COMPETITION POLICY IN THE EU Learning Objectives
* To understand the nature, scope, and purpose of EU competition policy. * To describe competition between companies and its economic importance. * To outline EU competition legislation and identify the policy contradictions. * To assess the effectiveness of the policy.
Introduction
The establishment of the single market has led to increased competition between european business, with the free movement of goods, services, labour, and capital. We have noted in the Single Market section that Cecchini had predicted substantial economic benefits for Europe as firms restructured and achieved economies of scale. However the advantages of market integration may not be realised without an adequate competition policy, which seeks to eradicate certain undesirable business practices.
What is Competition Policy?
Competition policy seeks to monitor the behaviour of corporations and subsequently regulate the markets for goods and services in which they operate. The objective is to establish fair competition between companies in order that the economic benefits of competition can be achieved. In a boxing match if the contestants have each abided by the relevant rules and regulations the fighter with the best ability should emerge victorious yet, conversely, if one contender chooses to cheat through the use of loaded boxing gloves then winning is not an accurate reflection of sporting prowess. The professional development of the sport as a whole depends upon establishing the parameters of acceptable practice and enforcement of the rules. In the same manner it is hoped that, with competition policy, firms operating in European markets are able to gain a competitive edge over their rivals as a result of their particular attributes rather than any unfair advantage. This should benefit both consumers and business. In the long run this should lead to greater efficiency and innovation. In the words of Peter Sutherland, in charge of EC Competition policy between 1985 and 1988, competition policy aims to develop ‘a level playing field where individual talent, effort and comparative advantage lead to victory, rather than an inclined pitch with moving goalposts, a biased referee and an opposing team full of steroids’. (Welford and Prescott, 1992, p.83).
What is Competition?
Competition can be said to exist when companies operating in the same market are free to exploit their different production costs, prices, and quality. In order for this to take place firms need to be free to advertise their goods and services without excessive interference from government. In addition companies need to be free from tying clauses (where companies make special agreements with customers or distributors ) and be able to enter or exit the market relatively easily. Also there must be no special arrangements between two or more firms in an industry. It is these kind of issues that competition policy seeks to address.
firms in the market could negate the benefits of the free play of market forces suggesting the need for some form of regulation by the authorities. If competition policy is established this should lead to greater economic efficiency which will be of benefit to both consumer and firm. Benefits might include, for example, an increase in national income or improved competitiveness.
Technical Efficiency
When firms have decided to produce a given good or service they are then interested in producing it in the most efficient way. Technical efficiency , the most commonly used term, refers to that level of output with the lowest possible production costs per unit. In economic theory this is denoted by the lowest point on the average cost curve. Also, in the long run, it is possible for companies to achieve economies of scale, through merging or increasing the scale of production, and this means lower average costs. This is also considered to be more technically efficient.
Allocative Efficiency
The study of economics is primarily concerned with the scarcity of resources and the ways in which these resources are allocated towards different tasks. Allocative efficiency refers to the direction of resources towards alternative productive uses in order to maximise total utility (or satisfaction) in society as a whole. It is worth mentioning that the measurement of total utility is a lot more difficult than the calculation of technical efficiency since it involves subjective calculations. However the distinction between these two terms is important since a firm may be operating in a technically efficient manner yet the resources could be put to a more appropriate use thereby enhancing allocative efficiency.
Market Structure
A market can be defined as any arena where buyers and sellers meet and negotiate the exchange of goods and services. It is in the marketplace that prices are determined in a free market economic system. The number of firms that operate in each market will affect the level and type of competition that exists in that industry and so therefore an analysis of this market structure will aid our understanding of the objectives of EU Competition policy.
Perfect Competition
Under conditions of perfect competition there are lots of companies producing the same good or service in the same market. Also the products are homogenous which means that they are relatively similar and therefore the customers are indifferent when choosing their suppliers. Furthermore the firms have equal ability to enter and exit the industry and have equal access to perfect information. In the short run it may be possible for a firm to achieve abnormal profits (in excess of the minimal acceptabe amount) although in the long run these will be competed away. Each firm will produce at an output level which achieves technical efficiency .
Monopoly
the product (or the output sold) in order to achieve maximum profits and can achieve abnormal profits both in the short and long run.
Oligopoly
According to economic theory an oligopoly market structure is one that is dominated by several large firms. The companies can either be in competition with one another or they may collude. A formal collusion is called a cartel and is outlawed under EU law except under particular circumstances. However informal (or tacit) collusions do take place and under such circumstances the firms are able to act collectively as a monopoly and gain whatever benefits that may be available sharing these between them. This is also outlawed under EU law except under special circumstances. Also even if the firms are in competition they still may be subject to regulation since the market condition described by the ‘kinked demand curve’ may persist (see standard economic text books) whereby prices remain higher than they would under conditions of perfect competition. Competition policy could be introduced in order to engender efficiency and lower prices.
Monopolistic Competition
This is likely to be a more realistic description of many markets since the conditions of perfect competition rarely exist in practice. Here several firms compete with differentiated products and in the long run technical efficiency is established.
Dynamic Efficiency
In general, competition policy seeks to approximate conditions of perfect competition or monopolistic competition, since these market structures lead to better technical efficiency. The consumer enjoys more choice, lower prices, and the economy benefits from the improved competitiveness. However, it may be possible to achieve these objectives through a monopoly or oligopolistic market structure if ‘dynamic efficiency’ is established. If the firm achieves economies of scale, as a result of the size of the company, and technological advances which improve costs, as a result previous abnormal profits, then it may be possible to achieve even lower prices and increased output than under conditions of perfect competition. Sometimes it may be appropriate to break up a monopoly market structure in order to create allocative and technical efficiency and on other occasions it is more appropriate to leave the companies untouched.
European vs National Legislation
corporations succeed in Europe and may be less enthusiastic about regulating their uncompetitive practices.Social policies may also conflict with competition policies if different legislation exists in the member states. Finally the existence of separate currencies and different forms of taxation in the member states will serve to give unfair advantages to some European firms. In the absence of full economic and monetary union it is difficult to perceive a truly effective EU competition policy which covers the single market as a whole. Notwithstanding EU competition policy exists and has been very relatively successful.
The Legislation
The Commission has had to reconcile two seemingly contradictory objectives: Firstly to allow firms to restructure and merge in order to compete more effectively with the United States and the Far East and, secondly, to ensure that the newly restructured firms do not employ practices that harm the consumer or inhibit some of the benefits that competition should bring. The main ways in which competition is restricted in Europe are through restrictive practices, market domination, state aids, and through public procurement restrictions. All of these issues are dealt with in the legislation. The Treaty of Rome and the Single European Act contain much of the legislation that relates to competition and the major aspects of these EU laws will be examined in turn in conjunction with a new merger policy adopted in 1990.
The Single European Act
The SEA has, in itself, contributed towards a fair competitive environment for European businesses since the elimination of non tariff barriers means that firms are competing on a more equal footing. The physical, technical, and fiscal barriers that have almost disappeared in the single market have served to give some firms an advantage. Subsequently, the single market programme has helped to level the playing field.
Article 85 (81)
This aspect of the legislation relates to restrictive practices. Under article 85 agreements or practices which affect intra-community trade or distort fair competition are explicitly prohibited. The Article identifies five main types of arrangements which should be condemned:
* price-fixing arrangements (direct or indirect)
* arrangements which limit technical or productive development or those which control the market
* arrangements which share out markets between independent suppliers * the application of different terms on different buyers of the same product * arrangements which demand tying clauses between suppliers and buyers
Yet there are a number of exemptions that apply if the agreement contributes to and is essential for:
* improved conditions of production and distribution * improved economic and technical performance * better consumer welfare
are not hindered. Exclusive purchasing agreements are allowed subject to some restrictions. Also some specialisation agreements are allowed if they help small to medium sized firms rationalise production.
Application of Article 85 (81)
EC plastics cartel involving 23 of Europe's top chemical firms; 90% share of EC's supply of PVC and 80% share of the low density polyethylene market. Guilty of collusion in order to sustain profit levels (through market sharing) in an industry with severe overcapacity. During 1984-1987 120 million Ecu (£184 m) fines were imposed.
Tate and Lyle and British Sugar ended a 4 year price fixing agreement in 1990.
However not every decision is so clear cut. There have been cases where the implementation of Art 85 (81) has resulted in decisions which are not compatible with the aims of the internal programme, nor with the objectives of other policies.
Example:
The MFF decision - involving the German milk board: Commission deemed that the MFF had distorted competition by aiding German exports to other countries. NB: Commission was wrong to use Art 85 in relation to trade in a product which formed part of a national organisation. Art 2(1) exempts the use of Art 85 in this kind of scenario.
ARTICLE 86 (82): Dominant positions.
Art 86 (82) also applies to the restriction or distortion of competition through the abuse of monopoly positions.The Treaty of Rome states that :
“Any abuse by one or more undertakings of a dominant position within the common market or in substantial part of it shall be prohibited as (being) incompatible with the common market inso far as it may affect trade between member states".
Definition: A dominant position in effect is a concentration of power which enables the firm to influence the outcome of the market and abuse is deemed to be, that position whereby sheer economic strength ensures the prevention of competition in the relevant market.
It is not just through market share that such positions emanate,but through:
* behaviour which enables the firm to act independently of competitors, customers and ultimately of its consumers.
* shortage situations where long standing consumers become dependent on their suppliers and competition between suppliers evaporates.
Dominant position are not prohibited per se but abuses of such but are. Abuses of position which only have domestic effects are excluded from Community level investigations. Abuses undertaken outside the EC which have effects within are included ie, a parent company based outside the EC can be held responsible for the actions of an independent subsidiary.
Also Swiss company Hoffmann-La Roche offered fidelity rebates to customers of their vitamins in 1979 and a ruling was made against them.
Many past cases highlight problems inherent in the application of Art 86. Two major points of focus are; the size of market share and the concept of the relevant market which sometimes can cause difficulties for investigators. During 1978, for example, there was a dispute as to whether the banana constituted its own market or whether it was part of the fresh fruit market.
Also the article used to be used in conjunction with article 85 to regulate merger activity yet it proved to be fairly ineffective. When New York company Continental Can merged with a Dutch firm and German firm to achieve a monopoly share of the European metal can and bottle top industry the Commission tried to prevent the process yet it was overturned by the European Court of Justice later on.
With respect to the this case, another point was also raised; that of the inability of Art 86 to deal with mergers unless an act of dominant position abuse occurred. as a direct result of this shortcoming, proposals for the regulation of mergers were put forward.
ARTICLES 90,92,93: STATE AIDS. Article 92 states that;
" save as otherwise provided in this treaty, any aid granted by a member state..in any form..which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between member states, be incompatible with the common market"
There are however, a number of exemptions which include:
* aid of a social character to individuals where no discrimination on the basis of origin exists * aid related to national calamities
* aid to develop underdeveloped regions * aid to promote projects of European interest
* aid to develop certain activities or certain economic regions
Examples:
Bull company (computing): Commission ordered freezing of capital allocation from French govt. Commission had received information that the capital was not going towards the restructuring plan as declared.
Commission intervened in 1988 when British aerospace was planning to takeover Rover and UK government was planning to write off a debt of £800 million. Deal did proceed although the Commission forced UK to reduce the aid to £469 million.
French government were permitted to give Renault 12 billion francs in 1988 provided that the company was restructured with the money. The French have since been ordered to repay the money.
As a consequence of the Single European Act in 1986, there has been a marked increase in cross-border mergers in the EC as a result of:
* a desire of companies to take advantage of the impact of 1992 * a general, global tendency towards mergers
The New Merger Legislation: Regulation EC - 4064/89.
Aim: to prevent the creation and enlargement of dominant market positions. Criteria for investigation and rules of investigation:
* turnover of two or more firms in excess of 5bn Ecu * each firm having turnover of more than 250m Ecu * less than 2/3 of business in one EU country
* 20% stake in another firm could qualify as a merger
* Commission must be notified of bid within one week of bid * EC has one month for preliminary enquiry
* four months to complete investigation
* member states can ask for small mergers to be investigated under EU law.
Problems:
* no reference to the degree of concentration * only the large firms are investigated
* both market structure and ‘public interest’ criteria are used to judge suitability of merger * decision making procedure is slow and complex
* Shortage of specialised staff
* EU bias towards the creation of ‘Eurochampions’ (large firms that can compete effectively with the US and Japan)
Example: Areospatiale/ De Havilland
France and Italy were upset by the decision to block a joint takeover of a Canadian aircraft manufacturer. Decision stemmed from the view that post merger scenario would be tantamount to a 'quasi-monopoly'. An argument was put forward that the market had been defined too narrowly There are signs that this policy needs to be made more specific.
Elimination of internal market barriers and merger activity should result in: * greater allocative efficiency
* economies of scale
* improved access to innovation, new products and processes
In view of this the question could be asked whether cost savings need to be taken into consideration by competition law. So the new policy does not escape criticism.
Public Procurement and State Monopolies
equitable competition. The commission has recently initiated several programmes which are aimed at eliminating state-owned monopolies from the market place. Article 90 recommends ‘ progressive adjustment’ leaving room for significant delays. The telecommunications industry data transmission and other services have been open to European competition but areas such as mobile telephony, public voice telephony, and infrastructure await transformation . The privatisation of utilities in recent years has contributed to the policy objectives although the democratic deficit has led some to call for increased regulation.
In the area of public procurement the consequences for effective competition are disappointing. In 1986 the size of the EC procurement market amounted to Ecu 530 billion of which 300 billion was tradable. Yet it has been estimated that less than 5% of contracts are awarded to firms outside of the member state and many do not involve a competitive tender. Paolo Cecchini had estimated that the liberalisation of public procurement would lead to a cost saving of Ecu 17.5 billion (Cecchini, 1989). In order for effective competition to exist much more needs to be accomplished. Past regulation has been ineffective yet there have been several measures since the late eighties to redress the balance.
Study Guide. Further Reading:
European Business. 2nd edition Ch 4. Neil Harris. European Business. Welford and Prescott
The Economics of Europe. Ch 12&13. E.Nevin.
The Single European Market and Beyond. Ch 3&4. D.Swann. European Competition Policy. P.Montagnon.
European Mergers and Competition Policy. M.Cook.Journal of European Business Education. Vol 2, No1, Dec 1992. European Economy Feb 1994.
State Aids. European Commission. Background Report. ISEC/B3/95
