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‘Modern Competition Policy: A Re-evaluation of economic efficiencies’

In this article, Robin Van Mulders (LLM in International Competition Law and Policy) discusses the applicability of Robert Bork’s welfare standard ‘economic efficiency’ in modern states. It evaluates the effectiveness of the standard in the context of US antitrust law as well as in the context of EU’s market integration goal and developing countries. The article suggests that the previous belief that economic efficiency as a competition objective is not a one-size-fits-all objective that can be applied and implemented in competition regimes, but that rather, due consideration ought to be given to the jurisdictions stage of economic development and current market structures...

MODERN COMPETITION POLICY: A RE-EVALUATION OF ECONOMIC EFFICIENCIES

Introduction

Since the 1960s the Chicago School has promoted the view that the only goal of US Antitrust law should be the pursuit of competition through economic efficiency.[1] This view has resonated greatly with the international community,[2] and is generally contrasted with the European Union’s goal of achieving ‘workable competition’ i.e. aiming to further the integration of the single market as promulgated in Metro I.[3] These two contradicting views have shaped the development of competition policy, and the question that this paper will aim to answer is whether such pure economic efficiency is a suitable goal. It is argued here that economic efficiency, while suitable and effective in industrialised states, it is not suitable in a variety of circumstances. The argument will be based on an evaluation of Robert Bork’s argument that economic efficiency should be the sole policy objective, followed by a consideration of the impact that the EU’s ‘market integration’ goal, and any impact that the stage of a country’s socio-economic development may have on what other policies may be pursued rather than pure efficiency.

Economic Efficiency

Economic efficiency as a sole objective of any antitrust statute is intuitively appealing for numerous reasons. Its basis in price theory[4] where allocative efficiency is produced under conditions of perfect competition provides a measurable criterion that can be measured and assessed by the use of economic analysis. Robert Bork provides five justifications on why the criterion is superior to others, it:

  • assures legal certainty,
  • it is politically neutral,
  • maintains the integrity of the legislative process,
  • requires real, rather than abstract economic distinctions, and
  • avoids arbitrary and anti-consumer rules.[5]

An ancillary benefit of the criterion is that it produces clear objectives for competition to pursue. Since the the antithesis to perfect competition, and as such allocative efficiency, is monopoly, where market power can be exercised to raise prices above the competitive level, behaviour that is prone to strengthen market power ought to be discouraged. This is evident since the majority of competition regimes have some form of regulation of dominant corporations and implement a cartel offence.[6] Furthermore, the treatment of horizontal agreements in general across jurisdictions, in particular the US and EU, is consistent. In the US they have been considered per se illegal since the introduction of the Sherman Act in 1890.[7] In the EU any form of coordinated practice is considered as having as its ‘object’ to restrict competition[8] and is a ‘hard-core’ restriction under the Block Exemption Regulation.[9] The uniformity of approach across jurisdictions illustrates the clarity that comes from using a measurable criterion like economic efficiency.

The mentioned benefits, however, do not suggest that it is superior in every respect. Substantial criticism can be attracted on the basis that the theory is informed by static, rather than dynamic, analysis. This means that the model of perfect competition does not take into account the necessary profit levels required to achieve long term economic investments in research and development,[10] and is blind to the implications that luxury goods have on a demand curve.[11]

Furthermore, recent research illustrates the lack of ability that US antitrust policy has in terms of achieving distributive effects or tackling inequality. In their article,[12] Baker and Salop argue that the efficiency focused antitrust policy has contributed to increasing corporate market power, and as such contributes to increasing inequality. They point to the fact that ‘median income and wealth both declined in real terms between 2010 and 2013’ while ‘the real income of the 1% grew by 31.4%.’[13] They also point to the similarity of the increasing wealth inequality, with the ‘bottom 90% has steadily declined since the mid-1980s, while the wealth share of the 0.1% has grown from 7% in 1989 to 22% in 2012’[14]. The steady increase in wealth divergence suggests that increased economic efficiency may not work in the interest of consumers in the long run, but will actually only contribute to the wealthiest of the wealthiest.

EU and the Single Market goal

When assessing the goals of EU competition policy, and whether it should pursue only economic efficiency, it is important to consider the context in which it was created. Competition rules were envisaged as early as the European Coal and Steel Community 1952 Articles 65 and 66 in relation to coal and steel, and subsequently implemented in the  Treaty of Rome 1958 in Articles 85 and 86 EEC. These rules are currently found in Article 101 and 102 TFEU. They have since Metro I[15] been interpreted according to Art 3(3) of the Treaty on the EU (TEU) to provide for ‘workable competition’, meaning competition necessary for the objectives in the Treaties to be achieved.[16]

Part of the difficulty with comparing the US with the EU in a competition context is the fact that you are comparing, in common terms, apples and oranges. While the US is a full-fledge federal state, the EU is a supranational organisation and as such does not in my view fulfil the preconditions that are necessary in order to ably implement pure economic efficiency as a policy goal. This is particularly evident in the context of the EU’s approach to vertical agreements which differs starkly from that promoted in the US Supreme Court decision Leegin Creative Leather Products, Inc v PSKS, Inc.[17] where they removed the per se illegality rule against resale price maintenance in favour of a rule of reason approach. The Court of Justice has long held a particular skepticism against the general pro-competitive nature of vertical agreements[18] due to their ‘teleological approach’ towards market integration of the single market.[19] This goal has been safeguarded through early cases such as Consten & Grundig[20]  and reaffirmed recently by the Court of Justice in GlaxoSmithKline v Commission (GSK).[21] The necessary pre-condition that this approach to vertical agreements is trying to remedy is that the EU does not have full market integration and as the CJEU time and time again has successfully shown, as in Consten & Grundig and GSK, vertical agreements are prone to lead to barriers of trade between Member States, something which the EU is intrinsically attempting to avoid.[22]

The benefits of this additional goal, outwith economic efficiency, are plentiful. As part of a substantial internal market covering 500 million people, the EU is an attractive market for external corporations to invest in and establish a competitive foothold anywhere across the union. It also attracts liberal trade deals, intended to bolster competition for the benefit of economically efficient companies that can serve to lower prices and lead to new products on the markets to the benefit of consumers.[23] Furthermore, the breadth and diversification of markets across the EU means that larger corporations may achieve economies of scale as a result of common investment in projects. Consider the Airbus Industrie[24] joint venture, now competing effectively in several commercial airline markets against the American National Champion Boeing.[25] The access to these macro-economic benefits illustrate the benefit that an ancillary goal such as market integration may have, despite its negative implications in preventing pro-competitive vertical agreements.

Developing Countries – Calls for Unique Approaches

A relevant consideration on the question of objectives of competition policy concerns the past 20 years experience of ‘legal [transplanting]’ competition regimes alongside the underlying policy objectives of either EU or US approaches.[26]  The relevant question arising from this is whether this is appropriate in developing countries, where it might be more relevant to focus on issues of enforcing limited competition issues such as cartels or abuses of dominant positions in markets.[27]

Research considered in two separate articles, one by Evenett[28] and one by Sing,[29] suggest that it is naïve to implement economic efficiency as the sole objective of competition policy, and that dynamic and stable competition may be more appropriate.[30] It is pointed out that until the 1990’s, there were only 16 developing countries which operated under a formal competition policy, and the suggested reason stated was that it was because it was not necessary as majority of countries had substantial state control over the economy, which would regulate any anti-competitive behaviour immediately.[31] The research thus suggests two main issues to consider when implementing competition policy. Firstly, what is the institutional design of the country and secondly, how do we ensure that the competition policy is pursued and enforced, rather than merely being unenforced legislation. William Kovacic suggest that the best way of implementing an effective policy objective is by implementing simple competition rules, targeting cartels and natural monopolies, especially in countries where the state has had a great influence in structured market planning as in former communist and socialist states.[32]

An example of how this policy can be implemented is illustrated by the Chinese Anti-Monopoly Law 2007. While Article 1 of the legislation sets out numerous goals, including improving economic efficiency, they show deference to the historical emphasis on large state-owned enterprises in Article 7, thus exempting their legitimate business activities from the law. It is a compromise in the move to liberalising a former completely state-operated market, and shows a possible way in which the state can pursue several objectives.

Conclusion

In summary, this paper has questioned whether it is suitable to pursue economic efficiency as a sole objective in any given jurisdiction. While economic efficiency has been substantially pursued in a US context, and to some extent in an EU context, it is not a ‘one size fits all’ objective. Due regard needs to be had to alternative objectives, especially with regard to supranational organisations which do not have full market integration as well as developing countries which may need to pursue general market liberalising policies where competition policy is a means to an end, rather than pure economic efficiency in itself.

                      

Bibliography

Books

Robert Bork, The Antitrust Paradox: A Policy at War with Itself, p. xi. (1993: The Free Press, New York).

Treaties, Legislation and Regulations

Treaty on the European Union

Treaty on the Functioning of the European Union (TFEU)

Sherman Act 1890

Anti-Monopoly Law 2007

Regulation 330/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices

Cases

Etablissements Consten SA and Grundigverkaufs-GmbH v EEC Commission [1966] ECR 429

GlaxoSmithKline v Commission [2010] 4 CMLR 2

ICI v Commission (Dyestuff) [1972] ECR 619

Leegin Creative Leather Products, Inc v PSKS, Inc 551 US 877 (2007)

Commission Decision, Boeing/McDonnell Douglas Merger (1997) 2598

Metro-SB-Grossmarkte GmbH & Co. KG v Commission [1977] ECR 1875, [1978] 2 CMLR

United States v Addyston Pipe & Steel Co 85 Fed 271 (1898)

United States v Joint Traffic Association 171 US 505 (1898)

Journal Articles

Jonathan B. Baker & Stephen C. Salop ‘Antitrust, Competition Policy and Inequality’ (2015) 104 Georgetown Law Journal, 1

Simon J Evenett, (from Gal et al.) ‘Competition law and the economic characteristics of developing countries’ 15

Alison Jones ‘Analysis of agreements under US and EC antitrust law – Convergence or divergence?’ (2006) 51 Antitrust Bull 691

William E. Kovacic ‘Designing and Implementing Competition and Consumer Protection Reforms in Transitional Economies: Perspectives from Mongolia, Nepal, Ukraine, and Zimbabwe’ 44 DePaul L. Rev 1197 (1995)

Barak Y. Orbach ‘The Antitrust Consumer Welfare Paradox’ (2010) 7(1) J Comp. L & Econ 133

Ajit Sing ‘Competition and Competition Policy in Emerging Markets: International and Developmental Dimensions’ (UNCTAD/GDS/MDPB/G24/18, 2002)

George Telser ‘Why should Manufacturers want Fair Trade?’ (1960) 3 J Law & Econ 86

 

Practice Guidance and Websites

ICN, ‘Recommended Practices on Competition Assessment’ (ICN Doc 978), p.1 (Access on 20th August 2016)

TTIP (http://ec.europa.eu/trade/policy/in-focus/ttip/about-ttip/ (Accessed on 20 August 2016)

CETA (http://ec.europa.eu/trade/policy/in-focus/ceta/ (Accessed on 20 August 2016)

Airbus info: (https://en.wikipedia.org/wiki/Airbus) (Accessed on 20 August 2016)

 

[1] Robert Bork, The Antitrust Paradox: A Policy at War with Itself, p. xi. (1993: The Free Press, New York).

[2] Established ‘best practice’, See:  ICN, ‘Recommended Practices on Competition Assessment’ (ICN Doc 978), p.1.

[3] Metro-SB-Grossmarkte GmbH & Co. KG v Commission [1977] ECR 1875, [1978] 2 CMLR 1.

[4] For explanation of price theory, see Bork (n 1), p. 90-91.

[5] Ibid, p. 81.

[6] On Abuse of Dominant Position, See: Article 102 Treaty on the Functioning of the European Union (TFEU); §2 Sherman Act 1890 or Article 6 of Anti-Monopoly Law 2007 (AML) (China). On Cartels, See: Article 101 TFEU, §1 Sherman Act 1890 or Article 3 AML.

[7] For example see: United States v Addyston Pipe & Steel Co 85 Fed 271 (1898); United States v Joint Traffic Association 171 US 505 (1898).

[8] ICI v Commission (Dyestuff) [1972] ECR 619 (Concerted Practices).

[9] Regulation 330/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, Article 4.

[10] Barak Y. Orbach ‘The Antitrust Consumer Welfare Paradox’ (2010) 7(1) J Comp. L & Econ 133, 141.

[11] Ibid, 153-154.

[12] Jonathan B. Baker & Stephen C. Salop, ‘Antitrust, Competition Policy and Inequality’ (2015) 104 Georgetown Law Journal, 1.

[13] Ibid, 1.

[14] Ibid, 3.

[15] (n 3).

[16] Ibid, at

[17] 551 US 877 (2007).

[18] On pro-competitive nature, see: George Telser ‘Why should Manufacturers want Fair Trade?’ (1960) 3 J Law & Econ 86.

[19] Alison Jones, ‘Analysis of agreements under US and EC antitrust law – Convergence or divergence?’ (2006) 51 Antitrust Bull 691, 741.

[20] Etablissements Consten SA and Grundigverkaufs-GmbH v EEC Commission [1966] ECR 429.

[21] [2010] 4 CMLR 2.

[22] See Art 3(3) TEU, Arts 34-46 TFEU.

[23] See EU’s ongoing trade negotiations, TTIP (http://ec.europa.eu/trade/policy/in-focus/ttip/about-ttip/ and CETA (http://ec.europa.eu/trade/policy/in-focus/ceta/ (Both accessed on 20 August 2016).

[24] https://en.wikipedia.org/wiki/Airbus (Accessed on 20 August 2016).

[25] For the previously competitive concerns, See: Com Decision (1997) 2598 Boeing/McDonnell Douglas Merger.

[26] Simon J Evenett, (from Gal et al.) ‘Competition law and the economic characteristics of developing countries’ 15, 17-18.

[27] Ibid, 17.

[28] Ibid.

[29] Sing, A. ‘Competition and Competition Policy in Emerging Markets: International and Developmental Dimensions’ (UNCTAD/GDS/MDPB/G24/18, 2002).

[30] Ibid, vii.

[31] Ibid, 6.

[32] William E. Kovacic. ‘Designing and Implementing Competition and Consumer Protection Reforms in Transitional Economies: Perspectives from Mongolia, Nepal, Ukraine, and Zimbabwe’ 44 DePaul L. Rev 1197 (1995), p. 1203-1206.

 

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