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Academic Paper, 2013, 97 Pages
1 Antitrust or Competition Policy: Magna Carta of free enterprise
1.1 Evolution of Antitrust Regime:Antitrust 1.0, Antitrust 2.0 & Antitrust 3.0
1.2 The Great Antitrust Paradigm Shift
1.3 Contemporary Antitrust World
1.4 Aims of Competition Policy
1.5 Pillars of Antitrust Mechanism: The Efficiency Factor & The Fairness Factor
1.6 An Important Task: Create perfect blend of efficiency and fairness
1.7 An Overview of Antitrust Regulation of various countries
1.8 In a Nutshell
2 Global Markets need Global Governance
2.1 Puzzle: Whether there is need for unifying international competition policy ?
2.2 Need for Global Competition Laws
2.3 Enforcement Dilemma: Domestic Policies and Global Market
2.4 Need for Unifying Global Competition Policy
2.5 Need for International Dispute Settlement Mechanism
2.6 In a Nutshell
3 Benefits of unifying Antitrust Regulations
3.1 Transaction Cost
3.2 Ready availability of Expertise
3.3 Maximization of Consumer Welfare
3.4 Maximization of Global Welfare
3.5 Efficient Allocation of World Resources
3.6 Harmonization leads to increment in Productivity
3.7 Collective Efficiency vs. Collective Inefficiency
3.8 In a Nutshell
4 Unifying Competition laws: Areas of Harmonization
4.1 Unifying Substantive Regulations
4.2 Unifying Procedural Aspects
4.3 Unifying Level of Enforcement
4.4 In a Nutshell
5 Limitations of Harmonization
5.1 Political Reasons
5.2 Social Areas
5.3 Other Reasons
5.4 In a Nutshell
6 Conflict Areas
6.1 Conceptual Discord
6.2 National Welfare vs. Global Welfare
6.3 Economic Structure of Countries
6.4 Erosion of National Autonomy
6.5 Intergovernmental Disputes
6.6 Spillover Effects
6.7 Extending beyond Nation’s Jurisdiction
6.8 Enforcement Mechanism
6.9 Jurisdiction conflicts and Confusion
6.10 In a Nutshell
7 Other Modalities of Cooperation
7.1 Unilateral Approach
7.2 Bilateral form of Cooperation
7.3 Mutual Legal Assistance Treaty Agreements (MLATs)
7.4 Multilateral form of Cooperation
7.5 In a Nutshell
8 Various Initiatives
8.1 International Trade Organization (ITO)
8.2 General Agreement of Trade Tariff (GATT)
8.3 Organization for Economic Co-operation and Development (OECD)
8.4 At EU level
8.5 The UN Set
8.6 World Trade Organization (WTO)
8.7 International Competition Network (ICN)
8.8 In a Nutshell
9 Concluding Remarks
9.1 The Mystery of Antitrust 4.0
9.2 Their Remarks
9.3 My Observations
Appendix I to VIII
Since the failure of the Havana Charter in 1947 till the success of the combined efforts of leading antitrust authorities against mighty Microsoft, the antitrust regime has witnessed several ups and downs. Auf jeden Fall the journey was not an easy one. Moreover now antitrust regime is standing at international crossroads and is wondering about its future direction. Today, at this crucial juncture the antitrust world is confronted with several dilemmas simultaneously. Choices are to be made between national welfare or global welfare, national autonomy or global regulations, the efficiency factor or the fairness view, national champions or global champions, collective efficiency or collective inefficiency, WTO or ICN, the US model or the EU model and so on.
It is widely believed among experts that to overcome these dilemmas, the world needs some truly unified international antitrust framework, which would enable the international community to achieve optimal product mix incorporating the best from all options and through such optimal product mix the global community can enjoy to a large extent advantages that competition policy has to offer. In this direction I have examined the feasibility and viability of unifying international competition policy in this work. Additionally, as the title suggests I have listed out advantages and disadvantages of such moves.
In the beginning I have dealt with evolution of competition policy since its origin in a nutshell. My aim is to explain the dynamic character of competition policy. I have also described the gradual change that has occurred in the ideology of competition policy over last 100 years. Primarily, Competition policy addresses economic issues and hence depends on economic structure of a country. After giving a short history of competition policy, I have formally started with the introduction of competition policy. Economic development in today’s world is unevenly distributed and accordingly the aims and objectives of antitrust regime of individual nations also differ. With the help of various case laws and other incidental literature I have made an attempt to illustrate how these differences are influenced by time, places and circumstances. A thorough understanding of these differences is according to me, essential to understand reasons for differences in antitrust area worldwide. Only after diagnosis of the problem area, one can find better remedies. Toward the end of chapter 1, I have elaborated on two basic foundation concept of competition policy, namely the efficiency and the fairness. Thereafter, I list out concrete aims and objectives of some contemporary antitrust regime of some of the major economies.
Chapter 2 begins with analysis of the major question; whether there is need for unifying international competition policy? After describing global scenario in brief, I proceed with discussion on global remedies such as: global governance, global laws, global competition policy and so on. I have also discussed various dilemmas faced by antitrust regime and also a vacuum created by absence of a globally valid competition policy.
Assuming that the world succeeds in getting a unified antitrust regime, in chapter 3 I have listed out the advantages that can be enjoyed under such a scenario, such as reduction in transaction cost, increment in consumer welfare, efficient allocation of resources etc. Advantages of a unified antitrust policy are immense. Hence I admit the list is essentially not an exhaustive one.
Chapter 4 deals with areas of harmonization. Effective unification of international competition policy call for coordinated efforts and requires substantial changes in domestic rules and regulation. In addition to substantial changes in domestic legal provisions and procedural requirements, harmonization also calls for effective domestic enforcement.
Prima facie antitrust regime is part of economic policy. However very often governments around the world use antitrust regulation as an instrument to realize social goals, achieve political targets and other aims. These factors cause distortion in effectiveness of antitrust provisions. As the social and political circumstances around the world substantially differ, national governments are forced to have country specific antitrust remedies. This adds to heterogeneity of antitrust regime worldwide and consequently renders the task of unification of international competition policy almost impossible. In chapter 5 I have dealt with these aspects very briefly.
Plurality of economic, political, social and other circumstances around the world have strong influence on national antitrust policies and also contribute to contradictions and conflicts. “(…) efforts to advance harmonization or “convergence” of national rules regulating competition can reach their full potential only if two sets of preconditions—economic/commercial and political—exist to support such harmonization or convergence.” In chapter 6 I have dealt with possible conflict areas. At times due to strong conflicts, harmonization seems impossible. Hence extra efforts on the part of authorities are needed to deal effectively with these conflict areas.
At present, feasibility of a unified international competition policy is under doubt. However a small beginning in form of cooperation among antitrust authorities could go a long way in harmonization process. Bilateral agreements between the EU and the US are good examples. In chapter 7 I have dealt with other possible modalities of cooperation between antitrust authorities, namely unilateral approach, bilateral agreements and multilateral forum.
Efforts for harmonization of competition laws began as early as in 1948. Till date there are several binding and non-binding arrangements made in the direction of harmonization. The WTO and the EU for effective coordination in antitrust area have launched recently new initiatives. International Competition Network, a forum for active interaction among antitrust officials, even though non-binding in nature is doing considerably good work. I believe such confidence building initiatives among nations would help in arriving at some amicable solutions, agreeable to all nations. Chapter 8 focuses on various such initiatives taken in the direction of harmonization.
In the concluding chapter, I elaborate further on need of having a unified antitrust regime under a contemporary scenario. Recommendations and views of experts are also presented. At the end I discuss my views about feasibility of having a truly unified antitrust regime in foreseeable future and other possible alternative measures that might help in achieving harmonization in future.
The Apex Court of United States in a very rare occasion has honored antitrust framework or competition policy with near constitutional status. The Court described Competition Policy as “ Magna Carta of free enterprise” and “ as important to the preservation of economic freedom and our free enterprise system as the Bill of Rights is to the protection of our fundamental personal freedom”. Although, such comparison appears slightly rhetoric, the importance and effectiveness of antitrust framework in protecting consumers against anticompetitive actions and thereby ensuring social welfare cannot be undermined. Recent successes of antitrust authorities against software juggernaut Microsoft and against other international cartels such as vitamin cartel are some of the shining examples. “Competition is a public good and society cannot expect the victims of anticompetitive conduct to protect themselves.”
In this section, I briefly deal with evolution of competition policy or antitrust regime as called in the US, since enactment of first antitrust regulation in Canada in 1889. Thereafter, I explain some basic fundamental concepts of competition policy. In the last section of this chapter various aims and objectives of competition policy are dealt with.
The first antitrust regulation was enacted in Canada in 1889. A year later, celebrated antitrust regulation Sherman Act was enacted in US. In US, antitrust laws are usually described in general terms and hence they provide possibility for several different interpretations. To mention a few, Sherman Act prohibits agreement in restraint of trade (Article 1) and monopolization (Article 2), FTC Act prohibits unfair practices and Clayton Act (Article 7) goes against acquisitions likely to lessen competition substantially or tend to create a monopoly. In the absence of further explanations these statues give more liberty to courts in interpretations. On various occasions courts have taken liberty to interpret the laws according to prevailing political and social circumstances. These decisions are strongly influenced by ideologies and power of their proponents, at the prevailing time. As a consequence it appears that these statues can pursue a plethora of perspectives and goals.
Since enactment of Sherman Act in 1890, there have been paradigm shift in ideology and thinking of antitrust experts. In later part of this chapter I deal with these aspects. History of antitrust regime could be easily divided in three distinctive phases, namely;
- Antitrust 1.0
- Antitrust 2.0
- Antitrust 3.0
Antitrust 1.0 era began with the enactment of Sherman Act and this era can also be described as the Classical Era. Forefathers of the Sherman Act and presiding Judges, who decided early antitrust matters in the US under the provisions of this Act, did not differentiate between classical economic values and political values. For them these values were closely connected. Hence in those days the Sherman Act was more or less equated with social legislations, introduced only for betterment of society in general. By and large, the efficiency aspects were ignored.
Justice Peckham differentiated between ordinary contracts – ‘a lease or purchase by a farmer, manufacturer, or merchant of an additional farm, manufactory or shop the sale of goodwill of a business with an accompanying agreement not to engage in similar business…[or an] agreement entered into for the purpose of promoting the legitimate business of an individual or corporation’ and agreement in restraint of trade under the Sherman Act. According to him “ The ‘corporate aggrandizement’ of trusts and combinations is ‘against the public interest’ even if generates cost reductions that lower price, because ‘it is power of the combination to raise [price]’ and the trust may ‘driv[e] out of business the small dealers and worthy men whose lives have been spent [in that line of commerce].’ Originally the Sherman Act was more understood as an instrument to protect economic liberty, security of property and competitive process, free from artificial interference. Hence, maintaining individual business opportunity, economic efficiency, national prosperity, justice, and social harmony were some of the original aims of competition policy. Needless to mention, that these aims were primarily guided by the fairness principle.
Slowly and gradually experts of antitrust regime realized that the economy was changing. Innovations of new technologies have enabled industry to produce more through automation. Firms are taking advantage of economies of scale and economies of scope. Induction of railways and other forms of transport facilitated procurement of raw materials from remote areas at a cheaper cost. Geographical reach for finished products also expanded substantially.
Wide geographical reach, technological innovation and efficient use of modes of transport led to emergence of large corporations and rise in market concentration. Many observer felt need for more enforcement of antitrust regulations as market concentration was rising. They realized that the growth of large corporations was inevitable but sought to regulate them simultaneously. President Theodore Roosevelt promoted Trust busting and in 1914 Federal Trade Commission (FTC) was established. FTC an independent agency was entrusted with the task to regulate unfair trade practices with active cooperation with Department of Justice, a government agency responsible for enforcement of antitrust laws in US at the federal level. Another group had their reservations concerning antitrust. They thought that antitrust regime was creating unnecessary obstacle in the way of progress by blocking growth of large and efficient producers. Antitrust experts took positive note of such reservations and willingly accommodated them also. Subsequently, in 1911 in Standard Oil decision a compromise was found, which incorporated both perspectives.
The Standard Oil Case (1911)
In this case the Apex Court upheld the use of Sherman Act to break the monopoly and found that conduct of the Standard Oil has witnessed a “ a purpose to maintain the dominancy over the oil industry, not as a result of normal methods of industrial combination, but by new means of combination which were resorted to in order that greater power might be added had normal methods been followed…” This speaking order actually benefited large-scale enterprises in the long run. This judgment established a new legal parameter: the rule of reason. This decision made clear that Sherman Act prohibited only unreasonable restraints of trade.
Proponents of antitrust were disappointed and this led to the beginning of a new political debate. Eventually, this led to establishment of FTC and a new anti-merger law namely Clayton Act was enacted in 1914. The Clayton Act explicitly prohibits practices, such as price discrimination, which lessens competition and interlocking directorates among competing firms.
Appalachian Coals vs. United States: The New Deal
Again during the Great Depression of 30’s, classical antitrust ideology came under fire. Ability of unregulated marketplace to serve public welfare was questioned. This thought became transparent in Supreme Court decision in the New Deal, which permitted 137 coal producers to appoint an exclusive selling agent so as to counter and effectively deal with ‘destructive trade practices’ that drove down price. “ The Court found that this agreement was not unlawful since it was to be considered as a reasonable response to protect the market from destructive practices.” Several years later, as the circumstances changed; around the beginning of the structural era, the Supreme Court effectively overruled it. In 1938 Thurman Arnold was appointed as head of Antitrust Division of Justice Department. During his tenure as the head, he sought to increase the impact of the Sherman Act and conducted various new investigations and reached new enforcement levels through consent settlement. Under his leadership the antitrust division of DOJ “revealed numerous examples where monopoly and participation in international cartels had reduced the US military and economic capability for war.”
Antitrust 2.0 era began around the middle of the 20th Century and is also known as the Structural Era. Journey of antitrust regime from World War II till mid seventies could be understood as a phase of Thurman Arnold’s approach. Without caring much about ongoing political debate, his approach simply suggested a forward way for antitrust jurisprudence. Antitrust experts during this phase had very often reservations about the conduct of large corporations. It was widely believed that large corporations were acting in public interest. Industrial Giants were not only seen as threats to consumers and other buyers, but also were considered as menace to small business, restricting their potential to compete.
Now I narrate some important judicial landmarks of Antitrust 2.0:
Unites States vs. Von’s Grocery Company
Antitrust laws concluded that mergers among rivals are detrimental to competition.
United States vs. Arnold Schwinn & Company
Exclusive distribution in territories was declared illegal per se.
In 1968 merger guidelines were issued by the Department of Justice under leadership of lawyer-economist Donald Turner to counter harmful effects of high and rising market concentration.
Antirust authorities initiated monopolization proceeding against IBM, AT&T, Xerox, the breakfast cereal industry, the rubber industry and the oil industry. Such proceedings were by and large unsuccessful. Observers were surprised by such large failures of these antitrust actions. Many felt that prevailing circumstances played a decisive role. These cases commenced during structural era but many ended after courts had begun accepting Chicago School perspectives.
Antitrust 3.0 also known as the Chicago School Perspective Era began around last quarter of the 20th Century. There was a revolution of ideas. These ideas were by and large developed and dominated by thinkers and writers, economists and lawyers affiliated to University of Chicago. A renowned Chicago school economist George Stigler, who later won the Nobel Prize in economics in an article published in 1964, wrote that it was not appropriate to presume that the firms in any market, even when they are few in number, would find a way to raise the price above the competition level. In support of his views he also offered convincing evidences in that article. Proponents of the Chicago school also expressed their reservations about a single firm with high market share necessarily exercising market power. In defense of their opinion, they put forward another argument that threat of expansion by fringe sellers and potential competition from new entrants kept prices low.
New merger guidelines issued by Assistant Attorney General William Baxter was a clear departure from the 1968 guidelines. These guidelines incorporated new range of features including mergers’ likely competitive effects. During the Chicago School Era there was radical transformation of several other doctrines.
Telex Corporation vs. IBM Corporation
Held: Agreement among rivals is not anti-competitive per se.
Continental TV Inc. vs. GTE Sylvania Inc.
Per se prohibition of exclusive distribution territories was overruled.
Big was not necessarily seen as an evil.
However, some experts believe that with the induction of Reagan administration in 1988, the Chicago revolution was by and large complete.
During its journey of last 100 years, antitrust regime has witnessed frequent paradigm shift in its ideology. Ideologically, it has moved away from the fairness factor and got closer to the efficiency factor. In the beginning, antitrust authorities were worried about social issues such as protection of small participants form large entities, equitable distribution of wealth, protection to vulnerable sections of society and so on. Later on, with emergence of new technology, large-scale production facilities and efficient transport and communication systems, wide growth of marketplace and urge for more production at lesser cost, “efficiency” factor started playing crucial role in decisions of antitrust authorities. Through efficiency, production cost per unit can be reduced and that could lead to efficient allocation of resources and increase in consumer welfare. In a nutshell, at least now, in some leading economies efficiency is preferred over fairness.
Reasons for Paradigm Shift
A closer look at history of antitrust regime makes it clear that there have been a frequent and radical changes in aims, objectives, and purposes of competition policy. Policy framers were acting according to ever changing economic environment. It vindicates the stand that antitrust framework is dynamic and not static. Antitrust framework moulds itself according to the need of the time and demand of policy makers. Now I would like to narrate various reasons and circumstances as listed by Jonathan Baker that compelled such paradigm shift in antitrust framework over last 100 years.
-Developments in the economy
Industrialization and thereafter-great depression of 30s had strong influence on economy and business environment. During industrialization phase general sentiment was to protect small players from large organizations. Hence, antitrust authorities were guided by the fairness factor. During The Great Depression several distinctive and rare questions were raised. Creating an environment, which is conducive for survival of business entities was the priority. During this period several agreements, which would under normal circumstances be termed as anticompetitive were given the green signal. “ Something similar may be happening today, as the antitrust laws come to grip with the information revolution.”
Proactive approach of political system
Throughout history of antitrust regime, the prevailing Political system had a proactive approach in competition policy matters. Political leaders moulded themselves, according to the need of society and were by and large receptive to changing circumstances. To mention one, during The Great Depression, political leaders acted swiftly and came out with the new deal to overcome prevailing economic crisis.
Influence of Think tank
Change in economic policy, thinking or parameters of experts or to be precise of group of experts affiliated to same institute, or otherwise also led to paradigm shift in aims and objectives of competition policy. For example, Edward Chamberlin’s research on monopolistic competition designed antitrust’s structural era. Thereafter gurus belonging to Chicago School successfully challenged the antitrust model designed in a structural era. It were the initiatives from scholars belonging to the Chicago school that led to an increase in importance of efficiency factor.
Antitrust framework followed by large economies, such as the US antitrust framework, The EU competition policy framework and the Japanese competition policy framework, rule contemporary international antitrust arena. By and large, the US antitrust framework is considered as Musterbeispiel. Recent trends indicate convergence of the EU competition policy toward the US antitrust framework e.g. SSNIP test. Some scholars are of the opinion that “One size does not fit all”. Ajit Singh in his G-24 discussion paper lays emphasis on suitability of the Japanese antitrust framework for developing economies.
Massimo Motta gave the formal definition of competition policy as “ the set of policies and laws which ensure that competition in the marketplace is not restricted in such a way as to reduce economic welfare”
After discussing evolution and describing definition of competition policy, now I proceed to elaborate on various objectives of antitrust regime. National competition authorities very often formulate antitrust provision in such a manner, so as to achieve desired aims and objectives. Aims and objectives are strongly influenced by socio-economic and political considerations. There may be some contradiction between welfare objectives and other objectives.
Objectives of Antitrust Regulations:
“ Welfare is given by total Surplus, that is the sum of consumer surplus and producer surplus.” Consumer surplus is the difference between the price of goods or services and his valuation (i.e. his willingness to pay). Consumer surplus is aggregate of surplus of all consumers. Producer surplus is aggregate of profits earned by all producers in a given industry. Maximization of total surplus is one of the main objectives of antitrust framework. Concept of total surplus overlooks the issue of distribution of income between consumers and producers. Hence it must be distinctly understood that antitrust regulation doest not per se strive for socio-political causes such as reduction in inequalities of income and wealth among different sections of society.
Prima facie reduction in consumer welfare leads to reduction in total welfare. But very often there are exceptions. To mention perfect price discrimination by a monopolist (in circumstances where all consumers are forced to pay exactly equal to their willingness to pay) maximizes welfare but is detrimental to the interest of consumers. Primarily, aim of the authorities is to maximize total welfare and hence it is difficult to say that maximization of consumer welfare is always the ultimate objective of competition authorities. However, regulatory authorities generally accept efficiency defense “provided that it is to consumer advantage”. Such provisions vindicate the stand that consumer welfare is one of the important objectives of competition policy. Revised US merger guidelines state, “ the agency considers whether cognizable efficiencies likely would be sufficient to reverse the merger’s potential to harm consumers in the relevant market, e. g. by preventing price increases in that market”. Hence, as far as mergers are concerned, it seems that US antitrust framework favors consumer welfare. However competition authorities in several other countries, like Canada, Australia and New Zealand go for total welfare standard.
Such discrepancies regarding purposes of competition policy create hindrance in devising a globally valid competition policy.
Protection of Small Entities
Protection of small firms is one of the original objectives of antitrust regulations. In fact anti-trust laws were introduced in the US due to grievance of the small entities against the large entities. “Farmers and small businesses had enough political force and public sympathy to lead to creation of ant-trust laws in many US states.” Giving benefits to small firms so as to balance the level of playing field is in coherence with objective of economic welfare. However, such measures should be sparingly used. Such measures should in effect enhance competitive capabilities of smaller firm, so that they can face the challenges imposed by larger firms successfully. It must be distinctly understood that artificially helping small firms to survive not operating at efficient scale of production is in contradiction with economic welfare objective. Such attitude would encourage inefficient allocation of resources and therefore would go against fundamentals of competition policy, i.e. the efficiency factor and fairness factor.
Promoting Market Integration
As per treaty, the EU competition policy aims for promotion of market integration. This is enforced by the EC and also endorsed by judiciary. This objective may be politically correct but might not be in conformity with parameters of economic welfare. EC competition laws de jure prohibit price discrimination across national borders. Uniform pricing policy across borders may not necessarily lead to increase in economic welfare, because income standards in member countries differ substantially and hence purchasing power. A lot of other measures need to be taken to make market integration more beneficial.
Ensuring economic freedom might be also objective of competition policy. This is probably the main rationale behind competition laws in Germany. Sometimes there may occur friction between this objective and objective of economic efficiency. To mention, sometimes efficiency defense in agreement such as retail price maintenance are allowed. But these arrangements are per se against economic freedom of retailers.
After describing fundamentals, evolution and various objectives of competition policy, now I proceed to deal with basic elements of antirust regime, which are core to all competition policy frameworks irrespective of their national or international character namely, the efficiency and the fairness. These core concepts can offer us some help in unifying international competition policy. In this chapter I also describe some conflict areas among national policies simultaneously.
“Surprisingly there appears to be no obvious relationship between competition and competition policy.” There are empirical evidences to prove that many countries successfully maintained competition in their market despite absence of a codified competition policy. Hence the question arises; why do we need competition policy and what is task of antitrust regime? Prime task of antitrust regime is to ensure efficiency and fairness. Based on these two pillars, efficiency and fairness, every country has developed conventions or rules of conduct for firms. I admit that all countries do not have formally codified competition laws but all countries have informal competition convention. And more and more countries are formulating codified competition laws. (See Appendix I: Countries adopting formal Antitrust Regime)) Almost all competition policies are designed to ensure that efficiency and fairness prevails. When there is a conflict between the efficiency and the fairness, the objective is to evaluate and trade-off between them. Experts seek a perfect mix of the efficiency and the fairness.
The Efficiency Factor
“ Die Wettbewerbspolitik zielt in erster Linie darauf ab, die Effizienz der Wirtschaft zu sichern.” The term efficiency could be understood as “getting most out of least resources”. Production of desired goods at least cost is characteristic of an efficient market. Efficiency is further classified into static efficiency and dynamic efficiency. Even though the term efficiency is very clear in its meaning and purpose for competition policy matter, different treatment is given to efficiency factor in different countries. Countries pursuing static efficiency may regulate cooperative high-technology activities more strictly. Countries pursuing dynamic efficiency may subsidize innovations.
One more critical area: What might be efficient for one country might not be efficient for another country. Export cartels and monopoly marketing brand are some such examples. Very often such activities are carried under protection from respective governments. “Most nations explicitly exempt export associations from the prohibitions of their competition policy laws, sometimes (as in the United States) insisting that competition reducing spillover effects be avoided in domestic markets, sometimes not.” Such attitude of national government provides protection to those establishments, who are globally inefficient. Needless to mention, this leads to inefficient allocation of scarce global resources. If all countries taken together collectively pursue such harmful goals, the World will be full of collective inefficiencies. (Discussed in detail in chapter 4)
The Fairness Factor
The meaning of term fairness is culturally distinctive. To mention in United States equality of opportunities or free entry into business is often associated with fairness. In other countries reward for loyalty or favored activity is associated with fairness. In Japan, loyalty toward traditional supplier is considered “just and fair”. In several countries, creating opportunity for weaker section of society is considered fair. Several countries under pretext of fairness formulate their policies in a manner so as to protect vulnerable sectors of economy (these sectors are not opened for competition from outside). Sometimes extra incentives are provided to several sectors, when large chunks of population are dependent on these sectors. “ Cross-country conflicts in competition policy are increasing because concepts of fairness often differ.” And precisely these conflicts are obstacles in creation of a unified international competition policy.
Prima facie efficiency and fairness like oil and water do not mix easily. Under normal circumstances efficiency cannot be achieved without some sacrifice of fairness and vice versa. Inherent conflicts among these objectives surface inter as well as intra countries or economies. Hence, creation of regulatory instrument, which has perfect mix of efficiency and fairness, is a Herculean task.
Within countries, conflicts might surface when policies giving push to efficiency of some participants appear unfair to others. Merger between firms (say two large companies having different place of origins) is normally efficient for insiders at the cost of unfair disadvantage for outsiders. Recent merger of steel giants Mittal and Arcelor might have created “European Champion”. But creation of such giants might be harmful to the other players from other parts of the World.
During the past hundred years since enactment of first antitrust regulation in 1889 in Canada, there has been significant paradigm shift in the aims and objectives of competition policy. Prime facie protection of competition at market place is given utmost importance by antitrust advocates. As the following statement issued by World Bank and OECD jointly, says:
“ While many objectives have been ascribed to competition policy during the past hundred years, certain major themes stand out. The most common of these objectives cited is the maintenance of the competitive process or of free competition, or the protection or promotion of effective competition.”
This definition also vindicates the stand that efficiency and fairness has been seen traditionally as guiding parameters of competition policy in many countries. Preamble of the competition law of India enacted in 1998 mentions about aims of preventing practices that have negative impact on competition, promoting and sustaining competition in markets, protecting the interest of consumers and ensuring freedom of trade carried on by other participants in markets in India. Here I would like to mention that objectives of national competition polices are influenced by socio-political and economic factors prevailing in respective countries and this makes the task of unifying international competition policy more difficult. As Frank Fishwick rightly says, ” Economic policies cannot be divorced from political and social philosophies – nor should they be.” Alexis Jacquemin also vindicates these views. He says, “ Competition policy varies from country to country, and in the same country, from decade to decade, reflecting changes in economic and social conditions as well as reversal in academic thought.” Fair enough. But there are some basic parameters, such as efficiency and fairness, which are incorporated in most of the competition policies. To mention, Posner says that fundamental objective of US antitrust law is the protection of competition and efficiency.
Recently scholars are talking about importance of dynamic efficiency as an objective of competition policy. To mention, Singh recommends that competition policy in developing countries should contribute to overall development of an economy. He puts emphasis on dynamic efficiency, “ the need to emphasis dynamic rather than static efficiency as the main purpose of competition policy.”
Dynamic nature of markets, striking speed of information and innovation now call for reassessment of importance given to static efficiency as an objective of competition policy. Hence ensuring an environment that is conducive to innovation and dynamic efficiency is also an important purpose of competition policy.
Competition laws in Germany are strongly influenced by agenda of the neo-liberal school and its demand for a strict codified legal system for economy. Additionally there is also an influence of American antitrust policy, which is regarded as most progressive and rigorous. These influences make German competition policy, especially least with respect to mergers and monopolies, the most rigorous of all market economies.
As I have mentioned earlier, competition policies in several countries are strongly influenced by socio-economic and political considerations. Competition laws in South Africa are designed in such a manner, so as to achieve socio-economic equality and development in addition to economic efficiency. The Competition Act of 1998 in South Africa mentions:
“ The purpose of this act is to promote and maintain competition in the Republic in order,
(a) to promote the efficiency, adaptability and development of the economy;
(b) to provide the consumer with competitive prices and choices;
(c) to promote employment and advance the social and economic welfare of South Africans;
(d) to expand opportunities for South African participation in world markets and recognize the role of foreign competition in the Republic
(e) to ensure that small and medium sized enterprises have an equitable opportunity to participate in the economy; and
(f) to promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged persons”(Chapter 1, Article 2)
These examples vindicate the stand that competition laws need not be uniform world over. National competition policies and national needs are different from global needs. Competition policies need not be directed toward single objective of promoting efficiency and fairness. Very often these regulations strive for a plethora of objectives and these objectives are determined according to need, tradition, socio-economic considerations and the other prevailing circumstances in the country. To mention, traditionally, Germans opted for system of social market economy. “ In Germany competition policy is acknowledged as a main part of the so called “Ordnungspolitik” means the formation of legal framework conditions for a workable economic system, especially for the system of the social market economy.”
To conclude, one can say that like all other regulations competition policy regulations also reflect history, culture and need of countries. As a consequence it is dynamic and constantly changing and also differs among countries.
Antitrust regime has witnessed various changes in its journey through the last hundred years. The Efficiency factor and the Fairness factor do have influence on national competition policies. However, sometimes due to various reasons countries do ignore these parameters. National competition authorities very often pursue different goals and aims, according to their needs. “ The goals of competition policy, as well as competition culture and traditions, differ among jurisdictions. This can be traced back to different citizen preferences about role of competition and competition policy.” Sometimes these goals are in contradiction with the basic tenets of the competition policy. Such heterogeneous environment makes task of unification of international competition policy more complex.
A sudden spurt in trade liberalization, globalization coupled with increase in global takeovers and mergers has led to the emergence of a global marketplace. “ Ökonomisch betrachtet bedeutet Globalisierung vor allem das Zusammenwachsen bisher nationaler und damit voneinander getrennter Märkte zu übernationalen, häufig weltumspannenden Märkten.” Global marketplace calls for a truly global governance mechanism. Quantum of global commerce of mergers and takeovers have increased fivefold in the past decade reaching US $ 2.5 trillion in 1998. International mergers and takeovers demand coordination between legal authorities of different nations. Companies are obliged to obtain permission from respective authorities of each country individually. Under these circumstances demand for a truly global legal system is perfectly justified.
In their essay “How to Reduce Conflicts over International Antitrust?” Justus Haucap et al raise an interesting puzzle. They doubt the need for unifying international competition laws in an integrated world economy. They write that globalization should prima facie reduce the need for antitrust regime. As more and more segmented markets come together, more players will join emerging as a single market and as a consequence intensity of competition at marketplace should increase. “More players makes markets almost always more competitive.” Empirical evidences suggest that increase in international competition lead to reduction in Price-Cost margin. Hence globalization per se should foster competition and reduce need for artificial intervention and supervision. Ajit Singh also put forward instances where countries were able to ensure considerable competition at marketplace even without formal codified competition policy.
In an integrated world economy economic and commercial activities are no longer confined to national boundaries. Anticompetitive activities of players not only affect domestic consumers and domestic firms, but also might harm foreign customers and firms. Additionally the recent rise in number of international hardcore cartels, incidences of cross border mergers and other forms of cooperation, jurisdictional conflicts and disputes over extraterritorial application of one’s own laws call for existence of an international antitrust framework. Emergence of international merger wave has led to creation of big business giants. “The basis of our competition is threatened by an unprecedented growth of big business. Continuous strengthening of the competition policy is needed to minimize these defects and dangers.” Additionally, “ Increased international interdependence, often also discussed under headings such as globalization, has also increased potential for international conflict.” Hence there is an urgent need for an internationally valid antitrust regime. In the forthcoming paragraph and also later in other chapters I have discussed these issues in detail.
“National competition law can be defined as the set of rules and disciplines maintained by governments aiming to counteract attempts to monopolize the market (and thus ensure that competition is guaranteed), either through agreements between firms (including attempts to create dominant position through merger) that restrict competition or through unilateral behavior (abuse of a dominant position).”
Illustration: Competition Policy Frameworks
illustration not visible in this excerpt
The prime objectives of national competition law are to ensure competition at marketplace and maximization of national welfare. National policy framers also very often use competition laws as an instrument to achieve social objectives, which ultimately maximizes national welfare. I have discussed them in detail in chapter 1.
National antitrust regulations are designed to achieve national goals and priorities. Prevailing technological environment and liberalization rules and regulations are attracting global business. As the markets are becoming global, competition problem surpasses national boundaries. National competition laws are based on framework of national competition policy and are designed to achieve national objectives. In the above diagram, I describe various aims and objectives of national as well as global competition policy. I admit that the list of aims and objectives is not exhaustive. Very often the terms competition laws and competition policy are used as synonyms. However, in above illustration these terms should be understood in their precise meaning.
It could be observed that existence of vacuum due to absence of global competition laws creates hurdles in achieving global welfare and other incidental objectives.
Antitrust authorities today worldwide are confronted with international cartels. Recent example is Trans-Atlantic Agreement among shipping companies from various countries such as the United States, Mexico, Japan, Korea and other Countries, which notably fixed prices for inland transport operations. Technological innovations are enabling emergence of global giants. A new kind of market dominance is surfacing at worldwide level. Recent Microsoft cases are good examples.
Nowadays antitrust authorities are encountering giant companies having worldwide reach. “ One after another, the long standing barriers that protected companies from takeover are dissolving. The result: an unprecedented wave of deal-making (…).” “ Unternehmenfusionen sind in den letzten Jahren zu einem Dauerthema geworden: Es vergeht kaum eine Woche, in der nicht große Fusionsvorhaben angekündigt oder vollzogen werden.” Under such scenario, antitrust authorities also need a comprehensive mechanism having global reach and global deterrence against the antitrust crime. The recent mega merger wave is having global dimensions (see Appendix II & III: Statistics of Mega Mergers Worldwide and details of cross border mergers). For example, the EC recently decided to oppose proposed merger of mining interests of South Africa’s Gencor and Lonrho because it would create duopolistic dominance worldwide. Such resistance from the EC was again observed in merger of Boeing and McDonnell Douglas. Apart from few exceptions number of acquisitions and merger from foreign firms in past few decades have increased substantially worldwide. (see Appendix IV )
In the absence of a comprehensive internationally valid competition policy, regulatory authorities around the world are looking for other alternative solutions to overcome vacuum created by such absence. These authorities are working together in some or other form to deal effectively with antitrust matters extending beyond their national territories. They are pursuing simultaneously three different strategies:
- the extraterritorial application of their competition laws (Unilateral framework )
- the conclusion of bilateral or regional cooperation agreements (Bilateral framework)
- the creation of a worldwide competition regime within the framework of the WTO (Multilateral framework)
I have discussed these modalities of cooperation among various authorities later in chapter seven in detail.
“As markets integrate across national borders, the logic of purely national antitrust policy breaks down.” “ Mit dem Übergang von einer außenhandelsfokussierten (Fokus auf nationale Märkte) zu einer wettbewerbsfokussierten Perspektive (Fokus auf supranationale Märkte) bedarf auch die internationale Wettbewerbsordnung einer wettbewerbspolitischen Dimension.” Simultaneous existence of domestic policies with national jurisdiction and global markets with global reach calls for urgent creation of some mechanism to cover cross border competition problems. National competition can effectively deal with cross border disputes only when foreign entities have de facto presence and substantial stake within its jurisdiction and that too only when national law apply. Antitrust pundits call for some form of international mechanism because they believe national laws suffer form inherent deficiency in dealing with cross border disputes, “when foreign supplier does not have a commercial presence.”
Existing framework of national laws with some collaborative international agreements very often fails to check inter country anti-competitive behavior and to be precise, cross border spillovers. Additionally, rules and procedures available under existing arrangements i.e. cooperation agreements are cumbersome and very often pose administrative problems. Compliance of such rules necessitates additional transaction costs.
Global Marketplace has led to emergence of international cartels. Actions against such offenders may take place in more than one jurisdiction. Big firms may enjoy dominant position in markets of more than one country and circumstances may require thorough simultaneous investigation by antitrust authorities from various countries. Merger between domestic company and foreign entity might need approval from different authorities individually. Such situations pose additional administrative burden on authorities and needless to say additional financial burden for both authorities as well as firms. Creation of any globally valid antitrust mechanism will definitely lead to large financial savings. Taxpayers’ precious money could be used for other constructive purposes.
Justus Haucap et al list out various reasons for harmonization of competition policy.
In the absence of a globally valid antitrust regime, companies having presence in various countries have to deal with antitrust authorities of each country individually. Such additional administrative task reduces benefits that could be realized through international presence. One of the prime aims of competition policy is maximization of consumer welfare. Nowadays consumers in almost all countries are badly affected irrespective of their country of presence due to existence of hard-core cartels worldwide. Moreover consumers in developing countries are more prone to such exploitation due to absence of an effective mechanism to deal with such eventualities. (see Appendix V ) As mentioned in earlier discussion, national competition authorities are entrusted with the prime task of ensuring national welfare. Some policies may enhance domestic welfare to the detriment of global welfare. “Allowing national firms to form an export cartel may permit the domestic industry to raise prices on export markets and improve the country’s term of trade.” Such behavior of national antitrust authorities are harmful to international of global consumers, as they end up paying high prices for goods and services.
In addition to the above-discussed reasons there are numerous benefits of unifying international competition policy. I have discussed them in detail in forthcoming chapter.
 See Antonio F. Perez, P. 1
 See Timothy M. Reif and Gary E. Bacher, P. 1
 See United States vs. Topco Associates, Inc., 405 U.S. 596 (1972)
 See Jonathan Baker, 2003, P. 1
 The terms “antitrust regime” and “competition policy” are by and large synonymous. However the term “competition policy” includes aspects of state aid, industrial subsidies etc.. In the US these aspects form part of “industrial policy”. See Robert Feinberg, P. 1
 See Jonathan B. Baker, 2001, P. 2
 Id., P. 3
 See Jonathan B. Baker, 2001, P. 3
 See United States vs. Joint Traffic Association, 171 U.S. 505 (1898)
 See United States vs. Trans-Missouri Freight Association, 166 U.S. 290 (1987)
 See Jonathan B. Baker, 2001, P. 4
 Economies of scale- reduction in per unit cost of production due to large production; economies of scope-reduction in per unit cost of production due (spare) capacity utilization
 See Jonathan B. Baker, 2001, P. 5
 See Massimo Motta, P. 6
 See The Standard Oil Case, 221 US 1, 75 (1911)
 See Massimo Motta, P. 5
 See Appalachian Coals vs. United States, 288 U.S. 344 (1933)
 See Massimo Motta, P. 7
 See Denys Gribbin, P. 143
 See Jonathan B. Baker, 2001, P. 8
 Id., P. 8
 Id., P. 9
 384 U.S. 270 (1966)
 388 U.S. 365 (1967)
 See Jonathan B. Baker, 2001, P. 10. As mentioned such proceedings were by and large unsuccessful. However as an exception substantial relief was obtained against AT&T and Xerox.
 See Jonathan B. Baker, 2001, P. 10
 Id., P. 11
 Id., P. 11
 510 F.2d 894(10th Cir.),cert.dism’d, 423 U.S. 802 (1975)
 433 U.S. 36 (1977)
 See Jonathan B. Baker, 2001, P. 15
 See Jonathan B. Baker, 2001, P. 17
 Id., P. 17
 See Jonathan B. Baker, 2001, P. 18
 See Justus Haucap et al, P. 320
 See Ajit Singh, P. vii
 See Massimo Motta, P. xvii
 See Massimo Motta, P.17
 Id., P.18
 Id., P. 18
 See Massimo Motta, P.19
 Id., P. 19
 Id., P. 20
 Id., P. 20
 Ambit of term small entities does not include only small businessmen who suffer from cost disadvantages due to small operations, but also includes wholesalers, manufacturer’s agent and other middlemen who face threat of being driven out of business as the large producers move forward and the large retailers move backward into wholesaling. For further details see Massimo Motta, P. 72
 See Massimo Motta, P. 3
 See Massimo Motta, P. 22
 Id., P. 23
 Id., P. 24
 Id., P. 24
 See Edward M. Graham and J. David Richardson, P.8
 See Ajit Singh, P. 7
 See Edward M. Graham and J. David Richardson, P. 7
 The number of countries with codified competition laws has increased.
 See Manfred Neumann, P. 229
 See Edward M. Graham and J. David Richardson, P. 11
 See F. M. Scherer, P. 46
 The Competition Act, South Africa, 1998
 See Edward M. Graham and J. David Richardson, P.10
 See Edward M. Graham and J. David Richardson, P. 9
 See Joan-Ramon Borrell, P. 1
 World Bank-OECD 1997, P.2; for further details see Julian L. Clarke and Simon J. Evenett, P. 7
 History of antitrust legislation in India to promote fair market dates back to 1969, with enactment of Monopolistic and Restrictive Trade Practices Act. Recently a new legislation has been introduced in 2002 to promote competition at market place based on efficiency and fairness parameter.
 See Frank Fishwick, P. 175
 See Alexis Jacquemin, 1990, P. 2
 See Julian L. Clarke and Simon J. Evenett, P. 8
 See Ajit Singh, 2002, P.22
 See Julian L. Clarke and Simon J. Evenett, P. 8
 See Erhard Kantzenbach, P. 10 Neo-liberal School – Contrary to classical liberalists proponent of neo-liberalism do not believe in a laissez-faire economy. They also advocate for strong state. According to them state should neither participate nor intervene in competitive process of economy. But state should formulate rules and effectively enforce them. Rules should be formulated in such a way that in addition to self-interest of participants, they should serve public interest also. Neo-liberalists put strong emphasis on ordering function of the state. And hence they are also called Ordo -liberals.
 See Erhard Kantzenbach, P.25
 See The Competition Act, South Africa, 1998
 See Erhard Kantzenbach, P. 1
 See Edward M. Graham and J. David Richardson, P. 7
 See Oliver Budzinski, 2003, P. 47
 See Oliver Budzinski and Wolfgang Kerber, 2003, P. 9
 See Christian Conrad, P. 57
 See Justus Haucap et al, P.309
 See Ajit Singh, P. 7
 See Justus Haucap et al, P. 309
 See Corwin D. Edwards, P. 318
 See Stefan Voigt, 2006, P. 1
 See Bernard Hoekman and Petros C. Mavroidis, P. 4
 See Youri Devuyst, P.2
 See Dennis K. Berman et al, P.1
 See Stefan Voigt, P. 9
 See Youri Devuyst, P.2
 See Simon J. Evenett et al, P.13
 See Oliver Budzinski, 2004, P.1
 See P. J. Lloyd and Kerrin A Vautier, P.13
 See Justus Haucap et al, P. 312
 See Justus Haucap et al, P. 328
 See Bernard Hoekman and Petros C. Mavroidis, P. 5