European Competition Law Annual 1997: Objectives of Competition Policy

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EUROPEAN COMPETITION LAW ANNUAL 1997: The Objectives of Competition Policy

EUROPEAN COMPETITION LAW ANNUAL 1997 The Objectives of Competition Policy

Claus Dieter Ehlermann Laraine L. Laudati European University Institute

editors

•HARTPUBLISHING

OXFORD 1998

Hart Publishing Oxford UK Distributed in the United States by International Specialized Book Services Portland, Oregon 97213-3644 USA Distributed in Australia and New Zealand by Federation Press Pty Ltd PO Box 45 Annandale, NSW 2038 Australia Distributed in Netherlands, Belgium and Luxembourg by Intersentia, Churchillaan 108 B2900 Schoten Antwerpen Belgium © The contributors severally, 1998 Hart Publishing is a specialist legal publisher based in Oxford, England. To order further copies of this book or to request a list of other publications please write to: Hart Publishing, 19 Whitehouse Road, Oxford, OX1 4PA Telephone: +44(0)1865 434459 or Fax: +44 (0)1865 794882 e-mail: [email protected] British Library Cataloguing in Publication Data Data Available ISBN 1-901362-67-1 (cloth)

Typeset in lOpt Times NR by Hope Services (Abingdon) Ltd. Printed in Great Britain on acid-free paper by Biddies Ltd., Guildford and King's Lynn

CONTENTS

INTRODUCTION

vii

1. Objectives of Competition Policy in General 2. Competition Policy Objectives in the Context of a Multilateral Competition Code 3. Objectives of Competition Policy in the Context of Future reforms of the E.U.'s Competition Policy 4. Conclusions

ix xii xiii xvii

BIOGRAPHICAL NOTES ON THE PARTICIPANTS

xix

COMPETITION POLICY OBJECTIVES

1 Panel Discussion 2 Working Papers I Frederic Jenny II Gabriel Castaneda III Allan Fels IV Anna Fornalczyk V Hideaki Kobayashi VI Francine Matte VII Damien Neven VIII Alexander Schaub IX Dieter Wolf

'

1 27 29 41 53 67 81 85 111 119 129

COMPETITION POLICY OBJECTIVES IN THE CONTEXT OF A MULTILATERAL COMPETITION CODE

3 Panel Discussion 4 Working Papers I Eleanor Fox II Roderick Abbott III Jacques Bourgeois IV Ulrich Immenga V R. Shyam Khemani VI Joel Klein VII Mitsuo Matsushita VIII Petros Mavroidis IX Francois Souty

133 155 157 167 173 179 187 247 261 271 311

Contents

COMPETITION LAW IMPLEMENTATION AT PRESENT

5 Panel Discussion 6 Working Papers I Barry Hawk II Ian Forrester III Calvin Goldman IV Herbert Hovenkamp V Martin Howe VI Abott (Tad) Lipsky

321 349 351 359 387 417 433 453

FUTURE COMPETITION LAW

7 Panel Discussion 8 Future Competition Law I Richard Whish II Jonathan Faull III Christian Kirchner IV Valentine Korah V Mario Siragusa VI James Venit VII Michel Waelbroeck VIII Alberto Heimler & Piero Fattori INDEX

459 493 495 503 513 525 543 567 585 595 601

INTRODUCTION

This volume is composed of the collected written works and edited transcripts of dialogue which occurred during the Second Workshop on European Competition Law, held at the Robert Schuman Centre of the European University Institute in Florence in June 1997. Following the successful example of the First Workshop on European Competition Law, held in April 1996, the workshop's participants were again a group of approximately thirty-five high level officials from the world's major competition enforcement authorities and international organisations, renowned scholars and private practitioners specialising in competition. Participants came mainly from the European Union and its Member States, but also from Canada, Japan, Mexico, Poland and the United States. During one and a half days, the workshop, organized in four panels, discussed different aspects of the fundamental question of what objectives are or should be pursued by competition policy. The choice of the overall theme of the Second European Competition Law Workshop was a direct consequence of its 1996 predecessor. Readers of the Robert Schuman Centre Annual on European Competition Law 1996 will remember that the First Workshop on European Competition Law was devoted to the problems of enforcing competition law in a 'federal' context. During the debate in April 1996 it became clear that some of the substantive and procedural/institutional problems with which the European Union has been struggling for a couple of years might be linked to a hidden agenda, i.e. implicit divergences about the objectives of the European Union's competition policy. Like the final objectives pursued by Member States of the European Union through European integration, the objectives of EU competition policy are rarely discussed, as discussion might reveal major differences of opinion and prove to be divisive. However, a better understanding of these objectives is useful—if not indispensable—both for substantive and procedural reforms, in particular a new approach to vertical restraints of competition, and for the institutional debate, i.e. the responsibilities of Member States' competition authorities and the controversy concerning the establishment of an independent European Competition Authority.

viii

Introduction

In addition to these problems internal to the European Union, a discussion about objectives of competition policy seemed appropriate in view of the efforts, undertaken in the framework of the World Trade Organisation, to determine the prospects for a multilateral competition code. A basic agreement on objectives could be as helpful as clear understanding of the differences of goals and perceptions of the major participants in the discussions under way in Geneva. These policy oriented considerations determined the sub-divisions of the overall theme which was examined in four successive panels. Thefirstdiscussed competition policy objectives in general. The second looked at competition policy objectives in the context of a multilateral competition code. The third tried to determine the objectives which are actually and in reality pursued in the European Union, Canada and the United States. The fourth was exclusively devoted to future reforms of the E.U.'s competition policy, in particular a new approach to Art. 85 of the E.C. Treaty. The reader of this volume who is interested in the international dimension (the prospects for a multilateral competition code) will therefore concentrate on the panel discussions and working papers of Panel One (Chapters 1 and 2) and Panel Two (Chapters 3 and 4). However, they will certainly find it useful to look also at the proceedings of Panel Three (Chapters 5 and 6) which explain more clearly than Part One the real situation in the European Union, Canada and the United States. Readers who are particularly interested in the future orientation of EU competition policy will focus on the discussions and working papers of Panels One, Three and Four (Chapters 1, 2, 5, 6, 7 and 8). In view of the extraordinary richness of the material and in order to get a quick overview, it might be useful to start reading the comprehensive introductions to the collection of working papers written for each of the panels by one of the (four) General Rapporteurs. This reading might be followed by a study of the working papers. The transcripts of the discussions will reveal their high added value against the background of the working papers which were known to participants before the workshop started. We cannot and it is not our ambition to summarise in a few pages the multitude of insights which the reader will collect from the study of this volume. In view of the division of the overall theme into four panels and the two main policy orientations of the workshop (the international debate and internal EU reform) it might however be useful to indicate briefly the main results of the discussions.

Introduction

ix

1. Objectives of Competition Policy in General With respect to the determination of objectives of competition policy, it was considered to be useful to distinguish between ultimate goals and intermediate (operational or direct) objectives of competition policy (a similar distinction would be the one between benefits and objectives). Ultimate goals reach beyond the intermediate objectives of competition policy. While the ultimate economic goal of competition policy is the wholesome development of the economy of a country or a group of countries, ultimate political goals are the underpinning and furthering of the democratic process and its essential elements, like pluralism, free enterprise, individual freedom etc. Compared with ultimate goals, intermediate (operational or direct) objectives of competition policy are much more confined. Participants agreed that these objectives are—or should be—limited to economic efficiency and consumer benefit. Other objectives (like industrial policy, the protection of small and medium sized enterprises, employment, the fight against inflation, the improvement of the environment etc.) should not be pursued by competition policy, but by other instruments which will normally produce better results. Ultimate goals will be furthered by competition policy, but positive economic and political effects will rather be by-products than directly intended results. Objectives are rarely defined expressly in competition statutes (Canada and Japan provide examples to the contrary). They have to be inferred from legislative provisions which are broadly worded. This allows adaptation of the law to changing circumstances, be it those prevailing in the markets, or new insights in economic and legal thinking. Competition authorities might in this respect act more freely than courts which feel obliged to interpret the statutes primarily in the light of their wording. Discussions (particularly in Panels One and Three) showed that during recent years most jurisdictions have seen a remarkable trend toward a significant narrowing of competition law objectives in the direction of a more economic based analysis, according ever greater weight to economic efficiency and consumer benefit. This trend is based on the growing influence of economists and economic thinking on competition authorities and courts. Most participants (notably those from Canada and the U.S.) stressed the benefits of economic tools for the quality and predictability of decisions in competition matters. Economic theory was considered to be a common language which furthers transparency, and which facilitates understanding and critical appraisal. Economic analysis was therefore considered to be a positive contribution to legal certainty. Though recognizing the usefulness of (and need for) a thorough examination of the facts in the light of the most reliable

Introduction

economic insights, sceptical voices observed that economic theory is not a natural science, that economics is a function of politics (leading to 'left-wing', 'centre' and 'right-wing' economic theories), that economists therefore often arrive at different results, if only in giving different weight to certain facts. However, it was recognized that economic theory is a strict intellectual discipline which contributes, if combined with transparency, to greater accountability. Discussions in Panel One, but even more so in Panel Three showed that the situation in the European Union is characterized by four particularities. The first concerns market integration. Until recently, market integration was the dominant operational objective of E.U. competition policy. Progress on the road towards the effective establishment of the Single Market will contribute to diminishing the relative importance of this objective in the future. However, it is unlikely that it will be abandoned and replaced by the generally accepted objective of economic efficiency and consumer benefit. It was noted that market integration is a purely economic objective in a long term perspective. However, in the short and medium term, it is also—and in situations of conflict between the objectives of market integration and of economic efficiency even primarily—a political objective. The second particularity concerns the long list of other objectives identified in the Report on the E.U.'s competition policy for Panel Three. The E.U. Report on objectives prepared for Panel One and the discussions in these two panels seem however to indicate that E.U. competition policy has evolved and continues to evolve in the same direction as competition policy in other jurisdictions. Not only does onefindthe basic (and during the entire workshop generally accepted) distinction between fundamental goals and intermediate objectives in the E.U. Report for Panel One. This report concludes also inter alia 'that competition policy and enforcement are not appropriate instruments to achieve ultimate objectives, such as prosperity and job creation directly. On the contrary, social objectives may conflict with the maintenance of competition in the short run. Therefore, the maintenance of effective competition must be the direct objective of enforcement'. Whether this (policy) statement is followed in reality can easily be checked if decisions are fully reasoned and published (as under the E.U. Merger Regulation). The situation is much less verifiable under Art. 85, because of the rarity of formal exemption decisions and the brevity of reasoning in of informal comfort letters. The third particularity is the relatively late arrival of economic analysis in the application of E.U. competition law, in particular Art. 85. The delay is closely linked to the historically dominant E.U. objective of market integration and the related objective to protect the freedom of action of market players. The

Introduction

latter is probably a consequence of the strong influence of the 'Freiburger Schule' on German competition theory and practice, exported by the first E.U. competition law enforcers to Brussels. In spite of earlier invitations by the E.U. Court of Justice, in-depth economic analysis started only with the implementation of the Merger Regulation since 1990. From there it has spread into the traditional areas of E.U. competition law. However, in these areas the process of alignment with practice in other jurisdictions is far from being finished. Attention was drawn in this respect to the remarkable achievements of the Italian Competition Authority which was only established in 1990. The fourth particularity is the well known uniqueness of the E.U. decisionmaking process in competition matters. All individual decisions for the implementation of E.U. competition law are taken by the E.U. Commission and not by an independent agency or by courts. In this respect, the E.U. continues to resist a world wide historical trend which clearly goes in the direction of conferring the responsibility for the day to day application of competition rules to bodies more or less detached from government. Discussions in all four panels clearly showed the relationship between the objectives of a given competition policy and the institutional arrangements for its implementation. The broader the objectives, the greater is the need for a centralized political body to pursue them. On the contrary, narrower objectives will facilitate the transfer of responsibilities from the central government to an independent agency and/or courts. In other words, narrower objectives will permit deconcentration and decentralisation. The special situation of developing countries (or countries in transition) was examined both in Panel One and Two. It becomes particularly clear through the proceedings of Panel One, for which the General Rapporteur summarised the pertinent working papers and his own experience (among others as Chairman of the ongoing W.T.O. Working Party on competition problems) as follows: 'In summary, in developed countries, the immediate goal of competition policy is to promote an efficient allocation of resources in the traditional economic sense, and therefore such policy focuses on market behaviour of firms and control of mergers. In contrast, in developing countries or countries in transition (i.e. countries in which the preconditions for a market economy are not fully established), the immediate goal of competition policy is much broader, because: there is less consensus among public policy officials or politicians about the desirability of competition policy; the economic, legal, social or political structures are less appropriate for the development of a free market economy; and the public places greater weight on the short term disruptions from a market economy than on its long term benefit. As a result, the immediate goal of competition policy in these countries appears to be the emergence

Introduction

of economic opportunities and entrepreneurship in a context in which more attention must be paid to establishing the political acceptance of a market economy (and therefore taking into account the populist goals of competition policy) .. . Competition policy in a developing country often takes a more regulatory approach, thereby allowing it to contribute actively to transformation of economic structures and behaviours ... Moreover, the advocacy function of the competition authorities vis-a-vis the rest of the government, and the propaganda function vis-a-vis the public, are seen as crucial.' 2. Competition Policy Objectives in the Context of a Multilateral Competition Code The task of Panel Two was to examine competition policy objectives in the context of a multilateral competition code. One of the astonishing results was the conclusion of the General Rapporteur for Panel Two that 'all speakers agreed that differences in competition law are not as such, an impediment to internationalisation.' This contrasted sharply with the statement of the General Rapporteur of Panel One that 'whatever the solution at the multilateral level, it requires agreement among the trading nations regarding the legitimacy of competition policy principles.' The explanation of this apparent paradox may be found in the experience of a seasoned international negotiator, that actors in international negotiations may be able to agree on rules, even if they each have different reasons for accepting common rules. On the other hand, consensus on competition policy objectives (as between the European Union and the United States) does not guarantee that this consensus leads to the same position with respect to the desirability of a multilateral competition code, as demonstrated by representatives of both sides during the proceedings of Panel Two. Because of the agreement that differences in competition law objectives are not an impediment to internationalisation, participants in Panel Two examined more the fundamental question of the necessity or desirability of a multilateral competition code and its possible content. Here, too, it is useful to repeat the conclusions drawn by the General Rapporteur for Panel Two according to whom 'while there was some divergence among panel members, there was again remarkable agreement, and near consensus that: —nations should adopt competition laws and be obliged to enforce them against anticompetitive restraints of international trade; —the GATTAVTO principles of transparency, national treatment and non-discrimination, and against beggar-thy-neighbour restraints, should be included in competition law obligations;

Introduction

xiii

—nations should continue to develop bilateral cooperation, including cooperation in discovery and other comity measures; —if work begins on substantive rules against certain private or hybrid restraints, one should also cautiously build the foundation, possibly focusing on effects resulting from conflicting national regimes, core principles on which there is already international consensus, and the private equivalents of G.A.T.T.-illegal government restraints (e.g. quantitative restrictions on imports and exports and strategic nationalistic behaviour).' However, not all participants agreed that a multilateral competition code is necessary or desirable. As it is well known, the United States is in favour of strengthened bilateral cooperation between competition authorities. It fears that multilateral negotiations might undermine bilateral efforts; agreement will be hard to reach and might result in the lowest common denominator; W.T.O. dispute settlement would be inappropriate or ineffective, as competition law enforcement is highly fact intensive and involves confidential information. Other participants challenged the basic assumptions of the 'internationalists,' They asked whether there are any significant inefficiencies resulting from negative spillovers (acts or conduct that decrease aggregate world wealth) that cannot be addressed in the existing W.T.O. framework. They did not find a sufficient economic rationale for a multilateral competition code, considering the large extent to which current international trade law could be (but has not yet been) used to solve existing problems. In their view, no international competition agreement should be pursued unless it can be shown to increase aggregate world wealth. For further observations, we would like to refer the reader to the proceedings of Panel Two which benefitted from an extraordinarily rich collection of detailed working papers. We now want to turn our attention to the second policy oriented subject of inquiry of the 1997 Workshop, i.e. the future reforms of the EU's competition policy, in particular a new approach to Art. 85.

3. Objectives of Competition Policy in the Context of future reforms of the E.U.'s Competition Policy A. Substantive Competition Law All participants in the 1997 Workshop agreed that the E.U.'s competition policy under Art. 85 has to be adapted. The discussion concentrated on this article, while Art. 86 was mentioned only rarely. However, those who referred to Art. 86 were rather critical of certain aspects of the Commission's decision

xiv

Introduction

making practice. Conversely the implementation of the Merger Regulation received very good reactions; it was generally praised as a positive development and major contribution to a modernized European competition policy. Participants agreed also on the reasons why practice under Art. 85 has to change. These reasons are a combination of several factors. Academics and practitioners expressed their—well known—dissatisfaction with the results of the actual policy, which spends too much of the Commission's rare resources on the control of vertical restraints, instead of concentrating on much more dangerous horizontal restrictions. In addition, this policy does not produce enough formal decisions and therefore lacks transparency, independently of the problems of legal security resulting from the use of non-binding comfort letters. Representatives of DG IV stressed the need to adapt traditional competition policy to changing circumstances, the most important being progressive effective integration of markets within the E.U. and globalisation of markets at the world level, together with the perspective of further enlargement of the E.U. which will put even more strains on the already stretched resources of DG IV. Enlargement will reinforce the now generally accepted need for decentralized implementation of E.U. competition law by both administrative authorities and courts of the E.U. Member States. Discussions showed further a basic consensus on the main reason for the existing inefficiency of E.U. competition policy under Art. 85, i.e. the overly broad interpretation of its paragraph 1, more specifically the too wide interpretation of the notion of restriction of competition. We have already mentioned the origins (or contributing factors) for this development: the historically dominant objective of market integration and the related objective of protecting the freedom of action of market players. Critical observers outside the Commission mentioned in addition 'lazy thinking' facilitated by the existence of paragraph 3 of Art. 85 and perhaps even self-interest of an administration which might be tempted to increase its exclusive powers to apply this provision. Consensus reached even further. Participants agreed on the remedy, i.e. on the necessity to reduce the scope of Art. 85 (1). This reduction should be operated through a narrowing of the notion of restriction of competition and not through a stricter interpretation of the requirement that trade between Member States has to be affected. The latter would have the undesirable effect of a retreat of E.U. competition law followed by a corresponding extension of the scope of application of non-harmonized and therefore diverging national competition laws. The narrowing of the notion of restriction of competition and the consequential reduction of the reach of Art. 85 (1) would automatically reduce the need for exemption decisions of the Commission under Art. 85 (3). It would therefore lead to greater legal security, reducing at the same time the

Introduction

xv

costs for industry which would no longer need to apply for formal exemption decisions or at least for comfort letters. This operation would also enlarge the possibilities of decentralized implementation of E.U. competition law by administrative authorities and courts of E.U. Member States. Until now, this decentralized implementation is limited by the broad scope of Art. 85 (3) which can only be applied by the Commission. Participants agreed that the narrowing of the notion of restriction of competition is not affected by disagreements on the (intermediate, direct, operational) objectives of E.U. competition policy. In other words, the road to re-interpretation of Art. 85 (1) is not obstructed by divergences of opinion on the objectives which are pursued under this provision. This seems to us to be the clear result of the discussions in Panels One, Three and Four and one of the major, if not the most important insights produced by the 1997 Workshop. The workshop did not have the ambition to examine in depth the precise lirriits of the notion of restriction of competition and the exact borderline between paragraph 1 and paragraph 3 of Art. 85. Discussions in Panel Four indicated, however, the fundamental options. Everybody agreed that the so-called 'bifurcation' in Art. 85 (i.e. the existence of these two paragraphs) does not hinder the re-interpretation of paragraph 1. But participants took different views as to how much of the appreciation which is traditionally carried out under paragraph 3 could be transferred to paragraph 1, i e. into the examination of the notion of restriction of competition. For some, the examination under the notion of restriction of competition would limit itself to some of the efficiency oriented evaluations of the agreement or concerted practice. The rest would have to be evaluated under paragraph 3. For others, all efficiency related considerations should take place under paragraph 1. The balancing under paragraph 3 would therefore concern only considerations other than efficiency oriented evaluations. It is obvious that the strength and force of conviction of the second group depend on the separate—but closely linked—question whether and to what extent paragraph 3 takes into account non-efficiency related considerations of an economic or even purely political nature. This fundamental question was even less discussed by the workshop than the borderline between the two paragraphs of Art. 85. It is however of fundamental importance for the correct understanding and application of both paragraphs of Art. 85. Without engaging in a detailed analysis of the nature of the elements, which Art. 85 (3) allows to be considered, participants referred to two important factors of interpretation. Partisans of a narrow construction of Art. 85 (3) drew the attention to the wording of paragraph 3 which seems to exclude purely political considerations. Others recalled that Treaty provisions have to be

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interpreted in the context of other Treaty rules. Some articles even demand explicitly that certain policy considerations have to be taken into account in the formulation of other Community policies (e.g. Art. 130 r which stipulates that 'environmental protection requirements must be integrated into the definition and implementation of other Community policies'). Interpreting Art. 85 (3) in a way which insulates competition policy from all other Community policies therefore seems to be ruled out. Participants discussed in depth the question whether the approach to Art. 85 should be achieved through re-interpretation or through Treaty amendment. Treaty amendment was advocated strongly by one participant. One of his main arguments was the desire to hierarchize Community policy objectives, to rank competition policy (together with the four fundament internal market freedoms) at the top, and to isolate it from other Community policies. All other participants expressed a preference for reform through re-interpretation. According to the majority view, the Court of Justice would not stand in the way of reform, provided the Commission establishes its new approach by determined and courageous action. After all, the Court had told the Commission already on several occasions that Art. 85 (1) is to be interpreted in a more realistic, complete and economically determined way than traditionally in the past.

B. Institutional Issues We have already mentioned the considerable benefits which decentralisation of the E.U.'s competition policy will obtain from the new approach to Art. 85 (1). It should be noted that these benefits were considered so substantial that no one argued in favour of sharing the Commission's monopoly to grant exemptions under Art. 85 (3) with national competition authorities or courts. Implicitly, participants considered (first) that the monopoly—substantially reduced in scope by the reform—would no longer be a serious obstacle on the road to efficient decentralisation, and (second) that the remaining tasks under Art. 85 (3) required centralized decision making. The pro's and con's of an independent European Cartel Office were however discussed, though only marginally. Readers of the preceding volume of this series will remember that the 1996 Workshop was profoundly divided on this issue. It is somewhat surprising that the 1997 Workshop showed greater support for the establishment of such an office than the 1996 Workshop. The debate about competition policy objectives and on the interpretation of Art. 85 (3) clarified however—at least implicitly—the limits of such an initiative.

Introduction

xvii

The arguments for an independent European Cartel Office are strong in so far as E.U. competition policy is determined by considerations of economic efficiency and consumer benefit, i.e. the purely competition policy oriented objectives. If the E.U.' s competition policy was strictly limited to these considerations, a case could even be made for a single step procedure, confined to the independent Office, without any sort of appeal to the Commission. This would be like the procedure before the independent Italian Competition Authority which—unlike the procedure in Germany—does not allow an appeal to the Government. The case for a single step procedure becomes weaker in so far as broader economic policy considerations are allowed under Art. 85 (3). As we have indicated above, it is likely that paragraph 3, interpreted in the context of the Treaty as a whole, is open to such considerations. An independent European Cartel Office could certainly integrate them into its investigations and decisions. However, it is difficult to deny that precisely these type of considerations plead for the possibility of intervention of a political body, like the Commission. The same would obviously be true if Art. 85 (3) permitted the taking into account of purely political arguments. However, we do not believe that this is the case. An interesting variant of the arguments for an independent European Cartel Office was the request for the establishment of an independent 'toothless watchdog' in competition matters, following examples in certain Member States. One of us has already earlier made a similar suggestion, referring to the example of the German 'Monopolkommission', which publishes at least once a year a report in which German competition policy is critically reviewed and reform proposals are made. It would indeed be highly useful to set up formally an independent group of eminent persons which would critically analyze every year the competition policy pursued by the Commission. The European Parliament and public opinion at large might find such expert analyses useful. They would probably contribute to a further strengthening of the competition culture in the E.U.

4. Conclusions The Annual Workshops on European Competition Law, held at the Robert Schuman Centre of the European University Institute, are academic in nature, but they also pursue policy objectives. After the second of these Workshops, we are tempted to ask ourselves whether one can detect any influence of the

xviii

Introduction

discussions in Florence on actual policy making. We believe it is no exaggeration to say that we detect such influences both with respect to the issue of decentralisation, discussed in 1996, and to a new approach to the interpretation (or application) of Art. 85 (1). The latter might become more visible once the Commission has concluded its reflections on the future treatment of vertical constraints. When this book is published, the results of these reflections will probably also be public. In the light of the lack of consensus among participants in both workshops, it is not astonishing to find that the debate about the independent European Cartel Office has not progressed. On the contrary, this debate seems today to be dead. Not only has Germany not found any allies for its proposal to establish such an office during the last Intergovernmental Conference. It seems also that Germany has discredited its own initiative through its practical behaviour during recent months. However, the impression of (premature) death might be wrong. The actual scene is dominated by the extraordinary achievements of Karel van Miert, responsible in the Commission for the E.U.' s competition policy since 1993. He has clearly demonstrated to what extent the Commission can and does pursue a vigorous, economic efficiency oriented competition policy, in spite of its political nature and the shameless lobbying on the part of some of the Member States. Karel van Miert's predecessors were similarly determined and courageous, though not always equally successful. The E.U. has therefore enjoyed some 15 years of progressively strong competition policy leadership from Brussels. However, there is no institutional guarantee that this situation will remain unchanged. We therefore believe that the idea of the independent European Cartel Office is not dead, but only profoundly asleep. Let us hope that this sleep will last through to the new millennium.

Winter 199711998

Claus Dieter Ehlermann Laraine L. Laudati Florence, Italy

BIOGRAPHICAL NOTES ON THE PARTICIPANTS

RODERICK ABOTT

was appointed Ambassador and Head of Delegation of the European Commission in Geneva in November 1996. In the 1960s, he began his career in the then Board of Trade in London, moving later to the Department of Economic Affairs. He joined the European Commission in 1973, and was appointed Head of Division responsible for G.A.T.T. Affairs. He moved to Geneva as Chef Adjoint in 1975, and on conclusion of the Tokyo Round returned to Brussels in 1979. From 1982-1996, he was a Director in DG I with responsibilities for O.E.C.D. and G.A.T.T., including preparation of the Ministerial Meetings in Montreal, Brussels and Marrakech, and in charge of third country tariff negotiations (e.g. after E.C. enlargements). GIULIANO AMATO

is Professor of Law at the European University Institute in Florence. From 1993-1997, he was Chairman of the Italian Antitrust Authority; from 19921993, he was Prime Minister of Italy; from 1987-1988, he was Deputy Prime Minister; from 1987-1989, he was Minister of the Treasury, and from 1983-1987, he was Under-secretary to the Prime Minister's Office. He became a Full Professor of Comparative Constitutional Law at the University of Rome, School of Political Science in 1975. Prof. Amato has also been full time professor at the Universities of Modena, Perugia, and Florence. He has written books and articles on economy and political institutions, personal liberties, federalism, and comparative government. His current area of research is competition law in Europe on a comparative basis. MiLOS BARUTCISKI

is a Partner at the firm of Davies, Ward & Beck in Toronto, Canada. He was Special Advisor to the Director of Investigation and Research of the Canadian Competition Bureau from 1991-1993. Mr. Barutciski was an Adjunct Professor at the Faculty of Law of the University of Ottawa from 1990-1994, where he taught international trade law.

Biographical Notes on the Participants

JACQUES H.J. BOURGEOIS

is a Member of the Brussels Bar and Professor at the College of Europe in Bruges. In 1962, he joined the European Commission, and its Legal Service in 1965. He was Head of the European Commission's Trade Policy Instruments Division from 1983-1987 and Principal Legal Adviser to the European Commission Legal Service from 1987-1991. He returned to private practice in 1991. He has chaired a G.A.T.T. and a W.T.O. dispute settlement panel. He lectured at the University of Brussels, the University of Michigan Law School and the Autonomous University of Barcelona. He has been Jean Monnet Professor at the University of Bonn Law School. He has published on E.C. competition and trade law and on G.A.T.T./W.T.O. issues. GABRIEL CASTANEDA

is a Partner at the firm of Castaneda y Asociados. He served as the Executive Secretary of the Federal Competition Commission from the agency's inception until 1995. Prior to that, he held the position of Legal Director General of the Economic Deregulation Unit at S.E.C.O.F.I. Mr. Castaneda is Secretary of the Antitrust and Trade Law Section of the International Bar Association and is currently the Chairman of the Antitrust Commission of the Mexican Chapter of the International Chamber of Commerce. GEOFF EDWARDS

is an Economic Analyst with the Australian Competition and Consumer Commission's Telecommunications branch in Melbourne. He previously worked with the Commission in its Mergers branch and Executive area. He has published articles on various topics of competition law. His main areas of interest include competition law and economics, and infrastructure access issues, particularly in the telecommunications industry. CLAUS DIETER EHLERMANN

is Professor of Economic Law at the European University Institute in Florence, and a Member of the Appellate Body of the W.T.O. in Geneva. In 1961, he joined the Legal Service of the European Commission, where he was Director General from 1977-1987. He served as Spokesman of the Commission from 1987-1990, and then as Director General for Competition from 1990-1995. He has lectured at the College of Europe in Bruges, at the Free University of Brussels and at the University of Hamburg, where he became Honorary Professor in 1983. His publications focus on European Community law and in particular on institutional and competition law issues.


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PIERO FATTORI

is Director of the Legal Office of the Italian Antitrust Authority. Before joining the Authority in 1991, he was a researcher in administrative law at Luiss University in Rome, and he was Assistant to the President of Consob, the agency in charge of stock market supervision andfinancialservices in Italy. His publications focus on antitrust issues. JONATHAN FAULL

is Director of Directorate A (Competition Policy, Coordination, International Affairs and Relations with the Other Institutions) of the Directorate General for Competition (DG IV) at the European Commission in Brussels. He is Professor of Law at the Vrije Universiteit Brussel and Visiting Fellow at the Centre for European Legal Studies, University of Cambridge. ALLAN FELS

has been Chairman of the Australian Competition and Consumer Commission since November 1995. He has a five year appointment. Professor Fels was Chairman of the former Trade Practices Commission from 1991-1995. He was also Chairman of the Prices Surveillance Authority from 1989-1992. He was Director of the Graduate School of Management, Monash University from 1985-1990, and is now Honorary Professor in the Faculty of Business and Economics at Monash University. Professor Fels is the Co-Chairman of the Joint Group on Trade and Competition at the OECD. ANNA FORNALCZYK.

is Professor of Economics at the Lodz Univerity Department of Economics and Sociology in Lodz (Poland), and a Member of the Committee of Management Sciences of the Polish Academy of Science. From 1990-1995, she was President of the Polish Anti-monopoly Office. In 1991, she took part in negotiations on the Europe Agreement between Poland and the European Union, with particular responsibility for competition and state aids. She has lectured at Central European University in Budapest. Her publications focus on competition concerns in contexts of restructuring, privatisation and deregulation. IAN S. FORRESTER

practices European law in Brussels with White & Case/Forrester Norall & Sutton. He also practices as an advocate in Scotland and, as a barrister, is a member of 2 Hare Court in London. He has participated in many cases before the European Courts, the European Commission, Scottish and English courts.


He specialises in the fields of competition, trade, professional sport, broadcasting and pharmaceutical regulation. He has lectured on E.C. trade, competition, legal and political topics to academic and private bodies in many countries, and has published extensively on these themes. He was appointed Queen's Counsel in 1988 and Visiting Professor in European Law at Glasgow University in 1991. ELEANOR M. FOX

is the Walter J. Derenberg Professor of Trade Regulation at New York University School of Law. She is a member of the International Competition Policy Advisory Committee to the Attorney General and the Assistant Attorney General for Antitrust. She is a member of the Board of Directors and the Executive Committee of the Lawyers' Committee for Civil Rights Under Law. She was a partner and is counsel at the New York law firm Simpson Thacher & Bartlett. Her books include a casebook on the law of the European Union, an antitrust casebook, and a treatise on mergers (all co-authored). She has written numerous articles and essays in the area of competition. CALVIN S. GOLDMAN

is a Partner at the firm of Davies, Ward & Beck, Toronto, Canada, where he heads the competition law and trade practices group. After practising as defence counsel in competition law matters and as Assistant Special Counsel to the Attorney General of Canada in the Uranium cartel proceedings, in 1985 he was appointed Director of Investigation and Research and Head of the Competition Bureau in the Canadian Government. Prior to his return to private practice in 1990, he was appointed Queen's Counsel and was appointed to the Soloway Chair of Business and Trade Law at the University of Ottawa. Mr. Goldman is Chair of the Competition Policy Committee of the Canadian Council for International Business and is a past Chair (1995-1996) of the National Competition Law Section of the Canadian Bar Association. Mr. Goldman has published extensively and spoken widely in Canada, the U.S.A., Europe and elsewhere. BARRY HAWK

is a Partner at the firm of Skadden, Arps, Slate, Meagher & Flom LLP and Director of the Fordham Corporate Law Institute in New York. From 1968-1990, he was a Professor at Fordham Law School in New York. He has lectured at, among other institutions, Michigan Law School, New York University Law School and University of Paris. He has published numerous books and articles focused primarily on competition law and E.C. law and he


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has edited the annual volumes of the proceedings of the Fordham Corporate Law Institute since 1974. ALBERTO HEIMLER

is Director of the Research Department of the Italian Antitrust Authority. He is Adjunct Professor of the History of Economic Regulation at Luiss University in Rome and Chairman of Working Party 2, 'Competition and Regulation,' of the Committee on Competition Law and Policy at the OECD. Before joining the Authority in 1991, he was a Senior Economist with the Confederation of Italian Industries. He has published extensively on applied economics and industrial economics. HERBERT HOVENKAMP

is a Professor of Law at the University of Iowa College of Law where his principal area of teaching and scholarship is federal antitrust law. He also teaches and occasionally writes in the fields of American legal history, law and economics, and property law. In antitrust, he has authored a standard one volume textbook (Federal Antitrust Policy: the Law of Competition and its Practice), a casebook (Antitrust Law, Policy and Procedure), and more than fifty other books and articles. He has also consulted extensively with the federal government, various state attorneys general, and many private firms. He began writing on the Antitrust Law treatise with Phillip Areeda in 1985. MARTIN HOWE

is a Special Professor in the School of Management and Finance at the University of Nottingham, and works in the competition policy and regulation fields in various advisory capacities in the U.K. and abroad. From 1973-1977, he was Senior Economic Advisor at the Monopolies and Mergers Commission. He moved to the Office of Fair Trading in 1977, where he became Director of the Competition Policy Division in 1984 and Deputy Director General in 1996. He retired from the Civil Service in 1996. ULRICH IMMENGA

is Professor of Law at the University of Gottingen, where he has been the Director of the Institute of International Economic Law since 1974. From 1986-1989, he was Member and Chairman of the German Monopolies Commission. He was also Professor of Law at Bielefeld (1970-1971) and Lausanne (1971-1974). He has been Visiting Professor at Georgetown University (U.S.A.), Kobe University (Japan), Nanking University (People's Republic of China), and several universities in France. His publications focus

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on competition law, corporation law and European law, with reference to comparative or international aspects. FREDERIC JENNY

is Vice-chairman of the Conseil de la concurrence. Since 1997, he has chaired the W.T.O. Working Group on the Interaction between Trade and Competition Policy. In 1996, he was appointed Special Advisor to the French Minister of International Trade and Competition on international trade and competition issues. In 1994, he was elected Chairman of the O.E.C.D. Competition Law and Policy Committee. He was General Counsel (Rapporteur General) of the Conseil de la concurrence from 1985-1992. Prof. Jenny served as special assistant to the French Minister for Consumer Affairs in 1977, where he was in charge of the revision of the French antitrust law. He has been Professor of Economics at E.S.S.E.C. since 1972, and has published extensively in the areas of industrial organization and competition law. He has taught as Visiting Professor at Northwestern University (U.S.A.), Keio University (Japan), and the University of Capetown (South Africa). R. SHYAM KHEMANI

is Manager of the Business Environment Group in the Private Sector Development Department of the World Bank. Previously, he was on the Faculty of Commerce and Business Administration at the University of British Columbia in Vancouver, Canada. He has held several senior positions in the Canadian Competition Bureau, including Chief Economist and Director of Economics and International Affairs. He has participated in the work of two Royal Commissions in Canada and has published and edited several monographs, books, and articles in professional journals on issues relating to competition policy. CHRISTIAN KIRCHNER

is Professor of Civil Law, European and International Economics and Business Law at Humboldt University in Berlin. From 1977-1993, he held teaching and research positions at various universities, including Frankfurt University, Tokyo University and Hannover University. He served as government advisor with respect to China prior to 1989, and with respect to Central and Eastern Europe since 1991. His publications focus on German, European and international economic and business law and on law and economics. HlDEAKI KOBAYASHI

is Minister Plenipotentiary, Deputy Chief of Mission at the Embassy of Japan in Washington, D.C. In 1968, he joined the Ministry of Foreign Affairs of


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Japan, where he served as Deputy Director in the Treaties Bureau from 1983-1984, Director of the Asian Affairs Bureau from 1984-1988, Counselor at the Embassy of Japan in Australia from 1988-1990, Minister of the Embassy of Japan in Poland from 1990-1993, Deputy Director General for Consular and Immigration Affairs from 1993-1995, and Deputy Secretary General of the Japanese Fair Trade Commission from 1995-1997. His publications focus on Japanese competition law and trade and competition policy. VALENTINE KORAH

is Emeritus Professor of Competition Law at University College London and Visiting Professor at Fordham Law School, the College D'Europe, Bruges, and the Universities of Valencia in Spain and of Lund in Sweden. She has authored numerous books and articles on E.C. competition law. She is consultant to IBC on three E.C. competition law conferences annually, and is on the editorial boards of many publications concerned with competition law in Europe, the U.S. and New Zealand. LARAINE L. LAUDATI

is Research Fellow at the European University Institute in Florence, Italy, where she works with Professors Giuliano Amato and Claus Dieter Ehlermann on various research projects involving competition law. She has worked extensively as a legal consultant to the Directorate General for Competition of the European Commission. She has practised law in Washington, D.C. Dr. Laudati has published numerous studies and articles concentrating on E.C. competition law, and has been co-editor of the Robert Schuman Centre Annual on European Competition Law since 1996. ABBOTT B. LIPSKY, JR.

is Senior Competition Counsel to The Coca-Cola Company, Atlanta, Georgia and Secretary of the American Bar Association Section of Antitrust Law. He joined the U.S. Department of Justice Antitrust Division in 1976. He served as Deputy Assistant Attorney General in the U.S. Department of Justice from 1981-1983, and as Special Assistant to the Chairman of the U.S. Council on Wage and Price Stability in 1978. He has also been in private practice from 1979-1981 and 1983-1992. His publications cover a broad range of topics in the law, economics and policy of national and international antitrust and competition, economic regulation and deregulation. MITSUO MATSUSHITA

is Professor of Law at Seikei University in Tokyo and a Member of the Appellate Body of the W.T.O. in Geneva. In 1968, he joined the faculty of


Sophia University, then moved to the University of Tokyo as a Professor of Law in 1984, which awarded the title of Professor Emeritus in 1994. He has served as a member of various councils attached to the government of Japan, including the Customs and Tariffs Council, the Industrial Structure Council and the Telecommunications Council. His publications focus on competition law issues in Japan. He is of counsel to Nagashima & Obno Law Office in Tokyo. FRANCINE MATTE

is Senior Deputy Director, Mergers Branch, of the Canadian Competition Bureau. From 1996-1997, she was Acting Director of Investigation and Research. In 1994, she became Senior Deputy Director (Mergers). Prior to her appointment, she was Head of Legal Services, Industry Canada in the market framework unit. In that capacity, she advised the Competition Bureau. She has also held various managerial positions and acted as legal counsel for many departments and organisations. She was special advisor to the Deputy Minister of Justice from 1983-1985, and Corporate Secretary to Investment Canada from 1987-1990. She was appointed to Queen Counsel in 1986. PETROS C. MAVROIDIS

is Professor for Public International Law and E.C. Law at the University of Neuchatel. He was previously with the Legal Affairs Division of the G.A.T.T. and worked as a consultant for the O.E.C.D. His most recent publications include The W.T.O. Law and Practice (co-author), State Trading in the 21st Century (co-editor) and Law and Policy in Public Purchasing, the W.T.O. Government Procurement Agreement (co-editor). ADRIAN OTTEN

is Director of the Intellectual Property and Investment Division of the Secretariat of the W.T.O., the responsibilities of which include intellectual property, investment measures, competition policy and government procurement. Previously, Mr. Otten has held posts with the Commonwealth Secretariat in London, where he worked on international trade questions, and with the Swaziland Government in Brussels, where he assisted in negotiations with the E.E.C. in the context of the first Lome Convention. He joined the G.A.T.T. Secretariat in 1975, where he has held a variety of posts. Between 1986 and 1993, he was Secretary of the Uruguay Round Negotiating Group on Trade Related Aspects of Intellectual Property Rights. DAMIEN NEVEN

is Professor of Economics at the University of Lausanne. He has previously taught at I.N.S.E.A.D., the European College in Bruge and the University of


Brussels. His research focuses on trade and competition, with an emphasis on European matters and antitrust. His most recent publications include Trawling for Minnows, Agreements in European Competition Law (co-author). ALBERTO PERA

is Secretary General of the Italian Antitrust Authority. From 1987-1990, he was a consultant to various Ministers of Industry on antitrust and competition issues, and negotiated the E.C. Merger Regulation. Prior to 1987, he was a staff economist at the I.M.F., and Chief of Economic Research at I.R.I., Italy's state holding of public enterprises, and was involved in its privatisation program. He has taught economics at the University of Rome and public sector economics at Catholic University of Milan. He his publications focus on financial markets, publicfinance,privatisation and regulation. He has also been a consultant to the World Bank and O.E.C.D. on these matters. ROBERT PITOFSKY

is Chairman of the Federal Trade Commission. Formerly, he held positions as Director of the Bureau of Consumer Protection of the Federal Trade Commission; Commissioner of the Federal Trade Commission; Dean and Professor of Law at Georgetown University Law Center; Professor of Law at New York University School of Law and Visiting Professor of Law at Harvard Law School. He has also been counsel at thefirmof Arnold & Porter. His publications include various books and articles on antitrust law. JAMES F. RILL

is a Partner at the law firm of Collier, Shannon, Rill & Scott, where he specialises in domestic and international mergers, acquisitions, and strategic alliances and complex antitrust litigation. He is Co-chair of the International Competition Policy Advisory Committee to the Attorney General and the Assistant Attorney General. He is Vice Chairman of the Business and Industry Advisory Committee, O.E.C.D. Competition Law and Policy Committee. From 1989-1992, he was Assistant Attorney General for the Antitrust Division of the U.S. Department of Justice. During this period, he was responsible for the 1992 Horizontal Merger Guidelines jointly issued by the Federal Trade Commission and the Department of Justice. In 1991, he negotiated the U.S.-E.C. Antitrust Cooperation Agreement. CONSTANCE K. ROBINSON

is the Director of Operations and Merger Enforcement of the U.S. Department of Justice Antitrust Division. She has served as Department of Justice


prosecutor for 21 years. Ms. Robinson has also served as Vice Chair and Chair of the Criminal Practice and Procedures Committee of the American Bar Association's Antitrust Section. ALEXANDER SCHAUB

has served as Director General for Competition of the European Commission in Brussels since May 1995. From 1990-1995, he was Deputy Director General for Industry. Mr. Schaub previously served in the cabinets of Ralf Dahrendorf, Guido Brunner, Viscount Etienne Davignon, President Gaston Thorn and Willy De Clercq. In 1988, he was appointed Director at the Directorate General for External Relations and Trade Policy. Mr. Schaub has written a book on the European Parliament and articles on economic and commercial topics. MARIO SIRAGUSA

is a Partner at the firm Cleary, Gottlieb, Steen & Hamilton. He is engaged in corporate and commercial practice and specialises in E.C. competition law. Mr. Siragusa began work at the firm in 1973. He is professor at the College of Europe, Bruges and at the Catholic University, Milan. He lectures at conferences in various European countries and in the U.S. on E.C. law. He has published numerous articles on E.C. law. FRANCOIS SOUTY

is Rapporteur in charge of multilateral affairs at the Conseil de la concurrence in Paris, and Associate Professor at the Universite de La Rochelle. From 19901996, he served as Charge des affaires internationales de concurrence at the General Directorate of Competition, Consumers Affairs and Fraud Repression (D.G.C.C.R.F.) in the French Ministry of Economics and Finance. From 1983-1990, he was an investigator with the D.G.C.C.R.F. He has lectured at the universities of Paris, Nantes, Toulouse (France) and Groningen (Netherlands). He has authored five books on competition law and policy and has written extensively in thefieldsof economic policy and economic history. ANTONIO TIZZANO

is Professor of E.C. law at the University of Rome La Sapienza. He has been Professor at the University of Naples and Catania, and at the National University of Mogadishu, Somalia, and has lectured at the Hague Academy of International Law. He has served for many years as Legal Adviser to the Italian Permanent Representation to the E.C. Prof. Tizzano was a member of the Italian delegation to the I.G.C. on the Single European Act and on the


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Treaty of Maastricht on European Union. His publications focus on E.C. law, mainly on institutional issues, freedom of establishment, financial services, telecommunications, and antitrust. His is founder and co-editor of the review, // Diritto dell'Unione Europea. JAMES S. VENIT

is a Partner at the Brussels office of Wilmer, Cutler & Pickering, where he specialises in E.C. competition law. Mr. Venit has frequently participated in E.C. competition law conferences, both in Europe and the U.S., and has written extensively on various subjects of E.C. competition law. MICHEL WAELBROECK

is Professor of Law at the University of Brussels and President of the Commission de la Concurrence, which was established in 1991 to advise the Belgian government on competition matters. He has been Visiting Professor at New York University Law School and University of Michigan Law School (1969-1970), the European University Institute ((1981), and the Parker School of International and Comparative Law, Columbia University (1980-1989). Professor Waelbroeck has written numerous books and articles on international law and European Community competition law. MARK WARNER

is Legal Counsel in the Division of Policy Inter-relations in the Trade Directorate of the O.E.C.D. Mr. Warner is also Chair of the International Antitrust Committee of the American Bar Association Section of Antitrust Law and a member of the A.B.A.'s Antitrust in the Global Economy Task Force. He is co-author of the Second Edition of the leading Canadian trade law treatise, The Canadian Law and Practice of International Trade (1997). He is also an Adjunct Professor of International Competition Law at the University of Leiden in the Netherlands. REIN WESSELING

is an Associate at the firm DeBrauw Blackstone Westbroek in Amsterdam. He is currently completing a Ph.D. thesis at the European University Institute in Florence, excerpts of which have been published. RICHARD WHISH

is a Partner and Head of the E.C. and Competition Law Department at Watson, Farley, & Williams, London, and Professor of Law at King's College London. He has authored several books including Competition Law (3rd


edition 1993) and is General Editor, with Peter Freeman, of Butterworths Competition Law. DIETER WOLF

has been President of the German Bundeskartellamt, Berlin, since 1992. He previously was employed with the Federal Ministry of Economics where he headed the Industrial Policy Subdivision and the Competition Policy Section.

PANEL DISCUSSION


GENERAL RAPPORTEUR:

Prof. Frederic Jenny, Vice President, Conseil de la Concurrence, Paris, France

PARTICIPANTS:

Gabriele Castenada, Partner, Castaneda Y Asociados, D.F., Mexico Anna Fornalczyk, Professor, Vice-president, Competition Development Centre Ltd., Lody, Poland Hideaki Kobayashi, Deputy Secretary-General, Japanese Fair Trade Commission, Tokyo, Japan Francine Matte, Deputy Director, Canadian Competition Bureau, Hull, Quebec, Canada Damien Neven, Professor, University of Lausanne, Lausanne, Switzerland Robert Pitofsky, Chairman, United States Federal Trade Commission, Washington, D.C., U.S.A. Alexander Schaub, Director General for Competition, European Commission, Brussels, Belgium Dieter Wolf, President, Bundeskartellamt, Berlin, Germany

1 - Competition Policy Objectives

• PROF. AMATO—The workshop this year is devoted to objectives of competition policy. This is not a new topic, but we are proposing to discuss it in the context of the European Union, Eastern Europe, and globalisation of the marketplace, where this topic has very new and extremely intriguing elements. It requires a frank discussion, because it is doubtful that we all agree on the goals of competition. Generally, however, we refrain from discussing it openly, and ambiguities remain. • PROF. JENNY—I believe there are three major reasons for discussing this topic. First, many jurisdictions are debating how competition law has been enforced, whether there were political motivations behind decisions by independent authorities, and if so, what those political dimensions of competition policy are. Second, in the context of O.E.C.D. countries, which have a long tradition of competition law and policy, we have considered the themes of convergence, harmonisation, and cooperation, and recognised that there are differences among national competition laws and policies. What justifies these differences? Do the implicit goals of competition policy differ from country to country, and if so, what does that imply with respect to harmonisation, whether soft or hard? Third, we must consider whether common minimum standards might be achieved for the international community through discussions within the W.T.O. or other multilateral fora, and if so, how. This also raises questions of whether there are common goals of competition policy. So whether one looks at the national, regional or international situation, we are always asking ourselves what the goals of competition policy are. I had expected the papers for this session to take a much tougher stance that competition policy should focus only on efficiencies and economic welfare, and everything else should be rejected. However, my impression from reading the papers was that the authors generally recognised implicit political goals as well as economic goals. I do not mean political goals which would be less noble than economic goals. Rather, that certain goals underlie competition policy which may not come straight out of a microeconomic theory textbook. A recurrent theme in the papers is the relationship between competition, economic democracy, and political democracy. If economic democracy will help promote political democracy, this constitutes a political goal which is beyond the scope of microeconomic theory. Referring to Europe, Mr. Schaub says that market integration is the overriding political goal, and is a different goal from achieving economic efficiency. The Commission's Green Paper on Vertical Restraints indicates that this goal is very important in the implementation of European competition policy. Mr. Castaneda says that irrespective of a desire to follow a strictly

Panel Discussion

economic approach to competition policy, the aspiration to achieve fairness and to provide opportunities are important goals of competition policy. Mr. Fels states that one of the political goals of competition policy is to establish limits on the powers of both government and private bodies. Thus, the panellists agree that several types of political goals might underlie competition laws. I would like to raise several questions for discussion. First, does competition policy share the same non-economic goals all around the world, or does it vary from country to country? Second, is it legitimate for competition policy to protect small and mediumsized firms? The consensus in the papers is that political goals are legitimate goals of competition policy, but that the protection of small-and medium sized firms is not a legitimate goal. This begs the question: if we admit that it is legitimate that there be political as well as economic goals to competition policy, can we distinguish between legitimate and non-legitimate political goals, and if so, what are the criteria for doing so? Third, to what extent do the legitimate political goals of competition policy interfere with the strict economic goal of economic welfare? Mr. Castaneda asserts that there is no agreement on what economic welfare is, in policy terms as opposed to theoretical terms. Thus, when competition policy is based on both economic and political goals, adjustments must be made; a strict economic approach must not be followed. If that is true, why are we still inclined to talk about competition policy in strict economic terms? Fourth, do differences in competition laws follow when underlying political goals vary? Prof. Fornalczyk suggests that competition policy in countries in transition regimes takes a more regulatory approach, and addresses problems such as controlling inflation or prices. Does this follow because these countries have a different political agenda? Are some infractions defined as per se unlawful because there is an implicit assumption that economic power has the potential to corrupt the political system and is bad per se, irrespective of the efficiencies that could result? Are the institutions themselves and their degree of independence the result of the political considerations that underlie competition policy? If the differences among countries in competition policies follow from different underlying political goals, what does that mean for the international debates, in terms of harmonisation, in term of convergence? Is it legitimate to pursue harmonisation, or should we recognise and accept that we have different political goals? What are the implications for the multilateral framework? • MR. CASTENADA—There are several interesting aspects of the Mexican case. First, the Mexican Constitution of 1857 contained the first constitutional provision on competition. The 1917 constitution, which is still in effect in Mexico,


5

also contains a competition provision that establishes a good foundation for a sound competition policy. Art. 28 of the constitution contains a sweeping prohibition against monopolies and monopolistic practices, as well as a clear mandate to eliminate all horizontal or collusive agreements, and a prohibition of all anti-competitive practices. A new Mexican competition law was enacted in 1993, which takes a fresh approach to competition policy. Four years of enforcement of the new law provides a good framework for competition in Mexico. Second, to advance competition policy, it is important that politicians be committed to its objectives. However, it is difficult to get politicians to focus on this area, because they have many other issues that they must address and competition may not be their most immediate concern. Moreover, in a country like Mexico, which has a highly concentrated economy, strict enforcement of competition rules may not appeal to politicians. Third, we must compare theory to practice. One need only consider decisions and rulings around the world, from judges and competition authorities, to wonder whether all adhere to any pure competition policy. Having a good competition statute is very different from having a good and actively enforced competition policy. For the latter, it is necessary to have transparency, clearly motivated decisions, and social backing. Since 1985, Mexico has been in the process of deregulating and opening the economy. These processes help build social backing for the new competition statute. Fourth, the government is also subject to the Mexican competition law. Finally, the Mexican system contains several safeguards designed to prevent the enforcement agencies from deviating. These include private enforcement and accountability measures, such as annual reports and advocacy from the agency itself. • PROF. FORNALCZYK—I would like to make four points. First, competition policy and competition law enforcement are very important for both industrialised countries and transforming countries, and the goals of competition policy in both are nearly identical: to prevent abuses of dominant position, anti-competitive agreements, and to control merger activity. However, the conditions and the scope of work, as well as the political and economic environment for competition law enforcement, are more severe in transforming countries than in industrialised countries. Second, my experience in Poland and other transforming countries leads me to conclude that the balance between economic goals and social goals is very fragile. Competition policy in transforming countries must focus on economic goals to counterbalance the social goals that are the sole focus of many politicians. All

Panel Discussion

over the world, competition authorities are viewed as troublemakers, but it is especially true in transforming countries. Thus, they must base competition policy on efficiency and consumer interests. Competition advocacy within the government is very important in restructuring programs, in programs of privatisation, and in many issues of government economic policy. Third, I spent one year as consultant to the Russian anti-monopoly committee, and I know how many problems exist in the former Soviet Union. The situation there is far more difficult than, for example, it is in Poland or the Czech Republic. Fourth, harmonisation and convergence of competition law is very important for transition countries. When I was president of the Polish Antimonopoly Office, I often argued to government ministers that we must harmonise our competition law with European Union standards. Such discussions are important in our countries to change the way of thinking and support market oriented reform. • MR. KOBAYASHI—Prof. Jenny's questions appear to be based on the assumption that a clear distinction exists between economic goals and political goals. The political goals suggested by Prof. Jenny include the democratic process, pluralism, promotion of free enterprise, market integration, fairness and social cohesion, among others. However, I question whether such a clear distinction can be made between political and economic goals. My impression is that most of the political goals suggested by Prof. Jenny can also be described as economic goals. For instance, regarding democratic process, "the democratic development of the national economy" is mentioned as an ultimate objective of the Japanese competition law. This was meant to create the basis for prevention of the re-emergence of "zaibatsu," which were gigantic family concerns that controlled the Japanese economy in the pre-war era. This clearly has a political element, but it was basically conceived as an economic objective. Regarding fairness, the provision of the Japanese anti-monopoly law specifying objectives refers to "fair competition". The concept of "fair competition" is generally understood to mean competition by means of intrinsic elements of business, such as price and quality, which again, is basically an economic concept. Moreover, the concepts of market integration and the promotion of free enterprise as goals of competition law are primarily considered from the economic point of view. In some countries, "pluralism" mainly signifies cultural or ethnic pluralism. In Japan and several other countries, however, it signifies the need to preserve a variety of sizes or types of enterprises, which is basically an economic concern.


Accordingly, political goals appear to be based on economic goals, primarily efficiency. Political goals may be viewed as intermediary steps that may ultimately advance the economic goal of efficiency. Thus, it appears that it is not necessary to view political goals and economic goals as mutually exclusive. Political goals have many economic elements, which are generally acceptable in most countries. • Ms. MATTE—The views expressed here are my own. The "purpose clause" of Canada's competition act summarises its objectives; I will not discuss that here, because my paper refers to it at great length. Each nation's competition law is adapted to its needs, and follows its historical, cultural and institutional framework. This probably explains why the level of political involvement varies. In Canada, competition is not viewed as an end in itself, but rather as a means to further various other objectives. Our law has evolved through the years. Historically, the major objectives of Canadian competition policy have been to maintain free competition, to prevent abuses of market power (and to protect consumer interests), and to promote economic efficiency. There has been considerable debate over the primacy of these objectives in Canadian government, business, and academic circles over the years. A consensus has emerged, however, that competition policy should focus on the goals of protecting and conserving competition, and promoting economic efficiency. In recent years, concern with economic efficiency as an objective of competition has further evolved to encompass the goal of international competitiveness. Increased efficiency is now widely acknowledged as the key to improving Canadian performance in world markets. Increasingly, the social and political dimension influences our thinking on policy and law. We consult more frequently with interest groups, and do not limit our thinking to just the economic dimension. For example, with regard to the deregulation of telecommunications, we have followed a more social approach. During the transition period, we did not base all of our decisions on pure economic reasoning. We even recommended use of targeted subsidies during a period of rate rebalancing when local rates were being increased. Given my belief that competition law must adapt to the specific needs of each country, I am not convinced that international harmonisation would be possible or would be desirable. Some degree of co-operation can be achieved, and in the U.S./Canada context, much has already been achieved to improve our ability to co-ordinate enforcement efforts. Moreover, through meetings like this, we are sensitised to each other's laws. In the future, this may lead to further convergence.

Panel Discussion

• PROF. NEVEN—I shall make four points. First, the objectives that we assign to the agency in charge of implementing the policy might be better achieved if drawn narrowly. This is a familiar principle from the theory of delegation. Second, we must recognise the constraints under which institutions operate. We must simultaneously consider the objectives of competition policy and the design of the institutions that implement the policy. This may also suggest that in some instances, the objectives should be narrowed. Third, I question whether the objective should be narrowed to competition itself, rather than considering all aspects of economic efficiency. This is the approach that was followed by the E.C. merger regulation, at least formally. I have reviewed the recent economic literature in that respect, and have drawn two conclusions. One conclusion is that productive efficiency, as opposed to allocative efficiency, has received more attention recently. We have learned in the last ten years of empirical work in industrial organisation that price distortions do not matter very much. Instead, what matters is that competition might promote efficiency of firms, and ensure that they run a tight ship, that costs are minimised. The second conclusion is that competition might also provide firms with incentives to enhance dynamic efficiency, but this is more debatable. I concluded from this literature that we might well presume that competition would enhance both productive and dynamic efficiency. This would provide a good case for narrowing the objectives of competition. However, this certainly requires a much more refined concept of competition than the one we have been using, and a more refined concept of what is a restriction of competition, certainly than the one that is currently used in the context of Art. 85(1). Fourth, I believe that the E.C. pursues the objective of promoting market integration very often at the expense of market efficiency. Price differentials among E.U. Member States are more a symptom of market power than a cause of anything. Given the existence of this market power, it is often not efficient to promote market integration, which runs against economic efficiency. • MR. PITOFSKY—First, on the issue of economic versus political goals as the basis for a competition policy, I think we all agree that the primary influence on competition policy should be economics. In pursuing the economic goals of competition policy, that is, by challenging market power, cartels, and abusive behaviour, we are also producing jobs, improving international competitiveness, promoting innovation. Therefore, the differences between economic and political goals are modest. If differences exist, and if there is a political component to competition policy, I believe it should be reflected in how rules are fashioned for future application. For example, a country may decide to challenge horizontal mergers at


9

the ten- percent level, or at the thirty- percent level, or at the fifty- percent level. It is not entirely an economic decision; in part, it is also a political decision. In the United States, we must respond to what the legislature thought when it enacted the antitrust laws, and when it revised them, and what the legislature would say today. Most of the support for an exclusively economic approach in the United States comes from academia. However, I do not believe it would be the approach selected by our legislature today if this question were put to a vote. If you introduce a political component, how do you do it? Are all "political" values included? For example, why in the United States do we not interpret our antitrust laws specially to preserve small business? I believe the answer is that we do not really believe that distorting antitrust principles would help small business. We cannot save small food stores from the chain stores by blocking chain store mergers. We cannot repeal the marketing revolution through antitrust enforcement. Moreover, a real commitment to helping small stores compete could be better pursued through tax policy or subsidies. • MR. SCHAUB— I agree with Mr. Jenny that the debate on the objectives of competition policy is very important. Moreover, there appears to be room for clarifications because the papers seem to show divergence of objectives. The differences, however, become smaller and less frightening when we try to structure the variety of goals listed in the papers. In my view it is necessary to distinguish between ultimate and direct or intermediate goals. Ultimate objectives such as prosperity and growth or even pluralism are those which lead political decision makers to adopt competition laws. These objectives are partly political, partly economic. Political objectives have economic consequences and vice versa. At this level the divergences are not that great. Direct or intermediate goals, on the other hand, concern the maintenance of effective competition. They tell us when to intervene and what criteria to use for the assessment. The two categories should not be mixed up. If we did, antitrust policy would be burdened with too long a list of objectives. Furthermore, the criteria for the assessment of cases would become less clear and transparent. Political, social or environmental aspects, in my view, have no place in the direct application of competition law. And—at least since I have been Director-General— criteria such as the protection of certain industries or the promotion of national champions have never been taken into consideration. Under Community law the protection of competition as the mechanism in a market economy is decisive. In addition, market integration is an explicit objective. Within the antitrust family this is rather unique and may be seen as

10

Panel Discussion

a break from the general principle of protecting competition as an indirect mechanism. The importance of this objective will diminish with ongoing integration. However, I personally believe that we still need market integration as a direct objective within our competition rules for its psychological and pedagogical effects.

Observations and Comments • MR. BELL—Within our increasingly globalized economy, effects on competition no longer solely originate from within a jurisdiction's domestic borders. Instead, instances of anticompetitive conduct occurring outside domestic borders that impact or affect competition are becoming more prevalent. In addition, with more than 60 jurisdictions having enacted some form of legislation governing anticompetitive conduct, the likelihood of disparate treatment of alleged acts affecting competition is growing. Since it seems infeasible at this time to expect or even desire substantive convergence of antitrust laws on a worldwide basis, cooperation among competition enforcement authorities appears to be the most viable alternative in addressing these concerns. Cooperation between enforcement authorities can occur on many different levels, depending on the various jurisdictions involved and the degree of confidence each agency has in each other's competition regimes. The flexibility derived from international cooperation can range from simple ongoing dialogue during a multijurisdictional merger review, to the establishment of positive comity principles between two jurisdictions. At either end of this spectrum, the benefits gained from cooperation outweigh the potential frictions caused by unilateral enforcement or extraterritoriality. Some view divergences in both substantive law and domestic social issues as impediments to the possibility of international cooperation; however, the extent to which these divergences create barriers to cooperation has been exaggerated. Cooperation does not entail harmonization of substantive law, but instead seeks to find mechanisms to bridge the variant antitrust laws in order to coalesce in a worldwide economy. While the benefits derived from the use of cooperation in the international competition arena to date have been noticeable, more initiatives need to be pursued to improve such cooperation. If cross-border cooperative efforts are not pursued as a means to avoid or resolve disputes, the remaining alternatives hold the potential to create significant friction between enforcement authorities. Alternatives to cooperation include: extraterritorial enforcement, use of trade remedies (including Section 301 actions), or formal dispute resolution mechanisms. While these mecha-


11

nisms may be successful at resolving specific and individual areas of conflict, the resulting friction imposed by their utilization could remain detrimental to future relations between the countries. At present, cooperation efforts appear to hold the greatest potential for minimizing conflicts that could arise between international competition enforcement authorities. • MR. GOLDMAN—I would like to raise several problems with defining the legitimacy of political goals of competition policy. It is impossible to plan submissions to competition enforcement authorities with the uncertainty created by a political override, or when norms are not widely understood. There are inherent risks when political goals are pursued, other than, of course, the initial goals that are set fourth expressly or implicitly in the legislation, which must be established at the outset. • PROF. BOURGEOIS—Is it not making policy when we take decisions on what sort of competition, or how much competition we should have, or where competition should be, in a concrete case? For instance, the European Commission's market integration objective is a decision to pursue competition at the Community level, and not to permit separation of markets. Are we not hiding behind our pencils when we say "no, no we are not pursuing political goals when we are concentrating only on competition"? • PROF. FOX—A distinction should be made between political goals that clearly override competition and efficiency, such as national industrial policy and protection of national champions and those that do not, such as entrepreneurial access to markets on the merits. Setting that aside, economics is a function of politics. This discussion has drawn a line between politics and economics. Some seem to have suggested that, if only we applied economics, the competition law of all nations would converge to the same rules. However, economics is a function of politics within the range of conflicts that arise under the antitrust laws. This is evident when one considers the various schools of economics that have arisen at various times in history, or even simultaneously. Today, certain economists are more sympathetic to the Community system, and others are more sympathetic to the, more laissez faire, U.S. system. For instance, Alexis Jacquemain in Europe and Frederick (Mike) Shearer in the U.S. are sympathetic to one view of "what is competition that should be protected". In contrast, Frank Easterbrook and James Miller in the U.S. are sympathetic to another very free-market idea of competition. Some leading analysts don't purport to separate economics from politics. When he was head

12

Panel Discussion

of the Federal Trade Commission, James Miller would often say that a libertarian value of freedom was guiding his view of economics. Finally, we ought to recognise differences where they exist so that we can deal with them. For instance, the U.S. and the European Commission held differing views with respect to how to evaluate IBM's conduct in the 1980s. In particular, IBM's changes of the interface of its mainframe computers, and the failure to disclose those changes of interface, disadvantaged the makers of peripheral equipment who were forced to rediscover the wheel before they could make a new or improved disk or memory that was plug compatible with IBM's mainframe. United States enforcers dismissed their own action, on the ground that it was pro-competitive and efficient for IBM to be allowed to make product changes whenever it chose. In contrast, the Commission issued a statement of objections, on the ground that these acts were anti-competitive and anti-efficient. Thus, policy values and perspectives are always important, even when we believe we are pursuing competition and economic goals. Economics is a function of politics. • MR. FAULL—It is interesting to hear that in 1857 the Mexican constitution contained competition laws, because people often suggest that the Treaty of Rome created the first competition laws of constitutional status some one hundred years later. At times, it seems the search for goals leads us down fairly dangerous paths. For example, the notion that we are protecting economic freedom, which sounds very noble, has impaired the interpretation of Art. 85 for the last 40 years. Two groups have emerged: those who believe that the objective of Art. 85 is to protect people's freedom to act, and those (amongst whom I count myself) who believe that the objective of Art. 85 is to protect the process of competition. Competition law can't save the world. Other laws and policies address other aspects of the economic system. I believe we should remain modest in our goals. Of course, within apparently neutral bureaucracies, policy choices are being made. Perhaps President Wolf is correct to assert that they should be articulated more openly so that there can be more accountability in the system. In day to day work, most competition authorities represented around this table believe that they are doing their best to ensure that the competitive process is functioning, to prevent at least the most egregious distortions of competition, and thereby to assist consumer welfare. • PROF. HOVENKAMP—In the U.S. today, there is no longer a significant debate about whether antitrust policy should encompass non-economic goals.

/ - Competition Policy Objectives

13

Literally thousands of law review articles have been written on this topic, and many hundreds of actions have been brought by private plaintiffs containing claims based on non-economic goals. However, non-economic goals have been very largely written off in the mainstream debate. No one of much consequence in the U.S. would any longer assert that consumer welfare should not be the central or even exclusive goal of antitrust, or that antitrust should be concerned about unemployment, inflation or other macroeconomic issues. However, a very significant political debate continues with regard to selection of appropriate economic theory. Antitrust continues to have a left, centre, and right in the U.S. All believe that economics ought to be the exclusive engine for determining antitrust outcomes, but opinions differ considerably with respect to selection of the appropriate economic theory. For instance, the 1992 U.S. Supreme Court's Kodak decision held that Kodak might have an obligation as a firm acting unilaterally to share its replacement parts with independent small businesses who service its machines. I regard that as a kind of left wing, scatter-brained, rather harmful decision that has had a lot of bad effects on antitrust in the United States. When Justice Blackman wrote that opinion, he didn't dispute the basic proposition that economics guides antitrust. Rather, he found market power where many would dispute that market power exists, and the conclusion that Kodak might have this obligation to share was an economic decision, not a political decision that recognised a duty under the antitrust laws to aid small business. • MR. HOWE—I shall comment regarding the relationship between objectives and the design of the institutions responsible for implementation of the law. I have recently provided advice to a small developing country regarding how to establish an antitrust law and enforcement system. It was easy to agree that the objective of the antitrust law should be economic efficiency in some broad sense of the word. It was also easy to agree that the main substantive provisions of the law should cover cartels, dominance, and mergers. However, problems began when we discussed institutional design. The World Bank advocates independent agencies to enforce competition law, but what is meant by independent agencies? In any event, this country was not prepared to delegate such authority to an independent enforcement agency, as members of government were concerned about what could happen when jobs are at stake, or when foreign companies want to enter the local market. I left them with an outline of a good modern textbook antitrust law, but with uncertainty regarding who would enforce it and how. If ministers are going to intervene in any event, perhaps it is preferable to have a system that gives them a political override, rather than to have a clear-cut antitrust law that

14

Panel Discussion

is then fudged in its enforcement. Politicians have a legitimate interest in protecting small firms, or indigenous industry or jobs. I believe it is preferable to make this explicit, rather than have apparently clear-cut rules which are then fudged in the enforcement process by the intervention of other criteria. • MR. ABBOTT—Regarding the conflict between economic and political goals, a distinction is being made implicitly between decisions or recommendations made by the competition authority versus those made by the government. In many other areas of government policy, politics may interfere with the achievement of the primary goal. For instance, in areas like shipping or civil aviation, in most countries government authorities make daily decisions, but issues such as effect on the environment are raised and the decisions become political. Similarly, regional development is a clear case where both a social objective and an economic objective are present. Anti-dumping decisions can also become highly political. No one here has suggested that the conflict in policy goals in competition differ from any other area of government policy. • MR. LIPSKY—Economics provides a tool to predict what the ultimate effect of a given form of business conduct, or a rule that regulates that conduct, will be on society's ability to generate wealth through its scarce resources. In the U.S., every antitrust decision must begin with a fundamental and economically rational analysis. Otherwise, the criteria of analysis, whether economic, political, or other, will be unclear. The economic rationality standard is what puts competition into practice in a particular case. Without it, decision-makers would have no way to distinguish behaviour which is per se legal from that which is per se illegal, or subject to any standard between those two. One further point: the proscriptions that will be delivered on an economic efficiency criterion are identical to those that will be delivered on a consumer welfare criterion, except in very narrow and unusual circumstances. • PROF. AMATO—It appears there is general agreement that if goals other than economic goals are pursued, this should be done in a transparent manner. This creates a major problem under the Community system. The Commission may grant a negative clearance under Art. 85(1) because an agreement is not restrictive, or it may exempt an agreement under Art. 85(3) because it is restrictive but beneficial in some other way. Use of the power of exemption violates the transparency principle. Therefore, we should employ an economic assessment and determine whether agreements are restrictive under Art. 85(1); we could then use the power of exemption for other purposes, if other purposes must remain, such as social, regional or industrial policy goals.


15

We must, of course, be aware that different views exist regarding economic criteria. In the Kodak case, both the majority and Justice Scalia employed economic reasoning, but according to the majority, Kodak had market power, and according to Justice Scalia, it did not. • PROF. FOX—I do not agree that all credible people in the United States now say that economics and efficiency are the sole accepted criteria for applying the antitrust laws, as has been suggested. There is a left, middle and right of economics, but how can that be the case unless policy or political considerations other than economics are assessed? In the U.S., everyone uses language of efficiency because that is, at the moment, the accepted discourse, but other policy goals are considered. Market access restraints provide an example. Even in the U.S., differences exist as to whether a restraint that blocks market access is illegal only if a plaintiff can prove that it also lessens output, and is in that sense inefficient, or whether such a restraint is illegal if and when it significantly impedes the flow of trade and artificially blocks market access. • MR. FAULL—On the few occasions that we pursue goals other than efficiency under Art. 85(3), our proceedings are transparent: decisions are published; before decisions are rendered, a notice is published calling for third party comment. That is more transparency than is employed by many other systems around the world. I believe it is too easy to say that the Kodak majority was wrong but still based in economics. Of course, the language employed in the decision is that of economics. However, it is not clear from reading the decision what policy that particular economic language was based upon. A cynical European sees in Kodak sympathy for the small dealer. That has not changed from earlier periods in American antitrust history; it is written differently, the language has changed. Many different views are possible on what is politically correct economic language. I don't think that answers the question at all. I do not believe that from reading the Kodak decision, one can conclude that economics is more paramount in the United States than it is anywhere else. • PROF. HAWK—This discussion on the U.S. and Kodak is very interesting. It is not unique to the U.S. As I see it, when a case is presented before the courts or enforcement authorities, it must be argued in the language of economics. To persuade the court or authority, economic analysis must be employed. Economics is supposed to be an intellectual discipline. It is not on a scientific level equal to that of physics, but there is a science to it. However,

16

Panel Discussion

politics also enters into it. We generally no longer argue explicitly in political terms, such as protecting small business; the arguments have become less transparent. However, there is a political motivation that is the basis for the decisionmaker's selection of the economic school that he or she will apply. Nonetheless, the necessity of making arguments in economic terms still constitutes a constraint, to the extent that economics is a science, an intellectual discipline. • MR. SCHAUB—Depending on which economic school forms the basis of the arguments, the capacity or judgement of the individual making the arguments, or the quality of the economist, a decision-maker can arrive at entirely diverging assessments. In specific cases, arguments are presented based on a given economic theory, but lead to diverging conclusions. For instance, regarding the Commission's famous decision in the DeHavilland merger, a divergence was evident in all the internal papers regarding market definition. Some argued that the market was larger, and others argued that it was smaller. This issue was determinative, however. The day after the decision was issued, in particular following the press reports it would have been impossible for the general public to conclude that the decision was based on economics rather than industrial policy and national champions. However, such arguments had been rejected. In many cases, the frustrating situation will exist that notwithstanding brilliant economic arguments, people will suspect that the real motive for a decision is not the stated economic reason, but some other hidden reason. However, as long as human beings are involved, this is inevitable. • MR. FORRESTER—When one goes to hearings at the European Commission or the Court, one can find Nobel scientists on each side of the table, one proving with beautiful charts and diagrams the precise diametric opposite of what the other has argued. It is very important to acknowledge that when law is applied, it will not be done in a scientific or universally predictable manner. It is unlike medical science or nuclear physics, because it is very highly arguable. So much depends on how the kaleidoscope is shaken. It would be an interesting Ph.D. thesis to correlate the asserted purity of the purely economic policies being pursued by some antitrust jurisdictions around the world, and how those policies are actually applied in practice. I suspect that such an analysis of the practice of a super right-wing, purely economics, nonindustrial, non-social, non-consumer, non-anything else administration, compared with such an analysis of the practice of a fuzzy, gentle, green, friendly one like the European model, would reveal that the actual implementation in individual cases could not be easily distinguished.


17

• PROF. WAELBROECK—As long as cases are being handled by human beings, we will never agree. However, at least now we all speak the same language, the language of economics. Previously, we didn't know exactly what language we were speaking. When people speak different languages, there appears to be less chance of agreement than if they speak the same language. At Commission hearings, I have frequently heard economists making arguments which are quite opposite from what the Commission says, which also is supposedly based on economic theory. For instance, I have heard very good economists argue that there was no reason to be concerned about a horizontal cartel, because it had no effect on price, and if there had been no cartel, price movements would have been exactly as they were with the cartel. People disagree about whether Kodak is good or bad. Personally, I favour the Kodak decision, perhaps because I would be classified on the left of the economic schools. Definition of the relevant market is important to the outcome of a case, and involves economic judgement. An early Supreme Court decision held that a market share increase from 7% to 10% is very dangerous, because there was a trend towards concentration in the industry involved. However, this analysis was incorrect, because a trend towards concentration may indicate that it is efficient forfirmsto be larger. • PROF. NEVEN—Being underrepresented here, as an economist, I am a bit disturbed by this discussion. I share the concern that a completely unaccountable clique of economists will eventually capture competition policy. However, the problem is not that there is left and right and centre economics, but that there is bad economics and good economics. It is important that the lawyers understand what are good economics and what are bad economics. Economists should be made accountable in the same way that lawyers are made accountable. The first step in making economists accountable is to develop standards for economic arguments, thereby ensuring that lawyers understand them better. The second is to publish what they argue with respect to particular cases. Economists would be much more careful about what they argue at Commission or administrative hearings if their arguments were published. • MR. KHEMANI—I belong to the underrepresented portion of this audience: I am an economist. Unlike the professional requirements of lawyers, there is no minimum entry standard for economists. This often leads to lawyers becoming economists, but not economists becoming lawyers. The political gloss that is often linked with competition in order to make

18

Panel Discussion

it saleable should not be confused with the objectives. Competition legislation is frequently unpopular; to get the legislation passed, it is frequently necessary to attach a political gloss. To find the objectives of U.S. antitrust law, it is necessary to go back to the Congressional debates because the objectives are not articulated in the Sherman Act itself. In contrast, a specific provision articulating the objectives was included in the Canadian competition law. The various objectives mentioned during the U.S. Congressional debates have been given different weights over the past century. The outcome of any particular case relates more to the different weighting of factors, and not necessarily bad economics or good economics, or left, centre, or right-wing economics. Regarding independence of a competition office, I believe it is an important aspect of institutional design, but so are accountability and transparency, and a system of checks and balances. Even with all those safeguards, there are still no guarantees. When I was the chief economist in the Canadian competition office, I had no difficulty in assigning weights or deciding on the primacy of the goals articulated in the law. The primary goals are to maintain and protect competition, in order to advance economic efficiency, with consumer welfare being an important factor. Secondary goals relate to total economic welfare, Until now, there has been no need carefully to weigh this goal in a specific case. The analysis usually ends with consumer welfare. I do not agree that economic efficiency is automatically related to consumer welfare. The latter is a subset that willflowfrom the former, but it will not necessarily lead to total economic welfare. • MR. HEIMLER—I am an economist, and I do not believe that in the Kodak case, there were two economic theories. Two different results were reached, but the theory behind each was the same. It was a matter of assigning different weights to different factors. People have different attitudes towards those factors, but the economic reasoning was the same. The two sides of the Kodak case could easily discuss their attitudes without challenging the hypothesis of each. The hypotheses were well understood. I agree that there are good economics and bad economics, and if results flow from good economics, they are accountable, and can be discussed. I believe that maximising consumer welfare is generally the objective of our laws. This is the case with respect to Art. 85 in its entirety. We should not distinguish results under Art. 85(1) and 85(3); rather, we should see the whole as one system. This allows us to see that Art. 85 as a whole must be interpreted under the constraint of maximisation of consumer welfare.


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I do not believe a competition authority is the right institution to pursue objectives other than consumer welfare. Such other objectives should instead be pursued by a political entity, by government. Competition authorities should base their decisions on consumer welfare, because that makes them accountable and it makes their decision-making transparent. It also allows the theory of their decisions to be discussed. • MR. PERA—I believe that in a competitive system, consumer welfare and efficiency are essentially the same. However, I am concerned when we permit restrictive practices to continue, with or without undertakings imposed, because they improve consumer welfare. This risks allowing competition to become overly regulatory. A paper by Prof. Fox written several years ago discussed differences between the American and the European approach with respect to abuse of dominant position, and in particular the treatment of monopoly rents and excess pricing. The European law, probably for historical reasons, is interpreted to require regulation of the monopoly rather than to disallow the monopoly. I fear that the term 'consumer welfare' could easily be interpreted to mean consumer protection, imposition of maximum prices, and therefore regulation. • MR. MATSUSHITA—In referring to the international aspect of competition law, it is important to distinguish trade policy from competition policy. It appears that trade policy is not based on economic thinking. This leads to conflicts in these two areas of law, such as with respect to anti-dumping rules and voluntary export restraints. In technical areas of trade, the government sponsors many restrictive business practices. • MR. VENIT—One of the central issues we have been discussing is the role of economics in competition policy. Various people in this room have different models in mind when they approach competition policy. On the one hand, there is basic agreement that competition law is based on economics, and that the ultimate obligation that we have as practitioners, enforcement authorities or economists, is to identify the economic analysis that will form the basis of competition law decisions by a regulator. There are, however, some conflicting models. In the European model, the acceptance of economics has come later and more grudgingly. The European model has been essentially a social-political model. For historical reasons, its conception of restriction of competition has been linked to the notion of economic freedom. In the interest of transparency, it is important that we all recognise this difference.

20

Panel Discussion

• MR. CASTANEDA—I am amazed to see that we have some consensus around the table. Application of antitrust law has become more analytical as economic analysis has taken on a greater significance. However, there is also a need for legal certainty, and we lawyers must express our discomfort with respect to the often conflicting views of economists. If a group of economists were to have a round table discussion such as the present one, it would last a year, at the end of which there probably would be no consensus. Economics is far from an exact science, which is well illustrated by the history of economics in antitrust. Economics provides us with useful analytical tools, but we must be cautious about the precision and utility of those tools. Another good thesis topic would be to analyse court and administrative decisions regarding their consistency with economic theory. I doubt this would reveal a high degree of consistency. Second, within the government, there is a problem of conflicting goals. In Mexico, the competition law has accomplished a great deal by influencing policy development in important sectors of the economy, such as telecoms, energy, and electricity. It is important that government officials responsible for such regulatory matters take antitrust considerations into account. Thus, competition law in Mexico had become a consideration in policy development. I believe that competition authorities should be consistently advocating competition within the government as a whole. • PROF. FORNALCZYK—In Poland, it is critical that we have transparency in the decision-making process in antitrust cases. The public must know who is responsible for taking decisions, such as halting the restructuring programme in the coal-mining industry, which resulted in major losses to the public. Based on my experiences in Poland, I am deeply convinced that competition authorities should be independent in their role of enforcing the competition laws, and that their decisions should not be based on social or political concerns. They should also have an influence on other aspects of the government's economic policy. • MR. KOBAYASHI—It may be useful to compare competition policy with medical care. The direct objective of medical care is to cure the patient's illness, to remove impediments to health. Similarly, the direct objective of competition policy is to eliminate impediments to competition such as cartels, abuses of dominance, and so forth. There is a substantial parallelism between the two. The state of health of each individual is different from one person to another. The course of illnesses differs, the effect of injuries differs, and therefore the medical care given to each individual differs. However, the direct objective of med-


21

ical care remains the same: to remove the impediment to health. Similarly, with regard to competition policy, the economic conditions of each nation differ, and impediments to competition differ. Therefore, the measures taken under the competition law to remove those impediments must differ, although the objectives of the competition policy are the same: to protect the process of competition. Finally, regarding the ultimate objectives of medical care and competition policy, parallelisms exist as well. Some doctors are modest and curing alone might satisfy them, but many doctors hope that by curing a patient, that patient will be able to work effectively, creatively, and happily. But achieving the ultimate objective is not within the control of the doctor; rather, it is up to the patient to realise the ultimate objective. Similarly, the competition authority can remove the impediments to competition, but the ultimate objectives of development of the national economy, or improving international competitiveness of national industry cannot be achieved by the competition authority on its own. Rather, this depends upon the attitude of the private firms in question, and upon policy measures of other government agencies. • Ms. MATTE—Much of this debate has focused on consumer welfare and economic efficiency. The competition Bureau generally considers efficiencies within a total welfare test, which differs from a consumer welfare test. The total welfare test does not necessarily mean lower prices for the consumers. While the total welfare test is not necessarily a better test, it may be better suited to the Canadian economy. We are under growing pressure from outside groups, who may not have a good understanding of competition policy, to employ a public interest test, which does not exist under our present law. We were faced with such pressure in two recent cases. One was related to the newspaper industry and the other concerned the gasoline industry. Therefore, it appears that whenever we consider amendments to the Competition Act, we will be faced with such pressure. I do not believe that we have been successful in educating small- and medium-size businesses, or the average consumer, as to the significance of competition law. I surmise that this is why we are under such pressure. Therefore, we have begun to place greater emphasis on public education initiatives. • PROF. NEVEN—There is a somewhat surrealistic aspect to the debate about the role of economics, because there is no alternative to using economic analysis. Economists have made a strong case that they have a powerful approach. I believe we should strive to make better use of economic analysis, by making economists more accountable and by defining standards for economic analysis.

22

Panel Discussion

Regarding the link between laws and institutions, I agree that it is useless to design laws when there is no commitment to implement them. Institutions should be designed at the same time as laws, to ensure that the laws are going to be properly implemented. Consequently, it is likely that institutions will differ from country to country, depending on the circumstances within each country. Institutions in transition economies should be quite different from institutions in developed market economies, simply because they are facing different constraints. However, I believe there is a normative aspect with is common to all institutions: that transparency is always a positive element, irrespective of the institutional environment. More transparency will always result in more accountability, whatever the institutional framework. This must be helpful, not only with respect to the domestic matters of each nation, but also with respect to international co-ordination of competition policy. There is much confusion about co-ordination of competition policy at the international level, because there is a wide discrepancy between the declared objectives of national competition agencies and the perceptions of the various competition agencies regarding the practice of their counterparts. Thus, the international co-ordination of competition policy would be greatly supported by more transparency and accountability within each national agency. • MR. PITOFSKY—There is wide agreement here today that competition policy is designed to protect the free market, and that the free market in the long term will achieve a wide assortment of goals, some of which are economic, others social and political. Protecting the free market signifies protecting the process of competition and not individual competitors. Some of what has been said here is theflaringup of an argument that has perplexed people in the U.S. for some time, and that is whether the goals of antitrust are best achieved by a system that is exclusively economic or only predominantly economic. Prof. Hovenkamp states rather strongly that people who don't think that antitrust should be interpreted exclusively to serve economic goals are of no consequence and have been written off. I would like to emphasise that we disagree on this point, but the disagreement is quite narrow. A competition system is only sensible if it is predominantly guided and motivated by economic considerations. The problem with Prof. Hovenkamp's statement is the word 'exclusive.' I agree that in court, it is not constructive to argue about principles, or why the law is there at all. However, one must ask why the law is as it is. In the U.S., there is a per se rule against resale price maintenance and a statute addressing price discrimination—rules that might not exist in an exclusively economic universe. Perhaps


23

most importantly, U.S. merger policy does not accept Robert Bork's thesis that from an economic perspective, a merger is not harmful as long as two or three firms remain in the market after the merger. If economists controlled the law, perhaps our laws would be different in these areas. Thus, I believe these issues must be analysed as a matter of overall policy, and not on a case-by-case basis. Finally, I shall comment regarding the issue whether antitrust laws should be enforced in such a way as to support the enforcing country's ability to compete in international trade. Most people in the U.S. believe that the best way to help American firms compete in a global marketplace is to force them to compete vigorously at home. Thus, a firm could not defend anti-competitive acts by claiming that it is restricting competition at home in order to assist exports. However, I wouldn't expect that to be the rule in all countries—for example, in a newly privatised, decentralised economy that is concerned with protecting infant industries and facilitating exports. There are many different levels of development between the U.S. and other industrialised countries on the one hand, and newly decentralised economies on the other. I conclude that the political component of antitrust that is often present to a modest degree will vary according to place and time, and that is as it should be. • MR. SCHAUB—I agree with the comment that we should not hide behind our pencils and deny that enforcement of competition laws involves a political element. Of course, it is not the business of a competition enforcement agency, in its day-to-day work, to be open to pressures from political lobbies, powerful governments, or social groups. On the other hand, it is unhelpful and counterproductive if it behaves as if it were isolated from the broader political, economic system. Competition enforcement agencies are created by parliaments, by governments for clear reasons. They will be maintained as long as governments and the democratic process determine that they are delivering desirable results, not in the short term, but in the medium-long term. I believe it is a mistake to ignore this context or imply that these are nefarious links, because it threatens public support and acceptance of our work. Second, I believe that the basic logic of competition policy in developing countries should be the same as it is in our more experienced countries. However, in these countries, there are situations where a trade-off should be made between short-term pressures and long-term positive expectations. It is not desirable to do this, but it would be a mistake to ignore these constraints which exist in the real world. If we would like to assure the political acceptance of the competition system as it begins to develop in these countries, we may be forced to make certain compromises. However, what compromises can be made should be clearly set forth in the legislation, and thus be a political deci-

24

Panel Discussion

sion following the democratic process. It would be undesirable to allow such compromises to be made day to day, under unforeseeable nefarious influences or corruption. The real problem does not have to do with acceptance of a tradeoff, but with implementing a law that allows a trade-off in an acceptable and positive way, because there is an enormous temptation to succumb to pressures. Even a perfect government, and a perfect enforcement agency which resists these pressures and attempts to make such trade-offs in a positive way, would succeed only if it had a very rare combination. First, it would need an excellent economist who is able to foresee the economic consequences that will follow from competition-inspired decisions. Second, it would need good political judgement in order to anticipate the political consequences of its decisions. This combination is extremely rare in industrialised countries, not to mention developing countries. Finally, regarding the similarities and differences between the objectives of trade and competition policy, I believe there is a common element. We are all under enormous pressure in executing our day-to-day activities to consider trade policy, regional policy, industrial policy, and competition. The pressure is the same. The difference, however, is that while it is legitimate to balance these considerations in the trade area, in the social policy area, and in the industrial policy area, it is not legitimate that we give in to these pressures or negotiate in the competition area. • MR. WOLF—In Germany, we do not favour political trade-offs and compromises in the implementation of our competition policy. Competition has no lobby. Thus, if we allow negotiations with political forces in this area to take on the same importance as political decisions in other areas, competition will always be the loser. Institutional safeguards are needed to ensure that competition has at least one clear voice. If the institution can take into account other political goals, there is a problem. I do not believe it is a question of the role of economists versus the role of lawyers. In the Bundeskartellamt, we have 50% lawyers and 50% economists, and they have an equal impact on decisions. Of course, economic arguments must be taken into account in our decision-making. However, economists have learned to be advocates of the interests of their clients, just as lawyers have learned to do so. Thus, reliance on economic arguments does not protect the process. Independent institutions combined with judicial review by courts is the best way to guarantee objective results. Competition authorities must, of course, be staffed with lawyers and economists. However, as long as competition authorities are not independent, the risk is always present that specific


25

interests will influence their decisions. Therefore, I strongly advocate the creation of independent institutions that are able to guarantee the enforcement of competition policy. I believe that Europe is still deficient in this regard. • PROF. JENNY—To summarise this discussion, we have agreed that although the specific goals of competition policy differ from one country to another, the ultimate goals of competition policy are political goals that seem to be compatible and consistent with economic goals. If this is so, why do only sixty countries have a competition law, and why is there fierce resistance by many countries to adopt one? A second question: is it true that competition authorities deal only with the narrow agenda of economic welfare? I agree that competition authorities attempt to narrow their focus. Prof. Neven has provided some theoretical reasons to argue why this may be a good idea. However, the reason may not be that competition authorities are modest, as Mr. Faull suggested, but that they want to insulate themselves from political influence. Nonetheless, they take political objectives into account in the enforcement of competition laws, by making a choice of which economic theory—left, right, or centre—-to follow. Some participants, especially the lawyers, have argued that the ultimate goals of competition policy may be political, but competition authorities do not deal with ultimate goals. Rather, they deal with immediate goals, and in doing so, they rely on economic analysis. Others argued that in relying on economic analysis, political decisions are made. Economic consultants are advocates, able convincingly to argue either side of an issue. This implies that competition authorities must make a political choice that is not transparent to those outside the process. Therefore, they have a hidden political agenda, which follows from their discretion to base a decision on ambiguous economic evidence. I do not believe that the issue is whether economic theory is good or bad, or whether it is left, right, or centre, as some have suggested. Rather, I believe the issue is how the competition authority should interpret economic evidence that is very difficult to interpret. Economic theories may not be precise enough to provide guidance. Some have suggested that it is not a question of political agenda of competition authorities. Rather, the problem is that we're humans, we all make mistakes. The lawyers suggested that non-economic goals lead to more uncertainty than economic goals. I do not agree. A populist policy is very determined and constant over time. Some suggested that the political aspect of enforcement is hidden, and enters through unpredictable interpretation of the law. Thus, it is not the uncertainty of the ultimate goals or of the mandate of the competition

26

Panel Discussion

authority, but how the authority executes their responsibility that leads to uncertainty. Whether this uncertainty is sufficiently limited by requiring arguments to be based on economic theory is questionable. Prof. Neven recommended that decisions should be transparent, and that economists should be held accountable. However, considering the U.S. experience, many leading economists who participate in competition cases expose themselves to public scrutiny through publications. Many of them are recognised by their peers as being competent in their field, while still holding different views on how to define a market or whether a particular merger is going to lead to efficiency. Thus, I question whether being exposed to public scrutiny will solve the problem. The question was raised whether competition authorities should be independent. Some here have suggested that competition authorities should advocate competition with respect to various other government policies. However, I question whether it is legitimate for an independent agency to play the role of advocate, since, as an independent agency, it has no mandate to do so. I accept that a government may decide that all its departments should take competition considerations into account. However, it appears inconsistent with the idea of having an independent agency if it is to lobby government bodies, when it is not itself part of government. Finally, if competition policy is linked to the concept of democracy, what does that imply for countries which are not democracies? Should adoption of a competition policy not be advocated in those countries, or is competition policy a means which could be used to encourage these countries to change their political systems?

WORKING PAPERS


I II III IV V VI VII VIII IX

Frederic Jenny, Rapporteur of Session One Gabriel Castafieda Allan Fels Anna Fornalczyk Hideaki Kobayashi Francine Matte Damien Neven Alexander Schaub Dieter Wolf

Frederic Jenny Professor of Economics (E.S.S.E.C.) Vice-Chairman, Conseil de la Concurrence Paris, France Report of the General Rapporteur Of Session One

Introduction It is useful first to address a question that appears in Mr. Schaub's contribution: why should we be discussing the legitimate goals of competition laws? He observes that 'normally, these issues are debated when a political decision on the adoption of a competition law needs to be taken. One may ask why we are having this debate now, since we are not in the middle of adopting a completely new law, and the decision on the basic principles has already been made.' One reason this topic is important is that it will be a determinant of the future organisation of world markets in the face of the globalisation of business. The elimination of custom duties and other governmental impediments to international trade is not sufficient to create competitive international markets. Thus, market access and competition at the global level are still insufficient. The globalisation of markets compels trading nations to find a way to handle international competition issues, through the adoption and convergence of domestic competition laws combined with cooperation among national competition authorities, or through the adoption of minimum standards of competition law, or through the adoption of a supranational competition law in the context of the W.T.O. Whatever the solution to be adopted at the multilateral level, it will require agreement among the trading nations regarding the legitimacy of competition policy principles. At present, no more than 60 countries have adopted a competition law, and in some of those, competition policy does not play an important role. Thus, in more than 100 countries, the need for competition laws or competition policy is not strongly felt. The question, then, is whether the countries that have experience with competition law and policy can convince other countries that it would be in their mutual interest to promote competition through the adoption of domestic or regional competition laws, or through the multilateral adoption of competition standards.

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Working Paper I

A. The Distinction Between the Ultimate Goals and the Direct Goals of Competition Policy The contribution of Mr. Kobayashi analyses Art. 1 of the Japanese Antimonopoly Act (A.M.A.), which states the goals of the Act. Observing that this article is rather lengthy, Mr. Kobayashi states 'when it was introduced 50 years ago, competition law was something totally unknown to political leaders, government officials and the general public in Japan'. Mr. Kobayashi then states that the A.M. A. has 'two types of objectives: direct and ultimate, where the former are instruments to obtain the latter'. In his contribution, Mr. Schaub adopts a similar view by stating that '[b]efore entering the issue of objectives, one should always distinguish two levels of the debate: [t]he level of political decision making and the level of law enforcement. This distinction is important, because the first level concerns more fundamental or ultimate goals, while the second concerns operational criteria for enforcement practice.' In examining the maze of goals assigned to competition law, it may be useful to follow Mr. Kobayashi's and Mr. Schaub's approach, and to distinguish between the ultimate objectives and the intermediate objectives.

B. The Ultimate Goals of Competition Policy Mr. Kobayashi states that Art. 1 of the Japanese A.M.A. establishes that the Act's ultimate goal is to 'assure the interests of consumers in general, and also to promote the democratic and wholesome development of the national economy'. This assumes that the promotion of competition is not a goal in itself, but rather a means to achieve two underlying goals: an economic goal (the wholesome development of the national economy), and a political goal (as competition is linked to the idea of economic 'democracy'). Following a similar line of reasoning, Mr. Wolf states that 'political and economic systems are interdependent. Political freedom goes hand-in-hand with economic freedom, since the freedom of economic activity is a vital constituent of the basic rights of personal and political freedom.' Mr. Schaub believes that the ultimate objective of competition policy is 'economic prosperity or the welfare of citizens, employment, and social cohesion'. But he adds that political, social, and philosophical arguments can also justify the adoption of a competition law by adding, 'one may debate whether competition rules could also be an instrument to serve pluralism and democ-


31

racy'. Finally, he adds that '[i]n the Community, competition has one additional fundamental objective: to promote market integration'. Although he does not categorise this goal, I suggest that it is political rather than economic. In his contribution on the Mexican competition law, Mr. Castafieda argues that competition policy is not designed only to achieve economic efficiency, which seems to be a result rather than an aim in itself. Rather, competition policy is also concerned with subtle political components. Further, he argues that elementary notions of economics feed the popular belief that market fairness is a value to be protected. He then offers the view that '[e]conomic competition also involves: providing opportunities for market entry; promoting of innovation; decentralising power; balancing political considerations; popular myths that generate votes; eliminating red tape needed to keep jobs and investments; promoting national champions; erecting of trade barriers; and so on'. Prof. Fels and Mr. Edwards state that 'there are political and social ends of competition, quite aside from efficiency effects, which make the fostering of competitive processes desirable. In the present timeframe, these aims are often neglected, as the focus is mainly on economic efficiency effects. However, it is these political and social arguments, rather than models demonstrating economic efficiency benefits, which have "tipped the balance of social consensus towards competition"'. More specifically, they add that competition leads to the fulfilment of political and social goals, such as limitation on the powers of both government bodies and private individuals, reduction of concentrations of economic power, sheltering the political process from the influence of economically powerful interest groups, protection of small businesses, freedom of opportunities, development of initiative, self reliance andflexibility,freedom of choice, more equal treatment of workers, and increased economic security, among other things. These developments suggest that there is wide agreement that although the most important ultimate goal of competition policy is economic development, competition policy can also help achieve political goals, such as preserving 'the democratic process', 'pluralism', 'free enterprise', 'fairness', 'market integration', etc. Moreover, these political goals may have more appeal to a country deciding to adopt a competition policy than the strict economic goal of seeking economic prosperity. Recognition that the ultimate goals of competition policy may be both political and economic raises several questions. First, are these political goals simply additional possible benefits of a competition policy basically designed to foster economic development (i.e. by-products that can be used by governments to 'sell' a competition policy), or are they intrinsically legitimate competition policy objectives? Second, if, in addition to the traditional economic

32

Working Paper I

goals, the ultimate objectives of competition necessarily include political goals, such as those listed above, does this imply that competition policy is desirable only to the extent that its implicit political goals are themselves desirable? If so, does this weaken the case for competition policy because some governments might not find the political goals of competition policy desirable? Prof. Fels and Mr. Edwards say that they would challenge the assumption that 'political arguments are necessarily against the fostering of competitive processes'. There is, however, political opposition in certain countries to the adoption of a competition law, and perhaps this opposition results not from rejection of the ultimate goal of economic development, but rather from opposition to the political implications of competition policy. Third, if Prof. Fels and Mr. Edwards are correct in stating that 'the adoption of a competition law is a political act, and as such, political considerations should be paramount', what are the acceptable tradeoffs between the attainment of the implicit political goals and the economic goal of competition policy? Is a competition policy based on the political goal of promoting 'fairness' or 'pluralism' (and in which presumably the under-achievers will be protected from the rigours of competition or from disappearing) legitimate? Will this not lead to a lower level of competition than a competition policy more squarely based on economic considerations? Stated differently, if we recognise that competition policies have implicit or explicit political goals, and that these political goals are not necessarily the same in all countries, is it not true that the concept of competition policy becomes rather fuzzy, and that the prospect for common standards of competition policies becomes quite remote? Can we draw up a list of'legitimate' political goals and a list of 'illegitimate' political goals for competition policy? The remainder of this report will hopefully shed some light on the answers to these questions.

C. The Direct Goal of Competition Policy In his contribution, Mr. Wolf hints that competition can be desirable irrespective of its contribution to economic efficiency. He recognises that 'competition should not take place in a vacuum. Considerations other than competition can be legitimate, and therefore should be included. In particular cases, overriding public interest arguments prevail over the competition principle, but the public should be well informed when that occurs.... If the decision making process in the context of competition law is not transparent, the cost of political intervention is no longer identifiable.'


33

In their contribution, Prof. Fels and Mr. Edwards suggest that competition is desirable for several reasons. First, 'the benefits to both static and dynamic economic efficiency conferred by competitive processes must be acknowledged. A perfectly competitive economy would yield an efficient use of resources in both the allocative and productive senses.' Second, competition leads to the fulfilment of desirable political and social goals. Thus, they conclude 'there are political and social ends of competition, quite aside from efficiency effects, which make the fostering of competitive processes desirable'. Mr. Kobayashi notes that the first article of the Japanese A.M. A. states that the direct objective of the Act is 'to promote free and fair competition' in order to 'stimulate the creative initiative of entrepreneurs, to encourage business activities of enterprises, to heighten the level of employment and people's real income'. Thus, competition is seen as means to attain certain economic results, which will contribute to the attainment of the ultimate political and social goals established in the Act. Although economic efficiency is not mentioned in the Act, Mr. Kobayashi asserts that stimulating the creative initiative of entrepreneurs, encouraging business activities, or heightening the level of employment and people's real income are not unrelated to economic efficiency. However, he observes that in cases where there could be a conflict between efficiency and competition, protecting competition may be considered more important than achieving efficiency. For instance, he states that 'an increase in efficiency would not, for instance, render legal an otherwise illegal merger'. Mr. Schaub considers that competition is 'an instrument or intermediate objective to achieve economic prosperity and employment. . . . Competition .. . forces companies to run a tight ship, to adjust to changes, and to innovate. It thereby benefits the consumer and promotes the welfare of society in general. This is why we protect competition, in Europe and abroad.' Thus, he believes competition is valuable because it leads to efficiency, which in turn contributes to economic development. Similarly, Ms. Matte states that, in Canada, 'three major objectives of Canadian competition policy have been identified. . . . They are: maintaining free competition; preventing abuses of market power, including the protection of consumers; and promoting economic efficiency. . . . In the 1970s, there was vigorous debate over the primacy of these objectives in government, business and academic circles. A consensus emerged that competition policy should focus on the goals of protecting and preserving competition and promoting economic efficiency. Subsequently, concern with economic efficiency as an objective of competition policy in Canada and elsewhere has further evolved to encompass the goal of international competitiveness.'

34

Working Paper I

Although Mr. Wolf might disagree, in these other contributions we find that the direct goal of competition policy is to promote static and dynamic efficiency. Because competition policy does this, it will necessarily contribute to the ultimate goal of economic welfare. The authors of these contributions tend to view the economic goal of promoting efficiency as the exclusive immediate goal of competition. Thus, they appear to conclude that the political benefits of competition policy, discussed above, are the only possible by-products of competition policy. If this is true, the authors may believe that the political goals of competition policy should not interfere with the attempt to promote economic efficiency. If there is a tradeoff between the political and economic goals in the design or implementation of competition policy, in most cases the economic goal of promoting efficiency should prevail. This seems to be in line with the statement of Prof. Fels and Mr. Edwards that: A tradeoff must often be made between the efficiency and equity effects of economic policies. Policies that offer only minor efficiency gains and have undesirable effects on equity should tend not to be implemented. However, competition policy has a sound efficiency justification, and other tools of social policy, such as taxation and government spending, may provide more appropriate and directed solutions to distribution problems. Many of the 'political' challenges made to competition law and policy are not, in reality, based on genuine public interest concerns. Rather, they are challenges advanced by sectional groups with political clout, advanced in their own narrow sectional interests, rather than in the true public interest.

D. The Direct Goal of Competition Policy in Developing Economies and Economies in Transition Mr. Castaneda offers a note of caution: '[tjhere is general agreement that competition policy should strive to achieve economic welfare, but there is no agreement on the definition of economic welfare, how it can be promoted by antitrust policy, and how it should be measured. This debate seems similar to the familiar and unresolved question of whether political considerations are more important than economic considerations in determining whether a country is able to function properly. It does not seem possible to arrive at a single definition of economic welfare.' Thus, Mr. Castaneda appears to suggest that for competition policy to contribute to economic welfare, certain conditions are necessary. These conditions


35

might already exist in most developed countries. However, they do not necessarily exist in less developed countries, where: economic concentration is likely to be higher; the legal system is likely to be less developed; and economic agents are generally less able to redirect their resources into promising fields due to cultural values, lack of entrepreneurship, or unequal access to education, etc. In such economies, the direct goal of competition policy cannot realistically be limited to improvement of the allocation of resources in a neoclassical sense. Providing economic and social opportunities through a gradual process of opening markets (i.e. increasing market contestability) might be a better characterisation of the immediate goal of competition policies in such countries. In her paper, Ms. Fornalczyk makes a similar observation: '[i]n emerging markets, it is important to build a commitment of society to competition in all areas of public activity. At the beginning of market reform, competition seems like a strange and undesirable phenomenon. Many individuals view it as the root of difficulties which they face. Promotion of competition should be pursued by consistently enforcing competition law, encouraging state authorities to consider competition when taking their decisions, and advocating competition to society. Each of these activities is an important element of bringing about progressive change in the mentality of the people and their behaviour as consumers and producers, as well as improvement in the efficiency of the economy.' In summary, in developed countries, the immediate goal of competition policy is to promote an efficient allocation of resources in the traditional economic sense, and therefore such policy focuses on market behaviour of firms and control of mergers. In contrast, in developing countries or countries in transition (i.e. countries in which the preconditions for a market economy are not fully established), the immediate goal of competition policy is much broader, because: there is less consensus among public policy officials or politicians about the desirability of competition policy; the economic, legal, social or political structures are less appropriate for the development of a free market economy; and the public places greater weight on the short term disruptions of a market economy than on its long term benefits. As a result, the immediate goal of competition policy in these countries appears to be to contribute to the emergence of economic opportunities and entrepreneurship in a context in which more attention must be paid to establishing the political acceptance of a market economy (and therefore taking into consideration the populist goals of competition policy). Ms Fornalczyk provides a concrete example of this when she states that because price liberalisation may lead to price increases, '[t]his placed enormous pressure on the competition enforcement agency to mitigate the price-making

36

Working Paper I

policy of monopolies. In the short run, many of even the most liberal reformers were interested in the agency's price control function.' Similarly she states that '[fjrom the perspective of consumers interest, monopoly profits are not justified, but they allow the inefficient enterprise to survive. The bankruptcy of such a large enterprise may cause significant unemployment and social unrest, which is often stimulated by political opposition and trade unions. Since the number of such enterprises is considerable in a transition country, this problem may substantially impede progressive changes in the economy. The problem concerns declining industries, which should be the objects of the government economic policy rather than the targets of competition law enforcement.' More generally, she correctly states that there is a tradeoff between competitionfriendly government policy and effective fulfilment of legitimate competition policy objectives. As a result, competition policy in a developing country often takes a more regulatory approach, thereby allowing it to contribute actively to the transformation of economic structures and behaviours. It may accomplish this through restructuring and privatisation of industries orfirms,or through price controls for dominantfirms.Moreover, the advocacy function of the competition authorities vis-a-vis the rest of the government, and the propaganda function vis-a-vis the public, are seen as crucial. This is not meant to suggest that the latter functions are not important in the competition policy of developed countries. For instance, Ms. Matte's paper states that in Canada '[t]he Bureau views competition advocacy and enforcing the Act in particular sectors to be complementary. Effective advocacy which results in liberalisation of regulations governing particular sectors must be followed by vigorous enforcement to prevent private anti-competitive practices that could nullify the gains from regulatory reform.' Similarly, Mr. Wolf states '[c]ompetition has no lobby, and one of the foremost tasks of competition policy is to make people aware of the competition principle.' It seems, however, that the scope of the advocacy function of competition authorities in developing countries must be much greater than it is for their counterparts in developed economies. If for no other reason, this is so because in developed economies the advocacy effort is principally aimed at eliminating sectoral regulations in order to allow competition to prevail. In contrast, in some developing countries, the advocacy effort must be aimed at establishing the conditions (regulatory, structural, legal or cultural) which will enable a market economy to function.


37

E. Goals of Competition Policy in the Context of Multilateral Discussions The panellists hold sharply varying views on the extent to which it is legitimate to use competition law to achieve economic results that are not strictly related to the narrowly defined concept of economic efficiency (such as preventing price increases, maintaining the level of employement, etc.). For instance, Mr. Fels and Mr. Edwards stated that '[generally, competition law should not be used directly to achieve economic objectives which are not strictly economic efficiency objectives, such as preventing price increases, maintaining employment levels, etc. That is, competition law should not be distorted to achieve these objectives. Indirectly, these other economic objectives should be aided by an effective competition law.' Similarly, Mr. Wolf states that '[s]ocial considerations ought to be taken into account, but only after competition has performed its allocative function.' In contrast, Ms. Fornalczyk stated that '[i]n the short run, many of even the most liberal reformers were interested in the agency's price control function' to prevent inflation. Accordingly, the fundamentalist notion that competition policy's immediate objective should be strictly based on efficiency considerations may be appropriate in some countries but not in others. Economic analysis demonstrates that the social benefits from competition are to be reaped in the long run, but that competition entails private costs in the short run. These short run costs may be quite high in countries in which the economic structures, the legal environment, the political system, and the culture are not conducive to a stable and smooth-functioning market economy. Moreover, when considering the adoption of a policy, the discount rate used to compare the long run benefits and the short run costs is, in any event, dependent on individual preferences. We cannot claim that governments or citizens can never legitimately consider that the short run costs of adopting a policy outweigh the long run benefits. Assigning to competition policy political goals unrelated to the search for economic efficiency (or allowing it to include politically-based exemptions) may, in some cases, mitigate the short run private costs associated with the adoption of such a policy. This could increase its political acceptability, as well as the possibility that, at a later stage of economic development, a consensus will emerge in favour of the adoption of a competition policy more squarely based on efficiency considerations. Mr. Castafleda's discussion of the 1917 Mexican Constitution shows how competition policy provisions inspired by a combination of economic and

38

Working Paper I

political goals, and allowing wide possibilities of regulatory exemptions reflecting populist concerns, can eventually serve as the foundation on which to build an efficiency-based competition law. In order to attain the ultimate economic objectives of competition policy in developing countries, it may be advisable to start with a less pure, more global approach, in which the immediate objectives of competition policy reflect a combination of economic and socio-political or populist concerns. Once the structural and cultural preconditions for a properly functioning market economy have been attained, it would then be possible to shift to a more economically orthodox, efficiency-based competition law. Three questions should be considered: 1. Can, or should, safeguards be found to ensure that this gradual process will actually occur, and that the populist goals originally included in the competition law will not defeat the ultimate purpose of achieving an efficiencybased competition policy? 2. With respect to countries that do not see the need for competition policy, either at the domestic or international level, is it counterproductive to present the argument that such a policy is desirable because of its long run efficiency-increasing global benefits? Would it not be more productive to acknowledge that competition policy that is strictly efficiency-based may entail short run costs that are too high for some countries, and instead insist on the desirability of a competition policy based on a broader concept? For instance, such a broader concept may be the need to ensure that economic agents, whether consumers, firms or countries, should not use their economic power unfairly to deprive other agents of their economic freedom or opportunities. 3. What are the core principles, or minimum standards, of competition policy that one could propose in the context of the international globalisation of markets? This depends in part on the answer to the second question. If the goal of competition policy should be to enhance economic efficiency, minimum standards are likely to be derived from the experience of countries that have adopted and enforced such a law. If a more broadly based concept of competition policy is accepted, the definition of common standards or core principles may first require a re-examination of the relationship between the political economy of development and competition. These three questions, among others, will be discussed in the context of the WTO Working Group on the interaction between trade and competition policy, which was set up following the 1996 W.T.O. Singapore conference. It would be


39

entirely inappropriate for the author of this report to attempt to second guess the outcome of this Working Group, and that is not his intention. In any case, the Working Group will be devoted to the interaction between trade and competition policy, rather than to competition policy alone. Nonetheless, the above discussion of the papers presented in Session One of this conference suggests that when thinking about competition policy, several points should be kept in mind: 1. Competition policies and competition laws are not the same in all countries even though, broadly speaking, they share the same ultimate goal of promoting economic efficiency and economic development. The differences among competition laws or policies in different countries may reflect legitimate differences in the immediate goals assigned to such laws, which themselves are the product of differences in the economic, legal and political environments in which such laws or policies are implemented. However, as economic development sets in and as markets become more globalised, there is a natural tendency toward convergence of competition laws and policies across countries. 2. For a competition law or policy to be effective in the long run in achieving the goal of economic efficiency, it is essential that the enforcement of competition policy and law be, at all stages, transparent and non-discriminatory. As time goes by, and as economic development increases, this transparency is probably the best guarantee that the initial competition policy and law will be modified, that it will become less regulatory, and that its enforcement will be progressively fine tuned in order better to serve its long run goal. 3. In the initial stages of economic development, or in countries in transition, competition policy or competition law must be complemented by the development of a broadly-based competition and entrepreneurship culture. The existence of such a culture cannot be assumed to exist in all cases. Accordingly, in addition to enforcing the law, competition authorities have an important advocacy role to play. 4. As the interpenetration among national markets progresses, and as national economies become more interdependent, cross-border anticompetitive practices become more important. National competition authorities, having limited territorial jurisdiction and enforcing different competition laws, are not usually in a position to meet the new challenges raised by the growing relative importance of such practices. Thus, the international community must devise a mechanism which will provide a way to discourage such practices, while at the same time allowing for national differences in competition laws.

II Gabriel Castaneda Partner, Castaneda y Asociados D.F., Mexico

Introduction Most antitrust scholars and practitioners agree on what are the elements of competition policy, but few agree as to its objectives. Is it aimed exclusively at attaining allocative efficiency?1 If so, what exactly is allocative efficiency and how do we balance it against anticompetitive effects? Is competition policy an instrument to prevent concentration of excessive power? Does it seek to preserve opportunities for the many by preventing abuse by the few? Is it a political tool to keep essential balances and decentralise power? Is it a device to feed a populist creed? Is it a component of democracy translated to markets? Is it a noxious regulation that only increases transaction costs?2 Is it an exotic regulation unenforceable in developing countries, an elegant but futile task, as in W. Herzog's movie 'Fitzcarraldo', which depicts the formidable task of bringing Caruso's opera to the middle of the Amazon jungle? The debate is far from completed. Even the 'purest' economic thinking about antitrust is plagued with inconsistencies and lack of clarity; empirical work to assess the impact of antitrust enforcement is highly controversial; and government antitrust enforcement is often criticised for hindering competition and for not being economically accountable.3 Such debate is not trivial, since principles guide legal instruments that cause specific investment decisions and, often, costly disputes. In order to reap practical results, however, the debate should perhaps be moved from general terms to specific issues. It would be helpful to avoid common confusion of 'legitimate goals of antitrust' with how those goals are implemented. There may be consensus regarding what the general objectives of antitrust are, but there are many ways to implement them. Objectives are ideals that are seldom obtained in real world antitrust 1

As distinguished from 'productive' efficiency, allocative efficiency has to do with society's welfare: what is the best allocation or assignment of economic resources across the whole system. 2 Thomas E. Sullivan (ed.), The Political Economy of the Sherman Act: The First One Hundred Years (1991); William Letwin, Law and Economic Policy in America: The Evolution of the Sherman Act (1965). 3 William J. Baumol & James A. Ordover, Use of Antitrust to Subvert Competition, 28 J.L. & Econ. (1987).

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enforcement. As in most areas of economic regulation, there are no requirements as to language or principles. However, as a minimum, a common framework should be designed to measure the level of consistency between antitrust goals and results in those areas where it may be empirically possible. Thus, two questions should be addressed: (i) whether enforcement is consistent with what the statutes require; and (ii) whether results are economically consistent with the legal rationale. This paper explores the rationale and language of the Mexican constitutional provisions on antitrust in an effort to trace the guiding values of competition statutes and enforcement in Mexico. It begins with a brief analysis of those constitutional provisions and how they were translated into the first comprehensive and effectively enforced Mexican competition statute. The main argument of this paper is then set forth: that no single goal is identified as the paramount value of competition policy in Mexico. Rather, a complex mixture of interrelated values is pursued in a process designed to establish and maintain open markets. Allocative efficiency is the least volatile and the most accountable of the principles underlying the Mexican antitrust law. The discussion will focus on Art. 28 of the Mexican Constitution and the related competition statute, the recently enacted Federal Law on Economic Competition (F.L.E.C.), which empowered the Federal Competition Commission (F.C.C.), formally regarded as an independent government agency, with exclusive enforcement powers. The legislative history regarding the Mexican antitrust rules is not conclusive as to the goals or objectives of competition law and policy, as is the case with its us, Canadian and European counterparts. Legal precedent in Mexico provides little help, as it is patchy and vague. However, the Mexican case is interesting because Mexico has the oldest written constitutional provision on antitrust, adopted in 1857, more than thirty years before the U.S. Sherman Act and the Canadian Combines Act; and it has one of the most recent competition statutes, in force since 1993. It thereby provides substance for further discussion as to the role of competition policy in a developing economy. Art. 28 of the 1857 Mexican Constitution states the following: There shall be no monopolies or tax corners of any kind, nor prohibitions intended to protect (any) industry. The only exceptions shall be those related to currency issuance, mail and those privileges that, for a limited time, are granted to inventors or perfectionists of any improvement. This can be read to convey a clear efficiency goal: monopolies or privileges are harmful to economic welfare, and therefore should not be allowed, except (i)


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those designed to grant limited incentives for creativity and technology; (ii) mail, which appeared to be a natural monopoly and to raise confidentiality concerns which justified public control; and (iii) currency issuance, which required the backing of a unique central governmental creditor and exclusive regulator.

A. General Prohibitions Aimed at Creating Level Playing Fields Art. 28 of the 1917 Constitution, which is currently in force, is perhaps the most complete constitutional antitrust text in the world. Thefirstparagraph reads as follows: In the United Mexican States, monopolies, monopolistic practices, tax corners and tax exemptions are prohibited, as provided by Statute. The same treatment shall be granted to restrictions allegedly directed to protect industry.

This paragraph contains a sweeping prohibition against anticompetitive practices. Although it does not define the term monopoly, it nonetheless includes a broad prohibition of monopolistic practices. It also broadly prohibits Congress and the executive branch from granting regulatory exceptions, tax advantages, or protective industry shields. Accordingly, this paragraph covers two important competition issues: the need for level playing fields and the potential damage from regulatory intervention which grants privileges. The language of this provision is straightforward; its lack of adjectives confirms a neutral, pro-efficiency stance towards the creation of equal economic opportunity, and an impediment to regulatory capture by industry. Most importantly, this paragraph sets forth the main objectives of competition policy: to combat monopolies and anticompetitive practices, and to create level playing fields for all economic agents, including those in which federal and local governments intervene, directly or through the issuance of regulations.

B. Protection of the Right to Market Entry and the Competition Process The second paragraph of Art. 28 contains the core provisions on competition: In consequence, the law shall severely punish and the authorities will effectively prosecute every concentration of power in one or few hands, especially those

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involving consumer goods, when aimed at obtaining price increases; every agreement, procedure or combination of producers, manufacturers, merchants or service entrepreneurs that by any means eliminate free competition among them and force consumers to pay exaggerated prices; and, in general, everything that shall constitute an exclusive and undue advantage in favour of one or several persons which results in damage of the public in general or some social group.

Thus, this paragraph contains a populist goal of combating the greedy merchant or manufacturer that 'hides' products or restricts output to raise prices artificially. Moreover, it prohibits horizontal agreements or combinations that eliminate competition or free market entry, but includes an unnecessary qualification: that consumers are forced to pay exaggerated prices. This qualification is unfortunate because not every collusive arrangement raises prices, and it is impossible to demonstrate what 'exaggerated prices' are. The F.L.E.C. solved the latter problem by including a per se economic presumption that all collusive arrangements, whether involving price fixing or horizontal output restrictions, are anticompetitive and cause an artificial and undesirable effect on prices. It also contains a sweeping catch-all provision: everything that grants an undue advantage shall be unlawful; and undue advantages are against the competitive process, and therefore against the public interest. The latter part of Art. 28's second paragraph provided a constitutional base for the F.L.E.C. to prohibit conduct that creates abusive advantages in the market-place, applying rule of reason analysis. Accordingly, the second paragraph contains the core mandate for an active, pro-efficiency competition framework: a per se prohibition against collusive behaviour and a flexible device, based on the rule of reason, for elimination of practices that are proven to be more anticompetitive than procompetitive. The F.L.E.C. has followed its constitutional mandate. It contains a per se prohibition against horizontal price fixing, market allocation, information exchanges and bid-rigging. Further, it contains a prohibition based on the rule of reason for abusive conduct (vertical price fixing and market allocation, resale price or conditions maintenance, tying, exclusive dealing, boycotts, etc.) by dominant firms in a relevant market, technically determined through standard economic analytical tools. Accordingly, the second paragraph of Art. 28 has allowed the F.L.E.C. to strike a balance between the inevitable stiffness of collusive per se prohibitions and the inevitable vagueness of rule of reason vertical offences. It thereby sought to achieve two goals: legal certainty, by including a category oiper se offences; and economic efficiency, by prohibiting only those practices (and mergers) likely to eliminate competition.


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Thus, the second paragraph of Art. 28 is designed to protect the public interest by disallowing privileges, excessive prices and collusive power. It is complemented by an economic rationale. This provision was written in 1917, and although it was influenced by then existing us antitrust laws (Sherman Act, F.T.C. Act), the crafting of these provision demonstrates original thinking, based on the political, legal and economic objectives of that time. Most of those objectives are still valid today.

C. The Anti-market Provisions ('Prime Necessity Items') The third paragraph of Art. 28 introduces an unfortunate provision allowing Congress to enact laws to plan centrally the national economy through the use of instruments reminiscent of those used during wartime. This provision is at odds not only with basic market principles, but also with the paramount right of every citizen to choose his or her own profession or activity. It thus allows the great Leviathan the possibility of absolute intervention: The statutes will set the bases for fixing the maximum prices of items, raw materials or products that shall be considered necessary for the national economy or popular consumption, and shall impose modalities for the organisation of distribution of such items, materials or products, in order to prevent unnecessary intermediation from causing insufficient supply and price increases. The law shall protect consumers and induce their organisation for the best protection of their interests.

Thus, under this paragraph, Congress will enact statutes establishing maximum prices and 'modalities' for production of items, materials or products of prime necessity for 'the economy' or public consumption, as well as for their distribution, when an 'excessive' middle man intervenes, causing price increases or insufficient supply. It also provides for enactment of a complementary statute for consumer protection purposes. Based on this paragraph, in 1950, Congress enacted the 'Law on Attributions of the Executive Branch on Economic Matters'. This was an overexpansive war-time statute that not only empowered the president to impose maximum prices on almost anything, but also to require what should be produced, how to produce it and how to distribute it. This statute created the basis for a centrally planned economy that formally lasted more than thirty years, creating a culture of arbitrary decisions divorced from market principles and protection of inefficient industries.

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This Act was repealed in 1993 by the F.L.E.C, because it imposed a conflict in economic philosophy and because it was probably unconstitutional.4 The F.L.E.C. replaced the price controls of the earlier Act with a provision on how government may impose maximum prices: the president decides which 'basic necessity' products (not services) would be affected; a government agency sets the level of prices such that the cost structure does not lead to 'undersupply'; and the Consumer Protection Agency supervises compliance. The Federal Criminal Code still contains a provision addressing the old populist concern against 'starvers' that hide consumer goods in order to cause an 'artificial' price increase. However, records show that no prison sentences have ever been imposed stemming from such provisions. The F.L.E.C. did not include prison penalties, because judges would be reluctant to impose sentences based on vague antitrust formulas,5 and given the small size of the economy and the underdeveloped nature of the judicial system. The Mexican constitutional antitrust provision does not establish objectives of income redistribution or consumer protection. Rather, income redistribution falls within the ambit of tax revenue and general planning policies; consumer protection is an independent policy; and maximum prices for 'basic necessity' items are restricted to supply, which is what the Constitution expressly protects. Thus, from a regulatory perspective, the Mexican competition system is independent from alien interference stemming from domestic sources.

D. Antitrust Exemptions Several of the remaining paragraphs of Art. 28 exclude certain parties from coverage of the antitrust provisions: exclusive industries run by the State; 4

This statute had not only a 'shy away' effect on investments, but its bad economics impacted on several industries. For instance, canned sardines was a highly purchased product by low-wage workers and their families. Based on this statute, the government imposed a 'maximum' price that proved to be so low that it forced sardines to vacate the market for several years. This caused severe damage to that industry and to low-income consumers. 5 The Argentinean Law on Defence of Competition of 1980, which rests on the broad concept of 'damage to the general economic interest', provides a good example of how prison sentences may have a 'chilling' effect that prevents enforcement authorities from acting. Few, if any, convictions have been obtained on antitrust cases under this statute. See Reyes Oribe and Javier Iraola, Defensa de la Competencia: Sintesis del Sistema Argentino Actual y Proyectos de Reforma, 15 Revista del Derecho Industrial 5 (Ediciones Depalma, Buenos Aires 1993).


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workers' associations; certain associations or cooperatives; inventions; and industrial property. The Constitution also exempts currency issuance and other central bank activities. The Constitution establishes that exclusive areas run by the State are 'strategic areas', including: mail; telegraph; radiotelegraph; oil and related products; 'basic' petrochemicals; radioactive minerals; nuclear energy generation and electricity, and others that Congress may designate in the future. The F.L.E.C. reiterates this provision, but states that the exemptions shall cover only ancillary activities related to these 'restricted areas'. It thereby warns that state enterprises in charge of such areas may not abuse the exemption by leveraging their power upon other markets. The F.C.C. has acted against P.E.M.E.X., the oil monopoly, in cases which confirm the damaging effects of such abuses.6 The F.L.E.C. acknowledges that such areas are legal monopolies, but the market power exerted by state entities as the result of such legal monopolies may not be leveraged to other markets, nor may such entities enjoy an open licence to engage in restrictive practices. This constitutes a departure from the standard 'state action' and primary jurisdiction doctrines of other legal systems. It also confirms a commitment to the goal of obtaining a workable balance between protecting strategic state activities and preserving a competition system with as few negative externalities as possible. The 'export cartels' exemption in the Mexican Constitution is restricted to associations or cooperatives that: cartelise their efforts to sell their products abroad; sell products the production of which is the main activity of their region, and which are not 'basic necessity' items; and are expressly authorised by local legislatures and monitored by federal or state authorities. These limitations make it difficult to qualify for the exemption. The export cartel provision reflects the old 'beggar-thy-neighbour' goal of regulating antitrust matters only for domestic purposes, and disregarding their external effects. However, the F.L.E.C. did not renew this sentiment, as it allows for the design of a fresh international approach with respect to export cartels and extraterritorial enforcement of competition statutes. An urgent need exists to create specific exemptions for horizontal conduct in agriculture and related sectors, as is also the case in the U.S., Canada and the E.U. The F.L.E.C. did not include any such exemption, in order to avoid pressure from other sectors. 6

The F.C.C. ordered, for instance, that P.E.M.E.X. eliminate a territorial restriction that prevented gasoline retailers from operating gas stations in areas already 'covered' by others. See F.C.C, 1993-94 Ann. Rep. 33. The F.C.C. has accepted only a restricted interpretation of such exemptions.

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E. Regulated Public Services The tenth paragraph of Art. 28 of the 1917 Constitution provides that the State may grant concessions for the rendering of public services and the use of state property, but it does not explicitly authorise exclusive concessions. It expressly requires that such services not involve anticompetitive concentrations that may contravene the public interest. This important provision confirms another goal of competition law and policy: public services and use of public property shall also be in accordance with competition principles. The F.L.E.C. has reaffirmed this principle, and has required other laws and regulations, such as those governing telecommunications, railroads, roads, ports, electricity and natural gas, to include competition devices in the concession, licensing and pricing of regulated activities. The F.L.E.C. also empowers the F.C.C. to intervene to ensure that this principle is followed.7 This further confirms the departure from the 'state action' and primary jurisdiction doctrines adopted by other legal systems to exclude regulated sectors from antitrust scrutiny.8

F. Broad Economic Objectives in the F.L.E.C. The F.L.E.C. was enacted following two years of study and consultations. Economic and legal policy goals which it incorporates are: to change previous economic policy towards optimal efficiency of markets; to protect the competitive process, not specific competitors; to foster efficiency; to cover all economic agents, including government entities; to limit antitrust exemptions strictly to those included in the Constitution, in order to prevent the creation of political shelters; to rely on analyses of long term market effects; to incorporate a merger policy which is not directed at size; and to promote liberalisation of interstate trade.9 7

These statutes contain cross references to the F.L.E.C. and to the F.C.C, especially regarding tariff regulation and mergers. In particular, all mergers and licence transfers must be pre-cleared by the F.C.C, irrespective of monetary thresholds. 8 The recent U.S. railroad merger of Union Pacific and Southern Pacific illustrates how it could be disastrous for an infant antitrust system, like the Mexican system, to empower sectoral regulatory authorities to rule upon competition issues. There, the U.S. Surface Transportation Board allowed the merger, notwithstanding the strong opposition of the U.S. Antitrust Division (and the Mexican F.C.C). This merger creates the possibility for a single company to control over 90% of the U.S.-Mexico crossborder traffic. 9 See O.E.C.D. Doc. DAFFE/CLP (93) 10, at 2 (1993); Gabriel Castafieda et al., Antecedentes Econdmicos para una Ley Federal de Competencia Economica, 39 El Trimestre Economico 230, 237 (1993).


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The F.L.E.C. constituted a dramatic change of orientation from previous Mexican economic policy. Open trade, privatisation of large concerns, and deregulation of economic activity required enactment of a complementary vigorous competition law. The F.L.E.C. was intended to provide the starting point, with the goal of attaining equal opportunity, elimination of barriers to social mobility and protection of a competitive process that would, in turn, generate a reduction of costs, more and diversified products, better services and a reduction of prices. Consumer welfare was not in itself a goal of the F.L.E.C, but an expected effect of its proper enforcement. The F.L.E.C. was drafted with the goal of preserving the right to enter and stay in the markets, not protecting incumbent economic agents. Thus, few antitrust exemptions were provided, in order to minimise regulatory capture, and state enterprises were included within its reach, with the exception only of those expressly included in the Constitutional 'strategic areas'. Wealth redistribution was viewed as a by-product of proper antitrust enforcement, considering that tax, health and education policies are better equipped to address such social goals. During the process of drafting the bill, an attempt was made to include all possible economic agents within the F.L.E.C.'s reach. Particular emphasis was placed on including state agents, given the potentially distortive effects that can result from direct or indirect state intervention. It was apparent that proper antitrust enforcement in markets held hostage by state power would be nearly impossible, and there would be no incentives to enter such markets. The F.L.E.C. did not include 'crisis', 'structural', 'ecological' or similar competition exemptions in order not to allow them to become the rule. Instead, the new statute had an educational goal of teaching firms to abide by market rules. Gradualist approaches were viewed as hazardous for the new law's proper enforcement, and exemptions would have invited pressure towards a permissive set of rules. Other than the dogmatic per se rule on horizontal breaches, the F.L.E.C. was designed to be flexible. It applies the rule of reason to vertical arrangements. It thus adopts a market analysis approach which focuses more on future market developments with respect to elements such as market entry conditions, product substitutability, barriers to entry, consumer tastes and impact of new technologies. The F.L.E.C.'s approach does not follow populist thinking that big is always anticompetitive. Instead, rule of reason analysis of vertical conduct and proposed mergers take into account actual practice regardless of size. The same is true of predatory behaviour. Discrimination, efficiency and failing firm defences are not provided under the statute, in order not to allow inefficient

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firms to use such devices to exert pressure for special treatment. This also protects the new enforcement agency from political lobbying. The F.L.E.C. also addresses the wide array of anticompetitive devices local governments may employ, which threaten the competitive process by erecting various types of barriers to physical entry to their territories. It established a formal conduit for affected parties to seek limited remedies before the F.C.C. Thus, the F.L.E.C. also had a goal of reaffirming principles of economic federalism.

G. The Objectives of Competition Law in Theory There is general agreement that competition policy should strive to achieve economic welfare, but there is no agreement on the definition of economic welfare, how it can be promoted by antitrust policy, and how it should be measured. This debate seems similar to the familiar and unresolved question whether political considerations are more important than economic considerations in determining whether a country is able to function properly. It does not seem possible to arrive at a single definition of economic welfare. In any event, before economic welfare can be achieved, several conditions must be satisfied, some of which are political and some economic. As to the political conditions, elementary notions of economics feed the popular belief that market 'fairness' is a value to be legally protected. Incentives for entrepreneurs may also be a powerful objective of competition law and policy. As to the economic conditions, optimal efficiency may be an acceptable general goal of competition policy, but economic efficiency is a matter of degree. Moreover, achievement of both static and dynamic efficiencies must be considered. Markets are dynamic in nature. Microeconomic modelling is a useful tool for analysis, because it provides an economic framework for arriving at solutions. However, the need for legal certainty is problematic when using these models. For instance, the perfect competition model is only a target (and perhaps an impossible target) of classical antitrust thought. To resolve the static-dynamic debate, perhaps the main goal of competition policy should be viewed as providing incentives to make markets contestable, which is precisely what occurs within the competitive process.10 Market contestability is a matter of degree. The ideal degree of contestability is whatever 10

William Baumol & Janusz A. Ordover, Antitrust: Source of Dynamic and Static Inefficiencies?, in Antitrust, Innovation, and Competitiveness 82 (Thomas M. Jorde & David J. Teece eds. 1992).


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level is established by the technical evidence and reasoning in each individual market or set of interrelated relevant markets in the case being considered. Economic competition also involves: providing opportunities for market entry; promoting of innovation; decentralising power; balancing political considerations; popular myths that generate votes; eliminating red tape needed to keep jobs and investments; promoting national champions; erecting of trade barriers; and so on. Antitrust analysis is not pure, but is one among many policy tools, and one that is always threatened by political power, especially in undeveloped or incipient systems vulnerable by pressure groups. The ideal is to have political aims coincide with optimal market contestability, but the ideal is only a relative and vague aim. Perhaps the reason that competition policy is basically determined by economic content is that populist and other goals are more volatile and difficult to measure than economic criteria, and almost impossible to write into legal instruments. Moreover, notwithstanding their vagueness, economic standards provide more legal certainty than populist and other elements, as well as the possibility of ex post empirical assessment. We must consider the kind of antitrust enforcement needed in developing economies and the extent to which antitrust is properly equipped to counter market power generated by government protection (including trade distorting non-tariff barriers).11 Developing countries are more vulnerable to protectionist government policies and the negative effects of highly concentrated markets than industrialised countries. Therefore, developing countries require more antitrust advocacy and indeed more aggressive competition policy enforcement. As to the trade and competition interface, as trade liberalisation progresses, private anticompetitive behaviour creates new barriers that should be addressed. Thus, international cooperation should be pursued, perhaps in two stages: first, harmonisation of enforcement and basic principles; second, entry of cooperation agreements by competition enforcement authorities. Full harmonisation in the near future appears to be overly idealistic.

Conclusions Mexican constitutional provisions include the following explicit or implied competition policy goals: achievement of level playing fields; preservation of 11

A. Rodriguez & Mark D. Williams, The Effectiveness of Proposed Antitrust Programs for Developing Countries, 19 N.C. J. Int'l L. & Com. Reg. 209 (1994).

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the right to market entry; protection of the competitive process rather than competitors; per se prohibition of cartels; rule of reason analysis of restrictions of competition; a strong prohibition of market privileges, whether originating from public or private sources; limited allowance of populist concerns; preservation of the 'public interest' to limit the concentration of power; control or limitation, through statutes, of the State's market intervention; allowance of optimal competition even in regulated services or use of public property; free interstate flow of economic activities; and creation of entrepreneurial incentives. The F.L.E.C. translates pro-competitive principles into more detailed regulatory devices that are standard in developed competition systems. In addition, it includes several native ingredients, such as a strong commitment to antitrust advocacy and against state intervention, whether direct or through regulations. The F.L.E.C. has caused statutes aimed at regulated areas to conform with its principles; it grants competence to the competition authority in such regulated areas, departing from state action and primary jurisdiction doctrines applicable in other systems. Mexican competition law was intended to be an umbrella legislation that would cover wide structural, regulatory and behavioural situations. There is no single goal that could be identified as the paramount value of competition law and policy in the 1917 Mexican Constitution. Instead, it has a complex mixture of broad values. Finally, a workable solution to the theoretical debate may be to regard market contestability as a general principle that leads to other goals. Economic efficiency criteria are better equipped to allow empirical assessment and legal certainty in comparison with other broad competition policy objectives.

Ill Allan Fels Chairman, Australian Competition and Consumer Commission Canberra, Australia

Geoff Edwards Australian Competition and Consumer Commission Melbourne, Australia

Introduction Over the last several decades, the microeconomic paradigm has, with increasing frequency, been considered by academics and competition officials as the source for defining the legitimate goals of competition policy. This is perhaps a narrow view of competition, which has, in many jurisdictions, been increasingly criticised by the business community and the political elite. Many varied positions exist on what should be the legitimate objectives and goals of competition policy. These include: • that competition law should uniquely concern itself with maximising competition among firms, irrespective of other considerations; • that competition is desirable only to the extent that it promotes consumer welfare; • that competition is desirable only to the extent that it maximises total welfare—so that practices which increase producer surplus by more than they reduce consumer surplus should be allowed; • that in a world characterised by widespread underemployment of resources, the legitimate goal of competition law is to foster economic development and, consequently, competition law should not be limited to static efficiency analysis, but should concern itself also with dynamic considerations; and • that efficiency considerations are not the only legitimate goals of competition law, and other considerations, whether political (such as protecting small and middle sized enterprises, ensuring fairness, contributing to the democratic process, etc.) or social (such as maintaining employment, contributing to geographically balanced economic development, etc.) are also legitimate goals of competition policy.

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The question of the legitimate goals of competition policy should also be considered in light of the increasing globalisation of world markets. The establishment of a level world playing field in the area of competition presupposes some agreement on what the legitimate goals of such a policy should be.

A. Competition is Desirable in Itself Irrespective of its Economic (Efficiency) Effects The Australian Competition and Consumer Commission (A.C.C.C.) believes the arguments for competition are very strong, and encompass both economic benefits and positive effects on political and social conditions in a country or region. These arguments are set out in this section of the paper. The opposite of competition is monopoly, or a high concentration of market power, the shortcomings of which are generally the converse of the strengths of competition, and therefore need not be separately listed. First, the benefits to both static and dynamic economic efficiency conferred by competitive processes must be acknowledged. A perfectly competitive economy would yield an efficient use of resources in both the allocative and productive senses.1 In contrast, monopoly is generally condemned on efficiency grounds as leading to an inefficient allocation of resources through underproduction. As a result, consumer demands are not satisfied as completely as possible, given the resources available.2 Also, in the absence of competitive pressures, firms may fail to produce with optimal cost (productive) and managerial efficiency. Resources may therefore be wasted further.3 Where anticompetitive conduct or structures may be shown to enhance economic efficiency, an authorisation process is available in Australia, and public interest arguments may similarly provide an exception for firms in the European context. Competition may also better foster dynamic efficiency, also referred to as 'progressiveness'. The forces of competition may provide strong incentives to entrepreneurs to seek and adopt cost-saving technological innovations, or new or improved products.4 '[I]f industry capacity is correctly geared to demand at all times, the only way competitive firms can earn positive economic profits is 1

See Phillip Areeda, John Solow & Herbert Hovenkamp, IIA Antitrust Law (1995), 3-4; Roger Blair & David Kasserman, Antitrust Economics (1985), 21-22; Fred Hilmer, National Competition Policy (1993), 4. 3 See Frederick Scherer & David Ross, Industrial Market Structure and Economic Performance 23 (3rd ed. 1990). 3 Id, at 28-9. 4 Id, at 20-21, 28.


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through innovative superiority.'5 Thus, technological progress is likely to be more rapid, and dynamic efficiency more enhanced, in competitive industries than in sheltered ones. However, as shown below, the opposite has been argued, and has become known as the Schumpeter6 thesis. Second, there are political and social ends of competition, quite aside from efficiency effects, which make the fostering of competitive processes desirable. In the present timeframe, these aims are often neglected, as the focus is mainly on economic efficiency effects. However, it is these political and social arguments, rather than models demonstrating economic efficiency benefits, which have 'tipped the balance of social consensus towards competition'.7 The following is a brief outline of these non-economic effects of competition. • Competitive processes place limitations on the powers of both government bodies and private individuals. The atomistic structure of large numbers of independent buyers and sellers in competitive markets decentralises and disperses both economic and political power.8 Competition can be a means of reducing the concentration of economic power. Under competitive processes, resource allocation and income distribution problems are solved through the interaction of supply and demand forces in the market, not through the conscious exercise of power by private individuals (such as under monopoly), or government (such as under government enterprise or regulation).9 Without atomistic competition, consumers and small business may be vulnerable to unilateral action by big businesses with unassailable market power.10 Competition makes available alternative customers and suppliers, reducing the economic dependency of one agent on another.'' Also, without atomistic competition, a small number of private individuals and firms may have an undemocratic effect on the formation of government policy and even of public opinion.12 Concentrated wealth, concentrated economic power and concentrated control of economic activity are often seen as 5

Id., at 20; see also, Areeda, Solow & Hovenkamp, supra note 1, at 4. Joseph Schumpeter, Capitalism, Socialism and Democracy (1942). 7 Scherer & Ross, supra note 2, at 18. 8 Id., at 18; P.H. Karmel & Maureen Brunt, The Structure of the Australian Economy (1966), 62. 9 See Scherer & Ross, supra note 2, at 18-19. 10 See Karmel & Brunt, supra note 8, at 62. 11 See Maureen Brunt, Legislation in Search of an Objective, in Australian Trade Practices Readings (J.P. Nieuwenhuysen ed. 1970) 239. 12 See Karmel & Brunt, supra note 8, at 62-3; William Shepherd, The Economics of Industrial Organization (3rd ed., 1990), 175. 6

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incompatible with democratic government.13 Powerful and influential economic units in society can secure legislative and administrative policies in their own narrow interests, which are very different from the interests of the bulk of the electorate.14 The preservation of, or reversion to, a situation of numerous, individually small and relatively powerless economic units, may be a desirable political end in itself.15 If limiting the power of both government bodies and private individuals to make decisions that shape people's lives is a desirable goal, then the fostering of competitive processes is a means to that end. • Competition laws afford protection to small businesses from the economic power of large firms.16 One may query, however, whether favouring small businesses and affording them protection is a desirable objective of competition law. • Competitive market processes can solve economic problems impersonally, rather than having control of such matters reside with entrepreneurs or bureaucrats. This may be a politically desirable situation, as no identifiable individual or group can then be seen as responsible for market outcomes resulting from the impersonal interplay of competitive market forces.17 • Competition also may provide a more efficient means of economic organisation than central planning, or than monopoly (whichfitssomewhere between the two).18 Competition arguably provides the best means of discovery and utilisation of the enormous knowledge of specific circumstances in the economy held by many different individuals. It thereby co-ordinates the actions of these many individual economic actors. An alternative to this market driven system of organisation is central planning, which requires the gathering and processing of enormous amounts of situation-specific information, initially dispersed among many individuals. It is simply not feasible for all the useful knowledge held by economic actors to be conveyed to a central authority. By its nature, central planning based on statistical information cannot take direct account of the particular circumstances of time, people and place. Competition and market forces allow society to dispense with centralised control. With rapid adaptations to changing circumstances necessary for effi13

See Joe Bain, Industrial Organization 36 (2nd ed. 1968).. Id. at 36. 15 Id. at 37. 16 See Maureen Brunt, Lawyers and Competition Policy, in Australian Lawyers and Social Change 278 (A.D. Hambly & J.L. Goldring eds.). 17 See Scherer & Ross, supra note 2, at 19; Karmel & Brunt, supra note 8, at 62. 18 See generally Frederick Hayek, The Use of Knowledge in Society, 35 American Economic Review 519 (1945). 14


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cient organisation of the economy, ultimate decisions should be left to the individuals who are familiar with those particular circumstances. The problem cannot be solved by communicating all these bits of knowledge to a central body, which issues orders after it has integrated all the information. Individuals need only an effective price system to make good economic decisions. Prices in competitive markets co-ordinate the separate actions of many individual actors, allowing them to direct resources to their most efficient uses. • Competitive markets provide freedom of opportunity. At least when the 'no barriers to entry' condition of perfect competition is satisfied, individuals are free to choose their preferred trade or profession, limited only by their own talent, skill and ability to raise capital.19 Hence, a competitive society provides opportunities for new firms, new talent and new ways of doing things.20 Big businesses, if allowed to benefit from an absence of competition laws, may take advantage of their position as market leaders to establish a position of impenetrable strength, raising barriers to entry against other domestic firms.21 • Competition is associated with the development of initiative, self-reliance and flexibility of mind.22 Competitive firms are also more likely to be able rapidly to adjust to unforeseen changes in their environment.23 • Competition can lead to a greater freedom of choice, by creating a range of alternatives and variety for consumers, workers and firms.24 • Competition arguably promotes equal treatment of workers according to race and sex, as competitive firms cannot afford to discriminate.25 However, competition may also more rapidly marginalise less able workers. • Fostering competition and avoiding concentration in industries also arguably limits wealth transfers from consumers to capital owners.26 However, competition policy will often benefit capital interests. • Competitive markets also arguably foster economic security, that is, the steadiness of employment. Tight oligopoly can increase the severity of recessions.27 The costs of this include: more widespread unemployment; greater 19

See Scherer & Ross, supra note 2, at 19. See Brunt, supra note 11, at 239. 21 See Karmel & Brunt, supra note 8, at 64-5. 22 See Brunt, supra note 11, at 239. 23 See Hilmer, supra note 1, at 4. 24 See Brunt, supra note 11, at 239; Shepherd, supra note 12, at 164. 25 See Hilmer, supra note 1, at 5; Shepherd, supra note 12, at 172-5; K e n n e t h Elzinga, The Goals of Antitrust: Other than Competition and Efficiency, What Else Counts?, 125 U. Penn. L. Rev. 1191, 1202 (1977). 26 See Areeda, Solow & H o v e n k a m p , supra note 1, at 2; Shepherd, supra n o t e 12, a t 20

166-7. 27

See Shepherd, supra note 12, at 176.

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government expenditure for unemployment compensation; and a greater level of general insecurity in the community. • Competition has the capacity to dampen price inflation, generally regarded as an economic harm. • Competition can also foster community beliefs in the virtues of diversity, tolerance, flexibility, individual initiative, the atomisation of power and freedoms of opportunity and choice. Thus, there are strong political and social arguments for competition policy, quite aside from the contribution of competitive markets to economic efficiency. Political factors are thus not necessarily antithetical to competition policy. They may even be complementary.

B. Political Aspects of Competition Policy Section A has outlined legitimate rationales for competition policy other than economic efficiency. Further, in implementing competition policy, political considerations often override economic efficiency considerations. The adoption of a competition law is a political act, and, as such, political considerations should be paramount. However, this does not imply that political arguments are necessarily against the fostering of competitive processes. As shown in Section A, there are many convincing political arguments in favour of effective competition law. Further, competition policy may be politically unpopular, as it disturbs established economic interests (property rights) and affects the distribution of wealth. A tradeoff must often be made between the efficiency and equity effects of economic policies.28 Policies that offer only minor efficiency gains and have undesirable effects on equity should tend not to be implemented. However, competition policy has a sound efficiency justification, and other tools of social policy, such as taxation and government spending, may provide more appropriate and directed solutions to distribution problems. Many of the 'political' challenges made to competition law and policy are not, in reality, based on genuine public interest concerns. Rather, they are challenges advanced by sectional groups with political clout, advanced in their own narrow sectional interests, rather than in the true public interest.

28

See generally Arthur Okun, Equality and Efficiency: The Big Tradeoff (1975).


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C. Demand Side View of Efficiency The A.C.C.C. endorses a concept of efficiency that is much broader than just supply side cost minimisation. Efficiency also has demand side elements, which are sometimes overlooked. A truly competitive market would offer consumers a good choice of both price and product. Greater choice allows for more exact matching of consumer wants and enhanced allocative efficiency. Consumers not only want a good price for a product, they also want the possibility to choose from a range of quality, service, credit, etc. Competition should be encouraged in all these dimensions. For instance, when competition in the medical profession is suggested, fears are expressed that price-cutting doctors will emerge, offering below acceptable standards of service. Two arguments can be made in response. First, in the market for medical services, quality is not negotiable for consumers. A competitive health market should instead deliver improved quality, as what consumers want when they visit a doctor is, above all, quality. There may still be a range of choices along the price/quality plane, but this range should be in the high quality end. Second, it may be incorrect to assume that suppliers who cut price necessarily offer lower quality. Price cutters are often more efficient or technologically progressive, and therefore able to provide good quality at lower prices.

D. Static and Dynamic Efficiencies If economic efficiency is a legitimate objective of competition laws, the question arises of how we should handle the possible tradeoff between the static efficient allocation of resources and economic development. If competitive processes offered the best prospects for innovation and dynamic efficiencies, no tradeoff would be necessary, because fostering competition would be the best policy to enhance both static and dynamic efficiency. Only if dynamic efficiency is better served under uncompetitive market structures does the question of trading off static for dynamic efficiencies arise. Accordingly, we must first ask whether dynamic efficiency is better served under competitive or uncompetitive market structures. If dynamic efficiency is better served under uncompetitive market structures, we must then consider what value should be placed on dynamic, as opposed to static, efficiency. How important for future incomes is the rate of technological progress? Technological progress can contribute significantly to consumer welfare, not only because it leads to new and better

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products more accurately reflecting consumer tastes, and existing products at lower cost, but also because it increases the productive base of the economy, creating new industries and new jobs.29 In the long run, technological progress is likely to contribute far more to consumer welfare than the elimination of allocative inefficiencies is likely to do.30 It is the rate of technological progress, not the efficiency of resource allocation at any one moment in time, that in the long run determines whether real incomes will be high or low.31 The Schumpeter thesis holds that competition is inferior to concentrated scenarios in terms of fostering innovation and dynamic efficiency.32 First, Schumpeter argued that firms need supranormal profits, or at least the expectation of future supranormal profits, in order to have the funds, or expect sufficient returns, to invest in research and development.33 Thus, in a perfectly competitive market, there would be inadequate innovative activity. This is so not only because research and development is a high risk activity, but also because in a world of perfect knowledge, the full value of an innovation could not be captured by the innovator, since once disclosed, it could be used by others at little or no cost.34 The imitators' prices would not reflect the development costs, and competition would prevent the innovator from recovering its investment in the innovation. Firms need some protection from competition before they will bear the risks and costs of invention and innovation. Only within big sheltered units may long term views towards investment be possible.35 Therefore, Schumpeter argued that monopolies are necessary to provide the funds or the incentives for investment towards innovation. Second, research and development often require large scale, which may only be possible within firms of large size. These firms are more likely to exist in monopolistic markets than in atomistic competitive markets. Thus, the thesis of Schumpeter suggests that progressiveness may be inconsistent with static efficiency, and the competitive market structures required by the latter may impede the former. Several arguments refute the Schumpeter thesis. First, would a monopoly, with no threat of rivalry in the near future, need to spend on innovation, and bother to do so? Monopolists, secure from the threat of competition, may dis29

See Hilmer, supra n o t e 1, a t 4. See Scherer & Ross, supra n o t e 2, at 3 1 , 613-60. 31 See Scherer & Ross, supra n o t e 2, at 31, 613. 32 See Schumpeter, supra n o t e 6, at 106. 33 See id.; R i c h a r d Caves et al., Australian Industry: Structure, Conduct, Performance 118 (2nd ed., 1987). 34 See Areeda, Solow & H o v e n k a m p , supra note 1, at 29-30. 35 See Schumpeter, supra note 6; Areeda, Solow & Hovenkamp, supra note 1, at 32-3. 30


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play a 'lethargic attitude towards technological innovation'.36 Second, would not a competitive market structure better foster innovation investment? The forces of competition give strong incentives to entrepreneurs to seek and adopt cost-saving technological innovations, or new or improved products.37 Thus, technological progress may be more rapid, and dynamic efficiency more enhanced, in competitive industries than in sheltered ones. Would notfirmsbe more likely to seek innovations under competitive pressures, especially if effective patent laws offer innovative firms sufficient rewards from innovation? Third, firms in competitive markets may be well able to achieve the necessary scale for research, by combining with other firms in joint ventures, or outsourcing research and development programs to dedicated researchfirms.(See below.) Areeda, Solow and Hovenkamp suggest that oligopolistic structures may best facilitate innovative activity.38 Supranormal profits earned through oligopoly may provide access to sufficient funds for research and development. Unlike monopolists, oligopolists are vulnerable to the innovations of existing rivals, providing greater incentives to themselves to innovate.

1. Evidence Scherer and Rossfindstatistical support for the proposition that greater rivalry (approximated through lower concentration indices) invigorates research and development investment up to a point. However, an excessively atomistic market structure discourages research and development investment. This is because the share of the benefits from such investment that any one firm in such an industry could appropriate would be too small to confer net gains.39 They also argue that new entrants, without any commitment to established technologies, have been responsible for a very substantial share of revolutionary new industrial products and processes.40 Indeed, actual and potential entry appear to be important, both as a source of innovative products and processes, and as a stimulus for existing firms to innovate.41 36

Scherer & Ross, supra note 2, at 28; see also Areeda, Solow & H o v e n k a m p , supra note 1, at 34. 37 See Scherer & Ross, supra note 2, at 2 0 - 1 , 28; Caves et al., supra n o t e 3 3 , a t 119; Hilmer, supra note 1, at 4. 38 See Areeda, Solow & H o v e n k a m p , supra note 1, at 34. 39 See Scherer & Ross, supra note 2, at 637, 646. 40 See id., at 653-4; Caves et al., supra note 33, at 123-4. 41 See Scherer & Ross, supra note 2, at 653-4; Areeda, Solow & H o v e n k a m p , supra note 1, at 35; Caves et al., supra note 33, at 123-4.

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2. The Significance of Size on Incentives to Innovate Larger companies, which are more likely to exist under less competitive market structures, have several advantages in research and development.42 First, their size allows them to exploit scale economies, which are often necessary for research and development projects.43 Second, larger companies have the ability to maintain a diversified portfolio of research and development projects, enabling them to hedge their risks against any particular project failing.44 Third, larger entities are generally able to attract more capital,45 and at lower cost, making them better able to finance research and development projects.46 However, one disadvantage of large size is that small firms may be more adept at risk taking than large firms. Scherer and Ross suggest that there is a bias against really imaginative innovations in large firms.47 Ideas must be approved by several layers of management, which increases the likelihood that they will not be approved. The inability to get ideas approved by higher management may thereby drive creative individuals out of large organisations. Also, firms with little or no market share have greater incentives to force the innovative pace, where the potential of gaining first-mover advantage and substantial market share exists.48 Most importantly, small firms may be able to achieve the necessary scale for research that only large firms might otherwise possess, by combining with other firms in joint ventures, or outsourcing research and development programs to dedicated research organisations. Both large and smallfirmsthen have certain advantages and disadvantages in innovation. From a study of empirical evidence, Scherer and Ross conclude that the superiority of one over the other varies with the nature or stage of the particular innovative activity.49 Thus, there is a place for firms of all sizes in technological innovation. 'Technological innovation thrives best in an environment that nurtures a diversity of sizes'.50 42

See Scherer & Ross, supra note 2, at 652. See Scherer & R o s s , supra note 2, at 652; A r e e d a , S o l o w & H o v e n k a m p , supra note 1, at 31. 44 See Scherer & Ross, supra note 2, at 652; Areeda, Solow & Hovenkamp, supra note 1, at 31. 45 See Areeda, Solow & H o v e n k a m p , supra n o t e 1, a t 30. 46 See Scherer & Ross, supra note 2, a t 652; A r e e d a , S o l o w & H o v e n k a m p , supra note 1, at 3 0 - 1 . 47 See Scherer & R o s s , supra note 2, at 6 5 2 - 3 . 48 See id., at 651. 49 See id., at 651-4. 50 Id, at 654. 43


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There appears to be no conclusive answer on the accuracy of the Schumpeter thesis. There are as many arguments for as against the view that monopolies are best for dynamic efficiency. Certainly, a satisfactory rate of innovative activity requires significant departures from the model of perfect competition. The development of patent laws recognises this. Only a situation between monopoly and perfect competition could be optimal for progressiveness.51 Scherer and Ross suggest that a blend of monopoly and competitive processes, with greater emphasis in general on the latter, would be ideal.52 Also, a blend of large and small firms seems desirable.53 Our view at the A.C.C.C. is basically agnostic, but slightly favours competition as the better means of encouraging innovation and achieving enhanced dynamic efficiency.

E. Use of Competition Law to Achieve Economic Results which are Not Strictly Related to the (Narrowly Defined) Concept of Economic Efficiency Generally, competition law should not be used directly to achieve economic objectives which are not strictly economic efficiency objectives, such as preventing price increases, maintaining employment levels, etc. That is, competition law should not be distorted to achieve these objectives. Indirectly, these other economic objectives should be aided by an effective competition law. For example, competitive processes should lead to greater price restraint than uncompetitive structures and conduct. Moreover, an improved employment situation should be another result of fostering competition, as lower prices should lead to increases in demand, increases in firm outputs and corresponding increases in jobs. The assumption that competition is bad for jobs is clearly suspect in theory. In the long run, greater competition can only enhance employment opportunities. F. The Integration of National Markets is a Legitimate Economic Objective of European Union Competition Law, with Political Benefits The integration of national markets is a legitimate objective of competition law, both from an economic perspective and from a political perspective. It is 51 52 53

See Caves et al., supra note 33, at 130. See Scherer & Ross, supra note 2, at 660. See Caves et al., supra note 33, at 122.

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a legitimate economic objective of European Union competition law if the E.U. wants a more efficient overall economy and greater production of goods and services. Integration of national markets may also have political benefits for the European Union and its members. The integration of markets within the E.U. will also have worldwide benefits, as long as it is not accompanied by new or increased restrictions on trade between Member States and third countries. Raising barriers to trade between an economic union and non-union countries is a dangerous potential side effect of integration, as internal pressure will arise to restrict competitive pressures that emanate from outside the union. Politicians within the union may easily bow to such pressure, given that the main losers from such restrictions are foreigners holding no voting power.

G. Competition Laws and Policies in Different Countries should be Broadly Similar While their forms may differ, competition laws and policies across countries should be broadly similar. Indeed, a convergence can be detected around the world. Competition laws and policies in different countries may vary, not as the result of different views about economics, but as the result of different cultural inheritances. Between Europe and the United States, differences in cultural, moral and political history have resulted in 'differences in attitudes toward private economic power,54 the grant of broad discretionary authority to governmental bodies,55 the place of morality in economic affairs56 . . . and the emphasis to be placed upon distributive justice as compared with enhanced productivity'.57 European restrictive practices legislation reflects little distrust of concentrated business power.58 Further, where controls are placed on monopolies and cartels, broad discretion is usually entrusted to government officials.59 The acceptance of such private and bureaucratic power contrasts sharply with the distrust in the United States of both powerful business and powerful government.60 54

See C o r w i n E d w a r d s , C o n t r o l of Cartels and Monopolies: An International C o m p a r i s o n (1967), 22. 55 See E d w a r d s , supra note 54, at 22. 56 See id., a t 2 1 . 57 See id. a t 15, 2 1 - 2 . 58 59 60

Id. at 16. Id. Id.


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Different attitudes to the role of government in Europe and the United States have therefore conditioned their law and policy.61 United States antitrust law was born out of hostility towards big business, with a presumption that big is necessarily bad. In contrast, in Europe, there is a more neutral attitude towards big business, with no such presumption.62 Monopoly or large size are not, in themselves, seen as undesirable. Rather, each firm and industry is judged on its behaviour and performance. Rather than opposing market power as such, only the uses to which monopoly power may be put are controlled.63 United States antitrust policy, in contrast, tends more towards an attack on positions of market power as such, and on conduct byfirmsdirected at acquiring and maintaining that power.64 For instance, Arts. 85 and 86 of the Treaty of Rome are concerned primarily with the protection of consumers and of a dominant firm's purchasers and suppliers. Neither Article prohibits highly concentrated market structures, nor conduct aimed at retaining such structures. Thus, the main concern is not the survival of the competitive process, and it is not the acquisition and retention of monopoly power, but rather the abusive exploitation of existing power.65 The consequence of such differences in attitude is that even if similar views are held among nations as to the economics of competition, different views will exist as to the appropriate form of implementation of competition law. 61 62

See id., at 15-23.

See Joliet, Monopolization a n d Abuse of D o m i n a n t Position: A Comparative Study of the American a n d European Approaches to the Control of Economic Power (1970), 8-16. 63 See id., a t 8-9; Edwards, supra note 54, at 22. 64 See Rene Joliet, supra note 62, at 9 - 1 1 . 65 See id., at 11.

IV Anna Fornalczyk Vice President, Competition Development Center Ltd. Professor Lodz, Poland

Introduction This paper discusses legitimate and desirable competition policy objectives in transition countries. Development of competitive societies in transition countries is a substantial challenge for proponents of democracy and a free market economy. After many decades of operating under a communist system without political and economic freedom, it is difficult for individuals to adapt to the new requirements resulting from democratic and market-friendly reforms in the Central and Eastern Europe countries (C.E.E.C.). Following efforts of reformers, the public understanding of the advantages of the new political and economic order gradually increases. However, in the early years of reform, many are disappointed with the negative effects of political and economic liberalisation. Freedom creates difficulties because it requires individuals to take responsibility for their own lives. Under the communist system, an individual would work in the same enterprise and perform the same functions for his or her entire working life. A society whose mentality has been formed by such living conditions is not prepared to handle the demands of democracy and a free market economy. Nevertheless, it is impossible to return to the communist system. Reforms, therefore, must continue. From an economic perspective, liberalisation of prices and trade resulted in a radical change of income distribution. Social groups that were in the best position under the previous distribution structure are now worse off. Often, such groups feel that they are victims of re-allocation of resources under pressure of consumers' demands demonstrated in a market. Many enterprises face bankruptcy due to the pressure of market forces. Unemployment is the painful result of structural adaptation in emerging market economies. In the early years of economic reforms, some individuals profit dishonestly, which harms public opinion of business culture under normal market conditions. Thus, in transition countries, there are many reasons that promotion of competition is very important but controversial and difficult to achieve. The reforms needed in the C.E.E.C. may be compared to a surgical operation that is necessary and will be painful, and therefore should be completed as quickly

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as possible. If the reforms are postponed, their negative effects will prevail over the positive ones, and more individuals will lose the chance to achieve a better standard of living. The promoters of competition must clarify all of these controversies for the public, and undertake to increase public understanding of the advantages of market reform. These reforms must be supported by the majority, which may exercise its democratic rights in favour of or against politicians engaged in transformation from command to market economy. Populists point out the negative effects of reform in their fight against reformers. This fight for political power may substantially impede the progress of the transition process. Accordingly, in transition countries, competition policy plays a far more important role in promoting the activity of market forces than it does in mature economies. In emerging markets, it is important to build a commitment of society to competition in all areas of public activity. At the beginning of market reform, competition seems like a strange and undesirable phenomenon. Many individuals view it as the root of difficulties which they face. Promotion of competition should be pursued by consistently enforcing competition law, encouraging state authorities to consider competition when taking their decisions, and advocating competition to society. Each of these activities is an important element of bringing about progressive change in the mentality of the people and their behaviour as consumers and producers, as well as improvement in the efficiency of the economy. Competition policy should therefore be understood in a broader sense than competition law enforcement. Given that all transition countries inherited a monopolised industrial structure from the command economy, competition policy must cover many areas of economic activity. It is closely tied to the main economic tasks of reform, which are: decreasing the rate of inflation and the budget deficit, improving the convertability of the domestic currency, liberalising pricing and trade, restructuring and privatising, and developing the financial sector. Each of these tasks is directly or indirectly related to the concerns of competition policy. However, the tradeoff to be made between pursuit of competition policy and the aforesaid tasks is not as simple as it may seem. The remainder of this paper will address some questions and dilemmas of competition policy in transition countries.

A. Legitimate Objectives of Competition Policy in Transition Countries Since the inception of market-oriented reforms in transition countries, reformers have viewed competition law as a necessary element of a successful process


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of transformation. Competition policy consists not only of the enforcement of competition law. In addition, the power of enforcement authorities to bring competition cases provides them with leverage over other government departments to consider competition issues with respect to economic policy and decisions concerning privatisation and restructuring of enterprises and entire sectors of the economy. In general, the legitimate objectives of competition policy in transition countries are the same as the objectives well known in Western countries. However, under the laws of some of the Commonwealth of Independent States (C.I.S.), the competition agency, which is a state administrative body, has the power to take action against anticompetitive decisions of the state administration or local authorities. The reason for granting this power appears to be the lack of credibility of the commitment of public authorities to competition, following decades of fighting against the freedom of individuals. Old communist customs are still alive in the former Soviet Union. Under the communist regime, government economic policy was formulated based upon numerous compromises between various social, business and political interest groups. Such differing interests also exist in mature market economies and mature democracies. Differences may be overcome through the use of a democratic institutional framework and the willingness of people to compromise on problems that arise in all areas of society's political and economic activity. One goal of reform in transition countries is to construct an effective democratic institutional framework and to enable individuals to develop negotiating skills. However, the legitimate power of competition agencies to take action against the anticompetitive acts of other state bodies may not be workable in the long run, because it will lead to legal conflicts within state administration. The following areas are generally covered by competition law in transition countries: abuses of dominant position, anticompetitive agreements, merger control, and, in some countries, unfair competition. The majority of these countries have merger provisions that extend to privatisation of state owned enterprises and so-called mass privatisation projects. Thus far, the experience with enforcement of competition laws in transition countries has been relatively poor. Some of the main pitfalls and questions concerning promotion of competition in emerging markets have become apparent.

1. Pitfalls of Regulation As stated above, transition countries inherited monopolised markets from their command economies. Thus, competition agencies were originally flooded

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with complaints about abusive behaviour of incumbents in numerous product and geographic markets. The public did not understand the concerns of competition law, and thus complaints often did not take into account the market position of the firms in question. The agency was thereby forced to spend time on inquiries even when thefirmsdid not have a dominant position in a relevant market. In addition, price liberalisation in the early years of reform resulted in an increase in the inflation rate. This placed enormous pressure on the competition enforcement agency to mitigate the price-making policy of monopolies. In the short run, many of even the most liberal reformers were interested in the agency's price control function. As a result, competition agencies were broadly involved in regulation of the behaviour of enterprises, which was at odds with the proscriptive character of competition law. The law establishes what actions are prohibited from the perspective of development of competition, but it does not address how market operators should run their business. Enforcement of the law to control the pricing policies of monopolies placed the agency in the role of administrative price-maker, a role well known under the command economy. Moreover, it is especially difficult to implement a test of production costs in transition countries, since prices of almost all commodities in a market are in a state of dynamic change. The majority of competition agencies in these countries were able to avoid taking on the role of price-maker or to give priority to price control. Instead, they focused on counteracting market foreclosures, which involved them in various aspects of government economic policy.

2. Abusive Conduct of Bankruptcies The next dilemma concerns abusive conduct of enterprises that face bankruptcy. Often, an enterprise's profits follow from its monopolistic position and price-making policy. While the enterprise is large and politically powerful, enforcement of the competition law against it is difficult, notwithstanding the public support for it. From the perspective of consumer interest, monopoly profits are not justified, but they allow the inefficient enterprise to survive. The bankruptcy of such a large enterprise may cause significant unemployment and social unrest, which is often stimulated by political opposition and trade unions. Since the number of such enterprises is considerable in a transition country, this problem may substantially impede progressive changes in the economy. The problem concerns declining industries, which should be the objects of the government economic policy rather than the targets of competition law enforcement.


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3. Consumer Test and Efficiency Test A contradiction between the results of implementation of the consumer interest test and the efficiency test arises in many areas of competition law enforcement. Such contradiction is characteristic not only for transition countries; competition agencies in mature market economies also deal with it. However, in transition economies, the number of dominant and inefficient enterprises is much larger, and an insufficient level of financial and human resources has been devoted to solving the problem. For instance, the level of foreign capitalflowinginto an emerging market is related to the degree of concentration in that market. The evidence suggests that investors are not interested in investing in competitive markets. Rather, they are willing to pay higher prices for productive assets held by monopolies than for those held byfirmsin competitive markets. Asset owners are interested in receiving the highest price possible from investors. Most assets in transition countries are owned by the State. The lack of domestic capital, modern technology and qualified management imposes pressure on the government to sell the assets under conditions required by the investor.

B. Methodological Problems Competition law enforcement requires comprehensive market analysis, both to assess an enterprise's market position and to analyse the substance of its behaviour. It is difficult to apply the law in transition countries because determinations must be made which are difficult to make without rich precedent. Industrial organisation theory and experience gained by Western countries are useful for a rapid development of knowledge on methodological problems, but some sophisticated methods and interpretations are difficult to apply in emerging markets. For instance, how should the notion of 'substantial restriction of competition' be interpreted? What should be the balance between arguments related to existing market structure versus those related to potential competition? How much weight should be given to 'soft' information collected from consumers when attempting to define the relevant market? Finally, how should social reasons for market foreclosure be weighed in the assessment? In transition countries, the answers to all of these questions are more complicated than in Western countries as a result of characteristics of the transformation process. From a methodological point of view, market definition requires much detailed information about both the supply and demand characteristics of the relevant market. The supply-side analysis appears easier than

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the demand-side analysis, unless problems exist with gathering information on imports to the relevant market. Trade liberalisation in transition countries, huge numbers of very small firms, and unreliable statistical sources distort information on imports. In addition, information on the substitutability of products and methods of production are difficult to obtain from producers who are not accustomed to such analysis. Thus, market definition is based more on existing industry structure than market structure. The one-sided definition of the relevant market may distort the substance of the inquiry. Demand-side analysis of markets is not well developed in transition countries for two main reasons. First, competition agencies are not able to perform time-consuming and expensive consumer surveys, and there are few experts outside the agency that are specialised in such research. Random information collected sporadically does not constitute convincing evidence in formal cases. Tests developed in Western countries may not be appropriate for emerging markets. For instance, the 5 per cent test, which is proposed in the American Merger Guidelines, is not appropriate for emerging markets, which have a high and volatile rate of inflation. The social impetus for market foreclosures concerns the role of the competition agency as an advocate of economic policy, rather than enforcer of competition law. Competition law should be applied to promote what has legally been defined as the public interest. Other aspects of the public interest must be established by state officials who are responsible for various elements of government economic policy. Competition concerns should be taken into account in such deliberations. It is the responsibility of the competition agency to provide the information needed to allow competition concerns to be properly considered in such discussions. In general, the application of competition policy in transition countries must take into account the dynamic changes which are occurring in their economies. The results of change are difficult to predict, which impedes the ability of the competition agency to appreciate potential competition or to apply an efficiency test. Accordingly, it is desirable for the competition agency to be involved in policy development by the government. Involvement in policy development may provide a useful source of information for the competition agency, as well as a good opportunity for it to advocate competition concerns at the government level. A tradeoff must be made between effective fulfilment of legitimate competition policy objectives and other objectives of government policy. For instance, a domestic dominant producer may be protected from foreign competition by tariffs and quotas established by the government. Such protection has the effect of strengthening the firm's dominant position in the domestic


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market. Thus, it would be useless for the competition agency to counteract monopolistic practices of the protected dominant firm. There are many examples of market foreclosures in transition countries which both impede development of competition and support inefficient producers facing bankruptcy.

C. Desirable Competition Policy Objectives Competition policy in transition countries should cover many areas of public activity. Some aspects of the transition process should be covered by competition policy, such as: restructuring of enterprises and sectors; regulated sectors and activities; state aid monitoring; and competition advocacy in public.

1. Restructuring of Enterprises Restructuring of enterprises and entire sectors of the economy causes a reallocation of productive resources according to demand requirements. The reallocation may occur naturally as the result of market forces. It leads to many social and political difficulties. In the case of a declining industry, the government must be involved in liquidation of over-capacity, closing down enterprises because of environmental pollution, and decreasing unemployment by creating new jobs and financial incentives for unemployed individuals who would like to set up new businesses. Restructuring also may involve breaking up large enterprises into small, viable units that compete with each other in a market. It is the responsibility of the competition agency to promote such procompetitive restructuring of firms. Demonopolisation of the economy is highly controversial. In transition countries, many critics argue that such activity lessens competitiveness of the entire economy in the world market. Big business in Western countries is given as the argument against breaking up domestic giants. Many large enterprises in transition countries were set up to meet all of the domestic economy's requirements. The highly monopolised industrial structure facilitated the work of central planners to control the activities of enterprises. However, the level of concentration did not result from economic forces. The decision to break up these dominant firms will hopefully result in creation of a competitive market that will be more efficient, to the benefit of consumers and the economy as a whole. Demonopolisation must be implemented with a long-run perspective. The divestiture of enterprises and the prevention of anti-competitive mergers must be accomplished taking into account existing and prospective market

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structure. The competition agency must balance the effects of implementation under both the consumer interest test and efficiency test. The outcome of the efficiency test is often unpredictable; therefore, the consumer interest test should have priority. Moreover, in transforming countries, consumer interests are not represented as forcefully as are the interests of the business community, which also supports giving priority to the consumer interest test. Accordingly, the competition agency should represent the interests of consumers. The strategy pursued to accomplish demonopolisation must recognise that dynamic changes in many emerging markets provide an impetus for mergers and acquisitions, which are covered by the competition rules. Trade liberalisation also allows domestic producers to become sellers in the world market, which radically alters their market position. This should be recognised by the competition agency in making its analysis. Development of competition in a domestic market prepares domestic producers for competition with foreign firms. This should be the main argument used by the competition agency to persuade the government not to intervene on behalf of inefficient large producers. In addition, the agency should argue that such intervention, including state aid granted to unprofitable market operators, will lead to consumer losses. The large number of inefficient enterprises and sectors in transition countries, as well as the political aspects of solutions to this problem, should make the competition agencies sceptical of crisis cartels and reluctant to grant them exemptions from the competition laws. Historically, the governments of these countries did not employ market-friendly regulation of the economy. These countries also suffer political instability, which results in frequent changes of governments. Such an environment does not secure the continuity of restructuring projects commenced by the current government. The considerable resistance to implementation of restructuring projects is apparent when a new government takes control, as it will postpone or eliminate projects commenced by the previous government in order to encourage social stability. If enterprises which are being restructured are exempted from competition law enforcement, it will be difficult to eliminate such exemption at a later time.

2. Regulated Sectors Restructuring of enterprises is often carried out jointly with substantial deregulation of certain sectors, as well as privatisation of state owned assets. In market economies all over the world, some sectors and economic activities are regulated, because market failures would otherwise occur. However, regula-


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tion should be opened to competition concerns as much as possible. Promotion of pro-competitive changes in highly regulated sectors seems to be significant, desirable objective of competition policy. Regulated sectors often involve public utilities which are traditionally captured by strict administrative control in transition countries. In the process of deregulation, the competition agency should be involved in preparatory work, with respect to both restructuring projects and legal rules through which deregulation will be effected. The main task of the competition agency should include promotion of third party access and transparent standards of market access. Since assets in public utilities sectors are owned by the State, the agency should also be involved in establishment of regulatory bodies independent of state administration, and monitoring the fairness of the conduct of these bodies with respect to new entrants. The evidence shows that regulation by the owner of the service provider has protected the incumbent against new entrants. The best solution would be to privatise service providers, but in transition countries, the lack of capital and the conservative approach to public utilities make the changes of ownership impossible in the current timeframe.

3. State Aid The weak economic state of public enterprises is a significant impetus for the government to support them by financial and administrative measures. The same measures may be applied to restructuring and privatisation projects of state owned enterprises to provide incentives to investors. This group of government activities is called state aid; all types are detrimental to the development of competition, which requires equal access to markets and equal conditions for market operators. State aid may be granted to enterprises through subsidies, public procurement (where the price paid by the government is higher than the market price), mitigation of charges which must be paid under normal conditions (such as taxes and social security payments), preferential credits, credit guarantees and capital injections. Whatever the form of state aid, it benefits the firms that receive it and discriminates against their competitors. The rationale for state aid is provision of temporary support to the enterprises, sectors or regions which allows them to survive economic problems. State aid exists in market economies all over the world. In the European Union, state aid is compatible with the common market and accepted by the Commission under certain conditions. Even the most free market-oriented

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countries, like the United States, make public expenditures. A major difference exists between industrial and transforming countries with respect to their general approach to state aid. In industrial countries with mature market economies, state aid is treated as an exception from the normal rule that market forces govern, since the state-owned sector is small. In contrast, the stateowned sector is significantly larger in transforming countries, and state-owned enterprises treat state aid as a continuation of the rules which governed in the command economy. In addition, state aid is granted mainly to ensure the survival of inefficient, large, state-owned enterprises. The scarce financial resources used for state aid impede progressive, market-oriented changes in these misdeveloped economies. In the centrally planned economies, priority was given to the development of intermediate commodities, which distorted the entire structure of the economy in favour of heavy industries. Public spending to maintain an existing structure may secure social rest. However, in the long run, state aid may increase the budget deficit and the inflation rate, both of which are relevant to stabilisation of these emerging markets. Particularly in transition countries, state aid which delays structural changes necessary to render enterprises or sectors economically viable, and which allows inefficient market operators artificially to survive, should be avoided. The public should understand that long run negative effects are likely to outweigh short run benefits of maintaining a certain level of employment. Accordingly, a state aid monitoring system is a desirable element of competition policy. The rationale for including state aid in competition policy is that a competition agency is not substantially interested in granting aid as other government bodies may be, and that the agency is responsible for securing equal conditions for all market operators, including both incumbents and new entrants. State aid cannot be eliminated completely, because it is a significant element of government economic policy, especially in misdeveloped transition countries. However, state aid can be made transparent and discussed in public, so that taxpayers know how much of their money is spent for noneconomic reasons. Finally, the effectiveness of such expenditures in accomplishing progressive and market-oriented changes in the economy should also be known. Transparency of state aid is also required by the European agreements signed by the majority of Central European countries. In this way, the association process may support market reforms in these countries.


11

4. Competition Advocacy The last desirable objective of competition policy is advocacy of competition concerns to society. Given the relatively low level of public awareness about competition issues, this is a significant task for the competition agency. This advocacy can be performed formally or informally. Promotion of competition will support progress in the transition process. It is especially important to educate and inform the business community, which must adapt its activity to new market requirements. Advocacy may be effected through the following activities: publication in newspapers of decisions on competition matters, preparation of guidelines, organisation of conferences and workshops for people interested in competition matters, and public comments concerning the current situation and the effects of government decisions and policy. The agency should publish bulletins with its most important decisions and comments by the case-handlers. In the majority of transition countries, the competition agencies are involved in competition advocacy. However, a large number of cases and many methodological problems do not allow competition authorities to engage in advocacy, given its significance for development of public awareness about competition concerns. All of the competition policy objectives described above are interdependent. Effective enforcement of the competition rules by the competition agency strengthens its actual authority in the government and in public. Competition policy objectives generally influence both government economic policy and public awareness about competition concerns. Both are relevant to construction of developed market forces and a new business culture in transition countries.

Conclusions Development of competition in transforming countries is important not only for progressive changes in the economy, but also for changes in the mentality of the people, which has great significance with respect to building a political environment for society's new activities. Effects of competition must be evaluated with respect both to the short term and the long term. In transforming countries, the shortcomings of competition are felt by citizens through the negative effects of reallocation of resources and changes in income distribution. However, restructuring of these economies requires radical reforms; postponing them may cause

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larger losses in the future. Development of competition in transforming countries can be viewed as a process relevant to successful economic change. Effects of competition can be evaluated by implementation of the efficiency test. For purposes of competition law, economic efficiency can be defined at both a microeconomic and macroeconomic level. Elimination of inefficient firms will lead to an improvement of efficiency in the economy as a whole, because it will facilitate reallocation of resources and the more efficient use of resources. However, such a narrow definition of economic efficiency can result in price increases or growth in the rate of unemployment, both of which would be detrimental to public acceptance of market-oriented reforms. In transforming countries, the alternatives of postponing reforms or implementing other economic policy instruments may be available, and could mitigate the negative effects of such reforms. Effects of economic decisions made by state administrations or managers of firms should be evaluated from the perspective of dynamic efficiency, since transition from a command economy to a market economy involves the dynamic process of reallocation of resources. Apart from that, transition economies are a part of international markets, and domestic markets change very quickly. In this situation, static evaluation of efficiency may be misleading. For instance, profit gains of a firm may follow from its dominant position in a market, due to market foreclosures established by state authorities. It would be worthwhile to conduct a dynamic evaluation of efficiency, which means evaluation of existing profit gains and taking into consideration future competitive markets. Political and social goals, such as protecting weak firms or maintaining levels of employment, should not be competition policy objectives. State aid and protection of domestic producers are the most frequently employed methods for realisation of political and social goals. Both practices should be subject to scrutiny for their effect on competition in the relevant market. It may be justified to distort competition in a market for non-economic reasons, but such distortions should be temporary and aimed at solving actual problems within a defined period. Dynamic economic efficiency criteria must be applied to evaluate the effects of government projects. The main concern should not always be to contest the projects, but to measure the level of competition distortion which must be considered as externalities of these projects. Association of some transition countries with the European Union will support market-oriented reforms in these countries. Harmonisation of their competition law with E.U. competition law should facilitate the progressive change of emerging markets. This does not imply rapid and comprehensive adoption of European competition provisions by these countries. Differences between mature market economies and emerging markets are especially rele-


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vant to deciding which methods of competition law enforcement are most appropriate. In general, it is desirable to have similar competition policy objectives in countries which are trade partners, and which are increasing the level of cooperation. The degree of harmonisation needed depends on the intensity of economic cooperation.

V Hideaki Kobayashix Deputy Secretary-General Japanese Fair Trade Commission Tokyo,Japan

When it was introduced 50 years ago, competition law was something totally unknown to political leaders, government officials, and the general public in Japan. Thus, the competition law of Japan, the Anti-Monopoly Act (A.M. A.), included a detailed and complex provision on objectives. Discussions on the objectives of the Act have led to important distinctions between (i) the objectives and the tools of competition policy and (ii) its two types of objectives: direct and ultimate, where the former are instruments to obtain the latter. The A.M.A. provision on objectives states: Art. 1. This Act, by prohibiting private monopolisation, unreasonable restraints of trade and unfair trade practices, by preventing excessive concentration of economic power and by eliminating unreasonable restraints on production, sale, price, technology and the like, and all other unjust restrictions of business activities through combinations, agreements and otherwise, aims to promote free and fair competition, to stimulate the creative initiatives of entrepreneurs, to encourage business activities of enterprises, to heighten employment and people's real income, and thereby to assure the interests of consumers in general, and also to promote democratic and wholesome development of the national economy.

The provision on objectives can be divided into several parts. Thefirstpart lists the instruments that the Act employs to attain its purposes: prohibition of private monopolisation, unreasonable restraints of trade and unfair trade practices, and prevention of excessive concentration of economic power. The second part specifies the tools referred to in the first part: elimination of unreasonable restraints of production, sale, price, technology, and the like and all other unjust restrictions of business activities through combinations, agreements and otherwise. The third part indicates the direct objective of the Act: to promote free and fair competition. The fourth part explains the significance of the Act's competition policy: to stimulate the creative initiative of entrepreneurs, to encourage business activities of enterprises, and to heighten the level of employment and people's real income. The fifth part clarifies the ultimate 1

The views expressed here are personal, and do not necessarily reflect the position of the Japanese Fair Trade Commission (J.F.T.C.).

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objectives of the Act: to assure the interests of consumers in general, and to promote the democratic and wholesome development of the national economy. Several questions arise with respect to objectives. First, should competition be pursued irrespective of its economic effects? Under the A.M.A., it should not, because the Act assures free and fair competition and not unqualified competition. 'Fair competition' is generally considered to mean 'competition by means of intrinsic elements of business such as price and quality'.2 Since the A.M. A. also states the value and the ultimate objective of competition policy, it does not endorse the kind of competition that would be contrary to them. Second, is 'efficiency' the sole benchmark of the legitimacy of competition policy? The objective provision of the Japanese competition law does not specifically mention efficiency. However, the provision indicates that creative initiative of entrepreneurs stimulated by free and fair competition results in encouraging business activities of enterprises and in heightening the level of employment and people's real income. One may deduce that an increase in efficiency is presumed. However, an increase in efficiency would not, for instance, render legal an otherwise illegal merger. Third, should maximisation of consumer welfare be given the highest priority? There has been long-standing discussion on this question in Japan in relation to the last clause of Art. 1, which states: 'to assure the interests of consumers in general, and also to promote the democratic and wholesome development of the national economy'. Various theories have been advanced: that 'consumer welfare' is subordinate to 'development of the national economy'; that 'consumer welfare' itself is not the objective of the competition policy, but competition policy results in an increase in consumer welfare; and that competition law is consumer protection legislation. The second theory finds the largest number of supporters. The first theory has given the theoretical background to industrial policy makers when they attempted to promote A.M.A. exemption legislation. However, the J.F.T.C. has been delegated some consumer protection responsibility. Specifically, the Act against Unreasonable Premiums and Misleading Representation provides that the J.F.T.C. will regulate the offer by companies of excessive free gifts as accompaniment to sales, or of excessive prizes through lotteries and competition, and false or misleading representations, such as in T.V. or newspaper advertisement or in labeling. This is considered to be an extension of the regulation of unfair trade practice. Fourth, can protection of the weak be considered an objective of competition policy? The Act is silent on this matter. This is natural because competi2

Imamura, Dokusenkinshiho 5-6 (1978).

2 — Competition Policy Objectives

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tion law is designed to eliminate obstacles to free and fair competition, but not to guarantee protection of the weak. The provisions of competition laws related to protection of the weak usually prevent socially undesirable effects of competition. They often take the form of exemptions, such as that for cooperatives of small or medium sized enterprises or of consumers. Fifth, should increasing national income or employment be considered an objective of competition policy? Art. 1 of the A.M.A. refers to heightening the 'level of employment and people's real income'. However, as has been mentioned, this is usually interpreted as a statement of the value or significance of competition policy, rather than an objective. In practice, one of the strongest motivations for governments (including the Japanese government) to step up enforcement of competition policy is to improve international competitiveness through increased efficiency, and thus to increase employment and national income. Sixth, can promotion of regional integration be viewed as a legitimate objective of competition policy? For instance, strict territorial allocation schemes are subject to the rule of reason test in Japan. Attainment of an objective is in question here, which is outside the normal scope of competition policy objectives. Accordingly, it is not an objective of competition policy. Seventh, how should diversification of business conglomerates be handled? One of the A.M.A.'s objectives is the prevention of excessive concentration of business controlling power. Accordingly, Art. 9 of the A.M.A. prohibits the establishment of a holding company or transformation of any company into a holding company. This provision has two objectives: a political objective, to prevent reemergence of pre-war zaibatsu which were considered a driving force of the war effort, and were dissolved after World War II; and a competition policy objective, to prevent the emergence of a dominant economic power that could restrict competition in certain markets. In recent years, the Japanese business community has been requesting the abolition of this prohibition, stressing that increased competition in the domestic market has eliminated any risk of re-emergence of zaibatsu, and that the restriction unduly limits the alternatives of business organization for Japanese enterprises. The position of the J.F.T.C. is that since the risk of excessive concentration of businesscontrolling power still exists, restrictions on holding companies are still needed, although total prohibition may not be necessary. In March 1997, the J.F.T.C. proposed a bill to the Diet that would allow holding companies to the extent that they do not result in excessive concentration of businesscontrolling power. This is an example of the need for tailoring the provisions of the competition act to the specific condition, economic or otherwise, of each country.

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Eighth, how should below cost sales be controlled? The fairness element of the A.M.A.'s objectives implies that competitors must compete on a business basis. Moreover, some schools of thought hold that 'free competition' requires that competitors not be unreasonably excluded from competition. Below cost sales are problematic from the both standpoints. Under the Japanese competition law, below cost sales are actionable only when: goods or services are sold at a price far below their costs; over a substantial period of time, such sales are likely to create difficulties for other enterprises; and there is no justification for such sales. It would be difficult to outlaw all below cost sales under the competition laws. On the other hand, regulating below cost sales in order to prevent money laundering is a political decision. In any event, care should be taken to avoid any adverse effects on competition policy. Finally, will globalisation require the convergence of competition law among different countries? The most basic objective of competition law is to eliminate obstacles to free competition. This objective should be common among various jurisdictions. Moreover, from the viewpoint of creating a level playing field, it is desirable that the basic objectives of competition policy are the same all over the world. However, realising this objective is not easy. Accordingly, a more realistic objective would be to make the conditions of competition, or the degree to which obstacles are present, similar in each country. On the other hand, the economic conditions in each country (such as the degree of economic concentration, the presence of long term business relationships among enterprises, etc.) differ considerably. Accordingly, the specific instruments used to achieve competition policy objectives must be designed in accordance with the specific conditions in each country. Hence, it would not be desirable or necessary for each country to have the same instruments. It is difficult for countries to recognise the differences in the relevant economic conditions. Accordingly, the second best alternative may be agreement on a minimum standard for those instruments.

VI Francine Matte, Q. C. Senior Deputy Director of Investigation and Research, Canadian Competition Bureau Quebec, Canada

Introduction Globalisation, technological change and trade liberalisation have increased the integration of markets. In this context, competition policy must be flexible enough both to foster competition and, in full measure with the needs of the private sector, to make the adjustments necessary to respond to contemporary market demands. A framework that permits and encourages robust competition is a key component of a government's national economic policy. A. The Objectives of Canadian Competition Policy Historically, three major objectives of Canadian competition policy have been identified by the courts, ministers of the Crown, interested officials and academic analysts. They are: maintaining free competition; preventing abuses of market power, including the protection of consumers; and promoting economic efficiency. In addition, a number of supplementary objectives have been identified. These include codifying the common law doctrine of restraint of trade; fighting inflation; protecting small business; preserving the free enterprise system; and ensuring fairness and honesty in the market-place.1 In the 1970s, there was vigorous debate over the primacy of these objectives in government, business and academic circles. A consensus emerged that competition policy should focus on the goals of protecting and preserving competition and promoting economic efficiency. Subsequently, concern with economic efficiency as an objective of competition policy in Canada and elsewhere has further evolved to encompass the goal of international competitiveness. Increased efficiency is now widely acknowledged as the key to improved Canadian performance in world markets. Conversely, foreign competition via imports can play a key role in limiting the potential for abuse of market power in the domestic economy.2 1

For a fuller elaboration of these objectives, see Paul K. Gorecki & W.T. Stanbury, The Objectives of Canadian Competition Policy 1888-1983 (1984). 2 Bureau of Competition Policy, Canadian Competition Policy: Its Interface With Other Economic and Social Policies (1989).

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1. The Evolution of Canadian Competition Policy a. Origins In May 1889, Canada became the first western industrialised nation to enact legislation designed to prevent firms from forming agreements in restraint of trade.3 However, enforcement was difficult due to cumbersome administrative procedures. Canada's traditional antitrust law, the Combines Investigation Act, was enacted in 1910, and significantly amended in 1976. The 1976 amendments: • extended the enforcement of Canadian competition law to service activities; • established civil enforcement against restrictive practices through the Restrictive Trade Practices Commission; • strengthened the prohibitions against collusive agreements, bid rigging and resale price maintenance; and • made civil suits available to private litigants injured through antitrust violations.4 Even with these amendments, the Act remained a relatively inflexible statute with too much reliance on criminal sanctions to deter anticompetitive conduct. Criminal sanctions were seen as particularly inappropriate to merger review and monopolies/abuse of dominant position, where a more flexible, case-by-case approach under a civil standard balance of proof was deemed desirable. b. The Competition Act of 1986s Canada's competition law was substantially overhauled and modernised in 1986, when the law was renamed the Competition Act (the Act). The Act is a framework law which establishes basic rules for the conduct of business in Canada, including both criminal and non-criminal provisions.

3

An Act for the Prevention and Suppression of Combination formed in Restraint of Trade, S.C. 52 Vic, c. 41 (1889). 4 See Paul K. Gorecki & W. T. Stanbury, The Administration and Enforcement of Competition Policy in Canada, 1889 to 1952, in Historical Perspectives on Competition Policy (R. Shyam Khemani & William T. Stanbury eds., 1991). As shown below, a private right of action is not available with respect to the non-criminal provisions of the Act. 5 Competition Act R.S.C., ch. C-34 (1985) (as amended).


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The purpose clause of the Act summarises its objectives: to maintain and encourage competition in Canada, in support of four specific objectives: (1) to promote the efficiency and adaptability of the Canadian economy; (2) to expand opportunities for Canadian participation in world markets (while at the same time recognising the role of foreign competition in Canada); (3) to ensure that small and medium sized enterprises have an equitable opportunity to participate in the Canadian economy; and (4) to provide consumers with competitive prices and product choices. The Act applies to all sectors of the economy, with the exception of activities that are specifically exempted, such as collective bargaining and amateur sport, those subject to Crown immunity,6 or those that fall within the so-called regulated conduct defence.7 The rules under the Act differ fundamentally from direct economic regulation by a board or tribunal, in that they establish a broad framework within which businesses are largely self-governing. A high degree of voluntary compliance with the rules of the Act is relied upon, thereby precluding the need for ongoing monitoring of the behaviour and performance of firms. The Director of Investigation and Research (the Director) is an independent law enforcement official responsible for the administration and enforcement of the Act. He or she is appointed by, and serves at the pleasure of, the Cabinet. Employees of the Competition Bureau are on the Director's staff. The Director's role is to investigate, not to adjudicate, and he or she is empowered to conduct investigations with respect to both criminal and civil provisions of the Act. Evidence of criminal matters is referred to the Attorney General of Canada for possible prosecution in the criminal courts. With regard to civil matters, the Director applies to the Competition Tribunal for remedial orders designed to preserve competition. The Director can commence an inquiry when he or she believes there are reasonable grounds for making an order under a civil law provision, or where an offence has been or is about to be committed. The Director is also obliged to commence an inquiry if the responsible Minister so directs, or when six Canadian residents make an application pursuant to the Act. The discontinuance of an inquiry must be reported to the Minister, who can order further 6

The Supreme Court of Canada confirmed the application of Crown immunity for competition law offences in R. v. Eldorado Nuclear Ltd., 2 S.C.R. 551 (1983). However, s.2.1 of the Competition Act provides that the Act is binding on those considered as acting as an agent of the federal or provincial government 'in respect of commercial activities engaged in by the commercial corporation in competition, whether actual or potential, with other persons to the extent that it would apply if the agent were not an agent of Her Majesty.' 7 See part B.I, infra.

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inquiry. The Minister, however, cannot order the Director to discontinue an inquiry or to conduct the inquiry in a specified manner. Traditional enforcement actions are complemented by a comprehensive programme to encourage voluntary compliance with the Act. This programme encompasses extensive public information activities to inform the public about the application of the Act, and the provision of advisory opinions upon request. In addition, the Competition Bureau publishes guidelines and bulletins to foster public understanding of the Bureau's enforcement and compliance policies. The Act also provides explicit statutory authority for the Director to make interventions before federal and provincial regulatory agencies that make decisions affecting competition in particular markets. The Competition Bureau also has the opportunity to provide input into the design and implementation of other government policies that affect the competitive market system, such as financial sector reform. The Bureau also represents Canada's interests in international competition policy fora. In addition to the core provisions of the legislation dealing with agreements in restraint of trade, mergers, abuse of dominant position, deceptive marketing practices and other matters, the Act includes provisions dealing with specialisation agreements, which allow two or more firms to reorganise their production and product lines in order to achieve the efficiency gains made possible by specialisation and longer production runs. Unlike the other non-criminal provisions of the Act, private parties may apply to the Competition Tribunal to authorise the registration of a specialisation agreement. This authorisation of a specialisation agreement exempts it from application of the conspiracy, tied selling, exclusive dealing and market restriction provisions of the Act. The Competition Tribunal Act, which was also adopted in 1986, provides for the establishment of the Competition Tribunal which adjudicates civil matters on application by the Director.8 The Tribunal operates at arm's length from the Director. It includes judges drawn from the Federal Court, Trial Division, and lay members, who are typically economists or individuals with business experience. Decisions of the Competition Tribunal cannot be appealed to the Cabinet of the federal government on public interest or other grounds. This differs from other economic framework legislation in Canada, such as the Communications Act, where decisions of the Canadian Radio-television and Telecommunications Commission ('C.R.T.C.') may be appealed to the Cabinet. 8

The Restrictive Trade Practices Commission was abolished with the establishment of the Competition Tribunal.


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Similarly decisions of the Director have been characterised as administrative by the courts, with very limited scope for judicial review.

2. Overview of Key Provisions a. Abuse of Dominance The abuse of dominance provision is one of the key elements of the Competition Act. This non-criminal provision replaced the all but unenforceable criminal law on monopoly in 1986. This provision applies if one or more persons substantially control a class of business throughout Canada, and have engaged in, or are engaging in, anticompetitive acts that have the effect of preventing or substantially lessening competition. In these circumstances, the Tribunal may issue an order prohibiting or otherwise remedying the anticompetitive conduct at issue. However, in assessing the effects of anticompetitive acts, the Competition Tribunal may consider whether the practice is a result of superior competitive performance. This provision recognises that consumers benefit when product innovation or improved distribution systems result in a firm prevailing over its rivals in the market-place. The legislation also provides that the legitimate exercise of intellectual property rights is not an anticompetitive act. b. Mergers The merger provisions apply to all mergers in Canada, irrespective of the size or nationality of the parties. Firms are required to fulfill mandatory prenotification requirements when those transactions exceed particular threshold levels.9 The assessment of mergers by the Bureau focuses on the question whether a proposed transaction is likely to prevent or lessen competition substantially. The assessment is not based strictly on market share or concentration, but also may include a number of qualitative factors including, inter alia, the extent of effective foreign competition, whether one of the merging parties is a failing business, the existence of any barriers to entry (including regulatory barriers), and the nature and extent of innovation in the markets under examination. These qualitative considerations are discussed in detail in the Merger Enforcement Guidelines issued by the Director in March 1991. 10 9

The law requires prenotification of large merger transactions, where the combined revenues or assets of the parties exceed $400 million, and the general value of the acquisition target exceeds $35 million in revenue or assets, apart from amalgamations. 10 See Director of Investigation and Research, Merger Enforcement Guidelines (1991), 450-2 & Appendix 2 .

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The Act also provides for an efficiency exception in the event that a substantial prevention or lessening of competition is found likely. The merging parties must demonstrate that the gains in efficiency which will likely arise from the merger will be greater than, and will offset, the effects of any likely substantial prevention or lessening of competition, and that these gains would not likely be attained if the merger were prohibited. In this context, the Bureau requires the provision of meaningful data and verifiable information by the parties to back up their claims of efficiency gains, expanded exports and import substitution predicted to result from a merger.11 In specific circumstances, the Director shares jurisdiction for mergers with two other agencies of the federal government. The C.R.T.C. has jurisdiction over certain industries regulated under the Communications Act, while the Minister of Industry is responsible for reviewing large merger acquisitions involving nonCanadians under the Investment Canada Act. The Director's role in merger review is primarily to investigate and to apply to the Competition Tribunal for orders. The C.R.T.C. and Investment Review Division of Industry Canada perform essentially administrative law functions. Until 1996, the National Transportation Agency had the power under the National Transportation Act to review mergers in federally regulated transportation industries, such as marine shipping and air transportation. In 1996 this power of review was removed. c. Conspiracy Another key provision of the Act relates to conspiracy, which is the oldest existing provision of Canadian competition law. Section 45 of the Act makes it an indictable (i.e. criminal) offence for any person to conspire, combine, agree or arrange with another person to prevent, limit or lessen competition unduly. The Act lists several exceptions, including cooperative arrangements relating to research and development, the exchange of statistics and product standards. These exceptions do not apply in circumstances where an agreement is likely to lessen competition in respect of prices, the quantity and quality of production, markets or customers, or distribution channels. If the conspiracy relates only to the export of products from Canada, the conspiracy section does not apply—provided that the conspiracy does not result in a reduction or limitation of the real value of a product, or restrict any person from entering into or expanding the business of exporting products from Canada. Section 46 of the Act also proscribes participation in foreign business practices that give effect to a conspiracy, combination agreement or arrangement 11

For elaboration, see Margaret Sanderson, Efficiency Analysis in Canadian Merger Cases (1996).


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entered into outside Canada, that if entered into in Canada, would be in contravention of section 45.12 d. Deceptive Marketing Practices

The misleading advertising and deceptive marketing practices provisions of the Act are intended to promote the honest and efficient functioning of the market by prohibiting representations which are false or misleading in a material respect. The rationale underlying the misleading advertising provisions, which are criminal, relates to market information to both consumers and businesses. Unsubstantiated performance and durability claims, as well as misleading warranties and misrepresentations as to regular price, fall into this category. The provisions also cover multi-level marketing and pyramid selling plans, baitand-switch-selling and deceptive promotional contests. Enforcement of the misleading and deceptive marketing practices provisions of the Act is geared to ensuring that no competitor gains or retains market share by deception. The overall policy goal is to allow competitive market forces, within the framework provisions of the Competition Act, to determine winners and losers in the market-place.

B. The Interface Between Competition and Economic Regulation 13 1. The Regulated Conduct Defence In Canada, the interplay between competition law and regulation is governed to a large extent by a jurisprudential doctrine known as the regulated conduct defence. The essence of this doctrine is that specific activity which is authorised or carried out pursuant to a valid scheme of regulation is deemed to be in the public interest. As such, it cannot violate the criminal provisions of the Act. There is no conclusive jurisprudence with respect to the civil provisions of the Act, and it remains for the courts and the Competition Tribunal to determine the full scope of the application of the regulated conduct defence.14 12

See R. v. Sumitomo Canada Limited, Ottawa T-2687-93 (F.C.T.D. 1993). For a fuller elaboration, see Robert D. Anderson et al., Regulatory Reform and the Expanding Role of Competition Policy in the Canadian Economy, 1986-1996, in Review of Industrial Organization (forthcoming); Donald Mercer, The Regulated Conduct Defence and the Telecommunications Sector (1995). 14 This issue has been touched on in two recent cases: Canada v. Bank of Montreal et al., Comp. Trib. CT 9502/92,20 June 1996 (unreported)(Interac); Law Society of Upper Canada v. Canada, No. RE5349/95 (Ontario Court (General Division) 1996). 13

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2. Advocacy Sections 125 and 126 of the Act provide the Director with the independent authority to advocate competition in certain circumstances. Section 125 enables the Director to make representations in respect of competition before any federal board, commission or other tribunal where such representations are relevant to the matters under consideration. Section 126 empowers the Director, with the consent of a provincial regulatory board or tribunal, to make similar representations before any such provincial regulatory boards, commissions or tribunals. The Bureau has made formal and informal interventions in support of competition ranging from presenting evidence and participating in regulatory proceedings to providing working level commentary and advice to colleagues in other departments or agencies. The Bureau focuses its advocacy work on hearings, reviews and other proceedings in which it can make a significant contribution to enhancing or protecting competition in a market. For instance, the Bureau has intervened in proceedings regarding licensing or other such entry restrictions, unnecessary impediments to competition created by the regulatory, legal and institutional structure of industry, anti-dumping duties and other impediments to import competition and establishing the terms for competitive access to essential facilities. Since 1976, the Competition Bureau has made approximately 200 written submissions.15 The Bureau views competition advocacy and enforcing the Act in particular sectors to be complementary. Effective advocacy which results in liberalisation of regulations governing particular sectors must be followed by vigorous enforcement to prevent private anti-competitive practices that could nullify the gains from regulatory reform. As a result of regulatory reform in past years, the Bureau has seen a substantial increase in its responsibilities in terms of the amount of economic activity subject to the Act. The focus of the Bureau's advocacy activities has evolved over time in response to shifting priorities and opportunities for effective intervention. The first half of the 1980s witnessed a large number of interventions (in the range of 20-25 per year) in the transportation and telecommunications sectors, as the ground work was laid for deregulation of those sectors. Electricity generation and financial services are currently at the same stage in Canada that telecom15

See Joseph Monteiro, Regulatory Interventions by the Bureau of Competition Policy, in Canadian Competition Law and Policy at the Centenary (R. Shyam Khemani and William T. Stanbury, eds., 1991).


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munications and transportation were ten years ago. The Bureau has begun to advocate competition infinancialmarkets and in the energy sector. The Bureau is likely to renew its advocacy of competition in the agriculture sector before marketing boards and related institutions. a. Telecommunications Competition in the Canadian telecommunications markets has been a priority of the Bureau for more than a decade, beginning with terminal attachment, then long distance competition and currently local telecommunications services. The passage of the Telecommunications Act16 in 1993 highlights the convergence of telecommunications regulation and competition law in Canada. A primary policy objective of the Telecommunications Act is increased reliance on market forces for the provision of telecommunication services. Under this Act, the Canadian telecommunications regulatory body, the C.R.T.C., is required to forbear from regulation where itfindsthat a service or a class of services is or will be subject to competition sufficient to protect the interests of consumers. The Director has been a frequent intervenor before the C.R.T.C. in numerous proceedings relating to long distance and local telecommunications competition, the regulatory framework for telecommunications and the distribution of broadcast services, as well as forbearance from regulation in a number of areas, including most recently long distance services. The Bureau has also made representations with respect to the review of Teleglobe's statutory monopoly on the carriage of international traffic, and competition in the distribution of broadcast services by cable, direct broadcast satellite or other technologies. The Bureau has advocated that certain fundamental principles should govern the regulatory framework for the development of competition in communications services. In summary, these principles are: • Maximise reliance on competition and market forces at the outset; • As a corollary, minimise regulation for incumbents and avoid imposing economic regulation on new entrants; • Adopt market-based pricing as soon as possible in local telecommunications and, if necessary, introduce specific, targeted mechanisms to address social policy objectives; • Establish clear rules governing incumbents' obligations to provide access to their networks by competitors, and adopt appropriate pricing principles to induce efficient competition; 16

Telecommunications Act, S.C. 1993, Ch. 38.

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• Establish timely and effective dispute resolution mechanisms to ensure that incumbents do not attempt to delay access to their networks; and • Liberalise foreign ownership rules for communications networks to assist in the rapid construction and development of communications networks. Progress has been made to opening Canadian telecommunications markets to greater competition and reducing the level of regulation. Thus, the Bureau is shifting its emphasis away from regulatory and policy interventions, toward greater enforcement activity, including merger and other restructuring issues which are emerging in the transition period to a competitive market. b. Electricity The energy sector in general and the electricity industry in particular pose new challenges that require re-evaluation of existing regulatory structures. The Canadian electricity industry is only starting down the road toward open competition. This sector is a high priority for the Bureau, which can have a significant impact in establishing a competitive framework for the long term. The Bureau has been extensively involved in the Province of Ontario's deliberations on reforming the Ontario electricity system through the provision of comments and analysis to the relevant department of the Ontario government. It has provided input to the Advisory Committee on Competition in Ontario's electricity system, with respect to legislation and regulation restricting competition, particularly the generation and retailing of electricity. Issues that the Bureau addressed included the need for effective separation of the natural monopoly parts of the sector (transmission and distribution) from competitive parts (generation, retailing and electricity-related markets such as energy services), restrictions on international and interprovincial trade and competition in electricity, and regulatory and structural approaches for minimising the threat of cross-subsidisation from monopolistic to competitive parts of the sector. The Advisory Committee's recommendations are currently under consideration by the Ontario Government.17 While no specific restructuring proposals have been forthcoming from the provincial government, there appears to be strong support within the province for major pro-competitive reforms. c. Agriculture Between 1975 and 1996, the Bureau made thirteen interventions in the agriculture or agri-food sectors. A majority of these interventions occurred after 1986, 17

See A Framework for Competition: The Report of the Advisory Committee on Competition in Ontario's Electricity System to the Ontario Ministry of Environment and Energy (1996).


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when the sector was initially exposed to competitive forces. The interventions covered the poultry, dairy, and fruit and vegetable sectors. Seven representations were made to various federal boards, six to provincial boards. The issues addressed ranged from licence and access applications, merger agreements, dumping, etc. There have, however, been two overriding issues in these interventions: supply management and price setting.18 In its submissions, the Bureau has opposed marketing board schemes to determine the level of output and prices based on cost of production formulae, on the grounds that they would reduce output, raise prices, cause income distribution problems and use inefficient prices in costing formulae. The Bureau opposed government price controls in interventions on price setting issues, arguing that market based arrangements are more consistent with maintaining and promoting an efficient and competitive processing sector. d. Antidumping In Canada, the Special Import Measures Act19 governs the application of antidumping and countervailing duties to imports of dumped or subsidised goods that injur domestic producers. Since the early 1980s, the Competition Bureau has intervened in seven cases before the Canadian International Trade Tribunal and its predecessor organisations to address questions of material injury and public interest. The Bureau intervenes in proceedings that address significant economic sectors where important competition issues are at stake, particularly on material injury and public interest in these dumping cases. These interventions have involved the following industries: sugar, cars from Korea, fibreglass pipe insulation, beer and home canning materials. The Bureau has also played an important role in the reform of anti-dumping and countervail policy in Canada. This role has ranged from interdepartmental development of positions for trade negotiations, to making submissions and an appearance before a special House of Commons' Committee examining the Special Import Measures Act.20 A significant number of the Bureau's 18

See Gerald Robertson et al., Competition Policy, Trade Liberalization and Agriculture (a paper prepared for the Third Policy a n d T r a d e Disputes W o r k s h o p , Tucson, Arizona, M a r c h 1997). 19 Special I m p o r t Measures Act, R.S.C. 1985, Ch. 5-15. 20 See Submission of the Competition Bureau, Industry C a n a d a , t o the SubCommittee on the Review of the Special Import Measures Act of the Standing C o m mittee on Finance and the subcommittee on T r a d e Disputes of the Standing Committee on Foreign Affairs a n d International Trade, regarding a Call for C o m m e n t s concerning the Review of the Special Import Measures Act (20 N o v e m b e r 1996).

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proposals have been taken up in the Committees' Report,21 and have been included in government's response to the Report.22

C. Competition Policy and Economic Restructuring Competition policy has a particularly important role in an era of globalisation, trade liberalisation and increased mobility of production factors. While trade liberalisation, privatisation and deregulation can invigorate markets, they are not a substitute for the sound application of competition law and policy.23 Moreover, the evidence indicates that vigorous rivalry in domestic markets for goods and services promotes the competitiveness of domestic firms in export markets by fostering innovation and productivity improvement.24 Competition law and policy defines the rules and the environment within which Canadian companies can develop the strength needed to compete. The Act is fully compatible with the Canada-U.S. Free Trade Agreement and the North American Free Trade Agreement. By providing an efficiency gains defence in certain cases for otherwise anticompetitive mergers, it explicitly recognises the need for industry to adjust. Prior to the mid-1980s, Canada's economy was small, regulated and protected, and had inefficient manufacturing capacity and high-cost distribution systems. The 1986 Act facilitates the move by Canadian industry to a more open and deregulated economy. Vigorous enforcement of competition law provides incentives for investment in continual innovation and the systematic upgrading of products and production processes, necessary to keep pace with competitors. This serves the twin objectives of enhancing companies' ability to compete successfully in world markets and maximising benefits to the Canadian economy.

21

T h e Reports of the Sub-Committee was tabled in the House of C o m m o n s on 11 December 1996. See http://www.parl.gc.ca. 22 T h e Government Response to the Report on the Special Import Measures Act was tabled in the H o u s e of C o m m o n s on 18 April 1997 by the Minister of Finance, the H o n o u r a b l e Paul M a r t i n . See http://www.fin.gc.ca. 23 See R o b e r t D . A n d e r s o n a n d S. D e v K h o s l a , Competition Policy as a Dimension of Economic Policy: A Comparative Perspective, Occasional P a p e r N o . 7 (Competition Bureau, Industry C a n a d a 1995). 24 See Michael Porter, The Competitive Advantage of Nations (1990), 117.


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1. Enforcement of the 1986 Competition Act The Act, which came into force on 19 June 1986, differs considerably from previous legislation. Since the Act took effect, court decisions have clarified its meaning and assisted the business community in understanding and complying. The priority areas of enforcement have been abuse of dominance, mergers and conspiracy. In addition, direct mail promotions, telemarketing and marketing practices promoting the sale of telecommunications services are priorities in the enforcement of the deceptive marketing practices provisions.

2. Abuse of Dominance Prior to passage and implementation of the Act, convictions under the monopoly provision of the old law were rare. Between 1935 and 1985, seventeen cases were initiated, in only two of which convictions were obtained. Prohibition orders were issued in six of the cases (including one where a conviction was obtained), defendant firms were acquitted in six cases, and in the remaining four, charges were withdrawn. Remedial orders were issued in each of the six cases brought forward by the Director.25 Under the new Act, considerable experience has accrued with respect to abuse of dominant position provisions on such issues as market definition, contract exclusivity, allocation of markets, the concept ofjoint dominance, directed sales and the creation of barriers to product innovation. In addition to gaining experience in investigating and litigating these cases before the Competition Tribunal, several procedural issues, such as the role of intervenors, confidentiality and others, have been resolved by the Tribunal and the courts. In Canada v. Laidlaw Waste System Ltd.,26 the Director requested the Tribunal to consider a number of practices designed to create and protect a dominant position. These included, inter alia: acquiring competitors in the relevant market; entering a market by acquiring the sole competitor, then excluding that competitor through restrictive covenants; maintaining dominance by 25 See C a n a d a v. D & B Co. (Canada), 64 C.P.R.(3d) 216 (1996)(Neilsen); C a n a d a v. Bank of Montreal et al., supra note 14; C a n a d a v. NutraSweet C o . , 32 C.P.R.3d 1 ( C o m p . Trib. 1990); C a n a d a v. Laidlaw Waste System Ltd., 40 C.P.R.3d 289 ( C o m p . Trib. 1992); C a n a d a v. Tele-Direct (Publications) Inc., N o . C T - 9 4 / 3 (Comp. Trib. 26 February 1997); C a n a d a v. A G T Directory Limited et al., N o . CT-94/2 ( C o m p . Trib. 18 N o v e m b e r 1994). 26 Supra note 25.

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signing customers to long term exclusive contracts, which included right to compete clauses that gave Laidlaw the right to match the price of any competitor or any provision, and required the customer to accept Laidlaw's offer.27 The Tribunal ordered amendments to the customer service agreements and required Laidlaw to refrain from enforcing those terms in existing agreements that were found to be anticompetitive. In Canada v. The NutraSweet Co., the Tribunal addressed a number of issues relating to the role of intellectual property rights in the sweetener industry.28 The Tribunal accepted the Director's argument that an allowance which NutraSweet offered to its customers to encourage them to display the NutraSweet logo constituted an anticompetitive act, in view of the associated requirement that customers displaying the logo must use exclusively NutraSweet brand aspartame. In the Tribunal's view, this created an 'all or nothing' choice for purchasers, which impeded entry by competitors. The Tribunal's remedial order prohibited NutraSweet from continuing to offer discounts for the display of its trade mark or logo, and from engaging in other acts, such as offering its customers meet-or-release or 'most favoured customer' clauses, which were deemed anticompetitive. The decision suggests that the Tribunal viewed NutraSweet's marketing strategy as an attempt to extend artificially the duration of the company's Canadian patent protection. The Tribunal's decisions in these cases are particularly significant with respect to enforcement policy. Exclusionary and restrictive clauses are a frequent occurrence in certain industries' contracts. Where such clauses do not have a proper business justification, and serve only to protect a dominant position by creating barriers to entry, the Director will seek corrective action.

3. Mergers The merger provisions of the Act have generated the greatest interest over the past ten years. Previous criminal merger provisions penalised mergers that were detrimental to the public, and were an inappropriate standard to evaluate complex economic arguments and evidence. Since 1986, mergers have been examined under non-criminal standards, according to a merger's impact on competition and economic efficiency. Since the passage of the Act, a number of key cases have been decided, providing guidance in the merger area. For instance, in Canada v. Hillsdown 27 28

40 C.P.RJd 289 (1992). Supra n o t e 25.


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Holdings (Canada) Ltd.,29 the Tribunal noted that while market share can give a prima facie indication whether a merger is likely to lead to an enhancement of market power, the Director is also responsible for adducing some evidence regarding barriers to entry. Specifically, the Tribunal observed that 'in the absence of entry barriers, it is unlikely that a merged firm could maintain supra-competitive profits, regardless of market share or concentration'.30 The Hillsdown case also provided the backdrop for a discussion on the treatment of efficiencies under the merger provisions. Specifically, the Tribunal indicated that it had difficulty accepting the Director's position that pure transfers of wealth from consumers to producers were not 'effects' of a lessening of competition within the meaning of the Act. It offered as an alternate test: the weighing of inefficiencies against the likelihood that detrimental effects (both the deadweight loss and the wealth transfer, or a portion thereof) will arise from the substantial lessening of competition. The Tribunal thereby apparently suggested that the larger the price effects of a merger, the less weight should be given to efficiencies. The Tribunal's comments have been criticised as having the potential to erode the efficiency orientation of Canadian merger policy, which facilitates business restructuring. A pure consumer price test would effectively offset the efficiency exception of the Act. However, since the Tribunal's observation on this point was obiter dictum, it is not necessarily binding on future cases. The Director, therefore, elected not to appeal this aspect of the decision. In Canada v. Southam Inc.,31 the Federal Court of Appeal affirmed the conceptual approach to the delineation of relevant markets which is used by the Bureau and set out in the Merger Guidelines. The Court found that the Tribunal had given too much weight to the lack of evidence of price sensitivity as an indicator of the lack of competition, and had ignored other evidence that revealed that competition was present. This decision was recently overturned by the Supreme Court of Canada, largely on the administrative law grounds that as a specialised, quasi-judicial body, the Tribunal's decision should be accorded considerable deference by the appellate courts.32 The question before the Supreme Court was the application of tests for product market definition in the case before it. The Court observed that the weighting and application of certain factors should be 'subtle and flexible', not mechanical, and that 'as a 29 30 31 32

41 C . P . R J d 289 (Comp. Trib. 1992). Qd. at 324. 63 C.P.R. 3d 67 (F.C.A. 1995); Southam et al. v. Canada, No. A-1668-92 (C.A.). C a n a d a v. Southam Inc., [1997] 1 S.C.R. 748.

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matter of law, the Tribunal should consider each factor, but according of weight to the factors should be left... to the Tribunal'.33 However, the Supreme Court upheld the Tribunal's and Federal Court of Appeal's remedy order in the Southam case, which involved the print real estate advertising market in the British Columbia lower mainland. The Supreme Court held that the correct test is whether the proposed remedy will effectively eliminate the substantial lessening or prevention of competition. A remedy need not cause the market to return to its pre-merger state of competition, as the Tribunal originally required. Canada v. Asea Brown Boveri Inc.2"* involved restructuring in response to the lowering of trade barriers that resulted from commitments made in the Canada-U.S. Free Trade Agreement (C.U.S.T.A.). In 1989, the Tribunal issued a Consent Order under section 105 of the Act in relation to the acquisition of the electric power transmission and distribution business of Westinghouse Canada Inc. (Westinghouse) by Asea Brown Boveri Inc. (A.B.B.). The order required that A.B.B. divest certain assets acquired from Westinghouse in the event that it was unable to obtain specific tariff relief measures for imports of medium and large power transformers. Tariff protection was viewed by the Director as a significant barrier to entry in relation to competition in the Canadian market-place. On 24 May 1990, the Privy Council issued an order giving effect to the implementation of accelerated tariff reductions under the C.U.S.T.A., as required by the consent order. Revitalisation of the consent order process is a significant recent development with respect to merger review in Canada. Three consent orders are currently before the Tribunal. In Canada v. Dennis Washington et al. (Seaspan)35 and Canada v. Canadian Waste Services Inc.,36 the Tribunal issued consent orders in February and April 1997, respectively. The Director filed an application for a consent order in Canada v. ADM Agri-Industries, Ltd.31 in March 1997. Behavioral provisions, such as supply contracts, may be included in the remedial order, along with structural relief, divestiture offixedassets and customer contracts.

33

2d a t 770. Unreported decision (Comp.Trib., 18 December 1989). 35 CT-96/01 (unreported). 36 CT-97/1 (unreported). 37 CT-97/02 (unreported). 34


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4. Conspiracy A central element of the conspiracy section is the test of 'undueness' which is applicable to agreements that lessen competition. The decision of the Supreme Court of Canada in R. v. Nova Scotia Pharmaceutical Society ('PANS')38 confirms that the test of undueness embodies a partial 'rule of reason' standard. This requires that the seriousness or significance of the effect(s) of a particular anticompetitive agreement be considered. The test does not go so far as to permit potential efficiency-related benefits that derive from cooperative arrangements among competitors to be considered. In its decision, the Court also elaborated on its views regarding the major elements of the examination mandated under the conspiracy provisions. With respect to market structure, the court clearly emphasised that the main objective is to determine the degree of market power enjoyed by the parties to the agreement. Market share, while a relevant factor, is not determinative and must not be considered in the context of other relevant factors. Effective enforcement in a global economy requires cooperation between antitrust enforcement agencies. In the fax paper case, the cooperative mechanisms available under the Canada-United States Mutual Legal Assistance Treaty in Criminal Matters39 were employed. They enabled the Bureau and the Antitrust Division of the U.S. Department of Justice to undertake a joint investigation and secure convictions in both countries against four foreign suppliers of thermal fax paper. In 1994, Kanzaki Specialty Papers Inc.40 pleaded guilty to having conspired to lessen competition in Canada. Mitsubishi Corporation and its Canadian subsidiary Mitsubishi Canada Limited41 also pleaded guilty to having conspired to lessen competition as well as having engaged in price maintenance activities in Canada. Following further investigation in Canada and the United States, guilty pleas, fines and prohibition orders were secured against Rittenhouse Ribbons and Rolls Ltd.,42 New Oji Paper Company Ltd.,43 and

38

43 C.P.R.3d 1 (S.C.C. 1992). M u t u a l Legal Assistance in Criminal Matters Act, R.S.C., C h . C - 3 0 (4th S u p p . 1985). 40 C a n a d a v. Kanzaki Specialty Paper Inc., 82 F.T.R. 63, 56 C.P.R.3d 467 (1994). 41 C a n a d a v. Mitsubishi C a n a d a Limited a n d Mitsubishi C o r p o r a t i o n , N o . T-1825-94 (8 August 1994) (unreported). 42 C a n a d a v. Rittenhouse Ribbons a n d Rolls Ltd., N o . T - 2 6 6 3 - 9 5 (20 D e c e m b e r 1995) (unreported). 43 C a n a d a v. New Oji Paper C o m p a n y Ltd., N o . T - 1 6 9 3 - 9 6 (16 August 1996)(unreported). 39

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Mitsubishi Paper Mills.44 Fines in Canada in the fax paper matter have totalled $3.45 million.

5. Deceptive Marketing Practices The proliferation of sophisticated communications technologies has enabled illicit businesses to communicate rapidly and cheaply with their victims, no matter where they are located. Free trade agreements and deregulation within certain sectors have also helped to facilitate international consumer transactions. However, statutory and regulatory jurisdictions have remained fragmented and unco-ordinated. Consequently, in a number of cases, domestic markets are not well protected, and victims have little recourse when misleading advertising or deceptive marketing practices originate outside the country. The Bureau is especially concerned about the potential for on-line ('Internet') deceptive marketing practices. Cybermarketing is a fast growing activity bringing to consumers on-line magazines, catalogues, shopping centres and interactive advertisements. Canada is a member of the International Marketing Supervision Network. The Network, established in 1992, is an alliance of organisations from member and observer countries of the O.E.C.D. involved in the promotion and enforcement of fair trading practices. Its primary objectives are to share general information on cross-border deceptive marketing activities and to explore opportunities for cooperative enforcement. Canada currently serves as chair of the organization. At the last full Network conference, held in Ottawa in September 1996, examples of deceptive telemarketing schemes and successful cross-border enforcement initiatives were discussed. Delegates also examined their different regulatory regimes and how these can be effectively reconciled to achieve the common goal of promoting fair trading practices. Fiscal restraints and globalisation of markets will challenge the Bureau's abilities to enforce the misleading advertising and deceptive practices provisions of the Competition Act efficiently and effectively. The Bureau will continue to opt for a compliance-oriented approach, under which enforcement initiatives are directed selectively to have major economic impact on the Canadian marketplace, maximum deterrent effect, or optimal development of case law.4S 44

C a n a d a v. Mitsubishi P a p e r Mills, N o . T - 1 2 5 - 9 7 (17 F e b r u a r y 1997)(unreported). F o r disposition of m o s t recent cases, see D i r e c t o r of Investigation a n d Research, Misleading Advertising Bulletin. 45


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D. The Interface Between Competition Policy and Trade Policy Trade liberalisation and competition policy share broadly similar goals. Both seek to ensure that artificial barriers to the competitive process are removed to the greatest extent possible in order to encourage efficiency in the production and allocation of goods and services. One specific goal, market access, represents an important confluence between trade and competition policies. Measures that generally foster global contestability of markets will be consistent with objectives of both trade and competition policies.46 There is a growing acceptance of the linkage between strong rivalry in the domestic market, supported by vigorous antitrust enforcement, and the realisation of gains from trade liberalisation agreements. Domestic competition laws complement trade liberalisation agreements by ensuring that the benefits of such agreements are not negated by private restraints of trade. Strong competition in domestic markets also helps to smooth the structural adjustments that are the inevitable result of any trade liberalisation accord.47 The close relationship between competition policy and international trade is directly reflected in several provisions of the Competition Act. As noted above, the purpose clause refers specifically to the importance of Canadian participation in world markets as well as the role of imports in strengthening competition in the domestic economy. The role of imports as a competitive alternative is also included in the list of factors to be considered under the merger provisions of the Act. This view was reinforced by the Competition Tribunal in its Hillsdown decision, which focused on the potential competition offered by U.S. facilities that were not yet strongly active in the Canadian market. Competition policy has already begun to make an appearance in various international agreements. While the Canada-U.S. Free Trade Agreement Trade did not contain any specific chapter on harmonisation or convergence of antistrust laws between Canada and the U.S., consideration of competition policy did arise in the context of the convergence of anti-dumping and antitrust laws. In the North American Free Trade Agreement (N.A.F.T.A.), there is an explicit provision on competition law: Chapter 15 reflects a commitment in principle to maintaining and enforcing national competition laws and to promoting effective competition law enforcement in the North American free 46 See R. Shyam Khemani, The Complementarity Relationship Between Trade Policy and Competition Policy, Symposium Paper N o . 10, prepared for the O . E . C . D . T r a d e C o m m i t t e e Symposium on Regulatory Reform and International M a r k e t O p e n n e s s (9-10 July 1996). 47 See Anderson and Khosla, supra note 23.

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trade area. In the Canada-Chile Free Trade Agreement, the parties agreed to mirror the language of N.A.F.T.A. on competition. The parties also agreed to the mutual elimination of anti-dumping duties within a maximum of six years. In December 1996, following the World Trade Organization (W.T.O.) Singapore Ministerial meeting, a working group was established to study issues raised by members relating to the interaction between trade and competition policy, including anticompetitive practices, in order to identify areas that may merit further consideration in the W.T.O. framework.48 A second group on trade and investment was also established. The Organization for Economic Cooperation and Development (O.E.C.D.) has done extensive work in the area of trade and competition, which will undoubtedly contribute to the efforts of the WTO working groups.

E. Future Directions and Emerging Issues Given the internationalisation of markets, competition policy must be in full measure with the needs of the private sector to make the essential structural adjustments in response to evolving market demands. This reflects the shift in economic philosophy over the past decade away from government intervention and towards a new vision of an economy discussed in global terms, in which competitive market forces are the key factor in this global economy. The Competition Act of 1986 has now been in force for almost eleven years. It is the principal piece of framework legislation aimed at maintaining and strengthening the role of competitive forces in Canada. The Act successfully anticipated the competitive challenges arising from trade liberalisation agreements, such as the Canada-U.S. Free Trade Agreement and N.A.F.T.A. Furthermore, trade liberalisation has been reinforced on the domestic side by an increasing trend towards privatisation and deregulation. An Agreement on Internal Trade (A.I.T.) amongst the Canadian provinces has also been entered, the goal of which is to eliminate interprovincial barriers to the free flow of goods, services, labour and capital.49 The government is cognizant of the need to ensure that the Competition Act keeps pace with the corporate strategies of global firms. In their search for greater economic efficiency, firms are increasingly using new combinations of 48

World Trade Organization, Singapore Ministerial Declaration, N o . 96-5315, (9-10 December 1996). 49 See First Ministers of Canada, the ten provinces and the two territories, Agreement on International Trade (Ottawa, 18 July 1994).


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investment, trade and collaborative agreements to expand internationally, enter new markets and exploit technological and organisational advantages as widely as possible. Bill C-67, introduced before Parliament in November 1996, proposed changes to the Act, essentially aimed at more effective and flexible enforcement. The amendments are intended to provide quicker and more effective resolution of misleading advertising and deceptive marketing practices; address the recent proliferation of deceptive telemarketing practices; improve the administration of the merger prenotification process while reducing the regulatory burden on business; and expand the tools to address criminal conduct through consent resolutions and corrective orders. In recent years, several important sectors of the Canadian economy have been affected by privatisation and deregulation, including transport, telecommunications, energy and financial markets. This trend has expanded the scope of the Competition Act as the only available lever to discipline anticompetitive conduct at a time when fiscal restraints put pressure on all government agencies to do more with less. At present, only the Director may launch proceedings before the Competition Tribunal in respect of civil reviewable matters. Opportunities may exist for improving the effectiveness of the law and enhancing compliance by allowing private parties to initiate proceedings. Further consideration should be given to the potential for such a mix of public and private enforcement.

1. Cost Recovery With continued fiscal restraint, the Bureau has had to search for methods of generating revenue. In this context, cost recovery for the Bureau's services is an attractive option. Proposals include partially recovering the costs of reviewing Advanced Ruling Certificate50 requests and merger prenotification filings, rendering advisory opinions, and providing copies of seized documents prior to statutory requirements for their return. Charging fees for our service will enable us to increase our resources, improve our service standards, and make the Bureau more accountable in the delivery of those services.

50

Sec. 102 of the Competition Act, R.S.C. 1985, Ch. C-34, states that "Where the Director is satisfied by a party or parties to a proposed transaction that he would not have sufficient grounds on which to apply to the Tribunal under Section 92, the Director may issue a certificate to the effect that he is so satisfied.'

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2. Cooperation Among Firms Firms successfully competing in global markets must typically be highly innovative, keeping pace with technological change and other market developments. At the same time, the global market-place is increasingly characterised by interactions across borders, both between firms and within firms. These interactions involve all levels of activity, including research and technology development, design, production, sourcing and marketing. New methods of doing business are evolving, and we need to examine how best to ensure that competition legislation can distinguish between efficient responses to market developments and those which are clearly anticompetitive.51 Members of the business and legal communities have suggested that a review of the legislation may be needed to avoid discouraging firms from entering into beneficial forms of cooperation, which have no anticompetitive effect and are increasingly necessary in sophisticated global markets.

3. Enhanced Compliance Programmes Deterrence will continue to require selective litigation, but compliance programmes are highly cost effective in preventing anticompetitive behaviour. The Competition Bureau already has an active compliance programme, and will increasingly rely on compliance to fulfill its mandate.52 Fostering compliance with the Competition Act always has been, and will continue to be, the Bureau's overriding objective. We have an open door policy, under which parties can discuss proposed mergers and other business conduct in private. In fact, there is considerable saving in money and time to be gained by taking advantage of the Program of Advisory Opinions or by approaching the Bureau early in the merger planning process. The Bureau will be exploring ways to improve certainty for business and reduce anticompetitive conduct by expanding its compliance programmes.

51

F o r a fuller discussion, see Director of Investigation a n d Research, Strategic Alliances Under the Competition Act (Information Bulletin, 26 August 1994). T h e preface to the Bulletin observes that 'it is the Bureau's experience that most forms of strategic alliances d o n o t raise issues under the Competition Act': id. at 1. 52 T h e Competition Bureau expects t o release its C o r p o r a t e Compliance Bulletin in

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4. Intellectual Property The interface between competition policy and intellectual property rights has been receiving increasing attention from competition law authorities, including the Competition Bureau, as knowledge-based industries become increasingly important. It would appear that the goals of competition policy and the statutory power to exclude competitors through intellectual property rights are at variance. However, further analysis reveals that this divergence is not as great as it may initially appear. In a significant number of industries, intellectual property rights do not confer market power to the extent of raising concerns for antitrust enforcers. Moreover, in many instances, potential abuses involve extending intellectual property rights beyond their immediate domain, such as by incorporating tying arrangements or territorial restrictions to licensing arrangements, which are business practices subject to conventional antitrust prescriptions. In the long run, however, intellectual property rights may strengthen competition in the economy by enhancing innovation and providing incentives for the development and production of new products or methods of production.

5. International Cooperation International cooperation is part of the Bureau's comprehensive approach to a modern, effective and relevant competition policy. The 'nationality' of corporations has become more difficult to ascertain in the wake of far-reaching investment and capital market liberalisation. Hence, at present, the relative economic importance for the host country of national versus foreign firms is much less clear-cut than in the past. The Bureau recognises that globalisation and the emergence of large, 'stateless' corporations are placing new pressures on the international antitrust system. These pressures take many forms, such as transnational mergers and acquisitions which are reviewed by several antitrust jurisdictions; international strategic alliances and other forms of international cooperative arrangements; and international cartels which are sometimes promoted by trade measures such as voluntary export restraints. In September 1996, the Bureau and the U.S. Federal Trade Commission signed an agreement establishing a Canadian-U.S. Task Force on Cross Border Deceptive Marketing Practices. The primary purpose of the Task Force is to provide a framework to promote cooperation between law enforcement agencies in Canada and the U.S. with respect to deceptive marketing practices

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with a transborder component. The Task Force will operate within the confines of the laws, policies and practices of each country. With the globalisation of business activity, advances in technology, and greater potential for international deceptive marketing practices, this type of proactive, cooperative approach to enforcement has become increasingly necessary. Deceptive telemarketing is an area with international dimensions where we will focus attention. In this regard, Canada and the U.S. recently announced the formation of a binational law enforcement group to combat cross-border telemarketing fraud. Law enforcement agencies are to report back by September 1997 on joint progress in fighting this type of crime. The impact of competition policy is increasingly felt across borders, with a corresponding increase in the interaction between antitrust agencies. Canada has been at the forefront of greater cooperation with its trading partners in antitrust law enforcement. The 1995 Canada-U.S. Agreement Regarding the Application of their Competition and Deceptive Marketing Practices Laws, and the Mutual Legal Assistance Treaty in Criminal Matters between Canada and the U.S., facilitate close cooperation between Canadian and U.S. competition law enforcement agencies, in circumstances where this is warranted. The Bureau believes in increasing cooperation among antitrust enforcement agencies. International cooperation will become more significant as competition policy comes under closer scrutiny in other multilateral fora, such as the W.T.O. A sustained and determined effort to cooperate in the enforcement of existing laws over the next few years is the best way to determine whether new multilateral rules are required, and what form they may take.

Conclusion The legislative changes embodied in the 1986 Competition Act have enabled the government to open the economy to greater competition and have facilitated the structural adjustment of Canadian industry to global change. The Act expressly recognises the role of foreign competition and the objective of enhancing Canadian competitiveness. The Act has fostered stronger competition and more intense rivalry in the Canadian market-place, making Canadian companies more efficient and better able to compete abroad. In the long run, an open, competitive environment will serve to promote productivity, growth, and a rising standard of living. The experience to date with respect to the enforcement of the Act lends support for the objectives of Canadian competition policy, as stated in the Act's purpose clause. The Supreme Court expressly recognised in the PANS case


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that the Act is a central feature of Canadian public policy in the economic sector. The merger provisions and their enforcement are fundamentally economic in nature, and are designed to respond to the dynamic nature of a modern industrial economy. The cases brought by the Director and the case law indicate the flexibility and balance of the Act in dealing with anticompetitive abuses by dominant firms. The 'total welfare' approach to merger analysis is an example of the forward-looking, flexible approach needed for an open and small economy. In the global economy, competition authorities will pursue a growing number of cases in which cooperation and co-ordination will be necessary to ensure healthy and competitive markets. The challenge to antitrust enforcement in a global market-place will be to secure greater enforcement cooperation and harmonisation of competition policy. The work of the O.E.C.D. in the development of bilateral agreements has contributed to a better understanding of the need and merits of closer cooperation. The impact of the Act goes beyond the Bureau's enforcement activities. In most cases, businesses voluntarily design their practices, or alter existing arrangements, to ensure that they comply with the Act. Furthermore, the Bureau actively promotes voluntary compliance through a number of initiatives besides enforcement activities, notably programmes of information and public education. Finally, forums such as this workshop foster a deeper understanding of the issues facing competition authorities, improve international antitrust relations and thereby help us all to maximise our impact in our efforts to promote dynamic, competitive economies in our respective jurisdictions.

VII Damien Neven Professor, University of Lausanne Lausanne, Switzerland

Introduction This paper will focus on how to achieve the objective of economic efficiency (including how we should address possible tradeoffs between various aspects of economic efficiency) and on whether a conflict exists between economic efficiency and alternative objectives, with particular reference to market integration. Several more general comments willfirstbe made. Regarding the legitimacy of objectives, the adoption of a competition policy and associated legal and institutional framework seems to be a political act. What is legitimate is effectively determined by sovereign democratic institutions. Whenever a policy has been adopted by these institutions, its legitimacy cannot be questioned. A discussion of the relative merits of the various objectives, and of the possible tradeoffs between them may, nonetheless, be both useful and necessary to fuel the democratic debate about them. This paper adopts such a positive (rather than normative) approach. A distinction should be made between the objectives being pursued by the policy and the objectives that are assigned to the institutions in charge of implementing the policy, as reflected in the legal framework under which these institutions function. The objectives embodied in the legal framework may differ from ultimate objectives of the policy for at least two reasons. The first reason is that the constraints under which the institutions operate must be explicitly recognised. For instance, if an institution has limited resources, it may be wise to exclude a time-consuming task from its mandate. More generally, the political economy of such an institution should be considered; its mandate should be sufficiently limited so that one can be reasonably confident that the institution can fulfil it. For instance, if broad discretion in implementation could be abused, it may be desirable to formulate the institution's mandate in terms of simple rules. The consequence of doing so may be loss of precision in implementation with respect to the ultimate objective, but this could be less damaging than leaving implementation of general objectives open to capture by particular interests or by the implementing institution itself. Evaluation of efficiency benefits in merger cases illustrates this tradeoff: even if the efficiency benefits of mergers should be considered, pure economic efficiency may be better served if this consideration is excluded.

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The second reason involves strategic interactions that may occur between the institution in charge and other agents directly concerned with the policy (principally the firms subject to the statute but also, for instance, the authors of complaints). The theory of delegation provides the important insight that a particular objective may best be achieved indirectly, by delegating responsibility to achieve it to an agent with a different objective. For instance, shareholders will often enjoy greater profits by choosing managers who maximise sales rather than profits. This is because competitors will usually find it most profitable to accommodate the behaviour of afirmled by an aggressive manager by reducing their own sales. For instance, assume that two firms merge, and competitors will be in the best position by accommodating a change of strategy by the merged entity, so that a reduction in output by the merged entity does not trigger an aggressive response by competitors. The incentive of the merged entity to reduce costs is, in turn, enhanced by the degree of rivalry in the product market. Under a rule based on economic efficiency, which takes account of the cost reduction achieved by the merger, the merger is allowed, because the welfare loss associated with the reduction in output after the merger is compensated by efficiency benefits. In contrast, under a rule based purely on aggregate market power, the merger would be allowed only if it is structured in such a way that rivalry in the output market is not affected. However, this enhances the incentives for the merged entity to invest in cost reduction. Accordingly, this alternative rule may lead to lower market power and lower costs, and thus higher aggregate efficiency, than the rule based directly on efficiency.

A. Competition and Economic Efficiency In this section, it is assumed that the ultimate objective of competition policy is economic efficiency. Following the approach discussed above, this section will consider what 'intermediate' objective could be assigned to the institution in charge of implementing the policy when the ultimate objective is economic efficiency, and how narrow that objective should be. The European legal framework provides a clear illustration of alternative options in this respect. On the one hand, the merger regulation focuses exclusively on competition, and at least formally disregards efficiency benefits. On the other hand, the structure of Art. 85 can be viewed to recognise a primary concern for competition (in Art. 85(1)) which can, pursuant to Art. 85(3), be balanced against considerations of productive efficiency (improvement in the production and distribution) and dynamic efficiency (technological progress).


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An argument in favour of a narrow objective focusing on competition is that the evaluation of efficiency benefits is a difficult exercise, requiring broad discretion.1 Firms will always have an advantage over the competition agency in arguing their case for several reasons: they will have access to privileged information on cost issues, which is difficult to verify; and they are likely to have resources at their disposal to argue their case which far exceed those available to the monitoring agency. In addition, whenever an agency has broad discretion, accountability is difficult to implement institutionally, creating a higher risk of capture. The tradeoff between a narrow competition objective and a broader one that encompasses efficiency benefits will also hinge on the extent to which competition can be expected to promote economic efficiency. If the additional considerations that could be taken into account with broader objectives are relatively insignificant, then the case in favour of narrow objectives could be quite strong. Most economists and antitrust lawyers probably share the belief that competition enhances efficiency. This belief is based on the classical paradigm of perfect competition, which achieves Pareto efficiency, and the presumption that more competition will tend to move the industry closer to this benchmark.2 Workable competition is then viewed as the acceptable approximation to perfect competition that should be pursued. This belief should be refined in order to evaluate whether competition can reasonably be assigned as the sole objective of the agency in charge of implementation. This discussion is aided by the discussion which follows, clarifying what is meant by 'competition' and what is meant by economic 'efficiency'.

1. Productive rather than Allocative Efficiency Economic efficiency can be considered from several perspectives. Traditionally, a distinction is made between three aspects: productive efficiency (products are produced at least cost); allocative efficiency (appropriate quantities of output are produced); and dynamic efficiency (adequate investments are undertaken).

1

Damien Neven, et al., Merger in Daylight (1993). Indeed, one of the most popular models of imperfect competition, the Cournot model, has the property that as competition increases (as measured by the number of firms), prices converge to marginal cost. 2

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Traditionally, allocative efficiency has been the focus of antitrust analysis (as reflected, for instance, in its emphasis on price distortions3). However, this emphasis is somewhat odd in light of the available empirical evidence regarding the magnitude of welfare losses associated with price distortions. Typically, estimated welfare losses do not exceed 2 per cent of GDP. This is not surprising, since the loss of consumer surplus which results when firms exercise market power is largely compensated for by profits. The net decrease in welfare (the Haberger triangles) is zero if demand is inelastic, and increases in line with the elasticity. Since elasticity of demand at the industry level is generally low (often below four), it is no surprise that net welfare losses are small. Regarding productive efficiency, the idea that market power may significantly raise the cost of production has been much explored in the last decade, both theoretically and empirically. It appears that the welfare losses associated with absence of productive efficiency will typically be much larger than the Haberger triangles of conventional theory. Regarding dynamic efficiency, important new insights have been developed in the theoretical literature, but the evidence is not as conclusive as that gathered with respect to productive efficiency. It appears, however, that at least in some circumstances, dynamic efficiency losses associated with lack of competition may far outweigh those associated with allocative efficiency. These developments underscore the need for a more precise definition of competition. The vague association between increase in competition and a move towards the state of perfect competition simply does not suffice to understand how competition affects productive and dynamic efficiency.

2. Competition is a Process and not a State In The New Palgrave, Stigler defines competition as 'a rivalry between individuals (or groups or nations) and it arises whenever two or more parties strive for something that all cannot obtain'.4 This definition is formulated in behavioural terms, in contrast with the traditional approach, under which competition is associated with a particular state of affairs which is characterised as perfect competition.5 Moreover, this definition is potentially quite broad, to the extent 3

See, e.g., Frederick M. Scherer & Daniel Ross, Industrial Market Structure and Economic Performance (1990). 4 George J. Stigler, Competition, in The New Palgrave (John Eatwell et al., eds. 1987). 5 It is paradoxical that little competition, in a behavioural sense, takes place in a perfectly competitive state.


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that it encompasses many different instruments of rivalry (including both price and non-price instruments, such as advertising or R&D) and different objectives (including profits, efforts, sales or market shares). Vickers observes that saying 'more competition' exists in a given situation can have several meanings: (i) lower barriers to entry (and more generally lower constraints for rival firms), (ii) an increase in the number of rivals, (iii) a move away from collusion and (iv) larger stakes (namely greater rewards from achieving what firms are striving to achieve and larger penalties for failing to achieve it).6

3. Competition, Productive and Dynamic Efficiency The links between competition and productive and dynamic efficiency are as follows. There are at least three reasons that competition may enhance productive efficiency. First, to the extent that managers and workers can control the disposition of the fruits of market power, the presence of substantial rents creates a temptation to inflate production costs rather than to work hard for the sole purpose of handing these rents over to the firms' owners. As Hicks remarked, 'the best of all monopoly profits is a quiet life'. Thus, there is a risk that market power will translate into higher costs rather than higher profits. As rivalry increases, the scope for increasing costs will fall. Second, competition may improve incentives for efficiency by providing a benchmark against which performance can be measured (sometimes referred to as 'yardstick competition').7 Such comparison improves the precision with which performance can be assessed, and thereby allows for a more efficient contract between managers and firm owners. Third, competition has a selection effect: efficient firms gain larger market shares than inefficient ones, and some may be driven out of the industry altogether. These themes have been much developed in the recent theoretical literature. Not surprisingly, results are often ambiguous, proof of the positive link between competition and productive efficiency will rest, in part, on empirical evidence. The available evidence is, however, comforting, as it8 suggests that 6

John Vickers, Concepts of Competition, in Oxford Economic Papers (1995), 1, 4. For a detailed discussion of this issue, see id. 8 See, e.g., Steve Nickell, Competition and Corporate Performance, 104 J. Pol. Ec. 724 (1996), Donald Hay & Georges Liu, The Efficiency of Firms: What Difference does Competition Make, (Mimeo, Institute of Economics and Statistics, Oxford 1994); Damien Neven & Lars-Hendrik Roller, Competition and Rent Sharing in the Airline 7

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when rivalry increases,firmsbecome more efficient. Moreover, it confirms that the effects are quantitatively large, and that the selection effect is present. The link between competition and dynamic efficiency is more delicate. The theoretical results are much less robust, and the empirical evidence is sparse, although it points in the right direction. For instance, Nickell finds that rivalry reduces the cost level, but enhances the rate of growth of productivity over time.9 Here again, the effects are quantitatively large. Until now, this paper has addressed the link between competition, productive and dynamic efficiency in isolation. It is worth asking whether a tradeoff is made between allocative, productive, and dynamic efficiency. Von Weizsacker argues that such a tradeoff is made at a very general level.10 He distinguishes three different levels of economic activity: consumption, production and innovation. He then argues that the efficient provision of activity at one level depends on the restriction of competition on another (where competition is defined as freedom of access). Incentives for production will require some restriction of competition at the level of consumption (since a firm has little incentive to produce if everyone can compete to consume its output). Such restrictions of competition take the form of property rights. Similarly, to provide incentives for innovation, some restriction of competition at the level of production will be required, which will typically take the form of intellectual property rights. Even if the terms of the tradeoff will presumably differ on a case-by-case basis, it is unclear whether competition law should consider these tradeoffs explicitly, given the difficulty of evaluating them. This approach may thus suggest that the balance that competition strikes between productive, allocative and dynamic efficiency should be determined essentially by property rights, independently of competition law. 4. A Tentative Conclusion The evidence tends to confirm that it may be reasonable to assign a narrow objective, formulated solely in terms of competition, to the institutions in charge of implementation. The presumption that competition will drive effiIndustry, 1996 European Economic Review 933; S. Olley & Adrian Pahes, The Dynamics of Productivity in the Telecommunications Equipment Industry (NBER Working Paper 3977, Cambridge, Mass. 1992); Paul Seabright & Francis McGowan, Deregulating European Airlines, 9 Economic Policy 282 (1989); Paul Geroski, Innovation, Technological Oportunity and Market Structure, 42 Oxford Economic Papers 586. 9 Nickell, supra note 8. 10 C. von Weizsacker, Barriers to Entry: A Theoretical Treatment (1980).


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ciency sufficiently well so that possible divergence can be ignored has recently gained some credence. However, the foregoing discussion has also highlighted the need for a more refined definition of competition. What we mean by competition must be made more precise and substantially broader, not only in theory, but also in antitrust practice. Especially in the European context, the concepts of competition and its restrictions are currently very narrow11 (and biased toward the evaluation of allocative efficiency). Thus, it may make sense to eliminate Art. 85(3), but this will require a fundamental rethinking of Art. 85(1). B. Economic Efficiency and Market Integration This section abandons the economist's abstract world and explicitly recognises that objectives other than economic efficiency will be assigned by democratic institutions. In the context of the European Union, market integration is probably the most important objective, which should be expected to remain in place in the short to medium term, according to Mr. Schaub. The question then arises whether the goals of market integration and economic efficiency conflict with each other and, if so, whether the tradeoff is severe. The Community's market integration objective does not necessarily promote market integration! Indeed, as Korah has observed with respect to vertical restraints, the Commission's insistence on the absence of territorial restraints for the sake of market integration might have the effect of deterring the distribution of commodities across Member States, since such distribution is profitable only in the presence of territorial exclusivity. By insisting that a restriction on parallel imports is practically a per se restriction of competition, the Commission tends to confuse symptoms with causes. The existence of price differentials between Member States may well be a symptom of market power in those markets, but it is by no means clear that, conditional on the existence of market power, parallel trade enhances economic efficiency. Indeed, when firms sell across segmented markets, they charge different margins in different markets (and typically higher margins in domestic markets where the elasticity of lower). An increase in parallel imports will reduce the scope for discrimination, but it does not necessarily enhance efficiency12; domestic consumers will typically gain sales at the expense of 11

See Jonathan Faull's paper for this conference, ch. 8; Damien Neven et al., Trawling for Minnows, Agreement in EC Competition Law (CEPR 1998), for an illustration from the recent case law. 12 See e.g. the ex post internal exercise published by DG II, European Economy (1997).

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consumers in export markets (where sales fall). Conditions under which less discrimination enhances efficiency are also rather stringent. Thus, there is not even a presumption that in most cases preventing arbitrage will increase efficiency.

Conclusion This paper has developed three arguments. First, a distinction should be drawn between the ultimate objectives of competition policy and the objectives assigned to the institutions in charge of implementing them; the latter should explicitly recognise the constraints under which the institution is operating, as well as its strategic interactions with other agents. Second, from the narrow perspective of economic efficiency, it may be reasonable to assign competition as the sole objective of a competition agency. This would however require a more refined definition of competition, and of what constitutes a restriction of competition. Third, the market integration goal is often in conflict with the economic efficiency goal. It may be advantageous to reduce its scope.

VIII Alexander Schaubx Director General for Competition European Commission Brussels, Belgium

Introduction The debate on what the objectives of competition policy ought to be is not new. Issues such as monopoly exploitation, the protection of the weak against the strong, and the compatibility of economic power with democracy have been debated over centuries, if not millennia. One might think of the Code of Hammurabi or the ancient ruling in Greece to prevent monopolistic exploitation. The subject is, indeed, much older than the first modern competition law. Moreover, it has not been the 'exclusive territory' of economics or law, but also has philosophical and political elements. What are the objectives of competition policy? The promotion of efficiency to the benefit of consumers, i.e. economic objectives? The support of pluralism and democracy, as well as the protection of small and medium sized enterprises? Or is competition an end in itself which must be protected without looking further towards ultimate objectives? Normally these issues are debated when a political decision on the adoption of a competition law needs to be taken. One may ask why we are having this debate now, since we are not in the middle of adopting a completely new law, and the decision on the basic principles has already been made. Could there be disagreement on what the fundamental objectives should be? And, if so, does such a disagreement cause significant divergence in competition law enforcement? Moreover, what do we imply when we talk of competition policy? Do we mean classical antitrust exclusively or do we go beyond this subject? In other words, do we agree that a consistent competition policy should include, or at least be in line with, other fields such as state aid control and deregulation of public monopolies in order to achieve our objectives? Being an optimist, I hesitate to believe that there are fundamental discrepancies. This would be a serious problem, not only for a coherent competition policy within the Community, but also for further enlargement and international 1

I wish to express particular gratitude to Elke Graper of the Directorate General for Competition, who made an essential contribution to the preparation of this paper. Opinions expressed are personal.

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cooperation in general. Thus, I tend to believe that we agree on the basic principles, and that a reflection on our objectives will help us to shape competition policy for the twenty-first century. It will also help us to carry out specific projects, such as the Commission's Green Paper on vertical restraints, the F.T.C.'s Joint Venture Project, and the German reform of competition law. Competition is the key element of our economic system. It forces companies to run a tight ship, to adjust to changes and to innovate. It thereby benefits the consumer and promotes the welfare of society in general. This is why we protect competition, in Europe and abroad. In the Community, competition has one additional fundamental objective: to promote market integration. In this context, it is particularly important to remember that Community competition law not only protects competition against private action, but also against governmental measures.

A. Objectives of Competition Policy—Two Levels of Discussion Before entering the issue of objectives, one should always distinguish two levels of the debate: the level of political decision making and the level of law enforcement. This distinction is important because thefirstlevel concerns more fundamental or ultimate goals, while the second concerns operational criteria for enforcement practice.

1. Political Decision Making A debate on objectives in the context of a political decision, such as the adoption of a competition law, focuses on fundamental or ultimate objectives. These ultimate objectives are economic prosperity or the welfare of citizens, employment and social cohesion. A decision must be made whether these are better achieved with or without protecting competition. For instance, if the opinion prevails that the market mechanism should function without interference, adoption of a competition law does not make sense. The assumption that major players with market power are good for employment and social cohesion, as well as the acceptance of'freedom to act' as the ultimate aim, including the freedom to form cartels, also support this conclusion. On the other hand, if competition is viewed as the genuine element of an open market economy which must be protected against cartels, market power etc., then a law protecting effective competition and controlling market power does make sense.


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At the level of political decision making, economic arguments, as well as political, social and philosophical arguments, are considered. For instance, one may debate whether competition rules could also be an instrument to serve pluralism and democracy, and whether the provisions should be limited to protecting the efficient functioning of markets (by means of the control of market power, prohibition of cartels etc.) or extended to controling economic power (e.g. including divestiture, control of size). Social issues such as the possible conflict between competition and employment in the short term, may also be debated.

2. Law Enforcement Once agreement on the ultimate objectives is reached, it would then be necessary to translate them into provisions and criteria for law enforcement. For instance, if protection of effective competition as an instrument for the efficient functioning of markets were accepted as the ultimate goal, provisions such as the prohibition of cartels or the control of market power are the likely means of achieving outcome. Operational criteria for enforcement must be established, as well as the means to achieve the right balance between 'as much market mechanism as possible, but interference only where necessary'. One cannot go back to social or political considerations as direct criteria for law enforcement because it would change the basic concept, which is the—indirect— achievement of fundamental goals via the mechanism of competition. Job creation or security cannot be a criterion for law enforcement because, in the long run, this could have exactly the opposite effect or, even worse, as several state aid cases show. Moreover, it would change the basic concept of our economic system and move in the direction of economic planning. A debate on provisions and enforcement criteria may, however, include the classical question whether market structure, conduct, or performance should be the main test. Once protection of competition as a process and as an indirect means to achieving a proper performance is accepted, performance as a test can almost be excluded. Furthermore, a forecast as to market performance can hardly be carried out in an individual case. In practice, however, one does not follow a pure and ideal concept, but a 'mix'. Thus, most competition laws have both control of structure and of conduct as criteria; even rules related to market performance are used (prohibition of exploitative abuses, efficiency defences etc.).

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B. A Comprehensive Approach to Community Competition Policy Community competition policy, as established in the Treaty of Rome, protects competition as a means of achieving our ultimate objectives, such as establishing a common market, promoting a high degree of convergence of economic performance, and raising the standard of living and quality of life.2 Ensuring that 'competition in the internal market is not distorted'3 is the intermediate or direct objective of competition policy, which also is reflected in the competition rules. Prosperity, employment and social cohesion are the ultimate objectives, which are the reasons that the political decision for a Community competition policy has been taken. This is clearly set out in Art. 3a of the Treaty, which stipulates that economic policy is, among others, conducted in accordance with the principle of an open market economy and free competition. How are these basic principles translated into provisions of law? Classical antitrust or 'competition rules for undertakings', as we call it in the E.U., constitutes only one of the areas covered. However, control of private action is not enough. Governmental measures such as subsidising industry or protecting rigid market structures by regulation can also cause a substantial degree of competition distortion. The best antitrust law can accomplish little if vast amounts of state aids are handed out to ailing industries. Why should we prevent the creation of market dominance by means of merger control if, at the same time, some monopolies are protected by regulation? We do not promote dynamism and we do not prevent the existence of the 'lazy monopolist' by antitrust alone. That is the reason that Community competition policy covers rules for Member States as well. The Commission is the only authority that can adequately control or terminate these governmental measures, even if it is not an easy task. It would not make sense to leave it to the Member States to control themselves, or simply to call for discipline. As the most recent state aid report has shown, the Member States exercise only limited discipline: particularly the richer ones have increased aid to industry during the period from 1992 to 1994 to an average level of 43 billion ECU per year. Problems with deregulation measures in certain sectors, such as postal services, is another example. Within the Member States, one may ask how antitrust enforcement coexists with these interventionist measures. For instance, Germany is well known for the strict enforcement policy of the Bundeskartellamt. However, Germany is generous with state aid, which is partially explainable by the restructuring of east German industry. Each job in the coal mines is subsidised with more than 2 3

See Treaty of Rome, Art. 2. Id., Art. 3g.


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50.000 ECU, and further large amounts of aid have gone to other ailing industries such as shipbuilding. In addition, Germany is not a leader with respect to liberalisation measures. Thus, I question whether Germany has a coherent overall policy towards competition. Are there different objectives with respect to antitrust and other policy fields concerning competition? Or does the division of tasks between different authorities lead to these seemingly different approaches?

C. Coherence Between Different Policies The Treaty requires that the variousfieldsof economic policy be coherent. For example, measures to promote the competitiveness of European industry must be in accordance with a system of open and competitive markets.4 Consequently, subsidising specific industries or other interventionist measures cannot be the Community policy to promote competitiveness. Rather, the Community has the task of creating the essential conditions for the development of an efficient industry and providing a stable economic environment. In that sense, competition and competitiveness policy serve the same objectives; competition is a key element for achieving competitiveness. The internal market is another example of coherence of the various policyfields.Opening markets by means of public procurement directives or other measures increases competition, and therefore complements competition policy. Moreover, market integration creates essential conditions to promote dynamism and the efficiency of industry. Critics of the Community's approach argue that requiring coherence between different areas of policy leads to political interference with competition law enforcement. This criticism reflects a deep misunderstanding. Competition and other fields of policy are interdependent. Competition will bring about an environment that creates competitive industries only if the different policy fields are based on a coherent concept. In contrast, in a country where state aid to industry is an important aspect of economic policy, competition policy is in conflict with industrial policy, and the maintenance of effective competition would not seem to be the overall objective of economic policy.

D. Competition as an Objective in Itself Competition is not an 'ultimate' objective in itself, but an instrument or intermediate objective to achieve economic prosperity and employment. It is 4

Id, Art. 130.

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generally agreed that the welfare of our citizens is the ultimate objective. It would make little sense to have a policy and law protecting competition if we did not believe that it would help us to achieve this goal. Thus, competition is always an instrument or intermediate objective, though a fundamental one for the functioning of markets and for the achievement of these ultimate goals. Whether competition is an objective in itself was debated in Germany during the 1960s, and has recently resurfaced in the context of the German 'harmonisation debate', i.e. the envisaged reform of German competition law. Reports of the German Monopolkommission and the Advisory Council to the Ministry of Economics state that in the Community, competition policy is regarded only as an instrument for the fundamental objectives of the Treaty, whereas in Germany, competition policy is an objective in itself. Accordingly, German policy protects the freedom to compete (Wettbewerbsfreiheit). The logic of these arguments is questionable. The motivation for having a competition policy in Germany must also be economic prosperity. Indeed, the success of German competition policy has often been described as one reason for the smooth functioning ofsoziale Marktwirtschaft and for the Wirtschaftswunder. Thus, competition is not protected for its own sake, but helps to achieve these fundamental objectives. The meaning of the term Wettbewerbsfreiheit (freedom to compete) is elusive. Does any restriction to this freedom by means of cooperation or distribution contracts put effective competition at risk? Some restrictions may, but what is decisive is the effect on the market in view of market structure and the strength of the partners. Consequently, the term 'freedom' provides little guidance, as the once heated debates in Germany and the U.S. some decades ago showed. These debates occurred because competition policy and theory partly have their origins in free trade laws and the general liberalisation of professions/trade about 200 years ago. However, this historical background cannot serve as an interpretative tool for today's legal terms and economic reality. Modern competition theory and case law have provided better tools based on the assumption that the protection of a system of workable competition is at issue. In this context, restrictions on the freedom to compete are not always relevant. Moreover, a restriction of competition may not be caused by a restriction of freedom to compete. Rather, it may be the inherent effect of cooperation between competitors which cannot be characterised as a restriction of freedom (e.g. joint selling or buying without exclusivity, information exchanges, inherent effects of joint ventures/minority shareholdings between competitors). The subject appears to be a mere philosophical debate. Whether competition is defined as an end in itself or as a means to an end does not seem to result


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in significantly different enforcement practice. It does not seem decisive, either for the mix of provisions (i.e. structural and behavioural control) or for application of the law in individual cases. For instance, it is difficult to detect differences in the results of enforcement practice in Germany, the Community and the U.S. In all three laws, merger control plays an important role, and cartels and the abuse of market power are prohibited. Differences exist with respect to details. For instance, Germany, which defines in general the freedom to compete as the major issue, is, with respect to vertical restraints, less strict than the Community, which must take account of the market integration goal. In contrast to both, the U.S. places greater emphasis on efficiency justifications, as the new U.S. guidelines demonstrate in the area of merger analysis. This may be explained by their lower threshold for the identification oTprima facie cases. However, until now, efficiency defences have not played an important role in U.S. enforcement practice and, under the carefully drafted new guidelines, it is doubtful that they will in the future. It appears that differences occur mainly at the 'philosophical level', but are often not significant in practice. Thus, seemingly different objectives can lead to similar rules and case handling, as a comparison between Germany and the Community demonstrates. On the other hand, similar objectives and even the same set of rules can result in substantial differences with respect to enforcement. Thus, in the 1970s and 1980s, the Chicago School defined efficiencies to the benefit of consumers as the main objective, but concluded that cartels, but not mergers, could threaten achievement of this objective. Consequently, merger control in the U.S. was defacto non-existent in this period, although the rules basically did not change.

E. Economic, Social or Political Objectives Adoption of a competition law is a political act. Thus, a debate on objectives cannot be limited to economic arguments. However, economic reasoning dominates the debate, since competition and economic power are at the heart of economic life. Social and political considerations also play an important role. For instance,fiercepolitical debate can occur because maintenance of competition in the short run may conflict with the objectives of employment and social cohesion. If short term thinking dominates, the adoption of a competition law might be put into question altogether. This may occur, for instance, in regions facing structural unemployment where political campaigning occurs. If, however, competition is viewed as a mechanism essential to achievement of fundamental long term objectives, such issues should not be considered.

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Basing enforcement on social criteria would contradict the basic concept of competition, by attempting directly to achieve ultimate objectives through application of competition rules. Moreover, political, social or moral criteria are not operational, and may be applied arbitrarily and subjectively. What is fair? What is social justice? Where is the borderline between 'the weak and the strong'? We must bear in mind that competition is the essential mechanism of our economic system, and we must protect the process of competition. Competitors may thereby be protected, and in that sense, we also protect the 'weak against the strong'or help small and medium enterprises. Economic criteria and a proper economic analysis are essential in competition law enforcement. In case evaluation, however, this does not mean that we should focus exclusively on the 'microeconomic paradigm'. Microeconomic models are only one tool to express certain concepts. However, they cannot sufficiently take account of all important considerations, and they are not 'the absolute truth', as the various trends and schools have shown over the decades. Competition policy and enforcement criteria should not be overloaded with too many objectives, because this would render competition policy ineffective. Competition is essential, but many types of problems are not resolved through competition. In certain exceptional circumstances (e.g. training/education, basic research, environmental polution), measures such as state aid, regulation, taxation etc. can be more appropriate than a mere market mechanism.

F. Market Integration—Both a Political and an Economic Objective Market integration is both a political and an economic objective of Community competition policy. It is a legitimate objective for two reasons: first, it increases competition; second, effective competition promotes and facilitates market integration. Although it is a rather unique objective among antitrust authorities, national authorities are also concerned that national markets are not artificially divided by agreements between companies. In the Community, market integration has not only been an 'ultimate' or indirect objective of competition policy, but also a direct enforcement criterion, as absolute territorial protection is prohibited. This is an exception to the general principle that competition is maintained as an indirect measure to achieve ultimate objectives. It may even be criticised as a violation of the general rule, because it mixes enforcement criteria with ultimate objectives. In the current timeframe, markets have been largely integrated. This raises the question whether we should continue to use competition rules as a direct mechanism to ensure market integration, or whether we can now rely on the


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indirect mechanism, i.e. protecting the process of effective competition in order to create market structures which contribute to the objective of market integration. The latter would be more in line with the general principle. However, I believe that despite the progress towards the realisation of the internal market, a direct signal to companies is still required for its psychological and pedagogical effects, at least for the next years.

G. Different Economic Situations—Different Approaches to Competition Different countries have different economic environments. Eastern Europe is in a different situation from Western Europe, and developing countries face yet another set of problems. These specific circumstances must be recognised by laws concerning the economy. If, however, these countries follow a similar economic approach—an economy based on the market system and thereby on effective competition—the basic concept of competition policy should be the same. Without this, a level playing field will not exist, and cooperation between competition authorities will be impossible, be it within the E.U., between the E.U. and C.E.E. countries, or bilaterally or multilaterally with other countries. Therefore, we encourage harmonisation of competition laws within the Community, as well as the direct application of Community rules by Member States. We are also working to ensure approximation of legislation with respect to the C.E.E.C. countries. Applying the same principles and basic concepts does not mean having exactly the same set of enforcement rules. We do not even have this within the Community. It also does not mean that the priorities must be the same. For instance, a country just developing a market economy may focus on concrete liberalisation measures; in contrast, in the U.S., merger control is one of the cornerstones. In the Community, a merger control system would have been less important in the early years as compared to the present, where markets have become much more integrated and cross-border operations are frequent. A competition law must be flexible enough to address specific circumstances, but it is not a tool to solve all types of problems. If industry is already characterised by monopolies or conglomerates, divestiture measures should be considered before establishing competition rules, such as a per se prohibition of diversification which may affect dynamism and effective competition in general. If big drug dealer rings use reselling below cost as a measure to enter markets and thereby launder money, it is doubtful whether a competition rule

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prohibiting sales below cost in general is an appropriate measure. First, it will not solve the problem of laundering money because dealer rings will find other means of entering, such as takeovers. Second, such a measure could lead to rigid structures at retail level and less competition. Direct measures against drug dealers, subsidising farmers, etc., appear to be better methods.

Conclusion The main points argued in this paper are as follows. First, the ultimate objective of competition policy is the economic welfare of society. This includes the objective of low prices and high quality for the consumer, as well as dynamism and job creation of industry. Community competition policy also has the objective of market integration. Second, competition is not an end in itself, but an indirect means to achieve ultimate goals. Third, competition policy and enforcement are not appropriate instruments to achieve ultimate objectives such as prosperity and job creation directly. On the contrary, social objectives may conflict with the maintenance of competition in the short run. Therefore, the maintenance of effective competition must be the direct objective of enforcement. To achieve this objective, indications such as market strength or concentration ratios must be employed. Fourth, different countries may have different competition rules with respect to particular aspects. However, the basic concept should be the same. Otherwise we cannot reasonably cooperate, and a level playing field will not be achieved.

IX Dieter Wolf President of the Bundeskartellamt Berlin, Germany

Introduction This paper deals with the question of what competition, competition law and competition policy should or even can achieve. The subject induces me to be— moderately— provocative: Is competition merely an instrument or a means of achieving any number of aims? Is competition the economists' magic wand which alone brings efficiency, but does not produce all the expected results and therefore has to be guided by courageous politicians who are of course more creative than the merely mechanistic market process? Can competition be compared to a computer which is condemned to stupidity until politicians of all fields of policy and party affiliation have programmed it—or made it intelligent? Can competition then also be programmed for the future? And if competition is programmable, could it not take on a few more objectives than just efficiency alone? One could also set it goals such as achieving full employment or monetary and social policy aims. And since competition, when introduced, is like the hypothetical machine that once set going continues for ever, one could assume that it will not break down under the huge burden! It might be no surprise to learn that the president of an antitrust agency thinks otherwise. In this paper I will put forward an argument in favour of the primacy of competition and argue that competition policy is not merely one among many policies of equal rank. What is the case for a theory of the primacy of competition? I am from a country which had to start from scratch when I was very young. Not only did Germany lie in ruins in the literal sense of the word, she also had to cope with the ruins of a totalitarian political and economic regime. We were very fortunate in having the opportunity to start anew in political as well as economic terms. A decisive factor for this new beginning was the teachings of the members of the Freiburg School. Their central theory is that the political and economic systems are interdependent. That is to say, whoever desires political freedom must also allow economic freedom and vice versa since the freedom of economic activity is a vital constituent of the basic rights of personal and political freedom. Or in other words, whoever enjoys democratic freedoms in business life will assert the same rights in the political sphere—a fact which the rulers of the socialist "reforming" countries had to learn, sometimes the hard way, in the 1980s.

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The consequence of this is that free societies are always interrelated through open markets, and thus also through the basic steering principle of competition. The interdependence of economic and social freedom is the decisive argument in support of the view that competition policy in Europe and elsewhere is not merely one among many policies of equal importance but should have priority. The advocacy of the primacy of competition thus results from reflections on how individual freedom and economic freedom interact. However, that does not mean that this evaluation is merely hypothetical. On the contrary, it is of great practical relevance. This may be illustrated by considering three issues: the relationship between competition policy and the Community's goal of achieving the single market; whether competition policy should concern itself with economic efficiency; the relevance of non-competitive objectives to this concept?

A. The Relationship Between Competition Policy and the Single Market First, the relationship between competition policy on the one hand and the goal of achieving the single market and the integration of national markets on the other has to be considered. Without doubt the integration of markets, the removal of government barriers to trade and of customs duties constituted an ambitious goal which greatly intensified competition. In this respect, competition policy and single market policy shared a common aim and were in synch with each other. But, this does not rule out the fact that, from the perspective of market integration, competition policy then had to be interpreted differently from now. For example, the ban on restrictive vertical agreements in Art. 85(1) of the E.C. Treaty made good sense at that early stage of integration, since distribution agreements are an excellent means of sealing off or allocating markets, thereby thwarting any efforts at integration. Now that the single market has been legally completed and has become an economic reality in many areas, the dangers of vertical restraints of competition have diminished considerably. Thus, it is only logical that the Commission considers in the pertinent Green Paper whether the scope of Art. 85 of the E.C. Treaty should remain as broad as it used to be. At this early stage, competition policy was not subordinated to the goal of integration. Rather, the two policies were complementary. Therefore, as a logical consequence, both policies have been pursued consistently by the Commission. A different situation has arisen now that the single market has


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become a reality. It is time for the emancipation of competition policy. The goal of integration has largely been reached, but the goal of competition can only be reached in an on-going process.

B. Competition Policy and Economic Efficiency As far as the efficiency question is concerned, the basic assumption is of course that competition itself is the best means of ensuring efficiency. However, in particular cases, restraints of competition may have efficiency-enhancing effects. For instance, cartel agreements are generally banned, irrespective of the effects they have on the market. But certain forms of cooperation between firms are efficiency-enhancing. Thus, we also have to provide for exemptions to ensure that the possibility of efficiency-enhancing cooperation between companies is not ruled out altogether. This is the purpose of Art. 85(3) of the E.C. Treaty or the German provisions for instance on rationalisation cartels. The crucial point, however, is that such agreements must not eliminate competition with respect to the products in question. Things are different as far as merger control is concerned. Under German and European law, mergers are allowed in principle. Companies may fully realise merger-induced efficiency gains. A merger has to be prohibited only if a market-dominating position is likely to be created or strengthened, in other words if competition is in danger of being eliminated completely. This leaves no room for efficiency considerations, because nothing can justify relinquishing competition. The advantages of dynamic competition as a discovery process are far too great to be given up for static efficiency considerations as they are laid down in the famous Williamson trade-off.

C. The Relevance of Non-Competition Objectives Another question is to what extent economic and social policy goals should play a part in competition analysis. To put it bluntly, I would say, not at all. A clear distinction must be made between competition as a system and the results of competition. Protecting competition as a system does not mean having to accept the economic results of the competitive process at all times. Correcting the distributional results of the market process in favour of the poor is in fact the "social" ingredient of the market economy. But: Social considerations ought to be taken into account only after competition has been able to perform its allocative function. But I do not wish to advocate that competition should

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take place in a vacuum. Considerations other than competition concerns can be legitimate, and therefore should be included. In particular cases, it may indeed be appropriate that overriding public interest arguments prevail over the competition principle. But the public should be well informed when this occurs. It is only the public discussion that makes sure than industrial or social policy concerns remain transparent and are not used under the guise of apparently competition-based arguments. If competition is to take second place to other goals, somebody must clearly assume the political responsibility for this decision. If the decision-making process in the context of competition law is not transparent, the cost of political intervention is no longer identifiable.

Conclusion In conclusion I wish to address the question as to whether competition policy and competition law ought to be, or even should be, similar in all countries. If there are in fact legitimate objectives of competition policy all over the world, one could expect to find similar laws all over the world that serve to reach these goals. But the situation is not that easy. The pillars on which modern competition laws are based should be similar in all cases, but the details of the legislation must depend on the economic situation prevailing in the country concerned. In a highly concentrated and integrated economy, merger control is likely to be the prime concern. In contast, in an economy characterised by small and medium-sized firms the focus will be on the ban on discrimination in order to protect small enterprises from an abuse of market power by dominant firms. This is the underlying reason why it is more important to establish a competition culture than to place particular emphasis on the wording of laws. Competition has no lobby, and one of the foremost tasks of competition policy is to make people aware of the competition principle. As a German I know what I am talking about—the German economy was dominated by cartels and large industrial groups in the first half of the century. There was no competition awareness whatsoever. Today, Bundeskartellamt decisions generally enjoy public backing. Securing freedom was at the forefront of German competition policy after the war and its current standing is the result of a long process and hard work. Persistence in enforcing the law is probably the most important aspect of establishing a competition culture.

PANEL DISCUSSION

COMPETITION POLICY OBJECTIVES IN THE CONTEXT OF A MULTILATERAL COMPETITION CODE

GENERAL RAPPORTEUR:

Eleanor Fox, Professor, New York University School of Law, New York, New York, U.S.A.

PARTICIPANTS:

Roderick Abbott, Head of Delegation of European Commission, Geneva, Switzerland Jacques Bourgeois, Professor; Partner, Akin Gump Strauss Hauer & Feld, Brussels, Belgium Ulrich Immenga, Professor, University of Gottingen, Gottingen, Germany R. Shyam Khemani, Group Manager, Competition and Strategy Group, World Bank, Washington, DC, U.S.A. Connie Robinson, Deputy Assistant Attorney General, Antitrust Division, United States Department of Justice, Washington, DC, U.S.A. Mitsuo Matsushita, Professor; Member, Appellate Body, World Trade Organisation, Geneva, Switzerland

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Petros Mavroidis, Professor, Universite de Neuchatel, Neuchatel, Switzerland Frangois Souty, Conseil de la Concurrence, Paris, France

Panel Discussion

3 - Competition Policy Objectives in a Multilateral Competiton Code

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• PROF. FOX—This session addresses objectives of competition policy in view of the prospect of internationalisation of antitrust . . . or one might say it is about internationalisation of antitrust in view of the divergence of objectives of antitrust policy in various countries. Would the divergence in antitrust goals of various countries undercut any initiative to internationalise antitrust? The answer to this question is a function of what we mean by internationalisation. Three possible concepts of internationalisation are: (1) at one extreme, more and better cooperation of the antitrust agencies, more positive comity, and possibly inclusion of competition policy in various sectoral trade agreements; (2) at quite the other extreme, a detailed international code; (3) the middle ground, a world antitrust policy linked with liberal trade policy, which would address private restraints of trade that bar access to markets, along with public restraints of trade that are now already governed by the W.T.O. system. This last option might involve an international instrument linking trade and competition systems in some way, and covering mainly procedural safeguards such as rights of foreign nations to bring actions in harming nations, transparency, non-discrimination and national treatment, and choice of law rules. That type of agreement would present fewer problems than a full international code, because it would not be necessary to mediate among diverse objectives. I shall summarise some of the positions of the panellists in their papers on the question whether differences in values impacts upon the effort to internationalise. Interestingly, the panellists who were more sympathetic to internationalisation tended to believe that the disparity of goals does not present a problem, while those who were less sympathetic towards internationalisation tended to believe that disparity of goals was a real problem. Several panellists expressed specific ideas about the diversity of values. Mr. Khemani's paper sets out a possible scheme for linking a competition system with world restraints, and states that substantive harmonisation is neither necessary nor realistic. Prof. Immenga believes that clear objectives can be achieved by an international competition policy, and that recognising the imperative of internationalisation does not require an initial analysis of national differences. Prof. Bourgeois states that nations that have different objectives on various policy issues commonly come to agreement on certain rules that they have a reason to support, although their reasons may differ. Similarly, Mr. Souty suggests that some rules seem to be broadly accepted among trading partners, and that we should begin with an international law against cartels. Mr. Klein is greatly sceptical of the international project, because he is concerned that differences in antitrust values will undermine antitrust, causing movement towards a lowest common denominator, and perhaps forcing those with stronger antitrust rules to accept weaker, fairness rules. Prof. Matsushita

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suggested that we should begin thinking about trade-linked concepts for internationalisation, and that we should take into account the goals, values and voices of less developed countries. Prof. Matsushita's perspective seems to feed into the concerns of Mr. Klein, who is concerned that those who believe in strong competition rules might be pushed towards weak rules by countries that want protection against efficient multinational companies that might come to invade the economies of the former. Most of those who wrote on the issue felt that any conflicts among nations in antitrust values would not interfere with internationalisation for the following reasons. Prof. Immenga argued that certain antitrust principles are likely to develop in an international environment that are consistent with the goals of various nations. For example, nations that want to be part of a world trading system may agree that they must prohibit anticompetitive restraints that block market access. Differences among nations may also be addressed by allowing the countries themselves t o formulate whatever they believe is an anticompetitive restraint impairing market access, as long as it is a credible antitrust principle. Mr. Abbot, coming from the trade side, stated that we in the antitrust community are always discussing harmonisation, or cooperation through bilateral agreements, and that is not what the trade community had in mind when they sought progress in international rules related to trade and competition policy. He proposed that we should discuss the values of competition policy versus the values of trade policy, and whether and where there is convergence of liberal trade principles and competition principles regarding market access restraints. Mr. Klein discussed the progress that has been made through bilaterals. Prof. Mavroidis asked whether we really want and need internationalisation, and whether negative spillovers impel us to create international rules. Prof. Mavroidis' paper provided a sceptical a counterpart to Mr. Khemani's paper, which also addressed negative spillovers and how they should be handled in an international environment. To conclude, I shall frame some questions for discussion. First, to what extent do differences undermine the effort for internationalisation? Many possibilities for internationalisation exist, both substantive and procedural. We should focus on anticompetitive blockage of market access and, maybe more generally, cartels. In this regard, does it matter whether the form of cooperation is an agreement that incorporates subsidiarity principals (natural law with non-discrimination and choice of law rules), as opposed to a complete code? Second, do differences in goals and in cultures, such as the difference between statism versus liberalism, undermine the effort for internationalisation? This is particularly important because internationalisation could involve


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disciplines on governments not to allow export cartels or perhaps require governments to redraft antitrust laws so that they recognise harms caused by their firms anywhere in the world, rather than just consumer harms in their own territory. Finally, should we have internationalisation? • MR. ABBOT—This panel should consider competition policy objectives in the context of a multilateral code, but we must first define the sort of code we are considering. Trade policy advocates are concerned with how competition principles dealing with certain market access restraints reinforce the disciplines on governments imposed by trade policy. Internationalisation of antitrust is something else, and covers cartels, boycotts, and exclusive agreements. For instance, the proposed Boeing-McDonnell Douglas merger may present a problem, because it goes beyond a single jurisdiction. However, that is not what trade policy advocates are concerned with. Moreover, it may not even present a problem, because it can probably be addressed through existing and future bilateral agreements. Such agreements could be developed into a network that will address jurisdiction problems, especially with respect to mergers and dominant positions. Any multilateral agreement would have to be much simpler. It is worth spelling out what the E.U. now seeks at the multilateral level, within the W.T.O., because it is really quite modest, compared with the position taken by Sir Leon Brittan in a 1992 speech, calling for a complete framework and an international authority. The E.U. seeks a multilateral accord that countries should be encouraged to adopt a competition law and a proper means of enforcing it which would promote free trade principles and free competition. This should reflect some common principles, especially in areas like cartels and boycotts, but not in more complex areas. The areas where the greatest degree of consensus exists should be identified for this purpose. The E.U. also seeks a government commitment that a competition authority would investigate a complaint by another country of a practice within the jurisdiction of that competition authority. Thereafter, the competition authority would prepare a report, on the basis of which some action might be taken by that authority. That is a fairly modest agenda, but even that is going to take a long time, because only 40 or 50 countries presently have any form of competition law. To conclude, trade policy advocates are concerned about cartels, boycotts and exclusive agreements of various kinds that result in market access restraints. I believe these should be regarded as illegal per se because they block trade. • PROF. BOURGEOIS—An initial agreement on international competition rules

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should include consultation and cooperation obligations. Such rules should not, however, attempt to pursue a consensus on objectives because this would kill the negotiation. There are many examples of international negotiations where states could agree on rules without agreeing on the objectives that they pursue. For instance, in the negotiations on a subsidies code, there were two distinct views on the objectives to be pursued, the U.S. view and the E.U. view. Nonetheless, an agreement was reached on concrete rules. Second, a consensus should be built based on the nuisance value of the absence of common rules, that is, adverse or counterproductive effects of conflicting requirements. For instance, conflicting requirements have resulted when one country has cleared a merger, but another country has not cleared the same merger. The practical result is that the merger does not go through. Consequently, these conflicting requirements put into question the efficiency of each nation's competition system, and the interests of the companies that a given competition system is supposed to protect. Third, the purpose of international rules should be to prevent anticompetitive conduct that restricts international trade. This may not be the optimal solution, but it is, at least, a feasible solution. International rules preventing governments from imposing quantitative restrictions on imports and exports already exist. Agreement on similar rules applying to private companies does not seem like a very large step. Finally, two sets of rules are needed: one applying to conduct that significantly affects international trade, and a second applying to conduct not affecting international trade, that continues to occur on a national level. This would avoid the danger referred to by Mr. Klein, that international antitrust rules may weaken national rules. • PROF. IMMENGA—Divergences in national competition law are not an important obstacle to achieve an international understanding. Four categories of differences may be identified: those related to competition policy; those related to the impact of politics on competition policy; those related to national enforcement practices and institutions; and those related to cultures and traditions. These differences are an impediment, but they are not insurmountable. They can be overcome by considering the objectives of internationalisation, and balancing those obligations against national differences. Achieving the ideal of an international code does not require an initial analysis of national differences. A general understanding of the need for internationalisation of competition policies, which goes beyond the general need to maintain competition, may be achieved. On the basis of such understanding, a discussion of the substance of an agreement will be possible. Only then, will national differences become relevant.


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A major argument in favour of internationalisation was underscored by the success of the Uruguay round, which substantially set aside state barriers to cross border trade. This process of trade liberalisation will continue, as confirmed by the recent W.T.O. agreement to liberalise the telecommunications sector. However, absent internationalisation of competition laws, private firms will re-establish trade barriers through agreements or through the use of economic power. Thus, internationalisation is inevitable. By its nature, this argument goes beyond national divergences. Furthermore, the linkage of trade and competition policy, as for instance in thefieldof market access and antidumping, supports creation of an international competition regime. Finally, arguments regarding the need for a level playing field for global players are not closely related to national competition policy objectives. If we could agree on international objectives, an understanding on substance might be achieved, and the national differences might be overcome. An international code might be useful, but we cannot start with a comprehensive code, such as that presented by the Munich group. In the end, we might arrive at such a code. We must start with an international agreement on the most important types of cross-border restrictions, on the plurilateral level of the W.T.O., and not on a multilateral level. • MR. KHEMANI—At the World Bank, we have been searching for a cohesive framework to deal with international competition conflicts. There are conflicts between trade and competition policy in many areas, but one area where there is confluence is market access. Market access fosters competition, and competition policy can be used to foster market access. However, not all market access issues are necessarily competition issues. Therefore, the substantial lessening of competition screen must be used to determine when market access issues are competition issues. Moreover, means must be focused to distinguish between different types of such situations. Since the focus is on trade issues, the following should be considered: restrictions imposed by importing countries, restrictions imposed by exporting countries, and restrictions that may arise from strategic application of trade or competition policy. There are differences in competition policy objectives in different countries, and indeed, not all countries have a competition law in place. The number of countries with competition laws has grown considerably since 1990, and this trend is likely to continue. It is not necessary to dwell on the differences in competition policy objectives, because there is agreement on the core principles. Most, if not all, of the statutes that I have come across seek to maintain and encourage competition, although not necessarily to achieve the same ends. These differences in goals probably do not reflect differences in culture, since

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competition is an area where there is a cultural confluence. Indeed, if one were to identify an area where neo-classical economists, Marxist economists, Islamic fundamentalists, Christian clergy, Hindu priests, Jewish rabbis and monks of other religious orders would agree, it would be on the evils of monopolistic exploitation. Thus, core principles of agreement exist, but it is necessary to address the differences in approach that can be accomplished by redesigning some of the institutional elements. Where international competition conflicts are involved, nations should be required to enact a national competition law. It need not be a specific law. Some jurisdictions may not have a specific competition law in place. However, their legal/economic system contain provisions against monopolistic exploitation. This is exemplified by the case of Mexico, whose constitution contained a provision against monopolistic exploitation, although it was not applied. International standards should allow private actions, so that the enforcement burden does not fall solely on the government, especially if the government is likely to be captive to various pressures. Political independence of the administrative mechanism to deal with competition conflicts should be fostered. In order to address trade-related issues, the law should establish standing of private parties, foreigners and exporters, including those without subsidiaries. Non-discrimination principles, i.e. national treatment, should also be provided. In an ideal world, competition principles should replace anti-dumping rules. However, if abolition of antidumping is not possible, then other screens should be established where antidumping suits are launched by firms that have a record of engaging in anticompetitive practices. • Ms. ROBINSON—An important agenda in international antitrust enforcement is partially relevant to international trade issues, but the concerns of international antitrust are much broader than those of international trade. That agenda can be realised soon, based on many of the efforts currently underway. It is important that thefirststep of an international antitrust agenda achieves meaningful cooperation in the prosecution of global cartels. Cartels are unambiguously viewed as bad. They are straightforward. The second step should be market access. Procedures currently underway to achieve bilateral agreement on positive comity are progressing, and could achieve much success in the near future. It is critical that these ongoing efforts continue as the W.T.O. work programme progresses. We urge a cautious approach to the W.T.O. agenda on competition policy, allowing us to observe what happens in these other areas. The differences in antitrust policy among the various countries may prevent


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any kind of affirmative result in the forseeable future in the W.T.O., but these other efforts are likely to succeed notwithstanding the differences. In the cartel example, the problem of gathering confidential information on an international basis has been difficult, largely due to rules of procedure in the us and abroad. However, these problems can be overcome. Arrangements to share confidential information are underway, and the U.S. has enacted a new statute that will permit greater freedom to do so. We are less sanguine, however, about the prospect of a global resolution of market access issues. The complexity of different laws in different countries creates a practical difficulty to cooperate in this area. To conclude, we are pleased with the cooperation that has occurred to date. We hope to see more international cooperation in the future, and we continue to be sceptical about what we can do with respect to market access. • PROF. MATSUSHITA—My remarks are based on the assumption that it is desirable to have some kind of agreement on competition policy within the W.T.O. framework. Globalisation of economies and the reduction of trade barriers following trade negotiations have brought about the situation that domestic restrictive practices increasingly affect international trade. Accordingly, market access has become an important issue. It appears that a competition code is needed within the W.T.O. On the other hand, the W.T.O. agreements are based on a very delicate balance between the powers of the member governments and those of international organisations. When the member governments are concerned about their sovereignty, this balance must be safeguarded. Violation of a W.T.O. competition code would be subject to the W.T.O.'s dispute settlement procedures, and economic sanctions could be imposed. Thus, we should proceed gradually and incrementally. One option is bilateral agreements, which are easier to conclude than multilateral agreements. Japan has not entered any bilateral agreements to date. We should also consider how the existing W.T.O. agreements might be used, as many of them contain competition provisions, including the agreements on trade in services, safeguard, T.R.I.M.S., and anti-dumping. Second, since we are in an early stage of the development of an agreement on competition policy at the W.T.O., I advocate an agreement whose scope is limited to restrictive business practices that directly affect international trade. It may cover, for instance, export cartels, import cartels and boycotts of foreign products. It is appropriate that a W.T.O. competition code cover these areas because such practices can nullify or impair the benefits of the trade concessions achieved through the international negotiations. Thereafter, we could proceed to a more comprehensive international code, such as that proposed by the Munich group.

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Finally, supplemental agreements that rely upon private enforcement should be considered, such as an agreement concerning injunctive relief. The Japanese anti-monopoly law does not contain an injunctive relief provision. However, such a provision could guarantee access by foreign parties to the judicial process when they have market access problems. Other possibilities are international agreements providing for recognition of damage judgments, or recognising the effects of antitrust laws of foreign countries. The latter could provide that a contract that contravenes a foreign country's antitrust law would be null and void. • PROF. MAVROIDIS—The paper which I co-authored with Henrik Horn and Marc Baccheta is a straightforward application of the theory of regulation and delegation to the question whether there is a need to intervene and, if so, whether this should occur on the international plane. In essence, we consider whether negative spillovers from domestic competition policies mandate a multilateral agreement on competition. My colleagues suggest that negative externalities can occur from enforcement of domestic policies. They classify negative externalities in two categories: cases where domestic authorities do not take account of foreign producers' welfare; and cases where domestic authorities do not take account of foreign consumers' welfare. However, the magnitude of these problems is not known. Rather, these problems are only assumed to exist in theory. Nonetheless, the extent to which the existing legal regime can address those externalities is analysed. We find that existing trade and competition law instruments can largely address the existing theoretical problem. For instance, Art. XI of the G.A.T.T. can be used to address export cartels, as the semiconductors case at the end of the 1980s demonstrated. On the other hand, persuasive evidence has been gathered demonstrating that bilateral cooperation agreements in the competition field function well. We conclude that no problem exists with the existing regime that mandates a new approach. Actual use of the system is, however, limited. Only one case has been referred to the W.T.O. in 50 years: the Kodak-Fuji case. Thus, if use of the existing instruments is an indication, externalities do not present a serious problem. However, this could be deceiving. Perhaps the present system is not adequate. It is difficult to imagine how a case like McDonnell Douglas could go to a W.T.O. panel, a body consisting of three ad hoc adjudicating members, aided by a member of the legal affairs division, who are not permanent. Consistency cannot be guaranteed. Legitimacy of W.T.O. panel decisions is needed, and could be created by rectifying institutional aspects, in order to provide consistency, internal coherence, and long-term application of the same law, indepen-


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dently of the litigators. Such legitimacy currently does not exist at the W.T.O., largely because of the ad hoc nature of panels. However, new international substantive rules are not needed. Finally, our paper analyses the parallelism between the domestic level and the international level. At the domestic level, the list of per se prohibitions is shrinking, and the rule of reason is being over-extended. The same is true at the international level. At the W.T.O., two substantive rules are relevant: Art. Ill, which can be used against national champions, and Art. XI, which can be used against export cartels. Bilateral competition agreements do not contain any substantive rules, but alert the parties to each other's interests. Domestic competition authorities should begin to understand that their national interest is different from what it used to be. It includes not only consumers' and producers' welfare, but also foreign nations' welfare. This can be rectified only through existing procedural requirements that have not been used to date. • MR. SOUTY—The E.U. provides a useful model of how to internationalise competition rules, both from an institutional and a substantive perspective. Important differences in legal and economic cultures are present. There is convergence in the E.U. with respect to three elements: independence of enforcers, checks and balances, and advisory bodies, or 'toothless watchdogs'. Second, limited convergence on substance has occurred within the E.U. Since National enforcement objectives are not identical in the Member States, either among themselves or to the Commission's. Objectives have also varied within each Member State over time. Treatment even of the single anticompetitive practice about which we seem to agree, namely cartels, differs, both in terms of how cartels are defined and how they are treated under the law. As to the future of the W.T.O., I conclude with three brief remarks. First, history has taught us that international competition rules in Europe did not start with detailed rules. Second an international system should integrate the principles of institutional autonomy, independence, checks and balances, and advice from expert, toothless watchdogs. Third, an international system of competition rules should ensure that new national competition authorities and systems do not unnecessarily impair business operations, but impose market efficiency and, chiefly, transparency.

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Observations and Comments • MR. GOLDMAN—A joint working party of the International Chamber of Commerce on trade and competition policy, which I chair and which has been ongoing for one and one half years, is dealing with the very issues that we are discussing. It is difficult for trade experts and competition experts to speak the same language on issues such as anti-dumping and antitrust. We have had such debates in Canada, as well as debates on the right of private action and private relief for competition law offences. Moreover, competition experts from different countries do not always speak the same language. A joint working group within N.A.F.T.A. on trade and competition policy has existed for about five years, which has made little progress. Accordingly, attempting to resolve issues of trade and competition policy, and as to whether there should be an international forum with some form of dispute resolution, is extremely difficult. We must not move too quickly; we ought to learn to walk together before we attempt to run, because otherwise we may end up with recommendations that constitute the lowest common denominator, and which may be ineffectual. Two years is a good timeframe to initiate the discussion, but these issues are going to take many, many years to resolve. The participants in this discussion should include government and the business community. Moreover, we ought to build on bilateral experience in the interim. • MR. WARNER—Market access is a very important and complex issue. Earlier discussions here focused on the use of economics, and the difficulties with economic analysis. Most market access issues involve vertical restraints. Economics is used to analyse the effects of vertical restraints. In working through the consequences of a vertical restraint with respect to market access, we must recognise the lack of consensus on economics, as well as issues of market definition. Query whether it is reasonable to rely on national competition authorities to handle a complaint from a foreign aggrieved party, and to expect that authority to ignore the domestic effects of its actions and instead pursue the world interest. It seems like something that academics might ponder, but unlikely to occur in the real world. Apparently, Kodak did not expect that the Japanese competiton authorities would resolve their concerns. The problem of legitimacy may have to be resolved internationally and institutionally. • PROF. HOVENKAMP—Any discussion of the extent of multilateral agreements must begin with the premise that such agreements are appropriate only where the economic consequences of the practice are unambiguous, and the


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principal effect of the practice about which the agreement is made is to export monopoly elsewhere. As long as nations pay a significant portion of the economic or social cost of a practice, they will have an inducement not to engage in it. Second, and more importantly, in cases where practices are not fully understood, differential policies across the world act as a very important laboratory in which we can test their consequences. Full multilateral agreement, such as an agreement to condemn vertical non-price restraints, or vertical maximum pricefixing,would eliminate the possibility of observing the impact of various rules. Until we have a very high degree of certainty that vertical maximum price fixing is economically harmful, such multilateral agreement would do much more harm than good. Accordingly, such agreements are only appropriate where the practices they cover are unambiguously harmful and the principle effect is to export monopoly elsewhere. • MR. FAULL—The experience of the U.S. Webb-Pomerene Act has not been an obstacle to U.S./E.U. cooperation in the competition field. In fact, the E.U. has jurisdiction over Webb-Pomerene cartels that operate in our territory. The Americans do not appear to object to that, and we could not object if the U.S. prosecuted firms for the harmful effects there of activities that we had exempted under Art. 85(3). Regarding the O.E.C.D. and W.T.O., I believe it is premature to discuss an O.E.C.D. agenda. Discussions are ongoing at the O.E.C.D. I agree that two years is a short period of time for the W.T.O. agenda. During this period, we are meant to explore but not to begin negotiating. There have been some surprising misunderstandings in the business community with regard to what we are doing. One should not expect business to like all aspects of cooperation between competition agencies. We just have to live with that, as they must as well. We must make great efforts to explain and consult, but there comes a time when competition agencies must take responsibility to enforce competition law, and business must comply with the laws. Finally, if the competition community does not work together, we risk seeing the trade community hijack what we do and hold dear, because they will not wait. With state-imposed barriers to trade coming down, the competition problems have become much more obvious. If we sit around for the next ten years arguing about the finer points of vertical restraints, the trade community is going to say this is a market access problem and that they will handle it. I do not believe this would be a satisfactory outcome. We must deal with vertical agreements that foreclose market access in a significant way. We can characterise them as having horizontal effects where appropriate. If we do not deal

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with them in cooperation with each other, our trade friends will, and using less sophisticated economic analysis in competition policy terms. • MR. KHEMANI—Trade policy issues are separate from antitrust issues. In the context of domestic application of antitrust policy, market access issues should be treated as entry issues. That is, when a firm, or one or a group of exporters, finds it difficult to enter a market, domestic antitrust policy should be applied as it is in any other situation where a firm is attempting to enter a market and is facing barriers. A domestic competition agency would have to consider the sources of those barriers, and whether a substantial lessening of competition has occurred. Competition authorities receive many complaints, from both domestic and foreign firms, of barriers to entry into particular markets. We have developed a framework for deciding whether to act. In addressing this issue, I do not agree with others here that global economic welfare must be considered. No national authority currently has the power to do so. Finally, cartels may exist without government supporting mechanisms. Cartels, by nature, tend to be secretive, and not necessarily supported or facilitated by governments. When a market access problem exists where there is a transborder cartel, such as occurred in the Canada-U.S. Fax Paper case, it can be handled through the principles of cooperation and comity. However, when a foreign firm complains about a domestic cartel, an investigation may not take place because the foreign firm lacks standing. This is a procedural issue that can be easily addressed. • MR. OTTEN—At the W.T.O., a new working group has a mandate to study the interaction between trade and competition policy over an initial period of two years. We must identify issues that merit further study. At the end of 1998, the W.T.O. General Council should take a decision on what further work is needed. We are asking our members to identify the issues that they would like to see studied in the Group. The Members may submit written papers to this end. The European Commission has submitted a paper indicating that its thinking is further developed than those of other Members. Until now, other Members have been fairly discreet about the agenda they would like to see pursued in this Group. Thus there is no question of precipitous action in the W.T.O. This group will address areas where trade problems result from anticompetitive practices and how competition law is applied. Members are likely also to raise issues concerning existing trade instruments, and how they fit with the approach taken from a competition policy perspective. A range of provisions already in the W.T.O. agreements address enterprise practices which may distort competition, including in the areas of telecoms,


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state trading, monopolies and exclusive service suppliers. A number of issues that arise in accession working parties concern the implications for access to the markets of countries seeking accession to the W.T.O. of the extent to which there are functioning competitive domestic markets in the countries concerned. • MR. KOBAYASHI—I wish to comment on how well the W.T.O. is equipped to deal with competition issues. I am involved in the Kodak case. It is difficult to discuss this case because it is ongoing, although both sides have published most of their submissions. One point is that this case is not between Kodak and Fuji, but Kodak and the Japanese government, and it is not a competition case, but a trade case. Kodak's main argument is that it is not the private practices that have caused the problem. Rather, the problem is that the primary wholesalers in Japanese film distribution are virtually monopolised by Fuji. Further, Kodak contends that measures taken by the Japanese government have brought this situation about. These measures are now being questioned in the W.T.O. as a trade issue. In particular, the measures taken by the Japanese Ministry in charge of industry with regard to the distribution system are at issue. The J.F.T.C. is involved, not because it is responsible for the distribution system as such, but because it administers regulations on premiums and representations. It is alleged that this regulation blocks entry of a particular product from abroad. So again, this is a trade issue, not a competition issue. However, one aspect of the case relates to market structure: the extent to which the distribution system of Japanese film products is closed for foreign manufacturers. Kodak has presented a large volume of 'evidence' on this point. This volume of paper heavily burdens those who must decide the case, which is extremely fact-intensive. • PROF. NEVEN—International cooperation is needed only when there is a conflict between the various constituencies or authorities. When a conflict is present, one jurisdiction must take account of the cost or benefit that accrues to the other jurisdiction. Even if both jurisdictions agree on rules, it is necessary to ensure that these rules are actually implemented, where implementation is left to the discretion of the authorities. Some argue that an institution and sanctions are needed to ensure implementation. I believe that the problem of competition agencies in this context is a little bit like the problem of collusion among firms: all would be better off if all competition agencies take into account the interests of the others. Perhaps this is not completely unrealistic, to the extent that competition agencies have repeated interactions, that they have cases that require them to take account of the interests of each other. For instance, the half-

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defunct E.E.A. agreement had common rules, as well as a rule to allocate jurisdiction. This required great trust among the authorities, because each was to implement the rules in the same way as the other when it had jurisdiction. • MR. SCHAUB—In the Kodak-Fuji case, I believe the trade action that has been taken was not the first preference of the U.S. For a long time, they had sought to get unilateral sanctions under Section 301, and it was only because this did not work out that they finally chose the second best approach. This matter could have been handled under the competition rules, but this approach was not pursued for fear that the J.F.T.C. would not take it seriously. This illustrates that no serious and effective international cooperation will occur as long as the competition authorities are not perceived as credible operators. They may be considered more or less credible in a given case depending upon whether an obvious national interest is involved. I would be interested to hear from Mr. Kobayashi about how the treatment of the Kodak-Fuji case was viewed from the inside of the J.F.T.C. Has the J.F.T.C.'s investigation led to anything? Is Kodak's perception correct that involving the J.F.T.C. would not lead to useful results? • MR. KOBAYASHI—Currently, three types of issues are before the W.T.O. on the Kodak matter. One is the question related to G.A.T.T. 1994, which I have already described. The second is a service-related issue, involving an alleged violation of the G.A.T.S. agreement, and this relates to the Japanese large-scale stores law. Kodak claims that this law hinders imports of films into Japan by restricting the growth of the numbers of large-scale shops, which the Japanese government disputes. The third is the competition issue, which concerns private practice in the Japanese market. The U.S. has proposed discussion in the W.T.O., under the G.A.T.T. decision of 1960, which relates to restrictive trade practices. However, this is outside the dispute settlement mechanism. This G.A.T.T. decision requires consultation to solve the problems related to competition policy issues. Japan accepted the proposal of consultation based on the 1960 decision under specified conditions. However, the other party did not accept one of these conditions. As a result, these proceedings have stalled, and it is not clear when this discussion on the 1960 decision will occur. As to the seriousness of the J.F.T.C, of course we inside the J.F.T.C. believe in it. Kodak itself came to the J.F.T.C, and provided it with some information. However, Kodak has provided no further information. On its own initiative, the J.F.T.C. is conducting an economic survey (as distinguished from a compulsory investigation). We are gathering information that is provided voluntarily, and have made very good progress.


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• MR. ABBOT—In a situation where a competition authority cannot investigate, for whatever reason, grounds may exist for a trade policy dispute under the W.T.O. rules, but no grounds for action on the basis of competition law. While the W.T.O. trade rules offer a possible solution, their use requires the W.T.O. to make a judgement on anticompetitive behaviour based upon trade provisions. This would perhaps lead to confusion, as may have occurred in the case on autoparts, had it not settled. It is only the first case in 50 years. Nevertheless, it is an important example of what could occur as markets become more globalised. Second, I am not suggesting that a choice must be made for either a network of bilateral agreements or a multilateral agreement. Rather, both are possible. Currently, we are exploring the possibilities for a two-year period in the W.T.O.; in the meantime, using and expanding bilaterals, especially regarding positive comity, presents no problem. Bilaterals should resolve some of the problems, but they may not resolve all of them. In the future, it may be necessary to compel a competition authority to make an investigation. The question would then be who would take action. The government of the country involved may decide to do something. Moreover, a basis for W.T.O. action may be established on the basis of an objective report rather than in the manner being described, i.e. a trade case with allegations flying to and fro with no real analysis involved. Therefore, I believe that both bilateral and multilateral efforts should be pursued, and the bilateral efforts are likely to move more quickly than the multilateral efforts. We are interested in measures affecting trade, and areas where governments have commitments and obligations but private enterprises do not. In contrast, negative spillovers involve the result of a decision taken by a competition authority, which could then have a negative effect. • Ms. ROBINSON—The large quantity of documents referred to by Mr. Kobayashi typically includes the most sensitive business plans and the strategic long-term plans of a company. This is the reason the business community is outspoken regarding positive comity. Moreover, these cases typically involve an entire industry. As to remedies, we must guard against being overly regulatory in designing relief. I have been involved with enforcement of the A.T.&T. consent decree for many years, which required me to act as a regulator for the telecommunications industry. The consent decree entered in the BTIMCI merger case has also been criticised for being so inherently regulatory, and having the potential to create problems in the long run. Even the relief in a fairly routine merger case must not be permitted to become overly regulatory. Relief must be designed to

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allow the efficiency enhancing parts of the merger to go through, and remedy the part of the merger that should be remedied. Frequently, that involves an investigation, as well as long-term monitoring. • MR. FORRESTER—I would like to make a pessimistic point of a rather technical nature. Over the past years, it has been suggested that anti-dumping measures and competition measures are mirror images, complementary mechanisms, and that the one should take the place of the other. As dumping has been defined in the United States and in the European Union, there is very little correlation between what a businessperson or an economist would regard as dumping and what the statutes as upheld by the courts regard as dumping. Anti-dumping measures are, therefore, not normally a means of restoring fair trade (although sometimes they can be). Rather, they are a protective mechanism, even a protectionist mechanism. It would be very optimistic to assume that the elimination of anti-dumping measures would easily follow from the widespread institutionalisation of competition measures. If I were the government of a developing country and had the choice between elimination of developed world anti-dumping measures against my country in exchange for implementing competition rules in my country, I would regard that as a wonderful bargain. Correspondingly, I would imagine that wealthy business would probably regard the opportunity of doing business 'fairly' in that country as inadequate compensation for surrendering the benefits of anti-dumping measures. • PROF. JENNY—It is not clear whether competition policy is relevant for developing countries. We have acknowledged that competition policies should be tailored to local needs. We have assumed that Singapore, Hong Kong, Malaysia, and Indonesia need a competition policy, and that they are aware of this need. In reality, however, they do not know that they need one, and it is questionable whether they actually do. Second, if vertical restrictions are the main trade problem, then it would not be satisfactory to deal with everything except that. Mr. Faull has argued that we must deal with this issue because otherwise the trade community is going to hijack the policy. But is it correct to assume we are talking among ourselves as people involved in competition policy enforcement in developed countries that have a competition policy, or are we really trying to address the general issue of what could be done with respect to interaction between trade and competition? • MR. KHEMANI—I am a carpetbagger travelling around the world selling competition policy. Passing a competition law does not guarantee competition;


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and it is possible to have competition and competitiveness without having a competition law. The performance of Singapore, Taiwan, Japan and other countries that were viewed as not having a sufficient degree of competition have been highly competitive in the international arena. Most countries have little choice, due to internationalisation and globalisation of markets: they must address the issues of competitiveness. They find that becoming increasingly open, they can inject competition in their economy because export market performance is the best way to foster economic development and growth. It is possible to restrict competition in domestic markets, but it is impossible to restrict competition in international markets. Competition in international markets functions as a transmission mechanism for injecting competition in domestic markets. Moreover, governments do not have thefiscalspace to continue to operate state enterprises or provide subsidies as internationalisation occurs. Thus, they privatise and deregulate, and then focus on how to prevent private monopolies from taking over where government monopolies left off. They then begin to consider competition law. That is the normal sequence. There is no lobby for competition, because everyone recommends competition for someone else, but not for himself. Opponents to competition law tend to be rent-seekers. In many countries, such as Indonesia and other developing countries, the opponents are a small coterie of individuals. With increasing international communications and internationalisation of markets, the general population has begun to question why it does not have a share of the pie. That becomes a stimulus for competition. • PROF. MAVROIDIS—It is possible to have export cartels without government intervention, but the question is what is the size of the problem. It is questionable whether priority should be given to common competition rules rather than to finishing the unfinished agenda of the W.T.O. In the case of reiterated prisoners' dilemma, the incentive is to cooperate, and this is precisely why bilateral cooperation agreements function well. • PROF. FOX—To conclude this session, I make the following observations. First, it does not appear that the pursuit of different values in enacting and enforcing competition laws by different countries creates a serious obstacle to internationalisation. Therefore, the idea that competition laws must be harmonised before an international agenda can be realised appears to have withered away following this discussion. Other problems loomed much larger, such as whether any imperative exists for internationalisation of antitrust, and what the problems are in doing so. These problems do not, however, include a lack of common goals among the countries with antitrust rules.

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Some participants believe that there is no need for internationalisation because they believe nations can take care of most problems themselves, and any new system would be costly. In addition, a new system might end up being perverse by handicapping efficient firms and therefore more costly. Some cite substantial differences between the goals of trade policy and competition policy and worry that a mixture of the policies will dilute antitrust. Several positive agendas were articulated. Prof. Bourgeois recommended a positive agenda for those inclined to adopt an international policy. To this end, he suggested that to advance internationalisation, those areas where there is a serious trade impact must be addressed. Where governments are prohibited from certain trade-restraining conduct, trade/competition agreements should require private parties also to refrain from the conduct. Moreover, where national interpretations lead to conflicts, an international rule of law should be formulated that would resolve the conflict. The participants held differing views as to whether a minimal agenda should be established on a broad scale or limited to the trade/competition interface and market access. If the latter, nations could be required to have and enforce laws prohibiting anticompetitive blockage of market access. Establishment of minimal principles on all kinds of restraints would be a very ambitious agenda, and would raise a series of problems. Reference was made to the Kodak-Fuji case, and the fact that its present posture separates the trade and competition issues. The separation of these disciplines, with trade people talking only to trade people, and competition people only to competition people, exacerbates the problems. Mr. Faull expressed the concern that if antitrust people do not address the problems of globalised competition, trade people might hijack this area. I take that to mean that competition policy will be hijacked by trade people who want fair trade as opposed to liberal trade. This is true, and it may be the impulse that leads even sceptics to address essential issues. Global issues arise, but tend to be viewed as national. No one is charged with responsibility to address the whole problem. National enforcement alone is not sufficient because nations tend to have blinkered vision. Internationalisation requires governments not to take nationalistic positions. This goes beyond the export cartel problem, although having export exemptions is one way to view the problem. Another is counting the costs on consumers beyond national borders. In the more remote future, disciplines could be imposed against anti-competitive dumping laws. I believe that disciplines on governments, as well as rules for settlement of conflicts, are two of the most important aspects of addressing internationalisation. Finally, Mr. Khemani suggested that developing countries have begun to

3 - Competition Policy Objectives in a Multilateral Competitor! Code

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understand that they need to have open markets in order to integrate with the world in some way. Further, they understand that a competition system will help bring this about. In the United States, for many years the idea of open markets was a guiding force of antitrust. In the last ten or fifteen years, a more technical, economic paradigm was adopted. The value of open markets is no longer considered as a good in itself. Open markets have been a very important part of E.C. law, the E.E.A. agreement and the Europe Agreements. Open markets and market access are part of the same picture. The trade people perceive that we need to have an open market paradigm as a counterpart to the trade agreements that constantly rachet back government restraints. Nations perceive that openness of markets is an important, dynamic antitrust value. I believe that the concept of market access and openness of markets might help lead the way in to the first, and perhaps only, substantive international rule: that there should be no unreasonable private as well as public restraints barring market access. There is a linkage between liberal trade and competition. The trade people are saying it very clearly; the antitrust people are far behind. I believe that the discussion has moved us in the direction of making it a more solid point of reference for globalisation.

WORKING PAPERS

COMPETITION POLICY OBJECTIVES IN THE CONTEXT OF A MULTILATERAL COMPETITION

I II III IV V VI VII VIII IX

Eleanor Fox, Rapporteur of Session Two Roderick Abbott Jacques Bourgeois Ulrich Immenga R. Shyam Khemani Joel Klein Mitsuo Matsushita Petros Mavroidis Francois Souty

I Eleanor M. Fox Rapporteur of Session Two Walter Derenberg Professor of Trade Regulation New York University School of Law New York, New York, USA

Introduction Different goals, cultures, and institutions lie behind the competition laws of the various nations. For example, U.S. antitrust today is driven largely by the goal of maximising U.S. consumer welfare. U.S. law is relatively non-interventionist, and even monopoly firms are encouraged to engage in hard competition without regard to its impact on small firms. Canada seeks to maximise total Canadian welfare, and anticompetitive mergers may be justified not only by productive efficiencies, but also by their potential to increase exports ('competitiveness')- Even so, Canada applies some fairness principles; dominant firms are constrained not to take action that will unnecessarily foreclose smaller actors. European Community competition law is driven by a complex mix of integrating markets, preserving the economic opportunity of small and middle-sized businesses, aiding consumers and fostering competitiveness. Many newly reindustrialised countries use competition laws to keep markets open in order to safeguard the new economic liberalism and democracy, to foster freedom of enterprise and to protect small actors from the exploitations of still-dominant enterprises that are the legacy of the command and control era. The task of Session Two was to reflect on these differences and to consider their significance vis-a-vis efforts to internationalise competition policy. There was a remarkable consensus of the participants. All speakers agreed that differences in competition law goals are not, as such, an impediment to internationalisation, although not all were in favour of efforts to internationalise. Several participants stated that there is no need to press for further harmonisation of national laws as a precondition to building a foundation for an international understanding, and that insistence on harmonisation first would be likely to impede progress at building an international system. The participants in Session Two considered whether and why an international regime might be desirable or necessary, and if it is, what form that regime

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might take. While there was some divergence among the panel members, there was again remarkable agreement, and near consensus that: • nations should adopt competition laws and be obliged to enforce them against anticompetitive restraints of international trade; • the G.A.T.T./W.T.O. principles of transparency, national treatment and non-discrimination, and against beggar-thy-neighbour restraints, should be included in competition law obligations; • nations should continue to develop bilateral cooperation, including cooperation in discovery and other comity measures; and • if work begins on substantive rules against certain private or hybrid restraints, one should cautiously build the foundation, possibly focusing on: effects resulting from conflicting national regimes; core principles on which there is already international consensus; and the private equivalents of G.A.T.T.-illegal government restraints (e.g. quantitative restrictions on imports and exports and strategic nationalistic behaviour). On the other hand, there were many points of tension among the panelists, to which I shall turn.

The Participants' Papers As originally conceived, Session Two concerned 'Competition Policy Objectives in the Context of a Multilateral Code'. Stated differently, how could an international code be wise or attainable given that nations march to different drummers in devising and applying their competition laws? That question cannot be answered without reference to a concept of an international agreement, and, perhaps for that reason, most panelists quickly turned to sketching their views of what an international agreement might contain. The pursuit of divergent goals by nations was, for many, a minor theme. Prof. Bourgeois wisely observed that nations with different objectives often support common rules for different reasons. Accordingly, in this section, I attempt to synthesise the participants' perspectives on what, if anything, an international agreement should contain. The most fully developed proposal is presented by Mr. Khemani and Mr. Schone in their paper. I shall begin with a review of this paper, then work through several other papers that make discrete first-stage proposals and several that elaborate on W.T.O. institutions and what they offer as a framework for solving the problem of private restraints. Finally, I shall address the two most sceptical papers—those of Prof. Mavroidis and Mr. Klein.


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The Khemani/Schone paper argues that the problem of market access restriction by private firm behaviour is a gap left largely unaddressed by the G.A.T.T.AV.T.O. system, and that where insufficient relief is available through current arrangements, the gap should befilledby an international agreement. The paper cites data, case examples and studies to show that trade liberalisation does not cure the problem; indeed, it presents facts illustrating that liberalisation may itself inspire further public and private efforts to protect domestic markets by new means. The paper makes a number of proposals, and offers case-specific issues for consideration by the W.T.O. Working Group on Trade and Competition. For instance, it suggests that: nations should be required to have and enforce antitrust law, and to do so on a non-discriminatory basis, especially against market access restraints; the competition agency should be independent; excluded exporters should have a right to sue in the excluding nation; to address uneven playing field issues due to differences in antitrust policy, the paper favours convergence on principles and minimum standards, backed by cooperative links among competition authorities; strategic antitrust policy, such as export cartels, should be prohibited, and minimum standards for R&D cooperation should be adopted; procedural minimum standards should govern merger control; antidumping laws should be abolished; positive and negative comity should be implemented; and W.T.O. dispute resolution should be available. The essay of Mr. Souty begins in a somewhat different place but ends with a compatible—if less detailed—suggestion. Mr. Souty presents a comparative view of competition policy and its evolution in a context of political economy, noting that some countries, such as the U.S., stress hard competition, and others, such as the U.K. and Japan, stress fair trading. Institutionally, he notes the successes of the qualities of independence, collegiality and expertise of and within antitrust agencies, and describes how the competition authorities in Germany, the U.K. and France are supplemented by a 'toothless watchdog' commission, which provides both expertise and advisement. Secondly, Mr. Souty observes how the European Union has been successful in promoting convergence of competition policy, even among nations with strongly different traditions. He draws from that experience the lesson that different traditions and objectives are not an obstacle to internationalisation. Thirdly, regarding cartels, Mr. Souty observes that all competition policies in the world have been basically designed to fight against cartels. This observation leads to a proposal: 'a limited prohibition which allows national enforcement under the review of a collective and autonomous body, advised by an independent toothless watchdog with a strong expertise in the field of law and economics, and subject to review by an appeal authority'.

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While Mr. Souty seems implicitly to anticipate the evolution of a much more fully developed international system, Prof. Immenga does so expressly. Convinced that internationalisation of competition law is inevitable, Prof. Immenga looks in the direction of a plurilateral system, based on internationally agreed rules, which leaves the enforcement of these rules to national agencies and courts while assuring that the application of the rules by national authorities is under international control. His suggestion goes farther than those put forward by the other panelists in contemplating a complete set of antitrust rules. Prof. Immenga believes it to be more important and essential than adopting specific rules to recognise the forces that are impelling us towards internationalisation, and to find the commonalities of systems that buttress the common cause in promoting 'the general virtues of maintaining competition'. Areas of convergence, he suggests, should be identified, and—because conflicts will be most easily overcome in these areas—they should become the core of the common policy. He identifies consensus wrongs, such as naked cartels. Prof. Immenga identifies the following categories of divergences in competition policies: differences within competition policies (e.g. different socioeconomic conceptions of competition policy and different economic theories); divergences which result from valuing certain external goals more highly than competition (e.g., jobs, the environment); diverging enforcement policies (margin of discretion, control by political bodies such as ministries or independent agencies or courts); and culture and tradition (e.g. degree of liberalism versus statism). These differences may make agreement on specific rules difficult, especially where national interests are at stake and where political interests— such as jobs—may trump competition interests in particular nations. Accordingly, agreement on wrongs such as naked cartels will be easier to reach than agreement on mergers, which are often linked to industrial policy. Nonetheless, the points of common interest 'should encourage a process to develop an international code and to overcome existing national divergences'. The paper by Prof. Matsushita is premised on the proposition that world competition is increasingly overshadowing domestic competition so that, in the future, a clear line between domestic and international trade policies will no longer be distinguishable. In this first and current stage, like Mr. Khemani and Prof. Immenga, Prof. Matsushita sees the 'need to control private restrictive practices that offset the effect of liberalisation achieved through trade negotiations and agreements'. However, in contemplating the later stage—a more nearly integrated world—he argues that a more ambitious approach will be required, although nations should not be requested to give up more sovereignty than necessary to deal with the global problems.


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Prof. Matsushita believes that the W.T.O. is the right forum for integrating trade and competition issues. He explains that the W.T.O. is a forum for liberalisation which incorporates a new focus on the rule of law, in view of the enforcement and appeal mechanisms adopted in the Uruguay Round. He outlines existing W.T.O. agreements that contain competition policy aspects, prohibiting or authorising nations to prohibit public or private anticompetitive restraints. These agreements include: Agreement on Technical Barriers to Trade (T.B.T.), Agreement on Trade-Related Investment Measures (T.R.I.M.s), Agreement on (i.e. limiting) Antidumping Subsidies and Countervailing Duties, the Safeguard Agreement (prohibiting agreements on voluntary export restraints), General Agreement on Trade in Services (G.A.T.S.), and Agreement on Trade-Related Aspects of Intellectual Property Rights (T.R.I.P.s). He encourages policymakers to build upon those agreements. Prof. Matsushita describes the diverse goals and values of nations perhaps more poignantly than others. He identifies as the common thread 'preservation of the market mechanism'. Behind this common thread are nations' diverging needs and preferences, e.g. for efficiency, pluralism (to counteract suspicion regarding concentrated power), equity in transactions (to counteract undue use of bargaining power to impose harsh terms), market integration (E.U.—which might provide some lessons for an integrating world), and the goals of transition economies and less developed or developing countries like China, whose needs include a mixture of establishing a modern civil law system and protecting market actors from unfair competition. Prof. Mitsushita believes that eventually it will be necessary to enter a W.T.O. agreement wide enough to accommodate nations' diverse objectives. He contemplates openly hearing the voices of developing countries. For the present, his proposal is modest: to deal with core problems (e.g. cartels and boycotts) that directly impact international trade. Mr. Abbott provides a view from the trade community. While national competition authorities' bilateral cooperation on pure competition issues is welcome, he said, '[i]t is not what some in the trade community envisioned when we called for progress on international rules relating to trade and competition policy'. Mr. Abbott focuses on cases in which market access is impaired by private behaviour. He observes that many W.T.O. countries do not have antitrust laws, and others that do might not fairly investigate and enforce their laws to enhance foreign access. Countries are experimenting bilaterally with positive comity, but this has yet to be tested. Although market access is an international trade and competition problem, no legal base for multilateral surveillance has been established.

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Mr. Abbott recommends multilateral agreement obliging nations to adopt competition rules with a proper structure for enforcement, and obliging competition authorities to investigate market access complaints and to make their investigative reports publicly available. Failure to do so would be an actionable breach within the W.T.O. dispute settlement system. Prof. Bourgeois, who is expert in both the trade and competition disciplines, observes that unfair trade practice law causes the greatest tension with competition law. He suggests that the two bodies of law be kept separate and, for the moment, that we simply live with the inconsistencies. In time, we can face the need to adjust unfair trade laws, such as antidumping law, to competition goals. Second, Prof. Bourgeois contrasts the perspective of the trade lawyer with that of the competition lawyer and suggests lessons that we can learn from one another. He suggests that competition lawyers 'may learn that the absence of international competition rules also stifles competition'. Third, he provides the insight that an international competition agreement does not presume consensus on objectives. Experience shows that actors in international negotiations reach agreement without agreeing on objectives. Fourth, states may reach a common formulation when the nuisance value of many diverse rules is high enough. The nuisance value includes: adverse effects on a nation's own regulatory system and on its market actors which result from multitudinous laws with different standards, and the anticompetitive effects of trade laws adopted in the name of the unlevel playing field. Applying these lessons, Prof. Bourgeois suggests that the most likely target of an international competition agreement would be conduct having an impact on international trade and its most likely purpose would be to prevent anticompetitive conduct that restricts international trade. Most likely subjects for rules would be forms of conduct with respect to which there are already some international rules regulating the conduct of governments. For instance, boycotts of imports and exports, abuse of dominance by exclusionary, discriminatory and exploitative practices, rules against bid rigging, and barrier-creating standard-setting can all be seen as extensions or counterparts of W.T.O. agreements, such as those on Government Procurement and Technical Barriers to Trade. Also a good candidate for rules would be 'forms of conduct whose disparate regulation by states is most likely to result either in excessive costs and delays for multi-jurisdictional transactions, or even in allowing one state to block such transactions [as mergers and alliances] which have been cleared by other states . . . .' Unlike the first five author/panellists, who believe that there is an international problem that would naturally be solved by international measures and who focus on how best to address this problem, Mr. Klein and Prof. Mavroidis


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question these premises. Mr. Klein's paper identifies three areas of concern in the global economy: transnational mergers, which may be subject to review by numerous national authorities; international cartels; and market access blockage. He contends that multi-nation review does not hinder mergers. Moreover, the parties can decrease transaction costs by allowing the various reviewing authorities to share confidential information. Mr. Klein identified cartels and market access restraints as areas in which arrangements between governments may significantly enhance enforcement. In both areas, the U.S. Department of Justice has sought, and in some cases obtained, the cooperation of antitrust authorities abroad. Without cooperation and without being able to gather evidence abroad, enforcement may be stymied. This concern led the U.S. Congress to pass a statute giving the Justice Department authority to negotiate bilateral antitrust cooperation agreements and to exchange confidential information on a reciprocal basis with trusted foreign counterparts. Mr. Klein also reported the U.S. initiative in the O.E.C.D. contemplating bilateral agreements against hard core offences. Finally, he detailed the refinement of positive comity and recommended agreement to fit the following scenario: Country A, believing that its companies are closed out of country B by private restraints, may make a preliminary determination that there are reasonable grounds for investigation. If it does so, it may refer the matter to country B's authorities, who would then have the duty to investigate and report back to country A, and to consult with country A as to: the nature of the investigation, B'sfindingsand any remedy B's authorities are considering. Mr. Klein expressed fear that W.T.O. initiatives on trade and competition could undermine the ongoing cooperative efforts among competition authorities. He argued that: agreement on sound competition rules will be hard to reach, because different national objectives will result in forced trade-offs; the process might result in a lowest common denominator, legitimating weak and ineffective rules; W.T.O. dispute resolution would be infeasible, inappropriate or—if it is limited to review of nations' obligations to adopt and enforce antitrust rules—ineffective, because competition laws go beyond core W.T.O. concerns, and competition law enforcement is fact-intensive and involves confidential information. Profs. Bacchetta, Horn and Mavroidis challenged the 'internationalists' by methodically addressing the focused question: do negative spillovers from nationally pursued competition policies provide a case for multilateral competition rules? In effect, they ask when negative spillovers produce inefficiencies from an international point of view, and whether there are any significant such inefficiencies (acts or conduct that decrease aggregate world wealth) that

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cannot be addressed in the existing legal framework. They conclude that since conduct with spillovers (e.g. import cartels that foreclose non-nationals) does not necessarily decrease world wealth, it does not provide an economic rationale for a multilateral competition agreement. The Bacchetta/Horn/Mavroidis paper investigates the extent to which economic incentives would induce nations to pursue competition policies that impair world resource allocation. It finds no economic reason to believe that incentives run in this direction (finding, among other things, no economic reason to believe that liberalisation will give nations added incentives to pursue beggar-thy-neighbour policies). The paper then considers the extent to which current law, especially trade law, is or can be used to resolve the problems. It finds this extent large, actually or potentially, after detailing and discussing all available G.A.T.T.AV.T.O. instruments and obligations, bilateral cooperation agreements, and the availability of extraterritorial applications of national law. The authors have applied economic models which expressly exclude certain fact-based realities. For example, they assume for their model that nations pursue the goal of national aggregate wealth, though they recognise in their text that nations take protectionist measures. The authors conclude that no international agreement should be pursued unless it can be shown to increase aggregate world wealth. The paper has a contrapuntal relationship with Session One, which shows that competition policy was adopted in various nations for a variety of policy reasons, including concerns with the distribution of wealth and economic opportunity, openness, fairness and legitimacy. Indeed, it has been observed that most nations would not adopt competition laws if their goal was to improve the allocative efficiency of the nation, because anyone with this burden of proof could not meet it.' Accordingly, some may believe that the objective of internationalising competition law is not to achieve more aggregate world wealth, but to mediate systems dissonance, eliminating narrow nationalism and opening the world to economic opportunity on the merits, and to gain a world vision of world transactions. Therefore, it would be interesting to ask the authors to flip their question and ask: assume a system such as proposed by Khemani. What if any are the costs to world welfare?

1

See Dominick T. Armentano, Antitrust and Monopoly—Anatomy of a Policy Failure (1982); John S. McGee, Why not 'Deregulation' for Antitrust?, in Industrial Concentration and the Market System, 53 (E. Fox and J. Halverson, (eds.) 1979).


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Conclusion The papers are uniquely harmonious and especially noteworthy for the set of liberal principles, outlined in the introduction, to which they basically subscribe. Nonetheless, there are many differences, the most obvious of which is that between the majority of participants (who accept the internationalisation of competition law and work 'in the vineyards' to try to guide its development along fruitful paths), and the minority (who do not accept internationalisation of the law and work to stem the tide). Most in the majority seem to have the positive view that we are living in a world of global markets, and that there is a need for architects to fit the law to the problems. The majority also includes, however, those persuaded by the remark of Mr. Faull that if the competition community does not work together to consider what form of competition agreement makes sense, its worse fears will come true—the trade community will do so.2 Even among the 'positivists', there are many different proposed routes. Some envision, ultimately, a complete set of world competition rules; others would limit world rules to a few hard core consensus categories; yet others would limit world rules to anticompetitive restraints (and maybe core categories) that directly restrain international trade. Some would identify consensus wrongs as the convenient starting point for a fuller world system, pragmatically starting where conflict is least; others would identify consensus wrongs as the place to start and end. Some envision competition policy broadly and use the opportunity to seek to eliminate inconsistencies between competition as the rule of trade and protectionist national laws, such as antidumping; others would work more narrowly inside competition proper. Some would accept the wide range of values underlying policies that nations may call competition policy (including protecting the weak against the strong); others construct their proposals so as to avoid fairness issues and only to build upon efficient competition rules. Some see the international exercise as levelling the playingfield;others see the exercise as a way to promote world efficiency; still others see the project as simply a way to link systems and put a lid on nationalistic behaviour. All 'positivists' contemplate some dispute resolution but none work out the details of a dispute resolution system how the issues for dispute resolution would be framed, when an issue would be ripe for dispute resolution, what if 2

It is said that the trade community is more likely than the antitrust community to embrace protectionist ideas and bargaining methodologies rather than rule of law in the interests of competition and consumers.

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any, fact-finding authority a dispute resolution panel would have, and how the panel would receive and assess the evidence. This remains an important discussion item, for the feasibility of internationalisation with dispute resolution cannot be fully addressed without positing a dispute settlement system that will work. Regarding enforcement, most 'positivists' had in mind public and private enforcement, beginning at national level under national law that would incorporate agreed international substantive principles accompanied by duties of non-discrimination and national treatment. The panelists of Session Two have significantly advanced the debate on internationalisation of competition law. Engagement at the points of difference remain for another day.

II Roderick E. Abbott Head of Delegation of the European Commission Geneva, Switzerland

Introduction This paper sets forth the views of what the trade policy community considers to be the important elements of the interface between trade and competition policy. In particular, it will focus on the kinds of international cooperation that could be achieved, and how the two communities could reinforce each other as to the ultimate objectives that they largely share. The papers in Session One indicate that the legitimate objectives of competition policy are generally considered to be complementary to the goals of trade liberalisation. In practice, however, these objectives are being pursued by the two policy communities in a largely separate fashion. For example, only two of those papers explicitly mention the competition/trade interface, or the need for international cooperation or multilateral agreements. Others refer in passing to the trend towards globalisation of world markets, or trade liberalisation as factors affecting competition objectives. This is quite natural, since Session One addressed the legitimate objectives of competition policy. However, it gives the impression that the analysis of policy objectives is essentially focused on economic efficiency in the context of the development of national economies, and that application of these concepts in the context of the global economy is not yet seen as of similar importance. The papers for Session Two recognise the global economy, but take considerably different approaches regarding the purpose that a multilateral competition code could serve and the purpose of international cooperation. This paper shall consider whether mere complementarity is enough, or whether a more proactive stance must be taken to ensure that competition policy objectives can help achieve a greater degree of market access in a world where globalisation is reducing the importance of national boundaries.

A. International Cooperation Major concerns exist in the competition policy community relating to conflicts over which competition authority has jurisdiction over certain activities (especially over cartels and mergers leading to dominant market positions). In

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particular cases, more than one authority may have a specific interest, which raises the possibility that these authorities share information and exchange views. In some cases, more than one authority may even assert decisionmaking authority. This constitutes a typical international problem for competition policy-makers. For instance, the competition authorities of both the U.S. and the E.U. have investigated the current merger proposal of Boeing aircraft company with the civil aircraft interests of McDonnell Douglas. The European Commission investigated this proposed transaction and its possible competition effects on the European market for sales of aircraft and of parts and maintenance services. Similarly, several years ago, a merger was proposed between two regional aircraft companies, A.T.R and Alenia, and the Canadian company, DeHavilland. The European Commission prohibited that proposed merger, based upon the negative effects it would be likely to have on competition in the European market. These concerns have led to the establishment of bilateral agreements between governments, which establish the procedures for improved cooperation between their competition authorities. This is welcome, but it is not what some in the trade community envisioned when we called for progress on international rules relating to trade and competition policy. In the trade community, we were concerned that, in certain cases, anti-competitive practices in the market of another country led to difficulties for exportingfirms.Such a case would clearly fall outside the jurisdiction of the competition authority of the exporting firm, but no mechanism was available to have effective action taken in the other country to address such problems. For instance, in recent years, there have been well-publicised difficulties between the United States and Japan over access to the Japanese market for car sales and for the supply and sale of car parts. Some of these difficulties related to the Japanese system of distribution via auto dealerships, as well as the way in which maintenance and car part sales were organised within the system. These problems were partially covered by competition rules; they also constituted a trade issue, to the extent that the U.S. felt that it was denied opportunities to develop its export sales in Japan. Another case, currently before a W.T.O. panel, concerns the conflict between Kodak of the U.S. and Fuji of Japan regarding sales of films in each others' markets. This case also involves questions of distribution systems and of dominant market positions in both countries. In such cases, it was usually possible for an exporting firm to lodge a complaint with the competition authority of the country concerned, but there was no guarantee that it would be investigated or, if an investigation was made to


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guarantee that a substantive report would be published. Further, competition authorities often took the position that, although exporters experienced difficulties, no clear violation of their competition law had occurred and thus that they could take no enforcement action. At present, international law offers no mechanism for multilateral surveillance of procedural or substantive decisions of national competition authorities. Moreover, although the principle of positive comity is gaining ground in some bilateral agreements, it is still to be tested in situations such as those described above. This left a situation where grounds could arise for a trade policy dispute within the W.T.O. rules, but no case for action on the basis of competition law. Although the W.T.O. could make a judgement on competition law violations on the basis of trade provisions, this could lead to confusion over the respective roles of the two policies. It seemed that it would be more effective if rules could be established which would oblige a competition authority to investigate such a complaint, and to make a report publicly available. This would allow any W.T.O. complaint to be based on an objective factual report from the competition authority concerned, rather than unsubstantiated allegations and counter-allegations. Further, the failure to fulfill such commitments could itself be actionable as a breach of a government obligation within the W.T.O. dispute settlement system. B. Multilateral Code Thinking on these issues has evolved since they were initially set forth. Although a certain degree of homogeneity has developed in O.E.C.D. countries regarding the existence and application of competition laws, no such general statement could be made with respect to the W.T.O. member countries. On the contrary, many W.T.O. members have no competition law at present, although that number is decreasing; still less any form of independent enforcement authority. Thus, primary focus at the W.T.O. has been on establishing recognition by all governments of the need for such a law, and commitment to introduce it and a proper structure for its enforcement. Only following a more general, commonly shared set of principles and legal provisions would it make sense to seek international rules in any form. Annex At the Ministerial meeting of the World Trade Organisation held in Singapore in December 1996, the members decided to establish a Working Group to

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study the interaction between trade and competition policy. In doing so, the W.T.O. has broken new ground. Previously, competition law and its enforcement had been considered domestic policy. Following this decision, however, it is now broadly recognised that the world economy is globalised, and often liberal and integrated. Competition policy, if it is to remain effective, must keep pace with these developments. This Annex addresses the international dimension of competition policy from a W.T.O. perspective, since binding global rules or principals may be developed in the future in this forum. The W.T.O. Working Group faces many challenges: • Competition policy of W.T.O. members is at widely different levels of development: some have had a competition policy for decades, while others have only recently drafted legislation, and still others have not yet taken any legislative action; • The objectives and emphasis of competition policy varies from country to country; • Competition enforcement structures vary from country to country, some relying predominantly on administrative action for enforcement, others relying on both private action (which may be encouraged, inter alia, through provisions for treble damages, etc.) and administrative action, implemented through judicial decisions of civil courts. The Working Group may consider the following questions: • Assuming that it would not be feasible to create a supranational competition authority with its own powers of investigation and enforcement in the near future, can we agree that any international rules which may be developed should be intergovernmental in nature, as are all W.T.O. rules? • Could a feasible first step towards an international framework of competition rules be taken through an agreement among all W.T.O. Members to adopt competition policy and enforcement structures domestically? • With respect to which categories of anticompetitive practices is it likely that international consensus on a set of principles could be mustered? • An effective international code should ultimately contain a number of binding elements, in order to ensure that the provisions which support market access objectives (i.e. where anticompetitive practices are restricting exports or investments in foreign markets) can function properly. How can enforcement of agreed principles best be guaranteed? Should this be through intergovernmental administrative cooperation? If one competition agency asks another to take investigative, and if necessary, enforcement action, to what procedural and substantive obligations should the latter be subject?


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• A requesting agency may refrain from taking action itself, and instead seek to ensure that a requested agency is effectively addressing the alleged anticompetitive practices through the procurement of information from that agency and the use of the 'positive comity' instrument when its important interests are affected. How can information exchange and positive comity instruments be developed further? What might be the implications of the development of interagency cooperation on the prosecutorial discretion of competition agencies? • In view of the increasing scope of W.T.O. rules (goods, services, in the future possibly foreign investment), should an international code allow one country to ask another to take enforcement action if the important interests of the former are affected regarding both its exports and its investments?

Ill Jacques H.J. Bourgeois Partner, Akin, Gump, Strauss, Hauer & Feld Brussels, Belgium Professor, College of Europe Bruges, Belgium

A. Scope of Competition Rules Countries developing their first competition policy generally seek to foster competition, ensure fair competition and protect consumers. Countries that already have competition rules in place may also seek to realise these objectives, but some do so in separate laws. For instance, a country may have competition rules, including a prohibition of restrictive business practices and of abuse of market power, as well as laws prohibiting unfair trade practices, designed to protect both competitors and consumers. The rules designed to achieve these various objectives, whether included in a single law or enacted in separate laws, may conflict. For instance, on 14 July 1991, the Belgian Parliament passed an (amended) Act on Trade Practices and Information and Protection of the Consumer1; less than one month later, on 5 August 1991, it passed the Act on the Protection of Economic Competition,2 which is modelled on E.C. competition rules. However, neither Act sets forth the relationship between the two Acts. In particular, they do not address the question whether a business practice consistent with the latter Act may still be held contrary to the former Act. The Competition Council, which is the special tribunal established to enforce the Act on the Protection of Economic Competition, prohibited a merger on grounds that had less to do with this Act than with the Act on Trade Practices.3 Accordingly, when reflecting on competition policy objectives in a multilateral context, countries should first agree on the definition of the subject matter, clarifying whether objectives pursued by legislation on unfair trade practices are to be considered competition policy objectives. I believe that these objectives should not be included and should be kept separate. This does not exclude the possibility that if and when international competition rules are established, 1

[1991] Moniteur Beige {MB), 18712. [1991] Moniteur Beige 22493; ECLR (Supplement). 3 Conseil de la Concurrence—Decision of 18 May 1994, no 94, C/C 14, Parfumerie Douglas/Compartilux [1994] MB 18412 (12 July). 2

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they will have an impact on, and perhaps require a modification of, unfair trade practices rules, such as antidumping laws.

B. The Need for International Competition Rules The need for international competition rules has been considered in the literature from two perspectives: from the perspective of competition policy and from the perspective of trade policy. The trade policy community generally supports the idea4; however, the competition policy community is more sceptical.5 The issue should be dealt with simultaneously by both the trade policy and the competition policy communities. In doing so, the trade policy community may learn that regulating competition at the international level is more complex than regulating government procurement or the trade-related aspects of intellectual property. The competition policy community may learn that the absence of international competition rules also stifles competition. The evidence which places the two communities at odds with each other with respect to the need for international competition rules is, thus far, not persuasive. For instance, the contention that trade policy measures have a stifling effect on competition is supported only by anecdotal evidence.6 Likewise, with respect to the competition problem resulting from the coexistence in an increasingly globalising world of different competition systems, the evidence appears to be anecdotal.

C. The Need for a Consensus on Objectives Any effort to build consensus on policy objectives before negotiating on international rules may be counter-productive, and could even have the effect of making any progress on rules impossible. Experience shows that actors in 4

E.g. Bernard Hoeckman and Petros Mavroidis, Competition Policy and the G.A.T.T., 17 World Econ. 121 (1994) (the authors see four holes in the W.T.O. as far as competition policies are concerned). 5 See various contributions in O.E.C.D. Documents, New Dimensions of Market Access in a Globalizing World Economy (1995). The O.E.C.D. Committee on Competition Law and Policy is opting for 'convergence' rather than for a set of international rules. See O.E.C.D. Interim Report on Conveyence of Competition Policies (June 1994). 6 See some examples analysed by Jacques Bourgeois and Paul Demaret, in European Policies On Competition, Trade And Industry. Conflict And Complementarities 65 (Pierre Buyges et al. (eds.) 1995).


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international negotiations may be able to agree on rules, even if they each have different reasons for accepting common rules. Thus, they may not agree on the objectives that underlie the agreed rules. Paradoxically, a successful negotiation on rules may require that policymakers devise rules that pursue different objectives. For instance, the objectives pursued in the Tokyo and in the Uruguay Round negotiations on subsidies differ from the objectives pursued by the E.C. rules and the U.S. rules. The E.C. rules are based on the 'injury-only' theory, under which subsidies play a role in correcting market distortions and may thereby pursue policy objectives other than maximisation of economic efficiency. Under this theory, subsidies should only be prohibited and counteracted where they cause injury to the industry of another country. In contrast, the U.S. rules are based on the 'antidistortion' theory, under which subsidies are viewed as inconsistent with the law of comparative advantage, which maximises production and distribution efficiencies. These contrasting objectives are reflected in different regulatory approaches: under the 'injury-only' theory, subsidies are permitted unless their injurious effects are established; under the 'anti-distortion' theory, subsidies are prohibited unless it is established that they have no such effect. Notwithstanding these differences, both sides were able to reach a comprehensive agreement regulating subsidies and countervailing measures in the Uruguay Round.

D. Feasibility of a Commonly Accepted Formulation of Competition Law and Principles As states become less able effectively to control anticompetitive conduct in global markets, and as differences in their laws and principles have increasingly adverse effects on their interests, they will probably become more willing to depart from their own competition law and principles in order to reach a common formulation. Accordingly, the nuisance value of the absence of a common formulation could be an important factor in consensus-building. In assessing such nuisance value, one should also have regard to the competition stifling effects of trade-policy measures whose purported justification lies in the absence of a common formulation of competition law and principles. This is particularly the case for antidumping laws. Governments and domestic industries often justify the existence of such laws by noting that, in the absence of international competition rules, exporters can sell abroad at low prices while protecting high prices in their home markets by means of competition restrictions. It is noteworthy that the European Community was willing to renounce enforcement of its antidumping rules within the European Economic Area

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when a comprehensive set of competition rules and a mechanism for enforcement were established there. It is doubtful, however, whether certain states would be prepared to abandon their antidumping rules if and when a comprehensive set of international competition rules and a mechanism for their enforcement were established.

E. Differences in Competition Policy Objectives as an Obstacle to Achieving International Agreement The extent to which differences, in competition policy objectives impede the achievement of agreement on a commonly accepted formulation of law and principles with respect to a series of typical forms of conduct would depend on a number of factors, including: • Whether the formulation would apply generally or only to conduct likely to have an impact on international trade—the more likely object of the exercise would be conduct having an impact on international trade, and its more likely purpose would be to prevent anti-competitive conduct that restricts international trade. This would require devising some brightline tests to define when anticompetitive conduct is deemed to have an impact on international trade, and is therefore covered by international rules. • The extent to which such international competition rules or principles would be detailed—experience at both national and international level would caution against detailed substantive rules or principles. Establishing a detailed catalogue of competition restraints at the international level would probably be impossible, and futile in view of the dynamics of the market-place. The less detailed the substantive rules, the more necessary an international dispute settlement machinery would be. The acceptability of having international panels of arbitrators interpret a generally worded international antitrust code has been questioned.7 Interestingly, arguments which have been made against this are similar to arguments made in the Uruguay Round negotiations that led to the W.T.O. Dispute Settlement Understanding.8 One such argument was that review of complex decisions of national authorities would constitute 'second 7

E.g. Daniel Tarullo, Wrong Lessonfrom Boeing, Financial Times, 13 Aug. 1997, at 12. See Steven P. Croley & John H. Sackson, W.T.O. Dispute Panel Defence to National Government Decisions: The Misplaced Analogy to the U.S. Chevron Standardof-Review Doctrine, in International Trade Law and the G.A.T.T.-W.T.O. Dispute Settlement System 187, 189 (Ernst-Ulrich Petersmann (ed.) 1997). 8


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guessing' their conclusions. However, the review by dispute settlement bodies need not be de novo, and certain rules could be agreed upon denning the scope and the standard of review by such bodies. • whether such formulation would leave room for national policy concerns where it sets detailed rules—it may be possible to avoid dealing with the differences expressed in 'efficiency versus fairness' by seeking to distinguish between competition policy proper and fair-trade policy, and by focusing on competition policy proper, while continuing to live with possible inconsistencies between fair trade policy and competition policy. For the purpose of selecting the most appropriate area for common formulation, the following distinctions should be made: • A first distinction should be made between forms of conduct already subject to some international rules (although such rules regulate the conduct of governments) versus those for which there are no international rules. Several forms of conduct belong to the first category: bid-rigging could be addressed as an extension of the existing W.T.O. plurilateral Agreement on Government Procurement; boycotts by enterprises could be viewed as seeking the same result as import or export restrictions imposed by governments, as could abuse of dominance (including exclusive and other dealing that tends to foreclose), refusals to deal, high price strategies and discriminatory exclusions that have the same results as governmental restrictions on international trade. A similar situation exists with respect to standard setting by private industry where it would lead to the same sort of obstacles to international trade as those which the W.T.O. Agreement on Technical Barriers to Trade addresses. • A second distinction should be made between forms of conduct whose disparate regulation by states is most likely to result in either excessive costs and delays for multi-jurisdictional transactions, or even in allowing one state to block such transactions which have been cleared by other states, and other forms of conduct. International joint ventures, alliances and mergers are most likely to fall into the first category. The current uncertainty in a number of jurisdictions with respect to when joint ventures will be treated as mergers has a chilling effect. F. Differences in Competition Policy Objectives as an Obstacle to Implementation of an International Agreement If the scope of a common formulation were limited to the forms of conduct identified in Section E above, it could be successfully implemented, provided

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the parties also agreed to certain ancillary commitments. For instance, national competition authorities could be required to engage in mutual consultation for alliances, joint ventures and mergers that were deemed to have an impact on international trade. A 'one-stop-shop' principle could be established, which implies an agreement on allocation rules. In certain cases, it appears that competition authorities have cleared mergers and merger-like operations that should have been prohibited in order to further national industrial policy concerns. Accordingly, states might be reluctant to accept a 'one-stop-shop' principle, thereby relinquishing control over some of such transactions. This would be short-sighted, as this 'one-stop-shop' principle would apply precisely where there are competing claims of jurisdiction. Even if one state were to clear such a transaction, another state would be likely to prohibit it, with the consequence that the parties abandon it. Moreover, a carefully drafted 'one-stop-shop' rule would mean that a state which relinquished jurisdiction in some cases would acquire exclusive jurisdiction in others. G. Differences in States' Commitment t o Competition as an Obstacle to an Agreement Imposing Disciplines on Governments Regarding state aid, W.T.O. Members have accepted a number of disciplines by entering the Agreement on Subsidies and Countervailing Measures: some subsidies are prohibited (Art. 3), others are 'actionable', i.e. may not be used by W.T.O. Members when they cause adverse effects to the interests of other W.T.O. Members (Art. 5); still others are 'non-actionable' (Art. 8). Moreover, this Agreement imposes on W.T.O. Members the duty to notify 'any subsidy as denned in paragraph 1 of Art. 1, which is specific...' identifies the information that notifications must contain (Art. 25), and introduces surveillance by a W.T.O. Committee (Art. 26). Thus, a consensus on objectives is not always a prerequisite for a consensus on disciplines. Regarding the facilitation by a state of conduct by enterprises that runs a foul of consensus rules, the more similar such conduct is to measures prohibited by international trade rules if taken by the State, the more likely an agreement on disciplines applicable to states would be.

IV Ulrich Immenga Professor of Law, Director, Institute of International Economic Law, University of Gottingen Gottingen, Germany

Introduction Differences among nations with respect to the objectives of competition policy will probably eliminate the possibility of any quick and easy understanding among nations. Identification of categories of competition policies will aid evaluation of these differences and their impact on the potential for harmonisation or development of a multilateral competition code. These categories aid in identification of the importance and degree of obstacles which must be considered in order to proceed on an international path of competition policy. Four such categories are suggested here: • Differences in competition policy in a strict sense; • Differences resulting from political influences on competition policy; • Different forms of national enforcement of competition policy; • Differences resulting from viewing competition policy in specific national contexts with different cultures and traditions. This paper will discuss these categories of differences, and present arguments in support of internationalisation of competition policy. Thereafter, international competition policy objectives will be assessed in the perspective of divergences in national competition policies.

A. Differences in Competition Policy in a Strict Sense Three goals of competition policy should be distinguished. First is the decentralisation of economic power, which implies the protection of individual freedom and individual rights. Monopolies and cartels are departures from such individualism. In 1890, the Sherman Act was enacted in the U.S. to prohibit these kinds of restraints of competition. Second, and closely related to the first, is preservation of economic freedom of competitors, and not of competition. Coercion and discrimination are targets of this policy. Third, and economically

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the most important, is assurance of consumer welfare, including both allocative and productive efficiencies. These objectives are valid not only for a domestic competition regime, but also for an international competition regime. In principle, they are in accordance with the free trade goal of international trade policy. However, a crossborder competition policy should focus on market access to permit penetration of national economies. This focus is evident in the European Community's competition policy to aid in establishment of the internal market. National perceptions differ as the result of the diverging economic theories that underlie national policies. The most evident clash is that between the Chicago School's focus on efficiency as the prevailing goal versus the focus on non-economic values. These divergences still exist. For instance, the United States just revised its Merger Guidelines, placing greater emphasis on productive efficiency. Moreover, consumer protection, the market position of small and middle-sized firms or the interest of economic sectors (e.g. with respect to distribution) are considerations that a national policy might rely upon as the basis for modification of strict competitive policies. Moreover, economic perceptions of the role of competition in regulated industries (e.g. transport) determine when national laws shall provide exemptions. Views also differ with regard to the effects on competition of vertical restraints, which is also reflected in national competition policies. The main players in the competition field are specialists, particularly economists, pressure groups or ministries. In international discussions, differing views should be easier to overcome than in the domestic realm, since specific national interests are not at stake. An agreement on consensus wrongs, such as naked cartels, should be possible. Accordingly, it seems that some degree of common understanding can be achieved with regard to internationalisation of competition policies. However, in some areas, such as mergers, policy will be heavily influenced by criteria that are determined according to policy backgrounds.

B. Differences Resulting from Political Influences on Competition Policy National antitrust authorities are inclined to allow mergers that might create 'national champions', considered to be ahead in international competition and to keep workers in their jobs. Moreover, technical progress or the promotion of environmental interests may be a reason to permit collaboration between competing firms. Arguments related to health policy or energy supply may also


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have an impact on the assessment of restraints of competition. Such influences do not create conflicts within the field of competition policies; rather, they are exterior impacts. Policy-makers who are not competent in the field of competition policy thus exert their influence to temper or modify objectives of competition policy. Among the various nations, there are differences in the specific kinds of public interest considerations that are regarded to be of a higher importance than maintaining competition. In principle, such public policy concerns may influence all categories of restraints. For instance, horizontal agreements may improve rationalisation, or bring about progress in research and development. Export cartels may be used to foster national exports. Vertical restraints might be used to close national markets, which governments might view as a positive result. With regard to dominant firms, whether a misuse has occurred might be determined by applying non-competition criteria, or may be a vehicle for price control. The latter occurred in Germany in the 1970s, when the reach of misuse control was being debated. Merger policy is closely related to industrial policy, which is by its nature still national. It would be difficult to achieve agreement in these fields, where numerous differences exist. Any progress would require an understanding that competition policy is to be predominant over other policies, or that there will be limits to the impact that other policies can have on competition policy. However, the latter would not be possible, since the influence of public policy on competition policy reflects the importance to each nation of its competition policy as compared with its other public policies, both economic and non-economic. Therefore, agreement on the benefits of competition as an instrument to advance national and international welfare should be sought. This might seem Utopian, but such an evolution has occurred since 1958 in the European Community. At that time, no one could have imagined the high regard that the Member States would come to place on the benefits of competition. In the current timeframe, the Central and East European countries are following the E.C. model. Any expectation of such an understanding on a global level must be seen within the context of the arguments put forward in support of internationalisation of competition policies.

C. Different Forms of National Enforcement of Competition Policy The role of competition law enforcement is often neglected, but it is crucial. Even a perfect antitrust law would be a tiger without teeth if it were not applied effectively. Not surprisingly, national enforcement policies differ greatly, as

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they reflect the respect for competition within a given economic order. In general, enforcement largely corresponds with the respective substantive rules. However, the role of enforcement must be further evaluated. Substantive rules expressly provide for the discretion of the relevant authority, particularly in the field of competition law. More importantly, the authorities enjoy a large degree of interpretational discretion when applying the complex economic terms of antitrust rules. What is the relevant market, when is afirmdominating, what is the meaning of substantially lessening competition? Significantly, the European Court of First Instance refrains from resolving such issues when it reviews Commission decisions. The Court considers only whether the Commission applied relevant criteria, acted within a given margin of discretion, and its decision does not contain evident errors. Therefore, a predominant aspect of competition policy is who decides and enforces competition laws. Moreover, experience has shown that agencies may be influenced by governments to restrict their activities in specificfieldswhich are close to trade policy or other government policies. The Japanese Fair Trade Commission is said to be under such pressure. In principle, a nation's enforcement policy reflects its basic understanding of competition. Enforcement activities may be executed in many ways. At one end of the spectrum, competition policy may fall completely under the rule of politics; at the other end, competition policy may be seen as a social and economic value comparable to other principal values, such as a stable monetary system, and characterised as a rule of law. Enforcement policy depends less on rules than on institutions. Therefore, the institutional aspects of competition policy must be included in the discussion of the impact of differences on the internationalisation of competition policy. In practice, three types of institutions may be distinguished: • • •

governmental institutions; agencies or commissions; courts.

Enforcement of competition policy by governmental institutions implies that it will be more or less strictly under the control of politics. The enforcement structure in the Netherlands and Luxembourg comes close to this form. However, such control need not be comprehensive. For instance, with regard to merger policy, France reserves enforcement to ministries. Most countries, however, have set up agencies or commissions that are institutionally separated from government and administration. This is designed to ensure the independence of decisions and to bring together the necessary pro-


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fessional experience in law and economics. Great Britain and Germany have set up such independent institutions. Independent institutions were also established in other European countries that implemented their competition laws in accordance with E.C. rules. A key question with respect to such institutions is the degree of their independence, which depends on several factors, such as: who nominates the personnel; what is the duration of their appointment; whether they are appointed to a full time or a part time post; and what is the distribution of competences within the agency. The most objective procedure might be one that relies on courts to decide competition cases. This establishes the highest degree of separation from political influence. With such an enforcement structure, it is important that the competition laws are precise and clear, and that the competence to initiate court procedures is not excessively discretionary. For instance, the U.S. system relies heavily on courts to make decisions in competition cases. However, the role of the F.T.C. in this regard should not be underestimated. What are the consequences for internationalisation of competition policy which follow from these considerable divergences? For the moment, an autonomous international body which rules on the basis of the laws of a multilateral system should be excluded, since national enforcement policies cannot be disregarded. Therefore, a plurilateral system based on internationally agreed rules, which leaves the enforcement of those rules to national agencies and courts, would be an appropriate path to pursue. However, application of the rules by national authorities must be under international control. The Draft International Antitrust Code, developed by the so-called Munich Group, presents a proposal with detailed provisions for further discussion. Art. 19, Section 2, of the Draft Code offers an appropriate compromise between national and international interests in enforcement of international competition rules. It provides for the creation of an International Antitrust Authority, which can bring actions against national antitrust authorities in individual cases before national law courts whenever a national antitrust authority refuses to take appropriate measures against individual restraints of competition. The international authority would also have the right to sue private persons and undertakings before national courts, and to seek injunctions against restraint on competition, and the right to appeal within the national court system, even when the authority is not a party to the case, under the same conditions as parties.

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D. Differences Resulting from Viewing Competition Policy in Specific National Contexts with Different Cultures and Traditions Differences in national cultures and traditions are important, since laws generally cannot be explained and evaluated simply by their wording, but instead must be seen within their social context. Laws vary with culture, although the ideas of justice and legal solutions are often similar. Laws may differ according to liberal or corporatist traditions, religious ideas, or social values. Competition policy and laws vary with culture, in the same way as other laws do, and cannot be regarded simply as a mechanical instrument to achieve specific results, especially if non-economic objectives are an essential aspect of competition policy. A competition system corresponds not only with free markets, but also with individualism, freedom of expression, free flow of information and non-intervention by governments in the market process. This is a liberal view of state and man, driven by self-interest as the supreme motivating force. There are, however, differences in the degree to which liberalism functions as the guiding principle. A long-standing tradition of state intervention in the economy generally implies that regulatory, interventionist models will be presented, especially with respect to systems that view individuals as only one aspect of a greater web of society. Some societies are based on a common understanding and tradition to adapt to life in groups. Behaviour is determined by social restraint and individual modesty, and laws and their enforcement reflect this culture. Other societies are characterised by an increasing corporatist trend. The power of associations, unions or other pressure groups has a tendency to create pressure to modify competition laws to meet their needs. Insofar as competition is closely related to culture and tradition, the possibility to harmonise competition policies is doubtful, as the roots of divergences might be deep. Conclusion The categories of divergences discussed above were intended to facilitate understanding of how to overcome national divergences in order to internationalise competition policies. In addition, a certain relation between the categories has emerged. Policies which rely on competition as an instrument to achieve specific goals, such as efficiency, consumer protection, or protection of small and medium-sized firms, will come close to systems which subordinate competition to other public-policy objectives, whose enforcement policy will


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generally not be strictly competition-oriented. Whether competition-oriented regimes are less influenced by social values based on liberalism and a restricted role of government in the economy remains as a question for further study. The categories may shed light on what are the obstacles to an international antitrust code. The variety of national competition regimes must be assessed in light of the objectives of international competition policies. Two points should be considered. First, arguments for international policies must be considered in the context of the national divergences that exist. However, consideration of an international code does not require an initial analysis of national differences. A general understanding may be achieved concerning the need for internationalisation of competition policies. Such arguments go beyond the virtues of maintaining competition. On the basis of such understanding, discussion of the substance of a code will be possible. Only at this point do national divergences become relevant. Secondly, areas of convergence between national and international policies should be identified which would allow conflicts to be overcome more easily. As to the first point, a major argument favouring internationalisation follows from the success of the Uruguay Round. State barriers to cross-border trade were set aside to a considerable degree. This process will continue, as confirmed by the recent W.T.O. agreement to liberalise the telecommunications sector. This policy would be undermined by private firms, which would like to re-establish these barriers by mutual agreements or through the use of economic power. Internationalisation, therefore, seems inevitable. This argument, by its nature, goes beyond national divergences. Furthermore, the linkage of trade and competition policy, as for instance in thefieldof market access and anti-dumping, is a key issue in the present discussion to establish an international regime for maintaining competition. Another point of discussion relates to the need to provide a 'level playing field' for players in international markets. These issues are of common interest to nations, which should encourage a process to develop an international code and to overcome existing national divergences. The second category, the areas of conflict or concurrence between national and international policies, should be the subject of further discussion. For instance, policies that favour efficiency and show little concern for economic power will generally accept the idea of providing firms with a 'level playing field' through an international regime. Such converging interests might be found in other fields as well. Discussion of the categories of the divergences of national policies supports the need for further research in this field.

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References DONALD BLACK, The Behaviour of Law (1976), 63.

EUROPEAN COMMISSION, Competition Policy in the New Trade Order: Strengthening International Cooperation and Rules, Report of the Group of Experts (1995). WOLFGANG FIKENTSCHER, WOLFGANG and ULRICH IMMENGA (eds.) Draft International

Antitrust Code (1995). ELEANOR FOX and A. ORDOVER JANUSZ, 'The Harmonisation of Competition and Trade

Law—The Case for Modest Linkages of Law and Limits to Parochial State Action', 19 World Competition 5 (1995). HELMUT GRONER and ANDREAS KNORR, Internationalisierung der Wettbewerbpolitik,

Festschrift fur Ernst-Joachim Mestmacker (1996). JOHN O. HALEY, 'Competition and Trade Policy: Antitrust Enforcement: Do Differences Matter!', in John O. Haley and Iyori (eds.), Antitrust: A New International Trade Remedy? (1995), 303. FRIEDRICH LUDWIG HAUSMANN, Staatliche Kartellrechtsdurchsetzung im Internationalen

Vergleich, Dissertation (1997). ULRICH IMMENGA, Rechtsregeln fur eine internationale Wettbewerbsordnung, Festschrift fur Ernst-Joachim Mestmacker (1996), 593. ALEXIS JACQUEMIN, Antitrust Economics—New Challenges for Competition Policy (1994), 27. ERNST-ULRICH PETERSMANN, 'Proposals for Negotiating International Competition Rules in the G.A. T. T.-W. TO. World Trade and Legal System', AuBenwirtschaft, Heft II/III (1994), 231. SONYA

MARGARET

WILLIMSKY,

Competition L. Rev. 54.

'The Concept(s)

of Competition',

[1997] Eur.

R. Shyam Khemani Private Sector Development Dept. The World Bank Washington, D.C., usA.

Rainer Schone1 Neue Ziircher Zeitung Zurich, Switzerland

A. Introduction The World Trade Organisation (W.T.O.) and its predecessor, the General Agreement on Tariffs and Trade (G. A.T.T.), traditionally have focused on governmental distortions of international competition that arise from restrictions on imports, such as tariffs, quotas, discriminatory practices, antidumping and state subsidies. The objective of the G.A.T.T./W.T.O. is to enhance global economic welfare through a predictable and liberal international trade order, which allows specialisation and fosters trade and investmentflowsacross national borders according to the comparative advantage of nations. The various rounds of multilateral negotiations during the postwar period have gradually reduced barriers to international transactions, thus enhancing market access and preventing unnecessary output restrictions to the detriment of consumers. With the resultant increased transactions between firms located in different countries, competition among firms involved in international commerce has increased. However, with growing competitive pressures, firms may also have increased incentives to engage in practices that restrict competition, particularly since it is more difficult to obtain protection through government actions. Given the W.T.O.'s general objective to facilitate removal of restrictions to international market access, both anticompetitive measures adopted by governments and by private agents logically fall in its mandate. Following the constant reduction of government imposed barriers in international trade, 1

The authors are at The World Bank and Neue Ziircher Zeitung respectively. The views expressed in this paper are their own and do not necessarily reflect those of their institutional affiliation. Valuable comments and suggestions on a earlier draft were provided by Bernard Hoekman, and by the participants at this Workshop.

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international cooperation must now be extended to antitrust policy to address trade barriers erected by private restrictive business practices. The G.A.T.T.AV.T.O. currently does not contain either specific rules or general principles applicable to anticompetitive behaviour by private firms. Given the W.T.O.'s mandate to improve market access in international trade, there is a case to extend its discipline to restrictive business practices, if remedies currently available are insufficient to secure access to national markets. In some cases, national antitrust laws might well be able to deal with barriers to entry which prevent market access and adversely affect international trade. However, in other cases, no relief or insufficient relief may be available under current law(s). As a result, if existing national competition rules prove insufficient to deal with restrictions of market access by private firms, a case arises for developing new international rules within the W.T.O. regarding anticompetitive conduct by private agents. The aim of this paper is to develop a proposal regarding the manner in which the W.T.O. could address restrictive business practices in international trade.2 Recently, a number of proposals have been put forward regarding the appropriate terms of reference, governing principles, mandate and scope of the work which the W.T.O. can/should embark upon in this area.3 The approach adopted in this paper is somewhat different, in that it is case-oriented. We identify cases where anticompetitive behaviour by private firms restricts market access in international commerce, thus resulting in a welfare-reducing restraint of output. We subsequently discuss current remedies and their inadequacy in order to suggest possible improvement at the national level and within the W.T.O. We believe there is a need to address international restrictive business practices only where market access is restricted and there is insufficient relief available through existing legal-institutional arrangements. Market access is a basic tenet that both trade and competition policy experts would embrace. To trade economists, enhanced market access further improves theflowof trade and investment. To competition policy economists, enhanced market access increases actual and/or potential competition and improves consumer welfare. Securing and/or enhancing market access, there2

At the conclusion of the Uruguay Round in Marrakesh in 1994, several countries expressed their desire that the future work agenda of the W.T.O. should include antitrust issues. As discussed below, the Singapore meetings of the W.T.O. held in Dec. 1996 resolved that a working group should be established to study the interface between trade and competition. 3 A useful summary prepared by the Global Forum on Competition and Trade Policy can be found in Current Proposals for an International Code, 24 Int'l Bus. Law 448 (1996).


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fore, represents an important point of confluence between trade and competition policies. Measures which generally foster 'global contestability of markets' will be consistent with the objectives of both trade and competition policies.4 Our main concern, therefore, relates to making trade liberalisation and antitrust remedies complementary, where anticompetitive practices stem from private restrictions of market access. Trade policy instruments, such as tariffs, safeguards, antidumping, countervailing duties, and voluntary export restraints, erect barriers that do not foster competition by restricting market access. Trade-policy instruments usually protect domestic competitors from foreign competition, whereas antitrust policy protects competition. Consequently, there is a need to augment trade policy instruments with antitrust policy where private firm behaviour restricts market access—a goal that is consistent with the mandate of the W.T.O. of liberalising international trade and fostering open markets. As a result, we suggest that a distinction should be made between restrictions to market access by governments on the one hand, and by private firms on the other hand. Market access restrictions should be addressed by both the W.T.O. and the countries affected. Restrictions caused by governmental policies are trade policy issues, and require a solution between governments at the international level. This clearly falls under the present mandate of the W.T.O. By contrast, private restrictions pertain to interfirm rivalry, and should (at least first) be addressed by national antitrust laws. It is not desirable that governments represent the competitive interests of private firms in disputes on anticompetitive conduct between private firms. If a government gets involved in enhancing the competitive opportunities of particular domesticfirmsvis-a-vis foreign rivals, this is an act of strategic trade policy, which may distort international competition. Therefore, direct government involvement should be limited to trade relations issues, where the conduct of foreign governments creates barriers to market access. Governments should be concerned with establishing a generally supportive environment for firms to compete on their respective merits, which includes providing the means for private firms to resolve conflicts as to inter-firm rivalry under antitrust laws. In this connection, we believe that all countries, whether industrialised, developing or in transition from communism or central planning to a market oriented economic system, must have effective competition laws and policy in place. 4

See Robert Z. Lawrence, Towards Globally Contestable Markets, paper prepared for the O.E.C.D. trade committee (Paris, February 1995). Lawrence argues that it is not necessary to harmonise policies in all areas such as competition policy, government regulation, technology policy, government procurement, corporate governance, standard setting and tax policies. National diversity should be respected but transparent, minimum rules and operational procedures aimed at market access are desirable.

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The issue of anticompetitive practices in international commerce is not new.5 There have been various efforts by the international community to subject antitrust problems to global rules,6 but none has proven to be an overall success. The first attempt to make restrictive business practices subject to international discipline was the 1948 Havana Charter, which aimed to establish the International Trade Organisation (I.T.O.).7 The Havana Charter included, inter alia, (1) an obligation for members to take appropriate measures against restrictive business practices, i. e. to adopt national antitrust laws; (2) a list of prohibited restrictive business practices, such as price-fixing, exclusionary and discriminatory practices; and (3) a non-binding international dispute settlement system applicable to antitrust enforcement against the prohibited R.B.P.s, including extensive investigative powers of the I.T.O. to demand information.8 The Havana Charter was, however, not approved by national governments. 5

Eleanor M. Fox, Competition Law and the Agenda for the W. T. O.: Forging the Links of Competition and Trade, 4 Pac. Rim & Pol. J. 1, 4 (1995). Fox states that 'antitrust has periodically surfaced on the world agenda. In the 1940s, the concern was driven by the horror of world cartels that were used by fascist governments to reinforce their power. In the 1960s and 1970s, the concern was triggered by the growth of multinational corporations and their perceived social, political and economic power to shut off opportunity for outsiders and to repress less developed nations. The 1980s witnessed an unleashing of world competition along with freer trade, dissipating much of the market power that large corporations had accumulated in the 1960s. The years 1989 and 1990 saw attempts to construct free enterprise economies from the ashes of communism. Freer competition and trade continues to break down economic and political power and to create incentives for new forms of nationalism and protectionism, on the one hand, and for new avenues for progressive, integral world transactions, on the other hand.' We could add that in the 1990s, one of the most obvious concerns is about perceived anticompetitive behaviour by import-competing companies, especially in Japan, which restricts market access to foreign exporters resulting in complaints on 'unfair' trade conditions. 6 See, e.g., John H. Jackson, Alternative Approaches for Implementing Competition Rules in International Economic Relations, 49 AuBenwirtschaft 177, 191-3 (1994) hereinafter 'Jackson 1994'; John H. Jackson, Statement on Competition and Trade Policy before the US Senate Committee on the Judiciary, 26 J. World Trade 111 (1992) (hereinafter 'Jackson 1992'); Ernst-Ulrich Petersmann, Proposals for Negotiating International Competition Rules in the G.A.T.T.-W.T.O. World Trade and Legal System, 49 AuCenwirtschaft 231, 238-9 (1994) (hereinafter 'Petersmann 1994c'); ErnstUlrich Petersmann, Competition Policy Aspects of the Uruguay Round (1994) (hereinafter 'Petersmann 1994b') 3-4; Fox, supra note 5. 7 United Nations Conference on Trade and Employment, Havana Charter for an International Trade Organization, Final Act and Related Documents (1948). 8 Id., Chapter V; Ernst-Ulrich Petersmann, Competition Elements in International Instruments (1994) (hereinafter 'Petersmann 1994a'); Petersmann 1994c, supra note 6, at 238-9; Petersmann 1994b, supra note 6, at 3; Jackson 1994, supra note 6, at 191-3; Jackson 1992, supra note 6, at 113-14; Fox, supra note 5.


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After the failure of the draft I.T.O., subsequent discussions and attempts were held both within and outside the newly created General Agreement on Trade and Tariffs (G.A.T.T.), but in the end, these did not lead to the inclusion of restrictive business practices within the G.A.T.T. The most important achievements in addressing restrictive business practices in international trade were the 1976 O.E.C.D. Guidelines for Multinational Enterprises, several other O.E.C.D. guidelines on cooperation in antitrust matters, and the 1980 U.N.C.T.A.D. Set of Principles on Restrictive Business Practices. All of these codes, however, were non-binding and virtually non-enforceable. The G.A.T.T. Uruguay Round did not directly address anticompetitive business practices by private firms that restrict international trade.9 Nevertheless, some Uruguay Round agreements contain provisions regarding private trade restrictions. The Agreement on Trade-Related Intellectual Property Rights (T.R.I.P.s) recognises that intellectual property rights (I.P.R.s) may be abused in anticompetitive ways, but leaves members a choice whether to adopt national laws to control anticompetitive abuses.10 The Agreement on TradeRelated Investment Measures (T.R.I.M.s) provides that a review within five years shall determine 'whether [the agreement] should be complemented with provisions on investment policy and competition policy'.11 The General Agreement on Trade in Services (G.A.T.S.) contains a requirement that monopoly service suppliers that have been granted exclusive rights by their government do not abuse their monopoly position outside the scope of their monopoly privilege, but makes no provisions regarding anticompetitive

9

Some developing countries tried to bring restrictive business practices by multinational firms on the agenda of the Uruguay Round multilateral trade negotiations, but no consensus could be reached on the inclusion of those issues. At the opening of the G.A.T.T. Uruguay Round international trade negotiations, the Chairman of the 1986 Ministerial Conference at Punta del Este noted that the issue of restrictive business practices has been raised by some countries, but that no consensus on including those issues was reached. G.A.T.T. Activities 1986; Petersmann 1994a, supra note 8, at 9; Richard Blackhurst, Competition Policies: National Versus Multilateral Jurisdiction, 49 AuBenwirtschaft 223, 227 (1994). 10 Agreement on Trade-Related Aspects of Intellectual Property Rights, 15 Apr. 1994, Arts. 8:2 and 39^40; Petersmann 1994c, supra note 6, at 247-56; Petersmann 1994b, supra note 6, at 8-14. 11 Agreement on Trade-Related Aspects of Investment Measures, 15 Apr. 1994, Art. 9; Patrick Low and Arvind Subramanian, T.R.I.M.s in the Uruguay Round: An Unfinished Business? (1995), 1-10 (unpublished memeo, on file at the World Bank, International Economics Department); Petersmann 1994c, supra note 6, at 247-56; Petersmann 1994b, supra note 6, at 8-14.

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behaviour by other private service suppliers, whose occurrence the G.A.T.S. merely recognises.12 Recently, the issue of the interface between trade and competition policy has received renewed impetus from the W.T.O. At the conclusion, of the Singapore Ministerial Meetings (13 December 1996), a resolution was passed to 'establish a working group to study issues raised by members relating to the interaction between trade and competition policy, including anti-competitive practices, in order to identify any areas that may merit further consideration in the W.T.O. framework'.13 However, beyond these global approaches, there are already several regional trade agreements that have been concluded between U.N.C.T.A.D. and O.E.C.D. member countries, which include antitrust rules and/or provisions for the coordination and application of national antitrust policies. The E.U., the A.N.D.E.A.N. Pact countries, Australia-New Zealand Closer Economic Relations Trade Agreement (A.N.Z.C.E.R.T.A.), and the North American Free Trade Agreement (N.A.F.T.A.) are among such examples. In addition, there are several bilateral agreements, such as the Canada/U.S. agreement, and the E.C./U.S. agreement. While we do not review these regional or bilateral agreements in detail, we will mention these models during the ensuing discussion wherever they are relevant.14 These models contain useful features that should be considered within the W.T.O. The organisation of this paper is as follows. Section B will argue that international trade liberalisation in and of itself is not sufficient to discipline anticompetitive behaviour by private firms, and therefore cannot replace effective antitrust enforcement. As we are focusing on restrictions of market access 12

General Agreement on Trade in Services, Part II, Arts. VIII and IX, in Rusults of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts (Geneva, 1994). Art. VIII and IX; Petersmann 1994c, supra note 6, at 247-56; Petersmann, 1994b, supra note 6, at 8-14. Moreover, the Uruguay Round Agreement on Preshipment Inspection provides rules for private preshipment inspection firms; the Agreement on Technical Barriers to Trade includes provisions to ensure that private bodies do not adopt or apply technical regulations and standards that are more trade-restrictive than necessary. Petersmann 1994c, supra note 6, at 247-56; Petersmann, 1994b, supra note 6, at 8-14. 13 Singapore Ministerial Declaration WT/MIN(96)/DEC. WTO/(1996). Para. 20. 14 See, e.g., Petersmann 1994a, supra note 8; Bernard M. Hoekman and Petros C. Mavroidis, Competition, Competition Policy and the Gatt (1994) (Discussion Paper, Centre for European Policy Studies, London); Richard Harmsen and Michael Leidy, Regional Trading Arrangements, in R. Shyam Khemani (ed.) International Trade Policies: The Uruguay Round and Beyond (1994) (Background Papers, vol. II, I.M.F., Washington, D.C.).


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through anticompetitive conduct with impact on international trade, the three main sections that follow deal with the three areas where such restrictions of market access occur, namely (1) market access restriction by import-competing firms in their home market that exclude foreign rivals (Section C), (2) restriction of market access by exporters in the importing country (Section D), and global non-market-specific restriction of market access due to spillovers between national antitrust policies (Section E). In addition, in all three areas, governments may tolerate and promote market access restrictions by domestic firms to enhance their competitive position vis-a-vis foreign companies for strategic trade policy reasons, which we will subsequently discuss as 'strategic antitrust policy' (Section F). In a final section, we will address the argument that differences in national antitrust approaches create an uneven playing field for competition between companies located in different jurisdictions (Section G). Competition policy may include a variety of policies that directly affect the behaviour of enterprises and the structure of industry. An appropriate competition policy, as we define it, includes both (1) policies that enhance competition in local and national markets, such as trade liberalisation, relaxation of foreign investment and ownership requirements, and economic deregulation; and (2) competition law, designed to prevent anticompetitive business practices by firms (antitrust policy) and unnecessary government intervention in the marketplace. In this study, we focus on antitrust policy, which includes the regulation of cartel agreements, monopolisation, abuses of a dominant position and mergers.

B. Why Trade Liberalisation Cannot Replace Antitrust Enforcement15 In many economies where high levels of industrial concentration exist, anticompetitive business practices are less feasible if domestic markets are exposed to international competition. In the absence of barriers to trade, domestic monopolists or oligopolists lose their ability to exercise market power irrespective of actual imports' share of the domestic market, in view of the threat of potential competition.16 15 This section is in part derived from R. Shyam Khemani and Mark Dutz, 'The Instruments of Competition Policy and Their Relevance for Economic Development', in Frischtak (ed.), Regulatory Policies and Reform: A Comparative Perspective, draft on file at the World Bank (December 1995). 16 See H.C. Eastman and S. Stykolt, A Model for the Study of Protected Oligopolies, 70 Econ. J. 336 (1960); Jagdish Bhagwati, On the Equivalence of Tariffs and Quotas, in R. Baldwin (ed.) Trade, Growth and the Balance of Payments (1965).

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The view that imports limit market power is supported by studies that find differing degrees of convergence between domestic and international prices in the face of trade liberalisation, and a negative relationship between price and cost or profit margins and imports.17 Several recent empirical studies, however, suggest that effects of trade liberalisation may be less significant than previously thought, raising questions about the true effect of trade liberalisation on competition.18 The procompetitive effects of tariff reductions may be diluted if the import supply is not very elastic. This occurs when increased demand for imports can be met only at significantly higher prices, or when imports are comparatively insensitive to changes in domestic prices. It is possible to construct various economic models where imports meet only a small part of domestic demand and are provided by a fringe of firms, which domestic oligopolists have already taken into account in their pricing strategies.19 In addition, in an environment of floating exchange rates, if domestic firms fail to rationalise high cost operations and improve productivity, the domestic currency is likely to depreciate, offering new protection from import competition. In Mexico, for example, recent currency devaluations have more than offset the tariff reductions negotiated under N.A.F.T.A. Furthermore, trade policy consists of more than tariff policy. Quotas, voluntary export restraints, antidumping and countervailing duties are among the instruments that governments can wield to limit import competition. While a true 'free trade' policy would require that all such measures are removed, in reality this never happens. Indeed, as import tariffs are liberalised, the pressures to invoke other measures only increase. Over the past few years, as more countries have liberalised trade policies, a simultaneous movement has occurred to put in place systems of protection against dumping and subsidies. By the end of the 1980s, at least 50 countries had become new signatories or observers of the G.A.T.T. antidumping code, and in the period from 1980 until

17

See, e.g., Frederich Scherer and D. Ross, Industrial Market Structure and Economic Performance 424-426 (1990). 18 See S. Globerman, Trade Liberalization and Competitive Behavior: A Note Assessing the Evidence and the Public Policy Implications, 9 J. Pol. Analysis & Mgmt. 80 (1990); E.E. Learner, Cross-Section Estimates of the Effects of Trade Barriers, in R.C. Feenstra (ed.), Empirical Methods for International Trade (1988); A. Fishlow, The Latin American State, 4 J. Econ. Perspectives 61 (1990). 19 See M. Perry and R. Porter, Oligopoly and the Incentive for Horizontal Merger, 75 Am. Econ. Rev. 219 (1985); T.W. Ross, Movements Towards Free Trade and Domestic Market Performance with Imperfect Competition, 21 Can. J. Econ. 507 (1988).


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1992, more than 2,000 antidumping and countervailing duty actions were taken.20 Even if trade barriers such as antidumping are eliminated, other factors can impede the procompetitive effect of trade liberalisation. First, an increasing share of economic activity in developing as well as industrial countries relates to non-tradable goods and services. These include high weight-to-value products with high transport costs (such as cement and steel), perishables (such as food), and legal, financial, and other services.21 Secondly, in the absence of effective competition, domestic firms can raise prices up to the international price plus transport costs and still keep out imports. Thirdly, differences in income, tastes and culture and in product safety, consumer protection and technical standards may also separate markets. Fourthly, inter-firm contractual arrangements and vertical integration may prevent the development of new sources of inputs or new distribution channels. This problem has been cited by many American firms as limiting their ability to gain access to markets in Japan, and forms part of the 'framework' and 'structural impediments initiatives' discussions between the U.S. and Japanese governments. Fifthly, international cartels may divide up markets through price-fixing or geographic 20

See Antidumping: How it Works and W h o Gets Hurt (J. Michael Finger ed., 1993); Patrick Low and Arvind Subramanian, Trade Protection in Agriculture: A Special Casel (1993) (mimeo on file with the World Bank, International Economics Department, Washington, D.C.); Bernard M . Hoekman and Petros C. Mavroidis, Dumping, Antidumping, and Antitrust, 30 J. World Trade 27 (1996). It is often suggested that enacting an antidumping law does not generally serve the best interests of a country. Such a law can thwart the benefits of trade liberalisation; it tends to be used to protect (inefficient) competitors rather than competition. Consumers pay higher prices while having reduced product choice and quality. Provisions in competition laws dealing with predation and price discrimination offer a reasonable substitute to remedy dumping practices by firms. Two main motivations appear to be responsible for the trend toward the use of antidumping. First, as governments lower tariffs and nontariff barriers, they come under increasing pressure from adversely affected import-competing domestic producers. Antidumping duties are a convenient substitute mechanism for providing protection to firms that claim injury. Secondly, with increased trade liberalisation, many countries joined the G.A.T.T. for the first time in the 1980s. Following the example of such economies as the U.S. and the E.U., these countries adopted the full arsenal of provisions permitted by the Antidumping Code to ensure that they respond to similar protective trade practices by other governments and that domestic firms have a set of protective remedies similar to those of their foreign counterparts. 21 T h e G.A.T.s would help in this regard by dismantling 'within border' regulatory barriers. Almost a quarter of world trade is service-related. See H . G . B r o a d m a n , G.A. T. T: The Uruguay Round Accord on International Trade and Investment Services, 17 World Econ. 281(1994).

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market-sharing agreements. Importers and foreign firms have, in fact, often been charged with precisely this offence in several jurisdictions. In concentrated industries such as pharmaceuticals, petro-chemicals, and telecommunications equipment, where the total number of firms worldwide is small, such arrangements are particularly common. Some empirical examples/cases serve to illustrate these points.22 In Colombia, the leading brewer allegedly has geographic market sharing agreements with existing and potential competitors in neighbouring countries. It also owns and controls the sole bottle manufacturing plant, and has exclusive dealing clauses with the great majority of distributors. Recently, the same dominant Colombian brewer acquired all the breweries in Ecuador. A leading U.S. biscuit manufacturer found it difficult to enter the Colombian market due to exclusive distribution clauses between the dominant domestic manufacturer and major retailers. It has instead entered into licensing and joint marketing arrangements with the dominant firm because of the barriers these restrictive distribution agreements posed to both importation and local manufacture. In many product areas, such as fertilisers, pharmaceuticals and plate glass, domestic and international price differentials persist despite trade liberalisation, due to manufacturing and marketing linkages between domestic and foreign firms. In Ecuador, government enterprises and private sector counterparts are alleged to engage in tacit price and market sharing agreements in cement and steel. In the case of many other industrial products, the government continues to regulate the market through price controls. The industry associations for domestic oil and pharmaceuticals have successfully obtained a government mandate to limit entry, coordinate and increase prices. While importation of automobiles has been liberalised, distribution remains the exclusive area of government-owned or appointed dealers. In the European Union, complaints of discriminatory practices have covered products such as computers, aircraft, high-speed trains, power generation and telecommunication equipment. In Indonesia, importation, production and/or domestic marketing of products as diverse as automobiles, oil and gas, rattan, steel, citrus fruit and wheat remain with state designated monopolies. In Japan, antitrust complaints have related to products such as automobiles and parts, film, soda ash, plate glass, and cellular telephones. For these and other such reasons, liberalised trade cannot effectively substitute for competition (antitrust) law. The two policy areas should be viewed as complementary. Chapter 15 of N.A.F.T.A. explicitly recognised the view that 22

Based on author's advisory work in several of these countries.


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competition law can foster trade and investment. To enhance business and investor confidence, Mexico decided to modernise its competition law prior to N.A.F.T.A. In a world where multinational companies have grown accustomed to operating under competition laws, the absence of such a law or a poorly designed one in a country can act as a barrier to trade and foreign investment. A pending matter in Brazil is illustrative of this point. Colgate Palmolive recently acquired a 'dominant' Brazilian health care products manufacturer, Kolynos. Through exclusive dealing and vertical arrangements, Kolynos is reputed to control 80 percent of the toothpaste market. Another U.S. multinational enterprise, Proctor and Gamble (P&G), has argued that market penetration is difficult due to anticompetitive business practices, including various interfirm contractual arrangements in a highly concentrated wholesale-retail distribution network, and weak competition law enforcement by Brazilian competition authorities. It is reconsidering its medium- to longterm investments, including closing its subsidiary operations in Brazil. While the current dispute between Kodak and Fuji films in Japan also relates to alleged non-enforcement of competition law and differential treatment of U.S. v. Japanese firms, the Brazilian case illustrates how two firms of the same nationality may pre-empt each other in international markets. Of course, the merits of each case, as well as the nature of the competitive harm, have yet to be established. As local enterprises begin to operate more in international markets, a national law that converges or is in harmony with the national laws of competitors makes it easier for them to adapt. It also spares foreign firms any additional hurdles in their business activities.23 In this connection, a number of bilateral and multilateral approaches to the enforcement of competition law have been forged by different countries. Canada and the United States have signed a memorandum of understanding (M.O.U.) and a mutual legal assistance treaty (M.L.A.T.). M.O.U.s have been drafted, though not yet finalised, between Canada and the European Union and the United States and the European Union. Twenty-four member nations are signatories to the 23

E.g., the merger between Gillette and Wilkinson, two multinational razor blade manufacturers, led to a simultaneous review of the transaction by authorities in 14 jurisdictions. The focus and nature of the reviews varied extensively across the 14 jurisdictions. While in the end the deal was allowed to proceed with minor alterations prompted by different authorities, the delays, procedures, and compliance costs the firms experienced were far from trivial. See Richard Whish and Diane Wood, O.E.C.D. Merger Process Convergence Project, D.A.F.F.E./C.L.P./W.P.3(93)6 (1993). The Whish/Wood study reviews 8 other case examples involving such firms as Westinghouse Electric-A.B.B., Matsushita-M.C.A., Renault-Volvo, and Fiat-Ford.

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O.E.C.D. Council Recommendations Concerning Cooperation on Restrictive Business practices (1986). The U.N.C.T.A.D. Set of Multilateral^ Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices (1980) is another multilateral agreement. These arrangements are designed to facilitate cooperation and information sharing. While these measures do not involve complete harmonisation or the development of common principles for administering and enforcing competition law, they contribute towards reducing business transaction costs that may arise from frictions between different legal/economic systems. Other measures may also be worth exploring. For example, in most jurisdictions, competition law enforcement rests within the discretionary authority of an appointed body. Permitting private actions and granting standing to foreign firms affected by anticompetitive arrangements may provide channels for relief.24 C. Restriction of Market Access by Import-Competing Firms Following our basic distinction between trade policy issues and inter-firm rivalry issues, this section will discuss how restrictions of market access by import-competing firms should be dealt with, and what should be done at the international level to bring sufficient relief where currently no adequate remedy is available. The restrictions we will examine in this section, which have the effect of impeding market access of foreign exporters, are mainly due to vertical restraints, such as vertical integration, exclusive dealing, exclusive distributorship and resale price maintenance. Restriction of access to a foreign market may be the result of different factors, including governmental barriers to trade and private exclusion of foreign competitors, as well as a mix of private and governmental action. An adequate solution to problems pertaining to such barriers to trade depends on identifying the sources of restricted market access. This requires examining whether limited market access is due to anticompetitive behaviour of private firms on the one hand, or governmental measures which support or tolerate such restrictions, on the other hand. 24

In the Kodak-Fuji dispute, it has been pointed out that although the Japanese Fair Trade Act allows private actions, the permission of the Japanese Fair Trade Commission (J.F.T.C.) is needed before such an action can be initiated. In the 50 years since this provision was adopted, only seven such cases have been permitted, none of which was successful. It has been argued that the J.F.T.C, in effect, has the complete power to extinguish private rights of action. In the E.U., there is no provision for private actions. In other jurisdictions, the nature and scope of private actions varies from non-existent to widely (perhaps overly) used, such as in the U.S.


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Where access to a foreign market is restricted, we suggest enforcement of national antitrust law in the importing country, where market access barriers are due to private firm conduct (interfirm rivalry issue); and an international solution among governments, where market access barriers are due to government conduct (trade policy issue). Where it is alleged that private anticompetitive behaviour by importcompeting firms impedes market access to exporting firms, the first step must be tofilean antitrust complaint or law suit in the importing country. However, several circumstances may obstruct the pursuit of this avenue. We can identify five factors that limit the possibility of antitrust relief in the importing country: (1) legal standing of foreign companies; (2) legal standing of private parties to file an antitrust case; (3) discriminatory non-enforcement of antitrust law; (4) discriminatory enforcement of antitrust law; and (5) differences in substantive antitrust standards. Rather than generating trade disputes between governments, we suggest opening the way for effective antitrust enforcement in the importing country. Exporters that are denied market access to foreign markets must have the means of obtaining an antitrust remedy against restrictive business practices in the importing country. The assistance of the exporters' home government in a particular case will not always be necessary. Where possible, focus must be on the creation of ways and instruments that enable competitors to resolve disputes pertaining to interfirm rivalry under antitrust laws. An international agreement within the W.T.O. should address impediments to effective antitrust enforcement in the importing country, thus avoiding future governmental intervention in specific cases. The sections that follow will discuss the types of problems that may arise with antitrust enforcement in the importing country, and suggest how international rules could be established to remove these impediments.

1. Legal Standing of Foreign Companies Exporters may not have legal standing in the importing country. This prevents them fromfilingan antitrust complaint with foreign antitrust agencies or a lawsuit before an independent court. In such cases, no antitrust remedy will be available for foreign exporters in the importing country. At times, the lack of legal standing may result because an exporter does not have a subsidiary in the importing country. In such a case, establishing a subsidiary in the importing country could grant the exporting company legal standing and access to antitrust remedies. However, the possibility of setting

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up a subsidiary depends on domestic regulations, such as those pertaining to registration and foreign direct investment, which may obstruct the pursuit of this avenue. As a result, there may be a case for granting the same rights of legal standing as domestic competitors have to foreign firms that are affected by anticompetitive behaviour of import-competing industries, even without domestic subsidiaries.25 An international agreement on legal standing of foreign firms would give exporters equal access to domestic antitrust remedies in the importing country.

2. Legal Standing of Private Firms to File an Antitrust Case A further reason that an exporter may lack legal standing in an importing country is the absence of right of any private party to request initiation of an antitrust investigation. Some national antitrust enforcement procedures rely completely on administrative enforcement, not containing any rights for private parties, either domestic or foreign, to demand an investigation and enforcement action. This is the case with Japan, for example, where private parties have neither the right to compel the Japanese Fair Trade Commission (J.F.T.C.) to initiate an investigation, nor tofilea private lawsuit alleging anticompetitive behaviour before an independent court. Rights of legal standing of private parties under the Japanese Antimonopoly Act (A.M.A.) are limited to (1) reporting to the J.F.T.C. about anticompetitive practices, with no right to compel the agency to initiate an investigation, and (2) suing another party for damages caused by anticompetitive behaviour, once an administrative decision has been rendered determining that the practices are in violation of antitrust law.26 There are no remedies available to exporters if antitrust authorities have discretion as to whether to initiate an antitrust investigation, and they decide not to prosecute a case. Private parties should have the possibility both to demand an administrative investigation and tofilea private lawsuit. The latter is especially important for foreign firms. Exporters might sometimes be hesitant to file a complaint with administrative antitrust authorities, because they fear that those agencies are not independent enough to render impartial judgement between domestic and 25 Ideally, hurdles to the establishment of subsidiaries should be reduced, including excessive registration requirements as well as foreign direct investment controls. 26 A n t i m o n o p o l y a n d Fair trade Maintenance Act, Japan, Arts. 14(1) 25(1947). Takashi B. Y a m a m o t o , Japan, in James J. Garrett (ed.), World Antitrust L a w a n d Practice (1995), 33-45.


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foreign firms. Independent courts have a better reputation of being able to apply the law in a nondiscriminatory manner. The following measures would render effective antitrust enforcement at the request of a private party and sustain exporters' trust in impartial enforcement in the importing country, thus decreasing the pressure for trade policy measures against the importing country, such as those according to 'section 301' in the U.S.27: (1) domestic, as well as foreign, firms affected by anticompetitive conduct should be granted legal standing to request the initiation of an antitrust investigation; (2) private parties should have a choice either to complain to administrative antitrust agencies or tofilea case before an independent court28; (3) countries should take measures to guarantee that administrative antitrust authorities are politically independent.29

27

T h e E . U . G r o u p of Experts suggests an international rule of 'positive c o m i t y ' , which includes a legal right of antitrust authorities of one country to request the initiation of an administrative antitrust investigation in another country. E u r o p e a n Commission, Competition Policy in the N e w T r a d e Order: Strengthening I n t e r n a t i o n a l Cooperation (Office for Official Publications of the European Communities, 1995) (hereinafter 'Van Miert Report'). Nevertheless, we believe it is indispensable t h a t adversely affected private parties that are denied market access have legal s t a n d i n g directly to request the initiation of a case without a need to lobby their home a n t i t r u s t authorities, in order t o act via positive comity obligations. Only where h a r m of restrictive business practices affects consumers, as opposed to competitors, in another c o u n try, m a y there be a need for intervention by antitrust authorities of the affected c o u n t r y to request enforcement of antitrust laws in the country where anticompetitive b e h a v i o u r originates. Positive comity has the following disadvantages in comparison to legal standing of foreign exporters: (1) affected firms must lobby their antitrust authorities t o make use of their positive comity rights a n d request antitrust enforcement in a foreign country; (2) antitrust authorities in the affected country have discretion w h e t h e r t o request antitrust enforcement abroad; (3) antitrust authorities in the requested c o u n t r y have discretion whether to initiate a case; and (4) antitrust authorities in the r e q u e s t e d country may not have an incentive t o enforce their antitrust law if enforcement benefits foreign firms only by restricting domestic firms. 28 Petersmann stated that '[a Plurilateral Agreement on Competition a n d T r a d e ] should . . . guarantee private access to domestic competition authorities a n d c o u r t s ' : Statement of Ernst-Ulrich Petersmann in the Van Miert Report, supra note 27, at 3 0 . I n contrast, the M a x Planck Draft International Antitrust C o d e relies exclusively o n administrative antitrust enforcement. It suggests granting legal standing to affected p a r ties to request an administrative antitrust investigation while ensuring that n a t i o n a l administrative antitrust agencies are politically independent (Draft I n t e r n a t i o n a l Antitrust Code, Art. 17, Sees. 1 (b) & 3 (b) (hereinafte ' D I A C ' ) ; Josef Drexl et al., Draft International Antitrust Code, 64 Antitrust & T r a d e Reg. Rep. 1629 (1993). 29 See D . I . A . C , supra n o t e 28, Art. 17 Sec. 1 (b); Drexl et al., supra n o t e 28.

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3. Discriminatory Non-Enforcement of Antitrust Law In a country where private parties have no rights to demand initiation of an antitrust investigation, the decision whether a case will be prosecuted depends exclusively on the discretion of administrative antitrust enforcement agencies. There is no legal discrimination against foreign companies, since both foreign and domestic firms have no legal standing to initiate an antitrust proceeding. However, there may be discrimination if antitrust authorities refuse to open an investigation, which is aimed at protecting domesticfirmsagainst increased market access by foreigners firms. Non-enforcement of antitrust law can also be discriminatory if enforcement is lax in cases where foreign firms would benefit from enforcement action, while being rigorous when domestic firms benefit. The discriminatory denial to initiate an antitrust investigation could be the subject of an appeal before the W.T.O. for violation of the national treatment requirement. As established in Art. 111:4 of the G.A.T.T., national treatment requires equal treatment of domestic and foreign products under internal domestic regulations once an imported product has entered the market.30 An affected country can file a complaint under Art. XXIII: 1 (a) of the G.A.T.T. with respect to any violation of national treatment. If antitrust authorities refuse to initiate an antitrust investigation following a complaint by a foreign firm, in obvious discrimination against foreign goods, this could provide grounds for a W.T.O. appeal.31 A violation complaint will initiate a regular 30

G.A.T.T. Art. 111:4 states:

'The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulation and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.' 31

Alternatively, a country may seek to file a non-violation complaint as set out in Art. XXIII: l(b) of the G.A.T.T. if none of the explicit G.A.T.T. rules is violated, but where the country considers its negotiated rights of market access nullified or impaired by not expressly prohibited governmental measures. A non-violation complaint protects exporting countries against governmental measures in importing countries that 'nullify or impair' their 'expectations on the competitive relationship between imported and domestic products' based on mutual market opening concessions. As a consequence, only unforeseen governmental measures can impair reasonable expectations, which are taken subsequently to the agreement o n mutual market opening concessions. A non-violation complaint is therefore possible only where a country turns to a discriminatory antitrust policy only after having committed itself to a certain level of openness. Thus, lax antitrust enforcement that has always been lax is not eligible for a non-violation complaint. Three conditions must be met in order to file a non-violation


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W.T.O. dispute settlement mechanism, including consultations, a binding ruling by an independent panel, and the possibility of appealing the decision to the W.T.O. appellate body.32 To date, there has not been a test case before a G.A.T.T.AV.T.O. panel on discriminatory enforcement or non-enforcement of antitrust law against foreign goods. Thus, the scope of violation or non-violation complaints regarding antitrust enforcement practice remains unclear. As previously indicated, disputes on antitrust and restrictive business practices are generally not within the scope of the G.A.T.T. Historically, antitrust issues are excluded from the G.A.T.T. discipline, for the G.A.T.T. came into force only after provisions had been deleted regarding antitrust issues.33 Whether the non-discrimination rule applies to national antitrust enforcement must, therefore, be clarified. We suggest reaching explicit international agreement on the inclusion within the W.T.O. of a clear and enforceable rule that antitrust enforcement or nonenforcement must not discriminate against foreign goods, and on extending the G.A.T.T.AV.T.O. dispute settlement mechanism to such issues. This would establish the possibility of using W.T.O. dispute settlement in cases of discriminatory non-enforcement of antitrust laws against foreign products, thus ensuring non-discrimination. Although an improved W.T.O. dispute settlement regarding non-discrimination in national antitrust enforcement may appear a desirable solution, it cannot replace prior application of domestic antitrust law. In most cases, discrimination is not likely to be obvious without initiation of an investigation in the importing country. Consequently, discrimination or non-discrimination will be difficult to detect. This reinforces the above recommendation that complaint, as established by the 1990 G.A.T.T. panel report on oilseeds: (1) there must be a negotiated tariff concession, (2) a governmental measure, otherwise G.A.T.T. consistent, must alter the competitive relationship between domestic and imported goods established through the tariff binding, and (3) the measure could not have been reasonably anticipated at the time the tariff concessions were negotiated. {Oilseeds Panel Report, B.I.S.D. 37/86-132); see also Petersmann 1995, supra note 28, at 26; Hoekman and Mavroidis, supra note 14, at 23. Discriminatory non-enforcement of antitrust law meets these three requirements only if it became discriminatory after a country had committed itself to certain market opening concessions. 32 For more detail on antitrust issues under the G.A.T.T., see Hoekman and Mavroidis, supra note 14; Petersmann 1994a, supra note 8, at 8-9. 33 The 1948 Havana Charter, which was to establish the International Trade Organization, was not approved by the U.S. Congress, because it contained rules on antitrust policy. Subsequently, its agenda was reduced to that of the G.A.T.T., which excluded antitrust. Havana Charter for an International Trade Organization, U.N. Dec. E/Conf 2/78 [1948].

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access to antitrust enforcement in the importing country should be improved by granting legal standing to private parties to request the initiation of a case before administrative authorities and courts, and by ensuring political independence of administrative agencies and courts.34 This measure fosters accountability and transparency in the application of antitrust law. 4. Discriminatory Antitrust Enforcement Against Foreigners Enforcement of antitrust law in the importing country may discriminate against foreign goods, tolerating restrictive business practices that are aimed at foreign competitors while prohibiting such behaviour among domestic rivals. Exporters injured by discriminatory enforcement of antitrust law may seek to appeal to the W.T.O. for violation of national treatment as set out in Art. Ill of the G.A.T.T. Discriminatory enforcement of antitrust law against foreign goods in a documented case is likely to provide a sufficient basis for a violation complaint with the W.T.O. As with discriminatory non-enforcement of antitrust law, there might be doubts whether the non-discrimination provision of the G.A.T.T. could be applied to discriminatory antitrust enforcement. We therefore suggest that the international community make it clear that antitrust enforcement by national authorities comes under the G.A.T.T. AV.T.O. requirement of non-discrimination. In addition, as discussed above, improvements with respect to legal standing, private action suits, and political independence of administrative authorities will help prevent discriminatory enforcement of antitrust law. 5. Lax Foreign Antitrust Standards or Enforcement Dissatisfaction may arise because antitrust enforcement in the importing country is lax, in a non-discriminatory way, or because antitrust standards are less 34

In comparison, the Max Planck Draft International Antitrust Code suggests an 'International Procedural Initiative' to guarantee both enforcement of national law and compliance of national enforcement with international law. An independent International Antitrust Authority is vested with powers, on the one hand, to challenge national antitrust authorities before national courts, sue private parties before national courts, and appeal against antitrust decisions before national courts for violation of national antitrust law, and on the other hand, sue a country before an International Antitrust Panel for violation of the International Antitrust Code. D.I.A.C., supra note 28, Art. 19, Sec. 2 (a) through (e); Drexl et al., supra note 28; Wolfgang Fikentscher, Competition Rules for Private Agents in the G.A.T.T./W.T.O. System, 49 AuBenwirtschaft 281, 292 (1994).


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strict than in the home country of the exporter. A different antitrust approach may, in fact, restrict market access of foreign exporters if the importing country tolerates practices that would be held anticompetitive in the exporting country. Filing an antitrust case will not bring relief. There is no antitrust remedy available for exporters in the importing country. Generally, the sovereignty of nations suggests that every country should have a deliberate choice of internal regulation of commerce, including antitrust law and the rigour of its enforcement. If this situation is not satisfactory for the exporting country, it may be fruitful to discuss whether to harmonise or agree on minimum standards,35 or mutually to recognise differences of national antitrust laws. The five situations discussed above point to circumstances where enforcement of national antitrust law in the importing country is not possible or does not bring sufficient relief to exporters affected by restrictive business practices by import-competingfirms/industries.Allfivecases illustrate the need for governments to introduce or improve antitrust instruments, and to guarantee nondiscriminatory treatment in order to open the way for initiating antitrust enforcement procedures in the importing country. The effectiveness of antitrust remedies in the importing country should be improved before trade policy interventions are made in specific cases. Box 3.1: The Auto Case—The Japanese Supply and Distribution System for Cars and Car Parts In 1995, U.S. car and car parts manufacturers filed a '301 complaint' to get the U.S. government involved in their struggle to pry open the Japanese auto market, which was allegedly closed due to restrictive business practices of Japanese companies. Section 301 of the Trade Act of 1974 allows the U.S. government to impose retaliatory measures against imports when a foreign country violates U.S. rights or pursues 'unfair' or 'discriminatory' policies against U.S. exports. After negotiations under the threat of punitive tariffs of 100 per cent on selected Japanese cars, the U.S. and Japan reached agreement on improved access to the Japanese distribution system for cars and on increases in Japanese purchases of U.S. car parts.

35

See Joel I. Klein, A Note of Caution With Respect to a W.T.O. Agenda on Competition Policy, Address presented to the Royal Institute of International Affairs, 18 Nov. 1996. Klein argues for a cautious, de minimis approach first.

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The problems of U.S. firms with entering the Japanese market were allegedly related to vertical integration and cooperation in Japan, especially the 'keiretsu' system. Keiretsus are networks between auto manufacturers, part makers, and repair shops including cross-ownership, long-term business relationships and exclusive dealing. According to U.S. complainants, this prevented (1) U.S. cars from being exported to Japanese car dealers, and (2) U.S. car parts from being exported to car makers and repair shops in Japan. The U.S. insisted that Japan commit itself to enforceable quantitative import expansion targets. This strategy was motivated, on the one hand, by the striking imbalance in car trade between the U.S. and Japan—more than half of the U.S. trade deficit with Japan stemmed from trade in cars and car parts—and, on the other hand, by little success with earlier attempts to open up the Japanese market and increase U.S. exports to Japan. Whether the final agreement will result in a breakthrough is open, considering the different interpretations of the agreement and that commitments may not extend much further than what has already been planned. The U.S. chose not to follow an approach referring to violation of antitrust standards by Japanese car manufacturers, and it invoked neither the Japanese Antimonopoly Law nor U.S. antitrust law. Indeed, it is not clear whether any antitrust rules have been violated. An analysis suggests that the Japanese keiretsu system and perceived anticompetitive practices in the auto sector are most likely no violation of U.S., E.U., or Japanese antitrust laws. Strong competition exists among the different keiretsus of the bigfivecar producers in Japan, although they have a combined market share of 92 per cent. Furthermore, examples of successful non-U.S. car exporters to Japan suggest that the Japanese market is not really closed. According to Jagdish Bhagwati, the Japanese car market is open, but it 'is expensive to enter and the sales prospects are unexciting.' Several European car producers achieved higher market shares than U.S. companies by establishing their own dealerships, such as Mercedes Benz and B.M.W., or joint distribution with Japanese car producers, such as Volkswagen/Toyota.

Sources: Sheryl WuDunn, A Deal on Auto Trade: The Market; but is Japan Indeed Protectionist1} The New York Times, Late Edition—Final, 30 June 1995, Sec. D Financial Desk, p. 5; David E. Sanger, A Deal on Auto Trade: The Agreement; U.S. Settles Trade Dispute, Averting Billions in Tariffs on Japanese Luxury Autos, The New York Times, Late Edition—Final, 29 June, 1995, Sec. A National Desk, p. 1; David E. Sanger, Session Extended by U. S. and Japan in Impasse on Cars, The New York Times, Late Edition—Final, 24 June 1995, Sec. 1, Financial Desk, p. 1; Jagdish Bhagwati, On the Equivalence of Tariffs and Quotas, in Trade, Growth and the Balance of Payments (ed.) (1995).


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Box 3.2: The Kodak Case—Fuji's Distribution System of Photographic Film and Paper in Japan

In May 1995, Kodak filed a '301 case' with the U.S. government complaining that Fuji of Japan was restricting Kodak's access to the Japanese market for photographic film and paper. The U.S. government initiated an investigation, but until now, no concrete threat of trade sanctions against Japan have been launched. The allegations by Kodak focus on Fuji's exclusive distribution agreements with retail stores in Japan, resale price maintenance, and Fuji's practices to enforce those contracts. It is claimed that since Fuji has a dominant position in Japan with a market share of 75 per cent, Fuji precludes Kodak from selling via the regular retail system in Japan. This allows Fuji to maintain high prices in Japan and to preclude rivals from the distribution channel, while dumping its products in foreign markets through crosssubsidisation. As a result, Kodak's market share in Japan could not exceed 7 per cent, although in most other foreign markets, its share is around 40 per cent. Other foreign competitors, such as Agfa-Gevaert of Germany, have similar problems, but are trying to enter the market through nonconventional distribution channels, such as supermarkets, convenience stores, or discount camera chains. Kodak's complaint emphasises that Fuji's business practices would even violate Japanese antitrust law, but they have been tolerated by the Japanese government. In fact, the J.F.T.C. found that Fuji has not violated the antimonopoly laws. Fuji has denied Kodak's allegations and has counterclaimed that Kodak used restrictive business practices in the U.S. market, such as exclusive agreements and tying, to foreclose foreign competitors, thereby preventing Fuji from attaining a market share above 10 % in the U.S. In December 1997 a interim decision by the W.T.O. rejected Kodak's claims against Fuji and the Government of Japan. Sources: Dewey Ballantine, Privatizing Protection: Japanese Market Barriers in Consumer Photographic Film and Consumer Photographic Paper (1995); Acceptance of imported cars among Japanese, Financial Times, 5 June 1995, p. 4; World Trade News: W.T.O. completes legal framework—the body providing teeth to the complaints procedures, Financial Times, 29 Nov. 1995, p. 5; Michiyo Nakamoto, Japan urged to bolster cartel rules, 25 Nov. 1995, p. 3; Guy De Jonquieres, Kodak steps up assault on Fuji, Financial Times, 6 Nov. 1995, p. 6; Michiyo Nakamoto, World Trade News: Kodak wins deal to sell cut-price film in Japan, Financial Times, 24 Aug. 1995, p. 4; Michiyo Nakamoto, World Trade News: Kodak and Fuji trade anti-competitive allegations,

Illegal Rule of reason approach; no administrative prosecution

Illegal

Illegal

No violation

No violation No violation, as long as there is competition between different keiretsu systems

Not an antitrust issue Generally, technical standards are the deliberate choice of a nation. Discrimination against foreigners is prohibited under the G.A.T.T. (Art. Ill)

Resale price maintenance

Price-fixing

Long-term supplier-customer relationships (keiretsu)

Cross-ownership, vertical integration, (keiretsu)

Governmental regulations on car inspections

No violation

No violation

Illegal

Illegal

Legal, as a means to enforce Illegal if practised by a dominant legal forms of exclusive contracts firm

Illegal to enforce resale price maintenance, monopolisation, or as a collective refusal to deal

Distributor boycotts, and other retaliatory practices Rule of reason; no administrative prosecution

Illegal, if practised by a dominant firm; Block exemptions; Block exemption for car dealership (however recently limited in scope)

Rule of reason approach: illegal, if practised by a dominant firm, restricting supply, or no alternative distribution is available; legal, if efficiency gains prevail; no administrative prosecution

Illegal, if imposed by a dominant firm —auto manufacturers are considered dominant —Fuji's market share of 75 per cent would constitute a dominant position

Exclusive distributorship and exclusive dealing

EU

us

Japan

Practices

Box 3.3: Alleged Anticompetitive Practices Under Japanese, U.S., and E. U. Antitrust Laws


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Sources to Box 3.2 (continued): Financial Times, 1 Aug. 1995, p. 4; Emiko Terazono, World Trade News: Fuji to rebut Kodak charges, Financial Times, 27 Jul. 1995, p. 6; Nancy Dunne, World Trade News: Fuji challenges Kodak case on film market, Financial Times, 14 Jul. 1995, p. 4; Guy De Jonquieres, World Trade News: Kodak sparks U.S. challenge on access, Financial Times, 4 Jul. 1995, p. 4; Michiyo Nakamoto, World Trade News: Kodak claims exposes Fuji's grip on market—Sales of film in Japan, Financial Times, 1 Jun. 1995, p. 6; Nancy Dunne, U.S. steps up pressure on Japan: Kodak in trade action against Fuji as Kantor accuses carmakers, Financial Times, 19 May 1995, p. 18.

Box 3.4: The Pilkington Case—Abuse of I.P.R.S to Exclude Competitors in Foreign Markets In 1994, the U.S. D.O.J. filed an antitrust action against Pilkington of the U.K. and its U.S. subsidiary for abusing intellectual property rights (I.P.R.s) with the intent and effect to preclude US firms from entering foreign markets. Pilkington is the world's largest float glass producer and possesses patents on the production process for flat glass. Beginning in 1962, Pilkington entered into licence agreements with its competitors, which basically restricted the territories of its licensed competitors and the use of the patents, thus establishing an international cartel. The allegation by the D.O.J. included that Pilkington continued to enforce the licence agreements even after the patent rights had expired in 1982, in order to prevent its rivals from entering foreign markets and building float glass plants there. The U.S. D.O.J. initiated the action against Pilkington because Pilkington's behaviour negatively affected U.S. exports by restricting market access of U.S. exporters to foreign markets. The case ended in a consent decree with the D.O.J., in which Pilkington committed to terminate the anticompetitive practices. Source: U.S. v. Pilkington et ai, 59 Fed. Rg. f U , 339 at 41, 432 (1994). Sources to Box 3.3 (opposite): Lawrence J. White, Competition Policy in the United States: An Overview, 9 Oxford Rev. Econ. Pol. 133 (1993); Joel Davidow, Application of U.S. Antitrust Laws to Keiretsu Practices, 18 World Competition 5 (1994); Takashi B. Yamamoto, Japan, in James J. Garrett (ed.), World Antitrust Law and Practice (1995); Philip D. Bartz, U.S. Antitrust Law and Practice, Relations Between Suppliers and Customers; Pricing Products and Services, in World Antitrust Law and Practice James J. Garrett (ed.), (1995); Thomas C. Vinje and Kathleen D. Paisley, Competition Law and Practice in the European Union: Nonprice Restraints on the Distribution of Products and Services; Pricing Products and Services; Monopolization, in James J. Garrett (ed.), World Antitrust Law and Practice (1995); Mitsuo Matsushita, The Role of Competition Law and Policy in Reducing Trade Barriers in Japan, 14 World Econ. 181 (1992).

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Box 3.5: The Semiconductor Case—Anticompetitive Market Structure in Japan and Dumping in the U. S. 1985 301 petition by U.S. semiconductor manufacturers, alleging an anticompetitive market structure in the Japanese semiconductor market, including broad antitrust exemptions for joint research of semiconductor manufacturers and non-enforcement of antitrust law with regard to implicit agreement among Japanese producers and users to buy semiconductors from each other rather than from U.S. producers. Several antidumping cases by the U.S. against Japanese producers of semiconductors 1986 Settlement between the U.S. and Japan: Japanese government commits itself to encourage semiconductor users to increase purchases of U.S. semiconductors, and to discourage semiconductor producers from dumping in the U.S. U.S. imposes punitive tariffs on televisions, power hand tools and data 1987 processing machines, because U.S. is not satisfied with the implementation of the agreement in Japan Subsequent price increases of Japanese exports to the U.S. leads to partial suspension of duties New agreement between the U.S. and Japan addresses market access and dumping, establishing a goal of a 20 percent market share of U.S. semiconductors in Japan by 1992.

Sources: J. Michael Finger and K.C. Fung, Can Competition Policy Control "301", 49 AuBenwirtschaft 379, 386-9 (1994); Davidow, supra, Box 3.3 sources, at 47.

D. Anticompetitive Behaviour by Exporters in the Import Market Restrictive business practices in import markets, as opposed to global anticompetitive strategies, apply to internationally segmented markets. In an integrated global market, no market-specific strategies can theoretically be implemented, given the possibility of parallel trade and re-imports, which would offset such strategies. Abuses of dominant positions in global markets will be discussed below, in the section covering spillovers of competition policies. This Section addresses other forms of anticompetitive behaviour by exporting firms, including dumping.


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1. International Cartels and Market-sharing Agreements International cartels and market sharing agreements between firms in two or more countries are generally recognised as akin to horizontal pricefixingand other collusive agreements within a single country. In both cases, competition is limited, output is restricted, and/or markets are allocated for the private benefit offirms.As in the case of domestic cartels, international cartels must be vigorously prevented, and heavily penalised. Prevention of international cartels is the one area where consensus and cooperation are likely to emerge among trading nations. Such cartels have an adverse impact on competition in industrialised, as well as developing country markets.36 Since international cartels extend to two or more jurisdictions, cooperative agreements in the administration and enforcement of competition laws by different national agencies must be facilitated. As discussed above, several bilateral and limited multilateral agreements exist relating to information sharing, mutual legal assistance, etc. Such inter-governmental agreements provide useful models for consideration within the W.T.O., and as in the case of regional trade agreements, need not be superseded by the principles which the W.T.O. may adopt. However, an obvious anomaly would exist if the treatment of international cartels is different from that of export cartels. The latter is discussed in a separate section below, and generally involves agreements between firms in the same country which, in many jurisdictions, are granted antitrust exemptions. The W.T.O. should make it a priority to take measures to abolish export cartels on the same grounds as it or national governments contest international and horizontal cartels. 2. Predatory Dumping Predatory dumping by an exporting firm in an importing market has emerged as a major concern in several countries, especially during the post-war period. Consequently, many countries have introduced antidumping statutes, which have become a major instrument of trade protection against low-priced imports in industrialised countries, and increasingly in developing countries as well.37 36

See Klein, supra note 35, for description of U . S . / C a n a d a case examples. The main users of antidumping are still the E.U., the U.S., Canada, Australia, and more recently Mexico. However, since the 1980s, many more countries have adopted or reactivated antidumping laws, such as Argentina, Bolivia, Brazil, Chile, China, Colombia, Egypt, India, Indonesia, Israel, Jamaica, Malaysia, Morocco, Peru, the Philippines, South Africa, Thailand, Trinidad and Tobago, and Venezuela. See Antidumping (J. Michael Finer ed. 1993). 37

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Predatory dumping, or its equivalent predatory pricing, is an antitrust policy concern, for it may lead to monopolisation. An exporter may attempt to drive its competitors in the importing country from the market in order to gain monopoly power and thereafter increase prices.38 In domestic trade, cases of predatory pricing are few, whereas in international trade, antidumping cases are frequent. No case, however, has ever been reported where a predatory pricing strategy has resulted in monopoly. Currently, antidumping measures eliminate the possibility that low-priced imports will harm competition in the importing country. Whenever antidumping agencies detect that imports are sold below their home market price or below cost, and domestic import-competing industries lose profits or market shares, the importing country may impose antidumping duties on the dumped imports to prevent further injury. However, antidumping is not restricted to predatory pricing. Antitrust concern about monopolisation is only one objective of antidumping policy. Other goals include creating a 'level playingfield'between domestic and foreign firms, protecting 'strategic' domestic industries, and easing adjustment costs in industries injured by increasing imports. As a result, the substantive standards under antidumping law vary from those under antitrust law to prevent predatory pricing. In fact, while antitrust law is limited to protecting the competitive process from monopolisation, antidumping law protects specific domestic competitors from injury.39 This difference between antidumping and antitrust policy became very obvious in the Matsushita case in the U.S.,40 where parallel antidumping and antitrust proceedings came to different conclusions. While antidumping agencies called for protective measures, antitrust authorities could not detect any danger to competition (see below, Box 4.1). 38

T h e O . E . C . D . a n d U . N . C . T . A . D . have recognised that predatory pricing m a y constitute a d a n g e r for international competition by putting predatory behaviour on non-binding lists of restrictive business practices from which firms shall refrain. T h e O . E . C . D . Guidelines for Multinational Enterprises of 1976 provide that firms shall not abuse their d o m i n a n t m a r k e t position through, for example, ' p r e d a t o r y behaviour t o w a r d s c o m p e t i t o r s ' . T h e U . N . C . T . A . D . Restrictive Business Practices C o d e of 1980 states t h a t firms shall n o t engage in 'below cost-pricing to eliminate competitors'. 39 T h e r e is an a b u n d a n t literature on the differences between a n t i d u m p i n g and antitrust. E.g., R i c h a r d Dale, Anti-dumping Law in a Liberal T r a d e Order (1980); Patrick A. Messerlin, The E.C. Antidumping Regulations: A First Economic Appraisal, 125 Weltwirtschaftliches Archiv 563 (1989); Ernst-Ulrich Petersmann, Need for Reforming Antidumping Rules for the G.A.T.T.- W. T. O. World Trade and Legal System, 27 J. W o r l d T r a d e 35 (1990); Davidow, supra, sources of Box 3.3, at 4 1 - 7 ; Finger (ed.), supra n o t e 20. 40 M a t s u s h i t a Electric Industrial C o . v. Zenith R a d i o C o r p . , 475 U.S. 574 (1986).


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Antidumping measures have several negative consequences: (1) they produce losses of consumer welfare due to unnecessary protection41; (2) they place domestic downstream user industries at a competitive disadvantage vis-a-vis foreign competitors that are allowed to buy inputs at a pre-duty price; (3) they discriminate against foreign exporters, who must respect higher standards under antidumping law than domestic competitors do under antitrust laws; (4) by excluding foreign exporters from the market and artificially increasing import prices, they reduce competition in the import market. Given these negative effects, antidumping measures should be repealed and replaced with antitrust standards. We recommend replacement of antidumping laws with enforcement of national antitrust laws against dumped imports. Antitrust laws usually apply to any anticompetitive conduct that has a negative impact on competition in the domestic market, irrespective of whether afirmis located within that nation or abroad.42 Difficulties in establishing personal jurisdiction may arise if a dumping exporter has no subsidiaries in the importing country. Thus, we recommend that an international agreement should be entered which (1) explicitly allows application of national antitrust standards to foreign companies, according to the effects doctrine,43 if dumping is based on price discrimination,44 and produces negative effects on competition, (2) provides for cooperation between national antitrust agencies regarding the collection of evidence abroad and 41

F o r the U.S., the I.T.C. calculated a welfare loss of $1.59 billion dollars d u e to existing antidumping a n d countervailing duty orders in 1991. 42 In the E.U. a n d A.N.Z.C.E.R.T.A., t w o regional economic integration agreements, antidumping has been superseded by antitrust standards. T h e E . U . replaced antidumping measures between its members with a c o m m o n supranational antitrust policy, including c o m m o n harmonised rules a n d a central enforcement agency, while the A.N.Z.C.E.R.T. A. allows enforcement of national antitrust laws according t o the effects doctrine as a substitute for antidumping, but only after the approximation of antitrust laws. The C a n a d a - U n i t e d States Free T r a d e Agreement (C.U.S.F.T.A.) recognised the link between antidumping a n d antitrust, a n d recommended the establishment of a special task force to study the possibility of replacing antidumping with antitrust—which was, however, not accomplished. C a n a d a - U . S . Free T r a d e Agreement, Statutes of C a n a d a , Ch. 65 (2 Jan. 1988). 43 Recognition of the effects doctrine is one of the basic principles of the M a x Planck Draft International Antitrust Code. D . I . A . C , supra note 28, Art. 3, Sec. 2; Drexl et al., supra note 28. It has also been recognised in the 1990 A . N . Z . C . E . R . T . A . 44 In more general terms, this includes that markets are segmented a n d the dumping strategy is market-specific. If the market is global a n d the anticompetitive behaviour is not market-specific in the importing country, antitrust control by one country is likely to have spillover effects in other countries. This situation will be discussed in the section on spillover effects of antitrust enforcement.

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(3) provides for cooperation of enforcement action (discussed in further detail in the following section). Enforcement of antitrust law in the importing country against dumped imports is not likely to produce any adverse effects on competition in the exporting country if markets are segmented. Therefore, control of dumping in international trade does not necessarily require harmonisation of national predatory pricing rules. Existing national antitrust laws applied to foreign dumpers are sufficient to prevent monopolisation in the import market, with the above -mentioned procedural amendments regarding cooperation on the collection of evidence and enforcement action abroad. In addition, segmentation of national markets should be reduced in order to limit the occurrence of predatory pricing strategies in international trade. Market segmentation has two effects on dumping strategies. First, a segmented home market of the exporters allows them to make supracompetitive profits at home and to cross-subsidise below cost sales in foreign markets. International market segmentation distinguishes dumping in international trade from domestic dumping, as it allows cross-subsidisation between markets. This is not possible in an integrated market, where all competitors must compete under the same competitive conditions. Barriers to entry in export markets thus increase the possibility of predatory pricing strategies in international trade. Secondly, a segmented import market increases the profitability of predatory pricing strategies. Where barriers to entry in the import market prevent newcomers from entering the market, predatory pricing may be a profitable strategy to drive existing competitors from the market and attain a monopoly.45 Although a segmented export market may give exporters a competitive advantage over rivals in the import market, exporters will engage in predatory pricing only if it is profitable, i.e., if they have a chance to raise their prices later. The focus of antitrust investigation into low-price strategies, there45

Most national antitrust policies toward predatory pricing therefore include examination of either barriers to entry or the profitability of predatory pricing. An O.E.C.D. study on predatory pricing suggests an antitrust approach that, in a first stage, examines market structure and entry conditions to determine whether the market could possibly be monopolised by predatory pricing. If actual and potential competition are strong, the investigation should end. '[C]ompetition authorities would look first to the market in question and determine whether it is susceptible to successful predation . . . If it appeared unlikely due to market structure and entry conditions that the alleged predator would be able to exercise market power in the post-predation period, the inquiry should end, as there would be no harm to competition even if some competitors suffered during the price-cutting episode'. O.E.C.D., Predatory Pricing (1989) 82. Such an antitrust approach has been adopted toward domestic dumping by Canada.


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fore, must be on the importing market, regardless of what competitive conditions prevail in the exporters' home market.46 As a result, an international strategy to prevent predatory pricing strategies should replace antidumping with antitrust standards. It should also reduce segmentation of national markets, in order to lessen both the possibility of predatory dumping through cross-subsidisation between markets, and the profitability of a predatory pricing strategy due to the lack of potential competition in the import market.47 The reduction of market segmentation involves: internal deregulation in every country to ease market access; international negotiations on the reduction of governmental barriers to trade; and effective antitrust enforcement at the national level, supplemented with international cooperation (as discussed above) to prevent private agents—including the dumping firms themselves—from restricting market access to their home market through anticompetitive behaviour. Meanwhile, countries negatively affected by dumping practices should apply national antitrust laws against predatory pricing by foreign firms. We suggest also that a firm injured by dumped imports should be able to file an antitrust case in the home market of the dumpers, if restrictive business practices abroad give rise to dumping. This would help create a 'level playing field', thus erasing unfair advantages due to the lack of competition in the home market of dumping firms. We recognise that some problems may arise with this approach, which have been discussed (along with possible remedies) in the previous section on restriction of market access by import-competing firms.48 46

This was correctly assessed by the U . S . Supreme Court in the 1986 Matsushita case, where the Court did not consider the U.S. defendants' arguments that the alleged Japanese dumpers could m a k e supracompetitive profits at home while d u m p i n g in the U S , because even these high profits could not as such furnish a motive for predatory pricing: Matsushita Electric Industrial C o . v. Zenith Radio Corp., supra note 40, 475 U.S. at 593; Daniel J. Gifford, Predatory Pricing Analysis in the Supreme Court, 39 Antitrust Bull. 431, 460-464 (1994). 47 The O.E.C.D. study on predatory pricing concludes similarly that 'efforts to improve the conditions for entry a n d expansion in a given market, including the removal of barriers to international competition, should help combat the threat of effective predation': O.E.C.D., supra note 45, at 82. 48 W e d o n o t suggest that the c o u n t r y affected by d u m p e d imports either enforce its own antitrust standards extraterritorially against anticompetitive practices in the home country of the dumping firms, or use trade sanctions to pry open the foreign market. Harris First, An Antitrust Remedy for International Price Predation: Lessons from Zenith v. Matsushita, 4 Pac. Rim L. & Pol. J. 211,241 (1995) suggested extraterritorial enforcement of U.S. antitrust standards in cases where dumping is possible because of R.P.B.s in the home market: '[t]aking the view that the existence of a closed home market

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Box 4.1: The Matsushita Case—Dumping of Japanese Televisions in the U.S. Although television was invented in the U.S., American manufacturers subsequently faced strong competition from Japanese producers. This increasingly threatening situation led U.S. firms to seek relief from low-priced imports under antitrust laws, as well as under trade protection laws. The series of cases brought against Japanese manufacturers started with an antidumping complaint (1968), followed by two private actions for damages under antitrust law (1971 & 1974), a complaint by workers in the U.S. T.V. industry (1971), a '337' complaint against unfair trade practices (1976), and finally a '201' petition for escape clause protection (1976). The allegations focused on dumping of Japanese televisions in the U.S., and conspiracy among Japanese producers, which kept prices high in Japan while U.S. prices were below cost, in an attempt to injure U.S. competitors and finally drive them from the market. As a result, the U.S. decided to impose antidumping duties on Japanese T.V.s in 1971 (which, however, were never collected) and entered an Orderly Market Agreement with Japanese producers in 1977, which limited exports to the U.S. The antitrust case was finally decided against U.S. complainants by the Supreme Court in 1986. In the entire period from 1963, when exports to the U.S. began, through the early 1990s, the structure of the television industry changed fundamentally. Today, many former U.S.firmsare controlled by foreign companies, and foreign manufacturers shifted assembly to the U.S., with imports still remaining around 50 per cent. However, the major exporting country is no longer Japan, but Mexico, Taiwan, Singapore, Malaysia, Korea and others. Industry concentration has not increased; Japanese producers could not monopolise the market. Comparing the antitrust case with the trade cases, the most surprising outcome is that violation was found under trade statutes but not under antitrust law, which points to substantial differences between the two approaches. Obviously, protection under trade laws goes much further that protecting competition and market access, which is the explicit goal of antitrust policy. The Supreme Court, as well as the Department of Justice,

explains the willingness to sell at predatory prices and insures against retaliation, a remedy might be to order the foreign defendants to end their exclusionary efforts in their domestic markets.' A specific information provision is included in all existing bilateral cooperation agreements, whereas cooperation in enforcement action is provided for only in the E.C./U.S. agreement and the A.N.Z.C.E.R.T.A. Petersmann 1994a, supra note 8; Hachigan, supra note 49, at 132-41.


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were convinced this was not a case of unfair competition or monopolisation, but a case of a competitive advantage due to inventiveness and technical expertise of Japanese manufacturers, which benefits the American consumer. Sources: Matsushita Electric Industrial Co. v. Zenith Radio Corp., supra note 40, 475 U.S. 574; First, supra note 48; Kenneth G. Elzinga, 'Collusive Predation', in John E. Kwoka and Lawrence J. White (eds.), The Antitrust Revolution: The Role of Economics (1994); Gifford, supra note 46.

1. Collection of Evidence and Enforcement Action Abroad An importing country might face difficulties when restrictive business practices are conducted by a foreign exporter that does not have a subsidiary in the importing country. Problems may arise as to (1) the collection of information about the alleged anticompetitive behaviour by afirmlocated abroad,49 and (2) the enforcement of a decision against a foreign firm. Currently, some jurisdictions have concluded agreements on cooperation between national antitrust authorities, such as the 1991 agreement between the U.S. and the E.C. Most of those cooperative agreements in the area of antitrust contain some provisions on the exchange of information between national antitrust authorities.50 The E.C./U.S. agreement, for instance, provides for the 49

See, e.g., Nina Hachigian, Essential Mutual Assistance in International Antitrust Enforcement, 29 Int'l L. 117 (1995). 50 T h e following bilateral antitrust cooperation agreements have been concluded so far: Germany/U.S., 1976 (Agreement Between the United States of America a n d the G o v e r n m e n t of the Federal Republic of G e r m a n y Relating t o Mutual Cooperation Regarding Restrictive Business Practices, T.I.A.S. 8291, 27 U.S.T. 1956 (entered into force 11 Sept. 1976); Australia/U.S., 1982 (Agreement between the Government of the United States of America a n d the Government of Australia Relating to Cooperation o n Antitrust Matters, 29 June 1981, reproduced in 21 Int'l Legal Materials 702 (1982); Canada7U.S., 1984 ( M e m o r a n d u m of Understanding as to Notification, Consultation and Cooperation with Respect to the Application of National Antitrust Laws, 23 Int'l Legal Materials 275 (1984); France/Germany, 1984 (Agreement between the G o v e r n m e n t of the Federal Republic of G e r m a n y and the Government of the French Republic concerning Cooperation on Restrictive Business Practices, Paris, 28 M a y 1984, 26 I.L.M. 531 (1987)); E.C./U.S., 1991 (Agreement Between the Government of the United States a n d the Commission of the European Communities Regarding the Application of their Competition Laws, [1995] OJ L47 (27 April); A.N.Z.C.E.R.T.A., 1990. Australia/New Zealand (Cooperation a n d Coordination agreement between the Australian T r a d e Practices Commission a n d the N e w Zealand Commerce Commission, 26 July 1994).

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exchange of information between antitrust authorities in three respects: first, on current antitrust enforcement policy; second, on anticompetitive conduct that is 'relevant to, or may warrant, enforcement activity by the other Party's competition authorities'; thirdly, the antitrust authorities of one jurisdiction may request information in the possession of their counterpart agency, which may be necessary for the requesting party's antitrust enforcement activities. The agreement specifically excludes the exchange of confidential information, which is protected under national confidentiality laws, unless the company involved agrees to the exchange of such information.51 The provisions of the E.C./U.S. antitrust cooperation agreement have limited scope. They do not give antitrust authorities any investigative powers to collect evidence abroad, where they need to examine anticompetitive conduct of foreign firms. Also, the right to request foreign antitrust authorities for information is limited to data that are already within their possession, and which are not confidential. The agreement does not provide for the possibility of assistance in the collection of evidence. Generally, even upon specific request, antitrust authorities do not gather domestic information needed by foreign antitrust authorities. The U.S. and Canada entered a Mutual Legal Assistance Treaty (M.L.A.T.) in 1990, which contains a stronger information exchange provision. It provides for the exchange and collection of data by the other party's authorities upon request, including the provision of documents and records, the execution of searches and the taking of oral testimony.52 However, this agreement is limited to criminal proceedings53; it does not apply to civil antitrust cases,54 which 51

Neither party is required to provide information 'if disclosure of that information . . . is prohibited by the law of the Party possessing the information, or would be incompatible with important interests of the Party possessing the information': E.C./U.S. cooperation agreement, supra note 50, Art. VIII. T h e exchange of confidential information was allowed in the 1994 Microsoft case upon agreement of Microsoft. 52 T h e first case under the U.S./Canada M.L.A.T. was a joint criminal antitrust prosecution of U.S. and Canadian authorities against price fixing in N o r t h America with regard to thermal fax paper by Kanzaki of the U.S. and Mitsubishi from Japan, which resulted in fines against both companies. U.S. and Canadian prosecutors attack cartel behaviour by fax paper distributors, 67 Antitrust & T r a d e Reg. Rep. 108-109 (1994). 53 In the U.S., criminal violations of the Sherman Act include price fixing a n d conspiracy. In C a n a d a , criminal violations of the Competition Act include conspiracy a n d bid rigging. 54 See, e.g., Calvin S. Goldman and Joel T. Kissack, Cooperative Antitrust Enforcement Efforts Between C a n a d a a n d the United States: Investigations, Information Sharing a n d Confidentiality in Criminal Proceedings, Discussion Paper prepared for the A n n u a l Meeting of the American Bar Association Section of Antitrust Law, 6 August 1995; Diane P. W o o d , The Internationalisation of Antitrust Law:


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is the approach generally taken with respect to predatory pricing and merger control. Regarding enforcement of decisions in another jurisdiction, only the E.C./U.S. agreement and the A.N.Z.C.E.R.T.A. provide for cooperation. The E.C./U.S. agreement contains a provision on interagency assistance in enforcement activities. U.S. authorities shall assist E.U. authorities in the enforcement of a decision against a company in the territory of the former, and vice versa. However, the agreement does not limit the sovereignty of any party. Therefore, activities to enforce antitrust decisions of one party in the territory of the other party are restricted to cases where both parties have a common interest in doing so.55 In contrast, the A.N.Z.C.E.R.T.A. provides for mutual recognition and enforcement of court decisions.56 Options for the Future, Address before the DePaul Law Review Symposium, 3 Feb. 1995 (U.S. D.O.J., Washington, D.C.), 6-8; Georges Addy, Competition Act Amendments (Canadian Competition Bureau 1995) (hereinafter 'Addy 1995a'), 11-14; Georges Addy, International Harmonization and Enforcement Cooperation: The Canadian Experience, in

Wang Chih-Kang et al. (eds.), International Harmonization of Competition Laws (1995) (hereinafter 'Addy 1995b'), 400-4; Hachigan, supra note 49. The 1994 NA.F.T.A. encourages member states to cooperate on antitrust enforcement including mutual legal assistance, notification, consultation and exchange of information relating to enforcement. The North American Free Trade Agreement between Canada, the United States and Mexico (N.A.F.T.A.), Ch. 15 (Competition Policy, Monopolies, and State Enterprises) (17 Dec, 1992). In 1994, the U.S. adopted the International Antitrust Enforcement Assistance Act (I.A.E.A.A.), which aims to facilitate cooperation between U.S. antitrust enforcement agencies and their foreign counterparts. The I.A.E.A.A. authorizes the Department of Justice and the Federal Trade Commission to conclude Mutual Assistance Agreements (M.A.A.s) with foreign antitrust authorities, and to disclose information to those foreign agencies which have entered into M.A.A.s with the U.S. This includes the collection of information by U.S. agencies for foreign antitrust authorities, as well as the disclosure of information already in the possession of U.S. authorities to foreign antitrust agencies. Canada has a similar law, the Mutual Legal Assistance in Criminal Matters Act, which on the one hand implements the M.L.A.T. with the U.S., and, on the other hand, aims to conclude M.L.A.T.s with other foreign governments, although restricted to criminal matters. 55

Art. IV of the E.C./U.S. cooperation agreement, supra note 50, states: '(1) T h e competition authorities of each Party will render assistance t o the competition authorities of the other Party in their enforcement activities, t o the extent compatible with the assisting Party's laws a n d important interests, a n d within its reasonably available resources. (2) In cases where both Parties have a n interest in pursuing enforcement activities with regard t o related situations, they m a y agree that it is in their mutual interest t o coordinate their enforcement activities . . . ' 56 Petersmann 1994a, supra note 8, at 17.

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We recommend the conclusion of a multilateral agreement within the W.T.O. which provides for cooperation among jurisdictions as to the collection of evidence and enforcement action. This includes the following services of antitrust agencies in one country upon request by authorities in another country in civil and criminal antitrust proceedings: disclosure of information in the possession of antitrust authorities, even confidential—complemented with adequate safeguards57; collection of data through foreign authorities and their compulsory investigative powers58; and mutual recognition and enforcement of antitrust decisions rendered by administrative agencies or a court in one country through authorities and/or courts in another country. Such far-reaching obligations to provide information to foreign authorities and to enforce decisions rendered in a foreign country may entail a loss of sovereignty, which can be counterbalanced only through both reciprocal rights and effective rules on negative and positive comity.

2. Multinationals in Developing Countries Many developing countries are concerned about restrictive business practices by powerful multinational enterprises (M.N.E.s) and the abuse of their market power at the expense of developing countries. For instance, such monopolistic and trade-restricting practices of M.N.E.s may consist of requirements for subsidiaries in developing countries to buy imports from the parent company instead of local suppliers, the prohibition of subsidiaries from exporting products, or abusive licensing of technology. Traditionally, developing countries have been using regulations of foreign direct investment to control anticompetitive business behaviour of multi57

T h e V a n M i e r t R e p o r t emphasises the need to eliminate 'current obstacles relating to confidentiality rules applicable to exchanges of information' in the bilateral E.C./U.S. cooperation agreement: V a n Miert R e p o r t , supra note 27, at 14. Similarly, Georges Addy, former D i r e c t o r of the C a n a d i a n Bureau of Competition Policy, recognised 'the need t o c o m m u n i c a t e confidential information selectively... to foreign competition law agencies' a n d t h a t this requires 'a well-established framework for the treatment of confidential information a n d with adequate safeguards for the protection of those whose interests a r e affected': A d d y 1995a, supra note 54, at 11-14. 58 Georges A d d y m a d e a similar suggestion for bilateral cooperation agreements: '[m]utual assistance could include the following: authorizing the Director to use the compulsory p o w e r s available u n d e r the Act to obtain information for the enforcement

of another country's competition laws; and authorizing the Director to provide a foreign authority, upon request or at his own initiative, with information in his possession that may be relevant to the enforcement of the Competition Act or foreign competition law': id.


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nationals, including regulation of imports, exports, manufacturing, foreign exchange, repatriation of returns, local equity and the transfer of technology. Because of trade distortions caused by excessive investment requirements, the Uruguay Round agreement on Trade-Related Investment Measures (T.R.I.M.s) has declared some measures relating to imports and exports to be incompatible with the G. A.T.T. rules of non-discrimination and the prohibition of quantitative restrictions. However, many restrictions of trade and investment in developing countries will still be allowed under the T.R.I.M.s agreement.59 In parallel, developing countries have supported attempts to establish disciplines for restrictive business practices by powerful multinational enterprises on the international level. As a result, the international community, as gathered within the U.N.C.T.A.D., adopted 'The Set of Multilaterally Agreed Principles and Rules for the Control of Restrictive Business Practices' 60 in 1980, and 'The Code of Conduct on Transfer of Technology' in 1981, which, however, are not legally binding. The U.N.C.T.A.D. R.B.P. code emphasises the danger that anticompetitive conduct in international trade may restrict market access and competition, entailing negative effects on trade, especially with respect to developing countries.61 The code establishes detailed substantive antitrust rules for the conduct of private enterprises, including cartel agreements, the abuse of monopoly positions and mergers; and recommends cooperation between governments with regard to antitrust enforcement, exchange of information and multilateral consultations.62 Furthermore, some 59

A list of trade related investment measures, along with a discussion of the results of the U r u g u a y R o u n d T.R.I.M.s agreement, is provided by L o w a n d Subramanian, supra note 11, at 1-6. T h e following are inconsistent with the T.R.I.M.s agreement: local content rules, trade balancing requirements, foreign exchange balancing requirements, a n d domestic sales requirements. T h e following regulations will be not inconsistent with the agreement: manufacturing requirements or limitations, export performance requirements, product mandating requirements, exchange restrictions, technology transfer requirements, licensing requirements, remittance restrictions, a n d local equity requirements. 60 U . N . C . T . A . D . document T.D./R.P.B./CONF/10 (1980). 61 U . N . C . T . A . D . , C o d e of Conduct on Transfer of Technology, Int'l Investment Instruments: A C o m p e n d i u m , 1 Multilateral Instruments 181 ( U . N . 1996). T h e code condemns 'acts or behaviour of enterprises which, through an abuse or acquisition a n d abuse of a d o m i n a n t position of market power, limit access to markets or otherwise unduly restrain competition, having or being likely to have adverse effects on international trade, particularly that of developing countries, a n d on the economic development of these countries, or which through formal, informal, written or unwritten agreements or arrangements a m o n g enterprises, have the same impact'. U . N . C . T . A . D . (1980), supra note 60. 62 Petersmann 1994a, supra note 8, at 7-8, 17-18, 24.

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developing countries have unsuccessfully attempted to get the issue of restrictive business practices on the agenda of the Uruguay Round international trade negotiations.63 International antitrust rules could remedy market access restrictions caused by anticompetitive behaviour of dominant foreign firms in developing countries. Moreover, international antitrust rules that supersede investment regulations in developing countries could overcome trade distortions caused by excessive investment controls. However, substantive international antitrust rules are not necessary to control anticompetitive business practices by foreign investors. Instead, adoption and enforcement of antitrust laws in the countries where the restrictions of competition occur will likely be sufficient. Thus, we recommend that all countries adopt antitrust laws at the national level.64 Any country is free to adopt national antitrust laws unilaterally and should be encouraged to do so. Effective antitrust enforcement should substitute for excessive controls of foreign direct investment and the transfer of technology by multinational enterprises, as well as trade and production of their subsidiaries. As a complement, effective enforcement of antitrust law may, in some cases, require cooperation between national antitrust authorities regarding the collection of evidence and enforcement abroad, as discussed in the previous section. We therefore suggest a complementary international agreement facilitating interagency antitrust cooperation and consultations.

E. Spillovers of Regulating Competition in One Country on the Competitive Process of Another Country Anticompetitive behaviour and antitrust regulation of one juridiction may have spillover effects on competition in another jurisdiction. Such may be the case when there is a merger between two worldwide dominant firms in a global market. Although both firms might be located in the same jurisdiction, the effects of possible monopolisation are not limited to this jurisdiction, but may occur in other jurisdictions where those firms conduct business. Likewise, the regulation of such a merger under antitrust law of the home country, including its approval (with or without conditions) or rejection, will generate effects on 63

Blackhurst, supra note 9, at 227; Petersmann 1994a, supra note 8, at 9. Similarly the E . U . G r o u p o f Experts stated: '[o]ne should commence with the introduction of an a d e q u a t e set o f competition rules by those countries that d o not yet have o n e ' : V a n Miert Report, supra note 27, at 13. Adoption a n d enforcement of national antitrust laws in member countries was also a requirement in the draft I.T.O., as well as in the N . A . F . T . A . 64


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competition in foreign markets. Such issues were raised in cases such as the merger between DeHavilland and Aerospatiale-Alenia. Spillovers of restrictive business practices and of antitrust enforcement may also occur in other areas, such as various forms of anticompetitive behaviour by globally dominant firms that create or strengthen a globally dominant position. Potential concerns in this regard were raised by the practices of Microsoft, including alleged abusive licensing practices. This section does not discuss strategically intended spillover effects aimed at giving domesticfirmsa competitive advantage over foreign firms, which is covered in the section on strategic antitrust policy. Rather, it will focus on situations where a market is global and a firm is globally dominant, which may sometimes create spillover effects of anticompetitive behaviour, and its antitrust regulation from one country to another. 1. Merger Regulation in Global Markets Mergers may produce spillover effects in foreign countries wherever international trade occurs. The more global a market is, the larger will be the spillover effects between countries. No external effects will result where national markets are closed or no trade occurs. However, a merger in a closed economy today may also have future effects on a foreign market once trade between countries becomes liberalised. Spillover effects of a merger on other countries may occur regardless of whether the merging firms are located in different or in the same jurisdiction. Table 1 summarises the circumstances under which mergers and merger regulation produce external effects, and the nature of such external effects. Facing possible multiple effects of mergers, many countries may claim jurisdiction over a merger. This, in fact, often occurs.65 The one or two countries where the merging firms are located are likely to control the antitrust implication of a merger. Furthermore, some of the effects are not restricted to the home countries of the firms involved, but spread to the territory of other jurisdictions,66 which may initiate a merger investigation under their own antitrust laws. 65

See, e.g., the Whish/Wood study, supra note 23, which examined 9 international merger cases involving investigations by more than 2 national national antitrust a u t h o r ities. T h e merger between Gillette and Wilkinson was examined by the authorities o f 14 countries. 66 T h e U . S . , for instance, claims subject matter jurisdiction under Sec. 7 of the Clayton Act over any merger that h a s effects on U . S . imports. U . S . D . O . J . / F . T . C , Antitrust Enforcement Guidelines for International Operations, (1995) 119-20, especially 'Illustrative Example H \

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Table 1: Effects of Mergers on International Trade and Their Antitrust Regulation Closed Markets

Merging firms are located in the same jurisdiction

Mergingfirmsare located in different jurisdictions

Segmented Markets Global Market

Effects: Domestic effects + effects in foreign countries Possible regulation by: home country of the merging firms foreign countries affected by the merger Problems: lack of consideration of anticompetitive effects on foreign markets diverging evaluation of the competitive effects of a merger procedural differences collection of data and enforcement action abroad Cases: Gilettel Wilkinson Effects: Effects: No effects on competition Effects in both home markets + effects on third countries in either home or third Possible regulation by: countries; effects might spread to other countries home country of one firm home country of the other firm after trade liberalisation third countries affected by the Regulation: merger No regulation required Problems: Similar to above case Cases: DeHavillandIA lenia

Effects: Effects are only in the home country; future effects might occur abroad after trade liberalisation Regulation: by the home country

A variety of problems may arise when antitrust authorities of more than one country attempt to control a merger under national law, including problems resulting from procedural and substantive differences in national merger regulations, the lack of national antitrust authorities to consider effects in foreign


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markets, and the collection of evidence and enforcement action abroad.67 Similar issues might arise with global abuses of dominant positions or monopolisation strategies, as discussed in the following subsection.

2. Different Merger Evaluation by National Antitrust Agencies Different approaches toward antitrust policy across jurisdictions may lead to divergences in the evaluation of mergers. National antitrust policies vary with respect to their basic objectives, their economic approach and the weighing of positive and negative effects of a merger. As a result, national antitrust authorities may reach different conclusions regarding a merger, even though they have the same information on the merger transaction and the market, and the effects of the merger are similar in both markets. For example, country A might prohibit a merger because it creates a monopoly, while country B does not anticipate output restrictions because it expects discipline by potential competitors. As a result, antitrust authorities in country A might permit the merger, while authorities in country B see important anticompetitive effects that cause them to prohibit the merger. Furthermore, the objectives of national antitrust policies differ with respect to the degree to which they focus on consumer welfare, total economic welfare or general public interest. Whereas a consumer welfare approach does not allow mergers that restrict output, a total economic welfare approach allows consideration of gains in productive efficiency, and a public interest approach permits consideration of a variety of factors beyond economic efficiency. Whether a merger will be approved depends on those countries that have effective control of the mergingfirms,and that have the strictest antitrust standards. A decision to prohibit a merger may be contrary to the wishes of the affected countries with no control over the merging firms or with a less restrictive antitrust approach (see Box 5.1). Insofar as differing evaluations of the long-term effects of a merger stem from different schools of thought in economics and/or different antitrust experience, one approach cannot be preferred over another. Several approaches may be reasonable, diverging only with regard to the estimated future effects of a merger, which cannot be known with certainty in advance. No one approach is therefore prima facie correct. 67

In addition, where strict merger control in a country prevents the acquisition of a domestic firm by a foreign company, this can be regarded as a barrier to foreign investment. Nevertheless, if antitrust law is applied in a non-discriminatory way, this is simply an issue of compliance of foreigners with local rules of the host country.

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Presently, no binding remedies are available where antitrust approaches vary toward merger control. Relief is possible only through cooperation between national antitrust authorities, convergence or harmonisation of national antitrust standards. However, harmonisation of substantial antitrust standards, their objectives and enforcement, is not a realistic goal. Rather, mechanisms of cooperation between national antitrust authorities to prevent conflicts Box 5.1: The DeHavilland, Institut Merieux, and Boeing-McDonnell Cases Diverging National Merger Evaluations In 1991, the two European firms Alenia of Italy and Aerospatiale of France attempted to acquire the DeHavilland Division from Boeing of Canada. Investigations were initiated in the European Community and in Canada. While the Canadian Bureau of Competition approved the merger, the European Commission prohibited it, concluding that it would restrict effective competition in the market for commuter aircraft. Although both authorities agreed that the relevant market was global, they disagreed as to the effects of the merger on global competition. The 1989 merger between Institut Merieux of France and Connaught of Canada raised antitrust concern in Canada as well as in the United States. Institut Merieux and Connaught were dominant in the U.S. and Canadian market for a rabies vaccine. Furthermore, Connaught had a monopoly in both countries' markets for a polio vaccine, for which Merieux was a potential competitor, but did not use its license to produce and sell the polio vaccine. The U.S. F.T.C. considered competition endangered in both the rabies vaccine market, where both firms combined had a monopoly, and in the polio vaccine market, because the merger would eliminate the threat of market entry by Merieux. The F.T.C, therefore, allowed the merger only after entering into a consent decree with Connaught requiring the lease of Connaught's Canadian rabies vaccine business to a third party. By contrast, the Canadian Bureau of Competition did not object to the merger, because it considered that the existence of other potential competitors from the U.S. and Europe could discipline the monopoly in the polio vaccine market created by the merger between Connaught and Institut Merieux. In 1997, Boeing Co. proposed to merge with McDonnell Douglas, which would have directly impacted competition in the global commercial aircraft market. Since antitrust officials on the two sides of the Atlantic have different legal approaches to mergers, the proposed transaction almost immediately received a negative reaction from the European Union, while it was approved by the United States. The E.U.'s stance was characterised (by The Economist) as based more on law and politics than economics. The E.U.


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ultimately cleared the merger, but not without extracting commitments from Boeing, including the cessation of existing and future exclusive supply deals; 'ring fencing' McDonnell Co.'s commercial aircraft activities; and licensing patents to other jet aircraft manufacturers. The E.U. also indicated it would strictly monitor Boeing's compliance with these commitments. Sources: [1991] O.J. L-334 42; Director of Investigation and Research (Canada), 1990 & 1992 Ann. Rep.; Will economics bless this union?, The Economist, 2 Aug. 1997; European Union, press release dated 30 July 1997.

stemming from different merger evaluations should be pursued. An international agreement within the W.T.O. could include rules on general and case-bycase cooperation among governments and national antitrust agencies, positive and negative comity, the exchange of general and case-specific information, and transparency of national antitrust policies.

3. Lack of Consideration of Effects in Foreign Markets National antitrust authorities may fail to consider the effects of a merger on the competitive process of other countries. If national markets are segmented, the impact of a merger on different national markets may vary, depending on the competitive pressure of domestic and other foreign competitors or the lack thereof. Furthermore, a potential conflict might occur where efficiency gains of a merger benefit one jurisdiction, while the anticompetitive effects harm another jurisdiction. Antitrust authorities in thefirstjurisdiction might permit the merger if its law contains an efficiency defence, whereas authorities in the other country are likely to prohibit the merger for its negative effects on competition. Such situations may occur even where national antitrust laws are identical. If, for example, segmented markets exist in countries A and B, and country A allows a merger between twofirmsin its jurisdiction, Country B may be negatively affected by the merger evaluation of country A's antitrust authorities. For instance, welfare losses may occur if the new dominant firm decides to restrict output and raise prices in markets where there are no domestic competitors and no other foreign rivals due to market segmentation.68 68

Eventually, market segmentation may be overcome, but as long as markets are segmented, these effects may occur.

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Some jurisdictions, such as the E.U. and the U.S., have expressed a willingness to consider, on a unilateral basis, foreign interests in their antitrust enforcement activities.69 Moreover, some jurisdictions have concluded bilateral agreements to facilitate cooperation between national antitrust authorities, such as the E.U. and the U.S.70 These agreements typically provide for rules on positive and/or negative comity to respect foreign interests in national antitrust enforcement.71 We recommend inclusion of rules on positive and negative comity in a W.T.O. antitrust agreement, requiring that national antitrust enforcement agencies initiate an investigation upon request by a foreign country (positive comity), and take into account anticompetitive effects of domestic restrictive business practices in foreign countries when evaluating the effects on competition (negative comity), possibly in cooperation with foreign antitrust agencies. Antitrust authorities should not discriminate between domestic and foreign competitors and competition.72 Adversely affected countries should have the possibility of challenging foreign antitrust enforcement or non-enforcement before a W.T.O. panel. Dispute 69

T h e 1995 U . S . Antitrust Enforcement Guidelines for International Operations, supra note 67, at 20, provide 'In enforcing the antitrust laws, the Agencies [D.O.J. and F.T.C.] consider international comity. . . . In determining whether to assert jurisdiction to investigate o r bring a n action, or to seek particular remedies in a given case, each Agency takes into account whether significant interests of any foreign sovereign would be affected'. C o u r t s applied comity previously in the Timberlane and M a n n i n g t o n Mills cases (Timberlane L u m b e r C o . v. Bank of America, 549 F2d 597 (Cir. 1976); M a n n i n g t o n Mills, Inc. v. Congoleum Corp., 595 F.2d 1287 (3rd Cir. 1979)). Likewise, E . U . antitrust agencies respect foreign interests in antitrust enforcement, as shown in the I.B.M. case, where the E.U. suspended the case because enforcement would have h a d an unacceptable impact o n competition in the U . S . C o m m ' n v. International Business Machines C o r p . (1987) 3 C . M . L . R . 147. 70 E.C./U.S. Agreement, supra note 50. 71 Positive comity means that country A m a y ask for antitrust enforcement in country B where anticompetitive practices b y firms in country B adversely affect competition in country A. Negative comity requires that country A takes into account in its antitrust enforcement effects o f anticompetitive conduct by domestic firms o n competition in c o u n t r y B. T h e following bilateral antitrust cooperation agreements contain negative comity: G e r m a n y / U . S . , supra n o t e 50; Australia/U.S., supra note 50; C a n a d a / U . S . , supra note 50, F r a n c e / G e r m a n y , supra note 50; E.C./U.S., supra note 50. Positive comity is p r o vided for in the E . C . / U . S . agreement, supra note 50, and the A . N . Z . C . E . R . T . A . , supra n o t e 50. F o r an overview, see Petersmann 1994a, supra note 8. 72 Such a d o u b l e non-discrimination rule has been suggested by Petersmann 1994c, supra note 6, at 270.


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settlement should cover (1) the failure to initiate an investigation upon request by a foreign country, which should be considered a violation of the positive comity rule,73 and (2) the failure to investigate anticompetitive effects in foreign markets. In evaluating such cases, the W.T.O. panel should be particularly sensitive to whether a transaction will result in the reduction of global output and/or trade, or otherwise impede market access.

4. Collection of Evidence and Enforcement Action Abroad The firms involved in transnational mergers may not have subsidiaries in all countries where effects occur. For this reason, antitrust authorities in some countries may encounter difficulties in collecting information required to reach an informed decision on the impact of a merger. They have no legal powers to demand information from firms located abroad, with no subsidiaries in their own jurisdiction. Likewise, once antitrust authorities have reached a decision not to permit a merger or to impose certain conditions, the enforcement of such a decision may be impossible if the companies are located abroad with no domestic subsidiaries. These problems may result in the unsatisfactory situation that a merger may produce substantial anticompetitive effects in a country, with antitrust authorities being unable to block the merger or require modifications. Therefore, some countries, although adversely affected, may lack effective control over a merger. This problem has already been discussed above, in the section which addressed anticompetitive behaviour by exporters in the import market. We concluded that inter-country cooperation agreements should be extended to the global level, including giving foreign firms legal standing in other jurisdictions, and with appropriate safeguards, providing for the exchange of information, the collection of data through foreign authorities, and the enforcement of decisions by authorities abroad.

73

The E.U. Group of Experts has suggested a similar construction of positive comity enforced via international dispute settlement. However, the Group suggests extraterritorial enforcement of national law as an alternative to dispute settlement where a foreign country refuses to initiate an antitrust investigation. By contrast, we consider extraterritorial enforcement of antitrust law only as a retaliatory measure upon authorisation by the W.T.O. after a panel found violation of positive comity obligations. See also Petersmann 1995, supra note 28, at 20, 22.

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5. Costs Due to Procedural Differences The initiation of merger control proceedings in multiple jurisdicitons inflicts high costs on administrative agencies and on merging firms. These costs are even greater when procedural differences exist.74 For example, merging firms must notify authorities in multiple countries, provide documents to all national authorities, deal with different forms, different procedures and deadlines, different timetables for approval, and possibly even different conditions for approval.75 Cooperation between national antitrust authorities, as well as enhanced transparency of merger control proceedings and harmonisation of some elements of procedural law, are desirable. Cooperation and harmonisation of procedural elements may reduce costs to enforcement agencies merging firms, as well as to their competitors, without jeopardising national sovereignty regarding substantive merger standards. The 1994 O.E.C.D. report by Richard Whish and Diane Wood identifies several areas where procedural cooperation may be beneficial, including coordination of timetables, development of model filing forms, and alignment of notification requirements.76 Moreover, the O.E.C.D. Committee on Competition Law and Policy has suggested convergence in merger review pro74

T h e occurrence of high costs involved with multiple national merger proceedings has been recognised in the O.E.C.D. Interim R e p o r t on Convergence of Competition Policies: '[i]ndeed there is concern that diverging competition laws and enforcement practices result in administrative, compliance a n d enforcement costs for government and the private sector, although these cost burdens have yet to be properly documented and are based for the most part only on anecdotal evidence'. O.E.C.D. Committee o n Competition L a w a n d Policy, Interim R e p o r t o n Convergence of Competition Policies, O . E . C . D . (95) 139/Final. 75 A s noted above, the Whish/Wood Report, supra note 23, examined 9 internationally i m p o r t a n t merger cases, in which more than 2 antitrust agencies were involved. In the 1992 merger between Gillette a n d Wilkinson in the market for wet-shaving razor blades, 14 antitrust agencies got involved, imposing tremendous costs on the merging firms as well as o n their competitors, Warner-Lambert a n d Bic. 76 W h i s h / W o o d R e p o r t , supra note 23, at 97-115. Harmonisation of procedures o n the basis of the W h i s h / W o o d Report found support by the 1995 E.U. G r o u p of Experts. Van Miert R e p o r t , supra note 27, at 17. Similarly, the American Bar Association Special C o m m i t t e e o n International Antitrust suggested in its 1991 report that 'sovereign states should strive for greater harmonisation regarding the timing and content of their various premerger reporting requirements. I n particular, the same types of information should be required in each jurisdiction'. Reprinted as annex to Whish/Wood Report, supra, at 121. See also F o x , supra note 5, at 33, who suggests c o m m o n merger notification a n d report forms, as well as enhanced transparency of national merger policies.


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ceedings, such as early notification and contacts between national antitrust authorities involved in a case, model merger notification forms, and model forms that permit the waiver of confidentiality, thus facilitating the sharing of confidential information between national antitrust agencies.77 6. Dominance of Large Markets' Antitrust Regulation Smaller countries must generally accept merger control of multinationalfirmsby bigger countries. Small countries fear that a company may stop doing business in their market if merger enforcement is stricter than in larger markets. Rather than respecting higher merger control standards in a small country, a multinational firm might chose to abandon that market and proceed with a merger that is more likely to be approved in its major markets.78 As a consequence, merger standards of big markets tend to dominate the worldwide regulation of competition regarding global strategies, such as mergers, of multinational firms. Only convergence or harmonisation of merger control rules could remedy this imbalance between large and small countries. However, even in harmonisation negotiations, small countries would probably have to make concessions in order to reach a compromise. Therefore, the globalisation of markets results in the loss of power by smaller countries in the regulation of mergers, whether merger rules are harmonised or differ from country to country. 7. Regulation of Abuses of Dominant Position in Global Markets Various abusive practices by globally dominant firms may produce similar problems to those produced by mergers.79 Table 1, as well as the list of problems that can arise with respect to mergers in global markets, are valid not only 77

See O.E.C.D. Committee on Competition Law and Policy, 'Interim Report on C o n vergence of Competition Policies', 49 Aufienwirtschaft 334, 346 (1994); O.E.C.D., Revised Recommendation of the Council concerning Cooperation between M e m b e r Countries on Anticompetitive Practices Affecting International Trade, C(95) 130/Final (July 1995). 78 If there is continuous demand in such an ' a b a n d o n e d ' small c o u n t r y , other enterprises might attempt to trade the affected goods from a n e i g h b o u r m a r k e t t o the small country. Eventually, the small country must accept t h a t it is n o t able t o enforce stricter antitrust standards against multinational firms than major markets do. 79 The issue of abuse of dominant position in segmented markets has been discussed above, in the section addressing anticompetitive behaviour by exporters in the import market, which dealt with predatory pricing and abusive practices of multinationals in developing countries.

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for mergers but also for many global monopolisation cases or monopolistic strategies. An example for globally anticompetitive behaviour by a dominant firm is Microsoft's alleged abusive licensing practices, which in 1994 were simultaneously challenged by the U.S. and the E.U. Box 5.2: Microsoft—Monopolistic Selling Practices, Abusive Licensing In 1994, the U.S. and the E.U. filed antitrust actions against Microsoft, which resulted in two similar settlements between Microsoft on the one hand, and the U.S. and the E.U. on the other hand.80 It was the first time the U.S. and the E.U. cooperated in an antitrust investigation under the 1991 antitrust cooperation agreement. The charges against Microsoft, the dominant producer of computer operating software, included exclusionary per processor licences, unreasonably long licences, and non-disclosure agreements which restricted the development and sale of competing software products. Under its exclusive license agreements, Microsoft required PC manufacturers to pay a fee per PC sold, regardless of whether it contained pre-installed Microsoft software, thereby discouraging PC manufacturers from installing other operating software. In the settlements, Microsoft committed to discontinue the anticompetitive practices. Besides being an example of successful cooperation between antitrust agencies in the U.S. and the E.U., the Microsoft case also shows that there were no major differences in substantive antitrust laws between the E.U. and the U.S., which resulted in identical settlements between Microsoft and the two authorities. Nevertheless, the nature of Mircrosoft's practices did not prevent the U.S. or the E.U. from concluding different settlements with Mircosoft if they had followed different antitrust approaches. Although Microsoft's conduct was global, it could have been split up in marketspecific strategies in order to comply with different national antitrust laws, without directly affecting competition in foreign markets. Differences in national antitrust laws would not have produced negative spillover effects abroad. The evaluation of global abusive or monopolising behaviour depends on whether a company can pursue different strategies in different countries, while complying with different national antitrust rules. Generally, where market80

U.S. v. Microsoft Corp. 56 F.3d 1448 (D.C.Cir. 1995) Microsoft settles accusations of monopolistic selling practice, 67 Antitrust & Trade Reg. Rep. 106 (1994).


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specific behaviour is possible, national antitrust authorities can continue to regulate those practices under their respective antitrust rules. Thus, products will be sold in each national market at a price and in a manner that is in accordance with the different national antitrust laws. However, if a business strategy is generically not divisible between markets, a firm will either pursue this strategy on a global level or drop it globally. This implies that large jurisdictions with strict antitrust enforcement will eventually set the standard. Smaller countries are not likely to be able to control global strategies, for if they attempt to do so, a multinational firm may abandon such a small market. The problems discussed above with respect to merger control apply also to regulation of abuses of dominant position, such as (1) difficulties in the collection of evidence and enforcement action abroad, (2) jurisdictional conflicts as to differences in the evaluation of positive and negative effects, (3) failure to consider varying anticompetitive effects abroad, and (4) procedural inconveniences for companies.

F. Strategic Antitrust Policy Governments sometimes attempt to give domestic industries a competitive advantage over foreign rivals. This is often called 'strategic trade policy'. The usual instrument to support domestic industries facing global competition is subsidies. Antitrust policy can be another means to enhance the power of domestic industries vis-a-vis foreign competitors. Instead of limiting market power of firms through strict antitrust enforcement, a government may grant certain exemption from antitrust discipline to firms facing global competition in order to increase their dominance in world markets. For instance, this may occur by exempting export cartels from the general prohibition of cartels, or allowing certain mergers. Such strategically motivated arguments in antitrust enforcement may be called 'strategic antitrust policy. In economic terms, such strategic antitrust exemptions aim at shifting rents from foreign companies to domestic industries, which may increase profits as the result of more sales in foreign markets, thereby benefiting national economic welfare. However, costs may occur as well if competition in the domestic market is substantially lessened by granting exemptions from general antitrust discipline, thus inflicting costs on consumers due to a possible price increase.

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1. Exemptions for Export Cartels Many jurisdictions, including Canada, the U.S., the E.U. and Japan,81 legally exempt export cartels from the general prohibition of cartels. Countries permit exporting firms to join export associations, which may range from common marketing to price fixing, in order to prevent domestic firms from competing against each other in foreign markets, and allowing them to join forces against foreign competitors, and to shift rents from foreign to domestic firms. As long as the colluding exporters continue to compete in the home market, there are no negative effects in the domestic markets. For instance, a deal has been entered between Siemens and G.E.C. Alsthom in Europe for joint marketing of high-speed trains in non-European markets against their common rival in Japan. Furthermore, several international cartels regarding certain raw materials, such as diamonds, in practice may have similar effects as export cartels, since domestic consumption in the producing country is unimportant. Toleration of an export cartel under antitrust law of the home country to exploit its market power abroad at the expense of foreign companies and consumers is a 'beggar-thy-neighbour' policy.82 One country tries to improve its economic welfare at the expense of another. There are two economic effects of such a policy. First, in an already high-price oligopolistic market, rents may be shifted from foreign to domesticfirms.The mere transfer of rents does not necessarily involve global economic welfare losses; rather, it is a 'win-lose strategy' or 'zero sum game. Secondly, export cartels may reduce competition and lead to output restrictions. Where output is being restricted and prices increase, consumers lose more than producers win, thus incurring total economic welfare losses. As a result, if export cartels reduce competition instead of merely shifting oligopolistic rents, national antitrust exemptions of export cartels

81

In the U.S., the Webb-Pomerene Act of 1918 exempts export associations from application of the Sherman Act, which prohibits cartels. In the E.U., the cartel prohibition in Art. 85 of the Treaty of R o m e applies only to restrictions of competition that have an effect on competition in the E.U., thus excluding export cartels that may have anticompetitive effects only abroad. Likewise, the Japanese Antimonopoly Act applies only to cartels that restrict competition in the Japanese market; A . M . A., supra note 26, Art. 6(1). 82 T h e O . E . C . D . recognises that 'there is growing consensus that export cartel exemptions, at least with respect to naked restraints, may be inappropriate beggar-thyn e i g h b o u r policies': O . E . C . D . Committee on Competition Law and Policy and T r a d e C o m m i t t e e , 'Joint R e p o r t ' , 18 World Competition 185, 188 (1994).


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Box 6.1: Siemens! G.E.C. Alsthom—Export Cooperation in the Market for High-Speed Trains In July 1995, Siemens of Germany, the manufacturer of the InterCity Express train, and G.E.C. Alsthom, the Anglo-French producer of the Train Grand Vitesse, announced a project on the joint export marketing of high speed trains outside Europe and North America. The cooperation plan aims to end rivalry in export markets, and to join forces to compete with the Japanese rival, which is building the Shinkansen train in Japan. Mr. Heinrich von Pierer, chief executive of Siemens, predicts that at the end of the decade, 'you will have competition between a high-speed train made in Europe and a high speed train made in Japan. The project would include agreement on dividing up the world market among both European companies, ruling out that one company sells in the assigned territory of the other. It is most likely that the conclusion of such agreement would not violate European competition law, because the anticompetitive effects of reduced competition will occur only in foreign markets, whereas the increased profits will benefit the European companies. Source: the Financial Times, 25 & 26 July 1995. Andrew Baxter, Michael Lindemann and John Ridding, A transport of delight in the air: Will an 'Airbus on rails' plan get off the ground? Financial Times, 26 July 1995, p. 14.

result in a 'lose-lose strategy' or 'negative sum game, where economic welfare is lost internationally.83 We recommend two complementary measures as a remedy against export cartels. First, countries should agree reciprocally to abolish export cartel exemptions and abandon beggar-thy-neighbour policies.84 Although a ten83

There is, however, no 'race to the b o t t o m ' regarding antitrust standards, because any agreement a m o n g firms entailing anticompetitive effects in the domestic market remains under antitrust discipline. Only where anticompetitive effects are exclusively felt abroad does the exemption apply. Therefore, there is n o tendency to lower antitrust standards for domestic trade. 84 See also Petersmann 1994c, supra note 6, at 269; F o x , supra note 5, at 22; Van Miert Report, supra note 27, at 17. In contrast, Scherer suggests prohibiting export cartels in general, but allowing each country exceptions for three well-defined sectors. Those permitted export cartels are, however, actionable in importing countries, which are allowed to countervail a foreign export cartel through a domestic import cartel in order to balance market power. F . M . Scherer, Competition Policies for an Integrated World Economy 93 (1994).

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dency may exist for cartels to be unstable and to collapse,85 especially in a global market, export cartels should not be treated with different standards from domestic cartels.86 However, once the exemptions for export cartels have been abolished, there may be little incentive in the exporting country to initiate an investigation against an export cartel whose anticompetitive effects are in a different jurisdiction.87 As a result, the initiative to enforce antitrust law against export cartels must be by the importing country, where the negative effects occur.88 We therefore suggest that importing countries harmed by export cartels apply their antitrust law to foreign cartels according to the effects doctrine. Enforcement in the importing country requires that investigative tools be improved in order to become effective against foreign export cartels. As most jurisdictions contain per se prohibitions of domestic cartels, an investigation focuses on finding evidence whether an agreement exists, may might require extensive search in the exporting country. It is therefore essential that authorities in the importing countries have tools available to collect evidence in the exporting country. Cooperation between antitrust authorities is indispensable, allowing the importing country to request the collection of evidence by antitrust authorities in the exporting country and to use their compulsory powers to this

85

Even relatively stable cartels, such as the diamond cartel, seem to weaken eventually. 'It is the most durable cartel in recent history. But after 60 years it seems in danger of tearing itself a p a r t ' Kenneth Gooding et al., Diamond Cartel Cuts Up Rough: Relations are strained between the main producers, Financial Times, 24 Aug. 1995, p . 23. 86 Petersmann 1995, supra note 28, at 18, suggested a 'national treatment obligation in the sense that domestic competition laws must treat transborder cases (e.g. export cartels) n o less favorably t h a n domestic cases.' I n addition, as price-fixing, market-sharing, a n d supply-restricting cartels are per se prohibited in most jurisdictions, a complementary international rule could provide that such export cartels are n o t enforceable at law. Sir Leon Brittan, A F r a m e w o r k for International Competition, Address before the World Economic F o r u m in Davos, Switzerland, 3 F e b r u a r y 1992, at 10; Petersmann, 1994c, supra note 6, at 270. 87 'It is recognised that even with the exemption eliminated, the exporting country may find it difficult o r lack the incentive t o assert jurisdiction over an export cartel whose anti-competitive effects are felt only in foreign markets': O . E . C . D . Interim R e p o r t , supra note 78, at 344; O.E.C.D. Joint Report, supra note 83, at 188. 88 T h e U.S. D.O.J. a n d F.T.C. have clearly stated their will to enforce U.S. antitrust law against export cartels affecting the U.S. by asserting that subject matter jurisdiction is given under the Sherman Act. See 'Illustrative Example A ' in the 1995 Antitrust Enforcement Guidelines for International Operations, supra note 67, at 13.


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end.89 Similarly, enforcement action in the exporting country requires assistance by authorities there. Cooperation between antitrust agencies regarding both the collection of evidence and enforcement action has been discussed in the previous section on anticompetitive behavior of exporters in the import market. 2. Strategic Evaluation of Mergers There is a widefieldfor including strategic arguments in the evaluation of other anticompetitive practices. Wherever antitrust law allows the balancing of the positive and negative effects of restrictive business practices, it is possible to include the argument of increasing international market power of domestic firms as a positive consequence of an otherwise anticompetitive practice. Such considerations are important in the area of merger control. The reasoning is similar to that of export cartels: domestic rivals should not waste their forces battling against each other, but instead join their forces to compete in global markets against foreign rivals. As a result, there is a tendency that merger control becomes weak against firms acting in global markets, in order to improve their market power vis-a-vis foreign rivals. Some national merger laws explicitly allow consideration of strategic aspects of mergers. For instance, the Canadian merger law takes into account whether a merger is likely to increase exports.90 In the E.U., efficiency gains and

89

'Effective enforcement against export a n d other cartels will necessarily centre o n the jurisdiction(s) in which the anticompetitive effects are felt although much of the information necessary for successful prosecution will often be located in a n o t h e r country. This m e a n s in turn that if M e m b e r countries wish to facilitate action against such agreements, they would need to focus on developing for competition officials the legal mechanisms for cooperation in international cartel investigations and especially for the sharing of information a m o n g national competition offices': O . E . C . D . Interim Report, supra note 78, at 344; O . E . C . D . Joint Report, supra n. 83, at 188. Diane W o o d , former D e p u t y Assistant Attorney General in the Antitrust Division of the U . S . D.O.J., pointed to the necessity of cooperation in the area of export cartels, where a 'strict territoriality' a p p r o a c h and non-cooperation would create 'antitrust havens'. 'If cooperation with the legitimate investigations of the countries where the effects of such conspiracies are felt is not forthcoming, the general cause of strong antitrust enforcement is h a r m e d ' : W o o d , supra note 54, at 6. 90 C a n a d i a n antitrust law permits consideration of efficiency gains of mergers, including increases in exports: '[i]n considering whether a merger or proposed merger is likely to bring a b o u t gains in efficiency . . ., the Tribunal shall consider whether such gains will result in (a) a significant increase in the real value of exports': C a n a d i a n Competition Act, Art. 96(2).

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industrial policy have an ambiguous importance in the 1989 Merger Regulation: they are permitted as long as competition is not restricted and they benefit consumers.91 Unfortunately, merger control practice is not sufficiently transparent as to the degree to which strategic arguments have played a role. By contrast, the U.S. merger guidelines and merger control practice allow for efficiency gains, but not for strategic reasons.92 However, in contrast to export cartels, which have no direct negative domestic effect, lax merger control for strategic trade policy reasons may have anticompetitive effects in the domestic market. Consequently, there is a danger of a 'race to the bottom', meaning that merger discipline may become increasingly relaxed in order to give domesticfirmsa competitive advantage in foreign markets, but at the expense of domestic consumers. A collective action problem arises from a 'prisoner's dilemma,' where every country would be better off giving up strategic merger control, but no one has an incentive to do so unilaterally. Only international cooperation can solve the dilemma through reciprocal commitments. We recommend eliminating strategic arguments in merger control proceedings through a reciprocal international agreement. The prohibition of strategic issues should cover all arguments aiming at an increase through a merger of international market power, international market share, the volume of exports and profits at the expense of a possible reduction of competition and output in the domestic market. The prohibition of strategic arguments should not include issues relating to generic efficiency gains through a merger, such as cost savings or technical rationalisation.93 Consequently, there should not be dif91

T h e E.U. merger regulation states: '[t]he Commission shall take into a c c o u n t : . . . the development of technical and economic progress provided that it is to consumers' advantage and does not form an obstacle t o competition': 89 OJ L395 f 1989] 1, Art. 2: l(b), R e.g. 4064/89. Jacqemin concluded: 'The regulation apparently does not provide for authorization in derogation from the prohibition, o n the basis of the efficiency effects of the merger': Alexis Jacquemin, Mergers and European Policy, in P.H. Admiraal (ed.), Merger and Competition Policy in the European Community (1990), 32. Furthermore, the rejection of the merger by Aerospatiale-Alenia and de Havilland ([1991] O.J. L334/42) is often interpreted as showing that industrial policy has little importance in merger control. 92 T h e U . S . Merger Guidelines by the D.O.J. and the F . T . C . d o not include a provision allowing consideration of'efficiency gains' due t o enhanced international competitiveness or export sales. An inexhaustive list of efficiency gains from mergers is included in A r t . 4 of the 1992 D . O . J . / F . T . C . Merger Guidelines. U.S. Dept. of Justice/U.S. Fed. T r a d e C o m m i s s i o n , 1992, Horizontal Merger Guidelines, 41 Fed. Reg. 552, 563. 93 T h e 1992 U . S . D . O . J . / F . T . C . Merger Guidelines include some generic efficiency a r g u m e n t s t o be allowed for in merger proceedings, such as cost savings, economies of scale, better integration of production facilities, plant specialisation and lower t r a n s p o r t costs: 2d.


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ferential treatment of mergers with international importance versus those of primarily domestic importance.94

3. Exemptions for Research and Development Cooperation Antitrust exemptions for research and development cooperation are another area where countries do not strictly enforce antitrust law, with the goal of promoting the positive effects of inter-firm cooperation on competition and economic welfare,95 as well as increasing the international competitiveness of domestic industry. Antitrust exemptions for research and development joint ventures may be abused for strategic trade-policy reasons, and may lead to a tendency increasingly to ignore anticompetitive effects. Antitrust exemptions for cooperation in research and development exist in many jurisdictions. In the U.S., the National Cooperative Research Act of 1984 recognises the pro-competitive effects of R&D joint ventures, and provides that those positive effects should be permitted in antitrust evaluation. Similarly, the legally non-binding 1980 Antitrust Guide Concerning Research Joint Ventures by the D.O.J. emphasises the procompetitive effects of R&D cooperation. The E.U. has adopted a research block exemption from the

In the E.U., it is unclear whether, and to what extent, efficiency gains may be considered in defence of a proposed merger. The 1989 Merger Regulation apparently allows only for efficiency gains that are not in conflict with competition. The Canadian Competition Act states that increases in exports shall be considered as efficiency gains would not comply with its definition of efficiency. Competition Act, R.S.C. ch C-34, Part VIII, Sec. 96(2) (1984). 94 Petersmann 1995, supra note 28, at 18, suggested, however, with regard to export cartels, a 'national treatment obligation in the sense that domestic competition laws must treat transborder cases (e.g. export cartels) no less favorably than domestic cases The Max Planck Draft International Antitrust Code contains a provision permitting a cost-benefit analysis in national merger appraisals, if an approval of the merger does not harm the interests of another country: D.I.A.C., supra note 21, Art. 12, Sec. 1; Drexl et al., supra note 27. This implicitly outlaws justification of a merger for strategic arguments. 95 Governmental promotion of R&D activities is economically justified by market failure due to insufficient appropriability of the benefits of R&D activity: Alexis Jacquemin, Comments, in F.M. Scherer, Competition Policies for an Integrated World Economy (1994), 99-105.

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general prohibition of cartels.96 Furthermore, development joint ventures are likely to obtain an individual exemption under Art. 85(3). International minimum standards should be established in order to limit possible anti-competitive effects. In general, R&D cooperation between firms has positive economic effects. However, exemptions from antitrust discipline may cause external effects if national antitrust administrations tend to disregard domestic anticompetitive effects, where domestic firms may win a competitive advantage over foreign firms. Countries may be unable to prevent excessive allowance of cooperative agreement between firms on a unilateral basis, due to a collective action problem. Therefore, an international agreement is necessary. An international agreement on antitrust treatment of R&D cooperation should define minimum standards for the kind of inter-firm cooperation that should be allowed because it is likely to bring about generally positive effects, and the kind that should be prohibited because it is likely to bring about domestic anticompetitive effects and distortion of international competition.97 A general prohibition of R&D cooperation between firms is neither desirable nor adequate, and would ignore positive economic effects brought about by those agreements. In consideration of the similarities between antitrust exemptions and governmental R&D subsidies, our suggestion is a parallel to the G. A.T.T./W.T.O. Uruguay Round Agreement on Subsidies and Countervailing Measures.98 The W.T.O. subsidy agreement takes a 'traffic light' approach in establishing three categories of subsidies: 'red': prohibited subsidies; 'yellow': allowed, but actionable subsidies; and 'green': non-actionable subsidies. The green category contains subsidies for R&D,99 which are considered procompetitive, not trade 96

[1985] 85 O J L53/5, Reg. 418/84, amended by [1993] 3OJ L21/8, Reg. 151/93. A l t h o u g h the M a x Planck Draft International Antitrust C o d e suggested comprehensive international m i n i m u m substantial s t a n d a r d s , it failed to set detailed rules for R & D c o o p e r a t i o n : D . I . A . C . , supra note 28, A r t . 4, Sec. 2; Drexl et al., supra note 28. This, however, is the only area where we perceive a need for harmonised international minimum standards. 98 F o r a discussion of the Uruguay R o u n d Agreement, see Jeffrey J. Schott, T h e U r u g u a y R o u n d : A n Assessment (1994), 8 6 - 9 3 , 158-61. There has been some convergence between the E . U . a n d the U.S. on the issue of R & D subsidies, and that this was one of the factors allowing a subsidies agreement to be reached. T h e U.S. accepted the m o r e interventionist a p p r o a c h of the E . U . 99 Agreement on Subsidies and Countervailing Measures, Art. 8. G. A.T.T., Results of t h e U r u g u a y R o u n d Multilateral T r a d e Negotiations: T h e Legal Texts (Geneva, 1994). T h e agreement m a k e s a distinction between research subsidies, which may cover up t o 75 per cent of the costs, and 'pre-competitive' development subsidies, which m a y cover 50 per cent of the costs. Further specifications are included in the agreement. 97

4- Competition Policy Objectives

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distorting, and not injurious to foreign competitors.'100 Likewise, an international antitrust agreement should include a provision establishing how broadly to define R&D, which will be granted antitrust exemption (green category). All other horizontal agreements betweenfirms(red category) may not be exempted from national antitrust laws, most of which contain per se prohibitions regarding agreements on price-fixing, output restriction, and market sharing.

G. Concluding Remarks This paper has focused on market access restrictions due to restrictive business practices and competition (antitrust) law and policy. Market access is a basic tenet which both trade and competition policy experts will embrace. However, a distinction must be made between restrictions to market access by governments versus those by private firms. International restrictive business practices should be addressed only where market access is restricted and there is insufficient relief available through existing legal-institutional arrangements. We made suggestions of possible approaches for dealing with restrictions of market access without interfering with the freedom of each country to regulate internal commerce. We have, until now, respected the economic principle of competition among rules, in the absence of external effects, as well as the G. A.T.T./W.T.O. principle of national sovereignty, to adopt non-discriminatory internal regulations including antitrust law. Harmonisation or adoption of minimum standards was suggested only where national antitrust regulation has negative spillover effects on the competitive process of other countries. However, this approach has limits where market access is being restricted due to either differing substantive antitrust standards or discriminatory enforcement or non-enforcement of existing antitrust law. Where a country either has no rules against anticompetitive behaviour by private firms that restrict market access to foreigners, or does not enforce its law, on a nondiscriminatory basis, the previously suggested remedies are not sufficient to foster market access. There is no relief withfilingan antitrust case in the country where the restrictive business practices occur. In addition, restricted market access which stems from anticompetitive business conduct in a given country may be tolerated by government(s), since 100

However, if 'green' subsidies cause injury to a foreign country, they may nevertheless be actionable. The foreign country would have to prove that those subsidies have a 'serious adverse effect' that results in 'damage which would be difficult to repair': id., Art. 9.

Abolish antidumping International cooperation of antitrust agencies: collection of evidence and enforcement action abroad Comity rules

Adoption and enforcement of national antitrust laws in the importing country (effects doctrine)

Predatory pricing Import and export restrictions for subsidiaries of M.N.E.s Abusive licensing of technology

Anticompetitive Behavior by Exporters in the Importing Country

Legal standing of exporters without subsidiaries Legal standing of private parties Strengthen private action suits Political independence of administrative agencies International dispute settlement if enforcement is discriminatory

Enforcement of antitrust law in the country where market access is restricted via filing of cases by affected exporters

Exclusive dealership Long-term business relationships Vertical integration Distributor boycotts Abusive practices by trade associations

Restriction of Market Access by Import- Competing Firms

Complementary Measures through an Agreement at the International Level

Practices

Category

Remedies at the National Level

Table 2: Remedies to Antitrust Problems in International Trade

f

Level Playing Field

Accept different approaches in antitrust policy as the deliberate choice of a nation

Abolition of export cartel exemptions Prohibition of strategic arguments in merger control International minimum standards for R&D cooperation Discuss convergence of national antitrust laws

Export cartels: enforcement of antitrust laws in the importing country (effects doctrine)

Strategic Antitrust Policy

Antitrust exemptions for export cartels Exemptions for R&D joint ventures Strategic evaluation of mergers Less strict antitrust rules or enforcement may give companies a competitive advantage over rivals in foreign markets

International cooperation of antitrust agencies: collection of evidence and enforcement action abroad Comity rules Non-discrimination rules International notification, consultations, and dispute settlement Selective procedural harmonisation

Enforcement of national antitrust laws; diversity of national antitrust laws

Spillovers of Antitrust Mergers Regulation Global monopolisation strategies

-fc.

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Table 3: Three Pillars for an International Antitrust Code International Standards

Requirement to enact national antitrust laws Allow for private action suits Guarantee political independence of administrative antitrust authorities Grant legal standing to private parties and foreigners No discrimination against foreigners Abolition of antidumping Prohibition of strategic antitrust policy: Prohibition of export cartels and strategic arguments in merger control as well as minimum standards for R&D cooperation Procedural minimum standards for merger control

Cooperation Between Antitrust Authorities

Collection of evidence including confidential information abroad through foreign agencies Assistance in enforcement action abroad by foreign authorities Negative and positive comity

International Dispute Settlement

W.T.O. dispute settlement regarding all above obligations

domestic firms benefit from a competitive advantage vis-a-vis their foreign rivals. Cases may arise wherefirmsgain a competitive advantage over others in domestic and/or international markets. In other words, an 'uneven playing field' between competingfirmsin different countries may emerge due to differences in antitrust policy. Two alternatives should be considered to deal with an uneven playing field due to differences in antitrust policy. One is to harmonise antitrust law internationally, or at least set common minimum standards. The second is to accept nationally diverging approaches toward anticompetitive conduct, even when market access of foreign firms may be restricted through government toleration of restrictive business practices. We believe that harmonisation is not feasible or necessary. Convergence in competition law principles, and the development of minimum standards, are preferred. Moreover, countries should strive to adopt, modernise and effectively enforce competition law, and forge cooperative links among antitrust authorities. In order to assist the process offindingcommon grounds for resolving international competition conflicts, this paper has attempted to identify a 'road-


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map' of case-specific issues that are likely to arise. This should be examined by the Working Group on Trade and Competition being formed within the W.T.O. The suggested approaches towards resolving the various problems are summarised in Tables 2 and 3.

Other References H. G. BROADMAN, G.A.T.T.: The Uruguay Round Accord on International Trade and Investment in Services, 17 World Economy 281 (1994). ANNE K. BINGAMAN, The Role of Antitrust in International Trade, Address before the Japan Society in New York on 3 March 1994, Washington, D.C.: U.S. Department of Justice, 1994. COMMISSION OF THE EUROPEAN COMMUNITIES, Towards an International Framework of

Competition Rules, 18 June 1996. JONATHAN FAULL, The Future World Trade Agenda: The New Issues of Competition Policy, Address presented at The Royal Institute of International Affairs, 18 November 1996. HEINZ HAUSER and RAINER E. SCHONE, IS There a Need for International Competition

Rules?, 49 AuBenwirtschaft 205 (1994). BERNARD M. HOEKMAN, Competition Policy and the Global Trading System: A Developing Country Perspective (1997). INTERNATIONAL BUSINESS LAWYER, Internationalisation of Competition Law, November

1996. FREDERIC JENNY, The Interface Between Competition Policy and Trade, Investment and Economic Development, Paper presented at the Global Forum Conference on Competition Policy in a Global Economy, New Delhi, 17-18 March 1997. NAHEED KIRMANI, et al., International Trade Policies: The Uruguay Round and Beyond. Volume I: Principal Issues; Volume II: Background Papers (IMF, 1994). JOHN E. KWOKA and LAWRENCE J. WHITE (eds.), The Antitrust Revolution: The Role of

Economics, (1994). PHEDON NICOLAIDES, Towards Multilateral Rules on Competition. The Problems in Mutual Recognition of National Rules, 17 World Competition 5 (1994). DAVID PALMETER, Antitrust Rules and the G.A.T.T., Journal of Commerce, 18 March 1994. ERNST-ULRICH PETERSMANN, International Competition Rules for the G.A.T.T.-M.T.O. World Trade and Legal System, 27 J. World Trade 35 (1993). W. STEPHEN SMITH, U.S. Antitrust Law and Practice: Monopolisation and Related Offenses, in Garrett James J. (ed.) World Antitrust Law and Practice (1995). JOEL P. TRACHTMANN, International Regulatory Competition, Externalisation, and Jurisdiction, 34 Harv. Int'l L.J. 47 (1993).

VI Joel I. Klein Assistant Attorney General Antitrust Division, U.S. Department of Justice Washington, D.C., U.S.A.

Introduction Last December, the World Trade Organisation held a Ministerial Conference in Singapore, which I attended, along with many others. There, the European Union and other W.T.O. Members proposed the creation of a Working Group to initiate development of a trade and competition agenda at the W.T.O. The government and non-government proponents of this approach believe that significant market access problems exist, whose solutions lie in the application of competition law, and that negotiation in the W.T.O. of multilateral rules on the application of competition law would help to alleviate these problems. After much discussion, Ministers agreed to 'establish a working group to study issues raised by Members relating to the interaction between trade and competition policy, including anti-competitive practices, in order to identify any areas that may merit further consideration in the W.T.O. framework'. After two years, the W.T.O. General Council will determine how (or whether) the work of the group should proceed; in particular, the Singapore Declaration stated that '[i]t is clearly understood that future negotiations, if any, regarding multilateral disciplines in th[is] areafj, will take place only after an explicit consensus decision is taken among W.T.O. Members regarding such negotiations.' The new Working Group will operate under the expert Chairmanship of Frederic Jenny of France. I have quoted the precise Ministerial language because my goal in this paper is to explain why the United States concurred in the Singapore Declaration's cautious approach to a W.T.O. role in this area, and why the Antitrust Division of the Department of Justice fully endorses that approach. In making the case for caution, this paper will begin by explaining recent efforts in international antitrust enforcement, how those efforts relate to traditional tradeliberalisation concerns, and what would be lost if a misguided W.T.O. agenda were to derail or detract from these ongoing efforts.

* This paper was presented by Connie Robinson, Director of Operations and Merger Enforcement, United States Department of Justice, Washington D.C.

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A. The Intersection of Trade and Competition Policy The events that have sparked an intense interest at the intersection of trade and competition policy are well known. Two factors have converged to bring this matter to the fore: first, an increasingly globalised economy, spurred largely by technological advances, has made markets throughout the world economically available even to previously domestic businesses; and secondly, the successive reductions of government-imposed barriers to trade (resulting from the various G.A.T.T. rounds) has made entry into foreign markets not only economically feasible, but also practically feasible. Taken together, these developments have led to an explosion in worldwide trade—in 1996, there was over $5 trillion in merchandise and nearly $1.5 trillion in services traded beyond national borders; and in the U.S., for example, nearly one-quarter of our G.D.P. is comprised of export and import trade, which is double the figure for 1945. This ongoing process of globalisation has important consequences in terms of conventional trade concerns. Elimination of governmental restraints has brought into focus private business practices that inhibit market access. Globalisation also has great significance in terms of international competition issues, which fall into three categories: • the tremendous growth in transnational mergers has increasingly led to premerger review of the same transaction by several different countries' competition authorities; • international cartel cases, where competitors in various countries get together secretly to fix prices or allocate territories on a worldwide basis, have assumed increasing prominence; • market-access cases, in which anticompetitive horizontal or vertical restraints prevent foreign competitors from being able to compete on a level playing field, have also become more frequent. An international antitrust agenda should focus on all three areas, whereas a sensible trade programme need only focus on the third. We should consider what is at stake in each of these areas of international antitrust enforcement, what specific problems are encountered in addressing each area, and what efforts are already underway to deal with those problems. Transnational merger review presents fewer and less urgent problems than the other two. The Antitrust Division has worked with its counterparts abroad in several recent merger cases, including the Scott PaperlKimberly Clark1 and the 1

United States v. Kimberly Clark Corp. 1996-1 Trade Cas. (CCH) 171,405 (N.D. Tex. 1996).


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Georgia Pacific/Domtar2 mergers. Transnational mergers are not being inhibited by the necessity for multiple reviews. Moreover, at least on an informal level, the various enforcement agencies are already engaged in some cooperation that is likely to increase over time and likely to lead to more formalised merger review cooperation agreements in the years to come — initially on a bilateral, and then, perhaps, on a plurilateral, basis. In addition, merging firms that are subject to multiple reviews can facilitate coordination and cooperation among the various competition agencies by authorising them to share otherwise confidential information. There is, nonetheless, room for further improvement in this area and, in particular, additional measures may be devised to make the multi-agency review process more efficient and less burdensome. The O.E.C.D.'s Competition Law and Policy Committee is currently analysing proposals of this sort. The two other areas on the agenda of international antitrust enforcement where I believe that new arrangements between governments have the potential to make significant advances are cartel enforcement and market access cases. Both have important, although differing, effects on international trade. International cartels typically involve arrangements among manufacturers or producers of goods that sell in international markets. Just as occurs within domestic markets, the sellers of such goods in international markets sometimes conclude that collusion is preferable to competition, and decide to agree either on prices, volumes, or the markets each will sell in. Two such cartel cases were recently prosecuted in the United States. One involved the $600 million market for lysine (a farm feed-additive product), and the other involved the $1.2 billion market for citric acid. The defendants in these investigations have agreed to pay a total of nearly $200 million in fines thus far, and the citric acid investigation is continuing. A prominent U.S. corporation, Archer Daniels Midland (A.D.M.), has been sentenced to pay $100 million for its participation in these cartels, a fine that is almost seven times larger than any we had previously obtained. The Antitrust Division would have sought a larger fine if A.D.M. had not agreed to cooperate fully in our ongoing international investigation in citric acid. The international nature of these two investigations is apparent, as they have resulted in guilty pleas from A.D.M., two Japanese firms, a Korean firm, a U.S. subsidiary of another Korean firm, a U.S. subsidiary of a German firm, and two Swiss firms, and from two Japanese, one Korean, one Austrian, and two German nationals.

2

United States v. Georgia Pacific Corp., 1996-2 Trade Cas. (CCH) 1J71, 560 (D. Del 1996).

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Three present or former A.D.M. officials, all U.S. nationals, have been indicted and are awaiting trial, and one Japanese national has been indicted and is a fugitive. Such cartel cases can have an impact on trade by taking enormous amounts of money out of the pockets of consumers around the world. However, they rarely engage the attention or concern of the trade community. The companies that participate in such cartels, regardless of their country of origin, actually benefit from them. However, consumers (including consuming firms) are hurt. For example, at the U.S. sentencing hearing in the lysine case, Ajinomoto, a Japanese participant in the conspiracy, asserted that almost three-quarters of its sales occurred in Japan, where Japanese consumers seem also to have borne the brunt of this illegal cartel. Moreover, consumers in Europe and throughout the world who purchased these products are all likely to have suffered by having to pay artificially inflated prices as a result of the cartels' practices. Finally, market access cases involving private business restraints present not only the traditional antitrust concern posed by anticompetitive business practices, but also a significant trade concern arising from the impact of such practices on exports. In such cases, consumers in a domestic market are normally harmed because foreign companies are blocked from becoming effective competitors as a result of practices by domestic businesses that may violate domestic antitrust laws. From an antitrust perspective, this is the same as a situation where a new domestic entrant is prevented from being an effective competitor as the result of private restraints. In either case, domestic consumers are harmed because competition has been diminished. From the trade perspective, however, there is a special concern when foreign competition is kept out: the excluded country's economy is hurt by the limitations placed on its businesses, leading to the loss of jobs and overall domestic economic well-being. This set of trade and competition concerns in market access cases is motivating much of the current effort to find new mechanisms to provide redress. In an increasingly globalised economy, stimulated in part by the consistent reduction of government-imposed restraints on market access, it is hardly surprising that trade officials would have hit against private market restraints that impede foreign access. Some of these restraints may have existed even when government-imposed trade restraints were more numerous, while others may have arisen in response to the ongoing removal of government restraints. B. The U.S. Agenda for International Cooperation In searching for a solution to the market access and international cartel problems, the U.S. Department of Justice has focused largely on bilateral agree-


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ments and working relationships with other antitrust enforcement agencies. This section will discuss the reasons for this approach.

1. Cooperation in Gathering Evidence Regarding international cartels, the procedures available to antitrust enforcers for investigating and prosecuting these cases are not commensurate with their international scope. International litigation often raises questions of personal jurisdiction and service of process, and normally presents great difficulties in terms of an enforcement agency's ability to obtain documentary and testimonial evidence located abroad. Antitrust enforcement is fact-intensive, almost invariably placing a high evidentiary burden on enforcers. When they cannot get access to the evidence needed to prosecute a violation, the world's consumers and businesses ultimately bear the cost. Several recent cases illustrate these problems. For example, three years ago in the GE/DeBeers3 case, the Antitrust Division filed criminal antitrust charges against a U.S. company, General Electric, a Swiss affiliate of DeBeers, and two foreign nationals, for conspiring to raise the price of industrial diamonds. Much of the alleged conduct relating to the cartel took place in Europe. Thus, much of the evidence was located overseas and consequently beyond the Justice Department's reach, although we did seek and receive some assistance from the government of Belgium. The case proceeded to trial but, in December 1994, the court entered a judgment of acquittal, observing that much of the 'missing' evidence presumably was located outside the U.S., and beyond our reach. Efforts of the Antitrust Division to cooperate effectively with other antitrust authorities can also be stymied by the absence of arrangements that allow the sharing of our own evidence with those authorities. In criminal investigations, for example, U.S. federal rules of criminal procedure are very strict in protecting the secrecy of grand jury proceedings. Fortunately, we have powerful new legislation that allows the sharing of cartel evidence, but to take advantage of its provisions, other countries must be willing to cooperate on a reciprocal basis. For example, in the lysine and citric acid cases, we have uncovered and continue to develop evidence of price-fixing and market allocation that should be of vital interest to competition authorities in other countries. Our ability, however, under current law to share such information with countries that are not parties to cooperation agreements is very limited. United States v. General Electric Co., 869 F. Supp. 1285 (S.D. Ohio 1994).

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The Clinton Administration and the U.S. Congress, both recognising the critical importance of international cooperation and information sharing necessary for high priority investigations, recently gave us explicit authority to negotiate bilateral antitrust cooperation agreements in the International Antitrust Enforcement Assistance Act of 1994 ('I.A.E.A.A.').4 Once adopted, these agreements will allow the U.S. antitrust agencies to exchange evidence on a reciprocal basis with foreign antitrust agencies, for use in antitrust enforcement, and to assist each other in obtaining evidence located in the other's country, while assuring that confidential information will be protected. Negotiation of properly tailored I.A.E.A.A. agreements with our trading partners is a top priority for the Department of Justice. In April, the D.O.J. and the F.T.C. announced the first such agreement—with Australia.5 Both we and the Australians have requirements we must satisfy before the proposed agreement can be finalised. We are delighted with it, both because it will strengthen our already excellent relationship with the Australian authorities, and because we hope it will serve as a model for similar bilateral agreements with other important trading partners around the world. In further pursuit of this agenda, the United States also recently proposed an initiative in the O.E.C.D.'s Competition Law and Policy Committee to work towards a recommendation urging the adoption of bilateral agreements directed at hard-core cartel activity, which involves the most widely accepted antitrust violations. I believe this proposal will be adopted, after appropriate consideration, for several reasons. First, identifying the type of egregious anticompetitive conduct that constitutes a hard-core cartel is relatively straightforward. In most instances, there is little or no economic debate about the competitive effects of this conduct. Secondly, business community concerns about the sharing of information with foreign antitrust authorities are far less germane to the sharing of information for cartel enforcement purposes. This involves evidence of flagrant wrongdoing: discussions related to price-fixing, market allocation or bid-rigging, and evidence of agreements to pursue types of conduct that competition authorities generally agree can have no legitimate business purpose and therefore should not benefit from rules intended to protect business planning. There is, in short, almost never a need for antitrust authorities to examine, much less to share, the sensitive trade secrets or 4

15 U.S.C. §§6201-6212, Pub. L. No. 103-438, 108 Stat. 4597. Agreement Between the Government of the United States of America And The Government of Australia on Mutual Antitrust Enforcement Assistance. See also Department of Justice Press Release, International Enforcement to be Boosted by New Agreement with Australia, 17 April 1997. 5


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prospective business plans of the kind that may be needed in connection with mergers and other economically complex inquiries. Perhaps for these reasons, we have begun to meet with considerable success over the last year in our requests to numerous foreign governments (in addition to Canada) for assistance in criminal cartel cases, pursuant to both M.L.A.T.s and more traditional letters rogatory. In those matters, foreign government authorities have provided us with information, interviewed witnesses and/or conducted searches and seizures on our behalf. Nonetheless, we recognise that convincing nations that it is in their interest to enter into such bilateral agreements will not be easy, and that differences in the substantive and procedural rules in different countries will have to be carefully worked through. Most countries, for example, do not impose criminal penalties for violation of their competition laws. Moreover, important cultural and sovereignty issues must be resolved when such agreements are contemplated. I believe that such differences ultimately will not stand in the way of cooperation aimed at eliminating cartels. Other models of law enforcement cooperation support this conclusion. For centuries, governments have worked together in law enforcement when it has been in their mutual interest, as when fugitives seek to evade punishment by fleeing the jurisdiction. The United States signed its first extradition treaty (with the United Kingdom) in 1794. Since the 1970s, the Department of Justice and the Department of State have made it a high priority to negotiate mutual legal assistance treaties (M.L.A.T.s), which provide for comprehensive reciprocal assistance between the United States and foreign governments in criminal matters. Currently, M.L.A.T.s are in force, and many others are signed and awaiting ratification. In addition, the United States has recently begun to work cooperatively with other governments through mutual assistance agreements in other areas of law enforcement: tax and securities fraud. Accordingly, the Securities and Exchange Commission has entered into roughly twenty such agreements, which have significantly enhanced its ability (and that of its foreign counterparts) to deal with transnational securities fraud. Moreover, in the antitrust area, the U.S.-Canada M.L.A.T. has permitted the Department of Justice and the Canadian antitrust authorities to conduct a series of joint criminal investigations into price-fixing and market allocation conduct that affected both countries. These matters are extremely important. For instance, in the Fax Paper cases,6 the D.O.J. charged six Japanese firms, 6

E.g., United States v. Kanzaki Specialty Papers, Crim. No. 94-10176NMG (D.Mass. 1994); and United States v. Mitsubishi Paper Mills, Crim. No. 95-10296MLW (D. Mass 1995).

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one U.S. firm, two U.S. subsidiaries of Japanese firms, the U.S. subsidiary of a Swedish firm, five Japanese nationals, and one U.S. national with price-fixing in the fax paper market. Eight defendants agreed to plead guilty and pay fines totalling nearly $10.5 million, and a jury recently acquitted a U.S. firm and a U.S. national. For their part, the Canadians have charged, and obtained guilty pleas and significant fines from, some of the same firms, and I understand that their investigation is continuing. The remaining two Japanese corporate defendants in the Fax Paper cases moved to dismiss the indictments against them, arguing that United States courts had no subject matter jurisdiction over them in a criminal antitrust case because none of the alleged overt illegal acts occurred in the United States. The trial court agreed, and dismissed the indictment.7 In March, however, a U.S. Court of Appeals reversed the district court, holding that controlling Supreme Court precedent establishes that the Sherman Act 'applies to wholly foreign conduct which has an intended and substantial effect in the United States', in criminal as well as civil cases.8 The Court of Appeals recognised that '[w]e live in an age of international commerce, where decisions reached in one corner of the world can reverberate around the globe.... [A] ruling in [defendants'] favor would create perverse incentives for those who would use nefarious means to influence markets in the United States, rewarding them for erecting as many territorial firewalls as possible between cause and effect.' The D.O.J. agrees with this analysis. The Canadians first brought the Fax Paper case to our attention at a time when we were unaware of the conspiracy and of its harmful effects on U.S. consumers. The U.S. and Canadian authorities proceeded to work very closely together, exchanging information within the limits of the M.L.A.T., sharing documents and jointly interviewing witnesses. Both the cooperative analysis of documentation and the sharing of a database created by the Canadians were possible without violating any domestic confidentiality rules. Two other examples of cooperative antitrust enforcement under our M.L.A.T. with Canada are the Plastic Dinnerware case9 and an investigation

7

United States v. Nippon Paper Industries, Co., 1996-2 Trade Cas. (CCH)\11,575 (D. Mass. 1996). 8 United States v. Nippon Paper Industries, Co., 1997-1 Trade Cas. (CCH) 1(71,750 (1 st Cir. 1997), cert denied, Nippon Paper Industries, Co. v. United States, 118 S. Ct 685 (S. Ct. 1998). 9 See Annual Report on Developments in Competition in the United States (January 1-September 30, 1994), Submitted to the Organization for Economic Cooperation and Development, Committee on Competition Law and Policy, pp. 13-14.


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in the ductile pipe industry.10 In the former, the Federal Bureau of Investigation and the Royal Canadian Mounted Police simultaneously executed search warrants on both sides of the border. The evidence thereby obtained ultimately led to U.S. price-fixing prosecutions of, and guilty pleas from, three U.S. firms and seven executives, including two Canadians, with fines totaling over $9 million and jail sentences for all seven individuals, including the Canadians. The seized documents revealed that the conspiracy did not affect the Canadian market, so no Canadian investigation ensued. Lastly, the D.O.J. and the Canadians conducted parallel investigations into anticompetitive behaviour in the ductile pipe industry. The D.O.J. concluded the evidence was not sufficient to prosecute under U.S. law. However, the Canadian authorities assembled a different body of evidence of violations of Canadian law that led to a guilty plea and a then-record criminalfinein Canada, from a Canadian subsidiary of a U.S. firm. The U.S. would like to extend the type of cooperation that has been so successful with Canada to our other trading partners. As our Canadian experience suggests, in order to be effective and sustainable, bilateral cooperation must provide law enforcement benefits for both parties. All responsible antitrust authorities should endorse the first step of the U.S. international antitrust agenda, the promotion of meaningful international cooperation in the prosecution of global cartels.

2. Cooperation to Address Market Access Problems According to the experience of the D.O.J., the most effective way to redress private restraints barring access to foreign markets is to empower competition authorities and to insulate them as much as possible from short-term protectionist influences. This is the situation in the U.S. In several instances, such as the AT&T case," the U.S. markets were open to foreign competition by challenging private restraints that protected domestic competitors. From the perspective of competition policy, this makes sense, since more competition implies greater benefit to consumers. The problem in this area, however, is that not every country has the same history or tradition of independent enforcement in market access cases. With respect to those countries that do have such a tradition, bilateral 'positive comity' agreements are the best way to ensure effective enforcement. 10 11

See Regina v. Canada Pipe Co., 64 C.P.R. 3d 182 (Canadian Federal Court 1995). United States v. AT&T, 552 F. Supp. 131 (D.D.C. 1982).

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Under such an agreement, the antitrust agency of the country that believes its companies are being closed out of another country as a result of private restraints makes a preliminary determination that there are reasonable grounds for an investigation of the matter, perhaps under its own law but, in any event, under the law of the country in which the restraint operates. It then refers the matter, along with its preliminary analysis, to the competition authority in the country whose home market is directly affected. That authority conducts an investigation, then reports back to, and consults with, the referring country as to the nature of its investigation, its findings, and any remedy it is considering. The referring country can accept these conclusions, seek to modify them, or subsequently conduct its own investigation and take actions that it finds appropriate. This positive comity approach has its roots in a 1967 Council Recommendation of the O.E.C.D. on Cooperation between Member Countries on Restrictive Business Practices Affecting International Trade. The term 'positive comity' itself was coined in the 1991 cooperation agreement between the U.S. and the E.U.12 Positive comity is also a prominent feature of the 1995 agreement between the U.S. and Canada.13 We are currently negotiating a new positive comity agreement with the E.U. to clarify the situations that would presumptively call for referrals, and tofleshout the report-back and consultation mechanisms that would come into play once a referral has been made. The E.U. has sought public comment on a draft of the agreement. This approach has several advantages. First, competition authorities tend to have the greatest stake in taking such complaints seriously, even if they involve foreign access. Secondly, such a process facilitates the gathering of evidence for such cases. In the absence of a treaty, the limits of jurisdictional reach for all countries imply a limitation of their ability to gather evidence on another's territory, which thwarts effective investigations. Moreover, there is little chance that country A would use its law enforcement powers to provide evidence to country B in a market access case in which country A thinks country B lacks jurisdiction. Finally, the positive comity approach increases the pressure throughout the world to allow competition authorities to conduct their work fairly, since it enhances the likelihood that these kinds of cases can defuse trade 12

Agreement Between the Government of the United States of America And the Commission of the European Communities Regarding the Application of Their Competition Laws, 23 Sept. 1991. 13 Agreement Between the Government of the United States of America And the Government of Canada Regarding the Application of Their Competition And Deceptive Marketing Practices Laws, 1 Aug. 1995.


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tensions by providing a sensible, systematic approach to fact-gathering, reporting and bilateral consultation among competition authorities. Two recent cases illustrate how positive comity could function. In December 1997, the D.O.J. announced that it had closed an investigation into the way that AC Nielsen, a large U.S. firm, contracted its services for tracking retail sales.14 The U.S. investigation was closed because Nielsen entered into formal undertakings with the European Commission following a DGIV investigation that would alleviate any competitive concerns. The U.S. investigation had focused on whether Nielsen offered customers more favourable terms in countries where Nielsen had market power if those customers also used Nielsen in countries where it faced significant competition. These contracting practices occurred mostly outside the U.S., but they may have had an adverse effect on U.S. export commerce by preventing exports by Nielsen's U.S. competitors. Since most of the conduct occurred in Europe and had its greatest impact there, the European Commission had an obvious interest in dealing with the problem. Although no positive comity requests as such were made, the respective investigative staffs were in frequent contact, and it became clear to the U.S. staff that the Commission would effectively remedy the situation. In April 1997, the D.O.J. made its first formal positive comity request to the E.U. under the 1991 agreement. The D.O.J. asked DG IV to investigate possible anticompetitive conduct by certain European airlines that may be preventing U.S.-based airline computer reservation systems from competing effectively in certain European countries. It became clear that the European Commission was in the best position to investigate this matter, because the alleged conduct occurred in Europe and principally European consumers would be harmed if competition has been diminished. Accordingly, we concluded that this was an appropriate case in which to use our positive comity mechanism. I understand that DG IV's investigation is continuing. Positive comity should not be a controversial concept. An agreement on positive comity would not change U.S. or foreign law, and would not by itself permit the exchange of confidential documents and testimony. It also respects the sovereignty of participating countries, since it recognises that the country whose market is most immediately affected has the principal responsibility for enforcement. Our proposed positive comity agreement with the E.U. provides an excellent opportunity to demonstrate the value of this approach. In the long run, positive comity should occupy an important place on the international 14

See Department of Justice Press Release, Justice Department Closes Investigation into the Way AC Nielsen Co. Contracts its Services for Tracking Retail Sales, 3 Dec. 1996.

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antitrust enforcement agenda, as it offers a real opportunity to deal effectively with antitrust 'market access' cases on a principled, cooperative basis. Nonetheless, positive comity has its limitations. Many competition authorities currently lack the independence, if not the will, to do a proper job. Until that situation changes, positive comity referrals are not a satisfactory solution to the problem of market access that is blocked by private anticompetitive restraints. Moreover, different countries have different substantive law in the competition area. Thus, there is a risk of disparate enforcement. This problem is likely to diminish, though not disappear, through cooperative arrangements. Moreover, the differences are not drastic. A focus on consumer welfare adds a measure of consistency in the competition area that is likely to grow over time.

3. The Connection Between Cooperation on Cartel Enforcement and Positive Comity The ability of competition authorities to cooperate on cartel enforcement will be greatly diminished unless we simultaneously begin to develop positive comity arrangements. This is so because the greatest impediment to cooperation is the fear, or at least the suspicion, that the evidence will be used for trade purposes. Trust among countries, and even among their competition authorities, in this area is not high. Consequently, unless countries can be assured that information is being used only for purposes of international cartel enforcement, and not for trade-related purposes, overall cooperation will diminish and cartel enforcement, as well as market access enforcement, will suffer. This would be a serious loss.

C. The Trade and Competition Agenda of the W.T.O. Anything done at the W.T.O. should not jeopardise, or even detract from, the ongoing efforts described above, which involve bilateral undertakings between countries that have well-established commitments to, and experience in, competition matters. Such efforts are most likely to lead to enduring agreements that can subsequently become a template for other countries. A hasty effort to negotiate rules at the W.T.O. is fraught with risk. First, it will be difficult to reach agreement in the W.T.O. on sound competition rules, which depend substantially on the strict application of neutral legal and economic principles. Even the relatively like-minded Member States of the European Union needed seventeen years to reach agreement on the Merger


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Control Regulation. Indeed, the significant differences in the approach of the U.S. and the E.U. with respect to vertical restraints (which are the result, in part, of different histories and market structures) indicate that in some non-cartel contexts, agreement on common substantive principles may be very difficult. A W.T.O. competition policy debate will have to balance many often diverse national interests, with the possibility of positions shifting in response to tradeoffs in other trade negotiations related to agriculture, services, intellectual property, or any of the myriadfieldscurrently covered by W.T.O. agreements. Secondly, we must guard against a lowest-common-denominator outcome in the development of competition rules by the W.T.O. Efforts to achieve a 'minimum' set of competition principles, or to identify common substantive standards, could legitimate weak and ineffective rules, which would not serve the goals of trade liberalisation. Minimum standards often become the maximum. Thirdly, although a universal commitment to the adoption and enforcement of competition laws, and cooperation in antitrust enforcement, are worthy goals, they go beyond core W.T.O. concerns. This is evident when we consider the problem of how the W.T.O. would even identify, much less devise remedies for, violations of multilateral competition obligations. Over seventy countries, accounting for over 80 per cent of the world's GNP, already have enacted competition laws. Most of these laws would likely meet the requirements of any minimum substantive rules the W.T.O. could adopt. Moreover, competition law enforcement is often fact-intensive, but no government has proposed turning over to a W.T.O. body the kinds of confidential business information typically required for a proper competition analysis in particular cases. Such a process is not likely to be acceptable on a worldwide basis for many years to come. The problem of dispute settlement highlights the difference between competition law and other areas covered by the W.T.O. W.T.O. Members hold differing views on the objectives of competition law and the supporting analysis. Given this diversity, the use of dispute resolution with respect to a general requirement that Members adopt and enforce antitrust laws, and consider requests to investigate from other Members, is likely to have little impact on trade liberalisation. On the contrary, it could give procedural legitimacy to harmful actions masquerading as competition policy. Moreover, if dispute settlement were extended to individual decisions taken by domestic competition authorities, this would interfere with national sovereignty concerning prosecutorial discretion and judicial decision-making, and could also involve W.T.O. panels in inappropriate reviews of the credibility of witnesses and of case-specific, highly confidential business information.

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For these and other reasons, the United States remains 'cautious' about a W.T.O. agenda on competition policy. It might make sense for the W.T.O. to study what is occurring elsewhere and to analyse the significance of those developments, but only if such work is not seen as a precursor to negotiations in the W.T.O. on competition policy. This cautious approach is embodied in the Singapore Ministerial Declaration. The W.T.O. Members that make up the Working Group will determine how it will proceed. However, the strong recommendation of the U.S. will be that the group adopt a work program that: encourages participation by competition experts from all Members; fosters among Members a common understanding of the relationship of competition matters to the W.T.O. framework; and is neutral regarding any conclusions that may be reached at the end of the group's two-year life. Any such programme should be based on sound, realistic judgements about what is reasonably feasible and should not jeopardise the other work that is currently ongoing among antitrust enforcement agencies in other fora, such as N.A.F.T.A., A.P.E.C, F.T.A.A., and O.E.C.D.

Conclusion A busy and important agenda in international antitrust enforcement is currently underway. This agenda is relevant in part to trade issues, but its concerns are substantially broader than such issues. It can be accomplished in the reasonably near future among key trading partners for whom there already exists a broad but untapped policy consensus. These ongoing efforts should not be deferred while awaiting developments in the W.T.O. work programme. Abstract discussions can be useful, even important; but improved international antitrust law enforcement in the present is absolutely necessary in an increasingly globalised economy.

VII Mitsuo Matsushita Professor Seikei University Tokyo,Japan Member of the Appellate Body World Trade Organisation Geneva, Switzerland The W.T.O. is not the only forum in which issues of international competition policy are discussed. They have also been discussed and explored in the O.E.C.D. and U.N.C.T.A.D. There are advantages and disadvantages of discussing competition policy issues in the framework of the W.T.O. ; however, this paper takes the position that competition policy should be included within the W.T.O. framework. A. The W.T.O. and Competition Policy The W.T.O. consists of a series of agreements covering trade in goods, trade in services and trade related intellectual property rights. The basic aim of the W.T.O. agreements is to achieve liberal and fair trade, but not to interfere with domestic policies of Members that have no bearing on trade. To this end, some basic principles are established, such as most-favoured-nation treatment, national treatment, transparency, prohibition of quantitative restrictions and other related matters. Under these agreements, the Members are prohibited from imposing trade restrictions and from discrimination. One feature of competition policy in a broad sense is to remove governmental restrictions that tend to impede competition. In this respect, the W.T.O. and competition policy share the objective of pursuing economic activities without undue hindrance by governmental measures. As in the European Union, as trade liberalisation progresses among W.T.O. members, it is necessary to control private restrictions that offset the effect of liberalisation achieved through the W.T.O. agreements. Thus, competition policy should be introduced in some form into the W.T.O. framework. As tariff barriers and quantitative restrictions are reduced, certain domestic regulatory policies have had a greater impact on trade. For instance, a domestic policy to allow depression cartels is likely to have the effect of protecting domestic producers and reducing imports.

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In entering the W.T.O., the Members have relinquished sovereign powers and agreed to be bound by the agreements, as is reflected in the wording of the agreements. Thus, there is a subtle balance between the power of the W.T.O. to control the domestic policies of Members, and the power of the Members to control their own domestic policies that do not impact negatively on international trade. The W.T.O. incorporates a dispute settlement system, under which a violation of one of the agreements will be met with a recommendation to come into conformity with the agreement. A failure to comply with such a recommendation may lead to retaliation by the complaining member. The dispute settlement mechanism distinguishes the W.T.O. from O.E.C.D. and U.N.C.T.A.D. Thus, any agreement on competition policy should be cautiously conceived.

B. Diverse Objectives of Competition Policy Competition policy is a product not only of political and economic theory, but also of the political, economic and social reality of the country in which it operates. A nation's competition policy and law reflect the legal and administrative structure and tradition of that country. For this reason, the objectives of competition policy differ among nations. Some of the diverse objectives are the following. • Market economy—it is generally accepted that preservation of the market mechanism is the most fundamental objective of competition policy. • Efficiency—promotion of efficiency is also a common objective of competition policy. The Chicago School emphasises the importance of the efficiency goal. The Japanese Fair Trade Commission (J.F.T.C.) has published merger guidelines which include a provision that efficiency is an important factor in determining whether a merger promotes competition. Such a provision is likely to bring about a flexible enforcement policy that follows the rule of reason. Such an approach can also be followed with respect to vertical non-price restraints, which emphasises the importance of interbrand competition. • Pluralism—in the United States, antitrust policy originated following the movement of farmers and workers against large trusts. Currently, this philosophy is maintained by the Harvard School, which is suspicious of concentrations of political or economic power. The Harvard School holds that the goal of competition policy is not only to promote efficiency, but also to maintain a pluralistic society with no predominant powers. This concept is related to U.S. Constitutional notions of federalism, separation of powers, and checks and balances, all of which are designed to divide powers in order to prevent the


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accumulation of oppressive power in society. A competition policy based on this concept takes a strict attitude toward the existence of large enterprises, and mergers that are instrumental in creating predominant enterprises. • Equity in transactions—in Japan, equity in transactions is regarded as a goal of competition policy. The Japanese Antimonopoly Act (A.M.A.) provides that an abuse of bargaining power by one party to a transaction against another is unlawful. For instance, it would violate this provision for a large manufacturer of automobiles to impose harsh conditions (such as unreasonable delay in payment or unreasonable pressure to lower its prices) in a contract with a small subcontractor that supplies parts and components. This concept is important in Japan, where vertically integrated business systems are an important feature of the market. Under this system, subcontractors or dealers would generally have less freedom to switch to other manufacturers than would their counterparts in the U.S. Thus, the lack of horizontal mobility makes the victims of such abuses captives. This provision arguably does not relate to competition policy. However, this illustrates how competition policy and law reflect the realities of the country in which they are implemented. • Market integration—market integration has been the primary goal of E.U. competition policy. Accordingly, vertical territorial allocation of markets is deemed per se illegal. Since market integration is the ultimate goal of the W.T.O. system, the E.U. experiment is important. • Transition to market economy—a number of countries are moving from planned economies to market economies. Competition policy plays an essential role in the transition process. However, during the transition period, competition policy must be sensitive to the specific needs which arise. For instance, in the People's Republic of China, a series of laws and regulations have been enacted that constitute a mixture of competition law, intellectual property law, deregulation law and civil law, which are very different by nature. A civil law system must be created before a competition law system can take effect. Accordingly, if competition policy is incorporated in the W.T.O. framework, its scope must be sufficiently broad that some of the above objectives can be accommodated. These goals often conflict with each other, making it difficult to include all of them within the W.T.O. framework.

C. Utilising the Existing W.T.O. Agreements However desirable it may be to introduce an agreement on competition policy within the W.T.O. framework, it will be a long process, and it is not certain that an agreement will ultimately be reached. Therefore, it is useful to review the

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competition provisions of the existing W.T.O. agreements to determine how they can be used to promote competition policy. Although these provisions are scattered throughout the various W.T.O. agreements, and lack cohesiveness, they should nonetheless be stringently enforced. Some of these provisions are the following. • Agreement on Technical Barriers to Trade (T.B.T. Agreement)1—Art. 3.4 states: 'Members shall not take measures which . . . encourage . . . nongovernmental bodies within their territories to act in a manner inconsistent with the provisions of Art. 2.' Art. 2 provides for national treatment. Accordingly, it would be a violation for a government to encourage private standard control bodies to discriminate against foreign products, or intentionally to tolerate discriminatory practices by a standard body. • Agreement on Trade Related Investment Measures (T.R.I.M.s Agreement)2—Art. 9 states that a review shall be made within five years after the Agreement enters into force to determine whether it should be complemented with a competition provision. • Agreement on Antidumping Subsidies and Countervailing Duties3—Art. 3.5 requires that in order to impose an antidumping duty on a foreign product, the national authority responsible for administering antidumping law must establish a causal link between the dumped product and injury to a domestic industry. In determining causation, the authority must take into consideration trade-restrictive practices of, and competition between, foreign and domestic producers. For instance, an authority must consider whether an import cartel in its own country pressures foreign exporters to lower export prices, thereby causing it to dump; or whether an export cartel in its own country has reached an agreement to drive out competitors in the importing country. Taking such factors into consideration should help the importing authority to enforce competition policy. Art. 15.5 of the S.C.M. agreement contains similar language to Art. 3.5 of the Antidumping agreement. 1

Agreement on Technical Barriers to Trade, 15 Apr. 1994; Agreement Establishing the World Trade Organisation, Annex 1A; Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, Marrakesh, 15 Apr. 1994 in the G.A.T.T. Secretariat: The Results of the Uruguay Round of Multilateral Trade Negotiations, The Legal Texts (Geneva, 1995), at 138-162. 2 Agreement on Trade-Related Aspects of Investment Measures, supra, note 1, at 163-167. 3 Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (Antidumping Agreement), supra, note 1, pp. 168-196; Agreement on Subsidies and Countervailing Measures (SCM Agreement), supra, note 1, at 264—314.


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• Safeguard Agreement4—Art. 11.1 prohibits members from entering a voluntary export restraint agreement. Art. 11.3 states 'Members shall not encourage or support the adoption or maintenance by public and private enterprises of non-governmental measures equivalent to those referred to in paragraph 1. For instance, Art. 11.1 would be violated if the government of a member encourages exporters to create a cartel and limit exports of a product. Such an export cartel could be challenged by the competition authority of either the exporting country, the importing country, or both. • General Agreement on Trade in Services (G.A.T.S.)5—Art. 9.1 requires members to ensure that a monopoly supplier of services operating within its territory not use the monopoly in a manner inconsistent with Art. 2 (the Most Favoured Nation provision), and specific commitments. • Agreement on Trade-Related Aspects of Intellectual Property Rights (T.R.I.P.s)6—Art. 40 provides that members may enact legislation to control anticompetitive practices in contractual licences. D. International Competition Policy 1. Comprehensive Code Approach The Havana Charter,7 which never took effect, contained a comprehensive competition code which was to be enforced internationally. The framers of this charter believed that competition policy was an integral part of the liberal trade order that it was designed to establish. The Charter's competition code has served as a model for discussion of an international competition code in the current timeframe. A group of scholars known as the Munich Group prepared a draft international antitrust agreement, which covered a broad range of competition issues, including cartels, boycotts, vertical restraints, mergers and acquisitions, as well as enforcement and related matters. 4

Agreement on Safeguards, supra, note 1, at 315-324. General Agreement on Trade in Services, 15 Apr. 1994; Agreement Establishing the World Trade Organisation, Annex IB; Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, Marrakesh, 15 Apr. 1994, supra. note 1, at 325-364. 6 Agreement on Trade-Related Aspects of Intellectual Property Rights, 15 Apr. 1994, Art. 40.2; Agreement Establishing the World Trade Organisation, Annex 1C; Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, Marrakesh, 15 Apr. 1994, supra, note 1, at 365-403. 7 United Nations Conference on Trade and Employment, Havana Charter for an International Trade Organization, Final Act and Related Documents (1948). 5

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2. Double Track Approach A group of experts commissioned by the E.U. prepared a report presenting a design for introducing competition policy in the W.T.O. The report recommends that more bilateral agreements should be entered. It also suggests that an agreement within the W.T.O. framework should be sought, and some core principles should be adopted, including the prohibition of cartels and boycotts. With regard to non-price vertical restraints, it suggests that due process issues, such as disregard of clear evidence, should be addressed. The experts report thus recommends a two track approach—i.e. simultaneous pursuit of bilateral agreements and plurilateral agreements.

3. Evaluation of the Two Approaches Accordingly, two approaches have been suggested: the comprehensive code approach, such as that suggested by the Munich group, and an incremental approach, such as that suggested by the E.U. expert group. Both have advantages and disadvantages. The comprehensive code approach has the advantage that it covers a wide area, which would have the effect of promoting convergence of domestic policies of those subscribing to the code. However, this approach has the disadvantage that at present, it may be premature, which would make it difficult to rally political support for such an approach. The T.R.I.P.s agreement, discussed above, represents a comprehensive code approach. However, this agreement had a supportive constituency during the Uruguay Round Negotiations, which included the U.S., the E.U., and Japan, as well as a number of multilateral corporations. It is unlikely that a similar supportive constituency would exist with respect to a comprehensive competition code. Moreover, T.R.I.P.s was adopted through the process of the Uruguay Round negotiation, in which many issues were discussed simultaneously. Some developing countries regarded certain provisions of T.R.I.P.s to be adverse to their interests, but were willing to accept them as part of the W.T.O. framework package. Such conditions would not exist with respect to a comprehensive competition code. Accordingly, the W.T.O. should proceed cautiously in introducing competition policy.


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4. Short-Term Goal If the W.T.O. were to establish a competition policy scheme which, from the outset, affected domestic policies that have only an indirect impact on international trade, Members would be likely to react negatively. Accordingly, the initial step should be limited to establishing a set of competition principles that directly relate to international trade. Examples of private restraints that have a direct impact on international trade are: export and import cartels; boycotts which exclude imported products and foreign enterprises; certain vertical restraints, such as exclusive dealing, customer restrictions, and tie-ins, which specifically exclude foreign products; and predatory pricing by which domestic enterprises attempt to block entry of foreign products into their domestic market. Such restraints are an immediate concern to the W.T.O. because they offset the effect of the existing W.T.O. agreements. Accordingly, a general prohibition of cartels may be premature. In some countries, some types of cartels are exempted from the competition laws. For instance, in Japan, small business associations are allowed. Other countries exempt other types of cartels, such as depression cartels. The W.T.O. would be justified in addressing such cartels only if they have a direct impact on international trade. If they do not, the W.T.O. should proceed with caution in addressing them. Moreover, certain hard core violations of competition law that do not affect international trade may be more appropriately handled by national governments in the current timeframe. Examples of such violations are minimum pricefixingcartels which affect the domestic economy, and resale price maintenance contracts that keep prices from going down.

5. Long-Term Goal Once the process of globalisation has progressed further, and domestic and international trade policies are no longer distinguishable, a more ambitious approach can be pursued. National markets will then be more integrated, such that domestic policies of each W.T.O. member will have a much greater impact on the markets of other members. At this stage, the differences in competition policies of the various Members will become the main problem, because they will create incompatibilities of systems and cause frictions. Harmonisation of competition policies will then be necessary. The prohibition of cartels, boycotts and resale price maintenance will constitute the core competition rules to be included in the W.T.O. framework,

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irrespective of whether they directly affect international trade. Members should implement such rules by enforcing domestic laws in such a way that these practices are prohibited. This will have the effect of establishing national markets free from cartels and resale price maintenance, which will have the effect of promoting efficiency within the W.T.O. system. The issues are more complex with respect to non-price vertical restraints, as policies and laws vary from nation to nation in this area. In most nations, including the U.S. and Japan, such practices are dealt with under the rule of reason rather than the per se rule. In the E.U., however, vertical territorial restrictions according to the geographic market of each Member State are strictly prohibited, because they tend to compartmentalise national markets, thereby obstructing achievement of the goal of market integration. Given these differences, an international competition agreement should be limited to general principles in this area. For instance, it could provide that a vertical territorial or customer restraint is harmful if it is exercised by an enterprise with market power, and thus there is no interbrand competition in the market in question.

E. Optional Membership in Agreement on Competition Principles At present, more than 130 nations are Members of the W.T.O., many of which are not yet ready to adopt a competition law. Recent discussions on the relationship between trade and competition have focused on issues such as market access and abusive use of trade measures, such as antidumping law. The market access issue relates primarily to Japan; the antidumping issue relates primarily to the U.S. and the E.U. These issues do not necessarily concern all W.T.O. Members. Therefore, it seems that participation in a W.T.O. agreement on trade and competition should be optional for the Members. Technically, this would mean that a competition agreement would be an Annex IV agreement, in which Members have the option to participate.

F. Developing Countries Most Members of the W.T.O. are developing countries, at varying stages of development. For them, some of the issues of competition policy differ from those of the industrialised countries. Until now, discussions on competition policy in the W.T.O. may have neglected the issues that are important in the context of North-South relationships.


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The U.N.C.T.A.D. draft code of conduct of enterprises and draft code on restrictive business practices were not adopted since they placed too much emphasis on protection of developing countries vis-a-vis industrialised countries. Although this should not be repeated in the W.T.O. context, it is nonetheless important to consider the issues involved in the North-South relationship.

VIII Petros C. Mavroidis Professor, University of Neuchatel Neuchatel, Switzerland

Marc Bacchetta W.T.O. Secretariat Geneva, Switzerland

Henrik Horn W.T.O. Secretariat Geneva, Switzerland Professor, Stockholm University Stockholm, Sweden1

Introduction The case for negotiating multilateral competition rules, and the scope of any such rules, has recently become the subject of intensified debate.2 A number of prominent policy-makers and academics have called for such efforts.3 For 1

The paper represents the views of the authors and is not meant to represent the position of the organisations for which they work. 2 Competition policy in this paper is used in the conventional antitrust sense, i.e. disciplines on anti-competitive practices such as collusion between enterprises, the abuse of dominant market positions or their creation through mergers and acquisitions. 3 See, e.g., Sir Leon Brittan, A Framework for International Competition, Address to the Davos Symposium (1992); European Commission, Competition Policy in the New Trade Order: Strengthening International Cooperation and Rules, Report of the Group of Experts (1995) (hereinafter Van Miert Report); Claus Dieter Ehlermann, The Role of Competition Policy in a Global Economy, unpublished mimeo (1994); Alexis Jacquemin, The International Dimension of European Competition Policy, 31 J. Common Mkt. Stud. 91 (1993); Ernst-Ulrich Petersmann, Proposals for Negotiating International Competition Rules in the G.A. T. T.IW. T. O. World Trade and Legal System, 49 AuBenwirtschaft 231(1994); Frederic M. Scherer, Competition Policies for an Integrated World Economy (1994).

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instance, the E.U. has recently published a report prepared by a Group of Experts which supports an initiative of this nature.4 The views expressed in this report substantially reproduce opinions already expressed in the literature. Much of the literature calling for multilateral action argues that competition policy issues become increasingly international because of the globalisation of many industries, the unfair advantages for firms that benefit from lax enforcement of domestic antitrust laws, the problems created by extraterritorial application of laws, and the risk that developing countries may be particularly harmed by anticompetitive practices. Proponents of common competition rules have repeatedly stressed the need to take action in thisfieldat the World Trade Organisation (W.T.O.) level. Trade and competition thusfiguresamong the 'new' topics to be discussed in the near future by the trading partners alongside trade and environment, and trade and investment. Indeed, the W.T.O. Ministerial Meeting in Singapore 1996 established a Working Party to discuss this issue. From the perspective of economic theory, how competition policy should be pursued in an international economy is a special case of the more general question addressed in the theory of regulation and delegation. Regulation theory deals with governmental intervention in situations where, because of market failures, private decisions do not contribute to the maximisation of national welfare. The theory of regulation, which would most directly be applicable to the relationship between the national competition authorities and firms, identifies at least three broad categories of reasons for government regulation: externalities between firms, monopoly power and informational problems. However, when considering proposals for international agreements on competition policy, the issue is not only one of regulation, but also one of delegation of regulatory powers from national authorities to an international body. This question has been addressed by Bhagwati in connection with the broadening of the international policy agenda,5 as well as by Gatsios and Seabright6 and Neven7 when discussing regulatory reforms in the E.U. These authors have

4

Van Miert Report, supra note 3. Jagdish Bhagwati, Fair Trade, Reciprocity and Harmonization: The Novel Challenge to the Theory and Policy of Free Trade, Paper presented to the Conference on Analytical and Negotiating Issues in the Global Trading System, University of Michigan (1991). 6 Konstantine Gatsios and Paul Seabright, Regulation in the European Community, 5 Oxford Rev. Econ. Pol. 37 (1990). 7 Damien J. Neven, Regulatory Reform in the European Community, 82 Am. Econ. Rev. 98 (1992). 5


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attempted to identify the policies that should be subject to international negotiations or assigned to higher levels of government, identifying international policy spillovers as the key issue in this context. This paper partially follows these approaches in considering the extent to which negative spillovers motivate an international agreement on competition policy. It does not, however, make a thorough regulation theory analysis. Rather, the economic analysis is focused on the source and nature of the spillovers that would possibly justify regulation at the international level. We thus neglect possible adverse aspects of regulation at the international level. The paper distinguishes between 'spillovers' and 'distortions' from national competition policy. Competition policy decisions almost always benefit some agents while harming others. This is also true in an international context. What is special to the latter situation, however, is that the gainers may reside in one country, and the losers in another. In such a situation, there is a negative spillover on the latter agents from the decision, relative to some other policy choice. However, there is not necessarily any inefficiency associated with such a decision from an international perspective, except that winners do not compensate losers, which in any event occurs rarely in the competition policy context. For there to be an inefficiency at international level, there is at least one additional requirement: that a country take actions that are optimal from its own point of view, but inferior for the world as a whole in comparison to some other feasible actions. In such a situation, there is a 'distortion' associated with the national competition policy decision. The importance of this distinction between spillovers and distortions is that spillovers alone do not provide an economic rationale for countries to form a multilateral competition policy agreement, since they are not necessarily associated with any inefficiencies from an international point of view. It is only those spillovers that give rise to distortions that motivate international agreement. Accordingly, a fundamental question that proponents of a multilateral agreement on competition policy should address is whether the negative spillovers from national competition policies also result in distortions. This paper will begin with an investigation of the extent to which there are economic incentives for countries to pursue national competition policies that give rise to distortions for other countries. If these distortions do not exist, or are likely to be small, the case for a multilateral agreement on competition policy seems rather weak. However, in order to remain manageable, this analysis disregards the legal remedies against such beggar-thy-neighbour competition policies. Section B considers the extent to which policies of this type can be addressed under the existing legal framework. Section C argues that, in principle, current trade law could substantially resolve these problems. Finally, Section D draws

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some conclusions for the question that motivated the analysis: do negative spillovers provide a case for a multilateral agreement on competition policy? We believe that an economic-legal analysis of this type is necessary, but not sufficient, to support the claim that there should be a multilateral agreement on competition policies. It is necessary, because an economic case for an agreement can only be made if basic principles of economics support such an agreement. However, it is not sufficient, since there is a discrepancy between the economic and legal analysis that must be resolved before any particular solution is advocated, if the legal regime can in principle address the problems suggested in the economic analysis. In particular, the economic analysis is based on unrealistic assumptions about how the legal system functions, and the distortions it points to are empirically not apparent, in which case there is little need for a multilateral agreement. Alternatively, the legal system cannot in practice address the problems, in which case the externalities may still be a real-world concern, which would remain to be verified empirically. In this case, the proposed solution should take into consideration the weaknesses of the current legal regime, in order not to duplicate these weaknesses. A. Economic Incentives for Beggar-Thy-Neighbour Competition Policies When markets are imperfectly competitive, there is a general case for government competition policy intervention. The standard approach in economics is to view the purpose of competition policy, like that of any other policy, as the maximisation of 'welfare'. Under a number of stringent simplifying assumptions (for instance, that the policy under consideration affects only a small part of the economy), the maximisation of welfare can be seen as equivalent to the maximisation of the sum of consumer surplus and producer profits. Consumer surplus is a measure of 'consumer profits', in that it measures the difference between consumers' willingness to pay for their consumption and what they actually pay. The essential point for the present discussion is that the welfare criterion weighs the interests of consumers and producers. The precise weights are not material. It is important that profits of nationally owned firms are viewed as a national good, alongside consumer surplus. The implicit assumption underlying the use of the sum of producer and consumer surplus as the objective for the competition authority is that the authority should not be concerned with distributional aspects of its interventions. This could be motivated from a welfare point of view, even if society had preferences with respect to the distribution of the total surplus. For instance, such preferences could be apparent from the existence of redistributional tax


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schemes or from consumers' ownership of significant parts of industry, through pension funds. While neglect of the distributional aspects in the pursuit of competition policy may be acceptable in a closed economy, it has an additional dimension when the policy is pursued in an open economy, given the lack of explicit international redistribution schemes. However, it may be accepted in an open economy if the countries under consideration are relatively symmetric, in the sense that they gain in some sectors but lose in others. Under such circumstances, there is a common interest in maximising global welfare, even if not for altruistic reasons. From a theoretical perspective, it is almost impossible to imagine situations where the choice of competition policy in one country does not affect other countries. For instance, if there is perfect competition in all sectors except one non-tradable sector in one country, there is no foreign direct investment, and there are no imported inputs, then there is no role for competition policy to play in any other sector. It may, at first glance, appear that competition policy pursued vis-a-vis the one sector will only be of interest to the economy which harbours this sector. However, this policy will affect all the trading partners of this economy, albeit more or less directly. For instance, by affecting the conditions under which firms compete in this sector, competition policy will affect the sector's demand for factors of production. This will affect the prices of factors of production used in this sector, which will affect other sectors of the economy, and consequently also trading partners. Hence, at a very general level, nationally pursued competition policies are bound to affect foreign countries. However, these indirect effects in many, if not most, cases would be very small. Competition policy is typically concerned with more direct effects arising in the sector where intervention is considered. We will also restrict our attention to such effects.

1. Negative Spillovers and Distortions from Nationally Pursued Competition Policies The typical analysis of optimal competition policy in the context of closed economies—which is the context within which almost all economic analyses have been performed—seeks to establish the optimal trade-off between the interests of consumers and producers. The optimal policy almost invariably results in gains to some agents and losses to others. This will also be true when the policy is pursued in an open economy context. For instance, a country's policy choice may, on balance, reduce the welfare of another country, relative

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to some other policy choice. In such a case, the policy gives rise to a 'negative spillover' for the other country. The existence of a negative spillover does not necessarily signal the presence of an inefficiency from a global point of view. Just as a welfare maximising competition policy in a closed economy produces some gainers and some losers, competition policy in an international economy does the same, even if the policy maximises global welfare. It is then possible that gainers reside in the country pursuing the policy, while losers reside in other countries, even if the policy seeks to maximise global welfare. National policies, including national competition policy, should generally maximise national, rather than global, welfare. This has important implications, since competition policy deals with imperfectly competitive markets. Specifically, the existence of market power among firms makes it possible and tempting for national governments to increase domestic welfare at the expense of foreign agents. This gives rise to a strong presumption that interventions undertaken by a national competition authority will differ from those undertaken by a worldwide competition authority. When a national competition authority chooses a different policy than would a worldwide authority, the policy gives rise to a 'distortion'. Distortions are thus a special case of negative spillovers. There are strong analogies between competition policies giving rise to distortions, and 'strategic trade policies', both with respect to the assumed setting (oligopolistic or monopolistic international markets), and with respect to the mechanisms at play. Indeed, the same types of market structures in which strategic trade policy may play a role, also make competition policy interventions attractive. With both types of policies, distortions are the deliberate consequence of policies that seek to improve national welfare, partly at the expense of other countries, rather than as accidental by-products. Moreover, as in the case of strategic trade policy, the interest behind strategic competition policy is not trade flows per se, but the possible negative impact on other countries in terms of loss of consumer and/or producer welfare. While government officials seem to be interested in trade effects, these are not of primary interest, from our point of view. As suggested above, there are two basic sources of distortion from national competition policy. First, such interventions affect, but do not take into account, the interests of foreign consumers. For instance, if twofirmsin country A propose to merge, the merger will be approved by the competition authority in country A if the positive impact of the merger on the merging firms' profits is considered to outweigh its possible negative impact on country A's consumers. In the evaluation of this proposal, the competition authority in


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country A will not take into consideration possible negative consequences for consumers in country B. Similar conflicts may also arise in cases involving business practices that would legally fall under the heading of abuse of dominant position, and that are anti-competitive from an economic perspective. Other examples are coordinated behaviour between firms, such as export cartels, which may increase national welfare as long as they do not have pronounced negative effects on domestic consumers. Even when national competition policy seeks to maximise consumer surplus of domestic residents, and does not attach any weight to domestic producer surplus, it may still have negative repercussions on foreign consumers. For example, the merger discussed above may have beneficial consequences for consumers in country A, and thus be approved (even if producer surplus is not taken into account) despite its detrimental effects on foreign consumers. Such a case may arise when competition policy influences the choice of location of production. Consumers residing in the market where afirmlocates may benefit from lower prices due to lower trade costs, adaptation of products to local standards, etc. However, the more competition policy emphasises the maximisation of consumer welfare, and the less weight that is put on producer interests, the lower the concern for distortions. The second reason that nationally pursued competition policy may give rise to distortions is that the interests of foreign producers are not taken into account. For instance, a merger between two firms in country A may be approved in country A, even though, from a world point of view, it should not be approved because it causes severe harm to producers in other countries. Distortions from competition policy might arise in the home market of the country pursuing the policy, as well as in its export markets. For instance, the former would be the case when a vertical arrangement is permitted, which results in the foreclosure of foreign producers from the national market. The latter would be the case when the foreclosure is in foreign markets. These two situations are often treated differently from a legal point of view. In the former case, competition law may not enable the foreign competition authority to intervene against the foreclosure (unless the law is applied in an unreasonably extraterritorial manner). In contrast, in the latter case, the authority might be obliged to do so. However, from an economic point of view, it is irrelevant whether the negative impact on the foreign producers arises in the domestic or in the foreign country. It would still be a distortion that might provide a rationale for an international agreement.

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2. Distortions and the Gains from an International Agreement on Competition Policies This section considers whether negative spillovers may motivate a multilateral agreement on competition policy. Negative spillovers on other countries from national competition policies do not, as such, provide a rationale for an agreement. As stressed above, even a policy that maximises global welfare may have negative repercussions for agents residing in certain countries. In such a case, no inefficiency results, and it is not possible to improve on the global allocation of resources by choosing some other competition policy. There is, however, still a distributional dimension to the policy that may call for some international compensation. But, if countries are fairly symmetric, in the sense that they gain in some sectors and lose in other sectors, they can all share the gains of efficient policies. Negative spillover alone does not give rise to a situation where an international agreement affecting the choice of competition policy will improve world welfare by influencing resource allocation. A distortion must also be present. For instance, a distortion resulting from a country's choice of competition policy on a trading partner could be corrected through an agreement between these two countries, which could improve welfare for both. This agreement would stipulate a different choice of competition policy with a more favorable outcome for the partner country, which could more than compensate the policy active country for the lower welfare implied by the new choice. For the agreement to be feasible, there must be some way in which this compensation can take place. In practice, each country makes a large number of competition policy decisions with ramifications for other countries. This has two related consequences. First, a multilateral agreement may become beneficial to all countries, even absent some type of compensation scheme, since countries may be gainers in some sectors and losers in other sectors. The second, and more subtle consequence is that the interaction between the various distortions becomes of interest. The most straightforward case is where there is hardly any interaction, such as when countries' policy decisions concern different industries. In this situation, the logic from the case of a single distortion carries over directly. For instance, assume that two countries may allow cartels among their exporters, and exports occur in different industries. From the perspective of national welfare, it is preferable to allow cartels, regardless of what the other country chooses. However, the countries have a common interest in curbing export cartels globally, since the gains they experience from the cartelisation of


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their own export industry are smaller than the losses imposed by the cartelisation of their imports. This is a simple example of a prisoners' dilemma situation applied to competition policy. The distinguishing feature of such a situation is that in the pursuit of the individual interest, decision-makers end up in a suboptimal position. If the countries could instead make a binding agreement not to allow export cartels, they would both be better off. However, in some situations, countries intervene in the same or in closely related markets. The question then arises as to the combined effects of these decisions. While each decision tends to cause distortions, the combined effect of these decisions is to magnify the distortions, which strengthens the argument for an international agreement. Conversely, distortions may counteract each other to the extent that there are no gains achievable through an international agreement. Hence, when evaluating the gains from a multilateral agreement, the cross-effects from the interactions between the competition policies must be considered, which is a daunting task.

3. Features of Competition and Trade Policy that may Affect Distortions This section will address whether the distortions resulting from national competition policies are important in reality. It will also consider some factors that may influence the size of these distortions. a. Competition Policy that Discriminates Across Countries Whether a particular policy amounts to discrimination is of central importance from the perspective of international trade law. Competition policy interventions involving distortions typically involve some form of discrimination. For instance, the 'national champion' merger, which is a merger that would not be permitted if it involved foreign firms, but is permitted when it involves domestic firms, clearly amounts to discrimination. However, the possibility that competition policy will induce distortions does not necessarily require discrimination in the sense of treating foreign agents differently from domestic agents. For instance, the competition authority may find other characteristics of foreign firms that enables the authority to extract surplus from them. For example, a national competition authority would prefer a merger between two domestic firms to one between a larger foreign firm and a domestic firm in an industry. However, it cannot explicitly discriminate against the foreign firm by disallowing a merger with this firm on nationality grounds. If the authority instead pursued a general policy of limiting the degree of concentration that is permitted to accumulate through mergers, and this

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policy is said to apply regardless of the nationalities of firms involved in possible mergers, it could set a threshold of concentration at a level such that the only possible merger is between the domestic firms. Until now, the distinction between distortions resulting from discriminatory and non-discriminatory national competition policies has not received attention in the theory literature. However, it may be of practical interest since nondiscriminatory beggar-thy-neighbour competition policies are presumably much harder to identify empirically, and thus to prevent through an international agreement. The distinction might also have important consequences for the appropriate design of an international agreement on competition policy. However, this is beyond the scope of the present paper. b. The Objective of Competition Policy We have conjectured above that the relative weight put on consumer and producer surplus in national competition policy may affect the size of the distortions associated with the policy. Unfortunately, little work has been done on questions concerning the importance of the objective function of competition policy for international distortions. Thus, we can only raise certain issues that merit further investigation. The following issues should be considered. First, where competition policy only serves to protect domestic consumer interests, will foreign firms not be treated differently from domesticfirms,even though they are not formally provided national treatment? Secondly, will extraterritorial application of national competition laws have more favourable welfare properties from a global point of view than those which result when weight is also attached to domestic producer interests (see below)? Thirdly, what are other possible objectives of competition policy such as promotion of domestic rather than national welfare? The national welfare criterion in standard economic analysis, which does not typically view profits generated by a foreign multinational in the domestic economy as part of national income, but does take into account the profits made by domestically owned firms in foreign countries, in many cases does not seem empirically very descriptive. c. Extraterritorial Application of National Competition Laws The basic distortions problem is due to the discrepancy between the coverage of the interests that are promoted by competition policy and the reach of its economic effects. In an attempt to solve this problem from a national point of view, competition policy in certain countries has extraterritorial reach. The existence of these policies has two conflicting effects on the potential gains from international agreements on competition policy. From an economic point of


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view, extraterritoriality enlarges a country's available 'set of decisions'. On the one hand, the extraterritorial reach of countries' competition policies has positive implications from a global point of view, in that it permits countries to offset the discriminatory treatment of domestic interests by foreign competition policies (including lack of formal competition laws, or slack enforcement). This reduces the gains from an international agreement. 8 For instance, this would occur if country B prevented a 'national champions' type merger to be consummated between two firms in country A, i.e., if this merger were intended to shift profits from country B firms to the merged entity. On the other hand, the negative effects result because extraterritoriality allows countries to include foreign agents in the territorial reach of their competition policies, while their interests are not considered. Thus, the country asserting extraterritorial jurisdiction is able to extract more foreign consumer and producer surplus, resulting in new problems with distortions. Continuing with the example, the proposed merger may increase aggregate welfare of both country A and country B, but be prevented by country B because it reduces welfare there. It does not seem possible to draw any general conclusion as to whether extraterritorial application of competition laws increases or decreases distortions. d. Bilateral Agreements on Competition Policy The extent to which there are distortions from competition policies pursued by individual countries is also likely to be affected by the extent to which countries have bilateral agreements on comity. Such agreements would ideally mitigate distortions because they require both countries to take into account the interests of the other party. There are, however, some unresolved aspects of these agreements. First, it is not clear exactly what is meant by taking into account the interests of another country. Does it amount to giving equal weight to the interests of the two countries? If a certain business practice is beneficial for a large number of foreign consumers, but adversely affects the interest of a smaller number of domestic consumers, what would be required to satisfy comity requirements? Would the domestic competition authority be expected to accept the practice? Secondly, a distinction should be made between a situation where there are only a limited number of bilateral agreements, and one where all countries have such agreements with all other countries. In the former case, the bilateral agreements are likely to produce new distortions. For instance, assume that countries A and B have a bilateral agreement, and country A is to make a 8

This type of internalisation of distortions caused the postponement of the discussion on common competition rules. See discussion in Section B, infra.

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decision on a practice by a country B firm that exploits consumers in country C. Since the bilateral agreement enables country B to ask country A to take its interests into account, and its interests are in this case to exploit consumers in country C, the decision with respect to the practice is more likely to be an approval than it would be if no agreement existed. Hence, while the agreement might mitigate distortions between countries A and B, it may create distortions for country C. To the extent that B and C, and A and C, have common interests, there might be positive spillovers. If, instead, bilateral agreements had been entered into to cover all possible pairs of countries, and the same business agreement is under consideration, then, if both countries B and C ask A to take their respective interests into account, it is not clear how country A should do this. Accordingly, the existence of bilateral agreements may have important ramifications for the degree of distortions that is internalised. More research is needed, however, in order to determine their importance. e. Differences in Competition Policy Across Countries Distortions from competition policies does not presuppose differences between competition policy across countries in equilibrium.9 For instance, two symmetrical countries that have identical competition laws, and that both allow export cartels, would lead to distortions, but these distortions would not be affected by an agreement to harmonise. This is because the source of the problem is not differences across countries in the laws, but rather the design of the law. Hence, harmonisation of competition policies would not remove the problem with distortions, except trivially in the case where countries converge on a competition policy that prevents any type of beggar-thy-neighbour behaviour.l0 / Do Distortions Necessarily have Anti-competitive Effects? Another issue is whether distortions are inherently anticompetitive, so that they could be identified by looking at the competitive effect of competition 9

Competition policies must have the possibility of differing for the policy interaction to be of a prisoners' dilemma type. If they did not have this possibility, then countries would always be forced to be co-ordinated in their choice of policies. 10 There are other economically valid arguments for why an international agreement may be beneficial that depends on the existence of national differences in competition policy. One such argument is that procedural and legal costs are higher whenfirmshave to deal with different rules and procedures in each country. Compliance costs, for example, have become a source of concern for parties contemplating multi-jurisdictional mergers. However, since these issues are not related to the presence of distortions, they are not dealt with here.


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policy interventions. In general, the appropriation of foreign consumer surplus only requires competition authorities to allow particular anticompetitive practices. A competition authority that seeks to reap foreign consumer surplus has no incentive to promote wasteful competition between domestic firms in foreign markets. As to shifting foreign firms' profits, in various cases, beggarthy-neighbour policies will require a permissive attitude from the competition authorities. There are also reasons that foreign profits can best be appropriated under a stringent competition policy. It is in the interest of a group of domesticfirmsto be allowed to employ anticompetitive practices vis-a-vis foreign firms. This may also be in the national interest, even if no foreign consumer surplus is exploited, as in the case of vertical arrangements that foreclose foreign producers. However, competition policies also have structural components, such as the long-run effects of merger regulations. This implies that in a longer-run analysis, one cannot take the group of firms as given. Rather, the possibilities of entry must be considered, which is affected in various ways by competition policy. Long run domestic industry profits may be larger with a stringent competition policy that allows for significant entry of domestic firms. Firms may have smaller profits in such a situation, but on the other hand there will be many domestic firms in the market. Hence, in the long run, foreign firms' profits will not necessarily be extracted through a slack competition policy. National policy in this case is procompetitive, but the policy would still result in a distortion for the foreign country, and would lead to an inefficient outcome for the world as a whole. g. Trade Liberalisation Finally, the relationship between trade liberalisation and the incentive for countries to pursue distortionary competition policies should be considered. It is sometimes claimed that multilateral trade liberalisation, in particular that pursued through the Uruguay Round, makes an international agreement on competition policies desirable. This claim may be interpreted in several ways. One interpretation is that as border protections have come down, other already existing barriers have become more visible. Thus, it is necessary to address the restraints caused by nationally pursued competition policies. Another interpretation, which would make the claim slightly stronger, is that it is necessary to remove the already existing competition policy barriers in order to reap the potential gains from trade liberalisation. Some commentators go further, however, arguing that trade liberalisation might induce countries to pursue policies with a greater beggar-thy-neighbour flavour than had the policies pursued prior to the liberalisation. This argument assumes, in line with the analysis in

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section A.I, that nationally pursued competition policies are purposely employed to exploit foreign countries, and that the incentives to do this increase as the level of trade liberalisation increases. A growing body of theoretical research exists on this matter.'' Matters are more complicated than they may first appear. From the perspective of economic theory, however, there is no reason to believe that trade liberalisation induces countries increasingly to pursue beggar-thy-neighbour policies. The claim that trade liberalisation fosters beggar-thy-neighbour competition policies appears to be based on the idea that when countries are constrained in their ability to use trade policies for such purposes, they will look for other policies through which they can achieve similar results. Competition policy is one such policy. However, it is the change in the incentives with regard to competition policy caused by trade liberalisation that is significant. This change might depend in part on whether the policies are substitutes. It will also be affected by other circumstances, such as properties of consumer preferences and production technologies, about which limited information is available. For instance, assume an industry in which the number of domesticfirms,and the degree of industrial concentration among domesticfirms,affects their level of profits when they compete with foreign producers. Assume further that the number of domestic firms is determined by the merger regulation. Before trade liberalisation, the domestic government would use tariffs to protect domestic firms; after liberalisation, this is no longer possible. The competition authority chooses the optimal number of firms, such that the benefit from the exit of an additional firm (i.e. the merger of twofirms)in terms of savings onfixedcosts, equals the cost of this exit in terms of consumer welfare. This is the standard economic 'marginal cost equals marginal benefit' condition for any optimal decision. The trade policy stance would affect this choice to the extent that it affects the balance between these costs and the benefits of allowing an additional merger. With a new trade policy, the optimal restrictiveness of the merger regulation will change, and the direction in which the policy must be changed depends on how the balance between the perceived gains and costs of

11

This subsection builds primarily on Henrik Horn and James Levinsohn, Merger Policies and Trade Liberalisation, (1997) (unpublished paper, available through the University of Michigan). Other relevant works are Martin Richardson, Trade and Competition Policies: Concordia Discors? (1996) (unpublished paper, available through the University of Otago); Marc Rysman, Competition Policy in Strategic Trade (1997) (unpublished paper, available through the University of Wisconsin). In all four papers, simple open-economy oligopoly models are employed to study how trade liberalisation affects the optimal degree of concentration among domestic firms.


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an additional merger is affected by the trade policy. In technical terms, this will depend on curvatures of demand and cost functions. Thus, the conclusion is that there is no theoretical reason that trade liberalisation leads to increased use of distortionary competition policy. This does not preclude the possibility that theoretically valid arguments along these lines could be made. The claim is only that they do not exist to date, and they seem, a priori, rather difficult to construct.

B. Existing Legal Remedies Against Beggar-Thy-Neighbour Competition Policies This Section will examine the possibilities offered by the existing regulatory regime to address R.B.P.-related concerns at the multilateral level. It will consider both trade and competition law instruments that can help address the distortions mentioned in the preceding section. The essence of the argument is that, in principle, the existing regime could be employed to deal with distortions created by competition policies in many situations. There is, however, a discrepancy between the theoretical possibilities and actual practice, the rationale for which is examined in Section C. Subsection B.I will consider the extent to which the existing G.A.T.T./W.T.O. regime can address distortions. It will focus on the relevant G.A.T.T. Articles because the interpretation of those Articles through a series of G.A.T.T. panels will lead to some meaningful conclusions. Such an endeavour would not be possible with respect to the G.A.T.S., because none of the relevant G.A.T.S. articles has yet been interpreted by a panel. However, the focus on G.A.T.T. is not meant to imply that there is no link between trade and competition in the services context. To the contrary, a number of G.A.T.S. Articles, such as VIII and IX, explicitly refer to this link. At this stage, however, any general conclusions would be premature. Having investigated the possible use of the G.A.T.T./W.T.O., a possible competition regime will be considered.

1. The G.A.T.T./W.T.O. Option The available legal framework in the tradefieldprovides substantive rules. For instance, Art. Ill requires W.T.O. Members to observe national treatment when regulating. This is not the case of bilateral agreements on cooperation in the field of competition law, which typically aim at sensitising domestic competition authorities as to foreign interests. The most elaborate instrument in

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this direction is positive (as opposed to traditional) comity. Consequently, such bilateral agreements constitute mere procedural vehicles on which competition-related concerns can travel. However, they do not include substantive competition rules, in contrast to the multilateral trade regime. a. An Historical Perspective

Art. XXIX of the G. A.T.T. (entitled 'Relation of this Agreement to the Havana Charter') provides the institutional link with the history of the treatment of R.B.P.s in the multilateral trade context. Art. XXIX: 1 stipulates that 'contracting parties undertake to observe to the fullest extent of their executive authority the general principles of Chapters I to VI inclusive and of Chapter IX of the Havana Charter pending their acceptance of it in accordance with their constitutional procedures'. Chapter V of the Havana Charter12 (H.C.) is dedicated to R.B.P.s. It contains a potentially all-encompassing list of R.B.P.s that must be addressed by contracting parties because they 'have harmful effects on the expansion of production or trade and interfere with the achievement of any of the other objectives set forth in Art. I'. 13 The G.A.T.T. entered into force through the Protocol of Provisional Application in the expectation that the H.C. would be ratified soon thereafter. This expectation did not materialise, however, as a proposal to delete Art. XXIX was unanimously adopted in 1955.14 Failure by one contracting party to ratify this change to the General Agreement led to the continued inclusion of the Article in the text of the G.A.T.T.15 Although Art. XXIX is technically still a part of the G.A.T.T./W.T.O., it is at least questionable whether Members are still bound by obligations contained in Chapter 5 of the H.C. This point of view has been accepted in the G.A.T.T. case law.16 12

The Havana Charter was designed to establish the International Trade Organisation. It never entered into force because the US Congress refused to ratify it. See John H. Jackson, World Trade and the Law of the G.A.T.T., (1969) 36. 13 See the Havana Charter, Art. 46, reproduced in UN Doc. E/Conf.2/78 (1945). Art. 1 states the objectives of the Charter, which include trade expansion and income growth. 14 B.I.S.D. 3S/240. (1955). 15 See Protocol Amending Part I and Arts. XXIX and XXX of the G.A.T.T., G.A.T.T.-Status of Legal Instruments 2-7.1 (1994). 16 'The Panel noted that the deletion of Art. XXIX of the General Agreement was proposed in 1955 and accepted by all but one contracting party, and that—although this Article is technically still in force—it refers to an instrument which itself has never been implemented and the acceptance of which is no longer pending as is assured in Art. XXIX. This leaves considerable doubt as to the manner in which its provisions would have been interpreted if they had entered into force.' See Canada-Administration of the F.I.R.A., B.I.S.D. 3OS/161 §5.12 (1984).


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Notwithstanding the 1955 attempt to eliminate the link to the H.C., G.A.T.T. contracting parties established a Group of Experts in 1958 to study whether and to what extent the G.A.T.T. should deal with R.B.P.s.17 Members of the Group were unable to reach consensus in their 1960 report. A majority considered that it would be unrealistic at that moment to recommend the negotiation of multilateral disciplines to control R.B.P.s. However, they recognised that R.B.P.s could have a harmful effect on international trade, and proposed that bilateral consultations take place between interested parties on specific practices. The suggested procedure was to keep this outside the realm of Art. XXIII (dispute settlement): '[members of the Group] were not competent to judge . . . whether the provisions of Art. XXIII would be applicable. However, the majority were convinced that, regardless of the question whether Art. XXIII could legally be applied, they should recommend to the CONTRACTING PARTIES that they take no action under this Article'.18 A minority proposed a multilateral procedure to address R.B.P.-related issues. A group of experts would deal with those issues that could not be settled bilaterally, and would submit a report to the G.A.T.T. secretariat, which would in turn report annually to the contracting parties. The disagreement led to a decision to provide a forum for consultations in this area, upon request, and appoint a group of experts on R.B.P.s 'to be convened when appropriate'.19 While the adopted report contains two differing opinions on the possibility of addressing R.B.P.s in the context of Art. XXIII, there was agreement on one crucial point: R.B.P.s could have harmful effects on world trade. Moreover, even the majority refrained from addressing the crucial question of the general applicability of Art. XXIII in this context. b. Preliminaries

This subsection examines the extent to which the current G.A.T.T.AV.T.O. agreement can be employed in order to address competition policy related concerns. The G.A.T.T. agreement offers three legal routes for complaints, the legal reach of each of which is discussed below. Three general issues are first considered: the incorporation theory, the role of previous G.A.T.T. panel decisions, and the necessity of attributability. The distortionary spillovers on foreign producers discussed in Section A exist only to the extent that the authorities deciding on and implementing competition policies do not consider the interests of these producers. However, in 17 18 19

B.I.S.D., 7S/29 (1959). B.I.S.D., 9S/170fT. (1961). Id.

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most industrialised countries, a firm with foreign ownership is given the same treatment under competition law as a national firm residing in the country, provided it has a local subsidiary through which its sales occur. This is so because most domestic laws accept the 'incorporation theory' for conferring jurisdiction, according to which, to the extent that a company is established under the laws of the host state, jurisdiction is conferred to the host state. Hence, the possibility of direct neglect of foreign producer interests is, at least theoretically, restricted to those firms that sell through independent agents. While this still includes a considerable volume of imports, it is far less than all imports. G.A.T.T. panel reports are relevant in the W.T.O.-context, since they constitute part of the G.A.T.T. acquis. Art. l(b)(iv) of G.A.T.T. 1994 specifies that adopted G.A.T.T. 1947 panel reports are an integral part of G.A.T.T. 1994, which is one of the W.T.O. agreements. Thus, there is a legal requirement for future panels to consider them, while retaining the possibility of deviating from their dictum. This was the position expressed in the 1996 panel report on 'Japan—Taxes on Alcoholic Beverages'. However, the Appellate Body (A.B.) report dealing with the same issue expressed a different view, arguing that adopted panel reports do not constitute subsequent practice in the sense of Art. 31 of the Vienna Convention on the Law of Treaties (V.C.L.T.).20 Unfortunately, the A.B. did not clearly address the issue whether subsequent panels must address previously adopted panel reports that dealt with the same issue. We believe that the position taken in the 1996 panel report is fully in line with the prevailing doctrine in public international law. Sir Gerald Fitzmaurice authoritatively states: '[I]t would seem that, although the Court is not obliged to decide . . . on the basis of previous decisions as such, what it can do is to take them fully into account in arriving at subsequent decisions, and that... it is mandatory for it to apply judicial decisions in the sense of employing them as part of the process whereby it arrives at its legal conclusions in the case.'21 Accordingly, irrespective of whether adopted panel reports are characterised as subsequent practice, they must be addressed by subsequent panels dealing ratione materiae with the same issue. At the same time, subsequent panels dealing ratione materiae with the same issue can always deviate from previous rulings. 20

Reprinted in 8 Int'l Legal Materials 679 (1969). Sir Gerald Fitzmaurice, The Law and Procedure of the International Court of Justice, (1986) 584. For Franck, this is part of the process necessary for all international tribunals to follow in their quest for legitimacy. Thomas M . Franck, Fairness in International Law and Institutions, (1995) 25. 21


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The G.A.T.T. is a contract among governments. The legal consequence is that unless the G.A.T.T. rules are recognised to have direct effect, only governments have locus standi before the competent fora. There has been intense debate in the literature of public international law on whether it is for national constitutions to recognise the direct effect of international law. Until now, with the exception of the European Community legal regime, this seems not to be the case. This means that it is left to individual W.T.O. Members to decide whether to confer locus standi to private parties with respect to W.T.O. rules. In practice, W.T.O. Members systematically refuse to confer locus standi for a number of reasons, discussed in Section C below.22 Hence, in order for the G.A.T.T./W.T.O. agreement to offer an option to address competition policy related concerns, the distortions mentioned in Section A must be attributable to governments. Conversely, to the extent that a distortion cannot be attributed to a government, it cannot be challenged by the current G.A.T.T./W.T.O. regime. Attributability, therefore, becomes the necessary, albeit not always sufficient, condition for G.A.T.T./W.T.O. rules to become an option. There is a discrepancy between economic thinking and actual status of law in thisfield.Generally, in economic thinking, any policy (including, for example, not to enact competition laws) reflects a conscious choice by decisionmakers based on the economic consequences of all the available actions. The status of law on attributability is more restrictive, although international law is still in the process of being codified on this issue. The issue of attributability of a behaviour to a state has recently been the subject of in-depth discussions in the International Law Commission (I.L.C.) in the context of the codification of the law in thefieldof State Responsibility.23 This body of work has already been influential with respect to international adjudication fora24 and G.A.T.T. case law.25 The relevant G.A.T.T. provisions in this context are Art. Ill (national treatment), Art. XI (quantitive restrictions) and Art. XXIII:lb (nullification and impairment of benefits from the G.A.T.T. agreement). 22

F o r an excellent illustration of the E.C. caselaw, see Piet Eeckhout, The Domestic (1997) 34 Legal Status of the W.T.O. Agreement: Interconnecting Legal Systems, C o m m o n M k t . L. Rev. 11. 23 See U . N . G . A . D o c . A/CN.4/L/528/Add. 2. (1996). 24 See, e.g., the arbitral sentence in Rainbow Warrior as presented in Jean Charpentier, L'affaire d u R a i n b o w Warrior, et la responsabilite des Etats (1991). 25 See the unadopted panel report on U.S.—Countervailing Duties on Steel Products from Germany, France and the U.K., S.C.M./185, where the panel considered, inter alia, the question whether private bank debt forgiveness could be attributed to a government.

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c. The Form of Complaints in the G. A. T. T. IW. T. O. System There are three grounds for a W.T.O. Member to invoke the dispute settlement procedures. According to G.A.T.T. Art. XXIII, a W.T.O. Member can claim that benefits accruing to it directly or indirectly under the G.A.T.T. are being nullified or impaired or that the attainment of any objective of the G.A.T.T. is being impeded as a result of: (1) the failure of another contracting party to carry out its obligations under the Agreement (violation complaints); (2) the application by another contracting party of any measure, whether it conflicts with the provisions of this Agreement (non-violation complaints); or the existence of any other situation (situation complaints). Violation complaints essentially concern cases where a G.A.T.T. provision allegedly has been infringed. Non-violation complaints, in contrast, deal with cases where even though a W.T.O. Member taking a particular action is not violating a G.A.T.T. provision, a benefit accruing to other W.T.O. Members is nonetheless nullified or impaired as a result of the action. Finally, situation complaints deal with all possible cases other than violation and non-violation complaints. As stated above, Art. XXIII: 1 is not applicable to purely private anticompetitive practices (i.e. cases where no government involvement exists). Since they cannot be attributed to governments, they do not violate any G.A.T.T. provision. In what follows we will slightly reverse the order and first examine violation" complaints, next situation complaints (where there is not yet any G.A.T.T. case law), and finally non-violation complaints. Violation Complaints Violation complaints concerning competition policies refer either to the national treatment obligation in Art. Ill or the prohibition of quantitative restrictions in Art. XL Both are addressed below. W.T.O. Members are free to enact any competition law they deem appropriate, or to abstain from enacting such a law. Their only obligation with respect to the other W.T.O. Members is to apply national laws in thisfieldin conformity with the principle of national treatment — that is, they should not discriminate between domestic and foreign products. Art. Ill obliges W.T.O. Members to guarantee national treatment to imported products 'with respect to any laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use'. The term 'affecting' has been interpreted quite broadly in the G.A.T.T. case law26; the interpretation 26

According to the 1958 panel report on Italian Discrimination Against Imported Agricultural Machinery, L/833, 7S/60, 64 para. 12 (23 Oct. 1958), the term 'affecting' was used to cover also 'laws or regulations which might adversely modify the conditions


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seems to extend and cover domestic antitrust laws as well, in line with the economic analysis above. Moreover, until now, application of laws has been the subject of disputes in G.A.T.T. cases. In fact, only in exceptional cases have the laws themselves been the subject of disputes, since the judicial review standard applied by G.A.T.T. panels in this regard is quite stringent. Decisions concerning competition policy enforcement can, however, be adjudicated.27 For instance, in the case of a 'national champion' merger, let us assume there are three firms in an industry, firms 1 and 2 which reside in a country A, and a foreign firm 3 that serves the country A market through a sales agent. The three firms are symmetric in all respects other than nationality. A 'national champion' merger would involve the approval of a merger between firms 1 and 2, under circumstances where a merger between one of those two firms with firm 3 would not be approved. Such a merger would arguably violate the national treatment clause of Art. Ill, since it is the result of the execution of a law that affects the 'internal sale, offering for sale, purchase, transportation, distribution or use' of the foreign firm. Moreover, when enacting/applying competition laws, W.T.O. members must also respect the obligations resulting from Art. XI (prohibition of quantitative restrictions). The premise of the argument related to this Article is that private restrictions on competition amount to quantitative restrictions (Q.R.s) which can, in many cases, be attributed to government actions. Consequently, they violate Art. XI. Arts. XI to XIV provide the legal framework for addressing Q.R.s: Art. XI forbids Q.R.s; Art. XII exceptionally permits Q.R.s used for balance-of-payments (B.O.P.) reasons; Art. XIII requires that Q.R.s apply on a nondiscriminatory (erga omnes) basis; and Art. XIV provides that if Q.R.s are applied for B.O.P. reasons, the nondiscrimination requirement may be waived.28 Art. XI: 1 imposes the basic obligation on W.T.O. Members to refrain from introducing or maintaining Q.R.s.29 Import quotas constitute of competition between the domestic and imported products on the internal market'. This view was confirmed in the 1989 panel report on United States—Section 337 of the Tariff Act of 1930, L/6439, 36S/345, 385/6, para. 5.10 (7 Nov. 1989). The legal value of adopted panel reports is considered infra. 27 For a discussion of attributability in the context of Art. XI, see infra. 28 John H. Jackson, World Trade and the Law of the G.A.T.T., 308 (1969). 29 Art. XI: 1 states: ' N o prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting

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import restrictions within the meaning of Art. XI: 1, whether or not they actually impede imports.30 Art. XI addresses 'prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures'. Art. XI is, consequently, similar to Art. Ill in that its purpose is to establish competitive conditions, independent of trade effects.31 The extent to which Art. XI can be used to address beggar-thy-neighbour competition policies hinges on interpretation of the term 'measures', since the terms 'quotas', 'import' and 'export licences' are unambiguous, and do not directly relate to competition-policy issues. A G.A.T.T. panel noted that measures must be governmental and that the drafting history of the G.A.T.T. suggested that the drafters were primarily concerned with the effectiveness of the measures.32 The panel did not, therefore, feel bound by the legal qualification of the measure in question, but focused its attention on effect. In this case, the measure in question was a non-mandatory 'administrative guidance' by the Ministry of International Ministry of International Trade and Industry (M.I.T.I.), based on consensus and peer pressure. While the Panel found that this was a measure under Art. XI, it emphasised that its conclusion was limited to this specific case and should not be construed to encompass all 'administrative guidance'. Another Panel concluded that in determining whether specific non-mandatory measures contravene Art. XI, two criteria must be satisfied: 'First, [the existence of] r e a s o n a b l e g r o u n d s t o believe that sufficient incentives o r disincentives existed for n o n - m a n d a t o r y measures t o take effect. Second, [that] the operation of t h e m e a s u r e s t o restrict exports [is] essentially dependent o n G o v e r n m e n t action o r intervention. > 3 3 party.' A r t . X I : 2 lists t h e permissible exceptions. See T h e Results of the U r u g u a y R o u n d Multilateral T r a d e N e g o t i a t i o n s : T h e Legal Texts (Geneva 1994), at 510 et seq. 30

E.E.C.-Payments a n d Subsidies t o Processors a n d Producers of Oilseeds a n d Related A n i m a l - F e e d Proteins, L/6627, B.I.S.D. 37S/86 (25 J a n 1990) ( T h e mere existence o f a Q.R. is presumed t o cause nullification o r impairment not only because of its trade effects b u t also because it w o u l d lead to increased transaction costs and would create uncertainties which could affect investment plans'); Japanese Measures o n I m p o r t s of Leather, B.I.S.D. 31S/113 (15/16 M a y 1984). See also Brazilian I m p o r t Taxes, Vol.II/184-5 (30 J u n e 1949). 31 See 1987 panel report, U n i t e d States—Taxes o n Petroleum a n d Certain Imported Substances, 34S/136, 158, §5.1.9 (17 J u n e 1987). 32 See Japan-Restrictions on Imports of Certain Agricultural Products, L/6253, B.I.S.D. 35S/242, §5.4.1.4 (22 Mar. 1988) 33 Japan-Trade in Semiconductors, L/6309, B.I.S.D. 35S/153^, 154-5, §§108-9 (4 May 1988). The matter of concern was a minimum export price that the Panel found to operate in the form of a mandatory requirement.


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Accordingly, non-mandatory government measures can violate Art. XI. Thus, according to the two G. A.T.T. panels, if a measure can be attributed to a government, and has the effect of a Q.R., Art. XI can come into play. Even if the criteria mentioned in the second panel should change in the future, it is precisely this concept of 'attributability' that is crucial to application of the G.A.T.T./W.T.O. provisions. A number of measures have been found inconsistent with Art. XI: 1, such as: (1) a clause in a U.S. law prohibiting, with certain exceptions, the importation or public distribution in the U.S. of a copyrighted work consisting mainly of non-dramatic literary material in the English language34; (2) the provisions of the U.S. Marine Mammal Protection Act prohibiting imports of tuna if harvested in a way that does not respect the standards imposed by the law35; (3) minimum import price systems (enforced by additional security)36; and (4) minimum export price systems.37 The G.A.T.T. also recognises that Q.R.s may be used by state-trading enterprises. An interpretative note in this regard states that throughout Arts. XI, XII, XIII, XIV and XVIII, the terms 'import' or 'export restrictions' cover restrictions made effective through state trading operations. The note refers to 'restrictions made effective through State-trading operations', and not to 'import restrictions', in an attempt to ensure that contracting parties cannot escape their obligations with respect to private trade by establishing state trading operations.38 In conclusion, to the extent that a practice operates like a Q.R. and can be attributed to a government in accordance with the dictum of the relevant G.A.T.T. case law, the Art. XI option deserves, at least, to be further explored. 34

U . S . - M a n u f a c t u r i n g Clause, L/5609, B.I.S.D. 315/91, §42(i) (15/16 M a y 1984). U.S.-Restrictions o n I m p o r t s o f T u n a , DS21/R, §§5.17, 5.18, 5.36 (unadopted) (1994). 36 E . E . C . - P r o g r a m m e of M i n i m u m I m p o r t Prices, Licences a n d Society Deposits for Certain Processed Fruits a n d Vegetables, L/4687, B.I.S.D. 25S/99-100, §4.9 (18 Oct. 1978). 37 J a p a n - T r a d e in Semi-conductors, B.I.S.D. 35S/153, §105 (1989). 38 As explained in a G.A.T.T.-panel: 'this was a recognition of the fact the in the case of enterprises enjoying a monopoly of both importation and distribution in the domestic market, the distinction normally made in the General Agreement between restrictions affecting the importation of products and restrictions affecting imported products lost much of its significance since both types of restriction could be made effective through decision by the monopoly. The Panel considered that systematic discriminatory practices of the kind referred to should be considered as restrictions made effective through 'other measures' contrary to the provision of Article XI: 1': Canada-Import, Distribution, B.I.S.D. 35S/89, §4.24 (1989). See also Japan-Restriction on Imports of Certain Agricultural Products, B.I.S.D. 35S/229, §§5.2.2.2 (1984). 35

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This option could be used to address export cartels, which are one of the most common examples of a competition policy distortion, or practices covered by the broad U.S. Noerr-Pennington doctrine.39 Moreover, the governmental link can be easily demonstrated with respect to legislative schemes such as the Webb-Pomerene Act.40 Situation Complaints The wording of Art. XXIII:l(c), which addresses situation complaints, suggests that in principle, it is all-encompassing. Until recently, no panel has ever considered a situation complaint.41 The one exception concerned E.C. allegations that certain measures taken by the Japanese government were inhibiting the importation of products manufactured in the E.C. In its request for the establishment of a panel, the E.C. claimed that benefits of negotiations with Japan had not been realised because a number of factors made it extremely difficult for E.C. products to penetrate the Japanese market. Factors mentioned included the marked concentration and interlinking of the structure of production, finance and distribution in Japan, which made it difficult for for-

39

See Eleanor M . F o x , Toward World Antitrust and Market Access, 91 Am. J Int'l L 1,17 (1997). Essentially through such practices, private parties request from competent authorities lax enforcement (or n o enforcement) of domestic antitrust laws, to the extent that the anticompetitive effects are not felt (or not substantially felt) within their national market. 40 O n e could plausibly argue that Art. XI operates like a super 'effects doctrine', since the plaintiff does n o t even need to show that an R.B.P. produces negative effects in its market. Rather, it need only show that an R.B.P. (operating like a Q.R., for example, a market sharing arrangement) is in place. 41 Other than for the E.U. v. Japan case, G.A.T.T. D o c . L/5479 (1989), a threat of making use of this provision occurred only once. This was following the accession of the United Kingdom to the E.U., when Canada's access opportunities to the U.K. market were substantially reduced. Canada felt that Art. X X I I I : l c was the appropriate provision to handle such issues, since negotiations under Art. XXIV:6 with the E.U. were expected to be unsuccessful. Subsequently, however, Canada dropped the case. G.A.T.T. Docs. L/4107, L/M/101, CMV7250, CAV7251. Ernst-Ulrich Petersmann,

Violation Complaints and Non-Violation Complaints in Public International Trade Law, German Y.B. Int'l L. 175, 227 (1991) has argued that situation complaints had fallen in desuetudo and that they were no longer an appropriate instrument for adjusting the G.A.T.T. framework of rights and obligations. The recent Kodak/Fuji dispute seems to contradict this view. See Frieder Roessler, The Concept of Nullification and Impairment in the Legal System of the World Trade Organization, in, Ernst-Ulrich Petersman (ed.) International Trade Law and the G.A.T.T./W.T.O. Dispute Settlement System (1996), (arguing that situation-complaints should be used in cases where no adoption of a 'measure' is involved).


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eign suppliers to establish distribution channels.42 The E.C. argued that such factors nullified and impaired benefits that would otherwise have accrued to it. The discussion that followed in the G.A.T.T. Council failed to shed light on this case, and the E.C. ultimately decided not to pursue it.43 In this case, the E.C. qualified its complaint as a 'situation complaint' under Art. XXIII: l(c).44 It is questionable whether Art. XXIII:l(c) can provide an appropriate forum to address concerns related to R.B.P.s.45 Recently however, the U.S. invoked Art. XXIII:l(c) in its dispute with Japan (Kodak/Fuji) as the appropriate legal basis, in part, for the panel to address the claim. No conclusions can be drawn since, as stated above, the standard of review of panels in this context remains unknown. Non-violation Complaints

The non-violation provision has an autonomous function in the G.A.T.T. dispute settlement system. Most non-violation cases brought before G.A.T.T. panels have involved the nullification or impairment of a negotiated tariff concession by the introduction of a subsidy that could not have been reasonably anticipated by the other party at the time such tariff concession was made. However, this is not the only type of action that might give rise to non-violation complaints.46 As Petersmann points out, 'non-violation complaints are based on . . . legal principles of effectiveness of concessions, reciprocity and bona fide protection of reasonable expectations'.47 Reasonable expectations are created by concessions negotiated at any point in time. The Vienna Convention on the Law of the Treaties (V.C.L.T.)48 obliges signatory states to 42

See G.A.T.T. Doc. L/5479 (1982). See G.A.T.T. Doc.C/M/167, at 9 (1982). 44 M a r c o Bronckers, Selective Safeguard Measures in Multilateral T r a d e Relations, (1985)151. 45 T h e first sentence of Art. XXIII:2 reads: 'If n o satisfactory adjustment is effected between the contracting parties concerned within a reasonable time, o r if the difficulty is of the type described in paragraph l(c) of this Article .. .' A t t e m p t s t o reach a satisfactory adjustment is n o t a precondition to seek the establishment of a Panel. Since the general rules, as embodied in Arts. X X I I - X X I I I of G.A.T.T., require t h a t for a Panel to be established, bilateral consultations must have taken place, 'situation c o m p l a i n t s ' should be regarded only in exceptional circumstances as a possible m e a n s of requesting establishment of a Panel. T h e conditions under which c o m p l a i n t s could b e qualified as 'situation-complaints' have never been specified in G . A . T . T . c a s e law. 46 In the G.A.T.T. legal system, Art. X X V I I I (modification of schedules) for example, can also provide a forum for such complaints. 47 Petersmann, supra note 4 1 , at 225. 48 V.C.L.T., supra note 20. T h e Convention applies only to s u b s e q u e n t l y concluded treaties. T h e portion governing general interpretation of treaties is considered to be 43

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refrain from acts frustrating the object of the treaty they signed (Art. 18) and recognises, in more general terms, that all treaties must be implemented in good faith (Art. 26). Since non-violation complaints aim to protect the competitive conditions established by agreed tariff concessions, any government measure that offsets such concessions can, in principle, be brought before G.A.T.T. as a non-violation complaint under Art. XXIII: l(b). For anticompetitive practices to be the subject of a non-violation complaint, three conditions must be met: (1) the measure must be applied by a government; (2) it must alter the competitive conditions established by the agreed tariff bindings; and (3) the measure could not have been reasonably anticipated at the time the tariff concessions were negotiated. Business practices that are not subject to any government involvement are excluded from the scope of a nonviolation complaint. There is some ambiguity, however, regarding the extent of government involvement required. Art. XXIII:l(b) speaks of'application of any measure' that nullifies and impairs benefits. The term 'measure' suggests that not only formal laws and regulations are included, but also other forms of government action that are necessary to make the government choice operative. The term 'application' suggests that positive action is required. If correct, then the mere tolerance by a government of an R.B.P. is not a sufficient ground for a non-violation complaint. However, if tolerance is reflected in a positive (specific) action, the first criterion will be satisfied. For example, an exemption granted by the competent antitrust authority to private enterprises, which effectively reduces market access opportunities for products of third countries by establishing distribution channels that are difficult to penetrate, could constitute such a positive action. In such cases, if the action (exemption) could not have been reasonably anticipated at the time market access conditions were negotiated, a W.T.O. Member might bring a non-violation complaint. Regarding the second condition, there should be a causal link between the measure and the alteration of the competitive conditions established by the agreed tariff bindings.49 Regarding the third condition, 'unexpectedness,' panels have interpreted the scope of protection of 'reasonable expectations' under G.A.T.T. as follows. First, the balance of concessions is the highest ranking codifying customary international law and therefore applies to treaties concluded before its entry into force and is binding even on countries that are not parties to it. 49 So far, disputes submitted in this context to G.A.T.T. panels concerned cases where actual trade damage (i.e. trade effects) were shown. In the future, it will be interesting to see how W.T.O. panels react in cases where the allegedly unexpected measure has not yet produced its results (that is, whether the absence of trade effects remains a privilege of violation complaints or whether it should be extended to non-violation complaints as well).


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norm protected in the W.T.O. system against both legal and illegal actions disturbing this balance. Secondly, W.T.O. Members can reasonably expect that this balance will not be nullified or impaired, 'failing evidence to the contrary'.50 The content of the term 'reasonable expectations' has not been interpreted in G.A.T.T. case law. Panels tend to follow a case-by-case approach. The appropriateness of defining specific criteria for determining the reasonableness of expectations is, indeed, questionable. A procedural rule following the dictum in the quoted Working Party on 'Other Barriers to Trade' could help. If 'failing evidence to the contrary' is always to be interpreted as a shift of the burden of proof to the Member seeking to reject the argument that something was reasonably expected, then 'reasonable expectations' will be perceived as always present and therefore protected when a concession is negotiated, unless the W.T.O. Member that allegedly modified the value of the concession provides evidence to the contrary. If the term 'evidence' is given its ordinary meaning, then the imposed standard of proof on the Member invoking the unreasonableness of expectations is high.51 The substantive content of the term 'reasonable expectations' is therefore arguably of secondary importance, since they exist until proven unreasonable. If this interpretation is accepted, the onus will be on the Member that alters the value of the concession to show that at the stage of negotiations, serious reasons should have led the other W.T.O. Member to believe that the agreed level of competitive conditions would eventually be reduced (modified negatively in the future).52 50

'[T]he recognition of the legitimacy of a n expectation relating t o t h e u s e of p r o duction subsidies in n o way prevents a contracting p a r t y f r o m using p r o d u c t i o n subsidies consistently with the General Agreement; it merely d e l i n e a t e s t h e scope of the protection of a negotiated balance of concessions.' See E . E . C . - P a y m e n t s a n d Subsidies Paid t o Processors a n d Producers of Oilseeds a n d R e l a t e d A n i m a l Feed Proteins, L/6627, B.I.S.D. 37S/128, §148 (25 J a n . 1990). Also, ' a c o n t r a c t i n g p a r t y which h a s negotiated a concession under Art. II m a y be assumed, for t h e p u r p o s e o f A r t . X X I I I , to have a reasonable expectation, failing evidence t o the c o n t r a r y , t h a t t h e value o f the concession will n o t be nullified or impaired by the c o n t r a c t i n g p a r t y which g r a n t e d t h e concession by the subsequent introduction o r increase of a d o m e s t i c subsidy o n the product concerned.' R e p o r t of the W o r k i n g Party on O t h e r Barriers t o T r a d e , B.I.S.D. 3S/224, §15 (1955). 51 T h e French translation of the term 'evidence' in t h e G . A . T . T . A n t i - D u m p i n g Code, for example, is 'elements de preuve'. 52 One may, nonetheless, speculate as to what could come under the term 'reasonable expectations.' For instance, can a W.T.O. Member reasonably expect another W.T.O. Member to respect its declarations in other international fora? If so, then The Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices, concluded at the U.N. (reproduced in 19 Int'l Legal Materials 813

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2. The Competition Regime This section will address the extent to which bilateral cooperation agreements in the field of competition law can adequately deal with the concerns mentioned in Section A. Further, it will consider whether extraterritorial application of competition laws can help internalise the distortions highlighted in Section A, without at the same time creating new distortions. a. Bilateral Cooperation Agreements

Some distortions can be addressed by means of bilateral cooperation in the competition field among competent national authorities. For instance, Wood offers empirical examples to the effect that bilateral cooperation agreements can, in practice, be an efficient way to address distortions.53 Notwithstanding the legal difficulties associated with its entry, the 1991 E.C./U.S. Cooperation Agreement54 is a good example. The move from 'negative' to 'positive' comity, whereby an interested party can request the competent authorities of another country to become active in a particular case, can greatly improve existing cooperation. However, the newness of these instruments implies that little empirical evidence is available at present as to their utility. (1980)) might be the basis of reasonable expectations between W.T.O. Members that they will not alter the value of negotiated concessions (after 22 Apr. 1980, the date of adoption of the Set) through behaviour inconsistent with the set of agreed principles. Notwithstanding the non-binding character of the U.N. resolutions, the argument can be made that such acts oblige signatories at least to act in a non-inconsistent way. For a discussion of this 'anti-inconsistency' principle, see Hans Baade, The Legal Effects of Codes of Conduct for M.N.E.s., in Legal Problems of Codes of Conduct for Multinational Enterprises (Norbert Horn ed. 1980). Cf. Frieder Roessler, Law, De Facto Agreements and Declarations of Principle in International Economic Relations, G e r m a n Y B Int'l L. 40 (1978) (calls such non-binding rules de facto agreements a n d defines them as 'declarations intended to give ground to expect p e r f o r m a n c e or forbearance of actions without creating legal rights a n d obligations'); G e o r g Berrisch, The Establishment of New Law Through Subsequent Practice in G.A. T.T., 16 N . C . J . Int'l L. & Com. Regs. 497 (1991) (supporting position of Roessler). T h e logical counter-argument is that limits must be placed on the application of this reasoning, as otherwise everything might be brought before the W.T.O. However, the issue here is n o t whether a convention signed outside W . T . O . legitimises a cause of action in the W . T . O . , b u t simply what can be understood to constitute a reasonable expectation. T h e cause of action in the W.T.O. context is the nullification or impairment of the agreed balance of concessions. 53

D i a n e W o o d , Options for the Future, 44 D e P a u l L. R e v . 1289 (1995). Agreement Between t h e Government of the U n i t e d States of A m e r i c a a n d the Commission of the European Communities R e g a r d i n g t h e A p p l i c a t i o n of Their Competition Laws, [1995] O.J. L47 (27 A p r . 1995). 54


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Two issues deserve further consideration in the future in this context: the standing of private parties and confidentiality. Regarding standing, problems analogous to those that exist in the trade field also exist in the competition field. Standing of private parties is a domestic law issue. Bilateral agreements are, among other things, instruments of diplomatic protection. It is left to domestic authorities first to decide whether to support a private concern by requesting a foreign competition authority to become active in a case, and then to argue the case on behalf of this party. On the issue of confidentiality, Wood observes that this has proved to be a major obstacle to a more meaningful cooperation among national competition authorities.55 None of those issues, however, reflects a need to negotiate new substantive international competition rules. They rather concern procedural impediments that are better addressed at their source. Such agreements derive their credibility from 'tit-for-tat' considerations: 'y° u take into account my interest today, I might do the same with respect to yours tomorrow'. For increasingly intertwined economies, repetition adds to credibility. b. Extraterritorial Application of Competition Laws The argument has been raised that establishment of common competition rules would be the appropriate way to address the extraterritorial application of competition laws by some countries, especially the U.S. The argument, which assumes that such extraterritorial application of competition laws runs counter to public international law obligations, is rooted in the manner in which U.S. domestic courts have applied the 'effects' doctrine. However, this critique often ignores that acceptable extraterritoriality of the same laws can often address a number of their other concerns.56 At the risk of over-simplification, the European Court of Justice (E.C.J.) has arguably applied the 'effects' doctrine more cautiously than U.S. domestic courts, as the E.C.J. will assert jurisdiction only if there is some form of implementation.57 There is practically no difference in how the U.S. and the E.U. would handle 55

W o o d , supra note 53. See the analysis by Eleanor Fox, supra note 39, who correctly makes the point that the active use of the Effects Doctrine over an extended period removed the need to address transnational restrictive business practices through international negotiations. See also Aubry D. Smith, Bringing Down Private Trade Barriers—An Assessment of the United States' Unilateral Options: Section 301 of the 1974 Trade Act and Extraterritorial Application of U.S. Anti-trust Law, 16 Mich. J. Int'l L. 241 (1994). 57 See Walter v a n G e r v e n , E. C. Jurisdiction in Antitrust Matters: the Wood Pulp 56

Judgment, in Barry Hawk (ed.), Proceedings of the Fordham Corporate Law Institute 1989(1990).

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cases in which the anticompetitive effects in the domestic market are felt through imports.58 Differences arise with respect to cases where importers in third countries block exports of the E.U. or the U.S. through allegedly anticompetitive practices.59 In such cases, U.S. domestic courts have already asserted jurisdiction. Davidow cites cases (e.g. the C. Itoh case) that have been adjudicated in the U.S. and could hardly come under the jurisdictional reach of the E.C.J, unless the E.C.J changes its position on the issue.60 The appropriate benchmark to establish whether the U.S. violates its international obligations in this respect is public international law, be it treaty or customary international law.61 Any dispute in this context is best subjected to the International Court of Justice (I.C.J.). The I.C.J., or any international third party adjudication, has the competence to determine the legitimate reach of domestic jurisdictions. Accordingly, the benchmark to determine the legitimacy of the jurisdictional reach of U.S. competition laws exists, and there is no compelling reason to 'invent' a new benchmark. The existing regime can provide the solution to a legitimate concern. If this were not so, the position that the best way to address irregularities is to overregulate would be correct. Moreover, empirical evidence shows that bilateral cooperation agreements can provide an appropriate forum to address claims of extraterritoriality.62 In fact, one of the most important objectives to be accomplished through bilateral cooperation agreements is to define a mutually acceptable jurisdictional reach. Finally, some important market access restricting policies are not yet covered by the W.T.O. For instance, Low and Subramanian have discussed the role of investment liberalisation in rendering non-tradable sectors more competitive.63 They conclude on the issue whether there is a case for common competition rules that 'except for the so-called Japan problem, which can be addressed directly, there does not seem to be the same commercial imperative for new rules as there was for rules on services or T.R.I.P.s'. 58

A l t h o u g h it is still questionable whether, in cases where no implementation of conduct takes place in the E.U. territory (i.e. in the case of an export restriction), the E.C.J. would still assert jurisdiction. See id. 59 See Eleanor Fox, supra note 39 (explaining the function of the famous 'Footnote 159' a n d t h e consequences of its deletion). 60 Joel Davidow, Keiretsu and US Antitrust, 24 L & Pol. Int'l Bus. 1035 (1993). 61 N o t e t h e parallelism with Section A, where the point was made that extraterritorial use of competition laws counteracts certain distortions, but creates other distortions. 62 W o o d , supra note 53. 63 Patrick Low and Arvind Subramanian, T.RI.M.s in the Uruguay Round: An Unfinished Business?, in The Uruguay R o u n d and the Developing Economies (Will M a r t i n a n d L. Alan Winters eds. 1995) (Discussion Paper N o . 307, The World Bank, W a s h i n g t o n , D.C.).


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3. Per se versus 'Rule of Reason' The existing regime offers two approaches. The trade regime contains substantive rules that can be used against distortions stemming from domestic competition policies. The competition regime provides a procedural vehicle for competition related disputes. The latter approach has been used more often in practice. The question arises whether private parties believe that competition authorities can deal more effectively with such cases, or whether the approach followed in bilateral competition agreements is better suited to deal with the issues at hand. Here, only the second question is relevant. Arguably, existing differences among domestic competition laws, even among ideologically similar states, are substantial enough to make an international agreement on substantive rules quite unlikely in the near future.64 However, even if we assume that it is possible, it is at least questionable whether substantive rules at the international level would be a positive step. There is an ongoing tendency at the domestic level to move away from per se prohibitions towards the rule-of-reason approach. The list of per se offences is therefore shrinking. As mentioned above, existing substantive rules in the trade field can, in principle, help address the most flagrant per se violations. How can new substantive rules help address the issue ofjudicial review at the international level of decisions by domestic authorities which are based on the rule of reason? Independent of the economic argument in favour of a competition in rules approach, the very nature of decisions at the domestic level provides an impediment to the negotiation of substantive international rules. C. The Use of the Trade and the Competition Regimes in Practice The previous Section suggested that the current legal regime in the trade and competition fields can, in principle, deal with many of the potential problems concerning distortions identified in Section A. This Section considers the extent to which these possibilities have been used in practice, starting with an examination of the trade regime, and then turning to the competition regime. Empirical evidence shows that sparse use has been made of the existing trade regime, even though globalisation of the world economy leads to a proliferation of alliances between firms that affect many markets simultaneously. The question arises how the sparse use of the existing regime should be interpreted. 64

For a synthetic comparison of U.S. and E.U. competition law, see Eleanor M. Fox and Robert Pitofsky, U.S. and E.U. Competition Law: A Comparison, unpublished mimeo(1995).

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1. Evidence Regarding Use of the Existing Regimes a. The Trade Regime In the trade regime, we distinguish between G.A.T.T./W.T.O. law, which is available exclusively to governments, and instruments of 'diplomatic protection,' which can be invoked by private parties. As stated above, private parties do not have locus standi before the competent G.A.T.T./W.T.O. bodies. The KodaklFujica.se, which was submitted to the W.T.O. dispute settlement system, is the first competition related case submitted to the W.T.O.65 The U.S. arguably believes that the existing regime (non-violation and situation complaints) suffices to address the issue presented in that case. Regarding diplomatic protection, the U.S. and the E.U. experiences are relevant, since they both have enacted instruments of diplomatic protection the 'Section 301' and the 'Barriers to Trade' regulation, respectively. Finger and Fung66 examined U.S. 'Section 301' investigations initiated upon complaints by private companies. Out of the dozens of cases that had been filed over the years, they found only one in which a positive '301' determination was based on the existence of anticompetitive practices.67 The 'anticompetitive clause' only became a part of the law in 1988. Nevertheless, some cases had been brought on grounds of anticompetitive behaviour in foreign markets prior to 1988. Other legislative attempts to attack anticompetitive practices in foreign markets have been exclusively intergovernmental in nature (e.g. Super 301), and may not therefore be predicated on narrowly defined market access concerns.68 A comparison of these figures with the number of complaints in other fields (e.g. intellectual property or anti-dumping) strongly suggests that confronting anticompetitive practices in export markets has not been a priority for the U.S. private sector. With regard to the E.U., Mavroidis69 provides a list of all invocations of the E.U. instrument for diplomatic protection to address trade barriers in foreign markets, and finds that no competition-related disputes are reported.

65

See E l e a n o r F o x , supra n o t e 39, at 11. J. Michael F i n g e r a n d K . C . F u n g , Can Competition Policy Control '301'?, 49 AuBenwirtschaft 379 (1994). 67 T h e recently s u b m i t t e d K o d a k / F u j i case is only the second instance where a positive Sec. 301 d e t e r m i n a t i o n w a s m a d e . 68 See N . D a v i d P a l m e t e r , Regulatory Reform in the European Community, 82 A m . Ec. Rev. 98 (1994). 69 Petros M a v r o i d i s , Handelspolitische A b w e h r m e c h a n i s m e n der E . W . G . und der U . S . A . u n d die F r a g e I h r e r Vereinbarkeit mit den G.A.T.T.-Regeln (1993). 66


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b. Bilateral Competition Agreements As stated above, bilateral cooperation agreements in the competitionfieldhave been used more often than the options offered by the trade regime. Wood studied the application of such and concluded that they can provide an adequate means to address distortions from nationally pursued competition policies.70 As further stated above, a word of caution is appropriate when evaluating the application of such agreements to date, given their newness. Nonetheless, such agreements have been used more frequently than the existing G.A.T.T./W.T.O. rules to address competition-related concerns.

2. Interpreting the Sparse Use As shown above, it is formally possible to address many of the distortions set forth in Section A through the existing texts of the G.A.T.T. The reasons that this possibility has hardly been used are not entirely clear. We must first consider whether distortions are important. At present, it is impossible to provide a definitive statement on this issue. Assuming that they are important, Subsection C.2.b examines whether, for systemic reasons (that is, for reasons unrelated to the adequacy of the existing substantive rules), the existing legal regime could be deemed inadequate. a. Distortions are Unimportant We first consider the possibility that, in reality, distortions are not very large, and that, consequently, there has not been a need to use the existing legal regime. While this may explain why the system has not been used on a large scale, it does not explain why there has not yet been adjudication of a single case. In some cases, it is likely that distortions have been large, even if, on average, they are not. Moreover, the very existence of bilateral cooperation agreements in the field of competition suggests that distortions are present. Another reason that distortions may not be important, or may not exist, is that the models which have been developed, and which rely on a number of stringent assumptions, do not reflect the essential aspects of reality. For instance, the models presuppose that governments have sufficient information to identify the sectors and firms where gains are possible from these types of policies. With regard to competition policies seeking to extract foreign firms' profits, this requires not only information about cost conditions in domestic firms, but also about foreign firms whose profits are to be shifted. Dynamic 70

Wood, supra note 53.

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elements are also missing from the reasoning above, which may render the models of little use. For instance, a prime consideration for governments contemplating the use of strategic competition policy should be whether their aggressive competition policies might not trigger similar responses from other countries, so that the competition policies become more strategically interrelated. Turning to empirical evidence, some studies suggest specific instances when certain countries appear to have pursued a beggar-thy-neighbour competition policy. For instance, horizontal export cartels are not only allowed, they are even encouraged in some countries. For example, Scherer,71 citing Mirow and Maurer,72 notes the Canadian government's actions to induce a Canadian subsidiary of Gulf Oil Corporation to join an international uranium cartel in the early 1970s.73 In the context of mergers, there are many cases where decisions have reflected desires to promote 'national champions'.74 As to vertical arrangements, there are cases where restraints pose important barriers to imports.75 There is also evidence regarding the spillovers of policies dealing with joint ventures.76 In the parallel case of trade liberalisation, many studies have systematically revealed the costs of protectionism, and that, together with basic trade theory, has served as an analytical foundation for the drive for international trade liberalisation. In contrast, in the case of competition policies, there is no welldeveloped body of theory that can be employed when advocating, or devising, an international competition policy agreement.77 The discrepancy between the empirical literature on competition and trade policies is even more dramatic: 71

Scherer, supra n o t e 3. K u r t R. M i r o w a n d H a r r y Maurer, W e b s of Power: International Cartels and the W o r l d E c o n o m y (1982). 73 This case is also interesting because it suggests that in making its decision, the C a n a d i a n g o v e r n m e n t considered the profits m a d e b y a foreign multinational firm. 74 See Frederic Scherer, supra note 3; Neil Campbell et al, The Role of M o n o p o l y L a w s in the I n t e r n a t i o n a l Trading System, P a p e r presented at the Taipai Symposium on C o m p e t i t i o n Policy in a Global Economy, V I I T r a d e Policy F o r u m of the Pacific E c o n o m i c C o o p e r a t i o n Council (Taipei 1995), a n d the references therein. 75 F o r recent evidence, see William C o m a n o r and Patrick Rey, Competition Policy Towards Vertical Foreclosure in a Global Economy, in L e o n a r d Waverman et al. (eds.), C o m p e t i t i o n Policy in the Global Economy, Modalities for Cooperation (1997). 76 See L a r s - H e n d r i k Roller and Mihkel T o m b a k , Exclusive Research Joint Ventures, P a p e r presented at the Taipai Symposium on C o m p e t i t i o n Policy in a Global E c o n o m y , VII T r a d e Policy F o r u m of the Pacific E c o n o m i c C o o p e r a t i o n Council (Taipei 1995). 77 E c o n o m i s t s have initiated research in this area only recently. See, e.g., Keith H e a d a n d J o h n Ries, I n t e r n a t i o n a l Mergers a n d Welfare U n d e r Decentralized Competition Policy, unpublished p a p e r available at t h e University of British Columbia, Vancouver 72


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we are unaware of any systematic study of the quantitative significance, in terms of losses in consumer and producer welfare, of distortions or negative spillovers. In sum, there is very little systematic empirical evidence that would allow us to assess the importance of spillovers, let alone distortions, from national competition policy. b. Inadequacies in the Current Legal Regime This section will attempt to explore the systemic reasons that the current legal regime has not been fully exploited. One reason the trade regime has not been utilised is that absence of direct effect has complicated matters.78 However, the limited use of diplomatic protection instruments indicates that this is only a partial explanation. If private parties had locus standi before the W.T.O., it is possible that more cases of the sort submitted to the multilateral dispute settlement system would be brought. A second reason for the lack of competition cases before the W.T.O. is that governments do not view distortions one-by-one, which occurs when private parties bring cases to the W.T.O. Rather, governments take a broader look. A country may be hurt by facing distortions in some sectors, but may gain from beggar-thy-neighbour policies in other sectors. Hence, the reticence to submit some potentially interesting cases to the W.T.O. can perhaps be explained because governments constitute sums of divergent interests. A third reason may be that too much discretion is needed to adjudicate competition related disputes, and governments do not trust W.T.O. dispute resolution panels. Since 'non-violation' complaints can be all-encompassing, some have cautioned that Art. XXIII: l(b) procedures not be overburdened. However, each time a W.T.O. Member takes action (even if G.A.T.T.-consistent) that nullifies or impairs benefits accruing to other parties, and thus defies 'reasonable expectations', the preconditions for the filing of a 'non-violation' complaint have been satisfied. This interpretation is dictated by Art. 31 of the V.C.L.T. (ordinary meaning of the term). Those who might argue that this was not the intent of the drafters of the G.A.T.T. must reverse the order of means of interpretation as embodied in Art. 31, and give priority to the intent of the parties over the ordinary meaning of the term. Such an approach is not

(1995), who investigated the conditions under which individual competition policy authorities would approve mergers that reduce world welfare. 78 For a comprehensive analysis of this issue, see Piet Eeckhout, supra note 22.

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accepted by public international lawyers.79 This legal possibility can only be meaningfully exercised if panels are entrusted with substantial discretion. However, in practice, governments seem not to trust the existing W.T.O. dispute settlement system with the exercise of substantial discretion. Although a number of significant steps have been taken to establish trust, their likelihood of success is questionable. This is because legitimacy is the basis of trust,80 and ad hoc adjudicating bodies generally lack legitimacy. G.A.T.T. panels, however, have not behaved as ad hoc bodies. They have regularly referred to G.A.T.T. case law, and the establishment of a legal office has helped to create a feeling of permanency and continuity in the G.A.T.T./W.T.O. case law.81 Moreover, establishment of the Appellate Body (A.B.) suggests that this trend is to be maintained.82 However, it seems that this is not enough: there is an undeniable discrepancy in the G.A.T.T./W.T.O. regime between the possibilities offered by the legal texts and the manner in which such possibilities can be adequately served by the existing institutional infrastructure. Notwithstanding the recent positive modifications, the current institutional infrastructure is still far from permitting a full exploitation of the possibilities provided by the current legal texts. Finally, the W.T.O. dispute settlement system does not have a fully developed procedural law. Some of the existing procedural impediments must be overcome for competition related disputes to be treated adequately.83 In addition, the G.A.T.T./W.T.O. legal regime is moving from negative to positive integration. The conclusion of the Agreement on Trade Related Intellectual Property Rights (T.R.I.P.s) is an excellent illustration of this phenomenon. A growing number of obligations contracted under the W.T.O. auspices require positive action by the W.T.O. Members, and negative obligations are disappearing. This does not mean that the traditional trade agenda has been completed. On the contrary, slow progress with respect to agriculture and 79

Jimenez de A r e c h a g a , I n t e r n a t i o n a l L a w in the Past Third of a Century, 159 Recueil des C o u r s 1, 4 2 - 4 8 (1978), states t h a t t h e message of the V.C.L.T. is that the a p p r o a c h a d v o c a t e d b y t h e p r o p o n e n t s o f t h e ' i n t e n t i o n s of the parties'-school was p u t aside. 80 See T h o m a s M . F r a n c k , supra n o t e 2 1 . 81 See R o b e r t E. H u d e c , Enforcing I n t e r n a t i o n a l Trade L a w (1993). 82 T h e A B deals only with legal q u e s t i o n s a n d therefore, de facto, its rulings will have some precedential value. 83 Petros C. M a v r o i d i s a n d Sally V a n Siclen, The Application of the G.A. T. TAW. T. O. Dispute Resolution System to Competition Issues, 3 1 J. W o r l d T r a d e 5 (1997) (identifying five specific areas, namely standing, confidentiality, expertise of panels, standard of proof a n d remedies, where additional w o r k is n e e d e d ) .


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textiles, among other sectors, indicates that the agenda is still unfinished. Thus, the W.T.O. is at a crossroads: on the one hand, it must complete the unfinished business; on the other hand, it is 'pushed' to the realm of positive integration. This can prove to be a tough test, and is precisely what the E.U. experience can offer as an example. The current inadequacies in the institutional infrastructure do not favour additional burdens. Rather, the strengthening of the W.T.O. infrastructure should be a priority before any new negotiations on substantive issues occur. c. But What About Telecoms? The conclusions of this paper seem to be contradicted by the recently concluded W.T.O. Agreement on telecoms, where sector-specific common regulatory principles were used to liberalise the world telecoms market.84 Once basic telecommunications were on the negotiating table at the W.T.O., negotiators were compelled to decide whether and how to deal with the determinants of market access attributable to firm behaviour, which normal G.A.T.T./W.T.O. access commitments would be unable to reach. Broadly, three options suggest themselves. First, the 'harmonisation' approach would involve agreement on uniform rules at the multilateral level. Secondly, the 'procedural obligations' approach would require governments to accept a multilateral obligation to enforce their own rules, without any obligation to make changes in substantive or procedural requirements at the national level. Thirdly, the 'do nothing' approach would require that negotiators restrict themselves to market access and national treatment commitments, thus relying (implicitly or explicitly) on independent national regulatory interventions and/or market forces to ensure that markets are contestable. The harmonisation approach has the advantage of guaranteeing legal security, but agreement may be difficult to obtain. The procedural obligations approach presupposes acceptance by W.T.O. Members of each other's national regulatory or competition frameworks. The do nothing approach assumes either that national regulatory or competition frameworks are acceptable and will be appropriately enforced, or that the degree to which the relevant market can be contested is sufficient for aspiring market entrants. The harmonisation approach was selected by W.T.O. negotiators. It was, however, constrained harmonisation, in that not all the W.T.O. members intend to subscribe to the regulatory principles, and certain modifications will be made by 84

See Barnard M. Hoekman, et al., Regulatory Competition Policy and Market Access Negotiations, in Competition and Trade Policies, Convergence or Conflict? 115 (E. Hopp and P. Mallary eds. 1998).

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some parties to the common text on regulatory principles that has been negotiated. Nevertheless, negotiators in the W.T.O. process chose an option at the higher end of the cooperative scale. This raises the question whether those emphasising the difficulty of reaching international agreement on substantive competition policy rules have exaggerated this argument. The procedural obligations approach was not favoured precisely due to the substantial differences among domestic antitrust and regulatory regimes, and the absence of 'trust' among the various jurisdictions. The do nothing approach, on the other hand, is problematic in an area where the addressees of the international commitments are, in most cases, not governments, but privatised giants. Two reasons may be advanced why a harmonisation approach was possible in basic telecoms. First, the negotiations are taking place at a time when many governments are moving in the same direction, and seeking to attain the same outcome, namely opening up their basic telecom markets to competition. The effort to liberalise via joint action in these circumstances probably made it possible to go further than would have been the case in a less dynamic setting. Secondly, the negotiations involve very specific issues in a single sector. Governments are unconcerned about the implications of what they are doing in telecoms for what they might wish to do elsewhere. Thus, it is easier to cooperate in a narrowly-defined sectoral context to design common regulations than it would be to draw up uniform competition principles of general application. Finally, the trading partners implicitly rejected the option to negotiate broad common competition rules, since they did not embark on a negotiation on Arts. VIII and IX G.A.T.S. By choosing negotiations on sectorspecific regulatory principles, they thus recognised the particular aspects of telecoms.

Conclusion The paper has argued that while national competition policy is likely, in many cases, to have negative consequences for trading partners, this does not warrant an international agreement. For there to be scope for gains from such an agreement, it is also necessary that decisions that seek to promote the national interest also imply distortions in the global allocation of resources. Unfortunately, there is little systematic empirical work that provides any guidance on the magnitude of spillovers in general, and, even more troubling, as to the magnitude of possible distortions. Therefore, at the moment, we are left with the possibility that such distortions could represent either a small or a


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large problem. Of course, if they are small, there is no good reason to negotiate a multilateral agreement. In contrast, if they are large, and since we have shown that the existing legal regime can in principle deal with most such problems, the existence of significant distortions would strongly suggest that the existing legal regime is unsatisfactory. Section C suggested several possible reasons that the current regime has not been used, but it is not clear which explanation is correct. From a policy point of view, this means that it is premature to propose a multilateral agreement. There are still too many uncertainties concerning the size of the distortions problem, and the sources of the lack of trust in the existing legal regime. Before these uncertainties are resolved, it seems inappropriate to advocate one solution as superior to all others.

Other References NEIL CAMPBELL and MICHAEL J. TREBILCOCK, International Merger Review: Problems of

Multi-Jurisdictional Conflict, in Competition Policy in an Interdependent World Economy, (Kantzenbach, Scharrer and Waverman eds., 1993). ANDREW DICK, Japanese Antitrust: Reconciling Theory and Evidence, 9 Contemporary Pol. Issues 50 (1993). SIR GERALD FITZMAURICE, The Law and Procedure of the International Court of Justice (1986). BERNARD M. HOEKMAN and PETROS C. MAVROIDIS, Competition, Competition Policy and

the G.A.T.T.,\1 World Econ. 121 (1994). KAI-UWE KUHN et al, Competition Policy Research: Where Do We Stand? C.E.P.R. Occasional Paper, No. 8 (1992). DAMIEN NEVEN and PAUL SEABRIGHT, Trade Liberalisation and the Coordination of

Competition Policy, in Competition Policy in the Global Economy, Modalities for Cooperation (Leonard Waverman et al. eds., 1997). MICHAEL PORTER, The Competitive Advantage of Nations, (1990). FRIEDER ROESSLER, The Concept of Nullification and Impairment in the Legal system of the World Trade Organisation, in International Trade Law and the G.A.T.T./W.T.O. Dispute Settlement System, (Ernst-Ulrich Petersmann ed., 1996).

IX Dr. Frangois J.L. Souty1 Rapporteur charge des affaires multilaterales Conseil de la Concurrence Paris, France Associate-Professor, University of La Rochelle

Introduction One of the major challenges in the W.T.O.'s future activities will be to unify sometimes varying conceptions of what Europeans call 'Competition policy' and Americans call 'Antitrust policy'. Even if one accepts the most common concept of 'competition policy,' different views still exist as to the significance and coverage of that policy. One way to reconcile the two concepts would be to emphasise the converging views of how to increase market efficiency at the international level. Even our understandings of market dynamics vary from country to country. In some countries, such as the United States, significant changes have occurred. Recent Chicago Schoolfindingsreflect these changes, following a succession of antitrust schools, since enactment of the world's first modern and original antitrust laws. In other countries, there is greater emphasis on the notion of 'fair trading' rather than competition. This is the case, for instance, in the United Kingdom and Japan. In Europe, a process of convergence has occurred over the last several decades among a group of countries with very different legal and economic traditions. The European Union has promoted a strong approach to competition policy, as defined in Arts. 85 to 94 of the Treaty of Rome. In the future, it may be useful to examine the extent to which the E.U. Member States have been able to converge in the area of competition policy. After World War II, the European Coal and Steel Community, and later the European Economic Community, engendered a complex process of legal and economic convergence among Member States, the effects of which can be seen at both national and Community levels. The complexity of the Community's competition regime lies both in the institutions of competition law and in the objectives pursued by those institutions. 1

The views expressed in this paper are the author's own and do not reflect any official position. Thanks to Ann Ayers for comments and suggestions.

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After discussing the above areas in further detail, this paper will consider cartels, the sole area where a consensus could be reached in the W.T.O. context, since competition policies worldwide are all basically designed to fight against cartels. A. A Process of Convergence in Europe from an Institutional Perspective Over the last thirty years in Europe, a set of competition policy regimes has emerged. These regimes encompass general competition laws and specific authorities or bodies devoted to the implementation of those laws. The Treaty of Rome has contributed to this general trend, and the system thus created was modernised in the 1980s. The paradigm of'Competition Law and Policy' is distinctive, and determines the quality and authority of those institutions that have the duty to analyse the evolution of market structures and to preserve their efficiencies by eliminating anticompetitive behaviour. The experience of the Community and the three Member States with the oldest competition regimes (Germany, the U.K., and France) illustrates these developments. Germany has an independent high federal cartel authority, the Federal Cartel Office (F.C.O.), which decides on the validity of behaviour, subject to review by the Court of Appeal of Berlin. The F.C.O. is independent in the sense that the Ministry of Economics, which has jurisdiction over the appointment of the Chairman of the F.C.O., may not give the F.C.O. administrative guidance or direction with respect to specific cases. Moreover, the F.C.O. makes decisions via a collegial process in its divisions. Independence and collegiality are the two main features of this institution. In addition, a 'toothless watchdog' has been created: the Monopolies Commission. It plays an expert and advisory role with regard to the merger control and abuse control activities of the F.C.O. and the Minister of Economics, but does not have enforcement powers. This expertise is the third feature of the German enforcement system.2 The United Kingdom also has a tri-polar system of control with regard to its competition and fair trading laws. The Office of Fair Trading is an independent agency outside the monitoring power of the Minister of Trade and Industry, although each of its decisions is subject to review by the Department of Trade and Industry, especially in the area of mergers. The two institutions are likewise supplemented by a 'toothless watchdog' acting in an expert capacity, 2

Ingo L.O. Schmidt, Wettbewerbspolitik und Kartellrecht : Eine Einfiihrung (5th ed. 1996); see Francois J.L. Souty, La politique de la concurrence en Allemagne Federate (1996).


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primarily with regard to mergers and monopolies. This watchdog is called the Monopolies and Mergers Commission. Its reports are submitted to the Director General of Fair Trading following a collegial deliberation. The basic features of independence, collegiality and expertise are, therefore, present in this system as well. The only missing feature in the British system concerns, so far, the role of the judges and the absence of a dissuasive fining system.3 Over the past ten years, France has gained similar experience through its Ministry of Economics, commonly seen as the major investigating body, acting through its directorate for competition, the Direction Generate de la Concurrence, de la Consommation et de la Repression des Fraudes ('D.G.C.C.R.F.').4 While the D.G.C.C.R.F. is primarily responsible for investigations, cases involving prohibited behaviour must be referred to the Conseil de la Concurrence, which is a collegial board that renders judgments as a specialised tribunal composed of senior magistrates who impose orders and fines upon corporations. The decisions of the Conseil de la Concurrence are subject to appeal in the Court of Appeal of Paris. The Conseil can institute a procedure sua sponte and request that the Ministry of Economics undertake the necessary investigations. With respect to mergers, the Conseil de la Concurrence becomes a 'toothless watchdog' because it can only give its advice to the Ministry, which may choose to follow it and which can decide to publicise the decisions or keep them secret. Again, independence combined with specialisation, collegiality and the toothless expertise drive this system.s The European Community seems to have promoted these basic features of independence, specialisation and collegiality. The only feature missing from the European system is the 'toothless watchdog'. The E.U. system has been severely criticised, especially with regard to the independence of the Commission. However, Commission decisions are subject to several important controls. First, from the outset, the Commission's decisions have been closely scrutinised by a very independent authority: the European Court of Justice (currently the Court of First Instance). Secondly, the E.U. Commissioner in charge of competition policy benefits from a large delegation of fellow Commissioners, and is aided by the independent body of DG IV, which is itself assisted by consultative committees of national experts representing the expertise of their national agencies. Hence, here again, the idea of a body vested with 3

Richard Whish and Brenda Suffrin, Competition Law (1993); Francois Souty, La politique de la concurrence au Royaume-Uni (1996); significant legislative changes are expected for 1999. 4 Ordinance no 86-1243 (1 Dec. 1986). 5 On French competition law and policy, see Guy Canivet and Marie-Chantel Boutard-Labarde, Droit francais de la concurrence (1994).

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a specialised authority, a specific expertise and collegiality controls the system to enforce competition law.6 If one focuses on purely institutional aspects, these four experiences follow a general pattern modeled on the U.S. matrix, incorporated more in the Clayton Act7 and the F.T.C. Act8 than in the Sherman Act.9 The former include a specific set of legal prohibitions defining extensively and in detail the economic order to be protected: a competition system based on a free market and an efficient economy. They also establish the tools to ensure such protection: specialised authorities under the supervision of the federal court system. By comparison, the Sherman Act simply defined a set of prohibitions to be enforced by common law judges. The intervention of the Department of Justice and its specialised unit, the Antitrust Division, emerged more than a decade after the signing of the Sherman Act. In contrast, the Clayton Act coincided with, and the F.T.C. Act gave birth to, the specialised authority with responsibility to implement the law, the F.T.C.

B. European Competition Policies are Converging to a Limited Extent Regarding Objectives We are currently faced with the issues of whether a detailed multilateral code should be entered, and whether an autonomous enforcement and adjudication system should be created; or, on the other hand, whether a bilateral or multilateral agreement should be entered specifying a few consensus principles of constitutional generality, which would be implemented and enforced at national level. The examples discussed above provide some guidance. To a limited extent, European competition policies have been converging. This process has been facilitated by the definition of a core of constitutional principles at the Community level, which has allowed Member States to agree to shared enforcement, while maintaining a certain degree of autonomy of E.U. law preempting national laws. The German experience is closely associated with a strict efficiency balance, existing within the framework of a workable competition concept. This concept has only been adopted following an animated debate involving the business community in the 1950s. However, in 1869, the German business 6 On E.U. law, see Whish and Suffrin, supra note 3; Franpois Souty, Le droit de la concurrence de l'Union Europeenne (1997). 7 15 U.S.C. §§12-27. 8 15 U.S.C. §§41-58. 9 15 U.S.C. §§1-8.


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community had been given full freedom of trade within the Zollverein, that is, without interference by governmental licence or permission. The creation of a nation-state where the same rule applies, notwithstanding the Land in which a firm operates, dates from the same period. Over the ensuing 100 years, the German business community learned to operate freely within Germany, with the notable exception of the Third Reich. The paradigm 'free operation' must, nevertheless, be cautiously considered, since co-ordination between operators, and even cartelisation, was widely admitted by the legal and business traditions during the last decades of the nineteenth and the first decades of the present century. Italy's experience was similar to Germany's, specifically with respect to the interstate free trade implemented by the Zollverein.10 In any case, the intricate legal and political processes have permitted successful economic integration stemming from a plurality of former sovereign states and juxtaposed economies. The present situation in Germany was initiated in 1957 with adoption of the Gesetz gegen Wettbewerbsbeschrankungen (G.W.B.).11 Since then, the long term process of integration of the German economy has forced a transfer of sovereignty from the classical states to the Federation, be it an empire or a republic. At the centre of the workable competition model, the federal cartel authority is vested with the mission of protecting the efficient competitive order of the market by focusing its enforcement actions chiefly on the restrictive practices of cartels and those deriving from some market-dominating corporations. This enforcement is backed by a powerful fining system, adhering to the German tradition of a strong imperial state, but under review of an appellate court. The British experience is different, largely reflecting the habeas corpus tradition which characterises the role of the state and severely limits the sovereign's powers with regard to individuals. In the United Kingdom, competition policy emerged in a mature economy in 1948, as a Labour reaction to a very highly concentrated economy and the exercise of market power, harmful to British consumers. This occurred with the support of the U.S. antitrust authorities, who were then seeking to dismantle global cartels involving major British and American corporations, on the heels of dismantling cartels in Germany and Japan. The British law followed the public interest approach, although this 10

Thus, the Italian legislative and business community may also be familiar with the association of two concepts related to sovereignty transfer on the one hand and creation of a unified free trading market on the other. 11 Gesetz gegen Wettbewerbsbeschrankungen (Kartellgesetz) in der Fassung des 5. Anderungsgesetzes vorn 22 December 1989 (B.G.B.I. 1989, Teil 1, 5.24.86).

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public interest is subject to varying interpretations. The most recent understanding of the public interest relates to efficiency aspects, as in Germany. Despite regular updating of the British competition law, however, enforcement authorities have never been granted sufficient sanctioning powers. Further, in the U.K., the competition authority has never had to share power with local authorities. Thus, it is not in the constitutional tradition to transfer sovereignty. The only break from this tradition has been participation in the European Community, which implies the acceptance of the acquis communautaire. In France, a strongly centralised state has not always been taken for granted. Although there has never been an experience similar to that of Germany, some intense provincial or regionalist feelings exist, making the French version of subsidiarity a form of regionalism. With respect to the market and economic law, a heavy industrialist influence was felt in France until the late 1980s. The French understanding of competition policy, therefore, is associated with the notion of a bilan economique, although the Conseil de la Concurrence has retained the bilan concurrentiel analysis. The latter is a concept in which efficiency considerations prevail, whereas the former encompasses various political and social objectives. As in Germany, there is no tradition of transferring sovereignty in France. However, acceptance and support for construction of the European Community by the French can be traced to such founding fathers as Robert Schuman and Jean Monet, who familiarised the French institutions with the intricacies of a coexistence of a supranational legal framework integrated into a national legal tradition. This acceptance of European integration has enhanced greatly the bilan concurrentiel school. Still, the existence of two paradigms of competition policy enforcement, influencing the reasoning either with purely efficiency-related concepts or broader concepts, raises some uncertainty with regard to the standards. This is especially perceptible in the merger control area, where the Conseil de la Concurrence gives opinions to the Minister of the Economy which are grounded in the bilan concurrentiel approach, whereas the Ministry's own opinions remain determined by the bilan economique approach. As the case law evolves, the applied standard is likely to become more uniform, and judging from the standards of analysis of the Conseil, the trend is clearly in favour of the efficiency conception {bilan concurrentiel). Finally, in constructing the Community competition law and policy, the European Community has had to take note of the experiences of the founding fathers. This was accomplished by elaborating a policy aimed at harmonising market institutions throughout the Community, eliminating barriers to free trade among the Members States (namely antidumping and other trade-related


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instruments), and submitting state aid and public subsidies to the monitoring power of the Commission. The process was supplemented by the Member States' delegation of sovereignty to the Commission. Two phenomena were induced by the establishment of this process. First, as noted by two European scholars in a recent paper, 'this competition policy, enforced centrally (from Brussels) and implemented in the individual member nations, led to vertical convergence, voluntarily accepted and enforced under law'.12 Secondly, this policy also led to a horizontal convergence that is one of the characteristics of the development of European Law. This was made possible under the auspices of the E.U. Court of Justice, with its case law creating and incorporating the 'general principles of European law' ('principes generaux du droit europeen'), which are comprised of a sampling of common law principles already established in the Member States. This second convergence process moves from the centre to the periphery, in the sense that Commission decisions are imposed on Member States and their nationals, or that the Commission delegates its powers to Member States; and from the periphery to the centre, in the sense that national problems and problems affecting two or more states are referred to Brussels for treatment.13 Horizontal convergence has also led to a narrowing of the scope of national legislation pre-empted by the directly applicable Articles of the Treaty of Rome and regulations derived therefrom. This can be viewed as a consequence of the transfer of sovereignty. E.U. competition law and policy are, therefore, the result of a compromise or trade-off between efficiency and integration. Within the European Community, the convergence process was sometimes more apparent than real, and implied choices of considerable political consequence.

C. International Consensus is Possible With Respect to Treatment of Cartels The Community system and the three national systems discussed above prohibit collective anticompetitive practices. However from a strictly economic and legal formulation, important differences remain even in the clear-cut area of cartels, and how they should be denned and treated.

12

Herve Dumez and Alain Jeunemaitre, The Convergence of Competition Policies in Europe: Internal Dynamics and External Imposition, in National Diversity and Global Capitalism (Berger & Dore eds., 1996). 13 Id.

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Section 1 of the German Competition Law of 1957 prohibits cartels. Following a long controversy with the Supreme Court, however, a new prohibition regime has been introduced by the legislators (section 25(1)), which closely resembles Art. 85(1) of the Treaty of Rome. Cartels are defined as agreements between enterprises or associations of enterprises, which are concluded for a joint purpose and may influence production or normal market conditions for trade in goods or services by restraining competition. The same rule applies to concerted practices that have a purpose and effect similar to that of a cartel. The basic prohibition of cartels is, however, qualified by a number of exemptions. In addition to the classical special exemptions for agriculture, utilities, transports, etc., the F.C.O. is authorised to grant exemptions under strictly defined conditions to cartels which are notified. Exemptions are granted mainly to S.M.E.s (more than 100 specialisation and cooperation cartels in the early 1990s) and to export cartels (around forty notified cartels under section 6 G.W.B. in the 1990s).14 Unlike Art. 85(3), the German exemption provision does not include a general rule of reason and does not grant broad discretion to the F.C.O. to lift the ban where economically appropriate. This is sometimes perceived by the business community as a structural deficiency of the German law, felt particularly in joint venture situations, causing corporations to seek clearance under E.U. rules. Furthermore, illegal cartels are fined even more heavily in Germany than in the United States (fines up to three times the amount of illegal profits in Germany as compared to twice in the U.S.). In the United Kingdom, two laws may allow the Office of Fair Trading to prohibit prima facie cartels: the Restrictive Trade Practices Act 1976 (R.T.P.A.) and the Competition Act of 1980. The Fair Trading Act of 1976 allows investigations when a 'complex monopoly situation' is created by a number of separate companies. No clear-cut definition of anticompetitive agreements exists, however, in British competition law as it does in Art. 85(1). In cases where anticompetitive behaviour has been established, the only action that British competition authorities can take is prohibition. However, they have no power to penalise past behaviour or provide relief to injured parties. Further, these parties have no right to sue for damages. From an economic point of view, the competition laws prohibit agreements between companies which together account for at least 25 per cent of the relevant market in the United Kingdom. The R.T.P.A. is the only legal tool creating the right to seek a contempt of court order for continuing prohibited behaviour, but a defendant can seek relief from the prosecution by using a series of tools ('gateways'

14

For a table of statistics between 1958 and 1993, see Francois Souty, supra note 2.


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and 'tailpieces') analogous to exemption provisions. In practice, this law is rarely used to sentence anticompetitive behaviour. After a long period of delay, the French competition law was introduced in its present form in 1986. Art. 7 of this law contains a clear definition of cartels, modelled on Art. 85(1), which states: 'any concerted practice, whether express or tacit, is prohibited when it has the purpose or effect of preventing, restricting or distorting competition in a specific market.' Unlike Community law, it does not contain a notification provision. The Ordinance is, in principle, enforced by the Ministry of the Economy, the Conseil de la Concurrence and common law tribunals. In reality, however, it is enforced primarily by the Ministry of the Economy's D.G.C.C.R.F, which is allocated the necessary resources to conduct investigations. The Ministry may also refer any case to the Conseil, unless it is covered by a de minimis rule or a clearance procedure. To avoid lax enforcement, all results of proceedings undertaken by either the Ministry or the Conseil under authority of the Ordinance must be published. Fines of up to 5 per cent of the firm's total domestic sales may be imposed. The Conseil has significantly increased the amount of fines in recent years (more than 100 million FF each year, 478 million in 1995). Finally, the European Community's cartel prohibition rule must be considered, as it is one of the best models for the future of competition law in the W.T.O. Indeed, it is the only experiment where several states have agreed to prohibit cartels affecting more than one national economy. This model, however, is not appropriate for adoption by the global community of states although it will inevitably gain broader support as it is adopted in Eastern Europe and Northern Africa. The prohibition articulated in Art. 85(1), and the exemption created by Art. 85(3), are well known. Under Reg. 17, the Commission is empowered to impose fines on cartels after first consulting with the Member State Advisory Committee. As a result, condemnation of cartels in the E.U. is the result of an objective, transparent, coherent and consistent law enforcement process that has been more consistent over time than has been cartel enforcement in non-European countries.

Conclusion First, it is possible to internationalise competition law, as the European integration process in the face of diverse national legal systems has shown. Second, as to whether a detailed multilateral code with an autonomous enforcement and adjudication system should be adopted, or a less detailed set of principles of constitutional generality and contemplating national imple-

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mentation and enforcement, Europeans have nothing to fear by supporting the first alternative. History has nevertheless taught us that competition enforcement rarely starts with detailed codes. Instead, several decades and legislative amendments have often been necessary to build the systems of competition policy presently operating in most major economies. Third, a synthesis of the two alternatives and composed of some common features from the examples above may provide a preferable third solution: a limited prohibition which allows national enforcement under the review of a collective and autonomous body, advised by an independent toothless watchdog with a strong expertise in the field of law and economics, and subject to review by an appeal authority.

PANEL DISCUSSION


GENERAL RAPPORTEUR:

Barry Hawk, Partner, Skadden Arps Slate Meagher & Flom, New York, New York, U.S.A.

PARTICIPANTS:

Ian Forrester, Partner, White & Case, Brussels, Belgium Calvin Goldman, Partner, Davies, Ward & Beck, Toronto, Ontario, Canada Herbert Hovenkamp, Professor, University of Iowa College of Law, Iowa City, Iowa, U.S.A. Martin Howe, Former Deputy Head of Office of Fair Trading, London, England Abbott (Tad) Lipsky, Senior Competition Counsel, The Coca-Cola Company, Atlanta, Georgia, U.S.A.

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• PROF. HAWK—Session three will attempt to follow David Hume's distinction between the ought and the is. We will focus on the 'is'—i.e., how policy objectives are implemented in the various jurisdictions. I would like to list nine issues for discussion, which are covered in the papers submitted by the panellists of this session. First, there is a considerable gap between the rhetoric of competition law objectives and the reality of their implementation. Canada and the United States provide two examples of this phenomenon. Why is there this gap? I think much of the reason is a failure to distinguish between the objectives of competition law and the asserted benefits of competition. For example, one asserted macroeconomic benefit of competition is reduction of inflation, but this has little, if anything, to do with competition law after it has been enacted. This reminds me of the excellent distinction made by Mr. Schaub between fundamental, ultimate objectives, and operational enforcement criteria. Although they do not use Mr. Schaub's distinction, all of the papers submitted by the panellists of this session say essentially the same thing. Second, in many jurisdictions, including Canada and the United States, there is a strong contrast between the objectives that are expressed in the statute and the narrower interpretations by the competent authorities. For example, many of the Canadian/U.S. statutory provisions, like the ban on price discrimination, expressly invoke populist, non-economic objectives. In general, those statutes are weakly enforced by the competent authorities. On the other hand, courts appear to be more willing than the competent authorities to follow the statutory objectives when faced with a claim, probably because courts have more limited discretion than a competent authority has. If it disagrees with the purpose of the statute, a competent authority has considerable discretion simply not to enforce the statute. Third, a trend has developed to narrow competition law objectives, primarily to a more economics based approach that accords either exclusive or great weight to welfare/efficiency at the operational level. Distinctions between consumer welfare, producer welfare, etc., have no effect at the working level. However, the papers indicate that there is a very strong trend toward far heavier emphasis on economics-based considerations, which rests upon increasing emphasis on economic analysis. This has had a number of effects, one of which is the non-enforcement, or very weak enforcement, of certain legislation that has broader, non- economic objectives. Fourth, this narrowing of objectives does not result simply from a political disagreement with the legislation. This is very important. Prof. Fox makes the point that choosing to pursue efficiency is a political judgement. Some have argued that Prof. Easterbrook and others are simply Chicago School economists, and are rejecting populist goals for political reasons. However, that is

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not the full picture. Prof. Easterbrook and others are also saying that competition enforcement should be limited to economics for lawyers' reasons, not just for political reasons, as economics provides better analytical tools to produce more predictable results than broader political objectives. The constraints on operating a legal system encourage a narrowing of objectives to economics. That is not a political judgement; that is a lawyer's judgement. Fifth, Prof. Easterbrook would say that an economics-based policy objective has the additional benefit of limiting the discretion of the decision-maker. We may not want to limit the discretion of the decision-maker, but if we do, then narrowing the objectives will help. Despite the debates on the uncertainties, economics at least provides firmer analytical rules to decide a case, and maybe formulate legal rules, than any alternative. Sixth, the E.U. system is the only one with a market integration objective. This is not merely an ultimate criterion; this is an enforcement criterion that results in per se prohibitions on certain kinds of vertical restraints, geographic price discrimination, etc. That, of course, raises tensions between this market integration goal, be it political, social, or something else, and the science of microeconomics. It may be possible to establish an efficiency justification for market integration, but it would take creative thinking. Seventh, the papers seem to suggest that the E.U. has one of the broadest lists of competition policy objectives. The U.K. is an exception, with its 'public interest' test, which is the ultimate ambiguity. Mr. Kobayashi's paper on Japanese antitrust law sets forth a broad list of objectives, but it is unclear whether the trend is the same in Japan that, notwithstanding these broad statutory objectives, the actual implementation is becoming more narrowly focused. Eighth, inclusion of non-economic objectives or considerations as enforcement criteria is intimately related to the institution and the enforcement system being used. Environmental, regional, or social considerations, and concern for national champions or competitiveness, are certainly not microeconomic considerations. As a lawyer, I believe that such considerations are distantly related to the normal microeconomics framework used in analysing cases. Centralised executive or administrative bodies are better able to implement broad, noneconomic policy objectives. In Europe, the Jacobin School of antitrust systems holds that the longer and broader the list of policy objectives, the more power and discretion should be accorded to a central 'integrated' body. For instance, a Commission argument in favour of maintenance of its monopoly over the power to grant exemptions under Art. 85(3) is that the Commission makes its exemption decisions on the basis not only of economics, but also on other regional, social, etc. considerations. The more that non-economic objectives


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are included as enforcement criteria, the easier it is to support a centralised, non-independent authority. Finally, legal certainty for me is like Liberty with an initial capital: never have so many sins been committed as those committed in the name of Liberty. Many sins are committed in the name of legal certainty, which is used as an excuse to resist the introduction of economic analysis into antitrust. I believe it is a wildly exaggerated concern. In the U.S. and Canada, where there are many open ended rules based on economic analysis, I question whether there is less legal certainty. • MR. FORRESTER—Being asked to find objectives in European competition law is as easy as being asked to find tasty vegetables in the market-place in Florence: there is a huge choice, it is very rich, very agreeable, there are many interesting things. I was embarrassed to hear that Mr. Schaub regarded my article as enumerating a chamber of horrors in that the Commission seemed to be pursuing so many different goals. I did not view it this way. Rather, the Commission is a relatively young but exceptionally successful competition authority. Therefore, it is natural that it shouldfindjustifications for its actions in many exotic corners. That really does not trouble me. Second, many discussions have occurred over the years on the subject of the market integration goal. The preoccupation of the Commission with market integration has been criticised by most people around this table, either publicly or privately, including myself. However, the pursuit of the goal of eliminating obstacles to cross-border trade was not, in itself, undesirable. Rather, people criticised the relative standard. Why should a modest restriction of cross-border trade be penalised so heavily, while cartels were treated more gently? Correspondingly, it was said that the Commission was too harsh on restrictions of trade, too soft on other things. That does not mean that the essential principle of encouraging cross-border trade, and using the competition rules as a mechanism to this end, was bad. More generally, the Commission has used cross-border trade as an independent mechanism for stimulating competition. Many questions have arisen over the years regarding how far that argument would hold. What about trade with Sweden, when it was not in the Common Market? What about trade with Portugal? What about trade with Poland, Hungary, countries of Eastern Europe, as well as restrictions on transatlantic trade? When the dollar is low, are restrictions placed on a U.S. dealer network with respect to transatlantic shipments caught by Art. 85(1)? Would the countries of central and eastern Europe be interested in using or at least exploring the possibility of cross-border trade as an independent mechanism for encouraging competition in their jurisdictions?

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At what point are we going to draw the line and say that cross-border trade may be insisted upon only up to this point? Third, the Commission should be given great credit, which it does not often receive, for recognising and attacking government distortion of the marketplace. That is almost unique to the European Commission. The law has not been perfectly consistent. The European Court sometimes has said that where parties get together and the government then ordains what they have agreed privately, that is caught by Art. 85(1). On other occasions, the Court has been more cautious and said that the competition rules do not apply under such circumstances. Accordingly, there are inconsistencies, but the principle that state distortions of the market-place are subject to the competition rules is extremely important. It has not been viewed as a problem in the United States, although I believe it is more of a problem there than American practitioners have perhaps recognised. It has been a problem in Europe and other countries around the world. Thus, this is a field in which the European experience should be of great interest, and from which other jurisdictions should borrow boldly. Fourth, in the enforcement of competition law in the European union, there is a strong element of moral righteousness. One might almost say it is a law against unfair competition. There are instances where a complainant presents to the Commission something that seems shocking in its unfairness, so that the Commission has a strong temptation to intervene on behalf of the party. That bears some reflection, because it suggests that even a sophisticated, mature, senior competition agency may be readily distracted from competition law into unfair competition law. Finally, there is no point in having a competition law unless it is actually implemented and enforced. We may have a beautiful, perfect competition law in Ruritania, but if there is no agency to enforce it (as indeed there is no agency in Belgium at the moment to enforce competition law because the officials have all resigned), there is no point in having the law. It's nice, it's there, you can read it, but it doesn't do any good. European law has developed in a pragmatic manner. There is a great deal of law, with a great deal of influence. I submit, however, that its weakness is a failure systematically to address an objective that has not been properly articulated: that the law should be observed and enforced. There is not enough output. Thus, although we have a rich law, we have extremely unpredictable circumstances with respect to the observance and enforcement of the law. That is a weakness that should be corrected in the years ahead. • MR. GOLDMAN—I would like to make six relatively brief points. First, the expressed statutory objectives contained in Canada's antitrust law have played a useful role in the enforcement of that law in three respects. One, from the per-

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spective of those at the enforcement agency, the objectives help in defining case priorities for the allocation of limited resources. Two, from the perspective of the private sector, the objectives of the Act and the experience under the Act tell a great deal about what kind of submissions are going to be more important. For example, in Canada, it would not be useful to focus on employment issues or on trying to create a national champion, since the law provides for national treatment and nothing else. Three, from the perspective of the adjudicator (the courts or the tribunal), the objectives assist them in trying to interpret the intention of parliament. The objectives do not remove the legal uncertainty at all times; nothing can. However, they provide useful guidance. Second, there is a definite trend in laws such as Canada's to incorporate more economic principles. We have an explicit set of provisions in the 1986 merger law on barriers to entry and innovation, as well as an express statutory efficiency gains defence. They reflect economic thinking and, again, they help to remove uncertainty, but they do not cure it. Third, there is a definite need for greater transparency in competition law at all times. Transparency assists in achieving the objectives, or at least makes the antitrust agency accountable as to whether it has achieved those objectives. Transparency also increases confidence, and educates the public, including the business, legal and consumer communities. When I first went into office, I decided to release detailed statements on cases that we did not challenge, as to why we had decided not to challenge them. Fourth, I tend to agree with the statement in Prof. Hawk's paper, that 'legal certainty is often a shibboleth'. Despite all the express provisions in legislation, legal certainty is like beauty in the sense that it is elusive, it can always be subject to peoplefindingflawsin it, and it does not necessarily get better with age. For instance, Canada had a conspiracy provision that was over 100 years old, and still subject to court challenge on the ground of being void for vagueness. It was set aside a few years ago at the trial division by a judge, but was ultimately resurrected in the appellate proceedings. Thus, anything can happen. Fifth, we must consider how to deal with conflicting competition policy objectives. Objectives are often not compatible. Even with the greatest economic thinkers, some parliaments write objectives that do not always seem to be consistent. The key to dealing with this problem is the balancing process. Comparing harms from anticompetitive acts to efficiency gains is like comparing apples and oranges. In the balancing process, the key phrase is relative certainty, that is, balancing how certain the likely efficiency gains are against how certain the likely anticompetitive harms are. Clear, covert, past cartel conduct presents an easy case, but a case involving prospective, future gains is much more difficult.

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Finally, in defining and implementing competition policy objectives, there is always the challenging task of dealing with competition policy issues on their face, as well as competition policy issues that run into other policies, such as intellectual property policy. Increasingly in this age of information, hi-tech and innovation, competition comes squarely into conflict with the objectives of intellectual property policy—those trying to protect their trade marks, copyright and so on. In Canada, our experience has, to date, been quite limited, yet we see other cases on the horizon where this balancing process will become a daunting task. However, there is no turning back. • PROF. HOVENKAMP—In the last ten tofifteenyears within the United States, there has been a narrowing of the focus of concerns. I would not describe this narrowing of focus so much as the elimination of non-economic concerns, since they had already been eliminated by then. They have some influence at the margin, but very little at the centre. Rather, this narrowing of focus relates to the use of more restrained criteria for acceptable economic theory. The predominant economics has become the traditional neo-classicism, characterised by the following assumptions: markets are all more or less alike, are fairly robust, and tend toward a competitive equilibrium; firms tend to maximise their profits; consumers tend to be well informed; resources are mobile; and finally, and perhaps most importantly, if there are permanent failures in a sufficient number of those criteria in a particular market, then that market does not work and it befalls the legislative branch, rather than the antitrust courts, to find a solution. Incidentally, our conception of the robustness of markets has broadened considerably over the last ten orfifteenyears. However, antitrust policy has not simply adopted neo-classical economic theory. There are many areas where it has not. In the United States, there are relatively severe shortcomings in this regard in some areas. First, the doctrine of antitrust federalism, known in the U.S. as the State Action doctrine, or the Parker v. Brown doctrine, gives states and properly authorised local governments very expansive power to create monopolies, to create or further cartels, or to engage in other significant anticompetitive practices. Thus, if the state articulates its wish to engage in some anticompetitive act, or to permit its local government to do so, and if private conduct is supervised, even if it is hopelessly anticompetitive, then that conduct is entirely immune from federal antitrust law. A very significant set of instances where markets deviate is where the actions of state or local governments accept that immunity and permit the markets involved to deviate. The other major area is our extremely expansive use of private antitrust enforcement. From 75 to 90 per cent of antitrustfilingsin the U.S. are by pri-


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vate plaintiffs rather than government agencies. Private plaintiffs have purely private motivations, and do not take the public interest into account. They are generally far less restrained in deciding when cases should be brought, some being quite responsible, but many not. They have the lure of treble damages and attorneys' fees for prevailing plaintiffs. That, coupled with non-expert judges (our federal judges are by and large generalists, not antitrust specialists), results in decisions containing many exceptions to the general principles of neo-classicism. For instance, the Ninth Circuit Court of Appeals recently held in Chroma Lighting v. GTE Sylvania that the Robinson-Patman Act prohibits charging two different dealers different prices, even though there was no proof of any impact on competition. This holding brought the Ninth Circuit into conflict with the Third Circuit. In the Ninth Circuit case, output in the market was not shown to be injured; the only injury was that one dealer had to pay more than another dealer. The court reasoned that when the Robinson-Patman Act was passed in the mid-1930s, competition was not on the mind of Congress. This is true, but does not distinguish this Act from any of the other antitrust laws. For instance, we know today that John Sherman's major constituency when he drafted the Sherman Act was small, Ohio gasoline producers who wanted protection from lower cost Standard Oil. Standard was shipping oil in tank cars; John Sherman's lobby was shipping it in wooden barrels. Sherman initially proposed legislation to the Interstate Commerce Commission forbidding the use of tank cars in the United States, thereby forcing Standard Oil to ship in wooden barrels. When that legislation failed to pass, he proposed the Sherman Act as an alternative. Fortunately for us, that set of motives no longer guides the interpretation of the Sherman Act. Finally, I view a recent set of a half dozen franchise cases as the nightmare of Kodak coming back to roost. Four of these cases, which are all basically the same, have now been approved for trial. Typically, the franchisee is a fast food seller. One of them, for instance, is Queen's City Pizza in New York. Queen's City alleges that Domino's Pizza has market power in the market for Domino's brand pizza dough. Pizza dough is made of flour, salt and water, and it is very hard to see how anyone could have a monopoly in pizza dough. The important element here is that the franchisee is obligated by his contract to buy all of his pizza dough from Domino's, and as a result, he is 'locked in'. Under Kodak, lock-in means that certain customers have no mobility as a result of prior choices. Did we mean, however, to use that case to rewrite contracts? Domino's Pizza is a case about someone who was unhappy with a contract that forced him to buy pizza dough from Domino's at a high price. Thus, he is now claiming that because his contract forces him to buy Domino's pizza dough, he is locked in with respect to that grouping of sales, which has become a relevant

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market. To me, this is a silly argument. In four of these cases, the judge has denied the summary judgment motion of the defendant and the cases are proceeding to trial or perhaps settlement. • MR. HOWE—U.K. law is still different from the laws of most countries. There is nothing in the U.K. competition statutes that indicates what their objective is. The substantive test that must be met before any agreement or practice of an individual firm or merger can be stopped or modified is that the agreement, practice or merger be against the public interest. Therefore, the objective of the law is presumably that the public interest is generally promoted by competitive markets and conduct. However, this is not necessarily the case. The statutes contain some indication of the considerations that the enforcement authorities should have in mind in applying this public interest test. In my paper, I describe the articulation of these considerations as a mishmash, which is far from an economic efficiency standard. The statutes explicitly state that the authorities may declare in a particular case that producer interests dominate consumer interests, that regional considerations are pre-eminent, that costs to jobs outweigh benefits to efficiency. That is clear from how the statute directs the authorities to view public interest. It is a vague test that is hardly operational, and very difficult to apply. Second, British competition law imposes an extremely low threshold for initiating cases. Usually, it is sufficient if a simple market share test of twentytwo per cent is met. Hence, the initiating body, which is usually the Office of Fair Trading, need not establish a strong economic case before it can initiate the proceeding. This very low threshold has, however, had the benefit of permitting us to look into some areas, such as oligopolies, which would not be possible in other systems. Third, except for restrictive agreements (which are adjudicated by a court), all cases are investigated by a tribunal, the Monopolies and Mergers Commission (M.M.C.), which is only an advisory body; a Minister takes the actual decision. Accordingly, the decisive role in almost all cases that come up now in the U.K. is in the hands of a Minister. This has obvious implications for the objectives ultimately pursued. The Minister is not obliged to accept the recommendations of the M.M.C.; rather, he can seek his own solution, which may include an alternative objective, or even a political agenda. Those characteristics lead to a broad, open-ended, pragmatic approach to enforcement in the U.K. However, as in other jurisdictions, there is a tendency to approach these issues in an economics-oriented way in the U.K. This is not immediately apparent from a review of the cases. However, decisions in merger cases demonstrate that the U.K. authorities are now emphasising efficiency


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considerations. There are a number of reasons for this. One is that the U.K. government, like many other governments, has become more pro-competition, pro-market forces in its general policymaking. In the U.K., this has manifested itself more in privatisation and deregulation than in competition law. Another reason is that the openness of the British economy and the increasing internationalisation of markets have destroyed any possibility of protecting domestic industry to make it more competitive in international markets. Not many years ago, this was a powerful argument, but it hardly exists any more. A third reason is that many more economists have been brought into the system. Indeed, before 1970, the U.K. competition authorities had no staff economists. However, the public interest test remains the law in the U.K., which provides less incentive to engage in the more rigorous style of analysis in the British system than in some other systems. Moreover, the involvement of Ministers in the process implies that it is not sufficiently transparent. It is transparent to the extent that the reports of the M.M.C. must be published, but where Ministers deviate from the M.M.C.'s recommendations, or decide that the M.M.C. should not investigate, no reasons are given. Regarding institutions, the M.M.C. is quite a good tribunal, well suited to evaluating the conflicting issues that can arise. The difficulty is that it often seeks the middle ground, and it does not like to make explicit trade-offs, such as detriments to consumer surplus, against cost savings from economies of scale. In essence, it does not like to expose these difficult choices, and tends instead to hide them in its reports. Nonetheless, I believe the institutional characteristics of the M.M.C. are better suited to perform the function of tribunal in competition cases than courts. Finally, the new British government, which came into power on 1 May 1997, has made a more robust commitment to competition law reform than its predecessor has. It has promised to propose a bill in the autumn. The likelihood is that it will be a more root and branch reform than the previous government's proposals, which were limited to amendment of the law on restrictive agreements. • MR. LIPSKY—In the U.S., the idea of non-competition-based justifications for anticompetitive behaviour was explicitly eliminated decades ago. Thus, for many years, justifications presented by defendants for their conduct have been presented in terms of economic efficiency, long run output growth, keeping prices low, etc., all of which fundamentally boil down to a long run, economics-based conception of competition. Two cases explicitly state that even though a horizontal pricefixingagreement among competitors has been established, it should be judged under the rule of reason. The two cases approved

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such agreements because they fit into the category of restraints that could contribute to long run output growth. BMI ASCAP v. CBS held legal the collective sales agency for copyrighted musical works and Nabanco v. Visa held legal the fixing of the bank interchange fee, used by the largest credit card systems in order to function. In fact, non-competition goals in the sense of long run objectives of the competitive process play a very healthy and active role in many U.S. competition cases. Mr. Howe has referred to the tendency of authorities to avoid explicit trade-offs. Such trade-offs are never made explicit. In that respect, the use of non-competition objectives at the operational enforcement level is always a kind of show. The spotlight must be moved on the stage such that it covers only those aspects that appear relevant to a competition decision, because if it were characterised as an explicit trade-off, it would not be accepted. I believe the E.U. Commission's attack on government distortions of trade is important and creditworthy. However, I do not agree with Mr. Forrester's assertion that it is unique. In the United States, competition is exposed to the political process, as far as the antitrust authorities are concerned. For instance, Congress could decide to restrain competition under its broad, Constitutionally-based interstate and foreign commerce regulatory authority. The broad State Action doctrine in the U.S. allows a state government to restrain competition by simply explaining that this was its goal. From the standpoint of the antitrust agencies and antitrust enforcement, that is the end of the debate. It is a terribly unfortunate aspect of our law, and I agree that it is an admirable aspect of European law, that the Treaty of Rome reads like a charter of how to control government restraints of trade and how to limit state anticompetitive interference in the economy. That is something that the U.S. would do well to imitate.

Observations and comments • PROF. EHLERMANN—The M.M.C. plays an extremely important role in the U.K. system. I have advocated the transposition of this model to the European level. How well it functions depends on the individuals sitting on the M.M.C. and their courage to speak out. • MR. PITOFSKY—In the second half of this century in the United States, and in other countries as well, economic analysis has taken on increased importance, and has been applied more effectively. In the 1960s in the U.S., there was


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great scepticism about economics and economic analysis, but this has changed. The question remains how far we should go with it. Economic analysis was described as relying upon assumptions that consumers are well informed and mobile, that they make rational choices, and that sellers are always profit maximisers. If this were always true, then we enforcers would be wasting our time, because the market would adjust to all problems. In the early 1980s in the United States, that attitude seemed to prevail, as only hard core cartels and a few horizontal mergers were challenged during that period. However, the state attorneys general, the U.S. Congress, and private enforcement provided checks and balances on the federal enforcers, as they believed that non-enforcement was inappropriate. The number of private actions increased considerably. Presently in the U.S., we are attempting to strike a middle ground by learning about economics on the one hand, but recognising that markets are not quite as efficient, cohesive, tidy, and coherent as some would argue on the other. The challenge is to accomplish this at a time when the commercial world is in a process of radical change, including global competition (e.g., ten times more exports and imports in the U.S. than there were just twenty years ago), and the increased significance of technological competition. Thus, the challenge is great, and it is not yet clear where it will lead. It is, however, clear that the 1960s represented a period of over enforcement, and the early 1980s represented a period of under enforcement. We enforcers must attempt to find the middle ground. • PROF. KIRCHNER—I shall raise two methodological points. First, the consistency of the market integration goal and efficiency is questionable, and depends on the type of economic approach being employed. If we apply neoclassical industrial organisation theory, then this problem cannot be addressed. However, if we apply a neo-institutional approach combined with a classical economics approach, then we have difficulties with this simple efficiency test. Second, as to legal certainty, I believe it is not simply an ideological question. Rather, it involves the rule of law and checks and balances on the antitrust agencies by the courts. It amounts to a principal-agent problem. Can the courts really control the antitrust agencies? This is not a matter of economic analysis. We might have good economic criteria and bad economic criteria, which are not justiciable. Therefore, this amounts to a lack of control of antitrust agencies by the courts. • MR. WARNER—Regarding checks and balances, the O.E.C.D. Competition Law and Policy Committee plays a useful role by performing country reviews of administration of antitrust policy. These reviews constitute an important device that could be expanded also to cover market access issues.

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In the last meeting of trade ministers at O.E.C.D. in late May 1997, a regulatory reform project was discussed, a key part of which also involves competition principles in regulatory reform. They agreed to implement a peer review system for domestic regulatory regimes. One aspect of that will be to review the application of competition policy to domestic regulatory regimes. This begs the question that if the W.T.O. has an existing country review of trade policy, this could be an avenue for building competition principles into the W.T.O. framework. • MR. CASTANEDA—Regarding checks and balances, I shall make two observations concerning the Mexican case. First, after 1993, both the government and the private sector found the government to be the main source of anticompetitive conduct. Thereafter, the concept of ancillary functions of the state was created. Thus, Pemex, the large state-owned oil company, would have an antitrust exemption, but would not be allowed to go beyond the limits set. The competition commission then took action against Pemex for anticompetitive conduct on two occasions. This amounts to one government entity, the competition commission, taking action against another governmental entity, Pemex. Second, specific provisions have been included in some statutes, such as the telecom statute, referring all competition matters to the competition law and to the competition commission. In the U.S., the Transportation Commission, which is a special regulatory commission, approved a merger in the railroad industry between Union Pacific and Southern Pacific. This has had effects on trade matters, as it affected 95 per cent of all the transport trade going to the U.S. through the Mexican gate. Competition rules should take this into consideration. It is undesirable to leave the interpretation of competition rules to special regulatory bodies, because as many competition rules will emerge as there are boards or commissions. • MR. SCHAUB—I admire the inimitable way in which Prof. Hawk and Mr. Forrester have illustrated the weaknesses of Commission practice regarding the multitude of objectives expressed in Commission decisions. I would like to recruit the two for training courses for both the young, and in particular notso-young, officials in DG IV. Second, I find Prof. Hawk's explanation of why the Commission is reluctant to decentralise Art. 85(3) to be simplistic. Over the last three years, I have not heard that the multitude of objectives, or in particular that the market integration goal, is the insurmountable difficulty. There are presently some serious difficulties, because nearly half of the national competition authorities still do not have national legislation empowering them to apply Community law. This


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poses serious problems. For instance, in the BAIAA case, the British competition authority is, for the first time, applying Community law in parallel to the Commission proceedings and in close cooperation with the Commission. The other problem is that many of the national authorities that have national legislation empowering them to apply Community rules are not interested in doing so, or do not have the resources to do so. For instance, in Belgium, such national legislation has been enacted, but the national authority has disappeared from the scene. Thus, it applies neither national nor Community law. Most importantly, we must assure a coherent application of the law within the fifteen Member States. This is not necessarily an insurmountable problem, but it should not simply be dismissed. Third, regarding legal certainty, I agree that excess use is made of this argument. However, in every competition law, an inevitable tension exists between legal certainty and use of economic analysis. We must continue to seek the proper balance between these two elements. • MR. HEIMLER—Economic analysis is important with respect to the efficiency goal in antitrust enforcement. In addition, economic analysis is important with respect to the Community's market integration goal. Economics is about paradoxes, and one of the most important paradoxes on which we all agree is that a system in which everyone does what he wants does not lead to chaos but to the best results. This is one of the most important contributions of economic thinking. There are many other paradoxes in economics, such as the paradox that vertical restraints promote competition rather than restraining competition. The same type of paradox exists with respect to vertical restraints and market integration—rather than reducing integration, they promote it. Thus, economic analysis is needed to analyse market integration. Preventing firms from introducing restraints is not always the best way of promoting market integration. Rather, in many instances, allowingfirmsto introduce vertical restraints or absolute territorial restraints is a good way to promote integration. • MR. KOBAYASHI—I would like to discuss an example of how the objectives provision affected the amendment of the Japanese law. In Japan, the holding company, defined as a company whose principle purpose is to control other companies, is totally prohibited. The reason for this is historic: to prevent the re-emergence of 'zaibatsu', or big family concerns. The private sector has strongly opposed this prohibition, asserting that it has been deprived of this type of business organisation, and that this prohibition is unique to Japan, and perhaps Korea. Government agencies in charge of industrial policy also favour

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abolition of this provision. The J.F.T.C., however, believes that regulations controlling the establishment of holding companies are still needed because certain economic practices in Japan, such as the custom of mutual holding of shares among companies, still result in the formation of large business groups. Thus, the J.F.T.C. has been rather isolated supporting the provision. Section 1 of the Japanese anti-monopoly Act provides that by preventing excessive concentration of economic power, it aims to promote free and fair competition. The J.F.T.C. has relied on this provision, arguing that the need to prevent excessive concentration of economic power still exists. Thus, it drafted a proposed amendment to the prohibition, which would abolish the total prohibition, but establish certain conditions under which the setting up of holding companies would be prohibited. For example, the total value of shares or assets of the entire group held by a single holding company could not exceed ¥15 trillion. Thus, the lengthy provision on objectives exerted an influence in this situation. • MR. KHEMANI—When the Canadian competition law was being drafted, the question arose as to who gives the competition office the authority to engage in competition advocacy. From the experience of other countries, we saw that since competition does not have a fervent lobby, competition advocates may be closed out of appropriate fora. Accordingly, a provision was included in the Competition Act that gives the competition director the power to intervene before federal tribunals, commissions, and parliamentary committees to advocate competition. The competition director cannot address other matters, such as equity or regional development, which do not fall within his or her mandate, but can specify the damage to competition that can result from various federal as well as other regulatory policies. This is a very important aspect of competition policy, which should be emulated in other countries. Both informally and formally, various other countries have analogous provisions, which may not be statutory. For instance, in the U.S., such a right has been recognised historically as the right of an intervenor in regulatory hearings. Formalising such a right in a competition law makes the competition office a focal point for discussion of competition issues, and of the potential negative spillovers from other government policies and arrangements. The competition office is the logical focal point for competition advocacy. For monetary policy, there is the central bank; for fiscal policy, there is the ministry of finance; for commercial policy, there is the ministry for international trade. However, there is no focal point for competition unless the competition advocacy function is embodied in a competition office. In this regard, the interface between competition policy and trade policy is


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very important. One of the major interventions by the Canadian competition office was in an anti-dumping case brought by the three large automobile companies, Chrysler, General Motors and Ford, against Hyundai Motors. We in the competition office argued that the Canadian import tribunal should take into consideration the impact of their decision on competition and consumers. In other jurisdictions, this function of the competition office would be very important in the context of privatisation proceedings. Governments are often in conflict with respect to privatisation. For instance, in the U.K., when British Caledonian was being privatised, both British Airways and Scandinavian Airlines were interested in acquiring it. The Thatcher government accepted the higher bid from British Airways, but could have injected competition into the holiday charter market by allowing Scandinavian Airlines to make the acquisition. In another context, in the Czech Republic, when Volkswagen made investments and an acquisition of Skoda, it also attempted to get increased tariff protection and a moratorium on foreign investment in the Czech republic. But for the advocacy of the competition office, that type of extraction of privileges might have gone through. Many jurisdictions are enacting various regulations in the context of privatising their infrastructure services, and are including competition policies within the regulations, thereby leading to fragmentation of competition. They fail to recognise that a competition office could play a critical advocacy role. • PROF. FORNALCZYK—A very important problem that exists not only in transforming countries, but all over the world, relates to the interdependence between state intervention into the economy and competition law implementation. I agree that a competition agency cannot be absolutely independent, because, with the exception of the Hungarian case, all competition agencies are government bodies. They are therefore all within the government. However, a competition agency must have professional independence. This is closely associated with the need for transparency and responsibility for decision-making. What should be the strategy of a competition agency in a case of state intervention that may strengthen the market position of certain companies? When I was the chair of the Anti-monopoly Office in Poland, in cases in which the government established special measures which strengthened the market position of a company, we did not initiate proceedings for abuse of dominant position or anticompetitive agreements. This would have meant implementation of competition law against the behaviour of companies supported by the government. It would have been undesirable, because the government must act with internal cohesion.

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• MR. FAULL—There is a tension between the idea that competition authorities should be independent, just applying the law and leaving the allegedly dirty business of policy and politics to others, on the one hand, and the view that the competition authority should advocate competition solutions when other policy and political positions are being taken, on the other. In the E.U., having DG IV embedded in the Commission, with its Commissioner sitting at the Commission table and discussing matters with the Parliament, etc., makes competition advocacy much easier than it would be if an independent agency were set up, with the sole responsibility of applying the law. Thus, there is some tension between the most effective forms of advocacy and independence. • MR. PERA—I shall make three points. First, institutional design must be considered in conjunction with how the law functions. In many instances, power is given to governments to intervene in order to allow mergers and agreements. How the law allowing such agreements is structured is crucial. For instance, E.U. law gives considerable powers to the Commission in the evaluation of particular cases. In the case of Italy, the government was never interested in competition. The Italian authority was born as a completely independent authority, and actually took charge of competition matters. This has had two effects. One, it has caused the authority to focus fully on competition, and to apply the law to achieve the competition objective, because that is its sole task. Two, it has given the authority a strong power of advocacy. The authority often intervenes, advocating competition. Second, if an economic approach to market integration or vertical restraints is not followed, this leads towards formal evaluation and therefore centralisation. Thus, either an economic approach must be followed or any change in the application of Art. 85(3) is bound not to succeed. Third, enforcement of Art. 90(2) is usually viewed as the application of regulatory measures by the Commission. I believe, however, that it should be viewed as part of the antitrust policy of the Commission. The Commission has a peculiar character, being the only antitrust authority that can act on state measures, usually via proposing regulations or directives to the Council. However, it can act directly under Art. 90(3). Those measures derive from the perception that they basically involve violations of Art. 86. Thus, they seem to be structural measures, which should perhaps be considered within the usual domain of competition policy stricto sensu of the Commission. • MR. HOWE—I would like to take the floor to react to Mr. Khemani's comment on the British Caledonian case, because I do not agree with his comments.


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It was not a privatisation, but a straightforward merger case. The bid for British Caledonian by Scandinavian Airlines would have created no problems, and therefore could have gone ahead. However, the British Airways bid caused competition problems and went to the M.M.C. In applying the public interest test, the M.M.C. had the dilemma of deciding how to weigh the adverse effects on competition, which were rather clear, with arguments about employment, because it was a failing firm. Although I respect the point that many issues that are not strictly competition considerations can be evaluated using economic analysis, I am not sure that when the trade-off is between jobs and competition, economic analysis is very helpful. The M.M.C. did not attempt to apply economic analysis, but instead had to make a judgement whether saving jobs meant more than losing competition. It made its judgement, weighing intractable things. • PROF. AMATO—Regarding the question whether a tension exists between independence and advocacy, it depends on what is meant by advocacy. According to the statutes implemented by the Italian authority, we have both adjudication and formal advocacy powers, in the sense that we can send recommendations to the government and to Parliament whenever we believe an existing statute, bill, or something else might distort competition. We do not view the two as different jobs. I would consider a tension to exist if we were involved in drafting and negotiating the final version of legislation, being present for meetings with ministers and others. However, we are totally foreign to that. Our recommendation is published and considered in the debate. However, we are not present when the final decision is taken, which I believe makes a significant difference. Second, regarding the reliance by courts on economic analysis, I do not view protection of competitors in essential facilities cases as the single most important exception to the judicial emphasis on efficiency. Rather, in Europe, another important exception is abuses of dominant position. Competition is protected by protecting existing weak competitors vis-a-vis a dominant firm that might otherwise destroy them. We do this for many reasons. For instance, we may believe that weak competitors that might survive are worth protecting because competition may be restored through them in the foreseeable future. I believe we continue to protect weak competitors in Europe due to our tradition of regulation of economic activities. We find it natural in Europe to impose rules when a firm reaches a certain level of power. However, we might also view protecting the right of minor competitors to sell as covered by the competition rules, according to the initial American tradition. I am not certain which applies.

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• MR. CASTANEDA—Mexico provides a fresh example because it has been implementing its competition law only since 1993. Two levels of advocacy should be distinguished. One involves sending letters to Congress or to regulatory agencies; the other is perhaps less an advocacy function than a statutory function, where powers have been given by statute to the competition commission. I believe the latter is gaining momentum to be part of a competition policy, which I will attempt to illustrate with two examples. The first involves rate setting, i.e., setting the maximum rates on telecom services, natural gas and other industries. Statutes provide that no maximum is to be set by a regulatory agency, except when there is no substantial competition in that particular area, which is a decision that must be made by the competition authority. Accordingly, the powers are removed from the sectoral regulatory agency, which eliminates the possibility of regulatory capture. The second example involves regulations of specific sectors with respect to mergers within that industry, which do not meet the monetary thresholds of the competition statutes. Such new sectoral regulations generally provide that mergers, transfer of licences, or concessions are to be reviewed by the competition commission. As in the first example, this is a way of decentralising power, and provides the possibility of eliminating regulatory capture. It focuses on the structural problems rather than the behavioural fudging that sometimes is natural when several regulatory agencies are involved in one transaction. The third example concerns the trade area. The new international trade law in Mexico provides that the competition commission may provide input in all anti-dumping cases. Thus, if information is presented in an anti-dumping case that establishes a breach of the competition law, the competition commission is obliged to try the case on the merits of a possible breach of competition law. This creates the possibility to eliminate rent-seeking—opportunistic conduct by people who are attempting to induce the government to file an anti-dumping case—and the competition commission to file an antitrust case. This presents the danger that there will be regulatory capture of both the trade and competition regulators, which supports the argument for more transparency in the system, especially in areas like dumping. • PROF. NEVEN—It is possible for an agency to have too much independence. An assumption seems to be made in this discussion that more independence is always better. However, we should be careful about how we define independence. We could say an institution is independent if it has the ability to fulfil the objectives that have been assigned to it without interference. Denned in this way, independence is potentially dangerous for two reasons: first, the agency


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can become lazy and do nothing; second, the agency can become full of ayatollahs, who enforce the law in an excessive manner. Accordingly, the agency can be captured by itself, in a sense, if it becomes too independent. This risk is particularly strong if the agency's objectives are very broad. If the objectives are narrow, then the risk of capture by itself is much less. Some sort of accountability of the independent agency by a third institution is an essential element of the German system, and that is probably what stops the competition agency from becoming either lazy or an ayatollah. Second, there is more than one way of achieving independence of an agency. We all have in mind the German model, which I admire. However, it is not the only way to achieve independence. The agencies in Eastern European countries are extremely telling. For instance, the head of the Czech competition agency was a full minister, who sat in the cabinet. This is no longer the case. The Czech agency was, nonetheless, rather independent because the man who headed it was respected. Therefore, perhaps one way of making the agency independent is to have a strong politician in charge of competition who is going to be respected by his peers in government. • MR. FORRESTER—There is a very profound difference between the U.S. approach and the E.U. approach with respect to how competition law is enforced. In Europe, it is quite common for parties to sign an agreement, and then years subsequently to assert 'Sorry, I was wrong to sign that agreement, I was living in sin all these years, and now I wish to be purged of those sins, I will no longer obey that agreement'. Because of the structure of Art. 85, the European Commission regularly intervenes, and courts intervene, to examine whether the parties were correct in asserting that the agreement was prohibited under Art. 85(1) when it was signed. That is a very distinctive and particular difference between the E.U. and the U.S. approach. Second, leading into the ayatollah problem, the European Commission also has the goal of protecting parties from inappropriate contracts. For instance, the know-how regulation, which specifies how to license knowhow on an exclusive basis, provides that the approval of Community law would apply only if the knowhow was recorded in writing. A competition agency has no reason to make such a requirement. It reflects a belief on the part of the Commission, which I submit should not be there, that it is part of its responsibility to preserve parties from bad bargains. Third, the Commission is concerned about quality; naturally, it is concerned about consistent enforcement throughout the Common Market. I submit that it is impossible to achieve consistency, but that is not a bad thing. Perfection is not the goal that the Commission should be pursuing. Rather, by

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taking a large number of decisions and running some risks, more jurisprudence will be produced, with a wider respect and recognition of Community law. • MR. WARNER—The trend of narrowing competition law objectives primarily towards a more economics-based analysis may present problems for jurisdictions that are adopting competition laws for the first time. As our analysis of competition law is increasingly focused on economics, it is questionable whether the data that are available in some of these countries are sufficient to perform real empirical economic analysis, as opposed to simply telling economic narratives. For instance, in my experience with mergerfilingsin Canada, data such as S.I.C. codes were not available. We relied more on fuzzy narrative telling, as opposed to rigorous economic analysis of market definition, calculation of market share, entry, efficiency, etc. I am both an American and a Canadian lawyer, and am often struck by the differences between the two systems. Thus, implementation of competition law objectives in countries just developing competition laws will be difficult, to the extent that data are required for economic analysis. • PROF. IMMENGA—As to the relation between underlying traditions and values of a country and the objectives and implementation of competition law, I would like to discuss a German example. This system provides for the ministerial authorisation of any prohibition delivered by the federal cartel office. It functions well because competition and liberalism in our society play a very important role and are broadly accepted, not only by the public, but also by governmental institutions, including the cartel office and the Ministry of Economics. The system could not function without broad acceptance of these underlying principles. On the European level, as regards the issue of the creation of an independent agency, I believe that a separation of the kind that exists in Germany would be dangerous, such as if DG IV were independent and its decisions could be overridden by the Commission. Thus, in considering the implementation of law, the context of the general underlying culture and acceptance of values must always be taken into account. • MR. SIRAGUSA—Antitrust authorities can have a dynamic function of bringing about change. The Italian antitrust authority is working in an environment that has a tradition of non-acceptance of principles of competition. Thus, Italy has a very peculiar situation: an authority which is like a Martian who has landed in a country with a tradition of state monopolies and government intervention, and is working to broaden the spectrum of applicability of


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the laws. A relationship must exist between the nature of this antitrust agency as an independent authority and the objectives of the law. In a situation like this one, I believe the antitrust authority should have a strict competition law objective. This will allow it to work independently, and to perform the function of advisor to the government on competition law matters. However, once the antitrust authority is responsible for implementing a law with other objectives, such as market integration, and using antitrust laws to liberalise markets, then it is more difficult to give the authority complete independence. It will become almost impossible for the authority to reconcile the tension between the various values. This is why the Commission is an ideal forum, given that it must implement a law with both competition objectives and deregulation objectives. I believe that in Europe values are accepted broadly enough that they could be entrusted to an independent authority. However, such an authority could not also be responsible for pursuing the other objectives. • MR. PITOFSKY—From my experience as a member of an independent agency in the U.S., our independence is much exaggerated. There are many ways by which the rest of the government can influence an independent agency and can replace the Commissioners as their terms expire: the President has the power to appoint the five members of the Commission; the Commission must undergo oversight review by Congress every two years, and Congress is not shy about telling us when they disapprove of what we are doing; through the annual budget approval process, Congress can inform us each year whether they disapprove of what we are doing; and our most important decisions are reviewable in court, and therefore must be ratified through the judicial process. These controls are not merely academic. Fifteen years ago, when the F.T.C. was widely regarded as having exceeded its boundaries, all four of those controls were imposed in such a way that the wings of the agency were clipped. Second, when Jim Rill was head of the D.OJ.'s Antitrust Division, he probably had greater influence in advocacy than someone like me, heading the F.T.C, especially if negotiations were part of the advocacy. However, if the competition advocacy is directed not to another government agency, but to the legislature, then history shows that in the U.S., the perceived objectivity of an independent agency has often been an advantage. An independent agency could have greater influence in the legislature than a member of the existing government, especially in the U.S. today where the government is divided, and the legislature is wary about proposals made by the administration. • MR. FORRESTER—It is easy in browsing through decisions of the Commission and the Court to find a hundred worthy social and economic

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goals that can be pursued under competition law. However, that does not prove either that those were the goals being pursued, or that the decisions taken were bad decisions. Rather, these are the justification for particular enforcement decisions. Accordingly, the richness and the discrepancies are not problematic. In the U.S., difficult decisions taken have probably been justified by an assortment of peculiar, even at times inappropriate, reasons. The problem in Europe is not the setting of incorrect goals, but the lack of resources to pursue the right goals, and too much concern about the possibility of making mistakes. Less perfectionism would allow more law and richer law to develop. There would be less need for agonising about past mistakes. • MR. GOLDMAN—A trend towards greater use and application of economic principles, and toward efficiency as a leading objective, is a positive development. However, in contemplating the implementation of objectives, it is important to consider the weight attributed to those objectives, particularly with respect to cases of cross-border conduct, and cross-border mergers. For instance, we should consider whether, when raising the efficiencies defence, the efficiencies must occur within the jurisdiction where the anticompetitive effects are felt, and whether the efficiencies can completely override the anticompetitive effects. These questions all relate to implementation of similar objectives. If the weight given to each objective differs considerably, such as occurred in the DeHavilland case, then the results may conflict, notwithstanding similarity of objectives. Therefore, even though the number of cross-border mergers will increase, conflicts are likely to decrease if both the objectives and the manner of implementation continue to converge. Fora like this and the O.E.C.D. play an important role to this end. • PROF. HOVENKAMP—The main antitrust objection of those who disagree with the essential facilities doctrine in the U.S., or who believe it should be seriously constrained, is that the term 'abuse' in such cases refers merely to the refusal to share an input. More specifically, in an essential facility case, a defendant refuses to sell something to a rival, which the rival claims is needed to conduct its business. I object to such a use of the antitrust laws because sharing would ordinarily occur at the monopoly price in any event. Thus, nothing more than increasing the number of participants in this market by one would be accomplished by a court order requiring a monopolist to sell to a rival, unless the court wants to act as a price regulator, since market output and market price will remain the same. Of greater concern is that this smaller firm will have acquired a judicially enforceable right to share the monopolist's input, which significantly decreases its incentive to find its own independent


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source for that input. However, the role of the antitrust laws is to make markets competitive, not to force firms to share inputs. Markets are competitive not when firms share their inputs, but when they find their own independent sources for them. Second, to clarify my earlier point about the Domino's Pizza case, the pizza franchisees were required by their contract to purchase their dough from the franchisor. They found that they paid more than the market price for pizza dough, because that is how the franchisor receives its franchise fees. Such an arrangement may well present a problem of unjust contracting, but the appropriate solution should then be found within the realm of contract law. It is inappropriate, however, to conclude that because the buyer is required to purchase Domino's pizza dough, then Domino's pizza dough is a monopoly, and therefore raises an antitrust problem. Doing so will have troublesome implications for a wide range of cases where plaintiffs will urge very narrow, idiosyncratic market definitions. Finally, regarding the British Caledonian case, there are economic criteria for analysing failing firms. However, such criteria are not employed systematically. Historically, the U.S. Supreme Court has not relied on them. Congress has been at least as concerned about problems of employment or injury to shareholders as it has with efficiencies. Efficiency rules could, however, be adopted. In some cases, it may be socially preferable to allow certain failing assets to be taken out of the market rather than to continue to use them. Moreover, the second best buyer should always be considered. In the British Caledonian case, there was a second best buyer that may have been able to save the firm with much less severe implications for competition. • MR. HOWE—I have participated in many round table discussions with colleagues from other enforcement agencies, which left me with the impression that we all seem to be approaching problems such as market definition, dominant firm behaviour, mergers, and assessing efficiencies in much the same way, notwithstanding the differences in our laws. The subject of objectives is bound to exaggerate the differences, whereas discussion of how to approach specific behaviour such as collusive tendering or exclusive dealing would tend to emphasise the similarities in our approaches. The British system is different from any other system, especially as a result of its public interest test. Public policy should be driven by public interest considerations. All laws are designed to promote the public interest, whatever their specific objectives. The question is whether the concept of the public interest provides a satisfactory operational objective for the British enforcement agency. I believe it has two main problems. First, a public interest test implies

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that no conduct is prohibited until it has subsequently been held to violate the public interest. However, the agency cannot be given major powers of investigation, and major penalties cannot be imposed on those who have been found to have violated the public interest. Accordingly, the British authority does not have the necessary tools to perform these functions effectively. Second, public interest is a very ambiguous concept. It allows, for instance, that a failing firm merger case will be addressed with all the rigour of the U.S. D.O.J. approach one day, and then in a subjective manner the next day. The track record of the British authorities over the years shows that although even cartels have been allowed if they were found not to be against the public interest, cartels are basically prohibited in the U.K. The law does not condone them, but condemns them. However, the British authority does not have the tools it needs to detect them. Regarding abuse of dominant position, under the British system a much wider range of dominant behaviour may be considered than some purists think is appropriate. This includes, for instance, excessive prices and distribution issues, as well as resource allocation issues. As for mergers, over the years we have moved away from heavily weighing non-economic, nonefficiency considerations. At present, although occasional aberrations occur, it is generally difficult to detect differences between our approach and the Commission's approach, although the statutes are quite different. Finally, the British system has more checks and balances built into it than most, which is an important advantage. However, when part of the checks and balances system involves a Minister, trouble may develop. We have a Minister of Competition and Consumer Affairs, who is not himself in the Cabinet, although his superior is. It is excellent if that Minister is pushing hard for competition, because it implies both that the final decision-maker is committed to competition, and that there is an advocate for competition within the government. However, problems occur when the politician has a different agenda. When there was a Labour government in power in the 1970s, the competition authorities were virtually sidelined, as the government chose to employ price controls and encourage mergers to create large scale British firms. There have been no indications that this will occur again with the new Labour government. On the contrary, we are looking forward to a much more rigorous enforcement. • MR. LIPSKY—We have not explicitly discussed the pursuit of various objectives and the problem of market failure. Even if pure economic efficiency objectives are adopted, in some industries competition may be an inappropriate policy. The essential facilities doctrine, which is a form of regulation of abuse or monopolisation, creates an institutional problem for antitrust enforcement. Once a court requires access, it must be prepared to regulate price. Otherwise,


the monopolist can simply set a very high price and achieve the same end as that achieved by refusal to deal. Moreover, it must also be prepared to regulate all the ancillary terms of service and quality. It must have the power to force the monopolist to add capacity, or else the monopolist will maintain enough capacity for only its own use. Thus, it is a slippery slope to a form of complete regulation, which may be perfectly justified on economic grounds. However, it is questionable whether federal district court judges in the U.S. system, or the Commission in the European system, should engage in this regulatory function. Second, it is tempting for a competition authority, as for any other institution of government, to improve its legitimacy by invoking themes that become popular in the political debate. However, there is a great danger that the political wind may shift, and the theme pursued by the agency will become unpopular, or that the agency's direction will become incoherent. • PROF. HAWK—This summary of Session III will hopefully lead us nicely into many of the issues to be discussed in Session IV. There seems to be a consensus that there is a gap between the rhetoric and the reality. Mr. Schaub's distinction between fundamental objectives and enforcement criteria is essential to a reasonable debate, because it eliminates much of the confusion. Second, there appears to be a consensus that a strong trend is under way toward economics, at least in industrialised countries. This creates some difficulties, such as insufficient data or imperfections of economics, but the strong trend is toward narrowing enforcement criteria to economics. One exception mentioned by Prof. Amato is the use of abuse of dominant position laws to protect weak competitors. In a Supreme Court case involving the Aspen ski resort, joint ski tickets used to be issued. The main ski lift operator of three of the four hills said: 'You can't get a ski ticket with me anymore', which constitutes a refusal to deal. The plaintiff sued that lift operator. The Supreme Court affirmed a jury instruction, which said: 'You on the jury will find a violation if you find that the intent in discontinuing the ticket was to exclude the competitor'. That decision was subject to extreme criticism by many commentators for reflecting a populist notion that most economists would agree had nothing to do with microeconomic analysis. Thus, such judgments exist in the United States, although they are rare today. Third, why do we have this trend toward economic analysis? I was pleased that no one responded to my assertion, defending Easterbrook, that the people who want to limit antitrust to economics are not simply making a political judgement, which is one way to dismiss them. They are making a lawyer's judgement that economics provides better tools within the legal system to decide a case when an economic law is being applied.

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Fourth, the distinction between competition advocacy and adjudication is crucial in discussing independence. With regard to the assertion that a competition culture is needed in order to have an independent authority, where is the competition culture in Italy to explain the truly extraordinary history since 1990 of the Italian authority, which is independent? As an outside observer, what has occurred with this independent authority is phenomenal. Thus, I am extremely sceptical that a competition culture is needed in order to have an antitrust authority.

WORKING PAPERS


I Barry Hawk, Rapporteur of Session Three II Ian Forrester III Calvin Goldman IV Herbert Hovenkamp V Martin Howe VI Abott (Tad) Lipsky

Barry E. Hawk Partner, Skadden, Arps, Slate, Meagher & Flom, LLP Director, Fordham Corporate Law Institute New York, New York, U.S.A.

Introduction The principal focus of Session Three is the actual in fact implementation of competition law objectives in the enforcement and application of competition law in specific jurisdictions. Following Hume's distinction between the 'is' and the 'ought', this session is intended to focus on the is, in contrast to Session One, which focused on the ought. Session Three participants were asked to focus their papers and remarks on the following questions: (1) To what extent have the following policy considerations influenced the application of competition law in your jurisdiction (contrast time periods if appropriate) and describe the actual influence (not theoretical debates): (a) Consumer welfare/allocative efficiency in the static sense; (b) Production efficiency in the static sense; (c) Efficiency in dynamic service (e.g. innovation, etc.); (d) Income distribution or wealth transfer effects; (e) Deconcentration/dispersal of economic power and preservation of democratic government; (f) Protection of small or medium sized enterprises; (g) Protection of individual traders/entrepreneurs; (h) Employment effects; (i) Market integration; (j) Environmental, health and safety, and other considerations; (k) 'Industrial policy' (provide its meaning in your jurisdiction); (1) 'Competitiveness' (provide its meaning in your jurisdiction); (m) Promotion of national champions; (n) Promotion of exports and international trading conditions; (o) Fairness/equity; (p) Promotion of opportunity; (q) Protection of consumers from exploitation; (r) 'Public interest' (provide meaning);

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(2)

(3) (4) (5)

(6) (7)

(8)

(9) (10) (11) (12) (13)

Working Paper I

(s) Macroeconomic effects (e.g. combat inflation); (t) Others? Assess the operability (i.e. useful application in particular cases) of the policy considerations in your jurisdiction; compare their operability with their rhetorical use (e.g. general enforcement policy statements, speeches, annual reports, etc.; assess the legal certainty (and uncertainty) generated by these policy considerations. Is there any priority or hierarchy among these policy considerations in your jurisdiction? How are decisions or conflicts avoided or resolved in general and in particular cases? What is the role/effect of institutions on competition policy considerations and objectives? Are some institutions (e.g. administrative bodies) better able to further certain policy considerations (e.g. promotion of national champions or protection of employment) than other institutions (e.g. courts)? Is there a relationship between 'independence' of the antitrust authority and the implementation and prioritisation of policy objectives? Describe the relationship (if any) between 'federal' or centralised enforcement on the one hand and implementation of specific policy objectives on the other hand. For example, do certain policy objectives or considerations require more centralised or uniform enforcement? What specific legal situations demonstrate or reflect the tensions/conflicts between efficiency (and economics-based considerations) and other considerations (e.g. fairness and protection of small traders)? (exclude E.U. market integration goal, which is separately addressed below); possible examples are: price discrimination, excessive prices, 'exploitative' abuses, essential facility cases, definition of a restraint of trade (e.g. Sherman Art. § 1, German A.R.C. § 1 and Art. 85(1)). Are formal/express exemption systems better (or worse) suited to resolve/avoid tensions and conflicts among policy considerations? Consider the importance of the market integration goal in the E.U. in the present timeframe. Has there ever been a similar goal in your jurisdiction? If so, describe and compare it with the E.U. goal. To what extent does the market integration goal conflict with other competition policy objectives, such as efficiency? What substantive areas have been most affected by the market integration goal, e.g. vertical restraints, geographic price discrimination, intellectual property rights?


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(14) To what extent can/should the Treaty's free movement rules today make unnecessary or less necessary competition policy oriented toward the market integration goal? (15) Should the E.U. market integration goal be modified or eliminated? And if so, how should this be implemented? More tolerant substantive rules (e.g. toward vertical restraints)? More relaxed jurisdictional rules (e.g. replacement of a Community dimension test for the potential effect on interstate trade test)?

Discussion Points/Conclusions The discussion was largely structured around a set of propositions, with respect to which there was a surprisingly strong consensus. First, there was apparent unanimity that a considerable gap exists between the rhetoric of competition law objectives and the reality of their actual implementation. This gap is particularly marked where one contrasts general 'political' recitations or litanies of competition law objectives with the (much narrower) list of objectives relied upon to decide particular cases. The Goldman/Barutciski paper discusses some examples of this for Canada. Second, there was apparent unanimity that much of the debate about objectives arises from a failure to distinguish between the objectives of competition law and the asserted benefits of competition. For example, asserted macroeconomic benefits of competition, such as reduced inflation, have at best only a rhetorical role with respect to competition law. Much of the political and economic debate can be explained by this 'category failure', to borrow another philosophical term of Gilbert Ryle. A similar distinction usefully can be made between fundamental/ultimate objectives and operational criteria for enforcement. Alexander Schaub's distinction between fundamental objectives and enforcement criteria nicely captures this distinction. Third, there was acceptance of the proposition that the general competition law statutory provisions (i.e. those concerning restrictive agreements, dominant firm behaviour and mergers) generally do not express objectives. Thus, competition law objectives usually must be inferred, a situation which permits changes in objectives over time, despite the absence of legislative action. One exception is Canada, where the current general statute expressly identifies four objectives: efficiency and adaptability of the Canadian economy; protection of small and medium size firms; international competitiveness; and competitive prices and consumer product choice, as discussed in the Goldman/Barutciski paper. Another exception is Japan, where promotion of employment and

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democracy are stated as objectives, among others, as described in the Kobayashi paper. In both jurisdictions, however, it is not clear whether these objectives have played a direct role in the application/enforcement of Canadian and Japanese competition law. Fourth, there was implicit acceptance of the proposition that in many jurisdictions (e.g. Canada and the United States) there is a strong contrast between statutory objectives expressly articulated in the legislation and the significantly narrower interpretations on the part of the competent authorities. For example, as discussed in the Goldman/Barutciski and Hovenkamp papers, many of the Canadian and U.S. provisions (like the bans on price discrimination) expressly invoke 'populist' (Poujadiste) non-efficiency objectives (if not noneconomics-based objectives). On the other hand, as discussed in the Hovenkamp paper, courts have been more willing to follow the expressed statutory objectives, probably because of their more limited discretion when faced with a claim under those statutes. Fifth, there was a strong, if not unanimous, consensus that in most jurisdictions there is a marked trend toward a narrowing of competition law objectives, primarily toward a more economics-based analysis that accords great (where not exclusive) weight to objectives like consumer welfare or efficiency (allocative, static or dynamic). Examples are discussed in the Goldman/ Barutciski (Canada) and Hovenkamp (United States) papers. This is certainly true in the more industrially developed countries. In Canada, the efficiency objective is supplemented with broader objectives, some of which are consistent with efficiency (e.g. the promotion of an open marketplace, free from the abusive exercise of market power by other market participants), and others, such as fairness, that do not fit well with an efficiency objective, as discussed in the Goldman/Barutciski and Matte papers. This trend rests on the increased emphasis on economic analysis in competition law enforcement. Thus, the growing influence of economists and economics in competition law not only has shifted the terms of the debate, but also has de-emphasised historically accepted, non-efficiency, populist or distributive objectives like protection of individual small traders. In turn, this has had the important practical effect of discretionary non-enforcement of certain competition statutes and legislation, which expressly were intended to protect certain groups (like small traders). Although courts have been more willing to follow express statutory objectives, the trend toward efficiency as the predominant objective can also be seen in U.S. court decisions, as discussed in the Hovenkamp paper. Perhaps the most important exception to the judicial emphasis on efficiency and protection of competition over protection of competitors concerns dominant firm behav-


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iour, where populist or distributive concerns arguably underlie aggressive application of the essential facility doctrine. Another example is the continued per se ban on resale price maintenance. This narrowing of objectives does not result simply from a 'political' disagreement with certain statutory objectives, such as protection of small traders. The narrowing and consequent emphasis on efficiency and consumer welfare also rests on a 'jurisprudential' or lawyers' judgment that economics (and thus economics-oriented objectives) provides better analytical tools to reach more predictable, well-reasoned results in particular cases (and to formulate more precise general policies) than broader, non-efficiency objectives. In a sense, application of the law to a specific set of facts requires more focused objectives, while the political arena (and speechmaking) can live with broader objectives. There is a greater need for transparency to the extent that broader (nonefficiency based) objectives are used. This is particularly true where the possibly relevant objectives in a specific case appear inconsistent. Published detailed rationales are necessary to explain how the different objectives were applied and reconciled, and to limit the discretionary power of the decisionmaker. Sixth, it was recognised that interesting issues arise concerning the relationship between the institutions applying competition law and the objectives. For example, some institutions, such as administrative bodies, may be more capable of furthering certain objectives (e.g. promotion of national champions or protection of employment) than other institutions (e.g. courts). Moreover, there is a relationship between the 'independence' of the competition authority and the implementation and prioritisation of objectives. Seventh, the E.U. is the only system with a market integration objective. This is certainly not mere rhetoric, or, to follow Mr. Schaub's distinction, market integration is a direct enforcement criterion and not merely an ultimate or fundamental policy objective. The market integration objective has played a paramount role in formulating specific legal rules and doctrines and in deciding particular cases. Indeed, it is this objective, and not welfare or efficiency objectives, that underlie the E.U.'s unique position toward, among other arrangements, many vertical restraints and geographic price discrimination. Moreover, as discussed in the Forrester and Kirchner papers, the tensions between the market integration objective and welfare or efficiency objectives have given rise to vigorous criticism of E.U. competition law as sacrificing efficiency on the altar of market integration. The Commission has its outside defenders, however. For example, Prof. Waelbroeck argues that the tension between market integration and economic efficiency is only temporary, because once markets are fully integrated there will no longer be any reason to fear disparate governmental measures that produce long-term distorting effects.

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The E.U. also appears today to have one of the broadest lists of competition law objectives in the world, with perhaps the U.K. and Japan having somewhat comparable open-ended objectives. It is not only the market integration objective that distinguishes the E.U. objectives from those of other jurisdictions. Broader objectives, which are not mere rhetoric or simply fundamental/ultimate objectives (as opposed to 'enforcement criteria'), appear to be used in the E.U. to decide cases. Examples include: • • •

• • • • •

protection of small and medium sized firms; promotion of European champions and exports; promotion of a 'level playing field' between public and private enterprises or undertakings. This last objective is expressed in Art. 90 and can also be seen in other jurisdictions, such as Mexico; 'industrial policy' considerations, such as the 'competitiveness' of European industries; control over state-sponsored distortions of competition; employment effects1; cultural considerations (e.g. approval of arrangement conditioned on investment in European films); and environmental policy considerations, although Forrester concludes that the impact is difficult to see.

Eighth, it was recognised that inclusion as 'enforcement criteria' of noneconomic objectives (like environmental, regional and cultural objectives) and objectives only distantly related (if at all) to economics-oriented objectives (like promotion of national champions and 'competitiveness'—a shibboleth or largely vacuous concept) has important institutional enforcement implications. Centralised executive/administrative bodies probably are better capable than courts at implementing such a broad array of vague and inconsistent objectives. Moreover, in Europe, unlike perhaps any other place in the world, the debate about objectives has a profound impact on the institutional debate. The 'Jacobin school' argues that the longer and broader the laundry list of E.U. competition law objectives, the greater the power and discretion that should be given to a centralised 'integrated' (i.e. non-independent) enforcement authority, with considerable weight accorded the authority's 'expertise' by reviewing courts. Indeed, the Commission has invoked its role as implementer of broad objectives (well beyond consumer welfare or efficiency) in order to justify its See, e.g., Remia v. Commission [1985] E.C.R. 2545, para. 42.


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non-independence, its primacy over Member State authorities and its union of investigative and decision-making functions. This contrasts with both the narrowing of objectives in many, if not most, other jurisdictions (including most of the E.U. Member States) and the independence and separation of powers in most other jurisdictions. In these respects, the E.U. appears increasingly isolated from the general situation throughout the world where the strong trend is toward competition 'law enforcement' regimes characterised by independent competent authorities, separation of investigatory powers from decisionmaking and a narrowing of objectives toward a heavy emphasis on welfare or efficiency objectives. The E.U.'s uniquely broad and varied list of objectives probably has had undesirable side-effects. First, economics may have become a bit lost in the crowd of other objectives. This is so at least in the sense that sophisticated economics analysis appears to have been unduly delayed at the E.U. level, when compared with the accelerating emphasis on economic analysis seen in competition authorities far younger than the almost 40-year-old Commission. The 7year-old Italian authority is one example. Secondly, the plethora of E.U. objectives makes formulation of enforcement priorities more difficult. For example, one might ask whether a more focused list of objectives would concentrate the Commission's attention and scarce resources on those agreements and practices (such as price fixing) about which there is a strong world consensus favouring tough competition law enforcement. Finally, the concept of 'legal certainty' frequently has played an unhelpful role, particularly at the E.U. level, in the debate about competition law objectives. Like 'Liberty', many sins have been committed in the name of 'legal certainty' which often is invoked to resist the desirable and appropriate introduction of economic analysis into competition law. 'Legal certainty' also has been invoked to resist an emphasis on or narrowing of the objectives to efficiency or economic welfare. Those jurisdictions (for example, Canada, Italy and the United States) in which efficiency and economic welfare are recognised and used as a paramount objective do not appear to have less legal certainty than the E.U. Bluntly speaking, legal certainty is often a shibboleth.

II Ian S. Forrester, Q. C.l Visiting Professor in European Law, Glasgow University Glasgow, U.K. Partner, Forrester Norall & Sutton Brussels, Belgium

Introduction The purpose of this paper is to examine the goals of competition policy. A striking feature of experience with Community competition law is that the main preoccupation of the law's principal enforcer is market integration, a political goal rather than one which would normally be attributed to an orthodox trustbusting authority. The economic wisdom of this goal, which has amounted at times to a near obsession, has frequently been in doubt. In retrospect, the penalties seem to have been disproportionate to the gravity of the offence viewed in non-political terms, especially when compared to the penalties for what, in competition terms, might have seemed more offensive behaviour. Although the emphasis on market integration has become less predominating, cross-border trading is still a hugely favoured economic activity, more encouraged in the E.U. than in any other jurisdiction. However, before repeating a familiar lamentation about the Commission's preoccupation with helping free riders, I begin by reviewing some other discernible competition law goals. The process of describing these may make the Commission's policy preoccupation with market integration easier to understand.

A. Review of Competition Policy Goals The Commission is not a free agent that has independently set its own goals. The point of departure must be the EC Treaty, as amended. Art. 2 calls for 'a 1

A number of the ideas set forth in this paper have been discussed in the annual reviews of competition law published in the Oxford Yearbook of European Law by Christopher Norall and me. I am grateful to my colleagues for ideas and suggestions. I express with pleasure my particular thanks to my colleague, Gregor Schneider, Assessor and Doctoral Candidate at the Europa Institut of the University of Saarbriicken, for his help.

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harmonious and balanced development of economic activities'; Art. 3(g) states that the activities of the Community shall include 'a system ensuring that competition in the internal market is not distorted'. The fourth recital to the Treaty records 'that the removal of existing obstacles calls for concerted action in order to guarantee steady expansion, balanced trade and fair competition'. Art. 85(1) does not provide much assistance in identifying goals, other than the obvious one of deterring the prevention, restriction or distortion of competition. Art. 85(3) contemplates giving the Commission's blessing to arrangements that may lead to: • • •

technical or economic progress; improvements in production or distribution; a fair share of the benefit for consumers.

The law is based upon a prohibition, which has been broadly interpreted, coupled with a wide-ranging power to exempt, which is rarely exercised in specific cases. This makes it difficult to say that the law favours particular social or economic goals other than those already identified in the basic texts, such as a fair share for consumers, economic progress and other bland objectives. It would be strange if Community competition law were as totally lacking in goals as the basic law would suggest. Thus, one would expect the decisions to provide clearer guidance. In individual Commission decisions, it is not easy to detect exactly how these goals are reconciled with other goals, including such notions as efficient allocation of resources, maximisation of prosperity or pure competition. Moreover, these decisions are not precise about the competition theories being pursued, or about difficulties encountered along the way. The Commission's annual reports are more reflective, and deserve to be quoted, but it is difficult to see how the policies espoused are implemented in actual decisions. The small number of individual decisions makes it difficult to trace how policies have been applied or pursued in reality. It is not clear whether E.U. policy favours protection of competitors or protection of competition. At times, when cases appear to present 'moral wrongdoing', the competition analysis can become less than rigorous, and the drafters condemn behaviour which may be economically rational and aggressive rather than abusive. There is always a tendency for lawyers to seek truth in the oldest texts, so I began by looking back at the annual Reports on Competition Policy, thefirstof which appeared in 1972. There, in the earliest days of modern Community competition policy, some familiar themes appear: that competition, on a Community-wide basis, is an essential vehicle for the achievement of economic


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regeneration, and that it can be a means of regenerating stagnant economies. Above all, there was to be a parallelism between the action taken at Member State level to eliminate public governmental hindrances to cross-border trade and competition law enforcement to eliminate private contractual hindrances to cross-border trade. In the First Report on Competition Policy, there was even mention of competition policy as an instrument for fighting inflation, although I am far from sure that economists would say vigorous use of antitrust rules is a cure for inflation.2 The Commission was probably observing that the economic problems of the day could not be solved by national protectionism, and that competition makes for healthier enterprises. In the Second Report on Competition Policy, the Commission spelled out its ideas further: The Commission's measures against restraints of competition liable to maintain prices artificially high are part of the policy which must be pursued both by the countries and at Community level to combat inflation. Seen from this angle, the competition policy is a tool that must be used to create conditions under which the monetary and budgetary policies can have their full effect. Its first objective is to ensure that the markets within the Community are opened up so that purchasers can operate throughout the Common Market.

This is why the Commission has expressed its determination—noted by the Council—'to strengthen its action against restraints of competition which may derive either from horizontal price agreements, concerted practices with regard to prices and price discriminatory measures applied by undertakings in dominant positions or from market-sharing agreements or other restrictive practices pursued by undertakings the purpose of which is to maintain fragmentation of the markets, or from self-limitation agreements, wherever such agreements hamper the Community's commercial policy.' 3

1. The Creation of a Common Market The Commission stated in its Second Report on Competition Policy: Side by side with application of the banning principle the Commission continued its policy of strengthening the competitive position of undertakings by exempting the desirable forms of cooperation between them from the ban on restrictive agreements via regulations or case-by-case decisions. This line is followed with regard to European Commission, First Report on Competition Policy, 12 (1972). European Commission, Second Report on Competition Policy, 25, para. 16 (1973).

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specialization agreements and exclusive-marketing agreements, especially as far as small and medium-sized firms are concerned. In the distribution field the Commission has still had to combat the tendency on the part of certain undertakings to keep the national markets separated by prohibiting exports or by concerted price discrimination according to country of destination within the common market.4

In the Fifth Report on Competition Policy, the Commission stated: In times of economic difficulty competition policy must continue to make its influence felt alongside all the other Community policies. Its function is to preserve a situation in which the structural changes that are needed can take place. Although competition policy can make only an indirect contribution to solving the economic difficulties now besetting the Community—and then only if it achieves its objectives—there can be no solution without it.5 This was echoed the following year in the Sixth Report on Competition Policy: The illusion that economic and social problems can be solved either by Community or national protectionism, jeopardizing the unity of the common market, cannot be maintained. Competition policy is one of the fundamental means for preserving the unity of the market. Its aim is to ensure that business operates along competitive lines, while protecting the consumer by making goods and services available on the most favourable terms possible. It therefore endeavours to cut monopoly profits, to ensure that the economy remains adaptable to circumstances and to stimulate innovation. In Community terms competition policy has to play an ancillary role to other policies, essentially to preserve or restore conditions in which competition can flourish.6 In short, the Commission was consistently saying that competition policy must be a key part of the policies underlying the creation of a common market.

2. Market Integration If one could review 10,000 pages of advice on E.C. competition law rendered by lawyers over the past few years, I predict that many portions would analyse not only whether cross-border trade would be limited by the arrange4 5 6

European Commission, Second Report on Competition Policy, at 15, para. 2 (1973). European Commission, Fifth Report on Competition Policy, 7, Intro. (1976). European Commission, Sixth Report on Competition Policy, 9, Intro. (1977).


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ments in question, but also whether such trade might be said to be limited by a complainant. This is especially true in the context of distribution, but also of technology licences and other fields. Thus, prudent lawyers become very defensive and conservative when there is a risk that cross-border trade could be hindered. When I was a young competition lawyer, acting for complainants, I believed (in accordance with my legal upbringing) that hindering cross-border trade was the most wicked thing one could do. As an older competition lawyer representing defendants, I found that the Commission's preoccupation with smiting export bans was perverse or obsessive. However, the policy was unhesitatingly justified by the Commission as part of its mission to achieve an integrated common market. To quote the introduction to the Ninth Report on Competition Policy: The first fundamental objective is to keep the common market open and unified. The metamorphosis of a heterogeneous collection of isolated national markets into a single vast market could not succeed without the establishment of some basic rules. There is accordingly a continuing need—and this is the primary task of the Community's competition policy—to forestall and suppress restrictive or abusive practices of firms attempting to divide up the market again so as to apply artificial price differences or impose unfair terms on their customers. European Commission, Ninth Report on Competition Policy, 9, Intro. (1980). The formidable non-contractual obstacles to cross-border trade and the formidable differences in market conditions were not denied, but the Commission consistently refused to let them be reinforced by private barriers. DG IV, in a sense, obliged private business reluctantly to participate in creating the common market by forcing it to ignore governmental barriers to trade and discrepancies in market conditions between different Member States. The profits of the supplier might be reduced if the parallel trader were allowed to buy in a cheap Member State and resell in a high-priced Member State without contractual interference from the supplier. The supplier could legitimately react by bringing his/her prices closer together, or by putting a volume ceiling on deliveries to the parallel trader, but he/she could not prohibit the trader from making supplies to the unwelcome exporter. A huge part of the Commission's enforcement efforts concentrated on making contractual barriers to cross-border trade imprudent and potentially costly. Up to the early 1980s, cases involving distribution problems were predominant among all cases in which fines were imposed. One consequence of this political objective

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was that, in contrast to other antitrust agencies, the Commission seemed to be soft on horizontal arrangements between major industrial enterprises. It was well known that, in certain sectors of Community industry, cartels existed but were not challenged by the limited Commission resources available. In the late 1980s, a new atmosphere began to emerge. Competition policy seemed gradually to be coming to reflect a more realistic vision of an integrated common market. Competition law enforcers, economists, businesses and even politicians seemed to be pursuing a common goal. Individual decisions concerning horizontal cooperation, especially in high technology sectors, were driven more by encouragement of innovation and less by fear of cartelisation. The decisions were still drafted in an artificial manner, whereby ten theoretical restrictions of competition were followed by five technical advantages justifying an exemption. But the feeling in the air was definitely changing; and in one or two instances, the decisions themselves were commendably radical. There was also evolution on the external trade front. As the momentum towards an integrated Common Market built up, the Community was compelled to make coherent its external relations with third countries, notably Japan, then the world's leading supplier of electronic equipment and technology. This success occasioned severe trade tensions during the early 1980s. Did Japanese companies represent a threat to European industry, or a valuable resource whose technological capacities and cooperation were essential to Europe's efforts to catch up in the technology race? Several leading European manufacturers complained about unfairly cheap (dumped) Japanese exports, and simultaneously entered into long-term cooperation agreements with the targets of their complaints. DG IV had reservations about the enthusiasm of DG I for antidumping and other protective measures, and it is possible that DG IV's encouragement of cooperation between Japanese and Community enterprises reflected these reservations. {CanonlOlivetti1 is an example of the Commission blessing a relationship with a foreign investor/technology partner which was at the same time the target of an antidumping complaint by its partner). In any event, the Community decided politically that the market was to be as freely accessible to competition from third countries as individual Member State markets were to be accessible for competition from elsewhere in the Community. As the barriers to European competition were removed, the Community refrained from erecting new barriers at its external frontiers, and maintained its traditional free-trading stance. However, it had uneven success in persuading the Member States to agree.

7

1988O.J. (L52)51.


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The absence of an environment that assumes and encourages vigorous competition ultimately weakens the enterprises that appear to be benefiting from the situation. The progressive feebleness during the 1980s of the French car industry demonstrates this phenomenon. In 1979, the President of the Republic announced that imports of Japanese cars would be limited to not more than 3 per cent of annual new car registrations. This spectacular attempt to defy economic gravity seems to have done little good for Simca, Peugeot, Renault or Citroen, which were deprived of the stimulus to innovate and keep their customers happy because the big threat of those days, the Japanese export tide, was to be diverted to other shores. Great ingenuity was deployed by the French administration to maintain French roads largely free of Frenchregistered cars made-in-Japan. If too many cars of one brand were registered in a particular month, the importer of that brand was punished by having to wait a few weeks for its next type-approval certificate permitting, for example, a new design of carburettor. Consumers responded by deploying many ingenious schemes to bring cars into France from other Member States, including complaining to the European Commission. However, although the facts were notorious, the Commission was unable to achieve consensus to take public legal action against this gross distortion of the marketplace. The risk of losing a policy battle with the French authorities was too great. This was one of the great failures, even scandals, of E.C. policy in the 1980s. Responsibility is certainly not to be attributed only or even principally to DGIV, whose senior officials and Commissioners favoured action. The state of the French automobile industry today demonstrates the consequences of protecting a domestic market, and the tolerance of the European Commission demonstrates that it has had varying degrees of success in translating its goals into action. Another example of the consequences of a protected domestic market is the insurance industry. From the end of the Second World War, only banks and insurance companies could conduct pension fund management in Japan. Insurance company premiums for all non-life insurance contracts were set by a rating agency composed of Japanese insurance companies, which compiled the raw data on all-risk and non-risk factors, casualties, and the like, and produced, in effect, recommendations to insurers on their premiums. Thus, all components of the risk were known, calculated and conveyed, after the inclusion of a 5 per cent profit margin, to the insurance companies, which simply applied them in their premiums. This activity was exempted from the Japanese anti-monopoly law. The competition environment was indeed very placid. European insurance companies, accustomed to a profit margin in the Community of approximately 1 per cent, had little basis on which to compete because there was no rate freedom and no real product differentiation. During

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the boom years of the 1980s, the weakness of the financial system was not troublesome; but when the bubble burst, the combination of bad debts, poor investments in rigidly determined funds and hidden losses (Japanese balance sheets not reflecting actual market value for a devalued piece of land) proved very damaging. The Japanese financial economy was hollowing out (like the industrial economy following the appreciation of the yen). The politicians reacted to the crisis not by protective measures, which had failed in the past, but by adopting a plan which would allow the progressive emergence of tougher competitive conditions, permitting hungry foreign investment advisers to enter the market. After modest concessions in favour of foreign investment advisers, policymakers recognised that more radical steps were needed, covering the entire financial services sector. The foreigners did a better job of managing the assets with which they were entrusted than their Japanese rivals. They were better at judging market opportunities through their experience in a highly competitive marketplace, where profit margins were much lower. Once the dust has settled, the marketplace probably will be more lucrative for Japanese and foreign service-providers alike. Thus, in Japan, on the one hand we have an example of ferocious competition, totally deregulated, between the members of a strong domestic industry (consumer electronics and cars) exporting to Europe and making in Europe the products developed on the domestic battleground. On the other hand, we have a clear example of what happens when producers, markets and consumers lose touch with each other. It is easy to draw a moral conclusion to the effect that competition is desirable, and protectionism does not pay. However, it is not so easy to draw conclusions about E.C. competition policy over the past twenty-five years. DG IV consistently spoke up for competition, consistently seemed to support competition in its annual Report on Competition Policy, yet its decisions were few in number, and by no means covered the entire field where Commission intervention was desirable. To use the familiar metaphor, if competition policy was a tree whose branches were constituted by decisions, it was seriously lopsided. The style of drafting also left something to be desired: instead of frankly acknowledging the real difficulties, decisions were often sonorous recitals of undeniable truths. A classic example is Bayer/Gist Brocades, where the Commission stated: The fundamental principle in this respect, established at the time the common market was formed, lays down that fair and undistorted competition is the best guarantee of regular supply on the best terms. Thus the question of a contribution to economic progress within the meaning of Art. 85(3) can only arise in those excep-


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tional cases where the free play of competition is unable to produce the best result economically speaking.8

Today, DG IV's heart is in the right place, but its decisional output (other than in the field of major mergers) is an inadequate guide to its heart's sentiments. It is not easy to point to examples where consumer protection or environmental considerations can readily be detected as the motivating forces behind a decision.

3. Policy Considerations in Commission Decisions a. Consumer Welfare and Allocative Efficiency Each favourable exemption decision certainly states (as it must under Art. 85(3)) that consumers will derive some benefit, but the effect on the consumer is usually rather indirect. In 1994, Commissioner Van Miert articulated the link as follows: Another crucial competition policy objective is consumer protection. The single market must first and foremost serve people. It must be ensured, through strict application of the competition rules, that consumers have freedom of choice between quality products at competitive prices.

As has already been noted, a true internal market does not exist in a number of sectors in which competition is restricted, or indeed prevented, by exclusive or special rights granted to enterprises performing certain services. Such services involve the fundamental requirements of all European citizens (for example, telecommunications, energy and postal services). A true internal market cannot be said to exist if, in daily life, firms and individuals in the Community have no choice but to deal with national enterprises in satisfying some of their essential requirements.9

Thus, consumer benefit can be detected in the opening up of choices, even costly ones, to consumers. In Yves St. Laurent, a distribution system limiting fine perfumes tofineshops received a formal exemption as it was:

8

1976O.J.(L30)19. European Commission, Twenty-Fourth Report on Competition Policy, Intro. (1994). 10 1992O.J.(L12)24, 29. 9

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intended merely to safeguard, in the public's mind, the aura of prestige and exclusivity inherent in the products in question, thus preventing any association with lower-quality goods.10

The Commission held that the conditions to satisfy Art. 85(3) were present. The rationalisation for what might seem a slightly surprising conclusion is set forth at length: The manufacturer's capacity to create and maintain an original and prestigious brand image is thus a key factor in competition. It follows that a luxury cosmetics brand must be distributed on an exclusive basis. Experience shows that generalized distribution of a luxury cosmetic product can affect the consumer's perception of it and in the long term reduce demand for it.''

The manufacture and distribution of the products were thus enhanced, ensuring that they are distributed under conditions that maintain the image and exclusivity required for luxury cosmetics. As to benefit for consumers from the system: The consumer is thus assured that the luxury product will not become an everyday product as a result of a downgrading of its image and a decrease in the level of creation.12

By contrast, the Commission took a hostile approach to justifications for the high prices of luxury goods in HennessylHenkell, where an exemption was refused for a distribution system involving constraints on price competition: even if the products in question are considered, as Hennessy considers them, to be luxury products. Hennessy stated in its letter of 3 November 1978 that the purpose of Art. 6 of the agreement is to ensure that its products 'which are regarded as luxury products, do not become subject to cut-price selling which would lead to business anarchy'. The Commission has already stated, however, when considering selective distribution arrangements in the luxury perfumes industry, that 'the luxury character of a product could not in itself be regarded as an adequate ground for exemption under Art. 85(3)'.13

Consumer benefit in other cases seemed rather uncertain. For example, a newly-published joint venture decision concerning cooperation between Iridium and Motorola to implement a global digital wireless communications service was blessed, along with pricing guidelines for future gateway operators: 11 12 13

1992O.J. (L12)24, 31. 2d. at 33. 1980O.J. (L383), para. 32.


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the principle of uniform prices and other conditions in different territories . . . seems appropriate to fulfil customers' needs.14 A critic could say that customers must tolerate consciously parallel rate fixing as part of the price to be paid for making European industry competitive. This is probably unfair. The explanation may simply be that the Commission considers that the consumer welfare criterion is not very important when considering high-technology alliances, especially when these will create European networks, and may briefly be disposed of by a reference to access to better goods and services. There is little trace of real concern for the welfare of consumers as direct beneficiaries of competition policy. There is, however, more concern for citizens as indirect beneficiaries, residing in a healthy economy. In Magill, it was relevant to the Commission and the Courts that an Irish consumer wishing to plan his television viewing on a weekly basis was obliged, for lack of a Magill multi-channel television guide, to buy three single broadcaster guides: The publication of the Magill TV Guide, albeit brief and of a limited print run, also clearly demonstrates the consumer demand for a comprehensive weekly TV guide in the area concerned. * * * In this connection the Commission considers that the three undertakings are perfectly capable, having regard to their present position and experience on the market, of playing a major role on the market for comprehensive weekly TV guides, if they so wish. Alternatively they may continue to publish individual TV guides on a market where comprehensive TV guides are available if they consider the consumer to be best served by their own guides, as they have stated. By limiting the scope of their licensing policies so as to prevent the production and sale of comprehensive TV guides, however, they restrict competition to the prejudice of consumers.15 The difficulty of finding a benefit for consumers was confronted in the Synthetic Fibres crisis cartel decision,16 where the ten largest producers mutually agreed to a mass reduction of capacity. In assessing consumer benefit, the Commission took a very long-term view based upon the advantages to the consumer of improved production, and a healthier and more competitive industry producing better and more consumer-oriented products. Consumers would be protected against price rises by virtue of a large number of producers (both 14 15 16

Iridium, 1997 O.J. (L16) 87, 94. Magill T.V. Guide/I.T.P, B.B.C. and R.T.E. 1989 O.J. (L78) 43, 49-50. Synthetic Fibres Agreement, 1984 O.J. (L207) 17.

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signatories and non-signatories) remaining in the market. The risk of shortterm price increases arising from capacity reduction was acceptable, given the supposed market strength of the consumers (textile manufacturers) who were subject to price pressure on these markets, and given the existence of nonsignatory producers (both E.C. and non-E.C). This reasoning is open to question. That the consumer is a producer on a vertically related market, and is itself subject to economic difficulties, hardly seems a reasonable ground for assuming that it will be able to resist price increases. Nor does this constitute a ground for assuming that it will benefit, at least in the short term, from the restructuring. Moreover, although the Commission pointed to E.C. non-signatories and non-European competitors as alternative sources of supply, it failed to appreciate that membership was, in fact, open to all European producers, and that vis-a-vis non-European producers, transport costs might well eat away much of the saving. b. Protection of Small or Medium-sized Enterprises, Individual Traders and Entrepreneurs, and Consumers

The competition rules have sometimes been used to help the small trader, such as a repair shop cut off from necessary replacement parts (HuginlLiptons11) or the family grocer displeased by an export surcharge imposed by a large whisky producer (Bulloch/DCL18). Kawasaki19 was precipitated by a mother who wanted to order motorbikes for her sons, and in the process caused an export ban to be revealed. ICI/Zoja/CSC20 involved the protection of a relatively small company threatened with elimination, because it was cut off from supply of an indispensable chemical. Thus, there is certainly E.C. sympathy for complainants, but it is rare for individuals to be mentioned. In the case of passenger cars, there is a unique statutory right in favour of the consumer. Reg. 123/8521 instituted a regime whereby a consumer could name an intermediary to act on his behalf in another Member State, placing an order for the model of the consumer's choice at the (presumably lower) price prevailing in that other Member State. The car manufacturer's distribution network could not, on pain of losing the benefit of the block exemption, refuse to supply the order tendered. This has been renewed in the successor Regulation.22 The battle between Eco System and 17 18 19 20 21 22

Hugin/Liptons, 1978 O.J.(L22) 23. Distillers C o . Ltd., 1978 O.J. (L50) 16. K a w a s a k i , 1979 O.J. (L16) 9. 70 J A / C S C - I C I , 1972 O.J. (L299) 5 1 . Reg. 123/85, 1985 O.J. (L15) 16. R e g . 1475/95, 1995 O.J. (L145) 25.


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Peugeot 23 was one of the by-products of the legislation. Eco System recruited hundreds of consumers, each of whom mandated it to order a new car in a Member State where prices were lower than in France. Although, in actual practice, it is not clear how many cars were sold in this manner, the initiative had a large impact in the marketplace. It is not clear that D G I V is truly helping small businesses, other than in the important respect of making them welcome as complainants, which indeed is a big exception. The risk of trouble through prohibiting parallel trade is that an unhappy dealer or customer will send copies of the incriminating correspondence to the Commission. Indeed, some traders placing unwelcome orders routinely send a copy to D G IV. Small businesses are not well served by the difficulty of completing Form A/B, a daunting task. Small firms are more likely than very large firms to address themselves to small non-specialist law firms, whose lawyers may wrongly, but reasonably, also believe that there is an obligation to notify any international exclusive agreement unless it precisely fits the criteria of a block exemption. c. Market Integration This extremely important subject has been addressed above. One further quotation from a Report on Competition Policy is added here: Key importance is attached to developing the interaction between competition policy and establishment of the internal market. Such interaction springs from the fact that these Community policies serve the same fundamental objective—reinforcing the wealth-creating capacity of the Community economy through improved allocation and more efficient use of productive resources.24 There is perhaps also merit in quoting the parallel aspirations of the Cockfield White Paper on the Completion of the Internal Market: We recognise that many of the changes we propose will present considerable difficulties for Member States and time will be needed for the necessary adjustments to be made. The benefits to a n integrated Community economy of the large, expanding and flexible market are so great that they should not be denied to its citizens because of difficulties faced by individual Member States. These difficulties must be recognised, to some degree they must be accommodated, but they should not be allowed permanently to frustrate the achievement of the greater progress, the

23 24

Eco System/Peugeot, 1992 O.J. (L66) 1. European Commission, Twenty-Third Report on Competition Policy, 88 (1993).

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greater prosperity and the higher level of employment that economic integration can bring to the Community.25

d. Environment, Health, Safety

It is difficult to say that environmental policy as such has had much impact on competition policy. However, the Commission has occasionally accepted the argument that some level of cooperation is appropriate between companies facing strict environmental norms.26 The question has also arisen whether cooperation within an industry in pursuit of green goals could exclude foreign competitors. In SpalMonopolelG.D.B. ,27 a complaint was at issue concerning a pooling system among German bottled water producers covering reusable bottles. Under pressure from the Commission, the relevant Genossenschaft allowed non-German water producers to enter the pool. The deals may have been approved even if they concerned something other than green issues, but the green credentials of the system unquestionably helped. In V. O. T. O.B.,28 tank storage companies had agreed that the cost of maintaining tanks without gas emissions was to be recouped by passing on to customers a uniform fixed amount reflecting the extra cost of installing new safety equipment. The Twenty-Second Report on Competition Policy stated: The case makes clear that the Commission is not opposed to the possible passing on to the customers of 'polluter pays' investment costs, since this makes them more aware of environmental problems and their implications. However, customers should not be barred from challenging price increases and shopping around for the smallest increase.29 e. Industrial Policy; Enhancing Competitiveness; Helping European Enterprises Compete Internationally (Promoting Competitiveness); and Promoting Exports

There has been much discussion about whether E.C. or national industrial policy should concentrate on picking winners or protecting losers. Conventional 25

Cockfield White Paper, Com(85) 310, 7, para. 14. See, e.g., Duales System Deutschland, European Commission, Twenty-third Report on Competition Policy, 94 (1993); IFCO Id. at 95; Press Release IP(93)430; (dealing with the sorting and recycling of packaging waste and the standardisation of reusable fruit containers, where an industry-wide solution seemed appropriate). 27 European Commission, Seventeenth Report On Competition Policy, 70 (1987). 28 European Commission, Twenty-Second Report on Competition Policy, 106 (1992). 29 European Commission, Twenty-Second Report on Competition Policy, 106, 108 para. 185 (1992). 26


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wisdom is that it is better to establish conditions in which competition can flourish than to leave it to enterprises to compete. The Commission offered a view on industrial policy in its communication, Industrial policy in an open and competitive environment30: Industrial policy rather seeks to create the essential conditions for the rapid development of an efficient Community industry... the idea is for the Community to act as a catalyst in encouraging innovation and creating an appropriate and stable environment. Seen in this way, the main achievement is certainly the completion of the internal market, which should allow the Community industry to benefit from economies of scale, while at the same time exposing it to greater competitive pressures, which can only boost its productivity.31 In 1991, the Commission was aware of the risks of allowing industrial policy considerations to distort competition law analysis: [T]he Commission is favourable to cooperation between companies and restructuring of an industry in order to create efficiencies and to attain the optimal scale to produce and market within the Community and worldwide. It takes care to implement its policy with due regard to the interest of industry in a stable environment where excessive bureaucracy and unnecessary intervention are avoided. [However,] artificial concentration of resources in one or a few companies to face powerful competitors from third countries is not without risk. If insufficient attention were paid to ensuring effective competition on Community markets, European consumers would normally have to pay higher prices on account of the lack of effective competition on home markets. In addition, experience has shown that, in most cases, maintenance of effective competition on EC markets does not normally preclude the maximum exploitation of economies of scale.32 By the time the Twenty-Fourth Report on Competition Policy was published in 1994, doubts about industrial policy considerations had dispersed. As shown above, the Commission sees competition policy as an instrument of industrial policy, and: intends to maintain a favourable approach to forms of cooperation that strengthen the efficiency and thus the competitiveness of the parties. The opening-up of markets following the completion of the internal market programme and the liberalization of trade at world level, on the one hand, and the need for restructur30 31 32

European Commission Doc. COM(90)556. European Commission, Twenty-Third Report on Competition Policy, 90 (1993). European Commission, Twenty-First Report on Competition Policy, 42-3 (1991).

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ing in order to emerge from the crisis, on the other, call for efforts on the part of firms.33 It is easy to say the right thing, more difficult to do the right thing, when considering whether it should be legal for two major enterprises to collaborate in order to be stronger in facing global competition. One source of the trend towards liberalisation of the rules on joint ventures lies in a belief that gained ground in the dark years of the early 1980s. This was the belief that cooperation and restructuring, involving even very large companies with considerable power on the E.C. market, might be beneficial or even indispensable for the survival and restructuring of European industry. During the 1980s, the blessing of cooperative arrangements was achieved by very cautious decisions. However, in 1990, five interesting decisions were issued, two of which seemed to be adventurous and break new ground, three of which34 were more conservative. The first of the more adventurous decisions was ElopaklMetal Box-Odin?5 Odin was a joint venture company created to develop a new kind of container for U.H.T. foods, to develop the machinery and technology for filling the containers, and to produce and distribute the containers and their filling machines. One of the parent companies, Elopak, was a manufacturer and supplier of U.H.T. cartons. It had also supplied U.H.T. filling machines manufactured by others, but this arrangement had recently been terminated. It acquired an American manufacturer of fresh foodfillingmachines, which was trying to develop U.H.T. filling machines. The other parent company was the Metal Box Group, a much larger company with a number of businesses including packaging, notably metal cans. One of its packaging products was an aseptically filled polypropylene container with an aluminium top, used for various products including U.H.T. milk. The Commission found that the agreement was not caught by Art. 85, and granted negative clearance. Specifically, it found that Elopak and Metal Box were not competitors, actual or potential, in the relevant product market, and the development of the product by either party on its own was highly unlikely. This conclusion was defensible, but the intellectual route followed by the Commission in giving its blessing was somewhat startling: Neither party could in the short term enter the market alone as such entry would require a knowledge of the other party's technology which could not be developed without significant and time-consuming investment. 33

European Commission, Twenty-Fourth Report on Competition Policy, 24 (1994). Alcatel Espace/ANT Nachrichtentechnik, 1990 O.J. (L32) 19; Cekacan, 1990 O.J. (L299) 64; KSB/Goulds/Lowara/ITT, 1991 O.J. (LI9) 25. 35 1990O.J. (L209)15. 34


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Both Metal Box's and Elopak's experience and resources are necessary to develop the new product which will be a combination of their respective technical and commercial know-how. The technical risks involved in carrying out research for a brand new product yet to be proven and which involves a whole new area of technology for each partner, and the risks involved in developing the new filling, sealing and handling machinery necessary, would realistically preclude each party from attempting to carry out research and development on its own. In addition, considerable risks are involved not only in gaining final consumer acceptance for the new carton, but also in persuading food processors/packagers to reinvest in the expensive new packaging and sealing equipment that will inevitably be necessary for the new product. Moreover, Odin will have to provide a rapid after-sales and maintenance service for filling and sealing equipment which food processors require if they are to be persuaded to re-equip. Back-up services are essential if breakdown and delays, which can be very costly in terms of spoilt foods, are to be avoided. Consequently, combining the know-how of each party reduced considerably the technical risks involved, thus diminishing the financial burdens to be borne jointly.36

Many decisions have used this kind of reasoning in the past, but always as justification for granting an exemption under Art. 85(3), as opposed to a negative clearance under Art. 85(1). It seems that the Commission, at least in this case, was willing to take a more tolerant view. It was content to justify this view by accepting that the U.H.T. carton market is subdivided into a number of specialised and distinct submarkets, and that it is technically and commercially difficult for a company active in one submarket to make the jump into another. That the development of a new product and technology was involved played a major role in the decision. The Commission also emphasised the freedom of the parties and the strength of competition in the other submarkets, some of which competed with Odin's product. In any event, having concluded that the joint venture itself was not caught by Art. 85(1), the decision proceeded to what would be considered an ancillary restriction analysis under the Merger Regulation. Even if the parties are present in the same general area, it may be possible, by dividing that area into clearly defined submarkets with high technical and financial entry barriers, to argue plausibly that the parties are neither actual nor even potential competitors. Finally, the cooperation must substantially facilitate the development of the product. Better still, it may be possible to argue that its development by any of the parties alone is impossible. In practice, the decisions taken under Art. 85(1) encouraged companies and legal advisers to go ahead with transactions 36

1990O.J. (L209)15, 19.

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without notifying them—a legitimate and healthy development, whose continuation should be encouraged. Under a competition system which was more rational and less suspicious, a decision like Elopak should raise no eyebrows. However, these decisions represented quite a change in attitude: they were less nervous, more realistic. Perhaps the Commission's sympathy for small and medium enterprises reflects an industrial policy goal, but it could equally be regarded as an example of competition law being applied only where intervention is necessary.

/ Others The Maastricht Treaty inserted references to culture into the E.C. Treaty. More specifically, Art. 92(3)(d) now tolerates the grant of state aid 'to promote culture . . . where such aid does not affect trading conditions and competition in the Community to an extent that is contrary to the common interest'. There have been few references to cultural considerations in past competition decisions, but these will probably increase. The broadcasting industry in particular is changing rapidly in light of pay-per-view and digital television, the huge sums of money generated by the broadcasting of sport, and the weakening of public-service broadcasters in the face of their commercial rivals. In the near future, difficult choices must be made concerning the extent to which a state may fund a broadcaster that competes for viewers with commercial broadcasters, who depend on advertising. In E.B.U.IEurovision system,31 the Commission approved the collective acquisition by public broadcasters of television rights to major sporting events, notably the Olympic Games. Such cooperative bidding and the sharing of rights to the television signal generated was particularly helpful to smaller countries' broadcasters, who might not otherwise have the muscle to win the right to broadcast the Olympics. Thus, the Commission noted that E.B.U. members were enabled to offer a broader range of sports programmes, 'including minority sports and sports programmes with educational, cultural or humanitarian content'. According to the decision, television viewers and sporting associations, especially minority sporting associations, also benefited. The application of E.C. competition rules in the field of sport has never been easy. Sport has a number of fundamental characteristics that distinguish it from other industries. First, while at its most lucrative level, sport is an economic activity, most sporting endeavour is profoundly amateur and in need of subsidisation. Thus, economically speaking, sport is a collective activity, and ideally, revenue from the professional game will be used to fund the grassroots 37

E.B.U./Eurovision System, 1993 O.J. (L179) 23.


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game. Secondly, success in professional team sports does not involve the elimination of competitors; their relative success and continuing prosperity are necessary to make matches interesting. Thirdly, sports organisations are national, for reasons of history, national pride and very strong sporting tradition. They are nearly always structured on a national level by a national federation, which supervises the sport from school and amateur level up to the professional leagues (if any). The highest success for an individual athlete or team lies in winning the national championships or in representing the nation in an athletic event against competitors from other countries. The goals of competition policy (eliminating national economic barriers, encouraging economic aggression, permitting economic transparency and logic to govern) appear ill-adapted to sport. This does not mean that sport is not subject to the law, but that the unusual features of sport must be taken into account when the law is applied. The Commission has taken no formal decisions applying the old case of Walrave and Koch v. Association Union Cycliste Internationale,t38 which toler-

ated encroachments on individual freedom of employment if these could be justified by a sporting purpose. However, the Commission has been called upon, in the wake of the Bosnian39 judgment, to take positions on a wide variety of sporting controversies. It is too soon to generalise, but the prospects seem cautiously encouraging for the sporting bodies that are being confronted daily with previously unheard-of challenges. There has been discussion of the possibility that a specific provision for sport should be put on the I.G.C. agenda, but it is doubtful that any diplomatically drafted text will be precise enough to prescribe how the competition rules should take account of the specificities of sport. (With the benefit of hindsight, Declaration 29 to the Amsterdam Treaty 'calls on' the Commission 'to listen to sports associations when important questions' affecting sports are being discussed.40 The implications of these words are quite unclear.)

4. Control over State-sponsored Distortions of Competition One policy consideration which has influenced the application of the competition rules concerns how to control the power of the state in the marketplace. E.C. competition law is unique in obliging the state to submit to the constraints of competition policy. This takes two forms. First, the prohibition on the grant 38 39 40

Walrave a n d K o c h , 1974 E.C.R. 1405. U n i o n R o y a l e Belgedes Societes de Football Ass'n v. Bosnian, 1995 E.C.R. 1997 O.J. (C340) 136.

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of unauthorised state aid has constituted a serious limitation on public subsidisation of private enterprise. This is extremely important and valuable, and a worldwide first. During the 1970s and 1980s there were many state aid controversies. However, the watershed between the old and the new law (and, maybe more important, governmental attitudes) was the Court's November 1991 judgment in French Salmon Processors.41 The Court held that aid granted without the Commission's prior blessing could not retrospectively be rendered legal, even by the Commission's explicit retrospective approval. This judgment, coupled with the judgments in such cases as Francovich42 and Factor tame III,43 meant not only that covert aid could never be legitimated, but also that it could expose the state to liability at the instance of an injured third party. The importance of these legal developments cannot be overestimated. Art. 90 imposes a different constraint on state distortions of the marketplace. This Art. has greatly limited the advantages that can be given to a statesponsored enterprise. In Dutch Courier Services,44 the Commission condemned Arts. 2 and 12 of the Dutch law of 26 October 1988, on the operation of the postal service. These articles had the effect of insulating the P.T.T. Post B.V. (the Dutch Post Office) from competition from private express courier services. Although, in theory, the Post Office had a monopoly on the collection and distribution of letters, in practice, its monopoly was limited to what the Commission called 'a basic letter carriage system'. The Post Office competed for express delivery business with private undertakings. However, under the 1988 legislation, significant constraints were imposed on the private sector's capacity to compete. The new law prohibited all undertakings other than the P.T.T. Post B.V. from collecting, transporting and distributing letters weighing up to 500 grammes, unless the undertakings provided a 'significantly better service than that provided by the Post Office as regards delivery times and supervision during carriage'.45 The effect on intra-Community trade was obvious. The Commission thunderously rejected the arguments made by the Dutch authorities in favour of the privileged situation established by the new law. Post Office profits had risen nearly fifteenfold in two years, when competition from private couriers was tolerated. The basic postal service, for which a monopoly could be justified by implication, would not be jeopardised by competition in the market for express 41

Federation Nationale du Commerce Exterieure des Produits Alimentaires v. French Republic, 1991 E.C.R. 1-5505. 42 Francovich a n d Bonifaci, 1991 E.C.R. 1-5357. 43 Factortame III, 1990 E.C.R. 1-2433. 44

1990O.J. (L10)47.

45

Id. at 47.


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deliveries. The Post Office was well positioned to cope with competition, in that only it could sell stamps or establish post boxes. The Commission therefore decided that Arts. 2 and 12 of the new law, and the implementing Decree, were incompatible with Art. 90(1) of the E.E.C. Treaty, when 'read in conjunction with Art. 86'. The decision was overturned on procedural grounds in Luxembourg,46 but the message had been conveyed.

B. Contrast Policy in Theory and Reality; and the Extent of Legal Certainty The largest source of legal uncertainty about E.C. competition law is the existence of the exemption regime as it functions today. A broad prohibition, coupled with a theoretically available exemption, which in actual practice was granted in only the very rarest cases, is a source of legal uncertainty. The Commission's legal theory generates a demand for legal certainty, which its resources are plainly inadequate to deliver. Therefore, at the level of the Annual Report on Competition Policy, one can find commendable expressions of commendable goals. In daily life, however, the important function of granting exemptions simply is not working adequately. Possible reforms (changing the way in which Art. 85(1) is interpreted; taking more, simpler, decisions; and sharing the burden with national competition law agencies) should be considered.47 An objective which is insufficiently articulated in E.C. competition law is that the law should be observed consistently, predictably and transparently. In a small number of cases, the procedural environment produces decisions which have been carefully prepared over several years, and have a good chance of surviving judicial review in Luxembourg. Thus, it is easier to block a decision from being taken than to cause a decision to be taken. It does not produce a decision in every case, and the vacuum into which non-decided cases fall represents a source of serious legal uncertainty. Making perfect output a higher priority than disposing of the caseload is understandable in a young agency, but undesirable in a mature one whose involvement is procedurally indispensable in most cases. Thus, process is crucial to the setting of the law's goals. A striking feature of E.C. law is the lack of a process that ensures that the law will be applied in individual cases. 46

Netherlands v. Comm'n, 1992 E.C.R. 1-565. See paper of the author in Robert Schuman Centre Annual on European Competition Law 1996 (Claus D. Ehlermann and Laraine L. Laudati (eds.) 1997). 47

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C. The Hierarchy of Standards The dominant policy goal must be the encouragement of market integration. More recently, a pro-technology bias can be detected in cases involving horizontal relationships between high-technology enterprises endeavouring to stay competitive in world markets.

D. The Reconciliation of Conflicts Commission officials, especially those aged over 50, can recall the days when Member States could be expected to lobby on behalf of companies. Today, as E.C. competition law has reached a level of maturity, Member State intervention on behalf of national champions is less prevalent, other than in state aid cases. However, debates between DG IV and other Commission services, notably the Legal Service, occur regularly. Only an insider could confirm the impression that the pro-competitive voice of DG IV prevails in many cases where the instincts of other members of the Commission are frequently protective rather than pro-competitive. However, there is still slowness, nervousness, a fear of going to court, the multiplicity of procedures, consultations, doctrinal issues and factual doubts (if, for no other reason, because approvals cannot be issued in the numbers required). Collectively, this means that it is easier to block than to procure the taking of a decision. Thus, once again, the system is structured to avoid error rather than to ensure that the law is enforced. On a formal and legalistic basis, balancing the pro-competitive merits of an agreement containing restrictive features is appropriate for the reconciliation of conflicts within a legal regime involving a broad prohibition and a discretionary mechanism. The controversy lies not in whether the basic law should consist of a prohibition mitigated by the availability of an approval (that basic structure is prescribed by the Treaty), but in whether the prohibition should apply in the majority of possibly doubtful cases. Majority opinion holds that the prohibition should apply much less frequently, but there is unquestionably a textual difficulty: how to adopt a new policy without changing the underlying law. It would be possible to confine the use of Art. 85(3) to the rare circumstances where there is a genuine need in the public interest to derogate from the normally applicable rules, in a sense to use Art. 85(3) for what used to be called industrial policy.


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Conclusions First, if E.C. competition law were enforced according to jurisdictional and administrative structures and procedures different from the present ones, then the degree of protection of national champions, the enforcement priorities and the patterns of enforcement would be different. Predicting how matters would be different is highly speculative. There are two major families of suggested reforms. One is to create an E.C. cartel office, but it seems such an office would be subject to the same degree of direct and indirect lobbying as the Commission, without the benefit of thirty years of history behind it to handle such lobbying successfully. The debate about an independent cartel agency is, in reality, a debate about what independence is, and whether DGIV is sufficiently independent. It is unlikely that there would be more functional independence in individual decisions if there were a cartel agency. The second, and more intriguing possible reform would be to tinker with the current regime as radically as would be possible without a change in the Treaty. Presumably we would want to see: •

more decisions, to give a richer jurisprudence, even if individual decisions are imperfect; a continued broadening of the goals of competition policy in fields which were neglected in the early years in favour of market integration. Again, a richer number of cases would solve the problem naturally; affirmative sharing of responsibility with national competition authorities, for example by giving them the job of formally advising on local notifications and granting negative clearance where appropriate.

•

•

I favour a system that functions well, even if it is burdened by certain apparent weaknesses (such as lack of formal independence). The problems today do not concern setting incorrect goals. Rather, they concern lack of resources to pursue the right goals, too much fear of doing the wrong thing, and too much of a perfectionist approach to drafting decisions applying Arts. 85 and 86. Secondly, regarding the difficulties of reconciling conflicts between economic efficiency and fair protection of small traders, the Commission is supposed to be particularly alert to the problems of small and medium-sized undertakings, which should be particularly well received if they make a complaint to DG IV. However, it is difficult to identify concrete manifestations of a pro-S.M.E. policy. In Volvo/Veng,48 refusal to grant a licence over a design 48

1988 E.C.R. 6211.

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right was held not to be an abuse of a dominant position, although the beneficiary of the licence would have been a small competitor of the Volvo giant. In Magill,49 a compulsory licence was imposed on broadcasters who used copyright claims to put a small publication out of business. The legal reasoning in each case largely ignored the issue of protecting small traders, and instead concentrated on the legal merits. However, the plight of Magill as 'innocent victim' must have had an impact on the Commission's decision to press ahead with a revolutionary case. In the essential facility cases, likewise, the Commission's reasoning appears not to recognise that the beneficiaries of the doctrine are likely to be smaller than those operating the facility. One issue which is perhaps not readily categorised in antitrust theory is that of moral right. In certain cases, it appears that the Commission embarks on an investigation not because there is a clear issue of competition law infringement, but because one company (often small, and usually skilfully represented) conveys a sense of moral outrage in its first contact with DG IV. The inquiry is opened rather aggressively, and it is very difficult for the target enterprise convincingly to demonstrate its good faith, or to persuade DG IV to take a different point of view. Somehow the Commission's analysis is coloured unfavourably, often irreversibly, by its earliest impression of unfairness. If very strong, the apparent moral equities can make the Commission much bolder than it normally is. One may think of some 'demonised' targets of aggressive enforcement, such as Roche50 twenty years ago, TetraPak51 ten years ago, and U.E.F.A.52 last year. The Commission's services seem more confident when they are smiting the morally guilty. The beneficiaries of these attacks are statistically likely to be smaller than the target companies; but preserving fair dealing seems more significant than preserving small traders. In short, no systematic pattern of assistance to small traders, which is difficult to reconcile with economic efficiency, is apparent. An occasional pattern of vigorous intervention, driven by largely emotional factors, is apparent, at the end of which interesting new legal principles emerge. Thirdly, an exemption system should frankly acknowledge the various conflicting policy considerations. It is regrettable that the Commission does not rank its various preoccupations clearly. There is little overt acknowledgement of the difficulties in drafting Commission decisions or Court judgments: an 49

Magill T.V. Guide/I.T.P., B.B.C. and R.T.E., 1989 O.J. (L78) 43; R.T.E. v. Comm'n, 1989 E.C.R. 1141. 50 Hoftman-LaRoche v. Comm'n, 1979 E.C.R. 461. 51 Tetra Pak v. Comm'n, 1990 E.C.R. 11-309. 52 Union Royale Beige des Societes de Football Ass'n v. Bosman, supra note 39.


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exemption decision, reached afterfiveyears of intense inter-service debate, may reveal no hint that the case was difficult or unusual. Advocates-Generals' opinions are more informative and appetising.53 Fourthly, we should consider whether the market integration role of the E.C. should be abandoned or modified. Competition policy selected soft targets in the 1970s and 1980s. Cartels and large cosy structural relationships were left in relative peace, while economically trivial infringements of the rules on cross-border trade were severely punished. Competition policy today covers a far wider field than it did twenty years ago (transport, high technology, essential facilities, major mergers, intellectual property), which is a positive development. The debate about whether market integration is a proper goal of competition policy has no current relevance; market integration is not an unacceptable goal for any Community policy. However, red lights should not flash when a competition analysis detects an impact on cross-border trade. The presence of such an impact should show merely that a jurisdictional test has been met, not that grave problems are at hand. For instance, when analysing distribution systems, we could be less anxious whenever an issue of cross-border trade arises. At the moment, a sober competitive analysis is liable to be distorted by fears of how a deal could be made to appear if controversy arose, rather than how it actually functions. It would be splendid if, one day, the Commission were to conclude that an arrangement was acceptable even though, in certain respects, it made cross-border trade more difficult. Finally, I shall offer a few comments on the European Courts, which have contributed greatly, especially in the early cases, to the shaping of modern com53

See, e.g., Goettrup Klim v. Growareselskab [1994] E.C.R. 1-564 1, where Advocate-General Tesauro examines the notion of workable competition, suggesting that this is the level of competition necessary to attain fundamental goals of the Treaty. Its nature and intensity may vary in light of the products and markets concerned. He then reviews the Court's decisions concerning the types of contractual restrictions necessary to ensure the effectiveness of an otherwise legitimate agreement (such as, in the context of the sale of a business, a promise by the seller not to compete for a reasonable period of time). The Advocate-General offers a textual method to support a rule of reason analysis, by making a strong distinction between analysis of the competition object and the competitive effect. He implies that the Commission does not give proper weight to this distinction, and that it instead makes a global assessment, at the end of which it decides whether the agreement is or is not caught by Art. 85(1). He observes that it would be possible for the terms of a particular agreement to be pro-competitive in effect in one market situation, yet to be restrictive of competition in another. Application of these reflections to the facts of the case is notably interesting and merits sympathetic study.

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petition law. There is an antiquarian pleasure to be taken from a browse among the opinions of Advocates-General in the golden days of the 1960s, when every decision was an event and each argument in Luxembourg a day out. First, we should note that the Courts are there to review the legality of Commission action. To quote Lord Justice Woolf in a recent report on reform of English justice: Appeals serve two purposes: the private purpose, which is to do justice in particular cases by correcting wrong decisions, and the public purpose, which is to ensure public confidence in the administration of justice by making such corrections and to clarify and develop the law and to set precedents.54

Discerning a consistent line from the Courts on competition policy and theory is not easy. In the 1970s, we saw some not totally persuasive judgments in cases such as Roche/ Vitamins55 and United Brands,56 where the moral equities seemed to colour the Court's thinking. More recently, the Courts have devoted much greater attention to process rather than policy and substance: questions of evidence, fairness, access to the file, rights of the defence. There is a greater willingness to be severely critical of the Commission,57 which is unquestionably a welcome tendency, though it has probably added to the timidity about deciding. The Courts have given no indication of disagreeing with the market integration goal of the Commission. It is strange that some E.C.J. judgments seem rather perfunctory and lacking in enthusiasm.58 For example, in TetraPak v. Commission,59 logic was absent in the Court's statement that it 'must be possible to penalize predatory pricing' whenever there is a risk that competitors will be eliminated, when it also said there was no need for the Commission to prove that TetraPak would have been able to recoup its losses after the predatory episode. If TetraPak's goal was not to make more money after eliminating its competitor, how can we be sure it was acting in a predatory manner? The explanation may be that the moral equities did not favour the company. The terseness of judgments may also be a consequence of the success of the E.C.J. M

The Rt. Hon. the Lord Woolf, Final Report on Access to Civil Justice, HM50, ISBN 0-11-380099-1. 55

Hoffman-La R o c h e v. C o m m ' n , supra note 50. United Brands v. C o m m ' n , 1978 E.C.R. 207. 57 E.g., Societa Italiano Velvo v. C o m m ' n , 1992 E.C.R. III-1403; Polypropylene Cartel, 1988 O.J. (L230) 1; A h l s t r 6 h m ( A ) 0 s a k e y h t i o v. C o m m ' n , 1988 E.C.R. 5193. 58 See, e.g., the relentless run of judicial setbacks in TetraPak, supra note 5 1 . 59 Id., para. 44. 56


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in reducing its own backlog—i.e. to answer the question in hand, and not to speculate. It is rare that major new principles emerge from Luxembourg in appeals. As to references, cases which the Commission was too timid to take up or where the Commission was not consulted, there is more colour, more boldness. In some cases, the process of judicial review seems conservative and mechanical. Maybe the file is too thick, the facts-too contentious for the Courts to contribute very much. On rare occasions, surprising pieces of judicial creativity emerge, discussing big, thumping issues of principle as to what, substantively, competition policy should be.60 60

See, e.g., Magill, supra note 49; Bosman supra note 52; Continental Can, 1972 O.J. (L7) 25; Ministere Public v. Tournier, 1989 E.C.R. 2521; Bodson v. Pompes Funebres, 1988 E.C.R. 2479.

Ill Calvin S. Goldman, Q. C. and Milos Barutciski Partners, Davies, Ward & Beck, Toronto, Canada Mr. Goldman was Director of Investigation and Research (1986-1989) and Mr. Barutciski Special Advisor to the Director of Investigation and Research (1991-1993), Bureau of Competition Policy, Ottawa, Canada Introduction As a growing number of countries, both developed and developing, adopt competition laws, it can be expected that competition policy will become an increasingly important determinant of economic activity throughout the world. At the present time, all twenty-nine member countries of the Organization for Economic Cooperation and Development (O.E.C.D.) have a competition law in place. In addition, competition laws have been adopted in more than thirty non-O.E.C.D. countries in Asia and the Pacific Rim,1 Latin America and the Caribbean,2 and the economies in transition of Eastern Europe and the former Soviet Union.3 As with any form of public policy, the effectiveness of its implementation may be measured against the objectives of that policy, stated or unstated. However, to the extent that a public policy is motivated by more than one objective, its application risks giving rise to outcomes that are in conflict with one or more of the underlying objectives. The various objectives of competition policy which have been identified over the years are relatively broad and include: • • • • • • • •

preserving the free enterprise market system; promoting consumer welfare; promoting increased product choice and innovation; protecting small and medium-sized businesses; preventing abuses of economic power; promoting fairness and honesty in the marketplace; achieving economic efficiency; promoting international competitiveness; 1

E.g., India, Pakistan, Sri Lanka, Taiwan and Thailand. E.g., Argentina, Brazil, Chile, Columbia, El Salvador, Jamaica, Peru and Venezuela. 3 E.g., Bulgaria, Kazakhstan, Latvia, Lithuania, Romania, Russia, The Slovak Republic, Ukraine and Uzbekistan. 2

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promoting economic pluralism; and other objectives.4

Competition policy in Canada and elsewhere has been motivated by varying objectives over the years. We believe, however, that there is a clear trend in Canada toward a careful balancing of two fundamental evolving objectives. First is the promotion of a marketplace framework through a law of general application, whereby participants may contract, buy and sell, free from the abusive exercise of market power by other marketplace participants. This objective will also promote economic efficiency in the long term. Second is the promotion of short-term economic efficiency, with consequential benefit to the international competitiveness of Canadian industry.5 The fundamental question to be addressed in this paper, then, is what are the implications of the objectives of competition policy in relation to their practical application in the implementation of competition law. In particular, the need to balance the two broader objectives identified above has important practical implications depending on whether the conduct in question is prospective, such as a proposed merger, joint venture or strategic alliance, or whether it is existing or past conduct, with usually more certain anticompetitive effects. In our view, the degree to which efficiency gains should be considered in the balance will depend on the relative certainty of the anticipated efficiency gains, on the one hand, and the anticompetitive effects of the conduct in question, on the other. Moreover, the more egregious and covert the conduct, the less likely that the anticipated efficiency gains ought to trump the anticompetitive effects of the conduct. The trend toward emphasising the promotion of economic efficiency in Canadian competition policy will be elaborated in greater detail in the remain4

For a discussion of the various objectives of competition policy, see, e.g., Economic Council of Canada, Interim Report on Competition Policy (1969); O.E.C.D. Steering Group on Convergence, The Objectives of Competition Policy (29 Sept. 1993); R. H. Bork, The Antitrust Paradox (1978). 5 The importance of a careful balancing of objectives was an important theme in a number of public statements made by one of the authors when he was the Director of Investigation and Research, during the first three years after the introduction in 1986 of the new Competition Act. See, e.g., C. S. Goldman, New Developments in the Enforcement of Canadian Competition Law, Address to the Law Society of Upper Canada (26 Sept. 1986); C. S. Goldman, The New Merger Provisions of the Competition Act of Canada, Address to the Fordham Corporate Law Institute (22-23 Oct. 1987); C. S. Goldman, Merger Review in Canada: Twenty Months of Experience Under the Competition Act, Address to the Canadian Bar Association (16 Feb. 1988); C. S. Goldman, Merger Review Under Canadian Competition Law: The Quest for Balance, Address to the Canadian Bar Association (23 Aug. 1989).


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der of this paper. However, this trend is not unique to Canada. Rather, it is evidenced by the statement of objectives in the competition laws of several other countries: •

Denmark: 'To promote competition and thus strengthen the efficiency of production and distribution of goods and services etc. through the greatest possible transparency of competitive conditions'; Norway: 'To achieve efficient utilisation of society's resources by providing the necessary conditions for effective competition'; Russia: 'To prevent, limit and suppress monopolistic activity and unfair competition, and ensure conditions for the creation and efficient operation of commodity markets'; Venezuela: 'To promote and protect the exercise of free competition' as well as 'efficiency that benefits the producers and consumers'.6

• •

•

The promotion of economic efficiency is becoming one of the primary objectives of Canadian competition policy. However, it is clearly not the only objective, as is evidenced by two elements. First is the statutory language of the current Competition Act (the 'Act'). Second is the published enforcement policy of the Director of Investigation and Research (the 'Director'), appointed under the Act, who is the official charged with responsibility for the enforcement and administration of the Act. In Section A of this paper, we provide a historical and conceptual overview of the objectives of Canadian competition policy, as reflected in its statutory and jurisprudential evolution and the policy debate that has driven the development of Canadian competition law. This has culminated with the passage of the current Act in 1986. In Section B, we provide an overview of the current legislative and enforcement framework, including the various Enforcement Guidelines and other policies published by the Director, which play an important role in the application of the Act. In Section C, we discuss the specific application of the objectives of competition policy in several enforcement contexts, including mergers and joint ventures, abuse of dominant position, anticompetitive agreements and other provisions of the Act. We conclude by advancing the view that, in an increasingly integrated global economy, the promotion of economic efficiency should be acknowledged as an important objective of competition policy. At the same time, however, efficiency must be carefully balanced against the promotion of free competition and marketplace 6

Quoted in United Nations Conference on Trade and Development, Draft Commentaries to Possible Elements for Articles of a Model Law or Laws (21 Aug. 1995).

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'rules-of-the-game', with benefits flowing to all marketplace participants, including both consumers and producers, large and small.

A. Objectives of Canadian Competition Policy—A Historical and Conceptual Overview The first Canadian competition legislation was passed in 1889, one year before the United States' Sherman Act. The 1889 legislation, An Act for the Prevention and Suppression of Combinations in Restraint of Trade,7 was at least in part a response to the growing activity of trusts in the supply of various commodities, such as coal, salt, binder twine, and other goods. These trusts followed from the implementation by the Canadian Government in 1879 of a National Policy establishing substantial tariff barriers against imports.8 The Canadian economy has, from an early stage, been characterised by high levels of concentration in many industrial and commercial sectors. The relatively small size of the Canadian economy and the distribution of its population across an entire continent partially explain these high levels of concentration. Indeed, the National Policy was expressly intended to stimulate domestic Canadian production and East-West trade as a means of responding to the perceived threat of economic integration of Canada's regions with the United States on a North-South axis. In addition, by promoting the development of an East-West transportation and communications infrastructure, the Canadian Government sought to create the conditions for industrial growth based on domestic Canadian markets.9

7

S.C., ch. 41 (1889) (Can.). For a history of development of Canadian competition legislation, see P. K. Gorecki and W. T. Stanbury, The Administration and Enforcement of Competition Policy in Canada, 1889 to 1952, in Historical Perspectives on Canadian Competition Policy (R. Shyam Khemani and W. T. Stanbury (eds.), 1991). 9 The National Policy of promoting domestic production primarily for domestic consumption may be contrasted with the current Canadian policy of removing or reducing trade barriers. During the 1970s and early 1980s, the Canadian Government became increasingly concerned that Canadian businesses established to supply the relatively small Canadian market were unlikely to achieve optimum economies of scale. Similarly, tariff and non-tariff barriers to foreign imports were recognised as having the effect of raising the cost of inputs for Canadian industry. The result was the adoption of the Canada/U.S. Free Trade Agreement, N.A.F.T.A. and significant commitments to liberalise trade under the Uruguay Round Agreements, thus reversing the earlier trend established by the National Policy. 8


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Perhaps inevitably, this policy soon gave rise to concerns over perceived abuses of economic power by dominant firms in concentrated industries, and the threat that this posed to free competition in the marketplace. Indeed, the objective of maintaining free competition in the marketplace was recognised by the Supreme Court of Canada at an early stage in the evolution of Canadian competition law in the case of Weidman v. Shragge, where Chief Justice Fitzpatrick made the following remarks: Parliament has not sought to regulate the prices of commodities to the consumer, but it is the policy of the law to encourage trade and commerce and Parliament has declared illegal all agreements and combinations entered into for the purpose of limiting the activities of individuals for the promotion of trade; and preventing or lessening unduly that competition which is the life of trade and the only effective regulator of prices is prohibited. 10

Maintaining free competition, however, is only one of the objectives that has been recognised in Canadian competition law jurisprudence. In their study of the objectives of competition policy in Canada, Gorecki and Stanbury have identified three primary themes underlying Canadian competition policy. They summarise these themes as follows: •

Preventing abuses of economic power and thereby protecting the interests of both consumers and of those businessmen who wish to be free to act in a competitive fashion. This view has been articulated by Parliamentarians, particularly in 1889 and 1910, when new legislation was enacted, and by the judiciary, particularly in cases up to World War I, but occasionally thereafter, as well.'' 10

[1912] 46 S.C.R. 1, 4. The principle of maintaining free competition in the marketplace was reiterated by the courts in several later cases. E.g. Container Materials v. The King, [1941] 3 D.L.R. 145, 167-168 (Ont. C.A.) (Robertson, C.J.O. stated: "Competition from which everything that makes for success is eliminated except salesmanship is not the free competition that s. 498 is mainly designed to protect. It brings to the customer no opportunity to buy at a lower price or on better terms, or to buy better or more attractive goods for the same money and this is one of the principal benefits to be had from free competition."); see also Howard Smith Paper Mills Ltd. v. The Queen 118 C.C.C. 321, 324 (S.C.C., 1957). 1 ' For example, in the Supreme Court of Canada's decision in Thomson Newspapers Ltd. v. Director of Investigation and Research, [1990] 1 S.C.R. 425, 510, La Forest, J., indicated that the former Combines Investigation Act (the predecessor of the current Act) "also has broad political overtones in that it is aimed at preventing concentration of power, of critical importance in the present case as it involves control of the press".

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'Maintaining free competition', a judicial concept, although ill defined, which seeks to ensure that unreasonable or undue restraints on competition are struck down. This view can be found in the earliest judgements and in most judgements up to the 1970s, but it has since been largely ignored, rather than rejected, by the courts. Achieving economic efficiency, broadly defined to include the encouragement of the lowest cost of production and distribution, the least restriction on output, and the facilitation of technological and organisational change in a dynamic economy. This view has been advanced largely by economists, most strongly since the late 1960s, and by the 1970s it formed the most important analytical basis for reforming Canadian competition policy legislation.12

While the foregoing objectives have dominated Canadian debate on the nature and purpose of competition policy, several other, 'lesser', objectives have been cited by governments, Canadian enforcement officials, the courts and commentators. These include fighting inflation,13 protecting small and medium-sized businesses,14 preserving the free enterprise system,15 preventing 12 P. K. Gorecki & W. T. Stanbury, The Objectives of Canadian Competition Policy 1888-1983(1984), xvii-xviii. 13 When the first Combines Investigation Act was introduced by the then Minister of Labour, W.L. Mackenzie King, he made the following remarks to Parliament: 'It is this question of the cost of living which has helped to make the question of combines, monopolies, trusts and mergers and the possible effect that they may have on prices, so important. In the popular mind there has come to be a gradual association between these two phenomena.' House of Commons Debates (April 12, 1910), at 6803. Similarly, when the predecessor to the current price maintenance provision (s. 61) was passed in 1951, the Minister of Justice commented that the Combines Investigation Act 'has been and is being used to prevent the present high prices largely caused by a limited supply and a heavy demand from being driven higher still by illegal price-fixing agreement or combines.' Quoted in Gorecki & Stanbury, supra note 12, at 119. 14 The protection of small and medium-sized businesses has been cited as one of the objectives of the price discrimination and predatory pricing provisions of the Act in Parliamentary debates, as discussed by Gorecki & Stanbury, supra note 12, at 122-126. Similarly, the protection of the 'weak against the strong' was also cited in connection with retail price maintenance by the Manitoba Court of Appeal in R. v. Kito, 25 C.P.R. 2d 145, 149 (1976) ("In my opinion, the mischief aimed at by section 38 [now Sec. 61] of the Combines Investigation Act was the practice of large corporations, with monopolistic or near monopolistic powers, artificially keeping retail prices high by coercing independent retailers into fixing prices and by refusing to supply such independent retailers if they did not maintain the suggested list price of products. Before 1951, for instance, a retail gasoline station which undercut the suggested list price of gasoline was


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the concentration of economic power,16 and maintaining fairness and honesty in the marketplace.17 Moreover, as discussed below, the purpose clause of the new Act expressly provides that the Act is intended to maintain and encourage competition in order to promote not one, but four objectives specified in the clause.18 The operational impact of these disparate objectives on the application of Canadian competition law is examined in further detail in Section C of this in danger of having its supply cut off as a punishment. I believe that Parliament wanted to protect the small retailer from undue pressure from large wholesalers, distributors and manufacturers. Parliament wanted to protect the weak against the strong, though it enacted words which catch the weak as well as the strong"). 15 The preservation of a free enterprise system has been cited by both Conservative and Liberal governments as one of the objects of competition law. For example, in 1955, the then Conservative Minister of Justice made the following remarks in a speech to the American Marketing Association: 'In an authoritarian country like Russia, the state controls production, distribution and prices. In socialist countries, the government has a deliberate policy to intervene, and in other cases supervise, a wide range of business undertakings. Canada, on the other hand, as a free enterprise country, holds that the economic advantages and political rights of the individual may best be promoted by leaving production, distribution and prices, to the greatest degree possible, to the controls of the free competition of individual citizens and corporations. A primary purpose therefore of the Canadian anti-combines legislation is to maintain an efficient system with free competition and free enterprise—to keep free enterprise from falling under the private control of combines on the one hand or of government regulation and control on the other.' Quoted in Gorecki and Stanbury, supra note 12, at 128. Likewise, in 1971, the then Liberal Minister of Consumer and Corporate Affairs made the following remarks in an address to the Canadian Manufacturers Association: T don't want to see socialism in Canada, and you don't. I suggest also that none of us would consider it acceptable in Canada to have business activities stringently regulated by government. We are confident, the [proposed] Competition Act is an affirmation of our confidence, that effective competition in a free enterprise economy can bring about the efficiencies and the restructuring of our industries that will enable Canada to compete internationally'. Quoted in id, at 130. 16

See id. at 131-136, for a discussion of Canadian Government statements linking competition policy with the prevention of concentration of economic power. 17 Id. 18 Sec. 1.1 of the Act provides as follows: 'The purpose of this Act is to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognising the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices.'

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paper. The purpose clause in the current Act identifies several objectives without providing an express indication of any order of priority among them. We believe, however, that there may be a trend emerging in practice to give priority to the promotion of economic efficiency. Such priority is, however, subject to a careful balancing of competing objectives where those other objectives, implicitly or explicitly, underlie the specific provisions of the Act in question in a particular case. This trend finds considerable support in the debate that led up to the comprehensive overhaul of Canada's competition law in 1986, as well as in several of the statutory provisions introduced by the new Act.19 Moreover, while recognising the importance of other objectives, the growing international trend toward acknowledging the promotion of economic efficiency as a central purpose of competition law has been increasingly recognised by the O.E.C.D.'s Committee on Competition Law and Policy.20 In addition, as noted above, the importance of promoting economic efficiency in the design of an effective competition law has been coupled with a concern for promoting international competitiveness. For example, the importance of promoting domestic rivalry as a means to attaining and maintaining international competitiveness was stressed by Professor Michael Porter in his seminal text, The Competitive Advantage of Nations.21 It was also stressed in a study conducted by Professor Porter and Monitor Company, which was cosponsored by the Government of Canada. 22 Indeed, the overhaul of Canada's competition law in 1986 occurred in the context of a number of simultaneous initiatives by the Canadian Government to facilitate the transition from a protected economy to an open economy, increasingly dependent on international trade.23 Through the 1980s and into this decade, successive Canadian Governments have aggressively pursued a policy of deregulation, privatisation, and trade

19

See, e.g., Sees. 8 5 - 9 0 (Specialisation Agreements), Sec. 95 (Joint Ventures) a n d Sec. 96 (Efficiency G a i n s Exception for Mergers). See also P . S. C r a m p t o n , The Efficiency Exception for Mergers: An Assessment of Early Signals from the Competition Tribunal, 21 C a n a d i a n Business L a w J o u r n a l 371, 387-388 (1993). 20 O.E.C.D., supra note 4, a t 3; see also proceedings of the Roundtable on T h e Objectives of C o m p e t i t i o n Policy o r g a n i s e d by the O . E . C . D . C.L.P. ( M a y 1992). 21 (1990). 22 Canada at the Crossroads: The Reality of a New Competitive Environment, a study prepared for T h e Business Council o n N a t i o n a l Issues a n d the G o v e r n m e n t of C a n a d a (1991). 23 E.g., m o r e than 3 0 % of C a n a d a ' s g r o s s domestic product depends on international

trade.


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liberalisation, including the Canada/U.S. Free Trade Agreement (F.T.A.), the North American Free Trade Agreement (N.A.F.T.A.) and the Uruguay Round of G.A.T.T. negotiations.24 In particular, the role of competition policy takes on a greater importance in the case of recently deregulated industries currently dominated by incumbent firms that, until deregulated, may have enjoyed a statutory monopoly, or protection through regulatory barriers to entry, within specific markets. In this context, the new Act, while recognising the importance of other objectives, gives a significant emphasis to the promotion of efficiency as discussed below in Section C, notably in its provisions regarding mergers, joint ventures, and specialisation agreements. B. Overview of the Canadian Competition Act and its Enforcement The Act is the principal competition law in Canada.25 It is enforced by the Director, who is the head of the Competition Bureau (the Bureau).26 The Bureau, like the U.S. Antitrust Division and the F.T.C., employs staff with legal, economics and business training. The Act applies to all business activity in all sectors of the Canadian economy, with certain limited exceptions. It contains a number of criminal offences, notably pricefixingand bid rigging, which are among the Bureau's main enforcement priorities. The Act also contains certain non-criminal matters (referred to as 'reviewable matters') which may be the subject of a remedial order by the Competition Tribunal (the 'Tribunal'), a quasi-judicial tribunal composed of Federal Court judges and lay members. With respect to criminal matters, the Bureau conducts investigations and, if itfindsevidence of criminal conduct, the Director may refer the matter to the Attorney General of Canada for prosecution. The decision to lay criminal charges is ultimately made by the Attorney General. Similarly, the Director may recommend to the Attorney General that individuals or firms be granted immunity as a result of their cooperation in the detection and investigation of 24

See D . Khosla a n d R. Anderson, C a n a d i a n Competition Policy: Its Interface with other Economic a n d Social Policies, (1989); Z . Sadeque, Chief, International Affairs Division, Competition Bureau, Competition Law, Privatisation and Deregulation: A Canadian Perspective, Paper presented at the A.P.E.C. Conference on Competition Law a n d Policy (June 1995). 25 I n addition t o t h e Act, several provinces have enacted legislation dealing with unfair business practices. However, although the provincial statutes have an impact on commercial practices and, in consequence, on competition in the marketplace, they are primarily aimed at consumer protection. 26 F o r a more extensive review of C a n a d a ' s competition laws, see Competition L a w of C a n a d a (C. S. G o l d m a n & J. D . Bodrug (eds.)).

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criminal offences. Ultimately, however, the decision to grant immunity is made by the Attorney General.27 The Act provides for fines of up to Cdn. $10 million and prison terms of up to five years for price fixing and other conspiracies to unduly lessen competition, and unlimited fines and prison terms of up tofiveyears for bid rigging. In contrast to the U.S., Canada has a long history of a voluntary, compliance-oriented and less litigious enforcement approach to its competition laws. As such, there have been relatively fewer public and private proceedings. Nevertheless, there has been a recent trend toward increasingly higherfinesimposed in price fixing and bid rigging cases and, more recently, jail sentences have been imposed on individuals accused of these offences.28 As noted above, the Director has issued several detailed Enforcement Guidelines during the past six years to provide the business and legal communities, as well as the general public, with a greater measure of predictability and transparency in the application of certain provisions of the Act.29 These guidelines, as well as the Director's recent practice and public announcements, provide further support for the view that the application of Canadian competition policy is increasingly motivated by a balancing of the dual objectives of 27

F o r a discussion of the D i r e c t o r ' s I m m u n i t y Policy, see H. I. Wetston, Director of Investigation a n d R e s e a r c h , N o t e s for a n Address to the C a n a d i a n C o r p o r a t e Council Association (19 A u g . 1991); H . S. C h a n d l e r , D e p u t y Director of Investigation and Research, G e t t i n g D o w n to Business: T h e Strategic Direction of Criminal Competition Law E n f o r c e m e n t in C a n a d a , A d d r e s s t o the Insight and Globe and Mail Conference on E m e r g i n g Issues in C o m p e t i t i o n L a w (10 M a r . 1994); C. S. G o l d m a n a n d P. S. C r a m p t o n , T h e D i r e c t o r ' s I m m u n i t y P r o g r a m : Some Policy a n d Practical C o n s i d e r a t i o n s , Speech presented a t Insight Conference on Competition L a w — C o m p l i a n c e in an Aggressive M a r k e t p l a c e (11 M a y 1993). 28 O n 9 Sept. 1996, the Q u e b e c S u p e r i o r C o u r t sentenced the owner of a chain of driving schools to a jail term of o n e year following his conviction under the price-fixing, p r e d a t o r y pricing a n d regional price discrimination provisions of the Act; see C o m p e t i t i o n B u r e a u , Prison T e r m s I m p o s e d under the Competition Act following J u r y Trial, N e w s Release (9 Sept. 1996). O n e year jail sentences to be served in the c o m m u nity were also i m p o s e d by the Q u e b e c S u p e r i o r C o u r t on two executives of a waste m a n agement firm, following their c o n v i c t i o n on one count of conspiracy to unduly lessen competition in the m a r k e t for h a u l i n g a n d disposing commercial waste in a region of Quebec: C o m p e t i t i o n B u r e a u , R e c o r d F i n e of $550,000 Imposed on an Individual for Conspiracy Offence u n d e r the C o m p e t i t i o n Act, News Release (29 Jan. 1997). 29 See C o n s u m e r a n d C o r p o r a t e Affairs C a n a d a , Merger Enforcement Guidelines (1991); C o n s u m e r a n d C o r p o r a t e A f f a i r s C a n a d a , Price Discrimination Enforcement Guidelines (1992); C o n s u m e r a n d C o r p o r a t e Affairs C a n a d a , Predatory Pricing Enforcement Guidelines (1992); I n d u s t r y C a n a d a , Strategic Alliances u n d e r the C o m p e t i t i o n Act (1995).


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promoting free competition through marketplace 'rules-of-the-game' and promoting economic efficiency. Parliament may have had in mind other objectives beyond the promotion of economic efficiency in passing the predatory pricing and price discrimination provisions of the Act. The Director's Guidelines recognise this, but emphasise the importance of the careful exercise of enforcement discretion in order to ensure that enforcement of the Act does not deter procompetitive and efficient conduct or transactions.30

C. Specific Applications of the Objectives of Canadian Competition Policy 1. The Purposes Clause In 1986, for the first time, a purpose clause was added to the Act. It states that the purpose of the Act is to maintain and encourage competition in Canada in order to achieve four objectives: (i) promoting the efficiency and adaptability of the Canadian economy; (ii) expanding opportunities for Canadian participation in world markets (while at the same time recognising the role of foreign competition in Canada); (iii) ensuring that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy; and (iv) providing consumers with competitive prices and product choices. Some commentators have noted that these four objectives may not be entirely consistent.31 For example, ensuring that small or medium-sized enterprises have an 'equitable opportunity' to participate in the Canadian economy may be inconsistent with the objectives of promoting efficiency and expanding opportunities for Canadian participation in world markets, where the latter are dependant on increasing economies of scale through rationalisation. Thus, the Act contains provisions which are more clearly aimed at promoting efficiency (e.g. mergers, joint ventures and specialisation agreements) as well as provisions which appear more concerned with protecting small businesses, even at 30

F o r a commentary on the Director's Price Discrimination Enforcement Guidelines, see C. S. G o l d m a n a n d J. D . Bodrug, Price Discrimination under the

Canadian Competition Act: The New Enforcement Guidelines and their Application to Cross Border Transaction, paper prepared for the Meeting of the Robinson-Patman Act Committee, ABA Section of Antitrust Law (2 Apr. 1993); for a commentary on the Predatory Pricing Enforcement Guidelines, see C. S. Goldman and J. D. Bodrug (eds.), supra note 26, §4.05. 31 See, e.g., R. Anderson and D. Khosla, Competition Policy as a Dimension of Industrial Policy: A Comparative Perspective (1993) 36; B. Dunlop et al., Canadian Competition Policy (1987), 287.

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the cost of efficiency (e.g., price discrimination), and perhaps other objectives as well (e.g., misleading advertising). The concluding remarks in the Government's Discussion Paper, which accompanied the introduction of the new Act in Parliament, recognised the importance of all of the objectives described in the purpose clause. However, it clearly focused on the twin themes of efficiency and international competitiveness: The Government is committed to ending the competition policy debate and getting on with the job of modernising our competition law. Competition law reform has dragged on far too long. This reform is far too important to the long-term health of our economy to allow the existing, outmoded legislation to languor in its current ineffectual state. After considerable discussion and consultation, there is substantial agreements on the reforms that are now required. This Bill represents a significant step toward economic renewal and should have lasting impact on the efficiency and international competitiveness of the Canadian economy (emphasis added) 32

The purpose clause does not contain an express ranking of the enumerated objectives by order of priority. It is noteworthy, however, that the Government defeated several attempts by members of the opposition to change the order of the listed objectives, or to limit the stated objectives to the promotion of competitive prices and product choice for consumers, and the protection of small and medium-sized enterprises.33 2. Mergers The economic efficiency rationale is perhaps most evident in the provisions of the Act relating to mergers.34 Canada's substantive merger law is, in many respects, similar to that of the United States, although it goes further than U.S. law in expressly mandating a balancing and trade-off between the anticompetitive effects of a merger and the efficiency gains likely to be generated by the merger. Thus, under section 92 of the Act, a merger can successfully be chal32

C o n s u m e r a n d Corporate Affairs C a n a d a , Competition L a w Amendments: A Guide (1985). 33 F o r a discussion of the proposed amendments, see C r a m p t o n , supra note 19, at 385. 34 Sees. 91-103. 32 C o n s u m e r a n d Corporate Affairs C a n a d a , Competition L a w Amendments: A Guide (1985). 33 F o r a discussion of the proposed amendments, see C r a m p t o n , supra note 19, at 385. 34 Sees. 9 1 - 1 0 3 .


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lenged if it 'prevents or lessens or is likely to prevent or lessen competition substantially'. This is similar to the U.S., where the test in section 7 of the Clayton Act is whether the effect of the merger 'may be substantially to lessen competition or to tend to create a monopoly'.35 Nevertheless, there are differences between the two laws, including the statutory non-exhaustive list of factors that the Tribunal is required to consider in assessing a merger under the Act. These include an examination of: • • • • • • • •

the extent of foreign competition; whether a party to the merger is likely to fail; the availability of acceptable substitutes; barriers to entry, including trade and regulatory barriers; the extent of effective remaining competition; the removal of a vigorous and effective competitor; change and innovation in the relevant market; and any other factor relevant to competition in a relevant market.36

In addition, the Canadian law expressly provides that the Tribunal must not make an order with respect to a merger if it is likely to bring about gains in efficiency that will be greater than, and therefore offset, the effects of any prevention or lessening of competition resulting from the merger, where the efficiency gains will not likely be attained if an order were made.37 Moreover, the Act expressly directs the Tribunal to consider whether efficiency gains are likely to result in significant increases in the real value of exports or significant substitution of domestic products for imported products. This latter provision emphasises the objective, set out in the purpose clause of the Act, of expanding opportunities for Canadian participation in world markets.38 35 For a detailed discussion of Canadian merger law, see P.S.Crampton, Mergers and the Competition Act (1990). 36 Sec. 93. 37 Sec. 96. 38 The Director has taken the position in the Merger Enforcement Guidelines that the efficiency exception in sec. 96 of the Act mandates the balancing of the effects of any prevention or lessening of competition likely to be brought about by the merger against the efficiency gains that would not likely be attained if the merger did not proceed or if an order were made in respect of a part of the merger (i.e. an order for a partial divestiture). Although the Guidelines adopt a 'total welfare' approach to the efficiency exception, the Tribunal expressed 'difficulty' with this approach in an obiter dictum in Canada v. Hillsdown Holdings (Canada) Ltd., 41 C.P.R.3d 289 (Comp. Trib. 1992), where the former Chair of the Tribunal appeared to signal a preference for a 'consumer welfare' approach to the assessment of efficiencies. The Director later stated publicly that, in

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The Canadian approach to merger review emphasises the importance of carefully balancing the various interests that come into play in the implementation of competition law. There have only been two decisions in contested merger cases to date,39 as well as five contested applications that were later resolved on a consent basis. This reflects the cautious approach that the Director has adopted to ensure that the enforcement of the Act does not interfere with pro-competitive transactions and the flexibility of action that businesses require in an increasingly competitive global economy.40 The approach set out in the Merger Enforcement Guidelines may, however, lead to controversial outcomes, particularly in the case of mergers where the expected efficiency gains accrue to the Canadian economy while the bulk of the anticompetitive effects are incurred by foreign consumers. For example, the Director chose not to challenge the proposed 1991 sale of DeHavilland to the Franco/Italian A.T.R. joint venture. It is our understanding that this decision was made partly on the basis of an application of the efficiency exception, and partly on the basis of the failing firm doctrine described in these Guidelines. In the end, the transaction did not proceed since the European Commission blocked it under their Merger Regulation. DeHavilland was later sold to Bombardier Inc. and the Ontario government. In our view, the correct approach to mergers (as well as to other prospective business transactions such as joint ventures and strategic alliances) where the anticipated anticompetitive effects are unclear and where such transactions are likely to generate relatively certain short-term efficiency gains, is to allow

view of the fact that the T r i b u n a l ' s r e m a r k s were obiter, he would continue to apply the total welfare a p p r o a c h described in the Guidelines. T h i s a p p r o a c h contrasts with the c o n s u m e r welfare a p p r o a c h reflected in t h e recent revisions to the efficiencies provisions in the U . S . Horizontal Merger G u i d e l i n e s issued j o i n t l y by the D.O.J. and the F.T.C., a l t h o u g h the willingness of those agencies t o t a k e a l o n g run a p p r o a c h to the assessment of whether claimed efficiencies are likely t o be passed on to consumers may bring the U.S. a p p r o a c h closer t o the Director's a p p r o a c h . 39

C a n a d a v. Hillsdown Holdings ( C a n a d a ) Ltd., supra n o t e 38; Canada v. Southam Inc. 4 3 C.P.R.3d 161 ( C o m p . T r i b . 1992). In a d d i t i o n , several p r o p o s e d mergers have been a b a n d o n e d following an indication from the D i r e c t o r that he intended to bring an application before the Tribunal. 40 F o r a discussion of the C a n a d i a n a p p r o a c h to m e r g e r review, see C. S. G o l d m a n and J. D . Bodrug, The Merger Review Process: The Canadian Experience, 65 Antitrust Law Journal 573 (1997); C. S. G o l d m a n , A Commentary on Certain Aspects of Canadian Merger Law in a North American Context, speech presented at F o r d h a m C o r p o r a t e L a w Institute (1991).


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the transactions to proceed.41 Indeed, in many cases, even subjecting a transaction to formal consent order proceedings may generate a degree of uncertainty sufficient to stop the proposed transaction at a very early stage in its planning.42

3. Joint Ventures The objective of promoting economic efficiency is also readily apparent in the provision of the Act relating to joint ventures. Section 95 of the Act creates an exception to the application of the substantive merger provisions in respect of joint ventures undertaken for 'a specific project or a program of research and development' if certain conditions are met. These conditions are that (i) the joint venture in question contemplates a project or programme which would not otherwise be likely to take place; (ii) no change in control over any party to the joint venture will thereby result; (iii) all of the parties to the joint venture have entered into a written agreement that imposes on one or more of them an obligation to contribute assets to the joint venture, and governs a continuing relationship between them; (iv) the written agreement restricts the range of activities that may be carried on by, and provides for termination of, the joint venture upon completion; and (v) the joint venture is not likely to prevent or lessen competition, except to the extent reasonably required to undertake and complete the venture. The joint venture provision has not been considered in any Tribunal decisions to date. 41

Examples of mergers that were allowed t o proceed o n the ground, in part, that they would generate significant efficiencies, include R o t h m a n s Pall Mall/Benson & Hedges, 1987 Dir. A n n . R e p . 15; Fletcher Challenge/B.C. Forest Products, 1987 D i r . Ann. Rep. 15; Trailmobile/Fruehauf, 1988 Dir. A n n . Rep. 11; Hostess/Frito-Lay, 1989 Dir. A n n . R e p . 10; Dofasco/Algoma Steel, 1989 Dir. A n n . R e p . 11; Wolverine T u b e / N o r a n d a Metal Industries, 1989 Dir. A n n . R e p . 14; Molson/Carling, 1989 D i r . Ann. R e p . 18 (1989); see also Consumer a n d C o r p o r a t e Affairs C a n a d a , News Release and Backgrounder (6 Jul. 1989); Consumers Packaging/Domglass, 1990 Dir. A n n . R e p . 12; C r o w n Cork & Seal/Continental Can, 1990 Dir. A n n . Rep. 12; de Havilland/A.T.R., 1992 Dir. A n n . Rep. 7. Examples of mergers that were allowed to proceed subject to m o n itoring on the ground, in part, that the anticompetitive effects were n o t certain include: Unilever C a n a d a / N a b i s c o Brands C a n a d a , 1988 Dir. A n n . R e p . 10; Trailmobile/ Fruehauf, supra; Hostess/Frito-Lay, supra; Wolverine T u b e / N o r a n d a Metal Industries, supra; Central Soya/Canada Packers, 1990 Dir. R e p . 17. 42 F o r a discussion of the role of consent orders in the merger review process, see C. S. G o l d m a n , The Merger Resolution Process Under the Competition Act: A Critical Time in its Development, 22 O t t a w a Law Review 1 (1990).

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4. Abuse of Dominant Position With the adoption of the Act in 1986, Parliament repealed the former criminal prohibitions against monopolies and introduced a new reviewable practice with respect to abuse of dominant position.43 The earlier criminal monopoly provision44 prohibited 'monopolies' which were denned as 'a situation where one or more persons either substantially or completely control throughout Canada or any area thereof the class or species of business in which they are engaged and have operated such business or are likely to operate it to the detriment or against the interest of the public, whether consumers, producers or others . . .'. As is apparent from the jurisprudence interpreting the former monopoly provisions, the 'public detriment' requirement introduced a consideration of further purposes beyond the effect of the alleged monopoly on competition. In the leading case of R. v. K. C. Irving Ltd.,45 the Supreme Court of Canada concluded that the deliberate formation of a monopoly is not unlawful unless it is accompanied by some specific detriment to the public interest beyond the lessening of competition flowing through the monopoly itself. The Court did not specify what effects or activities would be characterised as being to the detriment of the public. However, it appears that the Court had in mind unfair practices of a kind which had been found to justify a conviction under the monopoly provision in an earlier case, e.g. industrial spying, the use of fighting brands and other forms of predatory pricing, exclusive dealing arrangements etc.46 At least one commentator has suggested that the Court's articulation of the legal test under the former monopoly provisions would allow courts to consider other public policy objectives, including the employment and efficiency effects of the monopoly.47 The new abuse of dominant position provisions of the Act, by contrast, adopts a test of'preventing or lessening competition substantially in a market'. As interpreted by the Tribunal, these provisions address the conduct of a dominant firm that prevents or impedes market access through the creation or raising of barriers to entry. As such, it is the conduct of the dominant firm, rather than the fact of dominance itself, which is the focus of the abuse provisions.

43 44 45 46 47

Sees. 78 and 79. Combines Investigation Act, 23 R S C §§ 2, 23 (1970). [1978] 1 S.C.R. 408. Eddy Match Co. Ltd. v. The Queen, 109 C.C.C. 1 (Ont. CA 1953). See R. J. Roberts, Anti-Combines and Anti-Trust (1980), 79.


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Abuse of dominance under the Act involves a practice of anticompetitive acts by one or more persons who substantially or completely control a class of business, where the practice has had, is having, or is likely to have the effect of preventing or lessening competition substantially. Section 79 of the Act contains a non-exhaustive definition of anticompetitive acts, including: (1) squeezing, by a vertically integrated supplier, of the margin available to an unintegrated customer who competes with the supplier; (2) the acquisition by a supplier of a customer who would otherwise be available to a competitor of the supplier, or the acquisition by a customer of a supplier who would otherwise be available to a competitor of the customer; (3) freight equalisation on the plant of a competitor; (4) the use offightingbrands introduced selectively on a temporary basis; (5) the pre-emption of scarce facilities or resources required by a competitor for the operation of a business, with the object of withholding the facilities or resources from a market; (6) buying up of products to prevent the erosion of existing price levels; (7) the adoption of product specifications that are incompatible with products produced by any other person; (8) requiring or inducing a supplier to sell only or primarily to certain customers, or to refrain from selling to a competitor; and (9) selling articles at a price lower than the acquisition cost. In determining whether an act is anticompetitive, the analysis must take into account 'the commercial interests of both parties served by the conduct in question and the degree of restraint or distortion of competition which exists'.48 A consistent theme in the enumerated anticompetitive acts is that a dominant firm is targeting a smaller rival, thus suggesting that the Tribunal may view that the protection of small and medium sized businesses is an important objective of this provision.49 The abuse of dominance provisions are particularly important in the context of a deregulated and privatised business environment, and can be instrumental in assisting in the transition from regulation to deregulation. Moreover, 48

See Canada v. Laidlaw Waste Systems Ltd., 40 C.P.R.3d 289 (Comp. Trib. 1991). See, e.g., Canada v. NutraSweet Co., 32 C.P.R.3d 1, 50 (Comp. Trib. 1990). F o r a more detailed discussion of the abuse provisions, see C. S. Goldman and C. L. Witterick, Abuse of Dominant Position under the Canadian Competition Act, Paper prepared for the B.I.A.C. Preparatory Meeting for the O.E.C.D. Competition Law and Policy Committee Roundtable (1996). 49

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they help to ensure that dominant domestic firms do not preclude the competitive discipline promised by the removal of trade barriers and increased foreign competition.50 Provisions similar to the Canadian abuse of dominant position provisions can also be effective tools to address issues of access to essential facilities. For example, it may not be sufficient simply to implement a policy of deregulation without ensuring that entry on competitive terms is possible. The essential facility doctrine provides that persons who control a facility essential to entering a market must allow others access to that facility on reasonable commercial terms.51 This doctrine has yet to be explored in a reported case in Canada52 but will become increasingly important as Canada's telecommunications and other industries continue to be deregulated.53 Abuse cases are an enforcement priority of the Director, and since these provisions were introduced in 1986, four contested cases have been brought before the Tribunal. In the NutraSweet case,54 the Tribunal issued its first remedial order under the abuse of dominant position provisions against The NutraSweet Company, which manufactures and markets aspartame, a low-calorie sweetener, under the brand name 'NutraSweet'. At the time of the Tribunal's decision, NutraSweet accounted for approximately 95 per cent of sales of aspartame in Canada. The conduct of NutraSweet that gave rise to the Director's application to the Tribunal included NutraSweet's negotiation of supply contracts that (i) required customers to purchase from NutraSweet all of their aspartame requirements for specified products; (ii) provided a substantial price discount to customers if they displayed the 'NutraSweet' name and 'swirl' logo on their packaging and in print and television advertising for their products; and (iii) provided a substantial marketing allowance to support promotions of products containing only NutraSweet brand aspartame. The Tribunal ultimately 50 G . N . A d d y , Director of Investigation a n d Research, T h e Competition Act a n d the C a n a d i a n Telecommunications Industry, N o t e s for Address t o the Institute for International Research Telecommunications Conference (29 Mar. 1994). 51 F o r example, the European Commission recognised the essential facility doctrine in British M i d l a n d / A e r Lingus [1992] O.J. (L96) 34. I n that case, the Commission took the position that c o m p a n i e s in dominant positions have a duty to provide access to facilities when the effects o n competition of a refusal t o d o so are significant and there is n o objective, commercial reason for the refusal. 52 A l t h o u g h the Tribunal did not expressly a d o p t a n essential facility doctrine in the recent Nielsen case, it ordered the supply of historical scanner data t o facilitate entry and competition. Canada v. D & B Co. of Canada Ltd., 67 C.P.RJd 216 (Comp. Trib. 1995)(Nielson). 53 A d d y , supra n o t e 50. 54 Canada v. NutraSweet Co., supra note 49, 32 C.P.R.3d 1 (1990).


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held that the practices engaged in by NutraSweet were impeding entry into the market by small competitors, supported in this conclusion by evidence that a competitor had been unable to increase its market share. The Tribunal also noted that exclusive supply contracts covered 90 per cent of the Canadian market for aspartame, making it especially difficult for new suppliers to enter during the duration of these contracts. The Tribunal ordered that NutraSweet not enter into, or enforce, any term of an agreement for the supply of aspartame which contained exclusivity clauses, entitlements to discounts or allowance returns for the use of NutraSweet's trademark or logo, 'meet or release' clauses or most-favoured nation clauses. In addition to the four contested proceedings,55 two consent orders have been issued by the Tribunal in abuse cases that did not proceed to contested proceedings. In two other cases, the Director's concerns under these provisions were addressed by formal undertakings from the parties involved. A number of other abuse cases have been the subject of examination by the Bureau, some of which were resolved by informal commitments to change corporate policies. The concept of joint abuse by two or morefirmsis increasingly being recognised and addressed in Canada56 as well as in other jurisdictions such as the E.U. In fact, two of the recent Canadian cases involved allegations of joint abuse. The Director has similarly indicated that strategic alliances may be reviewable under the abuse provisions if the parties to the alliance substantially control a business and the other statutory tests are met.57 One of these recent joint abuse cases illustrates the effectiveness of the abuse provisions in addressing barriers to entry created by closed networks. The case involved the Interac Association ('Interac'), an electronic banking network which provides a shared cash dispensing service and electronic funds transfer, which allows consumers to make purchases at participating retail outlets using Interac trade-marked debit cards.58 The Director successfully obtained a consent order against Interac and nine of Canada's major financial institutions, which are the charter members of Interac.

55

C a n a d a v. Laidlaw Waste Systems Ltd., supra note 48, 40 C.P.R.3d 289; C a n a d a v. NutraSweet, supra note 49, 32 C.P.R.3d 1; Nielsen, supra note 52, 67 C.P.R.3d 216; C a n a d a v. Tele-Direct Publications Inc. & Tele-Direct Services Inc., 73 C.P.R.3d 1 (Comp. Trib. 1997). 56 See H . I. Wetston, Q.C., Director of Investigation a n d Research, Bureau of Competition Policy, Developments and Emerging Challenges in C a n a d i a n Competition Law, Speech presented at F o r d h a m Corporate Law Institute (22 Oct. 1992). 57 Strategic Alliances U n d e r T h e C o m p e t i t i o n Act, supra n o t e 29. 58 Canada v. Bank of Montreal, 68 C.P.RJd 527 (Comp. Trib. 1996).

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The Director alleged that the charter members of Interac substantially or completely controlled the market for the supply of shared electronic network services by leveraging their control of demand deposits and automated banking machines, and that they had jointly abused this dominant position. The alleged anticompetitive acts included exclusionary rules and fees that (i) prevented other competitors from participating directly in the network and offering such shared services; (ii) prevented competition in the pricing of certain services on the network; and (iii) had the effect of limiting innovation in the types of shared services available on the network. Following lengthy negotiations, the Director and the respondents agreed on a consent order which removed restrictions on connecting to the Interac network, provided non-charter members with a greater role in the governance of Interac, and eliminated discriminatory fees and restrictions on the types of accounts that can access the network. The consent order also put in place a mechanism for the introduction of new shared services on the network and permitted members to establish bilateral and multilateral shared services using Interac's software. In the recent Tele-Direct case,59 the Tribunal explored the developing relationship between competition policy and the right to protect intellectual property interests. Specifically, the Tribunal determined that the respondents' refusal to license a trade mark to certain persons or groups of persons was not an anticompetitive act within the meaning of the Act. The Tribunal acknowledged that there may be instances where a trade mark may be misused. At the same time, it found that the respondents' refusal to license their trade marks fell squarely within their prerogative. It held that their motivation for the refusal to license their trade marks for use by their competitors was irrelevant, as the Canadian Trademarks Act does not prescribe any limit on the rights of trade mark owners to determine to whom their marks would be licensed.60 This decision followed from the language in subsection 79(5) of the Act, which specifically provides that an act engaged in pursuant only to the exercise of any right or enjoyment of any intellectual property right, is not an anticompetitive act. 5. Anticompetitive Agreements The principal provision in relation to anticompetitive agreements is section 45 of the Act, which prohibits agreements that have the effect of 'unduly' lessening or preventing competition in a market. The Act also contains a per se 59

Canada v. Tele-Direct Publications Inc. and Tele-Direct Services Inc., supra note 55, 73C.P.R. (3d) 1. 60 Id. at 26-31.


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prohibition against bid rigging,61 as well as provisions relating to certain agreements in relation to professional sports,62 and agreements or arrangements among banks with respect to interest rates, service charges and other specified matters.63 The Supreme Court of Canada has recently characterised section 45 as 'not just another regulatory provision', but rather, that it 'remains at the core of the criminal part of the Act' and that '[t]he prohibition of conspiracies in restraint of trade is the epitome of competition law'.64 Section 45 and its predecessors have generated the most important body of competition case law emanating from the Canadian courts. Indeed, the provision has been considered on numerous occasion by the Supreme Court of Canada, and has elicited several broad statements of purpose over the years. For example, in the early case of Weidman v. Shragge, the court noted that 'the mischief aimed at is the undue and abusive lessening of competition which operates to the oppression of individuals or is injurious to the public generally'.65 Early on, the Canadian courts identified a public interest in free competition, and adopted the view that the private benefits to the parties to an agreement are to be subordinated to the public interest in free competition.66 The Supreme Court of Canada reaffirmed this view in its recent decision in R. v. Nova Scotia Pharmaceutical Society et al. (PANS), where the Court made the following remarks: Considerations such as private gains by the parties to the agreement or counterbalancing efficiency gains by the public lie therefore outside of the inquiry under s.32(i)(c) [now s.45(l)(c)]. Competition is presumed by the Act to be in the public 61

Sec. 47. Sec. 48. 63 Sec. 49. 64 R. v. Nova Scotia Pharmaceutical Society, 43 C.P.RJd 1, 30 (1992). 65 Supra note 10, at 4. 66 See the comments of Anglin J. in Weidman v. Shragge, supra note 10, at 42-43 ('... The prime question certainly must be does [the agreement], however advantageous or even necessary for the protection of the business interests of the parties impose improper, inordinate, excessive or oppressive restrictions upon that competition the benefit of which is the right of everyone'). See also Stinson-Reeb Builders Supply Co. et. al. v. The King, [1929] S.C.R. 276, 280 (Mignault J.: 'It may be emphasised here that the advantage thus obtained by the manufactures and dealers of the association is not the proper test. What is the true test was laid down by this Court in Weidman v. Shragge as above stated. Injury to the public by hindering or suppressing of free competition, notwithstanding any advantage which may accrue to the business interests of the members of the combine, is what brings an agreement or a combination under the ban of section 498 Cr. C. [now Sec. 45]'). 62

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benefit. The only issue is whether the agreement impairs competition to the extent that it will attract liability.67

The Supreme Court in PANS characterised the legal standard under section 45 as entailing a 'partial rule of reason', lying on a continuum between a per se standard and a full-blown 'rule of reason' standard. This standard illustrates the court's attempt to balance the different objectives of the Act, since it requires a court to inquire into the seriousness of the anticompetitive effects of an agreement while precluding 'a full-blown discussion of the economic advantages and disadvantages of the agreement'.68 It remains an open question, however, whether the court may have opened the door to at least a partial consideration of efficiencies, since it merely precluded a 'full-blown consideration of advantages and disadvantages'. The importance of section 45 in the overall scheme of Canada's competition policy may be seen in its prominent role among the Director's enforcement priorities. Successive Directors have publicly stated that the investigation and prosecution of anticompetitive agreements that contravene section 45 is one of the Bureau's foremost priorities, and that the Director will aim to maximise deterrence by seeking higher levels offinesagainst offending corporations and, where appropriate, jail sentences against individuals.69 6.

Specialisation Agreements

The introduction, in the 1986 amendments, of a new provision allowing the Tribunal to authorise certain specialisation agreements is a further indication of the evolving focus on the importance of promoting efficiency in the Canadian economy and the international competitiveness of Canadian industry. Specialisation agreements are agreements under which each party agrees to discontinue producing a certain product on the condition that each other party to the agreement agrees to discontinue producing another product, and include 67

Supra note 64, at 31. W.,at48. 69 See H . I. Wetston, Director of Investigation a n d Research, Current Issues in Conspiracy L a w a n d Enforcement, Speech presented at Meredith M e m o r i a l Lectures— McGill University (1990); G. N . Addy, Director of Investigation and Research, Address to the Canadian Bar Association Second A n n u a l Competition L a w Conference, Montreal (1994); H. S. Chandler, Director of Investigation and Research, Getting D o w n t o Business; The Strategic Direction of Criminal Competition Law Enforcement in Canada, Speech presented at Insight Conference on Emerging Issues in Competition Law (1994). 68


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agreements under which parties agree to buy certain products exclusively from each other. Section 86 of the Act allows the Tribunal to authorise a specialisation agreement where, upon application by the parties to the agreement, it concludes (i) that the implementation of the agreement will bring about gains and efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition that will result from the agreement, and (ii) where the efficiency gains would not likely be obtained in the absence of the agreement, (iii) provided that there has been no attempt to coerce any person to become a party to the agreement. If the Tribunal is satisfied that the statutory test has been met, it may order that the agreement be registered for a period of time that it specifies. Registration of a specialisation agreement immunises the agreement from the possible application of the conspiracy or exclusive dealing provisions of the Act. Although the specialisation agreement provisions have been in force for more than ten years, there have been no applications to the Tribunal pursuant to those provisions to date.

7. Predatory Pricing Section 50(l)(c) of the Act makes it a criminal offence to engage in a policy of selling products at prices unreasonably low, that have the effect or tendency of substantially lessening competition or eliminating a competitor, or are designed to have that effect. The predatory pricing provision was enacted in 1935 following the recommendations of the Report of the Royal Commission on Price Spreads,10 to the effect that certain unfair practices intended to 'destroy' competition or 'eliminate a competitor' should be prohibited. Although it appears that one of the underlying objectives of the Royal Commission's recommendation was to protect small businesses,71 it is not at all evident that the provision has had that effect. Moreover, although the predatory pricing provisions were enacted during the Great Depression of the 1930s, at a time of widely perceived 'ruinous' and 'cut-throat' competition, no charges were laid under the provision until 1976. In view of the limited case law interpreting the predatory pricing provision, and in light of the risk that businesses might refrain from engaging in vigorous competition due to uncertainty about the application of this provision, the Director published the Predatory Pricing Enforcement Guidelines in 1992.72 70 71 72

(Ottawa, King's Printer, 1935). See Gorecki a n d Stanbury, supra note 12, at 122-123. Supra n o t e 29.

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The Director's approach to the application of this section involves a two-stage analysis. In the first stage, the Director inquires whether the alleged predator has market power. If it is determined that the firm has sufficient market power to recoup any losses incurred after a period of low pricing, the second stage calls for an examination of whether the prices charged by the alleged predator are 'unreasonably low'. According to the Guidelines, prices at or above average total cost ('A.T.C.') will not be regarded as unreasonably low under any circumstances. Prices below average variable cost ('A.V.C.') are likely to be regarded as unreasonably low in the absence of a clear justification, such as the need to sell off perishable or obsolete inventory. Prices in the 'grey range' between A.T.C. and A.V.C. call for an examination of the surrounding circumstances, including demand conditions, excess capacity, whether the firm in question was loss minimising and evidence of the competitive intent. 8. Price Discrimination The price discrimination provisions of the Act,73 like the predatory pricing provisions, were introduced in 1935 during the height of the Great Depression. The price discrimination provisions resulted from the Report of the Royal Commission on Price Spreads, which was of the view that unfair price discrimination promotes the survival of the powerful rather than of the efficient.74 Nevertheless, there have only been three convictions by way of guilty pleas and no contested proceedings under this provision since its adoption in 1935. As a result, the Director issued price discrimination enforcement guidelines in 1992, which describe the enforcement policy that the Director will apply in this regard. The Director's Guidelines appear to go to great lengths to limit the potential scope of application of the price discrimination provisions. Indeed, the Director's Preface notes the risk that business persons may refrain from engaging in pricing behaviour which would be healthy and beneficial due to the continuing uncertainty regarding the application of the provisions. 9. Vertical Restraints The Act contains several provisions relating to vertical restraints, including the criminal price maintenance provisions in section 61, and the reviewable prac73 74

Sec. 50(1 )(a). See discussion in Gorecki and S t a n b u r y , supra note 12, at 124.


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tices of consignment selling,75 exclusive dealing, tied selling and market restriction.76 As noted above, there is some judicial support for the proposition that the price maintenance provisions are intended to protect small businesses against abuses perpetrated by more powerful, larger firms.77 Unlike the price discrimination and predatory pricing provisions of the Act, the price maintenance provisions were vigorously enforced for many years. However, the number of prosecutions under these provisions has fallen off considerably during the past few years, as result, in part, of a concern that vertical price maintenance may be efficient and ultimately pro-competitive insofar as it discourages intrabrand competition, and may be conducive to increased interbrand competition. Thus, it would appear that efficiency considerations have influenced the exercise of the Director's discretion in relation to the enforcement of the price maintenance provisions.78 There are indications that the reviewable practice of consignment selling in section 76 was introduced in 1976 as a means of disciplining the use of consignment selling to avoid the prohibitions against price maintenance and price discrimination. Section 77, which deals with exclusive dealing, tied selling and market restriction, was introduced in 1976, ostensibly on the basis that these practices prevent the entry into a market of products that would stimulate price competition.79 However, more recent economic theory suggests that many of these practices may be efficient and pro-competitive.80 10. Refusal to Deal Section 75 of the Act establishes a reviewable practice of refusal to deal. In order to make an order, the Tribunal must be satisfied that: (1) a person is substantially affected in his or her business or precluded from carrying on business due to an inability to obtain adequate supplies of a product on usual trade terms; 75

Sec. 76. Sec. 77. 77 R. v. Kito, supra note 14. 78 It should be noted that the C a n a d i a n price maintenance provision is not limited to resale price maintenance. As such, sec. 61 also applies to attempts to influence upward, or discourage the reduction of, a competitor's prices. It is notable that the majority of recent prosecutions under the price maintenance provision have related to horizontal relationships rather than vertical relationships. 79 See Bureau of Competition Policy, Consumer a n d C o r p o r a t e Affairs C a n a d a , Stage 1, Competition Policy, Background Paper 9 (1976). 80 See, e.g., D u n l a p et al., supra note 31, at 248. 76

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(2) the person is unable to obtain adequate supplies because of insufficient competition among the suppliers of the product; (3) the person is willing and able to meet usual trade terms; and (4) the product is in ample supply. Section 77 does not require the proof of market power before the Tribunal may make an order. Nevertheless, the Tribunal suggested in Canada v. Xerox Canada /we.81 that situations where a supplier refuses to supply for anticompetitive purposes will be rare in the absence of significant market power. The Tribunal's decisions pursuant to the refusal to deal provisions82 provide some indication that the Tribunal is prepared to exercise its discretion with the objective of protecting the business expectations of small and medium-sized businesses. Nevertheless, the refusal to deal provisions are not limited to instances where small and medium-sized businesses are unable to obtain a product from a supplier, and may apply in circumstances where the statutory requirements are satisfied irrespective of the character or size of the would-be customer. This is particularly the case where the refusing supplier possesses market power and is using the refusal to restrict competition in the relevant market. 11. Misleading Advertising The objective of protecting the interests of consumers in Canadian competition laws is perhaps most evident in the misleading advertising and marketing practices provisions of the Act.83 In this regard, the courts have expressly noted the consumer protection purpose of the misleading advertising provisions, as exemplified by the following passage from the leading case of R. v. ColgatePalmolive Ltd.: This legislation is the expression of a social purpose, namely the establishment of more ethical trade practices calculated to afford greater protection to the consuming public. It represents the will of the people of Canada that the old maxim, caveat emptor, let the purchaser beware, yield somewhat to the more enlightened view caveat venditor—let the seller beware.84 81 32 83

33 C.P.RJd 83 (1990). Id.; Canada v. Chrysler Canada Ltd., 27 C.P.R.3d 1 (1989).

Sees. 52-60 include several criminal prohibitions with respect to misleading advertising, testimonials, d o u b l e ticketing, p y r a m i d sales, referral selling, bait and switch selling, a n d sales a b o v e advertised price. 84 1O.R. 731,733(1969).


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The consumer protection rationale was clearly in the minds of Canadian legislators in connection with the misleading advertising and marketing practices provisions of the Act.85 However, the Director has viewed the misleading advertising and marketing practices provisions of the Act as having the additional purpose of protecting the competitive process. Thus, the Director noted in 1979: 'When advertising suppresses or distorts relevant product characteristics, the consumer is unable to make a rational choice, and loses confidence in the market information system. Consumer ignorance can also contribute to the creation of cartels by limiting price and quality competition and imposing barriers to entry. This important link with competition policy has been recognised in both Canada and the U.S., where administration of the federal deceptive marketing legislation is the responsibility of agencies which are the primary enforcement arms for competition policy . .. .'86

12. Process Considerations Process considerations, including the independence of enforcement officials, the philosophical approach to enforcement policy (e.g. compliance-oriented versus adversarial approaches), the degree of transparency involved in the administration of the law, and the choice of remedy, may also influence the implementation of the objectives of competition policy. For example, the Canadian experience with a compliance-oriented approach to enforcement has proven to be conducive to the voluntary supply of information to the Director by private parties. As a result, the Director is better able to make informed judgements when balancing competing interests and objectives. Similarly, the publication of Enforcement Guidelines may have enormous influence with respect to the attainment of certain objectives, by increasing the predictability of decision-making. Likewise, the independence of enforcement officials is essential for ensuring that the balancing of competing interests and objectives

85

See, e.g., the comments of the Minister of Justice in c o n n e c t i o n with the transfer of the misleading advertising prohibition from the Criminal C o d e t o the C o m b i n e s Investigation Act in 1969: 'I could not resist saying that the c o n s u m e r h a s a f u n d a m e n tal right to correct information a n d that truth in advertising is essential to a n y charter for the consumers. I hope that these amendments will more effectively protect the c o n -

sumer's right to correct information in future': House of Commons Debates, January 23, 1969,4723-4724. 86

Consumer a n d Corporate Affairs C a n a d a , Misleading Advertising Bulletin 3 (July/September 1979).

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will occur in an unbiased and objective manner, guided by established legal rules and enforcement policies.87 Conclusion In the last decade of the twentieth century, we are witnessing a growing recognition—internationally and domestically—that a free enterprise system is the most effective means of maximising economic welfare. The long-standing antitrust principle that competitive markets are the most efficient method of allocating economic resources is now gaining a growing number of adherents in the former Soviet bloc, the Republic of China and many developing countries around the world that vigorously applied a command and control economic model in the past. As a corollary, governments are increasingly recognising that an effective competition policy is an essential component of economic reform, in order to ensure that the benefits of reduced government intervention and regulation are not impaired by private anticompetitive conduct. Moreover, governments recognise that the promotion of competition is not an end in itself, but rather a means of attaining other, more tangible, objectives. The challenge, therefore, is to articulate the proper objectives of competition policy in a manner that gives clear guidance to businesses, enforcement officials and the public at large with respect to the application of competition laws and policies. Competition policy may be conducive to attaining a broad range of objectives in the long run—including such diverse objectives as increased employment, economic pluralism, lower inflation, increased economic development, etc. Experience in Canada and elsewhere has demonstrated, however, that competition law and policy cannot work effectively if its stated objectives are so diverse that they potentially give rise to significant conflicts in their application to particular cases.88 Effective economic policy in any domain recognises the need to balance conflicts between competing short-run interests in order to maximise long-run benefits. Competition policy is no different in this regard. The optimum policy will require the careful balancing of society's competing interest in promoting free market competition (or interfirm rivalry) against the efficiencies that may be generated in the short to medium term by conduct 87

F o r a m o r e detailed discussion o f process issues, see C. S . G o l d m a n et al., Competition Policy a n d the Transition from Closed t o O p e n E c o n o m y : Lessons from the C a n a d i a n Experience, Paper presented at Conference o n C o m p e t i t i o n Policy in a Global E c o n o m y , Global Forum for Competition a n d T r a d e Policy (New Delhi, 1997). 88 See, e.g., the discussion of the former criminal monopoly provisions supra.


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or transactions that may also lessen or prevent competition. This, then, leads us to the fundamental issue of what are the implications of the objectives of competition policy for practical application purposes in the implementation of a competition law. First, we have argued in favour of the recognition of two evolving fundamental objectives: (1) the promotion of a marketplace framework through laws of general application whereby participants may contract, buy and sell free from abusive exercise of market power by other marketplace participants, recognising that this objective will promote economic efficiency in the long term; and (2) the promotion of short-term economic efficiency, with the consequential benefit of promoting the international competitiveness of domestic industry. Secondly, since the foregoing objectives will not always be in perfect harmony, there is a requirement for a careful balancing of these sometimes competing objectives in the administration of competition law, and the need for an administrative framework that ensures independent and effective decision-making in the implementation of the law. Thirdly, with respect to mergers, joint ventures and strategic alliances that generally give rise to issues of prospective anticompetitive conduct, competition law enforcement ought to be more cautious. It should refrain from intervening in cases where the anticipated anticompetitive effects are unclear, and particularly where the transaction or conduct in question is likely to generate relatively certain short-term efficiency gains. Fourthly, in cases involving anticompetitive conduct that is egregious and covert, efficiency considerations ought rarely to be sufficient to trump the anticompetitive effects of such conduct.89 In addition to the relative certainty of the effects of such conduct, deterrence is often in and of itself an important consideration.90 89

Although the Supreme C o u r t of C a n a d a has rejected a per se a p p r o a c h to the conspiracy provisions of the Act and has adopted a 'partial rule of reason' a p p r o a c h requiring assessment of both the market structure and the behaviour in question, the C o u r t has also suggested that certain types of conduct may be so inherently injurious t o competition that 'it may also trigger liability even if market power is n o t so considerable': R. v. N o v a Scotia Pharmaceutical Society et al., supra note 64, at 37. 90 See the discussion of the importance of deterrence in penalties for antitrust offences in the j u d g m e n t of L a Forest J. in T h o m s o n Newspapers Ltd. v. Director of Investigation and Research, supra, note 11, at 514-515.

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In light of the Canadian experience in the legislative and jurisprudential evolution of competition law, we believe that the foregoing propositions may provide a workable model for the identification and effective implementation of the fundamental objectives of competition law and policy.

IV Herbert Hovenkamp Professor, College of Law University of Iowa, Iowa City, Iowa, U.S.A

Introduction This paper briefly evaluates the extent to which antitrust law in the United States ('antitrust') has actually implemented, recognised, or perhaps rejected a wide ranging list of goals that are generally associated with the public welfare or economic domain of democratic government. The list is far too large to permit detailed development of each of its many items.1 Rather, this paper groups the items in this list into broader categories, commenting on the status of United States antitrust law within each category.

A. Pervasive Issues: Static and Dynamic Efficiencies Since the 1970s, a significant part of academic antitrust's mainstream has argued that the pursuit of efficiency through competition ought to be the exclusive, or at least the dominant, goal of the antitrust laws.2 In sharp contrast, much of the case law, particularly in the 1960s, seemed to pursue a broad but poorly defined agenda, including the protection of small business from more aggressive or more efficient rivals,3 or the protection of 1

Included on the list are; consumer welfare; static allocative efficiency; dynamic efficiencies (innovation); income distribution/wealth transfer effects; deconcentration and dispersal of economic power; preservation of democratic government; protection of small or medium sized enterprise; protection of individual traders; employment effects;market integration; environmental, health, safety, and related considerations; 'industrial policy'; promotion of national champions; exports; international trading; fairness/equity; promotion of opportunity; protection of consumers from exploitation; 'public interest'; general macroeconomic effects (such as combating inflation). 2 See, e.g., R. Bork, The Antitrust Paradox: A Policy at War with Itself (1978) (summarising a great deal of earlier literature, much of it from Chicago School scholars); 1 P. Areeda and D. Turner, Antitrust Law: an Analysis of Antitrust Principles and Their Application (1978), ^109-112 (arguing that economic efficiency ought to be the predominant goal of antitrust, but then rejecting all other alternatives). 3 E.g. Brown Shoe Co. v. United States, 370 US 294, 344 (1962) (condemning merger in part because large vertically integrated shoe manufacturer/retailer would be able to undersell smaller, unintegrated rivals).

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individual traders, sometimes phrased as the preservation of entrepreneurial freedom.4 Practically any summary of subsequent case law would be controversial. At least two conclusions, however, would receive fairly broad support. Thefirstis the position that the exclusive, or at least dominant, antitrust goal should be facilitation of efficient resource allocation and production through competition. This has had a significant influence on antitrust in the 1980s and 1990s. The second is that this process has gone on in common law form, one case at a time, and is still not finished. Important areas where this theory of antitrust is not yet fully triumphant include our current per se rules against minimum and maximum resale price maintenance, differential pricing provisions of the Robinson-Patman Act, rules obligating dominant firms to share their inputs, and (at least arguably) overly aggressive rules against tying arrangements. Thus, it would not be quite accurate to say that efficiency as defined above is the exclusive goal of United States antitrust policy as reflected in the case law—but it is certainly much closer to accurate than it would have been twenty years ago. On the second point listed above, the task of determining the ideology of United States antitrust law to a significant extent befalls the courts rather than Congress. If it wished, Congress could certainly pass legislation declaring that hereafter all antitrust outcomes should be dictated by efficiency concerns, but it has not done so. While it has passed some legislation designed to shield efficient activity, especially various forms of collaboration, from antitrust challenge,5 most of this legislation operates on the margin rather than at the centre. On the issue of dynamic efficiencies, it seems to me that significant progress has been made, although we have perhaps not moved quite as far as we have with respect to the more fundamental issues of static efficiencies. Here, the role of statutes is somewhat larger, particularly if one takes deregulation into account. 4

E.g., Albrecht v. Herald Co., 390 US 145 (1968) (condemning maximum resale price maintenance imposed on newspaper carrier in order to protect entrepreneurial freedom); see Roger D. Blair and James M. Fesmile, Maximum Price Fixing and the Goals of Antitrust, 37 Syracuse L. Rev. 43 (1986). 5 Examples are the National Cooperative Research Act, 15 USC. §§4301-4304 (applying more lenient antitrust treatment to qualifying research joint ventures filed with the Justice Department or Federal Trade Commission; single damages for prevailing plaintiffs challenging activities within the scope of the registration; and prevailing defendants can recover attorney's fees; venture may not be involved in joint setting of price, market wide output restriction, or exchanges of price information); Health Care Quality Improvement Act, discussed infra, notes 44—45 and accompanying text.


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The list of statutory and case law developments that fall into the general category of facilitating both static and dynamic efficiencies includes the following, although there may be others: (1) Statutes6 and case law7 that express greater toleration ofjoint ventures with efficiency creating potential; (2) Case law that is more tolerant—or more likely to take seriously—claims that mergers will yield efficiencies8; (3) Case law that has made proof of predatory pricing claims much more difficult. Historically, smaller firms brought such claims, often challenging the efficient pricing of larger rivals with lower costs. Under current law, any price above cost9 is lawful, and even a price below cost is lawful unless it can be shown to destroy or discipline rivals with a realistic likelihood of creating or preserving a monopoly or oligopoly10; (4) Case law that has subjected vertical non-price restraints to rule of reason treatment, with the result that virtually all are legal; and that—while preserving the per se rule against resale price maintenance—has construed the 'agreement' and 'price maintenance' requirements for that rule very harshly against plaintiffs11; (5) Case law that has put stricter requirements on the doctrine that refuses to condemn tying or exclusive dealing unless the defendant has significant

6

E.g., National Cooperative Research Act, supra note 5. E.g., Broadcast Music v. Columbia Broadcasting System 441 U.S. 1 (1979) (BMI); Metro Industries v. Sammi Corp., 82 F.3d 839 (9th Cir. 1996), cert, denied, 117 S.Ct. 181 (1996); National Bancard Corp. v. Visa, U.S.A., 779 F.2d 592 (11th Cir.), cert, denied, 479 U.S. 923 (1986) (NaBanco); Rothery Storage & Van Co. v. Atlas Van Lines, 792 F.2d 210 (D.C. Cir. 1986), cert, denied, 479 U.S. 1033 (1987); Polk Brothers v. Forest City Enterprises, 776 F2d 185 (7th Cir. 1985). 8 Kg., Olin Corp., 5 Trade Reg. Rep. TJ22857 (FTC 1990). Most of the impact of efficiencies shows up as agency decisions not to challenge a merger rather than litigated defences establishing the legality of an otherwise apparently unlawful merger. 9 While the Supreme Court has yet to decide the issue, most lower courts use marginal cost as the relevant benchmark, with average variable cost often considered an acceptable surrogate. 10 See, e.g., Brooke Group Ltd v. Brown & Williamson Tobacco Corp., 509 US 209 (1993); and P. Areeda and H. Hovenkamp, Antitrust Law (rev. edn. 1996), Ch. 7-C. 11 Kg., Continental TV v. GTE Sylvania, 433 U.S. 36 (1977) (rule of reason for vertical non-price restraints); Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717 (1988) (making it much more difficult for resale price maintenance plaintiff to prove qualifying agreement as to resale prices). 7

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market power and the practice raises a significant threat of foreclosure, increased entry barriers, or other competitive harm12; (6) Amendments to collateral statutes such as the Patent Act, which narrow the scope of so-called patent 'misuse' and thus limit antitrust or antitrust-like challenges to various patent practices13; (7) A broad range of statutes 'deregulating' various aspects of the public utility, transportation, and communications markets, and bringing many disputes within these markets back into the jurisdiction of the antitrust laws14; (8) The great reduction in the legal theories and the number of challenges to vertical and conglomerate, or potential competition, mergers. However, not all cases have resulted in progress. Far more ambiguous are the host of cases dealing with the antitrust obligations that a dominant firm may have to share various parts of its technology with others. For instance, the Supreme Court's 1992 Kodak decision, to be discussed below, constitutes a serious setback, although most subsequent decisions have refused to follow its most far-reaching implications. Finally, the so-called 'antitrust injury' doctrine, which has become a prominent feature of the private plaintiff case law, has helped limit private antitrust actions to circumstances where the challenged act is anticompetitive in the neoclassical economic sense.15 That doctrine has seriously limited the use of the antitrust laws to protect small rivals or individual traders from larger, more aggressive rivals. The antitrust injury doctrine holds that a private plaintiff 12

Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984); Collins v. Associated Pathologists, 844 F.2d 473, 479 (7th Cir.), cert, denied, 488 US 852 (1988) (anticompetitive effect of exclusive dealing arrangement between hospital and pathologists to be measured in national market in which pathologists are hired, not in local market served by hospital). 13 Patent Misuse Reform Act, 35 U.S.C. §271 (d) (requiring proof of market power in ties of patented to unpatented goods; re-emphasising that there is no general duty to license). 14 A few of the many examples are Telecommunications Act of 1996, Pub L. No. 104-104, 110 Stat. 56 (1996), codified at scattered sections of 47 U.S.C; Natural Gas Policy Act of 1978, 15 U.S.C. §§3301-3432; Natural Gas Wellhead Decontrol Act, 103 Stat. 157 (1989), codified at 15 U.S.C. §3301; Motor Carrier Act of 1980, 94 Stat. 793 (1980), codified in scattered sections of 49 U.S.C; Interstate Commerce Commission Termination Act of 1995, PL 104-88, 109 Stat. 803 (1995). 15 Because the word 'competition' has acquired so many meanings in United States antitrust rhetoric, this paper uses the term 'neoclassical' competition to define competition as a neoclassical economist would define it—namely, a situation in which price tends toward marginal cost and relatively unfettered rivalry amongfirmsdetermines the amount and nature of cost savings, innovation and other dynamic efficiency gains.


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who is injured by the antitrust laws cannot recover unless the injury is of a type for which antitrust policy contemplates protection. For example, in Brunswick v. Pueblo Bowl-O-Mat, the Supreme Court held that a plaintiff who was injured when its nearly bankrupt rival was acquired by a large firm which would likely rehabilitate it into a robust competitor was not a victim of antitrust injury.16 The purpose of the merger laws is not to prevent firms from rehabilitating languishing rivals, thus making markets more competitive. Another example is where a plaintiff claimed that a post-merger firm would price more aggressively than previously and the court held that this did not result in antitrust injury, for the goal of merger policy is not to prevent firms from becoming more aggressive competitors.17 The same applies to the plaintiff complaining that as a result of maximum resale price maintenance imposed on its rivals, it must charge lower prices than it otherwise could.18 The real value of the antitrust injury doctrine is that it tends to force the private plaintiff to show in its complaint that the source of its injury is a decline in market competitiveness, rather than a need to compete against a more efficient firm. As a result, many more antitrust cases are dismissed at an early stage, often on the basis of the pleadings themselves.

B. Continued Recognition of Non-economic, or 'Populist', Goals; Protection of Small Business; Income Distribution In 1978, Professors Areeda and Turner stated that fairness was a 'vagrant' antitrust goal because no criteria could be developed for applying it in anything other than an arbitrary fashion.19 As the preceding section of this paper outlines, the courts have accepted that principle to a considerable extent. Nevertheless, instances remain in which United States antitrust doctrine cannot readily be understood as anything other than an attempt to protect a right of small businesses to operate within the market. One of these, of course, is the Robinson-Patman Act,20 whose anticompetitive uses are legendary. That statute, while identifying the prohibited harm as 'price discrimination', creates a right of action by (typically) small firms 16

429 U S 477 (1977); see P . Areeda a n d H . H o v e n k a m p , Antitrust L a w (rev. edn., 1995), H362. 17 Cargillv. Monfort of Colorado, 479 U S 104 (1986). 18 Atlantic Richfield Co. v. USA Petroleum Co., 495 U S 328 (1990). 19 See Areeda a n d Turner, supra note 2, TJ109a at 21. 20 15 U S C §13.

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complaining that some larger rival was able to obtain a lower price from the defendant than they were able to obtain.21 Another equally troublesome area in which a populist or distributive conception of antitrust survives in the case law is the so-called 'essential facility' doctrine and its siblings. Somewhat oversimplified,22 the essential facility doctrine states that a dominant firm that controls a properly defined essential facility, or input not readily capable of duplication, may have a duty to share that facility with a rival or potential rival. Further, a rival who has requested access to an essential facility and been denied can have an injunction or treble damages action against the dominant firm. In its broadest form, the essential facility doctrine would go so far as to force a dominant firm to participate in a joint venture at the request of a rival or potential rival, with the terms of the venture to be fashioned by a court.23 In practice, the duty has not been interpreted that broadly,24 although it (or some variation) has been applied so as to require: (i) a dominant firm to continue in a joint venture previously created with the plaintiff25; (ii) a dominant firm to share its database of customers26; (iii) a dominant communications carrier to interconnect with rivals27; (iv) a large electric utility with transporting facilities 21

F o r f u r t h e r development, see Herbert H o v e n k a m p , Federal Antitrust Policy: T h e L a w of C o m p e t i t i o n a n d its Practice (1994), ch. 14. 22 F o r a full explication a n d critique of t h e case law, see P. Areeda a n d H . H o v e n k a m p , A n t i t r u s t Law (rev. ed. 1996), HH771-774. 23 F o r e x a m p l e , t h e j u r y instruction a p p r o v e d b y the S u p r e m e C o u r t in t h e Aspen Skiing case w a s : [A] c o m p a n y which possesses m o n o p o l y power a n d which refuses t o enter a joint o p e r a t i n g a g r e e m e n t with a competitor or otherwise refuses to deal with a competitor in s o m e m a n n e r does n o t violate §2 if valid business reasons exist for that refusal. . . . A s p e n Skiing C o . v. Aspen Highlands Skiing C o r p . , 472 U . S . 585, 597 (1985). 24 E.g., SmileCare Dental G r o u p v. Delta D e n t a l Plan, 88 F.3d 780 (9th Cir.), cert, denied, 117 S.Ct. 583 (1996) (Aspen m a y require a d o m i n a n t firm t o continue its participation in a n existing joint venture, b u t does n o t create an obligation t o create o r join a new v e n t u r e ) . 25 See A s p e n Skiing C o . v. Aspen Highlands Skiing Corp., supra note 23, 472 U S at 597 ( n o t expressly applying the 'essential facility', doctrine, but providing an important basis for it). 26 G r e a t W e s t e r n Directories v. Southwestern Bell Tel., 63 F.3d 1378 (5th Cir. 1995); BellSouth A d v e r t i s i n g v. Donnelley Information Publishing, 719 F . Supp. 1551 (S.D. Fla. 1988). C o n t r a s t R u r a l Tel. Serv. C o . v. Feist Publications, 737 F . Supp. 610 ( D . K a n . 1990) ( c u s t o m e r list for production of telephone directory not an essential facility where plaintiff could have procured o r developed it by alternative means). 27 M C I C o m m u n i c . C o . v. AT&T, 708 F.2d 1081, 1132 (7th Cir. 1982), cert, denied, 464 U . S . 891 (1983), appeal after remand, 748 F.2d 799 (7th Cir. 1984); Southern Pacific


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to transport, or 'wheel', wholesale electric power for the benefit of smaller utilities with no such capability28; (v) the publisher of a dominant magazine in its market niche to provide advertising to a rival seller of other services29; (vi) the tenant of a large athletic stadium to lease space to a rival.30 The reason that the essential facility doctrine must be characterised as 'populist' or 'distributive' is that forced sharing of an essential facility is not a sufficient condition for improving competition in the market.31 To illustrate, suppose a firm is both a competitor in a natural gas field and a dominant firm owning a single pipeline to a certain area.32 For this pipeline distribution costs are $ 1.00 per unit. At that price, the dominant firm would sell 1,000 units of gas per day, subject to a $1.00 markup covering the distribution costs. Because the firm is a pipeline monopolist, however, it reduces its distribution to 800 units per day, and marks up its gas price by $1.50 for distribution, thus reflecting its monopoly position in the pipeline. A smaller producer in the same gas field wishes to sell natural gas in competition with the pipeline owner, and wins an injunction ordering the dominant firm to share the pipeline. What price will the pipeline owner charge? The answer is $1.50: that is, if the gas is sold competitively, the profit maximising strategy for the dominant firm is to sell transport space to the smaller firm for, say, 200 units at $1.50 per unit, reducing its own output through the pipeline to 600 units. Moreover, as a result of such forced sharing, exactly the same amount of gas passes through the pipeline; the price to consumers at the end of the pipeline remains the same; the dominant firm tends to earn its full monopoly profits, although by selling part of an input to C o m m u n i c a t i o n s v. A T & T , 740 F . 2 d 980 (D.C.Cir. 1984), cert, denied, 470 U . S . 1005 (1985). T h e 1996 Telecommunications A c t assesses this requirement of all carriers. See 47 U S C §251 (a) ('Each telecommunications carrier has t h e d u t y . . . t o interconnect directly or indirectly with the facilities a n d equipment of o t h e r telecommunications carriers. . . .'). 28

Otter Tail P o w e r C o . v. U n i t e d States, 410 U S 366 (1973). Colonial Penn Group v. American Assn. of Retired Persons, 698 F. Supp. 69 (E.D. Pa. 1988) (plaintiff wished to advertise its insurance, which it sold in competition with the defendant). 30 F i s h m a n v. Wirtz, 807 F . 2 d 520, 539 (7th Cir. 1986); H e c h t v. P r o - F o o t b a l l , 570 F.2d 982 ( D . C . Cir. 1977), cert, denied, 436 U.S. 956 (1978). 31 See, e.g., Judge Posner's conclusion in Blue Cross & Blue Shield United of Wisconsin v. Marshfield Clinic, 65 F.3d 1406,1413 (7th Cir. 1995) (essential facility doctrine has 'nothing to do with antitrust principles', for 'consumers are not better off if the natural monopolist is forced to share some of his profits with potential competitors....'). 32 See Consolidated Gas Co. of Fla. v. City Gas Co. of Fla., 665 F. Supp. 1493 (S.D. Fla. 1987), aff'd, 880 F.2d 297 (11th Cir.), opinion vacated, 889 F.2d 264 (11th Cir. 1989), on reh'g, 912 F.2d 1262 (11th Cir. 1990), rev'd. per curiam on nonantitrust grounds, 499 U.S. 915 (1991) (finding a gas pipeline to be an essential facility). 29

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others rather than employing it in its own production; and the rival is able to make sales in the market, presumably earning a competitive return. In sum, none of the static efficiency goals of the antitrust laws have been achieved. Further, to the extent that the costs of litigating the result and transacting the sharing process are above zero, as they certainly are, the outcome is socially costly. The only rationale for this antitrust solution is that it accommodates a smaller business, which thus has an antitrust 'right' to make sales in the market by sharing an input that the dominant firm has produced. Of course, the court can create a more competitive result by issuing an injunction that not only requires the defendant to share its pipeline, but also forces it to charge the competitive price of $1.00 per unit. However, such an order operates as nothing less than public utility-style price regulation, for which antitrust tribunals in the United States are very poorly suited and which, in any event, is inconsistent with the antitrust mandate, which is to make markets competitive, not to turn them into public utilities. The trend in the case law has been to narrow the scope of the essential facility doctrine; as a result, few plaintiffs have won cases in the last three or four years.33 One important exception, however, is the Kodak litigation pending at this writing before the Ninth Circuit and similar litigation still in the trial stage involving Xerox. These cases, as well as several other similar ones, involve the claim that the defendant had a 'monopoly' position in its own unique replacement parts, or perhaps in other aftermarket inputs such as diagnostic software.34 The claim in the current Kodak litigation is that Kodak violated section 2 of the Sherman Act, which covers monopolisation and attempt to monopolise,35 by refusing to supply independent service organisations with the parts they needed in order to service Kodak photocopiers. The problematic part of the litigation is that of the several thousand parts that go into a complex photocopier, Kodak itself manufacturers less than 10 per cent. Other firms with custom dies or procedures manufacture another 20 to 30 per cent. The balance, however, are 'off the shelf parts that are 33

See A r e e d a a n d H o v e n k a m p , supra note 22, ^ 7 7 3 - 7 7 4 . E.g., D a t a G e n e r a l Corp. v. G r u m m a n Systems Support Corp., 761 F . Supp. 185 (D. Mass. 1991), aff'd i n relevant part, 36 F.3d 1147 (1st Cir. 1994) (defendant's diagnostic software n o t an essential facility where plaintiff failed to show it could not produce its own alternative). 35 T h e original decision by the Supreme Court in 1992 was mainly a claim of unlawful tying, although the C o u r t ' s opinion included a few observations on a Sherman Act §2 claim as well. See E a s t m a n K o d a k C o . v. Image Technical Services, 504 U.S. 451 (1992). Subsequently, however, the tying claim dropped out for lack of proof of a qualifying 'agreement' t o tie ( K o d a k simply refused to sell parts to I.S.O.s), and the case proceeded to trial strictly o n a monopolisation theory. 34


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readily available from numerous sources. The plaintiffs' position was that in order to compete effectively with Kodak, they needed immediate access to 'all of the parts all of the time', and further that, since all were collected in Kodak's warehouse, Kodak should be obliged to supply all. They claimed—and won—an antitrust right that Kodak sell them any part in its inventory, whether or not the part was readily available from an alternative source and, equally problematically, whether or not Kodak held a patent on the part. Another area in which United States antitrust policy continues to recognise populist, or distributive goals is resale price maintenance. As of today, both minimum and maximum resale price maintenance are illegal per se under section 1 of the Sherman Act. There are well developed theories in the economics literature showing that minimum resale price maintenance may be used to facilitate collusion among manufacturers or dealers, or that it may be used anticompetitively by a dominant dealer to protect it from the competition of smaller dealers willing to sell for a lower markup. These situations, however, form a small percentage of the whole, and in most instances, minimum resale price maintenance is used to address free rider problems or otherwise ensure the supply of the optimum number of dealer services. As a result, the law condemning resale price maintenance per se probably operates most often to protect small, marginal dealers who do not wish to provide certain services to their customers, but want to capitalise on a small dealer mark-up. In any event, the consequence of maximum resale price maintenance seems to be quite well understood: it is designed to protect manufacturers from the high mark-ups of dealers or other downstream resellers who have a certain amount of market power in their resale market.36 Although there are some theories suggesting that maximum resale price maintenance can be used anticompetitively—for example, to force dealer participation in a predatory pricing scheme37—there is very little empirical evidence of such uses. In any event, the Supreme Court has overruled Albrecht and maximum resale price maintenance is now subject to the rule of reason.38 36

E.g., Albrecht v. Herald Co., supra note 4, 390 U . S . 145 ( m a x i m u m resale price m a i n t e n a n c e imposed b y newspaper o n newspaper carrier w h o h a d exclusive territory; unlawful per se). 37 E.g., Atlantic Richfield C o . v. U S A Petroleum C o . , supra note 18, 495 U.S. 328 (rival of dealer u p o n w h o m m a x i m u m resale price m a i n t e n a n c e is imposed lacks antitrust standing as long as the maintained price is non-predatory); however, on remand the Ninth Circuit concluded that if a supplier imposed a predatory maximum price on a dealer, the dealer's rivals could mount an antitrust challenge: USA Petroleum Co. v. Atlantic Richfield Co., 972 F.2d 1070 (9th Cir. 1992). 38 K h a n v. State Oil C o . , 118 S. Ct. 275 (1997).

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C. Consumer Protection; Health, Safety, Environment United States law has generally distinguished sharply between competition policy and consumer protection policy, and does not see 'consumer protection' as denned in our laws as a general antitrust goal. To be sure, there is more than a little ambiguity here, for consumer welfare is often stated to be the paramount antitrust goal. Nevertheless, antitrust generally uses consumer welfare in the technical sense relating to the maximising of consumers' surplus and control of monopoly, while it uses the term 'consumer protection' to deal with such issues as fraud, false and misleading advertising, collection practices, and the like. The distinction is certainly not as clear as some claim. For example, the consumer who is misled by false or misleading claims about the quality of a product can be said to pay too much for the product. Thus, he or she is denied a certain portion of consumers' surplus that he or she could have kept if the claims had been truthful. Misleading advertising communicated to a large number of people can yield widespread loss of consumers' surplus in similar fashion. Nevertheless, United States antitrust policy adheres fairly rigidly to the distinction that the reduction in consumers' surplus that concerns antitrust is that which results strictly from reduced market output and higher prices. In contrast, the reduction in consumers' surplus that concerns the consumer protection laws is that which results from misinformation that the consumer has about the product or service being purchased. To this end, the courts consistently hold that false and misleading claims about one's own product, or false and misleading disparagement of a rival's product, are not antitrust violations in the absence of significant market power (or the dangerous probability of acquiring it) and of some threat of the preservation or creation of relatively durable monopoly.39 Likewise, antitrust's theory of injury generally does not encompass concerns about health, safety or the environment. Certainly, no one disputes the proposition that unhealthful or unsafe products can reduce consumers' surplus, or that polluting firms can reduce consumers' welfare generally. Furthermore, we often presume that competition tends to produce optimal products, which by definition are products that are as healthful and safe as is cost-justified; and at least arguably, a monopolist may lack the appropriate incentives to produce such products. However, all such concerns are absorbed into the more general view that competition encourages dynamic efficiencies, or the optimal amount of research and product development. Health or safety are not set apart for singular treatment. 39

See Areeda and Hovenkamp, supra note 22, H782b, d.


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Health or safety issues might also be tangentially relevant when they are the subject of a particular restraint. For example, if competing firms conspire with each other to make a less safe or less healthful product, their conspiracy would clearly fall within the domain of the antitrust laws. A good example is the McCready case, which involved an alleged conspiracy among entities in the health insurance industry to refuse to insure the costs of clinical psychologists, as opposed to psychiatrists.40 But the United States antitrust laws treat such claims as no different from the general run of output reducing agreements—for example, an agreement among pasta makers to use inferior wheat in their fettucini.41 That is to say, any naked agreement among rivals to raise the price or else to reduce the output of their product (whether by reducing the number of units produced or the quality of the units) is unlawful. The same thing can be said of the so-called 'patient care' or 'patient welfare' defence that has been raised in some health care antitrust cases, mainly involving claims of concerted refusal to deal.42 For example, the Wilk case condemned a rule of the American Medical Association plus a hospital accreditation association that attempted to suppress chiropractors by denying them access to various hospital facilities, mainly x-ray laboratories. The court fashioned a rule that if the refusal was motivated by an objectively reasonable concern for patient care and there were no viable less restrictive alternatives for dealing with the problem, then the refusal would be justified under the rule of reason.43 To be sure, such a rule takes 'health' considerations into account— but it does not single out health as a unique factor among the many attributes of consumer welfare. Rather, the 'patient care' defence is merely a variation of the product quality defence that is often offered to justify joint venture exclusions, privately implemented licensing practices, and the like. One important exception calling for differential treatment is the Health Care Quality Improvement Act,44 creating a very broad immunity from the antitrust laws for medical peer review, provided that the review was

40

Blue Shield of Virginia v. M c C r e a d y , 457 U.S. 465 (1982). National M a c a r o n i Mfrs. A s s o c , 65 F . T . C . 583 (1964), affd., 345 F . 2 d 421 (7th Cir. 1965) (condemning agreement a m o n g manufacturers of spaghetti a n d o t h e r p a s t a to use a blend of 50% inferior farina wheat and 50% d u r u m wheat in their p r o d u c t ) . See H . H o v e n k a m p , supra note 2 1 , at §17.5b2. 42 E.g., F.T.C. v. I n d i a n a Federation of Dentists, 476 U . S . 447 (1986); Wilk v. A . M . A . , 895 F.2d 352 (7th Cir.), cert, denied, 496 U . S . 927 (1990). 43 See Wilk v. A . M . A . , 719 F.2d 207 (7th Cir. 1983); Wilk II, supra n o t e 42, 895 F . 2 d at 352, 357. 44 42 U.S.C. §§11,101-11,152. 41

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undertaken in objectively measurable good faith.45 Congress' articulated concerns in passing that statute were that hospital staff members required to evaluate the conduct of others would be intimidated from carrying out their task if every decision disciplining or dismissing the subject raised the threat of an antitrust lawsuit.46 One interesting development, mainly under state antitrust laws, which does seem to suggest a special antitrust concern with health are the various claims that have been brought by states attorneys general against domestic producers of cigarettes and other tobacco products. One of those claims is based on the antitrust laws, the essence of which is that the tobacco companies conspired to withhold information from the public about the harmful health effects of cigarette smoking. As a result, it is alleged, more cigarettes were sold to more people than would have been the case had the information been produced. The plaintiffs are now seeking as damages the costs of health care for the tobaccorelated health problems of consumers who were victimised by this collusive deception.47 Although this claim raises many difficult issues of proof, I do not believe that it is significantly different from any other claims against cartel members who collude by reducing the quality of their product rather than by raising the price. As a general matter, we would have little difficulty in concluding that if a group of firms acting in concert agreed to reduce the quality of their product while maintaining the price, their antitrust damages would be based on the overcharge. In this case, computation of the 'overcharge' is a little more com45

A few of the m a n y decisions include I m p e r i a l v. S u b u r b a n H o s p . Assn., 37 F.3d 1026 (4th Cir. 1994) (hospital and staff i m m u n e from a n t i t r u s t liability when all procedural requirements of H . C . Q . I . A . met); Smith v. R i c k s , 31 F.3d 1478 (9th Cir. 1994), cert, denied, 115 S.Ct. 1400 (1995) ( H . C . Q . I . A . i m m u n i s e s hospital providing adequate notice a n d o p p o r t u n i t y t o be heard in physician discipline process and conducting thorough review); Austin v. M c N a m a r a , 979 F.2d 728 (9th C i r . 1992) (H.C.Q.I.A. exempts peer review b o a r d from antitrust charges following dismissal of neurosurgeon if there was objective basis for dismissal, even t h o u g h s o m e review b o a r d members may have been hostile t o w a r d plaintiff). O n e recent decision f o u n d that good faith could have been lacking, mainly o n t h e basis of evidence t h a t t h e reviewing panel listened to too little evidence concerning the justifications for t h e plaintiff physicians' conduct: Brown v. Presbyterian H e a l t h c a r e Serv. 101 F.3d 1324, 1330-1334 (10th Cir. 1996). 46 See H . R . R e p . N o . 903, 99th C o n g . , 2d Sess. 3 (1986) (indicating that Congress was concerned t h a t medical professionals w h o were 'sufficiently fearful of the threat of litigation will simply n o t d o meaningful peer review', t h u s leaving patients at the mercy of people w h o should have been corrected o r r e m o v e d f r o m their positions). 47 M i n n e s o t a v. Philip Morris, Inc., 551 N W 2 d 4 9 0 , 1996-2 T r a d e Cas. 1)71506 (Minn. S.Ct. 1996) (state h a s standing as representative o f its citizens t o seek recovery of health costs related t o s m o k i n g u n d e r M i n n e s o t a a n t i t r u s t statute).


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plicated than in the ordinary price-fixing case; rather than wishing to know how much the price has been raised, we would want to know how much the fair market value of the product has been suppressed.48 The cigarette case is identical in principle. The information that was not disclosed pertained to the risk that cigarette smoking would cause cancer, heart disease, or other health problems. As such risks increase, the risk-adjusted value of a package of cigarettes to a rational smoker necessarily declines. Ex ante, of course, the risk is nothing more than a probability number. For example, if I know that there is a 1 in 1,000,000 chance that the next pack of cigarettes will kill me and I value my life at $1,000,000, then the value I place on the package of cigarettes is $1.00 less when I take the risk into account. Ex post, however—after the deaths or other health problems have occurred—the cost is no longer a risk distributed over the entire population, but a cost that has actually been experienced. In our imaginary smoking pool of 1,000,000, we assume that one person has died from a pack of cigarettes and the other 999,999 have not been injured at all. In sum, then, the payment of the health care (or burial or wrongful death) losses is simply a surrogate for the reduction in 'product quality' brought on by the cartel.49

D. Protection of Exports United States antitrust policy has taken the protection of exports into account by giving limited antitrust immunities to export joint ventures and even, to a certain extent, to cartels. The Webb-Pomerene Act, which is not of recent 48

F o r example, I d o not believe a U . S . federal court would have any difficulty in accepting a d a m a g e study such as this for the Macaroni case, n o t e 4 1 : In region A, 'high quality' pasta sells for $5.00 per unit; in region B, 'low quality' pasta sells for $3.50 per unit. N o w the manufacturers in region A agree with each other to sell only 'low quality' pasta while maintaining the price at $5.00. As a result, the overcharge is the difference between the price of the low quality pasta charged by the cartel, a n d the price that would have been charged for low quality pasta had the firms been behaving competitively—or, $1.50. 49 O r perhaps, to use a clearer illustration, assuming that antitrust injury includes the reduction in m a r k e t value of a product whose quality is reduced by unlawful collusion. Suppose automobile manufacturers agree not to deploy a safety device in their b r a k i n g systems. T h e result of not deploying the device is t h a t a car is m o r e likely t o have a serious accident, a n d a rational consumer would not be willing to pay as m u c h for a car posing higher risks of causing death, serious injury, o r p r o p e r t y d a m a g e . But after the accident has occurred (or the car driven its entire useful life with n o accident) the riskadjusted reduction in value has been fully discounted. Ex post, those w h o drive the car its entire useful life with n o accident have not been injured at all; those w h o have h a d accidents have been injured to the extent of the accidents' costs.

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vintage,50 gives a limited antitrust immunity to United States Citizens who produce goods in the United States and then form 'associations' for exporting them, provided that the associations are registered with the Federal Trade Commission and file annual reports. Under the Webb-Pomerene Act, it is quite lawful for an American cartel to export goods and charge a collusive price for them abroad." More recent legislation creates Export Trade Certificates of Review offering a limited antitrust immunity for firms wishing to develop export joint ventures.52 In order to qualify for a certificate, an applicant must show that its 'export trade' will (i) not substantially lessen competition or restrain trade domestically, nor substantially restrain the export trade of a competitor of the applicant; (ii) not 'unreasonably enhance, stabilise, or depress' domestic prices of goods or services of the class exported; (iii) not constitute unfair competition against competitors of goods or services of the class exported by the applicant; and (iv) not 'include any act that may reasonably be expected to result in the sale for consumption or resale within the United States of the goods, wares, merchandise, or services exported by the applicant'.53 These standards come close to replicating the substantive standards for filed agreements under the Webb-Pomerene Act. The most significant differences are that while that Act applies only to goods, an Export Certificate of Review may also include services and licenses of technology. Further, while only an export 'association' may receive a Webb-Pomerene immunity, any 'person' engaged in export trade and meeting the qualifications may receive a certificate.54 E. 'Macroeconomic' Goals The relationship between United States antitrust policy and macroeconomic policy generally can be viewed in two different ways. One way is to see antitrust 50

40 Stat. 516 (1918), as amended, 15 U.S.C. §§61-65. F o r an empirical analysis of cartels formed under this statute, see A . Dick, When Are Cartels Stable Contracts?, 39 J. L. & Econ. 241, 242 (1996). In addition, t h e Shipping Act of 1984, 46 U S C §§1701-1720, gives a limited immunity for American shipping, including export shipping. 51 See, e.g., United States v. M i n n e s o t a Mining & Mfg. Co., 92 F . Supp. 947,965 ( D . Mass 1950) (export cartel with 8 0 % m a r k e t share). While we are rather tolerant of domestic cartels exporting elsewhere, o u r D e p a r t m e n t of Justice recently w o n a criminal indictment against a J a p a n e s e cartel exporting facsimile paper into the United States. United States v. N i p p o n C o . , 109 F . 3 d 1 (1st Cir. 1997), cert, denied 118 S. Ct. 685(1998). 52 See 15 U . S . C . §4021. 53 15 U . S . C . §4013(a). 54 See H o r i z o n s Intl. v. Baldridge, 811 F . 2 d 154 (3d Cir. 1987) (approving such a certificate).


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policy as adopting a strictly neoclassical view of macroeconomic policy, emphasising that competitive markets are the key to a healthy economy at the macro level, just as they are the key to a healthy microeconomy. The second way is to see antitrust policy as simply ignoring macroeconomic issues, leaving these up to the more political branches of the government or to other statutory regimes. In my view, the second way is the most faithful to United States policy overall. Microeconomic policy in the United States is going through a distinctly neoclassical phase, manifested by a high degree of confidence in the robustness and efficiency of markets, and a correspondingly low degree of confidence in government regulation. Macroeconomics has not come nearly so far down the same path. Our general macroeconomic policy is relatively interventionist along modified Keynesian lines. Thus, numerous government agencies are actively involved in such things as the control of inflation and currency exchange rates, stimulation of employment, wealth transfer (within limits), provision of retirement income, provision of health care and education, and to a lesser extent, stimulation of industry and trade. But in the United States, the antitrust statutes and the tribunals interpreting them generally ignore all these issues. One good example is our merger policy, where the elimination ofjobs is today almost without question regarded as justifying rather than condemning a merger. That is to say, when the proponents of a merger make their case before one of our enforcement agencies, they will almost certainly argue that any anticompetitive consequences are more than offset by efficiencies that the merger produces. One of the most common of the claimed efficiencies is the elimination of jobs that become duplicative or otherwise unnecessary as a result of the merger. To the best of my knowledge, no one in the agencies even considers the impact of this job loss on the unemployment rate or on the futures of those people whose jobs are lost. To be sure, other branches of the government take these things into account, in such things as our policy for offering unemployment compensation. But they are simply irrelevant as far as antitrust is concerned. Nevertheless, there is one important 'background' sense in which macroeconomics is important. One finds in United States antitrust policy today a much stronger realisation that the United States is one of many among the world's trading partners, rather than a domineering master as it virtually was during the first generation following World War II. Further, international trading has become a much more significant and visible part of the United States economy. One important consequence is that antitrust policy is more inclined to see markets in global terms. The result is often larger market definitions and increasing tolerance of practices that might harm United States rivals but make the defendant a stronger competitor vis-a-vis foreign rivals.

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Conclusion United States antitrust law has clearly undergone a revolution in the last twenty years. To be sure, enthusiasts sometimes exaggerate when describing the place from which we have come, as well as the extent to which revolutionary goals have been accomplished. Nevertheless, views that were considered controversial in the 1950s and 1960s have entered the mainstream, and our antitrust laws no longer provide a general recipe for the protection of small business or other inefficient firms. But it is always important to remember that historically, antitrust in the United States has been a highly political area of law, notwithstanding relatively infrequent legislation. Just as surely as the long list of Reagan federal judicial appointments in the 1980s moved United States antitrust policy to the right, the growing list of Clinton appointments is starting a perceptible move to the left.55 Nevertheless, I do not foresee a return to the day when the Justice Department or the Federal Trade Commission brings the kind of overly aggressive cases they brought in the 1960s, in which the threat to neoclassically denned competition was simply not apparent.56 As a result, I also do not foresee the revival of any general concern with small business welfare, protection of traders, or the other 'noneconomic' goals that antitrust has embraced in the past.57 55

However, President C l i n t o n himself is definitely an antitrust moderate a m o n g D e m o c r a t s , a n d shows little inclination t o t u r n back the clock. Further, his highest judicial a p p o i n t m e n t w h o is k n o w l e d g e a b l e a b o u t antitrust, Justice Steven Breyer o n the Supreme C o u r t , has never been a n a n t i t r u s t e n t h u s i a s t and has decided nearly all appellate cases in which he has written t h e o p i n i o n against the plaintiffs. 56 E.g., B r o w n Shoe C o . v. U n i t e d S t a t e s , s u p r a note 3,370 U . S . at 344 (merger challenged because its efficiencies w o u l d injure s m a l l e r and less integrated rivals); United States v. V o n ' s G r o c e r y C o . , 384 U . S . 270 (1966) (enjoining merger on small m a r k e t shares in u n c o n c e n t r a t e d m a r k e t ) ; F . T . C . v. B r o w n Shoe Co., 384 U.S. 316 (1966) (cond e m n i n g exclusive dealing where t h e r e w a s n o realistic possibility of foreclosure or other competitive h a r m ) . 57 R a t h e r , the greater aggressiveness in t h e enforcement agencies seems (to this outside observer) to be expressed as a willingness to test out more adventuresome theories u n d e r which practices m i g h t be t h o u g h t anticompetitive on traditional neoclassical g r o u n d s . O n e e x a m p l e is increased a g e n c y c o n c e r n that mergers in p r o d u c t differentiated or auction m a r k e t s m i g h t p e r m i t u n i l a t e r a l rather than collusive or oligopoly price increases. F o r entre into the large a n d r a p i d l y growing literature, see J. Baker, C o n t e m p o r a r y Empirical M e r g e r A n a l y s i s , 5 Geo. M a s o n L. Rev. (1997), as well as other articles in this s y m p o s i u m ; G . W e r d e n a n d L. Froeb, T h e Effects of Mergers in Differentiated P r o d u c t s Industries: S t r u c t u r a l Merger Policy and the Logit Model, 10 J.L. Econ. & Org. 407 (1994).

V Martin Howe1 Former Deputy Head of Office of Fair Trading London, England

Introduction A main feature of U.K. competition law is that business practices and mergers are subject to case-by-case examination and can be prohibited, or required to be modified, only if found to have effects that operate against the public interest.2 An exception to this general rule applies to resale price maintenance, which is prohibited ab initio. The heads of the component parts of the U.K. competition authority have all expressed their fundamental objective in applying the law as the enhancement of the interests of consumers and of business efficiency through the promotion of competitive markets and conduct.3 This might suggest that the public interest is equated with the economist's concept of social welfare, such that any action that reduces social welfare would be against the public interest. The absence or loss of competition would be expected to reduce social welfare by reducing economic efficiency, whether productive efficiency (the internal efficiency of firms), allocative efficiency or dynamic efficiency. However, this interpretation would be too narrow. Efficiency considerations play an important part in the decisions of the U.K. competition authorities, but the public interest test is broader than the maximisation of social welfare.4 Policy considerations other than efficiency can be taken into account. A careful examination of the implementation of the law would be necessary to establish how the U.K. authorities have interpreted the public interest test. It would also be necessary in order to determine how far they have been able to reconcile the objective of promoting efficiency through the promotion and maintenance of competition, with a wider interpretation of the public interest. This is the purpose of this paper. 1

Any views expressed are personal and not necessarily shared by the Director General of Fair Trading, the writer's employer until his recent retirement. 2 Changes to the competition legislation are likely after the General Election on 1 May 1997. At the time of writing it is not yet known how extensive the changes will be and how they may affect the public interest test that is the subject of this paper. 3 See Trade and Industry Committee of the House of Commons, Enquiry into U.K. Policy on Monopolies: Minutes of Evidence, HC 249-(i) (Jan. 1995). 4 The maximisation of social welfare is, in any event, far from a straightforward policy objective, certainly when the markets to be dealt with are other than the textbook models of perfect competition and monopoly.

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A. Restrictive Agreements We begin with the law on restrictive agreements, the Restrictive Trade Practices Act 1976. Enforcement falls to the Director General of Fair Trading (D.G.F.T.) and the Restrictive Practices Court. The Court has the responsibility to reach a judgment on the public interest. Details of agreements containing restrictions of a kind set out in the Act (relating to prices to be charged, quantities and persons to be supplied, etc., and affecting two or more parties) must be furnished to the Office of Fair Trading (O.F.T.) for registration. If they are not, the restrictions that they contain are void and unenforceable. It is the duty of the D.G.F.T. to refer registrable agreements to the Restrictive Practices Court for adjudication, unless he or she (and then the Secretary of State) is satisfied that the restrictions are too insignificant to warrant examination by the Court. The law presumes that restrictions in agreements referred to the Court are against the public interest. The parties must convince the Court that a restriction brings benefits under one or more of several criteria set out in the Act, known as the gateways. They must also establish that the restriction is not unreasonable, considering the balance between any benefits and any detriments to the public that may also arise from the restriction (conventionally known as the tailpiece). Each restriction in an agreement is considered separately. The gateways (set out in sections 10 and 19 of the Act, for goods and service agreements, respectively) can be summarised as follows: (a) the restriction is designed to protect the public against injury; (b) removal of the restriction would deny the public specific and substantial benefits or advantages; (c) the restriction is needed to counteract measures taken by another business to restrict competition; (d) the restriction is needed so that the parties can negotiate fair terms with a user or a supplier who controls a preponderant part of the business; (e) removal of the restriction would be likely to have a serious and persistent adverse effect on the general level of unemployment in an area or areas in which a substantial proportion of the business is carried on; (f) removal of the restriction would be likely to cause a reduction in export business, when this is substantial in relation to the whole business of the particular trade or industry, or to the export business of the United Kingdom as a whole; (g) the restriction is needed to maintain another restriction found not to be contrary to the public interest;


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(h) the restriction does not directly or indirectly discourage competition to any material degree in any relevant trade or industry, and is not likely to do so. The gateways were established in 1956, when separate legislation on restrictive agreements was introduced.5 They reflect a mixture of policy objectives, some related to competition, others to other policy areas, notably employment and exports. In 1997, they have an incongruous look. The very general gateway— that the restriction brings specific and substantial benefits or advantages to the public—is the gateway most often used by those who have sought to defend their agreement. The gateways were intended to assist the parties and the Court, and to meet the criticism that the issues that come before the Court involve public policy and are not justiciable. To the same end, two lay assessors assist the presiding judge on the more commercial and economic aspects of a case. Almost all of the Court's decisions were made in the 1960s. In most cases where the parties argued that the restrictions in price fixing agreements were beneficial, the Court found them to be against the public interest and struck them down. In 1959, an important judgment was made in Yarn Spinners Agreement, where the Court found that although the price fixing arrangements protected local employment, this benefit was outweighed by the detriments of an inefficient use of resources.6 The Court's early judgments led to wholesale abandonment of the many cartels that had been duly registered as required by the Act. However, the Court found the restrictions in eleven agreements not to be against the public interest. Some of the judgments were bizarre, notably the Black Bolt and Nut Association Agreement, where the benefit was held to be that the price fixing agreement saved users the cost of shopping around.7 Of more economic significance, in Cement Makers' Federation Agreement, the Court accepted that a benefit of the pricefixingagreement was that it lowered the cost of capital by reducing risk, and hence led to a lower price of cement than would otherwise exist.8 The last occasion when the Court found price fixing restrictions not to be against the public interest was in 1965, in Distant Water Vessels Agreement, where the benefit was held to be that modernisation 5

Except gateway (h), which was added in 1968 when certain information agreements were brought within the ambit of those requiring to be registered. 6 [1959] 1 All ER299. 7 [ 1960] 3 All ER 122. This judgment confirmed that the 'public' held to enjoy a 'specific and substantial' benefit under gateway (b) did not have to be the public at large; here it was industrial users of bolts and nuts. 8 [1961] 2 All ER1975.

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of the fishing fleet was facilitated.9 The last agreement of any kind found not contrary to the public interest was the Association of British Travel Agents' Agreement, a reciprocal exclusive dealing agreement between tour operators and travel agents which, in the view of the Court, facilitated the organisation and financing of consumer protection arrangements.10 None of the eleven agreements held to be not against the public interest is any longer in operation. The incursion of competition from overseas suppliers or technological change has been the cause of the demise of most of the pricefixing agreements. The gateways are a mishmash, but they are now largely irrelevant with respect to cartels. The parties to cartel agreements do not furnish their agreements for registration. When such agreements are uncovered, they are referred to the Court. Invariably, the parties choose not to defend them, and the Court simply declares the restrictions to be against the public interest and issues an order (or obtains an undertaking) that restrains the parties from giving effect to the agreement. In practice, therefore, the law operates as a. per se prohibition of cartels. It is a priority of the O.F.T. to uncover secret cartels, but its investigatory powers are woefully inadequate, and there are no penalties for operating an unlawful agreement (except in breach of a Court order and therefore in contempt of court).11 These well-known limitations (well-known probably also to potential colluders) are the major reason that reform of the Restrictive Trade Practices Act is so necessary.12 Another shortcoming of the Restrictive Trade Practices Act is its long list of exemptions, and the powers it creates to exempt certain agreements from the registration requirement. Section 29 of the Act gives the Secretary of State the power to exempt agreements of 'national importance' while Schedule 3, para. 1(2) exempts self-help levy rationalisation schemes certified under the taxation legislation. These provisions open the door to those pushing industrial policy arguments for restrictive agreements. The advice of the O.F.T. will usually be sought on any application for exemption under section 29, but the decision is made by the Secretary of State. 9

[1966] 3 All ER 897. [1984]I.C.R. 12(RPC). 1 ' Persons damaged by an unlawful agreement can sue for damages (for breach of a statutory duty), but such actions are virtually unknown. 12 A White Paper proposing reform was published as long ago as July 1989; a draft Bill was published in August 1996. See Dept. of Trade and Industry, Tackling Cartels and the Abuse of Market Power: A Draft Bill and Explanatory Document (August 1996). Further proposals can be expected after the 1 May 1997 General Election. 10


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The conditions to be satisfied for a section 29 exemption are strict, and the exemption order must be laid before both Houses of Parliament and the agreement must be published (subject to any confidentiality excisions). Only four agreements have been exempted on the ground of national importance, all prior to 1984, and all the exemptions have expired. There has also been little recent use of the exemption for rationalisation schemes. A number of self-help levy schemes in the steel and textiles sectors were certified and exempt (and also approved by the European Commission) in the 1970s and 1980s, but there has only been one since 1983 (in 1992 for rationalisation of capacity in the dairy industry). The Government has introduced additional exemption procedures in recent years to ensure that certain agreements relating to the construction and operation of the Channel Tunnel, the generation, transmission and supply of electricity by the privatised industry, and the supply of gas under the provisions of a petroleum production licence do not get entrapped by the registration requirements of the Act. However, there are no grounds to believe that the apparently benign legislation has allowed industrial policy arguments to dominate objections to anticompetitive restrictions in agreements. There is indeed a view that even necessary or beneficial agreements will be frustrated if they must be submitted for registration. There is nofirmevidence to support this view, but it raises the question of how the O.F.T. deals with those agreements, hundreds each year, that are properly notified. With the vast majority, the D.G.F.T. concludes that the restrictions are too insignificant to warrant reference to the Court, sometimes after problematic restrictions have been modified or removed. The D.G.F.T. therefore may apply for a direction by the Secretary of State under section 21 (2), discharging him from his duty to refer the agreement to the Court. Such applications are invariably granted. In 1996,1,617 agreements were dealt with under this procedure. Decisions under section 21(2) are not published, and the O.F.T. has published little in the way of guidance on its own policy. This lack of transparency has, not surprisingly, been criticised. The O.F.T. maintains that it is not for the D.G.F.T. to reach a public interest judgement on any agreement; that is the function of the Court. The primary task of the O.F.T. is to assess whether the restrictions in an agreement are likely to reduce competition to an extent that would be harmful to the public or have discriminatory or unfair effects. However, 'significant', like 'public interest', is an elusive concept. The O.F.T. is not here dealing with cartels for which there can be no redeeming features, but with other restrictive agreements, the effects of which are invariably ambiguous (though for technical reasons vertical agreements often fall outside the Restrictive Trade Practices Act13). The O.F.T. will 13

This occurs, for example, if only one party to the agreement accepts restrictions.

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investigate the relevant market(s), consult those likely to be affected, and sometimes wait until experience has been gained with the agreement in operation. A degree of balancing of effects is frequently involved. Such benefits as the promotion of research and development may offset some detriments from the restriction of competition. But if the restriction of competition is considered to be significant, then the O.F.T.'s policy is to refer the agreement to the Court, whatever the benefits claimed. Thus, in February 1996, the D.G.F.T. referred two agreements to the Court, which related to the televising of Premier League soccer matches. The League had refused to abandon a rule preventing clubs from selling the rights to televise matches without the permission of the Premier League, enabling the League to negotiate the sale of the rights collectively. The D.G.F.T. considered this restriction too significant for section 21(2) treatment.14 Whatever the commitment of the O.F.T. to the promotion of competition, given the number of cases and the importance of the judgements made in many of them (the great majority of joint venture agreements are dealt with under section 21(2) for example), more transparency is desirable. The Restrictive Trade Practices Act is discredited: it is complex yet easily evaded, its procedures are cumbersome and it is ineffective in dealing with its main target, cartels.15 Moreover, there are more exemptions from the Act than are compatible with a vigorous competition policy. The irony, however, is that parties rarely choose to argue benefits for their agreements, using the wide gateways provided in the Act. Thus, the Restrictive Practices Court is rarely called upon to make a judgment on the public interest or to consider any arguments not based upon economic efficiency. There is little recent case law because most cases are dealt with administratively. However, the O.F.T.'s policy is to require the removal or modification of significantly anticompetitive restrictions, whatever benefits are claimed to result from them.

B. Monopolies and Mergers It is the Monopolies and Mergers Commission (M.M.C.) that must reach a judgement on the public interest with respect to 'monopoly situations' or mergers referred to it for investigation under the Fair Trading Act 1973, and anticompetitive practices referred to it under the Competition Act 1980. In contrast to the Restrictive Practices Court, the M.M.C. is in continuous session. The 14

The case is unlikely to be heard before 1998. This is so notwithstanding that the O.F.T. uncovers, and brings to Court, a steady stream of unlawful cartels. 15


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M.M.C. generally receives four orfivemonopoly references from the D.G.F.T. in a typical year, as well as ten merger references from the Secretary of State for Trade and Industry. References may also be made to the M.M.C. by the sectoral regulators under the separate regimes under which they operate. Competition Act references are rare. The M.M.C. is an independent tribunal, which collects its own facts and decides whether any of the matters investigated operate, or are likely to operate, against the public interest. The legislation offers little guidance on how the 'public interest' is to be interpreted. Section 84 of the Fair Trading Act states: [T]he Commission shall take into account all matters that appear to them in the particular circumstances to be relevant and, among other things, shall have regard to the desirability (a) of maintaining and promoting effective competition between persons supplying goods and services in the United Kingdom; (b) of promoting the interests of consumers, purchasers and other users of goods and services in the United Kingdom in respect of the prices charged for them and in respect of their quality and the variety of goods and services supplied; (c) of promoting competition through the reduction of costs and the development and use of new techniques and new products, and of facilitating the entry of new competitors into existing markets; (d) of maintaining and promoting the balanced distribution of industry and employment in the United Kingdom; and (e) of maintaining and promoting competitive activity in markets outside the United Kingdom on the part of producers of goods, and of suppliers of goods and services, in the United Kingdom.

Obviously, such considerations as the distribution of industry and employment are likely to conflict with the promotion of competition in the interests of consumers and efficiency. The statute does not suggest that any consideration should be given greater weight than any other, even though the reference to the desirability of competition heads the list and was first included in the legislation by the Fair Trading Act. In one case, it was put to the M.M.C, as a matter of construction of the section, that the objective of maintaining and promoting competition was paramount and that the M.M.C. was therefore unable to recommend a reduction of prices if the result would have been to stifle competition by making entry more difficult. The M.M.C. responded that there was nothing in the wording of the section or statute to support such a narrow construction, and indeed that it would conflict with the obligation to consider all matters that

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appeared relevant. It ruled that the relevant considerations 'are merely stated in sequence, without any indication that one of them should have greater weight or priority than any other'.16 Section 84 contains no provision akin to the tailpiece in the Restrictive Trade Practices Act, but it is of the essence of the M.M.C.'s task that it should balance any benefits against detriments in reaching a judgement on the public interest. In many statements over the years, M.M.C. chairmen have emphasised that, while they will first consider the competitive situation and the impact of any practice or merger upon the competitive process, they will also consider other matters concerning which evidence is presented during the course of their investigation. Thus, in response to a Select Committee enquiry, the present Chairman, Sir Graeme Odgers, stated that if a case raised important issues for employment, 'we will take that seriously on board'.17 Moreover, the Chairman likened the M.M.C.'s task in conducting an investigation to that of 'an experienced, high quality' jury, charged with deciding what weight to give each factor in the circumstances of the case, taking into account all relevant matters, including those listed in section 84.18

C. Monopoly References The D.G.F.T. can make a reference19 where 25 per cent or more of the goods or services supplied or acquired in the U.K. is accounted for by one firm (a scale monopoly), or where 25 per cent or more is accounted for by a group of firms which 'so conduct their respective affairs' as to prevent, restrict or distort competition (a complex monopoly). There are no criteria in the Act to guide the D.G.F.T. in using the wide discretion he or she is given by these provisions. The presumption merely is that firms in a monopoly situation may behave in ways that could be against the public interest. Nor has the O.F.T. published more guidance than various explanatory booklets on the legislation. Successive D.G.F.T.s have emphasised in speeches and other statements that they will 16

M.M.C, Tampons, Cm 9705, para 8.10 (1986). In the event, the M.M.C. did not recommend any reduction or control of prices in this case, but they have faced the dilemma that such a recommendation might inhibit competition in other cases. E.g. Classified Directory Advertising Services, Cm 3137 (1996). 17 Trade and Industry Committee of the House of Commons, supra note 3, para. 21. 18 Id., paras. 1.3,9. 19 The Secretary of State also has the power to make monopoly references but has only done so in exceptional circumstances. The sectoral regulators have concurrent powers with the D.G.F.T., but have yet to use them.


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require evidence of market failure from the exercise of market power before they will consider a reference to the M.M.C. In the words of the present D.G.F.T., John Bridgeman: I shall refer cases to the M.M.C. only where it seems clear that a business with market power is using that market power in ways that threaten the competitive process or exploit its customers, that its market power seems likely to persist, and that intervention under the competition legislation would be a proportionate response and likely to lead to an improvement in the situation.20

Wide discretion, however, remains. As an alternative to a reference, the D.G.F.T. may advise the Secretary of State to accept undertakings which, in his view, would deal with the concerns that would otherwise justify a reference. Any such undertakings are legally enforceable, even by third parties. These provisions, introduced in 1994, add to the discretionary powers of the D.G.F.T., but have yet to be used although two high profile cases were settled in 1996 by the D.G.F.T. accepting informal undertakings.21 One objective in setting up the O.F.T. with the D.G.F.T. as a nonMinisterial head was to depoliticise the making of monopoly references.22 This has been successfully achieved. The O.F.T. will consult other government departments, especially the Department of Trade and Industry, before the D.G.F.T. makes a reference, and he or she will take account of any representations that are relevant to his or her own analysis and assessment of the issues. However, the decision whether to make a reference is his or her own. The Secretary of State has the power to veto a reference. While the D.G.F.T.s intention to make a reference may not be welcome to other parts of government, the veto has been exercised only once. This was in February 1994, to stop a Competition Act investigation into bus services on the Isle of Arran, on the ground that the market involved was too small. This incident has encouraged the O.F.T. to pay greater attention to the likely costs of an investigation, and

20

Speech presented at European Study Conference on United K i n g d o m Competition Law (6 Feb. 1996). 21 These cases involved Milk M a r q u e a n d BSkyB. T h e D . G . F . T . preferred t h e greater flexibility of this approach. It is less transparent than the statutory procedure that involves a formal consultation process. 22 F o r a fascinating insight into how political the process was in earlier times, see Helen Mercer, Constructing a Competitive Order: T h e Hidden History of British Antitrust Policies (1995).

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to initiate research into more systematic ways of relating the costs of investigations to their potential benefits. In the period 1990-1996, the D.G.F.T. made thirty-eight monopoly references.23 They cover a variety of markets and market structures, including loose oligopolies and even more fragmented markets under the complex monopoly provision.24 Many forms of anticompetitive or exploitative conduct have been the cause of the D.G.F.T.s concern. Given the legislative provisions, there can be argument whether there is indeed market power in a particular monopoly situation, and whether it is used against the public interest. There can also be argument that there are efficiency or other possible justifications for apparently anticompetitive conduct, e.g. with respect to vertical restraints. The issues can be clouded by arguments about fairness, e.g. when putative retailers are refused supplies, when a supplier will not license intellectual property rights or when retailers complain that their larger competitors are able to negotiate more favourable buying prices. However, the D.G.F.T. need not be convinced that market failure results from the misuse of market power; it is sufficient that he or she has reasonable grounds for believing that an investigation by the M.M.C. is justified. It is then for the M.M.C. to investigate the matter and reach its own conclusions. In fact, in eleven of the twenty-seven monopoly references made by the D.G.F.T. in 1990-1996 where the report has been published, the M.M.C. found nothing against the public interest. The analysis in some of these reports has been criticised.25 The M.M.C. has, however, a good reputation for thoroughness, fairness and independence. It has no influence with respect to which cases will be referred to it. The issues to be addressed are invariably complex, involving judgements on which opinions can genuinely differ, especially when the enquiry concerns vertical restraints. Despite the breadth of the public interest test, issues unrelated to competition and efficiency have rarely been prominent in its judgements on monopoly references. Suggestions that the M.M.C. had begun to neglect the interests of consumers seem unfounded. For instance, the M.M.C. report on recorded music 23

This includes 8 separate references of domestic electrical goods (in 1995 a n d ongoing) which focus u p o n selective distribution a n d the use of recommended retail prices. 24 T h e M . M . C . identified more than one h u n d r e d mortgage lenders as complex monopolies by virtue of the restrictions they imposed on who might carry out valuations for t h e m a n d on the fees to b e paid (by borrowers) for such valuations: Residential M o r t g a g e Valuations, C m 2542 (1994). 25 A s a sample, see, S. Locke, A N e w A p p r o a c h t o Competition Policy, Consumer Policy Review (1994); National Consumer Council, Competition a n d Consumers: Policy a n d Practice in the United K i n g d o m (1995).


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was criticised for its readiness to accept the industry's arguments for using copyright to restrict parallel imports of compact discs and other recordings. However, in its subsequent report on video games, the M.M.C. rejected the arguments of the duopolists, Nintendo and Sega, that a restrictive licensing policy was necessary to maintain the quality of video games software, and concluded that the restrictions contributed to software prices which the M.M.C. regarded as excessive.26 The M.M.C. considers each case on its merits. The M.M.C.'s investigations on monopoly references have focused on the level of prices and profitability of monopolists. 'Excessive' prices or profits have been the reason for an adverse public interestfindingin a significant number of cases, often coupled with the recommendation that prices, or future price increases, be controlled. The most recent example is classified telephone directories, where the M.M.C. considered that the prices of Yellow Pages, a division of B.T. pic, were higher than they would be were there effective competition (Yellow Pages had 84 per cent of the market in 1994). It concluded that charges for advertising in these directories should not increase in any year by more than the percentage increase in the Retail Price Index, minus 2 per cent.27 Persistent 'excessive' profits point to the existence of market power protected by entry barriers. If the M.M.C. believes that effective competition is unlikely to be generated in the foreseeable future, it must decide whether the level of prices is against the public interest. On strict efficiency grounds, any redistribution of benefit from consumers to producers (shareholders) which results from the exploitation of market power can be disregarded. The 'excessive' profit may, nevertheless, indicate a deadweight loss from the absence of competition. The M.M.C.'s willingness to condemn levels of prices as too high to be in the public interest (notwithstanding any qualms about the efficacy of price control) is hardly consistent with a criticism that the M.M.C. is inclined to give too much weight to producers' interests. The M.M.C. is, nonetheless, aware of the dynamic dimension of efficiency. It endeavours to place its assessment into a dynamic context. In a number of cases, it has accepted that high levels of profit have been the reward for productive efficiency and innovation, or will provide the incentive for future efficiency and innovation, whether by the firm under investigation or competitors.28 26 See M . M . C , Recorded Music, C m 2599 (June 1994); Video G a m e s , C m 2781 (Mar. 1995). 27 M . M . C , Classified Directory Advertising Services, supra note 17. Undertakings to this effect a n d on other remedies requested by the Secretary of State were given by B.T. on 23 July 1996, a n d the price control has operated from 1 Sept. 1996. 28 See, e.g., M.M.C, Soluble Coffee, Cm 1450 (1991).

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A criticism that is difficult to refute is the unpredictability of policy. It is unclear whether a reference will be made to the M.M.C. on a given set of facts, or whether an undertaking will be sought in lieu of a reference. If a reference is made, it is unclear whether the M.M.C. will share the concerns of the D.G.F.T. and, if so, what conclusions it will reach and recommendations it will make. Given the issues, no competition policy can be entirely predictable outside the realm of per se prohibitions, but the breadth and ambiguity of the public interest test compounds the inherent uncertainties.

D. Merger References The Secretary of State has the sole power to refer mergers to the M.M.C. Mergers, which are broadly defined in the legislation, qualify for reference if they result in, or enhance, a scale monopoly situation (i.e. 25 per cent or more of the goods or services supplied or acquired) in the U.K. or a substantial part of it, or if the worldwide gross assets acquired are £70 million or more.29 The O.F.T. scrutinises all mergers that appear to qualify for reference. There is no mandatory pre-notification system. The D.G.F.T. advises the Secretary of State whether a reference is justified and, if it is, whether as an alternative to reference he or she should accept undertakings from the parties to divest assets or as to their future conduct. From 1973, when the post of D.G.F.T. was established, until the end of 1996, the D.G.F.T.'s advice was rejected on twenty-two occasions. In sixteen of these cases, the advice was to refer the case. From the introduction of the provision in 1990 until the end of 1996, seventeen cases have been dealt with by the acceptance of undertakings in lieu of a reference.30 As with monopolies, there are only broad statements of reference policy with respect to mergers. For many years, declared Government policy has been that in all but exceptional circumstances, it is the effect of a merger on competition within the U.K., taking the international dimension of competition into account, that determines whether it is referred.31 'Exceptional circumstances' have been found in some cases. In the mid1980s, there were concerns about the highly leveraged financing of some bids. Three were referred to the M.M.C, but the M.M.C. issued a report in only one 29 In a d d i t i o n , t h e m e r g e r does n o t fall within the exclusive jurisdiction of the E u r o p e a n C o m m i s s i o n u n d e r the E u r o p e a n Merger Regulation. 30 Until 1994, it w a s necessary that undertakings provide for the divestiture of assets. 31 This is t h e so-called Tebbit doctrine, which refers to a statement by the then Secretary of S t a t e o n 5 J u l y 1984, following an internal review of merger policy. T h e doctrine has been reaffirmed by Ministers on several subsequent occasions.


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of the three.32 In its report on the Elders/Allied Lyons merger, the M.M.C. accepted that public interest issues could arise if the financing arrangements were such as to weaken Allied Lyons' competitive position in the various drinks and food markets in which it was engaged. It concluded, however, that no such risk was present. The M.M.C. stated that matters dealing with the financing of bids should be handled by the Bank of England and the Stock Exchange, rather than the competition authorities.33 In 1988 the acquisition by the Investment Office of the Government of Kuwait of a sizeable shareholding in British Petroleum was referred and found against the public interest, essentially on strategic grounds.34 The most celebrated exceptions to the prevailing policy, however, followed the announcement in July 1990 by the then Secretary of State, Peter Lilley, that he would give 'close attention' to the degree of state control of any acquiring company to avoid the risk of'nationalisation by the back door'. Five references were made where state control was the main or only issue, three of which were against the advice of the D.G.F.T. because he saw no competition issues. The M.M.C. found only one of the five to be against the public interest: the acquisition by Kemira Oy of the fertiliser interests of ICI, where the M.M.C. saw serious effects on competition in an already concentrated market.35 While the M.M.C. acknowledged in its reports that state control might be a matter for it to consider in reaching a public interest judgement, it firmly rejected the Department of Trade and Industry's proposition that state control should be presumed to be against the public interest. Following a complaint to the European Commission, the Secretary of State acknowledged that he would not regard state control per se as a reason for a reference.36 The issue has not been raised in any subsequent references. Employment considerations have influenced some decisions, such as not to refer a merger where one of the parties appears to have been in financial difficulties. However, pressure from some quarters, such as the trade union movement, to give greater weight to the effects that a merger has on employment has been resisted. Established policy is that the decision to refer should turn on the effects of a merger on competition. However, there are no published guidelines on how the authorities should assess those effects. This enables commentators not only 32

References can be laid aside if the merger is irrevocably a b a n d o n e d . M . M . C . , Elders/Allied Lyons, C m 9892 (Sept. 1986). 34 M.M.C, Government of Kuwait/British Petroleum, Cm 477 (Oct. 1988). 35 M.M.C, Kemira Oy/ICI, Cm 1406 (Jan. 1991). 36 Speech t o L a w Society a n d B a r Association G r o u p (12 J u n e 1991); see also E u r o p e a n C o m m i s s i o n , Press Notice 31 (Oct. 1991). 33

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to question whether the competition issues are significant enough in a particular case to justify a reference, but also whether the true concern of the authorities was a policy consideration other than competition. In general, only sparse explanations are provided of why a merger is referred, and reasons are provided when a merger is not referred only exceptionally. Yet not every merger that raises competition concerns is referred. Among the reasons may be that the market is small. The government has taken a number of steps in recent years to reduce the 'burdens on industry' as part of its policy on deregulation. Another reason may be the financial difficulties of parties to the merger. About five per cent of mergers that qualify for reference have been referred in recent years, fifty-one in the period 1990-1996. In six further cases, the D.G.F.T.'s recommendation of a reference was not followed. There have been references of mergers that would create a more oligopolistic market structure, as well as mergers that would strengthen a dominant position, and there have been occasional references of a vertical merger. As with monopoly references, the M.M.C. has found that the merger referred to it would not be against the public interest in a significant proportion of the cases. Invariably, the reason for such a conclusion is that effective competition (or potential competition) would continue after the merger. Where the M.M.C. has concluded that a merger would significantly reduce competition to the detriment of consumers, it has rarely found any offsetting benefit to the public interest. Indeed, it rarely expressed its conclusions in terms of an explicit trade-off. Efficiency gains have been held to offset a reduction in competition in the domestic market in some cases. However, the M.M.C. has generally been sceptical about the size of the claimed efficiency improvements, the extent to which the improvements are dependent upon the merger, and the extent to which benefits are likely to be shared with consumers. Where the efficiency argument has been couched in terms of the enhancement of international competitiveness, the M.M.C. has rarely been persuaded that benefits from an increase in scale or widening of skills and experience would outweigh the detriments if competition was significantly reduced in the home market.37 This could only happen if the domestic market was insulated in some way from the wider international market. While the 'national champion' argument may sometimes have led to a decision not to refer a merger to the M.M.C, it has carried less weight in recent years than might be supposed under the public interest test. Wider benefits to 37

Two examples, however, are M.M.C, British Airways/British Caledonian, Cm 247 (Nov. 1987) and Alcatel Cable/S.T.C, Cm 2477 (Feb. 1994). A striking example of the M.M.C.'s rejection of the international competitiveness argument is G.E.C./Plessey, Cm 9867 (Aug. 1986).


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the public interest have usually been treated as incidental to the main conclusion on competition. One exception was the Prosper de MulderlCroda merger, which increased Prosper de Mulder's already dominant position in the animal waste sector, but was held not to be against the public interest in view of the efficiency improvements and the benefits to public health and the environment that it promised.38 This was so despite a report on an earlier monopoly reference, in which the M.M.C. had found a number of Prosper de Mulder's trading practices to be against the public interest.39 From 1976 until the end of 1996, the M.M.C. concluded that a merger would be against the public interest for reasons not to do with competition in only seven cases, six of which were decided before 1984.40

E. Implementation of M.M.C. Reports The M.M.C. reports and makes recommendations to the Secretary of State. The Secretary of State has broad powers to issue orders under the Fair Trading Act, with which to remedy any adverse effects on the public interest, though voluntary (but still legally enforceable) undertakings are generally sought from the parties in thefirstinstance. The D.G.F.T. will advise on the action he or she believes should be taken. Occasionally the Department of Trade and Industry has conducted a consultation exercise on a report on a monopoly reference, but usually the Secretary of State announces his or her own conclusions at the time of publication of the report. There can be no appeal against the Secretary of State's decision, although the process by which it was reached can be subject to judicial scrutiny (as can the M.M.C.'s findings) under the provisions of administrative law relating to judicial review. There have been few cases over the years where the Secretary of State has failed to take any action when the M.M.C. had concluded that a monopoly situation or merger operates against the public interest. In some cases, remedies have remained unimplemented for long periods, when undertakings could not be negotiated by the O.F.T. and doubts existed over the use of powers to issue orders. This occurred, for instance, with respect to video games where the licensing policies that the M.M.C. wished to see changed were determined by parent companies in Japan. The Secretary of State was unwilling to issue an 38 39 40

M . M . C , Prosper de Mulder/Croda, Cm 6111 (1991). M . M . C , Animal Waste, Cm 9470 (Apr. 1985). The remaining case was Government of Kuwait/British Petroleum, supra note 35.

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order to implement certain recommendations in the reports on beer and motor cars, which arguably clashed with decisions or block exemptions of the European Commission. Specifically, these were recommendations to prohibit tied loans in beer and to relax certain restrictions on dealers in the selective and exclusive distribution systems for motor cars.41 A recent example where the Secretary of State did not accept the M.M.C.'s findings in a merger case concerned a report published in May 1995. The report stated that a merger of G.E.C. and V.S.E.L. would be against the public interest, because it would result in a loss of competition in the building of warships. However, the M.M.C. concluded in a separate report that a merger of British Aerospace and V.S.E.L., which had also been referred even though no competition issues were present, would not be against the public interest. The Secretary of State chose to clear the G.E.C./V.S.E.L. merger, on the ground that he was persuaded by a dissenting minority view that the merger was unlikely to have detrimental effects, since the Ministry of Defence was a monopsony purchaser and the merger could facilitate desirable rationalisation.42 Defence considerations no doubt loomed large in the decision.43 It is more common for the Secretary of State to reject the M.M.C.'s recommendations for dealing with the adverse effects on the public interest. Some of the recommendations have been diluted. For instance, the M.M.C. recommended that British Gas should divest its gas trading business in view of the market power it enjoyed from the combination of that and the natural monopoly storage and transmission business.44 The Secretary of State, however, was content with accounting separation of the businesses and arm's length dealing between them.45 In contrast, in other cases, the Secretary of State has opted for a more radical remedy than the M.M.C. had recommended. One example is newspaper 41

M . M . C , Beer, C m 651 (Mar. 1989), a n d N e w M o t o r Cars, C m 1808 (Feb. 1992). M . M . C , British Aerospace/V.S.E.L., C m 2851 (May 1995), and G.RC./V.S.KL., C m 2852 ( M a y 1995). D e p t . of T r a d e a n d Industry Press Notice (23 M a y 1995). 43 Both mergers fell within the E.U. Merger Regulation but the military aspects were b r o u g h t back into U . K . jurisdiction p u r s u a n t to Art. 223 of the Treaty of R o m e . 44 M . M . C , Gas, V o l . 1 , Cm. 2315 (Aug. 1993). This was an unusual reference. Following references by the Director of G a s Supplies under his regulatory powers u n d e r the G a s Act 1986 when British G a s would n o t agree to his price control proposals, the Secretary of State, at British Gas' request, m a d e two Fair Trading Act m o n o p o l y references so t h a t the gas regulator's concerns could be investigated by the M . M . C . in a wider context. 45 As it h a p p e n s , as competition in the supply of gas has intensified since 1993, British G a s has carried t h r o u g h a more substantial restructuring t h a n the M . M . C . h a d proposed for its own commercial reasons. 42


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distribution, where the Minister required an undertaking from wholesalers that they would no longer refuse supplies to retailers on the ground that an area is already adequately covered. The M.M.C., having found the selective distribution system against the public interest because it inhibited efficiency and innovation, had recommended only that one retailer should be free to sell to another.46 Another example is the prohibition by the Secretary of State of two vertical mergers in the electricity industry. In those cases, the M.M.C. had concluded that the adverse effects on the public interest could be met simply by a limited divestment and some tightening of the regulatory arrangements in the industry.47 There is little point in adding to the catalogue of examples. If the M.M.C. has identified adverse effects to the public interest, the legislation gives the Secretary of State the ultimate power to decide what, if anything, should be done. The Secretary of State has no power to act, however, if the M.M.C. has not made an adverse finding; the Secretary of State must carry out his or her own functions with due diligence, and cannot simply rubber stamp the findings and recommendations of the M.M.C. It would be difficult to argue that the Secretary of State's decisions over the years have led to a serious watering down of the M.M.C.'s conclusions. However, it would be surprising if policy considerations other than the promotion of competition, even political interests, did not influence the decision in some cases. Moreover, the possibility that the Secretary of State may ultimately reach conclusions different from those of the M.M.C. adds a further degree of unpredictability to the U.K. system.

Conclusion The broad public interest test that runs through most U.K. competition legislation allows non-efficiency considerations to determine the outcome in cases concerning restrictive agreements, monopolies and mergers. Over the years, there have certainly been cases where policy considerations, broader than the promotion of efficiency through the encouragement of competition, have carried weight, most notably in merger cases. These have, however, been less frequent of late. Moreover, the conflict between the public interest and efficiency 46

M . M . C , Newspapers, C m 2422 (Dec. 1993). M . M . C , National Power/Southern Electric, C m 3230 (Apr. 1996), a n d PowerGen/ Midlands Electricity, C m 3231 (Apr. 1996); Dept. of T r a d e a n d I n d u s t r y Press Notice (24 Apr. 1996). 47

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is less than might be imagined. This is because the promotion of efficiency constitutes a large part of the public interest, even if the public interest is not wholly coincident with the economist's concept of social welfare. In addition, in the U.K., as elsewhere, it has become increasingly recognised that other policy objectives are better met by instruments other than competition policy. This is well illustrated by the limited attention now given to regional considerations in merger cases. Thus, the ambiguity of the public interest test is, in practice, less than often supposed or suggested by the legislation. Nonetheless, the breadth of the test and of the discretion of the authorities as to the cases they will bring for a reasoned and published public interest judgement reduces the predictability of the system. After the May 1997 General Election, there is a serious prospect of reform of the competition law. A prohibition of anticompetitive agreements, with provision for exemptions along the lines of Art. 85 of the Treaty of Rome, is likely to replace the Restrictive Trade Practices Act. The present law, however, operates in effect as a per se prohibition of cartels. Modifications would enhance the investigatory powers with which O.F.T. can detect secret cartels, and would empower authorities to impose financial penalties on cartel participants. It is less certain that a law prohibiting conduct amounting to the abuse of a dominant position along the lines of Art. 86 will be introduced. The flexibility of the monopoly provisions of the Fair Trading Act is attractive to the authorities. Cases have been referred to the M.M.C. that could not have been brought under Art. 86. However, a prohibition would be a stronger deterrent to anticompetitive or exploitative conduct than the present system. It would also focus the authorities' analysis and assessment more sharply on market power and its effects. A similar result could be expected if merger cases were to be judged explicitly on their effects on competition and efficiency, rather than on the public interest, as interpreted in the individual case. There would also be less justification for the decisions in merger cases to be taken at the political level. In the last analysis, Ministers, accountable to Parliament, must determine what is in the public interest. However, there appear to be no plans to make any fundamental changes to this part of the U.K. competition law and policy.

Postscript As foreshadowed in the paper, the new Government that took office in May 1997 has made major changes to U.K. competition law. The Competition Act


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1998 repeals the Restrictive Trade Practices Act and introduces a prohibition of anticompetitive agreements, with a possibility of exemption, in the same terms as Art. 85. It also prohibits conduct amounting to the abuse of a dominant position in the same terms as Art. 86. However, the power to make monopoly references under the Fair Trading Act is retained, mainly in order to retain the facility for wide ranging investigations of possible market failure and the power to impose structural remedies. There are no changes to the system of merger control. In these parts of the law, the test remains the effect on the public interest. Enforcement of the new prohibitions lies primarily with the Director General of Fair Trading whose investigatory powers are strengthened accordingly. In their sectors, the utility regulators have concurrent jurisdiction with the Director General. There is a right of appeal to tribunals of a newly constituted Competition Commission and on points of law to the Court of Appeal. The new Commission replaces the Monopolies and Mergers Commission and takes over all its functions that are not changed by the new law, including the conduct of monopoly and merger references. The system is therefore a hybrid one as regards both the substantive test that is to be applied before the authorities can take any action to remedy market failure, and the institutional machinery by which the law is to be enforced.

VI Abbott B. (Tad) Lipsky, Jr. Senior Competition Counsel The Coca-Cola Company Atlanta, Georgia, U.S.A.

The debate about non-competition or 'other' social objectives and purposes within the framework of competition rules frequently concerns the influence (actual or ideal) of the former over the latter. Can the intensity of competition within a national market be sacrificed for export promotion, or to promote research and development? Can competition be curbed simply because it threatens small businesses? Sometimes these questions take the form of a debate about the real meaning of competition. In the examples presented in this paper, one could pose the questions not as conflicts between competition and non-competition objectives (export promotion, R.&D., small business preservation), but as conflicts between competition in domestic and export markets, or between static and dynamic forms or conceptions of competition. In a leading U.S. Supreme Court decision, National Society of Professional Engineers v. United States,' a trade association of engineers defended its rules limiting price competition on the basis that such competition would lead to the design and construction of unsafe buildings. The defence was rejected in sweeping language to the effect that consideration of such non-competition objectives is not permitted under the Sherman Act. Few dispute the result, but the sweep of this rationale has been rightly criticised as implying that collective action to protect human life might be prohibited under antitrust law. Another view is that the Professional Engineers result was justified because the factual and logical bases for the defendant's position were so weak. More recently, in Allied Tube & Conduit Corp. v. Indian Head, Inc.,2 the Supreme Court affirmed the illegality of an industry construction standard, while essentially assuming the validity of its human-safety rationale. Thus, the literal interpretation of Professional Engineers retains vitality. One difficulty with conflicts between maintaining competition and protecting human health and safety is their clarity. How can courts and enforcement agencies justify horizontal price-fixing agreements under an antitrust standard, as they were asked to do in Professional Engineers, except as an implied antitrust exemption? And how can such exemptions be created, except on the 1 2

435 U.S. 679(1978). 486 U.S. 492(1988).

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basis of a sweeping power to ignore or blue-pencil valid laws enacted by the legislature? Enforcement agencies could always forebear from attacking specific conduct based on prosecutorial discretion and the related power to pardon, which is one of the few absolute powers vested in the President. For the courts to claim such a power, however, would clearly threaten the bedrock American principle that courts are law-applying rather than law-making institutions. Refusal to consider non-competition objectives as justifications for competitive restraints is a reflection not of alleged Chicago School narrowness, but of the fundamental nature of the legislature's law-making authority within a constitutional system relying on separation of powers. Arguably, the same principle is reflected in United States v. Philadelphia National Bank,3 which held that implied antitrust exemptions are heavily disfavoured, arising only in cases of 'plain repugnancy' between the antitrust laws and a supervening Congressional enactment. Where, for example, a regulatory agency has plenary authority to approve price cartels in a specific industry under defined circumstances, antitrust challenges to the regulated prices are largely preempted—the so-called 'filed rate' doctrine, recently reaffirmed in Square D Co. v. Niagara Frontier Tariff Bureau.4 By contrast, where the anticompetitive government action is explicit—or where the restraint arises from action authorised by individual states—it is 'open season' on competition and antitrust rules. Explicitly anticompetitive lawmaking by the states simply cannot be attacked under U.S. antitrust rules, and the constitutional basis for challenge is exceedingly narrow. The interesting debate, therefore, is how, in the absence of authoritative legislative prescription, courts and prosecutors define 'competition'. The foundation for this debate was cast, for purposes of U.S. federal antitrust law, in Standard Oil Co. v. United States,5 which adopted the 'rule of reason.' Important but vague refinements were placed on the rule in Chicago Board of Trade v. United States.6 The issue under discussion is not to be confused with the recent cases analysing when the per se rule applies, as exemplified by National Collegiate Athletic Association v. Board of Regents7 and related issues surrounding the existence and applicability of a 'truncated rule of reason'. The real question from our present perspective is how one defines 'competition' in a case explicitly relying on a full rule-of-reason analysis. Attacks under the 3 4 5 6 7

374 U.S. 321(1963). 476 U.S. 409(1986). 221 U.S. 1(1911). 246 U.S. 231(1918). 468 U.S. 85 (1984).


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rule-of-reason almost never prevail {NCAA v. Board of Regents was a notable exception). From the plaintiff's perspective, this may be due to the complexity of antitrust economics and the attendant difficulties of proving anticompetitive effects in specific cases. From the defence perspective, few business practices can actually be proven to harm competition when the per se rule and other evidentiary short cuts are abandoned and proof is actually demanded at trial. Broadcast Music, Inc. v. Columbia Broadcasting System? held that even a horizontal price-fixing agreement may be defended where essential to create or preserve competition in light of unique but nevertheless demonstrable objective market characteristics. The case illustrates the willingness of the U.S. courts to broaden their view of 'competition' where essential to adhere to basic competition-law objectives. Continental T.V., Inc. v. GTE Sylvania Inc.9 is another example, in which the Supreme Court recognised that intrabrand competition is not entitled to legal protection in a system of competition rules based on economic rationality. These observations suggest that the debate about competition law purposes, to the extent that it may be considered within the antitrust enforcement framework, is really a debate about the nature of competition and the best way to promote long-run economic progress. This debate has been clarified—and for that reason largely resolved, with notable exceptions (secondary-line Robinson-Patman cases)—in U.S. antitrust law because of the recent judicial commitment to transparency and economic rationality in the formulation and application of competition rules. As the result of trends culminating in a series of Supreme Court decisions beginning with GTE Sylvania in 1977 and lasting at least through the decisions in Brooke Group v. Brown & Williamson Tobacco Co.10 and Spectrum Sports v. McQuillan,11 U.S. antitrust decisions have been required to use rules based on the goal of maximising long-run social wealth and consumer welfare. These furnish consistent prescriptions in almost all realworld circumstances. The cases discussed to this point deal only with restrictive agreements. I have alluded to the rules on structural-change transactions, but the comment is equally applicable to U.S. antitrust rules governing single-firm conduct. Brooke Group and Spectrum Sports illustrate the principle in the contexts of oligopoly and single-firm conduct, respectively. The comments that follow form a related and somewhat speculative digression. The current remarkable performance of the U.S. economy, especially in 8

441 U.S. 1 (1979). 443 U.S. 36(1977). 10 509 U.S. 209 (1993). " 506 U.S. 447 (1993). 9

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comparison with economic performance in jurisdictions that have not followed the same approach to competition rules, would suggest the great success of the U.S. trend, if one could be convinced of the causal connection between the two. United States v. Von's Grocery Co.12 and United States v. Pabst Brewing Co.13 (establishing a strong, if not conclusive, presumption that horizontal acquisitions are illegal) were decided in 1966; United States v. Arnold, Schwinn & Co.14 (adopting a per se rule against all vertical restraints) was decided in 1967; and the complaint in United States v. IBM Corp.15 was filed in January 1969. 1968 was the year of the unmistakable downward 'kink' in the growth path of U.S. productivity. This 'kink' was at least partially reversed during the two sustained and remarkably strong U.S. economic upturns experienced since the first Reagan Administration. I would be hesitant to suggest any causal relationship between the two if I had not heard it suggested by F. M. Scherer, an eminent American antitrust scholar who is never identified with the Reagansponsored adoption of economically rational antitrust enforcement policy and judicial interpretation of antitrust. Perhaps Scherer was speaking in jest. In any event, the causal connections in such a profound, complex and far-ranging relationship (that is, the relationship between competition rules and economic productivity) are unlikely to be clarified, much less proven. Returning to the main argument and broadening the focus to examine the legal system at large, the U.S. system of competition rules is concerned primarily with long-run social wealth maximisation and consumer welfare. However, our lawmaking and political processes are constantly acting as if competition is the last item on the list of public desiderata. Laws and regulations protect whole industries from entry, certify and enforce cartel agreements, fix the prices, terms and conditions of many transactions, exclude capacity and limit output, guarantee high prices, stabilise market shares, or bestow competitive advantages based on criteria unrelated to competitive merit. Indeed, government attempts to bestow competitive advantage are often, if not characteristically, attempts to compensate for competitive deficiencies. Whether these deficiencies are perceived or genuine is usually debatable, and it may be the case that every one of these interventions is a step backward for society. The point is that it is not considered at all out-of-bounds to seek anticompetitive government action—and why should it be, in the arena of competition law? 12 13 14 15

384 U.S. 270(1966). 384 U.S. 546(1966). 388 U.S. 365 (1967). 687 F. 2d 591 (1982).


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The hypothesis suggested is that the debate about non-competition purposes in competition law is, in some respects, a misnomer, because the debate is concealed by the use of language tailored to the demands of advocacy. Within the political sphere, we have very powerful guarantees of the right to seek protection from competition. There are few rights that are as heavily protected in the U.S. as the right to influence laws, regulations and official conduct through the lawmaking process and through the political and electoral processes that select the lawmakers. These form an eclectic and opaque system, which often rewards the invocation of goals and methods inconsistent with competition or its basic objectives. The competition law enforcement process is a part of this much broader political process, but it is not and cannot be receptive to arguments that are explicitly inconsistent with the basic notion of competition. There are few, if any, competition decisions finding or even suggesting the possibility that while preservation of the competitive process and long run maximisation of social wealth and consumer welfare would suggest one rule for business conduct, a different rule is nevertheless appropriate. This comment is not limited to the United States. Arguments that can be harmonised with the methods and objectives of competition law will be harmonised to the extent possible when offered to enforcement agencies and courts rendering decisions under the competition rules. Arguments that cannot be so harmonised will be addressed to legislators or politicians. Professional Engineers and Allied Tube and Conduit are probably the inevitable result when such arguments are presented squarely to courts and competition authorities. A comparison between non-competition purposes and the 'quark' provides a facile metaphor for the essential point of this paper. Quarks are subatomic particles thought to be the primary building blocks of ordinary matter, yet for various reasons they are never observed. Non-competition purposes seem to be the main business of our legal and political systems, and they may often underlie fundamental questions that arise in formulating and applying competition rules. All goals and objectives reflected in the laws and rules created by a democratic legal system must ultimately be tested in some long-run sense by their ability to serve common human and social objectives. Debates about the content of competition rules can be viewed as debates about non-competition purposes, but they will inevitably be disguised by the demands of advocacy within the competition-law enforcement system. For this and other reasons, the debate about non-competition purposes is unlikely to be settled within a competition-law framework. These observations suggest a reformulation of the debate about noncompetition purposes within the competition-law framework. Suppose that

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competition rules are based explicitly on preservation of the competitive process, defined as that set of rules and enforcement practices that seems most likely to produce business conduct that will maximise long-run social wealth and consumer welfare. Where the rules applied to business conduct are so formulated, those who seek to attain different objectives will be compelled to clarify the circumstances in which social productivity and consumer welfare are to be sacrificed for those other objectives. It is objectionable for a judge to sacrifice society's wealth and consumer welfare to subsidise one specific group at the expense of another. There is no statutory authority to do so under U.S. antitrust law, and the grant of such authority would be inconsistent with basic U.S. conceptions of the judicial role. If society's wealth is to be reduced for the sake of some asserted social purpose, let that purpose be declared explicitly and let the sacrifices, judgements and tradeoffs involved be rendered visible through a transparent process. Objectives in tension or conflict with the rules and institutions of competition law are best pursued through distinct rules and institutions.

7 PANEL DISCUSSION FUTURE COMPETITION LAW

GENERAL RAPPORTEUR:

Richard Whish, Professor, King's College London, London, England

PARTICIPANTS:

Jonathan Faull, Director, Directorate A, Directorate General IV, European Commission, Brussels, Belgium Christian Kirchner, Professor, Humboldt Universitat zu Berlin, Berlin, Germany Valentine Korah, Professor Emeritus, University College London, London, England Mario Siragusa, Professor; Partner, Cleary Gottlieb Steen & Hamilton, Brussels, Belgium James Venit, Partner, Wilmer Culter & Pickering, Brussels, Belgium Michel Waelbroeck, Professor; Partner, Liedekerke Wolters Waelbroeck & Kirkpatrick, Brussels, Belgium

• PROF. WHISH—Thisfinalsession is entitled 'Future Competition Law'. Our terms of reference require that we consider what changes are needed in order more effectively to realise the legitimate and desirable policy objectives of competition policy. The question is of particular importance for the E.U. I shall explain the questions that I put to the panelists, and the reason for asking those questions. I will also attempt to identify some of the themes that appear in the papers of the panelists. The questions are based on the assumption that change is needed. Should we apologise for focusing on E.U. law in this session? Is this rather parochial, given that people are here from Canada, Poland, Mexico and the United States? I believe it is justified to focus on the E.U., partly because there is a crisis in the current enforcement of Arts. 85 and 86. For instance, the debate about what is meant by restriction of competition under Art. 85 has been with us for 30 years, but I do not believe we are any closer to an acceptable solution to this central conundrum of competition law. Moreover, we are in the midst of the consultation procedure on the Green Paper on Vertical Restraints. There has been considerable disappointment with the Green Paper, which sets out four options for reform, but is missing option five—that is, the fundamental reform that is needed in order to redirect competition law in the right direction in the Union. Another reason for focusing on the E.U. is that many nations are affected by how Art. 85 is interpreted. Many of the fifteen E.U. Member States are adopting Arts. 85 and 86 as their national law. Moreover, the countries that were covered by the E.E.A. agreement, the countries of Central and Eastern Europe, and countries elsewhere in the continent which are hoping to join the Union, or which are parties to association agreements, have modelled their law on the principles of the Treaty. The European competition rules have also been exported well beyond Europe. Many other jurisdictions in the world follow principles that are highly reflective of what has been done within Europe over the last 30 to 40 years. In the end, the debate here today will probably focus on what is meant by the term 'restriction of competition'. That fundamental question is relevant to anyone who has a competition law system. The questions that were put to the participants in this session are the following. First, is a Treaty amendment needed? The debate about Art. 85(1) and 85(3) has continued for decades. We seem unable to resolve the central questions raised in that debate, which is why I asked whether Treaty amendment is needed. The Commission's Green Paper states at the outset that Treaty amendment is not on the table in that process, which is understandable. Nonetheless, as part of the intellectual debate as to the meaning of Arts. 85 and 86, the question arises whether Treaty amendment should be contemplated. This debate concerns a wide variety of policies and objectives of competition law. The

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matter is even further complicated because the Treaty incorporates many policies within its 248 articles, such as an environmental policy, a social policy, and a commercial policy. Art. 3, which specifies activities of the Community, is very broad. Perhaps we should attempt to devise a hierarchy within Art. 3, so that the core principles of free movement of goods, workers, persons, capital, and perhaps the promotion of competition could be given a higher status than the promotion of the flowering of the cultures of Europe, which is in Art. 3(s). More specifically in the context of the competition rules, is the bifurcation of Art. 85 the 'original sin' of European competition law? Alternatively, was the original sin the Consten and Grundig decision? We should also consider whether Art. 86 should be amended. It is not entirely clear what the function of Art. 86 is intended to be—to protect weak competitors because one day they might become strong again? How can the essential facilities doctrine be justified insofar as it may discourage rather than encourage investment? Other legal systems with Art. 86-type provisions require that market power must be abused in order to constitute a violation. Such a requirement would involve a considerable narrowing of Art. 86 vis-a-vis how it is currently implemented. Other systems specify that behaviour cannot be abusive if it is attributable to superior economic performance, but this concept is not clearly stated in current E.U. law and practice. Since Treaty amendment is not on the table, should we be seeking evolution rather that revolution? If so, what is the nature of the evolution going to be? Can we reasonably hope for the Commission to take the initiative? Is it the Commission's job to take bold steps, to adopt decisions, etc., which might refocus the current practice under Art. 85(1)? I agree with the statement that it would be highly desirable for the Commission to take more decisions, even when it is not certain that they are correct. Those are the decisions that will be appealed, which will lead to development of the case law. Does the Commission adequately follow the case law of the Court of Justice? A disparity appears to exist between what is said sometimes by the Court, as in Pronuptia, Delimitis or Gottrup-Klimt, and the subsequent decisions of the Commission. Regarding Art. 85(2) and the nullity of agreements, a moral objection arises. A defendant who is being sued for rent, a franchise fee, or a royalty suddenly discovers Art. 85(2). Another problem with nullity is that it is not a credible deterrent in the cases when you most need a deterrent—i.e. straightforward horizontal price-fixing cartel. For instance, if the members of a pan-European widget cartel met today tofixprices for next week, and one of the cartel members cheats, no one will bring an action for nullity in a national court. Nullity in that situation has no meaning.

7 - Future Competition Law

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Turning now to the papers of the panellists, certain themes came through quite clearly. First, the panellists are Darwinian rather than fundamentalist. They seem unenthusiastic about rewriting the Treaty. Rather, they seem to support some refocusing and changing direction. Mr. Faull states that the Commission has adopted adventurous decisions, which is true. He mentions Odin and Metal Box, but many others could also be mentioned, such as Optical Fibres and Konsortium E.C.R. However, I do not believe that the decisional practice is good enough. Moreover, there is still a fundamental failure of transparency. There is a great deal of transparency in relation to draft notices, consultation procedures, competition policy newsletters, etc., which are excellent, and for which the Commission is to be congratulated. However, it would be difficult to define the meaning of a restriction of competition under Art. 85(1) based on the decisions of the Commission. So much is dealt with by comfort letter, by Art. 19(3) notices in the Official Journal, etc. In these, the Commission says: 'Here's a joint venture, here's a development agreement. It's been notified, we are investigating it under Reg. 17/62', or 'We invite comments', or even 'We intend to take a favourable decision'. However, it is not clear what is the basis for such decisions. These notices are often simply an invitation for comments from third parties. Perhaps some further clarification could be given. All participants agreed that there should be a change of the current practice under Art. 85(1), that there should be more economic analysis. In the earlier discussion on this issue, no one made the central point that there is a difference between economic policy and economics, or perhaps econometrics, on issues such as market definition. Economics seems to become increasingly scientific, in the sense that certain economists, if fed certain data and given certain assumptions, will come to the same solution. In that sense, economic analysis is a tool that can be employed by both practitioners and the Commission. In this respect, I agree that this science is useful to lawyers. Regarding the Courts, it seems that the jurisprudence of the C.F.I, and the E.C.J. presents certain problems. Some judgments are extremely good, such as Pronuptia, Delimitis and, perhaps most striking, Gottrup-Klimt. These judgments provide great insight into what might be meant by a restriction of competition under Art. 85. A number of the participants remarked, however, that the judgments of both courts appear to be erratic. Over the last nine months, several judgments were rendered which seem very difficult to understand, including Tetra Pak //and Compagnie Maritime Beige. Similarly, in Merck and Primecrown, the Advocate General's opinion was very strong, intellectually convincing and persuasive, but it was not followed by the Court. There can be many explanations for this. It may result from the difficulty that judges have in

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handling economics, or because the Court is in a conservative period. The Commission does not always accept, or sometimes only grudgingly seems to accept, the case law of the courts, as is illustrated with respect to the Maize Seed judgment and the Commission's reaction to it. The block exemptions on licensing intellectual property rights contain grudging recitals referring to Maize Seed, but it is questionable whether the Commission ever actually applies it. None of the panellists believes that the bifurcation of Art. 85 is a problem, but a number of comments were made to the effect that the manner in which the bifurcation has been implemented in practice is a problem. I believe the bifurcation can bring about a certain laziness. I have heard Commission officials saying 'Don't worry that your distribution agreement is caught by Art. 85(1) because there's a block exemption, and there are comfort letters', and so on. However, this is a less than ideal solution. We should return to employing Art. 85(3) as it was originally conceived: agreements that restrict competition can be authorised on some other ground. It would thereby become much more obviously a political provision than a competition provision. Many agreements get into the net of Art. 85(1) that should never be there, then are exempted under Art. 85(3) on competition grounds rather than on other grounds. If Art. 85(3) were refocused to be a more overtly political tool, this would again give rise to the issue of the independent authority. Mr. Venit stated that when we reconsider the role of Art. 85(1) and 85(3), we must keep in mind that many Members States are adopting the same law at the same time. If Art. 85(1) were to be interpreted more narrowly, so that more agreements fall outside the E.U. system, we should ensure that at the domestic level the same approach is being adopted. If not, an agreement not caught by the E.U. Art. 85(1) might be caught by the Ruritanain Art. 85(1), when Ruritania becomes a Member State. Perhaps the Commission could model its approach to Art. 85 cases upon the approach followed by the Merger Task Force (M.T.F.)—that is, incorporating a phase one and phase two investigation. Most people agree that this has worked extremely well in practice for merger cases, and the case handlers in the M.T.F. do a superb job in filtering out the difficult from the less difficult cases. DG IV has attempted to improve its procedures for non-merger cases in the wake of that experience, but is there yet more that can be done in terms of quick-look methods? Finally, as to legal certainty, we can use economic analysis without losing a large amount of legal certainty. The U.K.'s Restrictive Trade Practices Act relies excessively upon legal formalism, and leaves a number of questions to which it is impossible to find an answer. Accordingly, I do not fear economic analysis under Art. 85(1). I believe that a different legal uncertainty problem should be considered.


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There are thousands of companies entering into development agreements, R.&D. agreements, and licensing arrangements, that are uncertain whether their agreement is covered by Art. 85. They believe that there is nothing anticompetitive about what they are doing. Nonetheless, given their perception of the law, they believe they must take legal advice, expending their time and resources doing something that may, in the end, be futile. Perhaps provisional validity for agreements might be helpful. Under this doctrine, agreements that are close to the edge of an Art. 85(1) problem could benefit from provisional validity unless and until the Commission takes a decision to the contrary. That could help to deal with cases like Pronuptia, Schillgalis, Delimitis, and Domino's Pizza, where the moving party seeks damages for having to pay the price that he or she originally agreed to pay. To summarise, the questions for this session are: is Art. 85(1) a problem? Is the reasoning of the C.F.I, and the E.C.J. a problem? Is the balance of the relationship between the Commission and the Court a problem? Are there any problems within the Commission, or within DG IV, in deciding upon the future course of action? What about provisional validity? Finally, it seems that the independent authority issue is relevant here. • MR. FAULL—We could have a similar debate about most other competition law systems around the world to that which we are having now about the Community system. The problems of Community competition law are not severely worse than the problems in other jurisdictions. In the Community, we are faced with enormous challenges now and in the coming years. We know the problems of today. With some reservations, I can accept much of the criticism that has been expressed here, and that is reflected in the papers. Moreover, we will soon face the problems that arise from further and quite unprecedented enlargement of the European Union. We hope that economic and monetary union will soon take effect among some of the Member States, and afterwards among all of the Member States. This means that in the first years of the next century, the European Union will be a completely different place from what it was in the 1960s. It was during that period that most of the Community's competition law was conceived and enacted. Accordingly, the time is right to rethink these issues. Measures initiated by Prof. Ehlermann while he was Director General of DG IV, and vigorously pursued by Mr. Schaub, are in gestation in DG IV. Over the next few years, suggestions will be made as to how to respond to these challenges, and consultations will be launched. It is too early to tell whether they will be audacious or timid, because they have not yet been fully designed. However, there is clear awareness inside DG IV, and inside the Commission, that some aspects

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of competition law must be revised in order to prepare for the enlarged European Union of the next century. The system we have today is not best suited to meeting those challenges. Accordingly, modifications will be needed. What will those changes be, and how will they address some of the key questions, such as those raised by Prof. Whish? Could Art. 85(1) be narrowed by the introduction of more rigorous economic analysis to determine what is a restriction of competition, or based on a review of the notion of the effect on trade between Member States, or some combination of those two? If this occurs, then there will be more scope for the application of national law by the national competition authorities. On the other hand, if Art. 85(1) remains largely applied and interpreted as it is today, then the issue arises how to deal with the Commission's monopoly to grant exemptions under Art. 85(3). Already today, it is said that the Commission is not capable of applying Art. 85(3) properly. The decentralisation of enforcement of competition law, which we have been talking about for many years now, will bring us up against this obstacle of the Art. 85(3) monopoly—who is to apply it, and how can it be applied in a coherent way? Its application requires some sophistication in the analysis of economic issues. It also requires investigation and analysis of matters often going beyond the borders of a single Member State. The Commission may not be able to do it all, but we must determine who else can do it, and in what sort of structural framework. Finally, one feature of recent years has been the boom in national competition law and national competition law enforcement. This results, in part, from the entry into force of the merger regulation, and the very rapid and surprising growth of a competition culture in places where it was not expected to take off so quickly. Culture and traditions, however, can be formed rather quickly. For instance, some of the much-vaunted German tradition is of fairly recent origin; the Italian example is another case where culture and tradition were rapidly formed. Thus, we have a network of national competition agencies, as well as the Commission, and the relationship between all of those agencies remains to be fully worked out. We are still operating with the Reg. 17 structure, which was conceived in completely different times, when the Community consisted of a much smaller number of Member States. We need a new architecture of relationships between the Commission in Brussels and the national competition authorities. That will have an impact on how a new system is to be implemented. • PROF. KIRCHNER—The proposals outlined in my paper for reforming E.C. competition law cover a broad range: reordering the hierarchy of goals in Art. 3, placing greater emphasis on the competition goal; drastically changing Arts.


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85(1) and 85(3); defining restrictive practices more strictly; and shifting the weight from exemptions to negative clearances applied by an independent European competition authority, in close co-operation with independent national cartel agencies of the Member States. These proposals appear farreaching, but they are conventional. Thus, the rapporteur of this session has asked me to present the changes in methodological approach which lead me to my proposals. I am referring not to the operational level, as we have done in Session Three, but to the level of law-making, whether by the legislature, the courts, or the administration. A wide gap exists today between the legal and the economic approach. Lawyers feel threatened by the attacks of economists. These fears are unfounded. We should take a closer look at economic analysis, not only that based on neo-classical microeconomics, but also that based on the new sub-disciplines of modern economics. Some examples of the latter are the property rights approach, transaction cost economics, new institutional economics, economic theory of contract, constitutional economics and public choice. A few of the most important names in these fields are Coase, Williamson, Buchanan, Furnbotn, Richter, and Schmidtchen. Thus, economics is no longer confined to the notion of allocation of resources by means of markets. Rather, these new sub-disciplines analyse institutions like civil liability, property rights, contracts, and so on. They apply the toolbox of economics to phenomena formerly outside its reach. They allow us to analyse not just the economic impact of legal rules of antitrust, but to study the effects of institutional design. Their major conflict with neo-classical economics is that they do not rely on assumptions of complete information and full rational behaviour. Thus, they caution us not to apply the instruments of economic theory to reach certain results, like allocative efficiency, but rather to make proposals for institutional design which then should lead to an open learning process which arrives at the desired result. Our task then, in this sphere of European competition law, is to leave aside the illusion of a goal-oriented, instrumentalist and constructivist approach, and instead to look into the institutional design related to procedures and checks and balances in the competencies of the various players. • PROF. KORAH—I have never been so pessimistic in my life. I have always hoped that things could improve. We need reasoned policy statements in judgments from the European Courts and in the various documents produced by the Commission. We need recitals to regulations that say why we have the rules. We need recitals in decisions, press releases, and annual reports, giving the economic reasons for condemning or approving conduct.

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In the United States, the founding fathers were very much concerned about escaping from the tyranny of the king. They stated that it was very important that the policy of decisions should be properly articulated and debated; anything else was tyranny. As to legal certainty, if we understood the reasons for decisions, we would be able to apply them predictably to factual situations that were not obvious in the original statement. Thus, the law might develop in a principled way. Can we rely on the Court to produce reasoned judgments? The Court seems to have changed in the last two or three years. We no longer have a Court that calls itself teleological, that interprets the Treaty in accordance with policy visions that are articulated. I have just spent a week in Luxembourg talking to judges, who have been pointing out that both Courts have very limited jurisdiction. They can overrule the Commission for manifest error, or failure to give reasons; under Art. 177, they can give only an abstract ruling on the interpretation of the law. The Court of First Instance has been quashing decisions when the Commission has not established the facts to its satisfaction. However, the Courts both seem unwilling to make their own policy. The United States suffered from the Supreme Court's decision in the Schwinn case. Good academic articles were published criticising it, and the Supreme Court reversed it in 1977. It is vital that the European Court be prepared to reverse its failures. I am concerned that there are hardly any competition judges in the E.C.J. In contrast, there is quite a lot of competition expertise in the C.F.I. However, I believe that lawyers, and particularly those educated on the continent, tend not to think ex ante, and tend not to be concerned with having incentives in the right place. They tend to feel very unhappy with judgments on competition or intellectual property matters, where incentives are so important. I once believed that we needed only to provide for dissenting opinions. However, the Supreme Court of Denmark has dissenting opinions, but it has engaged only in textual analysis, and not analysis of policy issues. Other supreme courts are highly articulate, such as the Italian Supreme Court. Unfortunately, however, the Italian competition authority is subject to a different court, which is more formalistic. The C.F.I, is quashing Commission decisions for not articulating their reasons, contrary to Art. 190.1 believe we need the Commission to set out its reasons more clearly and coherently. My impression is that the Commission has great difficulty producing any paper. The Green Paper on Vertical Restraints has clearly been written by at least two people, and I suspect by many more, with very different views. If we are to get a coherent policy, the Commission must reconcile its view. At present, it seems that the Director General has limited power to impose his views on the directors, and that the directors' views are not coherent among themselves.


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I have been complaining about the bifurcation of Art. 85(1) and 85(3) for twenty-five years. It has become far more important that we change it now, as the competent authorities in the Member States are enforcing competition rules, but have no power to grant exemptions under Art. 85(3). • MR. SIRAGUSA—I agree that we should narrow the scope of Art. 85(1) by allowing a fuller economic analysis. The question is, how do we achieve this shift? I do not believe that legislative intervention is needed. The shift should be very gradual, because if the Commission makes a very abrupt change, there will be a lot of inconsistencies between the new decisions and the existing body of law. If the Commission starts issuing new decisions, then what should be the role of Art. 85(3)? It should be limited to exemptions in which values such as industrial, regional, or social policy, maybe even unemployment, and environmental policy, can be taken into account. Thus, there would be a natural shift. DG IV will decide on the applicability of Art. 85(1), and the Art. 85(3) intervention could be made at the level of the Commission. This may also have an impact on whether an independent authority should be created. How should this be achieved? First, it may be possible to have a block negative clearance communication from the Commission, which specifies that certain traditional clauses will generally not fall under Art. 85(1). An intermediate step could be to make more use of the white list in the renewal of the block exemption regulations. These provisions could state that specified clauses do not fall under Art. 85(1), rather than using the mechanism normally used. It may also be possible to begin developing a per se prohibition. Certain types of restrictions will never meet the requirements of Art. 85(3), because they impose restrictions on the parties that go beyond what is needed to obtain the positive goals. Would such a process lead to uncertainty or differing results in the various Member States? I believe that if such changes are made gradually, there is little danger of such problems. Soft harmonisation is occurring, and nine Member States have laws that are inspired by Arts. 85 and 86.1 hope the new U.K. government will modify the U.K. law, so that it too will follow the Community model. If that is achieved, then the panorama will be fairly harmonious, and this process of change can begin. The process requires a system of co-operation among the national authorities and between them and the Commission. The judgment of the Court in the Spanish Banks case is problematic because it creates a serious obstacle to the flow of information through the Commission. The principles set out in the Spanish Banks case should be revisited.

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This process of change is possible. We see it from the recent, interesting experience of the Italian authority. This is the path that the Italian authority has taken. There are very few decisions under Art. 4 of the Italian law, which is similar to Art. 85(3), and many under Art. 2, which is similar to Art. 85(1). The Italian authority has chosen to apply economic analysis under Art. 2, and to use the exemption provision very little. It is clear from the case law that this is a deliberate choice. Such a process at Community level would allow a more serious review by the Court, because the Court would always refuse to second guess the Commission's discretion in taking a decision under Art. 85(3). By contrast, the Court may be more willing to review a decision taken under Art. 85(1). Therefore, at the end of the day, economic analysis under Art. 85(1) will provide more legal protection, and more possibilities for juridical control. • MR. VENIT—There is broad agreement amongst the commentators in this section that more analysis is needed under Art. 85(1). However, with respect to the need for gradualism, I believe it would be possible to overcome the need for a transitional period through Commission notices, and perhaps through the definition of some per se restrictions. The Commission has published a notice on market definition, which it says has been its consistent practice in applying Art. 85 and the Merger Regulation. I believe that notice has many positive aspects, but the statement that this is the approach that it has always applied is not strictly accurate. That notice is very much oriented on price analysis as a way of denning markets, much more so than the jurisprudence of the Court ever has been, and much more so than the practice of the Commission ever has been. The Commission was not shy in taking a major analytical step in that notice. Therefore, I do not believe there is a great need for gradualism, as long as clear guidelines are published, specifying the position of the regulators. On the issue of procedure, I think we have a black market procedurally in the Community, and what I mean by this is the following. We have a legal system and a framework that is based on a prohibition system—i.e. everything caught by Art. 85(1) is illegal, unenforceable, and void, unless it has been notified and approved. However, in practice, the Commission's procedure is dramatically different. The Commission relies substantially on informal consultation, comfort letters, and other procedures, and has thereby essentially created an abuse control system. Accordingly, there is an enormous gap in Community law between the system as denned in the legal framework, and the system as actually practised. We need to reconcile the reality and the written framework. I believe that would mean moving towards an abuse system, which is basically what is being done now. However, we should make the legislative changes that are required to make the legal framework conform to practice. To


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do so, we would need to address the issue of nullity, the issue of provisional enforceability, and the issue of national enforceability where Art. 85(1) is found not to apply. All of those solutions can be found without Treaty modification, although Reg. 17/62 would have to be revised extensively in order to bring the system into focus. Such a reform is badly needed because it is undesirable to have a practice which differs from the legal framework. It creates what I would refer to as the 'bad' kind of legal uncertainty. There are two kinds of legal uncertainty. There is good legal uncertainty i.e., unavoidable legal uncertainty which results from economic analysis, or from changes in circumstances. For instance, something is done ten years ago, then the market changes. As a result, what was good then is no longer good. We can all live with that—no one is complaining about that kind of legal uncertainty. However, the legal uncertainty that results from a gap in the way the system is being applied in practice and the way the legal framework is written is not tolerable, and must be addressed institutionally. The importance of these issues comes out when one thinks on a broader scale, of the Commission's entire enforcement agenda. These types of reforms would not limit what the Commission is doing. Rather, the opposite is the case. The goal is to free the Commission to focus on the important issues that it faces. Competition law in the last ten years has moved into deregulation of major industries, and merger control has been established. The Commission has begun to deal with hard and serious problems, which go far beyond issues such as whether an agreement requiring distributor P to stock so many products for so long is caught by Art. 85. The changes being proposed would help not only business and the legal profession, but also free the Commission to sort out its enforcement agenda, and focus on what is important. That will be to the benefit of all of us. • PROF. WAELBROECK—I am an optimist. The Commission has been criticised, but there has been considerable improvement over the last few years. For instance, in the Iridium case, the Commission granted a negative clearance with respect to an agreement between substantial companies, which provided for harmonisation of their pricing policies. That is quite something, and I believe it was the correct decision. We must recognise, however, that the Commission is becoming braver in deciding that Art. 85 does not apply in certain circumstances. Another example is the treatment of classic joint ventures. In the past, the Commission seemed to consider any joint venture between substantial firms as involving a restriction of competition, because it is always possible to find that such firms could be potential competitors. If they make an undertaking that they will not compete with the joint venture, then they preclude

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competition between themselves. That is, therefore, a restriction of competition. Today, the Commission applies a narrower test for potential competition. It is more willing to accept that firms that are more or less in the same business are not potential competitors. It no longer considers that if the parents undertake not to compete with the joint venture, that is an implicit recognition that they are potential competitors, and that therefore the joint venture is restrictive. The Commission now takes the position that if the joint venture itself is not restrictive, then the undertaking not to compete with it is just an ancillary restriction. That is a substantial change. Fifteen years ago, some of my clients wanted to put a non-compete clause in their joint venture agreement. I tried to dissuade them from doing so, because the Commission would have viewed that as proof that they were potential competitors. There has been a considerable change in the attitude of the Commission in this respect. People correctly criticised in the past the Commission for accepting the Court's judgments only grudgingly. Let us hope, however, that in the future the Commission will be more responsive to the signs coming from the Court. Finally, with respect to provisional validity, I have always been against it. The first article I wrote, in 1962, was a criticism of the Bosch judgment, which was the first judgment of the Court of Justice on a competition matter. The Court held that agreements that had been notified were provisionally valid. I feel personally assaulted by the suggestion that provisional validity should be resurrected. I can understand that a British lawyer feels that it is not very decent, after years of having been in bed with another, and not having complained, to realise that what one was doing was immoral and contrary to the law, and therefore invoke Art. 85(2). We are not, however, discussing morals; we are discussing economic policy. The question is whether it can be favourable to economic policy to provide this possibility of invalidating the agreement, for whatever reasons. The reasons may be that the firm in question was badly advised, that the agreement was at the time advantageous to the complaining party and the situation since changed, or that the complaining party was the weaker party and was forced to accept terms from a stronger party, or that the agreement turned out to be anticompetitive because of a change in the market position of one or both of the parties. From an economic point of view, I do not believe there is anything wrong with allowing that company to plead the illegality of that agreement. In any event, the concept of provisional validity should be defined with greater precision. Would it apply only to notified agreements? If so, then how would it solve the problem of eliminating notification and simplifying the process? Until now, when we discussed provisional validity, it was always on the understanding that it would apply only to notified


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agreements. If that is not the case, where should the line be drawn? Prof. Whish suggests that provisional validity should be limited to agreements which, although they fall under Art. 85(1), are close to not falling under that provision. That is not, however, a very precise test. I can see many undertakings taking different views about that. I do not see the Community system becoming an abuse system. Huge fines can be imposed on companies for having engaged in conduct that they perhaps did not realise was wrongful conduct in the past. I do not think that is an abuse system, and I do not think it should become one. If it did, then its teeth would be removed.

Observations and Comments • PROF. EHLERMANN—I have heard many times, 'abolish notification, introduce provisional validity'. I do not, however, see how this can be done, Art. 85(2) being what it is. This leads to the more fundamental question: must the Treaty be amended? This is a technicality which we should not put at the centre of the debate. One point mentioned by Mr. Venit, which I consider to be very important, is what happens if Art. 85(1) shrinks. Would national law come in like a stream to fill the empty space, or are there pre-emption regulations which preserve Community law to regulate interstate commerce matters? Is the more radical view, that national law should fill the gap, the correct one? • MR. SCHAUB—A significant part of the criticism that I have heard here around the table is fully justified. It is regrettable that this criticism has been expressed now for quite some time, and has not found the appropriate response. I am convinced that fundamental changes are necessary, and I am determined to organise their implementation. The implementation is not easy in an institution that has been working for decades along the same lines, and on the whole has been working in a relatively successful way, if you consider the results. Prof. Ehlermann experienced the difficulties of change when he was Director General of DG IV in a very intensive way. He could tell more colourful stories than I could at this stage. I have found your contributions until now extremely constructive and helpful. Mr. Faull and I have been listening to what you have been saying with particular care. Since about a year ago, a clear change of the orientation within DG IV has occurred. This is not yet visible to the outside, and it will take time to organise fundamental change. It would be a mistake to jump on one or another idea that is aired just to be popular. One

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cannot make fundamental reforms every second year. If one takes a shot, it should be a good shot. What are the main areas in which changes are necessary? My starting point would be a guidance, such as that recommended by Mr. Venit. We must find solutions that allow us to concentrate on what is really essential at the European level, the hard core of European competition policy. What I am saying here is true not only for the area of antitrust, but also for the area of state aid control, where we have similar problems, and the area of Art. 90. How should we concentrate on the essential? The problems surrounding Art. 85(1) and 85(3) are key. We are currently in a very intensive internal debate on this. I am not in a position to announce any action, because we have not yet come to conclusions. We will do so, however, when the time is right. Another important area is how to achieve greater decentralisation, and how to strengthen co-operation with national competition authorities. We must move in this direction, but it is not easy to do so. The right partners are needed, i.e. national competition authorities who are willing and able to play this role, not just in one Member State, but in all fifteen of them. The Commission cannot choose to co-operate with only some of the Member States who are keen to do it, and forget the rest. We must take into account that we are dealing with fifteen Members States, and that we need solutions that will cover the whole of the European Union. Moreover, in the future, this may include a number of new Members States. As to the debate about abrupt change versus gradual change, I, by nature, favour gradual change. However, in view of the very many discussions I have had until now, I am not certain whether gradual change is possible under the present circumstances. We may be forced to make quite a substantial leap forward. A continuous complaint has been made here about lack of clarity with respect to the notion of restriction of competition. When I arrived at DG IV, I was puzzled that for several decades it has been applying an article which refers to restrictions of competition. Prof. Ehlermann said to me, 'you won't believe it, but there is no clear concept here of what a restriction of competition is'. He had already launched very important preparatory work. Thanks to his efforts, I have inherited very substantial work on this question, which has been brought to a satisfactory completion within DG IV. We must now decide how to process this result of Prof. Ehlermann's initiative in a way and at a time that assures that it will be a satisfactory breakthrough. There are still some minor problems to settle, which are not problems within DG IV. The eternal problem of vertical restraints is not quite such a simple topic as some try to make us believe. Rather, I find that there is an enormous variety of


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opinions. That is why we have launched our Green Paper, in order to have a maximum amount of reaction to it. This is the purpose of launching a Green Paper. If we were convinced that we had the definite wisdom, then we would not launch a Green Paper with options; we would come up with the final proposal. In view of the wide controversy, however, on this extremely complicated topic, we concluded it could be helpful to invite professors, judges, lawyers, and everybody who is interested to present comments, including extremely critical comments. Instead of being unhappy that there are only four options, someone who wants a fifth or sixth option should propose it. The whole purpose of this exercise is to open the door for additional options, and they will be examined with great care and intellectual interest. This is why Green Paper exercises are organised. A constructive approach would be to contribute to the debate on substance. Someone here expressed disappointment that there was no enthusiasm for Treaty amendments. We have asked the question in connection with the Green Paper on Vertical Restraints. We have had the chance in the last two years to look very closely at this process of Treaty amendment through the intergovernmental conference. Anyone who has some practical experience with this process under the present circumstances would not seriously suggest today, or at any time during the last twenty-four months, that a move to modify Art. 85 or 86 should be launched. It would have provoked general laughter, and it would not have strengthened the credibility of DGIV or the Commission in the search for serious and essential reform. There was still some euphoria about the creation of a European competition agency. In view of this debate over the last two years, I am still not convinced that under the present circumstances, this is a brilliant idea. Despite the vigorous campaign over this period, the sole national government that proposed the idea did not find the support of any other national government. Moreover, it was not a small Member State like Luxembourg that proposed this idea. It is an infrequent occurrence that a large Member State pleads for such a reform over a long time, in part with rather strikingly misguided arguments. For instance, this government argued that the Commission was so politicised that for each decision, the department prepares two or even three alternative drafts because we never know what the Commission will do. In the two years that I have been at DG IV, not one single case has occurred where the Commission has not followed the DG IV proposal, and there was always only a single proposal that had been prepared by DG IV. Moreover, I have some doubts about the sincerity of those who proposed the idea of the independent agency. I find it difficult to accept assertions of the dangers of politicisation, and then whenever a case is presented where this

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hopefully independent Commission could come to conclusions that are not liked, one then intervenes at all levels. I suppose Prof. Ehlermann could also contribute some funny stories about this. In my limited experience of two years, I could recount many stories of extreme political pressure coming exactly from the one government asserting that we must not be politicised. I have seen in these two years the extent to which we are exposed to political pressure, which we have resisted. I would not see easily a so-called independent agency in the present circumstances, able to resist in the same way. Moreover, I do not know of any national authority which has been resisting pressure in the same or a more convincing way than we have done. Finally, I have heard extreme pessimism here, which in my view is not founded. I admit that I am a professional optimist, but I would not have dared to speak along the lines that I am speaking here today just twelve months ago when some of these topics were discussed. I have, however, seen many changes and encouraging developments over these last twelve months. Thus, I am deeply convinced that we are on the right road to fundamental change. I can only invite you to continue the most violent criticism of the current situation. Keep in mind, however, that there are many people within the Commission who are firmly committed to change. You may need some patience, because if one were to make changes under the pressure of violent criticism in an amateurish, dilettantish, improvised way, jumping on some of the most popular ideas, we might not necessarily go in the right direction. It is extremely important that we examine the various options in order to ensure that the best possible solution can be found. • MR. SOUTY—Since criticisms have been expressed of the Commission, I feel the need to touch not the issue of independence, but the issue of institution. In particular, I would like to raise the issue of the 'toothless watchdog' agency. The criticisms that have been expressed in the debates on the Art. 85(l)/85(3) split and on the Green Paper are similar to the criticisms addressed to the Commission itself as an agency lacking independence, transparency, etc. At the European level, we do not have anything like a monopoly commission in the sense of the German tradition of organisation, whose function is to monitor and thereby inspire independence. In France, where I come from, when something is going wrong, it is easy for the government to attribute it to the Commission. Thus, a toothless watchdog could play an important role at European level. It may also be useful in the context of the W.T.O. In France, Germany and the U.K., we have toothless watchdog agencies. Thus, I would strongly support the emergence of such an agency, directly providing advice on issues andfilesof significance, such as Boeing/McDonnell Douglas and Bertelsmann/Kirch.


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A second thing lacking at the European level, which exists in the U.S., is legislative control over antitrust matters. This helps defuse the criticisms addressed to the F.T.C. or the D.O.J., as well as those addressed to the entire system, including the judiciary. Finally, when one considers U.S. antitrust history, we see that in 1890 the Sherman Act was passed without any specific enforcement agency. Theodore Roosevelt set up the first Antitrust Division ten years later. Twenty-four years after that, the F.T.C. was born, and it has been in a continuous process of development. In Europe, we have benefited from the U.S. experience and have created a system and the institutions to enforce the system. The Green Paper is not satisfactory to many people, especially academics. We should attempt to cope with substantial issues, but we should consider the reasons that substantial issues become so difficult to address. • PROF. MAVROIDIS—Regarding the TetraPak case and the alleged short reasoning of the Court of Justice, I believe this is an area where domestic courts have much to learn from international courts. The reason is that on the international plane there is no monopoly of enforcement. To a large extent, implementation of the decision relies on the co-operation of the party to whom the judgment is addressed. That is why the international court places the accent on adequate reasoning of the decision. As a result, the decisions tend to be fairly lengthy. Empirically, the more intense the level of integration, the less the accent on adequate reasoning, because the situation moves closer to monopoly of enforcement. This is deplorable, especially in the European Court of Justice, because the role of the Court above all is to explain what is just and why justice should be followed. I believe TetraPak is a case where the E.C.J. should behave more like an international court than a domestic court. • MR. CASTANEDA—I am delighted to hear such a candid discussion on the possibility of amending the Treaty. In Mexico in 1993, we had a rare chance to use a White Paper to re-regulate competition in Mexico. We searched for Roman tradition roots, which most of the countries here share. We are in Italy, where Justinian and a series of great jurists gave us the basis for our legal system in Mexico. We were struck, however, by the amazing picture of a whole competition system being regulated in Europe through just two articles in the Treaty of Rome. This goes very much along the tradition of the Anglo-Saxon competition systems. Thus, we reluctantly deviated from our Roman tradition, and observed the U.S. and British systems. We found that competition is a matter of culture in the U.S. With N. A.F.T. A., we thought it would be desirable to have an antitrust system that would be workable throughout the N.A.F.T.A. area.

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I believe it does not make sense to follow a purely formalistic approach to antitrust. It is nonsense to use formal formulas for something as lively as the economic workings of the day. I agree that the importance of economic analysis should be underlined. Economic tools are essential in analysis of antitrust cases. However, we need more empirical information, rather than sophisticated economic theories. The best presentations of cases that I have seen have consisted of very simple economic theory, very rich economic data, and very simple legal reasoning. In Mexico, we wanted a system that would recognise the importance of economic analysis. In Europe, the joint dominance problem has been addressed. It is not actually in the legal text, but has developed after years of practice, following the Anglo-Saxon tradition of enlarging a concept to other conduct. A court lacking such tradition would repeal the joint dominance theory, on the ground that it is not specifically provided in the law. Our great masters of law from Rome said that 'nullapena sine legge', which means there can be no conviction without a specific law. Thus, I would argue in favour of some degree of certainty. We need standards to interpret what the economic empirical data will tell us, and simple theory in economics that could be consistent through the years. We recognise that the insights from economists are rapidly evolving. We constantly have available more dynamic tools to interpret the economic reality of everyday life. We should press economists to give us more precise empirical data to use in our cases. Lawyers should get more involved in the economics of a case; and certainly economists should understand how the legal system works. There should not be a divorce between lawyers and economists. Antitrust specialists are a rare but necessary hybrid. At the end of the day, however, it is the judges who will decide the cases. Finally, I believe that the independence of an enforcement agency relates very closely to the prestige of its resolutions. If the resolutions are wellfounded, then the agency gains independence. • PROF. FOX—With regard to the Art. 85(l)/85(3) split, I disagree with the statements of Prof. Whish and Mr. Siragusa to the effect that Art. 85(3) should be relegated to political considerations, and all economic analysis should be made up front under Art. 85(1). This raises the problem of reading into Art. 85(3) something that does not appear in its wording, i.e. that unemployment, environment, or other such concerns can trump competition policy. I would make a very different proposal and one that would not read Art. 85(3) as a grant of right to exempt anticompetitive transactions on grounds of totally non-competition-related considerations.


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One of the initial problems is the very wording in Art. 85(1): 'prevention, restriction, or distortion of competition'. If conduct prevents, restricts or distorts competition, it is caught by Art. 85(1). The word 'distortion', however, is elastic. It is used in trade cases, competition cases, subsidy cases, and the state action cases. It implies that the playing field must not be unlevelled; one competitor must not receive unfair advantages over another. For example, in DeHavilland,1 the Commission said the merger would give A.T.R. a full line of commuter planes, and since buyers prefer to buy from one supplier, the merger would distort competition to the harm of British Aerospace and Fokker. No economic analysis was made. In TetraPak,2 tying agreements and low pricing were said to distort competition because they would advantage TetraPak over its competitors. Economic analysis may or may not have revealed these practices to be anticompetitive. The word 'distortion', which came from trade distortion, has slipped into antitrust and has become a catchall word for Art. 85(1). I shall now suggest how I believe Art. 85(1) and (3) ought to be divided. At present, the words of Art. 85(1) catch too much, including both trivial matters and practices that have no impact on competition. For an argument to be caught by Art. 85(1), a showing should be required that it has some anticompetitive properties that harm the competitive process. Some agreements, such as competitors' price-fixing, market division and naked boycotts, are so likely to harm competition that the harm would be presumed. Then and only then, the burden of going forward would shift to the parties seeking exemption to show that procompetitive, efficiency, or technological gains outbalance the anticompetitive aspects. Employment, environmental, social cohesion, and other non-market gains would not be admissible to justify an agreement that is on balance anticompetitive (nor would they be needed as a trump if the agreement were not on balance anticompetitive). Core harmful practices, such as competitors' price-fixing, market division and naked boycotts, could virtually never be justifiable; they do not have procompetitive or efficiency benefits. The one small exception is the narrow gateway for orderly reduction of systemic and destructive excess capacity, where the Commission has determined that, under certain controlled conditions, a crisis carted is justifiable (and presumably more efficient than the market) and may receive a limited exemption. The broad and loose application of Art. 85(1) in practice today distorts the 1

Aerospatiale—Alenia/De Havilland, 1991 O.S. (L334) 42. TetraPak Int'l SA v. Comm'n, 1995 E.C.R. H-762, appeal dismissed, 1996 E.C.R. 1-5951. 2

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Panel Discussion

competitive analysis and produces sloppy reasoning. The Ford/VW joint venture to produce multipurpose vehicles in Portugal3 is an example. Neither Ford nor VW produced a multipurpose vehicle prior to the formation of the joint venture, while Matra, in Portugal, was a near monopolist. There was no showing and no reason to suspect that the joint venture would have harmful rather than positive effects in the M.P. V. market; and, given the competitive nature of the broader vehicle market wherein both parents competed, there was no reason to predict negative spill over effects there, either. Nonetheless Art. 85(1) was said to apply because the joint venture 'distorted competition' (meaning nothing), and since the joint venture was caught by Art. 85(1), Ford and VW had the burden of justification. They argued that their joint venture was procompetitive, helpful to the environment, and helpful to social cohesion; and they won an exemption. Under the first prong of my test they would not have had to resort to the 'kitchen sink' argument. The Commission simply would not have made its threshold case of harm to competition. The competition analysis would have been clearly separated from the 'other factor' analysis. 'Distortion of competition' would no longer have its yawning reach, and the words as used in Art. 85 would simply be construed as another way of saying 'real harm to competitor' • PROF. EHLERMANN—An issue that has not yet been debated, and should be, is the borderline between Art. 85(1) revisited and Art. 85(3). It is assumed to be legitimate to bring into the analysis under Art. 85(3) goals other than purely competition goals. Is this a legitimate assumption? There has been practically no thorough analysis of this issue until today, in part because of the fudging between Art. 85(1) and Art. 85(3). However, once the borderline is clearly drawn with respect to the difficult notion of restriction or distortion of competition, this becomes the fundamental question. Under the Merger Regulation, there are no other considerations than the strictly economic competition goal—i.e. is there a substantial reduction of competition? Is it sustainable in the long run to have the non-economic considerations included in Art. 85(3) but excluded from the merger regulation? • MR. WOLF—I will not stress too much the question of an independent authority because I believe that question has gained its own momentum. We will see how it develops in the future. Moreover, I do not need to plead too much for it, because Mr. Schaub has made a plea for an independent authority in Europe in his presentation. If you are confronted with so many pressures, 3

Matra Hachette SA v. Comm'n [1995] 1 C.E.C. 18.


481

interferences, and interventions, you need some sort of protection against them. One may argue that things would not change with an independent agency, because Member States, including Germany, will continue to interfere. My reply is that we have European Courts consisting of judges from all Member States. I never heard anyone claim that the Court is not independent, or that it is not competition-oriented. This is an example of how the institution forms those who act in it. Over the last year in Germany, we have intensively discussed the issue of the relationship between Art. 85(1) and 85(3), because we are about to amend our law for the sixth time. The initial idea was simply to follow the European model of Art. 85(1) and 85(3), because the goal of the amendment is harmonisation to European law. However, we have decided to follow the model of Art. 85(1) but not 85(3). The general clause of the latter, with its many ingredients, is simply too broad, and therefore too dangerous. I do not blame the Commission for it, because it has not exerted its full powers on the basis of Art. 85(3). In contrast, we have maintained our approach of writing into the law the specific cases of legitimation of cartels, rather than adopting a general clause. In Germany, there is a discussion of how to deal in the future with networks. We are confronted with the traditional corporal networks, which we are trying to open to competition and to liberalise the sectors involved, such as telecommunications, energy and others. At the same time, non-corporal, socalled virtual networks have developed. They have to do with the information society. It is much cheaper and easier to establish a virtual network, consisting mainly of database software, not even hardware, than to establish a corporal network, which is very expensive. In Germany, we are relying upon economic theory to deal with the question of how to cope with that new challenge of competition policy. We in Germany believe that the essential facilities theory could perhaps be helpful in this context. On the basis of that theory, we are planning to insert into our amendment of the competition law a clause requiring that a firm that dominates a market must allow access to a network of infrastructural relevance that it owns, with financial compensation, if this is the only way for third parties to get access. I do not know what will be the fate of that proposal, since we are still at the very beginning of the process. However, the Ministry of Economics accepted our proposal, and we will now make the same proposal to Parliament. The advantage of such a prescription would be that we avoid the tendency of sectoralising our antitrust law, which is a major concern to me. We are on the verge of establishing numerous regulatory authorities, each with its own legislation, and with different courts being responsible. In essence, all of these regulations are closely related to antitrust law. The result is, to a degree,

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Panel Discussion

sectoralised antitrust law, which is a big danger. If the basic antitrust law could offer a possibility to open the markets foreclosed by networks, this would be a way to limit this sectoralisation of antitrust law. • MR. PERA—On the Art. 85(t)/85(3) debate, traditionally the Italian authority has been in favour of an economic approach. Our law is basically identical to Art. 85, but we have interpreted it in a different way. We have consistently stated that the appropriate way of revising the interpretation of Art. 85 would be to give an economic interpretation to Art. 85(1), and then to grant exemptions under Art. 85(3) in the cases in which there are restrictions of competition, but a decision is made on the merits to authorise the agreement. The criteria that are listed in Art. 85(3) as grounds for granting an exemption are technical and economic progress, improvement in supply, improvement in distribution systems, and some others. Basically, these are not political, employment, or environmental criteria. Rather, they are non-competition economic criteria, and basically enhancing efficiency. Thus, we believe that a decision to authorise can be based upon such economic analysis and the balance of efficiency. Art. 85(3) also requires that there are benefits to the consumer; that the agreement does not completely eliminate competition (although it can restrict competition), and that the agreement is authorised for a limited amount of time. It is a temporary limitation of competition, so that when it has expired, the benefits remain. Basically one must evaluate an agreement in a certain context. It has restrictive effects, it could have very positive effects from other points of view. This is the framework in which Art. 85 could be interpreted. The interpretation of Art. 85 is often considered in conjunction with the question of decentralisation. Decentralisation is necessary and desirable, but it is not necessarily related to the interpretation we give to Art. 85. Moreover, putting the two together could confuse the issue. • PROF. JENNY—When Mr. Faull said that the discussion with respect to the interpretation of Art. 85(1) and 85(3) could be had on any competition law, I began to think about whether that is true. Is there always confusion, in any jurisdiction, about how to define what is anticompetitive, what contributes to economic progress, etc.? Perhaps the specific procedures of the Community, particularly those of Reg. 17/62, make the issue specific to European law. In particular, as a result of the notification system, we must eliminate many notifications. Therefore, we begin to confuse Art. 85(1) and 85(3) by saying that everything is prohibited unless given an exemption. This has nothing to do with the contribution to economic progress, but has to do with administrative handling of the problem. Mr. Schaub said that changing the Treaty seems out of


483

reach. However, changing Reg. 17/62, although it probably would not be easy, might be a bit easier than amending the Treaty. Query whether the notification system is still justified, and if it is not, query whether this is the source of the problem. Second, regarding decentralisation, I was a bit mystified when Mr. Schaub said that in order to have any kind of co-operation, it is necessary to have people or at least institutions with whom to co-operate, and that since every country in Europe does not have a significant competition authority, one cannot rely on national authorities tofillthe void that would be created by a narrower interpretation of Art. 85(1). I have two thoughts in response to this. First, if we do not have relevant competition institutions or rules within the E.U. at national level, I question Mr. Khemani's comment during an earlier session that there was so much pressure at the world level for all countries to have a meaningful competition law. Second, I do not understand why a change would have to wait until every Member State had a meaningful competition law, resources, and authority. Under the merger regulation, there is already a system in place whereby the Commission can refer some merger cases to countries that have developed merger control systems. It does not have to make such referrals systematically, and therefore can exercise its own judgement on when to do it. Such a solution would also be possible for cases under Arts. 85 and 86. Is it not a valid pretext to say, 'I keep all the powers because not all the Member States have fully developed competition systems, and I will keep those powers until they all have in place such a system'. Since there will be more members acceding, it is never going to happen. Therefore, I was wondering whether there are not technical ways to address this concern. •

PROF. EHLERMANN—No, it is certainly not a pretext, but it is a delicate question.

• PROF. BOURGEOIS—One cannot simply modify the balance between Art. 85(1) and 85(3), without worrying about the consequences and implications. Otherwise, the E.U. risks ending up in the situation that the U.S. was in during the Reagan administration, i.e. a retreat by both federal enforcement agencies, which caused the state attorneys general to become active. This gave rise to some strange decisions. It will be afieldday for practising lawyers, of which I am one, if nothing more is done than simply modifying the balance, but it will be a disaster for clients. Perhaps we should create a system of delegating cases to national authorities, under the supervision of the European Commission. • PROF. TIZZANO—Community competition policy serves special objectives which are closely interlinked. The combined use of the rules has been essential

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in the past to make the single market programme a success. This link is also reflected, among other, in the institutional order of the Community. The mandate of a European competition authority has been given to the same institution which has been entrusted with the comprehensive task '[of ensuring] the proper functioning and development of the common market'. This enables the competition rules to be applied jointly, and more effectively, with other common policies. At present, the comprehensive application of the full range of competition rules is crucial for the Community to liberalise the markets, amongst other, for telecommunications, postal services, energy and transport. For example, the sector of air transport, cases of state aid to 'flag carriers', and the formation of strategic alliance occurring in the industry are found together and must be analysed together. In future, the full range will again be instrumental in the integration of national economies of new Member States into the existing single market in order to create an even larger single market. The same holds for the structural changes occuring as a consequence of the creation of the European Monetary Union. At present, one could characterise E.C. competition policy as in a period of review, at least in terms of implementation, or procedure and substance. But in terms of policy objectives, it remains very much the same. Two aspects are most relevant. First is antitrust, the maintenance of open markets to ensure that competition is the driving force of the economy. The free competition principle is now broadly accepted. Moreover Art. 3A of the Treaty has been recently modified to require an open market and free competition. This provision, which is very important, is usually less considered than the corresponding Art. 3B and the principle of subsidiarity. This signifies that now the principle of free competition is no more one of the many objectives of the E.C. mentioned in Art. 3, but it has become a fundamental and 'constitutional' rule. The second objective, which is almost unique to the Community, involves the reach of the E.U. goals. That is why community competition policy cannot simply be compared with national or American or Canadian or Japanese competition policy. In this sense, the Community is really unique. • Mr. WESSELING—The discussion in this session on future objectives of competition law focuses on the European situation, which suggests that the objectives of E.U. competition policy are particularly indeterminate. The uncertainty can only be understood in light of recent developments in the E.U.


485

First, there is the formal realisation of the internal market in 1992. Completion of the internal market project revealed the decreasing relevance of the market integration objective, which had, until then, been the paramount goal of E.U. competition policy. The well-known confusion in the Commission's competition law analysis of a restriction of competition with a restriction of the freedom to trade across borders stemmed from the attempt to use competition policy as a tool for economic integration. The gradual loss of the integration paradigm calls for redefinition of the objectives of E.U. competition policy. The debate on the meaning of a restriction of competition in the context of the Commission's Green Paper on vertical restraints results from this process. Second, the advent of the Treaty on European Union and the principles which it enshrines also challenge the current operation of E.U. competition policy. The jurisdictional scope for E.U. competition policy, for example, is traditionally very broad. The justification for the expansive interpretation of the effect on trade between Member States criterion was found in the desirability of completely uniform market conditions throughout the Community. The Treaty on European Union challenges the self-evidence of total uniformity, most notably through the introduction of the subsidiarity principle. The new balance between Community and Member States policies which needs to be sought under that principle affects the competition law system, including its objectives. Finally, there are institutional and procedural aspects and developments that must be considered. The appropriateness of competition policy objectives, for instance, depends on the institutional framework in which they are pursued. If competition law enforcement aims to further political objectives, a politically accountable body is most apt to fulfil that task. The debate on the independent E.U. cartel office is therefore directly linked to the debate on the future objectives of E.U. competiton policy. In short, the question of the future objectives of competition policy cannot be answered in isolation. Constitutional as well as institutional and procedural developments must be taken into account. The crucial changes that occurred in these realms over the past period in the E.U. explain why the debate on the future objectives of E.U. Competition policy is so topical. • PROF. WAELBROECK—I disagree with Prof. Whish and Mr. Siragusa that Art. 85(3) should be confined to non-economic, or even non-competition related matters. The criteria specified in Art. 85(3) for granting an exemption all relate to competition. This is the root of the problem. Indeed, Art. 85(3) allows exemption of agreements that in principle restrict competition, but not too much. If the balancing test is applied exclusively under Art. 85(1), then what remains for Art. 85(3)?

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Panel Discussion

I believe the only way in which we could begin to see the situation more clearly is by taking specific cases decided by the Commission and determining whether the Commission should have analysed it under Art. 85(1) or 85(3). The discussion here has been relatively vague. • MR. VENIT—I would like to focus on two issues. Regarding nullity and provisional validity, the issue is not to legalise everything that would otherwise be illegal. Rather, the issue is to determine which types of agreements are basically so innocuous that you can give them provisional validity and avoid the legal uncertainty of contractual disputes in national courts. Regarding competence, do we risk going from the frying pan into the fire, from the Community system into the national system? Some jurisdictional screen must be applied to determine which cases fall outside Art. 85, and might best be dealt with by the national authority, and which ought not to be. This kind of fine-tuning will take considerable thought. The term decentralisation was used, but I wonder whether we are really discussing federalisation. The national authorities have much to contribute with respect to the implementation and support of Community law. The Commission lacks enforcement resources. To have the Commission and the Member States operating together on important enforcement issues is key. This would constitute federalisation rather than decentralisation. The manner in which the German energy situation has been addressed is one example of this. • MR. SIRAGUSA—I have two comments. First, the crucial issue is where is the new borderline between Art. 85(1) and 85(3)? This issue is crucial because once the full economic analysis is done under Art. 85(1), what remains? I suggested that we should accept consideration at that point of industrial policy or some other policy. I agree that doing so is dangerous. Therefore, some limit must be imposed, which should probably be a time limit. It should be an instrument that brings the violation of Art. 85(1) to an end upon the expiration of the exemption. That was how the exemption provision was originally conceived. However, the distorted interpretation of Art. 85(1) historically taken has resulted in this time limitation not being imposed. Rather, the exemption was normally renewed and became a permanent solution. If, however, we adopt an approach that all of the economic analysis is made under Art. 85(1), a distortion of competition should be tolerated only for a very limited period of time under Art. 85(3), if and only if there is no longer a violation at the end of the period of exemption. Some industrial policy considerations must be accepted. For instance, in order to further technological development, some restrictions of competition


487

should be accepted for a limited period of time. That could be the analysis if time is to become the essential tool to balance Art. 85(1) and 85(3). Second, we must consider what will occur after the new approach is implemented, because the main effect is going to be federalisation, or decentralisation. Currently, we have this central system due to the Commission's monopoly on granting exemptions under Art. 85(3). However, once the scope of Art. 85(3) is reduced, there will be decentralisation. Thus, national authorities will have a much more important role to play. That is why I favour a gradual approach. The national authorities will need the guidance of the case law. At present, we have a very rich body of case law which is a very good guide for the national authorities. This case law must shift very gradually. I have never criticised the Commission for its implementation of Art. 85(3). I believe that Art. 85(3) was a necessary tool historically, at the time when the system was started. Now, this can probably change. Finally, there must be a way to fine tune the differences in how the national authorities apply Art. 85(1). Art. 85(3) is the instrument with which the Commission can recapture and control Member States that become too naughty. • PROF. KORAH—The essential facilities doctrine reduces the incentive to create the original facility. This is problematic when it is in the private sector, but not when it is in the public sector and incentives are less important, nor in a very recently liberalised industry. It is necessary for telecoms, where the taxpayer has paid for most of the investment, with the exception of B.T., which has been privatised for some time. Regarding the broad interpretation of Art. 85(1), the Commission has indicated in its Green Paper on Vertical Restraints that it cannot make a full economic analysis every time, but this is not necessary. For instance, one could look to the filters that Frank Easterbrook suggested: first, the filter of market power; if there is no market power, the case presents no problem, but if there is market power, then the free-rider argument might be considered. One arrives at a full economic analysis only after having applied about ten filters. The question of provisional validity depends on how Art. 85(1) is interpreted. If many agreements are prohibited because they restrict conduct, then provisional validity will be very important and should be extended to new agreements. If, however, Art. 85(1) is confined to agreements that significantly impede competition, then provisional validity is not needed. Finally, how should the interpretation of Art. 85(1) be narrowed? Should it be as Delimitis and the ice cream cases suggest? Or should there be a group exemption for agreements where the market share is under 20 per cent, as suggested in the Green Paper? I favour doing it under Art. 85(1), although there

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Panel Discussion

will be substantial pressures to do it in another way. Business is very concerned that it will have to seek clearance from fifteen national authorities. The Community has encouraged national governments to enact their own competition laws, and now is concerned that national competition rules can interfere with procompetitive agreements. In order to prevent this, would it be sufficient to issue a notice? The Court has always ignored notices by the Commission, or at least advocates general have told the court to ignore them. Do we need group negative clearance? Would it be necessary to go to the Council to get the power to create group negative clearance regulations? • PROF. KIRCHNER—One major question of this session is whether we plead for gradual, piecemeal reforms, or substantial changes. I agree with Mr. Schaub's position favouring a substantial jump. I would like to add a reason for the necessity for this, which relates to my experience in central and eastern Europe. Under the association agreements, some countries have accepted an obligation to harmonise their competition laws to the European competition law. This creates substantial difficulties in these countries, especially with the block exemption regulations. We advised the Czech government not to copy these block exemption regulations, but to enact only the black clauses, and not the white and grey clauses. This is a simplification that might help those countries. Thus, I urge the Commission and to DGIV promptly to deregulate block exemption regulations. • MR. FAULL—The most important thing I have heard all weekend is Mr. Schaub's speech, which is the clearest and most authoritative statement of a reform programme that we could give. The Commission will soon bring forward its views as an institution. When we talk about narrowing the interpretation of Art. 85(1), we are talking about a proper analysis in economic terms of what is a restriction of competition. This requires making an economic analysis of conduct, and asking whether it has an appreciable impact on the competitive process. It does not require us to ask only whether a party's conduct is constrained. DG IV has broken free of that confusion. We do not believe that a restraint of conduct necessarily gives rise to a restriction of competition. Once Art. 85(1) is interpreted and applied in that way, it will no longer be applied in some of the circumstances in which it has been applied in the past. To that extent, there is a retreat or a withdrawal. That change does not entirely eliminate the need for Art. 85(3). There will still be conduct that restricts competition, but nevertheless should be allowed to go forward because it meets the conditions of Art. 85(3), either on individual analysis or under a block exemption. Block exemptions will not disappear. As to whether Art. 85(3) involves


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only economic issues or also contains some para-economic issues, the Court of Justice has already pointed to a number of non-economic, or at least nonefficiency issues, which arise under Art. 85(3). That represents a policy consensus with respect to how most of the Member State governments view these issues, and how they apply their competition policy. Thus, I do not believe the scope of Art. 85(3) will ever be narrowed so much as to involve a purely efficiency-based analysis. We do, however, attempt to keep it as closely related to economic efficiency as possible. Thirdly, we are conscious that we should not forget the dangers of having sixteen, and perhaps tomorrow twenty or more, different competition policies applied at different levels within what is, after all, supposed to be one single market. One of our responsibilities is to ensure that companies operating throughout the European Union find substantially similar competition policy outcomes wherever they happen to be operating. This can be achieved in many ways, including informal networking, and more formal means, such as legislation. Perhaps a much more solid framework of competition policy could be set in Brussels, by means of legislation or guidelines laying down the principles to be followed throughout the territory of the European Union. Finally, we must achieve a balance between law and economics. We can all agree with respect to vertical restraints, and probably in many other areas as well, that every alleged restriction of competition should be considered on its merits, but we all agree too that this is impossible due to resource limitations. Thus, we need rules that establish safe harbours and presumptions. This may be achieved through various types of legal provisions. In the Vertical Restraints Green Paper, we develop the idea of block negative clearance. We can issue a regulation stronger than a notice, providing that a certain type of conduct in particular circumstances does not fall within Art. 85(1). The impact of that on the national legal systems must be carefully considered. We would explain more specifically the meaning of Art. 85(1) in order to avoid having cautious companies still file notifications because of grey zone problems. I believe that in the next year or two, we will see significant developments in this area. As soon as we are in a position to commence proper consultation on ideas, we will do so. We are all in this together, both within the European family, and with our foreign friends who no doubt will have advice for us. We will be seeking technical and institutional help in creating what amounts to a new system of competition policy for the next century. • PROF. WHISH—To conclude this session, the overwhelming feeling of the panel was that there is no need for Treaty amendment because there are other ways to achieve the necessary changes.

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Panel Discussion

The central issue that we have been discussing is what is meant by a restriction of competition under Art. 85(1). It appears to be generally accepted that there is a problem. Moreover, there appears to be a determination to try to find a workable solution. In order to find a solution, we enter into this debate of evolution, how gradual the change is going to be, how it is going to come about. We have heard a number of possibilities. The case law of the European courts will continue to be extremely important. We have a considerable body of law on vertical restraints, but relatively little on horizontal restraints, other than cartels. The Commission's guidelines are extremely useful. It has issued more guidelines in recent years, which have been more detailed. They have covered the telecommunications sector, the postal sector, etc. We look forward to more guidelines, and to updating existing notices, such as the agency notice. The subcontracting notice is still very useful, but it should be reviewed to determine the extent to which it can be updated, nineteen years after it was published. There has been some discussion about group negative clearance. No legal basis exists for a group negative clearance, although this does not mean that the idea should be dismissed. The greater the process of consultation, and the greater the acceptance of the eventual contents of the notice, the less likely it is to be challenged before the Court of Justice. I believe it deserves further consideration. More decisions might lead to more appeals, but this should not trouble any regulator, insofar as this tests out the jurisdiction and the law. There is no disgrace associated with a regulator losing a case from time to time. The consultation process on the Green Paper on Vertical Restraints will be of critical importance. When the Commission comes forward with itsfinalproposals, we will learn a lot more from it with regard to what the Commission considers to be the meaning of a restriction of competition, among other things. There are many initiatives being taken, and many ways in which we can gradually advance the understanding of Art. 85(1). The thoughts about the interface between Arts. 85(1) and 85(3) are perhaps the most useful ones that have come out of this session. We all feel certain doubts as to precisely what this interface is. We need a redefinition of the respective roles of Art. 85(1) and 85(3). I did not mean to suggest in my earlier comments that if we make additional analysis under Art. 85(1), then we can add many new criteria under Art. 85(3). Rather, the suggestion was that Art. 85(3) would have a different role, perhaps including taking decisions that are of a political nature. The Court's Metro decision suggests that employment considerations were relevant under Art. 85(3). In deciding to grant the Fordl Volkswagen exemption, Commissioner Van Miert said that a consideration was that the plant was being built in a green field site in a part of Portugal with relatively high unemployment. He did not specify how large or small a


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consideration it was, but that does seem to be political. Perhaps in considering the role of Art. 85(1), we must be clearer in our thinking as to the role of Art. 85(3). Mr. Wolf stated that in Germany they decided that Art. 85(3) is a kind of hornet's nest, and maybe they do not want to adopt it. I must get back to the U.K. and tell the government there, because there is a new bill in the pipeline. As to provisional validity, if more analysis is made under Art. 85(1), fewer agreements will have to be notified for purposes of Art. 85(3). This would reduce the arguments for provisional validity. Moreover, Art. 85(2) presents an obstacle because it provides that agreements that infringe Art. 85(1) are void. One possible way to get around this problem is Art. 4(2) of Reg. 17/62, which identifies a certain limited range of agreements that do not require notification if they are to be exempted. These are agreements dealing with R.&D., standardisation, and agreements between parties in the same Member State. Thus, this is something in an embryonic form which could perhaps be built upon. However, we may discover that the procedure is ultra vires because it contravenes Art. 85(2). Finally, as to the relations between the Commission and national authorities, a great deal more must be done. The Spanish Banks decision creates a problem. We must be clear that two different issues exist with respect to Art. 85(1). The first is determining Art. 85(l)'s jurisdictional scope. Perhaps there are some agreements that affect trade between Member States, and therefore are covered by Art. 85(1). We might, however, rethink the jurisdictional criteria so that such agreements would then end up within national law. The second is rethinking the concept of Art. 85(1), which will imply that agreements that are currently caught by Art. 85(1) will no longer be. Insofar as national law is the same, they would also conceptually not be subject to that either. Thus, it is not necessarily a question of taking such agreements out of the European plane and forcing them back on the national authorities. Rather, many agreements will no longer be subject to Art. 85 or its national law equivalents.

• PROF. EHLERMANN—The conclusion of last year's conference was clearly that more decisions, right or wrong, should be made by more actors, mobilising in particular national competition authorities. Some of us had a feeling that there was a hidden agenda. We have tried this time to address the hidden agenda, which relates to the question of Art. 85(1) versus 85(3). We have not solved all problems, but we have elucidated them. The next logical step would be to address more precisely the question of the borderline between the two paragraphs, and what results flow logically from the debate about goals with respect to Art. 85(3).

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• MR. FORRESTER—Some of us came here as what might be called 'competition workshop in Fiesole' virgins, in the sense that we had heard from our friends that something remarkable might happen. We scarcely believed it. We had read the literature, we were very intrigued, and having experienced the actual, we think it is wonderful. So I was volunteered last night to express the collective, passionate enthusiasm of all of us to the organisers for having done such a wonderful job. The only substantive comment is the following. I realise that we are mistaken in asserting that Italian competition law is new. I realised last night in the course of the discussion with our eminent chairman that in Siena there is proof that Italian competition law is not new. In the Signeria on the piazza in Siena, there is the Mirror of Good and Bad Government. In the well-governed city, the women are beautiful, the cows are prosperous, the chickens lay eggs, there is no crime, the fields are full of crops. Whereas in the city of bad government there is much disease, the children have no respect for their elders, there is adultery, there is crime, and there is fever walking the street. Even the houses look dilapidated and scruffy. Therefore it is clear that one of these should be labelled the mirror of good competition law, and the other should be labelled the mirror of bad competition law. If nothing else, I urge you to go to the publisher and invite him to put a fresh cover on the book, showing that Italy got there first. To the rapporteurs who have done a lot of work, from the speakers to, above all, our two most eminent chairmen for their ferocious chairmanship (I have never attended anything where 40 lawyers cheerfully accepted savage discipline as to the length of time they would speak), for the energy and diligence of those who put this together, and for the privilege of being invited, we all most sincerely thank you very, very much.

8 FUTURE COMPETITION LAW

WORKING PAPERS

I II III IV V VI VII VIII

Richard Whish, Rapporteur of Session Four Jonathan Faull Christian Kirchner Valentine Korah Mario Siragusa James Venit Michel Waelbroeck Alberto Heimler & Piero Fattori

I Richard Whish Professor of Law, King's College London Partner, Watson, Farley and Williams London, England

Introduction The panellists in Session 4 of this Workshop have been asked to consider what changes are needed in order to realise more efficiently the legitimate and desirable policy objectives of competition policy. This issue is to be considered in particular in the context of the European Community, where there is considerable concern about how Arts. 85 and 86 are currently applied. The debate about the Commission's Green Paper on Vertical Restraints1 has brought many of the issues to the boil, as many commentators have found that the Commission's utterances in this document simply demonstrate the extent of the problem rather than provide any useful solutions. Session 4 is not intended to continue the discussion of what the legitimate objectives of competition law are, nor what is wrong with the way in which competition law is currently applied. Rather, the function of the Session is to examine, on the assumption that changes are necessary, how those changes can be carried into effect.

A. Questions for the panellists As Rapporteur General, I formulated the following series of questions to foster debate: • Is it possible to bring about a change in the current application of E.C. competition law without rewriting the Treaty? It is not just that the wording of Arts. 85 and 86 is very broad: the Treaty itself is to be interpreted teleologically, and the text, from the Preamble, through Arts. 2 and 3, and on into the specific policies, is capable of supporting a variety of objectives. These include, but are not limited to, the promotion of competition and of an integrated market. Is it surprising, with this in mind, that competition policy is as "flexible" as it is? Is 1

European Commission, Green Paper on Vertical Restraints in E.C. Competition Policy, COM(96) 721 Final (22 Jan. 1997).

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it desirable or possible that Arts. 85 and 86 should be read in a more detached way: should competition policy be isolated—within the Treaty itself, or in the interpretation of the Treaty—from the (contaminating?) influence of other provisions of the Treaty? Is this legally possible? Why should the competition provisions be singled out for this separate analysis and application? Might it be sufficient to rewrite Art. 3(g), so that a clear objective for the Community's competition policy is set out in the list of its activities, and the competition provisions should be interpreted against that backdrop? • Even if Arts. 85 and 86 are not "isolated" from the rest of the Treaty in the way just described, do they require rewriting? Numerous possibilities exist. One is to remove the "bifurcation" in Art. 85, although many of the issues that have habitually been regarded by the Commission as relevant to the Art. 85(3) analysis in reality go to the question of whether an agreement promotes or restricts (or is neutral as to) competition. As long as Art. 85(3) is there, it clouds the conceptual argument. Art. 85(3) induces lazy thinking—a laxness as to what is meant in the first place by the expression "restriction of competition." Eventually the central conundrum of competition law will have to be confronted, and it is only the removal of Art. 85(3) that willfinallyfocus people's thinking on this central issue. A less radical suggestion would be that Art. 85(3) is not removed, but that consideration is given to its rewording. A possible problem with the current text of Art. 85(3) is that it encourages an analysis of agreements according to which (for example) they may "restrict" competition and yet be exempted because they "promote an improvement in the production or distribution of goods." The architecture of Art. 85 does not particularly invite the reader to question whether an agreement that promotes such an improvement can be said to restrict competition in thefirstplace, and of course many such (most? all?) such agreements promote competition. Perhaps Art. 85(3) should be rewritten so that it specifically permits non-competition criteria to be taken into account (these might be, for example, environmental considerations or employment), while ensuring that all questions that go to the impact of the agreement upon the competitive environment of the market are taken into consideration only under Art. 85(1). • Consideration must not be limited to Art. 85 and its content. Art. 86 also is open to the criticism that it has been applied with a host of different, and in some cases contradictory, aims in mind. Is this problem to be dealt with only by rewriting the Treaty? How could the wording of Art. 86 be improved? Should it be redrafted to make clear that there must be causation between the abuse and the dominant position? That is to say, should it be necessary to demonstrate that the dominant undertaking used its market power in order to bring about the abuse of which it is accused?

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• If it is not possible to rewrite the Treaty in the current timeframe, we must consider other ways in which it might be possible to bring about an alteration in the application of the competition rules. This raises complex institutional issues, in particular given the relationship between the Commission and the Court. Much of the criticism of the Community's competition policy arises from the Commission's application of it, but in defence of the Commission, it can be said that much of the Court's caselaw—by which it is bound—is itself rather suspect. Against this background, we should consider: • Whether it would be sufficient to rely on the Court to develop its caselaw in such a way that its application of Arts. 85 and 86 becomes more "realistic," "competition-oriented" etc. Several judgments of the Court can be cited in favour of the proposition that its approach has become more sophisticated. Can we therefore rely on a process of evolution to arrive at a more principled and effective competition policy? On the other hand, it might be that this is unduly optimistic: while some judgments are thoughtful and analytical, this is by no means uniform, and some of the more recent ones have been thin in terms of reasoning and substance.2 Indeed, the Community courts are arguably weaker now than for many years.3 • If it is not possible to rely on the Court to deliver a "better" competition policy, we must consider the extent to which the Commission is able to bring about change while, at the same time, not violating either the Treaty or the caselaw of the Court. To what extent does that caselaw leave the Commission in a position to refine the concepts of "restriction of competition" and "abuse of a dominant position" in an appropriate way? • If the Commission has a reasonable amount of freedom to adapt Arts. 85 and 86, how should it do so? Should it be persuaded to abandon the adoption of further block exemptions and instead to concentrate on Notices that explain what is not caught by Art. 85(1)? Do such Notices provide adequate legal security? How can they be updated sufficiently regularly so that they remain useful? • Could many of the problems of Community competition law for companies be eliminated by a single, simple expedient: introduction of provisional validity for agreements? 2

See, e.g., Tetra Pak International SA v. Comm'n (No. 2), 1994 E.C.R.II-762; Compagnie Maritime Beige v. Comm'n, 4 Common Mkt. L. Rev. 273 (1997). 3 The loss, for example, of Judge Rene Joliet has deprived the E.C.J. of one of the deepest thinkers on the true meaning of Art. 85.

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Accordingly, the panelists were invited to consider a range of possible solutions to the current "problems" associated with the Community competition rules. At one end of the spectrum, a gradualist approach, falling short of Treaty amendment, was contemplated: reliance on the developing jurisprudence of the Court and an alteration on the part of the Commission of its interpretation of the competition rules. At the other end of the spectrum, rewriting the Treaty was considered, in order to achieve the intended aims of the competition rules. One reason for raising the possibility of Treaty amendment was that the Commission itself, in its Green Paper on Vertical Restraints, had ruled out any such change. Since the debate was not to be had in the consultative process arising from the publication of that document, it seemed appropriate to give the matter an airing at the Florence workshop. Moreover, the Art. 85 debate has been with us for years—indeed decades—without being resolved. Radicalism might be needed in order to bring about a solution to the problem. The panelists did not favour a rewriting of the Treaty. Instead, they overwhelmingly supported change at the "gradualist" end of the spectrum, and in particular, a reconsideration of what is meant in Art. 85(1) by a "restriction of competition." There was relatively little comment on the application of Art. 86. This is surprising, given the amount of criticism that Commission decisions under this provision attract. Prof. Waelbroeck raises the possibility that Art. 86 should not be used against "exploitative" abuses, but only where there is anticompetitive behaviour. Exploitation should, perhaps, be dealt with, if at all, under provisions modelled upon Art. 90. He also stresses the adverse impact of state action on the competitive fabric of the economy, which he believes merits close attention. The following is a summary of some key points that emerge from the panelists' papers. There is fairly broad consensus among the panelists as to certain issues.

B. Analysis of responses 1. The need for a different analysis under Art. 85(1) Although their papers express the point in different ways, the panellists—practitioners, academics and a Commission official unanimously hold the view that a change in analysis is needed under Art. 85(1). This is the key point that comes out of their contributions. There is no basic quarrel with the bifurcation of Art. 85(3). Rather, the problem relates to how the Commission, in particular, has applied Art. 85(1). As to bifurcation, the introductory comments to my ques-

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tions suggested that there has, perhaps, been some laziness on the part of the Commission at times: an overbroad application of Art. 85(1) does not necessarily matter, since the possibility of redemption of an agreement exists in Art. 85(3). The panellists' papers note that, given the need to promote market integration, the Commission has been inclined to a broad application of Art. 85(1). However, the panellists note the many problems that this raises, and all agree that change is needed. The panellists generally believe that a more sophisticated analysis of the economic impact of agreements, and a less formalistic approach than that often taken by the Commission, is needed. This could be termed a European "rule of reason." This is not new: from 19674 onwards, the true meaning of a "restriction of competition" has been debated. Mr. Faull points out that the Commission has demonstrated itself to be capable of this more flexible approach, although other panellists doubt that the Commission has truly followed the Court's lead in this area. Prof. Kirchner argues that it is necessary to determine precisely what economic model of behaviour ought to be deployed when determining what is meant by a restriction of competition, and Prof. Korah notes the difficulty that lawyers and officials seem, sometimes, to have with economic concepts. These points do not, of course, detract from the need for more economic analysis.

2. Role of the C.F.I, and the E.C.J. Several judgments of the Court eschew the formalism (and the confusion of restrictions of conduct with restrictions of competition) of the Commission. This might suggest that time will prove to be the healer: let the Court's jurisprudence develop, and wait for the Commission to begin to apply the law that is, rather than the law as the Commission might like it to be. The panellists place great faith in the developing jurisprudence of the Court. Prof. Waelbroeck specifically enjoins us not to give up hope. One reason that the panellists did not choose the radical option of rewriting the Treaty is precisely that there is a well-known line of cases—from STM5 on—demonstrating that Art. 85(1) can indeed be applied flexibly and realistically. However, Mr. Siragusa points out that the Court's case-law can be "erratic", while Prof. Korah is more specific in her criticism: the Court often fails to give 4

Rene Joliet, The Rule of Reason in Antitrust Law: American, German and Common Market Law (1967). 5 S.T.M. v. Maschinenbau Ulm, 1966 E.C.R. 235.

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reasons for its judgments, instead stating only conclusions; and the Court currently appears to be in a "conservative" mood (i.e., it does not appear inclined to question its earlier judgments, such as Merck v Stephar,6 nor to build upon its earlier jurisprudence). Prof. Korah would extend the criticism of lack of reasoning to the Commission as well. For example, recitals in its block exemption regulations and provisions in its Notices may fail to explain its thinking on particular issues, and are often conclusions rather than reasons. Prof. Kirchner specifically rejected the idea of leaving it to the Court to sort matters out.

3. 'Bifurcation' Several panellists have pointed out that the bifurcation in Art. 85 is not the problem. Rather, a failure to understand the true purpose of Art. 85(3) has been the problem. Art. 85(3) should not be regarded as a second opportunity to consider the restrictiveness of an agreement upon competition. Rather, it provides an opportunity for the Commission to decide that some agreements that really do restrict competition should, nevertheless, be permitted because various benefits mightflowfrom them. The "political" role of Art. 85(3) should be recognized more clearly. It might even be that agreements that limit price competition might, in some circumstances, be granted an exemption. Prof. Kirchner questions whether the objectives of the Treaty, as set forth in Arts. 2 and 3 (other than Art. 3(g) on competition) should be relevant only when applying Art. 85(3), and not when applying Art. 85(1).

4. 'The frying pan and the fire' Mr. Venit asserted that a realignment in the application of Art. 85(1) would not deliver the desired benefits if it simply resulted in the application of national law. Mr. Faull also discusses the importance of getting the "architecture" of future competition law correct, which raises important questions for the relationship between the Commission and (a) national authorities and (b) national courts.

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1981 E.C.R. C.I.R. 2063.

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5. Practical responses Various practical responses to the need for a new approach to Art. 85(1) are suggested. One is that the Commission should issue "block negative clearances." Notices do not have the legal status needed to provide legal security; a binding legal instrument would be preferable. The process involved in the Green Paper on Vertical Restraints could lead to something more than the current Notices, given the extent of the consultation procedure. Mr. Venit observes that the experience under the Merger Regulation, which entails a "quick-look" at transactions in order to determine which ones require in-depth investigation, could be useful on a wider scale in the procedures under Arts. 85 and 86. Indeed, the operation of the Merger Regulation generally offers insights that would be useful across the range of competition law enforcement.

6. Provisional validity Should provisional validity be more widely available for agreements? The effect of Art. 85(2) is to require firms that have no anticompetitive intent, and whose agreements in fact will have no anticompetitive effect, to devote substantial resources to satisfying notification requirements or a block exemption. In general, these are not the agreements that a competition authority should be concerned with. They should be stamping out the naked cartels and serious abuses of dominance that really affect the market. The participants in a naked cartel and abusers will not be concerned about voidness; rather, their only concern is not to get caught. Thus, voidness is not a deterrent to those that should be deterred, but is enormously problematic for those that already intend to comply. Furthermore, Art. 85(2) can be used strategically in domestic litigation. At least two of the panellists have some sympathy for provisional validity (Prof. Kirchner and Mr. Venit). Mr. Siragusa points out that this issue will become less significant if Art. 85(1) is applied in the more realistic way that the panellists hope to see.

7. Textual amendment to the Treaty As noted above, there was relatively little support for a textual amendment of the Treaty. Prof. Kirchner suggested that Art. 3 should be reordered in a hierarchical manner so that the provisions on free movement and competition are

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given a higher ranking than other matters. He also favours the exclusion of vertical agreements from Art. 85, unless they are utilised to segment the European market into separate national markets.

Conclusion There is consensus on the need for a more realistic appraisal of agreements under Art. 85(1). The Court must continue to provide a lead, and should ensure that its judgments are fully reasoned. The Commission must follow the lead that has clearly been given by the Court. The Commission must also settle any internal debate as to the issues under discussion. It seems there are differences between the Legal Service and DGIV, and even within DG IV, as to these problems. This makes it impossible to advise in particular cases whether the Commission will take a "realistic" approach to Art. 85(1). At times, the Commission seems reluctant to abandon the power that nullity and the consequent need for notification provides. Yet it vocalises an intention to be "realistic" and that it understands the need for flexibility. The Commission cannot have things both ways. It should have the courage to use a finer mesh for its net. The big cases will not get away. The Green Paper on Vertical Restraints is a disappointment. However, the process is not yet complete, and the Commission still has the opportunity to take into account the considerations raised by these papers in determining the outcome. Provisional validity for agreements may have an important role to play in improving the current application of Art. 85. The panellists devoted most of their time to Art. 85 issues. Art. 86, however, seems to produce some very poor decisions and judgments. They do not make clear what Art. 86 is supposed to achieve.

II Jonathan Faullx Professor of Law, Vrije Universiteit, Brussel

Introduction Recently, DG IV has been essentially defensive in the face of criticism. This is partly because we have been concentrating on our daily business, rather than explaining policy and looking ahead. It may also be partly a result of delays in long-awaited initiatives, some of which are now underway. We must now look forward and face the future. The approach of a new century helps people focus on the achievements of the past and the challenges of the future. In the next few years, the challenges facing the E.U. are enormous. Economic and monetary union will soon be underway among some Member States, together with a further enlargement to countries of Central and Eastern Europe. Coping with these events, while preserving the achievements of the Community's competition policy, is a formidable task. Meanwhile, competition policy has grown on the basis of a system of law and choices made mainly in the 1960s. DG IV already finds it difficult to manage its growing workload with limited resources, which are certain to remain so. The feeling is widespread that we must refocus on core activities (threats to the single market, cartels, abuses of dominant position, liberalisation, merger control and state aid), and thereby eliminate unnecessary work. The block exemptions adopted by the Commission in the 1980s,2 which set forth policy on vertical and horizontal agreements, expire shortly. Rules must now be devised for the E.U. of the early 2000s, after an open process of consultation and debate. The balance between legal certainty and economic analysis, which all competition policies strive to achieve, must be redefined. We must look again at the best way to provide for market-sensitive analysis in a predictable, transparent legal system designed for an imperfect single market among Member States of very different sizes, traditions and economic circumstances. A feature in the E.U. since (and in part because of) the adoption of the Community's Merger Control Regulation in 1989 has been the growth of 1

All views expressed are personal. Regs. 1983/83, 1983 O.J. (L173) 1, Corrigendum 1983 O.J. (L281) 24 (exclusive distribution), 1983 O.J. (L173) 5, Corrigendum 1983 O.J. (L281) 24 1984/83 (exclusive purchasing), 417/85, 1985 O.J. (L53) 1 (specialisation), 418/85, 1985 O.J. (L53) 5 (R.& D. cooperation) and 4087/88 1988 O.J. (L359) 46 (franchising). 2

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national competition authorities and laws, together with sector-specific regulators and regulations. A new architecture of cooperation among the E.U.'s (indeed the E.E.A.'s) competition authorities is needed, and poses some hard questions about the future direction of Community and national rules and procedures. Some of these are considered below. The Commission's procedures have been built on (and some would say around) Reg. 17/62, now 35 years old. Anyone wishing to understand how DG IV actually operates must go beyond that Regulation. The law, policy and practice of competition policy enforcement in the E.U. are to be found in dozens of judgments, notices, decisions and statements. A Martian lawyer grappling with his/her first case under Art. 85 will look in vain at Reg. 17/62 for rules and guidance on such issues as comfort letters, interim measures, enforcement of inspection decisions, access to file, self-incrimination, legal professional privilege, warning letters or the treatment of cooperative joint ventures. The impact of the Court of First Instance in recent years has been considerable, and the time has come to rationalise the Community's procedural law. Work is underway on a new Commission Regulation to replace Reg. 99/63. Meanwhile, globalisation of the economy continues apace. Although competition policy still deals with many local problems, more and more markets are opening up to cross-border competition, both within the E.U. and between it and the wider world. This has many consequences. The Community's "internal" jurisdiction, triggered by the "effect on trade between Member States" rule in Arts. 85 and 86, is widened. However, its "external" jurisdiction, under the "implementation" rule, leads to a heightened risk of conflict and need for cooperation with foreign competition authorities. Recent years have seen a number of international initiatives, many of which were made by the European Commission. The E.U. has a competition agreement with the U.S., and a second agreement providing for enhanced "positive comity" will soon be concluded. This move away from extraterritoriality to mutual trust and cooperation is an important development. An agreement with Canada will also be concluded shortly. The Commission launched the idea of discussions of the international aspects of competition policy and its relationship with trade issues. These are now underway in the W.T.O. Meanwhile, cooperation and debate continue on a regular basis at the O.E.C.D. Recent years have seen the success of the Community's merger control system, as well as the emergence of a crucial role for competition policy in regulating markets recently opened up to competition. Competition policy is thus essential both in the process of liberalisation, and in coping with the problems of liberalised markets.

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State aid policy is an integral part of the Community's competition policy. Here too, the challenges of the coming years are enormous. In addition to the problems of coping with an already massive workload, which will certainly not be reduced by enlargement to the East, steps are underway to put state aid law on a proper legislative footing by transforming rules laid down in notices and frameworks into block exemption regulations and enacting a regulation on procedures. Meanwhile, in all aspects of competition policy, changing technologies and techniques in key business sectors are causing the Commission to reflect on policy choices made in the different world of the 1960s. For instance, just-in-time delivery systems requiring close collaboration between manufacturer and distributor, and the development of the Internet, raise issues unknown when Reg. 67/67 was adopted. More generally, and without making or accepting claims about scientific precision, we know a great deal more about the economics of markets and firms' choices than we used to, and we are now better prepared to acknowledge the crucial role of economics in competition policy. Indeed, one of the main challenges for competition policy in the years to come is to redefine the balance between economic analysis and legal certainty. The Community's competition policy has achieved a great deal since 1952 (E.C.S.C.) and 1958 (E.E.C.). A body of law and policy has been created, and a "competition culture" has spread through European industry, university faculties and the professions. Perhaps most importantly, Europe's consumers have come to appreciate the opportunities and benefits a system of undistorted competition has brought them.

Art. 85: A Programme of Modernisation A programme to modernise the Community's competition policy must respond to the challenges outlined above, and address the following issues. I raise a number of questions that I do not answer, because the time has not yet come for blueprints. It is argued that the Commission's application of Art. 85(1) is too broad and/or fundamentally misconceived. Arrangements which are pro-competitive in the market situation of a particular case are sometimes brought under Art. 85(1) and exempted under Art. 85(3), when it would be simpler and less burdensome if Art. 85(1) were not applied in the first place. To make matters worse, it is said, most of this unnecessary exemption activity is not carried out following the procedures established by Reg. 17/62, by decisions which confer legal certainty, but by the ersatz, extra-regulatory, informal and legally fragile

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comfort letters. The fundamental misconception lying at the heart of this excessive application of Art. 85(1) is the view that a restraint on commercial freedom of action is a restriction of competition. This leads to examination of individual clauses rather than economic analysis, and unnecessarily widens the scope of Art. 85(1). Critics also say that the move towards a "rule of reason" analysis in the caselaw of the Court of Justice has been received unenthusiastically by the Commission, which has sought to distinguish subsequent cases from the judgments concerned. While I do not deny the force of some of these criticisms, the Commission's practice shows that many comfort letters are issued stating that Art. 85(1) does not apply, based on the caselaw just mentioned and some of the Commission's more adventurous decisions.3 The "block negative clearance" idea outlined in the Green Paper on Vertical Restraints is further evidence that the Commission is willing to look for ways of clarifying the scope of Art. 85(1). More generally, it is accepted that economic analysis is required before restraints on conduct to which agreements, concerted practices or decisions of associations of undertakings give rise can be characterised as restrictions of competition. It is equally accepted that not all restrictions of competition arise from restraints on conduct, but may be inferred from certain relationships between undertakings, such as exchanges of some kinds of information or the influence brought about by a minority shareholding, again in certain economic circumstances. Overall, economic analysis, not legal parsing, is the key tofindinga restriction of competition. This is not to say that certain presumptions are not useful and, indeed, often used. Thus, price fixing, market sharing and division of markets along national borders within the E.U. are not usually subjected to much market analysis, because we know from experience that they are very likely to harm the competitive process and highly unlikely to meet the requirements for exemption. The principal jurisdictional criterion of Art. 85(1) dividing Community from national jurisdiction is the notion of effect on trade between Member States. This has been given a wide interpretation by the Commission and the European Courts and, as market integration develops, brings more and more matters under Community law.4 A reinterpretation of this notion would alter 3

E.g. Elopak/Metal Box-Odin, 1990 O.J (L209) 15. See Jonathan Faull, Effect on Trade between Member States and CommunityMember State Jurisdiction, 1989 Fordham Corp. L. Inst. 485 (Barry Hawk ed. 1990); Rein Wesseling, Subsidiarity in Community Antitrust Law: Setting the Right Agenda, 22 E.L. Rev. 35(1997). 4

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the scope of Art. 85(1). If the scope of Art. 85(1) were reduced, the opportunities for application of national competition law would be increased. This raises important questions about the future "architecture" of competition policy in the E.U. Is the future one in which Community law will be applied, mainly by the Commission and occasionally by national authorities and courts, to cases of Community dimension, leaving all other cases of national or sub-national importance to be dealt with by national laws? A subsidiary question is whether "Community dimension" can be defined satisfactorily and predictably in an economy of moving targets where market definition requires careful analysis in the light of the market integration process in the E.U. and the globalisation of the economy more generally. The Merger Regulation's division of jurisdiction by reference to turnover criteria has worked reasonably well, but the Commission believes that the turnover thresholds are set too high. This has led to a problem of notification of mergers affecting several Member States to a multitude of jurisdictions, each with different requirements, languages, procedures and substantive rules. Perhaps merger control, usually conducted on an a priori basis, can survive this situation for a while, albeit at great cost for companies operating in the E.U. and thus for its competitiveness. It is, however, hard to see how restrictive practices can be divided up neatly between Community and national jurisdictions without wastage and forum shopping. Is an alternative future one in which national law withers away altogether and Community rules are adopted as a common competition law to be applied at all levels by national and Community authorities? It would no longer matter if the precision of the dividing line between Community and national jurisdiction were achieved at the expense of leaving some cases in the wrong place, as long as: (i) the same rules were applied consistently in all places; (ii) a system of cooperation between all the authorities involved prevented forum shopping and facilitated the gathering of evidence and the application of a European vision. In any event, whatever the substantive rules applied in different places within the E.U., there is a need for a system of cooperation between national authorities inter se and between them and the Commission, to share information, analyses and experience in their common endeavour of enforcing competition policy in their single market. The shortcomings of the current system, built on the principle of primacy of Community law, sometimes conflicting interpretations of a rather old Court judgment5 and the institutional system of Reg. 17/62, are ever more evident. It does not cater properly for comfort 5

Walt Wilhelm v. Bundeskartellamt, 1969 E.C.R. 1.

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letters, it does not provide for any cooperation between national authorities and the flow of information between the Commission and national authorities is directed from the former about its cases to the latter, not vice versa. A new architecture is therefore called for, going beyond the current structure of Commission-national authority relations. Recent developments in cooperation between the Commission and the U.S. antitrust authorities have highlighted the paradox that there is sometimes more cooperation in competition matters between Brussels and Washington than between some European capitals. I have concentrated so far on national authorities, rather than courts. While the former have an expanded role to play in the future, the responsibilities of national courts in enforcing the law are fairly well established. Once damages are awarded in significant amounts for breaches of Arts. 85 and 86,1 expect the number of cases brought before the courts to grow quickly. Of course, national courts also suffer from the tricephalism of Art. 85. A related question is the application of Art. 85(3). At present, pursuant to Art. 9(1) of Reg. 17/62, only the Commission may grant exemptions under this provision, except in the unusual circumstances of Art. 88 of the E.C. Treaty. Neither national courts nor national authorities may grant exemptions pursuant to Art. 85(3), although they may consider and draw inferences from its application in various ways and, once it has been implemented in a block exemption regulation, they may apply the Regulation in the normal way.6 National authorities and courts may apply Art. 85, and indeed the Commission encourages them to do so, but they are handicapped by the Commission exemption monopoly. If the monopoly were relinquished, decentralisation of the application of Community competition law would be enhanced. There are of course risks inherent in this approach. Would all national competition authorities be able to make the often E.U.-wide economic analyses which Art. 85(3) requires? Would unequal treatment and forum shopping between Member States be the result? One way of minimising or avoiding these risks would be to create an institutional structure providing for close cooperation between all the competition authorities entrusted with the application of Art. 85(3), together with a system of judicial review (including the preliminary ruling mechanism of Art. 177). For instance, national authorities and the Commission could be empowered to exchange information freely with each other, and all draft decisions could

6

However, only the Commission may withdraw the benefit of a block exemption in an individual case.

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come before the Advisory Committee on Restrictive Practices and Dominant Positions which currently gives an opinion on Commission drafts only. Another solution would be to enact more Community legislation, creating a framework for all competition policy in the E.U. More numerous and more detailed block exemptions could set out clear policies for all authorities to apply. However, there will always remain issues of competition policy that cannot be reduced to legislative provisions. The market-sensitive analyses and economic judgements reflected in the Commission's discretion over the application of Art. 85(3), long acknowledged by the Court of Justice, and in similar arrangements in the Member States and elsewhere, show how resistant competition law is to detailed legislation. Indeed, the Commission's own block exemption regulations are criticised today for their "strait-jacket" effect, over-regulating complex commercial behaviour. The Green Paper on Vertical Restraints7 considers this issue. Advocates of market share thresholds as an economic response must answer the criticism that market definition and market share calculations are too uncertain to be used as thresholds in block exemptions. It is assumed in the preceding paragraph that the Council could lawfully abolish the Commission's Art. 85(3) monopoly by abrogating Art. 9(1) of Reg. 17/62. It has been argued that the wording and system of Art. 85(3) make it impossible to provide for its application by the courts.81 will not go into this argument here, but it will have to be faced if the decentralisation of Art. 85(3) is to extend to the courts. As far as national authorities are concerned, there seems to be no legal obstacle to allowing them to apply Art. 85(3), as indeed Art. 88 shows. So, in thinking about the architecture of competition policy in an enlarged E.U., we face an important question: should we go towards a system in which E.C. law is applied at all levels, or should we allow more room for the application of national laws? This is a question to be answered in both economic and political terms. What will lead to the most efficient allocation of economic and administrative resources? What is best for competition policy and its stakeholders (consumers, industry, policy makers and enforcers)? What do Europe's citizens want? Their views, mediated through national politics and the European Parliament, will have to be sought before major reforms are introduced. 7

European Commission, Green Paper on Vertical Restraints in E.C. Competition Policy, COM(96) 721 Final (22 Jan. 1997). 8 See Giuliano Marenco, The Uneasy Enforcement of Art. 85 E.E.C. as between Community and National Levels, 1993 Fordham Corp. L. Inst. 605 (Barry Hawk ed. 1994), quoting with approval Advocate General Lagrange in Bosch v. DeGeus, 1962 E.C.R. 45.

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At the very least, architects of the new order must ensure that competition policy is consistent throughout the E.U. Citizens and companies are entitled to expect that cases have substantially similar economic outcomes whatever the legal system or authority. I am not suggesting that there is always one scientifically correct answer to a competition problem. Honourable competition authorities will differ in their analyses from time to time, but a single market cannot have conflicting competition policies within its territory. If Member States empower their competition authorities to apply Community rules, or enact competition laws similar to Community rules, the risk of conflict is greatly diminished. A considerable degree of convergence has already taken place in the E.U. and beyond, as countries in and on the edges of the Union adopt competition laws modeled on the Community system. Some assessment of the impact of this process is needed before more radical steps are taken. Has it improved the consistency of policy across Europe? Has it reduced compliance costs for business? Has it made plaintiffs' tasks easier? An additional, more general question arises about the successes or failures of competition policy in Europe. How far has competition culture permeated into European industry? If competition policy is fundamentally about economics, it certainly needs law as an expression and a procedural framework. This leads to further consideration of the role of courts. Most courts in the E.U. have little experience in dealing with competition law. It sometimes seems that they have little inclination to broaden that experience. Do we need specialised national or Community competition courts?

Conclusion To sum up, the main features of Art. 85(1) as currently implemented are as follows. Art. 85(1) is interpreted broadly, particularly as regards the notion of restriction of competition, leaving only a limited space for the development of a rule of reason, and the jurisdictional requirement of effect on trade between Member States. This means that Art. 85(3) has to be applied very frequently. Unless covered by a block exemption or meeting the restrictive conditions of Art. 4(2) of Reg. 17/62, agreements must be notified to the Commission if they are to be considered for exemption under Art. 85(3). The question today is whether this system, which does not work as the authors of Reg. 17/62 intended, is meeting the needs of the E.U. as it faces the challenges of pursuit of economic growth and job creation, the completion of the single market, economic and monetary union and further enlargement.

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There is an opportunity to redesign a system for competition policy for the 21st century. At the same time, the Reg. 17/62 block exemption model comes under scrutiny as steps are taken to create a soundly based system for state aid control. Meanwhile, the intergovernmental conference brings institutional questions about the future role of the Commission. The European Union certainly needs an independent body to develop and implement its policies: I see no reason why the Commission should not continue to play that role in the next millennium.

Ill Christian Kirchner Professor of Law, Humboldt University Berlin, Germany

Introduction Proposals to change the existing European competition law must fit into the legal environment of the "constitutional structure" of the European Union. The Treaty establishing the European Community constitutes the centre piece of that constitutional structure. Arts. 85, 86 and 90, together with Art. 3(g), are the core of the Community's competition law. Proposals for change must be subjected to legal analysis to determine their compatibility with the existing legal framework of the Treaty. But such a legal analysis is not sufficient in itself; proposals for change should also be considered in light of what modern economics has to tell us about objectives of competition law and policy. Thus, the task of this paper will be an interdisciplinary one, combining legal and economic analysis. The paper is organized as follows: first, questions concerning the reform of Community competition law will be briefly addressed. Second, the legal context for the proposals will be outlined, and the reform proposals will be analysed in this framework as to their compatibility. Third, an economic analysis will be applied to test whether the proposals are to be refuted in the light of economic theory. The last of the three steps is the most challenging one because the existing theoretical basis of competition law, industrial organization theory, is fragile and questionable. It is not possible just to apply this approach because European competition law is characterized by its twin goals, promoting simultaneously integration of the national markets of Member States and protecting and promoting free competition in the emerging internal European market. Industrial organization theory cannot deal with these twin goals because it traditionally covers only the competition aspect and not the integration aspect.

A. Preliminary Issues /. Possibility to bring about change in the current application of EC competition law without rewriting the Treaty Any change of the Treaty requires a unanimous vote of the Member States. The legal structure of the European Union is based on treaties between

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sovereign nation states, and not on a constitution which could be changed by a qualified majority of a parliament or a body empowered to write and rewrite a European constitution.1 This legal structure leads to a petrification of Community law. Many articles of the Treaty use broad and vague language. The function of many of the provisions, which took effect in 1957, may now have a different function in the light of new phases of integration. Thus, it might be possible to reform the legal-institutional framework without changing the provisions of the Treaty. The following reforms seem possible under the present version of Arts. 85 and 86. • Block exemption regulations can be rewritten; • New definitions of negative clearance certificates and exemptions giving a broader scope to clearance certificates (e.g. block clearance certificates) can be established; • Organizational reforms which strengthen DG IV and transform it into an independent European cartel authority can be undertaken. Decision making power under Art. 85(3) can be delegated to this cartel authority, with an option for the full Commission to intervene. (Decisions can be separated into those based on competition policy objectives and those based political considerations can be made.) However, such reforms cannot ensure that the Court will follow the new lines. 2. Possibility to view Arts. 85 and 86 in isolation from the rest of the Treaty Arts. 85 and 86 EC should be clearly isolated from the various policies of the Community enumerated in Art. 3. Arts. 85 and 86, together with the provisions of the Treaty concerning the free flow of goods, services, persons and capital (the four freedoms), form a single entity.

1

The existing "constitutional" structure of the European Union has been analysed by Christian Kirchner, Competence Catalogues and the Principle of Subsidiarity in a European Constitution, in Constitutional Political Economy 8, 71-75 (1997). For a detailed discussion of the constitutional options, see The Tindermanns Group, Europe: Your Choice, Five Options for Tomorrow's Europe (Sammy van Tuyll von Serooskerken ed. 1995); Ernst Ulrich Petersmann, Proposals for a New Constitution for the European Union: Building Blocks for a Constitutional Theory and Constitutional Law of the E.U., 32 Common Mkt. L. Rev. 1123 (1995); Frank Vibert, Europe: A Constitution for the Millenium (1995).

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3. Possibility of rewriting Art. 3(g) to provide a clear objective for the Community's competition law and policy It would be helpful if Art. 3 would be organized hierarchically, setting the objectives of free flow of goods, services, persons and capital (including competition law and policy) at the top and ranking the various policies of the Community below this level. 4. The Needfor a textual amendment to Arts. 85 and 86 A revision of Art. 85(1) need not imply a textual amendment. However, it seems preferable to rewrite Art. 85(1) so that vertical agreements are only covered by this provision if they are utilized to segment the European market into separate national markets.2 Art. 85(3) should be rewritten to grant the cartel authority (and national cartel authorities to which respective powers are delegated) the explicit right to give negative clearance certificates and/or exemptions. The criteria for granting an exemption under Art. 85(3) should be reformulated to allow a clear analysis of the predicted impact of the agreement in question, and to weigh its pros and cons. 5. Rewriting Art. 85(3) to emphasize non-competition matters A political clause should be included in Art. 85(3). But the decision has then to be carried by the full Commission in the light of a published statement of the cartel authority on the expected negative impact on competition and the free flow of goods, services, persons and capital. 6. Possibility to rewrite Art. 86 to require that market power must have been exercised in order to bring about the abuse This would be a step in the right direction; Art. 86, however, should be reviewed more fundamentally. 7. Possibility of relying on the Court to develop its caselaw to bring about a more realistic application of Arts. 85 and 86 Judges have no real incentives to make such changes. In the past, judges have tended to emphasise integration rather than other objectives. 8. The Commission can improve the application of competition law without violating the Treaty or caselaw of the Court The Commission can improve block exemption regulations, clearance certificates and internal organization. It cannot, however, shift the balance 2

Christian Kirchner, Symbiotic Arrangements as a Challenge to Antitrust, 152 J. Institutional & Theoretical Economics 226.

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between different objectives of the Treaty. It can redefine the application of the criteria of Art. 85(3); but the Court is not bound by such changes.

B. The Legal Context: Compatibility of Reform Proposals with the Legal Framework 1. The two objectives of European Competition Law European competition law is an instrument for achieving a free flow of goods, services, persons and capital, i.e. the necessary precondition for establishing the internal market (integration function).3 It is also a goal in itself, protecting and promoting free competition in the emerging internal European market (competition function). Art. 85 is designed to cover all potential types of restraints of competition which might have an impact on trade between Member States. Para. 1 is extremely broad, covering horizontal and vertical agreements. This overshooting of Para. 1 is mitigated by Para. 3, which grants to the Commission the power to declare Para. 1 inapplicable for certain agreements or categories of agreements. The wording of Para. 3 is also extremely broad and vague. The policy objectives provide an explanation to justify this concept: Art. 85(3) delegates broad powers to the Commission to enable it, subject to court review, to filter out agreements which conflict with the integration objectives of the Treaty. Thus, Art. 85 is well suited for promoting and protecting the integration process. This emphasis on promoting and protecting European integration has been especially important in the earlier stages of integration, when the danger that private agreements might segment the market into national and regional markets was virulent. With the ongoing integration process, it seems prudent to shift the weight in the direction of the competition function. 3

Ernst-Joachim Mestmaecker, Wettbewerbsrecht und Wettbewerbspolitik in der Europaeischen Union, in Europa zwischen Ordnungswettbewerb und Harmonisierung, Europaeisch Ordnungspolitik im Zeichen der Subsidiaritaet 191,196 (Liider Gerken ed. 1995); Wolfgang Fikentscher, Das Wirtschaftsrecht der Europaeischen Gemeinschaften, Wirtschaftsrecht Vol. 2 (1983); see also Claus Dieter Ehlermann, Zukuenftige Entwicklungen des Europaeischen Wettbewerbsrechts, 1994 Europaeische Zeitschrift fuer Wirtschaftsrecht 647; Volker Emmerich, Kartellrecht (7th ed. 1994); Thomas Groger & Thomas Janicki, Weiterentwicklung des Europaeischen Wettbewerbsrechts, 42 Wirtschaft und Wettbewerb 991 (1992); Peter Oberender & Stefan Okruch, Gegenwaertige Probleme und zukuenftige Perspektiven der europaeischen Wettbewerbspolitik, 1994 Wirtschafts und Wettbewerb 507; Fritz Rittner, Das Europaeische Kartellrecht, 51 Juristenzeitung 377 (1996); Roger Zaech, Wettbewerbsrecht der Europaeischen Union: Praxis von Kommission und Gerichtshof (1994).

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2. Conflicts between the four freedoms and other objectives

Art. 3 of the Treaty, as modified by the Maastricht Treaty, contains a number of objectives which do not form a consistent overall goal. Two sets of objectives can be distinguished: (i) formation of the internal market characterized and created by a free flow of goods, services, persons and capital, and (ii) various policies of the Community, which are loosely connected with the integration goal, such as consumer protection, environmental protection, industrial policy. Competition law is an integral part of the provisions aimed at a free flow of goods, services, persons and capital, because free competition is a necessary precondition for these four freedoms. Obstacles to the free flow of goods, services, persons and capital may stem either from activities of the Member States or from private agreements formed by private or public enterprises. Art. 3(g) recognizes free (undistorted) competition within the Community as a major instrument of integration. Free competition is a dynamic force, which may eventually lead to a faster integration process than constructivist measures of public policy by Member States and/or the Community. Art. 3(g), however, articulates only one of the various objectives contained in Art. 3. Thus, there is the danger that competition law enforcement is being impeded or twisted by considerations outside the scope of protecting and promoting free competition. Viewing the competition provisions in the context of the whole Treaty demonstrates that the inconsistency of the various objectives constitutes a major threat to the functioning of European competition law. This threat may not have been important in the early stages of integration, when the integration function of European competition law was the paramount objective of Arts. 85, 86 and 90. But with the gradual creation of the internal European market and the vanishing of borders between the national markets of Member States, the competition objective of European competition law demands greater weight. European competition law has in the meantime reached a stage which makes it comparable to "normal" national competition laws, like the antitrust law of the U.S. Conflicting objectives of competition law (or antitrust law) and other policies—namely those leading to public regulation—are a common feature in all market economies, including the U.S. and the E.U. Member States. However, national jurisdictions have resolved these potential conflicts by separating competition law and its enforcement from other influences, and channeling solutions of still existing conflicts through special provisions which allow political institutions in exceptional situations to overrule decisions taken on the ground of competition considerations. The safeguards include the separation of cartel authorities from other parts of government, and judicial review of the activities of cartel authorities. European competition law has now reached a stage where comparable safeguards and procedural changes are necessary.

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Establishment of a hierarchy of the objectives articulated in Art. 3, of the free flow of goods, services, persons and capital (including competition law) as the highest priority, would be a constitutional rule which could legitimize organizational changes and textual revisions of Art. 85. The power to grant exemptions under Art. 85(3) should be delegated to an independent cartel authority. A "political clause" in Art. 85(3) should then provide grounds for selecting those cases where the decision of the cartel authority may be overruled by the Commission. Such a reform would narrow remaining conflicts between different objectives of the Treaty, and stress the political responsibility of the Commission, which has the power to overrule competition decisions. 3. Shifting the weight towards competition objectives The extremely broad and vague terminology of Art. 85(3) can only be understood as a delegation of powers to the Commission (and to some extent to the Court) for utilizing competition law and policy as a tool of integration. This vague terminology also has the function of immunizing decisions of the Commission against judicial review. In light of the changing functions and objectives of European competition law, this delegation model has become increasingly obsolete. The price paid for this delegation model is high: the need to exempt thousands of agreements prohibited by Art. 85(1) has led to a flood of block exemption regulations, which in their present form are a procrustes bed for the European economy, rather than an effective safeguard for free competition. They impede institutional competition between alternative contracts. Moreover, the vague terminology of Art. 85(3), combined with the block exemption regulations and individual exemptions, has led the Commission to follow a constructivist approach, utilizing competition law to organize markets instead of enforcing the rules of the game which allows for free competition in all markets (markets for products and services, markets for inventions, markets for institutions). Reforms are needed to cope with these problems, and to shift the weight from integration objectives to competition objectives and minimize the danger of over-regulation by means of constructivist application of European competition law. Both Paras 1 and 3 of Art. 85 should be rewritten. Para. 1 should distinguish between horizontal and vertical agreements. The latter should only be prohibited if they contain market segmentation clauses. Moreover, Para. 1 should clarify that only those agreements are covered that have a real, not just a theoretical or potential, effect on trade between Member States. Thus, Art. 85 (1) would cover less cases than the present provision. Art. 85(3) should clearly state that agreements containing certain provisions (fixing prices and quantities, market segmentation) cannot be exempted

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(per se rule). For the remaining agreements, the mix of criteria for granting an exemption articulated in the present version of Para. 3 should be replaced with a test which weighs economic pros and cons of the agreement in question, but does not retreat to a simple "efficiency test". This issue must be further discussed because the efficiency goal is highly controversial. 4. Conclusion

The legal analysis has demonstrated that the reform proposals are compatible with the existing legal framework of the Community if this legal framework is adapted to the necessities of the change resulting from different integration phases. The adaptation is necessary because European economic integration has reached a stage that demands a shift from the supremacy of the integration goal, to a balance between that goal and the competition objective. Thus, European competition law should be brought into line with "normal" competition laws of other jurisdictions. The integration objective should not be eliminated, but the proposed changes of Art. 85 should include sufficient safeguards to prevent private and public enterprises from again segmenting the emerging internal European market into national or regional markets. The proposed changes could be better instituted if Art. 3 and Art. 85 were rewritten. However, even without Treaty revision, certain changes are possible which lead in the right direction. If the Treaty is not revised, it is difficult to predict how the Court will respond to the changes. C. The Framework of Economics It is not possible here to outline a new approach as to how economics should deal with normative policy questions in the field of competition law. However, this section will argue that given the shortcomings of traditional industrial organization theory, it should not be utilized as guidance for such proposals. 1. Neoclassical Industrial Organization Theory Neoclassical industrial organization theory has certain methodological shortcomings following from its use of unrealistic assumptions. Moreover, this approach cannot deal with constitutional issues. 4

See Dieter Schmidtchen, Property Rights, Freiheit und Wettbewerbspolitik (1983); Christian Kirchner (1997). Kartelltecht und Instutionen oekonomik: Interdisziplinaere Ueber legungen, in Wettbewerbspolitik im Spannungsfeld nationaler und internationaler kartelltechts ordnungen, Festschrift fur Ingo Schmidt zum 65. 33 (Jorn Kruse etal.,eds. 1997).

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As a positive approach,5 neoclassical industrial organisation theory should have the capacity to demonstrate how real markets are functioning in order to be able to compare the results of such analyses which are made under varying institutional conditions.6 Thus, economic theory could indirectly provide information about the economic implications of different types of competition law. Modifications to competition law could be evaluated in the light of this information. Unfortunately, however, neoclassical industrial organization theory is not concerned with the study of real markets, but rather with markets under the assumptions of full information and unlimited rationality. Under these assumptions, the problems of real markets to which competition law should respond are nonexistent. Thus, it is futile to ask neoclassical industrial organization theory for guidance with respect to the results of making modifications to competition law. Proposing changes to existing competition law is a normative task. Therefore, guidance from economic theory can only come from a normative approach. Neoclassical industrial organization theory is either applied in its positive version, which allows certain predictions to be made, but does not lead to policy proposals, or in its normative version, which uses static and dynamic efficiency as objectives to be attained.7 It can be demonstrated that the efficiency goal as the ultimate social goal can only be defended in the context of a utilitarian philosophy, and that it rests on the assumption of full information and unlimited rationality. However, the latter two assumptions are criticized by authors of new institutional economics,8 as they lead to a nirvana approach. In a world of imperfect information and bounded rationality, the efficiency goal can only be pursued if a change is made from a static to a dynamic concept.9 Admittedly, economists have difficulties with a concept of dynamic effiency. To rely on neoclassical industrial organization theory for normative guidance is therefore not very promising.

5

"Positive" is meant here in the sense of "positive social science theories," which must not be confused with positivistic legal theory. 6 See Rudolf Richter & Eirik Furubotn, Neue Institutionenoekonomik (1996). 7 See Eirik Furubotn & Rudolf Richter, The New Institutional Economics: New Views on Antitrust, 147 J. Institutional & Theoretical Econ. 1 (1992); D.H. Ginsburg, The Goals of Antitrust Revisited, 147 J. Institutional & Theoretical Econ. 25 (1992); Silvio Borner et al., Oekonomische Analyse zur Revision des schweizerischen Kartellgesetzes, in Grundfragen der schweizerischen Kartellrechtsreform (Roger Zaech & Peter Zweifel eds. 1995); Christian Kirchner, supra note 4. 8 Rudolf Richter & Eirik Furubotn, supra note 6. 9 Eirik Furubotn & Rudolf Richter, supra note 7 (1991); Borner et al., supra note 7.

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The problem is constitutional. A clear distinction should be made between the constitutional stage, where the rules of the game are being determined, and the subconstitutional stage, where the game is played following the rules.10 Any discussion of modifying Community competition rules must address the constitutional aspects, since competing and potentially conflicting objectives of the Community must be resolved either in the Treaty itself or in the interpretation of the Treaty. Neoclassical industrial organization theory does not cover constitutional issues. It cannot make statements on conflicts between the integration objectives and other objectives of the Treaty. Even if proposals were made for changes of competition law and policy in the direction of more effectively pursuing economic efficiency, an analysis of the effects of such changes on the conflicts of objectives of the Treaty would be necessary. This second stage of analysis could not be covered by neoclassical industrial organization theory. 2. A New Approach: Combining New Institutional Economics and Constitutional Economics If economics shall be used as guidance for solving the problems discussed here, and if the deficiencies of neoclassical industrial organization theory are to be overcome, the following conditions must be met: • The assumptions of perfect information and unlimited rationality must be replaced by those of imperfect information and bounded rationality. • Economic analysis cannot be confined to the study of markets, but must comprise all social decision-making processes where actors are confronted with the problem of scarce resources (economics as an "imperial science").11 • Economic analysis must centre on the issues of how real markets are functioning and how institutional changes affect these markets. • The utalitarian efficiency concept has to be given up and substituted by a concept of normative individualism (developed by constitutional economics and normative new institutional economics).12 10

Dieter Schmidtchen, The Goals of Antitrust, 147 J. Institutional & Theoretical Econ. 31, 34 (1991); , p. 34; James M. Buchanan, The Domain of Constitutional Economics, in Constitutional Political Economy 1. 1 ' See Jack Hirshleifer, The Expanding Domain of Economics, 75 Am. Econ. Rev. 53 (1985); Gebhard Kirchgaessner, Oekonomie als imperial(istisch)e Wissenschaft. Zur Anwendung des oekonomischen Verhaltensmodells in den benachbarten Sozialwissenschaften, 7 Jahrbuch fuer Neue Politische Oekonomie 128 (1988); Economic Imperialism: The Economic Method Applied Outside the Field of Economics (Gerard Radnitzky & Peter Bernholz eds. 1987). 12 Ingo Pies, Normative Institutionenoekonomik, Zur Rationalisierung des politischen Liberalismus (1993).

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In the light of these changes of the economic approach (which becomes a general social-science approach), the proposals submitted in Section A of this paper would have to be tested in a comparative analysis. The differences between the existing institutional devices and the proposed ones must be compared under the perspective of how they change the rules of the game for the players, and what may be the expected responses of these players to these changes. These different results must be evaluated in the light of normative individualism.

D. Application of the New Approach Seperating the objective of the four freedoms, including competition law, from other objectives of the Treaty could lead to a more expeditious creation of a real internal European market, with its advantages of economies of scale and scope. If other objectives of the Treaty are to be pursued, the costs and benefits of such activities would be accounted separately. Such separation would facilitate the ability of the individual actors, i.e. the European citizens, to evaluate the merits of such policies and to decide whether to stop such activities, to maintain or to raise the level of those activities. This enhanced accountability strengthens the position of the principal (the voter) vis-a-vis the agents (the legislative, the executive and the judiciary). The proposal to establish a hierarchy of objectives in Art. 3(g) rests on the assumption that the benefits from faster economic integration are comparatively higher than those from other policies of the Community. The proposal to reduce the scope of application of Art. 85(1) is in line with a better relationship between the European citizen and the Commission. Under the present delegation model, control of the Commission is extremely difficult, and agency costs, which must be paid by the principals, are high. To separate decisionmaking by an independent cartel authority from that of the Commission (on "political" issues) strengthens the position of the addressees of the norm, providing for better possibilities of judicial review. It also adds to political accountability of Commission decisions, thus strengthening the position of principals. Laying more stress on clearance certificates than on exemptions means better predictability of potential application of competition law; thus, the position of the norm addressees is enhanced. Proposals to streamline the criteria for exemption agreements from the application of Art. 85(1) work in the direction of improving the rule of law and weakening the position of the agent vis-a-vis the principal.

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A review of Art. 86 seems necessary, because in its present form this article works as a kind of market intervention by the Commission. The examples chosen do not cover the whole range of reform proposals, but they at least demonstrate how an economic analysis based on new institutional and constitutional economics may be used as an analytical tool superior to the conventional tools of neoclassical industrial organization theory.

Conclusion The analysis has proven the fruitful combination of legal and economic analysis. The proposed changes may be better and more forcefully defended by economic reasoning making use of the tools of new institutional economics and constitutional economics. The legal analysis, however, has demonstrated that the constitutional structure of the Community must be adapted to the changing stages of integration. Integration has reached a stage where competition law deserves to be shaped according to its own merits, and not just to be instrumentalized for integration purposes. The changes proposed are leading in the direction of a better separation of activities and responsibilities of the various organs of the Community, thus stressing more the rule of law vis-a-vis administrative procedures. The outcome leads to some degree of deregulation in a field where the basic concept should rest on the idea of free competition, and not of organized markets.

Other Sources Claus Dieter Ehlermann, Zur Wettbewerbspolitik und zum Wettbewerbsrecht der Europaeischen Union, 39 Hamburger Jahrbuch fuer Wirtschafts- und Gesellschaftspolitik 255 (1994). Volker Emmerich, V. Kartellrecht, (7th ed. 1994). Wolfgang Kerber, Die europaeische Fusionskontrollpraxis und die Wettbewerbskonzeption der EG (1994). Wernhard Moeschel, The Goals of Antitrust Revisited, 147 J. of Institutional Theoretical Econ. 7 (1991). Ivo Van Bael, I. & Jean-Fran?ois Bellis, Competition Law of the European Community (3rded. 1994). Frank Vibert, Europe: A Constitution for the Millenium (1995). Roger Zaech, Wettbewerbsrecht der Europaeischen Union: Praxis von Kommission und Gerichtshof (1994).

IV Valentine Korah Professor Emeritus of Competition Law, University College London London, England

Introduction It is difficult to ensure that competition and intellectual property law develop sensibly unless both the Community Courts and the Commission set out clearly the considerations of policy and the arguments for and against a particular conclusion. This would encourage deliberation and discussion of the extent to which one policy option may preempt others, whether choices must be made and what weight should be attached to the rival considerations. If we are told the reasons for policy choices, we can advise our clients about matters that have not yet been decided and criticise developments more cogently and constructively. The law can develop continuously and mistakes can be corrected. Work has been done on the reasoning in European documents in other areas of law,' but this paper will focus on competition and intellectual property. The problems, nonetheless, extend beyond these areas. The European Court of Justice (E.C.J.) and the Court of First Instance (C.F.I.) are probably less comfortable addressing problems of economic policy than they are in constitutional cases, although even there, they are now very conservative. Europeans often compare the constitution of the European Union with that of the U.S. The U.S. Constitution was built on the need for deliberation to achieve democracy, and a system of checks and balances was designed to encourage discussion. All the institutions of government should provide the reasons for their decisions so they can be criticised and positions altered if dictatorship is to be avoided. The founding fathers constantly mentioned the need to give way once convinced one is wrong. Initial discussions may be held in private, but vigourous discussion both inside and outside the institution will often achieve a better policy and means for implementing it. Prof. Cass R. Sunstein remarked:

1

E.g., Joxerramm Benogoetxea, The Legal Reasoning of the Court of Justice: Towards a European Jurisprudence (1993).

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At the heart of the liberal tradition and its opposition to authoritarianism lies a requirement of justification by reference to public-regarding explanations that are intelligible to all citizens.2

This ensures that decisions are not made to benefit those who have political clout at the expense of those who have less. Transparency makes officials and courts responsible to those expected to read their decisions, makes it easier to predict their policy and enables businessmen to make enforceable contracts on the basis of which to invest. The European Commission appears to be very open, as it sends out draft regulations and notices for comment long before adopting them, and it makes modifications as a result. Unfortunately, many documents are the result of compromise between the people drafting and vetting them. This makes it difficult to spell out the reasoning, and all too often they give conclusions and not reasons. Sometimes recitals differ from the articles, because the person who lost the argument over the article is compensated by a recital or some other compromise. Provisions in articles may also be incoherent.3 It seems that both the judges and many lawyers in the Commission feel uneasy with respect to competition law and intellectual property law. These areas were not traditionally widely taught at university, and even now are taught mainly at postgraduate level. They are areas of economic law, where those developing the rules and applying them need to understand economic theories and arguments. Judge Easterbrook, formerly a Professor at the University of Chicago and now a judge on the U.S. Court of Appeals for the 7th Circuit, has repeatedly observed that economists think differently from lawyers in three important respects. First, economists are interested in having incentives correctly positioned to optimise economic activity. Consequently, they perceive transactions ex ante, when decisions to invest are being made. Far less investment would be made in R.&D., especially by the pharmaceutical industry,4 when 2

Cass R. Sunstein, The Partial Constitution 24 (1993). I am indebted to my colleague at Fordham Law School, Professor Flaherty, for an illuminating discussion on this matter. 3 Compare Arts. 2(2&3) of the merger regulation, 1990 O.J. (L257) 14 (corrected version), published as consolidated, [1997] 7 Eur.Competition L. Rev. 451. 451, [1997] 5 Common Mkt. L. Rep. 387, which provide a test based only on considerations of market power, with Art. 2(1), which makes other matters relevant. 4 For an analysis of the regimes and the economic drawbacks of allowing parallel trade in that industry, see National Economic Research Associates, Market segmentation: An independent report commissioned by the Economic and Social Policy

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everything can be copied from the specification of drugs that have been through their safety tests, if patent protection were not expected to be strong. No firm would invest heavily unless it expected to be able to appropriate most of the fruit. In contrast, many lawyers and politicians think ex post: when the medicine has been developed, consumer welfare would be increased if everyone could copy and sell cheaply. At that point, the incentive to the original investment is water under the bridge and irrelevant. Second, economists focus on the margin: less investment might be made if less protection is available. Lawyers may point out that exclusive dealers who cannot be given much territorial protection in Europe will, nevertheless, often commit some funds to promoting the product, without asking whether they might do more if their protection were greater. It is difficult in Europe to listen to hifiequipment in a soundproof booth and compare it with rival brands. Third, economists tend to distrust bureaucracies, on the grounds that officials will be induced to make administration interesting and rewarding, while lawyers tend to believe they act in the public interest, which many officials in fact do. A. Commission Regulations, Decisions and Notices Policy appears to be developed at various levels of DG IV, the Commission's competition department, and matters are often controversial. The result tends to be that the Commission has difficulty in arriving at clear, coherent decisions. 1. Recitals The function of a recital is to set out the reasons for adopting the rules specified in a regulation, directive or decision. The articles can be interpreted in light of the reasons for the policies set forth in the recitals. Unfortunately, many of the recitals in Commission regulations set forth the conclusions, some of them not even specified in the articles.5 Few, however, set forth the reasons clearly and unambiguously. Committee of the European Federation of Pharmaceutical Industries' Association in the effects of segmentation of the E.U. market for patented medicines, June 1997. 5

This is true of the group of exemptions for exclusive distribution and licensing. Recital 8 of the former sets forth various rules not mentioned in the operative part of the regulation, rather than the reason for them. Recital 7 of the technology licensing regulation does the same, providing the territorial limitations of the exemption. Recital 11 does not specify the reason that parallel trade must be allowed, or whether the restraint should be assessed ex ante, at the time it is imposed and a commitment made to expenditure, or ex post when that expenditure has already been made.

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2. Notices and annual reports Notices too, often set forth conclusions, although some of the recent ones have provided reasons.6 Nevertheless, reasons are not always given for issues that are controversial within DG IV. One advantage of articulating policy considerations carefully is that officials who know that their ideas will be scrutinised before being implemented enjoy more freedom in suggesting new ideas. Most new ideas prove defective or require some modifications, but some may be invaluable. The early reports of the Commission on Competition Policy, prepared by Roger Daout, explained the reasons for policy. Unfortunately, the contributions on individual cases have become shorter in an endeavour to reduce the translations necessary. The Commission has other ways of explaining its policies, including press releases. However, they are usually drafted to justify a decision that has already been taken rather than to analyse the policy considerations. The Competition Policy Newsletter, which was initiated several years ago, has been helpful. Much of it is factual, but some articles discuss policy issues.

Some of the recitals to Reg. 1983/83 are not true. For instance, Recital 6 states that in general, a supplier limits the number of outlets he supplies only if there is an exclusive territory. This is true in France, where there was the offence of refus de vente, and half true in Germany, under its competition law, but it is not true in most other countries. The reason suppliers give exclusive territories to dealers is to induce them to invest in promoting the product. Only if one is determined can one read into Recital 7 the need to protect dealers against other dealers taking a free ride promotion. Some recitals are not accepted by the Commission. All the group exemptions for technology licensing accept that open exclusive licences are outside the prohibition of Art. 85(1) when the product is new. Most recently, this was provided in the Technology Transfer Regulation, 1996 O.J. (L31) 2, Supp. iv, recital 10. In Nungesser v. Comm'n, 1982 E.C.R. 2015, the Court accepted that the new hardy FI hybrid maize seed that could grow on clay in the North of Europe was sufficiently new, as it was an important development. The Commission has never applied the precedent that open exclusive licences do not infringe Art. 85(1), because it has always found that the product is not new, even if it is better than rival products. It said that maize was not new, nor was frozen yeast dough, even when it was better than rival products. Rich Product/ Jus-Rol, 1988 O.J. (L69) 21. 6 The notice on the definition of the relevant market for the purposes of Community Competition Law 1997 O.J. (C372) 5, which reverses not only decisions by the Commission under Art. 86, but also caselaw of the E.C.J. that made no economic sense in light of the Commission's experience under the merger control regulation. Reasons are articulated. The Commission is expected to adopt thefinalversion late in October 1997.

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3. Individual decisions

The factual section of individual decisions precedes the legal appraisal, and often the latter does not specify which of the many facts are relevant to particular aspects of the appraisal. Thus, it is not possible to deduce the principles involved. The Commission may hesitate to specify its reasons with great clarity for fear of being reversed on appeal. B. The Court of First Instance The Court of First Instance, however, requires the Commission to set forth its reasoning more coherently, in accordance with Art. 190 of the EC Treaty. SYTRAVAL7 was a controversial case dealing with state aides, the procedure for which is governed by no implementing regulation. The Court of First Instance has been developing procedural rules and quashed the Commission's decision rejecting a complaint that various transactions amounted to a state aid. It said: 52. . . . [T]he statement of reasons required by Art. 190 must disclose in a clear and unequivocal fashion the measure in question in such a way as to make the persons concerned aware of the reasons for the measure and thus enable them to defend their rights and the Community judicature to exercise its power of review. . . . It is also settled case-law that the question whether the statement of reasons for a decision meets the requirements of Art. 190 of the Treaty must be assessed with regard not only to its wording but also to its context and to all the legal rules governing the matter in question. . . . 54. The judicial review which such a statement of reasons must allow is not, in the present case, a review of the question whether there has been a manifest error of assessment, similar to a review of the exercise by the commission of its exclusive power to examine the compatibility of national measures already found to constitute state aid... . 62. The Court finds that, by the Commission's own admission, it did not respond to the objection in the contested decision. Whilst it is clear from the caselaw that the Commission is not required to discuss all the issues of fact and law raised by the parties concerned (judgment of the C.F.I, in Case T3-89, Atochem v. Commission [1991] ECR II-l 177. [para. 222], it is none the less obliged to give a reasoned answer to each of the objections raised in the complaint, if only by referring where appropriate to the de minimis rule where the point is so insignificant as not to warrant the Commission spending any time on it. Consequently, the decision is vitiated in that respect by an inadequate statement of objections. 7 1995 E.C.R. 11-2651, confirmed on appeal (although not on all points), Case No. C367/95P (2 April 1998).

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This is very important, because only if the Commission's decisions are clear and coherent can the law be developed sensibly.

C. The Community Court's Judgements In the early days, when judges described the Court as teleological, it often developed new law, although the judgments hardly analysed the issues from the viewpoint of policy and legal theory. The opinions of Advocate General Roemer in competition and intellectual property cases were particularly illuminating, and were sometimes followed in whole or in part. The Court seems, however, to have become very conservative in recent years, at least in the areas of competition and intellectual property, in the sense that it is unwilling to reverse itself overtly, and some of the most important judgments have been almost devoid of reasons. It seems to assume that the principles were well established earlier. The U.S. Supreme Court habitually gives reasons, historical and textual, as well as sophisticated analysis of considerations of policy. In the statutory areas, such as corporation law, more reasons may be textual. The judges in the E.C.J. are being encouraged to write short judgments in order to lessen the strain on the Court's translation resources. However, that need not lead to cutting the policy aspects of the judgment. If the policy is clearly agreed, it can be written briefly. The Court of First Instance is being encouraged to write shorter judgments also to reduce the causes for appeal. The judgments of the E.C.J. are very varied in style. Some set forth at least brief policy reasons, such as those in Pronuptia8 Delimitis,9 Hag IP0 and Ideal Standard.'' Some are now very brief. After the hearing, the Court used to publish with its judgments hearing reports in all the Community languages, which fully set forth the reasons alleged by the parties in favour of the various possible policies to be followed, and could illuminate future submissions to the Community Courts. To reduce the pressure on the translation department, however, these are no longer published. The only language version that may be disclosed to outsiders is the language of the case. For some unknown reason, the Court decided that the 8

Pronuptia de Paris GmbH v. Pronuptia de Paris Inmgard Shillgalis, 1986 E.C.R.

353. 9

Delimitis v. Henniger Brau, 1991 E.C.R. 1-935. CNL Sucal v. Hag, 1990 E.C.R. 1-3711. 11 INT Internazionale Heiztechnik GmbH v. Ideal-Standard GmbH, 1994 E.C.R. 1-2789. 10

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French version should remain confidential. It would be helpful if the Court would continue to publish these reports in both French and the language of the case. It might be even better to translate them into German and English as well. These reports are even more important now that the Court does not consistently provide reasons of policy for its decisions. In cases under Art. 173 on appeal from the Commission, the Courts allow the Commission a considerable margin of discretion over economic appraisal and policy. They review policy only to determine whether there is a manifest legal error, and do not impose their own views. The C.F.I, controls the Commission's fact finding, however, and requires it to establish the existence of an infringement. The margin of discretion increases the importance of requiring the Commission to give sound reasons for the policies behind its acts, to avoid unchecked power. Under Art. 177, there is no question of a margin of discretion. The Court is supposed not to apply the law, but merely to give an abstract ruling. Nevertheless, given the broad language in which the competition rules are drafted, it is important that the law be developed in accordance with sensible economic policy rather than purely textual criteria. 1. Tetra Pak II In the second and fourth issues of the European Competition Law Review for 1997,l2 I analysed two recent judgments and criticised the lack of reasoning. Tetra Pak II seems unfortunate, since the Commission's decision clearly extended the law in finding that conduct in a market over which no dominant position was alleged and that affected only that market could be treated as the abuse of a dominant position in another market which had associative links with it. However, the relevance of the associative links was not explained. The Court also extended the concept of predatory pricing by not requiring the Commission to establish a likelihood of recouping the lost profits by raising prices later. The safe harbour of competition by a dominant firm on the merits, which does not infringe Art. 86, was eliminated.13

12

Valentine Korah, Tetra Pak II—lack of reasoning in Court's judgment, 18 Eur. Competition L. Rev. 98 (1997); Valentine Korah, Merck v. Primecrown, 18 Eur. Competition L. Rev. 265-273 (1997). 13 This might also be said of Compagnie Maritime Beige v. Comm'n, 4 CMLR 273 (1997), on appeal, (C-395/96P), where "fighting ships" were condemned without any allegation that they were making a loss on any definition of profit or loss. It seems that when faced by competition, the dominant firm must keep its prices at the old level, or at least not discriminate in favour of those likely to be served by the new competitor.

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Tetra Pak was fined an unprecedented amount, ECU 75 million, for abusing a dominant position, in a decision that did not provide sufficient reasoning to carry conviction.14 The decision was confirmed by the Court of First Instance,15 and has now been confirmed by the Community Court16 in a judgment that contains only conclusions, and almost no reasoning. Bad cases make bad law: Tetra Pak may well have been dominant in the non-asceptic markets as well as the asceptic ones, and it was recouping the losses made on its machines in England on the sale of the cartons. Will these factors be taken into account in a subsequent case? At each stage, articulate criticisms were made promptly in the literature. Yet a fine that was higher than any imposed on a single firm was affirmed for afindingof several infringements by a singlefirm,most of them at the very least marking a considerable extension of the law. The role of both Community courts is limited to judicial review, and the Court has repeatedly ruled that the Commission need not address all the arguments made by the parties.17 In direct actions, it leaves the parties to define the issues.18 The C.F.I, has unlimited jurisdiction over the level offines,but has made it almost impossible to exercise this jurisdiction when several infringements have been alleged. In Tetra Pak II, it did not require the Commission to apportion the fine between the various infringements by a single firm. 2. Merck v. Primecrown Another judgment that has given rise to great concern is Merck v. Primecrown.19 The Commission's arguments were short and not very basic, but Advocate General Fennelly wrote a highly articulate opinion, advising the Court to reverse its earlier judgment in Merck v. Stephar.20 Medicines are sold at very low prices in 14

1991 O.J. (L72)l. The author has criticised this decision in 46 Current Legal Problems 149 (1993). 15 Tetra Pak International SA v. Comm'n (No. 2), 1994 E.C.R.II-762. This decision has been criticised by several authors. E.g. N. Levy, Tetra Pak II: Stretching the Limits of Article 86, 1995 Eur. Competition L. Rev. 109; Alison Jones, Distinguishing Predatory Prices from competitive ones: Tetra Pak II, 17 Eur. Intell. Prop. Rev. 259 (1995). 16 4 C.M.L.R. 662(1997). 17 See e.g. SYTRAVAL, supra note 7, 1997 E.C.R. 11-2651, para. 62. 18 David Edward, How the Court of Justice Works, 20 Eur. L. Rev. 539, 543-4 (1995). 19 Merck and Co. Inc. and Beacham v. Primecrown Limited, 1996 E.C.R. [1997] 1 Common Mkt. L. Rev. 83. 20 1981 E . C . R . 2063.

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Spain and Portugal. Merck had patents in most Member States, but product patents were not available in Spain or Portugal when the inventions were novel. Moreover, prices were controlled there at levels very much lower than in some other Member States. Consequently, considerable parallel trade developed, and Merck wanted to exercise its U.K. patent rights to restrain importation in commercial quantities. The Court accepted that the very different prices in different Member States were due to national measures that distort the markets. Constant caselaw has established that a patent should reward a firm investing in a creative effort through the grant of an exclusive right. Yet in both Merck cases, the Court stated that once a patentee had chosen to market where it had not been able to obtain a patent, it must take the consequences of its choice and could not restrain the import of the product into Member States where it had a patent. At that point, it focused only on the exclusive right, and ignored the lack of reward. As the Advocate General observed, this was a conclusion, and not a reason. Unless the patentee has had a chance to make a monopoly profit in the country of export, the doctrine of exhaustion will deprive it of almost any incentives to invest in Europe.21 The Court could hardly be expected to harmonise state rules on maximum price control without help from Council legislation. It would have been bold to say that any state distortions would preempt the doctrine of exhaustion. Mr. Fennelly attempted to find a compromise by suggesting that where Merck could not obtain a product patent in Spain, it should be allowed to use its U.K. patent to restrain parallel imports. Where it had a patent, however, but was unable to earn a monopoly profit because of price control in the country of export, it should not be able to do so.22 In view of his insistence that the specific function of a patent includes the chance to earn a reward, this distinction is unsatisfactory (although it might have enabled the Court to solve the less serious problem). Patent rights can be undermined by the control of maximum prices as much as by compulsory licences, or the lack of product patents. No better compromise is readily apparent. Again, the Court refrained from giving reasons for not departing from its earlier judgment. The delay in giving judgment in a case that had been expedited because of the large amount of commerce hanging on the outcome indicates that the Court was locked in disagreement. 21

The advantage of the first mover is not great when the parallel importer can market under the brand name of the producer. 22

Cf. t h e classic article by R e n e Joliet, Patented Arts, and the Free Movement of Goods within the E. E.C., 1975 C u r r e n t Legal P r o b l e m s 15. H e considered that if for a n y

reason the patentee has no chance of obtaining the full market profit, the right should not be exhausted.

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This judgment, like most of those in the field in intellectual property, was given under Art. 177. The Court is even further removed from the facts by the division of functions with the national court. The facts, however, were not disputed. The question was clearly one of policy, where incentives to investment are very important at the time when a programme of R.&D. is commenced, but irrelevant by the time parallel imports start. Perceived ex post, the judgment may have been correct; perceived ex ante, however, it deprived pharmaceutical firms of most of their European incentive to invest in R.&D. The Court's rejection of their conclusions without providing reasoning should, under no circumstances, deter advocates general from laboriously preparing articulate opinions that might otherwise help the Court to develop the law wisely. A group of experts should try to persuade the Court of the need to articulate policy reasons for its decisions. The lack of reasoning in the Court's judgment in Tetra Pak //cannot have been due to serious disagreement between the judges, as the deliberations were not extended. One can only speculate as to why no reasoning was articulated: Are too many of the judges convinced that the principles developed earlier are satisfactory? Are they hiding behind the collective nature of their responsibility? Are they so unfamiliar with the issues of controlling the abuse of market power that they dare not articulate reasons? 3. Guerrin and Reiff Guerrin23 resembles Merck in that an analytical opinion by Advocate General Tesauro was rejected without reasons by the Court. It did not address the reasons for differing from him. In Reiff,24 the Court did not give cogent reasons for distinguishing its earlier judgment in BNIC v. Aubert25 4. KaliundSalz The Court has become very conservative in the last few years. It is looking to the text of the law rather than to policy, and is no longer prepared to construe the Treaty in favour of the Commission's powers. The Treaty did not provide competition rules and remedies appropriate to oligopolistic markets. Problems arise because firms may act as if there was collusion, without there being any need to collude. The remedies should be structural in the sense that the only conduct forbidden should be that which tightens the oligopoly. It is sensible to 23

C-282/95P (18 M a r c h 1997). 5 C o m m o n M k t . L. Rev. 145, p a r a s 1 7 - 1 9 (1995). 25 1987 E.C.R. 4789. It is hard to believe that the industry experts appointed by the minister did not have the interests of i n d u s t r y at heart. 24

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control mergers in concentrative markets, exclusionary conduct (such as inducing government to impose a licensing requirement) or conduct which makes it easier for firms to operate interdependently (such as agreements to share market information). At one time, the Commission attacked parallel conduct by easily inferring a concerted practice, but this does not provide an appropriate remedy and has been limited by Court judgments. Even oligopolists must be able to raise prices as their costs rise, or there will be ever fewer firms competing as one after another leaves the market. For several years, now, the Commission has been using a concept of joint dominance, both under the merger regulation and Art. 86, to provide a more suitable remedy. Under the merger regulation, the Commission imposed conditions to eliminate the development of a collective dominant position in Kali und SalzlMdKITreuhand.26 France v. Comm'n 4 Common Mkt. L. Rev. 829 (1998). On appeal, Advocate General Tesauro gave his opinion in France v. Commission,21 that the concept of collective dominance was not mentioned in the text28 or intended by the Member States legislating in the Council29 and, although such a concept may be desirable, the matter is for the legislature, not the Court.30 The Commission had argued that there is a gap in the Treaty, but Advocate General Tesauro thought that this would not justify the Court extending the law.31 The judgment accepted a concept of oligopolistic dominance. It is not clear, however, whether this concept presupposes links between the oligopolists, or whether the likelihood of parallel conduct is enough.

D. National Court Judgements There are very different national traditions in Europe. French judgments often consist of a single sentence, reciting certain facts, certain propositions of law and giving a conclusion with no reasons. Nevertheless, the Cour de Cassation and Conseil d'Etat have recently been giving more reasons. Danish Supreme Court judges have traditionally been reluctant to give reasons, although, again, 26

1994O.J. (L186)38. C-68/94 (6 February 1997). 28 See Art. 2 and the 15th Recital. 29 Paras. 81-93. The matter was apparently not mentioned in the Council debates, and the Advocate General assumes that something not provided for was not intended. 30 Para. 98. 31 Para. 96. 27

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since its current president has joined the Court, it has been giving more reasons, mostly textual rather than policy. The common law tradition has been to give many reasons, textual, precedential and policy. The Italian Constitutional Court habitually articulates its reasons, and was very articulate when quashing the rule that patents could not be granted for medicines.32 The Irish Supreme Court debates the policy issues very openly, and the German and Spanish Constitutional Courts give far fuller reasons than are usually given by the Community Court. The recent German experience is interesting.33 Until 1967, the German Constitutional Court did not provide dissenting opinions. The possibility of filing dissenting judgments had been contemplated by the Social Democratic draft of 1947, and dissents were collected by the President, but they were not published for fear of undermining the secrecy of the Court's deliberations. In 1967, the Senate of the Constitutional Court for the first time allowed the publication of dissents, and the Court decided by 9 to 6 to permit them. The term of the judges was lengthened34 and made non-renewable. Otherwise, dissents on sensitive issues would require courage. It was hoped that dissents would help to persuade the legislature to amend undesirable aspects of the law. However, the legislature had other priorities. Dissents have been published in only about 6% of the cases, and there is no plan to introduce dissents into other courts. It is doubtful whether dissents have led to better policy reasons being given.35 It is generally agreed that the reputation of the Court has not suffered. One cannot say whether the possibility of dissents has brought the efforts to find consensus to an end too early. Sometimes, after the preparation of a dissent, deliberations were resumed. The Court gives more reasons of policy than is common in the Community Court, and this must contribute to the fruitful development of the law. The Court's purpose, however, is different. The Court

33

I am greatly indebted to m y very able L L . M . student at F o r d h a m , Miss Romina Polley, for a note on the reasons for enabling the judges in the Constitutional Court to give dissents, a n d the outcome of the reform. Professor Bernhard Schloh, formerly a member of the Council's Legal Service, informed me that the Constitutional C o u r t has started to give dissents and rather more reasons, some of them policy. 34 Art. 1(1) of the Bundesverfassungsgorichtsgesetz provided for a non-renewable term of 12 years, subject to a retirement a g e of 68. 35 Contrasting views of the result of introducing dissenting judgments are discussed in Dieter U m b a c h , Bundesverfassungsgerichtsgesetz K o m m e n t a r (1992). 36 I am indebted to Jorge M a r t i M a r e n o , the partner in charge of the Uria & Manendez office in Valencia, for a very helpful note on the Spanish Constitutional Court.

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wishes to explain the reasons for its decisions to the citizens and, in particular, to the unsuccessful parties. Art. 120(3) of the Spanish constitution raised to the status of a constitutional rule the requirement that all judgments, not only those of the Constitutional Court, should be reasoned.36 Judgments of the Constitutional Court have established that this is an essential guarantee of the right to justice, expressed in Art. 24(1). The reasoning may be short, concise and concentrated, but must relate to the petition. Some authors stress that the dual aims of the requirement to give reasons are, first, to ensure jurisdictional control by expressing the grounds of decision and, second, to enable the parties affected by a judgment to understand the reasons for the decision. The Constitutional Court publishes any dissenting opinions. The arguments in favour of publishing dissents are,first,that they may lead to consensus within the Court; second, they lead to better reasoning in the majority judgment in order to persuade public opinion against the dissenting vote; third, they reflect the reality of the internal debates in the Court—the decision is not a revealed truth but built up through confrontation and debate; and finally, the interpretation of the majority is conditioned by the current background and may later be replaced by the view of the minority. The disadvantage of publishing dissents are seen to be,first,the possible weakening of the authority of the Court; second, the authors of dissenting opinions may be atttempting to achieve personal interests through publishing their views; andfinally,dissents could deter the best functioning of the Court.

E. Should The Court Provide More Reasons of Policy? Policy reasons should be made transparent, and hiding the absence of consensus or analysis behind a lack of reasoning should be discouraged. After debate, the participants usually understand the problem better. The parties who lose in litigation are likely to be less dissatisfied, those counsellingfirmsare better able to give sensible and reliable advice and, most important, later judgments can benefit from the analysis. Hiding policy behind formalistic interpretation is tyrannous. In the areas of competition and intellectual property rights, it seems obvious that markets would be more efficient if more people could enter them. It is only the need for inducements to investment that requires the existence of intellectual property rights and restrictions on taking a free ride. The confidentiality of the judges' deliberations makes it difficult for anyone else to understand the system and the reasons behind it. It appears to be constantly changing with the changes in the composition of the Court.

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It might help if more cases in the E.C.J. were heard in chambers. A plenum is now normally 11, so that even if one judge falls ill, a majority of the Court will remain. Perhaps the number should be reduced, as it is more important to have cogent judgments than to ensure that at least half the Court sits. The Commission might be more helpful in setting out policy considerations in greater depth on references under Art. 177, and might give better reasoned decisions to lessen the number of cases appealed under Art. 173, and make the appeals easier. It might also help if the C.F.I, were sometimes to have a chamber of a single judge, and more often of three. 1. Possibility of dissenting judgments to avoid the need to compromise When the Community was established in the six Member States, collegiate anonymous opinions were the order of the day.37 The question arises whether the time has come for the possibility of dissenting opinions. The Court cannot give good reasons when the judges cannot reach a common position. It might help, therefore, if the judges were permitted to give dissents from time to time. It would then be possible for a cogent majority opinion to be prepared without having to accommodate the views of the dissentient. Dissent and majority opinion could both be cogent. This would require a proposal from the Court to the Council. However, at present, there is no sign of a majority of judges favouring this.38 One objection raised by Judge Edward39 is that dissenting judges still contribute to the improvement of the single judgment. However, this would not have to stop if there were dissents. Moreover, the effects of the dissenters are not clear: in many judgments, there is a firm line taken, followed by a qualification that may later give rise to difficulties. If the "improvements" amount to this sort of compromise,40 a cogent dissent would be preferable.41 37

Sir Gordon Slynn, Introducing a E u r o p e a n Legal Order (The Hamlyn Trust, London 1992). 38 Id. at 161; Edward, How the Court of Justice Works, 20 Eur. L. Rev. 539 (1995). In February 1998, Fordham Law School hosted a conference attended by many existing and former members of the Community courts. With one hesitant exception, they all advocated the possibility of occasional dissents. They did not discuss, however, whether these should be on grounds of policy, o r merely based on texts and caselaw. Lord Slynn suggested that there might be a single dissent as is now the practice in the Privy Council, where all the counter arguments c a n be collected. 39 Edward, supra note 38, at 556. 40 An outsider cannot tell whether this is so, owing to the secrecy of the judges' deliberations under the Statute of the Court, Art. 32. 41 F o r instance, in Coditel SA v. CinA-Vog Films SA (No.2), 1982 E.C.R. 3381, at para. 15, the Court found that an exclusive license for a single Member State for performing rights did not in itself justify a ruling t h a t it was "the purpose, the means or the

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2. Disadvantages of permitting dissents Some people object that dissenting judgments would consume the resources of the Court. Both majority and dissent would have to be prepared, often in a foreign language, and both would require translation. However, it is easier to draft a judgment if it is not a fudged compromise, and also easier to translate when carefully chosen ambiguities do not have to be duplicated in other languages. It might even consume less time to have both, and the Court's deliberations could be shorter. Some people consider that if citizens knew that the judges were not unanimous, the reputation of the Court would be harmed. This is not more likely than under the present system when so many sensitive judgments are virtually without reasoning.

result of an agreement" prohibited by the Treaty. Nevertheless, it went on to say in para. 19 that the national court should consider whether it created artificial and unjustifiable barriers in terms of the cinematography industry and its need to earn a fair return on its investment. Copyright itself is artificial, it is a legal concept. The adjective, "artificial", adds nothing to the ruling. When is an exclusive license with absolute territorial protection justifiable? The Court's interpretation of a fair return is impossible to apply. The industry cannot foretell which films will succeed commercially—the successful ones are the by-products of the unsuccessful ones and must provide a return for both classes. Is a national court offirstinstance to decide what is a fair return for the industry as a whole? This is hardly part of the judicial function. A regulator with evidence from other film producers would not be very successful at performing such a task. Economists or businessmen would not look to fair returns, but to a return sufficient to justify the risky investment in product distribution. If this paragraph was inserted by the dissenters, it would have been better to have a clear dissent. In Volvo AB v. Erik Veng (U.K.) Ltd. 1988 E.C.R. 6211, the Court ruled at para. 8 that the right to refuse a licence was the very subject matter of design rights, but added a qualification that it might be an abuse of a dominant position, if there was one, to refuse a license while refusing to supply spare parts to dependent repairers, charging excessive prices for them, or ceasing to make them when there was still a significant number of vehicles of a particular model on the road. The qualification came back to haunt us as Magill TV Guide, ITP, BBC and TRE v. Comm'n, 1989 O. J. (L78) 43, on appeal, 1995 E.C.R. 1-443. It may be that the judgment does not require the holder of an important patent to grant a license to the holder of an improvement patent. The Court, however, did not spell out in what way the circumstances in Magill were special. I hope it was because copyright in information should not exist. Consequently, the rights of a dominant firm to the exclusive exploitation of its patents are not as clear as they should be to induce investment. A clear dissent would have been preferable to the qualification in Volvo.

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3. Non-renewable term of appointment If judges are expected to give dissents that might operate against the interest of their own country, or of the political party most likely to secure their reappointment, should their appointments be non-renewable, but for a longer term? At the moment, Art. 167 of the Treaty provides for a renewable term of 6 years, although when a judge retires prematurely, his successor is appointed only for the remainder of the six years. The Intergovernmental Conference papers suggested the possibility of amending this to a non-renewable term of 12 years for each Community Court. However, no such amendment was undertaken in the Amsterdam Treaty. Such a change would require a unanimous vote of the Council. Meanwhile, dissents on politically sensitive matters may require courage. Not all judges would be subject to governmental pressures in the same case, and it is difficult to determine how serious this problem would be. As Prof. Hugh Hansen observes,42 such pressures do not seem to have limited the expression of Advocates General. In some countries,43 there is a tradition of reappointing members of the Court who wish to stay. Moreover, despite the secrecy of the deliberations, there are now so many people at the Court that a government that wishes to control the votes of the judges it has nominated can probably find out how a particular judge voted. It does not seem problematic when a Member State has not attempted to implement a directive in time, but state aid or dumping cases in the C.F.I, or improper implementation cases might attract governmental pressure. Some cases under Art. 177 that might lead to damages being claimed by many citizens against a Member State might also be sensitive. Amending Art. 167 to give judges a longer, non-renewable term would not completely remove the pressure. Many of the judges are young and can hardly return to practice law at the end of even a 9-year term. Most will be dependent on government for judicial office in their home country at the end of their careers. Those in the Court of First Instance might need continuing governmental favour also for appointment to the Court of Justice. Another possible solution would be to follow the International Court of Justice at the Hague, and enable the judge nominated by the country most concerned to stand down and be replaced ad hoc. This ignores the problem of a court operating in so many languages. One great advantage of including a 42

At the conference on International Property Law and Policy he organised at Fordham University Law School in April 1997, the proceedings of which are to be published by Juris Publishing and Sweet & Maxwell. See also Edward, supra note 18, at 57. 43 Italy and Germany are not among these countries.

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judge speaking fluently the language of the case is that this judge can read the pleadings in French, and is likely to spot a mis-translation. This judge may also be in a position to explain the background of the case to colleagues. For similar reasons, the Court of Human Rights in Strasbourg requires the inclusion of a judge from the country against which the claim is brought.

Conclusion The E.C.J.'s jurisdiction is limited mainly to correcting manifest errors of law, although it also requires the Commission to establish facts to the requisite standard of proof. It has not been entrusted with full jurisdiction to make its own policy decisions. The C.F.I, has full jurisdiction overfines,but in Tetra Pack II has made it virtually impossible to exercise this jurisdiction, as it failed to require allocation between various infringements by a single firm. If it were to exercise this jurisdiction more fully, the Council might be persuaded to confer greater jurisdiction on the Community courts when amendments to the Treaty are again being reconsidered. Since there is little control over the Commission's policy by either European court, it is all the more important that the Commission's decisions, notices and other policy statements should be well reasoned. Too many of these are controversial within DG IV, and a coherent view is seldom reached. Much has been done with the advent of economists to the Merger Task Force, and their views are spreading to other parts of DG IV, as is evidenced by the draft notice on market definition.44 44

Draft Notice on the relevant market for the purposes of Community Competition law, 1997 O.J. (C372) 5.

Mario Siragusa Partner, Cleary Gottlieb Steen & Hamilton Brussels, Belgium

A. Shortfalls of the Current Enforcement System of Art. 85 of the E.C. Treaty The possibility to exempt under Art. 85(3) of the E.C. Treaty any agreements containing restrictions of competition, having an appreciable effect in the market and impact on interstate trade, has led the Commission to interpret very broadly the ban on restrictive agreements and practices under Art. 85(1). The bifurcation in the dictate of Art. 85 has thus resulted in the Commission's treating any appreciable restriction of the commercial conduct of independent parties—including notably any ancillary restraints necessary to make a (competitively neutral) main transaction viable—as a restriction of competition requiring exemption. This raises all the related problems of "bureaucratic interference."1 In addition to excessive compliance costs and time delays, the Commission's current practice of including economic analysis in the assessment of 1

See generally Margot Horspool & Valentine Koran, Competition, 27 Antitrust Bull. 337, 339 (1992). According to Professor Korah, the Commission's approach to the application of Art. 85(1) may have been influenced not only by the formalistic approach developed in the German case law in application of Art. 1 of the German cartel law, but also "by the difficulty of making a market analysis in each case, both for lawyers advising businessmen, and for its officials who deal with particular cases, most of whom are lawyers. For both lawyers and Commission officials, it is easier mechanically to point to clauses that restrict someone's conduct; then the Commission is free to make a complex economic assessment under Art. 85(3) in those cases it investigates in depth." Valentine Korah, The Rise and Fall of Provisional Validity—The Need for a Rule of Reason in E.E.C. Antitrust, 1981 Nw. J. Int'l L. & Bus. 320, 348-49. See also Christopher Bright, Deregulation of E.C. Competition Policy: Rethinking Art. 85(1), in 1994 Fordham Corp. L. Inst. 505, 514 (Barry Hawk ed. 1995) (stating that the broad jurisdiction reach of Art. 85(1) could be justified in the early years of the Treaty for purposes of laying the foundations for the application of E.C. competition law to cartels, but may no longer be justifiable as the system approaches maturity, and noting that the Commission's unwillingness to redraw the boundaries of Art. 85(1) may reveal "a lack of confidence, a hunger for jurisdictional competence or simply a paternalistic attitude to Community business"). Historically, the Commission's willingness to exempt (rather than clear) certain categories of agreements may also be explained by its agenda of establishing the need for as many block exemptions.

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agreements under Art. 85(3) raises further potentially serious concerns with respect to the parties' planned regulation of their respective economic interests. For example, "the intervention of the Commission when deciding whether to grant an exemption may lead to demands that the agreement be varied in material respects, thereby altering the delicate commercial balance reached between the parties in the first place" and altering their respective bargaining positions.2 As a result of the Commission's current approach to the application of Art. 85(1), even agreements that raise little or no risk of anticompetitive economic impact, i.e., no harm to consumer welfare in terms of price or output effects, are deemed illegal and unenforceable, if they have not been notified.3 This includes, for example, agreements that restrict only competition that could not have taken place in their absence, or restrict competition less than they increase it. Moreover, an agreement is eligible for an exemption (or informal clearance) only if all of the conditions set forth in Art. 85(3) are met. Thus, the low Art. 85(1) jurisdictional requirement means that agreements that are benign in terms of their impact on the competitive process, but do not fulfill the Art. 85(3) test, {e.g., because they do not advance technical or economic progress) cannot be exempted.4 Finally, Art. 85(2) provides that agreements in breach of the Art. are automatically void. This gives rise to serious complications when a national court is requested in private litigation to enforce an agreement that has been notified to the Commission, and may therefore later be exempted retrospectively to the time of the national litigation.5 This situation will likely discourage companies from undertaking many potentially beneficial projects that involve substantial investment. 2

Richard Whish, Competition Law 208 (3d ed. 1993); see also Korah, supra note 1, at 351. 3 This is so unless such agreements are tailored to fit squarely into one of the existing block exemption regulation "straightjackets*. 4 Bright, supra note 1, at 515. 5 If a national court is requested to enforce an agreement that has been notified to the Commission (or does not require notification pursuant to Art. 4(2) of Reg. 17), it may alternatively decide: (a) that Art. 85(1) is inapplicable, (b) that the agreement clearly infringes Art. 85(1) and is not eligible for exemption, (c) to stay the proceedings or adopt interim measures pursuant to domestic procedure, if there is a possibility that an exemption be granted, or (d) to refer the matter to the E.C.J. under Art. 177 of the Treaty. See Delimitis v. Henninger Brau, 1991 E.C.R. 1-935,ffl|50-54; Commission Notice, 1993 O.J. (C 39) 6 [hereinafter Notice on Cooperation with Courts],ffl[23, 30 and 32. In De Norre v. Brouwerij Concordia, 1977 E.C.R. 65, at 83-84, the Commission submitted that the enforcement by a national court of an agreement that it deems likely to be exempted by the Commission would not amount to granting an exemption; the Court, however, did not adjudicate this issue.

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Moreover, the Commission's formalistic interpretation of Art. 85(1), by encouraging recourse to the cumbersome and time-consuming individual exemption process, has resulted in an increased workload for its staff.6 Neither the extension of the de minimis rule, nor the issuance of a number of block exemptions,7 nor the practice of providing comfort letters under Art. 6

Other reasons for the present Commission's backlog are the necessary translation work (which will only get worse with the possible accession of new countries to the E.U.) and the requirements of due process, which will hopefully gain even greater momentum in the years to come. 7 Scholars hold divergent views of the Commission's practice of granting group exemptions for specified classes of agreements as a way of overcoming its inability to grant many individual exemptions. According to Professor Korah, since each block exemption regulation applies to only a narrow class of contracts drafted in formal legalistic terms, companies are often induced to distort the terms of a planned agreement in order to fit it within the scope of the relevant block exemption and make it enforceable "without improving the fairness or efficiency of the economy." Horspool & Korah, supra note 1, at 356-57. See also E.C. Competition Law Reporter (CCH, Ivo van Bael & Jean-Francois Bellis General Eds.) 1 10-210 (Oct. 11, 1995) (regretting that block exemption regulations very often codify contractual relationships in abstracto, based on considerations of equity or reasonableness instead of an analysis of their actual impact on the market, and noting that the circumstance that the Commission itself has felt the need for issuing a set of clarifying guidelines for certain regulations, such as Reg. 1983/83, Reg. 1984/83 and Reg. 123/85, confirms best that legal certainty is not necessarily enhanced by the issuing of block exemptions); Patrick Massey, Reform of E.C. Competition Law — Substance, Procedure and Institutions, in 1996 Fordham Corp. L. Inst. 91 (Barry Hawk ed., 1997) (stating that the establishment of white line rules concerning vertical restraints through blanket exemptions is likely to have been achieved "at the expense of permitting non-price vertical restraints in circumstances where they are genuinely anticompetitive and have no beneficial effects'); Roger Van den Bergh, Modern Industrial Organisation Versus European Competition Law, 1996 Eur. Competition L. Rev. 75, 81 (noting that in the Commission's block exemptions "a positive attitude predominates towards the automobile industry and franchised networks [e.g., as to the power of limiting the number of dealers admitted to the network, and that [in] both cases the specific regulations have been justified by the specific characteristics of the distribution systems concerned," and pointing out the danger of the regulators being captured by the regulated industries whenever the regulatory process is based on information supplied by them. Cf U.N.I.C.E., Modernising E.U. Competition Policy: ReFocusing the Scope and Administration of Art. 85 and Reform of State Aid Control 11-12 (June 28, 1996) (suggesting a number of potential improvements of certain aspects of the Commission's practice of granting block exemptions for procompetitive agreements)). But see Donald L. Holley, E.E.C. Competition Practice: A Thirty-Year Retrospective, in 1992 Fordham Corp. L. Inst. 669, 690-91 (Barry Hawk ed. 1993) (opining that, although block exemptions leave untouched (and are not expected ever to cover) many important areas of commercial activity, they are generally

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85(3),8 seems to have been effective in curing the backlog problem that has developed at DGIV over the years.9 In particular, the E.C.J. ruled that an Art. 85(1) comfort letter may be taken into account by a national court requested to enforce an agreement, but has no binding effect on it.10 Thus, Art. 85(3) comfort letters, which imply that the agreement in question violates Art. 85(1), provide less legal certainty to notifying companies. As of yet, it is unclear whether the Commission's efforts to encourage the decentralized application of the Treaty competition rules by national courts11 and competition authorities12 will succeed in alleviating its workload problem.13 easier to apply with certainty to a given factual situation than is a rule of reason, and indeed—at least to a certain extent and in certain limited areas—have taken care of the need for a rule of reason in the context of E.C. competition rules). 8 I.e., administrative letters express DG IV's intention to close thefileon the ground that an agreement merits exemption under Art. 85(3) or falls within the scope of a relevant block exemption (as opposed to Art. 85(1) comfort letters, which state that the agreement in question falls outside the scope of Art. 85(1)). According to the Commission, a national court may consider a comfort letter stating that the agreement being litigated before it merits exemption "as a factual element" Notice on Cooperation with Courts, supra note 5, *\ 25(a). 9 In 1995 (which is the last year for which statistical data is available), DG IV registered 559 new cases, including 368 notifications. This represented an increase of more than 42% compared with 1994 (392 new cases, including 236 notifications), but was largely attributable to the transfer to the Commission of cases pending before the E.F.T.A. Surveillance Authority following the accession of Sweden, Finland and Austria to the E.U. On the other hand, the number of cases closed in 1995 (i.e., 433 cases, including 419 by informal procedure: comfort or discomfort letter, rejection of complaint or administrative closure of the file) fell by 23.4% compared with 1994. Finally, in 1995, the stock of cases remaining open at the end of the year (1,178), compared with that of the previous year (1,052), increased for the first time since 1988 (an increase of 12%, or 5% if the number of additionalfilesof the new Member States are not taken into consideration). With respect to formal decisions, in 1995 the Commission adoptedfiveArt. 85(1) prohibition decisions, one Art. 85(l)/86 negative clearance decision, and three exemption decisions, and published ten Art. 19(3) notices announcing the adoption of a favourable position with respect to the individual notified agreement in question. European Commission, XXVth Report on Competition Policy 45-47, 145, 305 (1996). For 1996, the number of total formal decisions adopted by the Commission has not yet been disclosed, whereas the number of published decisions was 9 (comprised of four Art. 85(1) prohibition decisions, one Arts. 85(1 )/86 negative clearance decision, three exemption decisions and one Art. 86 prohibition decision). The Commission also published 14 Art. 19(3) notices announcing the adoption of a favourable position with respect to the individual notified agreement in question. 10 Procureur de la Republique v. Giry and Guerlain, 1980 E.C.R. 2327. 1 ' See Notice on Cooperation with Courts, supra note 5. 12 See Preliminary draft Commission Notice, 1996 O.J. (C 262) 5. 13 See Bright, supra note 1 (stating that the decentralization approach is "based on a

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B. The Need for a Renewed Emphasis on Economic Analysis in the Interpretation and Application of Art. 85(1) It would be politically controversial and entirely unnecessary to redraft the Treaty competition rules or Reg. 17/62, with a view to reducing the high compliance costs for business, satisfying companies' needs for legal certainty, and reducing the Commission's workload in the review of Form A/B notifications. Arts. 85 and 86 are drafted broadly enough to allow the Commission and the E.C.J. to bring about important changes in the current application of E.C. competition law without departing from the existing framework. Instead, these changes may be achieved through a gradual shift by the Commission in making its economic appraisal of agreements under Art. 85(1), rather than Art. 85(3). It could begin with a different approach to application of the phrase "prevention, restriction or distortion of competition" in Art. 85(1) and the appreciability test, as defined by the E.C.J. A similar effort would also be required of the E.C.J., which generally views economic analysis as an important part of the application of Art. 85(1), but whose caselaw on this matter has appeared, on the whole, rather erratic.14

myopic view of the effect of the Commission's attitude to application of Art. 85(1)" and is unable to remedy the further costs and difficulties arising from such attitude "in terms of economic progress, burdens on industry and the reputation of the [E.U.] institutions in particular," and advocating an overall reassessment of the whole approach to Art. 85(1)). The Member States' involvement in the enforcement of E.U. competition law is, of course, also in accordance with the principle of subsidiarity, embodied in Art. A of the Treaty on European Union, 1992 O.J. (C 224) 1 [hereinafter T.E.U.], and Art. 3b of the Treaty Establishing the European Community, 1 C.M.L.R. 573 (1992), incorporating changes made by T.E.U. 14 E.g., Societe Technique Miniere v. Machinenbau Ulm, 1966 E.C.R. 235, 250; Brasserie de Haecht v. Consorts Wilkin-Janssen, 1967 E.C.R. 525; Volkv. Vervaecke, 1969 E.C.R. 295; Metro SB-Grossmdrkte v. Comm'n, \911 E.C.R. 1875, 1905; Lancome v. Etos, 1980 E.C.R. 2511, 2536-37; Remia, De Rooij, Nutricia v. Comm'n, 1985 E.C.R. 2545,2571; Cooperatieve Stremsel- en Kleurselfabriek, 1981 E.C.R. 851,867; Nungesser et al. v. Comm'n, 1982 E.C.R. 2015, 2068-69; Coditel v. Cine-Vog Films, 1982 E.C.R. 3381, 3401-02; AEG, 1983 E.C.R. 3151, 3194; BAT Cigaretten-Fabriken 1985 E.C.R. 363; Pronuptia de Paris v. Pronuptia de Paris Inmgard Shillgalis, 1986 E.C.R. 353, 381, 388-89; Erauw-Jacquery v. La Hesbignonne, 1988 E.C.R. 1919, 1938-39; Delimitis v. Henninger Brau, supra note 5, 1991 E.C.R. 1-935; Gettrup-Klim Grovvareforeninger v. Dansk Landbrugs Grovvareselskab, 1994 E.C.R. 1-5641; Langnese-Iglo GmbHv Comm'n, 1995 E.C.R. II-1533,ffi[99-102. But see Societe de Vente de Ciments et Betons de I'Est SA v. Kerpen & Kerpen GmbHund Co. KG, 1983 E.C.R. 4173, 4182; Hasselblad (G.B.) v.

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Under such a sui generis "rule of reason approach,"15 the Commission, before deciding that a given restriction of conduct that is important in the market restricts competition, should make the following analysis. First, it should assess whether such competition would exist at all but as a result of the agreement in question.16 Second, if the project under review is found to restrict some competition, the Commission should carry out an economic balance between the agreement's positive and negative market effects,17 including, arguably, considerations relating to individual freedom of action or the promotion of integration of the Internal Market. Based on such economic analysis, the Commission would clear (rather than exempt) any agreements: (i) whose anti-

Comm'n, 1984 E.C.R. 883, 908-10; Bayer v. Sullhofer, 1988 E.C.R. 5249, 5287-88; Dansk Pelsdyravlerforening v Comm'n, 1992 E.C.R. 11-1931, HU 51-55. 15 The determinants for applying the U.S. rule of reason, according to the formulation by Professor Areeda, are (i) the type of threat to competition, (ii) whether the restraint is of sufficient magnitude to be "unreasonable', and (iii) whether the challenged conduct has any redeeming virtues that outweigh the detriments it may cause. Phillip Areeda, A Second Century of the Rule of Reason, 59 Antitrust L.J. 143 (1990). In accordance with Professor Whish's warning, since U.S. and E.U. competition law are materially different in numerous respects, terminology should not be imported from U.S. law that could blur this significant fact. Whish, supra note 2, at 209. However, since a close (albeit complex) relationship exists between the U.S. rule of reason and the similar concepts that have developed in certain areas of E.U. competition law, it is submitted that reference to the "rule of reason" concept with respect to the introduction of a more rigorous economic analysis in the application of Art. 85, for the sake of simplification, should amount to a venial sin. As emphasized by Professor Hawk, however, both the rule of reason and the per se rule could operate in the context of the suggested shift under Art. 85(1) of the full economic analysis of the competitive impact of agreements or practices, with recourse to a per se approach being aimed at simplifying the analysis (and reducing litigation costs) by dispensing of proof of market power and rejecting in principle economic or business justifications for naked cartel conduct such as price fixing, market division and customer allocation. Barry E. Hawk, System Failure: Vertical Restraints and E. C. Competition Law, 32 Common Mkt. L. Rev. 973, 987-88(1995). 16 E.g., it should consider whether a firm benefitting from exclusivity would have found it worthwhile to invest in resources that have no alternative use. 17 E.g., it should consider protection from free riding or the realization of savings on transaction costs as a potential justification for territorial protection or other limitations of the number of dealers in the context of a distribution agreement; or, in the case of a joint venture whose parent companies have complimentary facilities or technologies, but might have entered a new market independently of each other, whether the transaction's procompetitive effect {i.e., the joint venture's entering the market earlier than either parent company could have done by itself) outweighs its restrictive effect on potential competition.

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competitive effects are outweighed, or (ii) that probably do not restrict competition, given that such competition would not have been possible in the absence of such agreements (such as agreements that enable the development of a new product or the entry into a new market).

C. The Residual Role of the Exemption Process Under Art. 85(3) On the other hand, application of Art. 85(3) would be confined essentially to cases involving "political" issues. This would include agreements or practices that are deemed restrictive on pure antitrust grounds, where "redeeming virtues" of industrial,18 regional, social,19 or even environmental policy20 are found to outweigh the detrimental competitive impact of the cooperation or collusion between the parties, to the advantage of consumers. Individual exemption, however, would still be subject to the two-fold condition that the agreement in question neither (i) imposes on the parties restrictions that are disproportionate to the attainment of such (non-competition) objectives, nor (ii) affords them the possibility of eliminating competition in the relevant 18

Industrial policy considerations, such as the development and dissemination of new technologies throughout the Community or the competitiveness of European industries, have been to some extent taken into account by the Commission in its decisions concerning specialization agreements (e.g., Fine Paper, 1972 O.J. (L 182) 24; BPLC/ICI, 1984 O.J. (L 212) 1; ENI/Montedison, 1987 O.J. (L 5)13) and joint ventures (e.g., KEWA, 1976 O.J. (L 51) 15; G.E.C.-Weir Sodium Circulators, 1977 O.J. (L 327) 26). 19 Employment problems have played a limited role in crisis cartel cases. E.g., Synthetic Fibers, 1984 O.J. (L 207) 17. See also Commission Reg. No. 1475/95, Arts. 5(2)(2)-(3) and 8(2), 1995 O.J. (L 145) 25 (including, in the context of a block exemption for motor vehicle distribution and servicing agreements, provisions covering matters of social, fiscal and industrial policy, such as the required notice period to be given when a dealer is dismissed and the harmonization of car prices throughout the E.U.). 20 On the other hand, the Commission refused to give priority to cultural values over the aims of competition policy. E.g., VBVB/VBBB, 1982 O.J. (L 54) 36 (upheld by the E.C.J. in VBVB v. Commission, 1984 E.C.R. 19). That issues such as those indicated in the text can legitimately be considered for purposes of an Art. 85(3) exemption appears unquestionable under a teleological interpretation of the Treaty competition rules in light of the objectives expressed in Arts. 2 and 3. This proposition was upheld by the E.C.J. (in Metro SB-Grossmarkte v. Comm'n, 1977 E.C.R. 1875, and Remia v. Commission, 1985 E.C.R. 2545, % 42), which stated that, since the stabilization of employment may improve the general conditions of production within the Community, it may be taken into account for purposes of Art. 85(3) analysis under the "improvements in production" heading.

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market.21 In this respect, the new emphasis on non-competition matters in the application of Art. 85(3) would require merely an interpretive evolution, not a redrafting of this provision. At the same time, the Commission's current policy to regulate through block exemptions would become void of raison d'etre, and should be discontinued.22

D. Potential Advantages of the Proposed Enforcement Systems The Commission's new approach to application of Art. 85(1) should be laid down in guidelines to be published in one or more notices ('block negative clearances'). Such guidelines would help business, counsel and national courts/competition authorities empowered to apply the ban on restrictive agreements and practices, to determine whether an agreement is caught by Art. 85(1).23 In addition, the new "E.C. rule of reason" should be reinforced by the E.C.J. and the C.F.I, in firm, well-reasoned and consistent caselaw. The approach proposed above provides the advantage of greatly reducing the need for prior notification of procompetitive agreements. This would alleviate the regulatory burden on businesses and allow the Commission to curtail its bureaucratic process and concentrate on serious cartel issues, politically sensitive cases and policy developments. Furthermore, it would confer broader powers on national courts and competition authorities. In the current framework, these national institutions have a very modest role in the enforcement of Arts. 85 and 86, especially since the power of granting individual exemptions is reserved to the Commission pursuant to Art. 9(1) of Reg. 17/62.24 At the same 21

These c o n d i t i o n s w o u l d be met, for instance, where the parties to the agreement have negligible m a r k e t p o w e r o r , t h o u g h holding significant positions within the E.U. m a r k e t , face substantial c o m p e t i t i v e pressure from n o n - E . C . competitors. 22 In this respect, t h e m o s t o b v i o u s solution would be for the Commission not to renew the regulations c u r r e n t l y in force u p o n their expiration. 23 See Patrick M a s s e y , supra n o t e 7; U . N . I . C . E . , supra note 7, at 9. 24 T h e n a t i o n a l j u d g e m a y , h o w e v e r , directly apply block exemption regulations (Fonderies de R o u b a i x - W a t t r e l o s v. F o n d e r i e s R o u x , 1976 E.C.R. 111), t h o u g h it m a y not extend their scope of a p p l i c a t i o n t o agreements not expressly covered by them (Delimitis v. H e n n i n g e r B r a u , supra n o t e 5, 1991 E.C.R. 1-9351J46). T h e national j u d g e m a y also a p p l y A r t . 85(3) negatively, a t least in clear cases, i.e., decide that an agreement being litigated, which h a s n o t b e e n notified to the Commission (or is exempt from notification), infringes A r t . 85 o n the g r o u n d that the conditions for application of A r t . 85(1) are satisfied a n d , h a v i n g r e g a r d t o the Commission's block exemption regulations and previous individual e x e m p t i o n s , t h e agreement m a y n o t be exempted: (id., fflj 50-51).

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time, the proposed approach would not re-open the Pandora's box of the positive application of Art. 85(3) by national authorities.25 On the other hand, the Commission, as the competent political body of the European Union, would retain its exclusive responsibility in the application of Art. 85(3) for the adoption of those decisions likely to have the most far-reaching consequences in the Internal Market. E.U. competition policy must continue to develop as an integral part of other E.U. policies. Its application therefore requires a continuous and delicate balancing exercise among the various (sometimes conflicting) policies, that can only be carried out by a "politically-oriented" decisionmaking body such as the Commission. This implies that, in the context of the new enforcement system discussed in this paper, the creation of an independent cartel agency, as proposed by the German government at the Turin Inter-Governmental Conference of March 1996, would serve no meaningful purpose. However, the first step of the overall Art. 85 economic analysis, i.e., whether the agreement appreciably prevents, restricts or distorts competition, should be carried out in isolation from the rest Since Arts. 85(1) and 86 "create direct rights in respect of the individuals concerned which the national court must safeguard" (B.R. T. v. S.A.B.A.M., 1974 E.C.R. 51, K 16) and an agreement is void under Art. 85(2) only if it infringes Art. 85(1) and does not merit exemption (De Geus v. Bosch, Willem Van Ryn, 1962 E.C.R. 45 and De Bloos v. Bouyer, 1977 E.C.R. 2359,111). Art. 9(1) of Reg. 17 is invalid as contrary to the Treaty. It should thus be altogether disregarded by national courts. See Korah, supra note 1, at 353 (conceding that, however, that the E.C.J. has frequently referred to the national judges' inability to grant Art. 85(3) exemptions without casting any doubt on the validity of Art. 9(1)). See also Pietro Manzini, La rule of reason nel Diritto Comunitario della Concorrenza: Una Analisi Giuridico-Economica [The Rule of Reason in E.C. Competition Law: A Law and Economics Analysis], 31 Riv. Dir. Europ. 859, 877-92 (1991). 25

A widely-held view, which has been long supported by the Bundeskartellamt, strongly advocates the need for an amendment to Reg. 17/62 which would empower national competition authorities to apply Art. 85 in its entirety, i.e., including the power to grant an individual exemption under Art. 85(3), without which no genuine decentralization of the enforcement of E.U. law is deemed possible. E.g., Kurt Stockmann, Problems of National Competition Authorities in Enforcing EC Competition Law, Address at the IBC E.C. Competition Law Annual Conference, Brussels, 1994; Editorial Comments, 32 Common Market Law Review 1 (1995) (stating that the length of the current average waiting period for an Art. 85(3) exemption is "nothing less than outright scandal" and suggesting that the grant of an exemption by a national competition authority be restricted, at the beginning, to three or four years, with its renewal— if any—to be applied for with the Commission), and Pierre-Vincent Bos, Towards a Clear Distribution of Competence Between E. C. and National Competition Authorities, 16 Eur. Competition L. Rev. 410 (1995).

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of the Treaty. Conversely, the interpretation and application of Art. 85 would remain grounded in the Community objectives provided for in Arts. 2 and 3 of the Treaty for purposes of the assessment of any potential justifications for agreements found anticompetitive.

E. A Critical View of the Commonplace Potential Drawbacks of an "E.C. Rule of Reason" Approach The common contention that these proposed changes to E.C. competition law enforcement would result in an undesirable antitrust revolution26 lacks any basis. The introduction of a rule of reason test in Art. 85(1) by way of interpretation would certainly lead to different compliance burdens for businesses operating in the Internal Market. It would also, however, likely "establish new benchmarks that will be used to make it clear that a greater number of cases do not fall within the scope of Art. 85(1). The extra burden will arise at cases around the margin of any new benchmark."27 The argument that legal certainty would diminish as a result of inadequate judgments or an inconsistent development of the caselaw under Art. 85 in the different Member States, due to the alleged inability of Member State courts to draw on a uniform law tradition, contradicts the Commission's movement towards a decentralized application of E.C. competition law.28 Of course, the suggested reassessment of the approach to Art. 85(1) should originate at the 26

See H e l m u t h R . B . Schroter, Antitrust

Analysis

Under Art. 85(1) and (3), in 1987

Fordham Corp. L. Inst. 645, 691-92 (Barry Hawk ed. 1988). 27

Bright, supra n o t e 1, at 525. I n the C o m m i s s i o n ' s view, "[t]he decentralized application of the competition rules is often a quicker a n d m o r e efficient w a y t o b r i n g infringements to a n end. M o r e 28

frequent application by national courts and authorities reminds the Community citizen that these rules are part of the "living law" of each Member State and are aimed at protecting their (sic) rights." Moreover, "[i]n cases where an appreciable economic effect is felt mainly in one Member State, national authorities are closer to the market and may thus be better placed to handle the case." European Commission, XXVth Report on Competition Policy 1995 at 19, 44 (1996). The Court of First Instance has established the principle that the Commission is not required to investigate every complaint it receives and need only take decisions on matters within its exclusive competence (such as the withdrawal of exemptions granted under Art. 85(3)). Cases presenting an insufficient political, economic or legal Community interest, in which the parties concerned are able to secure adequate protection of their rights before a national court, are better dealt with by way of decentralized application of the Treaty competition rules. Automec v. Comm'n, 1992 E.C.R. 11-2223,ffi]74-75, 85, 91-94.

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center (Commission and E.U. courts), and gradually spread to the periphery, as it would be unworkable for national courts and authorities to be involved in this process at the outset. The often-stated argument about the inability of the national courts to assess economically complex situations is untenable. Indeed, already the decision as to whether a restriction of the freedom of action of a party to a contract constitutes a restriction of competition—which clearly falls within the jurisdiction of the national courts29 and competition authorities30—inevitably requires some economic analysis. It also raises the issue of a potentially divergent application of Art. 85(1) in the various Member States. The same holds true, mutatis mutandis, for the appreciability assessment under Art. 86. If the concept is accepted that the application by national courts/authorities of the Treaty competition rules necessarily implies that they exercise a certain degree ofdiscretion, there is no reason that these discretionary powers should not logically extend to the economic balancing process described above. Furthermore, in performing such market analysis, national courts would be able to rely on a vast body of precedents and guidelines. These would include not only the caselaw of the E.CJ. and the C.F.I., but also the criteria and principles established in the Commission's practice. These are evidenced both by the Commission's individual decisions, and by other sources such as interpretive communications and competition policy reports.31 Moreover, the suggested introduction of a reasoned assessment of agreements in their economic context to determine their overall impact on the competitive process would not affect the balancing of beneficial and detrimental effects on competition of an agreement. Such a balancing is the substance of the current legal analysis under Art. 85. It would only result in a modification of the purpose and legal basis of this analysis, i.e., the determination of whether an appreciable restriction of competition exists for Art. 85(1) to be violated. This contrasts with the current 29

B.R.T. v. S.A.B.A.M., supra note 24, 1974 E.C.R. atffll 14-16 (distinguishing the position of national courts applying Arts. 85 and 86 a litre incident, i.e., by virtue of their direct effect, from that of national courts especially entrusted to apply domestic competition law or to ensure its proper application by domestic authorities, a n d which apply Arts. 85 a n d 86 a litre principal, i.e., in their position as "authorities of the M e m b e r States" within the purview of Art. 88, whose jurisdiction is ousted by the initiation of proceedings by the Commission pursuant t o Art. 9(3) of Reg. 17). 30 Under Art. 9(3) of Reg. 17, until the Commission initiates a procedure under Reg. 17, "the authorities of the M e m b e r States remain competent to apply Arts. 85(1) and 86 in accordance with Art. 88 of the T r e a t y " (emphasis added), provided their national law has conferred the necessary powers on them. 31 Cf. Dijkstra, Roessel, de Bie v. Friesland Cooperatie, C a m p i n a , 1995 E.C.R. 32.

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approach, which makes such a substantive analysis to determine whether an exemption should be granted under Art. 85(3)). Therefore, there seems to be no reason that the proposed shift of the economic analysis from Art. 85(3) to Art. 85(1) would require a change in the substantive analysis under Art. 85. National courts and authorities could continue to rely, for purposes of carrying out the balancing process, on the established principles and criteria of E.C. competition law. In addition, it appears that national courts in many Member States are increasingly utilizing the cooperation mechanisms set forth in the 1993 Commission Notice on cooperation between national courts and the Commission, in order to obtain information from the Commission on competition issues. Likewise, as a way of pursuing uniform application of E.U. competition law, Commission and national enforcement officials communicate and cooperate with each other on a continuing basis.32 The forms of cooperation envisaged by the Commission for the application by national courts of the existing block exemptions33 could be replicated with respect to the proposed Art. 85(1) notices to be issued by the Commission. Finally, the E.U. legal system currently provides for certain built-in corrective mechanisms that may significantly alleviate the risks of an inconsistent application of Art. 85(1) by the various national courts and competition authorities. First, the decentralization process goes hand-in-hand with the Commission's continuing effort to clarify and simplify the substantive rules, in order to enable Member States to use the same concepts when applying E.C. competition rules. Second, the alleged national courts'/authorities' inability to follow a consistent and uniform pattern of decentralized enforcement of E.C. competition rules appears somewhat overstated in light of the legislative "soft harmonization" process that has occurred in the Member States. This process has been a natural consequence of the European integration process. Indeed, nine Member States34 have enacted competition laws which include bans on restrictive agreements and practices and abuse of a dominant position that closely resemble those provided for in Arts. 85 and 86.

32

E u r o p e a n Commission, XXVth Report on Competition Policy 1995, at 43-44. T h e Commission is willing to give its views on points of law relating to the applicability of Arts. 85 a n d 86, including an interim opinion on eligibility for exemption under Art. 85(3), and, arguably, advise as to the interpretation of block exemptions. See Notice on C o o p e r a t i o n with Courts, supra note 5, \ 38. 34 These M e m b e r States are Belgium, France, Greece, Ireland, Italy, Luxembourg, Portugal, Spain a n d Sweden. 33

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F. 'Block Negative Clearances" Admittedly, the proposal suggested in this paper is not likely to eliminate all conceivable concerns for legal security. However, legal certainty is less likely under the present process for application of E.C. competition law. In addition, there is room for certain procedural improvements, which, however, would call for an imprimatur by the E.C.J. and the C.F.I. As discussed above, in the framework of the proposed system, the Commission's present workload problem will be alleviated by a surge in the number of cases dealt with by national courts and competition authorities through rulings in application of Art. 85(1) in a decentralized manner. Moreover, as the basis for the Commission's decisionmaking process would largely shift from Art. 85(3) to Art. 85(1), sustantially fewer agreements would likely be notified to the Commission. In particular, the possibility that more notifications are made for the purpose of obtaining a formal decision of negative clearance (rather than individual exemption) than is currently the case would appear unlikely. This is because the main benefit of notification, i.e., immunity from potential fines under Art. 85(1), only applies if an agreement is notified for an Art. 85(3) exemption.35 Against this background, the suggestion to introduce provisional validity for notified agreements until adoption of a Commission decision granting or refusing exemption is bound to lose most of its appeal. The likelihood of a decrease in the number of notifications of agreements or practices to DG IV would depend heavily on the private parties' ability to rely, before the E.U. and national courts/competition authorities, on the future "block negative clearances." The Commission, on the basis of its individual casework, should produce and publish such block negative clearances for the purpose of aiding in the interpretation of Art. 85(1) and reducing the perceived scope of this provision in areas where no policy issues arise. Unless the Council expressly grants the Commission the power to issue group negative clearance regulations,36 its future declaratory statements explaining its policy in the application of the "E.U. rule of reason" will take the form of simple communications. The problem with such an option is that the notices issued by the Commission thus far are merely an expression of its own thinking in abstract terms. They do not prejudice the Commission's power to depart from them in 35

John Deere, 1985 O.J. (L 35) 58. This would be done pursuant to Art. 87 of the Treaty, as it was for the adoption of Art. 85(3) regulations. Council Reg. No. 19/65, 1965 J.O. (L36) 533, 1965-1966 O.J. Eng. Spec. Ed. 35. 36

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individual cases, and thus do not bind the E.U. or national courts. They therefore do not provide the desired level of certainty for business and counsel. Accordingly, the E.U. courts are unlikely to be willing to recognize an enhanced legal status of the Commission's new notices, unless they are drafted with enough clarity and detail to produce clear legal consequences by validating agreements that would otherwise be void and unenforceable. At present, this is most often the case for block exemptions. In this respect, the Commission's recent initiative in the field of vertical agreements, with the longawaited publication of a Green Paper could serve as a model for other areas of application of Art. 85(1). The Green Paper is meant to form the basis for consultation with Member States, other E.U. institutions and business, and to be followed by a white paper selecting the policy option. This is so at least to the extent that the selected option will be that more market analysis should be performed under Art. 85(1). In addition, a number of Art. 85(3) group regulations will expire in the forthcoming years.37 Thus, in the first phase of the new enforcement system based on the "E.C. rule of reason," the development of the new notices by the Commission could be planned to coincide with the adoption of the renewed block exemptions. These block exemptions could contain longer "white lists" of provisions deemed rarely to infringe Art. 85(1) than do the original regulations.38 The Commission should, however, refrain from presenting the white list clauses in the renewed block exemptions in an indiscriminate way. Thus, these clauses should not blur the boundaries of Art. 85(1) by exempting agreements for the sake of legal certainty, "just in case" they should fall within the scope of Art. 85(1) in light of the surrounding economic or legal circumstances.39 However, in the context of the proposed system, this combination of block negative clearance and block exemption legal instruments would only be of a 37

T h e following regulations will expire: R e g . N o . 1983/83 (exclusive distribution agreements), 1983 O.J. (L173) 1; R e g . N o . 1984/83 (exclusive purchasing agreements), 1983 O.J. (L173) 5, b o t h amended b y Reg. N o . 1582/97, 1997 O.J. (L214) 27, a n d Reg. N o . 4087/88 (franchise agreements), 1988 O.J. (L359) 46, all of which will expire o n Dec. 31, 1999, a n d R e g . N o . 416/85 (specialization agreements), 1985 O.J. (L53) 5, as a m e n d e d b y Reg. N o . 2236/97,1997 O.J. (L306) 12, which will expire on D e c e m b e r 3 1 , 2000. 38 T h i s was the case, for example, for C o m m i s s i o n Reg. N o . 240/96, 1996 O.J. (L31) 2 [hereinafter T e c h n o l o g y transfer block exemption], whose white list u n d e r Art. 2 is considerably longer t h a n t h e white lists in Art. 2 of the earlier Regs. N o . 2349/84 1984 O.J. (L219) 15 o n p a t e n t licensing agreements a n d N o . 556/89 1989 O.J. (L61) 1 on know-how licensing agreements. 39 E.g., Recital 18 a n d Art. 2(2) o f the Technology transfer block exemption.

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temporary nature. In this respect, this proposal differs radically from alternative schemes, such as the one illustrated in Option IV in the 1997 Commission Green Paper on Vertical Restraints.40

G. Expected Quantitative Growth of Third Party Complaints and Increased Involvement of National Competition Authorities in Enforcing Art. 85 In the framework of the new enforcement system, substantially fewer agreements would be notified to the Commission. It might also be expected that DG IV and the national competition authorities ('N.A.A.s') would receive a growing number of third-party complaints, the filing of which would become the most frequent means of alerting the authorities to the existence of agreements and practices potentially relevant for competition law purposes.41 Procedurally, a higher number of complaints would require the establishment of a precise and appropriate system of cooperation between all authorities involved in handling such complaints. In principle, the allocation of Art. 85 cases to the Commission and N.A.A.s could take place according to the criteria discussed in the 1996 Preliminary 40

European Commission, Green Paper on Vertical Restraints in E.C. Competition Policy, COM(96) 721 Final at 78-79,ffi[293-301 (22 Jan. 1997)(requesting comments on four alternative options for the Commission's future policy in this field. Under said Option IV, as a response to the criticisms that block exemptions have had a "straightjacket" effect, and that Art. 85(1) has been applied too widely to vertical restraints without reference to their economic and market context, a presumption of compatibility with Art. 85(1) of vertical agreements entered into by parties, each having a market share lower than 20% of the relevant market in the contract territory, would be introduced by way of a notice or negative clearance regulation. Such presumption would n o t cover per se illegal restraints, such as resale price maintenance or impediments to parallel trade or passive sales, and could be rebutted on the basis of a market analysis taking account of factors such as market structure, the cumulative impact of parallel networks, barriers to entry and the degree of integration of the E.U. market, with the result of raising the issue whether the agreement may benefit from one of the existing block exemptions. Vertical agreements entered into by parties with individual market shares in excess of 20% would be covered by new "wider" or "more focused" block exemptions, as described under Options II and III, respectively). 41 Third parties seeking to avoid penalties or damage as a result of an agreement or conduct in violation of Art. 85 may also commence proceedings in a national court. T h e Commission points out the following advantages to proceedings via national courts: speedier adoption of interim measures, the possibility of combining claims under E . C . law with those under national law, and the national courts' power to award compensation for damage and costs. Notice on Cooperation with Courts, supra note 5, % 16.

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Draft Commission Notice.42 Furthermore, the operation of this system would require each N. A. A. systematically to inform the Commission of enforcement proceedings initiated by it under Arts. 85 and/or 86, and would require the Commission to inform the other N.A.A.s. Where the relevant N.A.A. examines a restrictive agreement covered by E.C. law, it could promptly request the Commission's provisional opinion on the probability of an exemption. Under Art. 9(3) of Reg. 17/62, the Commission is empowered to terminate national proceedings under Art. 85 or 86 by initiating its own proceedings with respect to the same conduct. Coordination and extensive consultations between the Commission and the N.A.A.s at a very early stage of the proceedings would therefore become very important in order to ensure effective enforcement. Requiring the Commission to issue an early binding declaration that it does not intend to continue a particular proceeding would be necessary to reassure the N.A.A. that it can continue the proceedings itself, carry out the necessary investigation and work on the case until the adoption of a final decision.43 This system would offer the benefit of improved effectiveness of enforcement of competition rules by decentralizing responsibilities and sharing tasks between the Commission and the N.A.A.s. The following examples illustrates this principle: • An N.A.A. that has initiated proceedings under Art. 85(1) or 86 and/or its domestic competition rules needs to obtain certain information from an undertaking located in another Member State, or to carry out an investigation involving such undertaking. It will turn to the Commission, on which the framework of cooperation between N.A.A.s for the application of E.C. competition law would be centered, and which would have the function of assigning cases and providing guidance and assistance to N.A.A.s. Pursuant to Art. 11 of Reg. 17, the Commission could obtain all the necessary information from the governments, the N.A.A.s of Member States and directly from undertakings and associations of undertakings. Moreover, under Art. 13 of Reg. 17, the Commission can require an N.A.A. of the Member State in whose territory an 42

Supra note 12 (i.e., the actual o r foreseeable effects of a given restrictive business conduct must be located within a single M e m b e r State, must not raise any question of C o m m u n i t y interest, a n d t h e case m u s t involve a violation of Art. 85(1) which does not qualify for an exemption under A r t . 85(3) o r o f Art. 86. In addition, protection at the national level must be effective a t t h e level o f investigation, remedies and sanctions.) 43 For example, a two month period could be specified, consistent with the new system adopted by the Commission for dealing with structural joint ventures of a cooperative nature as of January 1, 1993. European Commission, XXIII Report on Competition Policy 1993, at 193-197.

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investigation is to be made to undertake such investigation. Once the Commission has acquired the information, the requesting N.A.A. shall then ask to see it, as expressly permitted by the Regulation.44 • If, in the course of its investigating activities under the Treaty rules and/or its national law, an N.A.A. obtains information which reveals the existence of parallel anticompetitive conduct at the national level in one or more other Member States, it should notify the N.A.A. of the Member State of the information which it has obtained in its territory. Again, the Commission could easily act as an intermediary between the two N.A.A.s, in order to provide the relevant information within the cooperation framework established by Reg. 17/62. Moreover, the Commission's role in this process will enable it to determine whether it should take over the enforcement action in a particular case. • The Commission's assistance in coordinating enforcement actions by N.A.A.s may also become necessary in the event that an N.A.A., in the course of its investigation proceedings under Arts. 85 and/or 86 and/or its national competition law provisions, establishes that the alleged anticompetitive conduct may have an impact in another Member State. In such a case, the Commission will likely initiate its own proceedings within two months of notification45, which in turn will prompt the N.A.A. involved to stay its procedure for the enforcement of the Treaty rules, and possibly to initiate proceedings under their national competition law. Unless the Commission decides to open proceedings concerning the same agreements or conduct, an N.A.A. which obtained relevant information from the Commission upon request or upon the initiative of another N.A.A., should also be empowered to use such information for the purposes of proving the alleged infringement of Art. 85 and/or 86 that are the subject of its proceedings. However, it should be subject to an obligation not to disclose information "of the kind covered by the obligation of professional secrecy" to third parties, 44

As recently established by the E.C.J., the Commission's obligation under Art. 10 of Reg. 17 to transmit to the competent authorities of the M e m b e r States copies of the documents it considers to be the most important of those lodged with it, however, m a y be limited by the general principle of the right of the undertakings concerned to protection of their business secrets. This right is protected by Art. 214 of the Treaty a n d various provisions of Reg. 17. Therefore, if the Commission intends to transmit a document to the competent national authorities, notwithstanding a claim that in the particular circumstances of the case that document is of a confidential nature as against those authorities, it must adopt a reasoned decision amenable to judicial review by means of an action for annulment. S E P v. C o m m ' n , 1994 E.C.R. 1-1911. 45 See note 43 supra a n d accompanying text.

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pursuant to Arts. 20(2) of Reg. 17.46 Such a position was supported by the Commission in the Spanish Banks case before the E.C.J.47 However, in that case, the Court took a different view on this issue, and concluded that N.A.A.s may not use information collected by the Commission under Reg. 17 in national proceedings for the enforcement of either Community48 or national competition rules. They may, however, take such information into account in deciding whether to open such proceedings.49 The Court reasoned that Reg. 46

T h e E.C.J. h a s n o t yet discussed what information it regards as being covered by the obligation of professional secrecy. It h a s been submitted that this notion is broader than the concept of a business secret a n d covers also technical information, know-how and conceivably all information n o t yet in the public domain. 3 Butterworths Competition L a w X/725 (Martin R . Smith contributing ed. 1995). 47 See Direccion de Defensa de la Competencia v. Asociation Espanola d e Banca Privada, 1992 E.C.R. 1-4785 U 20. This case, which arose from an Art. 177 reference from the Spanish Tribunal for the Defence of Competition, provided the Court with the first occasion t o discuss the purposes for which a competent N . A . A . can use information provided by o n e or m o r e undertakings to the Commission in response to a request for information pursuant t o Art. 11, or in notifications m a d e pursuant to Arts. 2, 4 or 5 of R e g . 17/62, in national proceedings. See generally Josephine Shaw, The Use of Information in Competition Proceedings, 18 E u r o p . L. Rev. 154 (1993). 48 T h e E.C.J. t o o k the view that the distinction proposed by the Commission between t h e application by N.A.A.s of the competition rules in the Treaty a n d the national law is irrelevant to the issue of the possible use of information obtained by the Commission p u r s u a n t to Reg. 17. According to the Court, in both cases the proceedings conducted by N . A . A . s are different from Commission proceedings, since Reg. 17 a n d E.C. law in general are n o t applicable to N . A . A . proceedings. T h e acquisition of evidence by N . A . A . s is governed by the provisions of national law, so that even when N . A . A . s enforce the basic provisions in Art. 85 and/or 86, they must apply them according to national law. Spanish Banks, supra note 47, 1992 E.C.R. at THJ 31—32. 49 Based on the premise that the national a n d E.C. competition rules have the same underlying philosophy, the Spanish government (intervenor in the case) suggested that Art. 20(1) of Reg. 17 should be interpreted as allowing N.A.A.s to use the information obtained b y the Commission under Art. 11 for the purposes of pursuing any competition proceedings. T h e E.C.J. held, however, that Art. 20(1), which prohibits the use of information acquired through a request for information or investigation other than for the p u r p o s e of that request or investigation, precludes N.A.A.s from relying on such information either in a preliminary investigatory procedure or to justify a decision based o n provisions of competition law, regardless of whether they are applying E.C. o r national rules. Moreover, with respect t o the rights of N.A.A.s to use information contained in t h e annex t o a notification o n F o r m A/B, the Court pointed out that the use of such information is not covered by Art. 20(1). Nonetheless, the Court concluded that the n a t u r e of the notification mechanism established by Reg. 17 requires the observance of similar restrictions by N.A.A.s. According to the Court, if N . A . A . s could use information contained in notifications to justify the imposition of national sanctions, the

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17, Art. 20(l)'s restriction on the use of information collected pursuant to Art. 11 is intended to protect the rights of companies that are the subject of Art. 11 requests. This includes the right to be informed of the legal basis for, and the purpose of, such requests, as provided in Art. 11(3), and the obligation of professional secrecy. Although Art. 10(1) envisages the transmission of information collected by the Commission to N.A.A.s, the purpose of this provision is to inform the Member States of any Commission proceedings concerning companies located in their territories, and to promote the Commission's collection of information by enabling N.A.A.s to make observations. The transmission of such information, however, does not imply that the N.A.A.s can use it such as to jeopardize the operation of Reg. 17/62 or the fundamental rights of the companies concerned. The E.C.J. emphasized the protection of the rights of the defense of the undertakings under investigation, and the coherence and integrity of the E.U. enforcement system.50 This, however, is not sufficient to support the conclusion that Commission investigations should be regarded as entirely separate from investigations undertaken by N.A.A.s regarding alleged breaches of the Treaty competition rules. The view that the use of information obtained by the Commission in antitrust proceedings conducted by N.A.A.s would amount to a "use for other ends" within the meaning of Reg. 17/62, Art. 20 seems unreasonably formalistic. Irrespective of who the enforcer is in a specific case, that information is used for the purpose of applying the same set of rules (except for rules governing the imposition of sanctions).51 benefits of notification to the Commission would be substantially reduced. The Court, however, concluded that this does not mean that N.A.A.s have to ignore information communicated to them by the Commission. N.A.A.s may take information transmitted by the Commission into account as circumstantial evidence in deciding whether to open national proceedings. The facts reflected in the documents transmitted by the Commission must be established by means of evidence appropriate under national law and respecting the safeguards intended in that law. 50

Spanish Banks, supra note 47, 1992 E.C.R. I a t 1) 30. Art. 88 of the Treaty does not grant to the Member State authorities the power to impose fines for the violations of Arts. 85/86, and Art. 15 of Reg. 17 confers such power only on the Commission. Therefore, in the context of an enforcement procedure under the Treaty rules, an N.A.A. may only impose the sanctions provided for under its national competition rules. However, this circumstance should not be an obstacle to the possible use of information obtained from other N.A.A.s via the Commission for the purposes of applying Arts. 85 and/or 86. It seems fair that an undertaking which indulges in anticompetitive conduct that produces effects mainly in the territory of one Member State should be subject to fines according to that State's national rules. N.A.A.s could also bypass a potential problem raised by inequality of fines in the 51

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In particular, the Court's position in Spanish Banks seems untenable in that it appears to be based on the premise that at least some of the national competition systems would afford the undertakings involved a lower level of protection of their rights of defense than the E.U. system. In fact, the reverse is true: it is on the very basis of the generally accepted principle of administrative law in force in the Member States that the existing body of Community rules on the protection of the rights of defense have been developing over time.52 Moreover, different national systems by invariably initiating Arts. 85/86 procedures also pursuant to the national competition law at the same time. I am sympathetic with the E.C.J.'s concern in Spanish Banks (supra note 47, 1992 E.C.R. 1-4785, at ffll 51-53) that for the purposes of establishing a breach of Arts. 85 and/or 86 of the Treaty, allowing N.A.A.s to use the information derived by the Commission from a Form A/B and transmitted to them could undermine the benefit of the immunity from fines that Art. 15(5) of Reg. 17 grants to the parties to such a notification. This could discourage undertakings from notifying their agreements or practices in the first place. However, such a potential problem could be solved in the proposed framework of cooperation among N.A.A.s and the Commission by means of a binding undertaking from the N.A.A.s that, were they to receive such information from the Commission, they would observe the principle of immunity fromfinesset forth in Art. 15(5). However, the latter technically applies only to the fines provided in Art. 15(2) of Reg. 17 and imposed by the Commission. This undertaking could be restated in the final draft of the Commission notice on the application of Arts. 85 and 86 by N.A.A.s, supra note 12. On the other hand, it is out of the question that under the suggested cooperation scheme, an N.A.A. which, upon request, obtains from another N.A.A., through the Commission, information concerning an alleged infringement of the Treaty competition rules, may use such information in enforcement proceedings it has opened under the relevant national competition rules. This could occur, for instance, because it had to stay an Art. 85/86 investigation following the opening of Commission proceedings on the same agreements or conduct. As affirmed by the Court in Spanish Banks fl| 11), the substantive provisions in national and E.U. competition rules pursue very different objectives in that the latter rules aim at preventing restrictions of competition which have as their object or effect a segmentation of the market, whereas the policy objectives of national competition rules vary among the different Member States. See also Walt Wilhelm v. Bundeskartellamt, 1969 E.C.R. 1. 52

E.g., Alvis v. Council, 1963 E.C.R. 97, (affirming right to be heard in staff cases); Association v. Comm'n, 1974 E.C.R. 1063, 1088 (affirming that right to be heard forms part of those rights upheld by "the law," referred to in Art. 164 of the Treaty, in competition cases) (E.C.J. per Advocate-General Warner). See also Jurgen Schwarze, European Administrative Law 1371 (1991) (stating that "[i]f one compares the position [as to rights of defence] in the Community with that in the Member States, it becomes apparent that the protection under Community law departs as regards certain points of detail from that guaranteed in the Member States, but not as regards the principles on which it is based." (emphasis added)).

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as emphasized by Advocate General Jacobs in his conclusions in Spanish Banks, no obvious general principle common to the Member States' legal systems, and no provision in the European Convention on Human Rights and Fundamental Freedoms, would appear to prohibit or restrict such flows of information between N.A.A.s and the Commission.53 If the proposal for a fully decentralized application of Community competition rules is to work effectively, the very idea that application of those rules by the Commission is the only way to preserve the rule of law throughout the enforcement process, and to ensure the integrity and coherence of the enforcement system, must be abandoned.

H. Upgraded Comfort Letters Irrespective of whether the developments described above are likely to materialize, in the "new system" the Commission should further develop its current policy of adopting a relatively small number of formal decisions under Reg. 17. Such decisions should be issued in selected cases of great importance for the development of the E.C. competition policy. Accordingly, a much larger number of cases should be settled informally, through Art. 85(l)/86 (or, more rarely, Art. 85(3)) comfort letters,54 with the added benefit of cost and time savings. However, the E.C.J. has ruled that since comfort letters are not published under Arts. 19 and 21 of Reg. 17/62, they do not amount to decisions under Arts. 2 or 6 of Reg. 17/62. Therefore, a national court which is requested to enforce an agreement covered by a comfort letter must merely consider the Commission's views expressed in such a letter, but is not bound by it in reaching its own decision.55 (Arguably, the same holds true with respect to the legal 53

Spanish Banks, supra note 47, 1992 E.C.R. I a t 1-4814-15. Informal settlements may occur because the notified agreement is de minimis, falls under a block negative clearance notice or is of no genuine Community interest. 55 See note 10 supra and accompanying text. But cf. Green Paper, supra note 40, at 55-56, H 190 (stating that "[c]ompanies can reasonably rely upon comfort letters for several reasons. First, they indicate the Commission's prima facie favourable opinion and its lack of interest to pursue the case further, at least in the immediate future. [As is the case where it withdraws the benefit of a previous formal exemption decision], the Commission would not revoke a comfort letter or take a decision at odds with one unless a major change in the facts or circumstances were to occur. . . . Second, a comfort letter demonstrates an informal commitment by the Commission that if it were to become necessary, a formal decision would be issued. Third, a comfort letter discourages third parties from challenging an agreement, although in several instances they 54

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status of comfort letters vis-a-vis national competition authorities). Again, the smooth functioning of the "new" system would be greatly improved if DG IV were able to issue "formal comfort/discomfort letters" and the E.C.J./C.F.I. were to take the view that such acts amount to decisions of a binding nature on Member State authorities. Pursuant to E.C. case law, it is clear that a letter signed by a Director in DG IV (rather than the Commissioner responsible for competition matters) may amount to a decision within the purview of Art. 189 of the Treaty.56 In developing such an "up-graded" comfort letter procedure, DG IV should, first, direct its efforts at supporting its letters with a fully reasoned opinion. In addition, the Commission would have to draw on its two notices on procedures concerning applications for negative clearance57 and notifications.58 These notices provide that the essential contents of notified agreements should be routinely published in the Official Journal in order to invite comments from third parties,59 and that the Commission should consult the Advisory Committee on Restrictive Practices and Dominant Positions. However, for such a procedure to result in an effective increase of the legal authority of comfort letters, it would be crucial that the Commission dramatically improve its current compliance record. For example, in 1995, DG IV published a notice in the Official Journal in only 16 out of 171 cases in which it closed afileby comfort letter.60 Furthermore, the Commission should also consider the possibility of publishing the text of the administrative letters it ultimately adopts. If the E.C.J. and the C.F.I, were willing to endorse these (and other) adjustments in the Commission's enforcement methods, they would acknowledge their ability to improve legal certainty and fill gaps in the current framework of concurrent jurisdiction of the E.U. and national authorities. Thus, the "new" have done so when in possession of new evidence.. . . Finally, although not bound by a comfort letter, no national court or national authority has ever issued a decision at odds with the position expressed in one. These comfort letters are highly persuasive because they indicate the Commission's assessment of the agreement."). 56

E.g., B.A.T. v. C o m m ' n , 1987 E . C . R . 4487; S.F.E.I. v. C o m m ' n , 1994 E.C.R. I2681. Therefore, formal comfort letters would b e c o m e subject to judicial review under Art. 173 of the Treaty. See BE. U. C. v. Comm'n, 1994 E.C.R. 11-285, \ 38. 57 1982O.J. (C343)4. 58 1983 O.J. (C 295) 6. 59 I n the Commission's view, "[t]he legal c e r t a i n t y provided b y a comfort letter is even stronger if a notice h a s been published p u r s u a n t t o R e g . 17, Art. 19(3), which has not elicited adverse c o m m e n t s from third parties': G r e e n P a p e r , supra note 40, a t 56, f 190. 60 See European Commission, XXVth Report on Competition Policy 1995, at 308-12(1996).

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system based on an E.C. rule of reason would provide companies, counsel and the national courts/competition authorities with a considerable degree of security and a working analytical framework that would allow greater flexibility. These benefits would apply not only with respect to agreements within the specific area of the present block exemption regulations, but also with respect to agreements that fall outside of the scope of any block exemptions.61

I. Experience from the Laboratory: The Pratice of the Italian Autoritd Garante in the Application of the Domestic Ban on Restrictive Agreements and Practices A "rule of reason" approach similar to the one proposed in this paper has been applied by the Italian Antitrust Authority (the "I.A.A.") in its practice in application of Arts. 2 and 4 of Law No. 287/1990 of October 10, 1990 (i.e., the Italian provisions correspond to Art. 85(1) and 85(3) of the Treaty, respectively).62 Businesses and counsel have not complained about legal uncertainty resulting from a lack of clarity of these provisions. Moreover, the application 61

See Holley, supra note 7, at 690 n.55. As of January 9,1997, out of a total 97 decisions concerning a g r e e m e n t s a n d practices, the I.A.A. has adopted 40 Art. 2 prohibition decisions, 4 7 A r t . 2 clearance decisions (including 11 cases in which clearance was granted after t h e parties a m e n d e d the original agreements), a n d only five Art. 4 exemption decisions. T h e L A . A. h a s described its approach in the following terms: "Consistently with the C o m m u n i t y a p p r o a c h , the Authority has stated that, after an agreement is found to have a restrictive object, an assessment of the restrictive nature of its effect is not necessary for p u r p o s e s of establishing a violation of Art. 2(2) of Law N o . 287/90, since the t w o prerequisites laid d o w n in this provision are alternative . . . As a qualification t o the a b o v e , h o w e v e r , . . . it cannot be ruled out that, even if an agreement is found to h a v e a restrictive object, the analysis of its effects, as a possible indicator of the agreement's restrictive n a t u r e with respect to the structure of the relevant market, m a y become a p p r o p r i a t e . T h e agreement's effects m a y become relevant for the purpose of establishing possible external factors, which must be taken into account in the whole assessment, with p a r t i c u l a r respect to the agreement's appreciability. U n d e r the settled case law of C o u r t of Justice, the effects of an agreement must be assessed in its legal and e c o n o m i c context. Therefore, the way in which market relationships would have developed in t h e absence of the agreement in question must be taken into account. F u r t h e r m o r e , the a g r e e m e n t must be assessed jointly with any other similar agreements existing in t h e s a m e m a r k e t . W h e r e scrutiny of an agreement's effects appears necessary, a n e c o n o m i c analysis of the m a r kets, which must take into account such elements as the existence of intellectual p r o p erty rights, the existing degree of competition a n d the c o m p e t i t o r s " reaction to the agreement's effects, will thus be indispensable" (our translation). A u t o r i t a G a r a n t e dell 62

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of domestic competition rules by the I.A.A. does not "prejudice the uniform application throughout the common market of the Community rules on cartels and of the full effect of the measures adopted in implementation of those rules."63 Based on this experience, there is hope that having the Commission and national courts/competition authorities apply Art. 85(1) to agreements and practices based on a case-by-case "rule of reason" approach would not result in disaster or collapse of the system, as alleged by the Commission's Cassandras.

Concorrenza e del Mercato, Relazione Annuale Sull'Attivita Svolta [Annual Report] 1994, at 129 (1995). Obviously, in light of its jurisdiction pursuant to Law No. 287/1990, the I.A.A. is only allowed to exempt a restrictive agreement or practice on purely competitive grounds, i.e., because it improves the conditions of supply (such as an increase or qualitative improvements of production or distribution, or the introduction or spreading of process or product innovation) and results in consumers' obtaining substantial benefits (such as lower prices or a broader choice range). For example, in its decision in Case 1138, Consorzio del prosciutto San Daniele-Consorzio del prosciutto di Parma, Bollettino No 25/5 (1996), the Authority found that San Daniele and Parma consortia, two associations of raw ham producers, had entered into anticompetitive agreements to maintain production quotas and reduce purchases of fresh pork legs when the prices of pork legs exceeded a certain level. Nonetheless, it granted the parties a four-year exemption on the ground that the quota agreement was indispensable to ensure product quality until full implementation of a mandatory quality control system. 63 This is the test of compatibility with the Treaty of the parallel application of Community and national competition laws set forth by the E.C.J. in Walt Wilhelm v. Bundeskartellamt, supra note 51,1969 E.C.R. at H 9.

VI James S. Venit Partner, Wilmer, Cutler & Pickering, Brussels, Belgium

Introduction What has recently been described as the "system failure" of E.C. competition law1 has long been known to practitioners and has been the subject of public debate over at least the past ten to fifteen years.2 The Commission has itself now become more open about acknowledging the limitations of the system that it has created and nurtured through its desire to maintain control over the direction of competition policy. A number of factors appear to have convinced the Commission that there is, indeed, a serious need for reform. These include the globalization of the economy, increasing contact with other enforcement agencies and, perhaps most importantly, the experience of resolving complex structural cases speedily under the Merger Regulation. The failure of various palliatives that have been tried out and/or proposed in an attempt to deal with the problems created by Reg. 17/62 and the Commission's overly broad approach to Art. 85(1) have added further pressure. The constituent elements of the "system failure" are both substantive and procedural. On the substantive side, the principal culprit is the excessively formalistic, overly broad approach to both Art. 85(1) and the block exemptions promulgated pursuant to Art. 85(3)3 and the resulting absence of serious economic analysis. On the procedural side, the problem lies in: (i) the creation of a system of prior control (instead of a system of "abuse" control) by an agency that lacks the effective manpower and procedures to provide such 1

See Barry E. Hawk, System Failure: Vertical Restraints and E. C. Competition Law, 32 Common Mkt. L. Rev. 973 (1995). 2 See Ian S. Forrester & Christopher Norall, The Laicization of Community law— Self-Help and the Rule of Reason: How Competition Law Is and Could Be Applied, 1983 Fordham Corp. L. Inst. 305 (Barry Hawk ed. 1984); James S. Venit, Slouching towards Bethlehem: The Role of Reason and Notification in E.E. C. Antitrust Law, 10 B.C. Int'l & Comp. L. Rev. 17 (1987); Christopher Bright, Deregulation of E.C. Competition Policy: Rethinking Art. 85(1), 1994 Fordham Corp. L. Inst. 505 (Barry Hawk ed. 1995). 3 The consequence is that competition law analysis too often begins with a purely formalistic analysis of whether individual clauses are facially restrictive and, if so, whether block exemption regulations are applicable. It thus does not follow a structural, economic analysis designed to determine if there is the potential for a serious restriction of competition and thus a need for closer economic analysis.

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control; (ii) the sanction of retroactive invalidity for those (exemptible) agreements that have not been notified; and (iii) the absence of "pre-screening" which would exclude from the scope of Art. 85(1) cases that rise above the de minimis level but, nevertheless, do not give rise to competition law concerns that are serious enough to warrant close regulatory scrutiny. The net result of these defects is significant inefficiencies in the form of: • the imposition of unnecessary regulatory costs on industry; • a serious misallocation of the Commission's scarce enforcement resources; and • distortion of competition law analysis. The impact on the Commission's effectiveness as an enforcement agency is particularly disturbing. As a result of the glut of unimportant cases that absorb its scarce resources, the Commission is prevented from effectively pursuing a prioritized enforcement agenda. Such an agenda would focus on the areas— cartel enforcement and liberalization of critical, formerly monopolized sectors (such as telecommunications, transport and energy)—where regulatory involvement is most needed and where the overall social benefits from rigorous enforcement would potentially be the greatest.

A. The Significance of the Commission's Experience Under the Merger Regulation The Commission's application of the Merger Regulation over the past seven years has doubtlessly played a major role in focusing awareness on the defects of the existing system created by Reg. 17/62 and the inefficiencies inherent in the Commission's approach to Art. 85(1). Experience is the best teacher, and the Commission's practical exposure to dealing with concentrations has no doubt been far more effective than the criticism of academics, practitioners and industry representatives in convincing the Commission of the need for reform. The key lessons that have been learned under the Merger Regulation may be summarized as follows: 1. The use of structural analysis to evaluate competitive impact Under the Merger Regulation, the Commission has gone to the heart of the matter and relied on structural analysis to determine whether there is a risk that the merger will give rise to market power (thereby elevating that issue to decisive importance). This style of analysis inevitably suggests itself as a model that

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should also be applied under Art. 85, and it is clearly the type of analysis that both practitioners and regulators instinctively undertake when they first consider a new case. It may be questioned for how much longer (and on what grounds) the Commission can, and the Community Courts will be willing to, justify the continued existence of regulatory intervention under Art. 85(1) in respect of arrangements (other than those involving "hard core" infringements such as horizontal price fixing or absolute territorial protection) that do not give rise to serious structural concerns, while continuing to permit mergers that do not create or strengthen market power. The scrutiny applied to vertical and certain horizontal4 agreements that fall short of a merger should arguably not be significantly harsher (with the exception of price fixing arrangements and, given the primacy of the market integration goal, arrangements that divide geographic markets by providing for absolute territorial protection) than that applied to the merger of two competing undertakings where the arrangements have an underlying business justification. Undoubtedly, this growing awareness has led the Commission to undertake itsfirsthesitant steps in the direction of self-reform, at least insofar as vertical agreements are concerned. 2. Importance of economic analysis and quantitative data to support structural analysis Economic analysis, which has become the norm in important cases under the Merger Regulation, has too often been lacking under Art. 85. Moreover, the analysis under Art. 86 has very often been inadequately supported by quantitative evidence. In his recent opinion in the Kali & Salz case,5 Advocate General Tesauro placed great emphasis on the need for quantitative proof with respect to economic issues such as the definition of the relevant geographic market.6 The Commission's exposure to, and reliance on, economic analysis 4

The situation in respect of horizontal agreements becomes somewhat more complex outside the realm of structural arrangements. For instance, because of the risks of cartel behavior, information exchanges and reciprocal joint sales arrangements have characteristics (and raise issues) that justify closer scrutiny than a purely structural analysis. 5 France v. Comm'n, Case C-68/94, and Societe commerciale des potasses et de l'azote (SCPA) et Entreprise Miniere et Chimique (EMC) v. Comm'n, Case C-30/95, Opinion of Advocate General Tesauro, 6 February 1997, not yet officially reported. 6 In his opinion, the Advocate General criticized the Commission for not providing sufficient data on price levels in different Member States, and noted that the Commission also failed to establish that transport costs did not constitute a barrier to interstate trade. However, because the appellants themselves had not introduced any quantitative data in support of their critique of the Commission's analysis, the Advocate General rejected their challenges on these points.

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under the Merger Regulation signify that ignoring economics is no longer a tenable option under Art. 85. 3. Treatment of ancillary restraints The Commission's practice in dealing with structural cases has also forced it to begin to move away from its older view that all restrictions on freedom must be dealt with under Art. 85.7 The Commission may not yet have moved as far as some would like. It has, however, at least begun to take steps in the right direction by taking a flexible and pragmatic approach to restrictive provisions that are reasonably related, and thus ancillary, to transactions that do not raise any structural concerns. 4. Development of a "quick look" test In its Art. 6(1 )(b) decisions under the Merger Regulation, the Commission has, in effect, developed a "quick look" test designed to determine whether, under any hypothetical definition of the market, a transaction has the potential for raising serious competition law concerns. Where the answer is negative, the case is quickly cleared without any further analysis. Where, under one or another possible definitions of the relevant market, there could potentially be some concern, a more careful analysis is made, although the vast majority of these cases are also cleared within one month. As will be discussed in Section D below, the Commission has, in its Green Paper on Vertical Restraints, proposed institutionalizing a "quick look" test in the form of automatic negative clearance of agreements which are unlikely to give rise to, or strengthen existing, market power. This proposal is probably a direct result of the Commission's experience with Art. 6(l)(b). 5. Ability to meet tight deadlines This is probably one of the greatest achievements under the Merger Regulation. The pressure of deadlines has helped "focus" the Commission's "mind" and has forced it to become more pragmatic and efficient in getting down to the important issues. In this way, deadlines, along with the type of structural analysis that is essential to merger control, have helped redefine the substantive parameters of competition law in a beneficial way which has implications for all spheres of the Commission's activity. *** In short, in the past seven years the Commission has developed a "paradigmatic" structural analysis under the Merger Regulation whose validity and 7

See the Commission Notice regarding restrictions ancillary to concentrations, 1990 O.J. (C 203) 5.

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applicability need not be limited to merger cases. The constituent elements of this paradigm may be summarized as follows: • in cases where it is necessary, rigorous market definition based on economic evidence and the use of quantitative techniques; • analysis of structural factors (e.g., the competitive and economic parameters of the sector concerned, the structure of supply and demand and the existence of barriers to entry) to determine whether a serious competition law problem exists; and • identification of ancillary restrictions to deal with non-structural elements. This style of analysis is, arguably, the appropriate starting point for all rational competition law analysis. For at least two reasons, it is clearly preferable to an analysis that commences by listing all the provisions of an agreement that restrict commercial freedom, and then seeking to determine if a block, or individual, exemption is available. First, it is analytically relevant. Second, it makes possible use of a "quick look" review to weed out those cases that are not likely to give rise to regulatory concerns.

B. The Bifurcation of Art. 85 Is Not The Problem It has sometimes been suggested that the overly broad, formalistic approach to Art. 85(1) is mandated by the bifurcated structure of Art. 85, and that the Commission has no alternative but to apply the law as drafted. According to this school of thought, a unified approach is precluded by the division of Art. 85 into two distinct analytic acts: (i) identification of all restrictions of competition under Art. 85(1); and (ii) assessment of their compatibility with the goals of the Treaty under Art. 85(3). This differs from the approach under Art. 86, where analysis of the potential justifications of the allegedly anticompetitive conduct are made in the context of a single unitary assessment. Accordingly, a "flexible" or "unified" approach under Art. 85(1) is not possible, inasmuch as an overall assessment can only come into play under Art. 85(3). A treaty amendment would be required to solve these problems. A series of European Court judgments, and indeed, the administrative practice of the Commission itself, would appear to have discredited this line of analysis. The Court has issued a large number of judgments in which it has either held that (i) facially restrictive provisions are outside the scope of Art. 85(1) because they are inherent in, or reasonably related to, the arrangement

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under review;8 or (ii) it is necessary to examine the agreement in question in its economic context to determine whether an agreement or practice falls within the scope of Art. 85(1).9 The Commission, which has tended to interpret such judgments narrowly, has, nevertheless, itself been guilty of similar heresies. Its 1962 Notice on Subcontracting Arrangements10 was, in effect, an early application of the "inherency" analysis. Moreover, the Commission's approach to restrictions on supply by wholesalers to end users in the context of selective distribution agreements in Metro / ' ' and its treatment of the differentiation of distribution channels in Villeroy and Boch12 also arguably applied in this analysis. Similarly, the Commission has developed and applied a doctrine of ancillary restraints relating to the sale of a business13 (affirmed by the Court in Nutricia14). In its Notice 8

See, inter alia, Nungesser et al. v. Comm'n, 1982 E.C.R. 2015; Coditel SA, Compagnie General pour la Diffusion de la Television et al. v. Cine-Vog Films SA et al., 1982 E.C.R. 3381; Louis Erauw-Jacquery SPRL v. La Hesbignonne SC, 1988 E.C.R. 1919; Remia BV et al. v. Comm'n, 1985 E.C.R. 2545; Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Shillgalis, 1986 E.C.R. 353; and Gottrup-Klim Grovvareforening et al. v. Dansk Landbrugs Growareselskab AmbA (DLG), 1994 E.C.R. 1-5641. In Gottrup-Klim, the Court was faced with clarifying the status under Art. 85(1) of rules of a purchasers' cooperative which prohibited the members of the cooperative from purchasing independently. The provisions in question clearly restricted the freedom of the cooperative's members to buy on their own. Nevertheless, the Court had little difficulty concluding that the restrictions in question fell outside the scope of Art. 85(1) because they were inherent in the nature of a purchasing cooperative. 9 See, inter alia, Societe Technique Miniere v. Machinenbau Ulm GmbH, 1966 E.C.R. 235; Franz Volk v Etablissements J Verwaecke, 1969 E.C.R. 295; Stergios Delimitis v Henninger Brau, 1991 E.C.R. 1-935; Langnese-Iglo GmbH v. Comm'n, 1995 E.C.R. 11-1533; Scholler Lebensmittle GmbH & Co. KG v. Comm'n, and 1995 E.C.R. 11-1611; and Dansk Pelsdyravlerforening v. Comm'n, 1992 E.C.R. 11-1931. 10 Commission Notice concerning subcontracting agreements in relation to Art. 85(1) of the E.E.C. Treaty, 1979 O.J. (C 1) 2. 11 SABA, 1976 O.J. (L 28)19. 12 See Villeroy & Boch, 1985 O.J. (L 376) 15. 13 See Reuter/BASF, 1976 O.J. (L 254) 40; Nutricia, 1983 O.J. (L 376) 22. 14 See Remia BV et al. v. Comm'n, supra note 8, 1985 E.C.R. 2545, paras 17-19: " . . . the fact that non-competition clauses are included in an agreement for the transfer of an undertaking is not of itself sufficient to remove such clauses from the scope of Art. 85(1) of the Treaty. In order to determine whether or not such clauses come within the prohibition in Art. 85(1), it is necessary to examine what would be the state of competition if those clauses did not exist. If that were the case, agreement for the transfer of the undertaking could not be given effect. Against that background non-competition clauses incorporated in an agreement for the transfer of an undertaking in

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on Ancillary Restraints,15 the Commission made clear that it no longer takes the view that every facially restrictive provision is automatically caught by Art. 85(1). While the ancillary restraint doctrine has been interpreted restrictively by some commentators,16 even the relatively limited use of the doctrine to date constitutes an important acknowledgment that many restrictive provisions can be brought outside the scope of Art. 85(1) without doing violence to the Treaty. The foregoing overview should be sufficient to confirm that the bifurcation of Art. 85 does not present an insuperable obstacle to a more rational approach to Art. 85(1). A reasonable case can be made that the Court has already developed a style of analysis that implies a unified approach to Art. 85 and that, as a result, limits the scope of Art. of 85(1). Indeed, the Court has arguably divided Art. 85 cases into three classes: • cases in which Art. 85(1) can be deemed not to apply per se (the so-called "inherency" doctrine);17 • cases in which the applicability of Art. 85(1) can only be determined after economic analysis;18 and • cases per se of infringement, such as absolute territorial protection and horizontal pricefixing,in which Art. 85(1) is deemed to apply without the need for any economic analysis.19

principle have the merit of ensuring that the transfer has the effect intended. By virtue of that very fact they contribute to the promotion of competition because they lead to an increase of the number of undertakings in the market in question." 15 See note 6, supra; see also Elopak/Metal Box/Odin, 1990 O.J. (L 209)15. The Commission has also been willing to find that facially restrictive provisions fall outside Art. 85 (1) because of their limited effects. See, inter alia, Carlsberg Beers, 1984 O.J. (L 207) 26, in which the Commission held that a clause requiring a licensee not to challenge the licensor's trademark was not caught by Art. 85 (1) because the trademark was not sufficiently well known to convey a competitive advantage. 16 See Gonzalez Diaz, Some Reflections on the Notion of Ancillary Restraints under E.C. Competition Law, 1995 Fordham Corp. L. Inst. (Barry Hawk ed. 1996). 17 See cases cited in Note 8, supra. 18 See cases cited in Note 9, supra. 19 See, inter alia, ICI v. Comm'n, 1972 E.C.R. 619 ('Dyestuffs'); SA Hercules Chemicals NV v. Comm'n 1991 E.C.R. 11-171 ('Polypropylene'); see also Etablissements Consten SARL und Grundig-Verkaufs-GmbH v. Comm'n, 1966 E.C.R. 299; Compagnie Royale Asturienne des Mines SA and Rheinzink GmbH v. Comm'n, 1984 E.C.R. 1679; Sandoz Prodotti Farmaceutici SpA v. Comm'n, 1990 E.C.R. 45.

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Thus, it appears that the problem with Art. 85 lies not in its bifurcation, but, rather, in the Commission's reluctance to apply and extend the approaches adopted by the Court. If this analysis is correct, the need for a Treaty amendment cannot be legitimately advanced to justify avoiding reform.

C. Suggested Outline of an Alternative Approach It is not difficult to identify the changes in analytic style and procedure that are required, and that are within reach, without a Treaty amendment: • a more pragmatic and economically-oriented approach to Art. 85—i.e., a tightening of the definition of what constitutes a restriction of competition so that it coincides with the notion of a serious restriction in an economic sense;20 • reliance on a "quick look" review to exclude from the scope of Art. 85(1) those cases that do not give rise to any serious regulatory concerns; • provision of legal security at the level of Community law in respect of agreements excluded from the scope of Art. 85(1), pursuant to the analysis in the above two points, by, inter alia, eliminating the presumption of illegality that attaches to unnotified "new" agreements,21 which would rely on modification of Reg. 17/62 rather than on procedural mechanisms, (such as comfort letters or opposition procedures that require notification and Commission review); • provision of legal security at Member State level to ensure that the consequence of the non-applicability of Art. 85(1) is not the applicability of national competition law; and • imposition of deadlines on the Commission in the cases which are notified to it voluntarily or brought to it pursuant to formal complaints. These modifications could be accompanied by a reform of national procedural rules designed to facilitate and encourage private litigation to complement the Commission's enforcement powers. The foregoing reforms go beyond the proposals that the Commission has advanced in its Green Paper on Vertical Restraints, European Commission, Green Paper on Vertical Restraints in E.C. Competition Policy, Com(96) 721 final, (22 Jan. 1997), although parts (i)—(iii) are arguably implicit in the negative clearance option.22 They also go further than other procedural reforms, 20

It is somewhat surprising that the Commission has so far been unwilling to take full advantage of the Court's recognition of its discretion in evaluating economic facts. 21 The most likely mechanism would be an expansion of Art. 4 of Reg. 17. 22 See discussion in Section D, infra.

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such as the more extensive use of comfort letters or opposition procedures employed in the regulations applicable, inter alia, in the air transport sector.23 Rather, under the proposed approach, the Commission would abandon its attempts to monitor competition by encouraging notifications (and using nullity as the sword of Damocles to dissuade parties from entering into agreements that do not pose any serious threat to the competitive process). Instead, it would seek to shape its own enforcement agenda and rely on the marketplace to bring serious infringements to its attention through complaints, thereby ensuring that important cases do not "slip through the net." Complaints have already played a key role in the development of E.C. competition law throughout the past twenty-five years. There is no reason to believe that the number of complaints would increase dramatically if the Commission adopted a more flexible approach to the application of Art. 85(1). Reducing the number of notifications which it must address would, at least, enhance the Commission's ability to deal effectively with the most serious complaints that are brought to its attention. Given the unjustifiable costs imposed on undertakings by the present system, and the Commission's inability to deal adequately with notified agreements, it can hardly be objected that the approach outlined above would unduly shackle the Commission. Rather, it would release undertakings from their current burden of choosing between unjustifiable regulatory costs and legal uncertainty, and would enable the Commission to focus more effectively on its enforcement priorities. If Reg. 17/62 were amended to eliminate the presumption of invalidity in respect of agreements that have not been notified,24 the foregoing proposal would result in a net increase in legal security at the level of Community law. Moreover, the number of cases that need be subjected to full scale economic analysis would be fewer than the number that, under the existing formalistic approach, are deemed to come within the scope of Art. 85(1) (or the penumbra of uncertainty that surrounds it).

23

Reg. 3975/87 h a s t h e virtues of eliminating t h e p r e s u m p t i o n of invalidity from unnotified agreements a n d giving undertakings t h e benefits of Commission inaction through an opposition procedure. As such, it is preferable to the regime under Reg. 17. However, Regulations such as 3975/87 still impose regulatory costs in the form of notification and initial Commission review. 24 This approach has already been adopted in the various transport regulations. See, e.g., Reg. 3975/87, 1987 O.J. (L374) 1, corrected by 1991 O.J. (L122) 2.

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D. From the Frying Pan Into the Fire—The Applicability of National Law The devil, it is said, lies in details. In this case, the particular "detail" is that the effectiveness of the attempt to redress the problems discussed above by limiting the scope of Art. 85(1) may be frustrated by the division of competence between the Commission and the Member States that is embodied in Reg. 17/62 and, perhaps, in the scheme of Art. 85 itself. Again, making a diagnosis is easier than finding a cure. Under the existing system created by Reg. 17/62, a determination that Art. 85(1) does not apply (which would routinely result from an economically rational interpretation of what constitutes a restriction of competition) may have the effect of opening the door for the application of national law. The firms concerned could thereby be subject to regulation by competition authorities in each of the Member States affected by their arrangements.25 If this is the case, substantive reform of the approach taken to Art. 85(1) will not, by itself, be sufficient if the goal is to provide the highest degree of legal certainty to agreements that are deemed not to pose any serious risks to competition under Community law. The serious consequences of the existing system created by Reg. 17/62 become apparent when one analyses the proposals set forth in the Commission's Green Paper on Vertical Restraints. In the Green Paper, the Commission has proposed four options. Thefirstof the listed options is maintaining the status quo. The other three options involve, to varying degrees, some reform of Commission policy relating to vertical restraints, as currently expressed in its block exemption regulations applicable to distribution arrangements26 and in its case-by-case treatment of selective distribution agreements.27 Two of the options would seek to make block exemptions more generous by expanding their terms and making them more flexible.28

25

T h e seriousness of the problem m a y vary with the identity of the national competition a u t h o r i t y since a significant n u m b e r of national authorities rely o n C o m m u n i t y law precedents for the application of their national competition rules a n d some tend t o take a m o r e flexible a n d economically-oriented a p p r o a c h t h a n the Commission. 26 Council R e g u l a t i o n (E.E.C.) N o . 1983/83 of 22 June 1983, 1983 O.J. (L 173)1 (exclusive distribution agreements); Council Reg. (E.E.C.) N o . 1984/83 of 22 June 1983. 27 See, e.g., Saba ( M e t r o I), supra note 14, 1976 O.J. (L 28)19; I B M personal c o m puters, 1984 O.J. (L 118) 24, Villeroy & Boch, supra note 14, 1985 O.J. (L 376)15. 28 In the first of these, (Option I), the Commission proposes the following general measures:

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Option III would add market share criteria to block exemptions, thereby seeking to build in some economic analysis, or at least assumptions based on economic analysis.30 1. block exemptions could apply to similar or less restrictive clauses; 2. the inclusion of prohibited clauses might not deny the benefit of the exemption for the rest of the agreement; 3. block exemptions could apply to agreements involving more than two parties; 4. enactment of a block exemption or notice relating to selective distribution. In addition, the Commission proposes the following specific measures: — Exclusive distribution and exclusive purchasing—extension to cover services or to permit the distributor to transform or process the contract goods. Distributors would be allowed to add significant value by changing the economic identity of the goods without losing the benefit of the block exemption. — Exclusive purchasing—amendment of the block exemption to include partial as well as exclusive supply. — Franchising—extension of the block exemption to permit maximum resale price maintenance. — Selective distribution—establishment of an arbitration procedure for distributors denied access to a selective distribution network. — Beer-supply agreements—amendment of the requirement to specify "tied" beers so that only the type of beer tied need be identified. — Service-station agreements—consideration of treatment of forms of distribution other than exclusive purchasing for goods sold in service station convenience stores. Possible abandonment of the requirement that the supplier should make available or finance lubrication equipment in order to benefit from an exclusivity of supply for lubricants. While the specific measures proposed are generally positive, Option II does not present any solution to the absence of economic analysis in the Commission's treatment of vertical restraints, and would only alleviate to a minor extent the perceived "straitjacket effect" of the block exemption system. As a result, it cannot be seriously considered as a solution. 29

1996O.J. (L31)2. This option would consist in the adoption of market share limits o n t h e availability of the existing block exemptions, i.e., the protection from A r t . 85 afforded b y t h e existing block exemptions would be unavailable if either party t o t h e a g r e e m e n t in question h a s a market share exceeding, for example, 40%. A s a n alternative, the benefit of the block exemption might be lost not for the entire agreement, b u t only in respect of clauses (i) protecting against active sales from outside the territory, o r (ii) protecting exclusive dealing, if the specified market share ceiling were exceeded. T h i s o p t i o n might be combined with the modifications to the existing system p r o p o s e d u n d e r O p t i o n II, in particular the adoption of a block exemption regulation for selective distribution (which would also be subject t o a market share ceiling o f 40%, a n d possibly a lower ceiling for oligopolistic markets). T h e Commission proposes that i n t h e specific case of 30

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None of the options, however, seeks to narrow the scope of Art. 85(1) or to address the issue of what constitutes a "restriction of competition" for the purposes of Art. 85(1). Rather, they attempt to avoid the criticisms of the defects of the current regime, most notably the absence of economic analysis and the straight-jacket effect of block exemption regulations, by broadening the latter, and, in one of the options, by also imposing market share ceilings.31 In its third option (numerically the fourth, if one counts the "do-nothing" option), the Commission proposes adopting, by notice and subsequently by means of a negative clearance regulation,32 a mechanism to exclude vertical restraints from the application of Art. 85(1) where the undertakings concerned do not have market power. Under this option, there would be a rebuttable presumption of compatibility with Art. 85(1) for parties with less than a specified market share in the contract territory. The presumption of compatibility would cover all vertical restraints with the exception of (i) minimum resale prices, (ii) impediments to parallel trade or passive sales, and (iii) vertical restraints contained in distribution agreements between competitors.33 The Commission suggests 20% as one possible threshold for this safe harbor. 34 beer-supply agreements, a n alternative t o a m a r k e t share test w o u l d b e t o limit exclusivity t o a given percentage of the total beer supplied t h r o u g h a particular p u b (e.g., 3/4 tied, 1/4 free) o r t o certain containers (e.g., d r a u g h t tied, bottles a n d cans free), a n d that in the case of service-station agreements, the m a x i m u m permitted contract term could be reduced as a n alternative to a market share test. 31

Experience from the debate over the technology transfer b l o c k exemption suggests that t h e introduction of a market share ceiling for t h e availability of the distribution block exemptions is likely t o be strongly o p p o s e d b y industry, inter alia, on the basis that as a result of the difficulty of calculating m a r k e t s h a r e with certainty (and in particular, correctly denning markets), it will cause serious legal insecurity a n d result in a large n u m b e r of failsafe notifications, thereby u n d e r m i n i n g t h e p u r p o s e of the block exemptions in a regulatory system based o n a p r e s u m p t i o n of illegality. 32 This measure would presumably require a new Council enabling regulation under Art. 87 of the Treaty. T h e Commission h a s n o t addressed t h e issue of whether negative clearance, p u r s u a n t t o such a regulation, would preclude t h e applicability of national competition law t o agreements that were covered b y t h e negative clearance regulation. 33 This approach bears obvious similarities to the approach set forth in the Commission's draft notice on de minimis agreements, except that the market share threshold is somewhat higher. 34 Recital 15 to the Merger Regulation suggests that market power will not exist with a market share below 25%. The Court has held that there is a rebuttable presumption of dominance with a market share of 50% and that dominance may exist with a market share of 40% with the presumption running the other way. See Akzo Chemie BV v. Comm'n, 1991 E.C.R. 1-3359. The problem with equating market share with market power is that different market share thresholds may apply in different sectors, depend

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The negative clearance presumption could be rebutted by the Commission on the basis of a market analysis, which would take account of the structure of the market (e.g., oligopoly), barriers to entry, the degree of integration of the single market (evaluated taking into account differences in price and penetration levels between Member States), and the cumulative impact of parallel networks agreements. In cases falling outside the negative clearance presumption, or where the Commission has demonstrated, on the basis of its market analysis, that an agreement falling below the negative clearance threshold nevertheless falls within the scope of Art. 85(1), the agreement in question would either (i) be covered by a wider block exemption as described under Option II, providing that the terms of the block exemption were met or (ii) be covered by a block exemption only if a maximum market share threshold were not exceeded, as in Option III.35 The negative clearance option would introduce an element of implied economic analysis into the Commission's assessment of vertical restraints under Art. 85(1), and would, therefore, represent a significant change of direction from the Commission's current approach to Art. 85. Coupled with an amendment of Reg. 17/62 to eliminate the presumption of illegality that applies in the case of agreements that have not been notified, it would do much to rectify the defects of the current system insofar as Community law is concerned. Notwithstanding these real gains, the negative clearance approach may not prove to be appealing if it has the consequence of subjecting to national competition law agreements benefiting from negative clearance under Community law.36

ing on a variety of factors, including purchaser power and the nature of the competitive process (bidding markets are one example.) 35

Pursuant to the case law of the Court of Justice, the negative clearance presumption would apply to exclusive beer-supply and service-station agreements only insofar as the cumulative effect of parallel networks has no significant foreclosure effect. See Delimitis v Henninger Brau, supra note 9, 1991 E.C.R. 1-935; Langnese-Iglo GmbH v Comm'n; Scholler Lebensmittle GmbH & Co. KG v. Comm'n, supra note 9, 1995 E.C.R. 11-1533, 1995 E.C.R. 11-1611. 36 The Commission has chosen not to address this issue in the Green Paper. As a result, the Commission has not indicated whether, in its view, the negative clearance regulation would expressly provide that national competition law does not apply to agreements that come within its terms, or whether the Commission is of the view that a negative clearance regulation, because it was a formal legislative instrument, would be sufficient, in and of itself, to preclude the application of national competition law.

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E. Drawing the Line Between Community and National Law The dividing line between Community law and national competition law has been analyzed by the Court of Justice in Walt Wilhelm37 and in the Perfume cases.38 The former decision established that the Member States may not take action to vitiate the effects of a Commission exemption; the latter held, inter alia, that a negative clearance decision does not prevent the Member States from applying their national competition law. Taken together, these judgments suggest that the following Commission actions prevent a national Court or a national authority from applying Art. 85(1) to the agreement in question:39 the grant of a formal exemption by decision pursuant to Art. 6 of Reg. 17/62; a determination that an agreement is covered by a block exemption; or a declaration of negative clearance pursuant to Art. 2 of Reg. 17/62. However, national authorities are not precluded from applying national competition law where the Commission has determined that Art. 85(1) does not apply to the agreement or practice in question.40 The assumption underlying this line of analysis is that the non-application of Art. 85(1) cannot have the effect of "ousting" national law, since the nonapplicability of Community law creates a vacuum which national law may legitimately rush in to fill.41 This contrasts with the situation under Art. 85(3), which involves affirmative Commission action. Since Guerlain involved an informal comfort letter, rather than a decision under Art. 2 of Reg. 17/62, it may still be argued that a negative clearance, if 37

W a l t Wilhelm et al. v. Bundeskartellamt, 1969 E.C.R. 1. P r o c u r e u r de la Republique et al. v. Bruno Giry and Guerlain SA et al., 1980 E.C.R. 2327. 39 See id., p a r a s 10-11, a n d 15-17. 40 See id., paras 17-19: " T h e fact that a practice has been held by the Commission not to fall within the a m b i t of the prohibitions contained in Art. 85(1) and (2), in n o way prevents that practice from being considered by the national authorities from the point of view of the restrictive effects which it m a y p r o d u c e nationally." 41 According to Ritter, Braun and Rawlinson: 38

A negative clearance u n d e r Art. 2 of Reg. 17 is not considered a "positive action," and therefore presents n o conflict with stricter national law which may prohibit the cond u c t t h a t receives a negative clearance. Such a clearance therefore does not prevent application of stricter national competition rules. N o r does a conflict exist if the C o m m i s s i o n takes the position that Art. 85 does n o t apply by issuance of a notice or b y issuance of a comfort letter which states that there are n o g r o u n d s for the C o m m i s s i o n t o intervene. Ritter, et al., E . E . C . Competition Law, a Practitioner's Guide 38 (1991).

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adequately formalized, could preclude the applicability of national law. According to this line of analysis, the language in Walt Wilhelm is broad enough,42 and the language in Guerlain narrow enough,43 to support an argument that, where the Commission has acted pursuant to a decision, or the Council pursuant to a negative clearance regulation, the effet utile of Community law would be vitiated by the application of national competition law to the same agreement.44 The argument appears particularly strong in the 42

See Walt Wilhelm v. Bundeskartellamt, supra note 37, 1969 E.C.R. at paras 6-9:

[C]onflicts between the rules of the Community a n d national rules in the matter of the law o n cartels must be resolved by applying the principle that C o m m u n i t y law takes precedence. It follows from the foregoing that should it prove that a decision of a national authority regarding a n agreement would be incompatible with a decision adopted by the Commission at the culmination of the procedure initiated by it, the national authority is required to take proper account of the effects of the latter decision. Where, during national proceedings, it appears possible that the decision to be taken by the Commission at the culmination of a procedure still in progress concerning the same agreement m a y conflict with the effects of the decision of the national authorities, it is for the latter to take the appropriate measures . . . national authorities may take action against a n agreement in accordance with their national law, even when an examination of the agreement from the point of view of its compatibility with C o m m u n i t y law is pending before the Commission, subject however to the condition that the application of the national law may not prejudice the full and uniform application of C o m m u n i t y law or the effects of measures taken or to be taken to implement it. 43

In Guerlain, supra note 38, 1980 E.C.R. at paras 12-13, 18, the Court appears to have relied primarily on the fact that the comfort letter did not constitute a Commission decision pursuant to Art. 2 or 6 of Reg. 17: [L]etters such as those . . . constitute neither decisions granting negative clearances nor decision in application of Art. 85(3) within the meaning of Arts. 2 a n d 6 of Regulation N o . 17 . . . The contracts in question merely formed the subject-matter of a decision to close the file on a the case taken by the Commission, which gave the opinion that there was no need for it to take action in respect of the contracts in question under the provisions of Art. 85(1) of the Treaty. T h a t fact cannot by itself have the result of preventing the national competition authorities from applying to those agreements provisions of national competition law which m a y be more rigorous than Community law in this respect. 44

Both Walt Wilhelm a n d Guerlain rely, and are based, on the existing legal framework created by Reg. 17. Thus, it cannot be stated with certainty that the Court would decide in favor of the application of national competition law where the Council h a d adopted a negative clearance regulation. It is at least arguable that a formal act, such as the adoption of a negative clearance regulation, could by itself be sufficient t o shield agreements from the application of national law, even absent an express provision precluding the application of national law. O n the other hand, it can also be argued

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case of the negative clearance regulation, since under Art. 87 the Council would act by qualified majority to adopt such a regulation, thereby giving the latter the requisite institutional legitimacy to preclude, implicitly, the applicability of national law. If Walt Wilhelm and Guerlain are to be read as not precluding the application of national law to agreements that are deemed to fall outside the scope of Art. 85(1), express legal measures restricting the possible scope of national law would be required if the fundamental problems inherent in the current system are to be successfully addressed. Presumably, this would mean the adoption of a Council regulation or a directive that would expressly preclude the application of national law by giving Community law exclusive jurisdiction over the agreements that benefit from negative clearance. 1. Power of the Council to draw the boundaries between Community and national law by regulation The Council, acting pursuant to Art. 8745 or Art. 235, arguably would have the legal power expressly to define the boundaries between Community and national law to preclude the application of the latter to agreements that benefit from negative clearance. The counter argument is that the supremacy of Community law is an issue that simply does not arise where Art. 85(1) is not applicable. If this argument correctly reflects the law, modification of the Treaty or measures designed to harmonize, at the level of national law, the relationship between Community and national law would be required. According to this line of argument, such measures would not include a regulation adopted pursuant to Art. 87 disapplying national law to agreements falling outside the scope of Art. 85(1), because such a regulation would not be an "implementation" of Art. 85.46 If this reasoning were accepted, it would still leave open two possibilities: (i) a regulation adopted pursuant to Art. 235, assuming that clarifying the lines between Community and national law could be viewed asfillinga gap left by with some force that, when Community law—in this case Art. 85 (1)—does not apply, there is n o effet utile t o protect. 45 A r t . 87(2)(e) provides that the Council m a y adopt regulations " t o determine the relationship between national laws and the provisions contained in this section or a d o p t e d p u r s u a n t t o this Article." This language would arguably be broad enough to permit the Council to a d o p t a regulation disapplying national law in the case of agreements that fell outside the scope of Art. 85(1), at least where the latter was itself provided for by a Council regulation. 46 As noted in note 45, supra, A r t . 87(2)(e) would seem to provide a legal basis for Council action.

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the Treaty; or (ii) a measure harmonizing national competition law pursuant to Art. 100.47 2. Where should the line be drawn?

Any legislation restricting the application of national law should be aimed at excluding from their scope arrangements that merit assessment only under Community law. One way of approaching this problem would be to adopt a turnover based approach, as under the Merger Regulation, with the turnover threshold being set at a sufficiently low level to avoid the problem of multiple jurisdiction by national authorities. Another would be to define a category of purely national agreements involving parties and transactions limited to a single Member State, which might better be dealt with at the national level. Experience under the Merger Regulation suggests that the latter approach, or a test which shifts jurisdiction to Community law where the agreement in question would be subject to the simultaneous application of national law in two or more Member States, would be the preferable solution.

Conclusion Given the Court's jurisprudence and its own experience under the Merger Regulation, the Commission's overly formalistic approach to Art. 85(1) and the procedural inconveniences created by the presumption of illegality embedded in Reg. 17/62 are no longer acceptable. The Commission's current proposals for reform, set forth in its Green Paper on Vertical Restraints, represent a step forward, but are nonetheless inadequate because (i) the expanded use of block exemptions ignores, and indeed perpetuates, both the analytic defects embedded in the Commission's formalistic approach to Art. 85(1) and the procedural problems created by Reg. 17/62; and (ii) measures are needed to ensure that an economically rational approach to Art. 85(1) does not result in the wholesale substitution of national competition law for Community law. If this

47

Reliance on Art. 100 may be the least controversial approach in terms of legal orthodoxy, since it would seek to deal with the problem at the level of national law. It would, however, presumably be complicated since an attempt at harmonization of national competition law would potentially raise a wide range of issues. On the other hand, such an exercise could also provide a basis for reforming national procedural laws to encourage and facilitate private party actions by, inter alia, making it easier to obtain evidence of infringement and shifting the costs and risks of litigation from plaintiffs to defendants in competition law cases.

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diagnosis is correct, the way forward will require modification of the structure created by Reg 17/62 and, therefore, Council action.48

48

The Commission's proposal to expand block exemption regulations significantly would, in any event, also require Council action if the Commission is to include services or industrial supply and O.E.M. agreements that do not involve goods for resale.

VII Michael Waelbroeck Professor, University of Brussels Partner, Liederkerke Wolters Waelbroeck & Kirkpatrick Brussels, Belgium

Many of the radical proposals made by the rapporteur in his introductory paper do not take sufficient account of the possibility that improvements in the application of Community competition policy are taking place continuously. Considerable progress has been achieved in comparison with the situation that existed in the first years after the entry into force of Reg. 17/62. The purpose of this paper will be to recall the very considerable changes that have occurred, and then point out some avenues which could be pursued to achieve further progress. It is not possible to express an opinion on the changes to be made in the application of competition policy if one does not agree on the objectives of such a policy. This paper shall assume that the objective of competition policy is to improve the efficiency of the economic process and thereby benefit the long term interest of consumers or society.1 In seeking to further this objective, competition policy must recognise that the European Community has other objectives, such as the promotion of full employment, price stability, economic and social cohesion, protection of the environment, of European culture, etc. However, these are not objectives of competition policy as such. Some of them (such as the maintenance of full employment) may even enter into conflict with competition policy, at least in the short term. Competition policy is designed to ensure that business firms operate in an environment in which they are free to take their decisions on the basis of their own perception of what is beneficial to them. Competition policy is, therefore, an essential ingredient of a free market economy. As a result of the Maastricht Treaty making free competition one of the main cornerstones on which the Community edifice is based,2 competition policy today has a preeminent role to play within the Community framework. Dirigistic interferences, whether they emanate from national governments or from the Community itself, are inherently incompatible with the aims of the Treaty. 1

In this context, consumers and society probably mean the same thing, since all members of society are consumers. 2 See Art. 3a of the E.C. Treaty, as modified by the Maastricht Treaty.

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In most cases, the relationship between competition policy and economic integration is synergetic. Indeed, the opening up of the economies of the Member States is bound to result in an increase in competition. Firms that held dominant positions within their national markets when these were protected find themselves exposed to competition, and are obliged to become more efficient if they want to survive. Consumers have an increased choice between a larger number of products of various origins, and are able to take advantage of lower prices for better quality products offered by firms from other countries. The outcome is, therefore, a better allocation of resources and an increased efficiency of the economic process. However, economic integration does not always result in greater economic efficiency. Thus, where conditions of competition between firms of different countries are artificially distorted by national interventionist measures such as State aid, price control regulations, "buy national" purchasing policies, discriminatory tax regimes or exchange rate fluctuations, the opening up of national economies may have the effect of magnifying such distortions rather than furthering competition on the merits. Although the Treaty provides for a variety of remedies to deal with these problems, such remedies, where they exist, have only limited efficacy. What should be the attitude of competition policy enforcers in the presence of such State-induced distortions? Should they allow firms to protect themselves by restricting imports to the extent necessary to reestablish "fair" conditions of competition? The Community authorities have always given a negative answer to this question.3 They have not been swayed by the argument that allowing freedom of import and export in such cases would not necessarily benefit the most efficient firms. Their attitude was probably influenced by the consideration that, if they gave in to the requests from the "artificially disadvantaged" firms, they would, in effect, be legitimizing governmental measures giving rise to disparities, and thus reducing the pressure on the affected governments to eliminate such disparities. Thus, although a certain tension may sometimes appear between the need to integrate markets and the objective of promoting economic efficiency, such tension is only temporary. In the long term, once markets are fully integrated, there will no longer be reason to fear that disparate governmental measures produce long term distorting effects.

3

See, inter alia, the judgments of the Court of Justice in Centrafarm v. Sterling Drug, 1974 E.C.R. 1147; BMW Belgium v. Comm'n, 1979 E.C.R. 2435; Distillers Co. Ltd. v. Comm'n, 1980 E.C.R. 2229.

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A. The Need to Eliminate the Dichotomy in Art. 85(1) From a systematic point of view, Art. 85 is not ideal. However, we have been living with it now for more than forty years and have grown used to its structure and wording. A vast amount of caselaw and administrative practice have clarified its meaning. This effort would have to begin again if fundamental changes were made to the wording of Art. 85. Before engaging in such an exercise, one should examine whether less extreme ways exist to improve the situation. Let us first examine whether the situation is as bad as many people say it is. Most of the criticism concerning Art. 85(1) concerns the Commission's and the Court's tendency to consider that any restriction of the freedom of action of one of the parties to an agreement automatically amounts to a restriction of competition. For many years, such criticism has been justified.4 Recently, however, considerable progress has been made towards a more realistic and market-based assessment. The Court of Justice has, on several occasions, recognized that the grant of exclusive rights to a distributor or a licensee does not infringe Art. 85(1) if it is necessary to allow penetration of a new market.5 Similarly, it declines to apply Art. 85(1) automatically to exclusive purchasing agreements, insisting on the need to undertake a full-fledged examination of the effect of each agreement (and of similar parallel agreements) on the market before passing judgment as to its legality.6 The Commission has also adopted a more realistic approach in recent years. For example, it no longer considers that provisions in know-how licenses prohibiting use of transferred know-how after termination amount to restrictions of competition.7 It has shown an increased willingness to recognize that non-competition obligations imposed on the parties to a joint venture agreement, and restrictions imposed on the joint venture, do not constitute independent restrictions of competition, but are ancillary to the joint venture.8 It has adopted a less expansive view of the concept of potential competition, and considered as falling outside the scope of Art. 85(1) a number of cooperation 4

See Rene Joliet, The Rule of Reason in Antitrust Law (1967). See Societe Technique Miniere v. Maschinenbau Ulm, 1966 E.C.R. 337; Nungesser v. Comm'n, 1982 E.C.R. 2015; Coditelv. Cine Vog, 1982 E.C.R. 3381. 6 See Delimitis v. Henniger Brau, 1991 E.C.R. 1-935. 7 Compare the mechanistic approach adopted by the Commission in KabelmetalLuchaire, 1975 O.J. (L222) 34 with Art. 2(1)(3) of Reg. 240/96. 8 Commission notice concerning the assessment of cooperative joint ventures pursuant to Art. 85 of the E.E.C. Treaty, 1993 O.J. (C 43) 2, paras. 65-76. 5

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agreements between substantial firms.9 It has recognized that temporary associations between competingfirmsto achieve a specific object could be regarded as non-restrictive if none of the participating firms is capable of undertaking the project by itself.10 It has laid greater emphasis on the need to show that, even where an agreement can be said to restrict competition, it does so in a perceptible manner.'' The situation is not yet perfect. In many cases, the Commission still has a tendency to apply Art. 85(1) mechanically, rather than to examine whether the restriction in question really alters the proper functioning of the market. However, the Commission and the Court have been responsive to the criticisms expressed by legal commentators as well as by industry and practicing lawyers, and this has already contributed significant results. Thus, it is possible that the situation can be improved without resorting to more drastic measures, such as re-writing the Treaty. The existence of the exemption possibility provided for in Art. 85(3) may lead to a certain laxness as to what is meant by "restriction of competition." However, this is becoming less true. Art. 85(3) has a useful role to play insofar as it allows legalization of agreements that truly restrict of competition, at least in the short term, because they contribute to improving the efficiency of the economic process in the long term. For instance, the Commission would probably not be able to clear various agreements under a rule of reason analysis, but can exempt them in accordance with Art. 85(3). Examples of such agreements are specialization agreements, crisis cartels, and certain joint purchasing pools or joint selling arrangements between firms having substantial market power. Rather than doing away with the Commission's power to grant exemptions, the Commission should become more aware that its powers under Art. 85(3) include the possibility to legalize truly restrictive agreements, and not only agreements whose restrictive character is questionable. The intellectual laziness referred to by our general rapporteur has sometimes obscured this fact in the past. Thus, the Commission has, on occasion, stated that it would be contrary to the Treaty to exempt agreements containing certain clearly restrictive clauses, such as pricing or quantitative restrictions.12 It is clear, indeed, that the Treaty contains no such prohibition. 9

See, e.g., Elopak/Metalbox/Odin, 1990 O.J. (L209) 15. See Eurotunnel, 1988 O.J. (L311) 36, Alcatel/ITT Nachrichtentechnik, 1990 O.J. (L32) 19, International Private Satellite Partners, 1994 O.J. (L354) 75. 11 G.E.C.-Siemens/Plessey, 1990 O.J. (C239) 2. 12 See answer to Parliamentary question of Mr. Cot concerning the artificial fiber rationalisation cartel notified in 1979, 1979 O.J. (C 145) 2. 10

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As regards territorial restrictions, the Commission has, since the mid1980's, been more inclined to recognize that they could be justified by the need to grant a certain protection in the context of licensing or joint R.&D. agreements.13 Compared with the intransigent attitude it adopted towards similar restrictions in the 1970's,14 it is evident that measurable progress has been made. Regarding pricing restrictions, the Commission continues to adopt an inflexible approach. There may be certain instances in which pricing restrictions should be allowed under Art. 85(3). Thus, vertical retail price fixing clauses in distribution or franchise agreements concerning luxury products should not necessarily be outlawed. Similarly, price stabilization agreements have much to commend themselves in industries where the unpredictability and suddenness of price moves may have the result of inducing users to turn to alternative sources of supply.15 Moreover, agreements on exchanges of statistical information should not be prohibited simply because they increase the transparency of the market and allow individualfirmsto plan their production and pricing policies in a more rational manner than they would if they had to operate in the dark. One sometimes has the impression, when discussing these issues with officials of DGIV, that merely because an agreement may influence a firm's pricing policies, it cannot qualify for an exemption. This can be characterized as lazy thinking. Experience shows that, rather than fully exploiting the potential of Art. 85(3), the Commission has on occasion used it as an instrument to achieve goals that had no relation to competition policy. Thus, in BayerlBP Chemicals,16 the Commission imposed an obligation on the parties to put into effect their intention to close down one of their polyethylene manufacturing facilities before a certain date. It is difficult to see how the imposition of such a condition promotes competition. It clearly does the opposite. Similarly, in U.I.P.,X1 the Commission required U.I.P. to submit all future disputes with exhibitors concerning product allocation to arbitration; it also required U.I.P. to undertake to invest in production of European films. Here again, the connection with competition objectives seems questionable. 13

See, e.g., Reg. No. 2349/84, Art. 1. 5ee,e.^.DavidsonRubber,1972O.J.(L143)31;S.Af./'.£/Z..£1.Z,.,1978O.J.(L191)41. 15 I refer only to genuine price stabilization agreements, i.e. agreements having the effect of attenuating upward as well as downward puce,fluctuations,and not agreements that, under pretext of stabilizing the market, in effect result in increasing general price levels above those that would obtain under competitive circumstances. 16 1988O.J. (L15)35. 17 1989 O.J. (L226) 25. 14

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The same can be said of the obligation provided for under Art. 5(2)(2) of Reg. N 1475/95 on distribution of automobile vehicles for car manufacturers to conclude distribution agreements having a duration of at least five years or providing for a termination notice of at least two years. Protection of the "small guy" against pressures from the "big guy," rather than the objective of making the distribution of automobiles more efficient, seems to have prevailed in this case. B. Problems with the Interpretation of Art. 86 1. The concept of "dominant position" In their interpretation of Art. 86, the Commission, the C.F.I, and the E.C.J. have tended to rely predominantly on the market share held by the relevant undertaking. In Akzo,18 the E.C.J. even stated that a 50% market share isprima facie evidence of the existence of a dominant position.19 Moreover, the Commission and the Courts adopt very narrow definitions of the relevant product markets. One famous example is Boosey & Hawkes,20 where the Commission found that the relevant market was "brass wind instruments used in British-style brass bands." A less picturesque, but nonetheless extremely narrow, definition of the relevant markets was upheld in Tetra Pak II: the market in machinery for the aseptic packaging of liquid foods in cartons; the corresponding market for cartons; the market in machinery for non-aseptic packaging of liquid foods in cartons; the corresponding market for cartons. Such narrow market definitions are not in themselves objectionable as long as competitive pressures from neighbouring markets are taken into account when assessing dominance. Whilst the Commission normally undertakes such an analysis in its decisions under the Merger Control Regulation, many of its decisions applying Art. 86 fail to do so.21 It is important that the Commission's analysis of dominance under Art. 86 should be brought into line with its practice under the Merger Control Regulation. 18

1991 E.C.R. 1-3359. Fortunately, in the field of merger analysis, the Commission adopts a more sophisticated approach. 20 1987O.J. (L286)36. 21 See, e.g., Tetra Pak International SA v. Comm'n (No. 2), 1994 E.C.R.II-762, where the Commission and the C.F.I, considered that since switching from cartonbased systems to other packaging systems by influencing consumer habits would involve "a long and costly process," it was impossible to take into account pressures from neighbouring markets on Tetra Pak's position in the aseptic packaging sector. 19

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2. The concept of abuse

Art. 86 is a two-pronged provision: it prohibits on the one hand, "anticompetitive" practices, such as those aimed at preventing or increasing the costs of entry of rival firms and, on the other hand, "exploitative" practices, such as the imposition of excessive prices or unfair conditions on customers. As has long been recognized,22 there is a clear tension between the two objectives. If a dominant firm resorts to exploitative practices, this has the effect of encouraging competitors to overcome possible barriers to market entry and establish themselves as competitors to the dominant firm. The failure clearly to distinguish between the two aspects of Art. 86 may explain the somewhat muddled character of many Commission and Court decisions concerning this Article. If Art. 86 is to be rewritten, it should make clear that it only prohibits "anti-competitive" abuses. "Exploitative" abuses can best be dealt with under a distinct provision (possibly to be included in Art. 90) concerning monopolies (to the extent these may be justified by public interest considerations in certain sectors). 3. Causation I would not redraft Art. 86 to require a showing that there must be a causal relationship between the abuse and the dominant position. I believe that Continental Can23 and Hoffmann-La Roche,24 which established that any conduct of a dominant firm that consolidates or reinforces its market position by methods other than competition on the merits, constitutes an abuse, is fundamentally justified. That such conduct could equally well have been engaged in by a firm without market power should not be a justification. The injury to competition is the same in both cases. The above applies to conduct which occurs on the same market as the market on which dominance is established. To the extent such conduct occurs on different markets, some causation is required. However, it is not necessary to change Art. 86 to reach that result. In Tetra Pak II25 the Commission's Statement of Objections took the view that Tetra Pak's dominant position on the aseptic markets obliged it to observe Art. 86 on the non-aseptic markets. However, such a broad interpretation was subsequently qualified, first in the Commission's decision (where the Commission stressed the need for a "link" between the dominated market and the market on which the conduct took 22 23 24 25

See, inter alia, R. Joliet, Monopolization and abuse of dominant position (1970). Europemballage & Continental Can v. C o m m ' n , 1973 E.C.R. 215. HofTman-La R o c h e v. C o m m ' n , 1979 E.C.R. 4 6 1 . 1992O.J. (L72)l.

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place), and later in the judgment of the C.F.I.26 and particularly in the judgment of the E.C.J.27 of 14 November 1996. There, the Court stated that the application of Art. 86 presupposes a "link" between the dominant position and the abusive conduct "which is normally not present where conduct on a market distinct from the dominated market produces effects on that distinct market."28 It is only where "special circumstances" so justify that Art. 86 can apply to conduct found "on the associated, non-dominated, market and having effects on that associated market." 29 This statement appears to have sufficiently clipped the wings of DG IV's most enthusiastic antitrust enforcers so that changes to Art. 86 are not required. Moreover, in the present context of deregulation, it is necessary for the Commission to have at its disposal an effective means to prevent formerly monopolistic enterprises from holding on to their monopolies, or even from extending them to non-dominated markets. If a strict causal link had to be shown between the dominant position and the conduct on related markets, the Commission's deregulation efforts could be severely jeopardized.

C. Government Intervention The main risk for the proper functioning of the competitive process in today's world is not the possible existence of cartels or abuses of dominant positions. Although the number of cartels is not likely to have fallen significantly during the last twenty years, the Commission's tough enforcement policies, and the risk of very high fines, have reduced the effectiveness of cartels as a means to control the economic process. Indeed, to function properly, the parties to a cartel need not only agree on prices, but must also devise methods to control output. Except where such mechanisms can be strictly enforced or where the number of industry participants is sufficiently small to guarantee compliance with agreed volume targets, the participants in the cartel are likely to engage in opportunistic behaviour. Such "cheating" will inevitably lead to a situation which is, if not identical, at least not far removed from the competitive equilibrium. Government intervention, on the other hand, is a much more serious matter. It can result in protecting entire sectors of the economy from the rigors of 26 27 28 29

1994 E . C . R . 11-755. 4 C o m m o n M k t . L. R e p . 662 (1997). Id, Recital 27. Id.

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competition, slowing down necessary structural adjustments in declining industries, protecting "national champions" or preventing transborder reorganizations that are justified on economic grounds but risk involving loss of national prestige—or jobs. While the Commission's policy in the field of state aid has generally received the support of the European Court, it is still far from fully effective. In particular, it is doubtful whether the Commission's decisions ordering repayment of unlawful aid are fully complied with in practice. Since Member States have the same interest in this respect as the aid recipients, it is difficult to believe that they undertake serious efforts to comply with the Commission's decisions ordering repayment. Even if they do so in appearance, they probably find ways to circumvent the "effet utile" of the Commission's decision by granting some other benefits in other areas to thefirmsconcerned. For the Commission's control over state aid to be really effective, it would be necessary to adopt regulations under Art. 94 granting to the Commission rights of investigation similar to those it has under Reg. 17/62.1 realize that, in the present political context, this is not likely to happen in the short, or even the medium, term. We shall not be reading soon in the Financial Times that the Commission has conducted a dawn raid at the office of the Chancellor of the Exchequer or the Department of Trade and Industry. As regards the possibility of using Art. 90 to control the justification of national monopolies, regretfully, after a good start in 1991, the Court seems to have adopted a much more timorous view in the Crespelle30 judgment. This is surprising since the E.C. Treaty was amended to provide expressly that the Community's economic policy shall be conducted "in accordance with the principle of an open market economy with free competition." The same can be said of the Court's caselaw concerning the application of Arts. 3(g), 5(2) and 85/86 of the Treaty. Here too, after a promising start, culminating in the Nouvelles Frontieres31 and Ahmed Saeed32 cases, the Court has backed away, seeking refuge in an extremely formalistic interpretation of the relevant Treaty provisions.33 30

1994 E.C.R. 1-5097. 1996 E.C.R. 1425. 32 1989 E . C . R . 803. 33 See, e.g., Merg, 1993 E.C.R. 1-5751; Reiff, 1993 E.C.R. 1-5801; O.H.R.A., 1993 E.C.R. 1-5851; Delta Schiffahart, 1994 E.C.R. 1-2517; Spediporto, 1995 E.C.R. 1-2900; D.I.P., 1995 E.C.R. 1-3287. 31

VIII Alberto Heimler Director of the Research Department

Piero Fattorix Director of the Legal Office Autorita Garante della Concorrenza e del Mercato Rome, Italy

Introduction Art. 85(1) prohibits all agreements between firms that affect trade between Member States, and whose object or effect is to prevent, restrict or distort competition in the Common Market. According to Art. 85(1), an agreement is prohibited if it: a) affects trade between Member States and b) restricts competition in the Common Market. Some examples of prohibited agreements (price fixing, market sharing, price discrimination, tying) are also provided. Price fixing (both horizontal and vertical) and market sharing agreements, should they affect trade between Member States, have been traditionally interpreted as per se prohibited. The same is true with respect to price discrimination and tying, where economic analysis has rarely been relied upon in the decisionmaking process. However, the wording of Art. 85 could have led to a different interpretation. An agreement is prohibited only if it prevents, restricts or distorts competition in the Common Market. This implies that an analysis of market power is needed in order to prove that an agreement, whether vertical or horizontal, does indeed have, or potentially has, such effects. Without market power by the firms involved, an agreement can hardly affect the conditions of competition in the common market. The almost per se interpretation of the prohibition of Art. 85(1) has led the Commission and, to a lesser extent, the courts, to consider a number of agreements to be restrictive, far in excess of those that economic analysis would indicate to be of concern. This has led to a widespread use of the individual and block exemption possibilities of Art. 85(3). According to this provision, an agreement can be exempted if it contributes to the improvement of production or distribution, or to greater technical progress, but on the condition that its 1

The opinions expressed in this paper are only of the authors and cannot in any way be attributed to the Autorita Garante della Concorrenza e del Mercato.

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resulting advantages are shared with the consumer. This last condition implies that European competition law is directed towards the maximisation of consumer welfare. The decision making of the Commission and the rulings of the Court of Justice have not always satisfied such a constraint, and the exemption possibilities of Art. 85(3) have sometimes been interpreted as allowing for the promotion of industrial and economic policy objectives.

A. More Rigorous Interpretation of Art. 85 In principle, since the substantive provisions of European antitrust law are written in a general and broad manner, clarifying the goals that competition policy pursues is an essential step for a coherent interpretation of the rules and for an efficient enforcement of the law. In practice, the objectives of European competition policy are regularly stated in the Annual Reports on Competition Policy, and they vary from effective competition, to market integration, to the competitiveness of European firms, to the protection of weak competitors and so on. These goals are not fully consistent with each other. For instance, large scale production and distribution may reduce costs, but also result in difficulties for small firms; the protection of weak competitors or of fair competition may diminish the level of efficiency in the market; pursuing market integration as a separate objective may lead to inefficient outcomes. Recently, the Commission seems to have adopted a more coherent approach, focusing on economic efficiency and on the maximisation of consumer welfare.2 This is probably due to several factors, including progress in the process of market integration, increasing competition that European firms face from more efficient firms from third countries. The Commission, however, continues to maintain that European competition law pursues market integration as well. In this regard, the Italian Antitrust Authority has argued that market integration and effective competition are not separate objectives, and if an agreement restricts competition, it also impedes market integration.3 Art. 85(3) introduces as a binding constraint that consumers should benefit from the exempted agreement. Therefore, market integration is a legitimate separate objective only if its pursuit leads to an improvement of consumer welfare higher than that attainable if only economic efficiency were pursued. The 2

European Commission, XXIIIrd Report on Competition Policy 1995 (1996). Paper of the Italian Competition Authority, in Proceedings of the European Competition Forum (Claus Dieter Ehlermann & Laraine L. Laudati eds. 1997). 3

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Commission has never performed such a test. As a result, in many decisions where consumer welfare is not maximised, the Commission has not achieved market integration either. For example, in the Distillers4 case, the condemnation by the Commission of the dual price system and of the export ban designed by the company to hinder parallel imports led to a result opposite to that pursued by the Commission: the splitting of the brands under which Distillers sold the product in the U.K. and the Continent. Interpreting Art. 85(1) as introducing a per se prohibition, although asserted by the Commission and by the courts on a number of occasions, is not the only possibility. The recent Communication on de minimis5 implies that agreements put into place by companies that individually or collectively do not have significant market power (approximated by their market share) do not fall under the prohibition of Art. 85(1). Moreover, ever since the 1966 Technique Miniere case,6 the Court of Justice has recognised the need to examine all agreements within their legal and economic context, in order to ascertain whether Art. 85(1) applies. The Technique Miniere decision does not require a case by case analysis. Rather, a per se prohibition can be justified when there is certainty that in most circumstances, a given type of practice is restrictive, and only exceptionally may be neutral with respect to competition. If this is the situation, the administrative cost of a case by case approach could be considered too high, and a per se prohibition system would be preferable. However, per se prohibitions should be strictly limited to restrictions, such as horizontal pricefixingand market sharing, which economic analysis has shown to become pro-competitive only in very exceptional circumstances. At most, if the companies involved do not possess market power, such practices can be considered irrelevant under a competition test. Relying on economic analysis to ascertain the restrictiveness of certain agreements is not outside the mainstream of European antitrust provisions. In fact, the Commission's Green Paper on Vertical Restraints7 underlines the importance of an analysis of market structure to determine the restrictive impact of vertical restraints. Furthermore, the Commission recognises that the fiercer interbrand competition is, the more likely are the pro-competitive and efficiency effects. On the contrary, anticompetitive effects are only likely where 4

The Distillers Co. Ltd., 1978 O.J. (L50) 16. Commission Draft Notice on agreements of minor importance which are not caught by the provisions of Art. 85(1) of the E.C. Treaty 1997 O.J. (C 29) 3. 6 Societe Technique Miniere v. Maschinenbau Ulm GmbH MBU, 1966 E.C.R. 235. 7 European Commission, Green Paper on Vertical Restraints in E.C. Competition Policy, COM (96) 721 Final (22 Jan. 1997) 5

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interbrand competition is weak and there are barriers to entry at either production or distribution level. This approach is somewhat different from the principle of freedom of competition as established in Grundig* where the Court said that "Although competition between producers is generally more noticeable than that between distributors of products of the same make, it does not thereby follow that an agreement tending to restrict the latter kind of competition should escape the prohibition of Art. 85(1) merely because it might increase the former." The new approach of the Commission has been strengthened in the debate that followed publication of the Green Paper. A number of proposals now under discussion are based on the identification of agreements for which it is possible to exclude a priori the risk of a restrictive impact on competition, namely, those which are concluded between companies that do not have significant market power. Such proposals are based on the assumption that these agreements would be considered lawful under Art. 85(1), implying that economic analysis could be used for evaluating whether an agreement between two or more companies could in fact restrict or distort competition in the common market. An agreement that restricts or distorts competition may, nonetheless, bring about an improvement in efficiency, leading to an increase in the size of the market or to a reduction in unit costs. In such circumstances, society may receive some benefit from the agreement, although it is not always the case that consumers will. According to Art. 85(3), only in the latter case, that is, that consumers would benefit from the agreement, could an exemption be granted. This implies that the efficiency gains resulting from the agreements would be so strong as to induce a reduction of prices (or a quality improvement) that would make consumers better off than without the agreement. In this context, the fourth substantive condition of Art. 85(3), according to which an exempted agreement cannot eliminate completely competition in the market, has the effect of guaranteeing that consumers get a fair share of the resulting benefit, due to the existing competitive pressure. The analysis that should be conducted in the application of Art. 85 involves a two stage procedure. At the first stage, under Art. 85(1), the agreement is analysed with respect to whether it restricts competition. In particular, the agreement is prohibited if it creates market power not easily eliminated by the functioning of the market. All possible efficiency gains are considered only at the second stage. Under Art. 85(3), an exemption could be granted if the benefits to consumers outweigh the disadvantages originating from the restriction of competition. 8

Etablissement Consten SARL & Grundig-Verkaufs-Gmbh v Comm'n, 1966 E.C.R. 389.

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In general, the Commission and the courts have respected this principle. Only exceptionally have there been instances where the exemption was granted according to more general motivations that would not have been legitimate according to the wording of Art. 85(3). For example in Metro Saba I,9 the Court recognised that maintaining a certain level of employment can be taken into account in the appraisal of an agreement under Art. 85(3). In subsequent cases, however, the Court was less willing to rely on such arguments.10 However employment problems and broader social considerations have played a role in the treatment of crisis cartels. According to the Commission, crisis cartels are in fact anticompetitive and prohibited by Art. 85(1), but may qualify for exemption under Art. 85(3) when they merely reduce overcapacity and do not imply fixing prices or introducing production quotas. The Commission always considers whether effective competition is ensured by manufacturers not participating in the agreement. Finally, industrial policy considerations have sometimes been considered by the Commission in evaluating joint ventures and specialisation agreements. As to the possibility to consider non-competition factors in exemption decisions under Art. 85(3), although the competition rules are enforced within the general framework of achieving the fundamental objectives of Art. 2 of the Treaty (including that of strengthening Community and social cohesion), such general considerations cannot override the legal effect of single provisions. Therefore, exemption of prohibited agreements under Art. 85(3) should be possible only if the efficiency gains outweigh the harms from the identified restrictions to competition. The wording of Art. 85(3) is such that the advantages of an exempted agreement must benefit the actual consumers of the products involved, not society in general. This excludes, under a rigorous interpretation, the possibility of employment or industrial policy considerations.

Conclusion The substantive provisions of Art. 85(1) imply an extensive use of economic analysis, requiring that for an agreement to be prohibited it should appreciably restrict competition. Economic analysis is also needed to evaluate whether to grant an exemption, under the provisions of Art. 85(3). In particular, an 9

Metro SB GmbH & CO KG v. Comm'n, 1977 E.C.R. 1875. E.g., Van Landewyck Sari & ORS v. Comm'n, 1980 E.C.R. 3125 (Tedetabs'); Remia BV & Ors v. Comm'n, 1985 E.C.R. 2545. 10

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exemption should be granted if the efficiency gains following from a restrictive agreement are sufficiently strong to more than offset the damages resulting from the restriction of competition. Art. 9 of Reg. 17/62 excludes the possibility for national authorities directly to apply Art. 85(3). One reason for this exclusion is that leaving the power to exempt with the Commission should assure a more coherent application of the law, reducing the possibility that restrictive agreements are exempted for industrial policy considerations. However if Art. 85(3) is given a more rigorous interpretation, and the exemption possibility is constrained by a consumer welfare maximisation standard, then the discretionary power is considerably reduced. A decentralised application of Art. 85(3) would then not lead to a beggar-thyneighbour application of Community law, but instead would lead to an enhancement of efficiency while at the same time respecting competition principles. With such a rigorous interpretation of the provisions of Art. 85(3), exempting a restrictive agreement would not be different from granting a negative clearance under Art. 85(1), or ascertaining an abuse of a dominant position, all of which are activities that national authorities are already allowed to perform.

INDEX

abuse of dominant position: Article 86, 591-2, 600 Canada, 85, 89, 97-8, 391,402-6 EU competition law, 531 EU competition policy, 18 joint, 405 mergers, 231-2 Mexico, 44 multinationals, 231 protectionism, 339 United Kingdom, 346,450-1 United States, 18 advertising see misleading advertising Agreement on Technical Barriers to Trade (TBT), 161,264 Agreement on Trade-Related Investment Measures (TRIMS), 161, 191, 264 allocation of resources, 35, 59-60, 164 ANDEAN Pact, 192 anti-competitive behaviour or effects: article 85, 597-8 Canada, 403 cartels, 211 distortion of competition, 282-3 enforcement, 415 abroad, 217-20 evidence, 217-20 exports, 210-22 imports, 210-22 market access 198-9 market share, 211 Mexico, 334 multinationals, 220-2 predatory dumping, 211—17 regulation, 222 standards, 244 United States, 302, 331-2 anti-dumping see dumping ANZCERTA, 192,219 approximation of laws, 127, 181 Article 85,462-3,467,469-74, 478-91, 495-502, 510, 567-88 abuse of dominant position, 600 alternative approach to, 574-5 amendment, 515 anti-competitive effects, 597

application, 547-9 bifurcation, 496,498-500, 571-4 cartels, 599 certainty, 597 comfort letters, 506, 507-8, 563 Commission, 505-10, 516-17, 596-9 convergence, 510 decentralisation, 600 different analysis of, 498-9 distortion of competition, 595, 598 economic analysis, 506, 547-9, 595, 597-600 economic efficiency, 596 eliminating dichotomy in, 587-90 enforcement, 543-7 EU competition policy, 589, 596 European Court of Justice, 599 exemptions, 505, 508, 549-50, 596, 599-600 guidance, 504 implementation, 510 interpretation, 487-8, 547-9, 595-9 isolation of, 514 joint ventures, 599 jurisdiction, 506-7 market integration, 596 market share, 509 modernisation, 505-10 monopoly, 509 narrowing, 466 national competition authorities, 507-10, 557-63, 600 national laws, 507 negative spillover, 600 non-competition matters, 515 notices, 497 parallel imports, 597 restriction of competition, 498, 506, 565-6, 598, 600 role, 469, 490-1, 500 rule of reason, 506, 552-4 specialisation agreements, 599 welfare, 596, 598 Article 86, 469, 495-6 abuse of dominant position, 591-2 amendment, 461-2,475,496, 515 causation, 591-2 Commission decisions, 591

602

Article 86 (cont.): deregulation, 592 dominant position, 590-2 European Court of Justice decisions, 591 improvement, 496 interpretation, 590-2 isolation, 514 relevant market, 590 Australia: allocation of resources, 59-60 barriers to entry, 57 development, 59 economic efficiency, 54-63 economics, 57 equal treatment, 57 market forces, 56-7 monopolies, 54, 60-1 objectives of competition policy, 53-65 oligopolies, 61 political objectives of competition policy, 55,58 pricing, 57, 59, 60 research and development, 60-1 resources, 54 small firms, 62 social objectives, 55, 58 technology, 59-61 Auto case, 205-6 barriers to entry: Australia, 57 EU competition law, 363-4 market entry, 248 market integration, 363 national competition authorities, 146 predatory pricing, 214 United Kingdom, 443 WTO/GATT barriers to trade, 139, 186-7 Belgium, 173,335 bilateral agreements, 298-301 comity, 298 competition law, 299-300 confidentiality, 299 co-operation, 168, 298-9 distortion of competition, 281-2, 298-9, 303 effects doctrine, 299-300 EU competition policy, 299-300 extraterritoriality, 299-300 globalisation, 136 legal standing, 299 market access, 140 national competition authorities, 298-9 OECD, 163 rule of reason, 301 United States, 163, 250-3, 299-300 WTO/GATT, 149, 266 Boeing-McDonnell merger, 226-7 Brazil, 197 British Caledonian merger, 338-9, 345

Index

Canada: abuse of dominant position, 85, 89, 97-8, 391,402-6 joint, 405 advocacy, 92-6 agriculture, 94—5 anti-competitive agreements, 406-8 anti-competitive behaviour, 403 Competition Act 1986, 7, 86-91, 97-100, 104-6, 108-9, 336-7, 389, 395-414 competition law, 86-91, 96-100, 103, 336-7, 393-4 competition policy, 388 Competition Tribunal, 88-9, 91, 99-100, 105 compliance, 106 concentrations, 390-1, 393 conspiracy, 90-1, 101-2 consumer protection, 413 co-operation, 106, 107-9 United States with, 218-19, 253-4 costs, 105 criminal offences, 86, 91, 101-2, 108, 395-6 CUSTA, 100, 103 deceptive marketing practices, 91, 102, 107-8 deregulation, 105, 395,403^* Director of Investigation and Research, 87-90, 97-8, 105, 395-7,404-6, 408 discrimination, 410 dominance, 391 dumping, 95-6 economic efficiency, 85, 90, 99, 103, 388-92, 397-8 electricity, 94 enforcement, 88, 97, 101, 105, 108-9, 326-7, 395-7,404-5,408,413-14 essential facilities doctrine, 404 exemptions, 87 exports, 96, 237 freedom of information, 391-2, 407 globalisation, 96, 107 implementation of competition law, 388-416 inquiries, 87-8 intellectual property, 107, 406 international trade, 103 joint ventures, 401 liberalisation, 103, 107 market definition, 99-100 market power, 412 memoranda of understanding, 197-8 mergers, 89-90, 98-100, 103, 237, 398-401 misleading advertising, 91,412-13 monopolies, 402 NAFTA, 96, 103-4,395 national competition authorities, 88, 92-5, 106-7, 109, 395-7 objectives of competition law, 323, 353

Index

objectives of competition policy, 7, 85-109, 388-416 historical and conceptual overview, 29-5 evolution, 85-9 political objectives, 7 pricing, 409-11 discrimination, 410 predatory, 397,409-10 privatisation, 105 process considerations, 413-14 promotion, 91, 92-6, 102, 336 public interest, 407 purposes clause, 397-8 refusal to deal, 411-12 regulated conduct defence, 91 regulation, 91-6 relevant market, 99 restructuring, 96, 100 rule of reason, 101,408 small businesses, 397-8 social objectives, 7 specialisation agreements, 88, 408-9 Task Force, 107-8 telecommunications, 93-4 trade policy, 103^4, 336-7 United States, 107-8, 253^ co-operation with, 218-19, 395 vertical restraints, 410-11 WTO/GATT, 104,108,395 car parts, 205-6 cartels: anti-competitive behaviour, 211 Article 85, 599 cartels, 234-6 comity, 258 confidentiality, 141 co-operation, 258 crisis, 599 definition, 318 distortion of competition, 278-9 domestic, 236 EC cartel office, 381,485 enforcement, 159, 163, 211, 235-7 EU competition law, 319, 381, 485, 522 exemptions, 234-6, 267, 318-19 export, 47, 211,234-6 fines, 319 France, 319 freedom of information, 178 Germany, 318, 342 international, 211 consensus on, 317-19 Japan,267 liberalisation, 195-6 market access, 146 Mexico, 47 United Kingdom, 318-19, 346, 436,438 United States, 125, 249-50, 328, 428-9 WTO/GATT, 211, 267, 294

603

Central Europe, 66-7, 76, 127, 181 certainty: Article 85, 597 competition law, 327, 333, 335, 357 economics, 478 EU competition law, 468,471, 555 EU competition policy, 379 rule of reason, 552 codification see multilateral competition code Colombia, 196 comfort letters, 506, 507-8, 563-5, 580-1 comity, 257-8, 298, 504 Commonwealth of Independent States, 69 competition: advocacy, 6, 77 definition, 114-15, 117, 118 desirability of, 33 more, 115 perfect, 114, 273-4 primacy, 129-30 process as, 114-15 restrictions, 116 competition law see also implementation of competition law Article 85, 507 Belgium, 173 bilateral agreements, 299-300 Canada, 7, 86-91, 97-100, 104-6, 108-9, 336-7, 393-4 certainty, 327, 333, 335, 357 commonly accepted formulation of, 175-6 competition policy, 39 convergence, 64-5 developing countries, 39 distortion of competition, 280-1 economic efficiency, 38, 39, 63 economics, 37, 53 economies in transition, 39, 68-70, 72, 79 enforcement, 3, 36, 68-70, 79 extraterritorial application, 280-1, 299-300 future of, 460-92 harmonisation, 151 interpretation, 334 Japan,81-4 Mexico, 19 objectives of, 50-1, 323-48 political objectives, 4, 17 promotion, 35 public interest, 72 scope of, 173-4 small and medium-sized enterprises, 21 transparency, 327 United Kingdom, 316, 450-1 WTO/GATT, 290 concentrations, 41, 83, 336, 390-1, 393 consumer protection: Canada, 413 economies in transition 74 EU competition law, 65 Japan,82

604

consumer protection (com.): Mexico, 45-6, 49 United States, 426 convergence: competition law, 64-5 competition policy, 64-5 economies in transition, 6 EU competition policy, 159, 311-17 globalisation, 9, 160 mergers, 230-1 co-operation, 141 bilateral agreements, 168, 298-9 Canada, 106, 107-8 cartels, 258 comity, 258 Commission Notice, 554 cross-border, 10 divergence, 9-10 economic efficiency, 131 European Union, 145 United States, with, 218-19 evidence, 251-8 international, 167-9 multilateral competition code, 138, 220 national competition authorities, 147-8, 167-8,217-18,230 rule of reason, 554 United States, 145,250-8 European Union, 218-19 WTO/GATT, 259 costs: Canada, 105 economic efficiency, 112, 113 EU competition law, 575 Japan,84 mergers, 112 countervailing duties, 195, 264 Court of First Instance, 468 criminal offences: Canada, 86, 91, 101-2, 108, 395-6 Mexico, 46 United States, 251, 253 CUSTA, 100, 103 Czech Republic, 337 decentralisation, 179,482-3, 486-7, 546, 554, 600 deception: Canada, 91, 102, 107-8,412-13 promotional, 102, 107-8,412-13 DeHavilland merger 226 Denmark, 389, 535-6 deregulation: Article 86, 592 Canada, 105,403^ economies in transition, 75 Japan,366 Mexico, 5 national competition authorities, 75

Index

developing countries: competition law, 39 implementation, 342 competition policy 23, 34-6, 39, 150 economic welfare, 34—5 enforcement, 222 foreign investment, 220-2 liberalisation, 195 market access, 153, 222 multilateral competition code, 136 multinationals, 220-2 protectionism, 51 regulation, 36 restrictive business practices, 221-2 UNCTAD, 221,269 WTO/GATT, 221-2, 268-9 diplomatic protection, 302 discrimination: Canada, 410 distortion of competition, 279-80 economic efficiency, 118 enforcement, 202-4 foreign companies, 202, 204 freedom of competition, 179 market access 202-4 national competition authorities, 202 pricing, 22,410, 421-2 small and medium-sized enterprises, 132 United States, 421-2 WTO/GATT, 202-4 dispute settlement: globalisation, 166 multilateral competition code, 165-6 WTO/GATT, 141, 149, 159, 163, 169, 203-4, 259, 262, 290, 305-6 distortion of competition: anti-competitive behaviour, 282-3 Article 85, 598 bilateral agreements, 281-2, 298-9, 303 cartels, 278-9 competition policy, 273-85 competition law, 281-2 differences between, 282 competition policy, 304 discrimination, 279-80 EU competition law, 326,479-80 EU competition policy, 122, 332, 377-9 extraterritoriality, 280—1 inadequacies of current legal regime, 305-7 liberalisation, 283-5 market policy, 276 multilateral competition code, 273-4, 278-9 nationally pursued competition policies, 275-7 negative spillovers, 273-85, 304-5, 308-9 objectives of competition policy, 280 sources, 276-7 sparse use, 303-8 state aid, 378-9

Index

state-sponsored, 377-9 trade policy, 276, 279-85 unimportant, 303-5 United States, 175 welfare, 275-8, 280 WTO/GATT, 146-7, 187, 305-7 divergence: categories, 185-6 co-operation, 9-10 economic efficiency, 117 market definition, 15 multilateral competition code, 138 overcoming, 184 diversification, 83, 127 dominant position see also abuse of dominant position Article 86, 590-2 Canada, 391 EC competition law, 65, 478, 535 economies in transition, 70, 72 joint, 478, 535 United States, 420 dumping: anti-competitive behaviour, 211-17 Canada, 95-6 European Economic Area, 175-6 liberalisation, 194-5 Matsushita case, 216-17 Mexico, 340 predatory dumping, 211-17 protectionism, 150 semiconductor case, 210 United States, 210 WTO/GATT, 264

Eastern Europe, 67, 127, 181 economic efficiency, 31, 32, 34-5, 37 allocative, 113,367-8 Article 85, 596 Australia, 54-63 Canada, 85, 90,99, 103, 388-392, 394, 397-8 competition law, 38, 39, 53 competition policy, 39 co-operation, 131 costs, 112-13 delegation, 8, 112 demand, 59 development, 59 discretion, 113 discrimination, 118 divergence, 117 dynamic, 8, 59-63, 112, 113, 115-16, 416-21,443 economies in transition, 5-6, 68, 70, 74 essential facilities doctrine, 346-7 EU competition law, 112, 117, 482, 586 EU competition policy, 123, 131, 237-8, 367-8 freedom of competition, 414-15

605

Germany, 314-15 incentives, 116 institutions, 12-13, 111-12, 118 Japan, 82, 83 market integration, 3, 117-18, 333 mergers, 112,237-8 Mexico, 50 monopolies, 63 multilateral competition code, 138 national competition authorities, 112-13, 118 objectives of competition law, 344, 354-5 objectives of competition policy, 8, 30-2, 38-39,53-8, 111-18,121 parallel imports, 117-18 political objectives, 10-11, 58 pricing, 59, 114 productive, 8,112, 113-16 rivalry, 116 static, 59-63, 417-21 United Kingdom, 432, 439, 443, 446, 449-50 United States, 9, 125,417-21 welfare, 13, 17,20, 114, 367-8 WTO/GATT, 262 economics see also economic efficiency Article 85, 506, 595, 597-500 analysis, 21, 339, 347,479,486-7, 503, 506, 547-9, 575, 577, 595, 597-600 certainty, 478 competition law, 37, 63-4 competition policy, 18-19 constitutional, 521-2 enforcement, 126, 335 EU competition law, 463, 467, 469, 486, 503, 520-3, 531, 546-9, 575, 577 European Union 63-4 freedom of, 30 institutional, 521—2 Italy, 482 Japan,84 market integration, 126-7, 338 objectives of competition policy, 30-2, 125-7,131 prosperity, 30-1 theories, 12,328 United States, 12, 332-3 welfare, 34-5, 50 economies in transition: abuse of dominant position, 70-1, 73 bankruptcy, 70-1 enforcement, 68-70 competition advocacy, 77 competition law, 69, 70, 72 competition law, 68-70, 79 competition policy 34-6 consumer test, 71, 74 convergence, 6 deregulation, 75 dominant position, 70, 73

606

economies in transition (com.): economic efficiency, 5-6, 68, 71, 74,78 elimination of inefficient firms, 78 enforcement, 77, 79 EU competition law, 78 foreign investment, 71 harmonisation, 6 income distribution, 77 liberalisation, 72 market access, 75 market definition, 72 mergers, 73-4 methodological problems, 71-3 monopolies, 69-70, 73-4 national competition agencies, 69-70, 72, 74-5 objectives of competition policy, 5-6, 67-79 privatisation, 75 promotion, 6, 67-8, 75, 77 protectionism, 72—3 public interest, 72 reform, 67-8 regulation, 69-70, 74-5 relevant market, 71—2 restructuring, 73-4 social objectives, 5-6 state aid, 75-6, 78 unemployment, 67 WTO/GATT, 263 Ecuador, 196 EEA, 175-6 effects doctrine, 299-300 efficiency see economic efficiency electricity, 94 emerging markets see economies in transition employment see also unemployment economies in transition 83 EU competition policy, 123, 128 objectives of competition policy, 121, 128 United Kingdom, 445 enforcement: abroad, 217-20, 229 anti-competitive behaviour, 415 Canada, 88, 97, 101, 105, 108-9, 326-7, 395-7,404-5,408,413-14 cartels, 159, 163, 235-7 international, 211 caution, using, 415 competition law, 3, 36, 68-70, 79 developing countries, 222 different forms of, 181-3 discrimination, 202-4 economics, 126, 335 economies in transition, 68-70, 77, 79 EU competition law, 326, 381, 461, 466, 469, 471, 477, 517, 543-7, 550-2, 575, 559, 563 EU competition policy, 122-3, 125, 341-2, 586 evidence, 217-20

Index

Germany, 315 injunctions, 142 institutions, 182 international trade, 22, 140 lax foreign standard of, 204-10 liberalisation, 193-8 market access, 163, 198-210 market integration, 126 mergers, 229 Mexico, 5,42,49, 51 multilateral competition code, 162, 319-20 national competition authorities, 77, 346 objectives of competition law, 344-5, 356-7 objectives of competition policy, 41-2, 121, 128 political objectives, 22—3 predatory pricing, 213-14 private parties, 328-9 restrictive practices, 217 social objectives, 125-6 spillover effects, 228-9 United Kingdom, 330-1, 434 United States, 125, 253, 328-9, 341-2,454-5 WTO/GATT, 228-9, 259 environmental protection, 426-9 equal treatment, 57, 263 essential facilities doctrine: Canada, 404 economic efficiency, 346—7 EU competition law, 487 Germany, 481-2 United States, 344-5, 4 2 2 ^ EU competition law see also Article 85, Article 86 abuse of a dominant position, 531-2 agreements, provisional validity, 501 ancillary restraints, 572—3 annual reports, 528 barriers to trade, 363-4 Belgium, 335 block exemptions, 239-40, 469, 503, 556, 567, 576, 578, 583 cartels, 319, 381,485, 522 certainty, 468,471, 503, 555 changes in, 513-14, 520 comfort letters, 563-5, 580-1 Commission, 472,486, 497, 587-90 ancillary restraints, 572-3 annual reports, 360-3 Article 85, 516-17 competence, 576 control, 522 Council and, 582 decisions, 360, 463, 468-9,475, 529 discretion, 531 economic analysis, 543-4, 547-9, 575 efficiency, 568 enforcement, 550-1, 559, 575 exemptions, 588

Index

government intervention, 592-3 guidelines, 490, 504 independence, 359-60 investigations, 559-561 Merger Regulation, 568-70 national authorities, 491 notices, 470, 510, 550-1, 555-8, 575 procedure, 470-1 proposals, 574-5 reform, 583 role, 462,498, 502, 511,515-16 workload, 503 comity, 504 common market, creation of, 361-2 complaints, 557-63 constitutional stage, 521 consumer protection, 65 costs, 575 Council, 582-3 Court of First Instance, 468, 499-500, 529-30, 538, 540-1 decentralisation, 482-3, 486-7, 546, 555 distortion of competition law, 326,479-80 dominant position, 65 joint, 478, 535 economic efficiency, 112, 117, 482, 568, 586 economics, 463, 467, 469,479,486-7, 503, 520-3, 542-3, 575, 577 economies in transition, 78-9, 579 enforcement, 326, 381, 461,466,469,471, 477,517, 542-7, 559, 563 cat Commission, 575 advantages of proposed system, 550-2 essential facilities doctrine, 487 EU competition policy, 509 European competition agency, 475-6, 483 European Court of Justice, 463-4, 467-8, 477,497,537^1 appointment of judges, 540-1 dissenting judgments, 538-40 independence, 481 judgments of, 530-5, 538, 571-2 role, 499-500 exemptions, 360, 466-9,479,482, 485-7, 490-1, 502, 522, 544-6, 550-1, 556, 576-8, 583, 588 federalisation, 486-7 fines, 532 four freedoms, 517, 522 freedom of competition, 484, 516-17 future, 460 Germany, 481 globalisation, 504 government intervention, 592-3 Guerrin and Reiff, 534

harmonisation, 78 institutions xviii-xix, 476, 521-2 intellectual property, 525, 530, 533-4, 537 Internet, 505 Italy, 470, 565-6

607

joint ventures, 471-2, 480 Kali und Salz, 534-5 liberalisation, 484 market definition, 470 market integration, 324-6, 355, 359, 363-7, 495,499,516,523 market power, 462, 515 Merck v Primecrown, 532-4 Merger Regulation, 112, 466, 470,480, 483, 501,503^,568-70,583 mergers, 131, 535 national competition authorities, 466,469, 474,487,491,555,576 co-operation, 504 increased involvement of, 557-63 national court judgments, 535-7 national laws, 576-83 line between community and, 580-4 negative clearances, 467, 469, 471,490, 501, 555-7, 578-82 non-competition matters, 515 notification system, 482-3, 528, 575 objectives, 324-6, 355-6, 359-79,484, 515-18 hierarchy, 522 oligopolies, 534-5 parallel imports, 117-18 petrifaction, 514 political objectives, 363-4, 505 pricing, 532-3, 589 prior control, 567-8 promotion, 495 protectionism, 365-6 reasons, 535-6 reform, 381, 461-2, 471, 514-22, 567, 574-5, 583 relevant market, 549-50 remedies, 534-5 research and development, 534 restrictive practices, 463,467,489-90, 500, 510, 544,587 meaning, 496, 498, 578, 588 territorial, 489 rule of reason, 499, 548, 550, 552-5, 566 single market, 485 state aid, 75-6, 593 subsidiarity, 485 substantive xv-xviii system failure, 567-8 TetraPakll, 531-2, 590-1 transparency, 463 Treaty of Rome: amendments to, 501-2, 513 interpretation, 521 United Kingdom, 450-1 United States, 504, 525 vertical restraints, 461,474-5,485, 490, 501, 576, 578 EU competition policy: abuse of competition policy, 18

608

EU competition policy (com): approximation of laws, 127, 181 Article 85, 589, 596 bilateral agreements, 299-300 block exemptions, 239-40 Central Europe, 127, 181 certainty, 379 challenges, 505 coherence between different policies, 123 Commission, 122, 341-2, 367-77 annual reports, 371-2 independence, 313-14 weaknesses of, 334-5 competition law, 63-4 consistency, 510 consumers, 370-1 convergence, 159, 311-17 distortion of competition, 122, 332, 377-9 Eastern Europe, 127, 181 economic efficiency, 123, 131, 237-8, 367-8 economics, 63—4 effects doctrine, 299-300 employment, 123^1, 128 enforcement, 122-3, 125, 126, 128, 341-2, 586 entrepreneurs, 370-1 EU competition law, 509 exemptions, 14 freedom of competition, 124-5 future, 511 harmonisation, 127 IBM, 11 institutions, 316-17 integration, 551, 586 joint ventures, 374-5 jurisdiction, 485 liberalisation, 124,504 market integration, 8, 63-4, 120, 123, 125-7, 130-1,371-6,383 merger control, 127, 237-8 moral rights, 382 negative clearances, 374-5 objectives, 11, 120, 122-8, 324,483-4, 515 promotion, 338 protectionism, 370-1 quality, 341-2 reform, xv-xix research and development, 239-40 single market, 130-1, 180 small and medium-sized enterprises, 370-1, 376, 381-2 sole traders, 370-1 sport, 376-7 state aid, 122-3,505 United States, 257 vertical agreements, 130 welfare, 123-4, 128,367-8 European Court of Justice, 384-5,463-4,467, 477, 481 European Economic Area, 175-6

Index

European Union see also EU competition law, EU competition policy diplomatic protection, 302 European Court of Justice, 384-5,463-4 multilateral competition code, 137 United States, 145 co-operation between, 145 exemptions: Article 85, 505, 508, 596-7, 599-600 block, 239-40, 469, 503, 556, 567, 576, 578, 583 Canada, 87 cartels, 234-6, 267, 318-19 EU competition law, 360,466-9, 479,482, 485-7,490-1, 502, 522, 544-6, 550-1, 556, 576-8, 583, 588 EU competition policy, 14 joint ventures, 240 mergers, 233 Mexico, 46-7, 49 research and development, 239-41 United Kingdom, 436, 451 United Kingdom, 453-4 exports: anti-competitive behaviour, 210-22 associations, 234 Canada, 96, 237 cartels, 47, 211,234-6 exemptions, 234-236 import market, 210-22 mergers, 237 Mexico, 47 predatory pricing, 214-15 protection, 429-30 United States, 429-30 extraterritoriality, 280-1, 299-300 federalisation, 486-7 foreign companies: discrimination, 202, 204 legal standing, 199-201 market access 199-202 foreign investment, 71, 220-2 France: cartels, 319 competition policy, 316 national competition authorities, 313 national court judgments, 535 protectionism, 365 franchising, 329-30, 345 freedom of competition: Canada, 391-2,407 cartels, 179 coercion, 178 discrimination, 178 economic efficiency, 414-15 EU competition law, 484, 516-17 EU competition policy, 124-5 Germany, 125 monopolies, 179

Index

GATS (General Agreement on Trade in Services), 161, 191,265 GATT see WTO/GATT General Agreement on Tariffs and Trade see WTO/GATT General Agreement on Trade in Services (GATS), 161,191,265 Germany: cartels, 318, 342 competition policy, 23-4 economic efficiency, 314-15 enforcement, 315 essential facilities doctrine, 481-2 freedom of competition, 125 Freiberg School, 129 harmonisation, 124 liberalisation, 123 mergers, 131 national competition authorities, 312, 341 national law judgments, 536-7 networks, 466, 481 objectives of competition policy, 129-32 state aid, 122-3 goals see objectives of competition law, objectives of competition policy globalisation: abuse of dominant position, 231-2 barriers to trade, 139 bilateral agreements, 136 Canada, 96 concepts, 135-6 convergence, 9, 160 cultural differences, 136-7 dispute settlement, 166 EU competition law, 504 Japan, 84 markets, 29 mergers, 231-2 national competition authorities, 160 necessity of, 156-7 objectives of, 138-9 objectives of competition policy, 54, 135-7 regulation, 231-2 state aid, 151 undermining, 136 World Trade Organization, 185 Guerrin and Reiff, 534

Havana Charter, 190, 265, 286 health care, 20,427-8 health and safety, 426-9, 453-4 holding companies, 83, 335-6 Hungary, 337 IBM, 11 implementation of competition law: Canada, 388 developing countries, 342 Mexico, 340 objectives, 323-48, 353, 386-7

609

United Kingdom, 433-51 United States, 417-32 imports: anti-competitive behaviour, 210-22 exports, 210-22 market access 198-210 predatory pricing, 212, 214-15 incentives: allocation of resources, 164 competition policy, 274-85 economic efficiency, 116 innovation, 62-3 negative spillovers, 274-85 welfare, 274 income distribution: Central Europe, 67 Eastern Europe, 67 Japan, 83 Mexico, 46 United States, 421-5 injunctions, 142 innovation, 60-3 Institut Merieux merger, 226 institutions see also national competition authorities economic efficiency, 12-13, 111, 118 economics, 521-2 enforcement, 182 EU competition policy, 316-17 independence, 24, 182-3,476 objectives of competition law, 355 transparency, 21 intellectual property: Canada, 107,406 EU competition law, 525, 530, 533-4, 537 Trade-Related Aspects of Intellectual Property Rights (TRIPS), 161,191,265,266 internal market see single market international trade see also trade policy, World Trade Organisation Canada, 103 competition policy, 18, 160 enforcement, 22, 140 increase in, 248 market access, 193 multilateral competition code, 138, 162 remedies, 242 WTO/GATT, 267, 268 internalisation see globalisation International Trade Organization, 190-1 Internet, 505 investment, 71,220-2 Italy: economics, 482 EU competition law, 470 national competition authorities, 338, 342-3, 348 national law judgments, 536 restrictive practices, 565-6 ITO, 190-1

610

Japan: Anti-Monopoly Act, 81-4 purposes, 80—1 Auto case, 205-6 car parts, 204-5 cartels, 267 concentrations, 83, 336 consumer protection, 82 convergence, 84 costs, 84 deregulation, 366 diversification, 83 economic efficiency, 82, 83 economics, 84 employment, 83 equal treatment, 263 fairness, 6 globalisation, 84 holding companies, 83, 335-6 income redistribution, 83 injunctions, 142 insurance, 365-6 Kodak, 147-8, 207-9 level playing field, 84 market integration, 83 national competition authorities, 82-3 legal standing, 200-1 objectives of competition law, 353-4 objectives of competition policy, 6, 30, 33, protectionism, 82-3, 365-6 semiconductor case, 210 zaibatsu, 6, 83, 335-6 joint ventures: Article 85, 599 Canada, 401 EU competition law, 471-2, 480 exemptions, 240 liberalisation, 374-5 negative clearances, 374-5 negative spillovers, 304 research and development, 240 KaliundSalz, 534-5 Kodak, 14-15, 16-18, 147-8, 152, 207-9 liberalisation: Canada, 107 cartels, 195-6 Central Europe, 67 countervailing duties, 195 developing countries, 195 distortion of competition, 283-5 dumping, 194-5 Eastern Europe, 67 economies in transition, 67, 72 EU competition law, 484 EU competition policy, 124, 504 enforcement, 193-8 Germany, 123

Index

joint ventures, 374-5 market power, 193-4 market share, 195-6 Mexico, 51, 197-8 pricing, 35-6 protectionism, 304-5 regulations, 36 subsidies, 194 tariffs, 194 trade policy, 194 WTO/GATT, 161, 185, 261, 300 market access, 141 anti-competitive behaviour, 198-9 bilateral agreements, 140 cartels, 146, 163 developing countries, 153 discrimination, 202-4 economies in transition, 75 enforcement, 199,201-10 EU competition law, 75-6 foreign companies, 199-200 imports, 198-210 inter-firm rivalry, 198-210 international trade, 193 lax foreign standards or enforcement, 204-10 legal standing, 199-201 market entry, 146 multilateral competition code, 136 national competition authorities, 144 privatefirms,200-1 restrictions, 139, 189, 198-210, 241 government, 189 private firms by, 189 restrictive practices, 241 standards, 241 state aid, 75 surveillance, 161 United States, 14, 250, 256-8 vertical restraints, 144, 145-6 WTO/GATT, 159, 188-9 market definition Canada, 99-100: Commission notice on, 470 divergence, 15 economies in transition 72 EU competition law, 470 market entry see also barriers to entry barriers to entry, 248 economies in transition, 75 market access, 146 Mexico, 43-5, 52 protection of right to, 43-5 state aid, 75 market integration: Article 85, 596 barriers to trade, 363 competition law, 63-4 cross-border trade, 362-3

Index

economic efficiency, 3, 117-18, 333 economics, 63-4, 126-7, 338 enforcement, 126 EU competition law, 324-6, 359, 362-7, 495,499,516,523 EU competition policy, 8, 63-4, 120, 123, 130-1,355,383 Japan,83 merger control, 132 national, 63-4 national competition authorities, 126 objectives of competition law, 324-6, 355 objectives of competition policy, 117-18, 126-7 political objectives, 10, 63-4, 126-7 standards, 380 vertical agreements, 130 WTO/GATT, 161,263 market power: Canada, 412 distortion of competition, 276 EU competition law, 472, 515 liberalisation, 193-4 mergers, 233 United Kingdom, 442-3, 450 market share: anti-competitive behaviour, 211 Article 85, 509 liberalisation, 195-6 markets see also market access, market definition, market entry, market integration, market power, market share, relevant market access, 29 anti-market provisions, 45-6 Australia, 56-7 globalisation, 29 interpenetration, 39 large, 231 Mexico, 45-6 open, 153 segmented, 214-15, 227 Matsushita case, 216-17 Merck v Primecrown, 532—4

mergers: abuse of dominant position, 231-2 Canada, 89-90, 98-100, 103, 237, 399-401 control, 125, 127, 132, 226, 230-3, 238 convergence, 230-1 costs, 112,230-1 economic efficiency, 112, 237-8 economies in transition, 73-4 enforcement abroad, 229 EU competition law, 112, 466,470,480, 483, 501, 503-4, 568-70, 583 EU competition policy, 127, 131, 237-8 evidence, 229 evaluation, 225-7, 237-9 exemptions, 233 exports, 237

611

Germany, 131 globalisation, 223-5, 231 jurisdiction, 223-4 major markets, 231 market integration, 132 market power, 233 Merger Regulation, 112,466, 470,480,483, 501, 503-4, 568-70,583 multilateral competition code, 163 multinationals, 231 national competition authorities, 224-7, 230-3 political objectives, 9 public interest, 346 regulation, 222-3, 231-2 relief, 226 restrictive business practices, 237 segmented markets, 227 spillover effects, 223-4 lack of consideration of, 227-9 strategic antitrust policy, 233-41 strategic evaluation, 237-9 thresholds, 340 trade policy, 233-41 transparency, 230 United Kingdom, 346, 438-49 United States, 125, 248-9,431 WTO/GATT, 291 Mexico: abuse of dominant position, 44 anti-competitive behaviour, 334 anti-market provisions, 45-6 cartels, 47 competition law, 19, 50-1 implementation, 340 Constitution, 4-5, 42-52 consumer protection, 45-6,49 criminal offences, 46 deregulation, 5 dumping, 340 economic efficiency, 42—3, 52 economics, 48-50 enforcement, 5,42, 49, 51 exemptions, 46-7, 49 export cartels, 47 Federal Law on Economic Competition, 5, 42,44-51 income redistribution, 46 level playingfields,43, 51 liberalisation, 51, 194, 197 market entry, 43-5, 52 monopolies, 5,43, 47 NAFTA, 477 objectives of competition policy, 5, 37-8, 42-52 political objectives, 5 pricing, 44,45-6 prime necessity items, 45-6 privatisation, 49 prohibitions, 43

612

Mexico (com.): promotion, 340 public services, 48 rule of reason, 44 Microsoft case, 232 misleading advertising: Canada, 91, 412-13 United States, 426 monopolies: Australia, 54, 60-1 Canada, 402 economic efficiency, 63 economies in transition 69-70, 73 freedom of competition, 179 Mexico, 5, 43, 47 postal services, 378-9 pricing, 36 regulation, 347 United Kingdom, 438^14, 447 Monopolies and Mergers Commission, 313, 331,332 multilateral competition code : achieving, 158 ambiguity, 144—5 consultation, 138 co-operation, 138, 220 definition, 137 developing countries, 136 dispute settlement, 165-6 distortion, 273-4, 278-9 divergence, 138 Draft International Antitrust Code, 183 economic efficiency, 138 enforcement, 162, 319-20 European Union, 137 international trade, 138, 162 market access, 136 mergers, 163 need for, 174 negative spillovers, 163-4, 273-4 objectives of competition policy, xiv-xv, 37-9,135-320 obstacles to, 176-8 political objectives, 180-1 three pillars, 244 trade barriers, 139 UNCTAD, 198 WTO/GATT, 137, 141, 169-71, 265-8 multinationals, 220-1, 231 Munich Group, 183, 265, 266 NAFTA, 96, 103-4, 192, 395, 477 national competition authorities: Article 85, 507-10, 557-63, 600 barriers to entry, 146 bilateral agreements, 298-9 Canada, 88, 92-5, 106-7, 109, 395-7 Commission, 491 complaints to, 168-9, 557-63 co-operation, 147-8, 166-7, 217-18, 230

Index

deregulation, 75 economic efficiency, 112-13, 118 economies in transition, 69-72, 74, 77 enforcement, 77, 346 EU competition law, 469,474,483,487, 491,504,557-63,576 European competition agency, 475-6,480, 483 France, 313 Germany, 312, 341 globalisation, 160 Hungary, 337 independence, 17, 25, 338, 340-3,475-6, 478,480 Italy, 338, 342-3, 348 Japan,82-3, 200-1 jurisdiction, 167-8 legal standing, 200-1 legitimacy, 347 market access, 144 market integration, 126 mergers, 224-7, 230-3 objectives of competition law, 354 Poland, 19-20, 337 promotion, 339 rate-setting, 340 role, 12 state intervention, 337 surveillance of decisions, 169 United Kingdom, 312-313, 331, 332, 436-51 United States, 251-8, 343, 457, 477, 483 welfare, 24 negative clearances, 467,469, 471, 490, 501, 555-7,578-82 Norway, 389 objectives of competition law, 323-48 Canada, 323, 353, 397^114 economic efficiency, 344, 354-5 enforcement, 344-5, 356-7 EU competition law, 324-6, 355-6, 359-79 implementation of completion law, 353, 387-8 inferences, 353 institutions, 355 Japan,353-4 market integration, 324-6, 355, 359 narrowing of, 323-4, 342, 354-5 national competition authorities, 354 non-competitive, 453-8 penalties, 359 review, 359-79 transparency, 355 United Kingdom, 330-1 United States, 323,453-8 objectives of competition policy, xi-xix, 3-25, 30-9, 119-28 see also political objectives of competition policy, social objectives of competition policy

Index

allocation of resources, 35 Australia, 53-65 balancing, 415 Canada, 7, 85-109, 390-6 Central Europe, 127 concentrations, 41 conflicts, 139^10, 152, 157, 176-85, 327, 380 consensus on, 174-5 cultural differences, 140, 184 decision-making, 120—21 definition, 328 developing economies, 34-6 direct, 30, 32-6 distortion of competition, 280 Eastern Europe, 127 economic efficiency, 8, 30-2, 38-9, 53-8, 121 allocative, 41, 131 economics, 30-2, 125-7, 131 economies in transition, 5-6, 34-6, 67-79 employment, 121, 128 enforcement, 41-2, 121, 128 EU competition policy, 120, 122-8, 324, 483-4,495,515 Germany, 128-32 globalisation, 54, 135-7 hierarchy, 522 Japan, 6, 30, 33, 81^4 market integration, 117-18, 120 Mexico, 5, 37-8, 42-52 multilateral competition code xiv-xv, 37-9, 135 non-competition objectives, 12, 14, 131-2 protectionism, 4 public interest, 132 regulation, 74-5 restructuring, 73-4 small and medium-sized enterprises, 4 ultimate, 30-2 welfare, 18, 128 WTO/GATT, 262-3 OECD, 145, 192, 18 bilateral agreements, 163 competition policy reviews, 333—4 United States, 163,252,256 Office of Fair Trading, 312-13 oligopolies, 61, 534-5 parallel imports, 117-18, 597 Pilkington case, 209 pipelines, 423-4 pluralism, 262-3 Poland, 19-20, 337 political objectives of competition policy, 6-7, 31-2,34,37 Australia, 55, 58 Canada, 7 competition law, 4, 17 courts, 183 decision-making, 120-1

613

economic efficiency, 10-11, 58 enforcement, 22-3 EU competition law, 363-4 government policy, 13 legitimate, 4, 10 market integration, 10, 63-4, 126-7 mergers, 9 Mexico, 5 multilateral competition code, 180-1 United States, 332 variation, 4 welfare, 4 postal services, 378-9 predatory dumping, 211-17 predatory pricing: anti-competitive behaviour, 211-17 barriers to entry, 214 Canada, 397,409-10 enforcement, 213-14 exports, 214-15 imports, 212,214-15 level playingfield,212 Matsushita case, 216-17 restrictive practices, 215 segmented markets, 214-15 pricing see also predatory pricing Australia, 57, 59, 60 Canada, 410-11 discrimination, 22,410,421-2 economic efficiency, 59, 114 EU competition law, 532-3, 589 liberalisation, 35-6 Mexico, 44,45-6 monopolies, 36 resale price maintenance, 425,428-9 unemployment, 63 United Kingdom, 435 United States, 22,421-2, 425,428-9, 455 welfare, 114 privatisation: Canada, 105 infrastructure, 337 economies in transition 75 Mexico, 49 promotion: Canada, 91-6,102, 107-8,336,412-13 competition law, 35 deception, 91, 102, 107-8 economies in transition, 6, 67-8, 75, 77 EU competition law, 495 EU competition policy, 338 Mexico, 340 national competition authority, 339 United States, 343 protectionism: abuse of dominant position, 339 developing countries, 51 dumping, 150 economies in transition, 72-3 exports, 429-30

614

protectionism (com.) France, 365 insurance industry, 365-6 Japan, 82-3, 365-6 liberalisation, 304 objectives of competition policy, 4 small and medium-sized enterprises, 4 United States, 429-30 quantitative restrictions, 290-1 quotas, 291-2 reform: Central Europe, 76 competition policy, 414 economies in transition, 67-8 EU competition law, 381, 461 -2,471, 514, 516-21,567,583 state aid, 76 refusal to deal, 411-12 regulation see also deregulation abuse of dominant position, 231-2 anti-competitive behaviour, 222 Canada, 91-6 developing countries, 36 economies in transition 69-70, 74-5 globalisation, 231-2 mergers, 222-3,231-2 Mexico, 48

monopolies, 347 objectives of competition policy, 74-5 regulated conduct defence, 91 relief, 149-50 spillover into another country's competitive process, 222-3 relevant market: Article 86, 590 Canada, 99 economies in transition, 71-2 EU competition law, 549-50 United Kingdom, 438 United States, 16 remedies: international trade, 242 negative spillovers, 285-301 WTO/GATT, 295-301 resale price maintenance, 425, 428-9 research and development, 60-1, 239-41, 534 restrictive practices and agreements: Article 85,498, 506, 565-6, 595, 598, 600 developing countries, 221-2 enforcement, 217 EU competition law, 463, 467, 489-90, 496, 500, 544, 551-2, 578, 587 Italy, 565-6 market access, 241 mergers, 237 predatory pricing, 215 rule of reason, 553-4 territorial, 589

Index

LTNCTAD, 221 United Kingdom, 434-8, 450-1 WTO/GATT, 188, 191 restructuring: Canada, 96, 100 economies in transition, 73-4 objectives of competition policy, 73-4 rule of reason: Article 85, 506, 552-4 bilateral agreements, 301 Canada, 101,408 certainty, 552 comfort letter, 565 co-operation, 554 decentralisation, 554 EU competition law, 499, 548, 550, 552-5, 566 guidelines, 553 Mexico, 44 national courts, 552-4 resale price maintenance, 425 restriction of competition, 553 United States, 331-2,425,454-5 Russia, 389 Semiconductor case, 210 single market: EU competition law, 485 EU competition policy, 130-1, 180 small and medium-sized enterprises: Australia, 62 Canada, 397-8 competition law, 21 discrimination, 132 EU competition policy, 370-1, 376, 381-2 innovation, 62 objectives of competition policy, 4 protectionism, 4 United States, 9,431-5,432 social objectives of competition policy, 131 Australia, 55 Canada, 7 economies in transition, 5-6 enforcement, 125-6 United Kingdom, 456 Spain, 537 specialisation agreements, 88, 408-9, 599 sport, 376-7 standards: anti-competitive behaviour, 244 market access, 241 market integration, 380 multilateral, 29 state aid: Central Europe, 76 distortion of competition, 378-9 economies in transition, 75-6 EU competition law, 593 EU competition policy, 122-3, 505 Germany, 122-3

Index

globalisation, 151 market access, 75 monitoring, 76 reform, 76 transparency, 76 World Trade Organization, 178 subsidiarity, 485 subsidies, 194 see also state aid tariffs: Czech Republic, 337 liberalisation, 194 WTO/GATT, 295-6 TBT (Agreement on Technical Barriers to Trade), 161,264 telecommunications, 92-4, 307-8 TetraPakll, 531-2, 590-1 tobacco, 428 Trade-Related Aspects of Intellectual Property Rights (TRIPS), 161, 191 trade policy: Canada, 103^1, 336-7 competition policy, intersection of, 248-50 distortion of competition, 276, 279-85 liberalisation, 194 mergers, 233-41 strategic, 276 WTO/GATT, 192, 258-60, 334 TRIMS (Agreement on Trade-Related Investment Measures), 161, 191, 264 TRIPS (Trade-Related Aspects of Intellectual Property Rights), 161, 191, 265, 266 UNCTAD, 192, 198, 221, 269 unemployment, 63, 67 United Kingdom: abuse of dominant position, 346,450-1 barriers to entry, 443 British Caledonian case, 338-9, 345 cartels, 318-19, 346,436,438 competition law, 316, 450-1 implementation, 433-51 competition policy, 315-16 economic efficiency, 433, 439,443, 446, 449-50 employment, 445 enforcement, 330-1,434 EU competition law, 450-1 exemptions, 436-7,451 judicial review, 447 market power, 442-3,450 mergers, 346,438-40,444-8 monopolies, 438-44, 447 national competition authorities, 312-13, 331,332,436-51,477 objectives of competition law, 330-1 pricing, 435 public interest, 315-16, 330-1, 345-6,433, 435-6,440,442-51 relevant market, 438

615

reports, implementation of, 447-9 restrictive agreements, 434-8,450-1 United States: abuse of dominant position, 18 anti-competitive behaviour, 302, 331-2 antitrust injury doctrine, 420-1 bilateral agreements, 163, 250-3, 299-300 Canada, 107-8 co-operation with, 218-19, 253-4, 395 cartels, 9, 125, 249-50, 253, 258, 328,428-9 comity, 257-8 Constitution, 525 consumer protection, 426-9 co-operation, 250-8 courts, 329 criminal offences, 251, 253 diplomatic protection, 302 distortion, 175 dominant position, 420 dumping, 210 economic efficiency, 125,416-21 economic theories, 12 economics, 332-3 enforcement, 125, 253, 328-9, 341-2, 454-5 environment protection, 426-9 essential facilities doctrine, 344-5, 422-4 EU competition law, 504, 525 European Union, co-operation between, 145, 218-219, 257 exemptions, 453-4 exports, 429-30 franchising, 329-30, 345 health care, 427-8 health and safety, 426-9,453-4 IBM, 11 implementation of competition law, 417-32 income distribution, 421-5 joint ventures, 429-30 Kodak, 14-15,16,148 market access, 14, 250, 256-8 memoranda of understanding, 197-8 mergers, 125,248-9,431 misleading advertising, 426 mutual legal assistance treaties, 253 national competition authorities, 251-8, 457, 483 independence, 343 objectives of competition law, 323 macroeconomic, 430-1 non-competitive, 453-8 non-economic, 421-5 OECD, 163,252,256 pipelines, 423-4 political objectives, 332 pricing, 22,455 discrimination, 421-2 promotion, 343 relevant market, 16 resale price maintenance discrimination, 425, 428-9

616

United States (com.): research and development, 239 rule of reason, 331-2,425, 454-5 Semiconductor case, 210 Sherman Act, 314, 453 small firms, 9, 421-5,432 social objectives, 456 tobacco, 428 trade-offs, 332 welfare, 456 WTO/GATT, 247, 260 Venezuela, 389 welfare: Article 85, 596, 598 developing countries, 34-5 distortion of competition, 275-6, 280 economic, 34-5, 50 economic efficiency, 13, 17, 20, 114, 367-8 EU competition policy, 123-4, 128, 367-8 incentives, 274 national competition authorities, 24 objectives of competition policy, 18, 128 political objectives, 4 prices, 114 United Kingdom, 456 World Trade Organisation see WTO/GATT WTO/GATT: agreements, 161, 261-2 using existing, 263-5 anti-competitive behaviour, 296 barriers to entry, 188 barriers to trade, 187-8 bilateral agreements, 149, 258, 266 Canada, 104, 108, 395 cartels, 211,267, 294 competition law, 290 competition policy, 38-9, 140-1, 170-1, 258-69 complaints, 169, 287-8, 290-7 form, 290-7 non-violation, 295-7 situation, 294-5 violation, 290-4 co-operation, 259 countervailing duties, 264 developing countries, 222, 268-9 discrimination, 202-4

Index

dispute settlement, 141, 149, 159, 163, 169, 203, 259, 262, 290-7, 305-6 distortion of competition, 146-7, 187, 305-7 domestic policy, 261 economic efficiency, 262 economies in transition, 263 enforcement, 259 spillover effects, 228-9 equality, 263 future, 143 GATS, 265 globalisation, 185 historical perspective, 286-7 inadequate legal regime, 305-7 international trade, 267-8 Kodak, 148 legal standing, 289, 302, 305 legitimacy of decisions, 142-3 liberalisation, 161, 185, 189, 261, 300 long-term goals, 267-8 market access, 159, 188-9 market economy, 262-3 market integration, 161, 263 mergers, 291 multilateral competition code, 137, 141, 169-71, 265-8 negotiations, 258-9 objectives, 187-8, 262-3 panel reports, 288-9, 306 pluralism, 262-3 quantitative restrictions, 290-1 quotas, 291-2 RBPs, 286, 276-7 remedies, 285-301 research and development, 240 restrictive practices, 188, 191 safeguard agreements, 265 state aid, 178 state responsibility, 289 subsidies, 264 tariffs, 295-6 TBT, 264 telecommunications, 307-8 trade policy, 192, 258-60, 334 TRIMS, 264 TRIPS, 265, 266 United States, 247, 260 vertical restraints, 268 Working Group, 38-9, 146-7, 159, 247, 260, 272, 297

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European Competition Law Annual 2002 (European Competition Law Annual)

European Competition Law Annual 2005: The Interaction between Competition Law and Intellectual Property Law (European Competition Law Annual)

European Competition Law Annual, 2004: The Relationship Between Competition Law and the (Liberal) Professions (European Competition Law Annual)

European Competition Law Annual 1998: Regulating Communications Markets (European Competition Law Annual)

European Competition Law Annual 2006: Enforcement of Prohibition of Cartels

European Competition Law Annual 2000: The Modernisation of EU Competition Law

The Evolution of European Competition Law: Whose Regulation, Which Competition?

Experiments and Competition Policy

European Competition Law: A Practitioner's Guide

The International Dimension of EU Competition Law and Policy (Antitrust and Competition Law)

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Economics and the Enforcement of European Competition Law

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Cases in European Competition Policy: The Economic Analysis

Model Law on Competition: Substantive Possible Elements for a Competition Law, Commentaries and Alternative Approaches in Existing Legislations (Unctad Series on Issues in Competition Law and Policy)

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[Novelette] Competition

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European Competition Law Annual 1997: Objectives of Competition Policy

European Competition Law Annual 2002 (European Competition Law Annual)

European Competition Law Annual 2005: The Interaction between Competition Law and Intellectual Property Law (European Competition Law Annual)

European Competition Law Annual, 2004: The Relationship Between Competition Law and the (Liberal) Professions (European Competition Law Annual)

European Competition Law Annual 1998: Regulating Communications Markets (European Competition Law Annual)

European Competition Law Annual 2006: Enforcement of Prohibition of Cartels

European Competition Law Annual 2000: The Modernisation of EU Competition Law

The Evolution of European Competition Law: Whose Regulation, Which Competition?

Experiments and Competition Policy

European Competition Law: A Practitioner's Guide

The International Dimension of EU Competition Law and Policy (Antitrust and Competition Law)

A Principled Approach to Abuse of Dominance in European Competition Law (Antitrust and Competition Law)

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Economics and the Enforcement of European Competition Law

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Competition Policy and Law in China, Hong Kong and Taiwan

Competition Law and Policy in the EC and UK

Cases in European Competition Policy: The Economic Analysis

Model Law on Competition: Substantive Possible Elements for a Competition Law, Commentaries and Alternative Approaches in Existing Legislations (Unctad Series on Issues in Competition Law and Policy)

A Guide to United Kingdom and European Union Competition Policy

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Industrial Organisation: Competition, Strategy, Policy, 2nd Edition

Competition Policy: A Game-Theoretic Perspective

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Competition Policy for Small Market Economies

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