European Union Competition Law - Essay Example

EUROPEAN UNION COMPETITION LAW NAME COURSE DATE European Union (EU) Competition Law Executive Summary This paper reviews the competition law in relation to achieving consumer protection. The European Commission expects inherently higher standards of business behavior from undertakings it presumes to be dominant. The decisions made by the courts in this particular are clearly reflect the aims of the EU competition law. This article therefore reviews articles that allocate for the competition law and protection of the consumers and other SMEs from dominant players. The article therefore bases its discussion on Articles 101 and 102 stating the aims of the competition law in terms of consumer protection and welfare. Dominance is a significant issue that is given much attention in the analysis of the competition law. Introduction The European Union created competition laws that were expected to yield higher standards of business behavior from the more dominant players and the decisions made from the courts themselves. The initial provisions of the competition laws had already been provided in Article 101 (chapter 1) and 102 (chapter 2) which stand for fair competition between enterprises and fair consumer charges respectively. The laws have been effective for the last fifty years until the enactment of Lisbon treaty into law in 2009. 101 and 102 are the numbers used by the Lisbon treaty of 2009. Initially they were Article 81 and 82 respectively. The provisions of these laws were earlier provided for in article 2, 3 and 4. The provisions of the former Articles were too general and therefore lacked clear objectivity. The attention by scholars has been shifted towards the effectiveness of the law and how it helps consumers by protecting them from more dominant players’ exploitative activities. It is based on this particular instance that the paper seeks to clarify objectives of the law using different perspectives from the earlier provisions to the current ones. The treaty of Lisbon provided amendments to the former treaty. Most of the laws of the former treaty are still in use while some have been discarded. Some analysts indicate that the amendments may have effect on the interpretation of the competition law by the European court of justice in future.1 The goals of article 101 are therefore clarified they intend to attain market efficiency which in turn builds on consumer protection through economic delivery. Brief Overview of the EU Competition Law In 1957, the European Community was born.2 This was through the treaty of Rome where six member states were originally involved. These founding principles had a vision of creating a single market in the Europe zone. The benefits projected from the single market was the free movement of goods, capital, people and services within the member states. However to do this effectively, a standardized legal framework was required to govern both the market itself and the consumers on the upper hand. To avoid any different interpretations of the law within different countries, the EU commission assumed the central role of enforcing the law. The laws governing fair trade activities in the region are provided in article 101 to article 109. However, article 101 and 102 are commonly used by the commission in most cases. Article 101 is specifically meant to prohibit restrictive agreements while article 102 prohibits the abuse of dominance. Article 101 was put into effect in 1964 when it was first used on Grundig, a manufacturer from German, who had illegally abused certain aspects of fair trade through offering its subsidiary from France exclusive dealership rights.3 Other rules of article 101 of the TFEU have since then been stated as effective in protecting and ensuring fair competition. However, legal analysts state that article 102 of monopoly policy has not been effectively implemented. The problems to this particular article is mainly because member countries opted to protect their most productive and well doing companies from the legal responsibilities of this particular article. Academics have also criticized the commission for applying double standards in issues that are meant to protect the consumers. The commission has been on most occasions very strict on competition rules but has often ignored the dynamics that are behind most companies operations. When article 102 is implemented effectively and few loose ends tightened, it can ensure the consumer benefits and in most cases improve on the quality of goods available. This is because article 102 deals with the regulation of activities involving dominant players in the market. Objectives of the competition law The core goal of the competition law is to ensure that market efficiency is achieved through fair competition and that dominant players do not lock out smaller players and oppress consumers. However, there was no exact clarity on how consumer efficiency was achieved. The objective of the competition law since the enactment of the new treaty is more consumer based. It is easy to state that the goal of the law is to ensure market efficiency is achieved while those who take it from a different perspective can indicate that the law aims to protect consumers. This particular article provides its discussion based on the notion that the law aims to protect consumers from a market that on certain occasions can prove to be cruel. The role or the main objective of the competition law is a debated topic that involves other established economic zones. For instance, US scholars have been debating to what in particular is the main objective of the competition law. Aside from all these particular debates, the consumer is the most important party. The law should therefore concentrate on the best interests of the consumer before all other factors follow. Consumers are on most occasions left vulnerable to exploitation from dominant firms in the market. Contextual analysis of the competition law from the former acts of the Rome treaty Since the formation of the European Community, the main goal was to oversee a sustainable growth in economy with a single market for the whole region.4 Article 2 as provided for by the European Community advocated for the most essential rights towards economic development which included equality between men and women, social protection and high employment levels. When article 2 was first modified, it gave three choices which included formation of a common market, monetary and economic union with other common policies. The competition policy stated in article 3 paves a way for the objectives stated in article 2 of EC. The article goes ahead to state that the system shall not distort the internal market of the community. Article 4 also contributes on the same issue in particular by stating that most activities of the member states and the community shall be based on the internal structure and they shall act in line with the code of open market economy with free competition. A close scrutiny of the provisions of both of the two acts has no clear objectives in relation to free competition. The law has provided for intermediate goal for the community. The operational objectives of the competition law are not expressed directly raising more questions to scholars and legal analysts. Before ratification of the Lisbon treaty, less attention was given in terms of consumer protection.5 The ratification of the treaty changed a number of important factors that cannot be manifested in short term. Long term implementation of the treaty is projected to produce effects that deviate from the original provisions of the Rome treaty. In the Lisbon treaty, undistorted competition is no longer provided for as the main objective as it was in the former Article 3. The new treaty also ignores mentioning the provisions of a free market economy as it was described in article 4 of the former treaty. With prospects of long term effects, the new treaty is expected to affect system of the competition law. No underestimation can be done concerning the potential effects of treaty taking into account what the former Rome treaty had accomplished. However, in the new treaty, operational objectives of the competition law have been provided for, creating a contrast to the Rome that was too general. The provisions of the competition law in the Lisbon treaty are very clear in terms of stating out how the consumers will be protected. The European Court of Justice mostly referred to the both article 2 and 3 when justifying the competition law.6 After the competition law and other community related development policies were enacted, the EC left member countries to develop supporting structures on their own. The results were that there was no structure to support implementation of the law. This when combined to the fact that the competition law lacked clear operational objectives, it was hard to provide a good competition ground that was fair for all. This therefore indicates that with the Rome treaty, there were loopholes that could be exploited by dominant competitors. The ECJ indicated that there was no way they could develop structures for each individual country given the fact that could cause a problem in the implementation stage. Act 2 and 3 therefore provided a general overview with its main aim being to create a single market.7 Market efficiency In the welfare of the competition law that was passed by the EC, market efficiency and consumer welfare were usually classified together. Efficiency as mentioned earlier in the discussion, is taken was the main and core objective of the competition law. The Functioning Treaty of European Union (TFEU) changed the objectives of the competition law to be more consumer focused. Efficiency can be used in two perspectives. The first instance is where the all resources are allocated to the market in general in order to ensure efficiency thus called allocative efficiency.8 The second instance is where a firm is supported to exploit all the economies of scale thus termed as productive efficiency.9 Allocative efficiency is concerned with total welfare rather than the welfare of the consumers. It therefore justifiable to state that market efficiency cannot be obtained at the same time with perfect consumer welfare. While market efficiency is achieved, consumer welfare is ignored. These were the provisions that aimed to protect fair competition as provided for in the Rome treaty. Before the Lisbon treaty was enacted, provisions of the competition law only highlighted market efficiency but dwelt less on the welfare of the consumers. Lisbon treaty clarify all regulations of the commission based on dominant firms regulations and how exactly consumer welfare can be catered for. Consumer interests in EC The issue of consumer has grown to be a relevant topic in relation to the competition law. Competition authorities keep on emphasizing that the main force behind the competition policy is to protect consumers. All the competition commissioners who have been in power both used effective words that signified the role of competition law in consumer protection. The talk however did not yield much result in terms of protecting the consumer but rather ensuring market efficiency. Combining the two objectives using the same law proved to be unfruitful towards the commission. Before modernization, there was indirect way of referring to the consumer welfare by borrowing the phrase quality of life.10 In the EC treaty, this was allocated for in Article 2 and 3.11 The wording of Article 81and 82 strongly referred to consumer protection.12 The article required a fair share of consumers as one of the possible conditions in the formation of cartels. However, the interpretation of the article was underdeveloped until recently when concerns began to be raised. The commissioners were biased in the interpretation of the Article in that; they did not consider the fair share of consumers to be as important during the exemptions made on cartel formations. As a result, consumers were left vulnerable and easily exploited dominant players in the market. Both Articles 81 and 82 were never modified in light of consumer protection until the treaty of Amsterdam that made some changes towards consumer protection.13 It is important to note that in the context of how policies are operating, consumer policy occupies the market from a different perspective compared to the policy provisions of competition law. The competition policy enters the market segment from the supply side ensuring that consumers have the possible widest variety of goods to choose from.14 The consumer policy on the other and approaches the market from a different angle, usually the demand side that ensures the consumer is able to carry out intelligently the choices provided by the competition.15 The Consten Grundig case indicated that consumer rights were recognized early enough. It is only the revisions that used different wording to represent the important phrases. After the modernization process towards consumer protection intensified. The whole policy issue was revolutionized and was more consumer-based focusing on dominant players. Analysts use Americanization as the perfect term to describe the consumer based policies. The policy where consumer welfare is the central issue was derived from America where it had been emphasized in the famous Chicago school. The current article 102 that is in use keeps dominant firms on toss in terms of providing for acceptable consumer welfare. Dominant players and exemptions When discussing about consumer welfare, it is significant to highlight on the issue of dominant players in the market. This is simply because most of the small scale enterprises usually have no impact or have no major influence of the market activities. When two major players merge, a larger percentage of the market is likely to suffer more in relation to their activities. Dominance as a factor has to be highlighted deeply based on the exemptions and the potential effects they have on the consumer welfare. While highlighting the competition law, EC bases it derivation of the policy on the undertakings it deems to be dominant. The term undertaking as used by EC is used to refer to the major mostly private enterprises that are recognized by the government of each individual member country. As already discussed above using the former treaty of Rome, consumer welfare was not directly expressed during the exemptions that were considered for dominant companies. The demand for consumer protection has however changed tremendously with time. Consumer protection aims to be given the lead role by the competition law. To fully identify how consumers need to be protected by the competition law, it is advisable to understand the whole dominance issue works and under what circumstances is dominance allowed. It is also important to highlight on the welfare of the consumers once the exemptions have been made. This therefore indicates a radical shift from the scenario where market efficiency was targeted to a position that is consumer focused. Dominance Article 102 of the new dispensation gives exactly provisions that prevent dominant undertakings to abuse their position and abuse consumers. The Article states that, “Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible within the common market insofar as it may affect trade between member states”.16 Among important factors highlighted within the law include imposition of unfair market prices or in other situations unfair trade conditions that most definitely affects the small scale traders. The act also prohibits actions by dominant undertakings that may create limited production of certain commodities thereby impacting consumer’s range of options.17 The law does not apply to any firm that is large but rather dominant. Some large industries have existed without being able to occupy a dominant position in the market. A dominant firm is expected to behave in a manner that it is independent of its closest competitors and consumers in general. The EU law considers high market share indicates dominance. Therefore, dominance in the market is qualified by a market share that is more than 39.7 percent.18 With a market share equal to or more than the above mentioned percentage, it has a responsibility to oblige to as stated by the EU law of competition. The responsibility is not to use its position to carry out activities that may impair competition on the common market. Market shares are usually determined based on the market where the products of the company are sold. Mergers Dominant firms have the powers to do anything provided that they have higher percentages of the market share. Using the authority of the TEC Article 82, the commission is not only able to control the behavior of the dominant firms but also it is able to monitor how firms gain their dominant powers before they begin to abuse them. When dominant firms in the market merge together, all other market elements are prone to be doomed. The exact role of the commission in this particular scenario is to avoid the amalgamation of firms with larger market shares. Their doing so may heavily impact other factors such as productivity and the prices imposed to consumers. In short, the commission avoids power to be left to only few dominant players who most probably may end up abusing those powers. The competition law requires all the firms that are seeking to form mergers to gain authority from the relevant government bodies. Firms wishing to form mergers can go ahead but later be demerged when they are found to infringe on the fair competition in the market. Merging is seen as a one way of increasing dominance in the market. As a result, firms who have merged together have the powers to control over other small firms in the market and also limit consumers in certain ways. The control of major undertakings not to abuse their powers therefore begins with this instance of preventing merger formations. Dealing with a single dominant firm is deemed to be easier compared to the instance where two dominants have come together to influence the market price. Competition in this particular scenario is usually unfair. Consumers are usually on the receiving end when it comes to abuse of power by dominant firms. Collective dominance as it is referred to can cause more problems than expected. Once companies have excessive shares, they are prone to colluding to form conditions that are uncompetitive for other parties involved. A market that is transparent is easily manageable and the rights of the consumer can therefore be easily protected compared to the instance where the market is colluded. The aim of Article 102 of the newly ratified Lisbon treaty of 2009 was to ensure that dominant firms do not abuse their positions. All along in the former treaty that created the European Community did not reinforce on this particular issue. Article 102 does not prevent the formation of mergers nor does it limit the extent to which a firm can acquire the market share. The major role of this particular article is to make sure that no dominant firm abuses its powers.19 Possible abuse of power Dominance can exhibit the following aspects of abuse of power when article 102 is not in use. Price exploitation is usually the first form of abuse that usually results when article 102 is not enforced properly. However, most dominant firms in Europe do not commonly exhibit this particular behavior. The other common abuse under dominance is limiting the production process. Dominant players may limit production to influence prices in the market. Production goes in hand with technology where a firm can refuse to enhance its technology thereby slowing down its overall production process. Price discrimination forms the other possible factor that dominant firms can use to exploit the market. This falls under Article 102(2) c.20 The abuse involving price discriminations include the application of dissimilar conditions in transactions rated the same level with other trading partners placing them at a disadvantage in terms of competition. The British Airways plc v. Commission is a good example to express price discrimination.21 With a market share of approximately 40 percent, it is more than the total of the five of its closest competitors combined put together. With this level of market dominance, the Commission found out that the company had abused its dominance by discriminating between agents. The other form of exploitation is placing lower prices to knock out other competitors in the market. Prices are usually placed lower that then overall production costs meaning that the company is making losses. An example is the case that involved France Telecom SA versus the Commission. The broadband company was accused of putting lower prices that their production costs in order to kick out small firms and dominate the larger majority of the market. In 2004, the commission also delivered another important ruling that involved Microsoft. Microsoft was accused by Sun Microsystems for refusing to provide them with interface information.22 This crime committed by Microsoft prevented Sun Microsystems to compete effectively in the market. The ruling delivered by the commission stated that Microsoft should within 120 days restore accurate interface documentation that would allow other non-Microsoft operators to achieve full operational status using windows personal computers and servers. Both of these companies are American based. The decision of the European Court was not welcomed in the US; a factor that prompted Microsoft to appeal but the appeal was upheld as later indicated.23 Refusal to supply is also another instance where domination power can be abused. It is not common for this to occur in the current generation but several cases have been recorded. For instance, one of the famous cases is the Commercial Solvents v. Commission. Commercial Solvents was fined for the abuse of its dominance in terms refusing to supply chemicals to certain clients.24 Exemptions In reference to Article 102 of the newly enacted dispensation, there are no exemptions that have been provided. Dominant firms with larger market shares have the advantage of applying their powers well. The law makes sure that no exploitation activities are exhibited by the firms. Possible exemptions are only provided through Article 101 that highlights the major part of the competition law. Exemptions are only provided for the formation of cartels. Through clear implementation of both Article 101 and 102, a lot of benefits are accrued in relation to customer welfare and the protection of small and medium enterprises. Once the competition becomes fair, dominant firms will avoid abusing their powers to affect market and price patterns in general. Once dominant undertakings become fair, consumers are mostly likely to have a wide range of products at affordable prices. Small and medium businesses will also improve as a fair ground for generation is already in place. Conclusion It is clear that earlier objectives set by EC were majorly based on the formation of a single market. Once the single market was achieved, all articles highlighting on the issue of competition were just general and majorly focused on market efficiency. Consumer welfare was generally mentioned and nothing strong was implemented towards that. Through the single market, there exist dominant firms that have a greater influence on market dynamics. Dominant firms are more likely to abuse their position to impact small enterprises and consumers. However the competition law has evolved to its current form that is able to limit the activity of dominant players to ensure consumer welfare is catered for. The article therefore provides for the efficiency of competition law as provided for in article 102 in terms of ensuring consumer interests are well taken care of. Bibliography Erika, S. “Controlling Dominance In European Markets,” Fordham International Law Journal, Vol. 33, no. 6, 2011, pp. 1736-1775 Hefti, HT. "European Union Competition Law." Seton Hall Legis. J. vol. 18, 1993, pp. 613-620. Parret, LYJM. “Do we (still) know what we are protecting? The discussion on the objectives of competition law from different perspectives,” TILEC Discussion paper Series, 2009, pp. 1-48. Rompuy, B. "Thanks Nicolas Sarkozy, but No Thanks." CJEU Rules on Status of Protocol on Internal Market and Competition | Kluwer Competition Law Blog." Kluwer Competition Law Blog. November 25, 2011. Accessed March 14, 2015. Read More