European Competition Law (II)2017

Objectives

1. Generally examine the area of industrial economics;o Appreciate the main schools and trends of industrial

economics;o Understand the objectives of economic models.

2. Gain a general understanding of the types of objectivesthat are associated with competition and competitionpolicy in the EU.

Reading

The following reading is essential: • Richard Whish, David Bailey, Competition Law (8th Edition),

Chapter 1• Alison Jones, Brenda Sufrin, EU Competition Law: Text,

Cases, and Materials (6th Edition) (Chapter 1)• Gunnar Niels, Helen Jenkins, James Kavanagh, Economics for

Competition Lawyers (2nd Edition), Chapter 1

Lecture IICOMPETITION ECONOMICS

What is competition economics?

“Industrial organization studies the exercise and control of marketpower. To this purpose, it builds models that capture the essenceof the situation. Thee predictions of the model can then be testedeconometrically and possibly in the lab or the field. In the end, thereasonableness of, and robustness to modeling assumptions andthe quality of empirical t determine how con dent economists arein making recommendations to public decision-makers forintervention, and to companies for the design of their businessmodel.” (Jean Tirole)

The U.S. influence

Perfect competition

Perfect competition is a market structure where many firms offer a homogeneousproduct. Because there is freedom of entry and exit and perfect information, firmswill make normal profits and prices will be kept low by competitive pressures.

Characteristics

1. Many sellers: there are enough so that a single seller’s decision has no impacton market price.

2. Homogenous or standardized products: each seller’s product is identical to itscompetitors’.

3. Firms are price takers: individual firms must accept the market price and canexert no influence on price.

4. Free entry and exit: no significant barriers prevent firms from entering orleaving the industry.

Common market structures

Perfect Monopoly Oligopoly Contestable

Assessing market structures

• The Structure → Conduct → Performance Paradigm and the Harvard School

• The Chicago School• Post-Chicago• Neo-Chicago• Contestable Market Theory• Ordoliberalism

The Structure → Conduct → Performance Paradigm and the Harvard

School

The Chicago School

Post-Chicago

Neo-Chicago

Contestable Market Theory

Ordoliberalism

What are the benefits to competition?

At its simplest –– the benefits of competition are:• lower prices• better products• wider choice• greater efficiency than would be obtained under

conditions of monopoly. Whish and Bailey (p.4)

Can competition fail?

• Suppose, hypothetically, that there is a single producer ofapples. What happens to price and quantity? Themonopolist clearly can do better than set the price at €1and make only a ‘normal’ profit. It can restrict output, thuscreating some artificial scarcity, and raise the price, is thisa competitive failure?

Can competition fail?

• Suppose, hypothetically, that there are two producers oforanges (A and B). What happens to price and quantitywhen A and B agree to charge the same price as eachother? What happens when A and B agree to divide theorange market equally and not compete with each othergeographically? Are these activities competitive failures?

Does competition always work?

Economic theory has contributed to a greaterunderstanding of the effects of certain common businesspractices that regularly become the subject of competitioninquiries. When are these practices anti-competitive andwhen not? The answer is not always obvious. (Economics for CompetitionLawyers (2nd Edition), pg 2)

Lecture IICOMPETITION POLICY AND COMPETITION LAW

Competition law

• Is there a role for law in competition failure?– Competition rules are necessary to deal with market imperfections and failures. In

particular, left alone to determine their own conduct, firms are likely to combine orcollude in a way which is profitable to them but which works to the detriment ofsociety as a whole. Adam Smith himself described the tendency of those operatingwithin the same trade to conspire to fix prices, in what we now call cartels. Onmarkets where only a few firms operate without any one of them dominating (calledan oligopoly) they may be able to behave as monopolists by acting together withoutconspiring. (Jones and Sufrin, chapter 1)

• Competition authorities and courts have to distinguishbetween business practices that are on balance pro-competitive (they do more good than harm to competitionand efficiency) and those that are on balance anti-competitive. (Economics for Competition Lawyers (2nd Edition, chapter 1)

Economic context in the EU

“Article 3 of the Treaty of Rome set out a broad range of the ‘activities’ ofthe Community. This included a highly significant provision, Article 3(1)(gwhich stated that the activities should include:

a system ensuring that competition in the internal market is not distorted.

Article 3(1)(g) was of great importance because it embedded theprinciple of undistorted competition in the fundamental provisions of theTreaty.

The Court saw it as the foundation for the specific competition rules andreferred to it in interpreting those rules, most famously in the seminalContinental Can case.”

(Jones and Sufrin, chapter 1)

Economic Efficiency and Welfare

Economic Freedom and the Process of Competition

Protecting Competitors

Fairness

Public Policy and Socio-political Factors

Treaty changes: TFEU

Protocol No. 27 on the Internal Market and Competition statesthat the High Contracting Parties,Considering that the internal market as set out in Article 3 of the Treatyon European Union includes a system ensuring that competition is notdistorted, Have agreed that: To this end, the Union shall, if necessary,take action under the provisions of the Treaties, including under Article352 of the Treaty on the Functioning of the European Union.

Article 3(1)(b) TFEU states that one of the areas in which theUnion has exclusive competence is:The establishing of the competition rules necessary for the functioning ofthe internal market.

C-52/09, Konkurrensverket v TeliaSonera Sverige AB

20. In order to answer those questions, it must be observed at the outset thatArticle 3(3) TEU states that the European Union is to establish an internal market,which, in accordance with Protocol No 27 on the internal market and competition,annexed to the Treaty of Lisbon (OJ 2010 C 83, p. 309), is to include a systemensuring that competition is not distorted.

21. Article 102 TFEU is one of the competition rules referred to in Article 3(1)(b)TFEU which are necessary for the functioning of that internal market.

22. The function of those rules is precisely to prevent competition from beingdistorted to the detriment of the public interest, individual undertakings andconsumers, thereby ensuring the well-being of the European Union (see, to thateffect, Case C-94/00 Roquette Frères … paragraph 42).