European Union Ensuring There Is Competition within the Trading Bloc - Case Study Example

Competition Over the years, the European Union has successfully controlled trade dominance through its competition policies, rules, and regulations. Competition in an economy supports economic growth through the incentive to enhance productivity, introduces technological innovation and improvements, which subsequently reduces production costs and leads to improved competitiveness in international and domestic markets. A strong competition policy and an adequate legal framework will lead to a favorable environment for competition, where the rules of the business are equal for all businesses. Currently, the competition policy of the European Union is widely known as one of the best models (Alex 2008, p. 5). The history of competition policy and law in Europe started in 1957, when the Rome Treaty was signed. Article 85 of the Treaty prohibited cartels, in addition to restrictive practices, which might harm the competition. Article 90 comprised provisions of regulating the state monopoly. The European Commission is the institution mandated to enforce the competition legislation in Europe (Ali 2011, p. 85). European Commission was credited with all the adequate instruments and powers of carrying out its functions. The Economic European Community adopted a common competition policy, which led to the modification of the state competition policies of the member nations. The second phase of adopting competition regulations in Europe took place in the 1970s, while the third phase took place in the 1990s (Alison & Brenda 2007, p. 38). The European Union, formerly European Community, was formed to encourage and oversee economic and political cooperation among numerous European countries. The Treaties of Rome created guidelines for the formation of a common market in Europe, which allows free trade among member states, and free movement of services, people, and capital (Clive 2008, p. 22). In 1992, the Maastricht Treaty was ratified; the treaty emphasized on economic policy as the main instrument of European unification. The treaty led to official change of the name European Community to European Union. The treaty outlined the plan for conversion to a common market that comprised the creation of the European currency and the establishment of a central bank. The European Union contains several governing institutions that supervise different aspects of the union’s operations. The union comprises of twenty-seven members states, with equal representation of the members in the union’s governing bodies. This structure of the European Union enables this regional trading bloc to encourage and promote competition among member states and between firms operating within the bloc (Van 2005, p.25). One of the major roles of the union is to supervise economic cooperation among members; therefore, it plays an enormous role in how business is carried out throughout Europe. The union has established a single market trading system with no or low tariffs and taxes, and it encourages economic development (Alex 2008, p. 10). Competition is crucial in economic growth and development, since it allows equal rules of doing business among firms. There was the existence of monopolistic and oligopolistic competition in Europe. As such, the Europeans formed the European Community after World War II, with the main objectives of eliminating these imperfect market structures (Damian, Gareth & Giorgio 2010, p. 40). Initially, before the adoption of other treaties, the 1957 Treaty of Rome contained many articles on competition policy, for example, article 85 and 86. Article 85 outlawed deals among companies to fix prices, limit production, technical development and investment, share out markets, and other restrictive practices. The European Commission outlawed agreements such as price-fixing agreements, market-sharing agreements, exclusive purchase agreements, selective or exclusive distribution agreements, agreements on commercial and industrial property rights. Article 86 outlawed abuses of dominant position by companies or group of companies (Fiona 2003, p.145). Until 1990, the European Commission had no precise powers to prevent mergers though it intervened on numerous occasions, using the general power given to it under articles 85 and 86 of the Treaty of Rome (Louis & David 2011, p. 619). Regulations of vetting mergers came into effect in 1990. The regulations gave powers to the Commission to vet cross-border mergers in advance, but left the member states with the powers of vetting mergers within their countries. The regulation gave the Commission authority over the large-scale corporation mergers and takeovers. This influenced member states and surpassed certain domestic, EU and worldwide turnover thresholds (Van 2005, p.25). The Commission can prohibit mergers if it concludes that these mergers would strengthen or create a dominant market position. This mostly happens if this would considerably impede effective competition within European Union or a substantial part of it. However, the vast majority of intended mergers are passed, with only one percent blocked. The Commission has contentiously affirmed the extra-territorial jurisdictions. A particular contentious Commission action was in 1997 with its ruling that the amalgamation of McDonnell Douglas and Boeing, two U.S. companies, could not be successful. The amalgamation could only happen if they canceled twenty-year exclusive supply agreements with three U.S airlines to which Airbus aspired to sell aircraft (Fiona 2003, p.148). In 2002, the Commission came under serious attack from the European Court of Justice over its antitrust actions, which reversed three of its rulings that blocked mergers. This encouraged new reforms to competition law and policy, which came into effect in 2004. The reforms included in the amalgamation control mechanism were more oversight, consumer and economic evaluations, and stricter deadlines (Clive 2008, p. 25). In 2004, the European Union Directive was adopted, and it has been implemented in UK by ways of a combination of amendments to the Takeover Code and interim, statutory provisions. The major objectives of the Directive were to create a structure of common laws that would enhance takeovers in the EU, ensure a desirable level of protection for minority shareholders, and address the barriers to takeovers. The UK administration was vocal in its opposition. The Directive in its final form was a product of political compromise since there was intense political debate and negotiation (Duncan 2008, p. 12). This Directive will not generate a level playing ground across the EU, and this has become progressively evident as member nations have started to publish their implementations or proposals (Jeremy 2006, p. 30). Cross border takeovers remain extremely difficult outside the Ireland and UK. This is because of the predominance of defensive shareholding structures in several member states. Another reason is the simplicity with which management in target organizations can impede antagonistic bids without seeking the consent of shareholders (Ali 2011, p. 90). The Treaty on the Functioning of the EU contains the rules applying to undertaking. Article 101 (ex Article 81 TEC) prohibits all agreements between undertakings and resolutions by associations of undertakings. It also prohibits concentrated practices that may influence trade among member states and which have their object or affect the distortion, restriction or prevention of competition within the internal market (Van 2005, p.25). In particular, the Article prohibits those undertakings, which, indirectly or directly fix selling, or purchase prices or any other trade conditions, which control or limit production, technical development, markets, or investments. In addition, the Article prohibits undertakings that apply different conditions to equal transactions with other trade parties, thereby positioning them at a competitive disadvantage. Moreover, there is the prohibition of contracts subject to acceptance by the other stakeholders of supplementary responsibilities, which according to commercial usage or by their nature have no association with the subject of such agreements (Michael & Nix son 2007, p.115). However, provisions of any agreements between undertakings, resolutions by associations of undertakings, and concerted practices will be considered inapplicable. This happens if their objectives are geared towards improvement of production and distribution of commodities or promotion of technical or economic progress while permitting consumers a fair share of the resulting benefits (Gabriel & John 2010, p. 6). Article 102 prohibits one or more undertakings, which abuse their dominant position in the internal market or in substantial part of it that may affect trade between member states. The European Council lays down the appropriate directives or regulations to give effect to provisions in Articles 101 and 102. After consultation with the European Parliament, the European Commission gives proposals of these regulations or directives to the Council (Paul & Grainne 2011, p. 720). Article 106 (ex Article 86 TEC) gives competition provisions with regard to public undertakings. Undertakings delegated with the operation of services of common economic interest or those that have the nature of a revenue producing monopoly, are subject to regulations contained in the treaties, particularly to the rules on competition. These rules are applicable to public undertakings if the application of these rules does not limit the implementation of the tasks assigned to them (Van 2005, p.27). William (2010, p.174) observes that there are three basic types of market structures, which include perfect competition, monopoly, and oligopoly. In a perfect competition market structure, there is the absence of rivalry among individual firms and each firm is a price taker. Perfect competition has some main characteristics. First, there is a large number of firms; the firms have insignificant share of the market, and no individual firm has influence on the market price and output of the whole industry. The second characteristic is homogeneity of products; firms are producing perfect substitutes. Thirdly, there is freedom of entry and exit. Fourth, there are no artificial restrictions; there is freedom of trade. Fifth, perfect market information; firms possess absolute knowledge about the market prices at which products are sold and purchased and prices at which others are prepared to sell or purchase. Sixth, perfect mobility of products; there is freedom in the sense that products shift to those regions where they can bring the highest price. Monopoly is a form of market structure in which there is a single firm selling or producing products with no close substitutes. There are some characteristics of a monopoly. First, there is one seller or producer. Second, the monopolist has the entire control of the supply of the commodities. Third, there are barriers on the entry of other firms. Oligopoly is a market structure in which there are few firms producing or selling differentiated or standardized products. Similarly, an oligopolistic market structure has some characteristics. First, product branding; each firm is selling differentiated (branded) products. Second, entry barriers; there are entry barriers into the market, which prevent competition in the market. In the long run, these entry barriers enable maintenance of supernormal profits by the dominant firms. Small firms may operate on the edge of an oligopolistic market, but not firms that are large enough to have any significant effect on the market output and prices (William 2010, p.176). The third characteristic entails interdependent decision making; firms in the oligopolistic market take into consideration the likely reactions of their competitors to any modification in output, price or forms of non-price competition. Meannwhile, in perfect competition and monopoly, firms do not take into account the responses of the competitors when choosing output and price. Fourthly, there is non-price competition; oligopolistic firms employ non-price competitive strategies, for example, free installation and deliveries, heavy spending on marketing, advertising, and branding of commodities among others (Suzanne 2011, p. 102). Monopolistic competition is a market condition where there are several firms selling differentiated products; it denotes competition between several firms producing close substitutes but not perfect substitutes for each other. There is competition though not perfect between firms producing similar products. The following are the features of monopolistic competition; freedom of entry and exit of the firms, product differentiation, and a large number of firms, independent behavior, non-price competition, and product groups (Michael & Nix son 2007, p.115). Conclusion Through the European Commission, the European Union ensures that there is competition within the trading bloc. Through its various governing institutions, it ensures the compliance of the competition policy and law provisions, which aim to create a competitive market. In the real world, it is intricate to attain a perfect competition market structure; however, economies strive to attain this ideal market structure. Most economies are characterized by monopolistic and oligopolistic market structures. Since it is difficult to attain a perfect competition market structure, the monopolistic competition is the market condition, which dominates most developed economies including the European Union and the member states. The provisions contained in the competition policy and laws of the Treaties of European Union aim to control any dominance of firms and promote competition of firms operating within the trading bloc. The European Commission has been able to promote competition within the Union and member states, thus enabling the union to control and maintain trade dominance in the entire European economy. References List Alex, W. (2008). European Union: The Basics, London, Taylor & Francis. pp. 1-40. Ali, M. E. (2011). The European Union: Economics and Policies, Cambridge, Cambridge University Press. pp. 80-120. Alison, J. & Brenda, S. (2007). EC Competition Law: Text, Cases, and Materials, Oxford, Oxford University Press. pp. 38-80. Clive, A. (2008). The European Union, London, Taylor and Francis. pp. 5-60. Damian, C., Gareth, D., & Giorgio, M. (2010). European Union Law: Cases and Materials, Cambridge, Cambridge University Press. pp. 40-78. Duncan, W. (2008). The European Union, Edinburgh, Edinburgh University Press. pp. 10-50. Fiona, G.W. (2003). Regional State Aid and Competition Policy in the European Union, London, Kluwer Law International. pp. 145-177. Gabriel, M. & John, T. (2010). Commercial Law of the European Union, New York, Springer. pp. 2-40. Jeremy, R. (2006), European Union: Power and Policy Making, New York, Routledge. pp. 30-60. Louis, E.B. & David, L.K. (2011), Contemporary Marketing, New York, Cengage Learning. pp. 619-635. Michael, J.A., & Nixson, F.I. (2007). The Economics of the European Union: Policy and Analysis, Oxford, Oxford University Press. pp. 113-150. Paul, C. & Gráinne, D. (2011). The Evolution of EU Law, Oxford, Oxford University Press. pp. 718-760. Suzanne, K. (2011). Greening EU Competition Law and Policy, Cambridge, Cambridge University Press. pp. 100-150. Van, B. (2005). Competition Law of the European Community, London, Kluwer Law International. pp. 25-65. William, M. (2010). Microeconomics, New York, Cengage Learning. pp. 174-205. Read More