The EU Competition Policy - Assignment Example

343205 – EU Competition Policy Assignment Question: How and to what extent does E.C. Competition Law restrict the activities of businesses in Europe? Answer: I. Introduction 1 May 2004 marks a truly historic date in the evolving history of the European Union (EU). Alongside the much publicized EU enlargement to twenty-five members this date also initiated what amounts to nothing less than a revolution in the way that competition policy in the EU is both administered and made. The new changes affect the handling of both anti-trust and mergers cases and aim to both modernize and decentralize decision-making. Cartelbusting, the remains the major aspect of the European Commission’s activities in the area of competition policy and it has long served as the primary example of supranational regulation.1 When the member counties of the European Union agreed on the Treaty of Rome, the articles 85 of restrictive practices and 86 of abuse of dominant market power became European Union policy. These articles 85 and 86 became articles 81 and 82 respectively later. The policy aims to secure and ensure competition in the markets so that the society will increase its benefits from it. The policy also intends to remove both national and private barriers to inter-state competition and private competition. Article 81 states what behaviors are prohibited such as fixing purchase or selling prices, limiting or controlling production, and sharing markets or sources of supply. The policy must be consistent with each individual state’s existing policies. They can exercise the right to adopt competition policy on their own within their national boundaries. If trade is found breaching the national boundaries, EU policy can be assumed to take effect. EU policy can punish anti-competitive behavior if it is found anti-competitive behavior. However there is no formal agreement on to act in a competitive way. Regulators of the EU competition policy can impose penalties for any acts which are found contrary to the Treaty. The fine can be up to 10% of their turn over for any anti-competitive behavior. The accused individuals or firms do not have the right to appeal. Competition policy is aimed at securing efficient allocation of economic resources in functioning market economies. Efficient allocation of resources would be arguably the highest priority for post communist countries that wish to establish market economies. Because of true scarcity of resources in impoverished countries with pled economies, securing optimal resource allocation could bring significantly greater benefits than would be the case in a functioning market economy. Correspondingly, the cost of wasting resources is far greater in post communist countries than in developed economies. In the European context, European competition policy is seen as the cornerstone of the EU economic integration. The Central and Eastern European countries in pursuit of EU membership had to accept that fact and commit to its full incorporation in their domestic legal systems. Although a functioning market economy is a qualitative criteria for EU membership; the EU Commission adopted a formalistic approach. The Commission assumed that the EU model would help best the candidate countries in establishing functioning markets. Thus, the Commission evaluates fitness of candidate countries for EU membership on the basis of their ability to adopt and apply the EU legal system rather than on the analysis of a functioning market economy. Establishing a market economy and the role for competition policy As outlined above, transition is a lengthy and complex process. In that context the competition policy should be tailored to the needs of a particular country in transition. Especially important should be its role in fostering the establishment and development of a competitive market economy. The first decade of transition has provided insightful data regarding the establishment of a competitive market economy and the role for competition rules. The central element of a successful transition is the entry and expansion of start ups2 The main reasons, as pointed out by the EBRD Transition Report, are that start ups' extensively contribute to employment and output growth as well as to the reallocation of resources across sectors. Start ups are a dynamic component of employment and overall economic growth within the most sectors of a market economy. By introducing and expanding new goods and services, start ups are also a way of changing the balances between sectors. Finally, they play a critical role in encouraging innovations within existing firms and in forcing the contraction or exit of inefficient incumbents.3 The evidence gathered suggests that start ups in transition countries face an uneven playing field in relation to the incumbents. The two main factors for uneven treatment that hinder entry and expansion of start ups are the corruption and anti competitive practices. Of all the anti competitive practices surveyed start ups identified favorable access to essential business services for the incumbents as the most important specific anti competitive practice. Successful competition policy tailored for the specific needs of a transition country must ensure that all enterprises can compete on an equal basis that, in turn, fosters the expansion of the new private sector. Lower cost and innovative enterprises must be able to enter into the market and expand and force less efficient enterprises to restructure or to exit the market. Thus, the measures to ensure the ability of star ups to enter the market should be introduced. The benefits from increased competition are particularly important in infrastructure sectors like transport and telecommunication, as they affect the economy as a whole,. Simple regulatory rules allowing early introduction of competition to such sectors should not be delayed. The EBRD deduces that none of the transition countries dedicated enough effort in ensuring that all the enterprises, and particularly start ups, have unimpeded access to all essential business services. The countries also failed to detect the most important strategic bottlenecks to competition. The EBRD believes that"[I]t is crucial for transition economies to develop a more active role for competition policy and to foster4 sector specific regulatory reforms to improve access to essential business services" including telecommunications, transport and finance. II. Restrictive agreements There are some agreements made between firms who are offering the same kinds of services and products. Such agreements reduce competition among the firms who entered the agreements. For example, some firms agreed upon prices or cartels, so that the prices are fixed and consumers have less choices to choose the lowest prices from all suppliers existing in the market. Other firms may fix allocation on quota of production among manufactures so that they could share the market. Such agreements are not allowed in the Europe and its member countries because they will lessen the degree of competition of operators in the market. In the market, firms behaving anti-competitive acts can harm all operators of the business. Thus they require authorities’ and legislators’ interventions. For the last three years, there were more than 400 cases of agreements restricting competition every year which the European Commission has to deal with. Some examples of action taken by the Commission The agreement made between individual firms can be exempted under the existing Community law. For example, distribution agreements between individual firms can be considered an exemption when notified with the European Commission. Under the Article 81, the European Commission can exercise its authority and power to exempt a restrictive agreement. Individual firms are required to file their notification on agreements with the Commission. Such notification has reached an average of 200 per year at the European Commission office. The European Commission realized that there are many centralized notification of all agreements among enterprise which do not pose any serious problems for competition. Thus, the Commission should spend their time and concentrate on those agreements which involve serious problems for competition in the market. The competition authorities and courts of the Members of the State are expected to involve in the application of the Community competition rules. The European Commission does not rely on notifications from individual firms which entered into agreements. They also investigate and monitor on their own conducts which they normally carried out. In 1999, there were about 149 cases and complaints submitted by enterprises whereas the European Commission found 77 cases in their own investigation. The Commission is fully authorized to prohibit them and impose fines on the firms which offend the regulations. It can also make exemption on some agreements which threat competition. It can also exercise the power to investigate even in the premises of the firms in search of evidence on confidential agreements. (1) Cartel case. The European Commission terminated a cartel which was agreed and signed between manufacturers of distance-heating pipes in October 1998. The manufactures jointly set prices and fixed them for receiving tenders to public authorities. In 1990, the cartel was set in Denmark. Then it was extended to Germany and other EU member states. In 1994, it covered entire European market. The companies developed a system in which they manipulate the tendering process. They have abused the system so that they could easily award the favorite candidate. For example, when the companies would like to award a tender to a favorite one to win the contract, the other members submit tender with much higher price than the favorite’s price. In addition, the cartel members shared the national market by jointly fixing the prices for distance-heating pipes. Those who purchase the pipers, mainly local authorities do not have many choices left and they are obliged to purchase from the same suppliers. Thus the Commission fined the company EUR 92 million. Such behavior of anti-competition caused harms for those firms which were intentionally and systematically left out from the system for competing tender offers. (2) Sugar cartel. There were two sugar manufactures and traders in United Kingdom who adopted a strategy for increasing sugar prices in the market. As a result, the consumers face higher purchase prices of sugar which were higher than it would have been in the free competition market. Therefore, in 1988, the Commission imposed fine of EUR 50 million. (3) Open digital television. Open was a new joint venture by four stakeholders, BSkyB and British Telecom, and other two enterprises. The first two were British companies which are mainly involved in digital interactive television and telecommunications. Open intends to offer new digital television services in the United Kingdom. Once the new venture is established, banks, supermarkets, travel agencies, and so on will enable to offer their interactive services via television. Through a decoder, the services can be accessed. Even though there are huge advantages for consumers, the European Commission objected the new business operations. It was judged that the new business will weaken the competition in the area where BSkyB and British Telecom. Table 1. Examples of actions taken against restrictive competition No. Case Place 1 Distance-heating pipe cartel prohibited Denmark and Germany 2 Cartel prohibited in the sugar sector United Kingdom 3 Agreement concerning digital television exempted United Kingdom III. Abuse of a dominant position When a firm operated its businesses effectively, it can hold the dominant position in the market. In general, businesses which are efficient and effective can grasp the market fast and establishes the dominant position. However the firm in the dominant position can abuse its power in order to weaken the competition. Such anti-competitive practice constitutes abuses. The European Commission viewed such anti-competition act as wrong and unacceptable. A firm holding a dominant position has a strong economic power in the market. The firm may not consider reactions to its acts by consumers and other competitors. The firm can abuse its power in order to increase income and expand market by weakening the competitors, increasing the prices, and denying access to market for new entrants. Therefore, these acts are regarded as anit-competition and the Commission objects any of those acts. The Commission can impose any punishment on firms which committed those anti-competition acts. Some examples of action taken by the Commission (1) Ice-cream distribution. Mars submitted a complaint to the Commission against its competitor Unilever. After investigation, the Commission found that the Unilever had abused its dominant position to weaken the competition of its competitors. Unilever distributed its freezer for free of charge to Irish consumers on a condition that they stock the products of the Unilever. This results in Irish consumers having only choice of Unilever ice-cream. Thus the Commission considered that the Unilever abused its dominant position on the market required. (2) Transport services. In July 1999, Virgin Airways complained the Commission against British Airways on abusing a dominant position. British Airways attempted to build a brand loyalty system in which travel agencies are provided with extra commission on their sales exceeding the previous records. This has built barriers for other Airlines and agencies are discouraged to offer other airlines tickets which may be cheaper for customers. Travel agencies prefer to earn more so that the other competitors’ services which might be advantageous for customers are ignored. The Commission found that the British Airways has abused its dominant position in order to weaken the competitors in the market. (3) The Commission adopted a formal decision against the French committee which organized the Football World Cup held in France in 1998. The French holding the dominant position selling the ticket on the final match was discriminatory. They sold the tickets to those customers who provided them with the address in French. Therefore, the Commission found that the committee, CFO, held monopoly in organizing the event and committed an abuse of a dominant position. Then the CFO was ruled against by the Committee. Table 2. Examples of actions taken against abuse of competition position No. Case Place 1 Abuse of a dominant position on the ice-cream distribution market United Kingdom 2 Abuse of a dominant position on the market in air transport services offered by travel agencies United Kingdom 3 Abuse of a dominant position in the organization of the Football World Cup French IV. Discussion The European Commission’s Competition Law provides positive impacts on everyday life of people. First, the Law increase competition in the market which leads to effectiveness and efficiency. When firms are operating in the competitive market, the improved productivity in the production process provides benefits to the consumers. When production and services are efficient, they are less expensive for consumers, for example, telecommunications, and energy services in Europe. When the market is competitive, consumers are left with choices of products and services as well as lower prices. The Competition law improves the European public’s quality of life and purchasing power. However, this competition regulatory framework is based on assumption that the encouragement of competition will lead to efficient market. If and only if the assumption is true, the Competition policy will work. From a political science perspective EU competition policy per se has largely been neglected as an area of academic scrutiny albeit with a few notable exceptions (Cini and McGowan 1998; Eyre and Lodge 2000)5. This startling omission is somewhat puzzling for three main reasons: firstly, the operation of a rigorous competition policy, which was designed to ensure that private barriers did not replace the removal of tariff barriers, not only embodies one of the oldest and most established of EU policy competences but also constituted a prerequisite for any realization of a successful and genuine internal market. Both the Treaties of Paris (1951) and Rome (1957) held provisions on competition policy. 6 Secondly, unless competition can be allowed to flourish, the new strategic goal established by the Lisbon agenda of enabling the EU to ‘become the most competitive and dynamic knowledge based economy in the world’ by 2010 cannot be realized. Put simply, competition may promote innovation and improved product quality while keeping prices low for the consumer, but it cannot be guaranteed. It needs some body or institution to police the marketplace and enforce the competition rules.7 Thirdly, the EU competition policy regime displays distinct characteristics in terms of supranational governance as decision-making power has been placed in the hands of the European Commission. Unbeknown to many analysts and largely unrecognized for several decades by member state governments, competition policy has represented the best example of a genuinely supranational policy, and one that actually possessed ‘federal’ implications for the future administrative and governmental structure of Europe (Gerber 1994).8 All agreements that possibly either ran contrary to 81(1) or sought an exemption under 81(3) had to be notified to the Commission. Some types of agreement, however, were entitled to exemptions from the EU competition rules where agreements contribute to improving the production or distribution of goods, promote technical and economic progress or ensure that 988 Journal of European Public Policy consumers reaped considerable benefits. Article 81 may have identified policy priorities but it had failed to designate the means to secure these objectives. Firms have naturally opted to pursue cases through the courts and this has allowed the accumulation of substantial case law on competition (Goyder 2003)9. Indeed, infringements of the competition rules have culminated in the termination of agreements and increasingly an augmented determination to deter such infringements through the imposition of ever higher financial levies (McGowan 2000). For example, in 2001 the European Commission imposed fines of E462 million on Hoffmann-La Roche (vitamins cartel); E296 million on BASF (vitamins cartel); and E184 million on Arjo Wiggins (paper cartel). In 2002 E250 million was levied on Lafarge (plasterboard cartel) and E149 million on Nintendo (for price-fixing) while in 2003 Hoechst was fined E99 million (food preservative cartel). The ‘hitlist’ will continue to grow alongside the determination and resolve of many companies to conceal their anti-competitive activities by all means possible.10 Many firms considered the powers of the Commission to be excessive and questioned the Commission’s objectivity and a perceived tendency to prejudge cases (Neven et al. 1998: 142).11 The rationale behind the latest revisions to domestic competition policy both inGermany (see Lodge 2000)12 and the UK (Cini 2003; Green and Robertson, 1999)13 readily illustrates the assimilating tendencies. In operation, this will mean that companies which ‘had hitherto turned a blind eye to obligations under EU national law either because they were not relevant, were not understood, or worse, were unlikely to be detected, will now find that EU rules have permeated into national competition law’ (Nazerali 1998: 85)14. V. Conclusion In conclusion, the European Commission believes that the promotion of competition will lead to increase in market efficiencies. When the market is efficient, the consumers will benefit form the consequences. The consequences from the efficient market are lower prices, better quality products and services, and easy to enter the market for new entrants. This short examination of EU cartel policy has highlighted two fundamental issues arising from the latest reform that relate specifically to our understanding of European competition governance and inform our appreciation of Europeanization. There can be little doubt that the operation of EU competition policy has been modernized, through the reforms introduced by Regulation 1/2003, to ensure both greater clarity and consistency and to provide more efficient decision-making. This revolutionary reform has been well received and accepted as an essential step to achieving the objective of undistorted competition. More can still be done to simplify procedures. The latest reforms have made much of decentralization and should not be regarded as aiding any moves towards re-nationalization. On the contrary, they have been designed to involve the national authorities directly in competition decision-making. However, it could also be argued that this process of decentralization is in effect a very clever attempt by the Commission to engineer ever greater centralization of competition decision-making. The Commission’s role will prove the decisive factor here as it remains very much in the driving seat as an enforcer of EU competition rules. It still exerts widespread discretion, most notably in terms of the allocation of cases. It can even be argued that DG Comp has acquired a greater level of responsibility in the exercise of its powers than it had under the previous Regulation 17 system. The Commission remains the only body empowered to propose legislative texts and shape future development of competition policy. Advocates argue that the new ‘decentralized’ system will maintain legitimacy as long as Commission action ‘efficiently serves the treaty objectives at the same time paying due regard to the principles of proportionality and subsidiarity’, though ‘any degree of centralisation is appropriate, justified and legal’ (Pijetlovic 2004: 358)15. The newly formed competition network is the mechanism to facilitate cooperation and to iron out any probable inconsistencies. Its creation should be seen as a further example of augmenting international co-operation in recent years to combat anti-competitive practices. The virtual International Competition Network (established in 2001) remains the best known example. In order to ensure that the policy operates effectively and efficiently and as a matter of course, the Commission will continue to issue Notices and Guidelines in an attempt to explain policies and provide further guidance. The latter typify ‘soft law’ instruments which, although not binding upon member states, are expected to make a valuable contribution to the understanding of the competition rules. Co-operation between the Commission and the national authorities should enhance the consistency of application, and in reality the national authorities will increasingly become part of the EU system. Under this arrangement the possibilities for any form of political interference should be lessened. What has been occurring in this policy area amounts effectively to a process of harmonization or convergence by stealth where in the end all the national competition laws in the current member states will to a great extent be supplanted by EU competition law. In effect, it could be argued that this is already taking place in a process whereby the national authorities are becoming de facto branches of the Commission, much as the regional cartel offices exist alongside the Federal Cartel Office in Bonn. This may be the intention or ideal type in the minds of Commission officials, but caution needs to be applied as degrees of divergence, as the UK case illustrated, prevail. How these co-exist, develop and align themselves offers considerable potential for future research. Competition policy may remain one of the least studied of the EU policy competences but, like other technical and initially duller-looking sectors (e.g. financial services regulation), it provides ample scope for research and, in this case, one of the best examples of actual Europeanization. 16 References Akbara, Yusuf. 1999. The Extraterritorial Dimension of US and EU Competition Law: A Threat to the Multilateral System? Australian Journal of International Affairs, Vol. 53, No. 1, 1999 Cini, M. (2003) ‘The Europeanization of British competition policy’. ESRC/UACES Seminar on the Europeanization of British Politics and Policy, University of Sheffield, 1 May 2003. Cini, M. and McGowan, L. (1998) Competition Policy in the European Union, Basingstoke: Macmillan. Eyre, S. and Lodge, M. (2000) ‘National tunes and a European melody? Competition law reform in the UK and Germany’, Journal of European Public Policy 7(1): 63–79. Gerber, D. (1994) ‘The transformation of European Community competition law?’, Harvard International Law Journal 35(1): 97–147. Goyder, D.G. (2003) EC Competition Law, 4th edn, Oxford: Clarendon Press. Green, N. and Robertson, A. (1999) The Europeanisation of UK Competition Law, Oxford: Hart. Lodge, M. (2000) ‘Isomorphism of national policies? The “Europeanisation” of German competition and public procurement law’, West European Politics 23(1): 89–107. McGowan, Lee. 2005. Europeanization unleashed and rebounding: assessing the modernization of EU cartel policy. By:. Journal of European Public Policy, Dec2005, Vol. 12 Issue 6, p986-1004 Nazerali, J. (1998) ‘Plus c¸a change, plus c’est la meˆme chose’, Business Law Review 19(4): 84–5. Neven, D., Papandropoulos, P. and Seabright, P. (1998) Trawling for Minnows: European Competition Policy and Agreements between Firms, London: Centre for European Policy Research. Pijetlovic, K. (2004) ‘Reform of EC antitrust enforcement: criticism of the new system is highly exaggerated’, European Competition Law Review 25(6): 356–69. Read More