An overview into competition law
By Matthew Johnston
What is competition law?
Competition law is a type of regulation concerning the control of markets. Though competition law is present almost universally, its content and themes differ depending on the needs and history of the jurisdiction. The three most salient competition law regimes in the UK are those of the UK, the EU and the US. Generally, across the jurisdictions, there are three common problems that legislation seeks to solve: market dominance, abusive practices and cartels. There is some discussion over the purpose of competition/antitrust laws, but there is general agreement that these regulations are for the benefit of consumers in price and choice.
The EU is in ultimate control of the competition law systems of member states. The reality of the single market is that market dominance can stretch beyond national borders and so must be dealt with supra-nationally. This responsibility falls on the European Commission (EC), which serves as the executive branch of the EU as a whole. The EC is empowered by and charged with enforcing Articles 101-109 TFEU which concern competition law. Under these articles, the EC can request information and carry out investigations. Punishments come mainly in the form of fines, and the EC can offer leniency to whistle-blowers in terms of immunity or reduced penalties. On an internal member state level, Council Regulation 139/2004 allows national competition authorities to judge situations which are exclusively within their state market. Private individuals are also able to sue under EU competition law, as was seen in Courage Ltd v Crehan (2001).
The US has a similar system of competition regulation. In terms of civil antitrust enforcement, the Federal Trade Commission (FTC), the US Department of Justice (DOJ) and (sufficiently interested) private individuals all can sue under US antitrust law. Their legislation is especially punitive. As a disincentive to engage in prohibited behaviours, parties who have suffered an actionable loss can sue for three times under the Shearman Act 1890. Also, in a similar way to the EU, individual US states are responsible for antitrust/competition regulation within their state. However, by contrast to the EU, the US DOJ is capable of and willing to criminally prosecute those responsible for breaching antitrust, particularly in the case of cartels.
Jamie has already done a great article on the CMA’s merger control enforcement in the UK, which you can find here.
The EC seeks to prevent firms from attaining a dominant or monopoly position in the market. The primary way they achieve this is through merger control. This operates under similar principles to the CMA’s form of merger control which Jamie wrote about. The General Court of the EU (part of the ECJ) suggested in Genccor Ltd v. Commission that the purpose of merger control is “…to avoid the establishment of market structures which may create or strengthen a dominant position and not need to control directly possible abuses of dominant positions.” Under original European Union Merger Law (EUMR) Article 2(3) a merger cannot be allowed, which would create or strengthen a dominant position which would affect competition. However, since the ECJ decision in Aintours plc. v Commission, a large gap has opened within the legislation. Airtours plc. v Commission shows an unwillingness of the ECJ to factor in oligopoly markets (where there are only a few major firms) to the general formula on market dominance. Even in oligopolies where there is not any overt collusion, a market concentrated with a few members can allow those firms to tacitly collude in reducing capacity and raising prices without needing to form a cartel. This shows a hole in European merger regulation due to a failure to prevent market concentration among a few big players. This means that the EU is not good at enforcing non-collusive collective dominance in an oligopoly.
In the US, merger control was not initially covered by the Shearman Act. Instead, that act focused on either end of the antitrust spectrum, on monopoly and cartels. It was only the Clayton act in 1914, 24 years after Shearman, that gave the FTC and DOJ the capacity to prevent mergers. The SMARTER Act in 2014 sought to equalise treatment of mergers between the FTC and the DOJ. An example of the US authorities exercising their merger control power was the FTC’s action concerning the merger between Britsol-Myers Squibb and Celgene in 2019. The FTC mandated that Celgene divest their Ortezla medicine to prevent the combined company dominating that particular market.
Whereas the previous section describes the attempts by legislators to prevent firms from gaining a dominant position in the market, abusive practices concern punishment of actors who abuse their dominant positions to the detriment of consumers. The requirements under this article mainly relate to those specific advantages which can be utilised by unethical dominant firms. These include reducing production to increase price, unfair prices or price gouging and imposing unfair obligations onto competitors. These practices aren’t automatically an abuse of position. Only if a firm is dominant, do these restrictions apply. The EU explains the rationale for this distinction in Michelin v Commission, suggesting that dominant firms have a special responsibility not to distort competition. In the EU the line at which a firm becomes dominant is a 39.7% market share. These forms of abuse which this article outlined can be split into three concepts. Firstly, there is exploitative abuse where a dominant company’s actions harm consumers. Secondly, there is exclusionary abuse, where a company will attempt to prevent new businesses from entering the market or engaging in competition. Finally, in the EU especially, there is the theorised existence of single market abuse, where companies prevent the functioning of the single market such as through impeding imports of competitors goods across state borders.
By contrast, US law in this area has a much more aggressive history, concerned with “trust-busting”, breaking down already present monopolies in the market. In a similar way to the EU, monopoly itself is not a punishable liability. It is the abuse of that position which is punishable. These abusive behaviours include exclusive dealing, where distributors are given complete control of a particular product in a geographical area by a supplier, restricting competitor distributors from entering the market. Another abusive behaviour is price discrimination, where firms raise prices in areas where willingness to pay increases, leveraging their dominant position in the market to price gouge consumers. In addition, essential faculty abuse concerns where dominant firms with services that are required by their competitors seek to cut out access to the market by refusing to deal with their competitors. Another abusive behaviour is product tying, where dominant firms bundle together separate products to ensure the purchase of both products. This can lead to the sale of inferior products and discriminates against firms who only sell single products. Finally, dominant firms can also engage in undercutting, where firms lower their prices to loss-making levels so that either their smaller competitors go out of business through loss of money from provision of excessively cheap products or loss of market share through refusal to drop prices.
Where monopoly or market dominance regulations affect single firms dominating a market, cartels are what occurs when multiple firms collude in an anti-competitive manner to their benefit. Under Article 101 TFEU, the EU prohibits any contract or agreement between parties to distort the market, and this is interpreted widely, both preventing peer-peer and supplier-distributor deals. However, it is not enough only for these firms to coincidentally raise or lower their prices at the same time as each other. Instead, there must be evidence of an intention to distort the market. Cartel agreements are not legally enforceable in the EU, and a willingness to give leniency to whistle-blowers serves to destabilise these agreements, making firms less likely to collude when there is a great risk and a high chance of discovery. Exemptions to these regulations only really apply where the firms combined have a market share of less than 10%, and so any distortion is minimal or where collusion is beneficial to consumers, such as in the case of some technology companies. The EU is unwilling to engage in giving out exemptions for fear of creating loopholes.
In terms of the US cartel regulation, it has created four main categories of offence. The regime is inflexible in terms of agreements of price-fixing or market sharing arrangements, which always incur liability. If an action does not fall into these categories, then there is a “rule of reason applied to them”. In Chicago Board of Trade v United States, the Supreme Court suggested that collusion could be carried out for a good reason. In this case, preventing out of hours trading protected all traders’ right to a transparent market price. Brandeis J. suggested that the test of whether collusion made a cartel was whether it is positively or negatively impacted competition.
EU Specific State Aid
Finally, there is a category unique to the circumstances of the EU. To support the integrity of the single market, the EU must ensure that member states do not interfere in the market in support of their industries and jobs. Naturally, a government who is elected by a populace will be inclined to support the interests of that group rather than the rights of the European people as a whole. As a result, the EU has placed restrictions on states capacity to intervene in markets, especially in terms of supplying direct aid to businesses. Article 107(1) outlines the requirements for something to class as state aid. This is when a member state uses their resources to create an advantage for a business than distorts competition on an inter-state level. Unlawful state aid can be reclaimed with compound interest, allowing the EU punitive action to protect the single market.