EU COMPETITION POLICY

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EU COMPETITION POLICY REF: EU COMP POL TEACH Update feb 08

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EU COMPETITION POLICY. REF: EU COMP POL TEACH Update feb 08. INTRODUCTION. Driven by Treaty of Rome (art.3) ..”ensuring that competition in a common market is not distorted” Implemented through rules, incl: Anti-competitive behaviour & abuse of monopoly power - PowerPoint PPT Presentation

Transcript of EU COMPETITION POLICY

Page 1: EU COMPETITION POLICY

EU COMPETITION POLICY

REF: EU COMP POL TEACH

Update feb 08

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INTRODUCTION• Driven by Treaty of Rome (art.3)

– ..”ensuring that competition in a common market is not distorted”

• Implemented through rules, incl:– Anti-competitive behaviour & abuse of

monopoly power• arts. 81 & 82 in Amsterdam Treaty (previously

85 & 86 in ToR)

– Merger Policy• arts 86 & 87

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EU’s role• Exclusive competency of EU; Commission

controls (important policy!)• Look at justification for putting competition

policy at the EU level– Spillovers (negative effects of one Member’s

subsidies on other Members’ industry)– Need belief in ‘fair play’ if integration is to maintain

its political support• Note: recent ‘protectionist’ tendency of Member States to

prevent foreign takeovers

• Policy not consistently applied• Block exemptions exist

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Economic rationale• Free market v correction of market failure

arguments• SEM: 2 possible responses to new

competitive environment• firms act in competitive manner• firms react defensively

• See Pelkmans J, ‘European Integration’,or Baldwin & Wyplosz (on reading list) to focus on economic aspects. See ‘Competition Policy & the Consumer’ (Eur Commission) for an update on policy

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ART.81ANTI-COMPETITIVE AGREEMENTS

• Prohibited: intra firm agreements that distort intra EU trade and prevent, restrict or distort competition– Eg. Sotherby’s & Christies (2002)– http://europa.eu/rapid/pressReleasesAction.do?reference=IP/02/1585&format=HTML&aged=

0&language=EN&guiLanguage=en

• Horizontal co-operation– eg. Woodpulp case (1993),Nintendo(2002) – exclusive

territories– http://europa.eu/rapid/pressReleasesAction.do?reference=IP/02/1584&format=HTML&aged=

0&language=EN&guiLanguage=en

• Vertical co-operation – read up• Cartels subject of many investigations incl

– English Premier League – 8 Vitamin companies

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• Explicit prohibitions incl.– price fixing– output fixing– market sharing agreements (eg sugar cartel

1970s)– tied contracts

• Covers foreign firms if intra-EU trade affected

• Costs incl.– Economic inefficiency– conflict SEM

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Economic analysis: review of BE-COMP diagram (note: you can use other theories)

Sales per firm

AC

price

Totalsales

D

Number of firms

Mark-up

euros

x’

COMP

BEFT

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

p”

p’

Home market only

E”

E’

W

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review of BE-COMP diagram

• COMP curve is for ‘normal’, non-collusive competition– Firms do not coordinate prices or sales.

• Bigger, fewer, more efficient firms facing more effective competition

• Speed of adjustment– Slow (E’ – A – E’’) eg. European airlines– Fast (E’ – E’’) eg. Eur banking sector

• Welfare: gain = area W

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Anti-competitive behaviourCollusion in the BE-COMP diagram

• Collusion a concern in Europe – dangers of collusion rise as the number of

firms falls

• Extreme is ‘perfect collusion’– Firms coordinate prices and sales perfectly– Max profit from market is monopoly price & Q– Firms charge monopoly price and split the

sales among themselves

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• Perfect collusion line horizontal, assumes mark-up constant, regardless of no. of firms

• IF all firms charge monopoly mark-up– 2n’ firms can stay in

business (point G)

• Perfect collusion unlikely, thus partial collusion

Number of firms

Mark-up

COMP

BEFT

Perfectcollusion

Partialcollusion

E”

nB

mono

B

n=1 n”

A

2n’

pB

p”

G

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• Partial collusion mark-up between that of perfect & no collusion– LR equilibrium point B

• 2n’ is too high for all firms to break even– Industrial consolidation, but

only to nB (Point B),not n” as in competitive market

• Prices higher, pB> p”, smaller firms, higher average cost, stops benefit of integration

Number of firms

Mark-up

COMP

BEFT

Perfectcollusion

Partialcollusion

E”

nB

mono

B

n=1 n”

A

2n’

pB

p”

G

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Economic effectsThe welfare loss of collusion (versus no collusion).

area

price

Totalsales

Demand curve

Number of firms

Mark-up

COMP

BEFT

pB

Perfectcollusion

Partialcollusion

E”

nB

mono

B

n=1 n”

pmono

E”p”

B

CB

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• Exemptions – ‘negative clearance: improves

production/distribution of goods or promotes technical or economic progress - if consumers benefit & no elimination of competition

• Commission has considerable discretion

– block exemptions– SMEs

• Competition policy v competitiveness

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Enforcement of art.81

• Little used upto 1962

• If Commission find against agreement– firms usually agree to end or modify

agreement– Com. Issue formal decision– fines upto 10% turnover of each firm

• particularly heavy for cartels

– Examples• Co-operation may be beneficial

– co-operation & R&D (See Hansen & Nielsen)

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ART. 82 MONOPOLIES, ABUSE OF DOMOINANCE

• Abuse of dominance that affects intra-EU trade– Eg Microsoft & media player (2003-04)

• Economic analysis (see Pelkmans)

• 3 elements– has to be dominant position (not illegal)– abuse is illegal– possibility of affecting intra-EU trade

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• Relatively few cases (compared to art.81)– Defining market difficult

• Continental Can case 1971• Factors other than market share important

– Abuse of dominance incl.• unfair pricing• limiting markets• tied contracts

– Tetra Pack (Swiss co.)

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– Astra Zenica (2005)• Fined 60m euros for misuse of patents

– Delay entry of generics

– Coca Cola (2005)• New procedure to make policy more effective• Investigation ended early when Coke made

commitments, which were made LEGALLY BINDING. Coke end practices

– Exclusivity agreements– Rebates for targets & reserving shelf space– Use strong brands to sell weaker ones

• Within EU, Norway & Iceland!!!

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MERGER REGULATION• ToR contained no specific powers to

control mergers– covered under existing articles to a degree– not adequate– Commission proposed merger legislation

after Continental Can case, but…….– Merger Regulation in force 1990

• Merger prohibited if creates or strengthens dominant position which impairs competition

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• Covers horizontal,vertical, conglomerate mergers

• Economic analysis (See Pelkmans, Baldwin & Wyplosz & Hansen & Nielsen)

• Mergers & SEM– EU ‘Level playing field’– Ensure SEM gains not eroded by

defensive mergers

• Thresholds– 3 points– Opposition from some States

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• Criticisms incl..– few fully investigated– few banned

• ATR / De Havilland

– 8% to full proceedings– Unlike art.81 no trade off with other

aspects of performance– High thresholds excl. high concentration in

specialist markets, eg. Reed & Elsevier merger

– State intervention, eg national security

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ART.86 PUBLIC ENTERPRISES

• No anti-competitive behaviour

• Little done until late 1970s

• EU Directives re:– financial transparency– no discrimination in public procurement

• Extended to utilities

• SEM: Com. intensified policy in energy, utilities,transport

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• Difficult to implement– resistance from States

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arts.87-89 STATE AID• No trade-distorting aid• Economic Theory – see Baldwin & Wyplosz• Exceptions incl. Sectors like steel• Aid must be notified by States & authorised

by Com.• Tougher stance since SEM• More difficult to investigate• Cases

– car industry– airlines

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What if only some countries subsidise?

• If partner subsidies its firms to break even, • All restructuring forced on Home country• All exit (restructuring) falls on Home firms

– Unfair– Undermines political support for liberalisation

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RECENT COMPETITION CASES

• Premier League

• Vitamin companies

• Microsoft

• Airlines

• Others

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Other relevant theory

• See handout

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COMPETITION POLICY IN FUTURE

• Since 2000 moves to make more proactive

• Trend: Commission harsher , cases overturned by ECJ

• Feb05; proposed enabling harmed consumers/rivals to claim damages

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CONCLUSION• ToR framework has remained

• SEM– more vigorous application of the rules

– extended scope, eg to telecoms

• ECJ has had a significant role

• Merger Regulation• Com. Gained power over cross-border mergers,

where uncertainty existed before

• Some conflict• States & Com.

• EU competitiveness v competition policy

• Future

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Questions to consider– What is competition policy? What is the

economic justification for competition policy?

– Why is EU competition policy required when individual States have their own policies? To what extent is there a conflict?

– Why is competition policy important? To what extent is it compatible with the SEM?

– To what extent is EU competition policy effective?