Why and How the European Union controls dominance - Essay Example

?Thesis ment: Why and How the European Union controls dominance Introduction All wealth that fulfills the wants of consumers constitutes the wealth of a nation. Therefore, the aim behind expanding wealth is broadening the choices of the consumers is terms of quality, quantity and variety. Economists are involved in researches on the idea of free market with socially optimal allocation. The notion of competition constitutes the central part of economic theory. Controversies exist among the policy makers on the way competition contributes in the process of development. One can witness contrasting thoughts about the meaning of competition in the economic history. Among the different forms of competition, perfect competition has been able to find a place as the standard model of analysis. During the time of Adam Smith, the concept of competition was popular and viewed as independent rivalry among people. Some of the views suggest competition as a tool that will eliminate profits in the long run. But perfect competition and monopoly rules the real market conditions. Therefore conditions imposed by imperfect competition and asymmetric information calls for inefficient competitive equilibria (Cook, 2001, p. 4). The different ways in which the authorities of national government and the European Union look into markets so that it can work better is regarded as the policy of competition. The framework of the policy of competition has not been string for the low income economies. A wide range of policy measures influences the competition policy. The policy measures include policies that are subjected towards trade, employment and industry. There have been cases where it developed ways that protect the domestic competition instead of promoting competition between the competitors (Motta, 2004, p. 3). The aim behind the policy of competition is to achieve economic welfare and efficiency at the highest level. The European commission joined hands with the authorities of national competition with the aim to ensure free and fair mode of competition in the European Union. However the aim of the competition policy is to promote competition. If markets are made to work better it will contribute to increase efficiency and competitiveness of the economy of UK within the single market of the European Union. Competition ensures broader choices for the consumer in the markets for goods and services and advancement in technology which promotes gains in dynamic efficiency. The policy of competition will also ensure competition in price between the suppliers. The policy can also investigate complaints on anti-competitive behavior within markets. This type of behavior can have negative effect on the welfare of the consumer. In the UK and the European Union there are four pillars of the policy of competition. The first pillar i.e. antitrust and cartels involves removal of contracts which looks to restrict competition. The second pillar i.e. liberalization of market works on introducing fresh competition in sectors of monopolistic competition. The policy of competition analyses the state aided measures. This ensures that the measures taken cannot distort the competition in the single market. This concludes the third pillar i.e. state aid control. The forth pillar of the policy of competition investigates mergers and take-overs between firms (Bennett, 2010, p. 3). A firm is able to hold a strong foothold in the market if its economic power provides the firm the opportunity to operate within the market without taking into consideration the reaction of the competitors or the consumers. The European Commission considers the share of the market and some other factors like ability of the competitors and access of the firm to raw materials and control on the network of distribution while appraising the economic power of a firm. If the firm is able to hold its dominant position because of its own efficiency it is highly credible. But if the firm maintains its position by exploiting the power of competition, it is bound to be an anti-competitive practice. Strategies that limit the degree of competition in a market are regarded as anti-competitive practices. A firm can take such an action in a collusive manner or in isolation. Predatory pricing through cross subsidization is an example of anti-competitive practice (Competition Policy, n.d.). Treaty on the functioning of the European Union: “The consolidated version of the treaty on the functioning of the European Union” based on the following provisions (Official Journal of the European Union, 2010, p, 12). The provisions are named as common provisions, provisions of democratic principles, provisions of the institution, provisions on enhanced competition, General provisions for the Union’s external action and specific provisions on the common foreign and security policy, final provisions. Article 101 of the version provides some functions that shall be banned as not compatible with the internal market. The functions include all contracts or agreements between enterprises, the decisions by the concerned authorities of the undertakings which aim to prevent or restrict competition within the internal market and can impact the trade between the Members. The agreements which can directly or indirectly fix the sale price of a certain tradable good or fix the conditions of trading shall be prohibited. Among other agreements on which the prohibition was imposed included limitation or control of production, market or investment plans, the sources of supply. Any agreements or decisions banned to this article shall be cancelled automatically. The Article 102 stated that any abuse by individual or more undertakings within the internal market shall be cancelled as not compatible with the internal market as it may affect the trade between the members. The particular abuses consisted in imposing directly or indirectly unfair sale price or other conditions of trading, limiting the production or the market development for the welfare of the consumers, applying different conditions to transactions of similar types with trading parties which provides them a comparative advantage and making the conclusions of contracts subjected to acceptance by other parties of additional obligations. The Article 103 stated to set the appropriate regulations to provide effect to the principles on the above articles. The regulation is to be laid down on a proposal after consultation with the European Parliament from the Commission. The regulations shall be designed to ensure conformity with the prohibitions in the above articles. The possible way of ensuring the regulation can be by making rules for fines and penalty payments periodically. The regulation shall be designed to set the rules for the application of Article 101. The requirement to ensure effective supervision and simplify the management to the greatest degree possible shall be taken into account. Article 104 states that the authorities of the Members shall administer on the acceptability of agreements and decisions. The Member States shall administer according to the law in their country on any abuse of a dominant position in the internal market. They shall also follow the provisions of Article 101, specifically the third paragraph of Article 102. Article 105 states that it is the duty of the commission to ensure the application of the principles in Articles 101 and 102. The commission shall also investigate cases of suspected violation of the principles. If the investigation results in possibility of infringement appropriate measures shall be taken to end such possibilities. But if the commission fails to end the infringement, it should record such violations in a logical decision. The Member Sates may also be authorized by the commission to take the measures and publish the decision. The Article 106 states that the Member States will not get involved in any enforcement that is in contradiction to the rules of the treaty. The cases of undertakings of the public are taken into account in this case. Undertakings which are in operation of services and entrusted with the task of revenue generation shall be subjected to the rules of the competition. The Commission has the authority to address the Member States where necessary, to ensure proper application of the provisions of the article (European Commission Competition, n.d.). The Competition Law in Denmark states that ‘dominance’ should be interpreted in line with the commission. The definition of ‘abuse’ in the Competition Law of Denmark is also in line with that of the Commission. A section of the Act states that the Danish Competition Council has the authority to declare whether a particular undertaking maintains a dominant position or not. If the declaration is negative i.e. the undertaking do not enjoy the dominant position are binding until revoked. The undertakings have the option to request the Council to announce that a certain conduct are outside the prohibition in a certain subsection and will remain outside the purview of an order under another subsection. The final provision of the section confers the Council with the authority to remain aloof from any declaration that may have implications for abuse of a dominant position in the market and can affect the trade between the Member States of the European Union. The Danish competition Council also has the authority to ask the dominant undertakings to offer their general terms of trading for some review process. This sort of activity can take place when the council receives a grievance from a competitor or the Council thinks that the complaint is based on some foundation. A special market condition may also arise which calls for the Council to obtain information about the discounts and determination of price of the undertakings. The dominant undertaking has the right not to implicate itself. The undertakings can ask the council whether their submitted general trading terms is in line with the Act. The Authority can refrain itself from arriving on a decision if trade between the Member States are affected. The regime of merger control of Denmark mirrors the merger control of the European Union (Bertelsen, Kofman and Plum, 2011, p. 45). In the first place effective EU merger control played a major role in preventing the dominant position from emerging. The Commission published the guidelines in December, 2008 on its enforcement priorities. The priorities were directed towards abusive conduct by the dominant undertakings. The focus of the guidance is on the risks that may weaken the structure of competition in a market. The conducts include various ways of foreclosure like discounts and refusal to supply. The Commission involved in the task of enforcing article 101 and 102 prohibitions against public undertakings in the first three decades. The Commission began to enforce the rules of the competition on the public undertakings. The task was extended to cover undertakings that enjoy special and exclusive rights (Agraa, 2011, p. 207.). It is the responsibility of the Commission to assess the environmental and economic impacts of a proposal before its initiation. The Commission prepares the impact assessments which address the advantages and the disadvantages of the options of the policy. The Commission also consults the various nongovernmental organizations and the civil society or experts who can propose their views on a recommended proposal. The case of Microsoft can be taken as the example where the decisions of the commission were felt. After investigation of five years the European Commission found the company guilty of abuse of dominant market position. The situation aroused in the month of March, 2004. The Commission found the company guilty under the Article 82 of EU law. The Commission imposed the largest fine ever of 497 million pounds for the antitrust violation in the country. The Commission identified two ways by which the company had abused the monopoly power of personal computer. The company deliberately restricted the interoperability between the Windows personal computers and work group servers which do not belong to the company. The company tied its windows media player with its ubiquitous windows operating system. The computers that allow sharing of files and can store large amounts of data are called work group servers. The commission demanded major remedies. The remedies included compulsory licensing of intellectual property and to disclose full and complete documentation. This will allow the other work groups to achieve the interoperability with the personal computers of windows. This had lead to a conflict about the implementation of the remedies. The case also raises the question on the behavior of the policy of competition on industries characterized by rapid innovation. In the case of the server the basic argument from the Commission was that the company extended the power of the market from PC operating system into a complementary market (Genakos, Kuhn and Reenen, 2007, p. 3). By strengthening the control over the PC operating system the company could limit the operability between windows and other competitors. Simple manipulation of the interfaces assigned with the task of connecting windows and other software will help to achieve the target for Microsoft. The Commission was efficient to identify both short and long run incentives for the company to do this. Microsoft was concerned about the presence of the rivals in the market. Such presence will not allow the company to enjoy the profits from monopoly power. The company’s monopoly power can be hit if customers reduce their dependence on PCs. Microsoft can eliminate such threat if they can extend the platform of windows from PCs to servers. The ability to discriminate price in the monopoly market more effectively can be one such incentive. The policies of competition imposed at the national level indicate that countries impose substantial external effects on each other in presence of international trade. The economic integration enhances the benefits the coordination of the policies of competition. A number of problems arise because of centralizing the competition policies. This is exemplified by the merger plan recently. The merger plan was between two Swedish motor manufacturers namely Volvo and Scania. The main issue that is of concern behind this type of cases is that the proposed merger can nullify the degree of competitive environment and lead to risks which might result in collusive behavior. This case raised the question of whether the small countries are at a disadvantageous position if the definition of the Commission on market dominance refers to small and divided markets. This fuels the concerns of the small countries of loosing capital to the larger ones. The firms based in the small countries face strong restrictions in merger as they will reach the market shares rather quickly in spite of the reason being small in absolute size. The proponents of the argument are of opinion that such types of mergers can be beneficial on the part of the small nations as they contribute in making the domestic companies large enough so that they can acquire rents on the imperfectly competitive markets. The firms in the small countries have the capability to engage themselves in cross border mergers. So they can acquire the international competitiveness without causing harm to the interests of the domestic consumers. In the month of August, 1999, Volvo signed a contract with AB Investor to acquire control of Scania. Volvo notified the plan to the Commission. The Commission decided to institute the phase-2 procedure as the investigation gave rise to concerns on whether the merger followed the rules and the regulations of the market. The investigation proposed that the acquisition was not compatible with the common market regulations. The determination of the relevant product and the geographic market was the decisive factor that influenced the decision of the commission. Volvo and Scania shared equal market for the truck and bus. They were competitors on the market for some time. The other competitors were not as big as the Volvo and Scania in the market. The merger between the two companies would result in the largest truck company in the continent of Europe (Jalles, 2007, p. 7). Conclusion Competition policy is the superset of competition law and tries to establish rules and guidelines that will promote market power and dominance. The laws consider the notion of market power is not compatible with the notion of economic efficiency. They consider that the dominance in market will provide the option to erect barriers. This will result in restricted competition. But many countries are involved in the task of monitoring competition although they have systems which are not too strong. Researches point out that allocated resources to regulation and implementation of the policy of competition is not great. There is scope to improve the access to information system for better regulation of competition. The ability of the competition agencies is lacking to evaluate the claims of market dominance and strategic behavior effectively. Private monopolies are likely to take advantage of the situation arising due to lack in information. They can influence the regulatory environment or even evade the regulation. The potential gains from privatization and deregulation will not get felt under weak regulation of competition. Countries are now involved in introduction of new competition laws but the success of these laws depends on effective monitoring and enforcement of provisions. The policy of competition will be more credible in the inflow of foreign investment. In the developing countries the regulation policies deals with trade and production of commodity. Regulation and controls were imposed in the past for some state owned enterprises but the aim behind such impositions remained unsuccessful as the problem of regulating competition got compounded by weakness of administration and institutions faced overlapping responsibilities. The dynamics of the market encourages innovation. The dynamic efficiency that is generated by market concentration can actually benefit the consumers. Additional strategic instruments are offered by network externalities and the firms will be able to abuse the dominant positions in the market. Reflective Essay What did I learn from producing the coursework? A detailed research technique has been followed in the coursework. Emphasis has been give on competition policy and the treaty on the functioning of the European Union. The coursework provides the opportunity to acquire knowledge about the global world and the role of competition in the market structures. The motivation behind the coursework was the intense aim to know the impact of competition in the global world. What problems did I encounter when completing the assignment (if any)? The treaty on the functioning of the European Union is huge as many articles have been concluded in the Treaty. It was difficult to sum up the articles that related to competition. What would I do differently next time and what would have enabled me to do a better job? I will like to choose a different topic that will address a totally different issue than competition as I am eager to know the world and the structures which rule the market. A better job could have been done if more time could have been invested. A lot of time got wasted just to sum up the articles from the Treaty. I will also like to choose a topic that will take into account more number of articles in the Treaty. When completing the assignment, which learning outcomes did I find easiest / perform best at? The policies of the competition and the case examples are the ones where it was easy to perform the best. When completing the assignment, which learning outcomes did I find most difficult / perform worst at? The most difficult part of the essay was to have an understanding of the articles in the Treaty. Do I honestly believe that I have performed to the best of my ability? I do believe that I performed the best to my ability. Reference n.d. Competition Policy, [online]. Available at: http://tutor2u.net/economics/revision-notes/a2-micro-competition-policy.html. [Accessed:3rd April, 2012]. Official Journal of the European Union, 2010, Consolidated versions of the Treaty on the European Union and the Treaty on the functioning of the European Union. [pdf]. Available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:083:FULL:EN:PDF. [Accessed:3rd April, 2012]. European Commission Competition, n.d. Legislation>Treaty Provisions. [online]. Available at: http://ec.europa.eu/competition/antitrust/legislation/articles.html. [Accessed:3rd April, 2012]. Bertelsen, E., Kofman, M. and Plum, J. 2011. Competition Law in Denmark. [online]. Available at: http://books.google.co.in/books?id=wxyHEEQmyRUC&pg=PA45&lpg=PA45&dq=EU+regulations+that+impact+on+dominant+undertakings&source=bl&ots=8P_jgx7ITZ&sig=qGHxXb_fZTFxP2qyJqontjFFhpg&hl=en&sa=X&ei=w716T9KPNcnHrQeflsSwAg&ved=0CFwQ6AEwBQ#v=onepage&q=EU%20regulations%20that%20impact%20on%20dominant%20undertakings&f=false. [Accessed:3rd April, 2012]. Agraa, A. The European Union: Economics and Policies. [online]. Available at: http://books.google.co.in/books?id=z0Z1reM7QEoC&pg=PA206&lpg=PA206&dq=EU+regulations+that+impact+on+dominant+undertakings+(or+prospective+dominant+undertakings)&source=bl&ots=n1efp5ieYf&sig=DbWdf7zazMTDgFH2Vp5gkq-CfZ0&hl=en&sa=X&ei=Nch6T-G0LsPPrQe69dn9AQ&ved=0CDEQ6AEwAQ#v=onepage&q=EU%20regulations%20that%20impact%20on%20dominant%20undertakings%20(or%20prospective%20dominant%20undertakings)&f=false. [Accessed:3rd April, 2012]. Genakos, C., Kuhn, K. and Reenen, J. 2007. The European Commission versus Microsoft: competition policy in high-tech industries. [pdf]. Available at: http://cep.lse.ac.uk/pubs/download/cp223.pdf. [Accessed:3rd April, 2012]. Jalles, J. 2007. EU Competition Policy: Some Real Life Case Applications. [pdf]. Available at: http://fesrvsd.fe.unl.pt/WPFEUNL/WP2007/wp521.pdf. [Accessed:3rd April, 2012]. Cook, P., 2001. Competition and its Regulation: key Issues. [pdf]. Available at: http://www.competition-regulation.org.uk/publications/working_papers/wp2.pdf. [Accessed:3rd April, 2012]. Motta, M. 2004. Competition Policy: Theory and Practice. [pdf]. Available at: http://assets.cambridge.org/97805218/16632/sample/9780521816632ws.pdf. [Accessed:4th April, 2012]. Bennett, M. 2010. Competition Policy in Distribution services. [pdf]. Available at: http://www.oecd.org/dataoecd/19/57/46503105.pdf. [Accessed:4th April, 2012]. Read More