The Competition Rules

Up until twenty years ago, there were only a handful of competition laws and competition authorities around the world.  Today there are over 100.   Competition rules are increasingly global, increasingly important, and increasingly in the public eye. Competition law disputes are frequently covered in the business pages of newspapers and often make the front page.

So what are these competition rules?  They are rules that are aimed at ensuring that markets operate as efficiently as possible: that consumers get the best choice of products and services according to their demands, and that companies that produce those products and services succeed – and those that don’t, don’t.

But not everything that could make markets operate efficiently is a matter for the competition rules.  Rather, the rules only lay out certain specific prohibitions.

In most countries there are three.

First, virtually every jurisdiction prohibits price fixing or market sharing agreements between competing companies; for the EU, the prohibition is in Article 101 of the TFEU.  Consumers get better products and lower prices when firms compete.  So, for example, both the EU and the US  authorities have condemned price fixing arrangements among airlines that agreed prices for fuel surcharges on a wide range of routes around the world.  Although they are not the only agreements between companies that are prohibited, cartels are widely regarded as the worst form of anti-competitive behaviour and are heavily punished.  As well as high fines on the companies, some jurisdictions – though not the EU – can also disqualify individuals involved from acting as company directors, or send them to jail.

Second, abuses of monopoly power are also banned (Article 102 of the Treaty).  Monopolists who try to gain custom not on the basis of their better products or services but by trying to exclude their rivals face enforcement action that could restrict their behaviour and, in the EU but not the US, impose fines. Both EU and US authorities have taken action against monopolistic behaviour by companies such as Microsoft (for the European Commission, see here; for the US, see here).

Third, while many mergers pose no problems under the competition rules, some reduce competition by eliminating an important competitor from the market.  This kind of merger reduces the overall efficiency of companies on the market, rather than increases it. In the EU the prohibition is not in the Treaty itself, but in the Merger Regulation.  In recent years the Commission has prohibited very few mergers, but has, for example, banned the proposed mergers between Ryanair and Aer Lingus in 2007 and Olympic and Aegean in 2011, mergers which would have led to dramatically reduced competition on the Irish and Greek markets respectively.

The EU competition system also has two additional sets of rules that apply to the actions of Member States, and not just companies.

The Treaty prohibits state monopolies unless those monopolies serve a legitimate public objective (Article 106 of the Treaty); absent such an objective the sectors concerned must be liberalised – opened to competition.  It was these provisions that opened up the telecoms markets in the 1990s and the energy markets in the last decade.

The Treaty also prohibits certain forms of State aid – State aid which does not serve a legitimate public objective (Article 107 of the Treaty).   The State aid provisions are similar to, but more extensive than, the WTO anti-subsidy provisions.

That the EU rules include prohibitions on state action reflects in part the greater role that states have historically had in intervening in the economy compared to, for example, the US.  It also reflects the integrated view of the original drafters of the treaty that competition and markets may be undermined just as much by state action as by that of companies, and the risks that intervention to protect national companies may bring.

With these last two provisions, the EU Treaty has a more complete set of competition rules than any other jurisdiction.

All of these rules, however, have similar goals – making markets work better.

 

[Note: this article was originally published in the online magazine ESharp in 2011. The publication date of this blog post reflects the date of original publication.]

 

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