Competition law

1. Competition law • Three sets of issues: • Unfair competition • Misuse of monopoly power • Mergers

2. Sources of Confusion in Competition Law • Economic definition of monopoly vs. Legal definition of monopoly • Business competitors that fail to compete with one another (by cooperating illegally) violate the laws. • BUT, businesses that compete too aggressively also violate the laws • Forms of competition that are not illegal for one firm (a non-monopolist) may be illegal for another (a monopolist)

3. Sources of Confusion (cont’d) • Changing philosophies over time: • Movement away from presuming harm to consumer and toward requiring government/plaintiff to prove harm (increasing application of rule of reason) • Movement towards greater focus on effect on consumer in the long run • European Commission v. US DOJ

4. Similarities between US Antitrust laws and EU Competition laws • EC Art. 81: prohibits agreements “which have as their object or effect the prevention, restriction or distortion of competition within the common market” • US Sherman Act: outlaws "every contract, combination . . . , or conspiracy, in restraint of trade"

5. Cooperative Strategies: The remote mountain town of Euroville is socially divided along sectarian lines, and has only two pharmacists. One pharmacist is Catholic, the other Protestant. The town is segregated by religion, and the Catholic pharmacist is located on the Catholic side of town; the Protestant pharmacist on the Protestant side of town. But some Catholics shop at the Protestant pharmacist’s shop, and some Protestants at the Catholic pharmacist’s shop. The two pharmacists agree that each will refrain from advertising their products to customers on the other’s side of town. Every Sunday, the two pharmacists meet in the park and compare prices to “make sure their competition doesn’t get out of hand.” VIOLATION?

6. Article 81 of the EC Treaty The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions;

7. Horizontal Agreements (cont’d) • Price Fixing and Bid Rigging • When competitors agree on the prices at which they will buy or sell, their price-fixing is a per se violation of EC Article 81. • Pharmacists • English Premier League owners agree not to compete for players for one year, to hold salaries down. • Trade shows / ETSI • Bid-rigging

8. Graphite Electrodes arrangement

9. Graphite Electrodes arrangement “Home producer” sets price; others agree not to compete on price, or expand production North America Europe Asia UCAR SGV (most) & Japanese UCAR (some) producers Eventually non-home producers withdraw from market Arrangement kept alive via regular meetings (“top guy” and “working level”

10. Article 81 of the EC Treaty The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (c) share markets or sources of supply;

11. Horizontal Market Divisions • Any effort by a group of competitors to divide its market is a violation of EC Article 81. • Customer divisions: • By class (religion) • Geographically (side of town) • Supply divisions: • We won’t sell X in competition with you, if you don’t sell Y in competition with us. • E.g., two hardware stores in a small town agree that one will not stock plumbing equipment while the other will not stock electrical equipment

12. Article 81 of the EC Treaty • The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: • (b) limit or control production, markets, technical development, or investment; Graphite Electrodes deal prohibiting “technology transfer”

13. Article 81 of the EC Treaty The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

14. Illegal Horizontal Agreements (cont’d) • Refusals to Deal / Boycotts • Concerted refusals to deal vs. individual refusals • A refusal to deal violates the law if it harms competition. • Hilton Hotels boycott

15. Article 81 of the EC Treaty The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

16. Article 81 of the EC Treaty • The provisions of paragraph 1 may, however, be declared inapplicable in the case of … any agreement, …any decision, … or … any concerted practice … which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: • (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; • (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. • To what does this exemption refer?

17. Remedies Commission investigation  injunction + fines up to €1 million or 10% of company’s annual turnover. Private suits in national courts by injured competitors or consumers. What were the penalties imposed in the Graphite Electrodes decision? How were the penalties determined? SGL Carbon €80.2 million VAW €11.6 million UCAR €50.4 million Japanese group €12-24.5 million

18. Article 82 of the EC Treaty • Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States. • Such abuse may, in particular, consist in: • (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; • (b) limiting production, markets or technical development to the prejudice of consumers; • (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; • (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

19. Microsoft Example PC operating systems - >95% US CT: Even if Apple's Mac OS were included in the relevant market, Microsoft's share would still stand well above eighty percent. …” Does Microsoft have a “dominant position” in any market? If so, which one?

20. MICROSOFT ARGUMENT: Our dominant position cannot hurt consumers for two reasons: • Innovation in the computer industry is so fast that any monopoly is inherently unstable. If we are inefficient, we will lose our monopoly. • Our industry is characterized by “network effects” – i.e., the value of the product increases as it is more widely used. These two characteristics mean that consumers benefit (and costs of production decrease) from a monopoly, AND that the monopoly nevertheless must be efficient (keep costs down) to survive.

21. Microsoft Example MICROSOFT AND NETSCAPE “As soon as Netscape released Navigator on December 15, 1994, the product began to enjoy dramatic acceptance by the public ... This alarmed Microsoft, which feared that Navigator's enthusiastic reception could embolden Netscape to develop Navigator into an alternative platform for applications development.”

22. Microsoft Example MICROSOFT AND NETSCAPE Microsoft offered to leave the browser market for non-windows machines to Netscape (i.e., not to develop a version of Internet Explorer for those machines) and to give Netscape preferred access to information about new versions of Windows IF Netscape would refrain from developing its produce as a “platform” that could support applications.

23. Microsoft Example MICROSOFT AND NETSCAPE When Netscape refused to cooperate with Microsoft, Gates sought to limit other companies’ use of the Netscape Browser. “Apple was installing Netscape at the default browser on its machines. … Ninety percent of Mac OS users were running a suite of office productivity applications [called] Microsoft's Mac Office.” “Microsoft threatened to cancel the product unless . . . Apple distributed and promoted Internet Explorer, as opposed to Navigator, with the Mac OS.” Apple agreed.

24. Microsoft Example MICROSOFT AND SUN “The inventors of Java at Sun Microsystems intended the technology to enable applications written in the Java language to run on a variety of platforms . . . [so that] a program written in Java . . . will run on any PC system.” Wanted Java to be windows-compatible, but …

25. Microsoft Example MICROSOFT AND SUN “Microsoft designed its Java developer tools to encourage developers to write their Java applications using certain "keywords" and "compiler directives" that could only be executed properly by Microsoft's version of the . . .” “Microsoft encouraged developers to use these extensions by shipping its developer tools with the extensions enabled by default and by failing to warn developers that their use would result in applications that might not run properly with any [version of Java] other than Microsoft's . . .”

26. Microsoft Example MICROSOFT AND INTEL “Although Intel is engaged principally in the design and manufacture of microprocessors, it also develops some software.. . .” At a meeting, “Gates told [Intel CEO] Grove that he had a fundamental problem with Intel using revenues from its microprocessor business to fund the development and distribution of free platform-level software. In fact, Gates said, Intel could not count on Microsoft to support Intel's next generation of microprocessors as long as Intel was developing platform-level software that competed with Windows.”

27. Microsoft Example MICROSOFT AND INTEL “Intel's senior executives knew full well that Intel would have difficultly selling PC microprocessors if Microsoft stopped cooperating in making them compatible with Windows and if Microsoft stated to [PC manufacturers] that it did not support Intel's chips. Faced with Gates’ threat, Intel agreed to stop developing platform-level interfaces that might draw support away from interfaces exposed by Windows. . .”

28. Microsoft Example MICROSOFT AND IBM IBM makes PCs, operating systems (OS/2) and software. “Microsoft tried to convince IBM to move its business away from products that themselves competed directly with Windows (OS) and Office (software) . . . . When IBM refused to abate the promotion of those of its own products that competed with Windows and Office, Microsoft punished the IBM PC Company with higher prices, a late license for Windows 95, and the withholding of technical and marketing support.”

29. Mergers

30. Mergers • Governed by 1989 Council regulation empowering the Commission to: • Investigate proposed mergers with a “community dimension” • 1 month preliminary investigation • 4 month full investigation • Commission may decide to deny approval to the merger, approve the merger, or approve with conditions, in order to prevent “anti-competitive” mergers.

31. Mergers • What does “community dimension” mean? • Must both firms be primarily European? • Must one firm be primarily European? • What if both firms operate almost exclusively within the same European nation? • Why did the HP/Compaq merger have a community dimension?

32. Mergers • What does anti-competitive mean? • That one firm will dominate? • That competition in the relevant market is substantially lessened? • Compare U.S. HHI approach • What is the relevant market? • HP/Compaq

34. Network Industries: Energy and Telcoms What is the historical structure of these industries in EU member nations, and in the accession countries? What is the EU’s policy toward these industries? How does it hope or expect to see them evolve differently than they have in the past?

35. Network Industries: Energy and Telcoms • Energy: • What is the EU “liberalisation” program, and how is it progressing? • Is the EU natural gas market or the electricity market a “single market”? DG-Tren Electricity and Gas Directives

36. Network Industries: Energy and Telcoms • Energy: • 1. Goals: Lower prices; more sellers; a well-functioning private market • 2. Friction in the move toward open markets: • Incentives to invest; grid management • Other incumbent advantages/issues • Unbundling • Transparency • TSOs • Access to network • Regulatory capacity • Siting generation

37. Source: Commission 2d Benchmarking Report (2002) Red=impediments to open markets Green=policies conducive to open markets

38. Source: Commission 2d Benchmarking Report (2002) Red=impediments to open markets Green=policies conducive to open markets

39. Network Industries: Energy and Telcoms • Update: • Spain v. EDF / France • Lisbon agreement / commitments of laggards • Energy: Capacity Issues • What sources of energy to Europeans rely upon? • How will that source mix change in the future? • What forces will influence that process?

40. Nuclear Reactors in Europe

41. Electricity Production in EU (source: IEA) 27% 6% 17% 33% 14%

42. Network Industries: Energy and Telcoms • There is no DG-Telcoms, but the DG-Competition regulates the telcoms market • 1998 initiatives: part of the EU “knowledge economy” initiative • Goal = liberalisation • Mandated open markets • How is the process proceeding? Is liberalisation happening? How is it working in accession countries?

43. Network Industries: Energy and Telcoms • Telcoms in the CR: • Formerly state-owned incumbent, privatized • Rapid liberalisation via adoption of acquis communitaire • Standards of service • Mandatory competition • Interconnection • Different status quo • Universal service • Elimination of cross-subsidies • Digital/broadband

44. Landline Services, Source: Comm’n

45. Landline Services, Source: Comm’n

46. Landline Services, Source: Comm’n

47. Mobile Telephony, Source: Comm’n

48. Broadband Growth, Source: Comm’n

49. Broadband ownership, Source: Comm’n