EU Competition Law

1. EU Competition Law

2. 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?

3. 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

4. Monopoly Rent

5. Introduction to US Antitrust Law • Why “anti-trust” and not “competition” law? • 19th 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

6. 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?

7. Herfindahl-Hirschman Index (HHI) • Developed by OrrisHerfindahl & 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

8. 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

9. 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

10. 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

11. 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 1,000 • 1954 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 44th 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

12. 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”

13. 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…

14. 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

15. 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