4 tenants of the EU competition policy and its influence on American business in Europe

European Community competition law is one of the areas of authority of the European Union, regulating the balance of market power use by large companies, governments or other economic entities. In the European Union (EU), it is considered as extremely important part of ensuring the fair completion European market with free flow of working people, goods, services and capital in a borderless Europe among the participating states with non-uniform economic power and local business laws (Wikipedia, 2008).

There are four major areas of the competition policy to be distinguished (Buthe, 2005):

1.      Antitrust Enforcement, including the enforcement of prohibition against cartels and the abuse of market dominance (monopolies, oligopolies).

2.      Merger Review and Control.

3.      State-owned enterprises and special relationship between states and firms, such as government-granted monopolies for postal delivery, IT service provisions, etc.

4.      State Aids, public subsidies to private and public firms, including direct loans and grants, targeted tax breaks, and preferential goods, services, and financing, available at special rates and conditions.

Antitrust Enforcement

Article 82 of the Treaty establishing the European Community is providing legal regulation aimed to prevent companies holding dominant positions to use their prevailing status in order to abuse the smaller rivals. It is stated in the article, that "any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States" (Wikipedia, 2008). The two of the major points, included in this category are as follows:

�  Directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions, as stated in the Article 82(2)a. For example, exploitation of market power by charging high prices can be considered an abusive policy, if it can be proven that the high prices have no direct relation to the real economic value of the product. Or, pricing the products significantly below average variable costs can be considered predatory with direct intention to eliminate competitors (OECD, 2005).

�  Limiting production, markets or technical development to the prejudice of consumers is prohibited by Article 82(2)b. The described violation of the free competition in EU is related to the practice of artificially restricting business operations in order to create indirect, but unfair advantage to one of the business player on the market.

Example: Case C-179/90: Merci convenzionali porto di Genova SpA v Siderurgica Gabrielli SpA. Granted monopoly to perform dock work to Porto di Genova lead to demand additional payment for services which have not been requested, charging disproportionate prices, refusing to apply modern technology or to grant price reductions to certain consumers and offsetting such reductions by an increase in the charges to other consumers (Colling, 2005).

Merger Review and Control

European Community merger law, enacted under Merger Regulation 139/2004 (ECMR) regulates which firms can merge with one another to ensure that firms do not acquire dominant holdings on the free market so as to harm the interests of consumers, the economy and society as a whole (Wikipedia, 2008). The two major points to be reviewed for this category are as follows:

�  The law requires that firms proposing to merge either get pre-approval from the relevant government authority, or face merger reversal if they proceed anyway and the merger is later found to lessen global competition. Merger regulation in most cases involves not only measuring the current effects of merger, but also predicting potential market conditions in the case.

�  The standard guidelines presume that the merger does not violate the effective competition in the related industry, if the newly created entity possesses of no more than 25% overall market share. However, this guideline can be reduced if there is a substantial proof that the new organization can be dominating the market by planned collective cooperation with other firms (OECD, 2005).

Example: Case T-102/96: Gencor Ltd v. Commission. EU Court of First Instance prohibited the merger of Gencor and Lonrho to avoid the establishment of market structures which may create or strengthen a dominant position and not need to control directly possible abuses of dominant positions (Gallego, 1999).

State-owned enterprises

Article 86 of the Treaty regulates the relationship between participating states and businesses and organizations, which were given exclusive rights to establish preferential monopolies on the government-regulated economic sectors, like state security, postal services, etc. The key points of this article are (Buthe, 2005):

�  Article 86(1) requires member states of the EU to comply with all regulations of the EC competition law in the processes of creation, handling, and monitoring of "public undertakings and undertakings to which Member States grant special and exclusive rights". However, there is a disclaimer that regulation can be enacted only in the cases, when the reviewed operations of services can be considered as being of general economic interest or having a character of revenue-generating monopoly.

�  Article 86(3) delegates the special rights to the Commission to issue directives to member states to ensure their compliance.

Example: Case C-429/99: Commission v. Portugal. Commission prohibited establishing government monopoly granted to Portugal Telecom in respect to the "call-back" system, claiming that the "call-back" system should be a subject for competition, waiving Portugal protests on grounds that virtual telephony liberalization might jeopardize the financial stability of the public operator and hinder tariffs adjustments (Cullen, 2003).

State Aids

A company which receives government support obtains a competitive advantage over its rivals. Therefore, the Articles 87 to 89 of the Treaty generally prohibit State aid unless it is justified by reasons of general economic development, specified as accepted exclusions from the generic legal guidelines. The key points of this concept are as follows (Buthe, 2005):

�  Article 87(1) prohibits "any aid granted by a Member State or thorough State resources in any form whatsoever which distorts or threatens to distort competition". Article 88 provides the Commission a proper authority to enforce the prohibition.

�  Several supplementary articles specify accepted exemptions to this regulation. For example, Article 87(2) secures special exemption for aid having a social character and damage relief after natural disasters and other "exceptional occurrences", and Article 87(3) provides exemptions for special cases of economic development, for culture and heritage conservation, or in the general interest of the European Community.

Example: C 51 / 2006 - Misuse of aid by Arcelor Huta Warszawa. Commission did not find a national restructuring program for the Polish steel industry to be a valid justification to grant Polish steel producer Huta Lucchini Warszawa around 50 million euro of state aid and ordered to repay the aid to the Polish government (AP, 2006).

American businesses, looking to establish and widen their marketing positions in the countries being members of EU, should investigate in depth the similarities and the differences between the US and EU competition laws, since automatically applying the USA processes and procedures might lead to the unforeseeable complications.

There is a lot in common between competition laws in the USA and in the EU. However, out of different histories and different concerns, significant variations in law, policy, and enforcement approaches become apparent. In the EU, economic integration of the different members of the community is considered as a main objective of the competition policy, practically articulated by free movement of goods and people across members state borders, while the core principles of the US competition policy is based on the more economically-elaborated analysis, supported by the US Constitution (Fox, 1997).

For example, in the subject of abuse of dominance, the EU competition law is applying frequently and effectively ban of a dominant firm conduct, based on excessive pricing prohibition according to the Article 82, while the US antitrust laws have no comparable equivalent to this provision. Also, the general attitude toward dominant firm conduct interpretation in the USA is significantly more favorable to the objects of investigation, than in the EU. Applying a quantitative approach to the policies comparison, market dominance in the US is defined substantial for the companies that are possession of 50% and more of the general market share, while this percentage is considered decisive for the levels of 40%, or even slightly lower in some cases, in the EU (Kovacic, 2008).

Comparing the USA and EU policies, economists often say, that while the USA protects the spirit and legal guidelines of competition, the EU competition law protects the process participants � the competitors. This dissimilar approach creates the concern, that there is an on/off switch for efficiencies when it comes to dominant firms. While efficiencies are good in the hands of ordinary firms, the critics say, regulations do not allow dominant firms to become more efficient because they will become even more dominant on the market. In its most extreme form, as it was observed in the case of the GE/Honeywell merger, this view can lead to the conclusion that these mergers should not be allowed that enable dominant firms to become more efficient because they may use those efficiencies to drive rivals from the market, after which they will be able to raise price and harm consumers (Kolasky, 2002).

Historical comparison revealed that the vast majority of the prosecution cases in the EU have been significantly less technical than in the USA. The European Commission and the Court readily presume dominance and increases in dominance without the elaborated factual record and proof, which might be required in the United States (Kovacic, 2008). Therefore, the American company planning a critical move on the European market should be over-cautious to foresee the possible complications with the EU commission prosecution, even thou the planned steps and related outcomes are considered completely legitimate according to the established US guidelines. 

References

Associated Press (2006, December 6). EU regulators launch probe into state aid given to Arcelor's Polish subsidiary. Retrieved August 28, 2008, from http://www.iht.com/articles/ap/2006/12/06/business/EU_FIN_EU_Poland_Steel.php

Buthe, T. (2005, September 16). The policies of competition in European Union: The first 50 years. Retrieved August 26, 2008, from http://www.princeton.edu/~smeunier/Buthe%20Memo.pdf

Colling, M. (2005). Development of policy, legislation, and programs in the EU port sector. Retrieved August 27, 2008, from http://www.euromedtransport.org/fileadmin/download/maincontract/ts2/ts2_portreform_colling_eu_summary_day1.pdf

Cullen International (2003, January). Guide to the case law of the European Court of Justice in the field of Telecommunications. Retrieved August 28, 2008, from http://www.cullen-international.com/documents/cullen/exdocs/xd3397.pdf

Daniels, J.D., Radebaugh, L.H., & Sullivan, D.P. (2001). Globalization and Business. New York: Prentice Hall. Chs. 7-8, pp. 148-200.

Fox, E. (1997, December). US and EU competition law: A comparison. Retrieved August 30, 2008, from http://www.iie.com/publications/chapters_preview/56/10ie1664.pdf

Gallego, M. (1999, March 25). The concentration between Gencor and Lonrho is incompatible with the common market. Retrieved August 27, 2008, from http://curia.europa.eu/en/actu/communiques/cp99/cp9921en.htm

Kolasky, W.J (2002, April 10). United States and European competition policy: are there more differences than we care to admit? Retrieved August 31, 2008, from http://www.usdoj.gov/atr/public/speeches/10999.pdf

Kovacic, W.E. (2008, June 2). Competition policy in the European Union and the United States: Convergence or Divergence? Retrieved August 31, 2008, from http://www.ftc.gov/speeches/kovacic/080602bateswhite.pdf

Organization for Economic Cooperation and Development (2005). European Commission � Peer review of competition law and policy. Retrieved August 27, 2008, from http://www.oecd.org/dataoecd/7/41/35908641.pdf

Wikipedia (2008). Article 82 of the Treaty establishing the European Community. Retrieved August 27, 2008, from http://en.wikipedia.org/wiki/Article_82

Wikipedia (2008). European Community competition law. Retrieved August 26, 2008, from http://en.wikipedia.org/wiki/European_Community_competition_law

Wikipedia (2008). European Community merger law. Retrieved August 27, 2008, from http://en.wikipedia.org/wiki/European_Community_merger_law