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individual but also the socialists at the same time thinking, as
we know, that monopolies imply both the destruction of capi-
talism and the beginning of a new communistic society. However, during the period of the New Economic Policy, both right
social democrats in Germany (Socialization Law of 1919) and
Bolsheviks in Russia tried to solve the problem of managing
the economy through compulsory syndication methods.
Until 1923, it was easy to establish and run cartels in
Germany. During the period of the Weimar Republic, the state
made attempts to counteract the monopolism negatives. What
really helped was the Power Abuse Resolution of 1923 (The
Cartel Resolution). However, it was efficient only with regard
to some types of abuse; in fact, it did not forbid cartels which
continued developing rapidly. Later, during the National So-
cialistic period, cartel structures were used to establish the to-
talitarian management of the economy. Forced cartelization
was exercised as a way to support this regulation mechanism.
After World War II, guided by the solutions of the Potsdam conference, the allies tried to decartelize the country,
which turned out to be a failure. Actually, only four monopo-
lies were decentralized (the most known and successful decen-
tralization was that of the IG Farben concern).
Ordoliberalism representatives — especially
W. Eucken — stood for a true radical decartelization and in-
sisted on creating conditions under which an extensive development of monopolies would be impossible. In several expert
reports of 1947–1948, W.Eucken emphasized that the forthcoming economic reforms would inevitably be a failure without decartelization and borderless markets.
However, the industrial community did not allow quickly
(right after the monetary reform and abolition of the state con-
trol over the distribution of products) to implement the radical
anti-cartel program. In 1957, the German Cartel Law Act was
adopted (but only after Erhard had promised to retire in case of
171
further delays on the part of the Bundestag). However, this law
was adopted with essential modifications. Only in 1973, the
new version of the law suggested important standards of the
control over business mergers. Thus, the law was adopted in its
original version.
Certainly, this law plays an essential role in the institutionalization of the social market economy as well as in making
important behavioral rules in the market. Without this law, the
market mechanism in Germany would be less effective.
However, this law didn’t succeed in eliminating the agglomerating and monopolizing tendencies. Despite the anticartel law, the level of the German industry agglomeration continued to grow. The share of ten largest enterprises in the cumulative industrial turnover increased from 9 % in 1954 to
18,8 % in 1973 and to 28.4 % in 19901. Besides, according to
the data for the first half of the 1970s, more than three-quarters
of all the business mergers took place at the horizontal level
(while in the 1960s the share of this type of merges was even
higher — over 80 %). It means that firms consolidated primarily and mainly to secure a big market share and to dominate in
this market. Horizontal mergers were advantageous for enterprises, but these merges undermined competition most of all.
Yet, without the anti-cartel legislation, the competitive environment in Germany would not have been effective.
Nowadays, there are two groups of legal acts constituting
the legal basis for the competition policy in Germany:
• fair trade laws: the Unfair Competition Act (1909), the
Buyer’s Premium Act (1932), the Cash Discount Act (1933);
this group of laws can also include trademarks, patents, and
samples acts;
• anti-restrictions legislation: the German Cartel Law
Act as well as legal acts of the European Union.
1
It is calculated on the basis of: Zahlen zur wirtschaftlichen Entwicklung der Bundesrepublik
Deutschaland. Koeln : IDW, 1992. P. 65, 69.
172
Certainly, the German Cartel Law Act is essential for the
whole system of the competition promotion policy in Germany.
The basic principles of the competition policy are defined
by the Department of Economic Affairs, while control over the
German Cartel Law Act is assigned to the German Federal Office (GFO) and land anti-cartel departments. The GFO has quasi-judicial functions and, consequently, is quite independent: it
is independent from the federal government as it makes some
specific decisions. However, these decisions can (on the basis
of statements of claim) be checked by the courts of competent
jurisdiction.
The German Cartel Law Act is not just of antimonopolistic character, but it is against any form of competi-
tion restriction on the part of business entities. Here we mean
restrictions predetermined by the agreements between enterprises (for example, against a single vertical price) or by coordinated actions in the markets as well as by formulating special
requirements to other business entities. The law revision implying mergers control regulations deprives a firm of "bypass
ways" (i.e. business mergers) to take the lead. The main goal is
to allow for no domination of a separate firm (or groups of interconnected firms) in the markets as well as for letting it get
out of the GFO’S control.
To achieve this goal, there is a system of interconnected
tools: legal anti-cartel (anti-monopoly) policies, compulsory
registration, anti-cartel agencies’ authority to set restrictions of
this kind, a possibility of disaggregation, civil claims for compensatory damages as a result of some monopolistic behavior,
penal sanctions (equal to the amount of three times as much as
the extra profit gained as a result of some illegal activity).
The German Cartel Law Act is applicable to any private
business activities, but is not part of some activity (legislative
or executive) of the state. However, if the state performs entre-
preneurial functions in the economic sphere, then the law is
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extend to it (for example, instructions about control over merges are relevant even if the federal or land authorities get a share
stock of any large enterprise).
At the same time, there are exceptions to these antimonopolistic rules. Some of these exceptions are evident, while
others are very disputable. For instance, the state (or non-state)
monopoly is absolutely necessary when issuing banknotes and
coins. However, the necessity of the railway monopoly exercised by the state can be disputed. In Germany, there are a lot
of spheres where competition is legally limited by the state itself. We will consider this question later.
As it has already been emphasized, workable competition
is based not only on business freedoms, but also on preventing
unfair competition methods on the part of business entities. As
it would be incorrect and dangerous to consider entrepreneurs
as altruists and honest-to-god people, it is necessary to establish an accurate legal competition regulation tool so that until it
would come down to taking “dynamiting measures”. In Germany, this function is mainly performed by the Unfair Compe-
tition Act adopted in 1909 (last time it was updated was in
1986 when the amendments preventing some new inadmissible
types of entrepreneurial behavior were introduced) as well as
by other laws — those mentioned above. In particular, the Un-
fair Competition Act prohibits destructive pricing wars, a com-
petitor’s defamation (through distribution of false information),
imitation of its trademark, violent imposing of goods to buyers
(for example, delivery of unordered goods to the house), incorrect advertising information about the goods or the firm, etc.
Special rules also regulate bargain-sales.
Constraints of some types of actions which are considered to be inadmissible do not only undermine the freedom of
competition (as some adherents of an absolutely free market
claimed), but rather raise a competitive potential of the econo-
my. The experience (including that in Russia) shows that if
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there is no accurate competition regulation and prohibition of
certain types of behavior, competition can result in a mere
gangster fighting.
10.2.3. BASIC METHODS
OF ENSURING COMPETITION
Cartels are created so as to come to pricing agreements as
well as agreements on the production volume and sales markets. Agreements of this type signify that the supply-anddemand situation is deliberately distorted, and the partners
cannot take advantage of the competitive mechanism.
The price cartel is the most powerful form of cartels that is
most dangerous for the competition. Pricing agreements mean that
the producer actually sets prices on his own, being guided by its
personal interests (for example, adjusting the prices to the costs).
Thus, not only the consumer but the whole national economy suffer from it, as the rule of the rational use of limited resources is
not observed. Therefore, what is to be done in the first place is
prohibition of fixed (obligatory) prices.
It should be noted that until 1973 it was allowed to fix
prices for high-quality brand products. Fixed prices are desira-
ble for many groups of people:
• with their help, producers can pursue their own (trade-
free) pricing policy (changing prices and production volumes);
• they help dealers make calculations, and can serve as
an argument (or even an alibi) in persuading customers to buy
a product;
• consumers feel more comfortable with stable (though
high) prices than with constantly fluctuating ones.
However, the number of disadvantages of fixed prices is
bigger than the number of than advantages, the latter being often hyperbolized. That’s because entities are no longer that free
to make a choice of the most effective way of commercial
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transactions, and they cannot perform entrepreneurial functions
as appear incapable to quickly adjust the prices to the fluctuating demand-and-supply ratio. The prices stop performing their
information and regulating functions. As a result, the general
economic equilibrium is really difficult to achieve. There’s no
longer any interest in increasing the efficiency. Therefore, the
law permits only recommended (non-obligatory) prices for
proprietary (brand-name) products.
As it always happens in any sphere of anti-cartel policies,
there are exceptions to the general rule of fixing stable prices. One
of these exceptions is printed products (it is a publishing house
that really sets prices for books, magazines, albums, etc., and informs suppliers about it). Other exceptions, though partial, are
transport prices and tariffs, prices in the agricultural industry, in
the field of crediting and insurance, and in the system of watergas-electricity supply, as well as prices guiding intermediaries and
sales agents (which many firms use to advantage).
Besides pricing agreements, competing companies can
also make agreements on establishing production quotas and
sales markets sharing. However, these forms of cartels also aim
at a forced price fixation that is not based on free interactions
between demand and supply. Thus, we observe a situation of
an uncontrolled domination of separate firms in the market.
It is also necessary to note that the leading market position allows firms to impose rigid requirements to the state (in
particular, in cooperation with other large economic structures)
so as to get certain advantages and privileges and then to adjust
the whole economic-and-political order to their own (personal
or corporate) interests. All these things do not simply destroy
competition and violate the democratic principles transforming
them into authoritarianism and totalitarianism.
That’s why, the Act Against Restrictions of Competition
of 1957 made the anti- cartel principle fundamental. Agree-
ments that limit competition between the contracting enterpris-
176
es are considered insignificant in civil law. Since 1973, not on-
ly written agreements, but also “handshake deals”, i.e. oral arrangements has been counting, if these oral contracts actually
mean some kind of cartelization (of course, on the one hand, it
is difficult to prove the fact of this scheme, but on the other
hand — the field of the interested enterprises is getting narrower). Anti-cartels measures imply heavy fines (that can be thrice
as much as the extra profit gained as a result of some cartel
agreement).
However, constraints of pricing and sales agreements do
not mean constraints of other agreements between enterprises.
If these agreements facilitate firms’ collaboration, and the general economic benefits obtained as a result of this collaboration
are more significant than anti-competition damages (for example, for carrying out R&D activities or for a fundamental rationalization of production), they can even be encouraged rather than prohibited. This is mainly the case for small and
moderate-sized firms. Specialization agreements between producers of homogeneous products as well as between enterprises
of those industries that are plagued by a compound (structural)
crisis can be approved. It should be noted that in all exceptional
cases, there are special provisions of special conditions under
which these exceptions are approved (for example, if we are
talking about cartelization for the sake of rationalization, we
mean that not only the cartel’s participants, but also the whole
economy should enjoy the benefits of the agreement, which is
possible through an increase in effectiveness; at the same time,
if we are talking about cartels for the sake of specialization —
a rather high competition potential is to be characteristic of the
relevant market).
The law also guarantees that in particular exceptional
cases cartels can be created by the decision of the Department
of Economic Affairs even if they do not comply with any of the
points approving of cartels. However, these cases are really ex-
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ceptional, and the German Department of Economic Affairs
does not abuse the right, which is proved by the fact that during
the period of 1957–1991 there were created only four cartels of
this type.
Some industries and economic structures do not
come within the provisions of the general anti-cartel regulation.
For instance, the federal mail, the railroads and urban rail
transportation, the Bundesbank, the national bank "Kreditanstalt fuer Wiederaufbau", the state monopolies and the enterprises of coal mining and iron industry are entirely excluded
from the Act Against Restrictions of Competition (as the latter
two industries are regulated by special regulating standards of
the European Union). An agricultural sphere, other means of
transport (except for the railway), credit institutes and insurance companies, electricity-and-gas-and-water supply as well
as copyright protection agencies are partially excluded. It is
easy to see that anti-cartel exceptions are mainly typical of
those economic spheres that are at the same time characterized
by anti-price fixation exceptions.
Since 1973, the GFO has been exercising control over
company mergers that threaten the freedom of competition as
much as cartels do. If companies integrate, with their afterconsolidation joint turnover’s exceeding 500 million euros, the
management is obliged to inform the GOF about it. If the turnover of each of the integrating enterprises was more than 1 billion DMs, the report is to be filed before the merger (small
mergers are not subject to any control, and notifications are not
required here). If the GFO finds out that the merger leads to its
domination in the market, it will not permit this merger. In other words, the GFO can forbid a business merger not only in
case of some abuse but also if there appears (or is intensified)
the dominant position of a newly-formed concern. Thus, "control is exercised not only against a certain method of behavior,
but also against certain market structures".
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Unlike cartels, company mergers exercise not only a negative influence on competition. For example, if two "small"
enterprises integrate and enter the market where one “large”
company has taken the lead, the competition potential even in-
tensifies. Nevertheless, the process of concentration signifi-
cantly worsens the competitive environment.
The consolidation assertiveness of a corporate business
also has other positive effects because it is easier for them to
gain access to the raw materials and sales markets, which results in transaction costs decrease. However, it can increase the
costs of other competing firms in the same markets. Therefore,
the rational antimonopoly policy constantly controls the balance of advantages and disadvantages, maximizes the total utility. Thus, German anti-cartel bodies also take into account
competitive relations in European and world markets, trying
not to undermine domestic-owned firms’ competitiveness, but
at the same time not to protect ineffective productions.
One of the most difficult problems while controlling
company mergers is a lack of reliable criteria and tools for
measuring the extent of the market domination. Unfortunately,
the German antimonopoly practice is not armed with them, ei-
ther. Legislators recognize that it is "possible" to speak about
the domination if an enterprise with an annual turnover of no
less than 2 billion DMs integrates with another enterprise that
already keeps under control 30 % of the market. The word
“possible” means, first, that anti-cartel bodies have to make
inspections and prove the fact of domination, and secondly that
enterprises can provide counter evidence disproving this fact.
Disputable cases are disposed to legal proceedings.
To emphasize, control over mergers does not mean intervention in the competition process, as this control is exercised
just to check whether competition rules are observed or not.
Even large company mergers cannot be prohibited if the fact
that they cause market dominance and restrictions to other sub-
179
jects’ freedom is not proved. The Federal Department of Eco-
nomic Affairs can permit a consolidation of firms forbidden by
the GFO but it can do it only on an exceptional basis if this
consolidation can bring much profit not only to these enterprises, but also to the national economy in general and if the market order is not undermined. However, for more than 40 years
of the operation of the law there have been just 14 appeals only
six of which have been met.
An enterprise can take the lead even without cartelization
or mergers. Besides, sometimes it can not only take advantage
of its market position, but can also abuse it (for example, to
prevent new competitors from entering the market). To avoid
this state of affairs, there have been introduced special controlling schemes excluding both any discrimination of other subjects and barriers against entering the market. It is a kind of
market correction: anti-cartel departments somewhat replace a
lack of competition.
Of course, the state does not control every single step of
the company’s management team, as the actions and plans of
the heads of even major companies are not to be agreed upon
by anti-cartel bodies. The latter interfere only if competition
rules are not observed. The most important criterion of illegal
domination is a situation when market subjects can’t choose
other products or another seller. Thus, control over any form of
market force abuse mainly prevents competitors from leaving
the market and doesn’t allow for the discrimination of competi-
tors or partners. Like in the case of mergers control, a signal of
some possible abuse (requiring evidential confirmation) is a
situation when a business entity controls 30 % of the market.
Two forms of abuses are known:
• blocking the competitors’ activity (for example, at-
tempts to drive competitors out of the market by knocking the
prices down, making sellers be obliged to sell the goods of a
particular producer, etc.);
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