Competition Policy In The European Union

You know what....y'all want to know my thoughts..........well here they are.....one of the nerdier ones....

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The evolution of Competition Policy in the European Union (EU) is a direct result of a basic requirement to create a European single market. This basic requirement came as a result of the impact of 19th century Industrialization. The impact resulted in the need for greater productivity in less time, with increased efficiency to sustain economic growth. The marriage of invention with new technology created a new standard of living in a society that would come to expect for this standard of living to be maintained at all costs. European businesses, whether privately-owned or state-owned, were experiencing unprecedented growth with diversified revenue streams. As competition increased, European businesses were willing to adopt a “By Any Means Necessary” approach to sustain economic growth. An effective Competition Policy would need to be developed to prevent businesses from getting out of control in their zeal for sustained economic growth.

Competition Policy is “the application of established rules to make sure that companies compete with each other and, in order to sell their products, innovate and offer good prices to consumers.” The formal study of ‘competition’ dates back to the Enlightenment and the work of Adam Smith. The work that he is most known for, “An Inquiry into the Nature and Causes of the Wealth of Nations” is the prominent dissertation on the political economy at the onset of the Industrial Revolution, and is generally considered to be the first contemporary work in the field of economics. The work is also the first all-inclusive justification of free market policies.

“When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay the whole value of the rent, wages, and profit, which must be paid in order to bring it thither, cannot be supplied with the quantity which they want. Rather than want it altogether, some of them will be willing to give more. A competition will immediately begin among them, and the market price will rise more or less above the natural price, according as either the greatness of the deficiency, or the wealth and wanton luxury of the competitors, happen to animate more or less the eagerness of the competition.”

This primary source quote outlines a portion of Smith’s “invisible hand” theory that deals specifically with competition. The “invisible hand” theory states that if each consumer is permitted to decide without restraint exactly what to purchase, and each manufacturer is permitted to decide freely what to retail and how to manufacture it, the market will reconcile on a product distribution, and the cost that is beneficial to the all individual members of a society, and hence to the society as a whole. In the quote, Smith refers to the concept of competition as the means to reconcile the market price of a product that falls short of the demand. Smith’s ideas would provide the economic foundation of the common market. This foundation is important because the Single market is defined as a refined incarnation of the common market that provides for additional emphasis on removing the impediments that inhibit the member states such as the tangible (i.e., “borders”), procedural (i.e., “standards”) and financial (specifically, taxes). The definition of the Single market falls right in line with the primary objective of the European Union to foster cooperation amongst its member states by developing a common system of law and making member states’ economies completely interdependent.

The formation of the EU began as a calling for unity following World War II. There was a conference in 1948 at The Hague that provided a forum for the discussion of unification. There was still lingering division, but The Council of Europe was formed as a compromise to those in attendance. The Council still exists today as a means to defend human rights and to arbitrate any complaints against its member states, but falls short in establishing “stronger transnational institutions” that are vital to ensure proper European integration amongst its member states. Two French leaders would solve this problem by creating an institution had the same vision of an integrated Europe, but started with modest beginnings that would evolve from that point.

The EU that we know today started as the French-German Coal and Steel Authority in 1950. It would evolve into the European Coal and Steel Community (ECSC) in 1951 (documented by the ECSC Treaty) inspired by the inclusion of Italy, Belgium, Luxemburg, and the Netherlands. This would be the creation of the first common market in Europe as it was charged with coordinating the production and distribution of coal and steel. In 1957, the Treaty of Rome would bring about additional evolution and the ECSC would go on to create EURATOM to develop atomic energy and the European Economic Community (EEC) (also known as "the Common Market") to work towards abolishing tariffs between one another. The European Community (EC) formed in 1967, combining the EEC’s three organizations into one single entity. The abolition of internal tariff barriers would finally be achieved in 1968. The EC would gain considerable traction with the addition of Britain, Ireland, and Denmark. The Single European Act was signed in 1986 to launch a Single European Market by 1992, by removing the barriers to free movement of capital, labor, goods and services.

The foundation of EU competition policy draws from Article 3(f) of the EEC Treaty. This Article sought to guarantee that ‘competition in the Common Market is not distorted.’ The EEC Treaty outlined that this Article would be implemented through ‘rules on competition’, which outlined the EU’s authority to control cartels, monopolies, and oversight of state-aid. They have been expanded to include mergers between corporations and to detail provisions that deal with specific exceptions that have not been previously addressed. But the foundation largely remains intact from the ratification of the EEC Treaty in 1951 to today.

Throughout the evolution of EU competition policy, there are several landmark cases that have upheld the policy’s foundation with the EEC Treaty. These landmark cases cover the four major areas of competition policy: Cartels, Monopolies, Mergers, and State-Aid. The cases have validated European Union competition policy, developed a healthy respect from world leaders for its enforcement measures, and in some cases, provided impetus to make revisions to competition policy.

There is historical significance to beginning our discussion of landmark cases with the Vitamin Cartel breakup of Hoffman-La Roche. Cartels were the first entities to develop out of the Second Industrial Revolution as companies throughout Europe bonded together out of necessity to stay in business. At that time, factories were not receiving enough business to survive, let alone maintain economic growth. These firms would bond together to “monopolize” entire divisions of industry, by colluding to negotiate higher prices for their services and fixing higher prices in the marketplace.

The Vitamin Cartel breakup started when Stanley Adams, Hoffman-La Roche's World Product Manager in Basel, initiated contact with the EEC in 1973 with proof that Hoffman-La Roche had been violating antitrust laws, engaging in price fixing, and market sharing with its competitors. Hoffman-La Roche was fined appropriately, but the EEC botched the investigation by permitting Hoffman-La Roche to discover that Adams was behind the EEC investigation. He was subsequently arrested for illegal disclosure — a crime under Swiss law — and incarcerated. Then from 1990 until 1999, Hoffman-La Roche engaged in an illegal price fixing cartel for vitamins, which also included BASF and Rhone-Poulenc SA. In 1999, Hoffman-La Roche pleaded guilty in the United States and paid a $500 million fine, then the largest fine ever secured in the United States. The European Commission levied against Hoffman-La Roche €462 million for the exact same violation in 2001. The historical significance lies in the fact that these were record fines levied at the time, which drew worldwide attention to competition policy, not limited to EU competition policy.

The landmark case for a monopoly that we will use for this discussion is the Microsoft Antitrust Case. This case is one of the most significant antitrust cases due to amount of the fine and the extensive nature of the case. The case originated with a December 1998 complaint from Sun Microsystems alleging that Microsoft was refusing to supply it with interoperability information critical to interoperate with Microsoft’s PC operating system. Several companies including Novell and RealNetworks would be listed on the formal complaint. Microsoft was able to reach a settlement with these companies, but that did not prevent EU from levying a €497 million on Microsoft in 2003. Microsoft and EU would tangle back and forth through an appeals process that would last until October 2007, when all of the EU’s findings were upheld and Microsoft chose not to file additional appeals.

In 1998, WorldCom completed its $37 billion merger /purchase of its former competitor, MCI Communications. This merger was significant because it was the largest corporate merger in United States history. Immediately, the EU had concerns that the existing company would possess a prevailing position on the "backbone" of the Internet. After significant negotiations, MCI reached an accord to sell some of those data trunk lines to the British firm Cable & Wireless for $625 million. However, that would not enough to dispel concerns that the merged entity would possess too much jurisdiction over the future of the Internet. MCI would cave by agreeing not only to sell all of its Internet business, but also promised not to solicit its past Internet clientele for a predetermined period of time. The EU would later intervene in the combined companies’ proposed merger with Sprint Corporation, which would have been the largest corporate merger in the world, citing monopoly concerns with the combined company. The EU’s actions in this situation proved to the world that its enforcement was a force in the global economy.

The EU has been heavily involved in the regulation of state-aid to commercial industries, and of certain industry divisions and public services. The train system, power or gas serves as examples of public services that are being regulated by the EU. Article 4 of the Treaty of the EC delineates the EU liberalization program that has proved to be critical in easing the barriers that have been in place previously that have inhibited member states economic policy in this case.

So if the foundation of competition policy has not evolved from its inception in 1951, how has competition policy evolved in the EU? The answer lies not in the policy itself, but in the process in which competition policy developed. This process developed from the impact of 19th century Industrialization developing a problem, which was how to keep businesses’ honest in the wake of increasing pressure to maintain economic growth. The problem escalated from a problem to a need for a solution as social, political, and economic challenges that arose from 19th century Industrialization led to several tenures of Imperialism and two World Wars. These conflicts fostered numerous discussions in which a base set of solution requirements was developed in order to foster European integration amongst member states. Then a solution would be implemented in the form of a Treaty, along with initial set of rules and policies that had to be handed down to the member states. Finally, we had implementation, where the competition laws of the member states had to be toughened in order to match up with the policies of the European Union and an organization had to be developed to enforce these policies. This overall process is how competition policy evolved in the European Union from an initial problem to an established policy that is touted as a European success story.

“.... European competition policy is certainly a success story. From humble and highly controversial beginnings it has become a cornerstone of the Commission’s activities. Competition has never commanded such attention among commentators as it does today…”

This quote accurately reflects the conclusion that European Competition policy has evolved into a success story. As we continue to embark into the 21st century, there are challenges that lie ahead and European competition policy will need to maintain its foundation but continue to evolve in order to meet the challenges of a global economy.