The essential core of competition legislation is to counter private restrictions on competition. However, there is disagreement over what constitutes private restrains to competition. Three widely accepted principal targets of modern competition policy include:
1) agreements among firms, 2) the abuse of a dominant position (monopolisation), and 3) mergers among firms. The first area covers the relationships and agreements between otherwise independent firms; the second area refers to the actions by a single firm; while the third area concerns structural combinations of independent firms. The second and first aspects concern the single-firm monopoly and joint action by a group of firms respectively, while the third aspect prevents the creation of a monopoly. Related policy instruments have been developed to curb the anticompetitive effects of these practices. The central concern of competition policy is related to all issues raised by market dominance, whether this comes from a single firm or a group of firms acting overtly or covertly together. The issues and targets involved in competition policy are complex. To make sense of the complexity, Table 3-2 categorises the major targets of competition policy, distinguishing horizontal from vertical issues.
Table 3-2 Major targets of competition policy
Target of competition policy Horizontal Issue Vertical Issue Agreements among firms Horizontal agreements Vertical agreements
Abuse of a dominant position
Price discrimination Predatory pricing Strategic behaviour
Vertical restraints – Resale price maintenance – Selective distribution systems – Tying arrangements – Exclusive dealing – Refusal to sell Mergers among firms Horizontal mergers Vertical mergers
Agreements among competitors are implicit or explicit agreements that restrict competitors’ ability to act independently. The term of agreements encompasses a broad range of conduct, from joint ventures, joint advertising or marketing and trade association activities, to price-fixing, bid rigging and allocation of markets, sales and customers. There is a prominent distinction between horizontal agreement and vertical agreements. The former are the agreements among firms at the same level of the production chain; the latter are agreements among enterprises at different levels of production chain. Not all agreements between competitors hurt competition. Competition authorities distinguish between agreements that reduce competition on balance and those that promote competition on balance or are at least competitively neutral.
Certain horizontal agreements to restrict the terms of trading (price, output, rebates, discounts, and so on) are anticompetitive. These agreements are intended to eliminate competition among firms and do not involve integration of operations, creation of a new product or method of distribution, or any other joint effort intended to further competition.
Such agreements are overt restraints of trade, are often referred to as cartel agreements, or collusions. Examples are pricing-fixing, bid rigging, the allocation of territories or customers, and boycotts or refusals to deal in support of these practices. These agreements have no economic or social benefit and are unequivocally harmful. They have received the greatest degree of unanimity of treatment by the antitrust authorities. Most countries view cartel agreement as the most serious competition offences; in some countries cartel agreements are per se illegal and prosecuted as crimes. Most economists and practitioners of competition policy strongly condemn price-fixing and similar forms of cartel agreements, which are referred to as hard-core cartels. Vertical agreements can have desirable effects, uncertain effects or undesirable effects. The vertical agreements that are restrictive raise the antitrust concern. Regardless of the specific form taken by a vertical agreement, it is crucial to treat particular upstream and downstream firms as a single vertical structure. Vertical agreements are most likely to be harmful when at least one of the transacting parties is dominant in either the upstream or downstream market. However, even restrictive vertical agreements that involved dominant firms can result in efficiency gains. This requires caution in dealing with such cases so that efficient market developments are not impeded.
Certain restrictive business practices, such as price discrimination, predatory pricing and vertical restraints, can be qualified as the abuse of a dominant position. Price discrimination is the sale of two or more similar goods at prices that are in different ratios to marginal cost (Stigler, 1968). A firm with a degree of market dominance may be able to discriminate on price. Although economic analysis gives an ambiguous view of the
possible effects of price discrimination10, competition policies in both the United States and the European Union have considerable scope for the examination and the possible control of price discrimination. A particular form of price discrimination is predatory pricing, which refers to a deliberate conduct, usually by a dominant firm, to cut prices to a very low level in the short run in order to drive competitors out of the market or deter a potential rival. Despite the ongoing debate on the effects of predatory pricing, the competition authorities in the United States and the European Union have spent a great deal of resources on the cases of predatory pricing. The issue of predatory pricing has been broadened to cover strategic behaviour, which involves other variables apart from price.
The strategic behaviour by dominant firms aims to deter potential entrants rather than to destroy actual competitors. Although the research in strategic behaviour has influenced the US antitrust practice11, it has not been convincing that the pre-commitment of resources and the strategic behaviour of dominant firms have been sufficient to constitute monopolisation of an industry. Vertical restrictions occur when a firm at one stage of the line of value-added activity imposes restraints on the terms of trading by firms at another stage – vertical restrictions take place between firms in a vertical relationship, usually manufacturers and distributors. A complex variety of vertical restraints/agreements includes resale price maintenance, selective distribution systems, tying arrangements (tie-in sales), exclusive dealing and refusal to sell.
Alleged abuses of a dominant position can also promote efficiency in which possible anticompetitive harm is weighted against possible efficiency benefits. Much of the economic analysis in this area is equivocal. The ambiguity and complexity of different cases suggests that a rule of reason rather than a general hostile stance in the implementation of competition policy in this area will produce more efficient results. In an investigation of an alleged abuse case, competition authority should explain how the alleged exclusionary practices might harm competition and explore possible efficiency benefits from the practice.
Most M&As impose no threat to competition. However, some M&As would severely harm competition by significantly increasing the probability of abusing market dominance.
These are the transactions that the competition authority seeks to identify and prevent.
Mergers can be identified as horizontal, vertical and conglomerate. A horizontal merger involves the acquisition of or merger with an actual or possible competitor. A vertical merger involves the acquisition of or merger with a supplier of an input or a customer. A conglomerate merger refers to a merger between firms operating in different markets that
10 Theoretically there are three categories of price discrimination: the first degree refers to the case where the seller has complete knowledge of the reservation prices of customers; the first degree refers to the case where the seller has incomplete information of the reservation prices of customers; third degree price discrimination refers to the case where the seller can isolate customers either geographically or by end use. According to the conventional view, the first and second degrees of price discrimination should not be a target for antitrust action because, compared with the available alternatives, it actually improves economic welfare (Utton, 2003). However, a fundamental change in market structure may make possible more favourable alternative. Third degree
discrimination may have rather ambiguous effects. Due to the potential welfare gains that can rise from al three types of price discrimination, on the one hand, and the distinction between persistent and systematic price discrimination, on the other, most economists take an agnostic or even positive view of the effects of price discrimination.
11 The preemptive strategies include: 1) accelerating R&D expenditures in order to acquire ‘preemptive patents’
as argued by Gilbert (1981) and Gilbert and Newbery (1982); 2) brand proliferation and excessive advertising for incumbent firms to attempt to protect their position (Schmalensee, 1978; Hilke and Nelson, 1984). For more detailed discussions, see Porter (1980, 1985) and Salop (1981).
do not have a vertical relationship. When examining horizontal or vertical M&As, competition authorities seek to prevent the creation, preservation or enhancement of market dominance. The horizontal M&As between sizable firms operating in the same market are likely to have the most direct impact on market power. The vertical M&As between firms operating at different stages in the production process may also have consequences on market power. The effects of conglomerate M&As have been intensively disputed in the past but are now generally regarded as having little or no market-power impact (Utton, 2003). Competition authorities may be concerned about horizontal M&As when a firm combines with an existing competitor or a firm that is likely to enter the market in the near future under circumstances suggesting that competition in the market may be diminished. They may be concerned also about vertical M&As when such a merger makes it more difficult for competitors to enter the market, when, for example, the merger would cause the competitors to experience difficulty in gaining access to needed inputs or distribution channels. For competition authorities, the primal priority of merger control is to prevent firms that already dominate their markets from making anticompetitive acquisitions of or combinations with competitors and to inhibit M&As that create market dominance that did not exist before the merger.
Compared with the per se approach to collusion, for competition authorities, the position with horizontal merger is much more ambiguous. The competition authorities will not intervene in case that a horizontal merger, while increasing the market share of the new entity, may have a negligible effect on market power. If a merger may simultaneously enhance market power and promote technical efficiency, the competition authorities have to decide whether the merger should be blocked, principally based on the trade-off between the probable increase in market power and the prospective efficiency improvement. Thus merger policy is more complex than other major areas of competition policy because its decision is based on projection rather than past events.
Competition advocacy encompasses all activities of the competition authority that do not fall under the three main enforcement categories of competition policy. Competition advocacy has recently been accepted as an important function for all antitrust authorities. It complements law enforcement activities, assists in public education and helps to promote economic development. Competition advocacy refers to those activities conducted by the competition authority related to the promotion of a competitive environment for economic activities by means of non-enforcement mechanism, mainly through its relations with other government entities and by increasing public awareness of the benefits of competition (International Competition Network, 2002). These activities are targeted on other public authorities in charge of regulation or policy-making with the aim of curing anticompetitive effects of regulatory intervention and the society (the judicial system, other government entities, economic agents and the public at large) with the aim of raising public awareness of importance of competition.