Competition Policy Between the United States and European Union

1. Competition Policy Between the United States and European Union By Chad Carta, Colin Mead, Eric Luoma, Pablo Vives, Bob Grannatt and Kim Weeden

2. Legislation and Competition Background • Goal of governments has always focused on competition • Europe originally believed in an economic-nationalist approach (mercantilism) • In 19th century, governments evolved to endorse free trade

3. Important Competition Legislation • The Sherman Antitrust Act, 1890 • The Clayton Act, 1914 • The Federal Trade Commission Act, 1914

4. Goals of EU Competition Legislation • Regulate natural monopolies • Suppress the emergence of new monopolies by regulating mergers and acquisitions • Dissuade collusive and anticompetitive behavior • Promote integration within the market

5. Vertical and Horizontal Cooperation Vertical Cooperation • occurs when anti-competitive agreements are made between manufactures and distributors Horizontal Cooperation • prevents economic integration within industries

6. Merger Control within EU • To prevent collective dominance • The prevention of state aid which is rampant in the European Union • Emerging companies are occasionally subsidized, which is anticompetitive and a significant problem for competition control policies

7. Microsoft Anti-trust Case

8. Case Against Microsoft • EU has taken action against Microsoft for not allowing adequate competition within the computer industry • Microsoft’s bundling technique has drawn criticism from competitors like Nokia, IBM, Oracle, Real Networks and Red Hat

9. Microsoft’s Defense • Microsoft claims to be producing a superior product, which is able to incorporate a variety of necessities for the consumer • It uses these bundling techniques to minimize costs for consumers • The variety of Microsoft programs are compatible with other systems and external appliances like digital cameras or Firefox explorer

10. EU Decision • The EU found that Microsoft was unfairly influencing competition with the industry • First penalty, $600 million in fines to EU and competitors • Second penalty, Microsoft is now required to sell a stripped down version of its Windows operating system that will not contain Windows media player

11. Defense of the EU Decision • This decision is a precedent for the EU and will have an impact on monopoly activity in the future • Now competitors will have an equal chance at winning over competitors • Microsoft is still likely to retain its 90% market share, but this will allow customers to have more choice in their products

12. BoeingvsAirbus Subsidies International Trade Policy Anti-Trust Law

13. History… • 1916: Company created by William Boeing • 1992: Produces 60% of commercial aircrafts in world History… • 1966: Created by pooled resources of 4 European countries • -Aerospatiale S.A. (France) • -Aerospace PLC (Britain) • -Messerschmitt, Boelkow, and Bloom (Germany) • -Construcciones Aeronauticas S.A. (Spain)

14. Background of Dispute-Part 1- • Early 1990s: American companies switch to Airbus • Better technology • Lower prices • New designs vs. Boeing’s modified old designs

15. Background Behind Dispute -Part 2- • Airbus Subsidies • “Loans” from European government • No repayment timetable • Financial information not published • Leads to strategic trade policy • Targets domestic industry for subsidies • Captures monopoly profits on foreign sales • Boeing Subsidies • Contracts with US Government for military aircrafts • No official government subsidies • Held bidding war for location of new U.S. plant • Local subsidies from Washington State • Airbus claims this was illegal

16. Market Strategies-European- • Frequent subsidies • R&D, declining industries, new industries, regional development, and export promotion • Equity infusions, non-program-specific operating loans, R&D funding, and production subsidies • Focus on alliances and cooperative ventures • “Loans” • Payback period • Interest -American- • Free market economy • Government is mainly regulatory

17. The Solutions • 1979: Civil Aircraft Code of the General Agreement on Tariffs and Trade (GATT) • Eliminates tariffs, prohibits licensing requirements, and bans discrimination • Parties ensure a “reasonable expectation of recoupment of all costs”

18. The Solution-Part 2- • 1992: Variable 30-33% cap on government subsidies (“Airbus Accord”) • Also requires financial info to be published • Boeing pulls out in 2004; counteraccusation against Boeing • Airbus subsidies are legal under 1992 accord

19. The Implications • Subsidy Regulation • Greater competition • Higher production costs • Increased air travel costs • No Subsidy Regulation • Unfair advantages between companies • Lower market prices for aircrafts • Greater chance of a monopoly

20. Oracle and PeopleSoft Merger In June of 2003, Oracle launches a hostile bid for software rival PeopleSoft

21. Reaction of the European Community • The European Commission challenged the merger because of its potential threat to competition • The EAS supplier market consists of three major companies; SAP, Oracle, and Peoplesoft. The Commission was concerned that the number of competitors being reduced from 3 to 2 would decrease competition and result in higher prices.

22. Merger Proceedings • -Oracle argued that the merger would not cause a decrease in competition for 2 main reasons: 1. German company SAP is the largest player in the sector 2. Smaller EAS vendors such as Microsoft, Lawson, Intentia, and QAD have won bids for enterprise software projects contributing to competition in the market

23. The EU Decision • The European Commission analyzed hundreds of bids launched by smaller vendors and overall conditions in EAS market. • The Commission approved Oracle’s bid for Peoplesoft on the grounds that the merger would not create a dominant position for Oracle, and competition in the common market would not be impeded

24. General Electric Honeywell Merger • 42 billion dollar deal largest proposed takeover in history • Both American based firms • Reason behind merger both firms are leaders in the aerospace industry

25. Governmental Regulation • Proposed Merger was approved by U.S. Justice Department • Needs approval by EU, if not GE/Honeywell would be unable to do business in Europe’s single market • July 3rd 2001 EU blocks proposed merger between GE and Honeywell

26. What Killed the GE Honeywell Merger • Area of contention: The strength of GE’s aerospace component after the merger. • Two Main Aerospace market • Jet aircraft engines • Avionics and non-avionics

27. GE’s Vertical Integration • GE’s size and enormous amount of resources provide the firm with benefits its competitors do not have • Important components to GE’s dominance in the Aerospace industry • GE Capital • GE Capital Aviation Services (GECAS)

28. Future Ramifications • Set precedent for future mergers • US and EU merger regulations differ significantly • EU not afraid to block mergers between to American firms

29. Ford/Volvo Merger • Ford Motor Co. offers $6.45 billion for Swedish based Volvo • Auto Sales (1997) Ford- 6.9 million Volvo- 400,000 million

30. Anticipated Result of Merger • Increase competition in luxury market by: 1) Ability to use Ford parts in Volvos 2) Distribution of Volvos through Ford’s networks

31. EU and Market Share Concerns • Merger would increase Ford’s market share • Passenger and large car sectors would go from approx. 15% to 20% • Ford’s national market share would end up below 25% even after merger

32. EU Decision • Merger is endorsed by the EU • Ford’s market share is marginal after merger • Dominance and lack of competition is not a factor in this case

33. The End