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EU
Competition Policy The basic principles for a competition policy to create a competitive economic environment in the European Union were set out 40 years ago, in Articles 85 and 86 of the Treaty of Rome. The European Commission's Annual Reports on Competition Policy, however, have displayed a broad, even bewildering, set of objectives, and their priorities have shifted considerably over the period. A new CEPR publication, Trawling for Minnows: European Competition Policy and Agreements Between Firms, provides a comprehensive review of the principles and practice of public intervention policy in the field of agreements and undertakings between firms in the EU, highlights the main strengths and weaknesses of the current approach, and formulates specific proposals for improvements in both the legal framework and the practical application of the policy. Written by Damien Neven (Université de Lausanne and CEPR), Pénélope Papandropoulos (ECARE and DULBEA) and Paul Seabright (University of Cambridge and CEPR), the book covers five crucial areas: (1) it provides an up-to-date account of modern industrial and institutional economic analysis as it applies to agreements between firms; (2) it proposes a new, and more streamlined, procedure for the evaluation of vertical agreements; (3) it establishes criteria for assessment of joint ventures, balancing their risk to competition against their potential efficiency benefits; (4) it casts light on the way the Commission currently takes decisions and the inducements this creates for lobbying; and (5) it proposes reforms to increase transparency and reduce the costs for business of compliance with Article 85. As a background, the authors note that the Treaty of Rome committed the Community to a system that would not 'distort' competition. Although Articles 85 and 86 sought to give effect to this objective in respect of oversight of both cooperative behaviour (whether in the form of formal or tacit agreements between firms) and abusive exercise of market power, they provided ample scope for a variety of interpretations and left much to the subjective judgements and discretion of the Commission. This was true, for example, of the provisions that prohibited an agreement if it 'affected' trade between member states or 'restricted' competition within the Common Market. Nor has the situation improved as new policy goals – such as the encouragement of innovation by, and the promotion of the competitiveness of, European firms – have been added with the passage of time. In short, examination of the declared objectives of European competition policy demonstrates both their variety and their consequent potential for inconsistency. Turning to the underlying principles, the authors consider what the economics literature has to say about the effects of inter-firm agreements on competition, and about the consequent rationale for public intervention. They first examine 'vertical' restraints, namely contracts between firms at different stages in a production chain that specify more detailed commitments by the parties than simple exchange of goods and services in agreed quantities and at agreed prices. Examples include retail price maintenance, exclusive distribution agreements and tied-sale requirements. The authors provide careful and detailed evaluation of recent theoretical arguments – embodied in the so-called 'Chicago approach' – to the effect that there may be many good reasons why all kinds of economic agents may wish to enter into such contractual arrangements, and many circumstances under which they can enhance productive efficiency. While recognizing the validity of these arguments, they conclude that there are also significant circumstances in which vertical restraints may prove anti-competitive. They therefore reject the extreme Chicago view that such arrangements should not be proscribed. At the same time, however, they do agree that, on efficiency grounds, there are good reasons for vertical contracts to be presumed innocent until proven guilty. The primary rationale for this presumption is derived from an important insight yielded by the Chicago approach, namely that vertical restraints are agreements between producers of complementary, as opposed to substitute, goods and services. Furthermore, each party to a vertical contract has a fundamental interest in preventing, rather than facilitating, the exercise of market power by the other. In effect, therefore, each party to the contract is more an ally than an enemy of the public interest. It is only when third parties are harmed that public intervention is called for. In contrast, agreements between producers of substitutes are inherently and necessarily suspect from the point of view of public policy, because the exercise of market power by one producer always benefits the producers of substitute products. This theoretical distinction leads the authors to suggest a simple test for distinguishing between horizontal and vertical agreements for policy purposes: if the parties to the contract operate in the same product market in respect of the goods or services specified in the contract, or in markets for sufficiently close substitutes, the agreement is horizontal and there should be a (refutable) presumption of illegality. If not, the agreement should be seen as vertical and there should be a prima facie presumption that it is legal. Returning to vertical restraints, the implication frequently derived from the ambiguity of the theoretical results is that public policy towards such restraints must be inherently highly discretionary and case-specific. Discretion, however, imposes many costs, including uncertainty, administrative delays, opportunities for regulatory capture and inconsistent decisions. The book therefore emphasises the importance of clear and predictable policy that does not give unnecessary discretion to public officials. A two-stage decision procedure is recommended for evaluating vertical agreements, in which market power is first assessed, and then the impact on third parties is evaluated. The former step would seek to establish whether, in the case of a full vertical integration, the parties would together possess substantial market power for their combined final product. The answer to this question will hinge on the extent of inter-brand competition. If it is sufficiently strong, the contract should be seen as legal, unless it can be shown that the parties are seriously likely to exert more market power without vertical integration. Only if full integration would indeed lead to substantial market power would the second stage of the investigation proceed. Here, the focus would be on any external effects exerted by the contract on third parties, such as consumers, competitors and potential entrants. If these parties are not likely to be damaged by the contract, it should be deemed legal. In the case of horizontal agreements, a distinction is drawn between those involving the creation of joint ventures (which account for a large proportion of cases) and explicit or implicit price-fixing or market-sharing agreements ('cartels'). In the case of joint ventures – which generally create some productive benefits – the authors again exploit the utility of comparing the joint venture with the benchmark case of full integration between the activities of the parents. They argue that if a merger of these activities would be allowed, then a joint venture should also be allowed. Conversely, if a merger would not be allowed, then there should be a presumption that the joint venture also involves serious restrictions of competition. In those circumstances, it should be deemed illegal unless it can be shown that the parents are unlikely to be able to use the joint venture as a coordination mechanism. Two conditions are seen to be essential for this assessment: the extent to which the joint venture can appropriate the benefits from the pricing decisions of the parents; and the extent to which the parents will be able to capture the average profit made by the joint venture. Under the terms of the Treaty, agreements that generate 'efficiency benefits' that outweigh the detrimental effects on competition are eligible for exemption from prohibition. Again, joint ventures are the most likely candidates, with the benefits arising from the various strategic commitment mechanisms that they can implement regarding the management of specific assets and outputs from the joint venture. Scale economies, complementary assets and technology transfers are among the several potential sources of efficiency benefits. With the assistance of a survey of firms involved in completed competition cases since 1989, the authors examine the actual procedures and decisions of the Commission, and find them to be deficient in many important respects. Both the Commission and the Courts apply a very narrow definition of what constitutes a restriction of competition, and there is often a failure to distinguish properly between intra- and inter-brand competition. The former point in particular has been noted by a number of legal commentators and the study confirms, from a economic perspective, that there are many instances where agreements have been adjudged unlawful even though they have had negligible effects on third parties. Such a narrow approach means firms seeking legal security have a strong incentive to notify their agreements. There is often also an incentive for firms to obtain prior clearance of agreements to avoid the risk of challenge, possibly by a partner to the agreement in case of dispute. Such challenges can be particularly costly where irrecoverable investments have been undertaken as a result of the agreement. The number of agreements notified is therefore large, and the Commission labours under a very heavy case-load, following procedures that are slow and cumbersome. Rather than seeking to reduce the flow of cases, however, the Commission has merely increased its exercise of discretion in ignoring or settling cases informally. These 'reforms' may speed up the process, but only at significant cost in terms of the (already limited) transparency of the procedures and the difficulties that firms face in predicting the outcome. The majority of cases are thus cleared or negotiated away from public scrutiny. An econometric analysis, undertaken by the authors, of the determinants of lobbying by firms seeking to influence the outcome to their own advantage, indicates that the opacity of the procedure also increases this tendency. The situation with regard to the granting of exemptions is similarly unsatisfactory. These decisions also seem to follow a rigid legal structure and often fail to consider the question of efficiency benefits in any depth. The range of benefits referred to is large, but hardly any of them are given a serious hearing. Some of the arguments refer to genuine externalities which might enhance efficiency. Others refer in vague terms to general objectives which have a remote and unspecified link with economic efficiency. In all cases, the arguments are simply stated and there is no attempt to evaluate their significance, let alone to quantify their importance. By contrast, the authors consider that the Commission's practice in dealing with explicit or implicit 'cartel' agreements concealed by firms has a great deal to recommend it. In particular, the Commission (and the Court) seem, rightly, to look with tolerance on implicit agreements between firms which do not involve explicit coordination. Nevertheless, a particular concern arises because of the requirements imposed by the Court on the material evidence required to convict firms. These requirements appear excessive in the light of the small cost that wrongful conviction may entail in this area; they also explain the apparent lack of deterrent effect that the current policy has on cartels. The analysis of the determinants of lobbying behaviour suggests that firms are more likely to lobby senior Commission officials for cases that appear 'difficult' or involve high technology. Firm characteristics also determine lobbying behaviour, with significant differences between nationalities in this respect. Lobbying is also significantly more intense in cases in the transport sector. Assessment of the impact of lobbying, however, and particularly whether it succeeds in influencing the outcome of individual cases, is rendered difficult both by the diversity of the cases and firms involved and by the lack of adequate data. The study concludes by recommending reforms in the decision-making processes and criteria that may help improve the Commission's analysis and drastically reduce the number of cases that it would need to examine. The main proposal for improvement relates to notified agreements. Given the need for a more systematic basis for distinguishing between horizontal and vertical agreements, the authors urge adoption of their simple test outlined above. They also consider that it would be desirable to find ways of applying the criteria for prohibition less restrictively, so that agreements are not obliged to pass through the legal process at all unless there is a real likelihood of their damaging competition. These changes would enable the Commission to examine the reduced number of remaining cases in a more transparent manner. Finally, there is need for a more systematic treatment of efficiency benefits. The authors believe that these changes could be implemented without major changes to Community legislation and without changing the Treaty. They might, however, require changes in secondary legislation, in particular, block exemptions and Commission notices. Since present practice is a long way from what realistic reforms might produce, they would certainly require more than marginal changes in the Commission's own approach. In the authors' view, the need for change is urgent, and current Commission proposals, such as the reforms aired in the recent Green Paper, which in any case relate only to vertical restraints, go nowhere near far enough. The requisite sharp change in policy could be communicated and implemented via a set of published guidelines which clearly laid out the principles of the Commission's intended new practice, and recognised officially a degree of departure from some of the earlier case law. This procedure would both increase the degree of consistency between cases, and ensure that firms were better able to foresee whether their agreements were in breach of the law. Trawling
for Minnows: European Competition Policy and Agreements Between Firms ISBN: 1 898128 34 0 Please contact CEPR for details |