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EU COMPETITION POLICY

EU COMPETITION POLICY. REF: EU COMP POL TEACH Update feb 08. 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

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EU COMPETITION POLICY

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  1. EU COMPETITION POLICY REF: EU COMP POL TEACH Update feb 08

  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. EU’s 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 Member’s 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. Sotherby’s & Christies (2002) • http://europa.eu/rapid/pressReleasesAction.do?reference=IP/02/1585&format=HTML&aged=0&language=EN&guiLanguage=en • Horizontal co-operation • eg. Woodpulp case (1993),Nintendo(2002) – exclusive territories • http://europa.eu/rapid/pressReleasesAction.do?reference=IP/02/1584&format=HTML&aged=0&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) euros price Home market only Mark-up BE D BEFT E’ 1 E’ E’ m' p’ p’ E” W E” E” p” p” A A mA pA AC COMP MC Number of firms n’ n” 2n’ Sales per firm x” Total sales C’ C” x’

  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 behaviourCollusion 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 Mark-up BEFT G Perfect collusion mmono B pB E” Partial collusion p” A COMP Number of firms n=1 n” nB 2n’

  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 nB (Point B),not n” as in competitive market Prices higher, pB> p”, smaller firms, higher average cost, stops benefit of integration Mark-up BEFT G Perfect collusion mmono B pB E” Partial collusion p” A COMP Number of firms n=1 n” nB 2n’

  12. The welfare loss of collusion (versus no collusion). area Economic effects price Mark-up Demand curve BEFT pmono Perfect collusion mmono B B pB E” Partial collusion E” p” COMP Number of firms n=1 n” nB Total sales CB

  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. 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 What if only some countries subsidise?

  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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