11. Anticompetitive practices Lexis

a) Any business practices that damage competition are called anticompetitive practices.

Match the terms (1 - 6) with their definitions (a -f). Translate the terms into your own language.

Terms	Definitions
1 price-fixing	a agreements that restrict entry to a trade or profession, so that new firms cannot penetrate the market
2 tie-in arrangements	b business practice whereby a supplier fixes the price at which his goods may be sold by others
3 resale price maintenance	c arrangements that force the buyer to buy a second product or service when he purchases the first
4 blacklisting	d the practice undertaken by large businesses of pricing their goods or services at such a low level that competitors are forced to leave the market; the fall in price is usually dramatic but temporary
5 creating barriers to entry	e business practice whereby trade associations put the name of an offending company, which has sold the goods at less than the recommended price, on a blacklist and refuse to supply it henceforward
6 predatory pricing	f the practice employed by two or more companies in an industry whereby they agree on the prices they will charge for their product or service (this usually involves raising the price)

b) Work with a partner. Test each other on the knowledge of the terms and definitions.

c) Write sentences contrasting: 1 price-fixing and resale price maintenance: 2 price-fixing and predatory pricing; 3 creating barriers to entry and predatory pricing. In your answers use the prepositions unlike, in contrast to, as opposed to and relative clauses.

12. Pre-reading tasks

1. Before reading the text, say: what are, in your opinion, the advantages and disadvantages of competition among businesses?

2. Scan the first section of the text and a) find an example of a price-fixing arrangement; b) find an example of a tie-in arrangement; c) say what areas of business activity are regulated by Articles 81 and 82 respectively.

3. Now read the text and answer the questions that follow.

EU Competition Law

Effective competition in business is the best stimulus to innovation and efficiency. It leads to improving the quality and range of products, to the optimum allocation of resources and the lowering of prices. It makes businesses competitive internationally and creates jobs and wealth at home. But healthy competition may be distorted in many ways, and it is generally felt that it is the government’s duty to protect both consumers and businesses from some of the excesses of a market economy. In very general terms, abuses arise when either several independent enterprises collude to eliminate competition between them in order to increase their prices and profits (restrictive trade practices) or when one undertaking acquires a dominant position on the market and uses it to the detriment of others (abuse of a dominant position) or when other persons' freedom to run a business is limited (anticompetitive practices). Competition law (US, ‘antitrust law’) is concerned with the regulation in this very complex area, which is growing even more complex with the growth of international markets.

EC competition law was laid down by the Treaty of Rome, and it is Articles 81 and 82 that are of prime importance. Article 81 deals with cartels and restrictive practice agreements between organisations independent of each other. Cartels are national or international associations of similar enterprises that would normally compete with each other but have grouped together in order to prevent competition and control prices, in other words, to create a monopoly in a given industry. Restrictive agreements are agreements between undertakings (enterprises) whose objective is to eliminate competition between them in order to increase their prices and profits without producing any counterbalancing advantages. Such agreements damage consumers and society as a whole as they set prices higher than they would in conditions of free competition.

Article 81 prohibits:

(1) Price-fixing. This is a classic method used by cartels to gain monopoly profits. Perhaps the most famous example in history is OPEC (the Organisation of Petroleum Exporting Countries), which controls half of the world’s oil exports and keeps the price of oil high.

(2) Limiting production, markets, technical development or investment. These agreements between businesses aim to restrict output of goods or provision of services so that demand remains unsatisfied and a high price is maintained.

(3) Sharing markets or sources of supply. An example would be an agreement between two large suppliers to split the country into two parts, with one firm supplying the one part and the other firm the other. (In the US, even discussing the idea of price-fixing or dividing up territory with a competitor, even if the idea is never put into practice, is a crime and may lead to criminal prosecution and imprisonment.)

(4) Discriminating against other trading parties. Barriers to entry and discriminatory pricing in different Member States may come within this heading. And so can resale price maintenance, which may be done by means of a contract or blacklisting. Provisions in contracts of sale between suppliers and dealers fixing minimum resale prices are void, and it is illegal to withhold supplies to a dealer who has sold goods below the recommended price.

(5) Making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations. This would include tie-in (tying) arrangements. A good illustration is the Microsoft case, where one of the charges incriminated was the packaging of the Internet Explorer browser and Media Player with the Windows operating system. This would also cover contracts in restraint of trade, i.e. an employment contract or partnership agreement prohibiting a party from engaging in a similar business for a specified period after the relationship ends; or an agreement to sell only a particular manufacturer’s product in return for grants and concessions. (The term ‘restraint of trade’ is also used to refer to any restrictive or anticompetitive practices which could affect free trade.)

Other anticompetitive activities include collusive tendering (secret agreements to allocate tenders between companies in a cartel, also known as bid rigging), information exchange cartels,

e.g. agreements to communicate to a competitor details of pricing policy, price lists, discount structures and dates when prices would be increased, and some other illegal practices.

Article 82 prohibits unlawful activities by single undertakings (enterprises) which have reached a dominant position on the market, that is, a position of strength which makes the normal constraints of competition no longer applicable. In a dominant position are considered to be those businesses which have a market share of at least 40% in at least one EU state. The dominant position is not in itself illegal but only if it is abused. Examples include operating discriminatory terms; refusing to supply an existing customer when it has begun to operate in competition with the dominant company; unfair or excessive prices; tying clauses in contracts; engaging in predatory pricing (while small companies are entitled to price as they wish, provided they do not collude with other companies, dominant businesses must comply with Article 82).

Besides the prohibition of concerted practices which may affect trade between Member States and the prohibition of abuse of a dominant position within the internal market (as long as it may affect trade between Member States), three more principles characterise the EU competition policy:

- supervision of aid granted by the Member States favouring certain undertakings or the production of certain goods;

- preventive supervision of mergers with a European dimension (see below);

- liberalisation of certain sectors where public or private enterprises have hitherto evolved monopolistically, such as telecommunications, transport or energy.

The main enforcement authority is the European Commission in Brussels. It regulates all vertical and horizontal arrangements, i.e. agreements between businesses at different levels of trade and at the same level respectively. An example of a vertical arrangement would be an agreement between suppliers and distributors, or between wholesalers and retailers. An example of a horizontal arrangement would be an agreement between two or more manufacturers or wholesalers. Most cartels are horizontal agreements.

Agreements that infringe Articles 81-89 of the EC Treaty are void and unenforceable, and third parties have the right to bring actions for damages if they have suffered loss through the operation of such agreements. However, companies with a European dimension may argue their case in front of the European Commission. If they can show that an agreement improves the production or distribution of products, or promotes technical progress, it can be allowed. State aid schemes may also involve less strict application of community rules. In some cases, if the Commission declares an agreement void or practice illegal, it can ask for a ruling from the European Court of Justice, and then it would be for the court to determine whether the agreement falls within the scope of the Articles. The Commission can fine businesses up to 10% of their annual worldwide turnover for unlawful activities.

Enforcement in the UK

The main legal instruments in the UK are the Competition Act 1998 and the Enterprise Act 2002, which has largely replaced the Fair Trading Act 1973. They prohibit agreements and practices which have a damaging effect on competition. The Competition Act was modelled on EC competition law and made it part of the UK law. The government watchdogs are the Office of Fair Trading (OFT), which has strong powers of investigation, and its big brother, the Competition Commission. Financial penalties are very strict and can reach up to 10% of the business’s annual turnover under UK and EU competition law.

Under the Competition Act 1998, certain types of restrictive agreements are presumed to be against the public interest and therefore void. However, the parties may first try to justify their agreement to the OFT by showing why the agreement is in the public interest. If they can show, for example, that it contributes to technical or economic efficiency, that the benefits of such an agreement will go to consumers, it may be registered and allowed to continue. If the OFT declares that the agreement is contrary to the public interest, it can order the parties to discontinue it and refrain from making a new similar agreement.

The OFT has powers to decide whether or not goods of any particular class should be exempt from the statutory prohibition on resale price maintenance. Some agreements that are important to the national economy may be exempted by the Secretary of State. Certain services, such as legal, dental, educational, medical etc. are exempt under the Act, as are intellectual property agreements.

Special arrangements apply to monopolies and mergers. The Fair Trading Act 1973 defines a monopoly as a situation in which only one or a few large firms supply 25% or more of particular goods or services in the UK in a way that may distort competition. In the case of a single enterprise it is called a ‘scale monopoly’, and in the case of a group of companies or trade association it is called a ‘complex monopoly’. The OFT can also fine businesses with a European dimension for breach of Article 82 (where the market share of an undertaking is over 40%), and thus has a choice as to which provisions to use to investigate monopolies.

Merger is the joining together of two separate companies of similar size in which the members of the merging companies exchange their shares for shares in a new company or for shares of one of the merging companies. It is usually effected by a takeover bid, an offer to buy all or a majority of the shares in a company so as to control it. In certain circumstances, the takeover of a competitor may amount to abusive conduct. If a merger involves the creation of a monopoly, which will result in a substantial lessening of competition, it qualifies for investigation. When the Competition Commission finds that a merger could be expected to operate against the public interest, the Secretary of State for Business, Innovation and Skills can prohibit it or allow it, subject to certain conditions being met. Companies may notify the OFT of a proposed merger but are not obliged to do so. Where the merger has already taken place, action can be taken to reverse it. If a proposed merger is one with a Community dimension, companies must notify the European Commission. In this case it has sole jurisdiction over competition issues and Member States are prevented from applying domestic competition laws.