1. Protection of Competition Daniel Čekal Theory of regulation and protection of competition

2. 2 What is the objective of the presentation? Fundamental principles defining rules on protection of competition are identical EU US CZ and other countries Four basic pillars and regulatory framework Typical market actions and situations defined as (potentially) distorting competition Practical guidance for identification and solution of competition problems: regulators vs. businesses Structure of traditional competition policies and protection of competition Cross-boarder co-operation: US, EC, NCAs vs. sectoral regulators Expected development of regulation

3. 3 Structure of competition regulation Regulation of businesses Cartel agreements and concerted practices Horizontal Vertical Conglomerate Abuse of dominance Single dominance Collective dominance Merger control Mergers, acquisitions, joint ventures Regulation of state interventions State aid Public procurement Liberalisation of state monopolies

4. 44 Competition?

5. 55 Why is competition important?

6. 66 Competition and state supervision? NCA European Commission Courts Local general regulator Local sectoral regulator Private enforcement Transnational regulators General Sectoral

7. 7 Defining relevant markets: 3 elements Product element Raw materials/products Services Geographical element World (Microsoft SW) Europe/CEE National (majority) Regions/local (retail) Other (air transport) Time element Permanent (majority) Seasons (Concrete) One-off events (UEFA)

8. 8 How to define relevant market? Products within a separate market must be interchangeable in terms of Price Functional characteristics and Intended use SSNIP test (5-10%), price elasticity, barriers to switch/entry Demand, supply and potential interchangeabilities In practice Initial indication: instinctive identification of product group; marketing studies and reports; decision-making practice of regulators (United Brands); opinion polls among customers (Herb liqueurs) and competitors; questionnaires/inquiries; existence of clear customer groups + no cross- supplies/selling (oils and lubricants); Objective/technical confirmation: price tests/econometric and statistical methods; technical and functional interchangeability (United Brands); supply/demand side interchangeability (paper); barriers to entry and switching costs; customer patterns; brand loyalty; spare capacity; distribution systems; Other indicators: past developments; prediction of market/product developments; historical and expected market entries/developments etc.

9. 9 Key: Market structure and positions What is relevant market What market shares/market concentration (CR5/HHI) Turnover calculations Volume calculations What is your market share and other players‘ shares? What are barriers to entry? Administrative barriers (customs duties, licenses etc.) Investment and cost benefits (R&D, essential facilities etc.) Surplus capacity Marketing, distribution and transport costs Economies of scale/scope etc. Formal critical benchmarks: 10-75% market shares De minimis: 10/15% Block exemptions: 20-30% Dominance: +40/50% Supra-dominance:+75%

10. 10 How to protect competition? Regulation of business Cartels Abuse of dominance Merger control Regulation of state intervention State aid Public procurement Liberalisation of state monopolies

11. 11 Fundamental pillars Competition Regulation Merger controlState aidAntitrustPublic procurement

12. 12 Antitrust Competition Regulation General principlesCartelsAbuse of dominanceRegulators‘ powersAlternative mediations European/global competition network How to minimize risks

13. 13 Cartel agreements

14. 14 Cartel agreements Formal, informal agreements Decisions of associations Concerted practices, coordination That distort or „are capable“ to distort fair competition  Does not apply to intra-group arrangements

15. 15 Horizontal agreements Competitors Company Competitor BCompetitor A

16. 16 Vertical agreements Company Product supplierService supplier Distributor DealerAgent Production/distribution chain

17. 17 Horizontal cartels Very high risk Coordinated boycotts Coordinated discrimination and bid rigging Market sharing – territory, customers, purchase sources Price fixing, discount schemes etc. Exchange of business sensitive information and co-ordination of business strategies Coordinated tying and unfair arrangements

18. 18 Horizontal cartels Cautious approach - risk Justifiable arrangements, schemes and info sharing re costs/savings Business terms, strategy, customer experiences, stock and production capacities etc. Publication of non-standard/sensitive information „Blind“ following of competitors Arrangements and actions not economically justifiable Some activities within professional associations, information, schemes, „recommendations“

19. 19 Horizontal cartels (Usually) permitted Technical or ethical standards, quality guarantees Standard activities of professional associations Information for state authorities General media statements and information Research and development General joint reports and studies

20. 20 Vertical agreements Production/distribution chain Company Product supplierService supplier Distributor DealerAgent

21. 21 Contractual or factual price fixing, minimum prices etc. Market sharing, territory, customers etc. Very high risk Vertical cartels

22. 22 Vertical cartels Recommended and maximum prices, discounts etc. Tying and unfair arrangements, bundling Non-compete arrangements Exclusivities – single branding, exclusive distribution etc. Export and import restrictions, co-ordination of business strategies, other territorial restrictions on business partners Risk Minimum and maximum purchases and their relation to price arrangements + loyalties

23. 23 Risk assessment (vertical and horizontal cartels) De minimis (10–15%) Block exemptions (typically 20–30%) Dominance (usually +40%) Risk benchmarks

24. 24 Beware! “Objective“ principle BUT Market actions are ultimatelly interpreted and formal rules applied by NCA/EC… not by businesses. Does not matter whether an undertaking knows or wants to…– market effect is what matters. !

25. 25 Alternative mediations Methods available depend on Type of issue Factual situation and player‘s role Stage of authoritative procedures Player's strategy and strategies of other players' involved and actual position and approach of regulators Alternatives Antitrust advocacy Settlement Immunity a Leniency programmes Offer of remedial measures by undertakings Authoritative imposition of remedies by regulators Some of them can be cumulated to enhance their effect

26. 26 Immunity, Leniency programmes and Settlement Escape from cartel / minimising risks? Authorities introduced Immunity and Leniency programmes Recently also settlement rules Efforts to detect more cartels and make investigations more effective (shorter and cheaper) Rules for “pleading guilty“ of cartel participation First, quick and complete “whistle-blowing“ Immunity and “discounts“ on fines Best practices of regulators Growing trend Co-ordination issues as regards multinational/corss-boarder cartels Private enforecement issue: actions for damages Criminal implications

27. 27 A cartel at work?

28. 28 June 5, 2006 19:00 meeting JD, FH and VS - Orient Bar

29. 29 Price development January–September 2 006 CZK

30. 30 CZK Price development January–September 2 006

31. 31 Regulator’s investigation

32. 32 XXX subject to a cartel investigation A EUR 3 billion fine JD, FH, VS in jail!

33. 33 Questions?

34. 34 Abuse of dominant position

35. 35 Dominance? Power over price = absence of market correctors Market and economic power Capable to reduce competition By allowing to act to considerable extent independently – not taking relevant account of other competitors or customers (lack of competition correctors) For a „longer“ period of time Indicative threshold of dominance (+40%) +75% supra-dominance 40%-60% presumed dominance -40% unlikely dominant Abuse of dominant position is always prohibited (no exception exists) A special dominant‘s liability Responsibility for results/effects of their market actions

36. 36 Dominance? Individual Collective (Airtours/First Choice, ABI, Campagne Maritime Belge, Building societies, Banks, Gas stations) High market concentration Behaving like one collective entity (1) – joint strategy and policy sustainable in time (2) Absence of reasonable competitive correctors Increased market transparency – monitoring/check of strategy implementation (2) Link between operators or market structure allowing to implement joint strategy Existence of “punishment“ measures (deviation from joint strategy) (3) Predictability competitors‘ and customers‘ responses/reactions (2) Supply dominance (Ceska rafinerska) Demand dominance (CEZ/MUS – brown coal) Connected/„neighbouring“ markets (Tetra Pak) : horizontal and vertical leveraging issue Aftermarkets: vertical leveraging issue

37. 37 Dominance? Definition of market Geografical (Microsoft), product and time market (UEFA) SSNIP test: market worth monopolizing celophane fellacy and reconstruction of the market price (Eastman Kodak) leveraging dominance (Hilti, Kyocera, Hugin, TetraPak II) supply (paper production) and demand interchangeability (Coca-Cola: soft drinks) Market structure and market shares of competitors (duopoly/oligopoly/concentration, transparency, balance costs, low elasticity of demand, barriers to entry) Nature of product (homogenity/heterogenity – Gas stations) Nature of demand(elasticity, concentration, groups of consumers (United Brands), buyers‘ power a lump orders, prevailing sales conditions, product differentiation, preference of customers (Herb liqueres)) Potential competition and barriers to market entry (legal, capacity, economies of scale and volume, investment performances (Michelin I), distribution network development (Airtours), tying of distribution channels, resp. customers, absolute cost advantage (Microsoft, Oskar Bronner), licence (Magill), geographic substitutability/transport costs etc..) Phase (growth/decline/stagnation) and market maturity(emerging vs. settled markets), historical development(fluctuations in market shares, market entries, product transitions) and an estimate of future new technologies (Microsoft), new products (BT: SMS/MMS), market entries, expiring licence etc.) Switching costs (time, costs, administrative burden, efficiency) etc.

38. 38 Abuse of dominant position Extrusion practices Price Predatory pricing policy Rebate schemes Discrimination Non-price Single branding Exclusivity Coupled businesses and bundling Refusal to supply Exploitation practices excessive pricing policies (SACEM- French copyright collecting society) Price and non-price discrimination Refusal to supply etc. Horizontal (single branding, exclusivity, predatory pricing, rebates, coupled business and bundling) and vertical (refusal to supply, margin squeeze) market closure It is always necessary to examine the nature of behaviour, faults and impacts on the market, competition and consumers Actual and potential impacts on the market It is necessary to analyse short-, medium- and long-term impacts of behaviour on the market, competition and consumer

39. 39 Risk Loyalty discounts, special discounts, annual discounts, seasonal discounts Tying/ bundling Restricting supplies for certain customers Discrimination of individual customers or customer groups Single branding,exclusivities, exclusive purchases, “English“ clauses, sales Predatory pricing and discounts Enforcing “unfair“ business terms, e.g. short due dates, advance payments etc. Agreements and cooperation arrangements with competitors or „powerfull“ business partners Abuse of dominant position and remedy

40. 40 Abuse of dominant position Defense arguments Objective reasoning (health, safety, general interest) Meeting competition (legitimate market defense action, proportionality, inevitability) Effectiveness (Art. 101/3 EC) Savings, production or distribution improvement, support of economic and engineering development, improvement of a product‘s quality Inevitability for achieving a legitimate goal Reasonable and timely benefits for consumers, balancing potential negative effects Non-elimination of competition on significant part of a market

41. 41 Discount schemes Quantity discounts Savings from the quantity or other effects Proportionality Scheme non-discrimination versus discounts „made-to- measure“ (Brussels Airport) Loayalty and progressive discounts (Michelin) Factual exclusivity Purchase of rather large amount of consumption (80%) Non-discrimination Target discounts Market structure Multiproduct discounts Special offers Increase in intra-brand competition in distribution channel Negative impact on intra-store competition

42. 42 Predatory pricing policies Temporary price reductions and short-term loss rates or reduced profitability with the view of eliminating competition and increasing prices afterwards (recoupement of investment) Presumption of predatory prices if the price is under AAC or MC (indirect proof) is rebuttable by objective justifications efficiencies When prices are under AVC, but above AAC we do not presume abuse of dominance. We can only presume that if the price makes no economic sense, except in the case of elimination of the competitor and increasing prices afterwards Prices under ATC are normal, especially if there is excess capacity Cyclical markets Intention to eliminate the competitor (direct proof, smoking guns prooves) AKZO/ECS: prices under AVC, internal memos manifesting the intention Microsoft

43. 43 Product bundling/tying Leveraging market power Products make different markets Bundling: only bundles are offeres and one or none of the „bundeled“ products are not available separately(pure bundling, mixed bundling, tying) Possible horizontal or vertical foreclosure effects, discrimination and higher prices Aggravating circumstances: network effects, high barriers to entry, economies of scale Extent of the fixed part of market, key customers, market shares LAIC and their use May lead to production savings, distribution, transaction costs or improve quality or be objectivly justifiable (health, safety) Microsoft, Fernet

44. 44 Refusal to supply or deal „Educational“ aim Elimination of competition Essential input for further production Forms: refusal or elimination of supply, decelerating negotiating tactics, unfair terms and conditions, excessive prices Defense: untrustworthy business partner, own needs, lack of capacity, production effectivity

45. 45 Abuse of dominance and pricing policies Unified pricelist Favouring of individual customers Favouring of groups of customers Quantity discounts Loyalty and annual discounts Multi-product discounts (purchase of more products) Different discounts for different customers Discounts on purchases of goods Loans for customers and payment of discounts in advance Special discounts and one-off discount actions Accelerated maturity Warranties and securities

46. 46 Beware! “Objective“ principle BUT Market actions are ultimatelly interpreted and formal rules applied by NCA/EC… not by businesses. Does not matter whether an undertaking knows or wants to…– market effect is what matters. !

47. 47 Good advice? Do not take chances!

48. 48 Depends on Gravity of issue Market structure and market position of the undertakings concerned Status of the official investigation/proceedings Alternatives available Advocacy (margimal issues at a initial phases only) Settlement Immunity and Leniency programmes (cartels only) Offer of corrective commitments by business towards NCA/EC Imposing of unirateral corrective remedies by NCA/EC Alternative solutions of antitrust issues

49. 49 Concentration of undertakings

50. 50 Notification conditions When is notification required? A transaction is a concentration One of turnover thresholds is met

51. 51 What is a concentration? Merger Consolidation Amalgamation Transfer of a business or a substantial part of assets (usually also a simple transfer of assets) Various types of acquisition of control (shares, loan, management or sub-ordination arrangements etc.) Joint ventures x Intra-group restructurings are not concentrations

52. 52 Notification conditions When is notification required The transaction is a concentration One of turnover thresholds is met

53. 53 Czech Republic Start Is the transaction subject to the European Commission’s approval? (see the flowchart concerning the European Union) Did the combined net turnover in the Czech Republic of all concentrating undertakings in the last financial year exceed CZK 1.5 bln. (approx. EUR 41.6 mil. EUR)*? Did the net turnovers in the Czech Republic of each of at least two concentrating undertakings in the last financial year exceed CZK 250 mil. (approx. EUR 6.94 mil.)*? In the case of mergers/amalgamations or establishment of joint ventures - did the worldwide net turnover of one of the concentrating undertakings; acquisition of control over another undertaking or business (or its part) - did the worldwide net turnover of the acquirer of such control in the last financial year exceed CZK 1.5 bln. (approx. EUR 41.6 mil.)*? In the case of mergers/amalgamations or establishment of joint ventures - did the net turnover of the other concentrating undertaking; acquisition of control over another undertaking or business (or its part) - did the net turnover of the target (controlled undertaking or business (or its part)) in Czech Republic in the last financial year exceed CZK 1.5 bln. (approx. EUR 41.6 mil.)*? Transaction is subject to approval in the Czech Republic Transaction is not subject to approval in the Czech Republic YES NO * Conversion to EUR has been calculated according to the average exchange rate of the Czech National Bank for 2007: EUR 1 = CZK 27.762. NO

54. 54 Did each of the concentrating undertakings achieve more than 2/3 of its EU-wide turnover within one and the same EU Member State (e.g. Czech Republic)? Did the combined worldwide turnover of all the concentrating undertakings exceed EUR 2.5 bln.? Did the EU-wide turnovers of at least two of the concentrating undertakings exceed EUR 100 mil.? Did the combined turnover of all concentrating undertakings exceed EUR 100 mil. in each of at least three EU Member States? Did the turnovers of each of at least two concentrating undertakings exceed within the same three EU Member States EUR 25 mil.? Did the EU-wide turnovers of each of at least two of the concentrating undertakings exceed EUR 250 mil.? Did the combined worldwide turnover of all the concentrating undertakings exceed EUR 5 bln.? Transaction is not subject to European Commission’s approvalTransaction is subject to European Commission’s approval YES NO European Union Start YES

55. 55 Notification test - turnovers Principles Worldwide turnover EU turnover Local (national) turnover Aggregated turnover Generated during the last fiscal year „European dimension“ of transaction: material impact on multiple EU MS (eg. 3 and more)

56. 56 Suspension rule Prior to approval, it is prohibited to determine or influence competitive behaviour of the other parties to the concentration

57. 57 Notification deadlines Notification may be filed before or after execution of formal documents/actions establishing concentration - no deadline Take-over bids are subject to exceptions (fast track)

58. 58 A transaction is subject to notification?

59. 59 Sanctions

60. 60 Fines and other consequences Fines Up to 10% of turnover generated in the last financial year Indirect cost Private actions for damages Extensive reports for regulators Cost of specialized advise and HR costs Share value depreciation International impact - group Criminal liability Remedial measures by regulators Reputation damage Others?

61. 61 Company Fine (CZK in million) YearSector Gas insulated switchgears 9792007Engineering Building societies 4842004Banking RWE Transgas3702006Energy Gas stations3132004Petrochemical Fines

62. 62 Company Fine (EUR in million) YearSector Dow, Eni, Shell, Bayer 5192006 Synthetic rubber Microsoft4972004IT Hoffmann La- Roche 4622001Vitamins Lafarge2492002Construction Fines

63. 63 Forced sale of shares, assets Prices adjustments, however, price, levels may not be ordered Product re-design Access to facilities/networks, forced licensing etc. Adjustment of distribution system Cancellation or adjustment of agreements Remedies Remedial measures

64. 64 Distortion of competition by state intervention State Aid Competition Regulation Public procurement Liberalisation of state monopolies

65. 65 State aid

66. 66 Fundamentals State intervention + public resources Favoured treatment of individual undertakings, groups of undertakings or industries (selectivity/discrimination) Distortion of/threat to fair competition, i.e. not at standard market conditions Affecting trade between MS's (only „big things“) Generally, state aid is prohibited but ….

67. 67 Most frequent examples: no market value Tax breaks, waivers of social and health insurance payments Sales of assets at favourable prices Equity increases and debt for equity swaps Purchase of “bad“ assets at favourable prices Public loans, guarantees Privatizations Public payments remissions Investment incentives (cash grants, training aid, job creation aid etc.)

68. 68 Some exemptions from general ban General exemptions - repair of damage - exceptional occurrences - unification of Germany consumer and non-discriminatory benefits Individual exemptions - “underdeveloped“ areas - underdeveloped activities - cultural heritage - important EU project - serious disturbance - unemployment EC Accepts

69. 69 European organisational framework  EC  EU courts  NCA‘s (monitoring units)  Local courts (private enforcement)  ECN (information sharing)

70. 70 Distortion of competition by State intervention Prohibited restriction of competition State Aid Public procurement Liberalisation of state monopolies

71. 71 Public procurement

72. 72 Fundamentals State intervention by using public funds Public tenders: Transparency Reasonable and objective criteria (no discrimination) Effectivity Avoiding risk of favouring one undertaking or industry Distortion of/threathening to distort fair competition

73. 73 Distortion of competition by State intervention Prohibited restriction of competition State Aid Public procurement Liberalisation of state monopolies

74. 74 Liberalisation of state monopolies

75. 75 Fundamentals State intervention based on exclusivity in respect to certain economic activity Benefit for customer and savings of public funds Smooth transition to competition and opening up of markets Free movement of goods and services Unbundlings: Access to networks (essential facilities)

76. 76 Investigation

77. 77 Investigation Access to business premises Subject to approval, access private premises of individuals (management and employees) Inspect accounting books and other internal/external documents, computers etc. Seal/copy business premises, computers or accounting books EC/NCA is authorised to

78. 78 Investigation Share evidence/information obtained by other NCA‘s/EC (ECN) Require oral explanations (questioning) Impose penalties for Non-cooperation Supply of misleading or incomplete information Non-compliance with measures imposed by authority EC/NCA is authorised to

79. 79 What is ECN?

80. 80 Formal framework in MS Parallel application of national and EU rules In addition to EC/EU courts, European rules are also applied by NCAs, local courts and other national authorities European Competition Network - ECN Borad powers to investigate and penalise (EC in MS's/local authorities) Almost identical rules Increased aggressivity in tackling competition issues / massive penalties

81. 81 Why ECN? Main reasons Too many MSs  decentralization Relief burden of EC EC to focus on major cases (antitrust/concentrations) Cooperation and information exchange (ECN) Improve efficiency and enforceability of competition law - antitrust Unification of competition rules across EU

82. 82 Antitrust Case is dealt with by the best placed NCA Impact on competition in the country concerned Ability to eliminate anti-competitive behaviour effectively Effective collection of evidence of anticompetitive offences Disputes over authority/delegation of cases EC has the „final say“ Who is authorised to investigate in member states?

83. 83 Unification and cooperation Co-operation between EC and NCA Duty to disclose at inception of proceedings and pending a decision Exchange of information, experience, documents and evidence, incl. confidential information (!) Assistance in investigation and provision of evidence Anything may be used

84. 84 What does it mean? EC/NCA's focus primarily on antitrust NCA activities in MS's have seen a sharp increase Cartel investigation Abuse of dominant position Introduction of Leniency Programmes Amounts of fines imposed are soaring As an innovation, NCA's impose remedial measures National investigations have international implications Activities unchallenged so far become a risk factor Support of private enforcement actions

85. 85 Questions?