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Presentation on theme: "EU COMPETITION POLICY REF: EU COMP POL TEACH Update feb 08."— Presentation transcript:


2 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

3 EUs 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 Members 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

4 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

5 ART.81ANTI-COMPETITIVE AGREEMENTS Prohibited: intra firm agreements that distort intra EU trade and prevent, restrict or distort competition –Eg. Sotherbys & Christies (2002) – &language=EN&guiLanguage=en &language=EN&guiLanguage=en Horizontal co-operation –eg. Woodpulp case (1993),Nintendo(2002) – exclusive territories – &language=EN&guiLanguage=en &language=EN&guiLanguage=en Vertical co-operation – read up Cartels subject of many investigations incl –English Premier League –8 Vitamin companies

6 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

7 Economic analysis : review of BE-COMP diagram (note: you can use other theories) Sales per firm AC price Total sales D Number of firms Mark-up euros x COMP BE FT BE 2n x nn E E CC E A 1 E A MC p p pApA ' A p p Home market only E E W

8 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

9 Anti-competitive behaviour Collusion 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

10 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 BE FT Perfect collusion Partial collusion E nBnB mono B n=1n A 2n pBpB p G

11 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 n B (Point B),not n as in competitive market Prices higher, p B > p, smaller firms, higher average cost, stops benefit of integration Number of firms Mark-up COMP BE FT Perfect collusion Partial collusion E nBnB mono B n=1n A 2n pBpB p G

12 Economic effects The welfare loss of collusion (versus no collusion). area price Total sales Demand curve Number of firms Mark-up COMP BE FT pBpB Perfect collusion Partial collusion E nBnB mono B n=1n p mono E p B CBCB

13 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

14 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)

15 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

16 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.)

17 –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!!!

18 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

19 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

20 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

21 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

22 Difficult to implement –resistance from States

23 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

24 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

25 RECENT COMPETITION CASES Premier League Vitamin companies Microsoft Airlines Others

26 Other relevant theory See handout

27 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

28 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

29 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?


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