Economía

In the theory of transaction costs, the basic analytical unit in the research on economic organization is transaction and its costs. As such the theory highlights in a particular way the studies on management in a situation when transactions are removed from the market and are placed under unified governance, that is, when changes in ownership take place, as well as changes in terms of incentives and governance structures (Williamson, 1998, pp. 395 – 396). In other words, when in place of market transactions a hierarchical organization (a firm) is established as being more efficient in eliminating transaction costs related to the conclusion and implementation of contracts, search for market information and opportunism. Moreover, the transaction cost economics emphasizes that the size of the firm, through the absorption of market transactions, cannot grow indefinitely, for the process of supplanting the market is accompanied by an increase in transaction costs arising from coordination and management. In literature these costs are sometimes broken down into transaction market costs, managerial and public costs (Staniek, 2005, p. 25). K. Arrow, who has been credited with introducing the concept of transaction costs, associated those costs with the costs involved in the functioning of an economic system, perceived as a separate type of costs in relation to production costs, them being the focus of neoclassical analysis (Willimason, 1998, pp. 22 and 32). H. Demsetz’s definition is more narrowed down, rendering the essence of transaction costs in that he defines them as the exchange of property rights (Demsetz, 1968, p. 35). Transaction costs – in these economists’ views – hinder, and in some particular situations block market information. Here the fundamental thought appears that of Hayek, to be further elaborated by Coase, that the market does not operate free of charge. This author believes that the flaws of the market result from transaction costs, which K. Arrow compared to the friction in physical systems. K. Arrow argued, however, that given that ‘market failure is not absolute; it is better to consider a broader category that is of transaction costs, which in general impede and in particular cases completely block the formation of markets’ (Arrow, 1969, pp. 48–49). Transaction costs – as it is believed – can also hinder an efficient reallocation of resources, if certain transactions have failed to be carried out (Colomo, 2012, p. 545).

The costs of market operation arise largely from searching for information concerned with the investigation of price relationships. The second type of costs involved in market transactions are those pertaining to contract conclusion. They are made up of costs incurred while finding a contractor, negotiating contract terms and conditions (prices, delivery times and payments, delivery

insurance, contractual penalties) and the costs of resolving disputes arising under the contract. The third type of costs of market operation mentioned by transaction cost economics stems from market uncertainty, as a variable constantly present in different segments of the market. This uncertainty comes from price fluctuations and changes, insufficient knowledge of the behavior of competitors, contractors and consumers, as well as the asymmetry of the information held by market participants. This third type of transaction costs encompasses costs which one could refer to as the costs of contract implementation (Cooter and Ulen, 2012, p. 88).

Improvement of economic efficiency, which economics boils down to economizing on market operation costs, is where the focus of transaction cost economics is centered. Transaction costs should be economized by ‘assigning transactions (which differ in their attributes) to governance structures (the adaptive capacities and associated costs of which differ)’ (Williamson, 1998, pp. 31–32). This cost saving is thus located within the field of product exchange and governance, and consists of the formation of market structures that are more hierarchical and integrated. The behaviors and decisions aimed at economizing on costs have to lead to supplanting the market exchange with structures and mechanisms proper for a firm. The structures of economic organization which display a greater degree of hierarchy and integration lower the costs, in that they reduce or eliminate uncertainty and opportunistic behavior of distributors and suppliers. These non-market modes of economic organization, perceived as an alternative for economizing on transaction costs, may therefore unfold through restraining effective competition and monopolizing the market, in other words, through supplanting the market by the structure of firms.

In the process of internalization, that is, conducting the mentioned transactions within a single firm, the hazards involved in the market disappear. Next to these borderline modes of organization, one can, however, encounter also intermediate modes (mixed) which are not fully hierarchical and where integration between supplier and buyer is embedded in contracts containing clauses which limit, to a greater or lesser degree, the autonomy of suppliers supplying materials and sellers of products provided to end-users. These agreements lower economic uncertainty and transaction costs in relation to vertical cooperation based on market transactions. These are the self-same agreements which underpin the operation of selective distribution networks and franchising, which are so dominant in today’s sales of technically complex products, branded and valuable products to end-users. Thus, economizing on transaction costs can unfold at the price of competition deterioration. It is in such circumstances that competition policy intersects with transaction cost economics. While assessing agreements which bring about such effects,

transaction costs saving could provide the reason and rationale behind having them exempted from the prohibition on restrictive agreements.

In traditional competition policy, any kind of subject-based and territorial restrictions included in vertical agreements were regarded as anti-competitive practices. Transaction cost economics took a different view on those restraints. It assumed that those practices were aimed at protecting transactions and thereby reducing transaction costs. Declining transaction costs are one of the potential benefits that vertical integration may yield.13

There is no doubt that the emergence of transaction cost economics has allowed antitrust analysis of vertical agreements to be expanded towards their assessment being carried out more on the basis of the rule of reason than that of per se illegality, that is, to weigh the effects arising from restraining competition and the benefits arising from reduced costs and increased efficiency, of which a considerable portion should also be enjoyed by consumers. Therefore, in the context of the transaction cost theory, many restrictive clauses included in vertical agreements such as exclusive dealing, exclusive distribution, resale price maintenance, tying, bundling are no longer seen and assessed solely in terms of market monopolization (that is, price arrangements, barriers to entry, discrimination) on account of their possible cost savings.

With respect to employing directly transaction cost economics in competition policy and law, the costs calculation presents certainly a hindrance. Nevertheless, it should not prevent the perception of vertical restraints, as proposed by transaction cost economics, where those restraints are perceived as seeking to eliminate uncertainty, counteracting opportunism and economizing on costs, to be considered and taken into account in the antitrust analysis conducted by competition authorities. At the same time, this assertion ought to be complemented in that references to transaction costs made in specific cases by American or EU competition authorities are rather theoretical and intuitive, without drawing on empirical evidence. Savings generated within those costs are mentioned as positive effects, which are to compensate for competition restraints arising under agreement that, however, are not directly associated with a specific type of transaction costs. This statement can be found in the Commission Regulation for the application of Article 101(3) of the Treaty to categories of vertical agreements and concerted practices, in which, for example, it was laid down that certain vertical agreements can be exempted from the prohibition if they can lead to a reduction in the transaction and distribution costs of the parties.14

13 _{Guidelines on the assessment of non- horizontal mergers under the Council Regulation}

on the control of concentrations between undertakings, OJ C 2008, 256/6.

14 _{Commission Regulation of 20 April 2010 for the application of Article 101 (3) of the}

Notwithstanding the foregoing, competition policy became, in terms of vertical agreements, one of the areas where the achievements of transaction cost economics can be applied in practice. That is so because the majority of endeavors seeking to economize on transactions costs concentrate on distribution. Consequently, transaction costs, as an analytical tool in antitrust cases, also undermined the negative effects of leveraging (Williamson, p. 33), which is to monopolize a related market not yet monopolized, as well as they provide new arguments in support of viewing vertical prices as never anti- competitive in their effects. This position – as H. Hovenkamp writes – places the theory of transaction costs somewhere in the middle, although slightly closer to Chicago’s position than that espoused by the Harvard School (structural), which has always displayed a hostile attitude towards leveraging, and the traditional leverage theory (Hovenkamp, 2010, p. 8).

The American and EU antitrust authorities incorporated relatively early the transaction cost economics into their competition policy as a further useful tool in an economic analysis assessing the restrictions included in vertical agreements. With respect to the United States, the first decision on vertical agreements in which a reference to the concept of transaction costs is made concerns the already mentioned Supreme Court verdict in the GTE-Sylvania case. That the views of transaction cost economics were taken into consideration by the court can be found in the Court’s statement that ‘vertical restrictions of various forms have been widely used in our free market economy.’ Moreover, a clear reference to transaction cost savings can be encountered in the reasons given for the verdict by the Supreme Court in the Broadcast Music, Inc. case. Applying the rule of reason, the Supreme Court discerned benefits in the vertical agreements which it examined in the reduced number of individual transactions and easier access to the base of the songs concerned.15

Microsoft also cited transaction costs when seeking to justify its sale to PC producers of a Windows 98 and Internet Explorer bundle. In its defense against the charge that the company in this way, using its market power held on the operating systems’ market, aimed at building a strong monopolistic position also on the web browser market, Microsoft argued that this kind of sale could provide end users with value in that by buying products in a bundle they would incur reduced transaction costs and avoid other inconveniencies. However, the argument citing transaction costs was accepted neither by the US Justice Department nor by the District Court,16 _{to which this high-profile}

antitrust case went.

15 _{Verdict in Broadcast Music, Inc v. Columbia Broadcasting System, Inc 441 U.S. 1 (1979).} 16 _{U.S. v. Microsoft Corp., 87 F. Supp.2d30 (D.D.C. 2000) and U.S. v Microsoft Corp.,}

In its decision-making practice, the Commission also invokes transaction cost savings as an argument for the agreement concerned not to fall within the prohibition of Article 101(1) TFEU. At this point, one could mention four Commission decisions where transaction costs were a valid criterion in the assessment of a particular agreement according to the legal rules laid down in this Article.17 _{The best known Commission decision is one made in the}

UEFA Champions League case. In the decision, the Commission contended that failing to conclude the agreement on selling jointly the rights to broadcast the Champions League matches, TV operators interested in buying those rights would have to incur considerably higher transaction costs. The fourth decision pertains to the quantitative distribution system of Land Rover motor vehicles, which the EU antitrust authorities examined as a result of Land Rover refusing to authorize Auto 24 SARL as a distributor of this brand of motor vehicles. In the Auto 24 SARL verdict, the Court of Justice, referring, among other things, to the transaction cost rank in distribution systems adopted the following stance: ‘Vertical agreements falling within the categories defined in this Regulation18 _{can improve economic efficiency within a chain}

of production or distribution by facilitating better coordination between the participating undertakings. In particular, they can lead to a reduction in the transaction and distribution costs of the parties and to an optimization of their sales and investment levels.’19

In evaluating the relevance of the transaction cost analysis for antitrust cases, one should, however, note that it is not a practice that is frequently applied by the European and US competition authorities.

IX. Conclusions

Integration efforts of businesses, both those which incorporate previously independent firms and those consisting of specific long-term contracts, are dictated by efficiency goals based on the benefits to be derived from scale, scope, synergy effects arising from the same research and development

17 _{Commission Decision of 5 February 1992, 92/204 IV/31.572 and 32.571 – Building/the}

Netherlands, 1992, OJ L 92/1; Commission Decision of 8 October 8 2002 COMP/C2-/38.014 – IFPI Simulcasting 2003. OJ L 107/58; Commission Decision of 23 July 2003 COMP/C.2 – 37.398 – UEFA Champions League, 2003, OJ L29/25.

18 _{The Regulation cited refers to Commission Regulation (EC) No 1400/2002 of 21 July}

2002 on the application of the Article 81(3) of the Treaty to categories of vertical agreements and concerted practices in the motor vehicle sector.

19 _{Court of Justice judgment of 14 June 2012, file case C-158/11 Auto 24 SARL v. Jaguar}

center, development and implementation of common and uniform marketing programme for advertisement, promotion and pricing policy, or using the same know-how. In vertical integration, the source of synergy is the reduction of transaction costs arising from the opportunism of contractors operating independently and from thus-related risk. The effects of synergy, the efficiency, will also be brought about by specialization, when, for example, the manufacturer acquires control of a specialized entity within the scope of distribution and marketing.

The aforementioned efficiency considerations, looking for ways to economize on transaction costs, as well as consumer benefits derived from vertical agreements, demonstrated because of the progressing economization of antitrust law, have had the effect that today vertical agreements are largely assessed according to the rule of reason, in other words, according to how they will impact the market and consumers, rather than according to the per se illegality rule, which is an assessment carried out from the point of view of the aim of the agreement, with the rule being strictly applied in horizontal agreements and particularly in cartel agreements.

The discussion conducted in the paper shows that in their ponderings the salient schools of antitrust policy, such as Harvard, Chicago and ordoliberal, neglected the factors exerting influence on the functioning of efficient competition and further to that, while providing the grounds for their assessment of antitrust cases that involved vertical agreements, they neglected the achievements of the transaction cost theory, despite it being available at the time. The schools remained faithful to efficiency understood and described by neoclassical economics, failing to include directly transaction cost economics in their discussion on the manifestations of efficiency. As H. Hovenkamp notes, in the model of ‘free riding’ (Hovenkamp, 2010, p. 7) devised by L. Telser, one can see clearly the interface between the Chicago School and transaction cost theory when it comes to vertical agreements. The explanations as to the efficiency of the application of resale price maintenance presented in the model are essentially a form of transaction cost analysis. As Hovenkamp maintains, although Telser did not use Coase’s theory for his basis, his famous paper on RPM refers to alternative costs, mechanisms allowing distributors to provide additional services. To illustrate the point, Telser asserted that a firm could choose between its own distribution and a distribution through independent firms, depending on the cost relation between those choices (Telser, 1960, pp. 86–87). The manufacturer could try to use contractual provisions to require that optimal services be provided by the distributor, however, monitoring and the distributor’s costs thus related could render this solution unattractive. That is why the resale price mechanism is often the best option allowing distributors to compete between one another

through launching new services as long as their costs do not affect the resale price maintenance (Telser, 1960, p. 90).

In evaluating the impact of economic theories and schools presented herein on competition law applied with respect to vertical agreements, one should note that although the views on the harmfulness of vertical agreements to the functioning of efficient competition are quite differentiated in the theory of economics, they still share a common idea. Economics and economic analysis as regards the application and enforcement of competition law by antitrust authorities should play a key role, with some of those theories, as the Austrian School, going as far as to consider competition law to be false or even harmful and therefore leaving competition matters exclusively to economics. The economization process of competition law started by the Chicago School, despite the opportunism of antitrust authorities, is thus still ongoing. With respect to vertical agreements, as indicated in the paper, the process reduced significantly the catalogue of vertical practices and clauses supposedly restricting and being contrary to the rules of competition law. Although if one were to take into consideration the international universalism and international coherence of competition policy and competition law, as well as antitrust cases, then the economization process (which is for antitrust authorities to be guided by economic efficiency in their evaluation process of vertical agreements) is more visible in the practice of American rather than EU antitrust bodies, and ultimately in the practice of the Member States.

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