Introduction to EU Competition Law

Peter Willis

• Publisher: Informa Law from Routledge
• Year: 2013
• ISBN:
  9781317908838
• Edition: 1
• Topic: Droit
• Subtopic: Arbitrage, négociation et médiation en droit

This book provides an introductory but thorough guide to EU competition law, covering the underlying economics, and the key substantive areas of anticompetitive agreements (Article 81), abuses of dominance (Article 82), the application to the most common types of commercial agreement, state aids, state measures limiting competition and mergers. It also examines the procedures under which the relevant competition authorities apply the rules, private enforcement of the rules before the courts, and minimising risk by implementing a compliance programme.

The emphasis is practical rather than theoretical: the authors are practitioners in the field of competition law and economics, with many years' individual and collective experience in the area.

This will be an essential reference tool for practitioners, academics and students of EU Competition Law.

CHAPTER 1

INTRODUCTION

Sean-Paul Brankin, Lovells

1.1 WHY READ THE INTRODUCTION?

In many areas of law it is easy to understand why the rules are the way they are. You do not need to be an expert in criminal law to understand that murder is wrong, or an expert in contract law to understand that you ought to deliver on commitments you have agreed to and been paid for. The legal rules in these areas make sense because they embody principles of morality and fairness that we are all familiar with.

Competition law is different. It is not about fairness or morality (at least not directly). The rules of competition law reflect economic, not ethical, principles. And, as a result, competition law will sometimes permit behaviour that seems very unfair—like charging different customers different prices for the same product. Worse, it will sometimes prohibit and sometimes permit exactly the same behaviour—for example, refusing to supply a customer—depending on the economic background. All of this can make competition law very difficult to understand.

The problem is exacerbated by the language of competition law. The competition rules in the EC Treaty prohibit the “abuse” of a “dominant position” (in Article 82) and agreements that “have as their object or effect the prevention, restriction or distortion of competition” (in Article 81). On its face, this language is pretty meaningless. In order to understand it, you need to have some idea of what it is trying to achieve. And in order to do that, you need to have some understanding of the kind of problems that competition law is intended to address—or, in other words, why we have competition law in the first place.

This introduction is intended to give readers a basic understanding of what the rules of competition law are by exploring the type of problems that competition law is trying to address and how that is reflected in the rules themselves.

1.2 WHY DO WE HAVE COMPETITION LAW?

EU competition law can usefully be thought of as having two objectives. The first is to deal the problems that can arise when an undertaking (or coordinated group of undertakings) exercises a significant degree of market power. In relation to this first objective, EU competition law is just like competition law in other jurisdictions such as the US, the UK or Germany.

The second is the creation of a single market within the EU. This second objective is arguably separate from the first, and it is specific to EU competition law.

1.2.1 The first objective: dealing with market power

“Market power” is an economic concept. An undertaking has market power if it can make a profit by raising its prices above the level that would exist on a competitive market. Any undertaking can raise its prices. However, most will simply lose customers—and money—if they raise their prices higher than their competitors. Most undertakings do not, therefore, have market power.

The circumstances in which market power may exist, and why it can be a problem, are best illustrated with an example, as follows.

1.2.1.1 Opec’s 1973 oil price rise

On 4 November 1973, the member countries of Opec (the Organisation of Oil Producing and Exporting Countries)—who at that time represented around 55 per cent of world crude oil production—announced that they would reduce their production of crude oil by 25 per cent with immediate effect and by a further 5 per cent that December.

This had a massive impact on the price of crude oil: it jumped to four times its previous level. The profits of Opec members also jumped. Although Opec members were selling less oil (in principle, 30 per cent less) they were selling it at four times the previous price.

This is a nice example of the exercise of market power. By cooperating rather than competing, Opec members were able to raise the price of their product above the previous market level and to make a (very large) profit in the process.

1.2.1.2 Why oil prices rose

Why did Opec’s actions have this effect? Two factors were of particular importance. First, the position of Opec’s members in the market meant they were able to significantly reduce the total world supply of crude oil. Together they represented a 55 per cent of world production. Their competitors—the producers of the remaining 45 per cent of world supply—were unable to increase their own oil production to make up for the substantial reduction in supplies from Opec.¹

Second, there were no good substitutes for crude oil and the products derived from it. Oil refineries, power stations, chemicals plants and cars could not easily be converted to run on alternative fuels like coal or gas. If the owners of these assets wished to make use of them, they had to buy oil. And when the quantity of oil on the world market fell, they bidded the price up trying to obtain a share of the reduced supply.

If either of these factors had not been present, Opec’s strategy might not have worked. If other oil producers had been able to increase production in response to Opec’s action, customers would not have needed to bid up prices. Similarly, if customers could easily have switched to other fuels, they would have done so rather than pay the new high prices for oil. As we will see, both the availability of alternative products and the market position of the companies involved are key issues in determining whether a competition law problem exists.

1.2.1.3 The problem: welfare loss

The increase in the price of crude oil was not the only effect of Opec’s actions. Much more importantly, they had a hugely damaging effect on the world economy. In the 23 years prior to Opec’s announcement, between 1950 and 1973, the economies of the countries belonging to the OECD²—in effect, the economies of the developed world—grew by an average of between 3 per cent and 4 per cent per year. In the 12 years following the announcement, from 1973 to 1985, average annual growth in these economies slowed to just over 1.5 per cent per year. The oil price shock caused by Opec’s behaviour was a major factor in this slowdown. In other words, Opec’s behaviour contributed to a halving of economic growth in the developed world for more than a decade.

The reason for this is fairly simple. Less oil was being produced, and there were no effective alternatives. As a result, some owners of chemical plants, power stations, etc were unable to obtain the supplies of oil they needed—or at least were unable to pay the increased price of crude and still turn a profit. They had no choice but to allow their assets to lie idle. The wealth those assets could have created, if used, was never generated—and the world economy suffered (and slowed) as a result. This effect is referred to by economists as “welfare loss”.

This is obviously an extreme example of welfare loss. Oil is central to the operation of modern economies. Cartels in other industries—beer, for example—would have less dramatic consequences. However, the principle is of general application. Companies with market power have by definition the ability to raise the prices of their products to super-competitive levels, and the effect is a welfare loss suffered by society as a whole. This is the primary problem that the rules of competition law seek to address.

1.2.2 The second objective: market integration

A particularly hostile attitude is taken under EU competition law to behaviour that affects inter-state trade in the EU—such as provisions in agreements that prohibit the export of goods between Member States. It is generally accepted that what lies behind this is the (economically dubious) view that behaviour which interferes directly with the free flow of products between EU Member States is inconsistent with the creation of a single market within the EU.

It is unclear to what extent EU competition law prohibits behaviour under this secondary “market integration” objective where no market power issues arise. The better view is probably that it cannot do so. The remainder of this Chapter will therefore deal exclusively with EU competition law’s primary “market power” objective.

1.3 HOW EU COMPETITION LAW DEALS WITH MARKET POWER

Since the problem that competition law seeks to address is the welfare loss that occurs where market power is exercised, competition law might be expected simply to prohibit the holding of market power.³ However, there would be problems with such a straightforward ban.

First, a company may obtain market power “honestly”—ie as a natural result of competition on the market. This may occur because a company’s products are so much better (or cheaper) than those of its competitors that customers choose not to buy anything else. In such cases, the company’s competitors may go out of business. But that is no bad thing; it simply reflects the better service customers are getting from the successful company. Equally, the threat of going out of business is a powerful incentive for competing companies not to fall too far behind each other in terms of their products or prices. Alternatively, it may occur if customers in a market obtain greater benefits if they all buy products from a single supplier—for example, where customers benefit more if the products they buy are compatible (think of Microsoft’s word processing software or the battle between Betamax and VHS video recorders). In markets like this, a single supplier may emerge naturally as a result of customer choice. Arguably, this is how Microsoft achieved its monopoly position: its products were good and its customers benefited from all using the same software since this allowed them to exchange documents easily or work together in other ways. It would be counterproductive to make success of this type unlawful. That would reduce the incentive for undertakings to produce products if they might be “too successful” and could deprive customers of the benefits of better or cheaper products.

Second, once a company has achieved a position of market power—even if it has not done so “honestly”—the cost of putting an end to that situation may outweigh the benefits of doing so. The only remedy may be to break up the company with market power into smaller units. This will often be costly and disruptive. Moreover, the smaller units may be less efficient than the original company and may produce more expensive and poorer products as a result.

Given these problems, it should come as no surprise that EU competition law does not prohibit simply having market power or obtaining it “honestly”—ie by normal competitive means such as producing better or less costly products. However, short of that, EU competition law can and does prohibit behaviour that seeks, by means other than normal competition, to:

— establish new positions of market power or increase the level of existing market power;⁴

— entrench existing market power—ie protect or defend an existing position of market power from competitive attack; or

— exploit market power—eg through increased prices.

Identifying whether the effect of an agreement, a merger or the behaviour of a dominant company may have the effect of establishing, exploiting or entrenching market power goes a long way towards identifying whether it may infringe competition law.

1.4 HOW THE STRUCTURE OF COMPETITION LAW REFLECTS ITS PRIMARY OBJECTIVE

EU competition law operates through three central legal provisions. These are:

— Article 82 of the EC Treaty, which prohibits the abuse of positions of market dominance;

— Article 81 of the EC Treaty, which prohibits anti-competitive agreements; and

— the EC Merger Regulation (“ECMR”), which prohibits anti-competitive mergers, acquisitions and joint ventures.

These three provisions, and the three prohibitions they create, each seek to prevent behaviour that (i) establishes, (ii) entrenches, or (iii) exploits, market power. However, each provision does so in a slightly different context. The following sections describe how this works in more detail.

1.5 ARTICLE 82: ABUSE OF DOMINANCE

For an infringement of Article 82 of the EC Treaty to exist, an undertaking must both:

— hold a dominant position; and

— abuse that position.

These two concepts—“dominance” and “abuse”—are explored further below.

1.5.1 Dominance

The legal definition of a dominant position has been est...