The Importance of the Competition Law - Coursework Example

Introduction Competition law is a broad spectrum of rules and judicial processes that are maintained in a given jurisdiction to restrict competition, concentration or prevent the abuse of market power by private firms1. In other words, competition law is a collection of regulations and other laws that are kept by a state or regional body to regulate trade in a way that one business entity or a few business entities do not acquire or abuse power. This is to prevent a situation where smaller and less dominant businesses in an economy become unfairly affected by larger firms in their bid to stay in business. Competition law is very important since it protects competition and enhances development and efficiency in the markets through fairness and equal opportunities2. Jones and Sufrin identify some key elements of competition law3. First of all, they identify that competition law ensures that firms operate in a free market economy. Secondly, competition law provides the best outcome for the society through an conomic theory that employs models of perfect competition, monopoly and concepts of welfare and efficiency. Thirdly, competition law makes it obligatory for institutions and firms in a state to maintain a fair balance between welfare and efficiency. Finally, competition law is based on regulation of three main things: market power, market definition and barriers to entry. Professor Richard Whish argues in most of his writings that the ultimate end of competition law is to maximise consumer welfare. This paper examines the extent to which this assertion is valid in the European Union. Market Structures In each market, there are buyers and sellers. Sellers own businesses that take inputs from the society and process them into output for consumers to purchase. Sellers rely on the revenue they make from buyers to acquire new inputs and maintain their production systems. Thus, the higher their revenue, the more they can produce4. On the other hand, the rational consumer also wants to pay the lowest price for a given product. Thus, the true price of a product can be fixed after some sort of interaction or notional bargaining between what consumers are willing to pay and the lowest price suppliers are willing to sell. This interaction between demand and supply determines the equilibrium price of a product. Price elasticity of demand is the measure of the responsiveness of the quantity demanded by consumers to price5. Thus, if suppliers set higher prices, consumers will demand less. On the other hand, if suppliers set lower prices consumers will demand more. On the aggregate level, there are some classifications that describe trends in the markets based on the principles of demand and supply. Jones & Sufrin identify that there are three types of markets that could exist in any economy: a perfectly competitive market, a monopoly and an oligopoly6. These three market structures are analysed by economists on the assumption that there is only product which is homogenous in the market7. In this vein, a perfectly competitive market is one where there are large numbers of buyers and sellers. Buyers and sellers have access to perfect information. There are no barriers to entry and exits and no seller has any influence over price. In the perfectly competitive market, the price of the product does not exceed the marginal cost of producing it, thus if the price is below marginal cost, price will fall. Opposite to a perfectly competitive market is a monopoly8. In a monopoly, there is only one seller. The seller might exist alone because there are barriers for the entry of other suppliers into the market. A monopoly could also exist because one supplier produces everything and decides everything. In between the perfectly competitive market and the monopoly is the oligopoly. In an oligopoly, a small group of sellers compete with each other with little possibility for others to enter the market. As such, the firms in an oligopoly set the price of goods without much reaction by other parties in the economy. The existence of oligopolies prevent the entry of other competitors. A consumers position varies under these three market structures. A perfect competition is best for a consumer because prices are determined by the interaction of the forces of demand and supply. This is because no firm has full control over the markets and as such, consumers can switch as and when they deem appropriate. Prices are therefore set according to what consumers are willing to pay9. Hence prices are fixed by the invisible interaction of buyers and sellers through an unrestricted flow of information. In a monopoly, buyers are literally at the mercy of suppliers. This is because the single supplier determines the price and offers it to consumers on a take-it-or-leave-it basis. This means that consumers will have to pay whatever the supplier presents because there are no alternative options. This can lead to consumer exploitation and the production of sub-standard goods. In an oligopoly, buyers have a limited choice. However, the suppliers still retain a lot of power and can come together to set prices that consumers will have to learn to live with. This is as anti-competitive as the monopoly because consumers have to play according to the rules of the few suppliers. A perfectly competitive market is positive because it allows consumers to get the best prices and high quality products. Consumers take the final decision and are free from exploitation by suppliers. The power of suppliers are equally restricted and this prevents them from becoming extremely powerful in the economic. Legal View of the Markets in the European Context The economic view of market structures is quite idealistic. The assumptions made by economists in the discussions above are based on perfect situations and as such, can exist only in books. However, in real life, there is the need for laws to be enacted and applied enable nations to reach levels closer to a perfectly competitive market10. “Competition law prevents companies from engaging in certain types of corporation. In particular, any corporation which limits competition on prices is strictly outlawed”11. Thus, competition laws are meant to create a framework whereby consumers will be protected through a system that ensures that no firm remains extremely dominant12. This promotes efficiency and allows prices to be fixed by the forces of demand and supply rather than a dominant business entity in the economy. The European Union was formed based on a series of treaties that provide a supranational structure that is meant to enhance a common market and eliminate the power and influence of huge corporate entities13. The main motive of the establishment of the European Union is to create a single market that will enhance competition and promote better livelihood for the citizens of the union. The Van Gend en Loos14 case established that every member state cedes its sovereignty to the European Union. This therefore means that the treaties and rules of the European Union must be honoured and adhered by all the member states. Some of the key and definitive treaties of the European Union is the Treaty on the Functioning of the European Union enacted in 199415. The Treaty on the Functioning of the European Union (TFEU) set up various rules and regulations which include the current competition laws that are respected throughout Europe. Notable amongst them are Articles 101 and 102. Abolishing of Oligopolies Article 101 of the TFEU states that: The following shall be prohibited as incompatible with the internal market: 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 internal market16. This piece of statute exists to abolish all forms of uncompetitive ventures and corporations that come together to create any kind of cartel or association which hinders other businesses from entering the same market. Effectively, it prevents businesses and entities from setting up cartels that have a vision of restricting the entry of other businesses into the same market. The Article lays special emphasis on direct collusion ventures that are meant to fix purchases or sell shares with a view of controlling a given industry (Article 101 (1a)). Also, attempts to limit control of production, markets, development and investments in a given market by any corporate entity is strongly forbidden under the Article. Applying techniques and tactics meant to limit the markets and prevent entry of other competitors by any corporate entity or groups of entities are not allowed under law. In Höfner and Elser v Macrotron GmbH17 the German Federal Office for Employment held absolute power over job placement in and around Germany. Prior to joining the European Union, they had a total monopoly over employment as a state institution. After European Union laws came to place, the German Federal Office for Employment consulted with various stakeholders who also agreed that the Office for Employment should continue as the only entity through which job placement could be done across Germany. Hofner & Elser were recruitment consultants who had their clients sent to a job which was specifically meant to recruit only through the Employment Office. The job rejected Hofner & Elsers candidates and refused to employ them. Hofner & Elser took the issue to the European Court of Justice. It was held that the German Federal Office for Employment was operating against European Laws. The agreements that they signed with the various businesses to be the sole providers of employees was against competition laws in the Union. They company in question was therefore required to accept the recruits from Hofner and Elsers firm. This established that public entities in the European Union are also required to operate under the competition laws of the Union. This law is similar to Americas anti-trust laws which renders illegal any kind of dealing or contact, or a "meeting of the minds" between parties which prevent others from entering the same trade or business18. This ensures that no players in any industry remain extremely dominant enough to prevent others from entering or thriving in the same industry. This creates a system where there is competition amongst businesses in each and every industry. Elimination of Monopolies Article 102 of the TFEU states that: 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.19 This implies that any venture with dominant power or stake in the European Union is illegal because it has the tendency to affect trade in the nation. This means that no business can set up systems and structures that will make it the only dominant entity in its trade20. In United Brands Continental BV v. Commission21 it was held that a business is considered a monopoly if there is evidence that it operates independent of any of the demands of its competitors, customer groups and the consumer. In other words, it is illegal if there is a situation whereby these important stakeholder groups cannot have any effect on a given business due to its dominance. Also, if a firm has a large market share, that business can be considered a monopoly under European Law22. This is because such a firm might be seen as a dominant entity that has complete control over things and can influence things in its favour in an unfair manner. There are therefore restrictions on mergers and acquisitions as well as public funding to prevent any public or private entity from becoming extremely dominant in a EU member state23 The Advantages for the Consumer The EU competition law ensures that no business or firm becomes extremely dominant in any community24. This is in relation to the acquisition of so much power that no other competitor, consumer group or consumer can go contrary to the decisions of such an entity. The core advantage that the TFEU competition laws bring to the European Union is that it promotes competition which leads to the production of better goods and services25. This is because once there is competition, producers are forced to make the best use of resources and provide the maximum satisfaction for consumers. This ultimately leads to the establishment of a more progressive and prosperous community for the masses and restrict the concentration of wealth and power in small groups of people Conclusion The EU competition laws are meant to promote competition, fairness and efficient use of resources. Economists have identified that a perfectly competitive market is the best for consumers and encourages competition amongst producers which leads to efficiency. The European Unions Treaty on the Functioning of the European Union forbids the establishment of cartels and monopolies. This ultimately helps in the maximisation of the use of resources in communities in the Union. Endnotes References Alberto Alesina, Ignazio Angelioni, Ludger Schuknecht. “What does the European Union Do” (Public Choice Vol 123 No 3/4 2005) Ali El-Agraa & Brian Ardy. The European Union: Economics & Policies (Cambridge University Press. 2011) Alison Jones & Brenda Sufrin. EU Competition Law. (OUP 2004) Bernard Hockman & Peter Holmes. “Competition Policy, Developing Countries & WTO” (World Bank Working Paper Washington DC 1996). David Begg, S Fischer & R Dombusch. Economics (8th Edn McGraw-Hill 2005) Heather Grabbe. “European Union Conditionality & The Aquis Communitaire” (International Political Science Review. 2002 Vol 23 No3) Irvin Tucker. Economics for Today (Cengage 2010) Mark Furse. Competition Law of the EC and UK. (London: Polity Press 2005). Michael Burgess. “Introduction: Federalism and Building the European Union” (Publius Vol 26 No 4 1996). Michael Faure. Competition Policy & Regulation (Edward Elgar Publishing 2011) Official Journal of the European Union. “Common Rules on Competition, Taxation & Approximation of Laws. Consolidated Version of the Treaty on the Functioning of the European Union. Paul Bennett. “Anti-Trust, European Competition Law & Mutual Environmental Insurance” (Economic Geography Vol 76 No 1. Jan 2000). Ranaji Krishnan. “The Effects of Changes in Regulation & Competition on Firms Demand for Accounting Information.” (The Accounting Review Vol 80 No 2005). Richard Bellamy & Dario Castiglione. “Building the Union: The Nature of Sovereignty in the Political Architecture of Europe.” (Law & Philosophy Vol 16 No 4 July 1997) Robert Sexton Exploring Economics (2nd Edn Cengage 2010) Roger Arnold Economics (5th Edn Cengage 2009) Tony Prosser, The limits of competition law: markets and public services (Oxford: Oxford University Press, 2005 ) Case Lists Hoffmann-La Roche & Co AG v. Commission [1979] ECR 461 Höfner and Elser v Macrotron GmbH [1991] ECR I-1979 C-41/90 United Brands Continental BV v. Commission [1978] ECR 207". Van Gend en Loos V Nederlandse Administratie der Belastingen ECR 1; [1963] Read More