EC Competition Law Professor dr. juris Olav Kolstad Department of Private Law, Faculty of Law

What is competition law? Competition law exists to protect the process of competition in a free market economy –A system where the allocation of resources is determined solely by supply and demand in free markets Competition wanted because of the market result it produces –Efficiency –Low prices –Innovations Competition rules limits the freedom of the market players to protect the process of competition

The EC Treaty competition rules – an overview Article 81 –Article 81(1) prohibits agreements or concerted practices restrictive of competition is –According to Article 81(3) Article 81(1) “may … be declared inapplicable” Article 82 –Forbids dominant undertakings to abuse their market power Merger Regulation –Prohibits concentrations that significantly impedes effective competition

Competition policy and competition law Competition policy –Describes the way in which governments take measures to promote competitive market structures and behaviour –Formulation of goals Competition policy and science Competition law –The legal rules implementing the competition policy –Law and economics Developing competition policy through case law

Economic efficiency - main objective of competition policy Competition gives the best utilisation of scarce resources –Perfect competition v monopoly Perfect competition –Pareto optimal use of resources None could be made better of without someone being made worse of Consumer welfare maximized –Productive efficiency Constant pressure on costs Cost reductions is the only means whereby firms can stay in business and increase profits –Dynamic efficiency New knowledge

Monopoly –Leads to an inefficient allocation of resources Quantity supplied less the quantity which would be supplied in a competitive market –Deadweight loss Loss of consumer surplus which is not turned into profit for the producer –X-efficiency Perfect competition, monopoly and competition in the real world –Workable competition

Other goals of competition policy? Preservation of liberty Fair competition –Promoting small and medium sized undertakings Socio-political issues –Social policies –Employment –Industrial policy –Environment

The objectives of EC competition law ECJ: Teleological interpretation Article 2 EC Treaty: –The Community shall have as its task, by establishing a common market and an economic and monetary union and by implementing the common policies or activities referred to in Articles 3 and 3a, to promote throughout the Community a harmonious and balanced development of economic activities, a high level of employment and of social protection, equality between men and women, sustainable and non-inflanatory growth, a high degree of competitiveness and convergence of economic performance, a high level of protection and improvement of the quality of life, and economic and social cohesion and solidarity among Member States.

The common market is not an end in itself but a means of achieving the promotion of matters listed in Article 2 Common market –An area where direct and indirect barriers to trade between Member States are removed (internal aspect) and –a common import and export policy adopted toward the outside world as far as commercial transactions are concerned (external aspect)

Internal market –the internal aspect of the common market –Defined in Article 14: The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of this Treaty. Articles 3 sets out the ”activities” of the Community, including –(g) a system ensuring that competition in the internal market is not distorted

The role of competition policy as an instrument of single market integration absolutely crucial to understanding EC competition law –Regulates conduct of undertakings threatening the establishment of an internal market –Rules on ”free movement” directed towards Member States EC competition law serve to masters –Competition –Single market integration Thus: efficiency and allocation of resources a central concern, but not the sole goal

Other objectives? –The objectives in Article 2 –Interface with other policies

ECJs concept of competition ECJ has not relied upon any particular competition ”ideology” –But economic arguments/theories/models decisive for the application of the competition rules in individual cases Article 81 An economic approach to Aricle 82 Definition in Metro (case 26/76) –The requirements contained in Articles 3 and [81] of the EEC Treaty that competition shall not be distorted implies the existence on the market of workable competition, that is to say the degree of competition necessary to ensure the observance of the basic requirements and the attainment of the objectives of the Treaty, in particular the creation of a single market achieving conditions similar to those of the domestic market. In accordance with this requirement the nature and the intensiveness of competition may vary to an extent dictated by the products or services in question and the economic structure of the relevant market sectors.

The ECJs concept of ”workable competition” related to what competitin is inteded to achieve in the Community context –Not one of the concepts of ”workable competition” found in economic theory But influenced by the theory Concept of competition in the Merger Regulation compared: –Prohibits concentrations creating or strengthening a dominant position ”significantly impede effective competition” Article 2(2) and (3)

The sources of EC competition law The Treaty Articles Regulations –Merger regulation –Block exemptions Judgements –European Court of Justice –Court of First Instance Commission notices and guidelines Commission decisions Annual reports from the Commission Other documents

Some basic concepts Market power Market definition Barriers to entry S-C-P paradigm

The concept of market power Competition law concerned first and foremost with the problems that occur when a firm or two or more firms possess market power A firm or firms that possess market power can enjoy some of the benefits available to the true monopolist –Market power presents undertakings with the possibility of limiting output and raising price, which are clearly harmful to consumer welfare

Ways in which market power is manifested –Collusion and cooperation between competitors –Unilateral conduct; Abuse of dominant position –Structural changes; Merger Control –Split up off monopolies The legal test of market power; per se or rule of reason?

Market definition Decides the factual framework for the analysis of market power –The relevant market –Economic concept: Economic or econometric analysis of the facts An analytical tool, not an end in itself –”a tool for aiding the competitive assessment by identifying those substitute products or services which provide an effective constraint on the competitive behaviour of the products or services being offered in the market by the parties under investigation” But have normative implications –The implications of a broad or limited definition of the relevant market

The market definition focus on the market as it is today –Identify competitive restraints from actual competitors, does not include potential competitors The European Commission’s Notice on the Definition of the Relevant Market –Extract of the Commissions practice or experience –Without prejudice to the case law of the Court of First Instance and the ECJ –But: In practice an extremely an influential guide

The “relevant market” the product of three different market dimensions The relevant product market –Interchangeability: to what degree are other products substitutes to the product in question? The relevant geographic market –The area in which the actual product is sold; the relevant geographic market Temporal market

Barriers to entry Barriers to entry hinders the emergence of potential competition which would otherwise constrain the incumbent undertaking Crucial when determining market power –May have high market shares but no market power if there are no barriers to entry

Analysing barriers to entry Market definition and entry by production substitutes Market conditions and historical entry Assessment of absolute cost advantages Assessment of strategic (first mover) advantages Vertical foreclosure and exclusion Predatory behaviour Assessment of entry impediments

S-C-P paradigm Structure Conduct Performance

Enforcement – an overview Enforcement by the Commission –The legal basis Article 85, cfr. Article 83 Regulation 1/2003 Enforcement by national authorities –Regulation 1/2003

Enforcement by national courts –Article 81(1) and 82 have direct effect Case 127/73, BRT v SABAM –After Regulation 1/2003: Also Article 81(3) –Remedies in national courts The enforceability of agreements Actions by third parties –Damages –Does Community law require a national Court to ensure that a remedy is available?

The scheme of Article 81 The prohibition in Article 81(1) Nullity, Article 81(2) Exemption, Article 81(3)

Article 81(1) – the elements The meaning of “undertaking” Forms of co-operation caught –The meaning of agreement –Decisions by associations of undertakings –Concerted practices “Object or effect the prevention, restriction or distortion of competition” Effect on trade between member states De minimis

The concept of an “undertaking” Article 81 (and 82) applies only to “undertakings” –Undertaking not defined in the EC Treaty ECJs definition of an undertaking: –“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” Case 41/90, Höfner and Elsner v Macrotron, para 21

“Every entity” –The legal form of the entity irrelevant All kind of companies Persons –Self employed –Not employees (Opinion of GA Jacobs, case C-67/96, Albany) Associations –“Associations of undertakings” directly caught –But can also be found to act as “undertakings” –Example: Co-operatives, P&I clubs –Exception: trade unions representing their members –The entity’s engagement in “economic activity” decisive

“Economic activity” –Any activity consisting in offering goods and services on a given market Wide definition –Social activity not economic activity (joined cases C-159/91 and C- 160/91 Poucet and Pistre, case C-244/94 Fédération française des sociétés d'assurance, case C-67/96 Albany) fulfilling an exclusively social function the activity must be based based on the principle of national solidarity non-profit-making: The ”outcome” not dependent upon the contribution

The purchase of goods or services an economic activity? –An activity exercised on the market –Court of First instance: T-319/99 Fenin v Commission ”an organisation which purchases goods - even in great quantity - not for the purpose of offering goods and services as part of an economic activity, but in order to use them in the context of a different activity, such as one of a purely social nature, does not act as an undertaking simply because it is a purchaser in a given market ” (para 37)

State bodies Exercising official authority –ECJ: Article 81 does not apply to agreements concluded by bodies “acting in their capacity as public authorities and undertakings entrusted with the provision of a public service” (case 30/87, Bodson) –Includes tasks which are typical those of a public authority –Such tasks are not of an economic nature –Can to a certain extent be financed through fees of economic contributions Engaging in economic activity –Will be regarded as an “undertaking” –How the public body is organised is not decisive

Bodies both exercising official authority and engaged in economic activity Undertakings engaged in “services of general economic interest”, article 86(2)

Single economic unit doctrine Two or more separate legal undertakings can be treated as on undertaking –if the undertakings “form an economic unit within which the subsidiary has no real freedom to determine its course of action on the market, and if the agreements or practices are concerned merely with the internal allocation of tasks as between the undertakings” Case 30/87, Bodson Agreements between two undertakings within a single economic unit not regarded as an agreement “between” undertakings –Escapes the prohibition in article 81(1)

The rationale: –No freedom to take decisions regarding the market conduct Regarded as unilateral conduct May be caught by article 82 if the undertaking has a dominant market position –Internal allocation of functions The other side of the coin: –If a subsidiary engages in anti competitive agreements the mother company will also be regarded as part of the agreement

The test of control –If a parent company owns more than 50% of the shares in a subsidiary interdependency is presumed –Minority share holdings may also give control if combined with specific rights attached to them –One large shareholder and many small –Joint control (50/50) Jointly controlled companies must belong to a single group of companies to be regarded as part of one economic unit The State regarded as one economic unit?

The concept of an “agreement” ”Agreement”  widely construed –It is sufficient if the undertakings in question should have expressed their joint intention to conduct themselves on the market in a specific way Alignment of the competition parameters available to them “joint intention”  a legally binding agreement not necessary –The form of no importance (oral, signed, unsigned) –“gentlemen’s agreements” –The agreement does not have to be exhaustive It is enough just to set the broad framework for the undertakings market conduct

The engagement of the parties in the agreement –It is enough to be partly engaged in the collaboration Breach of contract regarding parts of the agreement –Passive “members” –An excuse if an undertaking has been “forced” into a cartel? Collaboration through the establishment of a company (joint ventures) The distinction between “agreement” and unilateral conduct –Joined Cases C-2/01 P and C-3/01 P, BAI v Bayer and Commission Consensus requires and intention from the supplier to impose a contract obligation (an export ban), and an intention from the distributors to adhere to the contract obligation

The situation when the agreement is terminated –ECJ: It is sufficient if such agreements continue to produce their effects after they have formally ceased to be in force Case 51/75, EMI Records Limited v CBS United Kingdom Limited –It is the effects of the agreement on the parties conduct that is decisive for the application of art 81(1)

“Decisions of undertakings” Collusion can take place through the medium of an association: Directly covered by art 81(1) –Makes it possible to hold associations directly liable Association  widely defined Decision  every statement made with the object or effect of influencing the commercial behaviour of the association’s members –Does not have to be binding (e g recommendations)

“Concerted practices” A form of co-ordination where undertakings, without concluding any sort of agreement or establishing a plan of action, knowingly substitute practical co-operation between them for the risks of competition –This criteria avoids that situations where companies collaborate without any kind of agreement but only on the basis of a common understand falls outside article 81(1) It is contrary to the rules on competition for a producer to co- operate with his competitors, in any way whatsoever, in order to determine a co-operated way of action or to ensure its success by prior elimination of all uncertainty as to each others conduct regarding the essential elements of that action –ECJ, case 48/69, ICI v Commission

Proving concerted practices Direct or indirect contact Meeting of minds or some kind of consensus –Exchange of information –Unilateral disclosure –Public announcements Competition is knowingly substituted with cooperation –Uncertainty eliminated –Subsequent behaviour in the market Casuality

Can a concerted practice be inferred from circumstantial evidence alone? A question of the use of economic evidence in competition cases Parallel market behaviour alone in itself not a concerted practice BUT: It may however amount to strong evidence of such a practice if it leads to conditions of competition which do not correspond to the normal conditions of the market having regard to the nature of the products, the size and numbers of undertakings, and the volume of the said market power –ECJ, case 48/69, ICI v Commission Oligopoly markets and economic evidence –Joint dominance

The distinction between “agreement” and “concerted practices” Overlapping concepts –Complex cartels  and/or No precise distinction –And no use for a precise distinction “Concerted practice” important mainly where the Commission or the Courts is forced to rely upon circumstantial evidence alone