THE INTERNAL POLICIES OF

1

• THE INTERNAL POLICIES OF
• THE EUROPEAN UNION
• Competition policy of the EU
• Prof. D-r Jovan Pejkovski

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• Effective competition is crucial to an open
  market economy.
• It cuts prices, raises quality and expands
  customer choice.
• Competition allows technological innovation to
  flourish.

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• The European Commission has wide powers to make
  sure businesses and governments stick to European
  Union rules on fair play in trade in goods and
  services, while allowing governments to step in
  if markets are failing consumers or business, or
  to promote innovation, unified standards, or
  small business development.

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• The main areas of competition policy are
• antitrust and cartels
• merger control
• liberalisation
• state aids.

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Market Structures

• firms operate in markets, these are structured
  differently
• we can look at three different types of market
  structure and find examples of each
• monopoly
• duopoly
• oligopoly

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Monopoly

• a market structure where there is a single seller
  of a unique product
• no competition, as the firm the market
• potential for abuse of monopoly position
• the market may be a natural monopoly
• having competition amongst firms in this kind of
  market would be costly

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Example of Monopoly

• there may be significant savings to be had from
  having one company running the market
• Network Rail are responsible for the maintenance
  and upgrading of the rail network
• is it safer to have one company in charge?

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Duopoly

• two large producers or sellers
• exactly two equally dominant firms seldom found
• tend to compete or collude

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Example of Duopoly

• global aircraft market
• two dominant firms are Airbus and Boeing
• how do they compete with each other?

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Oligopoly

• markets dominated by a small number of large
  firms
• the most common types of market
• large firms are involved in selling either
  identical or very similar products
• significant barriers to entry into the industry

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Example of Oligopoly

• the personal and domestic care product markets
• dominated by
• Unilever
• Procter and Gamble
• Colgate-Palmolive

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Liberalisation

• Ending monopolies has brought prices down.
• In an open economy, monopolies are rarely
  justified. They tend to result in high prices and
  poor service, and to stifle innovation.
  Exceptions and subsidies are allowed for
  inherently uneconomic services, which can be
  considered a basic right, such as postal
  deliveries in rural areas.

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• However, a monopoly supplier cannot use revenue
  from monopoly activities to cross-subsidise
  commercial operations in which it competes with
  other firms.
• If infrastructure constitutes a natural monopoly,
  like gas pipelines and some telecommunications
  infrastructure, then everyone must be allowed to
  use it on the same terms.

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• If there is no natural monopoly, then the process
  of selecting a company to provide the service
  must be transparent.
• Professional services are another area where
  barriers to operating across borders have been
  slow to come down, but the European Commission
  has recently stepped up action to produce change.

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Antitrust and cartels

• It is illegal for businesses, including the
  professions, to collude with each other to fix
  prices or carve up markets between them.
• If a single company has a dominant position in a
  particular market, it may not abuse its market
  power to drive out competitors.
• Nor may a large company exploit the weaker
  negotiating position of its smaller customers and
  suppliers.

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• Large firms may not, for example, impose
  conditions on suppliers which hamper their
  freedom to do business with other companies.
• The Commission can (and does) fine companies for
  all these practices.
• Some exceptions are allowed.

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• The Commission can allow companies to cooperate
  in developing a single technical standard for the
  market as a whole.
• It can allow smaller companies to cooperate if
  this strengthens their ability to compete with
  larger ones.

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• Some types of cooperation deal need specific
  Commission approval, but others are covered by
  rules on blanket exemptions.
• The overriding considerations are whether
  consumers will benefit or other businesses be
  harmed.

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• Differences in car prices across the EU are
  narrowing, in part thanks to the efforts of the
  Commission in bringing greater transparency in
  pricing. Commission intervention has made
  multi--brand car dealerships possible, enabled
  non-authorised dealers to sell parts and carry
  out repairs, and since 1 October 2005 - allowed
  dealers to operate in more than one EU country.

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• Some significant country-to-country price
  differences remain because tax systems vary, but
  the Commission is seeking a restructuring of all
  tax systems to create a true single market.

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Merger control

• The Commission can ban or impose conditions on
  mergers and takeovers of one firm by another if
  the enlarged company would too easily be able to
  squeeze out its competitors or if a merger would
  leave so few players in the market that
  innovation would be stifled, or price competition
  or consumer choice significantly reduced.
• In practice, most mergers are cleared without
  further action being necessary.

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• The Commission is generally only called upon to
  scrutinise the largest cross-border mergers,
  though smaller companies have the option of
  asking for Commission clearance if they think
  that will be less complex than going to several
  member states individually.
• On the other hand, the Commission will leave a
  member state to decide if the impact of a merger
  involving large companies with international
  operations will essentially be restricted to a
  single country.

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• It makes no difference, on the other hand, where
  the companies are based.
• If their sales figures in EU markets are large
  enough, the Commission has jurisdiction, and can
  prevent mergers even when the competition
  authorities in the country where the companies
  are headquartered have no objections.

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State aids

• The Commission monitors closely how much aid
  member state governments make available to
  business.
• It looks not just at obvious forms of aid, such
  as loans and grants, but also at tax breaks,
  goods and services made available at preferential
  rates and at loan guarantees which make the
  borrower a better credit risk.

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• Aid to businesses which have no chance of ever
  standing on their own feet is not allowed.
• Temporary assistance is permissible if there is a
  real chance that a business in difficulty can
  eventually become more competitive as a result.
• Aid for research and innnovation, regional
  development or small and medium-sized enterprises
  is often allowable because these serve overall EU
  goals.

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• The litmus tests are (1) whether the aid is in
  the interest of the Union as a whole and (2)
  whether a private investor would provide money in
  the same circumstances.
• The second test can justify start-up assistance
  granted by airports to attract low-cost airlines.
  
• Aid to low-cost airlines is also acceptable if
  the revenues they generate offset the cost to the
  taxpayer of underutilised infrastructure at
  secondary airports.

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• There are public services, such as broadcasting,
  which governments may legitimately fund, but they
  must be careful not to pay a disproportionate
  amount.
• Overpayment to the detriment of commercial
  competitors would be an illegal subsidy.

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Checks and balances

• The Commission's extensive powers to investigate
  and halt violations of EU competition rules are
  subject to judicial review by the European Court
  of Justice.
• Companies and member states regularly lodge and
  sometimes succeed in appeals against Commission
  decisions, particularly in anti-trust, merger or
  state aid cases.

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The challenge of globalisation

• In an age of globalisation, global players must
  not be able to do as they please just because
  they escape any single governments control or to
  take advantage of gaps in the coverage of
  competition legislation in some countries.

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• The EU takes part in discussions within the World
  Trade Organisation (WTO) on the relationship
  between investment and competition, and is an
  active member of the International Competition
  Network (ICN).
• More than 80 competition authorities are members
  of this network.
• The ICN does not make rules, but promotes best
  practice, particularly in enforcement.

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Guidelines on vertical restraints

• DEFINITION OF VERTICAL RESTRAINTS
• Vertical restraints are agreements or concerted
  practices entered into between two or more
  companies each of which operates, for the
  purposes of the agreement, at a different level
  of the production or distribution chain, and
  relating to the conditions under which the
  parties may purchase, sell or resell certain
  goods or services.

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• These guidelines set out the principles for the
  assessment of vertical agreements with a view to
  determining whether they affect competition
  between Member States.
• The negative effects on the market that may
  result from vertical restraints which EC
  competition law aims to prevent are as follows

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• foreclosure of other suppliers or other buyers by
  raising barriers to entry
• reduction of inter-brand competition between the
  companies operating on a market
• reduction of inter-brand competition between
  distributo33rs
• limitations on the freedom of consumers to
  purchase goods or services in a Member State.

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Method of analysis for vertical restraints

• In general, the assessment of a vertical
  restraint involves the following four steps
• the companies involved need to define the
  relevant market in order to establish the market
  share of the supplier or the buyer, depending on
  the agreement. In order to calculate the market
  share, the relevant product market (which
  comprises any goods or services which are
  regarded by the buyer as interchangeable) and the
  relevant geographic market (which comprises the
  area in which the companies concerned are
  involved in the supply and demand of the relevant
  goods and services) are taken into account

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• If the relevant market share does not exceed the
  30 threshold, the vertical agreement is covered
  by the Block Exemption Regulation, subject to the
  conditions set out in Regulation No 2790/1999
• If the relevant market share is above the 30
  threshold, it is necessary to assess whether the
  vertical agreement distorts competition. The
  following factors to be taken into consideration
  are the market position of the supplier,
  competitors and the buyer, entry barriers, the
  nature of the product, etc

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• If the vertical agreement falls within Article
  81(1), it is necessary to examine whether it
  fulfils the conditions for exemption. In that
  case, the vertical agreement must contribute to
  improving production or distribution or to
  promoting technical or economic progress and must
  allow consumers a fair share of those benefits.
• At the same time, the vertical agreement must not
  impose on the companies concerned restraints
  which are not indispensable to the attainment of
  those benefits or to eliminate competition.

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The most common vertical restraints

• Single branding
• Single branding results from an obligation or
  incentive which makes the buyer purchase
  practically all his requirements on a particular
  market from only one supplier. It does not mean
  that the buyer can only buy directly from the
  supplier but that he will not buy and resell or
  incorporate competing goods or services.
• The possible competition risks are foreclosure of
  the market to competing and potential suppliers,
  facilitation of collusion between suppliers in
  cases of cumulative use and, where the buyer is a
  retailer selling to final consumers, a loss of
  in-store inter-brand competition.

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• Exclusive distribution
• In an exclusive distribution agreement, the
  supplier agrees to sell his products only to one
  distributor for resale in a particular territory.
  At the same time, the distributor is usually
  limited in his active selling into other
  exclusively allocated territories.
• The possible competition risks are mainly
  reduced intra-brand competition and market
  partitioning, which may in particular facilitate
  price discrimination. When most or all of the
  suppliers apply exclusive distribution, this may
  facilitate collusion, both at the suppliers' and
  the distributors' level.

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• Exclusive customer allocation
• In an exclusive customer allocation agreement,
  the supplier agrees to sell his products only to
  one distributor for resale to a particular class
  of customer. At the same time, the distributor is
  usually limited in his active selling into other
  exclusively allocated classes of customer.
• The possible competition risks are mainly reduced
  intra-brand competition and market partitioning,
  which may in particular facilitate price
  discrimination. When most or all of the suppliers
  apply exclusive customer allocation, this may
  facilitate collusion, both at the suppliers' and
  the distributors' level.

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• Selective distribution
• Selective distribution agreements, like exclusive
  distribution agreements, restrict the number of
  authorised distributors, on the one hand, and the
  possibilities of resale on the other. The
  difference vis-à-vis exclusive distribution is
  that the restriction of the number of dealers
  does not depend on the number of territories but
  on selection criteria linked in the first place
  to the nature of the product.

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• Another difference vis-à-vis exclusive
  distribution is that the restriction on resale is
  not a restriction on active selling to a
  territory but a restriction on any sales to
  non-authorised distributors, leaving only
  appointed dealers and final customers as possible
  buyers. Selective distribution is almost always
  used to distribute branded final products.
• The possible competition risks are a reduction in
  intra-brand competition and, especially in cases
  of cumulative effect, foreclosure of a certain
  type or types of distributor and facilitation of
  collusion between suppliers or buyers.

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• Franchising
• Franchise agreements contain licences of
  intellectual property rights relating in
  particular to trade marks or signs and know-how
  for the use and distribution of goods or
  services. In addition to the licence of IPRs, the
  franchiser usually provides the franchisee during
  the life of the agreement with commercial or
  technical assistance. The licence and the
  assistance are integral components of the
  business method being franchised.

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• The franchiser is in general paid a franchise fee
  by the franchisee for the use of the particular
  business method. Franchising may enable the
  franchiser to establish, with limited
  investments, a uniform network for the
  distribution of his products. From the
  competition viewpoint, in addition to provision
  of the business method, franchise agreements
  usually contain a combination of different
  vertical restraints concerning the products being
  distributed, in particular selective distribution
  and/or non-compete and/or exclusive distribution
  or weaker forms thereof.

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• Exclusive supply
• Exclusive supply means that there is only one
  buyer inside the Community to which the supplier
  may sell a particular final product. For
  intermediate goods or services, exclusive supply
  means that there is only one buyer inside the
  Community or that there is only one buyer inside
  the Community for the purposes of a specific use.
  For intermediate goods or services, exclusive
  supply is often referred to as industrial supply.
  The main competition risk of exclusive supply is
  the foreclosure of other buyers.

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• Tying
• Tying exists when the supplier makes the sale of
  one product conditional upon the purchase of
  another distinct product from the supplier or
  someone designated by the latter. The first
  product is referred to as the tying product and
  the second is referred to as the tied product.
• If the tying is not objectively justified by the
  nature of the products or commercial usage, such
  practice may constitute an abuse of a dominant
  position. Agreements of this type, which are
  designed to make the sale of one product
  conditional upon the purchase of another distinct
  product, may be incompatible with the competition
  rules.

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• Recommended and maximum resale prices
• The practice consists in recommending a resale
  price to a reseller or requiring the reseller to
  respect a maximum resale price.
• The possible competition risk of maximum and
  recommended prices is that they will work as a
  focal point for the resellers and might be
  followed by most or all of them. They may then
  facilitate collusion between suppliers.

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• DEFINITION OF A HORIZONTAL COOPERATION AGREEMENT
• Cooperation is of a "horizontal nature" if an
  agreement or concerted practice is entered into
  between companies operating at the same level(s)
  in the market. In most instances, horizontal
  cooperation amounts to cooperation between
  competitors, which may lead to competition
  problems where it causes negative market effects
  with respect to prices, output, innovation or the
  variety and quality of products.

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• On the other hand, horizontal cooperation can
  lead to substantial economic benefits where it is
  a means of sharing risk, making cost savings,
  pooling know-how and launching innovations
  faster. These guidelines provide an analytical
  framework for horizontal cooperation agreements
  with a view to determining their compatibility
  with Article 81 of the EC Treaty.

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• Article 81(1) applies to horizontal cooperation
  agreements which have as their object or effect
  the prevention, restriction or distortion of
  competition. Many horizontal cooperation
  agreements, however, do not have as their object
  a restriction of competition and therefore an
  analysis of their effects in the market is
  necessary. For that analysis it is not sufficient
  that the agreement limits competition between the
  parties it must also be likely to affect
  competition in the market to such an extent that
  negative market effects as to prices, output,
  innovation or the variety or quality of products
  and services can be expected.

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• The agreement's ability to cause such negative
  market effects depends on the economic context,
  taking into account the nature of the agreement
  and the parties' combined market power together
  with other structural factors.

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• Each cooperation agreement must be analysed on a
  case-by-case basis. However, it is possible to
  identify in general terms cooperation agreements
  which
• do not infringe the competition rules
• This is normally true for cooperation that does
  not involve coordination of the parties'
  competitive behaviour in the market, such as (a)
  cooperation between non-competitors, (b)
  cooperation between competing companies that
  cannot independently carry out the project or
  activity covered by cooperation, and (c)
  cooperation concerning an activity which does not
  influence the relevant parameters of competition.
  These categories of cooperation restrict
  competition only if they involve firms with
  significant market power and are likely to cause
  foreclosure problems vis-à-vis third parties.

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• do infringe the competition rules
• These are cooperation agreements designed to
  restrict competition by means of price fixing,
  output limitation or sharing markets or
  customers.
• may infringe the competition rules
• These are agreements which do not belong to the
  above-mentioned categories and which need further
  analysis of the market position and structure.

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• Market power and market structure
• The starting point for the analysis is the
  position of the parties in the markets affected
  by cooperation. This determines whether or not
  they are likely to maintain, gain or increase
  market power through cooperation, i.e. whether
  they have the ability to cause negative market
  effects as to prices, output, innovation or the
  variety or quality of products and services.

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• To carry out this analysis, the relevant
  market(s) have to be defined and the parties'
  combined market share calculated. If it is low,
  cooperation is unlikely to produce restrictive
  effects. Given the variety of types of
  cooperation and the different effects they may
  cause in different market situations, it is
  impossible to indicate a general market share
  threshold above which sufficient market power for
  causing restrictive effects can be assumed.
• Market concentration, i.e. the position and
  number of competitors, may have to be taken into
  account as an additional factor in assessing the
  impact of cooperation on market competition.

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• ASSESSMENT CRITERIA FOR EXEMPTION (Article 81(3)
  of the EC Treaty)
• Cooperation agreements may be exempted provided
  that the following conditions are met
• Economic benefits
• Economic benefits, such as improvements in the
  production or distribution of products or the
  promotion of technical or economic progress, may
  outweigh restrictive effects on competition. The
  parties must demonstrate that the efficiency
  gains are likely to be caused by the cooperation
  and cannot be obtained by less restrictive means.

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• Fair share for consumers
• The economic benefits must favour not only the
  parties to the agreement but also consumers.
• Indispensability
• If there are less restrictive ways of achieving
  similar benefits, the claimed efficiency gains
  cannot be used to justify restrictions of
  competition.

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• No elimination of competition
• The criterion of "no elimination of competition"
  for a substantial part of the products in
  question is related to the concept of dominance.
  Where a dominant position exists, a horizontal
  agreement which produces anti-competitive effects
  cannot be exempted.

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• Block Exemption Regulations for RD and
  specialisation
• In RD and specialisation agreements, the
  combination of skills can be the source of
  substantial efficiency gains. Agreements of this
  type are usually exempted up to a certain market
  share threshold under the Block Exemption
  Regulations for RD and specialisation agreements.

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• TYPES OF COOPERATION AGREEMENT
• RD agreements
• Production agreements
• Purchasing agreements
• Commercialisation agreements
• Agreements on standards
• Environmental agreements

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• Action plan guidelines
• The reform of state aid policy must be a
  consistent and comprehensive. The action plan
  sets out guidelines for this reform that will be
  common to the various instruments involved.
• Less state aid more efficiently applied The
  objective is to target state aid towards
  activities to which the financial markets are
  reluctant to loan money or which contribute to
  growth, competitiveness or the creation of
  sustainable jobs. However, achieving this
  objective depends partly on a more refined
  economic approach.

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• A more refined economic approach This involves
  finding out why, without public intervention, the
  market does not achieve an optimum result,
  whether it is because there is a "market failure"
  or because it produces social or regional
  inequalities which must be corrected. It is
  therefore necessary to better evaluate whether
  state aid is justified, whether it represents the
  most appropriate solution and how it can be
  implemented without distorting competition to an
  extent contrary to the common interest.

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• This approach would facilitate and speed up
  authorisation of the aid which least distorts
  competition and, at the same time, would focus
  attention on the aid likely to have the most
  serious distortive effect on competition.

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• More effective procedures, better enforcement,
  higher predictability and enhanced transparency
  Improving the rules on state aid will require
  more effective and more transparent procedures,
  extension of the scope of block exemptions, a
  reduction in the number of aid measures to be
  notified, faster decision-making and procedural
  rules adapted to the enlarged European Union.

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• This will result in greater legal certainty and
  will facilitate administrative tasks for the
  Commission and the Member States.
• Moreover, as a result of enhanced transparency,
  firms, competition specialists, consumers and the
  public will find it easier to take action against
  unlawful aid, particularly before the national
  courts.

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• Shared responsibility between the Commission and
  Member States However, the rules and procedures
  on state aid cannot be improved without the
  active support of the Member States, which must
  undertake to notify all planned aid and to
  respect the rules on state aid.