Primary Objective of Competition Law - Essay Example

?Should economic efficiency be the primary consideration and priority for the enforcement of competition law? By Abstract Economists argue that the primary objective of competition law is to achieve economic efficiency in the market. However, legal scholars are not comfortable with this diagnosis of the purpose of competition law and its enforcement. Legal scholars call attention to the non-economic aspects of competition laws and argue that social and political considerations are just as important, if not more so, in the enforcement of competition laws. This research considers both sides of the debate and emphasises EU competition law and policies. It is concluded that there is no real dominant theme as between economic and non-economic policies and purposes in the enforcement of competition law. This is as it should be, since, the social, political and economic aspects of competition law and policies are equally important to the efficient operation of the market. It is argued that economic efficiency cannot be obtained unless, the political and social objectives of competition laws are achieved. Table of Contents Abstract 2 Introduction 4 The Purpose of Competition Law 5 Non-Economic Purposes and Policies of Competition Law 7 Economic Purposes and Policies of Competition Law 10 Non-Economic Factors as the Main Consideration in the Enforcement of Competition Law 11 Economic Efficiency as the Main Consideration in the Enforcement of Competition Law 15 Conclusion 17 Bibliography 19 Introduction Governments have introduced national competition laws reflecting a growing trend toward a general consensus that competition laws are primarily aimed at promoting economic efficiency in the market (Lloyd, 1998, p. 1129). Non-economic policies are also reflected in competition laws which are divided between social and political concerns (Baker, 2013, p. 2176). The purpose of competition law is consistent with both economic and non-economic factors. The purpose of completion law is to resolve issues that might arise to obstruct a free and open market (Furse, 2004, p. 1). Kerber (2009) argues that since the EU’s competition policy has become more geared toward the economic goals, greater attention has been paid to the question of economic efficiency in the application and enforcement of competition law (p. 93). Economists tend to favour the economic efficiency of competition law while legal scholars are not comfortable with this view (Kerber, 2009, p. 93). Lianos (2013) presents the two sides of the debate in terms of the economic welfare perspective versus the normative perspective (p. 7). The economic welfare perspective views economic efficiency as the main objective of competition laws. In this regard, economic efficiency refers to enabling consumption choices and the fairer distribution of production permitting freer market entry (Lianos, 2013, 7). The normative perspective refers to the promotion of innovation and democracy in the market for the social and political efficiency of the market (Lianos, 2013, p. 13). This paper analyses both sides of the debate and determines that while economic efficiency appears to be the main consideration and priority for the enforcement of competition law, non-economic factors should have equal consideration. In making this argument, this paper is divided into three parts. The first part of this paper presents the economic and non-economic policies of competition law. The second part of this paper analyses the non-economic arguments and the final part of this paper analyses the economic arguments. The Purpose of Competition Law The purpose of EU competition law can be gleaned from Article 101 of the Treaty on the Functioning of the European Union (Consolidation Edition) 2012 (hereinafter TEFU). Article 101 in general bans any agreement or collusion calculated to distort trade and competition in the market (TEFU, Article 101). A list of the applicable activities include, price fixing, production restrictions or controls, sharing markets or supplies, applying different conditions to similar transactions and creating a competitive advantage, and applying conditions to a contract that are no related to the contract and relate to commercial elements (TEFU, Article 101(1)). At first glance, the purpose of EU competition law can be interpreted as economic efficiency. However, a closer examination reveals that democratic efficiency is also contemplated as the many of the prohibited actions point toward fairness and equality. Fairness and equality are important to market participants and impacts how consumers are treated. For example, if a company engages in anti-competitive behaviour and corners a market segment with the result that consumers have no choice with respect to the products or services offered by the company. The company can introduce and maintain policies and practices to the detriment of the consumer since there is no threat that the consumer will take his or patronage to a rival company. Fairness and equality ensures that several companies may offer the same product and services so that consumers may choose between them. When consumers have more choices, companies are compelled to treat consumers well for fear of losing the consumer to rival companies. Therefore, in a roundabout way, EU competition law is designed to protect the consumer from unfair practices and policies by promoting fairness and equality in the market allowing greater competition. Greater insight as to the purpose of EU law is found in Article 101(3) of TEFU. Article 101(3) provides an exemption to Article 101 (1) provided an agreement between undertakings: …contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question (TEFU, Article 101(3). According to Article 101(3), the purpose of competition law is to promote both economic and technological progress and free choice for consumers. Again, there is a preference for consumer protection, which also suggest a preference for both economic and non-economic considerations. Moreover, it was held in Case T-168/01 GlaxoSmithkline Services v Commission and Case T-247/04 Aseprofar and Edifa v Commission, that the main purpose of competition law was the protection and promotion of consumer welfare. Thus the purpose of EU law can also be described as promoting social as well as political and economic justice. An unregulated market can not only have economic consequences, but can also put consumers at a disadvantage both economically, socially and politically by depriving consumers of choices and thus forcing them to pay whatever the asking price is or go without. It would appear that although economic efficiency is a desired outcome of EU Competition law and policy, it is not the primary area of focus. The emphasis is on consumer protection and although this includes the economic welfare of consumers, the overriding concern is the disadvantageous position that consumers are left with when choices are minimal or non-existent. Although businesses and therefore, economic efficiency is compromised by monopolies and corresponding monopolistic practices, consumers arguably suffer the most as they are virtually defenceless against the larger corporation with excessive power and control over any market segment. Non-Economic Purposes and Policies of Competition Law The non-economic purposes and considerations involved in the enforcement of competition law are social and political in nature. The social considerations address the welfare of the consumer and consumer protection in general and as such fall outside of the economic considerations. The issue is the protection of consumers from market powers and “broader socio-economic power held by large firms” (Dabbah, 2004, p. 7). Arguably, consumer protection and consumer welfare is indirectly linked to the objective of obtaining economic efficiency. Theoretically, if consumers are deprived of choices and are treated unfairly by monopolies, they will become unhappy spenders and this will reduce consumer spending. According to Keynesian economic theory, consumer spending stimulates economic growth because spending puts pressure on supplies which means increased production and greater employment (Younkins, 2008, p. 144). However, since Keynesian economic theory is only a theory and not an infinitive rule, it can only be speculated that consumer protection as under competition law is intended to encourage consumer spending as a means of stimulating economic growth and thus economic efficiency. At the end of the day, consumer protection would likely remain a key purpose of competition law, whether or not consumer spending actually stimulated the economy. Competition laws also aim to provide protection of the smaller business and thus the wider interest of the public in promoting “democratic values and principles” (Dabbah, 2004, p. 7). In other words, the non-economic considerations are concerned with ensuring a level of fairness in the market. As Dabbah (2004) noted: It is clear that this is an expression of wholly non-economic democratic principles of justice and equality of bargaining power (p. 7). The obvious intention is to provide safeguards against larger companies controlling the market to the detriment of smaller and less powerful companies and consumers. Competition laws intervenes to limit the extent to which larger companies can use their comparative advantage as a means of ensuring that smaller market participants and consumers are not prejudiced or unfairly disadvantaged. Regardless, the consumer occupies a protected position in non-economic characteristics of competition laws and policies. Another area of note where consumers are at the forefront of competition laws and policies is intellectual property protection. In enforcing competition law and its effect on product differentiation in intellectual property infringement claims the court will seek to ascertain the impressions of the product from the perspective of the consumer (Graham, 2012. Eberhard, 2006, p. 223). This suggest a preference for protecting the consumer from manipulation by larger and more powerful and wealthier firms. This would also protect the consumer from manipulation by smaller firms that use anti-competitive strategies such as intellectual property rights infringement as a means of gaining a market position. Moreover, the prevention of monopolies by larger and more powerful firms has political tones. However, the courts have determined that a large firm with a significant market share will not by itself constitute a dominant market position for the purpose of anti-competitive undertakings (Case 27/76 United Brands v Commission [1978]). In other words, justice will be achieved democratically and this means recognising that both the large and the small firms have propriety rights. At the same time, the political aims of competition policy of the EU are intended to facilitate market integration and harmony. Thus the elimination of dominant undertakings is central to the political dimensions of EU competition laws and policies. Therefore in promoting integration into the market, a group of undertakings might be considered collectively dominant and therefore anti-competitive where their market shares are significantly larger than all of their competitors. This is particularly so where the dominant groups are able to work together without having to rely on their other competitors and consumers (Italian Flat Glass,[1989]). Competition policy is also a non-economic policy of competition law. Competition policy refers to the government’s ability to intervene in the market to prevent or to respond to “market failure” or in the event of market imperfections (Dabbah, 2004, p. 8). In this regard, market failure is defined as: …circumstances in which private forces within the market fail either to sustain desirable activities or to act as a check on undesirable activities carried out by firms (Dabbah, 2004, p. 8). For example Article 105 of TEFU confers upon public authorities the right to conduct aggressive investigations of suspected anti-competitive activities. In addition, Article 23(2)(1) of EU Regulation 1/2003 provides for punitive fines against anti-competitive behaviour. This level of state intervention is obviously intended to punish infringers and to ensure that potential infringers. In a typical case, the primary motivation for infringing competition laws and policies is to gain an economic advantage in the market. The penal nature of enforcement is therefore to prove that rather than obtaining an economic advantage, the offender will obtain an economic disadvantage in having to pay a punitive fine. Although economic factors are involved in the punishment and the decision to infringe competition law and policy, the fine is non-economic in nature and speaks to the political dimensions of the enforcement of competition policies and law. The penal fine is political in nature because it involves government intervention and elements of social justice in the enforcement of equity in the market. Economic Purposes and Policies of Competition Law The economic dimensions of competition policies and laws are described as “issues such as efficiency and the maximisation of consumer welfare” (Dabbah, 2004, p. 6). Dubbah (2004) argues that it is obvious that the primary objective of competition law is to “achieve economic efficiency in the market” (p. 6). Economic efficiency is achieved by “allocative efficiency” and “productive efficiency” (Dabbah, 2004, p. 6). In this regard, allocative efficiency refers to the concept that prices are such that businesses are able to “produce what people want and are willing to pay for” (Van Den Bergh & Camesasca, 2001, p. 5). By contrast, allocative inefficiency refers to bigger and wealthier firms restricting production and the price in the market is consistently more than actual costs. At the end of the day, the allocative theory dimension of competition policy is intended to ensure that consumer welfare is safeguarded in that products and services in the market are reasonably priced and thus available to consumers who have access to improved quality and a variety of choices (Van Den Bergh & Camesasca, 2001, p. 5). Productive efficiency refers to the production in the market. In this regard, competition policy and laws are aimed at ensuring that products are produced and manufactured at a reasonably lower cost. According to Dabbah (2004) logically, by taking this approach to competition policies and laws, consumers will “look for a cheaper source of supply” or new competitors will enter the market with the result that: …each producer has an incentive to supply more efficiently in order to increase marginal revenue, a tendency which acts over the long term to force all producers towards the most efficient means of production (p. 7). According to economic theory, the economic health of society as a whole is enhanced because production efficiency eliminates excessive wasting of resources in production costs (Dabbah, 2004, p. 7). However, as Dabbah (2004) cautions, these outcomes are based entirely on theory which depends on flawless completion, which is not possible in reality (p. 7). The reality is, firms do not have equal resources and regardless of completion laws and policies, all firms are unable to equally compete. Therefore, if the primary goal of completion policy and law is to obtain economic efficiency, it has failed because economics in the market is and has always been distorted in favour of the bigger and wealthier firms. It would be entirely undemocratic to implement laws that would prevent a firm using its resources for its own economic efficiency to ensure economic efficiency for firms who cannot realistically compete with other firms. Non-Economic Factors as the Main Consideration in the Enforcement of Competition Law In explaining the purpose of competition law, Advocate General Kokott provided a non-economic perspective. According to Advocate General Kokott, the purpose of competition law was to protect market structure and thus to institutionalise competition (Case C-95/04 P British Airways Plc v Commission [2007]). Therefore, this non-economic objective suggests that the main consideration in the enforcement of competition law is not whether or not economic efficiency is obtained and followed. Rather, the main objective is to prescribe the boundaries of competition for regulating the market and to provide consequences for failure to follow those boundaries. However, this may be an oversimplification of the main considerations in the enforcement of competition law as it suggest that competition is simply a law for the sake of making it a law. Advocate General Kokott went further to state however, that the institutionalisation of competition is intended to regulate practices in the market that can impact consumers and also to protect market participants from the detrimental impact of an unstructured competitive system (Case C-95/04 P British Airways Plc v Commission [2007]). Therefore, when looking at the main considerations of competition law, it is important to take into account, the effect that practices might have on weaker parties including consumers, employees and smaller companies, if competition was unregulated. Enforcement is therefore important for achieving the goals of competition law itself: structured and prescribed competition to avoid unfair and inequitable results and practices. Nazzini (2011) argues however, the main consideration in the enforcement of competition law cannot simply be the institutionalisation of competition (p. 16). By taking this approach, the suggestion is that the only thing of significance is the interactions and relations between firms. Even if it were to be accepted that the only thing of concern to competition law was the interaction between firms, it would be difficult to determine when and in what circumstances a particular transaction or undertaking was anti-competitive. For example, if two firms wished to acquire a product or a market share, the acquisition of that product or market share might be deemed anti-competitive if one firm succeeded over the other. Similarly, it might be anti-competitive to legitimately obtain a disproportionately larger share of the market (Nazzini, 2011, p. 17). According to Nazzini (2011), economic efficiency would not be the outcome and must certainly not be the main consideration in attempting to regulate the market (p. 17). Economic efficiency cannot be obtained by forcing larger and wealthier firms to downsize for the sake of levelling the playing field with smaller firms. After all, if competition between firms was the only consideration or even the main consideration in the enforcement of competition laws, larger firms could not take advantage of economic opportunities if a smaller firm could not take advantage of the same opportunity. This would be unfair competition, if the main purpose of competition law was simply to regulate interactions between firms. However, this does not mean that the relationship and interactions between firms is unimportant, it just means that it cannot be the main consideration in the enforcement of competition law. This would mean that the enforcement of competition law would be entirely “arbitrary” and “random” (Nazzini, 2011, p. 17). Thus, the consumer’s freedom of choice is at the heart of the competition law and provides the main rationale for enforcing completion laws. The consumer’s freedom to choose is only achieved if the goods are offered at a price that the consumer is willing to pay for it. For example in Case 85/76 Hoffmann-La Roche & Co. AG v Commission [1979] the court referred to “normal competition in products or services on the basis of the transactions of commercial operations” (para 91). In other words, when the consumer’s choices are restricted, this is a reflection that competition is restricted. When a consumer’s choices are not restricted, this is reflection that competition is not restricted. Another important non-economic consideration in the enforcement of competition law is the concept of fairness. In this regard fairness must be looked at in terms of what is unfair. For example, Henning-Bodewig (2006) points out that in many cases, the European Court of Justice (ECJ) frequently refers to unfair commercial transactions (p. xiv). In addition, Directive 2005/29/EC refers to unfair commercial practices. However, as Nazzini (2011) points out, the issue is not so much substantive fairness, but procedural fairness (p. 22). In this regard, competition law is not concerned with the substantive fairness in the sense that it does not determine what and how a firm generates and spends its income as long as it is generated and spent lawfully. Competition law is only concerned that equal opportunities exist and unfair obstacles are not orchestrated to deliberately undermine a competitor’s ability to compete. Although liberalization of the market and market integration have been described as non-economic considerations in the enforcement of competition laws, they are also closely connected to economic efficiency and consumer welfare (Singham, 2007, p. 92). Consumer choice however, is a significant fixture in judicial rulings and government statements relative to competition policies and laws (Case T-201/04 Microsoft Corp v Commission [2007]). However, the emphasis on consumer choice is arguably flawed. If the main consideration is consumer choice, it is possible that a firm who corners the market so to speak, may get ways with anticompetitive behaviour on the grounds that the firm is providing the consumer with a unique product and it would be wrong, pursuant to Article 101(3) of TEFU to deprive the consumer of this unique choice. Clearly there are a number of non-economic considerations involved in the enforcement of competition laws. However, each non-economic consideration alone cannot provide a justifiable reason for its applicability to the enforcement of competition law. Together, the non-economic facts provide strong argument in favour of their importance in the enforcement of competition law. The main question is, should the non-economic factors, taken as a whole, provide the primary consideration in the enforcement of competition laws? In order to answer this question, the economic efficiency model must first be analysed. Economic Efficiency as the Main Consideration in the Enforcement of Competition Law Economists argue that the main purpose of competition law is to regulate the economic welfare of society and as such, economic efficiency is, as it should be, the main consideration in the enforcement of competition law (Van Den Bergh & Camesasca, 2001, pp. 18-19). Nazzini (2011) argues that although non-economic factors such as fairness, consumer choice, market integration and liberalisation are important to enforcement of competition laws, “they are not sufficient on their own to account for what is prohibited and what is allowed under competition law” (p. 32). Nazzini (2011) goes on to argue: …in order to move from abstract concepts of freedom and fairness to workable and operational concepts of freedom and fairness in competition law, there is no alternative but to determine the economic objective of the law (p. 32). In other words, the concept of fairness, freedom, market structures and so on combine with the economic efficiency model to present a competition system in which economic actors are at liberty to contribute to wealth creation for the greater good of society at large. In the absence of long-term economic goals, market fairness and consumer freedom would have little or no utility. On the other hand, if the main consideration of competition law was purely economic, competition laws would also be entirely meaningless as well. Regardless, economist argue on the basis of modern economic theory that competition laws should be enforced on the basis on economic efficiency. In this regard, economic efficiency in the context of competition law is accomplished when resources in any given economy are distributed fairly. This theory is similar to and builds on the equilibrium theory which is aligned with the Pareto-criterion. According to the Pareto-Criterion, the criterion is satisfied when there are no possibilities for increasing the “utility of any person in the economy without reducing the utility of any other person” (Kerber, 2009, p. 96). In other words, competition law should be centred round enforcement policies that respond to situations in which one entity or individual advances to the detriment of another. The reality is however, more often than not, when one person gains an economic advantage it is usually at the expense of others. This conceptualization of economic efficiency in competition law arises out of the fact that what is meant by competition is not clearly understood. The fact that there are both non-economic and economic factors to be considered in the enforcement of competition law, speaks to its definitional problems. Is competition a consumer-oriented concept or is it a firm-oriented concept or is it market oriented concept? As McNutty (1968) observed, it is impossible to state with any degree of certainty, what competition is and as such it is difficult to state with confidence that economic efficiency is the main consideration and priority for enforcing competition law (p. 639). As Nazzini (2011) puts it, economic efficiency is not achieved on the basis of a law that heavily supports the consumer’s willingness to pay for a product (p. 33). A consumer’s decision to pay for a product is not firmly and constantly rooted in economic options. There are many other ways in which a consumer values certain products and services. For example, a consumer may value a product or service purely for its sentimental value. Consumer choice, as a main construct of competition law, cannot be realistically conceptualized as a prominent contributor to economic efficiency as consumers have different non-economic reasons for purchasing products and services. Economists also argue that competition leads to the fairer allocation of resources and monopolies lead to the inefficient allocation of resources (Lipsey & Harbury, 1998, p. 168). Moreover, monopolies are concerned with maximising profits and as such increase the cost of production. Therefore competition laws are necessary for creating economic efficiency for the greater wealth of society as a whole (Lipsey & Harbury, 1968). However, this argument is flawed in that most firms, if not all, are concerned with maximising profits and this may or may not increase production costs. Other market forces create production costs and distort demand and supply. Therefore, it is not clear why economic efficiency should dominate the enforcement of competition law. Conclusion While economic efficiency is a desired outcome of competition law, it has not been the main consideration for the enforcement of competition law. Competition laws can be seen as the institutionalisation of competition for the purpose of regulating the market for the greater good of society. It certainly serves society’s interest, if economic efficiency is achieved. However, since economic efficiency can only occur if competition is perfect, in the sense that all competitors have the ability to participate in the market on an equal basis, it cannot be the main consideration in the enforcement of competition law. Likewise, although fairness is a major purpose of competition law, it is still an allusive concept when the reality of the market is taken into account. Only allocation efficiency which is a subset of economic efficiency can achieve fairness in the market. Some firms have much greater resources than others and providing firms with equal opportunities to trade and operate in the market does not remove the gaps between firms in terms of resources. As argued, substantive fairness is a lofty goal, but procedural fairness is realistic, but cannot be achieved since firms have varying resources and thus wealth is unevenly distributed in the market. In considering both the non-economic and economic considerations involved in the enforcement of competition law, it is obvious that the non-economic factors and the economic factors cannot alone provide the main incentives and considerations for the enforcement of competition law. However, when taken together, both sets of factors carry more weight. Consumer choice, fairness in terms of equal opportunities, market integration, market structure, allocation efficiency, production efficiency and welfare considerations are all equally important to the enforcement of competition law. Each of these factors are important policy considerations for the effectiveness of competition law. For example, in the absence of production efficiency, consumer choice and market integration is meaningless. 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