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Competition law
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Competition law, known in the United States as antitrust law, has three main elements:
The substance and practice of competition law varies from jurisdiction to jurisdiction. Protecting the interests of consumers (consumer welfare) and ensuring that entrepreneurs have an opportunity to compete in the market economy are often treated as important objectives. Competition law is closely connected with law on deregulation of access to markets, state aids and subsidies, the privatisation of state owned assets and the establishment of independent sector regulators.
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Encyclopedia
Competition law, known in the United States as antitrust law, has three main elements:
- prohibiting agreements or practices that restrict free trading and competition between business entities. This includes in particular the repression of cartels.
- banning abusive behaviour by a firm dominating a market, or anti-competitive practices that tend to lead to such a dominant position. Practices controlled in this way may include predatory pricing, tying, price gouging, refusal to deal, and many others.
- supervising the mergers and acquisitions of large corporations, including some joint ventures. Transactions that are considered to threaten the competitive process can be prohibited altogether, or approved subject to "remedies" such as an obligation to divest part of the merged business or to offer licences or access to facilities to enable other businesses to continue competing.
The substance and practice of competition law varies from jurisdiction to jurisdiction. Protecting the interests of consumers (consumer welfare) and ensuring that entrepreneurs have an opportunity to compete in the market economy are often treated as important objectives. Competition law is closely connected with law on deregulation of access to markets, state aids and subsidies, the privatisation of state owned assets and the establishment of independent sector regulators. In recent decades, competition law has been viewed as a way to provide better public services. Robert Bork has found that competition laws can produce adverse effects when they reduce competition by protecting inefficient competitors and when costs of legal intervention are greater then benefits for the consumers. The history of competition law reaches back to the Roman Empire. The business practices of market traders, guilds and governments have always been subject to scrutiny, and sometimes severe sanctions. Since the twentieth century, competition law has become global. The two largest and most influential systems of competition regulation are United States antitrust law and European Community competition law. National and regional competition authorities across the world have formed international support and enforcement networks.
History
Laws governing competition are found in over two millennia of history. Roman Emperors and Medieval monarchs alike used tariffs to stabilize prices or support local production. The formal study of "competition", began in earnest during the 18th century with such works as Adam Smith's The Wealth of Nations. Different terms were used to describe this area of the law, including "restrictive practices", "the law of monopolies", "combination acts" and the "restraint of trade".
Roman legislation
An early example of competition law is the Lex Julia de Annona, enacted during the Roman Republic around 50 BC. To protect the grain trade, heavy fines were imposed on anyone directly, deliberately and insidiously stopping supply ships. Under Diocletian in 301 AD an edict imposed the death penalty for anyone violating a tariff system, for example by buying up, concealing or contriving the scarcity of everyday goods.
More legislation came under the Constitution of Zeno of 483 AD, which can be traced into Florentine Municipal laws of 1322 and 1325. This provided for confiscation of property and banishment for any trade combinations or joint action of monopolies private or granted by the Emperor. Zeno rescinded all previously granted exclusive rights. Justinian I subsequently introduced legislation to pay officials to manage state monopolies. As Europe slipped into the dark ages, so did the records of law making until the Middle Ages brought greater expansion of trade in the time of lex mercatoria.
Middle ages
Legislation in England to control monopolies and restrictive practices were in force well before the Norman Conquest. The Domesday Book recorded that "foresteel" (i.e. forestalling, the practice of buying up goods before they reach market and then inflating the prices) was one of three forfeitures that King Edward the Confessor could carry out through England. But concern for fair prices also led to attempts to directly regulate the market. Under Henry III an act was passed in 1266 to fix bread and ale prices in correspondence with corn prices laid down by the assizes. Penalties for breach included amercements, pillory and tumbrel. A fourteenth century statute labelled forestallers as "oppressors of the poor and the community at large and enemies of the whole country." Under King Edward III the Statute of Labourers of 1349 fixed wages of artificers and workmen and decreed that foodstuffs should be sold at reasonable prices. On top of existing penalties, the statute stated that overcharging merchants must pay the injured party double the sum he received, an idea that has been replicated in punitive treble damages under US antitrust law. Also under Edward III, the following statutory provision outlawed trade combinations.
"...we have ordained and established, that no merchant or other shall make Confederacy, Conspiracy, Coin, Imagination, or Murmur, or Evil Device in any point that may turn to the Impeachment, Disturbance, Defeating or Decay of the said Staples, or of anything that to them pertaineth, or may pertain."
Examples of legislation in mainland Europe include the constitutiones juris metallici by Wenceslas II of Bohemia between 1283 and 1305, condemning combinations of ore traders increasing prices; the Municipal Statutes of Florence in 1322 and 1325 followed Zeno's legislation against state monopolies; and under Emperor Charles V in the Holy Roman Empire a law was passed "to prevent losses resulting from monopolies and improper contracts which many merchants and artisans made in the Netherlands." In 1553 King Henry VIII reintroduced tariffs for foodstuffs, designed to stabilise prices, in the face of fluctuations in supply from overseas. So the legislation read here that whereas,
"it is very hard and difficult to put certain prices to any such things... [it is necessary because] prices of such victuals be many times enhanced and raised by the Greedy Covetousness and Appetites of the Owners of such Victuals, by occasion of ingrossing and regrating the same, more than upon any reasonable or just ground or cause, to the great damage and impoverishing of the King's subjects."
Around this time organisations representing various tradesmen and handicraftspeople, known as guilds had been developing, and enjoyed many concessions and exemptions from the laws against monopolies. The privileges conferred were not abolished until the Municipal Corporations Act 1835.
Renaissance developments
Europe around the 16th century was changing quickly. The new world had just been opened up, overseas trade and plunder was pouring wealth through the international economy and attitudes among businessmen were shifting. In 1561 a system of Industrial Monopoly Licences, similar to modern patents had been introduced into England. But by the reign of Queen Elizabeth I, the system was reputedly much abused and used merely to preserve privileges, encouraging nothing new in the way of innovation or manufacture. When a protest was made in the House of Commons and a Bill was introduced, the Queen convinced the protesters to challenge the case in the courts. This was the catalyst for the Case of Monopolies or Darcy v. Allin. The plaintiff, an officer of the Queen's household, had been granted the sole right of making playing cards and claimed damages for the defendant's infringement of this right. The court found the grant void and that three characteristics of monopoly were (1) price increases (2) quality decrease (3) the tendency to reduce artificers to idleness and beggary. This put a temporary end to complaints about monopoly, until King James I began to grant them again. In 1623 Parliament passed the Statute of Monopolies, which for the most part excluded patent rights from its prohibitions, as well as guilds. From King Charles I, through the civil war and to King Charles II, monopolies continued, especially useful for raising revenue. Then in 1684, in East India Company v. Sandys it was decided that exclusive rights to trade only outside the realm were legitimate, on the grounds that only large and powerful concerns could trade in the conditions prevailing overseas. In 1710 to deal with high coal prices caused by a Newcastle Coal Monopoly the New Law was passed. Its provisions stated that "all and every contract or contracts, Covenants and Agreements, whether the same be in writing or not in writing... are hereby declared to be illegal." When Adam Smith wrote the Wealth of Nations in 1776 he was somewhat cynical of the possibility for change.
"To expect indeed that freedom of trade should ever be entirely restored in Great Britain is as absurd as to expect that Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is more unconquerable, the private interests of many individuals irresistibly oppose it. The Member of Parliament who supports any proposal for strengthening this Monopoly is seen to acquire not only the reputation for understanding trade, but great popularity and influence with an order of men whose members and wealth render them of great importance."
Restraint of trade
The English law of restraint of trade is the direct predecessor to modern competition law. Its current use is small, given modern and economically oriented statutes in most common law countries. Its approach was based on the two concepts of prohibiting agreements that ran counter to public policy, unless the reasonableness of an agreement could be shown. A restraint of trade is simply some kind of agreed provision that is designed to restrain another's trade. For example, in Nordenfelt v. Maxim, Nordenfelt Gun Co. a Swedish arm inventor promised on sale of his business to an American gun maker that he "would not make guns or ammunition anywhere in the world, and would not compete with Maxim in any way."
To be consider whether or not there is a restraint of trade in the first place, both parties must have provided valuable consideration for their agreement. In Dyer's case a dyer had given a bond not to exercise his trade in the same town as the plaintiff for six months but the plaintiff had promised nothing in return. On hearing the plaintiff's attempt to enforce this restraint, Hull J exclaimed,
"per Dieu, if the plaintiff were here, he should go to prison until he had paid a fine to the King."
The common law has evolved to reflect changing business conditions. So in the 1613 case of Rogers v. Parry a court held that a joiner who promised not to trade from his house for 21 years could have this bond enforced against him since the time and place was certain. It was also held that a man cannot bind himself to not use his trade generally by Chief Justice Coke. This was followed in Broad v. Jolyffe and Mitchell v. Reynolds where Lord Macclesfield asked, "What does it signify to a tradesman in London what another does in Newcastle?" In times of such slow communications, commerce around the country it seemed axiomatic that a general restraint served no legitimate purpose for one's business and ought to be void. But already in 1880 in Roussillon v. Roussillon Lord Justice Fry stated that a restraint unlimited in space need not be void, since the real question was whether it went further than necessary for the promisee's protection. So in the Nordenfelt case Lord McNaughton ruled that while one could validly promise to "not make guns or ammunition anywhere in the world" it was an unreasonable restraint to "not compete with Maxim in any way." This approach in England was confirmed by the House of Lords in Mason v. The Provident Supply and Clothing Co.
Today
Modern competition law begins with the United States legislation of the Sherman Act of 1890 and the Clayton Act of 1914. While other, particularly European, countries also had some form of regulation on monopolies and cartels, the US codification of the common law position on restraint of trade had a widespread effect on subsequent competition law development. Both after World War II and after the fall of the Berlin wall competition law has gone through phases of renewed attention and legislative updates around the world.
United States antitrust
The American term antitrust arose not because the US statutes had anything to do with ordinary trust law, but because the large American corporations used trusts to conceal the nature of their business arrangements. Big trusts became synonymous with big monopolies, the perceived threat to democracy and the free market these trusts represented led to the Sherman and Clayton Acts. These laws, in part, codified past American and English common law of restraints of trade. Senator Hoar, an author of the Sherman Act said in a debate, "We have affirmed the old doctrine of the common law in regard to all inter-state and international commercial transactions and have clothed the United States courts with authority to enforce that doctrine by injunction." Evidence of the common law basis of the Sherman and Clayton acts is found in the Standard Oil case, where Chief Justice White explicitly linked the Sherman Act with the common law and sixteenth century English statutes on engrossing. The Act's wording also reflects common law. The first two sections read as follows,
"Section 1. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine....
Section 2. Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine...."
The Sherman Act did not have the immediate effects its authors intended, though Republican President Theodore Roosevelt's federal government sued 45 companies, and William Taft used it against 75. The Clayton Act of 1914 was passed to supplement the Sherman Act. Specific categories of abusive conduct were listed, including price discrimination(section 2), exclusive dealings (section 3) and mergers which substantially lessen competition (section 7). Section 6 exempted trade unions from the law's operation. Both the Sherman and Clayton acts are now codified under Title 15 of the United States Code.
Since the mid-1970s, courts and enforcement officials generally have supported view that antitrust law policy should not follow social and political aims that undermine economic efficiency. The antitrust laws were minimalized in the mid-1980s under influence of Chicago school of economics and blamed for the loss of economic supremacy in the world.
Development in other countries
In the 1930s, Americans' fear of big business and their impending loss of accountability initiated the most aggressive antitrust campaign in history.
However, Britain, Australia, France, Nazi Germany and Japan found American-style antitrust incompatible to their cultures and institutions. An about face emerged after the World War when governments of those nations and the European Community progressively adopted antitrust measures. The international spread of antitrust correlates to the process of global capitalism, where antitrust was a pivotal conflict between state sovereignty and globalization as demonstrated by proceedings in the WTO.
It was after World War I that countries began to follow the United States' lead in competition policy. In 1923 Canada introduced the Combines Investigation Act and in 1926 France reinforced its basic competition provisions from the 1810 Code Napoleon. After the Second World War, the Allies, led by the United States, introduced tight regulation of cartels and monopolies in occupied Germany and Japan. In Germany, despite the existence of laws against unfair competition passed in 1909 (Gesetz gegen den unlauteren Wettbewerb or UWB) it was widely believed that the predominance of large cartels of German industry had made it easier for the Nazis to assume total economic control, simply by bribing or blackmailing the heads of a small number of industrial magnates. Similarly in Japan, where business was organised along family and nepotistic ties, the zaibatsu were easy for the despotic government to manipulate into the war effort. Following, unconditional surrender tighter controls, replicating American policy were introduced.
Further developments however were considerably overshadowed by the move towards nationalisation and industry wide planning in many countries. Making the economy and industry democratically accountable through direct government action became a priority. Coal industry, railroads, steel, electricity, water, health care and many other sectors were targeted for their special qualities of being natural monopolies. Commonwealth countries were reluctant in enacting statutory competition law provisions. The United Kingdom introduced the (considerably less stringent) Restrictive Practices Act in 1956. Australia introduced its current Trade Practices Act in 1974. Jersey introduced its competition law only in 2005. Recently however there has been a wave of updates, especially in Europe to harmonise legislation with contemporary competition law thinking.
European Union law
In 1957 six Western European countries signed the Treaty of the European Community (EC Treaty or Treaty of Rome), which over the last fifty years has grown into a European Union of nearly half a billion citizens. The European Community is the name for the economic and social pillar of EU law, under which competition law falls. Healthy competition is seen as an essential element in the creation of a common market free from restraints on trade. The first provision is Article 81 EC, which deals with cartels and restrictive vertical agreements. Prohibited are:
"(1) ...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..."
Article 81(1) EC then gives examples of "hard core" restrictive practices such as price fixing or market sharing and 81(2) EC confirms that any agreements are automatically void. However, just like the Statute of Monopolies 1623, Article 81(3) EC creates exemptions, if the collusion is for distributional or technological innovation, gives consumers a "fair share" of the benefit and does not include unreasonable restraints (or disproportionate, in ECJ terminology) that risk eliminating competition anywhere. Article 82 EC deals with monopolies, or more precisely firms who have a dominant market share and abuse that position. Unlike U.S. Antitrust, EC law has never been used to punish the existence of dominant firms, but merely imposes a special responsibility to conduct oneself appropriately. Specific categories of abuse listed in Article 82 EC include price discrimination and exclusive dealing, much the same as sections 2 and 3 of the U.S. Clayton Act. Also under Article 82 EC, the European Council was empowered to enact a regulation to control mergers between firms, currently the latest known by the abbreviation of Regulation 139/2004/EC. The general test is whether a concentration (i.e. merger or acquisition) with a community dimension (i.e. affects a number of EU member states) might significantly impede effective competition. Again, the similarity to the Clayton Act's substantial lessening of competition. Finally, Articles 86 and 87 EC regulate the state's role in the market. Article 86(2) EC states clearly that nothing in the rules can be used to obstruct a member state's right to deliver public services, but that otherwise public enterprises must play by the same rules on collusion and abuse of dominance as everyone else. Article 87 EC, similar to Article 81 EC, lays down a general rule that the state may not aid or subsidise private parties in distortion of free competition, but then grants exceptions for things like charities, natural disasters or regional development.
Antimonopoly Law of China
The idea of a comprehensive Antimonopoly Law for the People's Republic of China surfaced in 1987, in response to the diverse and incoherent existing laws such as Anti-Unfair Competition Law, Price Law, Foreign Trade Law. Representatives from various agencies and academic institutions began drafting the new Law in 1994. However, the initial drafts often reflected divergent and inconsistent goals among its various agencies. The final version of the law was finally adopted by the People's Congress on 30 August 2007 and took effect on 1 August 2008.
While the language of the new law is neutral subjecting both domestic and foreign entities to equal scrutiny, there are concerns among foreign entities about its implementation and enforcement.
Concerns are reflected by the significant market leadership foreign companies have and the increasing acquisition of domestic companies by foreign investments, where the law might be used to protect domestic entities. There are also concerns, similar to elsewhere, of consumers being victims of roadkill in the interest of protecting competition.
Among the stated aims of the law are to
- advance consumer interests
- promote economic efficiency
- protect economic security, which includes subjecting foreign acquisitions of Chinese corporations to national security review.
The law, as opposed to the antitrust laws of the United States and EU, subjects state-owned enterprises to the same regulatory measures. The law would be a tool in the Chinese government's protracted struggles against internal protectionism, where (similar to their entrenched involvement in the legislative process in United States) private special interests are deeply entrenched in national, provincial and local government agencies.
Antimonopoly in Japan
The U.S. Government on 6 September 1945, issued a presidential directive instructing the Supreme Commander for the Allied Powers (SCAP) to dissolve zaibatsu structures. Prior to the World War, Japan had no antitrust laws. There were seventeen zaibatsu organisations, the four largest of which had controlled approximately a fourth of all of the paid-up capital in the Japanese economy just prior to the World War.
In opposition to General MacArthur's fear that zaibatsu dissolution would lead to instability, the U.S. Departments of State and Justice sent a "Special Mission on Japanese Combines" to Japan for the implementation of a comprehensive antimonopoly framework. In response, MacArthur coerced the Japanese Diet into adopting legislation known as the Antimonopoly Act (AMA), with the persuasion to them that enforcement was optional.
McArthur's AMA, which is still Japan's fundamental competition law, generalised prohibitions against three types of anticompetitive conduct.
- private monopolization
- unreasonable restraints of trade and
- unfair methods of competition.
The AMA led to the formation of Japan's Fair Trade Commission (JFTC). The weakness of the AMA was due to vagueness requiring JFTC officials to be familiar with presumptions built into American antitrust laws. Seeing the need for stability and the growing threat of Communism, the United States backtracked on requiring Japan's enforcement of the AMA and instead encouraged the resurrection of zaibatsu structures.
Japan which had grown increasingly independent of the United States in the 1950s, succumbed to pressures from Japanese business and need for recovery from economic depression due to the end of the Korean war. The SCAP and the U.S. Government acquiesced to Prime Minister Yoshida's actions to enact relaxations to the AMA when occupation of Japan ended with the implementation of the San Francisco Peace Treaty on 28 April 1952. All cartels illegal under the original AMA were effectively legalized.
Amendments were made to strengthen the AMA in the 1970s due to, in part, pressures from American businesses. The oil crisis then and price fixing by Japanese oil companies further garnered public opinion in Japan against the weakness of the AMA and its lack of enforcement. The new articles introduced authorised the JFTC to dissolve or divest a company based on barriers against market-entry, lack of price benefit for consumers and unreasonable profits. The JFTC was authorised to impose fines for violations of the AMA.
However, the existence of cartels are still legalized with the following notes.
- Cartels calculate penalties beforehand and include such penalties as costs of business.
- Penalty calculations, which do not correlate with profits, present insufficient financial disincentives for businesses to collude.
- Courts in Japan lack contempt powers to ensure compliance with the JFTC's cease and desist orders.
International enforcement
Competition law has already been substantially internationalised along the lines of the US model by nation states themselves, however the involvement of international organisations has been growing. Increasingly active at all international conferences are the United Nations Conference on Trade and Development (UNCTAD) and the Organisation for Economic Co-operation and Development (OECD), which is prone to making neo-liberal recommendations about the total application of competition law for public and private industries. Chapter 5 of the post war Havana Charter contained an Antitrust code but this was never incorporated into the WTO's forerunner, the General Agreement on Tariffs and Trade 1947. Office of Fair Trading Director and Professor Richard Whish wrote sceptically that it "seems unlikely at the current stage of its development that the WTO will metamorphose into a global competition authority." Despite that, at the ongoing Doha round of trade talks for the World Trade Organisation, discussion includes the prospect of competition law enforcement moving up to a global level. While it is incapable of enforcement itself, the newly established International Competition Network (ICN) is a way for national authorities to coordinate their own enforcement activities.
It is unclear whether competition policy is a sensible role for government in developing, particularly low-income countries. In these countries the markets are usually very small and fragmented so that developing scale sufficient to raise competitiveness and engage in international markets is a major challenge. The bigger problem is however poor governance - in societies with widespread corruption, inadequate public finances, and weak judiciary and oversight institutions, competition policy may become another tool for capture by vested interests - becoming in itself a barrier to entry.
Theory
Classical perspective
Under the doctrine of laissez-faire, antitrust is seen as unnecessary as competition is viewed as a long-term dynamic process where firms compete against each other for market dominance. In some markets a firm may successfully dominate, but it is because of superior skill or innovativeness. However, according to laissez-faire theorists, when it tries to raise prices to take advantage of its monopoly position it creates profitable opportunities for others to compete. A process of creative destruction begins which erodes the monopoly. Therefore, government should not try to break up monopoly but should allow the market to work.
The classical perspective on competition was that certain agreements and business practice could be an unreasonable restraint on the individual liberty of tradespeople to carry on their livelihoods. Restraints were judged as permissible or not by courts as new cases appeared and in the light of changing business circumstances. Hence the courts found specific categories of agreement, specific clauses, to fall foul of their doctrine on economic fairness, and they did not contrive an overarching conception of market power. Earlier theorists like Adam Smith rejected any monopoly power on this basis.
"A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate."
In The Wealth of Nations (1776) Adam Smith also pointed out the cartel problem, but did not advocate legal measures to combat them.
"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. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary."
Smith also rejected the very existence of, not just dominant and abusive corporations, but corporations at all. By the latter half of the nineteenth century it had become clear that large firms had become a fact of the market economy. John Stuart Mill's approach was laid down in his treatise On Liberty (1859).
"Again, trade is a social act. Whoever undertakes to sell any description of goods to the public, does what affects the interest of other persons, and of society in general; and thus his conduct, in principle, comes within the jurisdiction of society... both the cheapness and the good quality of commodities are most effectually provided for by leaving the producers and sellers perfectly free, under the sole check of equal freedom to the buyers for supplying themselves elsewhere. This is the so-called doctrine of Free Trade, which rests on grounds different from, though equally solid with, the principle of individual liberty asserted in this Essay. Restrictions on trade, or on production for purposes of trade, are indeed restraints; and all restraint, qua restraint, is an evil..."
Neo-classical synthesis
After Mill, there was a shift in economic theory, which emphasised a more precise and theoretical model of competition. A simple neo-classical model of free markets holds that production and distribution of goods and services in competitive free markets maximizes social welfare. This model assumes that new firms can freely enter markets and compete with existing firms, or to use legal language, there are no barriers to entry. By this term economists mean something very specific, that competitive free markets deliver allocative, productive and dynamic efficiency. Allocative efficiency is also known as Pareto efficiency after the Italian economist Vilfredo Pareto and means that resources in an economy over the long run will go precisely to those who are willing and able to pay for them. Because rational producers will keep producing and selling, and buyers will keep buying up to the last marginal unit of possible output - or alternatively rational producers will be reduce their output to the margin at which buyers will buy the same amount as produced - there is no waste, the greatest number wants of the greatest number of people become satisfied and utility is perfected because resources can no longer be reallocated to make anyone better off without making someone else worse off; society has achieved allocative efficiency. Productive efficiency simply means that society is making as much as it can. Free markets are meant to reward those who work hard, and therefore those who will put society's resources towards the frontier of its possible production. Dynamic efficiency refers to the idea that business which constantly competes must research, create and innovate to keep its share of consumers. This traces to Austrian-American political scientist Joseph Schumpeter's notion that a "perennial gale of creative destruction" is ever sweeping through capitalist economies, driving enterprise at the market's mercy. This led Schumpeter to argue that monopolies did not need to be broken up (as with Standard Oil) because the next gale of economic innovation would do the same.
Contrasting with the allocatively, productively and dynamically efficient market model are monopolies, oligopolies, and cartels. When only one or a few firms exist in the market, and there is no credible threat of the entry of competing firms, prices raise above the competitive level, to either a monopolistic or oligopolistic equilibrium price. Production is also decreased, further decreasing social welfare by creating a deadweight loss. Sources of this market power are said to include the existence of externalities, barriers to entry of the market, and the free rider problem. Markets may fail to be efficient for a variety of reasons, so the exception of competition law's intervention to the rule of laissez faire is justified if government failure can be avoided. Orthodox economists fully acknowledge that perfect competition is seldom observed in the real world, and so aim for what is called "workable competition". This follows the theory that if one cannot achieve the ideal, then go for the second best option by using the law to tame market operation where it can.
Chicago School
A group of economists and lawyers, who are largely associated with the University of Chicago, advocate an approach to competition law guided by the proposition that some actions that were originally considered to be anticompetitive could actually promote competition. The U.S. Supreme Court has used the Chicago School approach in several recent cases. One view of the Chicago School approach to antitrust is found in United States Circuit Court of Appeals Judge Richard Posner's books' Antitrust Law and Economic Analysis of Law
Robert Bork was highly critical of court decisions on United States antitrust law in a series of law review articles and his book The Antitrust Paradox. Bork argued that both the original intention of antitrust laws and economic efficiency was the pursuit only of consumer welfare, the protection of competition rather than competitors. Furthermore, only a few acts should be prohibited, namely cartels that fix prices and divide markets, mergers that create monopolies, and dominant firms pricing predatorily, while allowing such practices as vertical agreements and price discrimination on the grounds that it did not harm consumers. Running through the different critiques of US antitrust policy is the common theme that government interference in the operation of free markets does more harm than good. "The only cure for bad theory", writes Bork, "is better theory". The late Harvard Law School Professor Philip Areeda, who favours more aggressive antitrust policy, in at least one Supreme Court case challenged Robert Bork's preference for non-intervention.
Policy developments
Anti-cartel enforcement is a key focus of competition law enforcement policy. In the US the Antitrust Criminal Penalty Enhancement and Reform Act 2004 raised the maximum imprisonment term for price fixing from three to ten years, and the maximum fine from $10 to $100 million. In 2007 British Airways and Korean Air pleaded guilty to fixing cargo and passenger flight prices.
These actions complement the private enforcement which has always been an important feature of United States antitrust law. The United States Supreme Court summarised why Congress allows punitive damages in Hawaii v. Standard Oil Co. of Cal.:
In the EU, the Modernisation Regulation 1/2003 means that the European Commission is no longer the only body capable of public enforcement of European Community competition law. This was done in order to facilitate quicker resolution of competition-related inquiries. In 2005 the Commission issued a Green Paper on Damages actions for the breach of the EC antitrust rules, which suggested ways of making private damages claims against cartels easier.
Practice
Collusion and cartels
The core of competition policy has, since the 1980s, been the anti-price fixing cartel agenda, despite criticism by libertarians. In The Wealth of Nations (1776) Adam Smith pointed out the cartel problem, but did not advocate legal measures to combat them. Nowadays a far stricter approach is taken. Under EC law cartels are banned by Article 81 EC, whereas under US law the Sherman Act prohibitions of section 1. To compare, the target of competition law under the Sherman Act 1890 is every "contract, combination in the form of trust or otherwise, or conspiracy", which essentially targets anybody who has some dealing or contact with someone else. In the mean time, Art. 81 EC makes clear who the targets of competition law are in two stages with the term agreement "undertaking". This is used to describe almost anyone "engaged in an economic activity", but excludes both employees, who are by their "very nature the opposite of the independent exercise of an economic or commercial activity", and public services based on "solidarity" for a "social purpose". Undertakings must then have formed an agreement, developed a "concerted practice", or, within an association, taken a decision. Like US antitrust, this just means all the same thing; any kind of dealing or contact, or a "meeting of the minds" between parties. Covered therefore is a whole range from a strong handshaken written or verbal agreement to a supplier sending invoices with directions not to export to its retailer who gives "tacit acquiescence" to the conduct.
Less of a consensus exists in the field of vertical agreements. These are agreements not between firms at the same level of production, but firms at different levels in the supply chain, for instance a supermarket and a bread producer. Recently, the United States Supreme Court has become more skeptical of antitrust cases predicated on agreements between companies that are not directly in competition with one another, such as a clothing manufacturer and a clothing retailer, while maintaining the strict prohibition against agreements that limit competition between companies at the same level of the supply chain, such as agreements between two retailers or between two distributors. Vertical agreements may still be illegal, but the burden of proving them illegal was raised by a number of recent cases from the per se illegal standard to a more demanding rule of reason standard.
Dominance and monopoly
When firms hold large market shares, consumers risk paying higher prices and getting lower quality products than compared to competitive markets. However, the existence of a very high market share does not always mean consumers are paying excessive prices since the threat of new entrants to the market can restrain a high-market-share firm's price increases. Competition law does not make merely having a monopoly illegal, but rather abusing the power that a monopoly may confer, for instance through exclusionary practices.
First it is necessary to determine whether a firm is dominant, or whether it behaves "to an appreciable extent independently of its competitors, customers and ultimately of its consumer." Under EU law, very large market shares raise a presumption that a firm is dominant, which may be rebuttable. If a firm has a dominant position, then there is "a special responsibility not to allow its conduct to impair competition on the common market". Similarly as with collusive conduct, market shares are determined with reference to the particular market in which the firm and product in question is sold. Then although the lists are seldom closed, certain categories of abusive conduct are usually prohibited under the country's legislation. For instance, limiting production at a shipping port by refusing to raise expenditure and update technology could be abusive. Tying one product into the sale of another can be considered abuse too, being restrictive of consumer choice and depriving competitors of outlets. This was the alleged case in Microsoft v. Commission leading to an eventual fine of €497 million for including its Windows Media Player with the Microsoft Windows platform. A refusal to supply a facility which is essential for all businesses attempting to compete to use can constitute an abuse. One example was in a case involving a medical company named Commercial Solvents. When it set up its own rival in the tuberculosis drugs market, Commercial Solvents were forced to continue supplying a company named Zoja with the raw materials for the drug. Zoja was the only market competitor, so without the court forcing supply, all competition would have been eliminated.
Forms of abuse relating directly to pricing include price exploitation. It is difficult to prove at what point a dominant firm's prices become "exploitative" and this category of abuse is rarely found. In one case however, a French funeral service was found to have demanded exploitative prices, and this was justified on the basis that prices of funeral services outside the region could be compared. A more tricky issue is predatory pricing. This is the practice of dropping prices of a product so much that in order one's smaller competitors cannot cover their costs and fall out of business. The Chicago School (economics) considers predatory pricing to be unlikely. However in France Telecom SA v. Commission a broadband internet company was forced to pay €10.35 million for dropping its prices below its own production costs. It had "no interest in applying such prices except that of eliminating competitors" and was being crossed subsidised to capture the lion's share of a booming market. One last category of pricing abuse is price discrimination. An example of this could be offering rebates to industrial customers who export your company's sugar, but not to Irish customers who are selling their goods in the same market as you are in.
Mergers and acquisitions
A merger or acquisition involves, from a competition law perspective, the concentration of economic power in the hands of fewer than before. This usually means that one firm buys out the shares of another. The reasons for oversight of economic concentrations by the state are the same as the reasons to restrict firms who abuse a position of dominance, only that regulation of mergers and acquisitions attempts to deal with the problem before it arises, ex ante prevention of creating dominant firms. In the United States merger regulation began under the Clayton Act, and in the European Union, under the Merger Regulation 139/2004 (known as the "ECMR"). Competition law requires that firms proposing to merge gain authorisation from the relevant government authority, or simply go ahead but face the prospect of demerger should the concentration later be found to lessen competition. The theory behind mergers is that transaction costs can be reduced compared to operating on an open market through bilateral contracts. Concentrations can increase economies of scale and scope. However often firms take advantage of their increase in market power, their increased market share and decreased number of competitors, which can have a knock on effect on the deal that consumers get. Merger control is about predicting what the market might be like, not knowing and making a judgment. Hence the central provision under EU law asks whether a concentration would if it went ahead "significantly impede effective competition... in particular as a result of the creation or strengthening off a dominant position..." and the corresponding provision under US antitrust states similarly,
"No person shall acquire, directly or indirectly, the whole or any part of the stock or other share capital... of the assets of one or more persons engaged in commerce or in any activity affecting commerce, where... the effect of such acquisition, of such stocks or assets, or of the use of such stock by the voting or granting of proxies or otherwise, may be substantially to lessen competition, or to tend to create a monopoly.
What amounts to a substantial lessening of, or significant impediment to competition is usually answered through empirical study. The market shares of the merging companies can be assessed and added, although this kind of analysis only gives rise to presumptions, not conclusions. Something called the Herfindahl-Hirschman Index is used to calculate the "density" of the market, or what concentration exists. Aside from the maths, it is important to consider the product in question and the rate of technical innovation in the market. A further problem of collective dominance, or oligopoly through "economic links" can arise, whereby the new market becomes more conducive to collusion. It is relevant how transparent a market is, because a more concentrated structure could mean firms can coordinate their behaviour more easily, whether firms can deploy deterrants and whether firms are safe from a reaction by their competitors and consumers. The entry of new firms to the market, and any barriers that they might encounter should be considered. If firms are shown to be creating an uncompetitive concentration, in the US they can still argue that they create efficiencies enough to outweigh any detriment, and similar reference to "technical and economic progress" is mentioned in Art. 2 of the ECMR. Another defence might be that a firm which is being taken over is about to fail or go insolvent, and taking it over leaves a no less competitive state than what would happen anyway. Mergers vertically in the market are rarely of concern, although in AOL/Time Warner the European Commission required that a joint venture with a competitor Bertelsmann be ceased beforehand. The EU authorities have also focussed lately on the effect of conglomerate mergers, where companies acquire a large portfolio of related products, though without necessarily dominant shares in any individual market.
Public sector regulation
Public sector industries, or industries which are by their nature providing a public service, are involved in competition law in many ways similar to private companies. Under EC law, Articles 86 and 87 create exceptions for the assured achievement of public sector service provision. Many industries, such as railways, telecommunications, electricity, gas, water and media have their own independent sector regulators. These government agencies are charged with ensuring that private providers carry out certain public service duties in line of social welfare goals. For instance, an electricity company may not be allowed to disconnect someone's supply merely because they have not paid their bills up to date, because that could leave a person in the dark and cold just because they are poor. Instead the electricity company would have to give the person a number of warnings and offer assistance until government welfare support kicks in.
See also
Further reading
- Competition Policy International (various issues), ISSN 1554-6853, available at http://www.globalcompetitionpolicy.org
- Elhauge, Einer; Geradin, Damien (2007) Global Competition Law and Economics, ISBN 1841134651
- Faull, Jonathan; Nikpay, Ali (eds) (2007) "Faull & Nikpay : The EC Law of Competition"; ISBN-13: 978-0199269297
- Georg Erber and Stefan Kooths, Windows Vista: Securing Itself against Competition?, in: DIW Weekly Report, 2/2007, Vol.3, 7-14.
- Keith N. Hylton et al., Antitrust World Reports, available at http://www.antitrustworldwiki.com
External links
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