PROPOSALS FOR REFORM OF EU COMPETITION POLICY
Section 1: Introduction
A new strategic goal was set for the European Union by the Lisbon European Council in March 2000 - to "become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion."
This aspiration cannot be pursued, let alone realised, unless competition has space to flourish. With profound changes taking place in the economic environment, EU competition policy needs to be adjusted so that it can operate effectively in the context of today's and tomorrow's markets.
The European Round Table of Industrialists (ERT) is putting forward suggestions for that adjustment in this paper. These suggestions reflect the experiences of ERT Members and the companies they lead. Most operate not only within Europe but also on a global scale. The Commission's initiative to engage European industry in discussions on the modernisation of EU competition law is most welcome. A common understanding of the basics between industry and the Commission is essential if progress towards the Lisbon goal is to be made.
The Commission's review comes at a time when the market dynamics on which current legislation is based are being fundamentally changed by globalisation and rapid technological development. The approach adopted in the present paper is essentially pragmatic, since the changes are economic rather than legal. ERT believes that the efficient and fair application of appropriate competition policy and law is necessary to European competitiveness and the conduct of business in general. It also believes that law and practice must take account of real world markets as they change. The uncertainty, delay and expense caused by inappropriate policies can reduce competitiveness and even damage companies.
In this paper ERT focuses on three broad issues:
°
a new approach to the analysis of competition, in particular the criteria for defining markets in relation both to geography and to products (including services); ° measures to enhance the predictability of competition processes generally and in the context of the new decentralised application of competition law; ° review of various national systems and more international co-operation so that European companies enjoy a more equal treatment around the world. ERT favours enlargement of DG Competition's staff. The improvements requested and the speedy execution of the growing case-load make such an enlargement vital.
Section 2: Reflecting Economic Reality
Market definition is an essential element in all cases under EU competition law, whether they concern restrictive agreements, alleged abuse of market dominance or mergers.
ERT urges the Commission to review its criteria and economic concepts on relevant geographical and product markets. These need to take account of the new driving forces behind competition in EU markets - globalisation, technological change and market dynamism. Past experience should not be the main foundation for deciding competition cases. EU competition policy needs to reflect the new market realities faced by European industry.
2.1. Globalisation and the geographical definition of competition
Where scale matters, EU corporate strategy is being formulated in a completely new situation. Globalisation:
°
creates larger markets with much greater market volumes ? larger markets increase the "optimum size" of companies ? larger optimum sizes mean that EU companies have to grow in size if they are to reap the benefits of scale economies in global markets ("market-pull"); ° intensifies competition in all regional markets (for example, within the EU) by lowering barriers to entry, so increasing the number of current and potential competitors ("competition-push"). ° improves efficiencies in European economies provided EU industry can restructure ("efficiency-push"); Scale, therefore, is the key for many EU companies to maintain global competitiveness. The combined market-pull and competition-push of globalisation forces EU companies to grow in size both organically and through acquisitions/mergers in order to achieve new efficiencies. Efficiencies through scale and increased competition are also decisive in ensuring that the benefits of globalising markets are passed on to EU consumers.
The positive impact of globalisation on competition in EU markets results from the virtual disappearance of international interaction costs. For example, recent studies show transport costs running at less than 10% of the levels in the early 1950s. Massive reductions have also occurred in the cost of raising capital and in the cost of diffusing information and technology across regions, so creating new competitors throughout the world. Globalisation is converting "closed" markets within the EU into markets open to actual and potential competitors from other world regions. Combined with large differences in other costs between the EU and elsewhere, the danger that mergers or agreements among EU companies can establish "single" or "collective" market dominance is much reduced.
Online marketplaces also make markets bigger. They dismantle barriers to entry by allowing supply and demand to be matched worldwide. In value, Business-to-Business e-markets (B2B) exceed Business-to-Consumer e-markets (B2C) by 10:1, but both types are growing fast. It is estimated that the value of B2B transactions will amount to $7.3 trillion worldwide by the year 2004. This has a huge potential to affect markets. It should be reflected in the competition law definition of the relevant geographical market.
2.2. Technological change and market dynamism
Rapid technological progress affects many traditional industries as profoundly as it does the "new" ones. At the same time, perpetual change in buying habits accelerates the pace of demand substitution. These dynamics make reliable forecasting of relevant product markets very difficult in traditional and new industries alike.
New technology sectors
Supply and demand are constantly moving in the markets where high technology industries are active. Technical and technological changes not only lead to new products, they also change demand and supply patterns, quickly and radically.
This raises new questions for competition authorities when defining relevant markets. For example, in the telecommunications market, customer demand patterns quickly follow changes in life-style, such as higher mobility, and developments in the field of content, software applications and the Internet. Telecommunications service providers adapt by introducing higher bit-rate technologies in transport and access networks, and customising their services portfolio. Internet and e-commerce platforms also increase demand-substitutability by drawing the customer's attention to many more interchangeable products.
The liberalisation of telecommunications markets in the 1990s resulted in supply-side substitution. Basic telecommunications services have become commodities. Rather than providing single services, telecommunications companies increasingly provide complex service packages, adapted to the changing needs of different customer groups, or even of single corporate customers. Given the difficulty of assessing the substitutability of different packages that are individually priced and configured, supply-side substitution should play a more prominent role.
Electronic marketplaces change the way that products are placed on the market and enable enterprises to lower their transaction costs. In time, expensive supply chains will become obsolete. E-business lowers barriers to entry and raises the number of current and potential suppliers. Again, supply-side substitution is fundamentally changing the way traditional markets work.
In dynamic markets, any attempt at market definition has to be seen as highly speculative. Neither the market players nor the competition authorities can be sure which factors will exert an influence. Future developments are equally unclear in relation to market demand, substitutability, price evolution and market structures. In the past, the Commission's market definition forecasts have been off-track on several occasions.
Rapid changes in "traditional industries"
Similar dynamics are changing markets in many traditional industries, and at a rate faster than can be evaluated from knowledge available at present. It is virtually impossible to forecast either supply-side or demand-substitution effects even over short periods.
The fund of scientific information doubles roughly every five years in some traditional industries, such as chemicals and electrical goods. Twenty years hence, it is expected to double within a year. Even in traditional "low-tech" industries, the fund of new knowledge makes most technologies obsolete within five to seven years. This means that traditional industries advancing faster than the average could experience a complete change of technology within the three to five year period applied in merger cases as the relevant assessment period.
Nor is this pace of change confined to new technologies. Product substitution can be misjudged by all parties. For example, in the case of de Havilland, the Commission defined the relevant product market as the market for turbo-prop aircraft for regional commuter traffic. The substitutability of jets was seen as ineffective. Yet now 80 percent of the regional commuter market is served by jets.
Consumer goods industries are undergoing an accelerating diversification of demand and substitution through increased consumer choice and shifting consumer habits. To this must be added that the role of "brand power", which in certain consumer goods industries is often considered by competition authorities as providing the base for raising barriers to entry, if not market dominance, is also changing.
2.3. Drawing on the US experience of substantive competitive analysis
The US approach to competition analysis looks at the real impact of mergers/acquisitions on consumers, including supply-side analysis, with consideration of efficiency improvements and less emphasis on market share figures than in EU practice. Such figures often rely too heavily on market definitions that are necessarily imprecise, as already seen.
Historically, EU law has been enforced with the primary goal of creating and safeguarding a common European market in which companies can trade across national borders without hindrance. That goal can now be adjusted in the light of significant de facto integration of the EU market, globalisation and the introduction of the single currency. The Commission is aware of this, but there is scope to develop its position further.
The US approach tends to be driven by consideration of whether a given merger or practice leads to lower prices and/or better quality for consumers. It therefore takes into account demand- and supply-side product substitution, and evaluates any efficiency improvement that is likely to be passed on to the customer. By contrast, the EU focus is narrower and tends to lead to the wider, global context within which many companies operate being discounted. The EU should consider emulating the US more fully in this respect.
2.4. Conclusions for the analysis of the relevant markets
Product market. Defining a relevant product/service market is already difficult, and it will become more difficult in future. ERT makes four proposals:
°
balanced use of the means that are in fact available in the EU Notice on the Definition of the Relevant Market. Market shares defined by demand-side substitutability may be useful initially to decide whether or not to start a procedure, but supply-side substitution and potential competition should play a more prominent role in market definition. They have the same disciplinary effect on competitive behaviour as demand substitution. ° extension of the presently too limited time horizon used to forecast competitive market structures/processes in cases involving dynamic industries. ° inclusion of new economic concepts, such as the theory of contestable markets and efficiency considerations, in the Commission's analysis of cases where dynamism prevents clear-cut market definitions and forecasts are growing more and more uncertain. ° ex-post analysis by the Commission of its forecasts of competitive market structures in past cases where it made a negative decision on a merger or agreement. The exercise would rationalise discussion of the issues, and comparing these forecasts with outcomes would be instructive. Geographical market. Global market analysis is needed in competition cases because European business is confronted by global competitive pressures. A narrow definition of EU markets - or, even less realistically, of national markets - places European companies that have to invest and compete in global markets in a straitjacket. The Commission seems uncomfortable with the concept of "world markets" in ordinary cases, though easy enough with the same concept when deciding negatively on highly publicised global mega-mergers.
ERT proposes a two-step change in the Commission's approach:
° more readiness to define the world market as the relevant geographical market in case-by-case analysis. In all cases, it should pay more attention to potential, as well as actual, competition from the rest of the world and examine barriers to entry from a worldwide perspective. Such a reform could be incorporated in the Commission's Guidance Note on Market Definition. ° a priori selection of the world market as the relevant geographical market where a merger is taking place in a fully or partly globalised industry, as indicated by recent economic analysis. The Commission is invited to develop a coherent substantive economic concept from which the impact of globalisation on its competition policy could be rationalised and made accessible to European companies. It is in an excellent position to integrate this new analysis into its competition policy, since:
a) It is already aware of the need to consider the impact of globalisation on the definition of the relevant geographical market. b) It already takes an industry-by-industry approach to define markets. c) It has already identified certain industries where the world market has been defined as the relevant geographical market. "Collective" dominance. The Commission should be careful in using the legal concept of "collective" dominance. In those EU markets where competition is determined by globalisation and rapid technological change, "collective" dominance is impossible: globalisation and rapid technological change are at odds with many preconditions for "collective" dominance. Additionally, in industries where fundamental changes are taking place, past competitive behaviour cannot be indicative of future situations.
ERT, therefore, invites the Commission - which is presently developing its "check-list" for "collective" dominance - to define assessment criteria that appropriately reflect the impact of global competition, technological change and market dynamism on the concept of "collective" dominance, taking into account that the aim of competition law and policy is to protect competition, not competitors.
Section 3: Accountability and Predictability
3.1. Industry needs an Economics-based Interpretation of Competition Law
Big investments call for an understanding of risk: the higher the risk, the less likely the investment. Scale is the key to competitiveness in a growing number of industries and calls for globalisation. At the same time, the rate of change in technology makes periods of amortisation shorter and shorter. Scale investments involving new technology therefore require investment-sharing partnerships to be formed more and more often. In many cases, they also require international agreements on standards for new technologies. In risk analysis, however, efficiency and consistency in the application of competition law is almost as important as the content of what is applied.
It is in the interest of the European economy that European companies should be encouraged to make these investments and to do so as early as possible in the lifetime of the technology. The effects on competition have to be evaluated on the basis of an economic analysis that will be applied predictably during the amortisation period. Yet all these issues can raise serious problems with existing competition authority thinking.
ERT has noted that the wide-ranging project outlined in the White Paper on Modernisation aims to foster a more economics-oriented application of EU competition law. More specifically, the introduction of wider and less form-based regulations providing "safe harbours" for vertical agreements, R&D; co-operation and specialisation was an important positive step. ERT proposes complementing this with a more realistic approach to defining relevant markets. The Modernisation White Paper also proposes inclusion of co-operative production joint ventures in the Merger Control Regulation procedure.
In the new Guidelines on Horizontal Agreements, the Commission has an opportunity to clearly say that - but for hard core restrictive agreements - competition problems as a rule do not arise in cases where none of the parties to the agreement clearly possesses structural market-power in one or more relevant markets. The Commission should specifically take into account the competitive pressures flowing from the dynamics of the markets concerned.
3.2. Accountability
European industry is concerned about the fact that in EU competition policy the Commission is both prosecutor and judge. The appeal procedure can be very long and only provide a marginal assessment of the economic and substantive analysis underpinning the Commission's decision. Often, the analysis in effect goes unchallenged.
Institutional changes should be introduced to make the decision process more accountable. The following options could be considered:
° giving a member of the Court of First Instance responsibility for the conduct of investigations and hearings, including procedural issues; ° setting up different units within the Commission with different responsibilities; ° revising the role and power of the Court of First Instance, which could also decide on the merits of the case; ° examination of decisions that develop new principles of competition law by the Court before they take effect (ERT endorses UNICE's suggestion to this effect). Merger cases raise a specific problem where approval is conditional on the parties giving undertakings as to disposals or future conduct or both. These undertakings are given under pressure, with the Commission saying that it will refuse clearance unless satisfactory promises are made. Companies have no means of challenging the Commission or questioning the need for the undertakings. This situation needs to be rectified.
ERT proposes a procedure for part-clearance. Article 7 of the Regulation could be amended to allow for clearance in Phase I while reserving contentious issues for Phase II. This would be useful where the contentious aspects are not crucial to the transaction but are sufficiently important for the parties not to want to give undertakings in a hurry. Also, companies could be given the right to apply to the Court for an order allowing the merger to proceed while suspending their obligation to perform the undertakings pending appeal.
3.3. Predictability and the Modernisation Process
The White Paper on Modernisation proposes that the risk of an agreement being ruled contrary to Article 81 should be a matter for self-assessment by enterprises. While ERT agrees on the need for a more economics-based interpretation of the cartel prohibition and the corresponding assignment of risk analysis to the enterprises involved, it believes that the system proposed in the White Paper will accentuate inconsistency, lack of transparency and unpredictability, in particular because of the wider application of competition law by national entities.
By way of resum�, a completely new interpretation of Article 81 of the Treaty would treat Article 81.3 as a "legal exception" to the general prohibition in Article 81.1. This exception could be evaluated by any institution with power to apply EU competition law, i.e. the Commission, a national competition authority (NCA) or a national judge. The new system would rely primarily on ex post controls. The current system of notification for exemption of individual agreements would be abolished, although "safe harbours" for certain types of agreements would remain available for agreements between enterprises below specified market share thresholds. In principle, ERT supports the replacement of the present notification system by self-assessment in a legal exception system.
Business is however seriously concerned that this new system as now proposed will not improve on the present enforcement of EU competition law. The proposals are insufficient to prevent the application of EU competition law from becoming fragmented by different bodies applying their own interpretations. The proposals need to be supplemented by at least four essential requirements:
° a facility whereby EU-wide legal certainty could be achieved for certain agreements ex ante - for example, those that involve substantial investment or risk, a novel issue of law, new or rapidly evolving markets, or multiple jurisdictions; ° speedy, transparent and consistent decision-making through a "one-stop shop"; ° clear primacy of all aspects of EU competition law over national competition law; ° straightforward procedures, imposing the lightest possible regulatory burden consistent with the need to maintain competitive conditions. ERT, like UNICE, has serious doubts whether civil courts should have any power other than to give preliminary interlocutory decisions on the applicability of the EU cartel prohibition.
The Commission's proposals to keep responsibility for policy formation appear both cumbersome and inadequate. Reserving for itself the right to take over cases having a "Community dimension", publishing non-binding written opinions when it considers it appropriate to do so, issuing explanatory guidelines and giving guidance to national authorities and courts, possibly through some form of amicus curiae approach, would seem a less effective way of ensuring consistency than a centralised system of appeals to the ECJ.
It is essential that, as suggested by UNICE, the Commission or the best placed NCA should be able to issue reasoned opinions ex ante in important cases (involving new issues, major investments, or potential challenges in a plurality of EU jurisdictions), comparable at the very least to the present comfort letters and having effect in relation to all interested parties. Where controls are predominantly ex post, it is important that investments, the transfer or licensing of know-how and similar actions are not declared illegal merely because of market developments outside the control of the parties involved.
3.4. Modernisation, protection of the rights of the defence and confidentiality
The Commission recognises the need for its Network with National Competition Authorities to be in constant communication and to co-ordinate their positions with a view to securing consistency of approach. Inevitably, this may involve the exchange of commercially confidential information among the authorities of the EU Member States. Increased circulation increases the risk of disclosure and so reduces the commercial incentive to disclose or even record and submit relevant information.
The incentive to conduct oneself within the rules should be preserved. Confidential information must be properly protected before it can be exchanged. Full confidential information exchange between the Member States is inherent in the Commission's proposals. This makes no sense without a concomitant ability of in-house counsel, when subject to adequate rules of ethical conduct, to claim the benefit of privilege for attorney-client communications for the purpose of providing advice.
While increasing the Commission's investigating powers, the Council and the Commission should not forget to protect defence rights. The increase to investigating powers must be associated with appropriate procedural safeguards, and subject to control by the judicial system. As an example, the proposed right of the Commission to record the statements of any natural person must be associated with tangible safeguards, such as sufficient notice and mandatory presence of an in-house or external lawyer.
Section 4: EU / US Regulatory Approaches and International Co-operation
Based on its members' experience of competition law in other jurisdictions, ERT suggests that the US and other models might supply ideas for tackling problems in the application of EU law outlined above. ERT also supports moves that would lead to a more even treatment of companies across jurisdictions through common approaches to anti-competitive practices, wider co-operation between competition authorities and harmonisation of procedures - always provided that the confidentiality of sensitive business information is preserved.
4.1. EU / US regulatory approaches
A comparison of the EU and US systems gives a mixed picture. The EU wins with its merger control procedures, its certainty in deadlines and the broad-based system of "safe harbours" for specific types of agreement. The US wins with its effects-based approach to competition analysis and the "business review letter" that can give companies a degree of legal security.
The advantage of adopting a more US-style competition analysis has already been discussed (Section 2 above). As for the "business review letter" procedure, which allows companies to request a "reasoned opinion" from the US authorities, the Commission seems inclined to respond positively to requests for assurances. It would be useful if it did so, particularly in view of the new market dynamics.
The US antitrust enforcement system also suggests some solutions to the accountability problems that beset the European system. The problems are mainly due to the lack of judicial remedies in the EU, with national courts reluctant to enforce EU competition law effectively and the European Court taking so long to rule on references to it that the remedy is worthless by the time it is granted. Judicial remedies are essential to the realisation of a more efficient, consistent and realistic application of competition law throughout Europe. The absence of appropriate and effective appeal procedures can make the EU situation highly disadvantageous to business, as in the case of "collective" dominance.
Despite this, however, ERT would not wish to see the adoption of US-style litigation as part of the competition law machinery. The enforcement of competition law should be secured primarily by competition authorities subject to legal control.
The US experience points to the necessity for uniform procedures and precise timing and deadlines both within the EU and internationally. The EU should call upon the US regulatory authorities for greater alignment of these, particularly in the timetables for merger procedures. These tend to be very different in practice. Further, transparency in US proceedings should be increased to avoid any feeling of discrimination against EU companies.
4.2. International Co-operation
International agreements and merger and acquisition activities are expected to increase in size and volume. This raises the question of how to deal with them in the most effective way where many laws and jurisdictions are involved.
ERT supports the activities within OECD and UNCTAD that are aimed at developing criteria for common approaches to anti-competitive practices and for wider international co-operation. However, these discussions are complicated and highly time-consuming.
ERT therefore welcomes the proposal that the Global Competition Initiative should again be taken up. It was supported by Joel Klein (US Department of Justice) and Commissioner Monti at the recent EU Merger Control Conference (14/15 September 2000).
The Initiative should, first, develop the exchange of information and views between competition authorities and, second, explore opportunities for enhanced co-operation. The Initiative could include interested jurisdictions (such as the EU and the US), and also the OECD, WTO, UNCTAD, World Bank and a representative world business organisation such as the ICC. Further exploration of the proposal would be warranted as business will increasingly be faced with inconsistencies between the regulation, criteria and procedures of individual jurisdictions.
While welcoming the Initiative, ERT would point out that:
° uncertainty in competition issues for business could be diminished if relevant regulatory bodies worldwide would voluntarily agree on common procedures for filing requirements, timetables on decision-making, etc. This would be an important first step. ° in the area of exchange of information, confidentiality of sensitive business information must always be preserved. But for hard-core cartel cases on the basis of a specific prior court authorisation, such an exchange of information should only take place on the basis of prior notice and consent by the company concerned. ERT would welcome an opportunity to discuss this issue further with the Commission.
Summary and Recommendations
In brief, ERT sees globalisation, rapid technological change and market dynamism intensifying competition in EU markets and world-wide. ERT asks the Commission to adjust the economic concepts of its competition policy to ensure that the application of EU competition law does not concentrate on assessing past market structures, but reflects more than before the dynamics of European industries.
ERT therefore invites the Commission to consider the following proposals for change in EU competition policy:
Definition of the Relevant Market
Product/service markets
° Give developing supply-side substitution and potential competition a more prominent role in market definition. ° Extend the time horizon of market forecasts in merger cases involving dynamic markets. ° Incorporate new economic concepts (e.g. contestable market theory, efficiency considerations) in competition analysis of dynamic markets. ° Compare market forecasts in past cases that resulted in a negative decision with the actual market outcomes. Geographical markets
° Be more ready to take the world market as the relevant geographical market in case-by-case analysis, with emphasis on the effects of potential competition from the rest of the world. ° Select the world market a priori as the relevant market when assessing fully or partly globalised industries. ° Develop and state a coherent substantive economic concept that explains the EU approach to global markets. "Collective" dominance
° Define criteria reflecting the impact of globalisation, technological change and market dynamism on the concept of "collective" dominance. Accountability and Predictability
Accountability
Introduce:
° a modification to the mechanisms of appeal and summary decisions against the Commission's decisions, that would ensure Court decisions are effectively taken in a reasonable timeframe, especially in the case of mergers. ° a procedure that would allow for part clearance of mergers, to avoid a freeze of the whole merger when only some product or geographical markets are contentious. Predictability
Five components are essential in any modernisation proposal:
° A facility for giving reasoned ex ante opinions on agreements where legal uncertainty is most acute (e.g. those that involve a big investment or risk, a novel issue of law, new or rapidly evolving markets, or multiple jurisdictions). ° Speedy, transparent and consistent decision-making through a one-stop shop. ° Clear primacy of EU over national competition law. ° Straightforward procedures and a light regulatory touch. ° Due process and judicial remedies in competition procedures, preferably involving a centralised system of review by the European Court. Learning from other countries and international co-operation
From the US model, the EU should adopt:
° The US approach to competition analysis. ° The "business review letter" system. Internationally, ERT calls for
° Bilateral alignment of timetables, deadlines and procedural requirements as a first step. ° International formulation of common approaches to anti-competitive practices and procedural matters. ° Further discussion of the Global Competition Initiative. Confidentiality
All international and EU exchanges of confidential business information must guarantee:
° Preservation of confidentiality. ° Prior notification and consent of the party concerned. ° Protection of attorney-client communications where in-house counsel advise on competition matters.
December 2000