Summary CML - WS 7 & WS 8 - Distribution Agreements and EU & UK Competition Law

(p. 1) 1 Competition policy and economics 1. Introduction 1 2. Overview of the Practices Controlled by Competition Law 3 3. The Theory of Competition 4 4. The Function of Competition Law 18 5. Market Definition and Market Power 25 1. Introduction (A) The growth of competition law Competition law has grown at a phenomenal rate in recent years in response to the enormous changes in political thinking and economic behaviour that have taken place around the world. There are now more than 130 systems of competition law in the world1 . Some of them have been in place for a considerable time: for example, the Sherman Act in the United States was adopted in 1890. The competition rules of the European Union were contained in the Treaty of Rome of 1957, the year in which the German Act against Unfair Restraints of Competition was passed. Competition law in the UK began with the Monopolies and Restrictive Practices (Inquiry and Control) Act of 1948. Most of the world’s competition laws are much more recent than this, however: for example, the Chinese AntiMonopoly Law was adopted on 30 August 2007, and the Philippines adopted its law on 11 June 2015. Numerous laws were introduced in the 1980s and 1990s. Many new ones have been adopted in the twenty-first century, for example in India, Singapore, Malaysia, Hong Kong, Ecuador, Swaziland, Egypt and Nigeria. Competition laws will be found in found in all six continents, and in all types of economies: they are by no means limited to the rich, developed countries; many developing states also have competition legislation. The size of a country is not a determinant of whether it might have a competition law: China and India—with more than three billion citizens between them—have competition laws; but so too do Fiji, Mauritius, the Seychelles and Barbados, with somewhat smaller populations! Many of the countries that had socialist regimes for much of the twentieth century now have competition legislation: this is true of Member States of the EU such as Poland, Romania and Bulgaria; but also of former socialist countries outside the EU such as Russia, Georgia, Armenia and Albania. Competition laws will be found throughout the continent of Africa, from Morocco in the north-west to Zimbabwe and Malawi in the south-east. The ten members of the Association of South East Nations—ASEAN—committed to adopt competition laws by 2015, and all but Cambodia have now done so. More than 135 competition authorities from 122 jurisdictions participate in the work of the International Competition Network (p. 2) (‘the ICN’), a virtual organisation which facilitates cooperation between competition authorities. The ICN has considerable influence by facilitating discussion of competition policy and promoting procedural and substantive convergence in competition laws and enforcement. Its work is considered in chapter 122 . These developments have been dramatic: 30 years ago it would scarcely have been believable that the world of competition law would look as it does today. It is important to try to understand why there has been this proliferation of competition laws. Competition laws give effect to economic policy, and in recent decades economic policy in most countries has tended to favour a free-market economy in which firms compete with one another for customers. Most of the world’s socialist economies have now been dismantled. Many legal monopolies have been abolished in recent years. Economies have been liberalised, trade 1 2 From: Oxford Competition Law (). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: Bodleian Libraries of the University of Oxford; date: 23 January 2020 barriers reduced and many protectionist measures removed. Utility sectors such as gas, electricity, telecommunications and post have been opened up to competition, and many international treaties and agreements have favoured open markets and free trade. Of course none of this is without controversy, nor is it irreversible. Recent events, in particular the financial crisis and the cynical manipulation of markets and disregard for the law in the financial services sector, have tarnished the reputation of liberal capitalism, and it cannot be assumed that there will not be a significant backlash against it. However, for the time being the free-market system is in the ascendancy, and the process of competition is a cornerstone of the free market. (B) Competition law and economics In so far as a country chooses as its instrument of economic policy the free market, there is a strong argument that there ought to be laws in place to ensure that the market functions properly. A central concern of competition law and policy is that a firm or firms can harm competition—and inflict harm on customers and ultimately consumers –where they possess some degree of market power. The concept of market power is an economic one and means the ability to reduce output or capacity, to raise prices, to reduce the quality of products, to limit the choice available to customers or to suppress innovation without fear of a damaging competitive response by other firms. The concern about market power cannot be expressed in a codified table of rules capable of precise application in the way, for example, that laws on taxation or the relationship of landlord and tenant can. The assessment of market power requires careful economic analysis, and lawyers and their business clients often need input from economists in order to reach robust and defensible conclusions. The same is true of the types of behaviour—for example refusals to deal, tying and bundling, predatory pricing, discrimination, mergers—with which competition law is concerned. These are not matters that can simply be analysed in a rule-based way. Competition lawyers must understand economic concepts, and competition economists must understand legal processes. It is common practice today—and much to be welcomed—that competition lawyers attend courses on economics and vice versa. Competition law is about the economic analysis of markets within a legal process; each case will depend on its own circumstances. A (possibly apocryphal) story is that a competition lawyer once remarked at a competition law conference that, in his view, in any competition law case the lawyer should be in the driving seat; and that a competition economist readily agreed, since he always preferred to have a chauffeur. To the extent that this suggests that there is inevitably a conflict between lawyers and economists it is, by now, outdated: it is better to think of (p. 3) the two as copilots of an aeroplane, each understanding the contribution to be made by the other. In the early days of competition law in the EU the role of economics was not particularly strongly emphasised; the same was true in the US in the early years of antitrust law there3 . Competition law developed in a fairly formalistic manner, and there were many more ‘rules’ of a legalistic nature than is the case today. The position—from the middle of the 1990s onwards—has changed dramatically, and it is now widely understood that competition law enforcement is usually justified only where there is a plausible case that a particular practice could lead to significant harmful effects to the competitive process; and that the extent of any harm is related to the degree of market power that a firm, or firms, have or will have on the market4 . An attempt will be made throughout this book to explain the economic rationale for the application of EU and UK competition law. (C) Plan of this chapter Section 2 of this chapter describes the practices that competition laws attempt to control in order to protect the process of competition. Section 3 examines the theory of competition and gives an introductory account of why the effective enforcement of competition law is thought to be beneficial for consumer welfare. Section 4 considers the functions that a system of competition law might be expected to fulfil. Section 5 introduces two key 3 4 From: Oxford Competition Law (). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: Bodleian Libraries of the University of Oxford; date: 23 January 2020 economic concepts—market definition and, more importantly, market power—that are of fundamental importance to understanding competition law and policy. It is hoped that a prior awareness of these concepts will facilitate a better understanding of what follows. The chapter will conclude with a table of market share figures that have significance in the application of EU and UK competition law, while reminding the reader that market shares are only ever a proxy for market power and can never be determinative of market power in themselves. 2. Overview of the Practices Controlled by Competition Law Systems of competition law are concerned with practices that are harmful to the competitive process. In particular competition law is concerned with: • anti-competitive agreements: agreements that have as their object or effect the restriction of competition are unlawful, unless they have some redeeming virtue such as the enhancement of economic efficiency. An example of an illegal agreement would be a cartel between competitors, for example to fix prices, to share markets or to restrict output—often referred to as a horizontal agreement 5 . Agreements of this kind are severely punished, and in some systems of law can even lead to the (p. 4) imprisonment of the individuals responsible for them. Agreements between firms at different levels of the market—known as vertical agreements—may also be unlawful when they could be harmful to competition: an example would be where a supplier of