Competition law ensures consistency between business frameworks through policing agreements, business practices and conduct that restrict competition, with the incidental benefit to the consumer. I shall analyse competition law in regard to economic behaviour and economic tests, with regard to European Economic Community (EEC) Treaty Articles, 81, 82, respectively.

The EEC was established to achieve a distinct single market, ccompetition law is therefore functional and as a result of market control there is ‘always a great deal of economic analysis and data gathering’[1] distinguishing it somewhat from other freedoms. Given the political background of industrialisation, liberalisation and privatisation away from state planning, market forces govern economic behaviour. Articles 81, 82, prevent anti-competitive practices and abuses of a dominant market position, seeking to enforce freedom between member states within a ‘workable competition’ framework implied in Articles 3, 81. Economic concepts can graduate commerce towards perfect competition and perfect monopolies, which are not examples of economic behaviour but polarised concepts, or oligopolies and the theory of workability, particularly relevant as the EEC enlarges.

The Commission has been criticised for sidetracking economic efficiency to ‘create’ market integration at a level playing field but Articles 81, 82, aim towards allocative efficiency with maximum consumer surplus, through dynamic efficiency where all firms are able to innovate and improve technology, this aims towards perfect competition to achieve market equilibrium. The ‘single market’ does not homogenise competition between member states, nations may naturally have comparative advantages, David Ricardo writes that nations should specialise in the most resourced product therefore behaviour is not restrictive, instead increased industrialisation might minimise monopolistic economies, therefore increasing competition unnaturally can ‘obstruct circulation of labour and stock’[2] without consumer benefit, so 'attacking individual monopolies while leaving other ones intact will simply exacerbate the pre-existing allocative inefficiency[3].  However, free trade does not call for ‘perfect’ competition.

Instead of fixing markets, competition law should allow for a survival of the fittest approach where ‘[a] dominant firm is entitled to compete on the merits’, AKZO[4]. This economic analysis involves a political decision, as larger firms can produce social goods, Whish makes an exception for natural monopolies because they bring efficiency, but ‘exclusive rights’ conferred by a state are clearly a distortion of this[5], but ‘natural’ is hard to define. A monopoly benefits from the network of consumer demand which increases dominance against new entrants, such as cheap prices resulting from economic scale, innovation or shared technology, but this could be artificially created through undercutting or limiting production under demand, the abuses listed in Article 81[6] show what a natural monopoly would not do: Price-fixing, market-sharing, limitation of production, discriminatory behavior and irrelevant obligations example abuses, this is non-exhaustive. Articles 81, 82 are anti-monopolistic because abuse drives out smaller businesses, therefore competition law aims at a redistribution of power, the Chicago School theorised that the focus is instead on harm to ‘consumers’. Instead an objectivist approach would allow deregulation as self-regulation; companies’ rational self-interest is ‘the interest of the public’[7] however this sees commerce as individual economic behaviour within a Community dimension without the distortions of competition. Keynes rejected a laissez-faire market allocation, ‘aggregate economic behaviour does not have the same outcome.’[8] This wider Community dimension makes the distinction between the legal, political and economic ‘elusive’[9], therefore competition law is both economic and legal.  

It is speculative to say that free markets tend to deliver ‘better outcomes’ than state planning[10] and this detracts from the purpose of intervention which is not to subvert efficiency. Classical economics assumes that supply creates its own demand, investment leads to consumption[11], but Keynes demand maximisation is outdated as it does not make use of ‘imperfect competition’-demand is not perfectly elastic[12], input can’t be used ‘to dampen as well as stimulate the economy’[13]. Fixed economic models are unrealistic therefore competition law must ensure that it does not restrict flows of trade by tracing ‘perfect’ standards. Collaboration can produce strong national efficiency but as against other countries therefore competition law regulates abuses of competition that ‘may affect trade between Member States’, this economic result might be difficult to apply in law. Société Technique Minière vs. Maschinenbau[14] suggested an objective test encompassing ‘direct or indirect, actual or potential’ distortion, depending on the nature and quality of products concerned, the market share and the isolated or serial nature and its severity, therefore the nature of the undertaking and inter-state abuse are commercial concepts, such abusive undertakings become automatically void[15].

An anti-competitive agreement cannot be examined in isolation as it could be conducive to economic behaviour, so it can only be assessed in relation to market practice[16]; therefore competition law concerns more than a party analysis characteristic of law. A concerted practice need not formalise an agreement so long as there exists parallel economic behaviour, such as identical price raises[17], this takes account of the willingness to trade in an industrial economic community. Meetings to transfer information constitute concerted practice as parties cannot fail to arrange their strategies accordingly, Shell[18]. In Nugesser v Commission[19] the predicted effect was new entry to markets carried too much economic ‘risk’[20], the ECJ thus assessed the economic behaviour of potential investors when defining an ‘artificial maintenance of separate markets’[21].  But how can the artificial maintenance be determined as apart from an ordinary market reaction without regard to accurate economic indicators? Under an oligopoly where there are a small number of companies with a large market share there is likely to be a ‘price leader’, ICI v Commission[22], and firms can make parallel decisions without colluding[23]. This case has been criticised, as normal conditions of the market are unclear particularly where there is high market transparency.

The need to ensure economic efficiency through competition is demonstrated to the change of attitude in regard to vertical agreements (between different stages of production, such as supplier and producer) as apart from horizontal agreements, because the former is more likely to advantage consumers, relationships must be in competition therefore a subsidiary and the parent company ‘forms an economic unit’[24] so is not captured.  The De-minimis Notice recommends an ‘appreciable impact’ test on trade, listing a 5 and 10 percent thresholds for 'horizontal' agreements and vertical or mixed agreements respectively[25], but the 2004 Notice has held it is ‘immaterial whether or not the… undertaking in the agreement has an appreciable effect on trade between member states’[26], so even the guidelines remain unclear about the economic dominance.

A strict approach of economic policy might be to strike down all restrictions. Article 81(1)(b),(c) exemptions are likely to be anticompetitive horizontal agreements but (d), (e) will rarely be objectively justified, because exclusivity agreements are seen as territorial protectionism[27], and this will rarely be indispensable.  Undertakings that are ancillary and proportionate to the public interest may be exempt under Article 81(3), suggesting proportionality mimicking the US antitrust Rule of Reason, condemning contracts[28] ‘unduly’ restricting opportunities[29]. The Commission and ECJ can balance protectionist and competitive effects but may have ‘less data than that available in the United States.’[30] This is no reason not to accept the rule, however Métropole Television v Commission[31] was concerned with the effectiveness of 81(3), rendering it unnecessary ‘to weigh the pro and anti-competitive effects’[32] however this seems under stated as an economic analysis is fundamental, Under EC rule of reason ‘non-essential restrictions’ are left to be considered under Article 81(3), and an empirical international test may prove efficient at tackling modern economic behaviour.

Theoretical economic models are determinative of behaviour but an objective of perfect competition is not realistic as businesses might act irrationally and reduce production without regard to marginal costs, further, rationality would not take account of social costs which can arise from a profit-driven business, perhaps competition law ‘should not concern itself with market externalities’[33], but it does despite protest. Article 81(3) exceptions take account of these economic products.   Where economic benefits to restricting trade are unclear, the Commission faces a dilemma over the extent to maintain single market intervention, without references to effective models.

Article 81(1) should not apply to anti-competitive agreements that ‘have pro-competitive effects by way of ‘efficiency gains’[34]. O2 v Commission[35] regarded Article 3 was regarded as ‘particularly necessary as regards markets undergoing liberalisation’, this is true as self-regulation by nationals may achieve greater economic efficiency.  After a change in the political market to decentralisation[36], an agreement seeking exemption under 81(3) no longer needs Commission notification, Regulation 1/2003. This suggests that competition law should allow economic progress more efficiently. This is desirable since specialisation can increase trade on a community or even international level, resulting in ‘fair shares’ for consumers[37]. Management and labour should not be undermined by Article 8(1). Given these benefits to the consumer, perhaps a narrower scope of Article 81(1) should be adopted, as agreements to establish markets and increase trade appear economically desirable.  

Article 82 regulates dominant economic behaviour having ‘the effect of hindering the maintenance... or the growth’ of competition[38], through the market power to behave independently of ‘competitors’, ‘customers’ and ultimately ‘consumers’: United Brands Co. v Commission[39] could ‘obtain supplies without any difficulties from independent planters’[40] the company was also sufficiently diversified to withstand natural disasters[41]. Given a variety of economic factors, competition law is therefore more specialised than a statistical degree of market share. Behaviour may have the ability to erase existing competitors or to prevent potential competitors from entering the market.

A collective dominant position can be established, in Italian Flat Glass[42] three producers held a significant 90-95 percent share, so competition law takes account of the whole economic market, whilst this is possible it is hard to define how much foreclosure of information is required to be competitive, and an undertaking may still defeat a larger group of competitors therefore competition law regards underlying theoretical economic principles rather than a numerical statistic-based approach, for example, companies without dominant market power are price takers so this can examine market manipulation, but this price level is not necessarily indicative of market power therefore the ‘two goals of EC competition law are potentially at odds with one other’[43]. However, these tests can achieve transparent legal outcomes, and are helpful as economic factors.

The economic test of product substitution is regarded to determine dominance in the relevant market, a test of cross elasticity of demand to determine whether the characteristics are specific. Where the relevant product market is narrow the relative dominance of the undertaking is enlarged, United Brands tried to argue the entire fruit market but bananas were relied on by infants and the elderly and became habitually demanded given their constant availability. Alternatively, the test of Small but Significant and Non-transitory Increase in Price defines the relevant market in relation to price, adopted from anti-trust law into the Notice on Market Definition[44], this concerns economic behaviour as‘demand substitution constitutes the most immediate and effective disciplinary force on the suppliers of a given product’[45].  Further, ‘market intervention that would, ‘in the short term’[46], lead to wider geographical markets’ should be taken into account, the status of ‘potential’ competition is economic and an inaccurate legal test but it is inevitable.

The test of supply side substitutability also relates to the behaviour of production. Commercial Solvents[47] where there were no other substitutes it was unnecessary to examine ‘an urgent need’ for supply or retained large quantities[48]. Hugin Kassaregister AB v Commission[49]’s finding of abuse ignores the fact that the party could easily shift its business to other producers thereby not harming consumers. The objective conditions of competition are the same for all traders; this may include the whole of the common market[50]. This wide scope is defensible given the substitutability of homogenous products in some markets.

Competition law concerns economics because it needs to define the market, but the relevant share is unclear. Hoffman La Roche suggested a dominance of 75-80 percent; bulk vitamin production is typically concentrated in a small number of firms[51]. United Brands placed less emphasis on percentage, 40-45 percent determined with regard to the ‘strength and number of the competitors.’[52] A high market share is not conclusive as it varies according to the structure of each market, barriers to entry include technical costs and time for establishment, brand competition and ‘sunk costs’ do not occur in a perfectly contestable market, so the Articles must be aware of economic realities.

Dominance in a particular market is not necessary if abusive behaviour can be shown. The World Cup football game[53] had not benefited from limiting ticket allocation as a rational-maximiser, but sporting events were not substitutable to this particular match. The exclusive tying programme in Hoffman La Roche limited competition from other suppliers without giving a chance, the main intention may be to limit competition rather than increasing a customer relationship. Refusal to supply will not be abusive if non-discriminatory and cogently justified; an ‘essential’ facilities doctrine reflects the natural exclusiveness of certain specialisations. The 2005 DG Competition paper[54] focuses on ‘exclusionary abuses’ so it may result with a more lenient application of Article 82, further the distortion of competition must be a ‘substantial part’ of the common market[55], therefore concentration must not ‘potentially engender’ substantial cross border effects[56], costs and economic conditions are therefore fundamental.

There is a reasonable ‘economic value’ test that mirrors the rule of reason. In British Leyland plc v Commission[57] charging extra fees only in relation to left-hand drivers was excessive, United Brands tried to compare the quality of its Chiquita bananas and separate market conditions[58] to defend differential pricing. The economic value test is straightforward if the selling price is excessive of the cost of production but discriminative pricing is hard to prove, prices against ‘average variable costs’ might not consist of predatory pricing. AKZO Chemie BV [59] concerned cut pricing ‘by means of which a dominant undertaking seeks to eliminate a competitor’ with ‘no interest in applying such prices’[60]. The Tetra Pak II[61] case has been criticised for not taking account of other associated income such as costs to subsidiaries[62], alternatively, ‘price discrimination … can increase output and lead to customers who might otherwise be priced out of the market being served’[63] suggesting economic benefits.

Restrictions on competition can be justified through an economic analysis of the formation of undertakings and their implementation, business motives can not accurately be determined therefore the economic tests should be clarified or instead concise legal tests should guide competition law. There is now a greater focus on large market share which helps to regulate mergers, but market power and operations can be driven by natural demand and efficiency. Nevertheless market forces cannot always produce economic welfare and lead to higher prices and less innovative products, so the analysis of ‘abusive’ behaviour is integral. Even if the focus on larger businesses is the wrong way to achieve competition, the Acts facilitate single market freedoms whilst aiming towards market efficiency and EEC integration.

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*www.coleurop.be/content/gclc/documents/Paper%20Dolmans.doc