Appunti di Competition Law

Competition law

Why a competition law?

There are three groups of reasons:

• Economic reason
• Political and philosophical reason
• The historical conditions

Economic reason

The core idea is that when firms are under adequate competitive pressure, they duel to keep and increase their customers and so to produce more products/services at lower costs of higher quality. The idea must be balanced with two facts:

The first fact is that if left without any control, the market often evolves towards reductions of competitive pressure, and this can lead to:

• Collusive behaviors of two or more firms
• Mergers, or acquisitions, or setups of a new common firm

Those two practices are not always negative; it depends on the size of the market that the firms obtain from these behaviors. It’s a negative fact when the market share is enough to condition the market itself; in this case, it’s not a market share but it’s a market power.

The second fact is that when competitive pressure is already low, the market, if left without any control, often evolves towards further reductions of competitive pressure or other scenarios that harm welfare as well. This case is always negative because the dominant firm may abuse its market power, excluding smaller companies and exploiting customers.

The aim of Competition Law is to protect the well-functioning of the market by ensuring the maintenance of adequate competitive pressure. It sets the legal conditions to treat firms' behaviors which may imply a reduction of competitive pressure.

Political and philosophical reason

They are connected to the idea of competition as economic democracy. This means that everybody can set up a firm and enter the market; it also means that consumers must be free to choose from different products (freedom of choice).

The historical conditions

USA (Sherman Act 1890): Political pressure of small traders and farmers against cartels which were entered into big enterprises in crucial economic sectors, such as heavy industry, energy, communications, transports.

ECSC (1951) - EEC (1957): After two world wars broken out in Europe, arose the need for a European Market of Coal and Steel, and then of a Common (later a Single, and finally an Internal) Market.

Three anticompetitive behaviors

• Restrictive agreements
• Abuses of dominance
• Concentrations

There are three important extra-legal factors which influence the enforcement of the law on them: economics, politics, and institutions.

Economics

• Economic theory: how do markets behave?
• What is (a restriction of) competition? Harvard school, Chicago School, Post-Chicago.
• What is welfare? Consumer Welfare, Total Welfare
• What is efficiency? Allocative efficiency, Productive efficiency, Dynamic efficiency.

Politics

• Policy: which aims competition law must pursue?
• What does "well functioning of the market" mean? Only economic goals (welfare, efficiency) / also other public goals (employment, environment, economic freedom, and pluralism, etc.)

Institutions

• How does the competition system work? What are the institutions entrusted with the enforcement of CL? Independent authorities/Political government.

Lecture 2: EU Competition Law and its scope of application

Sources of EU CL

European Union Law: general principles

• Treaty on European Union: article 3
• Treaty on the Functioning of the European Union: articles 119 and 120
• Protocol No. 27 which is attached to TEU and TFEU
• Charter of Fundamental Rights of the European Union (2007): article 16

And detailed rules:

• Treaty on the Functioning of the European Union (2007): articles 101-106 TFEU
• Regulations
• Soft law: praxis of European Commission, often summarized in Commission Notices
• Case law (two Courts: General Court and Court of Justice)

EU CL: general overview

3 anticompetitive behaviors 2 kinds of reaction by EU CL law

• Restrictive agreements: general ban; sanctions and corrective measures applied by competitive authorities
• Abuses of dominant position: general ban; sanctions and corrective measures applied by competitive authorities
• Concentrations: need of approval by the European Commission on a proposed transaction

In the first two cases, there is the general ban applied by the European Commission and/or National Authorities. In those two cases, CL is enforced AFTER the behaviors are put in action. In the case of concentrations, the reaction is EX-ANTE. There is the need for approval by the European Commission on a proposed transaction.

When EU CL is applicable?

Where does the scope of application of EU law begin? The answer depends on the anticompetitive practice concerned. On one hand, we have concentrations, on the other hand, we have restrictive agreements and abuses of dominance.

Concentrations with "Union dimension"

First set of thresholds (article 1, comma 1-2, Reg. No. 139/04):

• The combined aggregate worldwide turnover of all the undertakings concerned is more than EUR 5000 million, AND
• The aggregate EU-wide turnover of each of at least two of the undertakings concerned is more than EUR 250 million, UNLESS
• Each of the undertakings concerned achieves more than a given percentage of its aggregate EU-wide turnover within one and the same Member State, more than two-thirds.

Second set of thresholds (article 1, comma 1-2, Reg. No. 139/04):

• The combined aggregate worldwide turnover of all the undertakings concerned, more than EUR 2500 million AND
• In each of at least three Member States, the combined aggregate turnover of all the undertakings concerned, more than EUR 100 million AND
• In each of at least three Member States included for the purpose of point 2, the aggregate turnover of each of at least two of the undertakings concerned, more than EUR 25 million AND
• The aggregate EU-wide turnover of each of at least two of the undertakings concerned, more than 100 million UNLESS
• Each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State.

Restrictive agreements and abuses of dominance (art. 101 TFEU and art. 102 TFEU)

…within the internal market

• …within the internal market or in a substantial part of it
• …which may affect trade between Member State

We have two elements to understand the scope of application:

• The concept of trade: not only the traditional exchanges of goods and services, but all cross-border economic activities, including establishment
• Between Member States: at least two Member States

- Any restriction on import and/or export activities concerning one Member State implies that the condition of the harm of trade between Member States is met.

- Any agreement or practice which has as object or effect the maintenance of the current market structure within an entire Member State, has also the effect of partitioning that market, isolating it from trade with other Member States.

- Sometimes, the conditions are met even if the agreement or the practice concerns only an important portion of a Member State: for example, a port or an airport, because trade and transport connected with such facilities cannot influence trade between Member States.

But a question arises:

Which relevance have...

• The nationality of the firms concerned?
• (For agreements) the place where the contract was entered into?
• (For agreements) the law which is applicable to the contract?
• (For concentrations) the place where the production sites are?

No one: so-called "effects doctrine" applies:

• If the agreement/the practice has effects within the internal market, EU CL applies
• If the concentrations concern firms overcoming EU turnover thresholds above indicated, EU CL applies

Competition laws in Europe beyond EU CL

Domestic (or National) CL:

• In some cases is applicable only to anti-competitive practices which are not subject to EU law (so-called single barrier)
• In other cases, domestic competition law is applicable to anti-competitive practices which are also subject to EU competition law (so-called double barrier)

In any case, there is a strong influence of EU CL on (the evolution of) domestic competition laws.

Applicability and enforcement

Applicability of EU competition law is different from the institutional context where EU CL is enforced. The first refers to whether EU CL is applicable to a given anticompetitive practice, while the second refers to which authorities are entrusted to enforce EU CL.

Concentrations: if EU law applies, the institutional context for public enforcement is exclusively at the EU level.

Agreements and AoD: if EU applies, national authorities are directly entrusted to enforce it.

General framework: National authorities are entrusted by the enforcement of National CL for all the three anticompetitive practices. National Authorities can also be entrusted by the enforcement of EU CL for restrictive agreements and AoD. European Authorities are entrusted by the enforcement of EU CL exclusively for concentrations.

Lecture 3: Three anticompetitive practices, one common issue

Whatever anti-competitive practice is considered, the need for a double analysis arises:

• Determining the market power of a firm/the firms concerned
• Assessing the economic effects of the considered practice on competition

Whatever anticompetitive practice is considered, a common issue is crucial: the relevant market.

The relevant market: the role of the practice concerned

Defining the relevant market implies different analyses depending on the three different anticompetitive practices.

• For agreements and abuses, it’s an ex-post definition. A photograph of the market in the recent past is done and also an assessment of the effects that actually derived from the considered practices.
• For concentrations, it’s an ex-ante definition. In this case, there is a prospect of the future market in two conditions: as resulting from the considered concentration and as coming from the natural evolution of the market itself.

Relevant market: the legal concept

The legal concept of RM is: the place where firms exert market power, as much as they can (due to the competitive pressure of other competitors).

Defining the RM means identifying those actual competitors of the undertaking involved that are capable of constraining those undertake’s behavior and of preventing them from behaving independently of effective competitive pressure.

NOT as the physical area where the firm sells its products NOR as the economic sector where it belongs.

The relevant market: two levels of analysis

Definition of RM as identification of the competitors of the firms concerned:

• From a merceological point of view (so-called relevant product market)
• From a geographical point of view (so-called relevant geographical market)

Relevant product market concerns the interchangeability of goods and services offered by the firms involved (if they are interchangeable, they belong to the same RPM).

Relevant geographical market concerns the homogeneity of the conditions of competition where the firms involved operate (if they operate in areas where such conditions are homogeneous, they belong to the same RGM).

The relevant product market

Demand-side substitutability: all those products and/or services which are regarded as interchangeable, or substitutable, by the customer, by reason of the product’s characteristics, their prices, and their intended use.

Examples of different relevant product market (demand side):

• Beverages: with gas/without gas - alcoholic/non-alcoholic - distributed via supermarkets or via horeca - only to quench thirst/mainly in a social context
• Toothbrushes: manual/electric
• Air carriers: time-sensitive consumers/price-sensitive consumers
• Pharmaceutical: one more effective with more collateral effects and the others less effective but with fewer collateral effects.

Supply-side substitutability: the relevant market includes those suppliers that are able to switch production to the relevant products and market them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices.

Examples of the same RPM (supply side):

• Paper: copy paper/art book paper

Examples of different RPM (supply side):

• Beverages: fruit-based/milk-based

Demand-side and supply-side substitution: does it exist any hierarchy between the two?

Generally speaking, there is no hierarchy: Commission notice 1997 says that supply side subs. may also be taken into account in those situations in which its effects are equivalent to those of demand substitution in terms of effectiveness and immediacy. Actually, supply side subs. seems to be a means to check and correct the results of the demand side subs. : Commission Notice says switch of production by suppliers, without costs and risks may happen in those situations which typically arise when companies market a wide range of qualities and grades of one product: even if, for the customers, the different qualities are not substitutable, the different qualities will be grouped into one product market.

The relevant geographical market

The area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighboring areas because the conditions of competition are appreciably different in those areas.

Supply-side

Whether the conditions of competition are homogeneous or not in the areas where the firms concerned offer their products and services.

Example: cement, rim limited: operating area of a cement factory depends on the quantity and quality of the roads, the traffic conditions, the geographical characteristics.

Demand side

Whether customers are willing to move and search for better conditions of sale or supply.

Example: banks and insurance, rum mainly local: customers reluctant to move from home.

Methods for determining

The main method:

1. The SSNIP test (at the same time RPM and RGM): imagining a hypothetical monopolist of a given product in a given area who practices a Small but Significant Non-transitory Increase of Price (5-10%).

• Assessing whether, in response, the customers would switch to readily available substitutes or to suppliers located elsewhere. If substitution were enough to make the price increase unprofitable (because of the resulting loss of sales), additional substitutive products and areas included in the relevant market. The test is completed when a set of products or services and areas is identified where the price increase would be profitable.
• Assessing whether, in response, other firms would switch their production in order to include the product of the candidate market.

Some additional methods (mainly for RPM):

• Evidence of actual substitution in the past (shock analysis)
• Surveys, studies, and reports on views of customers and competitors of the firms involved.

Lecture 4: The notion of undertaking

The anticompetitive agreements: an overview of art. 101 TFEU

General prohibition and specific cases: article 101, par. 1, TFEU Prohibition art. 101, par.1, TFEU and exemptions art. 101, par. 3, TFEU

The reasons for the prohibition:

• Distorsive effects on allocation (pre-determining of prices and quantities, regardless of the demand, transfer to the producers of all the surplus paid by the consumers.
• Negative effects on innovation in productive and distributive processes.
• Additional costs for the setup and the functioning of the agreement (monitoring of the parties’ actual behavior, sanctions in case of any breach of the agreement, catching of the outsiders.

The reasons for the exemptions:

• (Possible) positive effects on productive and distributive efficiency
• (Possible) positive effects on technological progress and/or products’ quality

The general prohibition: the elements:

• Undertakings
• Agreements between undertakings / decisions by associations of undertakings / concerted practices.
• Which have as their object or effect the prevention, restriction, or distortion of competition
• Which may affect trade between member states

The concept of undertaking

There is no definition in legislation, neither primary nor secondary. The case law: a functional view: any entity is engaged in an economic activity, that is the supply of goods or services in a given market; an activity which may have an effect on competition in that market. There is no relevance for the registered address, ownership, ways of financing, legal status, profit-making purpose, existence of a professional organization engaged in the activity. The focus is on the function of the entity in the context.

What is an economic activity?

Some (extreme) cases from the case law:

• Individuals (as long as they do not act as employees or consumers; the case of the artist/performer who sells IP rights on his/her performances)
• Members of liberal professions (notwithstanding the nature of public law of their activity: customs agents, lawyers, architects, etc.)
• Sports associations engaged in commercial activities (selling broadcasting rights and merchandising articles, concluding sponsoring agreements, etc.)

What is not an economic activity?

Some examples:

• Activities which are connected with the exercise of the powers of a public authority: public order, safety, protection of the environment, etc.
• Activities which are carried out on the basis of the principle...