Competition and Competition Policy - Essay Example

Introduction: Competition is considered to be an integral part of a capitalistic or free market society. This freedom to do business (within the limits of certain statutes) provided an impetuous for growth of the economy. It provided jobs, brought in revenue for governments apart from bringing prosperity and wealth to the owners of businesses. The collapse of Communism and change of policies by countries like China apparently showed that a competitive market is the catalyst for growth. During the time when Adam Smith was writing his famous treatise, the situation was quite different. Competition did exist in the marketplace even during that period. But there were heavy restrictions on the way business was allowed to operate. Governments tried to protect their citizens by granting subsidies. Large corporations (monopolies) were allowed to flourish in order to provide jobs for people. Adam Smith argued that markets should be allowed to operate without intervention of any sort. The fittest and the best will survive and this will be the ideal catalyst for growth. Policies began to change and most Western nations began to follow a freer market policy. Markets started being highly competitive and this forced businesses to pursue ways and means to survive and grow. Price cutting, mergers and acquisitions, and formation of cartels began to be accepted as a way to keep away competition. Monopolies or monopolistic tendencies began to be seen in the market creating unfair competition for smaller players. Economists and policy makers saw the dangers of such practices and began to bring in new laws and statutes to prevent monopolies (and business agreements) that had the power to control the market. This paper is an advisory to Blue Peer Plc, a major supplier of alcoholic and non-alcoholic beer in the United Kingdom. The company intends to acquire or merge with other competitors in order to have a major market share in the country. But it needs to review competition laws and policies in the United Kingdom and the European Union before moving on with its expansion plans. This paper will review the current EU policy on competition and other statutes and provide advice to the company on its expansion plans. Background of the case: Blue Beer plc is an important producer of beer in Newcastle. Statistics shown that Blue Beer plc accounts for some 12% of all beer sold in the United Kingdom but that its Bluelite plc is especially successful and accounts for 40% of all non-alcoholic beer consumed in the UK. Blue Beer has been negotiating with County Beers Ltd with a view to merger. County Beers is the principal other producer of non-alcoholic beers and after merger the new company, British County Blue, will control 65% of the market in non-alcoholic beer Competition and competition policy: The overall policy of the European Union of competitive practices is as follows – “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. The European Commission acts as the referee to ensure that all companies play by the same rules”1. Philip-Lowe, Director General for Competition, writes in his introduction that the Commission looks at the following areas regarding the formation of unfair competitive practices. They include any agreements between companies, formation of cartels, mergers and acquisitions, and state-run and other monopolies. In effect all the above practices can create unfair competition and could drive the smaller or less competitive companies out of business. This is relevant since Blue Beer plc is planning a merger to create an unusually large market share in UK. Such merged entities, according to the EU policy can control prices and even charge high prices without losing business. It can, on the other hand, price its products at unusually low rates and run other companies out of business. It can dictate prices and conditions from its trading partners and force them to agree to unfair agreements and deals. It can also resort to discriminatory practices, for example, by showing special favors to certain customers. These are the broad areas which will be looked at before approval of the proposed merger between Blue Beer plc and Country Beers. Specific Articles of the EU Competition Policy: The policies of the European Union are governed by articles in what are known as Treaties. The first one was the Maastricht Treaty of 1992 which established the Union. Over the years, amendments and changes to the articles have been made by formation or modification of the original one. They include the Amsterdam Treaty, the Nice Treaty and the latest one, Lisbon Treaty2. The Lisbon Treaty is to come into force on December 1st, 2009. At present the Articles relating to Competition Policy are Articles 81 to 86. It is also seen from literature on EU cases and House of Lords decisions, other articles and factors also have an impact with regard to competition policies. It can also be seen that Article 82 has come in for criticism due to its emphasis on protection of market players rather than on wider social benefits. Literature on the future of the Articles with regard to the criticism will be reviewed. All these will be discussed in the following sections and relevant points to the merger in question will be highlighted. Member nations are governed by their national laws and the policies of the Union. This can be quite challenging in the sense that contradictory decisions that violate either national laws or Union policies could result. The competition policy “differentiates EC law from any system of competition law, whether in the Member States, the USA, or elsewhere. EC competition law has been seen as serving two masters, the ‘competition’ one and (even more demanding) the imperative of single market integration”3. According to Article 81(1), “The following shall be prohibited as incompatible with the common 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 common market…”4. It then goes on to provide some specific instances which falls under the purview of the said Article. No agreement shall provide the parties the ability to fix purchase prices or any trading conditions that may violate the above conditions. It should not try to restrict technical or any other form of development within the market. It should not be discriminatory to trading partners and should not contain any conditions that force partners to obligations that are outside the line of business or trade. Section 81(2) provides that violation of any of the above conditions will make the agreement between parties void. But 81(3) provide an escape route or loophole to the provisions of the two previous sub-sections. If the benefits of the agreement outweigh its violation, then the agreement can be considered to be valid. Benefits include improvement in production and distribution channels, has provisions aimed at promoting technical and economic progress, and sharing the additional benefits (or profits) with the consumers. Article 82 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 in so far as it may affect trade between Member States”5. This appears to be an extension of what was stated in Article 81(1). The text further specifies what actions could construe to fall under the above provisions and they are similar to what has been mentioned in Article 81(2) and 81(3) above. The other Articles pertain to penalties, definitions of areas of business, supervision, functions of Court of Justice and the Commission, and the commonality of national laws and Commission policies. It also provides for action against infringement and in case the Commission is unable to prevent such infringement, direct individual member nations to look into the matter. The matter can be referred to the European Court of Justice if no agreement between the dissenting parties can be arrived at. The EU has also specific polices on merger regulation by companies within the Union and is governed by Council Regulation 4064/89. This adds power to Article 81 and 82 mentioned above. Accordingly any merger that results in a gross turnover of five thousand million is subject to this provision. It will also be applicable if the turnover of any of the companies involved is in excess of 250 million Euros. But there are further riders to this clause. If two thirds of the individual turnover is within one single member nation or if the gross merged turnover is below five thousand million, then the merger is subject to national law of individual countries. Article 16 of the treaty can also have an impact on merger approvals with regard to competition policies. Article 16(1) states that “when national courts rule on agreements, decisions or practices under Article 81 or Article 82 of the Treaty which are already the subject of a Commission decision, they cannot take decisions running counter to the decision adopted by the Commission. They must also avoid giving decisions which would conflict with a decision contemplated by the commission in proceedings it has initiated. To that effect, the national court may assess whether it is necessary to stay its proceedings”6. So, any past decisions taken by the Commission cannot be overruled by national courts. This indicates that a new set of factors or issues can be tried in national courts without running counter to Commission decisions. As per Article 234, the Commission can also direct the Court of Justice to provide preliminary judgment on any matters infringing policy matters on the basis of a reference from national courts of member countries7. With regard to the merger between Blue Beers and Country Beers, this Article will come into effect if the above conditions are met. If either of the two companies has a turnover of over 250 million Euros, or if the combined turnover exceeds five thousand million, the merger will be subject to EU policy and control. But the turnover of both companies is not mentioned here. The management of both companies will have to look into it and see whether the proposed merger is subject to national statutes or a Commission decision of the Union. This applies only if the merged entity plans to expand operations to other member nations and there is no mention of this factor here. Otherwise, the full turnover (and not just two thirds) will be within a single member country and only national laws within the United Kingdom will be applicable. But the authority of the Commission of the EU under Articles 81 and 82 will be relevant if Article 16 is applicable. It will also become relevant if activities of the merged entity infringe the Articles with regard to the entry of a foreign beverage company into the UK market. Then the Commission has the authority to interfere in both the above instances. The decision by the House of Lords in Inntrepreneur Pub Company v Crehan could be relevant here. The above mentioned company leased a couple of public houses to Mr Crehan with proper documentation. Mr Crehan was required to buy specific types of beer from a company called Courage. The business of Mr Crehan failed and both the companies approached the courts in order to recover amounts due on purchase of beer and on the lease. The Court of Appeal ruled in favor of Mr. Crehan referring to Article 81 and stated that the price fixed by Courage prevented fair competition of Mr Crehan. But the House of Lords ruled that the opinion of the Commission was not legally binding on English courts and at best could be used as evidence only. In order for it to be legally applicable, the agreement between the parties should pass the two Delimitis test (Delimitis v Henninger Bru AG). The first test needs to prove that the agreement resulted in foreclosure of business in the UK market. In this instance, Mr Crehan could not prove this and hence the case was awarded in favor of Inntrepreneur Pub Company and Courage. Moreover Article 16(1) mentioned above was not relevant in this case since there were no similar cases or Commission decisions in the past8. In the light of events of this case, it appears that the Commission has not much power over English courts with regard to policy implementation except when Article 16(1) becomes relevant. It should be noted again that a foreign company entering into the UK market can approach the Commission if Article 81, 82 and 16(1) are infringed. While the judicial power of the Commission is limited in many instances as can be seen from the above section, EU policies issues can be decided by the supreme authority on legal matters in the Union. The body is the European Court of Justice (ECJ) assisted by the Court of First Instance (CFI). Both these bodies hold the judicial power to overrule decisions by the supreme courts of member countries as well as commission decisions9. Even if an English court did allow the merger between British Blue and County, an aggrieved member state or individual can approach this body for implementation of applicable competition policies. It appears that the only instance that an aggrieved party can approach the Commission or the ECJ is when that party is a foreign company who is restricted competition in the market due to the business policies followed by the merged entity. It can also do so if a company is bound to dominate the market as per Article 82. When the aggrieved party is a local company, it needs to approach courts in the UK for obtaining a decision. It should be noted that the ECJ and CFI, have in many instances overruled Commission decisions. Merges that had been approved by the Commission had been viewed as monopolistic and against Articles 81 and 82 in several instances. According to Vranas-Liveris, increasing globalization and free trade have resulted in foreign companies entering domestic markets through FDI, or mergers and acquisitions. “Therefore, merger control law stands only to gain importance with the increase of international undertakings”10. According to the author, one of the most significant of these overruling is the Impala v Commission case. It should be noted that the Sony-BMG combine (merger between Sony and Bertelsmann which was approved by the Commission) had been operational for two years when the decision of the CFI considered it to be illegal under Competition Policy. British County Blue, if approved, should be familiar with Articles 81 to 86 in order to be approved by national courts as well as the ECJ and CFI. A brief review of merger laws in UK is also provided here. The New Enterprise Act 2002 has provided extensive provisions regarding mergers that take place within the country. From now on, “mergers will be assessed against a pure competition test, rather than the wider public interest test which formerly applied. Generally, mergers will be prohibited, or remedies required, if they would result in a substantial lessening of competition in a UK market”11. Some of the provision will directly affect the proposed merger in this case. The Office of Fair Trade can (OFT) investigate if the merged entity controls twenty five percent or more of market share in the country or has a turnover of more than 70 million pounds. In the case of market share, the provisions do not apply if a company exceeds the limit even before the merger. British Blue already has a 40% share of non-alcoholic beer. Even if it was not so, intervention is only for goods considered important in the market. In this instance, beer may not fall under the category of an ‘important’ product. It also needs to be seen whether the turnover of British County Blue exceeds the set limit. If so, the OFT is sure to intervene and refer the matter to the Competition Committee if required. Alternatively, the OFT can ask the parties to the merger to correct any adverse effects of the merger. But again, it cannot interfere if the advantages (to consumers) outweigh other disadvantages or if the merger rules are in accordance with EC Competition Policy. Criticisms of the Competition Policy of the EU and future course of action: As mentioned earlier, the EU is caught between the policies and statures of individual member states and the need for an integrated common market. The policy should influence the promotion of international trade among members and at the same time address individual freedom and the policies of member states to remain competitive in an international market environment12. In spite of the noble aims of the Commission, certain criticisms especially regarding Article 82 have come up. The following section will review two such studies and the proposed suggestion to remedy the problems. Gromsen is of the opinion that the current Article aims at supporting other (smaller) market players (and economic freedom) should be enlarged to include social welfare and efficient allocation of resources. There are also criticisms that the legal aspect of competition control is given importance and the economic aspects are ignored. “One group of economic commentators has recently said that the way to avoid a confusion of the ‘protection of competition’ and the ‘protection of competitors’ is to adopt an economic approach to Article 82 EC. In this context, an economics-based approach is understood to be an approach that ‘requires a careful examination of how competition works in each particular market in order to evaluate how specific company strategies affect consumer welfare’”13. The unique situation of an integrated market combined with independent national policies is challenging for the policy makers of the Union. But it has succeeded in prevention of distortion of competition to a large extent. The author states that, while this factor is important and necessary, it should not be the sole objective as is the case now. US anti-trust laws take into consideration the greater view of consumer and social welfare also. Europe and the Union now follow the Ordoliberal School of thought with regard to market approach and competition control. This was in contrast to the oligopolistic structure of the market during the creation of the Union. The Ordoliberal approach was first developed at the Freiburg University in Germany. The group of economists and lawyers who were behind it, felt that a liberal democracy should form the basis of competition law. This would ensure equality, prosperity, and justice in a society. In a sense, this line of thought could be compared to Adam Smith’s philosophy of a market free from government interference. Ordoliberals believed that such a highly competitive market would ensure price stability and fairness by which the consumers will be benefitted the most. It would also ensure that everyone gets a fair chance to be a player in the market. But one factor that differentiates this approach from Smith’s philosophy was the concept of power and control. Unless a legal framework (and a strong government) existed, private agencies will become powerful enough to create imbalance in a competitive market. Hence the need for a strong competition law to prevent concentration of economic power in the hands of a few individuals or companies was required. An example of the Ordoliberal approach in concentration of power can be seen from the case of Continental Can v Commission. The Court stating Article 82 ruled that the merger was in violation of competition policies and would place too much power (dominant position) in the hands of the company. Gormsen states that while the ruling was correct legally and commercially, it did not follow the principles of social and economic welfare. Another ruling regarding Commercial Solvents v Commission will make the point more clear. The Commission ruled against the Commercial Solvent of indulging in unfair practices against Zoja (a competitor). Both companies had the technology to develop anti-TB drugs, but the former company had control over the supply of a raw material to Zoja. Commercial Solvents on the other hand had a good supply of the raw material from a partner company. This was deemed to be unfair by the commission. But taking a broader view, Commercial Solvents was in a position to provide the drug at cheaper prices than Zoja and this would have been more beneficial to consumers. This would have been the case whether the raw material was supplied to Zoja or not considering the capacity and size Commercial Solvents. Article 2 should be mentioned here with regard to social and economic welfare. It seeks to promote social and economic welfare, equality, protection of environment apart from what has been stated in the Competition Policy. The argument as provided by the author seems to be correct in this regard since Article 82 does not take the other factors into consideration. Apart from the above angle, the Article 82 is also criticized on two opposing viewpoints. According to a study by Messina, some critics argue that a competition policy of control is outdated in today’s dynamic markets. Others say that a control policy is essential, whatever be the environment in order to reduce dominance and network effects. Two divergent approaches that support both viewpoints are provided here by the author. One is the Harvard School of thought which promotes the need for control and the other is the Chicago School which states that markets have the ability to correct itself without interference14. Melissa argues that new technologies need economies of scale, networking, and high levels of innovation in order to survive in a dynamic market. In such a situation, dominance over long periods of time is difficult or even impossible, the possible exceptions being companies like Microsoft. For example, IBM’s or Apple’s dominance in certain markets could not be maintained to a large extent. Other competitive and dynamic companies have come up. What the author argues is that Article 82 is not equipped to handle both types of markets and is biased in favor of traditional markets. Accordingly certain changes (without radical modernization) should be incorporated to accommodate the new market players so that innovation and dynamism is not stifled. In other words, the control system should remain, but with the ability to support dynamic market players. It should be noted that Article 101 and 102 has replaced Articles 81 and 82 respectively by the Lisbon Treaty and is expected to come into effect in December 2009. It does not radically change the current position in any way. The new expanded articles also do not cover social and economic welfare or have any provisions to develop dynamic market players. Conclusion and recommendations: The merger of Blue Beer Plc and County Beers Ltd with reference EU (EC) competition policies have been discussed here. The main references were with regard to Article 81 and Article 82. The issue of its implications on the merged entity British Country Blue will depend on the following. It the company is operating solely within UK, it is likely that only English law will prevail as per the House of Lords decision. Both the Articles above are applicable only when more than one member state is involved. Hence, if a foreign company enters the UK market and finds British Country Blue violating the norms of the Articles, it can refer the case to the Commission. In cases where specific decisions made by the Commission are violated, the Articles will apply even though no foreign company or member country is involved. Unless there is involvement from another foreign country or other member countries, the merger approval will be under the jurisdiction of the OFT and Competition Committee with legal binding of the Enterprise Act. If the turnover exceeds 70 million ponds, the OFT can interfere. The benefits over disadvantages will also be taken into consideration. It will also depend on whether the OFT considers beer to be an important product. It is best that the company apply for a merger, but take care not to violate (intentionally or unintentionally) any laws, statutes and articles of both the UK and the European Union. In any case intervention of the OFT is likely before the merger is finally approved. With regard to criticisms regarding Article 81, there are several angles to be taken into account. One criticism is that it focuses on legal and competitive aspects only ignoring the social and economic welfare of the population in general. Critics feel that the Commission should look into these factors also before arriving at a decision. There is also a criticism that the Article is not conducive to the growth of the new industries (e.g. software) that operates in a dynamic environment. Traditional and new markets differ in terms of dynamism, high levels of innovation, and change. In such markets, dominance (as referred to in the Article 82) in the long term is difficult and the market will correct itself. The suggestion is that the Commission should take into consideration the type of industry and market (whether traditional or new) when taking decisions. References Civitas, European Court of Justice, Institute for the Study of Civil Society, viewed 11 December 2009, European Commission, EU Competition Policy and the consumer, European Commission, viewed 11 December 2009, European Commission, Overview of the application of EC competition rules by national courts in 2006, European Commission, viewed 11 December 2009, Euro-lex, Consolidated version of the Treaty establishing the European Community, European Commission, viewed 11 December 2009, Gromsen, LL, 2006, Article 82EC: Where are we coming from and where are we going to? The Competition Law Review, Vol. 2, No. 2, viewed 11 December 2009, Jones, A & Sufrin, B 2007, EC Competition Law: Text, cases and materials, 3rd Edn, A1 Books Jusline, Article 16, Jusline EU, viewed 11 December 2009, Lane, R 2000, EC Competitive Law, Harlow Longman Office of Fair Trading, Overview of the Enterprise Act, The Office of Fair Trading, viewed 11 December 2009, < http://www.oft.gov.uk/shared_oft/business_leaflets/enterprise_act/oft518.pdf> Parliament.uk, Annex 5: Glossary and abbreviations, House of Commons, viewed 11 December 2009, Parliament.uk, Select Committee on European Union Sixth Report, House of Lords, viewed 11 December 2009, Reckon, Article 81 (agreements and concerted practices), Reckon LLP, viewed 11 December 2009, Messina, M 2006, Article 82 and the new economy: Need for modernization? The Competition Law Review, Vol. 2, No. 2, viewed 11 December 2009, Vranas-Liveris, E n.d., Impala v Commision: Changing the tune of competition law, The Chicago-Kent Law Review, vol. 83, no. 3, pp. 1497-1521, viewed 11 December 2009, Read More