Role of Economics and Economic Behaviour in Competition Law - Essay Example

Role of Economics and Economic Behaviour in Competition Law ROLE OF ECONOMICS AND ECONOMIC BEHAVIOR IN COMPETITION LAW Essentially, competition law involves the study of markets in ensuring presence of competition between suppliers and its benefits to the consumer. Its application concerns identification and assessment of efficiency and effectiveness of market competition, as well as how actions of organizations affect the consumer and competition, which are economic issues1. Economics is involved with the study of how markets operate, especially with regards to allocation to different consumers of services and goods. Understanding economics enhances appreciation for market operations, behaviours, and subsequent competition to the customers’ benefits. It also acts as a tool market, power access, as well as in the determination boundaries within which analysis is carried out. In competition law assessment, one first needs to determine correct relevant markets, involving entry barrier determination in markets that are creatable by the behaviour of specific organizations with power in the market. Simply, competition Law is about economics and economic behaviour2. Thus, those practicing Competition Law should possess some knowledge in relevant economic concepts. The Competition Law in the European Union has its main objectives as the maintenance of openness, as well as unification of internal markets. These objectives are meant to ensure that the marketplace is economically efficient, protect the consumer, and ensure that there are effective conditions for competitiveness and competition3. The arrangements made by Articles 101 and 102 of the Treaty on the Functioning of the European Union are designed for the enhancement of effective enforcement of competition rules by the European Union, all in the businesses and consumer’s interest. In addition, this is to be accompanied by an easing of administrative burdens for those organizations that wish to conduct business in the European Union. Article 101 prohibits the formation of agreements and cartels that threaten the internal market’s free competition, while article 102 aims to prevent entities with dominant market positions from abusing market power4. It seeks to regulate monopolies that could be restrictive on private industry competition, resulting in negative societal and consumer outcomes. The new arrangements introduced by the European Commission are made for application in anti-trust procedures and designed to make sure that competition rules in the EU are enforced more effectively to the benefit of businesses and consumers5. In addition, they will also ease the burden of administration for those organizations willing to conduct business in the European Union. By ensuring that the competition rules are applied through a decentralized model, as well as through strengthening of posteriori control, these regulations will ensure that the administrative workload of the Commission is lightened. This will enhance their ability to concentrate on the enforcement of controls over the more serious infringements on competition rules. In addition, the role played by national courts and competition authorities in the implementation of European Union competition law will guarantee uniform and effective application6. Economists are involved in studying the manner in which different customers are allocated services and goods, as well as how these customers fare in the presence of fewer or more competitors. Due to economics’ and economic behaviour’s role in assessing market power and setting boundaries for analysis of market power by competition authorities, it is essential for legal practitioners to understand economic issues clearly7. UK and U.S. competition lawyers work regularly alongside economists involved in market power determination, market definition, and specific business behaviour analysis. In the United States, the 1930s saw the prevalence of the Structure-Conduct-Performance Model that focused on concentrated industries with widespread entry barriers. The model resulted in severely interventionist and antitrust enforcement policies up to the 60s, at which point the Chicago Model revolutionized antitrust thinking. In this model, the most fundamental goal of antitrust became the pursuit of efficiency as defined by markets8. It championed the market’s ability to correct inefficiencies sans any interference by antitrust law or the government. This model also changed antitrust thinking across the world, placing increased emphasis on economic analysis of specific behaviours in examination of possible impacts it may portend on competition within the relevant markets9. Competition law in the UK focuses on effective competition with emphasis on the impact of competition on the welfare of consumers. Policy on competition has had a key role to play in pushing the European Community towards market integration, especially with EU expansion in mid-2004. Market definition is crucial as a tool for the identification and definition competition boundaries between various organizations. Its legal test was administered in Continental Can Co Inc v Commission, in which products that could be considered as interchangeable were taken to be within similar product markets10. Here, the failure by the Commission to give a definition for relevant product market resulted in its squashing by the European Court of Justice. The Commission had been of the opinion that Continental can and SLW, a subsidiary, were in a position of dominance in three diverse markets, including metal tops, fish cans, and meat cans. However, they fell short of providing an adequate explanation for the separate nature of these markets from the general container and can markets and from each other. In effect, the European Court of Justice insisted that it was decisive for the Commission to define clearly and satisfactorily relevant Markey for products, as well as support this decision using well-reasoned decisions. In order to delimit the market, the European Court of Justice enjoined the Commission to investigate product characteristics that are only interchangeable with other services and goods to a limited extent, as well as those specifically apt for inelastic need satisfaction11. There was a similar situation in United Brands v Commission, in which the applicant contended that bananas and other fruits belonged in the same market. The European Court of Justice apprehended that this was dependent on whether it was possible to single out bananas using special distinguishing features that set it apart from other fruits, making it interchangeable with them to a limited extent and was exposed to competition in a hardly perceptible manner12. United Brands had managed to argue successfully its case before the Commission that banana were in the same common market as other fruits, while their market share within this market stopped it from being a dominant player because it was not large. Relying on economic analysis, the European Court of Justice was able to determine banana’s interchangeable or substitutive degree with other fruits, contending that due to the banana’s special characteristics, on which old individuals and small children were dependent on due to their lack of teeth, it could not be included as a fruit in the common market13. Thus, they held that the market for banana was adequately different or distinct from other markets for fresh fruits. For instance, the market for Chiquita banana, which was a specific banana viz. variety, the company, had a share of the market that topped forty percent. Continental Can Co Inc v Commission and United Brands v Commission are illustrative of the fundamental nature of economic analysis in the determination of correct and relevant markets. This led to the emergence of such concepts of economics as supply side substitutability and demand side substitutability, as well as SSNIP, or Small but Significant Non-transitory Increase in Price, test in the determination of the supply and demand sides of substitutability14. This test was initially used under United States Competition Law by the Federal Trade Commission and the Justice Department during the analysis of horizontal mergers, culminating in the Horizontal Merger Guidelines of 1992 subsequently revised in the year 1997. Using this test, markets, are defined as the narrowest group of services and goods for which a monopolist who was involved in producing all of the services and goods in this group would consider as profitable a 10% margin above levels of competitive price15. This test is also referred to as the Hypothetical Monopolist Test and has been extensively utilized in 1998’s Commission Notice on the Definition of the Relevant Market for the Purposes of Community Competition Law by the European Commission16. The Small but Significant Non-transitory Increase in Price test that was initially created in the United States within contexts that involved merger case has, however, been found wanting with regards to the Cellophane Fallacy. The Small but Significant Non-transitory Increase in Price test’s limitations was first noticed in United States v. El du Pont de Nemour and Co. Here, the United States Supreme Court erred through inclusion of cellophane that made up Read More