Comprehensive summary of the lectures for the course EU Competition Policy of the European Union. Suitable for students International Business. Given by Caroline Buts at the Vrije Universiteit Brussel in the academic year . Allowed me to pass during the first session.
Summary:
Theory lectures EU Competition Policy
PROFESSOR: CAROLINE BUTS
Gino Aytas | 1MA IB | Academic year 2021 – 2022
Version 1
,Practical information:
100% of the grade for this course can be earned via a group task where the goal is to write
up a paper on a competition case.
1. Introduction to competition policy
1.1. COMPETITION: A MULTILAYERED CONCEPT
Competition is a multi-layered concept, diverse interpretations exist.
For us it means the rivalry between firms to gain sales and profits. It
is purely out of self-interest with a beneficial result to society.
For example a fictive town with multiple bakeries. Due to multiple
being present they will compete with each other, trying to make the
best bread to capture the most customers.
In reality many diverse forms of market structure exist, ranging from
perfect competition which are highly competitive to a monopoly that
is little competitive.
Perfect competition is rarely achieved in reality. It requires
no barriers to entry, many markets have giants
(incumbents) who take over successful entrants.
The benefits of competition can be summarised as:
➢ Market allows for innovation
➢ Market is stable
➢ Quality improvement is stimulated
➢ Competitive price can emerge
➢ Diverse selection, range of options
➢ Wages are higher
There are several possible impediments to competition:
➢ Barriers to entry
➢ High market power of one company
➢ Cartels, implicit and not explicitly agreed (Ex. Tit-for-tat & dynamic pricing)
➢ Government monopolies, due to nature of the industry
o Ex. NMBS in Belgium, but liberalized in the UK for example
o Done to make sure non-profitable actions are also executed, for the good
of society
o Government compensates non-profitable public transport routes for
example
Thus Competition Policy aims to ensure that competition in the market is not
restricted in a way that is detrimental to society.
PAGE 1
, 1.2. ELEMENTS OF COMPETITION POLICY
There are three big blocks of Competition Policy: Antitrust, Merger control and Stage Aid.
We will shortly go over each, which we will look at in greater detail throughout this
course.
Antitrust is an umbrella term that includes all anti-competitive practices or
agreements and abuse of ones dominant position. This can range from one individual
firm to multiple firms, both horizontally and vertically. Additionally there is hub-and-
spoke collusion in which there is a combination of horizontal and vertical anti-
competitive agreements.
Merger Control (or concentrations) are any anti-competitive concentrations that occur.
State Aid captures all distortions to competition and trade resulting from state
interventions.
1.2.1. Antitrust
This includes Horizontal Agreements such as:
➢ Price agreement
➢ Output restriction
o Setting maximum production to control price
➢ Market allocation
o Dividing market share among players)
➢ Bid rigging
o Applicable to public tenders
But also Vertical Agreements such as:
➢ Exclusive supply agreements
o Ex. Prohibiting upstream supplier from supplying others
➢ Tie-in
o Bundling to increase sales of poor performing products
➢ Resale price maintenance
o Influence downstream prices of supply-chain
Finally there is Hub-and-Spoke Collusion. This is a combination of vertical and
horizontal anti-competitive agreements. Typically this takes the form of a cartel at the
horizontal level, coordinated via a “common hub” either up- or downstream in the chain.
Colluding companies have no direct communication between each other, making it more
difficult to be discovered by the Commission.
Additionally it can happen via an Abuse of Dominance via:
➢ Exploitative practices
o Excessive pricing & Discrimination
➢ Exclusionary practices
o Predatory pricing & Refusal to deal
PAGE 2
, Lets look at an illustration of such abuse of dominance. For example Google, the company
which is widely known and used as the go-to search engine. Google launches a new
product but fails to capture a sufficient amount of market share. To make it more used
they can “play” with their algorithm to ensure their new product will be found higher in
the search results than competitors their product.
1.2.2. Merger Control
This involves mergers that are anti-competitive. This can includes:
➢ Horizontal mergers involving competitors
➢ Vertical mergers involving companies in the vertical supply chain
➢ Conglomerate mergers involving firms in different lines of business
The situation before and after the merger need to be compared, to determine if sufficient
competition is still present in the market.
1.2.3. State Aid
Finally there is State Aid. It is any advantage that a company receives selectively
coming from state resources. Such aid is distorting competition and is affecting
trade. Such anti-competition measures are really typically for the EU with its Common
Market and Common Customs Tarif.
It is forbidden, but exceptions occur. The Treaty mentions that additional investments in
where the market fails, the environment and R&D are allowed.
Covid-19 for example was such an exceptional occurrence allowing Governments to legally
provide State Aid.
1.3. COMPETITION AUTHORITIES
All EU countries have their own competition authority. From the moment transnational
trade is involved it is for the Commission to deal with. This is done by the Directorate
General (DG) Competition. The EU has a lot of power in this policy field, supplemented
with sufficient investigative powers.
The Commission can work together with National Competition Authorities (NCAs) if
deemed necessary or can pass along cases to them (and vice-versa).
Additionally non-EU countries also have their own competition authorities.
1.4. CURRENT AFFAIRS
Lets look at a real life example of how this comes into play. For example Truck producers
(MAN, Volvo and so on) creating a cartel agreement whereby agreements on the truck
pricing and passing on the cost of compliance with stricter emission rules were made.
It is essential for companies to know the competition rules, as the consequences of not
doing so can be severe. Possible penalties include:
➢ Company or personal fine
➢ Imprisonment of key figures
PAGE 3
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