Competition Policy

European Union Competition Policy Analysis

It has been referenced by the EU Commissioners that the primary function of the European Union competition policy has been the protection of consumer welfare. However, many authors and critics have stated that this is false and that the EU was actually more concerned with protecting competition than consumers. I will evaluate both sides of the argument and provide examples or facts to either refute or support each claim.

“An effective competition policy is vital to the long-term health of the European economy.” Competition increases the incentives for firms to reduce costs, cut prices and improve the quality of their products. It benefits businesses, which gain from greater competition between suppliers. But above all, competition benefits consumers through lower prices and better products. “Competition policy is one of the European Union’s greatest success stories. It is also one of the most integrated areas of EU policy-making.” However, the Commission has long faced criticism for failing to place consumers at the centre of its approach to competition. The Commission has undertaken some useful but limited reforms in the last couple of years designed to better integrate consumer concerns into its policy-making. For the first time it has explicitly stated that the overall goal of its policy is to benefit consumers, and it has appointed a consumer liaison officer whose tasks include canvassing consumer opinion on individual competition cases. “The Commission has frequently been accused of paying insufficient attention to the interests of consumers in its investigations – producing only a cursory paragraph on the potential consumer benefits from individual competition decisions. Investigations were in response to complaints from a competitor.”

“The major aim of the competition policy of the EU is to protect and encourage the competitive process, resulting in an optimum allocation of resources and the maximization of consumer welfare in the Community and secondly to consolidate the single market objective. To maintain consumer welfare was the goal of parliament when deciding to enforce a policy that would restrict certain practices (EU Business News).” For instance, in the Guidelines on Vertical Restraints the Commission states that: “the protection of competition is the primary objective of EC competitive policy, as this enhances consumer welfare and creates an efficient allocation of resources.” The Commission adds that it planned to create a single European market. It is evident that the European Union’s primary function is to protect the consumers. . The move towards a more “economic approach in the evaluation of competitive restrictions is the first step in the implementation of a consumer welfare criterion. For years the application of both articles 81 and 82 of the Treaty has moved towards a more economic approach, which enables competition enforcers to better assess the efficiencies related to the business practices, the economic context in which they took place and the likely benefits for the consumers.” In 1978, in the United Brands v Commission case: United Brands was accused of charging unfair high prices for bananas in some member states while acting as a major supplier of bananas to the European market as a whole. The court had to determine whether the firm could be charged with abusing a dominant position pursuant to Article 82 (then Article 86). The Court has to suggest whether the banana market was a unique market or one in which consumers would readily switch their buying behavior to other fruits if the price of bananas rose. Ultimately, the court ruled that bananas cater for different dietary requirements, their specific qualities influence customer preference and substitution to other fruits is unlikely. Thus the market for bananas was considered to be distinct (European Business fourth edition). This case provides an example of the courts concern for consumer welfare.

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The following statement was given by the EU competition commission to illustrate the importance of this policy; ‘Competition in the marketplace is a simple and efficient means of guaranteeing consumers products and services of excellent quality at competitive prices. The best deal for customers emerges as a result of the contest between suppliers. This policy is important to the consumers as it ensures wider consumer choice, technological innovation, and effective price competition. If achieved these aims contribute to consumer welfare and the competitiveness of the European industry. The EU set up its competition policy to ensure that consumers benefited from competitive pricing, a wide range of goods and services on offer and technological innovation. Market liberalization is the deregulation of markets and has, in recent years, allowed the introduction of new competition in several monopolistic industries. It means that consumer welfare is served by introducing competition into markets where there is a monopoly (European Busines).

Cartels distort competition within a market place, and their existence often leads to higher prices and lower quality goods. They are therefore prohibited by the EU, and can be fined up to 10% of their annual worldwide turnover if their practices are deemed illegal and anti-competitive. Cartels create inefficiency for the consumers, since they pay higher prices for lower qualified goods, creating inefficiency at the expense of consumers. Example for cartels in the EU is the vitamin cartels which are eight vitamin companies that had agreed between themselves and created unfair competition in the sector for ten years. They had charged higher pries compared to the ones which would be possible in a competitive environment by fixing the prices, allocating sales quotas, agreeing on price increases and issuing price announcements to agreed producers (Baldwin & Wyplosz, 2004, p.262). The Commission used its right to impose fines on the vitamin companies, which can be up to 10 % of their total sales, according to the EU law. In this example the competition law is primarily aimed at maximizing consumer benefits.

“Accordingly, the EU has looked to tackle private and public barriers to competition through regulation and the construction of a broad legal framework (Simon Mercado).” These barriers are implemented to ultimately protect consumers from predatory pricing and increases. Special exemptions given in Article 81 benefits consumers in improvements in production costs where improvements are made in production, distribution or economic progress such as cost reductions or capacity increases; where fair share of the benefits accrues to consumers such as lower prices or the improved quality of goods and services; only agreements which actively contribute to the additional benefits will be permitted, and lastly a degree of competition must exist in a substantial part of the goods and services supplied. “European competition rules are designed to create and maintain such a healthy business environment where competition is based solely on merit. Our competition rules ensure that companies do not collude to impede competition or abuse dominant positions on the market and that merger can take place without harming competition in the marketplace (Kroes).” The following statement was given by the EU competition commission to illustrate the importance of this policy. It also aims to make markets more competitive if they currently are not so. State Aid is monitored because it rarely good for an economy being detrimental to those firms rival to the receiver and just delaying the inevitable for the company on the receiving end. Under EU state aid rules a company can be saved once, only though if the aid is approved and designed to aid the company’s long-term prospects. Government aid to boost research and development, regional development and as help for small businesses are normally permitted as it will be beneficial. The legislative history leaves no doubt that Congress intended to protect sellers victimized by trusts and other conduct within the scope of the Competition Policy prohibitions. For raising the prices of what they sell and for reducing prices for what they buy: These trusts and combinations are great wrongs to the people. They have invaded many of the most important branches of business.

Article 86 deals with controls on monopoly and abuse of a dominant position. “The inclusion of this provision comes from the general proposition that firms in a position to influence the market will push prices above MC and reduce the levels of consumer welfare and efficiency in the economy (EU Competitive Policy). The implication of this article is that it is concerned with the firm’s behavior and not the actual market structure. “However, despite this stated convergence, in the same period a difference in the application of fundamentally similar laws has emerged, sometimes in the evaluation of the same cases.” These diverging approaches have been attributed to different aims pursued by different legislations. In particular the European Commission is more focus on protecting competitors rather than consumers. According to the Court: “[i]t must be possible to penalize predatory pricing whenever there is a risk that competitors will be eliminated”; no particular reference to the likelihood of recovering the investment was made.” Article 82 prohibits low pricing with the object of eliminating a competitor, discriminatory pricing between or within member states and retaining customers by granting fidelity rebates. There are four main areas the EU looks at: anti-trust and cartels introduced to make companies compete rather than collude, producing greater competitiveness. Mergers monitoring and investigating take-over liberalization designed to make previously uncompetitive markets more competitive by introducing fresh competition. State Aid measures government action to ensure they do not distort competition. One of the main EU competition principles is to introduce added competition into markets which are currently monopoly. As it is often too expensive to create new networks for the new competition to use to compete with, the existing firms are forced to share their networks with their rivals. Some progress has been made in industries that were liberalized, particularly Air Travel and telecommunications, where the average price has dropped substantially since the markets were opened up for competition. If a firm has gained its position of monopoly through its own effectiveness then the EU does not mind. Only when a firm uses its position to further weaken the industry and improve its own position will the EU get involved as it is deemed an anti-competitive practice. A firm can use many anti-competitive practices to improve its position. A company will lower is price and drive out competition, before raising them higher when it has succeeded. It is illegal in the UK. Two companies which are continually looked at by the EU for their use of their dominant market position are Coca-Cola and Microsoft. Both have been hit with sanctions against them and have the threat of fines hanging over their heads if they do not comply with what they have been told. Microsoft has been hit with record fines and has continually lost appeals to try to overturn those fines. Coca-Cola has been forced to give up its restrictive practices and allow retailers to sell other soft drinks. It also has the threat of a 10% fine of its annual turnover if it fails to comply. “While mergers of firms can expand markets and bring benefits to the economy, some combinations may reduce competition by creating cartel-like conditions, in which there is a dominant company raising the prices, reducing choice for consumers or by less technological innovations (europa.com). So the role of the EU is to eliminate the mergers that would distort competition and which would lead to consumers having limited choice. Article 82 of the Treaty does not forbid a dominant position, but prohibits the abuse of a dominant position.

The European standard for abuse seems to be more based on extensive analysis, focused on consumer welfare. However, the perception is that in Europe, the conduct focuses more on the effect on competitors than on competition that is on consumers. Article 82 states that ‘any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between states’. In Europe legal and economic analysis seems to be guided by the presumption that dominant firms will generally be successful in their exclusionary practices, will raise prices and therefore will end up harming consumers.

“Complaint-led investigations which focus on alleged anti-competitive activities may not always uncover wider competition problems, including regulatory barriers which disadvantage consumers. This approach left the Commission vulnerable to criticism that it favors competitors not consumers.” The Commission has also lacked the tools to remedy many competition problems in consumer markets. The Commission has responded to criticism that it needs to more actively focus on consumer detriment, and give a greater voice to consumers in its competition deliberations. It has stressed the importance of consumers in its most recent statement of competition policy (A pro-active competition policy for a competitive Europe, April 2004). The Commission is committed to ‘the better integration of consumers’ interest in its competition policies. Meanwhile, Director-General SANCO’s latest action plan for consumer policy (Healthier, safer, more confident citizens: a health and consumer protection strategy, April 2005) stresses the need to integrate consumers into all aspects of EU policy-making. However, the plan fails to make any mention of the role competition can play in promoting better consumer policies. The Commission has sought to involve consumer groups directly in its competition investigations by establishing a consumer liaison officer within Director General Competition. The officer’s task is to increase contact with consumer groups and ensure they are better involved in DG Competition’s work. The liaison officer is also tasked with improving co-operation between DG Competition and other DGs on consumer issues. However, the Commission is now seeking to raise the overall level of competition within the EU’s single market; it aims to become an advocate of the benefits of competition, both inside its own bureaucracy and in the wider EU (europa.com). “The Commission should do more to involve consumer organizations in the competition process and enable them to bring their own complaints on sub-optimal functioning markets. This is the best way for it to guarantee the continuing success of EU competition policy, and effectively promote the long term competitiveness of the EU economy.” The EU’s competition powers are limited to remedies connected to anti-trust, mergers and state aid they do not deal with other areas of consumer detriment such as those relating to asymmetries of information and unfair commercial practices. Nor is there any effective mechanism for passing on market problems which fall outside DG Competition’s remit to other DGs for action. However, the Commission can no longer ignore consumer competition issues. This means the Commission should place a greater focus on market investigations: actively seeking out barriers to competition in the EU economy.”

In conclusion, the primary goal the European Union competition policy is to protect consumers from anti-competitive practices and to promote the working of the single market. The policy aims to increase benefits to society by securing competitive markets; it aims to remove national barriers to inter-state competition and to prevent private barriers to competition. “The EU has been very active in the field of consumer protection, producing a considerable volume of directives which require member states to regulate consumer protection to a particular standard.” The criteria set out by the Commission, and drawn from EC jurisprudence, seem to show that ample consideration is given to the possibility that arrangements and practices may result in positive effects on consumer welfare. Competition policy aims to offset market failures arising from scale economies and market power. “Moreover, the European Commission regards industrial policy not as an end in itself but as a mean of facilitation and defending the Single Market.” Without the EU policies on competition and industry, the benefits of the Single European Market would be simply undermined. “EU competition policy applies only to inter-country trade, targeting the behavior and conduct of firms that could frustrate the process of EU integration through trade in goods and services. It is an important feature of the development of the EU single market.’ source: .” Article 81 prohibits agreements and concerted practices affecting trade between Member States of the European Union, and which have as object or effect the restriction of competition within the European Union. This article is a direct result for the final consumer is an increase in market prices, but will cause good quality at competitive price which means consumers can buy good quality for a reasonable price. There are four main areas of action of European competition policy which include cartels, merger and state aid control, and liberalization. Merger control ensures the diversity of the market and low prices for the consumer. The EC can exempt companies from application of Article 81. The clearance decision by the EC is based on economic welfare effects of the agreement. One of the aims of the Competition Policy of the European Union is to foster competition and to develop level playing field in the Single Market. EU competition policy aims at preventing excessive market power and other distortions applying to intra-EU trade. “It is hoped that in these circumstances future consumer benefits from innovation will outweigh the welfare costs of allowing firms to work together in the short-term.” All such agreements must be brought to the Commission’s attention to ensure that they do not become a base for the setting up of cartels. The European Commission has adopted Directives on the basis of the legal right given by the TEC, and there has been a significant increase in the opening up these markets since 2004. Major decisions are on postal services, mobile telecommunications, airports, ports and maritime transport, and finally on insurance and banking sectors. Within the opening up of these sectors to competition, the consumers have started to enjoy lower prices, especially in the services of airlines and telecommunication. Therefore, I would agree that the primary function of the European Union’s competition policy has been the protection of consumer welfare.

REFERENCES

Neelie Kroes, European Commissioner for Competition

OECD, Abuse of Dominance and Monopolization, quoted, p. 219

European Parliament: Policy Fact Sheet Europa: competition policy summary

EU Business News (competition news)

European Business fourth Edition Simon Mercado * Richard Welford, Kate Prescott

EU Competition Policy and the Consumer, European Commission documents, 2004, p. 14.