EU Competition Policy Lecture Notes PDF

30564 Economics and Politics of the European Union Competition Policy 2023/2024 [email protected]  Outline 1. Introduction 2. Agreements and cartels 3. Abuse of dominant position 4. Concentrations (mergers and acquisitions) 5. State aid...

30564 Economics and Politics of the European Union Competition Policy 2023/2024 [email protected]  Outline 1. Introduction 2. Agreements and cartels 3. Abuse of dominant position 4. Concentrations (mergers and acquisitions) 5. State aid 2  Introduction EU Competition Policy is closely related to the creation of the EU Single Market Basic Intuition: One Market – One Set of Rules – One Referee Competition policy is aimed at ensuring: – Economic freedom – Efficient resource allocation 3  Introduction Economic integration determines an increase of competitive pressure on firms  “survival of the fittest” in the enlarged market, market consolidation with fewer, bigger, more efficient firms. Founders of the EU understood that such pressure would create two incentives: (1) for firms to collude; and (2) for national governments to subsidize their companies. Such unfair practices would undermine the well functioning of the single market, and reduce political support for economic integration. Thus, the Treaty of Rome already included broad prohibitions on private and public policies that distort competition, maintained over time with refinements… 4 Competition policy: structure of EU legislation Antitrust Art. 101 of the Treaty on the Functioning of the EU (TFEU) Collusive behaviour restricting competition Art. 102 of the TFEU Abuse of dominant position Control on concentrations (Mergers and Acquisitions) Merger Regulation 139/2004 State Aid Art. 107-109 of the TFEU 5  Who manages EU competition policy? Competition Policy is an exclusive competence of the EU Neelie Kroes Mario Monti (Italy) (the Netherlands) 1999 – 2004 2004 – 2009 Margrethe Vestager (Denmark) Since Nov 2014 Joaquìn Almunia (Spain) 6 2009 –2014  The framework of EU Competition policy The Commission ensures the correct application of EU competition rules. To do this, it has a wide range of inspection and enforcement powers, e.g. to investigate businesses, hold hearings, impose fines and grant exemptions. Governments also have a duty to notify in advance any planned support for business (State aid). The Commission decides independently on cases, i.e. no role for Council or Parliament. Parties can bring EC decisions to the EU’s General Court (previously “Court of First Instance - CFI”) for judgment, with appeals going to the European Court of Justice Nonetheless, some of the Commission’s enforcement functions have been undertaken by national anti-trust authorities of the Member States since 2004. This allows national competition authorities and national courts to apply and enforce Art. 101 and 102 of the TFEU. 7  Community Dimension The EU legislation not only identifies the legal instruments to be used in order to guarantee the effectiveness of competition in the single market, but it also defines its scope of application. The Treaty in fact states that EU rules apply only when a competition issue concerns practices which are capable to “affect trade between Member States” where “trade” covers all cross-border economic activities. The latter can be considered the criterion defining the so-called Community Dimension, marking the boundary between the European and the national competition legal frameworks. EU competition policy applies to the behaviour of undertakings in a relevant market that has a community dimension. 8  Definition of “undertaking” Undertakings are the subjects of competition law and they usually refer to companies. But not only… The ECJ in Hofner and Elser v Macrotron GmbH (1993): 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 A single individual may be an undertaking in circumstances where he/she has an impact on the market in a capacity other than that of a consumer. e.g. world class opera singers (in RAI/Unitel 1978), lawyers (in Wouters , 2002) 9  The relevant market definition The definition of the correct dimension of a market is a tool to identify and define the boundaries of competition between firms, with the objective to identify market power. Generally it is in the interest of defendant undertaking to describe the market as broadly as possible (so as to claim that there is a lot of competition), and for the Commission to define it narrowly (so as to say that there is not enough competition). Two dimensions of boundaries: product and geographic 1. 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 (the principle of substitutability). 2. 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 they are effectively competing with each other. 10  The relevant market definition: product market The assessment of demand substitution entails a determination of the range of products which are viewed as substitutes by the consumer. One way of making this determination is through a hypothetical “Small but Significant Non-Transitory Increase in Price” (SSNIP) test and evaluating the likely reactions of customers to that increase. The question to be answered is whether the customers would switch to readily available substitutes in response to a hypothetical small (in the range 5%-10%), permanent relative price increase (above the current level) in the products being considered. If substitution would be enough to make the price increase unprofitable because of the resulting loss of sales, these substitutes are included in the relevant market. 11 The relevant market definition: product market If a 10% price increase for pasta pushes customers to buy more rice so that the price increase is unprofitable (due to the decrease in demand for pasta towards rice), then the two products are substitutes and belong to the same relevant market Quantity rice Cross-price elasticity of demand Price pasta  The relevant market definition: product market If the 10% price increase for bananas is profitable, that means that consumers keep on buying bananas even tough they are more expensive. Therefore no other fruit is a substitute, and banana is a relevant market on its own. Quantity no-banana fruits Cross-price elasticity of demand Price banana  The relevant market definition: product market In United Brands the Commission (in 1978 appeal): “the banana is a very important part of the diet of certain sections of the community namely the very young, the elderly, and the sick and the banana has unique characteristics: appearance, taste, softness, seedlessness, and easy-handling”. So, the Court of Justice: “consequently the banana market is a market which is sufficiently distinct from the other fresh fruit market”. As a result, a firm having a huge market power on the banana market might be a prerequisite of violation of competition rules on a market which by definition has a relevant Community Dimension, and thus is liable to EU (vs. national) competition rules. 14  The relevant market definition: geographic market Technical characteristics of goods and services, and consumers’ preferences may imply that geographic and cultural (e.g. linguistic) barriers are important, so relevant markets are segmented on a geographic basis. For example, the relevant geographic market was defined by the Commission as regional in retail banking (BAI/Banca Popolare di Lecco, 1993) and world-wide in oil (e.g. Exxon/Mobil, 1999). As a rule of thumb, the size of the market is inversely related to the product’s transportation costs relative to the value of the product: a product with a high value and a low transportation costs will have a large geographical market and vice-versa as in Napier Brown-British Sugar (1988) where the UK constituted a separate market. For example, Airbus and Boeing is a duopoly in a world-wide market. 15 Competition policy: structure of EU legislation Antitrust Art. 101 of the Treaty on the Functioning of the EU (TFEU) Collusive behaviour restricting competition Art. 102 of the TFEU Abuse of dominant position Control on concentrations (Mergers and acquisitions) Merger Regulation 139/2004 State Aid Art. 107-109 of the TFEU 16  Prohibited agreements (Article 101 of the TFEU) Par. 1 The following shall be prohibited as incompatible with the common 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 common market, and in particular those which: 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. Par. 2 Any agreements or decisions prohibited pursuant to this article shall be automatically void 17  Agreements might be exempted from prohibition (Article 101 of the TFEU) Par. 3 The provisions of par. 1 may, however, be declared inapplicable in the case of: - any agreement or category of agreements between undertakings; - any decision or category of decisions by associations of undertakings; - any concerted practice or category of concerted practices, which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. Notice: 1. An agreement does not necessarily require a signature: implicit collusion with concerted practices is also punished 2. Block exemptions are foreseen for agreements on R&D, franchising etc.18  Agreements between undertakings Horizontal and vertical - Distribution - Research and Development (R&D) - Market analysis - Marketing and distribution channels 19  Prohibited agreements and concerted practices Fines and immunity Undertakings in breach are liable to be fined up to 10% of the turnover of the entire group of companies worldwide and for all products. Since it might be very difficult to find evidence (the “smoking gun”) of a cartel in a market, the Commission waits for information coming from the market, handled by a whistle-blower. A leniency programme encourages firms to inform the Commission about their infringements. The first undertaking to submit evidence that is sufficient for the Commission to launch an inspection, or enables it to find an infringement, receives full exemption from its fine (total immunity)  The cartel of rechargeable battery producers In December 2016 the Commission found that Samsung SDI, Sony, Panasonic and Sanyo took part in bilateral, and sometimes multilateral, contacts in order to avoid aggressive competition in the market for lithium- ion batteries. In particular, the four companies: agreed on temporary price increases in 2004 and 2007 triggered by a temporary increase in the price of cobalt, a raw material used in the production of lithium-ion batteries; and exchanged commercially sensitive information such as supply and demand forecasts, price forecasts or intentions concerning particular competitive bids organised by specific manufactures of products such as phones, laptops or power tools. Samsung received full immunity for revealing the existence of the cartel to the Commission. The risk for Samsung? A fine up to 30.5 billion USD (i.e. 10% of 305 billions USD, the worldwide turnover of Samsung Group) 21  The cartel of truck producers In 2016 the Commission found that MAN, Volvo/Renault, Daimler, Iveco, and DAF broke EU antitrust rules. These truck makers colluded for 14 years on truck pricing. Fine? Almost 3 billion euro! MAN was not fined as it revealed the existence of the cartel to the Commission. Relevant market? manufacturing of medium (weighing between 6 to 16 tons) and heavy trucks (weighing over 16 tons). Joint market share? 90%. The behaviour? Coordination of prices at "gross list“ (factory price of trucks). The infringement covered the entire EEA from 1997 until 2011 when the Commission carried out unannounced inspections of the firms. Between 1997 and 2004, meetings were held at senior manager level, sometimes at the margins of trade fairs or other events. This was complemented by phone conversations. From 2004 onwards, the cartel was organised via the truck producers' German subsidiaries, with participants generally exchanging information electronically. 22