Enforcement of the Antitrust Laws

1. Enforcement of the Antitrust Laws Antitrust in Europe • The responsibility for the enforcement of antitrust concerns that involve two or more member states resides in a single entity, the Competition Directorate. • Separate and distinct antitrust authorities within individual member states are responsible for those issues whose effects are felt within particular countries. • The antitrust laws of the European Union are quite similar to those of the United States. Nevertheless, there remain a number of differences between antitrust laws in Europe and the United States. • Merger evaluations typically are conducted more quickly in Europe. • It is easier in practice to prove that a European firm is dominant than it is to show that a U.S. firm has monopoly power.

2. Antitrust Laws PrivateEnforcement Public regulation Anti-competitivebehavior Merger Reglt 89 Public Aids Art 87 Liberalization Art 86 106 Collusion Art 81 101 Abuse of a dominant position Art 82 102

3. The definition of market • All firmswhoproduce the same good and sell in the same place are in the samemarket. • In an economic perspective, a marketcanbedefined as productshaving a strongsubstitutabilitybetweenthemat the supply and demandlevel • Ex: in 1956, Dupont wasarguingthatitwas not a monopolisteventhoughitwashaving 90% of the cellophanmarketbecauseitwasonlyhaving 18% of the market of wrappingmaterials (craftpaper).

4. Definition of the market • Cross priceelasticity A cross-price elasticity relates the change in quantity demanded for one good to a price change in another.

5. The marketdefinition • Criticism of cross-priceelasticities • The reaction of the demandis not alwaysinstantaneous • In a competitivemarket the cross-elasticitiescouldbesurprisinglyweak, • It could have somethresholdeffect.

6. The definition of market

7. The definition of the market • The convergence of clues • The cross priceelasticities • The correlation of price variation • The nature of the needsatisfied • The geographical distance

8. Antitrust Laws PrivateEnforcement Public regulation Anti-competitivebehavior Merger Reglt 89 Public Aids Art 87 Liberalization Art 86 106 Collusion Art 81 101 Abuse of a dominant position Art 82 102

10. Mergers In a mergertwofirm combine to form one new firm. • Horizontal: When the twofirmsweresupplyingproduct on the samemarket ex: Addidas and Reebook • Vertical:When a firmsismergingwith one of its provider or distributor, merging the step of the production process. ex: General Electric/honeywell • Conglomerate: A merger involves firms that operate in separate markets

11. Measure of Market concentration • Concentration ratio: if weorderfirms by marketshare (s) in descendingorder, i.e. firm 1 largest, 2 is the second largest, etc, then s1 > s2 >…> si >…> sn. The m firm concentration ratio is the sum of the marketshare of the largest m firms: CRm=∑mi si

12. Measure of Market Concentration HerfindahlHirschman Index (HHI) issimply the sum of marketshare (s) for all firms in the industrywith N firms: HHI=∑Ni s2i Directly use the european and US merger guidelines

13. The HHI • Marketwith 2 firmshaving 50% and 50% • Marketwith 4 firmshaving 25% each • Marketwith 5 firmshaving 20% each • Marketwith 2 firmshaving 80% and 20% • Marketwith 4 firmshaving 40%, 30%,20% and 10%

14. The HHI • Marketwith 2 firmshaving 50% and 50% HHI=2*2500=5000 • Marketwith 4 firmshaving 25% each HHI=4*625=2500 • Marketwith 5 firmshaving 20% each HHI=5*400=2000 => Rule 1: HHI isdecreasingwith the number of firms • Marketwith 2 firmshaving 80% and 20% HHI=6400+400=6800 • Marketwith 4 firmshaving 40%, 30%,20% and 10% HHI=1600+900+400+100=4000 => Rule 2: HHI isincreasingwith the marketshareasymmetry.

15. Official Journal of the European Union for the HHI levels • The Commission is unlikely to identify horizontal competition concerns in a market with a post-merger HHI below 1 000. Such markets normally do not require extensive analysis. • The Commission is also unlikely to identify horizontal competition concerns in a merger with a post-merger HHI between 1 000 and 2 000 and a delta below 250, or a merger with a post-merger HHI above 2 000 and a delta below 150, except where special circumstances [...]

17. Exemple Sanofi - Aventis • Calculus of the HHI delta • Depends on the marketdefinition = overwholemedecine => no need of examination • But if depends on the market of desease and the greographics air => need for carefulexamination

19. Procedures • Step 1: Assessment of anti-competitiveeffect => If no anti-competitiveeffect the mergerisauthorized • Step 2: Balancing anti-competitiveeffectwitheconomicsbenefit => If thereissome anti-competitiveeffectscarefulexamination

20. Balancing the effects • Anti-competitiveeffects are: • Market concentration and market power • Potentialcreation of entry barrier/ and entry barrier • Demandelasticity • Economicbenefits are: • Costdecrease • Investment in RD • Other social aspects (national employement)

21. Example Adidas - Reebok 4 principal firms : Nike 34% of marketshare, Adidas 16%, Reebok 10% and Puma 4% Calculate the CR4 and the HHI4. Shouldthismergerbeinvestigated by the European Commission ? Can weexpect anti-competitiveeffects? Can weexpectsomeeconomicbenefits?

22. Example Adidas - Reebok • CR4 = 64% • HHI with the four first firms • Before HHI = 342+162+102+42=1528 • After HHI = 342+262+42=1848 • ∆ HHI = 1848-1528 = 320 => Mergerinvestigated in the US and in Europe

23. Example Adidas - Reebok • Mergeraccepted • Anti-competitiveeffects < AnticipatedEconomicBenefits

24. Antitrust Laws PrivateEnforcement Public regulation Anti-competitivebehavior Merger Reglt 89 Public Aids Art 87 Liberalization Art 86 106 Collusion Art 81 101 Abuse of a dominant position Art 82 102

26. The case of abuse of dominant position • Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States. • Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

27. Exemples of abusive practices • Non pricingstrategies • Tying • ExcessCapacity • Product proliferation • Technologicalpreemption • Foreclosure • Pricingstrategies • Predatorypricing • Discriminatorypricing

28. The united states versus Microsoft Did Microsoft engage in illegal practices? The U.S. Government said yes; Microsoft disagreed. Here is a brief road map of some of the U.S. Department of Justice’s major claims and Microsoft’s responses. DOJ claim: Microsoft has a great deal of market power in the market for PC operating systems—enough to meet the legal definition of monopoly power. MS response: Microsoft does not meet the legal test for monopoly power because it faces significant threats from potential competitors that offer or will offer platforms to compete with Windows. DOJ claim: Microsoft viewed Netscape’s Internet browser as a threat to its monopoly over the PC operating system market. In violation of Section 1 of the Sherman Act, Microsoft entered into exclusionary agreements with computer manufacturers and Internet service providers with the objective of raising the cost to Netscape of making its browser available to consumers. MS response: The contracts were not unduly restrictive. In any case, Microsoft unilaterally agreed to stop most of them.