MQuEA

1. Introduction

January 10, 2023

Content

1.1. Concept and objectives of competition

policy
1.2. Some historical notes on competition
policy
1.3. Competition policy in the EU

Competition Economics - Lesson 1 2

Internet links

Introductory references:

European Union
EC (2023), Competition
https://competition-policy.ec.europa.eu/index_en
EC (2023), Competition & you
https://competition-policy.ec.europa.eu/consumers_en
EU Institutions and Competition Policy
https://competition-policy.ec.europa.eu/consumers/what-competition-
policy/eu-institutions-and-competition-policy_en
European Parliament (2022), Competition policy fact sheets
https://www.europarl.europa.eu/factsheets/en/sheet/82/competition-policy

United States
Federal Trade Commission (2023), Competition Guidance
https://www.ftc.gov/advice-guidance/competition-guidance

Course references:
Motta (chap. 1)
Competition Economics - Lesson 1 3
1.1 Concept and objectives of Competition policy

What is meant by Competition (or defense,

antimonopoly or antitrust) policy?

Competition Policy is the set of measures and standards

that try to ensure that competition in the markets is not
restricted by the behavior of the economic agents in
detriment of social welfare.

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Basic elements in the definition

• “Set of measures and standards.... ” → this set of rules

gives place to what is known as Competition Law
• “...try to ensure that competition in the markets...” →
Why is the development of competitive markets an
objective of the economic policy that requires a rule system
in defense of competition?
• “... is not restricted by the behavior ...” → It is necessary
to have a theory that allows us to analyze what kind of
behavior restricts competition.
• “ ... of the economic agents ...” → Firms, Public
Administration, Private Institutions (e.g., professional
schools) or consumers.

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(…continue)

• “ .... in detriment ...” →

 not all the agreements/decisions that restrict
competition are harmful!
 in order to implement the competition law it is
necessary to evaluate the effects of the agent’s
conduct on the market.
• “... of social welfare.” → What is meant by social welfare?
What is/should be the ultimate objective of competition
policy? (From the society’s point of view: economic
efficiency).

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State intervention and defense of competition

Market failures
ex-ante ex-post
public goods
externalities
Regulation natural monopoly
information asymmetries

Conduct of the
agents
distortions of the Competition
competition caused by
the behavior of
Policy
economic agents

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Scope of competition policy

1. Repression of competition restrictive practices (e.g.,

competition restrictive agreements and abuse of dominant
position).
2. Control of concentrations (mergers and acquisitions)
between firms that involve a significant obstacle for
competition.
3. Liberalization of the economic sectors under monopoly
(for example, the opening of the telecommunications
sector to competition).
4. Control of state aid (e.g., the prohibition of a state
subsidy to maintain the activity in a firm in deficit with no
perspectives of recovery).

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 What should be the objective of
competition policy?

◼ Consumer's welfare? (What happens with firms?)

◼ Defense of small firms?
(Do not confuse defense of competition with defense of
competitors! SME may be inefficient)
◼ Other objectives: Promoting market integration, economic
freedom, struggle against inflation, equity and justice, and
other commercial, political, social, environmental reasons...
◼ Economists favor as objective of competition policy that of
social (total) welfare, i.e., the sum of the consumers and
the producers' surpluses (“general equilibrium” perspective)

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Pros and cons of the consumers surplus

▪ Pros:
▪ Counterbalance the political power of producers (lobbies).
▪ Asymmetric information in favor of firms about the possible
effects of the mergers on the market/costs over competition
authorities.
▪ Simplicity when evaluating the effects of a merger.

▪ Cons:
▪ Consumers surplus does not consider the gains of the firms
(which consumers may own!).
▪ Consumers surplus maximization ( P = MC ) may lead to losses
(firms would disappear and goods would not be produced:
P < AC ), resulting in subsidies and would discourage
innovation (e.g., natural monopolies).

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 Social welfare (total surplus)
vs. consumers surplus

▪ Does it matter in practice to choose between one

surplus and another?
▪ Sometimes it doesn’t since the result would be the same (see
the case of the cartels that reduce both the total and the
consumers surpluses).
▪ But sometimes it does (see the cases of price discrimination or
a merger that results in costs savings, in where the total
surplus increases but the consumers surplus decreases).

▪ What criterion appears in Competition Law?

▪ USA → consumers surplus.
▪ Canada, Australia, … → Social (total) welfare.
▪ EU → undefined (consumers surplus (see art. 81(3) of the EU
Treaty) or total (see Guidelines on vertical restraints,
paragraph 7th).

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Other objectives associated to the defense of
competition
▪ Defense of small firms
▪ One of the initial objectives of the antitrust regulation in the USA in the
late nineteenth century.
▪ The favorable treatment to the SMEs is compatible with the economic
welfare when they are affected by abusive practices from the large firms
or the SMEs are more dynamic, innovative and more likely to create jobs
than large firms (evidence?).
▪ Conclusion: Although, it does not make sense to use CP systematically to
benefit SMEs, it is reasonable not to analyze mergers and authorizing
agreements between SMEs because it saves time and resources (minimis
rule).
▪ Foster market integration
▪ The European regulations forbids de facto price discrimination between
members of the EU → Does price discrimination necessarily have a
negative effect on total social welfare? → NO.
▪ Conclusion: the per se prohibition is not justified in economic terms.

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1.2. Brief history of competition policy

The antitrust regulation in the USA:

◼ Origins
◼ The Sherman Act
◼ The Clayton Act
◼ Recent historical evolution

The Competition Law in Europe:

◼ Great Britain
◼ Germany
◼ EU and Spain (next section)

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Origins of the antitrust regulation in the USA

The origins of competition policy in the USA dates to the late

nineteenth century, as a response to the formation of large
conglomerates of firms (known as trusts) .

Important facts:
◼ improvement of transportation and communications.

◼ creation of large firms as to take advantage of economies

of scale and/or economies of scope.
◼ increase in the number of rivals.

◼ low and unstable prices in many sectors.

◼ reaction of large firms reaching price agreements in

detriment of the interests of the SMEs and consumers.

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 The Sherman and Clayton Acts

The Sherman Act (1890)

◼ Horizontal price agreements: Trans-Missouri Freight Association
(1897) + Addyson Pipe and Steel (1899)
◼ Vertical price restraints: Dr. Miles and Park and Sons (1911) →
The Maintenance of the Resale Price on which the producer
forces the distributor to sale its product above a minimum
price, is declared illegal by the reason of its own object (illegal
per se).
◼ Predatory Practices: Standard Oil Company + American Tobacco
(1911) + Terminal Road (1912)

The Clayton Act (1914)

◼ Mergers and acquisitions
◼ Price discrimination

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 Recent historical evolution of the American
regulation
The interwar period (relaxation of the pressure by the
competition authorities)
◼ Appalachian Coals (1933): exception of the per se prohibition of the
price fixation agreements, prohibition established in the Socony-
Vacuum Oil (1940)

Before the mid 70’s (intense activity aimed on restricting the

conduct of the large firms, independently from efficiency gains)
◼ International Salt (1947) → per se prohibition of joint sales (tying)
◼ Schwinn (1967) → prohibition of exclusive sales clauses, in which
the producer assigns to a distributor the exclusive sale of its
product (in a specific territory)
◼ Alcoa (1945) → attempt of abusing dominant position

After the mid 70’s (influence of the Chicago School)

◼ GE/Sylvania (1977) → vertical price fixation agreements must be
subject to the rule of reason
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 Competition Law in Europe
Germany:
◼ In the beginning of the twentieth century the price agreements
and mergers were allowed and boosted (the Nazis even approved
a law of creation of mandatory cartels as a way to implement a
command economy)
◼ To break the economic power in Germany, in 1957 the allies
supported the approval of the Law against Competition
Restrictions which was strictly applied and in 1973, they also
supported regulation on mergers control

Great Britain:
◼ The Profiteering Act (1919)
◼ Restrictive Trade Practices Act (1956), Resale Prices Act (1964)
Monopolies and Mergers Act (1965) → no clear objectives, nor the
ability to sanction or systematic research
◼ The 1998 Competition Act (similar to the EU)

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1.3. Competition policy in EU and Spain

Origin and evolution of the regulation:

◼ EU

◼ Spain

In this course we will study:

◼ Competition restrictive practices

• Restrictive agreements between firms

• Abuse of dominant position
◼ Analysis of mergers

However, in this course we will study neither liberalization (opening

of sectors to competition) nor control of state aid.

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Origins and evolution of the regulation in the EU
Treaty of Paris (1957), by which the ECSC is created
◼ The commercial barriers and the discriminatory practices that
could distortion competition between the member countries
were forbidden (European single market)

Treaty of Rome (1959) by which the EEC is created (modified

by the Treaty of Amsterdam in 1999):
◼ Articles 81 and 82 of the Treaty (previously arts. 85 & 86) →
Competition restriction agreements and abuse of dominant
position

Regulation 1/2003 of the European Council on the application

of competition rules stated in articles 81 and 82 of the Treaty
◼ Substituted the 1962 Regulation nº17

Regulation 139/2004 of the European Council on the control

of the concentration of firms
◼ Substituted by Regulation 4064/89
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Origins and evolution of the Spanish regulation
Ley sobre Represión de Prácticas Restrictivas de la Competencia de
1963:
◼ Separation of the instruction (SDC) and resolution functions (TDC).
◼ Resolutions could not be appealed and had no power to fine

Ley 16/1989 del 17 de julio on the Defense of Competition, it was

submitted for several modifications → adopts EU regulation
◼ The Double Standards of the Community Competition Law

Ley 1/2002 del 21 de febrero on the coordination of the powers of

the state and the Autonomous Communities in terms of defense of
competition

Ley 15/2007 del 3 de julio on the Defense of Competition by which

the Spanish legislation was reformed and updated with the creation
of the Comisión Nacional de los Mercados y de la Competencia
(CNMC) in October 2013: https://www.cnmc.es )

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Objectives of the competition policy in the EC
(EU Competition Policy and the consumer, document of the
European Commission, 2000, p.7)

“Competition constitutes [...] a simple and effective way to ensure

consumers an excellent level of quality and price of products and
services. Moreover, competition leads the firms to strive to find the
competitiveness and economic efficiency. This policy is able to
strengthen the industrial and commercial structure of the
Community so as to enable firms to face the competitiveness of its
major partners and provide community firms the means to carry out
an aggressive commercial policy in foreign markets.”

“For competition to be effective, the market should be composed of

mutually independent suppliers under competitive pressure exerted
by others. Therefore, Competition Law aims to preserve the ability of
suppliers in order to exert this pressure on the market, prohibiting
agreements or anticompetitive practices.”

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 Objectives of the Spanish competition policy
(Ley 15/2007 de Defensa de la Competencia, B.O.E. 4 de julio)

“The existence of effective competition among firms is one of the defining

elements of the market economy, it disciplines the performance of the firms and
reallocates the productive resources in favor of the operators and the more
efficient techniques. This production efficiency is passed on to consumers in the
form of lower prices or as an increase in the quantity of the products offered, in
their variety and in its quality, therefore it increases the welfare of society as a
whole.
In this context, there is a generalized agreement regarding the growing
importance of competition, which has consolidated as one of the main elements
of economic policy today. Within the supply policies, the defense of
competition complements other actions of regulation of economic activity and is
a major instrument for promoting factor productivity and the overall
competitiveness of the economy.
It is therefore necessary to have a system that, without interfering unnecessarily
in the firms’ free decision making, allows having the appropriate tools to ensure
the proper functioning of the processes of the market.”

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First scope: competition restrictive practices

Basic regulation:
◼ Articles 81 and 82 of the Treaty
◼ Regulation 1/2003 of the European Council on the application
of the competition rules established on articles 81 and 82 of
the Treaty → Suppresses the notification and authorization
system
◼ Articles 1 and 2 of the Spanish Competition Defense Law

Economic Evaluation in the cases of competition restrictive

agreements (Guidelines):
◼ Guidelines on the application of paragraph 3 of article 81 of
the Treaty
◼ Guidelines on horizontal cooperation agreements
◼ Guidelines on vertical restraints
◼ Guidelines on technology transference agreements

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Article 81 of the EC Treaty on Competition Restrictive
Practices (Art. 1 of LDC)

▪ Paragraph 1 of article 81 prohibits all agreements which

may have as object the prevention, restriction or distortion
of competition

▪ This paragraph is immediately applicable when referring to

agreements whose objective is:
◼ fix purchase or selling prices or other trading conditions
◼ limit production, markets, technical development or
investment
◼ share markets or sources of supply between competitors; or
◼ apply discriminatory conditions to companies that are not
parties to the agreement, placing them at a competitive
disadvantage

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 Are all the agreements that restrain
competition forbidden?
Some agreements may have a beneficial effect on competition

Paragraph 3 of article 81 foresees the possibility of an

exemption of the prohibition stated in article 1 when
◼ it improves the production or distribution of goods or
promotes technical or economic progress;
◼ it allows consumers a fair share of the resulting benefit;
◼ the restriction of competition must be necessary to achieve
the two points above;
◼ it must not eliminate competition for a substantial proportion
of the products or services

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Article 82 of the EC Treaty on the Abuse of a
dominant position (Art. 2 of LDC)
Art. 82 of the EC Treaty persecutes the abuse of dominant
position
◼ → The regulation does not sanction the creation of a dominant
position, but its abuse!!!

The concept of dominant position refers to that conduct

designed to expel or weaken the competitors in the market or
to prevent access to new competitors “by resorting to
different methods that characterize competition under normal
conditions”

In order to sanction a firm for abuse, it has to be in a

dominant position → When is there a dominant position?
◼ Legally: when “it can act without taking into account the
reaction of the competitors or the clients”
◼ Economically: dominant position = market power
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Examples of abuse of dominant position
(See art. 82 of the Treaty and art. 2 of the LDC)

▪ Directly or indirectly imposing unfair purchase or selling prices or

other unfair trading conditions (minimum resale price)
▪ limiting production, markets or technical development
▪ Fix prices below the cost in order to exclude the weakest
competitors or new competitors from the market (predatory
prices)
▪ Applying dissimilar conditions to equivalent transactions (price
discrimination)
▪ Making the conclusion of contracts subject to the acceptance by
the other parties of unnecessary supplementary obligations
(linked sales)
▪ Unjustified refusal to satisfy the demand for purchasing products
▪ Unjustified termination of contracts without notice

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Second scope: analysis of the mergers

Regulation on concentrations:
◼ Regulation 139/2004 of the Council on the control of the
concentration between firms
◼ Chapter II of the Competition Defense Law

Economic evaluation in the case of mergers:

◼ Guidelines of the Commission on the evaluation of
concentrations

This regulation forbids the concentration between firms that

imply a significant obstacle for competition

In the EU, unlike in the USA, it is not distinguished between

horizontal and vertical mergers

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 Delimitation of powers and mandatory
notification
Concentrations of community dimensions must be mandatory
notified to the Commission before its implementation, so that
it can give its approval.

Mergers of European dimension:

◼ Worldwide sales volume > 5,000 M€
◼ Sales volume in Europe > 250 M€
◼ Less than 2/3 of the business is not centered in a single
country.

Mandatory Notification of the mergers of national dimension:

◼ When acquiring or increasing a share equal or higher to 30% in
the national market or in a geographical market defined within
itself.
◼ The total sales volume in Spain > 240 M€, whenever two
participants have a volume of 60 M€ in Spain.

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