#94 - Introduction To Competition Law - Competition Law

Introduction to Competition law – Furse

• The primary purpose of competition law is to remedy some of the situations in which the free market system breaks down

• “When working effectively, competition involves a process of rivalry between firms that strive to win customers’ businesses by achieving the lowest level of costs and prices, developing new products or services, or exploiting particular strengths, skills and other advantages”

  • Competition law is not directly about consumer protection or trading standards, although both may benefit

Domestic regime today

• Found in Competition Act 1998 and Enterprise Act 2002

• Competition legis also key in EC law:

  • Cf Eco Swiss China – provisions are “a fundamental provision, essential for the functioning...of the internal market”

• Arts 81 and 82 relate to the control of anti-competitive agreements and dominant firm practices

  • Note that Gerber argues that these provisions are a distinctly European model, reflecting German ordo-liberal ideology rather than the Sherman provisions

• In US law, the “rule of reason” is at the heart;

  • Furse says there are significant differences in the underpinning philosophies of US and European models

    • Cf AG Kirschner in Tetrapak

Role of economics

• Two roles:

  • General macro-economic argument can be made as to the existence of market failure and the costs imposed by it

  • Micro-arguments can be relied on in individual cases to justify intervention or to defend a company’s position

• Pareto optimum: this occurs where A can be better off without B being made worse off.

  Problems with monopolies:

• Ceteris paribus, prices are higher and outputs are less

  • There is a non-optimal allocation of resources

  • There is a consumer surplus: if the monopolist sets one price for the whole market, some of the customers would have been prepared to pay more

    • Note study by Harberger in 1954, attempting to quantify the total loss to American society from monopolistic interests in the US

    • Harberger calculated it as 0.1% net income but modern studies put it between 4 and 20.

      Harvard v Chicago

• Until mid-1980s, economists, regulators and to a certain extent lawyers could be grouped this way

  SCP Model

  • First development at Harvard in 1930s where research lead to development of the Structure-Conduct-Performance model: performance is determined by other firms’ conduct, which in turn is determined by the market structure

  • Kaysen and Turner argued that limitation of market power should be the central focus of comp policy

    Chicago’s response

  • Stigler examined the welfare implications of the structure of an industry, and of barriers to entry into that industry

  • Harvard economists had argued that higher barriers enabled incumbents to increase prices (and were therefore to be condemned)

    • Chicago concerned to examine the nature of the barrier, tolerating those which are the result of efficiency consids

  • SCP model replaced by one in which performance dictates market structure “reverse causation”

    • Cf Bork: the “real enemy” is “artificial barriers”

  • Generally, Chicago school accepts that in real world, all companies are restrained by comp

• Only concern of comp policy should be efficiency, and that ancillary goals (i.e. redist of income, concentration of socio-economic power) should not be part of it

  Modern approaches

• Chicagoan assumption that real-world behaviour is similar to perfect competition is incorrect

  • Has been challenged by emergence of industrial economics

  • Bork and Posner were appointed to the bench under Republican Presidencies

    Demand and Supply

• Ceteris paribus, as price rises, demand will fall

• Inelastic demand is where demand falls by less than price rises

  • This is affected by substitutes

    Costs

• Divided into

  • Fixed

  • Variable

  • Marginal: those added by the production of every one extra unit

    • These normally fall as production increased(economies of scale)

  • Average: total divided by quantity produced

  • Total

  • Short run/long run

    Markets

• Test favoured: SSNIP (small but significant non-transitory increase in price)

• But note the US v du Pont (cellophane fallacy) case

  • If the price is raised by a monopolist, who is already operating at the highest possible level, then a SSNIP will lead to some customers buying products in a different market, and hence making the market appear wider than it is

    Barriers to entry

• The higher they are, the greater the ability of the incumbent to ignore potential competition

  • Can include:

    • Lack of technical knowledge

    • Any premium rate paid for capital to compensate for the risk of this

    • Sunk costs

    • Legal monopolies

    • Costs of establishing brand recognition

    • Distribution systems

    • Etc

• Chicagoans argue that barriers to entry should be of no concern to regulators and are merely evidence of the efficiency of the incumbent

  • How does this stop them being effective barriers....

• Harvard school on the other hand says that sometimes positive obligations on incumbent are needed to reduce barriers

  Economics of Monopoly Abuse

• Strictly, a monopolist is the sole supplier in a market

• Monopolists are able to determine the market price, which will be higher than the market clearing (competitive price), quantity supplied will be lower

• There is a welfare loss to society as a whole

• Monopolist may also engage in wasteful behaviour in order to protect its position

  • Note that some radical Chicagoans do not see a private monopoly as being a problem at all

    Legal definition of monopolies

• Comp law extends to monopolistic situations, where one player has a significant degree of market power

  • In EC, around 50% market share will suffice

• Following Leibenstein, the terminology of X-inefficiency is used to describe the inefficiency that results from an inefficient use of existing resources

  • X inefficiency results where the same inputs might produce more outputs

    • Competition law is not well placed to deal with X inefficiency, as it would require a strongly interventionist approach

      Higher prices, lower output

• It will be assumed that all firms aim for profit maximisation

  • They will set the level where the marginal cost (MC) of production is equal to the marginal revenue (MR)

  • The monopolist can set the price in the market

    • This leads to a dead-weight welfare loss

      Predatory and Exclusionary prices

• Predation is conduct which leads to a short-term loss in order to allow a long term gain via the harming of competitors

  • Myers: there is some conduct which can be described as exclusionary: this is where prices are low, but not so low as to be predatory

  • The mere fact that there have been previous failed attempts at entry can act as a deterrent, even if structural barriers are not high

    • Cf the corpse analogy of Rapp

• Key question is whether a monopolist is able to so harm the market structure via barriers so as to reduce the threat of competition

  • This is at heart of Chicago/ Harvard debate

• Porter (Harvard) there are 5 major barriers to entry:

1. Economies of scale

2. Product differentiation

   • Note the law has tackled this, in Contraceptive Sheaths

3. Capital requirements

4. Switching costs (i.e. cost to buyer of switching to new supplier)

5. Access to distribution channels

   • Films

• Note that economies of scale are a form of efficiency

  • This, as well as requirement that new entrants should meet capital costs should not be addressed by comp law

    • Really? What about state monopolies? The tetrapak one?

• Furse agrees with Bork: real question “is whether there are any artificial entry barriers that are not forms of superior efficiency”

  Natural monopolies

• Sometimes it is the only efficient market solution

  • I.e. where there is no price at which two firms could cover their costs

    • This is the case where the MC is falling when the final consumer’s demand is satisfied

  • Arises where fixed costs are far greater than costs of production

    • I.e. rail transport, water, fixed wire telecommunications

• The y can also arise where there are situations of “network returns”

  • I.e. industries heavily reliant on standards and product compatibility

    • Cf computing industry (Microsoft)

• In late 1970s-80s, UK led way in de-nationalisation

  Conclusion

• Chicago school posits efficiency tests as the only acceptable standard by which to frame legis, without regard to individual businessmen whose efforts have been stifled by predatory conduct

• Note that in the EC and UK, competition enforcement is largely complaint-driven

  • This forces the courts and economists to consider the anti-competetive impact of short term behaviour

    Art 82 EC

    Basics

• Applies to abusive conduct by undertakings in a dominant position

• Assessment of whether undertaking is dominant involves determining in what market the undertaking operates, and its power within that market

  • The dominant position must be in a “substantial part” of the common market

• Abuses can be “exclusionary” or “exploitative”

• There must be an effect on trade between MS

• Conduct can be defended on grounds that it is “objectively justifiable” and hence not actually abusive

  Types of abuse

• May consist of:

  • Directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions

  • Limiting production, markets or tech d’ment to the prejudice of consumers

  • Applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage

  • Making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations

• Art 82 forms basis of actions less often than 81:

  • applies to fewer undertakings

  • those to...