Key Aspects of Competition Law in the United Kingdom - Literature review Example

Swarna1 Word count: 3556 P.Swarnalatha ID # 5448 Order # 193311 d 24th November 2007 Competition law Introduction In United Kingdom, the competition law of any agencies or companies is governed by the European union competition policy. The European Commission in this context, acts like national competition authorities except that it is responsible for Europe as a whole. The European Commission applies and enforces EU law. It can require companies to provide information and, if necessary, carry out surprise inspections in the offices of companies and, with a court order, in the homes of company personnel. If the European Commission finds evidence of illegal business practices which restrict competition, it can act to prohibit such behaviour. It can also fine companies up to 10 % of their annual turnover if the companies have, for example, participated in a cartel that fixed prices or agreed how to share out the market between them. The main purpose of competition Policy under European union is to basically apply rules to make sure that companies compete with each other in a healthy manner. It is also aimed at ensuring the proper selling of their products, innovate and offer good prices to consumers. The main intention of the successful implementation of competition policy or law is to safeguard the customers and to prevent the manipulation among the companies for controlling the market under their umbrella in the name of monopoly (C. L. Pass and J. R. Sparkes, 2000). In other words, the risk if theres no competition policy is that companies will do deals with each other to split up the market between them, or will act in a way, which doesnt allow competitors on to the market. As a result, the consumers are denied access to innovative products and pay higher prices. Several investigators reported the way of functioning of competition law of European Union, which governs the competition aspects of various agencies or companies in England. Here is a necessity to review the literature that spells about the functional aspects of European Union competition law. Review of literature The main function of European union competition law is to keep an eye on companies to make sure that they dont club together to share the market between them or dont act in a way to exclude "would be" competitors and if they step out of line then it can impose very considerable fines on them which can be up to 10% of their turnover. It has imposed a fine on Microsoft of almost half a billion Euros for safeguarding the consumers interests which is noteworthy. Article 81 of the EC Treaty (restrictive agreements) provides safeguards for the customers and regulates the fair competition among the companies. According to this act, agreements between companies or undertakings which lead to an appreciable restriction of competition are prohibited. In fact, they are automatically void, so that the normal rule agreements need to be respected does not apply. The European Commission or a national competition authority can order companies to end such illegal agreements and impose fines on companies for having concluded them. This applies also to unwritten agreements, as well as to concerted practices. It includes the following conditions. fix purchase or selling prices or other trading conditions; limit production, markets, technical development or investment; share markets or sources of supply between competitors; or apply discriminatory conditions to companies that are not parties to the agreement, placing them at a competitive disadvantage. The European Commission has decided to prohibit the dual pricing system which Glaxo Wellcome (GW) had introduced for all its pharmaceutical products in Spain (Europa, 2001). GW had notified this system to the Commission for clearance in 1998. Under the dual pricing system, GW requires its Spanish wholesalers to pay a higher price for products which they export to other Member States than the price which they pay when reselling the same products for consumption on the domestic market. This system aims to reduce parallel trade within the Single Market. In the Commissions view, the system interferes with the Communitys objective of integrating national markets and restricts price competition for GW products. The Commission also concluded that the dual pricing system cannot be justified on economic grounds. GW must immediately end its dual pricing system and inform the Commission within two months of the steps it has taken to achieve this. However, some restrictive agreements between companies are allowed as they may encourage competition, for example by promoting technical progress or by improving distribution. An agreement satisfying all of the following conditions is allowed: it improves the production or distribution of goods or promotes technical or economic progress; it allows consumers a fair share of the resulting benefit; the restriction of competition must be necessary to achieve the two points above; it must not eliminate competition for a substantial proportion of the products or services. However, this act adopted block exemption regulations which spell out the conditions to be fulfilled by certain categories of agreements in detail. Restrictive agreements that fulfill the conditions of a block exemption regulation are allowed under Article 81. The European Commission also issues guidance on how it will apply the conditions mentioned above in order to help companies to distinguish between agreements that are compatible with competition law and those which are not.  The European Commission has decided to impose a fine of €49.5million on Automobiles Peugeot SA and Peugeot Nederland N.V., for having obstructed between 1997 and 2003 exports of new cars from The Netherlands to consumers living in other Member States (Europa, 2005). By preventing these exports of new cars, the companies committed a very serious violation the EC Treaty’s ban on restrictive business practices (Article 81). Similarly, The monopoly of any bigger company may jeopardize the interests of the customers as it can lead to unfair competition and excessive prices of commodities (Adam Smith, 1776.). In this context, Article 82 of the EC Treaty (abuse of dominant position) protects smaller companies from manipulation of bigger companies and in that process, safeguards the interests of the customers. This article prohibits the abuse of a dominant position and applies under the following conditions: The company holds a dominant position, taking into account its market share and other factors, such as whether there are credible competitors, whether the company has its own distribution network and whether the company has favorable access to raw materials; all are factors which allow the company to evade normal competition; the company dominates the European market or a substantial part of it; the company abuses its position by, for example, overcharging customers, charging excessively low prices designed to squeeze out competitors or bar new entrants from the market, or granting discriminatory advantages to some customers. In case of France Telecom SA v. Commission, a broadband internet company was forced to pay €10.35 million for dropping its prices below its own production costs. It had "no interest in applying such prices except that of eliminating competitors and was being crossed subsidised to capture the lions share of a booming market (France Telecom SA v. Commission,2007). The European Commission or a national competition authority can prohibit an abuse and fine the off ending company. Some times, the merger of two or more companies may be intentionally targeted to restrict the terms of fair trade and hence the community law on merger control (Regulation (EC) No 139/2004) provides safeguard in this context (Gencor Ltd v. Commission, 1999). While companies combining forces (referred to below as mergers) can expand markets and bring benefits to the consumer, some combinations may reduce competition and harm consumers. The European Commission has the exclusive power to investigate mergers with a Community dimension. Companies thus have a one stop shop for merger control, which simplifies and reduces administrative procedures. The main benchmarks for determining which mergers have a Community dimension are that the worldwide turnover of the merging companies is over EUR 5 000 million and that their Community-wide turnover is over EUR 250 million. Mergers with a Community dimension have to be notified to the Commission for its agreement before they are put into effect. The Commission currently receives between 200 and 350 notifications every year. The Commission has adopted a number of interpretative notices on various aspects of merger control which provide a detailed explanation of the analytical framework employed by the Commission in assessing the likely impact of mergers on competition, and of some of the basic terms used in merger control law. Two large mergers in the pharmaceutical sector were notified to the European Commission: Sanofi / Synthélabo and Pfizer/Pharmacia (Pfizer v Pharmacia, 2003). The European Commission concluded that both mergers could have an adverse impact on competition, limiting the choice of certain drugs available to patients. In both cases, the parties proposed transferring some of their products to competitors, which the European Commission agreed would restore competition in the markets and so protect the interests of patients. In the case of Sanofi /Synthélabo, among the products transferred or sold were, for instance, vitamin B12 sold under the name Delagrange, certain antibiotics, hypnotics and sedatives. In the case of Pfizer/Pharmacia, the parties, for instance, proposed transferring to competitors certain products in development which would compete with Pfizer’s Viagra, thereby allowing the deal to be cleared. Article 86 of EC treaty gives the European Commission a specific duty to monitor public undertakings and undertakings to which Member States grant special or exclusive rights. It gives the European Commission the power to address appropriate directives or decisions to Member States which enact or maintain measures contrary to the rules contained in the Treaty. The European Commission has adopted directives under Article 86: to ensure that financial relations between the Member States and their public companies are transparent; and to open up the electronic communications markets to competition. If EU Member States do not comply with directives, the European Commission initiates an infringement procedure under Article 226 of EC treaty. The decisions taken by the European Commission under Article 86 also contributed significantly to the opening up of markets to competition. The European Commission also examined complaints in other sectors, such as energy, but solutions favorable to consumers were found without the need for formal decisions. In addition, the European Commission has proposed measures to the European Parliament and the Council to open up some of these markets to competition.  EU competition regulation authority has very considerable powers to enforce the rules which include notably the possibility to make unannounced inspections of companies premises and to seize documents which may give evidence that they have been colluding or keeping competitors out of the market. Its main objective is to ensure the fair competition in the market. In a free market, business is a competitive game. Sometimes, companies may be tempted to avoid competing with each other and try to set their own rules for the game. At times, a major player in the game may try to squeeze its competitors out of the market. It is of fundamental importance that competitors operate on an equal basis. Faced with free trade between EU Member States and the opening of public services to competition, national authorities sometimes want to use public resources to promote certain economic activities or to protect national industries. The granting of these resources is known as State aid. State aid can distort fair and effective competition between companies in Member States and harm the economy, which is why the European Commission monitors State aid. A company which receives government support obtains an unfair advantage over its competitors. Therefore, the EC Treaty generally prohibits State aid unless it is justified by reasons of general economic development. To ensure that this prohibition is respected and exemptions are applied equally across the European Union, the European Commission is in charge of watching over the compliance of State aid with EU rules. Services such as transport, energy, postal services and telecommunications have not always been as open to competition as they are today. The European Commission has been instrumental in opening up these markets to competition. In the EU Member States, services like these have previously been provided by national organizations with exclusive rights to provide a given service. By opening up these markets to international competition, consumers can now choose from a number of alternative service providers and products. Opening up these markets to competition has also allowed consumers to benefit from lower prices and new services which are usually more efficient and consumer-friendly than before. This helps to make our economy more competitive. Moreover, the role of international cooperation may affect the competition between different companies. With increasing globalization, more and more companies, mergers and cartels are international. As a result, the activities of companies based outside the EU may affect competition within the EU. This has made international cooperation on competition policy essential. If a company has a large proportion of the business in a particular market, it is likely to have a dominant position in the market. Dominant companies have the economic strength to act without having to take account of either their competitors or their consumers. This is why it is illegal for companies to abuse their dominant position. Such abuses may involve: charging unreasonably high prices, which may exploit customers; charging unrealistically low prices, which may be used to drive competitors out of a market or to make it more difficult for competitors to enter the market; discriminating between trading partners, for example by refusing to deal with certain customers or by offering discounts only to those customers which obtain all or most of their supplies from the dominant company; forcing unjustified trading conditions on trading partners. All EU Member States have national competition authorities which have the power to enforce EU competition law. They can order agreements and practices which restrict competition to be stopped and fine companies that have broken EU competition law. As part of their close cooperation in the European Competition Network (ECN), the European Commission and the national competition authorities inform each other about new cases to avoid multiple investigations. They also inform each other before taking a decision in their cases to ensure that the law is applied consistently regardless of who enforces it. More information on the ECN can be found below. Like the competition authorities, national courts have the power to determine whether a particular agreement complies with the requirements of EU competition law or not. Companies and consumers can claim damages if they have been the victim of illegal behavior which restricts competition. This creates an effective mechanism to counter companies which engage in cross-border practices restricting competition. The main objective of the ECN is to ensure that EU competition law is applied consistently across the EU. Through the ECN, the competition authorities inform each other of proposed decisions and take on board comments from the other competition authorities. Where it is necessary to ensure consistent and effective application of the law, the European Commission may decide to deal with a case itself. In addition, some competition acts in England also helped in ensuring proper competition in the market. The Competition Act 1998 (the Act) came into force on 1 March 2000 (David Strang and Toby Crick, 2001). The new Act replaces or amends the old Restrictive Trade Practices Act 1976 (RTPA), Resale Prices Act 1976 (RPA) and Competition Act 1980 and introduces a new system based on the European model. The Act also introduces a new and stricter enforcement regime that will provide the Office of Fair Trading (OFT) with wide ranging new powers. Fair Trading Act (1973) and Competition Act (1980) also play crucial role in ensuring fair competition among the companies and restricting unjustified acts of some companies and help in protecting the interests of genuine customers. Financial services and markets act (2000) and Enterprise act (2002) also act as important legal instruments for interpretation of competition law in United Kingdom. Low-cost airlines have been able to start operating and developing in Europe thanks to the European Commission opening up the airline industry to competition. The wider and more affordable range of services now available are enjoyed by many European consumers (Air transport portal of the European commission. 2007). In 2004, the European Commission intervened when the French and German gas companies Gaz de France and Ruhrgas allegedly refused to allow the Norwegian gas producer Marathon access to their gas networks. Both the French and the German companies subsequently offered to improve access to their respective networks, allowing customers in France and Germany to benefit more effectively in future from the opening of the gas markets to competition (Europa, 2004). The working style and approach of the European Commission has evolved over the years. In 1993, when requiring Denmark to end the monopoly rights of the State-owned railway company DSB on the port facilities at Rodby, the European Commission directed the Danish government the choice to allow competitors to use the same facilities or, alternatively, to construct new facilities near the existing port. However, it soon became apparent that establishing competing facilities, especially in the case of nationwide networks, requires a great deal of investment and is usually inefficient. So the European Commission developed the concept of legally separating the provision of the network from the commercial services using the network. In the railway, electricity and gas industries, the network operators are now required to give competitors fair access to their networks. Direct implications of the European Commission’s competition policy In the two markets which were opened up to competition first (air transport and telecommunications), average prices have dropped substantially. This is not the case for markets which were opened up to competition later or not at all (like electricity, gas, rail transport and postal services), where prices have remained unchanged or have even increased. Although this may be due to sector-specific factors, for example, gas prices are closely related to oil prices and it seems that consumers have been able to benefit more easily from lower prices in sectors which are more open to competition. The European Commission opened the telecommunications sector completely to competition on 1 January 1998. As a result, since 2000, the EU weighted average charge of a 3 minute call has fallen by 65% and the cost of a 10 minute call by 74%. Opening up new markets requires additional regulation to ensure that public services continue to be provided and that the consumer is not adversely affected. When applying competition law, the European Commission always takes account of the special obligations placed on any organization benefiting from ‘monopoly rights’. This approach ensures that there is fair competition without handicapping the State-funded provider, which is obliged to provide services in the public interest even where this is not profitable. Recommendations The European Union competition law should regulate the aspects of competition exists between different companies in more transparent manner. It must cover almost all the major sectors so that the customers would get tremendous benefit due to fair competition in the market. The coordination between the European Union competition authority and national competition authorities in respective nations must be strengthened further for effective implementation of competition policy. The guidelines issued by the European Commission for deciding the legality of some mergers and restriction of monopoly have to be improved. The legislation of European Commission which supports the competition policy in England must be publicized in all print and electronic media so that the public awareness would improve and the customers would get good quality products. Conclusion The European Commission Competition law has been highly effective in restricting the monopoly and dominance of some bigger companies and provides tremendous benefit to large number of small companies and in that process ensure customers to get an access to quality goods. It has helped several companies to get justice in cases of intentional suppression by bigger companies and provided customers the quality goods at reasonable prices. By stronger coordination with the national competition authorities and amending the legislature it would certainly ensure the fair competition in the market. References Adam Smith. 1776. An Inquiry into the Nature And Causes of the Wealth of Nations. Book I, Chapter 7, para 26. Air transport portal of the European commission. 2007. http://ec.europa.eu/transport/air_portal/internal_market/competition_en.htm. David Strang and Toby Crick, 2001. The UK Competition Act 1998 and the IT Industry. Utilities Policy. 10 (3-4): 129-136. Europa. 2001. Commission prohibits Glaxo Wellcomes dual pricing system in Spain. IP/01/661   Europa. 2004. Commission settles Marathon case with Gaz de France and Ruhrgas. IP/04/573. Europa. 2005. Competition: Commission imposes a €49.5 million fine on Peugeot for obstructing new car exports from the Netherlands. IP/05/1227. France Telecom SA v. Commission.2007. Case T-340/03. JUDGMENT OF THE COURT OF FIRST INSTANCE (Fifth Chamber, Extended Composition) Dated 30 January 2007. Gencor Ltd v. Commission. 1999. T-102/96, ECR II-753. Pass, C. L. and Sparkes, J. R. 2000. U.K. competition policy evaluated. 16 (3) : 157-161. Pfizer v Pharmacia. 2003. Case M.2922. C265. DG 24.40. IP/03/293. Financial services and markets act. 2000. Chapter 8. Office of public sector information. http://www.opsi.gov.uk/Acts/acts2000/ukpga_20000008_en_1.htm. Enterprise act. 2002. Office of public sector information. http://www.opsi.gov.uk/Acts/acts2000/ukpga_20000008_en_1.htm. Fair Trading Act. 1973. The UK statute law database. http://www.statutelaw.gov.uk/help/Help_for_the_Statute_Law_Database.htm. Competition Act. 1980. Office of public sector information. http://www.opsi.gov.uk/Acts/acts2000/ukpga_20000008_en_1.htm. Read More