European Competition Law - The Market for Industrial Filters - Essay Example

 European Competition Law - The Market for Industrial Filters Abstract There are twelve manufacturers of Industrial Filters operating in the European market who, between them, supply 100% of the market demands. As a result of complaints made to the commission from buyers of Industrial filters, and as a result of its own monitoring of the particular industry, an investigation into activities, which may have caused, and be continuing to cause, breaches the rules of competition, has been instigated. As a result the Commission, after notifying the organisations concerned, has acted to seize documents from the offices of all the parties in question. From their study of the documents and as a result of interviews conducted with representatives of the manufacturers in question, the Commission is of the opinion that a number of actions taken in concert by manufacturers of industrial filters in the European Union are in breach of current Competition Law, with particular reference to Articles 81(a)1 and 822. We have been asked by the Commission to study the facts and evidence relating to the case in question and, after careful consideration and research, to advise them on the relevance of such issues in respect of their breaches of the European Unions Competition Laws. In the preparation of this report we have studied the information to hand and undertaken extensive research, including reference to other relevant Competition cases. Our conclusion, outlined in depth within the main body of this report, is that there is reasonable evidence to confirm that the manufacturers of Industrial Filters have taken action in concert to artificially influence the market, and that such action is in contravention of current Competition Law. European Competition Law The Market for Industrial Filters We have been presented with all of the evidence that has been collected and collated by the Competition Director, where they are investigating the possible breach of EU Competition Laws by the manufacturers of Industrial Filters. In our opinion, there are two main issues to be addressed in reaching constructive conclusions within this report. 1) Does the combination of all the undertakings3 in this event represent a dominant force within the industry in which they operate? 2) Have the same undertakings, arriving at decisions made jointly between them, abused their dominant position and conducted themselves in a way which may affect4 the objectives of free trade within the EU and its member states and, by doing so, committed breaches of the EU’s Competition laws and In what specific areas of the Articles have such breaches manifested themselves? There are a number of different and varied categories of undertakings as defined within Articles 81 and 82. However for the purpose of clarification and for the purpose of this report we rely on the definition being "Any entity involved in commercial activity regardless of legal status and way it is funded", as defined in the cases, POUCET v. ASSURANCES GENERALES de FRANCE [1993] ECR I - 637. SAT v. EUROCONTROL [1994] ECR I - 43. DIEGO CALI v. SEPG INSTITUT DES MANDATAIRE v. COMMISSION [2001] ECR II – 223. For the purpose of this report, the word “entity” will also be deemed to mean the group of manufacturers involved in this investigation. With regard to the definition of agreements made, all types of agreements between such entities are included within the definition. GERMANY v. DELTA [1994] ECR I - 3437 1) Does the combination of all the undertakings5 in this event, represent a dominant force within the industry in which they operate? To ascertain whether an undertaking represents a dominant force in a specific industry, one first of all has to decide whether it has dominance in that industry. For example, a few single businesses in an industry with thousands of competitors would be unlikely. The one thing in common with all of the categories described below however, is that whatever their structure, they are all subject to the Commissions’ Competition Laws. By far the most common of these undertakings are: - a) Monopoly – A market a multitude of customers but just one seller. Some State organisations and others with monopolistic tendencies, such as Microsoft, fall into this category. The Commission dealings with such cases are widely reported; see Alan Lipietz (2003) Mary Mosquera (2000) The Local (2006). As far as this case is concerned it is apparent, being within the Industrial Filters market and consisting at present of twelve manufacturers operating, that it would not fall into the category of a monopoly. b) Oligopoly - A market or industry in which each of a few producers’ affects but does not control the market. Corporations in this market can be national or global, Aaron Chatterjee (2006) There are, however, similarities through which one could compare the case being studied in this report to an Oligopolistic market, Steve Margetts (Unknown date), although it does not conform to all the know structures, such as barriers to entry, Prof. Dorfman (Fall 2001). Numerous studies have been conducted into these types of markets; see Mark Furse (2004) Kirsty Middleton (2003). There is a possibility that one could class this case as one of an Oligopoly, but the point for discussion would be whether restrictive practices are contributing that situation. c) Cartel - A combination of independent business organizations formed to regulate production, pricing, and marketing of goods by the members. There have been a number of cases placed before the Commission in the past pertaining to the activities of Cartels, (Leighton Berwin 1998). It is our contention that the manufacturers of industrial filters, by virtue of the actions outlined later in this report, the fact that such action was taken in consort can be considered to have formed a cartel within the industry, as defined in [W503] ACF CHEMIE FARMA v. COMMISSION [1970] ECR 661 (Quinine Cartel). The point is that, having decided that a cartel has been formed, for whatever purpose, one has then to ascertain whether that cartel is of a strength that it represents a dominant force in the industry, Dut, Nauta (2004) and Ritter (2005), or an element of the market for that industry. In other words that this are no other entities within the industry that could nullify the effects of the cartel in question. One Cartel that immediately springs to mind for reference is OPEC6, which is dominant in terms of product. Next one has to study the cartel to establish if it is of such a size that any action taken by it would have, or is likely to, cause a significant effect on the performance or activities within that marketplace. The case of SUIKER UNIE v. COMMISSION [1975] ECR 1613 explores the subject of “substantial share”, and there has been much independent research on the subject and how to calculate “share.” Hague et al. (2004). In this case being studied here however, it has already been found that between the twelve manufacturers listed in the evidence, they supply 100% of the market. Relying on that evidence, it is confirmed that the said manufacturers has both the strength and size to represent a dominant force in the industry in which they operate. 2) Have the same undertakings, upon decisions made jointly, abused their dominant position and conducted themselves in a way which may affect7 the objectives of free trade within the EU and its member states and, by doing so, committed breaches of the EU’s Competition laws and in what specific areas of the Articles have such breaches manifested themselves? The next step of the investigation is ascertain whether the undertakings have been guilty of abusing their position of dominance8 and, if so, what specific areas of the articles of EU Competition Law have such abuses breached. Complaints from purchasers of filters instigated this investigation. Their complaints were based around the fact that there were no price differentials between the manufacturers, nor were any discounts available. Following this the Commission monitored the situation and found that there had been 3 price rises in six months, with a further one imminent. What heightened concern was that all the manufacturers followed the price rise announcements, which is unusual in any industry? A formal request for information was made to all the manufacturers and the industry association based in Luxemburg, quoting articles 18 and 249 of regulation 1/2003. From the information received the following facts came to light: - a) The demand for industrial filters came from a wide variety of different industries. b) There had been several meetings between members of the manufacturers including a public meeting in January 2006 at which several manufacturers representatives spoke of the effects of falling profitability one even advocating price rises. c) Other meetings took place, involving persons other than board level. A diary comparison revealed that marketing directors and others were meeting together as a group. No minutes were found. d) A memo was found stating that action was necessary to reach satisfactory levels of profitability, but cautioning care because of the AHLSTROM10 case. e) All previously mentioned price rises, which were full category range, were announced by one of the manufacturers within a few days of a meeting of manufacturers representatives. f) Prices were non-negotiable, irrespective of size. Copies of customer correspondance confirmed this. g) Manufacturers would not compete with quotes or orders already submitted by others in the industry. Instead they would actively turn down the prospective sale. h) Internal memo ordering that price rises be blamed on rising costs and can no longer be absorbed. Internal memos of several companies’ were examined and found the same reasons give and similarity of style. i) A visit to the Federation office in Luxemburg revealed survey of average sales price, monthly sales by country and production levels per company per product. No other information was available. j) Discovered a document indicating that a wide range of documents should be shredded as soon as possible, in a member manufacturers file. Whilst the above evidence may be “circumstantial”11 taken in isolation, taken as a whole the following results are revealed i) That the manufacturers of the Industrial Filters industry formed a cartel, and that this cartel was formed with the express intent of carrying out the following identifiable breaches of EU Competition Law. ii) That an agreement has been reached and, even a “gentlemen’s” agreement is admissible in EU cases HULS v. COMMISSION [1999] ECR II – 949, and that such agreement would affect trade12 because it precludes purchasers from being able to compete for products based on price or comparison. iii) That a further element of this agreement was to exercise a control the markets, which would be of benefit to none in the marketplace, save for the manufacturers themselves. iv) That the agreement is of the nature of price fixing, which is prohibited. AEG - TELEFUNKEN v. COMMISSION [1983] ER 3151. v) That such a horizontal13 agreement is prohibited under EU law CONSTEN AND GRUNDIG v. COMMISSION [1966] ECR 299. Such an agreement hampers competition. Cohen and Echikson (2006) vi) That a further breach of EU rules has occurred in that the manufacturers have abused their dominant position CENTRE BELGE v. CLT [1986] 2 CMLR 558 and EUROFIX-BAUCO v. HILTI [1989] 4 CMLR 677 Results The European Union’s Competition Laws, as with all national and global Competition law, was introduced originally with the express purpose of ensuring that the commercial markets of trade remained an environment where people and organisations could freely trade, without hindrance or unfair interference from others, usually larger organisation or group of organisations. The EU’s Law was revised in May 2004, partly to reflect the anticipated the growth in the number of member states, with the imminent inclusion of others, some from former Eastern Bloc area. EU Competition Commissioners Mario Monti (2003) in his speech outlined the revisions. One of the key areas of change related to the concentration on the problems relating to “Cartel’s”, commenting that the commission had, in the previous two years, collected over two billion euros in fines, more than it had collected in total in the years previous to that from Cartel related investigations. Whilst there have been isolated instances of failure in case bought by the Competition Commission, Mondaq Business Briefing (2002) when appealed to the CFI14, and in the case of price fixing against VW, in the majority of incidences, cases are not bought by the commission unless there is what is deemed to have been irrefutable evidence of breaches, or series of breaches of EU competition law. Having investigated the facts available in this particular case and the evidence laid before us, together with having undertaken the necessary research into those facts, we have now formed an opinion based upon those facts, which we recommend to the Directorate of Competition. It is our considered opinion that the manufacturers of Industrial filters did form a cartel with the express intention of creating a environment which would allow them to artificially manipulate the market prices in their favour and that, further, they did then conspire with each other to ensure that customers would have no effective competitive avenue through which they might achieve discounts or more favourable terms in the full knowledge of the repercussions of such actions would cause to customers and others in the market. We would further state that, in our opinion, the actions described did have the effect of, by the reason of increasing and fixing prices, pass undue and unwarranted costs onto their customers. To these, and further extents, the said manufacturers have breached both articles 81 and 82 of the EU Competition law. Discussions The term Free trade has expanded from its original definition15 to encompass the ability of every person or company to trade freely in any marketplace without restrictions or closure of that marketplace by the unfair and unjust actions of either state or other business and corporate organisations. Anti-competitive behaviour by persons or commercial organisations has been around for centuries. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Adam Smith (1776) It was these factors, which led to Nation States intervention and the introduction of laws to protect competition and freedom of trade. Although some corporate officers argue the view that the explosion of Internet trading activity, for example a spokesman for Time Warner Brad King (2000), opens the world markets for all, and still others call for strategic mergers to be allowed, Röller and Sickles (2004), the general consensus is for caution. With the rapid growth in globalisation, both in terms of markets and in the organisations that operate within them, Graham and Richardson (1997), Wolf Sauter (1998) Alexander Schaub (2000) and others all recognised that competition policy was become increasingly important in the global marketplace in terms of economic benefit to all. The EU Competition Directorate, under the directorship of Ms Neelie Kroes (2006) supports that view and is creating a policy, which eliminates barriers, protects consumers and small firms and helps to create a single European Market16, Cini et al (1998), our aim being broad community integration, Arua Kalu Onuma (2004). The reasons for raising these points is that in the case discussed within this report, at least one of the manufacturers has a parent outside of the EU. Consideration should be given as to whether any dialogue should be struck with the relevant department of the nation state where that parent resides. (Bruckhaus Deringer 2004) References Article (June 2002). Court of First Instance Annuls Commission Decision in the Airtours/First Choice Merger Case Mondaq Business Briefing Article (May 2006): Swedish pharmacy policy illegal. The Local (Sweden’s news in English) Arua Kalu Onuma (2004). Competition Law: To What Extent Is The Concept Of Collective Dominance Applicable Under The ECMR Author: Cini, Michele, and McGowan, (1998) Competition Policy in the European Union Lee Publication. Bael, Val and Bellis. (2005) Competition Law of the European Community, Kulmer Law International. Netherlands Bruckhaus Deringer 2004. Factsheet. Changes in EU Competition Regulations. 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European Commissioner for Competition. http://ec.europa.eu/comm/commission_barroso/kroes/index_en.html Leighton Berwin. (December 1998). Cartels: Commissions imposes heavy Penalties. www.Legal 500.com Lipietz, Alan MEP (3 April 2003) Article on Competition. The Parliament Magazine. Margetts, Steve. (Date unknown) Kinked demand curve theory http://www.revisionguru.co.uk/economics/oligopoly.htm Middleton, Kirsty. (2003) UK and EC Competition. Oxford University Press. Mosquera, Mary. (2000) EU Trustbusters May Give AOL-Time Warner Bid The Boot. Wall Street Journal. Press Release No 111/03. VW wins legal appeal. International Herald Tribune, France. Prof. Dorfman. (Fall 2001). AAEC 2580 – Sample Answers to Questions for Exam 3 ... Define a monopoly. Define an oligopoly. Röller, L and Sickles, R.C (arch 2004) Market Niches, and Efficiency: A Structural Model of the European Airline Industry. Paper No. 926 Ross, M.: `State Aids and National Courts` (2000) 37 CMLR 401. Schaub, Alexander (14 September 2000) Speech: Assessing International Mergers: the Commission's Approach. EC Merger Control 10th Anniversary Conference, Brussels, Smith, Adam (1776) The Wealth of Nations. Publisher not known Wolf Sauter (1998). Competition Law and Industrial Policy in the EU. Oxford University Press, USA. Ritter. (2005) European Competition Law. Kluwer Law International, Netherlands. Mario Monti, (October 2003) EU Competition Commissioner, EU Competition Policy after May 2004, Speech at Fordham Annual Conference on International Antitrust Law and Policy. New York. Read More