EU Competition and Procedure Law 2013

1. EU Competition and Procedure Law 2013 Henrik.Norinder@jur.lu.se

2. Introduction • What is Competition Policy? • Brief history of competition laws • Objectives of competition policy • Relationship with other public policy objectives

3. What is Competition Policy? • Competition Policy aims at ensuring that competition in the marketplace is not restricted in a way that is detrimental to society • Market failure also in markets without natural monopoly features. Even if entry is possible, dominant positions might persist, due to: • sunk costs industries • lock-in effects and switching costs • network effects

4. Do we need a Competition Policy? • Market failure also in markets without natural monopoly features. Even if entry is possible, dominant positions might persist, due to: • sunk costs industries • lock-in effects and switching costs • network effects

5. We also need it because: • Un-monitored, firms may resort to actions that increase their profits, but harm society, such as: • Collusion • Mergers which lessen competition • Predatory behaviour • Exclusionary behaviour

6. History of CompetitionLaws: The US • End of XIX Century in the US: • Revolution in transportation and communication, which lead to a single US market • Technological innovations, stock market, new managerial methods = economies of scale and scope to be reaped: firms’ size increases (also through mergers)

7. The US, part II • Market instability, due to macroeconomic crises and price wars (and also by phenomena above) + incentives to form cartels and trusts + negative effects on farmers and small firms • 1890: Sherman Act · Section 1: Conspiracies · Section 2: Monopolisation • (1914: Clayton Act - mergers, price discrimination - and Federal Trade Commission Act)

8. Enforcement in the US • 1897: first Supreme Court decisionsagainst trusts • 1911: Standard Oil broken into 34 firms Per se prohibition of priceagreements (initially, littledistinctionbtw. horizontal and vertical agreements) • 1933: AppalachianCoals v. US, an exception • 1950-60s: (too) activeenforcement • 1970s: efficiencycriteriabegin to play a role • 1980s: (Reagan): laissez-faire...

9. Germany • End XIX Century: cartels (enforceable contracts) as a • means to avoid cut-throat competition • 1923: Cartel law as reaction to hyperinflation • 1930: Great Depression: compulsory cartel participation in sensitive sectors • Nazi regime: cartels to prepare the war apparatus • After ’45: Programme to break economic concentration (stopped with Cold War) • 1957: Competition Law (ratio: protection of freedom of contract); Bundeskartellamt

10. The EC • Paris Treaty: (ECSC): no trade barriers, no • discrimination • Rationale: equal access to resources; principles of free markets • Predecessor of current EU Competition Law: – Art. 65: prohibits agreements that distort trade – Art 66: prohibits abuse of dominant position – Art. 66: concentrations

11. The EC, II • EC Treaty: Articles 81-82 and 83-89. Merger Regulation • Which objectives of Competition Law in the EU? • Competition as an intermediate objective (towards the primary objective: to help economic progress and welfare of European citizens) • European Integration (elimination of national discriminations in the economic system)

12. Article 101 • Article 101 does not distinguishbetweenagreementsbetweencompetitors (horizontal agreements) and agreementsbetweenfirms whichoperate at successive stages of the production process (verticalagreements). Economics: horizontal and verticalagreements should be treated in a different way.

13. The Effect on Trade Criterion A necessary condition for the application of EC Competition rules • Articles 101 and 102 of the Treaty are only applicable if there may be an appreciable, direct or indirect, actual or potential influence on the flow or pattern of trade between at least two Member States of the EU • Notice Guidelines on the effect on trade concept contained in Articles 81 and 82 of the Treaty (Apr. 2004)

14. PossibleObjectives of CompetitionLaw • Economic Welfare (Total Surplus) Definition: W=CS+PS (+ …) If price falls, welfare rises Size of the pie, not how slices are distributed Dynamic aspects important (future W matters)

15. Possible Objectives, II • Consumer Surplus CS v. W: lobbying arguments; who owns the firms?; If price equals marginal cost, who pays the fixed costs?; Who innovates and invests? Anyhow: usually, W and CS move together

16. Other Possible Objectives • Defence of smaller firms • Promoting market integration • Protection of economic freedom • Fighting inflation • Fairness and equity

17. Other Possible Objectives • Public policy considerations affecting competition • Social, political, environmental reasons • Strategic reasons (trade and industrial policies)

18. Competition Policy and Markets • The purpose of EU competition law is to keep markets “effectively or workably” competitive. In legal terms “undistorted” This requires that competition authorities attempt to keep markets open to new competitors as well as offering some basic protections to existing competitors. • Undistorted competition is meant to protect consumers from exploitation by cartels as well as exclusionary conduct by large firms. • It presses firms to behave more efficiently.

19. Effective Competition and Efficiencies • Allocative efficiencies • Productive efficiencies • Innovative efficiencies?

20. How does EU Competition Law Promote “Effective” Competition? • EU Competition law uses three basic tools: a law vs cartels and other restrictive agreements (Article 101); a law vs abuse of dominant market power (Article 102); • and a merger control policy

21. General Norms • Article 101 – prohibits agreements which restrict competition; agreements between competitors such as cartels and patent pools and agreements which are vertical such as distribution agreements and IPR licences.

22. Collusion in Economics • Explicit collusion: the industrial incest(G. Stigler) – Cartels serve to restrict competition without producing any objective countervailing benefits (e.g., no cost savings). They must be condemned by law without considering mitigating circumstances. • Tacit collusion: – using the market to “communicate” (e.g., signaling intentions to coordinate) versus direct communication between parties (price-fixing through meetings, mails) – repeated game with multiple equilibria

23. General Norms • Article 102 – prohibits abusive conduct by dominant firms

24. General Norms • Merger Policy - only allows mergers which do not substantially impede competition: differentiates between mergers between competitors BMG/Sony and “vertical” mergers AOL/Time Warner

25. Competition Tools Focus on the Extremes of Commercial Conduct • Art 101 Agreements must appreciably restrict competition. Many restrictions necessary to business are not caught. • Art 102 Abuses of dominance. Achieving dominance by lawful means is acceptable • Mergers: only mergers that significantly impede competition are prohibited • These leave wide margins to legitimate competition

26. How wide should the margins be? • Much depends on the underlying principles of the competition system: • EU law is based on Ordoliberal thinking which presupposes robust regulation of private power • US law currently based on post-Chicago thinking which retains a belief in the potential self correcting power of market forces

27. The issues in contention • (i) Structure versus process • (ii) Static vs dynamic efficiencies • (iii)Total vs Consumer efficiency • (iv) Per se vs rule of reason • (v) False positives vs false negatives

28. (i) Structural vs Process Analysis • (1) certain market “structures” (market shares) influence the conduct of competitors and the performance of the market as a whole, i.e. the structure/conduct/performance paradigm (Harvard) • (2) structural analysis must be complemented by an analysis of the process (actual behaviour) in the particular market. (The Chicago School) • (3) process is more complicated and involves an understanding of strategic behaviour by firms (Post-Chicago)

29. Examples • High market shares do not automatically equate to high market power. Actual competition, potential competition and barriers to entry a “reality check.” • Oligopoly. A “concentrated” market with few players. Is there actual competition or tacit coordination? E.g. roaming charges for mobile phones • The process of competition on a market must be investigated and analysed not assumed.

30. (ii) Static v Dynamic Efficiencies • Short term vs long term • Monopolists and innovation • Schumpeterian rivalry and innovation • Systems and network effects: direct and indirect

31. Regulation 1/2003 • The Commission: a prosecutor and a judge • The Commission combines the investigation and prosecution function and the decision-making function • Investigation is conducted by officials of DG Comp; they draft the statement of objections (SO) and the Commission’s decision • The SO is sent by the Commissioner; the oral hearing is chaired by an official who does not belong to DG Comp; the decision is adopted by majority vote by the Commission

32. Regulation 1/2003 • Art. 103: “The appropriate regulations or directives to give effect to the principles set out in Article 101 and 102 shall be laid down by the Council, acting by a qualified majority on a proposal from the Commission and after consulting the European Parliament” • Regulation 17/62 was the first regulation saying how to implement articles 81 and 82. It sets a centralized and ex ante system for Art 81 (3) • Replaced by Regulation 1/2003 - May 1, 2004

33. The role of national competitionauthorities and courts • NCAs and Courts are empowered to apply EC competition law and obliged to do it where trade maybe affected – EC law + national law, or EC law only – No stricter national decision in case of Art. 101 – Stricter national laws may be applied to sanction unilateral conduct (Art. 102) • A complex system is designed to ensure the necessary coordination between the Commission and NCAs (Art. 11 to 16)

34. The Powers of the Commission • Decisions (Art. 7 to 10) – Acting on a complaint or on its own initiative – Imposing behavioral or structural remedies – Ordering interim measures – Reopening the proceedings • Powers of investigation (Art. 17 to 21) – Requesting all necessary information – Conducting inspections in any offices, and in homes but with the authorization of a judge

35. The Powers of the Commission • Penalties (Art. 23 and 24) – Up to 1% of the total turnover if information supplied is incorrect or misleading – Up to 10% of the total turnover in case of infringement

36. Rights of Defence • “The rights of defense of the parties concerned should be fully respected in the proceedings” Art. 27(2) • Parties must be informed on the Commission’s objections (i.e., SO issuance) and have the opportunity to comment on it (i.e., oral hearing) • Access to the Commission’s file • Third parties may react on a published summary of the case or on the proposed course of action

37. A series of Reform • New Leniency Program (2002) • New enforcement regime (Reg 1/2003 and the modernization package (notices on the affectation of trade criterion, on cooperation with NCAs, on the application of article 81(3), etc.) • Reform of Merger Control (new Council Regulation, Guidelines on Horizontal mergers, Best practices, etc.)

38. A series of Reform II • Organizational changes (appointment of a chief economist, new statute for Hearing Officers, etc.) • Driving forces: – Enlargement (+ 10 MS + 2 MS) – Mature single market – Economy globalization – Widespread knowledge on competition law and its enforcement – CFI vetoes

39. A Series of Reform III What is next? – Article 102 (review and guidelines) – Encouraging private actions