 22, 15 17, 17

The prisoners’ dilemma

• Prerequisites for a successful cartel and what complicates the cartel?

• The problem of cheating?

• Efficiency, savings from the horizontal cooperation

What complicates collusion?

• Demand side• Elastic demand (can the cartel set higher prices?)• Balancing buyer power?• Differentiated (vs homogenous products)• Demand booms as a characteristics of the market)• Non-stable demand

What complicates collusion?

• Supply side• Low seller concentration• Existence of competitors with elastic supply• Ease of entry• Cost assymmetries between cartel members• Prior collusion history on the market (more attention from competition

authorities)

Need for the possibility of high gains

• Elastic and constant demand

• Potential fines? (active/inactive competition authorities)

• Members want and can cheat without being detected

Organisation

• Need to meet, agree

• Need to communicate regularly

• Many competitors vs “few” competitors• Reinhard Selton, the Nobel prize winner in “Four are few and six are

many”:• Profitable to collude if less than 5 cartel members• More attractive to cheat if more than 5 cartel members

Thank you!

• Julija Jerneva• Mobile: +371 29131597