Competition policy

General principles

    Competition law is one of the most important points of interaction between business,law and economics. Firms need to understand the rationale and practice of competition legislation and rules. Competition law is also important because it

impinges so closely on the welfare of the consumer and the dynamism of the

business sector. Badly framed competition policy will bring relatively few benefits

to the consumer at a high cost to business. These costs include not only the costs

of taking or defending a competition case, but the costs arising when a firm is

uncertain about the applicability of the law to its behaviour.

    While individual countries have their own distinctive competition regimes,

four general principles underlie competition policy:

1. Highly concentrated market structures are more likely to be monopolistic than

less concentrated structures. Competition policy tends to focus on the former.

2. Competition law is applied to a wide range of markets, i.e. to public sector

commercial services and non-profit organisations, as well as to the private

sector.

3. The benefits of competition include direct benefits to the consumer. But its

indirect effects on upstream and downstream markets have also to be taken

into account. An inefficient telecoms industry, for example, affects both the

individual telephone user and also the pattern of comparative advantage,

through raising communication costs.

4. Case-by-case studies are necessary to quantify the net economic benefits and

costs of a monopoly.

5. Care needs to be taken in devising remedies which can include sanctions,

declarations, structural and behavioural actions.

Competition policy – the example of the European Union

    The EU’s competition regime provides a practical illustration of the general

principles of competition policy.

    The principles of the EU’s competition policy are contained in Articles 85 to 94

of the Treaty of Rome. Since the Treaty of Amsterdam came into effect in 1999,

these have been renumbered Articles 81 to 90. To avoid confusion, we use the

post-1999 numbering in this chapter. These articles cover both uncompetitive

behaviour between firms and state aids that affect trade between Member States.

The objective of keeping the EU market open and free from distortion is

addressed by two key articles, Articles 81 and 82 .

    Article 81 prohibits restrictive agreements relating to price, market shares or production controls, unless specifically exempted or licensed. Exemptions can be given by the Commission if the restrictive agreements can be shown to improve efficiency,allow consumers a ‘fair’ share of the resulting benefits, and preserve

some degree of competition. The exemption clause has been frequently and successfully invoked._8 For example, selective and exclusive dealerships for new car sales are permitted by virtue of this clause .

  

    Article 82 addresses the problem of abuse of dominant position. It outlaws unfair

trading practices, unjustified tie-in clauses and similar arrangements. Concepts

such as ‘dominant position’ and ‘market abuse’ have been subjected to different

interpretations. Some indication of the complexity of the issues is given in the

summary of the judgment in the Woodpulp case .

    These articles apply in principle to vertical as well as horizontal agreements

between firms. Vertical restraints are contracts between firms at different

stages of the production chain that specify more detailed commitments on the

parties than simply to exchange a given quantity of goods or services at a given

price per unit. Examples include selective and exclusive dealerships

discussed in Box 7.4, retail price maintenance, service requirements, e.g. undertakings to spend on advertising and after-sales service, and two-part pricing involving a fixed charge and a fixed price per unit. VRs essentially involve

agreements between producers of complementary goods. They are distinguished

from horizontal restraints .HRs relate to agreements between producers at the

same stage of the production chain.

    Competition law tends to take a permissive view of VRs. The reason for this is

that abuse of market power by one producer  damages the producer of the complement .Thus any limit to sales by the manufacturer to exploit monopoly power reduces sales and profits of the dealer, and vice versa in case of use of monopoly power by the dealers. Hence both parties are driven by self-interest to an efficient outcome, very much in the spirit of Adam  Smith, and no intervention by the Competition Authority is needed. In judging VRs, the EU takes a permissive view provided efficiency is in fact achieved. It adds two other criteria: equity – protection of small enterprises; and promotion of market integration – hence any measure preventing ‘parallel’ imports is unfavourably regarded. The more inter-brand competition in the market, the less the danger of a VR being in breach of competition law.