EC Competition Law (Monti)
EU competition policy is undergoing a significant shift in economic theory and political ideology as well as in its institutional enforcement structure. In this chapter you will see that, from a political perspective, competition policy in the EU originally promoted core values: competition, the integration of the internal market and economic efficiency. Today economic efficiency and consumer welfare play a more significant role in motivating competition law enforcement than other values. The role of economic analysis in resolving competition cases takes centre stage. Author suggests that three themes underpin the economic approach favoured by the Community: 1) consumer welfare, 2) market power and 3) pluralism. In the following chapters author explores the extent to which this economic paradigm is activated in the ECJ case law. Significant number of public policy considerations affect decisions in competition cases. The transformation of the political and economic paradigms began in the 1990s, but has accelerated in recent years. The reason for the speeding up is that institutionally, the focus of enforcement is shifting from the Commission and towards National Competition Authorities, regulatory agencies and courts. These institutional changes are brought about by Regulation 1/2003. The exclusive application of economics to resolve competition cases can ensure greater coherence among institutions enforcing the competition law.
There are three conceptions of competition. First, competition may exist when there is rivalry among f undertaking s. Rivalry among undertakings is the means through which a number of socially desirable ends (economic efficiency, economic freedom or consumer welfare) are pursued. To see if there is a distortion of competition you need to look to see whether the ends are met rather than whether undertaking s are rivals, because this way provides a more precise method to determine whether there is a market failure. The reason for this is that undertaking s invent new ways of competing every day. Competition law does not prevent some forms of cooperation among undertaking (mergers), that's why rivalry as the benchmark of competition is incomplete.
Accordingly, most economists support a second conception of competition based on the effects of the behaviour of undertakings on economic welfare. This is preferable for two reasons: first, it provides a realistic benchmark by which to measure the presence of competition. Second, it is more precise, because there can be rivalry but no competition.
The question about whether there is competition is not whether the market is characterized by rivalry, but whether the market yields economic welfare. Defining competition by judging the effects on economic welfare (the neoclassical concept) is traditionally associated with economic approaches to competition law.
A third approach is the economic freedom conception of competition, whose roots you can find in ordoliberalism (political philosophy). Under this model, the aim of competition policy is protection of individual economic freedom of action as a value in itself, or the restraint of undue economic power. Two key notions of this economic philosophy, first, that the economic system should allow all individuals to participate unhampered by the economic power of others (pluralism). Second, that economic freedom is not guaranteed by an unregulated market – the risk of monopolies or cartels necessitates laws to sustain economic freedom.
Translated to competition policy, ordoliberalism necessitates rules that safeguard economic freedom in the marketplace by imposing obligations of fair conduct and suppressing economic power. This conception of competition is henceforth labelled the economic freedom approach.
The economic freedom interpretation of competition comes closer to explaining Article 81. In an early treatise on EU competition law, scholar took the view that competition is distinguished by two characteristics: 1) freedom of action of the individual enterprises; 2) the possibility that market participants may make a choice. The market participants in question are those who enter into the agreement to reduce the number of market players, this action increases the degree of monopolisation in the relevant market. Here, a restriction of competition is a restraint between the parties to the agreement, and it is irrelevant whether the market is competitive. This position is reflected in lots of decisions of the Commission. In discussing exclusive distribution agreements, the Commission noted, that the exclusive nature of a contractual relationship between a producer and a distributor is viewed as restricting competition since it limits the parties freedom of action in the territory covered (Twenty-third Report on Competition policy (1993) para. 212.)
The same analytical structure is found in many other decisions, an approach which would baffle any economist: the facts that explain why the agreement is declared anticompetitive under Article 81(1) are the same facts which are used by the Commission to show that the agreement yields economic benefits under Article 81(3). Commission is concerned about the risk other market participants might be foreclosed from market.
Article 81(3) is incompatible with the economic freedom: 1) if an agreement has an undesirable effect on economic freedom under Article 81(1), no exemption should be granted. The exemption provision in Article 81(3) is a way of reconciling an ordoliberal conception of competition with other important values. The use of other values in an agreement that restricts the economic freedom of undertakings may only be tolerated under the strict conditions provided in Article 81(3): that consumers benefit that economic freedom is not completely eliminated, and that the restriction of economic freedom is the least necessary to achieve those other public interest goals. This way the objective of economic freedom is sacrificed in part to other public interest goals.
The rule of reason is a concept that arose early on in the history of US antitrust law, its advocates pointed out that the uncertainties were less problematic than the procedural delays and arbitrary decisions of the Commission at present. US antitrust law distinguishes between practices that are per se unlawful and practices that are analysed under a rule of reason – that is, by a fact-specific inquiry to determine whether the agreements cause anticompetitive effects – to decide on their legality.
Procedurally the rule of reason eliminates the need for ex ante scrutiny, and substantively parties are able to identify for themselves whether the agreement causes anticompetitive effects necessitating notification.
The arguments in favour of adopting a rule of reason have been weak. First, its proponents advocate an exclusively economic analysis to competition. Their arguments do not fit within the political scope of EU competition policy. Second, an economic welfare interpretation of Article 81(1) would mean either that Article 81(3) is irrelevant or that Article 81(3) provides for exemption in cases where an inefficient agreement may nonetheless yield desirable political benefits, a conclusion that is the exact opposite of what the advocates of a rule of reason wish to achieve. The rule of reason suits US law but same legal method is unnecessary in the EU, because Article 81(3) provides the same functional of the rule of reason.
In some cases the Court takes the view that a restriction of the economic freedom of market players is a necessary element in the identification of a restriction of competition but is not sufficient: the degree to which economic freedom is restricted must be measured. The Courts’ contribution has been to identify parameters by which such measurement takes place: the economic context in which the undertakings in question operate, the products covered and the market structure. A recent example of this is the Court of First Instances (CFI’s) review of the Commissions Television par Satellite decision. The fact that the agreement restricted the economic freedom of other potential market participants was enough to find that the agreement restricted competition for the purposes of Article 81(1). In upholding this aspect of the decision, the CFI held that the Commission had not found a restriction of competition in the abstract, but had proved that the agreement foreclosed access to a lucrative market by other potential broadcasters, enough to show that the restriction of economic freedom was significant.
A similar approach can be seen in the Commissions Visa International decision. The Commission stated expressly that the efficiency justifications had no role to play in Article 81(1), noting that the impugned agreement would have affected the degree of price competition for acquiring banks and issuing banks, for their respective costs and revenues were largely fixed by the Visa agreement.
The Court has explained that a restriction of economic freedom in a contract would not infringe Article 81 when it did not constitute the major part of the agreement but was necessary to allow for the implementation of an agreement that did not infringe competition. For example non compete clause. In the Commission’s understanding the non-compete clause is an ancillary restraint. The legal effect of this is that if the major part of the agreement is not anticompetitive, then the ancillary restraint is lawful, without any competition law analysis of the restraint. The application of this doctrine requires an analysis of two matters: 1) determining first whether the restraint is subsidiary to the main transaction; 2) whether the restraint is necessary for the commercial operation of the main transaction. The Court has given some pointers on the second aspect, indicating that the restraint must be proportionate to the objective being achieved. The Court has given less guidance how to identify if a clause is ancillary, the case law although suggests that a restraint is ancillary when it concerns the behaviour of the parties outside the framework of the agreement (the non-compete clause is about restricting the sellers activities).
The doctrine serves to allow the enforcer to focus on the principal aspects of a transaction in question in determining its legality. If the main agreement is found not to restrict competition or is exempted, the ancillary restraint is valid automatically. (See Gøttrup-Klim and Metropole decisions.) The doctrine is merely about administrative convenience, allowing the Commission to focus on the principal effects of an agreement, but also to control minor aspects if the ancillary restraints are excessive in duration or scope.
The law on restraints of trade forbids a contract term like the non-competition clause discussed above on two grounds: first because the clause deprives one party of his freedom to use his skills, and second because society suffers as it is unable to reap the benefits of that person’s skills.
Phrase ancillary restraint was introduced in US antitrust law to describe restrictions that were reasonable and outside the scope of the Sherman Act. Now this interpretation has waned, but the doctrine of ancillary restraints has remained in US. It applies when restraints in joint ventures are assessed. Ancillary restraints are lawful if they are necessary for the transaction and they do not diminish the efficiency of the transaction. Ancillary restraints in EU competition law is another misplaced label from the US. In Gøttrup-Klim ECJ attempted to apply an approach which is similar to US law on ancillary restraints. EU’s approach is to inquire whether the restriction is necessary for the commercial success of the main agreement. If it is, and if the agreement as a whole is lawful: it is declared lawful even if it restricts the parties' economic freedom.
In discussing the legality of an exclusive distribution contract (where a producer uses one distributor as exclusive distributor in his geographical area) the Court said: The competition in question must be understood within the actual context in which it would occur in the absence of the agreement in dispute. In particular it may be doubted whether there is an interference with competition if the said agreement seems really necessary for the penetration of a new area by an undertaking.( Societe Technique Miniere) From this decision follows that if the agreement creates more competition by introducing new products on the market, then the restriction on other distributors is acceptable, if the restriction is necessary to create new competition.
The Commission used the same reasoning in Inntrepreneur and Spring. The partial restriction on wholesalers economic freedom was more than offset by the significant market opening possibilities for brewers created by the agreement. Underlying this analysis is belief that by providing easier market access, consumers benefit from more choice and lower prices. Thus there is some recognition of the positive economic benefits of the agreement, although the analysis is premised upon creation of economic opportunities for other market players, not on an economic cost–benefit analysis.
Since the beginning of EU competition policy has been used as mechanism for integrating the single market. The importance of competition law to create or maintain single market is reflected in the priority given by the Commission to apply competition law to practices that disintegrate the internal market.
Commission have stated that market integration is the first principle of EU competition policy. Consten and Grundig judgment is often used as an illustration that market integration is more important than economic efficiency. This case is also an illustration of the Community’s irrational understanding of market integration. To sum up, while market integration is an important end, it is not clear yet whether the enforcement policy in Grundig facilitates market integration in practice or whether it acts as a barrier to greater integration.
Economic welfare is one of the expected benefits from membership in the EU. The Commission has noted that the contribution of competition policy to economic efficiency early on. In the First Report on Competition Policy you can find passage: Competition is the best stimulant of economic activity since it guarantees the widest possible freedom of action to all. An active competition policy pursued in accordance with the provisions of the Treaties establishing the Communities makes it easier for the supply and demand structures continually to adjust to technological development. Through the interplay of decentralised decisionmaking machinery, competition enables enterprises continuously to improve their efficiency, which is the sine qua non for a steady improvement in living standards and employment prospects of the Community.
Economic efficiency is recognised implicitly in Article 81(3) – agreements which restricts economic freedom may be exempted when there are evidence that these restraints improve the production or distribution of goods or promote technical or economic progress.Typology of efficiencies:1) Allocative efficiency: existing goods and services are allocated to those who value them most, in terms of their willingness to pay. Resources thus allocated are used in the best way possible; no other distribution would increase aggregate welfare more. 2) Productive efficiency: this concept focuses on a particular undertaking or industry and considers whether a undertaking organizes its resources in such a way that it exploits all economies of scale, exploits existing technology effectively, and cuts all superfluous costs, so that production is at minimum cost. 3) Dynamic efficiency: this is a measure of whether undertakings have the ability and the incentives to increase productivity and innovate, developing new products or reducing production costs which can yield greater benefits to consumers.
Allocative and productive efficiencies are static measures: a snapshot of the current market position. Dynamic efficiency instead looks at the potential that the economy has to develop further. A high degree of dynamic efficiency yields an increase in allocative and productive efficiencies: as new products are developed, more goods that consumers value are produced and resources are used better than they would be without the technological development.
It must be remembered that while economic efficiency is relevant, it is not an end in itself. First, an exemption is only granted if the agreement and the individual restrictions in the agreement can’t be avoided to achieve the efficiencies. So if the efficiencies can be gained by causing less distortion, then the less harmful way must be chosen. Second, the consumer must benefit from these efficiencies. What the consumer could lose as a result of the restriction must be compensated by what the consumer could have as a result of the agreement. Efficiencies cannot justify an agreement that eliminates competition.
The primacy of economic efficiency is noted even further by Regulation 1/2003, which gives that Article 81(3) has direct effect. Productive and dynamic efficiencies are key to EU overall economic policy. The flipside, however, is that the increased recognition of the significance of economic efficiency leads to a unitary assessment of Articles 81(1) and (3), whereby the restriction of economic freedom under Article 81(1) today operates as a primary filter to indicate that there could be an infringement of the competition rules, and the analysis of if there is economic efficiency in Article 81(3) is thorough assessment of the economic realities of the agreement’s impact.
Under Article 81(3) the agreement will not be tolerated if it eliminates competition, even if there are efficiency gains: Ultimately the protection of rivalry and the competitive process is given priority over potentially pro-competitive efficiency gains which could result from restrictive agreements. Rivalry between undertakings is an essential driver of economic efficiency, including dynamic efficiencies. To sum up, the main aim of Article 81 is to protect the competitive process in the EU. It means that the Commission thinks that, in the long term, rivalry gives greater economic benefits than efficiencies generated by the elimination of rivalry.
Today efficiency is an increasingly important value. 2002 Report on Competition Policy: Competition policy then serves to: 1) addressing market failures resulting from anti competitive behaviour by market participants and from certain market structures; 2) and contributing to an overall economic policy framework across economic sectors that is conducive to effective competition, on the other.
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