Regulating Competition

Susanna Fellman, Martin Shanahan, Susanna Fellman, Martin Shanahan

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317693994
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Cartels, trusts and agreements to reduce competition between firms have existed for centuries, but became particularly prevalent toward the end of the 19th century. In the mid-20th century governments began to use so called 'cartel registers' to monitor and regulate their behaviour. This book provides cases studies from more than a dozen countries to examine the emergence, application and eventual decline of this form of regulation.

Beginning with a comparison of the attitudes to regulation that led to monitoring, rather than prohibiting cartels, this book examines the international studies on cartels undertaken by the League of Nations before World War II. This is followed by a series of studies on the context of the registers, including the international context of the European Union, and the importance of lobby groups in shaping regulatory outcomes, using Finland as an example. Section two provides a broad international comparison of several countries' registers, with individual studies on Norway, Australia, Japan, Germany, Sweden and the Netherlands. After examining the impact of registration on business behaviour in the insurance industry, this book concludes with an overview of the lessons to be learnt from 20th century efforts to regulate competition.

With a foreword by Harm Schroter, this book outlines the rise and fall of a system that allowed nations to tailor their approach to regulating competition to their individual circumstances whilst also responding to the pressures of globalisation that emerged after the Second World War. This book is suitable for those who are interested in and study economic history, international economics and business history.

Chapter 10 of this book is freely available as a downloadable Open Access PDF at http://www.taylorfrancis.com under a Creative Commons Attribution-Non Commercial-No Derivatives (CC-BY-NC-ND) 4.0 license.

1 Introduction

Regulating competition – the rise and fall of ‘cartel registers’ in the twentieth-century world

Martin Shanahan and Susanna Fellman

… 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. … Restrictions on trade, or on production for purposes of trade, are indeed restraints; and all restraint, qûa restraint, is an evil: but the restraints in question affect only that part of conduct which society is competent to restrain … As the principle of individual liberty is not involved in the doctrine of Free Trade, so neither is it in most of the questions which arise respecting the limits of that doctrine: … Such questions involve considerations of liberty, only in so far as leaving people to themselves is always better, cæteris paribus, than controlling them: but that they may be legitimately controlled for these ends, is in principle undeniable.

(John Stuart Mill, On Liberty ch. 5, 1859)

Introduction

Balancing producers’ freedom of contract and right to trade against consumer sovereignty and their right to free choice has long been a difficult task for regulators. The pendulum has swung in favour of one side or the other several times. In the area of preventing restrictive trade practices, authorities have swung between laissez-faire to prohibition depending on the prevailing views. This book is about one form of instrument used to regulate anti-competitive behaviour by firms, registers of restrictive trade practices (sometimes called cartel registers). Our focus covers a period, mostly in the middle of the twentieth century, when many government authorities around the world attempted to steer a middle course; one built on observation and negotiation; and one that frequently left contemporary records of the number and type of private sector restrictive trade practices in the official government registers. The contributors to this book look at a number of these registers and the legislation that created them, identifying their aims, methods and ultimately, their effectiveness. In the process we gain important insights into the issues facing the regulators of capitalism in many fields today.

For our purposes, a register of restrictive trade practices is a regulatory instrument, used by authorities to further the government’s efforts to regulate anticompetitive practices and achieve their competition policy. The register itself, therefore, forms a central part of the policy to improve competition. In this sense, the ‘cartel’ register; ‘restrictive practices register’ or related instrument, differs from the incidental, or procedural documents of tribunals, committees and courts, which were also kept as records, but which are sometimes also referred to as registers. While these later records are frequently public documents, they are not used by competition authorities as a direct mechanism to alter the behaviour of firms, make an example of their behaviour or otherwise alter the activities of others.

Today, regulating markets to control individual excesses, is again a topic of interest. After recent financial crises in Asia in the 1990s and globally in 2007, many are looking at the rules that regulate markets, firms and individuals (Eatwell and Taylor 2000; Goodhart 2008; Levine 2012). The consequences of the financial crisis reminded many of what can occur when regulators do not fulfil their obligations, and businesses, their owners and their employees conspire to increases profits and lessen competition.

The decline in the use of registers occurred in the late 1980s; around the same time the dominate view of the role of government began to change. As the post-war golden age of economic growth slowed in the late 1970s, there was a general questioning of state ownership of enterprise, government intervention in the market and the role of fiscal and monetary policy. Contemporaneously the planned economic systems in Eastern Europe began to unravel. With increasing globalisation the dominant and generally accepted view became one of governments not ‘interfering’ in markets (Prasad 2006). By 2002, however, the Sarbanes–Oxley Act in the United States was a clear indication that the pendulum had begun to swing back. Corporate scandals, together with international financial crises in Asia and more recent banking and global financial distress brought the role of the state in the economy back to centre-stage. This does not mean a return to earlier models, but rather that regulation and state involvement was again seen as a viable response to market problems. How and to what extent should and can markets be controlled and regulated? What is the role of the state in securing the stability of the market economy? Who can influence regulative models? These remain important theoretical and practical questions.

Competition policy is only occasionally a major topic of public debate; and usually only after a spectacular corporate collapse. Among academics, politicians, civil servants and representatives of various interest groups, however, it is a regularly contested field. Indeed competition policy is often perceived publicly as quite depoliticised or as quite technical and an issue for specialists. (McGowan 2010: 2–3; Fellman and Sandberg 2015). Pushed to the side-lines, the general public (often the consumers whose rights are most affected) are often seen as unwilling or unable to engage with these debates. As the chapters here show, however, interest groups know exactly how important these policies are and will use an array of arguments to achieve their desired outcomes. One of the more self-serving arguments for a secret register, for example, was that transparency was not in the public’s interest as they would not be able judge the information correctly.

As chapters in this book reveal, ignorance of the issues has not always prevailed. The use of registers of restrictive practices also involved a process of education; potentially for the citizens most impacted, but also for the public authorities charged with administering the process, and industry representatives. In many countries the main contents of the registers were open to the public. This revealed to consumers and competitors what agreements existed in the market; to firms in the private sector what was acceptable behaviour; and to the authorities, the numerous variations and forms of harmful behaviour that needed to be addressed.

Cartel registers: a brief history

The pinnacle of laissez-faire and freedom of contract is often described as occurring in the nineteenth century (Atiyah 1985). Towards the end of that century, however, American federal lawmakers, concerned at the anticompetitive behaviour of giant corporations in steel, railways and oil initiated a series of statues aimed at increasing competition and preventing harmful mergers. The Sherman Act of 1890 and Clayton Act of 1914, are regularly depicted as embodying America’s vigorous pro-competition approach to regulation; an attitude that is encapsulated as ‘anti-trust’.

In the field of competition regulation, this uncompromising approach is regularly contrasted with the ‘European’ approach, which until the late twentieth century was considered more lenient; where policies were more pragmatic and the agnostic attitude to restrictive practices resulted in a focus on the effects of restrictive practices, rather than on the agreements themselves (Harding and Joshua 2010: 40).

The regulatory approaches in Europe often meant balancing the pros and cons of cartels via market examination and market analyses, often on a case-by-case basis (ibid.: 44). The effects of firms’agreements were often assessed from a public interest perspective, weighing business interest against consumers, and often taking into consideration economic and political goals such as growth, inflation, or rationalisation (Thorelli 1959; Timberg 1953). According to Harding and Joshua, the American’s uncompromising stance was likely because the concentration of economic power was as much a political principle as an economic question (Harding and Joshua 2010: 47). Even in the US however, attitudes have varied over time. It has been noted for example, that during the inter-war period and up until 1935, US authorities were more tolerant of trusts and the Supreme Court often adopted a ‘rule of reason’ (only unreasonable restraints of trade were prohibited) in its decisions (Kovacic and Shapiro 2000). Some US firms also looked longingly to the more lenient attitude of the European regulations (McGowan 2010: 64). Until the more recent EU policies were adopted in Europe (post-1993) the American approach was also considered more legalistic, and the European approach more administrative.

If the high point for trusts in America was the 1890s, the inter-war period is usually seen as a highpoint for cartels in Europe and countries outside the American sphere of influence. The rise of big business globally in the second half of the nineteenth century and the issues governments had in dealing with it became a growing concern for many European states. Governments grappled with the problem of controlling ever larger corporations, or defending their country against ‘outside’ monopolies, trusts and combines. The result was rising tension between free market capitalism and national sovereignty. In the 1920s and 1930s discussions about the cartels, monopolies and trusts increased and concern about their detrimental effects came onto the agenda in Europe (McGowan 2010: 60–63). The possible problems and negative effects from anti-competitive behaviour and the power of big cartels were recognised. For example, Austria had legislative initiatives combatting their effects as early in the 1890s; Norway in 1920. Bulgaria, Czechoslovakia, Hungary, Poland, Rumania and Yugoslavia also introduced registration legislation before the Second World War. It was noted by many that cartels, monopolies and anti-competitive practices raised prices and could be detrimental to consumers. Competitors could be excluded from the markets. After the First World War it was feared they would hinder a return to free trade.

At least one important reason for this tolerance for local cartels in countries outside the United States may have been the existence of the Webb–Pomerene Act in the US (Amacher, Sweeny and Tollinson 1978). This statute, passed in 1918, allowed US firms to form their own cartels if they were trading internationally, where it was argued, such arrangements would enable them to compete. Smaller and industrially less-developed countries would have been very aware of the size and economic power of American firms, and how difficult it was for their own local companies to compete.

The League of Nations addressed the issue of trusts, combines and cartels on several occasions; especially in Geneva in 1927. Although it was stressed that co-operation between firms could have advantages, primarily in the form of technological advancement and rationalisation, many concerns were raised that they also had detrimental effects. In the League of Nations’ discussions, the big international cartels were seen as problematic for the abolishing of trade barriers.¹ The 1927 Conference did not, however, recommend member countries ban, or even restrict, the cartels or big combinations by legislation, but suggested that instead individual countries might adopt legislation which controlled them. The opposition towards any kind of regulation was strong, but the meeting urged the international community and independent countries to at least follow their activities closely (League of Nations 1927). It was also suggested that the League of Nations could establish a general observation position for evaluating restrictive agreements, publish reports on their investigation and give decisions in the forms of reports or memorandum, in response to request from various parties in these issues.

The European consumer cooperatives formed a group that regularly returned to these issues (Suortti 1927: 140–156). During the 1930s depression some countries accepted cartels as a reasonable response to the economic situation. The autocratic regimes often organised business in ‘new ways’ so as to control and direct production. For example, in Germany before the Nazi regime ‘uneconomic’ price fixing was illegal, but during the Nazi regime cartels became not only compulsory, but quasi-public bodies. This also applied in Fascist Italy (Wise 2005; McGowan 2010: 63). Occasionally international cartels were seen as able to release international tension. In the 1930s for example, coal and steel cartels were connected to appeasement policies (McGowan 2010: 67.) Even though the international cartels could not prevent military war, they might have prevented the outbreak of trade wars (Freyer 2006).

The Inter Parliamentary Union IPU of 1930 and 1931 adopted a harsher view on cartels, trusts and monopolies than the League of Nation. While the London delegates recognised cartels and trusts as producing some benefits, because they also had harmful effects, the final view was that they should be controlled. The London resolution suggested control based on the principle of ‘publicity’; a system of notification and registration of agreements, making them public, and so restraining firms’ anticompetitive behaviour (Boje and Kallestrup 2004; McGowan 2010: 64).

Post-Second World War: changing attitudes towards restrictive agreements

After World War Two, any lingering ambivalence towards restrictive practices began to evaporate. National Socialism and Fascism had demonstrated the dangers that might result from an extreme combination of government intervention and business cartels, while the material strength of the American economy and post-war political dominance provided evidence of the success of strong competition.

Concurrent with a rise in household consumption, stronger consumer interest groups and the need to rebuild economies, governments began to question (and seek answers) about the size and extent of anti-competitive arrangements. The result was that several European countries adopted some form of ‘competition legislation’. It was not really ‘anti-trust legislation’ of the type known to the Americans; rather it was legislation designed to monitor, assess and sometimes restrain, restrictive trade practices. The gradual shift towards a more hostile attitude towards restrictive business practices has frequently been portrayed as the result of outside (read, American) pressure, which often was an outcome of American and European policy networks (Schröter 2010; Djelic 2002, 2005; Leucht 2009; Edwards 1967). While the ‘register’system of regulation has often been interpreted as a first step towards controlling anti-competitive behaviour, and ‘inevitably’ harsher anti-cartel positions, in reality the legislation was more a function of the national context. The various pressure group activities; particular historical and political situations; individual countries’ economic and industrial structure; the business cycle; the legal context and awareness of developments in neighbouring or trading partner countries all shaped the final outcomes. The number of possible factors influencing a country’s regulatory policies helps explain the many different types of regulatory policy that emerged, and the many slightly different ‘cartel registers’ that were created.

As the chapters in this volume show, the spectrum of outcomes was large. Some legislation appeared quite strict, but the competition authorities were granted so little jurisdiction that, ‘the watchdogs were efficiently kept on their chains’(Dumez and Jeunemaître 1996). At the opposite end of the scale, the legislation might have appeared rather ‘open’ and conciliatory, but the regulatory authorities were granted considerable power and enough resources to interpret the legislation and act. The combined final outcome of both the formal legislation and the actual practices employed to enforce them were often a balancing act between strong business interest groups, the legislators, the competition authorities, and occasionally, unions and consumers.

An important driver of change was increasing trade liberalisation after the Second World War. Many countries needed to improve the capacity of their economies to respond to transformations in world markets. Earlier ‘private’ arrangements, which had been designed to assist internal markets and local interests, were increasingly perceived as imposing costs on others inside the economy. Restrictive trade practices also made it harder for ‘outsiders’ to enter markets and compete, thereby thwarting government efforts to grow economies and raise citizens’ standard of living. The emergence and growth of international free trade agreements changed the regulatory environment up to the border. This needed to be matched by regulatory change ‘inside’ the border. Registers helped this process.

The international community also turned their gaze to national regulation of non-competitive practices as a necessary component for promoting international free trade. National legislation was often in conflict with the goals of the free flow of goods. For example the European Free Trade Agreement’s (EFTA) articles 14 and 15 were explicitly designed to ensure that private and government actions would not frustrate the benefits derived from the removal of trade barriers (Szokolóczy-Syllaba 1975: 15).² While EFTA regulations remained dormant, and in practice had little effect, the international promotion of free trade carried with it expectations of competitive markets. In many countries, policies to control and gradually remove harmful anticompetitive behaviour evolved as a result of both demands at the domestic level and participation in international agreements. The restrictive trade agreement registers can thus be seen as important transition instruments as regulatory frameworks shifted from a focus that was internal and protective to one that was more open and competitive in outlook.

By the late 1970s and early 1980s, as the pace of globalisation increased further, the virtues of competitive markets came to dominate political and economic debate. Internationally there was a shift to a more private, competitive market focus for many developed and developing countries. International coordination of markets and trade regulation best exemplified by the EU and its supranational policies that required individual member nations to tackle non-competitive agreements within their own boarders and gradually harmonise their competition legislation according to the EU’s common policy. Although the USA had lead the way, Europe followed with a growing consensus that competit...