The Way the UK Competition Authorities Utilise Non-Economic Policy Goals to Develop Competition Law - Assignment Example

'COMPETITION LAW IS ABOUT MAKING COMPETITION WORK FOR A WIDER BENEFIT TO SOCIETY'. CRITICALLY ANALYSE THE WAY IN WHICH UK AND EC COMPETITION ITIES UTILISE NON-ECONOMIC POLICY GOALS TO DEVELOP THEIR RESPECTIVE COMPETITION LAW REGIMES. The Encyclopaedia Britannica Online has defined competition as 'a contest between rivals'. When used in the commercial context, competition connotes ' a struggle for superiority in the market place.'1 The UK Competition Commission has also described competition as 'a process of rivalry between firms seeking to win customers' business over time'. 2 Competition is a fundamental economics theory and the supposed benefits to be derived from the working of competition in the market underlies the importance of competition law or policy. Classical theories of competition held that competition is a form of reciprocal rivalry in the market and government intervention in the market was frowned upon.3 The existence of competition, it is expected, should result in the lower prices, greater efficiency in markets, better products and services, and a broader choice of products and services for customers.4 It has been argued that the above mentioned benefits of competition cannot be attained in a monopolistic market.5 Where perfect competition exists, producers will produce more as long as the cost of each additional unit of production (i.e. marginal cost) will result in a profit. However, one's decision not to produce beyond what is profitable will not affect the market as there are other producers in the market. Consequently, the existence of competition will result in resources being allocated to produce goods at prices consumers are willing to pay and at prices that producers are also willing produce and able to make profit. This results in allocative efficiency.6 When competition is allowed to operate, it is also expected that it will promote productive efficiency. The reasoning is that, producers aim at producing at the lowest reasonable cost in order to win customers and stay in the market. Productive efficiency allows resources to be used efficiently and this maximises social welfare. Where a monopoly exists, the monopolists is not pressurised by competitive forces to be efficient in its production. The inefficiency of the monopolists is thus passed on to the consumer resulting in consumer having to pay more for less quality goods than they would have if competition was allowed to operate.7 Where monopoly persists, the monopolist can also create an artificial shortage of goods in order to raise prices. In such instances, allocative efficiency and productive efficiency would not exist and the welfare of society is undermined.8 Consequently, in order for society to benefit from these welfare advantages of competition, competition law is instituted to regulate the working of the market against monopolistic tendencies. Government intervention into the through laws, policies and institutions are thus justified to the extent to which it prevents market failure and allows competition to function effectively so as to achieve the social welfare benefits of competition. One of the most eminent economists of the 20th century, Frederich von Hayek, stated that: "The functioning of competition not only requires adequate organization of certain institutions like money, markets, and channels of information - some of which can never be adequately provided by private enterprise - but it depends above all on the existence of an appropriate legal system, a legal system designed both to preserve competition and to make it operate as beneficially as possible."9 Within the European Community (EC) competition law/policy is considered one of the important pillars for the functioning of the internal market. The Commission and the European Court of Justice (ECJ) thus frown on any form of behaviour by undertakings that have as its cause of effect, the prevention of competition from operating. Article 81(1) EC thus prohibits: " all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market". Some of the specific prohibitions under Article 81 EC are direct or indirect price fixing, using market power or dominance to control production or the market, applying dissimilar conditions to equivalent transactions in an anti-competitive manner, and using agreements or contracts in a manner that obstructs the operation of competition in the common market. Thus, the Common Market project is an underlying objective for the functioning of competition law in the EC. The ECJ has thus stated that: The requirement contained in Articles 3 and 85 of the EEC Treaty (now Article 81 EC) that competition shall not be distorted implies the existence on the market of workable competition, that is to say the degree of competition necessary to ensure the observance of the basic requirements and the attainment of the objectives of the Treaty, in particular the creation of a single market achieving conditions similar to those of a domestic market.10 Agreements between undertakings is an important area of concern as some agreements could result in the formation of cartels who agree to fix prices for goods or products or to supply products to the market at agreed quantities. Agreements may also result in the partitioning of or sharing of markets along national or geographic lines. In its dealings with such agreement, the ECJ has adopted a wide scope of interpretation that does not restrict an agreement to 'legally enforceable contract'. Consequently, though anti-competitive conducts of undertakings may not be caught under prohibitions of anti-competitive agreements or decisions provided under Article 81 EC, they may however be caught under prohibitions against concerted practices.11 In ICI v. Commission, the ECJ defined concerted practice as: " a form of coordination between undertakings which, without having reached the stage where an agreement properly so-called has been concluded, knowingly substitutes practical cooperation between them for the risks of competition".12 The way undertakings behave in the market is an important consideration in ascertaining the existence a concerted practice as unlike contractual agreements there is no physical or oral proof of an agreement or decision. The ECJ however adopts a wide criteria in determining the existence of a concerted practice. It has for example held that parallel behaviour could be a possible indication of the existence of a concerted practice. This view is explained in the ICI case as follows: 'although parallel behaviour may not by itself be identified with a concerted practice, it may however amount to strong evidence of such a practice if it leads to conditions of competition which do not correspond to the normal conditions of the market, having regard to the nature of the products, the size and number of the undertakings, and the volume of the said market'.13 Concerted practices normally take place in oligopolistic markets and as such definition of market power is crucial in a finding of concerted practices. In oligopolistic markets there are few operators and the actions of one operator is easily known by the other competitor(s). Whish has further argued that the concept of fewness of economic operators in an oligopoly should not be understood in terms of numbers per se but rather one of the market power of the operators14. Thus in an oligopoly, there could be about two operators with a combined market share of 70 per cent, while other operators who may number about 20, have a combined share of 30 per cent. Due to the market dominance of the oligopolies, they can raise prices or control production or supply of goods in a way that the activities of other operators would not have much significance on theirs. Also due to the fact that the activities of one oligopoly is easily known by the other, there can be a tacit collision without the existence of any specific plan between them to collude in their behaviour. Such abuse of the market power by oligopolies can result in a situation where the social costs (or deadweight loss) of monopolies prevail and the social welfare benefits of competition become diminished or non-existent. Thus in Suiker Unie & Others v Commission the ECJ held that: "The criteria of coordination and cooperation laid down by the case-law of the court, which in no way require the working out of an actual plan, must be understood in the light of the concept inherent in the provisions of the treaty relating to competition that each economic operator must determine independently the policy which he intends to adopt on the common market including the choice of the persons and undertakings to which he makes offers or sells"15 Generally, competition law and policy in the UK toes the line of Community competition policy. Thus the above discussed Community regulations with regards to competition are applicable in the UK as well. In the UK, the advent of the Enterprise Act 2003, empowers investigators to enter into the premises of undertakings to search for evidence that are likely to incriminate undertakings who have for example entered into anti-competitive agreements or formed cartels. Company directors could also be disqualified under the Enterprise Act. Competition, as was argued earlier, promotes social benefits which must be protected. The aim of competition policy is thus to prevent the abuse of the market through agreements, market power or dominance, mergers, and other anti-competitive practices that impede the working of competition in the market and the elimination of the social costs of monopoly. Bibliography Case 26/76, Metro SB-Gromarkte GmbH & Co. KG v Commission of the European Communities Case 48-69 ICI v. Commission [1972] ECR 619 Craig, P., De Brca, G., EU Law Text, Cases, and Materials, Oxford University Press Inc., Oxford, 2003 2nd ed. Suiker Unie & Others v Commission [1975] ECR 663 Van Cayseele, P., and Van den Bergh, R., 'Antitrust Law', http://encyclo.findlaw.com/5300book.pdf (viewed on 03/05/08) Von Hayek, F. A. The Road to Serdom, Abingdon: Routledge, 1944 Viscusi, W. K., Vernon, J. M. and Harrington, J. E., Economics of Regulation and Antitrust (fourth edition), MIT Press, 2005 Wyatt, D.A., Dashwood, A, Annon, P. European Union Law, Sweet and Maxwell (2000), Fourth Edition, Whish, R., CompetitionLaw, LexisNexis, Fifth Edition, 2003 Read More