Competition Lawyers Must Understand Economic Concepts

LW302: EU LAW Spring Term Essay

Richard Whish Competition Law 6th Ed.

Discuss with reference to Articles 101 and 102.

It is apparent that when the European Union (hereafter “EU”) was formed that its prime objective was to build an internal market to enable border-free trading amongst member states (“MS”). Clearly with such an economically based aim in mind and that competition policies play an essential part in the creation of such a market (as reinforced by Article 3 of the Treaty of the Functioning of EU [1] (“TFEU”)), it is not shocking to find that competition lawyers will need to comprehend economic concepts in order to correctly understand competition law; this is particularly true when competition in the market is in itself an economic concept. What we will find is that economics actually play a crucial role in the interpretation of the law in this area at different stage; 1) it provides a framework of analysis of competition and its key features and 2) it has an important role in the developments of rules we find in EU Courts’ decision from which we determine whether the behaviour of the firm concerned are to be considered legal or not. In fact this could be seen very clearly in the light of Article 101 and Article 102 of TFEU [2] (the pair of articles that capture two forms of anti-competitive behaviour) which we are going to look at in details below. Accordingly, what we would eventually discover is that what Richard Whish said is indeed correct; competition lawyers have to understand economic concepts in order to appreciate the meanings of terms used and tests applied in establishing elements in Treaty Articles (“TA”).

Before moving on to the TA, we need to first acknowledge the genesis which came to the being of competition law which we know of today. The idea that competitive markets are a desirable framework for welfare and growth was brought about by Adam Smith (an economist and philosopher) in his work “An Inquiry into the Nature and causes of the Wealth of Nation [3] “. Since then, it is recognised and maintained that competition leads to desirable results; it encourages product efficiency, lower prices, it offers an incentive to innovation as well as encouraging firms to discover new areas. Adam Smith argues, thus, that rules should be in place so as to protect the competitive nature of markets. This thinking is acknowledged and accepted and so we have, as a result, a whole body of law governing competition in the EU.

Then, we proceed to look at the two articles that are the key to our assertion, Article 101 and 102 of TFEU [4] . Article 101 governs the control of anti-competitive agreements that prevents, restricts or distorts competition within the EU whilst Article 102, deals with the control of market power; it prohibits the abuse of a dominant position by a firm (or at times a number of firms) in so far that it may affect trade between MS. To prove that a firm had been in breach of either article, it is necessary for a number of elements to be satisfied and what we would find is that it is within the tests used in the establishment of these elements that we find the use of economic concepts. This constitute evidence to what we said earlier; that economic concepts contributes to the development of rules by determining whether the behaviour of the undertaking/s (defined in Hofner [5] ) in question are legal or not. We are going to look at the elements which are of relevance to us in details below.

Article 101

In order to find a breach of Article 101 [6] , it is necessary to find that there is:

“

An agreement between undertakings, a decision by associations of undertakings or a concerted practice;

that may “affect trade between Member States”;

“which have as their object or effect the prevention, restriction or distortion of competition within the common market.”

” [7]

For our concern, we need to look at the 2nd and 3rd element.

First, we need to turn to the element requiring for an agreement, decision or concerted practice. The reason for this element is that if competition law only apply to explicit, formal agreement, then it would be of little practical use since undertakings will simply try to avoid achieving their anti-competitive goals in a less formal way. Therefore, what we see is that it does not only apply to informal, formal agreements (see Chemiefarma [8] and Polypropylene [9] ) but also when a joint intention to conduct themselves in a particular way was expressed (Hüls [10] ). Relating to concerned practices (important for our purposes), there is two contrasting factors which must be considered; 1) firms may be very unscrupulous, they may collude on the basis of mutual understandings or verbal exchange; and 2) It is possible, if the terms have been interpreted widely that it could catch parallel behaviour (i.e. undertakings acting similarly in the market) which is simply a rational and natural response. In such an instance, economic considerations are necessary in determining whether what we have is a concerted practice or not since parallel behaviour may well be caused by market condition as opposed to actual anti-competitive behaviour. The market we are concerned here is an oligopoly (i.e. a market with few firms which are interdependent in their actions) since unlike normal competitive markets where firms are unlikely to charge at the same level except with some collusion, the same could not be said about an oligopoly since there is little product differentiation, high barriers to entry and price transparency. Consequently, it will appear rational, without any agreement or understanding between the firms in such market to mirror behaviour of one another. In such a case, while it is clear that this sort of behaviour will lead to uncompetitive condition as firms could simply set supra-competitive prices or limit output but here, it is recognised that this is a rational response to market condition and thus could not be illegal under Article 101 [11] (see ICI [12] ). What we will find, however, is that oligopolistic market is not something which is easy to recognise without economic knowledge and this reinforces the need for competition lawyers to be aware of economic concepts- see the case of Wood Pulp [13] .

Later, we turn to consider “the object or effect of preventing, restricting or distorting competition in the common market” [14] ; an element of which causes significant disputes since it is possible for the 2nd element to have features that simultaneously enhance and restrict competition. The debate we have here arose because the US adopted what’s called the rule of reason in determining its own provision (something which is equivalent to Article 101 [15] ) – this involves an economic analysis- balancing the pro and anti-competitive effects of the agreement to determine whether is it contrary to US’s anti-trust law; this is not something which we need to investigate since it is not of our concern. What we should note, though, is that in fact this sort of economic analysis plays an important part in the establishment of infringement under this Article (see Société Technique Minière [16] ) as well as determining whether the firm should be exempted under Article 101(3) [17] – which once again re-emphasise what Whish said.

One further point we should note from Article 101 [18] that are evidence of what Whish said is that while it is now established that it applies to both horizontal (made between undertakings at the same level of supply chain) and vertical agreements (made between firms at different level of supply chain- see Consten and Grungdig [19] ), the EU courts and the Commission is still rather benevolent when dealing with the latter- the reason is economical; it poses lesser a threat than that of former; rather it may increase or encourage competition within the market and so could be rather economically beneficial. This is particularly so when the parties to the agreements do not have significant market power.

Article 102

For this article, it is necessary to fulfil three essential criteria;

“

that the undertaking has dominant position,

that there is an abuse of that position and

The abuse must affect trade between Member States.

” [20]

Here we would have to focus on the first and second criteria.

In order to show there is dominance [21] , it is necessary to identify the “relevant market” as well as the market share that the company enjoy. Relating to the first, we have to focus on the economic concept of interchangeability; that is whether the goods or services under scrutiny are interchangeable with other products- if it does it will be held to belong to a larger market but if it doesn’t it will be held to belong to a smaller market (one of its own right). To do this we look at the cross elasticity of the product (an economic measure) which could be looked at from two sides; the demand side of the market or the supply side of the market. A good example of the cross elasticity of demand is United Brands [22] and the question being asked here is; whether the relevant product market was banana (for which is the product that United Brands traded) or the whole fresh fruit market. It was discovered by an analysis that consumers’ buying habits relating to bananas were not heavily affected by the prices and availability of the other fresh fruits and so banana is cross inelastic; the relevant market is therefore the banana market and not the fruits market. With regards to cross elasticity of supply, a good example of this is the case of ICI [23] . The question here is whether is it possible to substitute the relevant supply of raw material with an alternative one without incurring additional costs or risks. The answer is no because Zoja have no alternative supply except for the raw materials supplied by ICI, the product is hence cross inelastic. In connection with market share (i.e. again an economic concept) which the company enjoy; the question is simply what is the market share of the nearest competitor in comparison to the company in question? In United Brands [24] , they have 40-45% of the market and since the nearest competitors only have 16% and 10% meant that they have dominant position in the market.

Next, for our concerns we need to consider “an abuse of position”. What is necessary here is to draw a distinction between the kinds of behaviour which is to be held abusive and ones which are only normal competitive strategy- something yet again could not have been done without using economic analysis and thus could not be done in isolation of economic concepts. The most common form of abuse conducted by firms is one of price discrimination as we saw in United Brands [25] . This occur where goods are sold or being purchased at prices which are not connected to costs. This is exactly what happened in United Brands [26] , they charged banana at a higher price in one MS to another on factors unrelated to costs and thus they were held to have abused its dominant position. In connection to predatory pricing (i.e. when a firm sets out to weaken its competitors by setting low prices on its product), a good example is the case of Akzo [27] ; where the defendant in question reduced its price in order to force the other firm out of business. This was held to be in breach of Article 102 [28] , the Court stated that at 71. “Prices below average variable costs … by means of which a dominant undertaking seeks to eliminate a competitor must be regarded as abusive… A dominant undertaking has no interest in applying such prices except that of eliminating competitors so as to enable it subsequently to raise its prices by taking advantage of its monopolistic position, since each sale generates a loss, namely the total amount of the fixed costs … and, at least, part of the variable costs relating to the unit produced.” [29] [Emphasis added]. What we could see unmistakably from this quote, the economic analysis needed in the establishment of this element, and tests such as market share is that economic concepts play a very important role in the determination of breach of this TA. Terms such as “market share”, “price discrimination”, “variable costs” are all evidently terms from economics and are ones you would not be able to understand unless you understand economic concepts.

After in depth analysis; what we find is that indeed, competition lawyers ought to understand economic concepts; without so they will not be able to appreciate the meaning of the terms used nor would they be able to apply the test used to establish the elements in the TAs that are necessary to prove breach. While arguably, it is true that since we are still dealing with law that we will still find application of common law principle (such as that of de minimis to Article 101 [30] ) but with the substantial amount of economic concepts used in the construction of competition law meant that understanding economic concepts is a must and is not something in which you can escape.