EU Competition Law

Competition versus Monopoly Introduction to US Antitrust Law Introduction to EU Competition Law United Brands Case and company history – Percentage market share needed for dominance?

Competition versus Monopoly Perfect competition – Large number of sellers, large number of buyers No single buyer or seller can influence price – Buyers and sellers both have perfect information – Product is fungible/identical – Freedom of entry and exit Imperfect competition – At least one element of perfect competition missing – Imperfect competition characterizes markets with strong brands Oligopoly – So few sellers that change by any one of them affects prices Monopoly – Single seller in market – Government licensing and intellectual property can create/regulate legal monopolies

Monopoly Rent

Introduction to US Antitrust Law Why “anti-trust” and not “competition” law? – 19 th century prohibition on companies owning companies, so cartels based on trusts Sherman Antitrust Act 1890 – Prohibits “combinations in restrain of trade” – Prohibits abuse of monopoly power – Interpretation: per se illegal behavior versus behavior evaluated under “Rule of Reason” Per se illegal: bid rigging, price fixing, tying Courts undermined effect in early years – 1895 Sugar Trust Case: one company controlling 98% of sugar manufacturing in US not subject to Sherman Antitrust Act because manufacturing is local, not interstate commerce Clayton Act 1914 – Added private cause of action; restrictions on exclusive dealing or price discrimination that creates monopoly or reduces competition; and prohibits mergers/acquisitions that create monopolies

GE-Honeywell Merger Controversy General Electric wanted to acquire Honeywell – US antitrust review successful with minor divestitures – EU competition review unsuccessful US commentary highly hostile – EU competition law protects competitors, not competition while US law focuses on consumers and efficiency – Should EU be allowed to block merger of 2 US companies? (extraterritoriality) EU response: EU law also protects “consumer welfare” Court of First Instance upheld Commission decision on horizontal monopoly grounds – By the time of the CFI ruling, GE had lost interest How big is the difference between US & EU competition law?

Herfindahl-Hirschman Index (HHI) Developed by Orris Herfindahl & Albert Hirschman Measures size of firms in relation to industry to determine the amount of competition among them – US DOJ uses HHI to determine how “concentrated” a market is which indicates the likelihood of monopoly Only helps if the relevant “market” was defined correctly in the first place Used in 1992 US DOJ/FTC Merger Guidelines for Horizontal Monopolies

Introduction to EU Competition Law 1951 European Coal & Steel Community: prevent restrictions on “normal” competition (among state owned enterprises) 1957 Treaty of Rome: Protect competition in common market from “distortion” – Article 81 (ex 85) prohibits cartels and price fixing – Article 82 (ex 86) prohibits abuse of dominant position 1962 Commission given broad powers to enforce competition laws – Investigate economic sectors and individual enterprises Right to demand explanations and inspect premises/hostile access – Member states required to assist Commission in enforcing EU competition law – Commission determines when violations of EU competition law have occurred and renders enforcement decisions All Commission decisions (investigate, enforce) subject to review in Court of First Instance which can grant interim relief – Enforce decisions with cease & desist orders or fines

Abuse of a Dominant Position Dominant position = ability to hinder competition by acting independently of competitors and consumers Dominant position presumed above 50% – Section 2 Sherman Antitrust Act monopoly threshold generally MUCH higher What constitutes abuse? – Setting unfair prices or other conditions – Limiting production, markets or technical development to detriment of consumers – Unfair discrimination among trading partners – Tying arrangements

Introduction to United Brands United Brands Company is Chiquita Brands International today Founded 1871, known as United Fruit Nobel Prize winner Pablo Neruda poem La United Fruit Company criticizes US and multinational corporations exploitation of Latin America 1970 United Brands 1985 Chiquita Brands

United Fruit/United Brands/Chiquita Scandals 1920s largest employer in Central America, performing some government functions in Guatemala – El Pulpo (the octopus) with hidden influence in government, military, economy Banana Massacre 1928: Columbian Army opened fire on unarmed strikers to prevent US invasion to protect United Fruit plantations, killing 1, US CIA leads overthrow of democratic Guatemalan government after attempt to nationalize United Fruit plantations 1975 Banana-gate: bribes to Honduran dictator to avoid taxes – CEO Eli Black commits suicide by leaping from 44 th floor of Pan Am/Metlife Building 2007 $25 million fine to USDOJ for connections to Columbian paramilitary groups for protection for banana plantations 2007 French NGO accused subsidiary of violating human rights by knowingly exposing workers in Costa Rica to toxic pesticides 2007 US class action seeking compensation from victims of Columbian paramilitaries subsidized by Chiquita

Introduction to Externalities A cost (or a benefit) of an activity by one party that is imposed on (or received by) another party without compensation (or payment). – Positive externalities: Vaccinations, education, bee keeping, improving property, etc. – Negative externalities: Pollution, accidents, defective products, etc. Assuming we agree that negative externalities are bad, legal regimes should seek to force parties to internalize the external costs of their actions. When markets are organized around networks, strong externalities are called “NETWORK EFFECTS”

Competition & Innovation: Network Effects What impact rapid technological innovation on competition? – Intellectual property may create legal monopolies – Network effects may create de facto monopolies – Lower or higher barriers to entry? (lock-in problem) What about standards as a strategy to bring innovation to consumers without monopoly? – Next week’s class…

US Antitrust Case against Microsoft 1998 US DOJ & 20 states filed suit against MSFT for abuse of monopoly in PC operating systems – Dominant achieved by position by licensing term: pay for Windows for each machine, without regard to what OS is loaded on it – Application barrier to entry in software market created by dominance in operating system market and limited disclosure of application programming interfaces District court defeat for MSFT – District court decision: Facts 1999, Law 2000 – Holding: Abuse of monopoly position – Remedy: Split operating system and applications DC Circuit Court of Appeals affirmed finding of monopoly, overruled remedy & remanded District court adopted milder remedy on remand

EU Competition Case against Microsoft US competitors came to Brussels seeking EU relief 2000 Commission “Statement of Objections” notifying MSFT of challenge – Application programming interface disclosures – Windows media player versus competitors 2004 Decision: Increase Disclosures, Provide OS without WMP, €497 million fine 2007 CFI decision: upheld abuse of dominant position, overturned independent trustee to monitor compliance with greater API disclosure 2006 fine of €280.5 million for non-compliance with 2004 decision 2008 fine of €899 million for non-compliance with 2004 Decision