Download THE WORLD BANK

THE WORLD BANK
JUDICIAL REFORM FOR JORDAN
Module 1: Competition/Anti-Trust Law
23 March 2005
Diane P. Wood
Circuit Judge, U.S. Court of Appeals for the 7th Circuit
Senior Lecturer in Law, The University of Chicago
I. Introduction to Competition Law
A. History
1. In the United States: The antitrust laws grew up with the Industrial
Revolution and the growth of the national economy. The 1890 legislation known
as the Sherman Act was inspired by several goals: reining in the power of the
huge “trusts” that had come to dominate various sectors of the economy;
addressing abuses such as predatory practices and harm to consumers; responding
to various populist agendas. Over the 115 years of its history, the antitrust laws in
the United States have evolved, largely through judicial interpretation, but to
some degree through additional legislation. Today they are understood as laws
designed to protect the competitive process, not any particular competitor. The
overriding goal is to assure consumer welfare, in the sense of the most efficient
allocation of resources for the economy.
2. Globally: Until the period after World War II, very few other countries
had strong, effectively enforced, competition laws (as antitrust laws are more
typically known outside the United States). In the 1950s, however, the then-new
European Common Market decided that competition rules were essential if it was
going to create an effective internal market. It therefore included competition
articles in both the 1952 European Coal and Steel Treaty and the 1958 Treaty of
Rome, the two earliest treaties entered into by what is now the European Union.
Today, the EU’s competition rules govern not only the 25 member states of the
Union, but they are also emulated by numerous other countries around the world,
some of which hope eventually to join the EU, and others of which simply find
the EU’s rules to be a useful model on which to base their own law.
Outside the EU, many other countries were also either strengthening or adopting
competition rules during the time period beginning around 1960. Today, more
than 100 countries have competition laws. One good place to find an overview of
these laws is on the website of the relatively new International Competition
1
Network, www.internationalcompetitionnetwork.org, which now has
approximately 75 member states. ICN members work together to exchange
experiences, to find better ways of harmonizing their efforts with respect to
matters of common concern, and to educate countries with newer systems. To
similar effect, the Organization for Economic Cooperation and Development in
Paris has held a number of Global Competition Fora, which have been attended
by many countries with newer laws.
Developments in competition law have been especially important for
countries moving from a system of government control of the economy, whether
that control was socialist or simply reflected a preference for state ownership of
firms, to those moving to a more market-based economy. Thus, not only the
countries of central and eastern Europe that were part of the former Soviet sphere
of influence, but also many countries in Latin America, Africa, and Asia, have
turned to competition law to ensure that the potential vacuum left by deregulation
or privatization is effectively addressed by competition laws.
B.
Purpose
1. Reviewing competition laws around the world, and even looking just at
the history of the US antitrust laws, a number of different purposes can be found.
They include the following:
$
$
$
Economic efficiency
Total social welfare (balancing producer and consumer welfare)
Preventing monopolists from controlling too much wealth (i.e. addressing
the distributive consequences of monopoly)
Code of fair business behavior (preventing anticompetitive exclusionary
practices, predatory practices, etc.)
Protecting market access (usually for smaller competitors, or national
companies)
$
$
2. In the United States, the first of these has come to the forefront. This is not
because the other goals are somehow unworthy; it reflects instead deeper
concerns about how much interference in private business decisions is proper for
competition authorities and courts, and it assumes that certain goals, such as
development opportunities for small competitors, are better addressed through
other mechanisms.
C.
Relation to Other Laws
2
1. Foundation on which competition laws rest:
$
$
$
$
$
$
Laws defining private property rights
Laws protecting intellectual property
Enforceability of contracts
Infrastructure that allows entry into, and exit from, markets
Bankruptcy laws
Functioning financial markets
2. Competition law and other regulatory regimes
$
$
$
$
Telecommunications
Electric and other utility regulation
Banking
Insurance
II. Key Substantive Provisions in Competition Laws
A.
Anti-Cartel Rules
1. What is a “cartel”? Professor Herbert Hovenkamp defines it as “an
agreement among otherwise competing firms to reduce their output to agreed
upon levels, or to sell at an agreed upon price.” Hovenkamp, Federal Antitrust
Policy: The Law of Competition and Its Practice 144 (2d ed. 1999). Normally, the
agreement may also address economically equivalent matters, such as reduction in
output, allocation of customers or geographical territories, or bid-rigging.
2. Why are these agreements bad?
$
They lead to a reduction in output below that which would be produced in
a competitive market. Some people who would be willing to buy the product
cannot obtain it, and must settle for their second choice.
$
There is both a “deadweight” loss from cartels, to the extent that they
behave in the same way as a single-firm monopoly, and a transfer of wealth from
customers to the cartel members. Almost all economists agree that the deadweight
loss is harmful to society. From a social policy standpoint, many also believe that
the transfer is undesirable. In private damage suits in the United States brought
against cartels or single-firm monopolists, the measure of damages is generally
the amount of the transfer – put differently, the amount by which the cartel or
monopoly price exceeds what the competitive price would have been.
3. US law: Sherman Act § 1: agreements between firms that produce
close substitute products (that is, agreements between “horizontal” competitors)
3
are per se illegal, if those agreements fit the cartel model.
$
Note: not all agreements between competitors are automatically illegal.
The court or competition authority must examine the agreement first to see if it is
one with no purpose except to fix prices, reduce output, etc., and thereby to enrich
the members, or if on the other hand it is one likely to lead to productive
efficiencies. An example of the latter might be a joint research and development
agreement between two automobile manufacturers to find a better pollution
control technology.
$
If the agreement is per se illegal, the court will not permit the firms to
defend it on the ground that competition itself is bad for this industry (so-called
“ruinous competition”).
$
If the agreement is per se illegal, the parties cannot defend it on the
ground that they have no power to affect the overall market price or other market
conditions for the product or service
$
Although the terminology differs in the EU system and in other
competition law systems around the world, the concept of the near-automatic
illegality of cartels is widely accepted. Note, for example, the OECD resolution to
this effect.
4. Other types of horizontal agreements
$
Joint ventures: Agreements among firms, implemented either contractually
or through creation of new entity, to accomplish a particular purpose.
These agreements can enable the group to carry on an activity more
efficiently, to improve on information available to all members, to reduce
transaction costs, to eliminate free rider problems, or to achieve other
desirable goals.
Group boycotts/concerted refusals to deal
Standard-setting organizations
$
$
$
Useful test: Would the firms wish to engage in this arrangement if
collectively they held a minor position in the market (well less than 30%,
for example)? If so, then it is worth searching for the possible efficiency
explanation.
B.
Vertical Arrangements
1. Definition: arrangements between or among firms that produce
complementary products or services.
4
2. Typically looking at agreements between firms at different levels of the
production/distribution chain: input producer to manufacturer, manufacturer to
wholesaler, wholesaler to retailer, retailer to final consumer.
3. Price versus non-price restraints
$
Price restraints (often called resale price maintenance) occur, for example,
when a manufacturer specifies to a retailer the minimum price at which the
product must be sold. In almost every competition law system in the world
(with some exceptions, such as Mexico), such agreements are unlawful.
$
Non-price restraints: These include restrictions on locations for resale,
customers, territories, etc.
$
Economically, the explanations for price and non-price restrictions are
very close, if not identical. The manufacturer wants to induce a certain
level of services from the distributor, because the manufacturer believes
that more product will be sold this way. The services are not free, of
course, and so the manufacturer uses the vertical restriction as a way of
compensating the retailer for providing the services. If the manufacturer is
right, then output will increase; if the manufacturer is wrong, output will
dip and the manufacturer presumably will change strategies.
4. Other vertical restrictions:
$
Tying arrangements: As a condition of obtaining Product (or Service) A,
over which the seller has significant power, the buyer must also take Product (or
Service) B. Example: Microsoft had a monopoly over the Windows 98 operating
system for computers; it told its customers that they had to accept Internet
Explorer as a browser if they wanted Windows 98. The courts ultimately decided
that this was a potentially anticompetitive tie that had to be evaluated under the
US rule of reason. Later, the case was settled with a consent decree, so there was
no final judicial resolution of the legality of the practice.
$
Reciprocal dealing: This is similar to a tie. Company 1 says if you want to
buy Product (or Service) A from us, then you must sell Product (or Service B) to
us.
$
Exclusive dealing arrangements
$
Package discounts
C.
Monopoly or Dominant Firm Cases
5
1. This area of competition law addresses single-firm behavior.
Note: US courts have been far more cautious in addressing this behavior.
This caution is reflected in the strict rules for finding an agreement. There
must be evidence that tends to exclude the possibility of independent
action before an agreement can be found using circumstantial evidence. It
is often hard to distinguish a single firm’s vigorous competition on the
merits from a single firm’s anticompetitive behavior. Rather than risk
punishing healthy competition, we insist on clear proof of agreement. This
leaves the rules for single-firm behavior in place, of course, but singlefirm behavior is punished only if (a) substantial market power exists, and
(b) some form of abusive behavior is involved.
2. US statutory provision: Sherman Act § 2; compare EU Treaty Article 82.
3. Elements of monopolization case:
(1) the firm has “monopoly” power, defined as the power to
raise prices or to exclude competition without regard to what its rivals are
doing; and
(2) the firm has exercised that power, either by unlawfully obtaining the
monopoly power to begin with, or by engaging in anticompetitive
exclusionary behavior that is designed to maintain the monopoly position.
4. Monopoly power: How determine if such power exists? How much power is
too much?
$
Usual process: define a relevant product (or service) market, and
define a relevant geographic market.
$
Identify which firms are in that market, plus which ones very
quickly and inexpensively could be in it
$
$
See how large a share the single firm has
If it has >70%, it probably has monopoly power. Note, however,
that the courts in the US do not use a single benchmark. The authorities in
the EU tend to find “dominance” at lower levels. This is very much a
question of judgment, and the answer will depend on the way markets
operate in the country, ease of entry, strength of international competition,
and other similar factors.
5. Exclusionary acts
6
Difficult to define. Typical list includes various forms of
predation, such as predatory pricing (pricing below cost, under
circumstances in which later recoupment of the losses incurred from the
predation is possible); strategies that will raise rivals’ costs; refusals to
deal when monopolist controls an essential input for others; tying
arrangements; abuse of patents or other intellectual property; price
discrimination.
D.
Merger Control
1. Includes various forms of permanent consolidation of two or more firms, or the
assets of two or more firms. Could be formal merger; could be acquisition of one
firm by another of the shares of the latter; could be asset acquisitions.
2. Many countries require notification to the authorities of planned mergers at a
point before the transaction is complete, so that it can be reviewed for possible
competitive concerns.
3. Reason: once the firms are blended, the only way they can be
controlled is through the single-firm rules. But the merger may create competitive
problems, either because it will facilitate cartel or oligopoly behavior in the
market, or because of unilateral effects, that should be prevented.
4. Merger control is a predictive enterprise. The authorities first, and later the
courts, must use a crystal ball to see if the merger is likely to create
anticompetitive effects. Most mergers will not; thus, this area is one that requires
great economic sophistication, and adherence to the rule followed by the medical
profession: first, do no harm. One particularly difficult issue relates to the socalled efficiencies defense: to what extent will the merger create efficiencies that
could not have been realized in any other way? To what extent should efficiencies
excuse an otherwise troublesome merger?
5. Many countries, including the US, have issued guidelines spelling out the
analysis that is applied to mergers that have been notified to the authorities.
Generally, if the post-merger firm will not have significant market power, then the
merger will go forward. Each market in which the two firms operate will be
evaluated, if they are multi-product or multi-service or multi-area firms.
6. Both horizontal mergers and other mergers (vertical, conglomerate) fall under
the law, but the mergers most likely to receive attention from the authorities are
the horizontal mergers.
III. Analytical Tools and Methods
7
A.
Market Power
With the exception of the “hard-core” cartels, this requirement exists for
almost every other prohibition in competition law. Technically, an economist
would define market power as a firm’s ability profitably to deviate from marginal
cost pricing.
Define “marginal cost”: cost of producing the last unit. Contrast to fixed
costs, variable costs, average costs.
The greater the ratio of the firm’s profit-maximizing price (that is, the
highest price that the firm can charge without losing so many customers that it is
not profitable to go that high – assumes a “downward-sloping demand curve” that is, the lower the price goes, the greater the quantity of the product consumers
will be willing to buy) to its marginal cost, the more market power it has.
Consider this equation, known as the “Lerner Index”: (P-MC)/P, where P=the
firm’s price at its profit-maximizing level of output, and MC=the firm’s marginal
cost at the profit-maximizing level of output.
Problem: Marginal cost is very difficult to measure in the real world. So antitrust
litigators turn to a different way of measuring market power, which is to see how
high the firm’s share is in a properly defined relevant market.
B.
Market Definition Process
Technical definition (see Hovenkamp, supra, at 82): “A relevant market is the
smallest grouping of sales for which the elasticity of demand and supply are
sufficiently low that a firm with 100% of that grouping could profitably reduce
output and increase price substantially above marginal cost.”
Terms to define: elasticity of demand; elasticity of supply
Describe 1992 Merger Guidelines approach to market definition.
Risk of manipulation: monopolists will always want very broad market
definitions, so that their share looks comparatively small (for example, “flexible
wrapping materials” vs. “cellophane,” in famous DuPont litigation); plaintiffs will
always want very narrow definitions, so that the defendant looks very powerful
(“Mont Blanc pens” vs. all fountain pens, or all pens, or all writing implements).
That is why good economic estimates of elasticities and real substitutability at
realistic price levels are critical.
C.
Expert Testimony from Economics: Management Techniques
8
D.
Remedies
Public enforcement: goal is to assure that the market structure is still
conducive to competition, or to assure that following a problem, such as a cartel, a
monopolist, or other issue, that competition can be restored to the market.
Private enforcement: compensation for injuries attributable to the
anticompetitive aspect of the defendant’s behavior. In countries like the US with
private enforcement, this is an important supplement to public efforts.
9