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The Basics of Antitrust Policy A Review of Ten Nations and the European Communities Roger Alan Boner and Reinald Krueger

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WORLDBANKTECHNICALPAPERNUMBER160

The Basics of Antitrust Policy A Review of Ten Nations and the European Communities

Roger Alan Boner and Reinald Krueger

The World Bank Washington, D.C.

Copyright © 1991 The International Bank for Reconstruction and Development/THEWORLD BANK 1818H Street, N.W. Washington, D.C. 20433,U.S.A. All rights reserved Manufactured in the United States of America First printing November 1991 Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. Any maps that accompany the text have been prepared solely for the convenience of readers; the designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries concerning the legal status of any country, territory, city, or area or of the authorities thereof or concerning the delimitation of its boundaries or its national affiliation. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Publications Department, at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to photocopy portions for classroom use is not required, though notification of such use having been made will be appreciated. The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Publications Sales Unit, Department F, The World Bank, 1818H Street, N.W., Washington, D.C. 20433,U.S.A., or from Publications, The World Bank, 66,avenue d'Iena, 75116Paris, France. ISSN:0253-7494 Roger Alan Boner is a staff economist with the Antitrust Division, Bureau of Economics, U.S. Federal Trade Commission, Washington, D.C., and Reinald Krueger is a research economist with the HWWA-Institut fur Wirtschaftforschung, Hamburg, Germany. Library of Congress Cataloging-in-Publication Data Boner, RogerAlan, 1952The basics of antitrust policy: a review of ten nations and the European Communities/ RogerAlan Boner,Reinald Krueger. p. cm.- WorldBank technicalpaper, ISSN0253-7494;no. 160) Includes bibliographicalreferences. ISBN0-8213-1961-2 1. Antitrust law. 2. Competition. 3. Antitrust law-European EconomicCommunitycountries. 4. Competition-European Economic Commnunitycountries. I. Krueger,Reinald,1960- . II.Title. m. Series. K3850.B661991 343'.0721-dc2O [342.37211 91-33420 CIP

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PREFACE This monograph presents the fundamental concepts of competition policy and surveys antitrustpractice in the United States, Germany, Japan, the United Kingdom, France, Canada, Sweden, Australia, the Republic of Korea, Spain and the EEC. While the German and American systems have served as models for antitrust legislationand administration,these nations have adopted and modified particular features to suit national circumstancesand objectives. By illustratingand comparing the strengthsand weaknesses of different antitrust approaches,the paper provides valuable information for the design and implementationof competitionpolicy in developingeconomies. The Boner-Kruegerpiece places strong emphasison the need for antitrustpolicies and the institutionof an appropriateregulatory antitrust framework for the efficient functioningof markets. In fact. antitrust law is regarded as critical to promoting an open and competitiveenvironment. It provides countrieswith an economic code of conduct, a descriptionof what is fair business behavior and what is liable to penalties. In this sense, antitrust legislationhas an educationalrole, signallingto business that competitive,efficiency-enhancing conduct is acceptableand that, conversely, monopolizing,rent-seekingbehavior is not. At the core of antitrust regulatoryregimes are guidelinesmaking businessmen fully aware of what constituteactions detrimentalto the public interest. Antitrust legislationshould be seen as a means of improving the nrevailing commercialculture and developinga supRortivebusiness environment. Establishingan appropriateantitrust regulatoryregime is thus particularlyimportant in developingor transitioneconomiesbuilding market mechanisms and institutions. In view of the role of antitrust law in shaping an appropriateset of behavioralnorms for business, early codificationwould be preferable. Drafting of laws with sufficienttime before their full implementationwould allow economic actors to be educated and progressively adapt their practices to the new code of conduct. This in fact is one the important lessons from the American turn-of-the-centuryexperience. Then, business practices often served to restrain trade and distort competition,and only after a considerabletime lag did the new and forceful pieces of antitrust legislationmake a difference. This monograph also stresses that an open trade regime is not a substitutefor effective antitrustpolicies: the two are complementary dimensions of competitionpolicy. This proposition applies even to small open economies. Clearly, this is the case for non-traded goods and services. Yet even for tradable goods antitrust action might be required, if domestic firms producing those tradables are able to exercisemarket power without fear of losing sales to foreign suppliers. The extent of import penetration is an important considerationin assessing the intensity of import competition. When penetration is low, not constitutinga significantshare of the total domestic market, import response to price increases, for example,may be limited. Similarly,when name recognitionof imports is lacking, distribution channels are weak and after sales service poor, the contributionof imports to the forces of competition is, at best, marginal. This is particularly the case when effective use of a product is predicated on close assistanceby the

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seller, in terms of maintenance,repairs, and overall technicalassistance. In addition, numerous tradable goods sectors,due either to cost conditionsor to the policies of trading partners, exhibit oligopolisticmarket structures that encourage anti-competitiveconduct by suppliers. An open trade regime does not inhibit such behavior by foreign suppliers,but antitrust law should. Antitrust legislation.in both design and implementation,should strive to protect the process of competitionand not individualcompetitors. In the countries surveyedhere, antitrust laws have been designed and implemented to protect both small producers and the competitiveprocess, but with differing degrees of emphasis. Traditionally,this has been a key difference between European and American antitrust policies, with the former placing more emphasis on ensuring the survival of small firms. These dual goals are not always compatible,and in many instances,small firms can be protected only at the sacrifice of efficiency. Thus the law should proceed cautiously. Competitivebehavior, even if fairly aggressive,should not be restrained, as long as no overt predatory intentionsor monopolizingobjectivesare likely to succeed. Competition often requiresweaker rivals to restructureoperations or exit. This Schumpeterianprocess of "creative destruction"is as essential to economic progress as the entry of new actors in the market. In a world where response flexibilityand resourcemobility are critical for the competitiveposition of firms, industriesand nations, policy-generatedor strategic obstacles to entry and exit should be removed to the extent possible. Certainly,neither entry nor exit should be impeded by antitrust legislation. The design and implementationof antitrust legislationis not trivial. Required legal and economic expertise is often lacking in developing countries. Even with appropriate resources,the costs of regulatory failure may be significantand, moreover, dominate whatever benefits are derived from correcting perceivedmarket failures in the competitiveprocess. Regulatory capture, informationasymmetries,and more mundane problems of corruption contribute to decrease the efficiency of regulatory regimes. Still, antitrust law is implementable,even in less developed economies. A set of well-codified,simple, transparentper se rules (that is, not subject to interpretation)could be a beginning. It would provide deterrence through unconditionalprohibitionof conduct with relativelylow expendituresof enforcementresources. Particularlyin the early phases of implementation,and for an initial learning period, little discretionwould be left to the staff of the implementingagency. Rule of reason treatment,on the other hand, recognizesmitigating circumstancesin judging the legality of conduct, and is more appropriatefor types of behavior that may both harm competitionbut contributeto other efficiencyor equity goals. This treatment would be phased in over a longer period of time, as the enforcement agency matures. The implementationof antitrust law needs to be supportedby a legal system characterizedby enforcementof contractualobligations and ownership rights. Legal reforms will likely be necessary for the implementation of antitrust laws, both to curb corruptionand minimize the probability of regulatory capture. Regarding the latter, it would be helpful if civil parties were allowed to sue individualsor corporationsengaged in anti-competitivebehavior. Such a decentralizedmode of enforcementwould avoid having the potentiallypowerful instrumentof anti-trust legislationbe manipulated by a single agency or dominant interests. Proceedingsof the

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antitrust agency should be characterizedby transparencyand accountability, thereby opened to public scrutiny. Deterrenceof anti-competitivebehavior might be accomplishedat lower costs if both civil and criminal charges could be pressed, particularlyin instancesof per se prohibition,such as price fixing. Finally, despite possible imperfectionsin the legal system, the antitrust agency has an importantrole to play as an advocate for comRetition not only with society at large, but with other Government agencies. The educationalvalue of an antitrust legislationand its importanceto improving business ethics is closely related to how forcefully the agency in charge of its implementationpromotes competition. This technicalpaper is part of IENIN's series on regulatory policy and reform in industrializingcountries. Forthcomingpapers within the same general theme include: "The Economics of IndustrialPollution Control: an InternationalPerspective"; "The Basics of Consumer Policy: Principles and EnforcementPractice"; "A Cross-CountryAnalysis of IndustrialExit"; and "Labor Policies and RegulatoryRegimes." Mark Dutz and Claudio Frischtak

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ACKNOWLEDGEMENTS

The authors are grateful for the helpful comments of a number of colleagues. Special thanks are due Claudio Frischtakand Mark Dutz of the World Bank, Malcolm Coate and Jim Langenfeldof the Federal Trade Commission, Mark Frankena of Economists, Inc., and ProfessorJanusz Ordover of New York University. Special thanks are also due Professor Jorn Kruse, Dr. Hermann Kallfass, and Dipl. Vw. Marisa Weinhold of the Universityof Hamburg and Professor Erhard Kantzenbach of the HWWA-Institutfur Wirtschaftforschung, Hamburg, Germany. Opinions, errors, and omissions are the responsibilityof the authors alone and do not necessarilyrepresent the views of the Federal Trade Commissionor the HWWA-Institut.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY

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I.

INTRODUCTION .1... . . . . . . . . . . . . . . . . . .

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II.

THE CONCEPTUAL BASIS OF COMPETITION POLICY

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The Interaction Between Market Structure, Private and Economic Performance . . . . . . . . . Entry .... . . . . . . . . . . . . . . . . . . Barriers to Entry .... . . . . . . . . . . . . Market Structure and Efficiency . . . . . . . . Market Power and Antitrust Markets . . . . . . . Market Dominance .... . . . . . . . . . . . . . The Relationship Between Competition and Trade Policies .... . . . . . . . . . . . . . .

Conduct, . . . . . . . . . . . . . . . . . . . . . . . . . . .

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III. A BRIEF DISCUSSION OF NATIONAL ANTITRUST POLICIES United States Germany . . . Japan .... . France .... . United Kingdom EEC .... . . Canada . . . . Australia . . Korea .... . Sweden . . . . Spain . . . . IV.

CONDUCT POLICIES

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The Legal Treatment of Horizontal Restraints . Parallel Pricing . . . . . . . . . . . . . . . The Legal Treatment of Vertical Restraints . . Restraints by Dominant Firms and the Protection Competitors . . . . . . . . . . . . . . . . Enforcement Standards . . . . . . . . . . . . V.

STRUCTURAL POLICIES:

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MERGER CONTROL AND DEMONOPOLIZATION

Merger Control Regulations . . . . . . Pre-Merger Notification . . . . . . . Merger Control Enforcement . . . . . . Remedial Measures Under Merger Control Demonopolization . . . . . . . . . . .

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PERFORMANCE POLICIES.

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Administrative Pricing by Antitrust Authorities . . . . . .

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ANTITRUST EXEMPTIONS .90 Exempted Cartels . . . . . . . Domestic Competitive Effects of Cartels and Competition Policy Cartels and Industrial Policy Trade Unions . . . . . . . . .

VIII. INTERNATIONAL ANTITRUST

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The Economic Rationale for International (or Interjurisdictional) Antitrust Policy . . . . . . . Jurisdictional Principles of International and Interstate Antitrust Policy . . . . . . . . . . . . . . IX.

109 115

SUMMARY .118

REFERENCES ..

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EXECUTIVE SUHHARY The decade of the 1980s witnessed a world-wide trend towards economic liberalization,the opening of markets, and the encouragementof trade, as many developed and developingnations began to emphasize market forces rather than state direction as a means of determiningthe production and distributionof goods and services. Competitionpolicy (called antitrust policy in the U.S.) supports economic liberalizationby encouraging and sometimes requiring independentbuyers and sellers to compete. That is why during the 1980s virtually every developed nation strengthenedits competition laws while some countriesenacted new laws designed to ensure that barriers to trade and competition,once removed by the state, would not be resurrected by private action. By surveying the practices of ten nations and the EEC, this paper strives to illustratethe fundamentalconcepts and practical aspects of competitionpolicy. The survey covers the United States, Germany, Japan, the United Kingdom, France, Canada, Sweden, Australia,Korea, Spain, and the EEC. The laws of these jurisdictionsvary with respect to practical enforcement and statutory design. Historically,competitionpolicy has been employed primarily to protect the competitiveprocess in relativelymature economies for which internal competitionis an important feature of commerce;hence, the strictest competitionpolicies are those of the United States, Germany, and the EEC. In the German and American systems,which have served as models for antitrust legislationand administrationin the rest of the world, judicial decisions play a central role in defining and enforcing competition law, a feature shared with Australia,Japan, Korea, Canada, the EEC, and (recently)France. In contrast,judicial decisions play a relativelyminor role in the competitionlaws of the U.K., Spain, and Sweden; these nations employ an administrativesystem for which the interpretationand enforcement of the law rests with an administrativecourt and an appointed official of the executivebranch, usually a minister of economics. Fundamentally,competitionlaws that serve a variety of goals (rather than those that support competitionas an important means of attaining these goals) allow greater political discretionand generallyprovide for weaker enforcement. This has been an important element of the industrial and developmentalpolicies of the U.K., Sweden, and France. For competition laws relying on judicial decision,political discretioncomes primarily from the granting of legal exemptions,an important feature of Japan, Korea, and Germany. ComDetitionlaws are based on two distinctbut related concepts: market power and dominance. In practice, most forms of competitionpolicy are designed either to undermine the ability of suppliers to exercise market power or to inhibit the ability of dominant enterprisesto abuse their size. This is because the exercise of market power is often incompatiblewith economic efficiency, and dominance allows a supplier to erect private barriers to

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trade, restrictcompetition,and compromisethe economic freedom and viability of other parties. Market power is dependent upon relative size (market share) and the structure of economicmarkets, that is, upon the number of competing suppliers, the ease of entry, the presence and importanceof barriers to trade, and the availabilityof substitutegoods. Dominance is dependentupon the absolute size of the supplier, its links with customers and its own suppliers,and on its ability to determine the economicviability of its trading partners. Competitionlaws based on the concept of market power and efficiencyderive from a concern for consumer welfare. In contrast, laws based on the concept of dominance often serve to protect competitorsrather than the process of competition. Trade liberalizationconstitutesan inadequatesubstitute for effective competitionpolicy, because in many cases it is unlikely that liberal trade will result in competitivemarket structuresand encourage efficient conduct. Thus, it is more appropriateto regard competitionpolicy and trade liberalizationas complementary,rather than substitute,policies. The relationshipbetween trade and competitionpolicies is reflected in the role of foreign competition in market power analysis, in the use (in Canada and Japan) of trade policies as remedies for competitive restraints,and in the competitiveeffects of trade and industrialpolicies. Tariffs, quotas, and anti-dumpingduties all reduce the scope of economic markets, inhibit competition from foreign suppliers,raise industrial concentration,and in these ways contribute to the exercise of market power, to the detriment of consumers. (As used in competitiveanalysis, measures of industrialconcentrationdo not distinguishamong suppliers based on nationality. Thus, protectionisttrade policies that exclude foreign suppliers from a domestic market unambiguouslyraise industrialconcentration in the short run. See Sections II and VII.) Of the three jurisdictionsmost active in filing anti-dumpingactions, the United States, the EEC, and Canada, the first two have relatively strict competition laws, and Canada has recently strengthenedits competitionlaw. Were this not the case, a policy of actively pursuing anti-dumpingactions would likely be even more costly for consumers in these jurisdictions. Competition law intervenesin three distinct areas: in the conduct of business, in the structureof economic markets, and in economic performance. The greatest commonalityamong the surveyed jurisdictionsis in conduct regulations,which are usually stated as prohibitionsof conduct that either restrains trade, lessens competition,or abuses a market-dominating position. In certain circumstances,many of these competition-restraining types of conduct can contribute to economic efficiency,and competition laws are generally designed to balance harm to competitionagainst improvementof efficiency. In this regard, the competitionlaws of the United States, Germany, and the EEC judge competitiverestraintsunder a stricter standard than other jurisdictions,requiring greater evidence that the restraints improve efficiency. Elsewhere,the regulationof restraintsof trade is more lenient, particularlyin such economies as Sweden and the U.K. where res-

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traints are judged by goals (e.g. regional employment,balance of payments) other than competition. Competition law, as it applies to the structureof economic markets, intervenesin intercorporatetransactions,usually mergers, joint ventures, and asset transfers. This occurs when these transactionswould weaken the independenceof competing suppliers and raise concentrationin economic markets to high levels. Historically,only Germany and the United States have actively intervenedin market structure,by requiringpre-merger notificationand prohibitingcorporate transactionsleading to high concentration in economic markets; otherwise,the surveyedjurisdictionshave not exercised significantcontrol over market structure owing to a conviction that large economic entities are better able to compete in internationalmarkets. Yet as an economy developsand experiencesrising levels of industrial concentration,there is a tendencyfor governmentsto exercise greater control over market structure. It is this area of competitionlaw that has developed most rapidly throughoutthe 1980s, with the EEC, the U.K., Spain, Germany, South Korea, and Canada strengtheningthe oversight and control of market structure. Performancepolicies, those by which the state corrects monopoly situationsor restraintsof trade by dictatingprices or outputs, are generally availablebut little used in the surveyed jurisdictions. Fundamentally, such policies are perceived as incompatibleto some degree with the belief shared among the surveyedjurisdictionsthat markets do a better job of determiningprices and outputs. The United States makes little use of performance policies in enforcing its competitionlaws. They have been used in Sweden, the U.K., Germany, and France and are availablealso in Japan, Korea, and the EEC. Judging from the historical record, the state seldom has sufficientinformationto determine the price that would occur under competitive conditions. As a result, where competition law is enforced by the judiciary, enforcementauthoritiescan seldom defend an administeredprice in court. Economic performancemeasures are used primarily to direct enforcement efforts under the competitionlaws, particularlyin investigationsof price fixing, a practice illegal in each of the surveyedjurisdictions. The competitionlaws of the surveyedjurisdictionsallow antitrust exemptions as a means of supportingindustrialpolicies designed to promote sector-specificdevelopment. Industrialpolicies such as these often have significantanticompetitiveeffects. In particular, state-sponsored cooperation among domestic suppliers often harms competitionand encourages supra-competitivepricing. Where a nation must consume the products of protected domestic industries,these effects may offset any gains realized by domestic suppliers. Historically,Japan, Korea, and Germany have most often sanctionedcooperativeactivitiesamong domestic suppliers. Yet as development has progressed, owing to the increasingstrength of consumer interests, these nations have become increasinglyconcerned about the anticompetitive consequencesof certain industrialpolicies and are increasinglyskeptical that industrialconcentrationpromotes economic development. Reservations regarding the effectivenessof sector-specificindustrialpolicies, such as cartelization,have led to increasinglystringentcompetition laws and more narrowly defined criteria for exemption from those laws.

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The recent, striking developmentof the common market in Europe and the emphasis given there to competitionlaw points to the potential contributionto economic developmentfrom internationalcompetition law. Many nations pursue industrialpolicies that essentiallyfoster domestic industry by imposing costs on other nations. For example, each of the surveyed economies exempts export cartels from competitionlaw, thereby allowing supracompetitive pricing toward trading partners. Such policies commonly become the subject of trade disputes, and domestic competitionlaws provide a nation with limited means of defending itself against "beggar-thy-neighbor" industrialpolicies practiced by its tradingpartners. Yet domestic competition laws are designed, through limitationson jurisdiction,to promote the economic interests of only a single nation and do not reconcile the conflicting interestsof different nations. Conduct such as export cartelizationis permitted because it is economicallybeneficial for a single nation, even though the costs to trading partnersmay exceed the benefits to the exportingnation. Consequently,domestic competitionlaws provide only an imperfectmeans of promoting the developmentof the world economy. Internationalcompetition law better promotesworldwide developmentby reconciling conflicts among nations and determiningthe legality of business conduct in response to the international,rather than the national, competitive effects of that conduct. The primary example of an effective internationalcompetitionlaw is that of the EEC. Its competitionlaw was encoded in the Treaty of Rome and has evolved through decisions of the European Commissionand rulings of the European Court of Justice. As in the United States, where individualstates share enforcementresponsibilitywith the federal government,competition law in the EEC is enforced at two levels: by the member states and by the Commission itself, and jurisdictionis allocatedaccording to the geographic scope of commerce. Each member state regulates commercewithin its own borders and the Commissionregulates trade among the member states. Thus, the EEC and the U.S. practice parallel enforcementof competition law by national (or state) and international(or federal)authorities. Competition law in the EEC reduces barriers to trade (within the EEC) in two importantways. First, restraintsof trade by exporters,harming the interests of other member states, are likely to violate Community law even though legal under national law. Second, industrialpolicies detrimentalto the interestsof member states are likely to violate provisionsof Community law. The EEC provides a laboratory in which to view the effects, and ultimately the desirability,of eliminating trade barriers so as to create a larger economicmarket. In addition, the experienceof the EEC illustrateswell the pervasive effect of competition law on the conduct and growth of internationaltrade and the progress of industrialdevelopment.

I. INTRODUCTION The increasinginterest in competitionpolicy in a number of nations during the 1980s representsa strikingdevelopment. Competition policy, known in the United States as antitrustpolicy, is designed to preserve competitionamong independentbuyers and sellers in relatively unregulatedmarkets. In the last decade, the Republic of Korea, France, Spain, Italy, Canada, Portugal,Austria, Denmark, Finland, Ireland, New Zealand, and Switzerland,among others, passed new legislationor amended current legislationdesigned to effect or strengthenvarious competition policies.!/In many cases, the legislativeinitiativesaddressed the control of mergers and industrialconcentration. The European Economic Community,in preparation for a Communitywide common market (1992), recently enacted merger control legislation. More broadly, the EEC has been removing political and regulatoryimpediments to trade among its member states. The United States and Canada have entered into a free trade agreement,and Australia and New Zealand have agreed to coordinate their enforcementof competitionlaw. Finally, a number of nations, among them the United States, France, and the U.K., have taken steps to deregulatemarkets, with more emphasis on private decision-making. The movement toward economic liberalizationhas created a growing awarenessof competitionpolicy as a means of supportingefficientmarkets. Competitionpolicy strives to ensure that barriers to competitionand trade, once removed by the State, are not resurrectedby private action. This paper discusses the central notions of industrialorganization and competitionpolicy in an internationalcontext. The need for brevity prevents a comprehensivereview of the country-specificprinciplesof antitrustpolicy, law, and enforcement. Instead, the paper describes the main conceptsof industrialorganizationas they apply to antitrust and shows the diversity of antitrust policies in design and practice, illustratingthe theoreticaland practical strengthsand weaknesses of the various approaches to antitrust. The paper also discussesthe relationshipbetween competition policy and industrialand trade policies. Section II reviews the basic concepts of antitrustpolicy, market power and dominance,and briefly describes the structure-conduct-performance (SCP)paradigm of industrialorganizationas a means of classifying the various kinds of antitrust regulation. Section III reviews the major aspects of the antitrust policies of ten nations and the European Community. Section IV describes the regulationof private economic conduct under various competitionpolicy regimes. SectionsV and VI discuss competitionpolicy regulationand enforcementpertainingto market structure and economic performance,respectively. Section VII describes the relationshipbetween antitrust exemptionsand certain industrialand trade policies. Section VIII discusses issues arising from the internationalization of antitrust law in the context of the EEC. Finally, Section IX summarizes the main conclusions about the role of competitionand industrialpolicy in internationaltrade.

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See OECD, CompetitionPolicy in OECD Countries,Paris, 1989, pp. 7-26.

-2 II.

THE CONCEPTUAL BASIS OF COMPETITION POLICY

In the economiessurveyed, decentralized,competitiveeconomic systems are regarded as more efficient and more supportiveof economic development than centralizedregimes.-Yet experiencehas shown that unfettered competition (that is, with no ground rules) does not always serve national economicgoals. Private parties often have economic incentivesto acquire market power (i.e., discretionover price) through the erection of barriers to commerce, allowing them to raise prices and lower output of goods

and services,thus fosteringinefficientbusiness practices and impeding economic development.3In some of the surveyedeconomies,particularlyin Europe, competitionpolicy also serves politicaland social goals. For example, policy is designed to defend the individualright to engage in commerce in open markets and to dilute the economicpower of dominant enterprises. More broadly, it attempts to ensure that economic power is not concentratedin the hands of a few parties. The concept of economicpower is broader than that of market power and encompassesthe ability of large firms to determine the economicviability of their smaller trading partners and to influencethe political process in democraticsocieties. In practice, the concept of limiting economic power as the basis for competitionpolicy can be consistentwith the pursuit of economic efficiencyand development. Actions often are taken against dominant firms to prevent their exercise of market power. Yet defending economic freedom--byprotecting small, inefficienteconomic entities against large, efficient ones--sometimesattenuatesthe degree to which competitionpolicy promotes economicefficiency. Although there are many measures of, and criteria for, economic performance,the performanceof economic systems generally is judged in terms of allocativeand technical efficiency. Technical efficiencyand allocative efficiency are necessary conditionsfor static, system-wideefficiency.Y Technical efficiencyoccurs when productionand distributionof goods and

2/

A decentralizedeconomic system is one for which the production and distributionof most goods is controlledby many independent (usually private) parties. In contrast,productionor distributionmay be centralizedunder control by a state agency, by a private monopolist,or by a small group of oligopolists.

3~./ In this context, "price" refers to any component of the terms of trade between buyer and seller, includingbut not limited to product quality, service,warranties, and other conditionsof sale, as well as the nominal price paid for a product. 4/

Static efficiencyis defined with respect to fixed technological constraints. This should be distinguishedfrom dynamic efficiency, which depends on the rate at which technologicalconstraintschange over time (due, for example, to research and development).

-3 services take place at minimum cost, given technologicalconstraints. Allocative efficiencyoccurs when resources cannot be reallocatedamong parties, or production and distributionreorganized,to serve better the demands for goods and services. When an economic system cannot be improved upon (by better satisfyingthe demands for goods and services), it is said to be efficient. Another performancecriterion is "x-inefficiency," which refers to a variety of managementpractices resulting in technical or allocative 1 X-inefficiencyis particularlyrelevant to competitive inefficiencies.2 analysisbecause managerial efficiencydepends in part upon competitive pressures from other suppliers. The managers of a supplierprotected from competitionmay have the means and the incentivesto operate inefficientlyby toleratingthe wasteful use of resources (an allocativeand, perhaps, technical inefficiency),declining to undertake improvementsin productivity (a technical inefficiency),or expending resources to create or enlarge monopoly rents, even where such expendituresare not sociallyproductive (an allocative inefficiency). For example,productivity improvementsnecessary for a supplier to survive competitivepressures may be viewed by management as unprofitableif the supplier is protected from competition. In addition, capital owners, though able to monitor (throughcomparison)the managerial efficiencyof competing suppliers,are less able to monitor the managerial efficiencyof a supplier that is protected from competition,for protection from competition tends to undermine the basis for comparison.Y The Interaction Between Economic Performance

Market Structure,

Private Conduct,

and

The relationshipbetween the economic organizationof production and distributionin markets and economic performance can be described by a historicalparadigm that distinguishesbetween the underlyingstructure of markets, the private conduct of buyers and sellers, and the performance of the market in terms of social and economic welfare. The structure-conductperformance (SCP) paradigm provides a convenientway to classifyvarious competitionpolicies. The basic tenet of the SCP paradigm is that performance in a welldefined economic market depends on the interactionbetween the structure of the market and the conduct of buyers and sellers in that market:

2/

See H. Leibenstein,"AllocativeEfficiencyv. 'X-Inefficiency'," American EconomicReview 56, June, 1956, pp. 392-415.

i./

This is based upon the separationof business ownership and control and upon the propositionthat capital owners have limited informationwith which to assess the performanceof managers; thus, comparing the performance of the managers of competing suppliers improves the ability of capital owners to monitor managerialperformance and improves the functioningof the market for corporate control (in which managers compete for control over business assets). In this sense, managers inherit the competitivepressuresbearing on the firms they manage. See J. Tirole, The Theory of IndustrialOrganization,MIT Press, 1988, pp. 75-78.

-4 *

Structure refers to the organizationof productionand distribution and the determinantsof competition,namely the number and size of buyers and sellers, the extent of product differentiation, the ease of entry and exit by suppliers,the degree of unionization, and the contractualand legal relationshipslinking buyers and sellers (for example, through vertical integrationand the 2' extent of conglomeration).

*

Conduct refers to the general competitivestrategy and specific tactics by suppliers,such as pricing, product development, advertising,innovation,and investment.

*

Performancerefers to the goals of economic organization,namely the pursuit of productiveand allocativeefficiency,technological progress, price and availabilityof goods, and full employmentof resources.

The SCP paradigmwas originallyinterpretedto mean, first, that market structure could be basically capturedby measures of market concentration,and second, that market structurewould be the primary determinant of both conduct and performance. Yet, industrialconduct and performance are also criticallydependent on such structuralfactors as potential competitionand barriers to entry. Hence, a descriptionof market 2! Furthermore,the structure focusing on concentrationis incomplete. relationshipbetween structure and conduct is one of mutual interaction,not one-directionalcausation. For example,predatory market behavior (predation) and certain kinds of discriminatoryconduct are illegal in most of the surveyed economiesprecisely because these forms of conduct may influence market structure. Scherer correctly notes that "the policies pursued by sellers in coordinatingtheir mutual price interactionsmay either raise or lower barriers to entry, affecting market structure."LI If, as the reconstructedSCP paradigm maintains,economic performance flows from both conduct and market structure, then competition policies can be designed to influenceeconomic performanceby intervening directly (in performance itself) or indirectlythrough economic conduct and/or market structure.

]./

In addition,market structure depends on a variety of economic conditions regarding the nature of the product (durability,heterogeneity, cyclicalityor seasonalityof demand, transport costs), the production process and costs, and public policies (such as environmental,safety, and trade regulations).

{./

This view still persists to some degree; see C. Green, Canadian IndustrialOrganizationand Policy, 3rd. edition,McGraw-HillRyerson Ltd., 1990, p. 48.

i2/

For an early discussion of potential competitionand barriers to entry, see J.S. Bain, Barriers to New Competition,Harvard University Press, Cambridge, 1962.

Q/

See F. Scherer, IndustrialMarket Structureand EconomicPerformance, 2nd. edition, Rand McNally, 1980, pp. 4-5.

-5 The relativeemphaseson regulations of market structure,conduct, economiessurveyed and economicperformance vary among the industrialized laws appliedonly to conduct. here. In all these economies,early competition by laws or amendmentsextendingantitrust Later they were supplemented oversightto market structure,althoughsome governments,such as Sweden, intervenein market structureonly infrequently.

Entry In market economies,investmentdecisionsare generallymade by privateparties.Profit-seeking by these investorsresultsin the allocation of differentactivities of resourcesaccordingto the relativeprofitability so that producersare attractedto expanding(or under-supplied) marketsand exit from declining(or over-supplied) markets. Financialgain from enteringa particularmarket dependson the risks, delays,or costs of entry. In marketsfor which entryand exit are relativelyeasy, immediate,and inexpensive(i.e.,entry and exit are "free"), potentialsuppliersenter and incumbentsexit very quicklyin responseto 1 1 In fact, entryand exit periodiceconomicshocksthat affect profits.@ representa dynamicprocessby which the supplyof each productadjuststo economicshocksuntil the productprice is at a level that makes furtherentry unprofitableor furtherexit unwarranted. Ease of entry and exit allows efficientsuppliersto displaceinefficientones by offeringproductsat prices at which the lattercannotbe profitable. Furthermore, free entry and exit supportallocativeefficiencyby directingresources,withoutimpediment, acrossmarketsaccordingto their relativeprofitability. Entry conditionsare a cen.ralfeatureof antitrustanalysis market force that undermines becausepotentialentry representsa significant incumbents'tendencytowardunilateralor joint (collusive)exerciseof market the exerciseof marketpower requiresthat suppliers power. Fundamentally, restrainoutput,therebycreatingopportunities for potentialentrants. Where entry is easy, collusionto raise price, if successful,wouldattractnew supplierswhose presenceunderminesthe collusivearrangement.As a result, there is littleincentivefor incumbentproducersto attemptcollusion. Similarly,the abilityof a firm to abuse its dominantpositionin a particularmarketgenerallyresultsfrom a paucityof alternativesuppliers. such abuse. For that reason,entry representsa powerfulforce restraining

11!

By "shocks,"we mean events such as periodicand unforeseenfluctuations in productdemand and inputprices,the introductionof new technologies and changesin the legal and cost-savingdevices,productinnovations, and regulatoryenvironment.

12/

The landmark1972 ContinentalCan case illustratesthe point. ContinentalCan of the U.S. controlledthe largestcan supplierin AG, or SLW) and attemptedto acquire a Germany (Schmalback-Lubeca-Werke controllinginterestin the largestDutchmanufacturerof light cans for would likely enhancea preservedfoods. To show that the transaction dominantposition,the EuropeanCommissionhad to show that SLW was dominantin the Germanmarket for light cans. Even thoughSLW's market shares in the threedistinctrelevantmarkets (open-topcans for meat were 70-80%,90%, and and for fish and metal tops for glass containers)

-6-

Barriers

to Entry

Barriers or impediments to entry are obstacles which increase risks, delays, or costs to a new supplier and thereby result in a cost disadvantage vis-a-vis incumbents.L3 Thus, entry is less profitable and less likely. A variety of factors may give rise to barriers to entry: *

Large irretrievableexpenditures on plant and equipment, product development, commercial R&D, marketing or advertising which may raise the risk of financial loss;

*

Economies of scale requiring that an entrant capture a significant portion of the market (to avoid being a high-cost supplier);

*

Regulatory policies, such as requirements for product quality certification (particularlyfor food and drugs), which may delay the marketing of an entrant's products for several years; or restrictions on operating licenses (e.g., in taxicab regulations), which often are binding barriers;

*

Trade and industrial policies (see Section VII) such as tariffs, quotas, and domestic content regulations; and

*

Predatory practices and other entry-deterring conduct by incumbents in highly concentrated markets.

92/(...continued) 55%, the European Court of Justice decided that SLW was not dominant because of ease of entry. In particular, the Court ruled that an attempt by SLW to abuse its position would result in can production by customers (food processors), outside sales of captive can production by currently vertically integrated food processors, and supply side substitution by the manufacturers of other kinds of cans. See F. Fishwick, "Definition of Monopoly Power in the Antitrust Policies of the United Kingdom and the European Community," Antitrust Bulletin, Fall, 1989, p. 479.

J,../

Stigler defines a barrier to entry as any feature of a market imposing costs on entrants that incumbent suppliers did not face when they entered the market. For example, an environmentalpolicy of exempting existing production facilities from pollution control requirements, while requiring state-of-the-artpollution control equipment in new facilities, constitutes a Stiglerian barrier to entry. Note that the Stigler definition is very narrow--it excludes, for example, economies of scale. See G. Stigler, The Organization of Industry, U. of Chicago Press, 1983, Chapter 6. Antitrust enforcement is concerned not only with Stiglerian barriers, but more often with impediments to entry that impose costs on potential suppliers, regardless of whether these costs were once borne by incumbent suppliers. See J. Bain, Barriers to New Competition, Harvard University Press, 1956, pp. 1-2,; see also the U.S. DoJ "Merger Guidelines," sec. 3.3, 1984.

- 7Market

Structure

and Efficiency

Broadly speaking,market structuresare distinguishedby how intense are the competitivepressures faced by incumbents. The primary structuralcharacteristicsof a market are the number of suppliers, the severity of barriers to entry, and the extent to which competing products are viewed by buyers as substitutable. On the basis of these characteristics, markets can be categorizedas: *

Perfectly competitive--refersto a market with many suppliers selling a homogeneousproduct under conditionsof free entry and exit.14/

*

Monopolisticallycompetitive--identical to a perfectly competitive market except that the product is assumed to be heterogeneous,so that different suppliersprovide close but not perfectly substitutableproducts.

*

Oligopolistic--amarket with significantbarriers to entry and few suppliers;the latter operate in an environmentof recognized competitive interdependence(sales and profits of a single supplier depend on its actions and the reactionsof few others).

*

MonoDolistic--refersto a market supplied by a single firm 1 . insulated from competitionbecause of high barriers to entry.

In perfectly competitivestructures,unconstrainedmarket forces lead to socially optimal productionlevels at prices that exactly compensate suppliers for their necessary production costs, bringing therefore the attainment of static efficiency. With many firms supplyinga homogeneous product, competitivepressures leave each supplier little discretion over pricing--pricedifferentialsfor identical products are quickly eroded. Naturally, each firm has no incentive to set its price below the market price, while selling above the market price results in the loss of business to other suppliers. Thus, each supplierpossesses no market power. This means that

iA/

A homogeneousproduct is one whose physical characteristicsdo not significantlydiffer among suppliers. Cement, red winter wheat, copper ore, and crude oil are examples. A heterogeneousproduct is one whose physical characteristicsvary significantlybetween different suppliers. Automobiles,personal computers,household appliances,and consumer electronics are examples.

L5/

Though these definitionsrefer to the supply side of a market, equivalent concerns apply for the demand side, where the exercise of market power by buyers depresses the price paid for a purchased product and results in less-than-optimalsales of the purchased product when product supply is competitive. For market structureamong buyers, monopsony refers to a single buyer; oligopsony,to a few buyers; and so on.

-8 the output of each supplier is limited only by cost increases (at high levels 1 of output) that render further increases in output unprofitable.) In monoRolisticallycompetitivemarkets, each supplierpossesses some degree of market power because certain consumersmay have a preference for that supplier'sproduct and will pay a premium for it. Price differentialsare not eroded by arbitrage,thus reflectingthe value of qualitativedifferences among products. Moreover, because suppliers possess market power, they may set output levels below those at which costs would be minimized. Monopolisticcompetitionfails to provide for static efficiency only in that production costs would be lower if the product were produced under perfect competition. Yet this comparisonassumes that product variation has no social or economic value, an assumptionthat fails for markets such as apparel, for which style, color, and fit are important. If product variation has value to consumers, the attainmentof static efficiency depends upon whether monopolisticcompetition provides for too much or too little product variation, given consumer preferences and production costs. Yet even in monopolisticcompetition,free entry promotes more efficient conduct and superioreconomic performanceby ensuring supply by the most efficient suppliers,providing buyers with more alternatives,increasing the elasticityof demand of each supplier, and limiting the exercise of market power. Monopoly and oligopolisticmarket structuresare distinguished from perfect and monopolistic competitionin that entry is time consuming, costly, and risky. A monopolist typicallypossesses significantmarket power. On the one hand, by setting price just below the level that would attract rivals, the monopolist can earn supra-competitiveprofits.-7'On the other

]i~/

In these circumstances,suppliersare referred to as "price takers."

17/

In traditionalindustrialorganization,this considerationled to the theory of limit pricing, which recognizedthe influence of potential entry on the pricing of incumbent firms. A similar idea is captured in the theory of contestablemarkets, for which, like pure and monopolistic competition,entry can be accomplishedwithout significantsunk costs or delay. Unlike the pure and monopolisticcompetitionmodels, a contestablemarket may in practice be served by only a few producers. Yet even a highly concentratedmarket, if contestable,does not support the exercise of market power owing to the ease of entry. The best-known example of a contestablemarket is a city-pair market for commercialair transportation. Owing to economies of scale in air transport (note that the cost per passenger-mileis lower for high capacity planes such as the widebody aircraft),air service between two cities can sometimes be provided efficientlyby a single supplier. If such a "city-pair"market were contestable (as it would be if entry simply required that an air transportcompany divert an aircraft from serving some other market), then potential entry would prevent the single supplier from charging more than the competitiveprice. In fact, (continued...)

- 9 -

hand, the monopolistmay threaten or act in a predatory fashion towards entrantsvia selectiveprice cuts, thereby raising the costs--andrisks--and lowering the profitabilityof entry. Static efficiency fails therefore under monopolybecause restrictedentry and market power result in prices that are above, and output that is below, what is possible with available technology. Oligopoliesare characterizedby entry barriers and a small number of suppliers. The performanceof an oligopolycan range from competitive to monopolistic,depending on the characteristicsof the market and the conduct of suppliers. Antitrust is concernedwith oligopoliesbecause of the possibility that the few suppliers,recognizingtheir interdependence, will resort to collusivebehavior, essentiallyby avoiding competitionamong themselvesand chargingmonopoly prices.LI Collusive,monopolisticbehavior fails to attain static efficiency,as with a pure monopolist,because price is too high and output too low, given available technology. The simple microeconomicmodels described above provide considerableinsight into many fundamentalissues of antitrustpolicy. For example, the many varieties of exclusionarybehavior (such as predation, resale price maintenance,exclusive contracting,and refusal to deal) are commonly enjoinedby antitrust enforcementbecause they inhibit entry or other forms of efficient conduct. Many antitrustprohibitions--against price fixing, unreasonablerestraint of output, predation, and exclusion of rivals-serve to inhibit the unilateralor collusive exercise of market power. Finally, certain corporate transactions,such as horizontalmergers, are restrainedunder merger control policies so as to maintain independenceamong competing suppliers and inhibit further concentrationin markets with high barriers to entry. The presumption that high levels of concentrationlead to suboptimaleconomicperformancehas been criticizedbecause under plausible conditions,high concentrationmay itself be the outcome of more efficient enterprisesgrowing at the expense of their rivals. For example, if static economies of scale or learning-by-doingdrives cost reductions,then high concentrationoccurs as a direct result of firms behaving efficiently (by increasingoutput so as to reduce costs or speed the learningprocess). Thus, in some markets, technologicaladvantagesmay allow large (or more

Z/(.. *continued)

the allocation and pricing of aircraft landing and take-off rights may impede entry. See W.J. Baumol, "ContestableMarkets: An Uprising in the Theory of IndustrialStructure,"American EconomicReview 72 (1982). fi,/

Characterizingthe interactionamong oligopolistsis complex, for the competitive environmentvaries greatly across markets. Broadly speaking, the repeated interactionamong few suppliers (or repeated contact in many differentmarkets) is viewed as a vehicle by which they can learn to operate interdependently(and monopolistically). Alternatively,differencesin suppliers'characteristicsand delays in monitoring rivals' conduct are viewed as weakening this possibility. See J. Tirole, The Theory of IndustrialOrganization,1988, Chapter 6.

-

10

-

2 experienced) suppliers to operate at lower average cost than small ones.L9 The smallest firm (or plant) size consistent with the minimization of costs is referred to as the minimum efficient scale. The simplest example of a market for which a competitive market structure would not encourage economic efficiency is that of the natural monopoly, for which the minimum efficient scale is sufficiently large that one firm can serve the entire market.N1 A natural oligopoly results when the minimum efficient scale constitutes a significant portion of the market so that only a few suppliers may efficiently serve the market.21

Where technological factors allow large firms to be more efficient than small ones, the drive to minimize costs may result in a highly concentrated market. In this case, the exercise of unilateral or collective market power may be enhanced by suppliers' recognition of their competitive interdependence. Weighing the trade off between the efficiency advantages of large suppliers and competition presents some of the most difficult and interesting problems of competition policy.

Market

Power and Antitrust

Markets

Antitrust enforcement actions are most beneficial where the exercise of market power is likely. Although antitrust goals and policies vary considerably, analysis of market power does not; differences in analytic approach in the economies surveyed are often matters of nuance rather than substance. Market power is the ability to vary price without suffering large variations in sales, fundamentally due to a lack of alternative products. Analysis of market power therefore begins with an examination of the arena in which a particular supplier must compete.

L2/

A decline in long-run average cost as output increases is known as an economy of scale. Among the surveyed jurisdictions, one repeatedly encounters the argument that antitrust policy impedes the formation of large firms that may be more competitive at the international level than small firms. Maule and Ross argue that antitrust policy does not generally prevent the formation of large firms through internal growth supported by economies of scale and scope, nor does it normally prevent the demise of inefficient small firms (see Section IV). See C.J. Maule and T.W. Ross, "Canada's New Competition Policy," George Washington Journal of International Law and Economics 23, 1989, p. 86.

20/

Natural monopolies may be found in a number of public utilities such as electrical power and natural gas transmission, and local telephone service. Antitrust policy is seldom an adequate means of promoting efficiency in natural monopolies, and the pricing, production, and investment decisions of natural monopolists are generally subject to direct regulation.

21/

Numerous examples are available in markets whose products require research and development expenditures that can only be recouped if the developing firm serves a large portion of the market (e.g. commercial and military aircraft).

-

11

-

A formal concept of the competitivearena is the antitrust market. This consists of a set of sellers,buyers, and products for which substitution by the buyers, and competitionamong the sellers,encompasses the short-run competititiveforces influencingthe prices of the products. Antitrust markets have two components,the product market and the geographicmarket. The former consists of a group of products whose short-run prices are dependent primarily on competition from within the group. The latter consists of an area where suppliersare subject primarily to competitionfrom within that area. This commonlyoccurs in products for which high freight costs or tariffs effectivelylimit competitionto one region. The legal standards for constructingantitrustmarkets often must be gleaned from court records. To inform the private sector about enforcement criteria for competitionpolicy, some competitionauthoritiespublish guidelines describingthe applicationof competitiveanalysis. The U.S. Department of Justice's Merger Guidelines,most often cited by antitrust agencies around the world, provide probably the simplest unified characterizationof an antitrustmarket. Under these guidelines,a product market consistsof a group of products for which--if the products were suppliedby a hypothetical monopolist--asignificant,non-transitoryprice increasewould be profitable for the monopolist.2- Similarlyunder the guidelines,given the product market, a geographicmarket consists of an area for which--if the suppliers in the area were controlledby a hypotheticalmonopolist--asignificant,nontransitoryprice increaseby all the supplierswould be profitable for the monopolist. Profitabilityfrom the hypotheticalprice increase depends on the immediacy of the market reaction to the increase. For constructingantitrust markets, the U.S. guidelinesconsider only those reactions that occur within one year of the hypotheticalprice increase. These guidelines'assumption that all products and suppliers within a prospective antitrustmarket are controlledby a hypothetical monopolist focuses the analysis on competitionfrom outside the prospective antitrustmarket. In particular, a group of products and suppliers fails as an antitrustmarket when the group does not encompass all significant sources of competition. Where the hypotheticalprice increasewould be unprofitable due to competitionfrom outside the prospectivemarket, the antitrust market must be expanded to include these other sources of competition. This process

22/

The 1982 version of the DOJ Guidelinesused a 5-10% change in price as the standard for constructingantitrust markets. In 1984, the standard was changed to "significantand non-transitory"with the condition that a higher standard (10-20%)would be applied to define input markets for which the cost of the input was a small percentageof final product cost. In such markets, a small change in price (5%) would likely result in economic transfers to suppliers with no change in output. Hence, the higher standards are used to focus competitive analysis on situations where not only wealth transfers but also changes in output result from the exercise of market power. See Bureau of National Affairs, "Justice DepartmentMerger Guidelines,"Antitrust and Trade Regulation Report 1169, Washington, D.C., June 14, 1984.

- 12 -

of expansion continues until all significantsources of competitionare included (in the sense that competition from outside the prospectivemarket would fail to undermine a hypotheticalprice increase). The economies surveyed in this paper differ somewhat in their constructionof antitrust markets. Under the U.S. guidelines,an antitrust market includescompetitionfrom potential suppliers if that competitionis sufficiently immediate (i.e., occurs within one year of a hypotheticalprice increase). In contrast, European (and most other) antitrust agencies consider 1 only current suppliers to constitute the market.3 This differencein defining antitrust markets does not significantlyaffect the principlesof antitrust enforcementbut must be taken into account in comparing the scope of enforcement policies. This is particularlytrue for the use of market share standards in enforcement.B/ The size and configurationof geographicmarkets vary widely among products, from small areas to the entire world. Certain retail goods markets (notably grocery and departmentstores) have been found to encompass no more

2-/

The European approach to market definition is simpler than the American approachand distinguishesbetween market forces attributableto buyers and sellers. The American approach is more complex yet focuses on the effect (and the timing of that effect) of potential entry on incumbent supplierprofits; this approach better illustratesthe role played by potential entry and potential suppliers in enforcement standards. See E. Kantzenbach, "CompetitionPolicy in West Germany:A comparisonwith the antitrust policy of the United States," in Comanor and Jacquemin (eds.),Competition Policy in Europe and North America: Economic Issues and Institutions,Chur and London, forthcoming, p. 200. The competition statutesof certain nations, notably the U.K. and (prior to the 1986 amendments) France, do not rely on formal geographicmarket definition. Historically,the authoritiesin these countries defined geographicmarkets with respect to nationalboundaries. This ad hoc approach to geographicmarket definitionis inappropriatebecause commercialrealities often yield markets either smaller or larger than a single nation, in which case assuming a national market underestimates or overestimates(respectively)the extent of market power, with correspondingerrors in enforcement. U.K. merger review corrects for this by requesting sales and market share informationfrom merging firms on a regionalbasis; see Sir G. Borrie, "Merger Policy: Current Policy Concerns,"in J. Fairburn and J. Kay, Mergers and Merger Policy, Oxford, 1989.

24/

For a given market, potential and immediate supplierswould be included in the antitrustmarket under the American approach,whereas under the Europeanpotential entrants would be excluded from the market. Thus, if there were a number of potential and immediate suppliers, the American approachmight conclude that market concentrationwas low, whereas the Europeanwould find market concentrationhigher but entry easy. Generally, neither finding would be grounds for an enforcementaction on the basis of market power (though see our later comments on dominance).

- 13 -

than the metropolitanareas in which they operate.2- In contrast, for the many products actively traded in internationalcommerce, supra-competitive pricing by domestic suppliers often can be underminedby foreign suppliers. In this case the scope of the relevantmarket is international. Restrictivetrade policies such as tariffs and quotas reduce the size and scope of antitrustmarkets because they inhibit (low tariffs) or prevent (bindingquotas or high tariffs) the ability of foreign producers to supply the domestic market. In Korea, for example, Dong Yang's proposed 1982 stock purchase of Hankook, its sole domesticcompetitor in hydrogen peroxide, was blocked by the Korean Fair Trade Commissionbecause a 30% tariff made The tariff importedhydrogen peroxide uncompetitivein the Korean market. barred entry by foreign suppliers into the Korean market and narrowed what would have been a broader market, served by a number of suppliers,to one served by a duopoly. Because of the tariff, the proposed merger would have resulted in a domesticmonopoly. In contrast,a Canadian review of a merger between the only two newsprintmanufacturersin British Columbiawas allowed to proceed because the relevantmarket included the United States. Neither transportationcosts nor trade restraintsprevented U.S. newsprint suppliers 27 / from serving British Columbia. Within a valid antitrustmarket, the ability to exercise market power is stronglydependent on the number of competing suppliers or, implicitly,on the number of economic alternativesavailable to buyers. This aspect is captured in concentrationindices,which measure the extent to which economic activity is concentratedin the hands of a few suppliers. One set of concentrationindices,the leading firm concentrationratios, measures the proportionof sales accounted for by the leading firms in an antitrust market.M An alternativeconcentrationindex, currently gaining use in antitrust enforcement,is the Hirschman-HerfindahlIndex (HHI). The HHI is defined as the sum of squared market shares (expressedin percentage terms) 1 These indices increase as for all suppliers in an antitrustmarket.>

25/

For example, the Von's Groceriesmerger (1966) between parties controlling 7.5% of grocery sales in metropolitanLos Angeles was enjoined partly because the relevant antitrust markets were small areas of Los Angeles. The small markets defined in this case reflect the fact that consumers do not travel far to purchase groceries. See Scherer (1980), p.5 50 .

26/ See S. Wagner, "Antitrust,the Korean Experience,"Antitrust Bulletin, Summer, 1987, p. 513.

22/ Newsprint is an internationallytraded commodity,as only 12% of Canadian newsprint is consumed domestically. See OECD (1989), p. 72.

28f/ The concentrationratio Ci is defined as the proportionof sales accounted for by the i largest suppliers to a market. For example, Cl - 100% for a monopoly. If four equal-size supplierscompete in a market, then Cl - 25%, C2 - 50%, and so on. 9/

The HHI lies between 0 and 10,000. The HHI can be very small for competitive industrieswith many small suppliers. Alternatively,the HHI is 10,000 (100% x 100%) for a monopolist. The HHI has gained use (continued...)

- 14 economic activity in an antitrust market becomes concentrated in the hands of fewer suppliers. Although the standards for antitrust intervention vary among the countries surveyed, intervention often occurs when high concentration and difficult entry support the presumption that the exercise of market power is tm1 likely. Where the exercise of market power requires coordination among several suppliers, additional factors influencing the likelihood and feasibility of collusion must be taken into account. Broadly speaking, collusion to raise price creates a so-called "prisoners' dilemma" for the colluding parties.!3 Fundamentally, it requires restraint by individual participants. Yet a collusive arrangement, by raising price, creates an incentive for each supplier to secretly undercut the agreed-upon collusive price. Thus, the collusive group must have some means of monitoring the actions of its members and punishing those that stray from the collusive strategy. This is easier and less costly for a collusive group with few members. Given the number of suppliers, the feasibility of collusion in a well-defined market is influenced by ease of entry, product heterogeneity,

2/(...continued) among antitrust authorities because it accounts for the relative importance of all firms, whereas concentration ratios indicate only the relative importance of leading firms. Thus, the HHI gives a more complete description of market concentration. In addition, empirical studies have found the HHI to be positively related to price-cost margins and profitability, both of which rise with the ability of suppliers to exercise market power. See, for example, A.D. Strickland and L.W. Weiss, "Advertising, Concentration, and Price-Cost Margins," Journal of Political Economy 84, October, 1976. 10/

Market shares are most commonly calculated from sales. Yet sales do not necessarily reflect the ability of suppliers to utilize excess capacity or redirect output from one area to another. For some markets, particularly those involving homogeneous goods, productive capacity or reserve base is a more appropriate basis for market share calculation and a better indicator of the relative competitive significance of suppliers. See the DOJ Guidelines, section 2.4.

31/

The prisoners' dilemma refers to an anecdotal situation used in game theory to illustrate games for which all players can achieve higher payoffs through cooperation yet for which each player's self interest argues against his cooperating as long as other players attempt to cooperate. A non-cooperative strategy amounts to breaching the collusive agreement and often undermines the attempt to collude. The best example is provided by the difficulty experienced within OPEC in convincing certain OPEC members to restrain their individual production levels of crude oil. In this context, refusal to restrain production is most profitable for a particular country when high oil prices result from collusive restraint of production on the part of the other OPEC members. As the OPEC example shows, cheating on a collusive agreement tends to be contagious and thereby undermines collusion. Yet (as the OPEC example also shows) this may take a number of years and impose considerable costs on buyers; thus the need for antitrust policy.

- 15 -

productioncost structure,rate of market growth, size and frequency of transactions,and availabilityof public informationon prices and output. In heterogeneousproduct markets, suppliers can compete not only through price but through improvementsin a number of characteristicsvalued by buyers (e.g., quality, timely delivery,after-salesservices). As a result, administeringa collusive price-fixingarrangementis more difficult for 2' heterogeneousgoods than for homogeneousgoods.L Cost structure influencesthe tendencytoward collusionbecause supplierswith high fixed costs have an incentive to spread these costs over a larger volume of output and to operate at full capacity. Markets served by such suppliers often experiencesevere price wars during contractionsin demand; therefore collusion is attractiveas a way to avoid ruinous competition. Non-cooperativestrategiesare more profitable in rapidly growing markets; therefore,other things equal, collusion is less likely in such markets. Markets for which transactionsare large and infrequent (e.g., aircraft design and large public projects) provide supplierswith strong incentivesto behave competitively. Finally,where public informationon price and output of individualsuppliers is available,each supplierhas little incentive to cheat on a collusive agreement (by increasingits output), since doing so is likely to result in detection and retaliationby other colluding firms.

Market

Dominance

The competitionlaws of Germany, France, Spain, the U.K., Australia, and the EEC were founded originallyon the concept of market dominance rather than market power. The most common definitionof dominance is freedom from the constraintsof competition,or control over the economic viability of (upstreamor downstream)trading partners.33 Generally, competitionlaws in the surveyed economies do not prevent suppliers from holding a dominant positionbut only from abusing that position. Moreover, competitionlaws usually impose stronger constraintson the conduct of dominant firms (see Section IV). Dominance complementsstatic economic efficiencyas a rationale for competitionpolicy. Some scholars and policymakersbelieve that market power and efficiencyshould not be the primary basis for competitionlaw. Concentrationof economic power is thought to be anti-democraticand the benefits of maintainingcompetitivemarket structuresand protectingsmall

12/

Collusion in a heterogeneousgoods market is easier when accomplishedby suppliers'allocatingcustomers,marketing territories,or products among themselves.

13/

See Fishwick, op cit., p. 454.

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16 -

enterprisesare believed to outweigh any resultantefficiency losses.2' This principle was strengthenedin the 1986 amendmentsto French competitionlaw. For horizontal relationshipsamong suppliers in an antitrust market, the market power/efficiencyand the dominancerationales for competition law are virtually interchangeable,although enforcementstandardsvary. Where a large supplier is dominant, its control over competitors often can be used to exercisemarket power in the supplier'sproduct, in which case legal interventioncan be based on either market power or dominance concepts. The economies surveyed prohibit such conduct as either an exercise of market power or as an abuse of a dominant position. Yet market power analysis, particularlywith respect to merger control, generates enforcementactions in somewhat different circumstances than the analysis of dominance. Dominance analysisprimarily is concerned with the unilateralexercise of market or economicpower, most often by a large, powerful supplier. Hence, dominancemay not obtain, and intervention not be required,where the potential for unilateralabuse is offset by the presence of a second large, powerful, competingsupplier. In contrast, under these circumstances,market power analysiswould likely recommend intervention, owing to the possibility of collusionbetween two (or among a few) large suppliers. Vertical and conglomeraterelationships,central to the concept of dominance,can contribute to the exerciseof market power in several ways. First, under the theory of vertical foreclosure,vertical integrationby incumbent suppliers can be used to deny access by entrants to trading partners in upstream or downstreammarkets. Second, vertical integrationcan provide the means of evading rate of return regulations,thereby permittingthe unilateralexercise of market power by regulated suppliers. Third, firm size, although by itself not indicativeof the ability to exercise market power, is relevant for assessing the credibilityof predatory strategiesagainst rival suppliers. This is a practice that supports the exercise of market power. Competition laws generally prohibit predation on the basis of either market power or dominance. Market power analysis is sometimes used to justify interveningin vertical, product-extension, or conglomeratemergers on the basis of harm to potential competition. Market power analysis also provides a basis for interventionagainst actual predation. The dominance concept goes further,providing a basis for blocking transactionsout of a

S

See A.P. Jacquemin and H.W. de Jong (eds.),Markets. Corporate Behavior and the State (Vol. 1), Nijenrode Studies in Economics,Martinus Nijhoff,The Hague, 1976. In addition, if the growth rate of a supplier is dependentupon the size of the supplier, then protecting small suppliers (under a dominance approach)may also encourage growth (if small firms tend to have higher growth rates than large firms). Thus, there may be nation-specifictradeoffsbetween encouraging growth versus static efficiency. The relationbetween firm size and growth rates is observed to vary widely across nations and time periods; on these grounds,one would expect variation in the design of national antitrust policies. See A. Singh and C. Whittington,"The Size and Growth of Firms," Review of Economic Studies 42, January, 1975; see also J. Langenfeldand D. Scheffman, 'Innovation and U.S. Competition,"Antitrust Bulletin 34(1), Spring, 1989.

- 17 concern with potential predation and examining the extent to which a merger increasesthe financial resources of the merged firm (the "deep pockets" theory that predation requires large financialresources to withstand the 35/ losses of selling below cost). Competitionlaws based on market power generally emphasize economic efficiencyand the economicwelfare of consumers. Although the dominance concept encompassesthe exerciseof market power, certain applicationsof dominance concern the welfare of upstream or downstream trading partners rather than that of final consumers. As Fishwick notes, "Exploitation...of dominance over suppliers,downstream customers or competitors need not imply disadvantageon the part of the final consumer, who may have more substitutesavailable. "21 Competitionlaws based on market power, as exemplifiedby the U.S. policy, generally regard vertical integrationas efficiency-enhancing(except for the few circumstancesmentioned above). In contrast, laws based on dominance sometimes impede vertical integrationwhen attemptedby a dominant firm. In 1972, CommercialSolvents Corporation (CSC) of the U.S. entered the Italian pharmaceuticalmarket for ethambutol,an anti-tuberculardrug. CSC simultaneouslycut off supply of a critical input to Zoja, an Italian ethambutolsupplier and CSC's former customer.-1 Zoja sued on the grounds that CSC was abusing its dominantposition in the market for the input, in which CSC held a worldwide monopoly. The EEC's Court of Justice found CSC to be dominant,because of its control over the economic viability of Zoja, and ruled that eliminatingZoja, via refusal to supply, constitutedan abuse of dominance. Yet CSC's actions simply replaced Zoja with CSC as a supplier in the Italian market for ethambutol, Thus, it seems unlikely that CSC's action enhanced its ability to exercise market power by raising the price of ethambutolto Italian consumers.28J Most of the economies surveyed that rely on a dominance concept have altered enforcementstandards over time to strengthenmarket power and economic efficiencyas the basis for competitionlaw. Both the EEC and Germany,whose laws were intendedoriginallyto prevent the abuse of dominant

15/

The German Supreme Court affirmed the deep-pocketstheory as a rationale for prohibitingmergers in GKN/Sachs,a product-extensionmerger in which the merging firms did not compete but suppliedbrake and clutch componentsto the same customers,and Rheinmetall/WMF,a pure conglomeratemerger. See GKN/Sachs (1978) WuW/E BGH 1051 and Rheinmetall/WMF(1985) WuW/E BGH 2150.

ii/

Fishwick, op. cit., p. 456.

2i/

Fishwick, op. cit., pp. 484-485.

it/

In principle, if there were numerous close substitutesfor ethambutol, then CSC would not be able to affect the price of ethambutol regardless of whether Zoja or CSC produced this drug in Italy. Alternatively, if ethambutolhad no substitutes,then CSC's monopoly of the (necessary) input for ethambutolwould allow it to extract whatever monopoly rents were available (by raising the price of the input) in the market for ethambutol. In neither case would CSC's exclusion of Zoja have an effect on the price of ethambutolin Italy.

- 18 position, have instituted market share and entry (implicitly, market power) criteria for defining (joint) dominance. The EEC has ruled that dominance requires a finding regarding the relevant market in which dominance occurs, consistent with standard market power analysis. Entry is commonly regarded as the most powerful market force to offset attempts to exercise market power or abuse a dominant position. In that light, impediments to entry influence the speed with which (and the extent to which) markets adjust to changing conditions.39J Thus, antitrust policy, often enforced where entry is barred, can be viewed as a regulatory substitute for short-run market forces that would not otherwise provide for rapid adjustment. The scope of national antitrust policy may be judged against the estimated delay in market adjustment that activates intervention. For example, under the U.S. Merger Guidelines, proposed mergers are more likely to be enjoined when impediments to entry will delay market adjustment to the exercise of market power by at least two years. This is a standard that has evolved based on empirical observation of the characteristics of markets in price-fixing cases (after all, mergers are enjoined because of a concern with price fixing and the exercise of market power).40/ Of course, a shorter time horizon would provide for a more interventionist antitrust policy, and a longer time horizon would provide for a weaker antitrust policy. Except for the U.S., the surveyed economies have not disseminated exact standards on the degree to which entry is viewed as an adequate check--in lieu of intervention--on the exercise of market power. But virtually all the surveyed jurisdictions view entry conditions as a central determinant of the ability to exercise market power or abuse a dominant position.

The Relationship

Between Competition

and Trade Policies

Encouraging competitive market structures through antitrust regulation or opening an economy to international trade have in many cases similar economic effects. Namely, both policies provide buyers and sellers with additional trading partners. In this circumstance, liberal trade

19/

Markets are constantly buffeted by exogenous "shocks" such as improvements in technology, fluctuating input prices, changes in demand (such as those resulting from fluctuating national income), and changing public policies (e.g. taxes, tariffs, and pollution control requirements). Judging the merits of an economic system or public policy demands consideration of the extent to which the system or policy promotes or permits adjustment to changing economic conditions.

AQ/

The number of participants to a price fixing scheme influences not only the ease of administering the scheme, but also the likelihood that the scheme will be detected (by customers or the antitrust authorities). Merger control standards therefore account for the possiblity, not only that the collusion might be inherently unstable, but also that it will be detected and prevented through investigation and lawsuit by enforcement agencies or private parties. See A. Hay and D. Kelley, "An Empirical Survey of Price-Fixing Conspiracies," Journal of Law and Economics 17, April, 1974.

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19

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policies may provide a means of circumventing attempts by some domestic firms to exercise market power or abuse their dominant positions. This observation seems to imply that competition policy and trade liberalization are substitutable policies, so that a jurisdiction may choose either as a means of encour4 aging competitive market structures and pursuing economic efficiency. L/ With respect solely to market structure, in markets where domestic and foreign industries are competitive and the relevant geographic market is international, a liberal trade policy may be a perfect substitute for an effective competition policy. Domestic buyers would face a competitive market structure even if trade were foreclosed entirely, assuming competitive conduct by the domestic industry. Conversely, the absence of competition policy could be offset by a liberal trade policy. Restraint of trade by the domestic sector would be rendered unfeasible as long as foreign suppliers behaved competitively.Hence, for products actively traded in competitive world

Al/

In line with this perspective, the Federal Cartel Office of Germany noted "a decline in the number of proceedings instituted against enterprises on the suspicion that there were abuses of market-dominating positions. This seems to be due to the fact that in many markets of the Federal Republic there are excess capacities and that the German market is generally open to foreign products. The resulting competitive pressure on enterprises leaves little room for abusive practices." See OECD (1989), p. 123. In a different vein, competition policy measures can be used to replace protectionist trade policies. For example, the U.S. and Canada are currently engaged in negotiations to replace "border remedies" antidumping and countervailing duties - with measures relying on the competition laws of the two countries. The negotiations are intended to replace the protectionist bias of antidumping laws with competition law principles based on predation. See M. Dutz, "Enforcement of Canadian "Unfair" Trade Laws: The Case for Competition Policies as an Antidote for Protection," in If at first you don't succeed: How antidumping works and who gets hurt, The World Bank, Washington, D.C., forthcoming, 1991.

i2/

Whether competition policy or trade liberalization better promotes national economic efficiency depends in part upon comparative advantage. If a nation does not enjoy comparative advantage in the supply of a product, then trade liberalization may better promote (national) economic efficiency. An effective national competition policy (coupled with protection of the domestic market in that product) would, at best, ensure competitive conduct among comparatively inefficient domestic suppliers. Yet whether domestic supply enjoys comparative advantage depends fundamentally on the conduct of foreign suppliers to the domestic market. Non-competitive conduct by foreign suppliers attenuates and may remove their comparative advantage (based on costs) by allowing them to charge non-competitive prices based on market power rather than cost. In this situation, promoting competitive conduct among comparatively inefficient domestic suppliers may be a second-best optimum for an importing nation, given that foreign suppliers are behaving noncompetitively.

- 20 markets, the structural consequence of opening a national economy seems to imply that competition and liberal trade policies are substitutable. Nevertheless, formal competitive analysis, particularly in the construction of geographic markets, suggests that the substitutability between competition and trade policies is quite limited, for the structural argument presented above has severe limitations. Liberal trade policies cannot provide domestic buyers with access to numerous suppliers in markets that are concentrated at the international level. For example, the market for large commercial aircraft comprises three firms, McDonnell-Douglas and Boeing of the U.S. and Airbus Industries of Europe. These account for nearly all sales outside the Soviet Union and Eastern Europe. In general, the list of internationally traded products for which market structure is competitive at both the national and international level is short indeed, excluding many of the most important goods and services traded in developed and developing nations.43/ For similar reasons, liberal trade policies cannot enhance competition (by providing a competitive market structure) in products for which the relevant antitrust market is local or regional (e.g,, taxicabs, health care, retail trade, groceries, ready-mix cement). In addition, and as discussed in Section VII, the trade policies of many nations allow domestic firms to enter into export and import agreements that support the exercise of market power against foreign buyers and sellers. Such policies, by undermining the independence of the firms active in international trade, attenuate the force of liberalized trade policy for achieving competitive performance. Competition policy is likely to be more effective than trade liberalization in national markets for which international trade does not constrain the exercise of market power, due either to structural characteristics of the market (e.g., economies of scale, high transportation costs) or to the use of restrictive national trade policies. Conversely, liberal trade policy is likely more effective than competition policy in international markets where competition laws are either absent or do not prevent the exercise of market power.4 /

A3/

For example, automobiles, jet aircraft, ships, televisions, large computers, farm equipment, pharmaceuticals, flat glass and petroleum products are all excluded. Merger control policies provide a long list of industries and products that are not supplied under competitive conditions, since such policies are almost never exercised against suppliers in competitive markets.

44/

A good example of such a market is provided by the American automobile market, which appears to have been characterized by oligopolistic collusion among domestic auto suppliers throughout the 1950s, when European and Asian auto suppliers were far less of a competitive factor in the U.S. than during the 1970s and 1980s. See T. F. Bresnahan, "Competition and Collusion in the American Automobile Industry: The 1955 Price War," Journal of Industrial Economics 35, June, 1987. Bresnahan finds that a one-year reversion to competitive conduct appears to explain a brief decline in the quality-adjusted price of automobiles.

- 21

-

Finally, as emphasizedpreviously,efficient economic performance does not depend solely on market structurebut also on the nature of conduct. Examining antitrust laws around the world shows that, as a rule, these laws have been concernedprimarily with conduct,not market structure.! Unless we are willing to assume that numerous, ostensiblycompetitive,supplierswill generallybehave competitivelyor, at least, independently--andthere are many examples from antitrusthistory to the contrary--thepropositionthat liberal trade policies generate competitivemarket structuresand, therefore,competitive conduct, is untenable. Thus, because trade liberalizationprovides for competitivemarket structuresin limited circumstancesand does not necessarilyexert an effect on the conduct of suppliers,it is more appropriateto view competitionand trade liberalizationpolicies as mutually reinforcingor complementaryrather than substitutable.

4.5/

The emphasis on the regulationof conduct continues to be an important priority of antitrust enforcementagencies. For example, the Australian Trade Practices Commissionstated in its Annual Report that "The objectivesof the Commissionare...to administerPart IV of the Trade PracticesAct...with an emphasis on the preservationand the encouragement of competition and the eliminationof business practices which, unchecked,will work major economic harm in the community,that is to suppliers,buyers, and consumers." See Trade Practices Commission, Annual Report. 1985-1986,AustralianGovernment PublishingService, Canberra, 1986, Sec. 3.2, "Objectivesand Priorities,"p. 15.

- 22 III.

-

A BRIEF DISCUSSION OF NATIONAL ANTITRUST POLICIES

Antitrust policies are executed through nationaljudicial and administrativeorganizations. Although some antitrust prohibitionshave evolved from centuries-oldcommon law, antitrustpolicy has seen its greatest period of growth since the end of the Second World War. Most modern antitrust policies have been codified and executed through laws that specifically address antitrustconcerns. Table 3.1 lists the most importantcompetition law statutes among the surveyed countries. This section examines the basic antitrust statutesof ten countries and the EEC. The breadth of our treatmentprevents a detailed discussionbut does illustratethe flexibilitywith which competition laws have been designed and enforcedunder a variety of circumstances. 3.01. In these ten economies the institutionsenforcing the antitrust laws have been designed around two basic models: *

An administrative/political enforcementsystem, in which enforcement is the responsibilityof an administrativeagency, often under an economics ministry, with considerablepolitical discretion regarding antitrust enforcement.

*

A judicial enforcementsystem, in which antitrust law is ultimately enforcedby the judicial system. In this case, political discretionover enforcementis circumscribedby statutory amendmentsand is thereforemore consistentover time and less flexible.

The U.S., Germany, Japan, the U.K. and France are the largest nonsocialist economies with a history of antitrustenforcement. The strictest antitrust enforcement occurs through the judicial systems of the United States and Germany, and the laws of these two countriesare often used as models for competition laws in other countries. Japan has modeled its antitrust law after those of the U.S. and Germany and has greatly expanded the use of antitrust exemptions to pursue industrialand trade policies. The U.K. is the largest economy relying on an administrative/political system of enforcement, particularly since France strengthenedits competition law by giving greater weight to judicial enforcementunder the 1986 amendments. The EEC enforces competition law, derived from the German system, at the internationallevel. Canada and Australia have recentlyamended their competitionlaws, using the United States as a model; Australia is unique among the surveyed jurisdictionsfor applying competition law to trade unions. South Korea, whose competitionlaw was modeled after those of Germany and Japan, is a striking example because it relied greatly on industrialpolicies in its economic developmentand has institutedcompetitionlaw to support economic liberalization. The competition laws of Spain and Sweden are modeled after those of Germany as well, although enforcementis achieved through a political/ administrativesystem similar to that of the United Kingdom. Table 3.2 briefly summarizesthe administrativecharacteristicsof antitrust enforcement in the surveyed jurisdictions.

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23

-

Table 3.1: MAJOR COMPETITION STATUTES IN THE SURVEYED JURISDICTIONS

Jurisdiction

Statutes

Australia

1906 Australian Industries Preservation Act 1%5 Trade Practices Act 1974 Trade Practices Act

Canada

1910 Combines InvestigationAct 1986 Competition Act

U.K

1948 Monopoliesand Restrictive Practices Control Act 1956 Restrictive Practices Act 1964 Resale Prices Act 1%4 Mergers and MonopoliesAct 1973 Fair Trading Act 1976 Restrictive Trade Practices Act 1980 Competition Act

EEC

1957 Treaty of Rome 1989 Amendment

France

1977 Act No. 7-806 1986 Ordinance

Japan

1947 AntimonopolyAct 1947 Trade Association Act 1949 Act No. 257 (AMA Amendment) 1952 Export Trading Act 1952 Stabilizationof Specific Small and Medium Enterprise Temporary Measures Act 1953 Act No. 529 (AMA Amendment) 1958 Small and Medium Enterprises Organization Act 1977 AMA Amendments

Korea

1980 Monopoly Regulation and Fair Trade Act

Spain

1%3 Restrictive Practices Act 1988 Amendments

Sweden

1953 Act to Counteract Certain Acts in Restraint of Competition in Business in Certain Instances 1%5 Amendments 1970 Amendments 1982 Amendments

United States

1890 Sherman Act 1914 Clayton Act 1914 FTC Act 1936 Robinson-PatmanAct 1950 Cellar-KefauverAct 1976 HSR Act

Germany

1957 Act Against Restraints of Competition 1965 Amendments 1973 Amendments 1976Amendments 1980Amendments 1989Amendments

Table 3.2: ENFORCEMENT STRUCIURE IN THE SURVEYED JURISDICIIONS

Jurisdktion

Enforcement Agency

Enforcement Authority

Judcial Review

AdminisbtrativeReview

Exemption

Advisory Agency

Australia

Trade Practices Comm.

Trade Practices Comm., Gov't Solicitor

Federal Courts

None

Trade Practices Commission

None

Canada

Competition Tribunal

Competition Tribunal

Federal Courts

None

Competition Tribunal

None

Britain

Director General of Fair Trading

Secretary of State Trade and Industry

None

Restrictive Practices Court

Secretary for Trade and Industry

Mergers and Monopolies Commission

EEC

European Commission

European Commission

Court of Justice, National Courts

None

Commission

None

France

Conseil de la Concurrence

Conseil de la Concurrence, Minister of Economics

Paris Court of Appeals

None

Minister of Economics

Conseil de la Concurrence

Japan

Fair Trade Commission

Fair Trade Commission

Tokyo High Court, Supreme Court

None

Fair Trade Comm., MITI

None

Korea

Fair Trade Office

Minister, Econ. Planning Board

Seoul High Court, Supreme Court

None

Minister, Econ. Planning Board

Fair Trade Comm.

Spain

Competition Service, Registry of Restrictive Trade Practices

Competition Tribunal, Council of Ministers

None

Competition Court

Various ministers

Competition Council

Sweden

National Price and Cartel Office, Antitrust Ombudsman

Antitrust Ombudsman

None

Market Court

Cartel Register

None

U.S.A.

Federal Trade Comm. Dept. of Justice

Commission Attorney-General

Supreme Court, Federal Appeals Court, Federal District Court

AdministrativeLaw Judges

Statutory

None

Germany

Federal Cartel Office

Cartel Office Minister of Economy

Supreme Court Berlin Court of

None

Minister of Economics

Monopolkommission

Appeals

Note The table describes the separation of authority between administrative,enforcement, and investigatoryagencies,as well as the extent to which their decisions are subject to internal (administrative) or external (udicial) review according to the legal standards of common and commerciallaw. In particular, the first column describes agencies with authority to define kgality in antitrust investigations;the second column describes agencieswith the authority to issue orders to enforce the antitrust law (of course, many antitrust agencies have the authority to both investigateand remedy antitrust violations). The third and fourth columns,judicial review and administrative review,describe whether the review of decisions and findings of the antitrust authorities is the responsibilityof the judicial system or of a specializedadministrative court. The fifth column, ecemptions,describes whether the antitrust (or other) agencies offer discretionary exemptions to particular practices or agreements; of course, in anljurisdictions,statutory exemption is available. The sixth column, advisoryagency, describes agencieswhose role is to offer expertise and advice in the design and enforcement of antitrust law.

- 25 -

United States Of all nations, none has a longer history of active intervention in marketplace competitionthrough antitrustpolicy than the United States. The statutorybasis of antitrustpolicy in the U.S. rests on three federal laws--the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade CommissionAct of 1914. Significantamendmentsoccurred in the Robinson Patman Act of 1936 and the Hart-Scott-RodinoAntitrust ImprovementsAct of 1 These antitrust statutes 1976, which provided for pre-mergernotification.A apply to interstatecommerce and are enforced at the federal level by two agencies, the Departmentof Justice, an executive agency, and the Federal Trade Commission.0 In addition, enforcementactions can be brought by the attorneys general of the fifty states and by private parties who have suffered injury owing to violations of the antitrust laws. Approximately96% of the civil antitrust suits in the U.S. are brought by private parties.YJ The antitrust statutesof the United States, reflecting a pattern often repeated elsewhere,were written into law following a period of marked economic expansion with numerous mergers and consolidations. A variety of

L6/

The 1976 Hart-Scott-Rodino(HSR) Act established a pre-merger notificationrequirementallowing the FTC and the Department of Justice prescribed time periods for analyzing transactionsand, if necessary, seeking preliminary injunctionsfor potentially anticompetitivemergers and acquisitions. The pre-mergernotificationrequirementis motivated by enforcement considerations--itis generally easier and less costly to remedy a potentially anticompetitivetransactionbefore the transaction is consummated. The HSR Act (under subsequentamendments)requires premerger notificationof asset or security transactionsfor which the value of the acquiring and acquiredparties (or assets) exceed specified amounts. Parties to mergers, joint ventures, stock purchases, and asset transfers covered under the HSR filing requirementsmust notify the antitrust authoritiesin advance of consummatingthe transaction. The authoritieshave a specified time limit in which to ask for further informationand, if necessary,enjoin the transaction,pending the resolutionof any antitrust concerns.

42/

Interstatecommerce is defined as "trade or commerce among the several States or with foreign nations, or between the District of Columbia or any Territory of the United States and any State, Territory, or foreign nation." See Sec. 1 of the Clayton Act, 15 U.S.C. S.12 (1982). Though the Federal Trade Commissionand the Department of Justice have the primary responsibilitiesfor antitrustenforcement in the U.S., other agencies may have enforcementresponsibilitiesin areas of special expertise, such as banking (Comptrollerof the Currency),airlines (previouslyDepartmentof Transportation,now under Department of Justice), and regulated energy utilities (FederalEnergy Regulatory Commission).

Ai_/ See the Annual ReDorts of the Directorof the AdministrativeOffice of the United States Courts, Government Printing Office, Washington, D.C., annual.

- 26 -

restraints on competition,widely employedby large businesses,caused great popular resentment. In response, the Sherman Act was enacted in 1890 to inhibit a variety of practices viewed as injuriousrestraintson competition. Section 1 of the Act prohibits contracts,combinations,and conspiraciesin restraint of trade, section 2 prohibits monopolization,attempts to monopolize, and combinationsor conspiraciesto monopolize,and section 7 (later supercededby Section 4 of the Clayton Act) permits private parties injured by Sherman Act violations to sue for recovery of three times the amount of damages. The ability of private parties to recover treble damages for antitrust violations is unusual among the surveyed jurisdictionsand constitutes a comparativelystrong deterrent to violating the antitrust law.9 Though the Sherman Act was designed to enjoin a broad variety of anticompetitivebusiness practices, the Act was not effectivelyenforced for a number of years. Moreover, the Sherman Act applies strictly to the conduct of business, and the prosecution of violationsrequires that enforcers meet the high standard of showing that particularconduct was motivated by the restraint of competitionor monopolizationof a market. To broaden the scope of antitrust legislation,the Clayton Act was passed to cover other potentially anticompetiti-ve practices and to prohibit conduct likely to support the restraint of trade. Section 2 of the Clayton Act (later amended by the Robinson Patman Act) prohibits price discriminationin support of the restraint of trade or monopolizationof a market, and Section 3 prohibits tying and exclusive dealing contracts in restraint of competition. More important,the Clayton Act serves to discourage the developmentof certain structuralpre-conditions of anticompetitivebehavior: Section 7 prohibits mergers tending to substantiallylessen competition,and Section 8 prohibits interlocking directoratesamong competing firms.& The Federal Trade CommissionAct was passed in part to streamline the procedures for enforcing the antitrust laws. Whereas the Department of Justice, as the primary federal law enforcementagency, has broad responsibilitiesto enforce federal law, the Federal Trade CommissionAct created the Federal Trade Commissionas an administrativeagency with special expertise in business and commerce and with quasi-judicialauthority to enforce the antitrust laws.!V Section 5 of the FTC Act prohibits "unfair methods of competition,"which includesacts illegal under the Sherman and

9i2 Of the other surveyed economies,only Germany allows for recovery of treble damages (three times the illegallygained profit attributableto antitrustviolations).

5/

A significantamendment was the Cellar-KefauverAct of 1950, extending merger control to intercorporatepurchases of physical assets. See 64 Stat. 1125, U.S.C.A. Section 18 (1980).

2J1/ The head of the Departmentof Justice, the Attorney General is a member of the cabinet of the President. The FTC is headed by five commissioners,no more than three of which may belong to the same political party.

- 27 -

Clayton acts. In addition, judicial decisionshave found section 5 to cover practices that offend public policy or cause substantialinjury to consumers, potentially extending the applicabilityof the FTC Act beyond that of the other antitrust statutes. The Departmentof Justice and Federal Trade Commissionhave dual responsibilityto enforce the federal antitrust laws, a situationunique among the surveyed jurisdictions. Both criminaland civil cases can be brought by the Departmentof Justice and decided in federal district courts, with appeal to the appellate courts and the Supreme Court. In contrast, the FTC can bring only civil cases and can adjudicatecases through independentadministrative law judges, with appeal to the federal courts and the Supreme Court.§9 To some extent, the FTC and the Departmentof Justice coordinatetheir activities in areas of overlappingresponsibility,as in merger review for which each agency has developedparticular areas of expertise. Otherwise,the dual enforcementapproach of the U.S. provides for a broad, interventionist applicationof antitrust laws, since potentiallyanticompetitiveactions can be challengedby either the Departmentof Justice or the Federal Trade Commission. The 1936 Robinson-PatmanAct, written to ammend Section 2 of the Clayton Act, is a more complex and comprehensivestatute prohibiting resale price maintenance. Section 2 of the Robinson-PatmanAct prohibits discriminating in price between differentbuyers, limits the brokerage and other compensatoryfees between a buyer and seller, and prohibits the use of discriminatoryadvertisingor promotionalallowancesby sellers. Buyers as well as sellers are subject to the prohibitions,and Section 3 of the Act provides criminal sanctions for certain kinds of discriminatorypricing.1 With respect to other surveyed economies, several features of U.S. antitrust law stand out. The U.S. is the only one maintainingseparate

42/

Though the FTC can prosecute criminalviolations of the antitrust laws, it cannot ask for criminal penalties. The FTC, but not the DOJ, can sue for civil penalties (fines used as a financial deterrent against law violations).

2_/ The Robinson-PatmanAct resulted from the post-Depressionbattle between small grocers and large, more efficientchain grocers. The legal prohibition of price discriminationunder section 2 of the Clayton Act was based upon a lessening of competition. Robinson-Patmanextended this prohibition to discriminationthe effect of which is to "injure, destroy, or prevent competitionwith any person..," a change that protected small grocers by making it more difficult for large chains to pass cost savings through to consumers. The Act, which is based more on dominance and the protection of competitorsthan the exercise of market power, has been widely condemnedas harmful to consumerwelfare. See R.A. Posner, The Robinson-PatmanAct: Federal Regulationof Price Differences,American EnterpriseInstitute,Washington, D.C., 1976. Though little enforced at the federal level in recent years, the Act is still actively enforced through private litigation. See W.F. Shughart II, The Organizationof Industry, BPI/Irwin,1990, p. 204.

- 28 government agencies that share parallel authority to enforce the antitrust laws; federal enforcement,shared by the Departmentof Justice and the Federal Trade Commission,operates alongside enforcementby the attorneys general of the fifty states and is substantiallyaugmentedby private enforcement. The treble damages available to private litigantsconstitutea very strong financial deterrent against antitrustviolations as well as a strong incentive for private litigation. Finally, though a variety of activities are exempted from antitrust law, the selective granting of exemptionsis used very seldom and is not an important feature of antitrust law enforcementin the U.S.a' Germany German antitrust law is based on the 1957 Act Against Restraints on Competition (ARC), which replaced the Allies' decartelizationregulations of 1947. The ARC prohibits agreementsbetween parties to restrain competition, production,or market conditionswith respect to trade in goods or commercial services. The prohibitionsreach horizontaland vertical cartels, price fixing, the allocation of production,resale price maintenance,exclusive dealing,and tying arrangements. The ARC was amended in 1965, 1973, 1976, 1980, and 1989. The 1965 amendmentsmade antitrustexemptions available to specializationcartels of small firms. The 1973 amendmentsinstalled merger control and pre-mergernotificationrequirementsencompassingtransactions between large firms, expanded the exemptionsoffered small and medium size firms, extended the legal definitionof a market dominatingposition, and institutedrebuttablepresumptionsregardingmarket dominationby single and multiple suppliers. The 1976 amendment tightened the merger control standards for the press sector. The 1980 amendment further clarified the definitionof abuse by illustratingthrough example the characteristicsof dominant firms and introducingspecific standards for regulatingthe performance of large firms; this amendment also establishedclearer legal criteria for the application of merger control to vertical and conglomeratemergers. The 1989 amendment deleted a merger notice requirementbased on employmentand further extended the applicationof dominance to powerful buyers (rather than sellers,

54/

Most U.S. exemption statutes provide for antitrustor regulatory oversightby agencies other than the Departmentof Justice or the Federal Trade Commission. Separationof antitrustjurisdictionreflects either specializedexpertise or different enforcementgoals. For example, shipping agreementsare reviewedby the Federal Maritime Board (1916 ShippingAct); mergers in communicationsare reviewedby the Federal CommunicationsCommission (1934 CommunicationsAct); and banking mergers are reviewed by the Comptrollerof the Currency, the Federal Reserve Board, or the Federal Deposit InsuranceCorporation (1966 Bank Merger Act). Yet certain of the statutes, such as the 1945 McCarronFergusonAct replacing federal with state oversight of insurance, provide genuine exemption from antitrust scrutiny for specific activities. For a comprehensivelist of the U.S. antitrust exemptions, see W.F. Shughart II, oR. cit., Table 91, pp. 206-207.

-

29

-

as before).15 The ARC was originallydesigned to constrain the actions of large, powerful entities. The amendmentshave served to extend the law beyond situationsof a large, powerful firm dealingwith small trading partners. German antitrust law is administeredand enforcedby the Federal Cartel Office, an independentadministrativeagency with semi-judicial responsibilityfor interpretingand enforcing the ARC. The Cartel Office is authorized to rule on antitrustmatters, issue decisions,and obtain injunctiverelief for antitrustviolations. The 1973 amendmentof the ARC created an advisory agency, the five-memberMonopolies Commission,with the responsibilityof providing regular oversight and advice to the Minister of Economics regarding trends in business concentrationin Germany and the enforcement of the merger control and dominant firm provisionsof the ARC. The ARC authorizesthe Cartel Office to grant exemption from the general prohibition of concerted activity to cartels under specific circumstances. Exemption can be granted for nine types of cartels to allow concerted activity that promotes economic and technical efficiency,the attainmentof economies of scale by small- and medium-size firms, the promotion of exports, the writing of product standards,and the rationalizationof depressed industries. For mergers subject to notificationrequirements,authority over enforcement and exemption rests with the Minister of Economics,who is empowered to overrule Cartel Office prohibitionsof mergers in cases of "advantagesto the whole economy" or "overridinginterestof the public." In addition, the Minister is authorized to provide cartel exemptions in cases of dire emergency,as when sudden economicchanges threaten the viability of an industry. In general,ministerialexemption has been used infrequently.A' As in most of the surveyedjurisdictions,German antitrust policy is ultimately enforced through the judicial system. Yet, in contrast to the others, the language of the German antitrust statutes often provides very detailed descriptionsof the nature and scope of antitrust prohibitions,a statutory design that leaves little room for judicial discretionin determininglegality.' Private parties are authorized to intervene in

.2/

W6/ 51/

See E. Kantzenbach,"CompetitionPolicy in West Germany:A Comparison with the Antitrust Policy of the United States," in W. Comanor and A. Jacquemin (eds.),CompetitionPolicy in Europe and North America: Economic Issues and Institutions,Chur and London, forthcoming. Originally, the ARC regarded a dominant firm as one that was exposed to no significantcompetition,a definitionsuggestiveof a nearmonopolist. The 1973 amendment extended this definitionto firms holding "paramountpositions"vis-a-vis competitors (Kantzenbach, p. 196). Essentially,this definitionextends dominance to oligopolies. See also section 5 for structuraldefinitionsof firms in a "paramount position." See Section VII. In contrast,U.S. antitrust statutesare very vague regarding precisely what conduct is regarded as illegal; this issue is generally decided through judicial decision. For example,U.S. antitrust enforcement, particularlywith respect to mergers, changed markedly between the 1960s

- 30 -

proceedings before the Office and may also bring suit against antitrust violations for recovery of damages and injunctiverelief. Interpretationand enforcementdecisions of the Federal Cartel Office can be appealed to the Berlin Court of Appeals and ultimatelyto the Supreme Court. Originally,German antitrust law was designed primarily to prevent the abuse of a market-dominatingposition,usually by a single powerful supplier. This system of law, which stands in strong contrast to that of the U.S. and has been used in the design of competitionlaws in Australia, South Korea, the EEC, Japan, and other jurisdictions,is designed to permit the formation of large suppliers while constrainingtheir resort to abuse or the exercise of market power, particularlywhere the victims are likely to be small entities. Many conduct prohibitionsrequire a showing that the perpetrator is dominant. In general, the law protects small entities against abuse and the exercise of market power by large entities. Moreover, small entities may pursue conduct that would be illegal if perpetratedby large entities. Finally, the law, through exemption,attempts not to impede the opportunitiesof small and medium-sizefirms to realize economies of scale and scope otherwise available only to large firms. Because of the availabilityof the exemption option, the enforcement of German antitrust law is simpler than that of the U.S. and other countries for which enforcementdepends on a balancing of anticompetitive effect and economicefficiency (the rule of reason). Under German law, legality is not reached through balancing competitionand efficiency,and conduct found to impede competition or compromiseeconomic freedoms is generally illegal. Efficiency is treated under the law through exemption rather than through case-by-caseevaluationof a competition/efficiency tradeoff. Unlike the U.S., but similar to the EEC, the U.K., and Japan, German competitionlaw provides for performanceremedies, administrative pricing under section 22, to deal with cases of abuse of dominant position. The remedy allows the Federal Cartel Office to prosecute excessive prices, conditionalon a showing of abuse, and to order price reductions, the magnitude of which are based on prices in comparablemarkets where there is substantialcompetition.L/

Japan The centerpieceof antitrust law in Japan, the AntimonopolyAct, was written in 1947 as a post-war measure to dissolve the zaibatsu conglomeratesthat had dominated the economy of Japan until 1945. The act, modeled on the Sherman, Clayton, and Federal Trade Commissionacts of the U.S., establishedthe Fair Trade Commissionto administerand enforce the new

and the 1980s without significantamendmentsto the basic antitrust statutes. 5_8/

See I. Schmidt, "DifferentApproachesand Problems of Dealing with Market Power: A Comparisonof German, European, and U.S. Policy towards Market DominatingEnterprises,"Antitrust Bulletin, 1983, p. 457.

- 31 antitrust statute. The FTC must conduct an investigationwhen any party, in the belief that a violation has occurred, asks that necessary remedial measures be taken. In practice, potentialviolations of the antitrust statutesare addressed through negotiation,with public complaint,open hearings, and remedialmeasures availablewhere negotiation fails. Any governmentagency or public organizationmay intervene in the hearings. FTC decisions and rulings may be appealedby any person to the Tokyo High Court and from there to the Supreme Court. The original act encounteredwidespread resistancein Japan and was weakened by amendmentsin 1949 and more significantlyin 1953. The most important of the 1949 amendmentswere those (i) legalizingsecuritiesownership between competitorsinsofar as such ownership did not lessen competition, (ii) legalizinginterlockingdirectoratesbetween competitorsinsofar as such directoratesdid not lessen competition,(iii) weakening the original prior approval requirementapplying to internationalcontracts to a requirement of prior notification,and (iv) weakening the original prior approval requirement of mergers to one of prior notification. The 1953 amendmentsprovided a variety of exemptionsfrom the cartel prohibitionsof the AntimonopolyAct, legalizingcertain concerted activitiesand cartels under specific circumstances.J5 The antitrust laws were weakened again in the 1957 Small and Medium EnterprisesAct, exempting certain concerted activitiesof small business from antitrust prohibitions. Antitrust exemptionshave been used with far greater frequency in Japan than in Germany. In part, the Japanese exemption provisionsfollow those of Germany, so that cartel formation is permitted as a means of conductingexport and import trade, allowing small- and medium-size firms to realize economies of scale, and rationalizingcyclical or depressed industries. What distinguishesthe Japanese system from the German is that exemption is also permitted for cartels formed under special legislative acts and granted by ministries other than the antitrust authorities. Beginning in 1952 with the Stabilizationof Specific Small and Medium EnterpriseTemporary Measures Act and the Export and Import Trading Act, a number of statutes 1 providing antitrust exemption to cartels in specific sectorswere passed.0 Throughoutthe early 1970s, Japanese public and academic opinion became increasinglyrestive over the exercise of market power in the national economy,particularlyregarding resale price maintenanceand administered pricing in oligopolies. In response, the AntimonopolyAct was significantly

.a.9 The exemptions,similar to those of subsequentGerman law, allowed small- and medium-size firms to form cartels to realize economies of scale, write product standards,rationalizedepressed industries, promote exports, and conduct import trade. jQ/

The sectors in which legal cartels operate include,but are not limited to, machinery, electronics,coal mining, textiles, sugar, ocean and coastal shipping, regulated industries (water, air and harbor transport, warehousing, insurance),silk yarn, fruit, fertilizer,liquor, and perishable foods. See H. Ieyori and A. Uesugi, The AntimonoRoly Laws of Japan, Federal Legal Publications,1983, Ch. III.

- 32 -

amended in 1977 to provide broader and stricter antitrust enforcement. The highlights of the amendments include: (i) antitrust authority to levy financial surcharges,or civil penalties,on illegal (i.e. not formally exempted) cartels, (ii) the institutionof a divestitureremedy motivatedby the restorationof competition in otherwisemonopolisticsituations, (iii) authority to require financialreporting in situationsof parallel pricing by horizontal competitors,(iv) restrictionson stock holdings by financial and non-financialcorporations,and (v) increasesin criminal fines for antitrust violations and introductionof personal liabilityof corporate executivesfor antitrust violations.*1/

The AntimonopolyAct as amended prohibits private monopolization, unreasonablerestraint of trade, unreasonablerestrictionsin international contracts,certain restrictiveagreementsby trade associations,unfair business practices,refusals to deal, discriminatorydealing, discriminatory pricing, unreasonablyhigh or low pricing, exclusive dealing, resale price maintenance,vertical agreements in restraint of trade, and misuse of dominant bargaining position. In addition, the Act requirespre-merger notification for all mergers and restricts interlockingdirectorates.

France Though French antitrust law dates back centuries,most of the currently effective provisionswere enacted after World War II. Historically, the antitrust statutes, part of the French system of price regulation, reached monopolizationand restraintsof competition,includingtying practices, resale price maintenance,loss leader sales, price discrimination,refusalsto supply, collusive tendering,and price fixing.L' Prior to 1977, the French governmentencouragedmergers as a means of creating large firms better able to compete in internationalmarkets. Motivatedby discussionswithin the EEC regarding the enactment of merger control measures, the French significantly amended their competition law in 1977. The Commissionde la Concurrencewas founded as an administrativebody to investigateantitrustviolations and recommend remedialmeasures and was made independentof the Ministry of Economics,so that parties other than the minister could initiate antitrust 1 investigations.0 The economicminister was empowered to impose fines for antitrustviolations. In addition, a merger control provision was enacted, requiringpost-merger notice and providing for prohibitionor divestiture against mergers between parties with large shares of the French market. The

§j/

Ieyori and Uesugi, op. cit., pp. 29-30.

j/

For example,Article 50(1) of Price OrdinanceNo. 45-1483 prohibits concertedaction motivatedby or resulting in the restraint of competition;Article 50(5) of the same ordinanceprohibits monopolization,by either a single party or multiple parties. See CompetitionLaw in Western Europe and the USA, suppl. 24, FR.C. 42-43, Deventer,April, 1981.

i2./

See F. Jenny, "Evolutionof Antitrust Policies in France," paper presented at the 8th InternationalSeminar on the New Institutional Economics,Wallerfangen/Saar,W. Germany,June, 1990.

- 33 -

1977 amendmentsdid not change the fundamentalprohibitionsunder French law but greatly expanded the administrativemeans of ensuring enforcement. Under French merger control,mergers are judged according to their contributionto social welfare, and potentially anticompetitivemergers may be sanctioned if there are sufficientoffsettingefficiencies. Dominant enterprisesacting under governmentregulationare exempt from antitrust scrutiny. The 1977 merger control standards seldom applied even to the largest mergers and in 1985 were lowered to subject more mergers to antitrust scrutiny.

-

French antitrust law was strengthenedagain with the Ordinance of December 1, 1986, a deregulationstatute that instituteda greater reliance on market forces. Under the Ordinance,governmentprice setting is to be confined only to those sectors for which unfetteredprice competition is believed to be ineffective.-5This provision has broadened the applicability of competitionand the antitrust laws, and enforcement activity in France has acceleratedas a result. The competitionsectionsof the amendment were drawn largely from Articles 85 and 86 of the EEC's Treaty of Rome, and the Ordinance placed greater emphasis on private litigationto which the Commissionhas played a supportingrole.ff The 1986 amendment also founded the office of the Conseil de la Concurrence,independentof the Ministry of Economics, to replace the Commission as the chief enforcer of French antitrustlaw. In 1987, the Ordinance was amended to move appeals against decisions of the Conseil de la Concurrence from the AdministrativeSupreme Court to the Paris Court of Appeals, thus institutingjudicial decision into the interpretationof French antitrust law. The AdministrativeSupreme Court had previouslyrelied on the enforcement authorities to interpret the law, so that the merit of an appeal depended on the facts of the matter. The 1986 and 1987 amendments separated the

j4/

The 1977 merger control standards applied to horizontalmergers creating a party with 40% of national sales in some product and non-horizontal mergers between two parties, each with at least 25% of national sales in some product. In practice, even the largest concerns seldom met these standards. The 1985 amendment lowered the sales share requirement to 25% for all mergers. Under French law, mergers not meeting these standardsare not subject to merger control. See F. Jenny, op. cit., p.

@./

iii

11.

As of 1988, the governmenthad set prices in only three sectors (taxi fares, public urban transport fares, and school meal charges) under this provision. In addition, the CompetitionCouncil, which must be consulted on proposals to regulateprices, has issued favorable opinions in motorway tolls, seaport towing charges,electricity and natural gas prices, and embarking and disembarkingcharges in ports. See OECD (1989), pp. 99-103. See W. Moeschel, "The Goals of Antitrust Revisited,"paper presented at the 8th InternationalSeminar on the New InstitutionalEconomics, Wallerfangen/Saar,W. Germany, June, 1990, p. 5.

- 34 -

administrationfrom the interpretationand enforcement of antitrust law, placing the responsibilityof interpretationwith the judiciary. These amendments represent a fundamentalchange in antitrust law in France because they substitutejudicial oversight over legal interpretationand enforcement for political discretion (which is used in the British system). One practical effect is that judicial enforcementof antitrust law is more likely to constrain the use of industrialand trade policies with anticompetitive effects in France. Yet merger control has remained under political review in France, and an enforcementrecommendationby the Conseil requires authorization of the Minister of Economics.

United

Kingdom

Though certain aspects of antitrust law have been part of British common law for centuries,modern British antitrust law began in 1948 with passage of the Monopolies and RestrictivePractices Inquiry and Control Act, which was designed to provide regulatoryoversight to monopoly situations.0 This act was augmented in 1956 with the RestrictiveTrade Practices Act, which prohibited collectiveagreementsto restraincompetitionand harm the public interest. The 1956 Act also required registrationin a national restrictive practices register of any commercialagreement in which two or more parties accept restrictions.OJ Furthermore:

The 1964 Resale Prices Act extended the antitrust prohibition to resale price maintenance,again with the proviso that the conduct must be found to harm the public interest. *

The 1964 Mergers and MonopoliesAct authorizedantitrust scrutiny of mergers involving large firms (definedaccording to market share and asset value criteria)and granted authority to prohibit mergers found contrary to the public interest.

*

The 1973 Fair Trading Act lowered the market share standard for definingmonopoly situations(from 33% to 25% of the national sales of a product) and, more important,created the independent Director General of Fair Trading, an office with a mandate to protect competitionand independentlyinitiateantitrust investigationsand enforcementefforts. It also raised competition among the several public interestcriteria encoded in British antitrust law, broadened the antitrust statutes to cover public enterprises,and extended the restrictivepractices registrationrequirementto the service sector.

iZ./

A "monopolysituation"is defined as a market for which either (i) a single firm commands 25% of national sales, or (ii) a group of firms commands 25% of national sales and behaves in a manner that restricts, distorts, or prevents competitionin that market. See OECD, op. cit., pp. 224-225.

k8/

See J. D. Klein, "Cooperationand the Per Se Debate," Antitrust Bulletin, Fall, 1989, p. 521.

- 35 -

*

The 1976 RestrictiveTrade PracticesAct broadened the informationalrequirementsof restrictivepracticesregistration and required the Director General to take action against agreementswith significantcompetitiverestrictions.O2

*

The CompetitionAct of 1980 broadened the investigatorypowers of the DirectorGeneral to encompass any conduct that might harm competition.

Enforcementof British antitrust law operatesby balancing the harm to competitionagainst a variety of standards that explicitlydefine the public interest. Under the 1956 Restrictive Trade PracticesAct, the standardsunder which restrictiveagreementsmay be found legal are: *

the agreementprotects the public against injury;

*

ending the agreementwould deny the public specificand substantialbenefits;

*

the agreement is necessary to counter the power of an outside party;

-

the agreement is necessary to negotiate fair terms with a powerful party outside the agreement;

-

ending the agreementwould have serious effects on regional employment; ending the agreement would substantiallyreduce exports; the agreement sustainsa separate,accepted agreement; the agreementdoes not materiallyaffect competition;and

*

public benefit, as defined above, is not outweighedby any detriment.

Formal enforcementauthority rests with the Secretary of State for Trade and Industry. An advisory role is played by the Mergers and Monopolies Commission (MMC), which publishes official findings regardingmonopoly situations,their impact on competition and the public interest,and the appropriateremedies to prevent harm to the public interest. Studies and recommendationsby the MMC are initiatedonly in response to a formal "monopolyreference" from the Director General of Fair Trading or the Secretary. The Secretary is not obliged to follow the recommendationsof the MMC, but almost always does, and is empowered to prohibit a merger only where 2 ' In practice, the administrationand the MKC has reached an adverse finding.

gL2/ OECD, op. cit., p. 221. ZQ/

See T. Frazer, Monopoly, Competition,and the Law, Sussex, New York, 1988, p. 82.

- 36 -

enforcementof the antitrust statutes rests primarilywith the Director General of Fair Trading. The Director General is given broad authority to investigatepotential monopoly situationsand anticompetitivepractices. Generally, these practices do not involve a formal reference to the MMC or action by the Secretarybecause the Director General may require that private parties undertake formal "promises" (similarto a consent order in other 2 V Where nations) to conduct themselves so as not to harm competition. negotiationsbetween the Director General and private parties do not result in an agreement, the Director General may direct the matter to the Restrictive Practices Court, an administrativecourt with judicialpowers created specificallyto interpret the various public interest standards of the antitrust statutes. In contrast to most Western nations, the U.K. uses an administrative/political enforcement system. British enforcementdoes not rely on the judicial system, antitrust issues are not decided in the same forum as other commercial law issues, and there is no judicial appeal of decisions of the MMC and the Secretaryof Trade and Industry. U.K. restrictivepractices registrationalso provides a mechanism for prohibitingmergers and asset acquisitionsthat are likely to harm the public interest. Historically,merger prohibitionswere based on the multiple criteria definingpublic interest,but in the mid-1980s the Director General and the Secretarybegan to base a merger reference almost entirely on the competitiveeffects (if any) of the merger. Mergers for which the target assets have a value of at least 30 million pounds or the merged parties command at least 25% of U.K. sales of some product qualify for reference to the MMC.2 ?' After a reference, the MMC has six months (extendableby up to three months) to make a report to the Secretary,who then may prohibit or impose conditionson the merger. The Fair Trading Act of 1973 describes five standards that are particularlyrelevant to judging the legality of a proposed merger or asset acquisition--theseare:1'

_UJ

D2/

L3/

*

maintaining and promoting effectivecompetition,

*

promoting the interests of consumersand other purchaserswith respect to the price, quality, and variety of goods,

*

promoting cost reduction,the developmentof new products, and the entry of new suppliers into existing markets,

A promise or consent order is a legally binding contract between the governmentand a private party. It allows the party to commit to a course of action officiallyrecognizedas legal without admitting that its previous conduct was illegal. Such contracts are an important feature of antitrust enforcementin the surveyedjurisdictionsbecause they permit an enforcementagency to remedy anticompetitiveconduct without bearing the often-substantialcosts of formal legal action. See Sir G. Borrie, "Merger Policy: Current Policy Concerns," in J. Fairburn and J. Kay, op. cit., p. 247. See appendix I of Sir G. Borrie, op. cit., p. 256.

- 37 -

*

maintaining and promoting a balanced regionaldistributionof employment, and

*

promoting commerce in overseas markets.

EEC Internationalantitrust law in the EEC, the primary example of a broadly enforced internationalantitrust treaty, is based on Articles 85 and 86 of the Treaty of Rome.L4 These articles serve to ensure that, given the elimination of national protectionmeasures inhibitingtrade among EEC member nations, private firms shall not erect private barriers to trade. The fourteen-memberEuropean Commission,an administrativeagency with quasijudicial authority, enforces the Treaty in the national courts of the member states. The rulings and decisionsof the Commission can be appealed to the European Court of Justice. In addition,any of the member states may bring suit against alleged violationsof Articles 85 and 86. Regarding remedial measures, the Commissionis authorizedto prohibit certain conduct through cease and desist orders and to impose civil fines to ensure compliance. Article 85 prohibits agreementsand concerted practices affecting trade between member states and motivatedby the prevention, restriction,or distortionof competitionwithin the common market. Agreements in violation of Article 85 are held to be automaticallyvoid, although parties to an agreement can apply for an exemption from Article 85 on the grounds that a potentiallyrestrictive agreement (i) improvesproduction or distributionor technicalprogress, (ii) allows consumers a fair share of the benefits, (iii) does not impose restrictionsthat are dispensable, (iv) does not eliminate competitionwith respect to a substantialportion of the products involved, and (v) offers benefits that outweigh the disadvantagesto competition. The exemption is generally granted only for a limited period of time. The Commissionhas the authority to grant both individualand bloc exemptions. The former can be granted on notificationby the parties to a restrictive agreement;the latter can be granted to cover a class of restrictive

I4/

The antitrust provisionsof the Treaty of Rome exclude coal and steel, which are covered for antitrustpurposes under the Treaty of Paris, which created the European Coal and Steel Community. This treaty encompassesantitrust policies, administeredby the EEC, as they apply to the production and distributionof coal and steel. In addition, the European Free Trade Association,created under the Stockholm Convention and encompassingthe nations bordering the EEC, has provisions regarding to freedom of trade but is not used as an umbrella mechanism for enforcing antitrust laws. See Studies in Foreign Competition Policy, Canadian Department of Corporate and Consumer Affairs, Ottawa, 1976, and for an update, see B. Hawk. "1992 and EEC CompetitionPolicy," Antitrust, Summer, 1990.

- 38 -

agreements that, in the view of the Commission,provide sufficientefficiency 1 and distributionaladvantages to offset any harm to competition.15 Article 86 prohibits the abuse of a dominantposition by one or more concerns within the Common Market with an effect on trade among member states. Moreover, Article 86 provides a non-exhaustivelist of prohibited conduct, including the impositionof unfair trading conditions,limiting production, markets, or technicaldevelopmentto the detriment of consumers, applying discriminatoryconditions to similar transactions,excessive pricing, and tying. Thus the conduct covered under Article 86 is that which a large firm might (perhapsunilaterally)use to exercise market power or abuse economic power (against small trading partners) in a market in which the firm is dominant. As mentioned above, the conduct covered under the EEC antitrust statutes is similar to that covered under the national antitrust statutesof the ten nations. The signatories to the Treaty of Rome contemplatedthat the control of market structure and particularlyof mergers might impede the developmentof large enterprisesand thereby impede the ability of EEC firms to compete in the internationalarena. As a result, though broadly defined, Articles 85 and 86 are primarily concernedwith conduct and are of limited use in controlling the structure of economicmarkets. Originally, since Article 85 covers concertedpractices of multiple parties, it was interpretedas inapplicableto unilateral purchases of stock (mergers). This interpretation was overturned in Rothman's, where Article 85 was found to cover the purchase 16 of even minority shareholdingsin a competing enterprise. Over time, the Commissionhas become increasinglyconcerned with the potential of large enterprises to exercisemarket power and inhibit competition in concentratedmarkets. Attempts to introducemerger control failed in 1964 and 1971, and subsequentproposalsby the Commission in 1973, 1981, 1982, and 1986 failed to generate consensus among members states.0

25/

For example,under a variety of administrativeregulations,the Commissionhas the authority to grant bloc exemptionsfor agreements relating to exclusive dealing, industrialproperty rights, product quality standards,research and development,and production specialization. See EEC Antitrust Procedure,European Law Center, Ltd., London, 1981, p. 11.

Z6/

In fact, Article 86 has been applied to mergers but is of limited usefulness in this role; though it has generally allowed the Commission to intervenebefore the fact in proposedmergers, in only one case, ContinentalCan, did the EEC sue to enjoin a merger under that Article. See EuropemballageCorporation and ContinentalCan Co. Inc. v. Commission (1973) E.C.R. 215. That ruling was overturnedby the Court of Justice (see Section V).

DZ/

See L. Wullearts,et. al., Merger Control in the EEC, Deventer, 1988, pp. 219-223. The British governmentregarded merger control by the EEC as inappropriatewhile the British were conductinga review of their national antitrustpolicy toward mergers. Moreover, the Italian,

- 39 -

The EEC recentlypassed a merger control regulationto become effective in September,1990AY The regulationrequires that any merger or cooperativeagreementbetween firms operating in the common market be notified to the Commission prior to consummationif i) annual world sales of the merging parties exceed 5 billion ECU (approx.US $6 billion), and ii) at least two of the merging parties have, between them, annual EEC sales of at least 250 million ECU, unless iii) a single member state accounts for more than twothirds of the sales of each party to the agreement. The Commissionhas four weeks to decide whether it wishes to open an investigatoryproceeding and an additionalfour months to reach a finding regarding the legality of the merger. Legality depends upon whether the merger would create or enhance a dominatingposition that would considerablyhinder competition in (some part of) the Common Market. The new EEC merger control statute shares many features of those practiced in the U.S. and Germany. For example, the new regulationbases notificationon sales, as is done in the U.S. and Germany. The ECC standards would capture a smaller class of larger mergers than those of the U.S. and Germany. In addition, though enforcementpatterns have yet to be established, the new regulationwould create a safe harbor for horizontal mergers for which the market share of the merging parties is less than 25%, similar to the safe harbor created by the U.S. DOJ Merger Guidelines.79 The waiting period (duringwhich the merging parties, after notification,cannot consummate a merger) under the EEC regulationis considerablylonger than those of U.S. pre-mergernotification.0 Under the new EEC regulation, the waiting period is three weeks but can be extendedup to five months if the Commissiondecides to initiate a proceeding. Whereas the Commissioncan extend the waiting period by choosing to study the transaction,U.S. enforcement agencies do not have this option and cannot postpone a merger without taking formal action through the courts.

Spanish, and French governmentswere concerned regarding the position taken towards state-ownedenterprises (IRI in Italy, INI in Spain). PRcit. pp. 284-286.

78/

See Council Regulation (EEC) No. 4064/89, O.J.L. 395 (30 December 1989).

19/

See the preamble to Council Regulation (EEC) No. 4064/89, O.J.L. 395 (30 December 1989). In the U.S., horizontalmergers increasingthe HHI by less than 100 points are unlikely to be contested unless the pre-merger HHI exceeds 1800. See the 1984 U.S. DOJ Guidelines,section 3.1.

OQ/

In the U.S., the waiting period is 30 days except for cash tender offers, for which the waiting period is 15 days. Requests by the DOJ or the FTC for additional informationextend the waiting period by 20 days (10 days for cash tender offers) from the date the requested information is received. Of course, litigated interventionusually delays a transactionby years. See Antitrust Law Developments (2nd. ed.), p. 217.

- 40 -

Canada Canada's traditional antitrust law, the Combines Investigation Act (CIA), has a legislative history dating back to 1889, was enacted in 1910, and was significantly amended in 1976.8L1 The 1976 amendments extended the enforcement of competition law to services, initiated civil enforcement against restrictive practices through the Restrictive Trade Practices Commission, strengthened the prohibitions against collusive agreements, bid rigging, and resale price maintenance, and made civil suits available to private litigants injured through antitrust violations.12 Even after the amendments, the CIA was a relatively inflexible statute and relied heavily on criminal sanctions to deter violations. For example, a merger inhibiting competition was treated as a criminal offense with prosecution requiring proof to criminal standards. As a result, there was never a litigated conviction on this basis, and the criminal treatment of many violations made enforcement 83 difficult and costly. / The CIA was repealed in 1986 and replaced by the Competition Act. Broadly speaking, the Competition Act replaced the criminal treatment of "monopoly" with a civil treatment and retained criminal sanctions only for egregious attempts to monopolize, such as explicit agreements to limit competition, bid rigging, price discrimination, and predatory pricing. Other restrictive practices, namely abuse of dominant position, mergers that substantially lessen competition, refusals to supply, tying practices, and exclusive dealing are now defined as civil offenses subject to civil and administrative penalties. Mergers are evaluated in light of structural concentration and other market features such as barriers to entry, an enforcement approach similar to that of the U.S. They are viewed under a rule of reason standard

j/

See B. Hawk (ed.), International Antitrust, Fifth Annual Fordham Corporate Law Institute, Harcourt Brace Jovanovich, New York, 1979, p. 103.

2/

The Restrictive Practices Trade Commission, created in 1952, was originally an investigatory body with no enforcement authority; any influence it had derived from potential litigation by the Attorney General based on the Commission's reports. Thus, the Commission's role was similar to that of the U.K.'s Managers and Monopolies Commission. See C.J. Maule and T.W. Ross, "Canada's New Competition Policy," George Washington Journal of International Law and Economics 23, 1989, p. 71.

2/

See Hawk (1979), p. 112. To 1983, the Canadian authorities reviewed 8,461 mergers without ever winning a single contested merger case. Moreover, the Supreme Court decision in K.C. Irving (1976) completely emasculated merger control in Canada by requiring of a merger prohibition both a substantial lessening of competition and public detriment. Given the (criminal) standards of proof required under the CIA, this evidentiary burden made merger control untenable in Canada. See C. Green, "Mergers in Canada and Canada's New Merger Law," Antitrust Bulletin, Spring, 1987.

- 41 -

that balances the likelihoodof an anti-competitiveeffect against possible pro-competitiveaspects of the merger, such as increased efficiency. In addition, Canada has adopted pre-mergernotificationrequirementssimilar to those applied under U.S. antitrust law. Merger remedies include consent orders, and penalties for anticompetitiveagreementshave been increased from $1 million to $10 million.ff Canada used the Sherman Act of the U.S. and the EEC's Treaty of Rome as models for its new competitionlaw. Unilateral or collective attempts to monopolize are prohibited, as under the Sherman Act, and abuse of a dominantposition is prohibited, as under Articles 85 and 86 of the Treaty of Rome. The design of the CompetitionAct shares much with Germany's Act Against Restraintsof Competitionin that the statute is very specific regarding the kinds of conduct viewed as illegal, and predatory pricing, refusal to supply, exclusive dealing, tied selling, and market division agreementsare explicitlyprohibited.1iJ The CompetitionAct provides for enforcementthrough the CompetitionTribunal,which replaces the Restrictive Trade Practices Commission. The Tribunal has quasi-judicialauthority to reach findings regarding legalityunder the CompetitionAct and sole authority to issue remedial orders. Orders of the Tribunal are subject to judicial review. Among the surveyedjurisdictions,Canada is unusual in that it uses sectorspecific, trade liberalizationmeasures as remedies for antitrust violations. In particular, the CompetitionAct provides for customs duty reduction as an alternativeto asset divestitureto remedy mergers that violate the Act.AW Australia

Australian antitrustpolicy, relying on judicial enforcement, started in 1906 with the Australian IndustriesPreservationAct, prohibiting combinationsin restraint of trade as well as conduct harming competition through unfair means. However, court decisionsnegated the effect of this Act with the result that no cases were brought under it between 1913 and 1964. A weak piece of legislation,the Trade PracticesAct, modeled after the 1956 RestrictiveTrade Practices Act (U.K.),was passed in 1965. This Act prohibited collusive bidding and, under some circumstances,collusive tendering. Amendments extended the prohibition to resale price maintenance in 1971. Otherwise, the Act required that restrictivepractices be registeredwith the Commissionerof Trade Practicesbut allowed these to persist until challenged in court by injured parties. The Trade PracticesTribunal was created to administer the Act, to hear cases, and to interpret the legality of restric-

j4/

See Complying with InternationalAntitrust Regulations,International Business Portfolios,Albany, N.Y., 1989, sec. 6.04, pp. 6-8.

j2/

See B.C. McDonald, "Abuse of Dominant Position:A New Monopoly Law for Canada," Antitrust Bulletin, Fall, 1987. (For further definition and discussion,see Section IV.)

j5./ C. Green, op. cit., p. 265.

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tive practices. As in the U.K., the Act allowed great leeway in defining public interest. Consequently,enforcementof the Act was very weak. Owing to dissatisfactionwith ineffectualenforcement,Australia passed the Trade PracticesAct of 1974, modeled after the U.S. Sherman and Clayton Acts.0' As with German law, the Act clearly defined certain practices to be unlawful rather than leaving the interpretationof legalityunder a public intereststandard to an administrativeor judicial body. Moreover, the Act provided for merger control, created a new administrativeinstitution,the Trade Practices Commission,and empowered the Commissionto seek civil penalties and other civil remedies as a mean of enforcing the Act. In addition, private parties were given the right to sue for recovery of damages owing to violationsof the Act. Section 46 of the Act prevents a concern with substantialcontrol over a market from eliminating or damaging a competitor, impedingentry, or taking actions to deter competitiveconduct. Section 50 prohibits the use of a merger to strengthenor create a controllingor dominatingposition in a market. Mergers are judged under a broad public intereststandard that balances the harm to competitionagainst efficiencygains or effects on employment or the reliabilityof supply. Notificationof proposed mergers to the Commission is optional, but all takeoversby foreign concerns must be authorizedby the Commission. Though under the direction of the Attorney General, the Commissionhas independentauthority to grant authorizationsand clearancesunder the Act. An authorizationgrants a party immunityfrom prosecutionunder the Act. Authorizationsare granted in cases of restrictiveagreements, (excluding price fixing), exclusive dealing, and mergers in order to promote national industrialand trade policies with potential anticompetitiveeffects. A clearance is an advance announcementby the Commission that a particular restrictive practice or agreement has no significantimpact on competitionand therefore does not violate the Act. As in many nations with recently amended competitionlaws, the Commission expends considerableeffort in educating private parties regarding the scope of the law and the nature of enforcement. Enforcementactivityhas been relativelyhigh, particularlywith respect to the review of mergers and restrictive practices and adjudicationagainst horizontal price fixing and resale price maintenance.ffAmong the surveyed jurisdictions,Australia is unique in applying a prohibitionof secondaryboycotts to trade unions.VJ The

BZ/

Unlike the Sherman and Clayton Acts (U.S.), the Trade PracticesAct of 1974 provides for civil but not for criminal penalties. The maximum civil penalties are $250,000 for corporationsand $50,000 for persons. Either the Attorney General or the Commissionmay initiateproceedings to recover civil penalties.

t/

See Trade Practices Commission,Annual Report. 1986-87,Australian Government PublishingService, Canberra, 1987.

tg/

Trade Practices Commission,op. cit., p. 19.

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other surveyed jurisdictionsexempt trade unions from prosecutionunder the antitrust laws. The 1990 amendmentsto New Zealand's 1986 CommerceAct and the recent free-tradeagreementbetween New Zealand and Australia provide for closer cooperationbetween the competitionlaw enforcementagencies of the two countries,and the supervisionof abuse by market dominatingenterprises under 1 New Zealand law has been extended to firms headquarteredin Australia.2 Mergers between Australianfirms affecting the New Zealand markets are to be reviewed under New Zealand'smerger control statutes, and New Zealand's Commerce Commissionhas been authorizedto participate in the enforcement of Australiancompetitionlaw.

Korea Korea is one of the latest and most interestingadditions to the community of nations practicingan active antitrust policy. Korea is commonly and rightly regardedas an example of a developingnation whose growth has occurred through extensiveeconomic managementby the state, a policy strongly antitheticalto the goals of antitrust. In particular,Korea has pursued economic growth through the concentrationof economic and market power by, for example, forcing companies to merge and by condoning price fixing by export trade associations. 9Attempts to institute antitrust legislationbegan in 1964 and were stronglyreinforced,after the economic recession in the late 1970s, by the widely-heldopinion that Korea's ability to compete in internationalmarkets 2 9' Subseqwas inhibitedby the high degrees of industrialconcentration. uently, Korea began to liberalize its markets by removingprice controls and, as a complement of liberalization,passed the Monopoly Regulationand Fair Trade Act (MRA) of 1980, modeled after the antitrust laws of Japan and West Germany.23

20/

Under the Closer Economic RelationsAgreement, Australia and New Zealand are consideringreplacing anti-dumpingmeasures with harmonized competition law measures that effectivelytreat the two countries as a single market. Similar discussionsare also under way between the U.S. and Canada. See CompetitionPolicy in OECD Countries,OECD, Paris, 1989, p. 181.

91/

For a discussionof growth promotion policiesby the Korean government, See L. Jones and I. Sakong, Government,Business, and Entrepreneurship in Economic Development,1980.

22/

South Korea's economy has historicallybeen dominatedby large industrialconglomerates,or chaebol. Though comprisingless than 1% of corporations,Korea's 30 chaebol in 1981 accounted for 39.7% of sales in mining and manufacturing. See C. Kim, "AntimergerLaws of the United States, Japan, and Korea," Korean Journal of ComparativeLaw 9 (1984).

23/

See S. P. Wagner, "Antitrust,the Korean Experience,"1981-85, The Antitrust Bulletin, Summer, 1987.

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Chapter II of the MRA deals with dominanceand monopolization. Article 1 states that the MRA aims to encourage fair and free competitionand thereby promote balanced developmentof the national economy by prohibiting the abuse of market dominatingposition, excessive concentrationof economic power, and unfair trade practices. Article 3 prohibitsa dominant firm from determiningprice, restrainingoutput, hinderingnew entry, eliminatinga competitor, or otherwise restrictingcompetition. Chapter III prohibits combinationsin restraint of trade regarding the holding of stock, interlocking directorates,merger or joint ventures. Acquisitionspassing 10% of a company's stock must be registeredwith the Fair Trade Office, and exemptions may be grantedby the minister where concentrationsare necessary to rationalize an industryor strengthen its internationalcompetitiveness. Chapter IV of the MRA requires registrationwith the minister of concerted activitiesregarding the determinationof price and output levels, marketing areas, facilities expansionsor product standards. The minister may reject certain restrictiveagreementson the basis of restrictionof competition or on public interestgrounds. Chapter V prohibitsunfair trade practices, among them predation on a rival, and Chapter VI extends these prohibitions to trade associations. Chapter VII prohibits resale price maintenance, and Chapter VIII prohibits entering into internationalcontracts involving unreasonable restrictionsor unfair trade practices. The MRA follows the practice elsewhere of definingbroad statutory provisions, leaving interpretationof the law to an administrativeagency. Enforcement of the MRA is under the authority of the minister of the powerful Economic PlanningBoard. Within the Planning Board, the Fair Trade Office conducts enforcementactivities,investigations,and policy development. Interpretationsof the MRA and preparationof remedialmeasures for approval by the minister are responsibilitiesof the five-memberFair Trade Commission, whose opinionsare advisory only. In addition, the governmentmay issue interpretativestatements, PresidentialEnforcementDecrees,having the force of law. Enforcementof the MRA, following the model of many open economies, is accomplishedthrough requiredregistration,administrative order, and criminal sanction. Criminal sanctionsand civil penalties to compensateprivate parties for injury owing to an antitrustviolation must be approved by the minister, and only the minister has the authority to order corrective actions, issue regulations,and investigateviolations. Criminal prosecutionsare conducted by the office of the public prosecutor in the Department of Justice. The law provides a maximum penalty of one year in jail and a fine of 70 million won for failure to register a restrictiveagreement with the government. The penalty for evasion or obstructionof an investigationis a fine of 30 million won. Restrictive agreements,trade associations,and international agreementsmust be registeredwith the minister,who may reject the registrations if the agreementssubstantiallyrestrict competitionor harm the public interest. More often, negotiationbetween the Fair Trade Office, the Fair Trade Commission,and the parties to the agreementsresult in amendments correcting competitiveconcerns. In practice, enforcementauthority is

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delegated to the Chairman of the FTC. The law provides for appeal of decisions, first to the minister and ultimately to the Supreme Court. Since Korea's experiencewith antitrust is quite recent, there is not a long case history to illustrateattitudes towards enforcement. Only one appeal has been made to the Seoul High Court, that of a violator who appealed, not his conviction,but rather the requirementthat he publish a public apology in local newspapers. The Supreme Court upheld his convictionbut regarded the apology measure as too severe in light of the public inexperience with the new antitrust law.2J4

Sweden Though not previouslysilent on antitrust issues, Swedish law first addressed antitrust issues at length in 1953 with passage of the Act to CounteractCertain Acts in Restraint of Competition in Business in Certain Instances. The Act prohibitedresale price maintenanceand bid rigging (collusivetendering). For other types of restraints, the law required negotiationsbetween the governmentand the parties where the restraintswere judged harmful of the public interest.25 The Act also allowed the government to set prices for up to one year where restraintstended to strengthenmonopolistic pricing, a provision that has not yet been applied. To enforce the law, the Act created two institutions,the Office of the Freedom of Commerce Commissioner(the Antitrust Ombudsman) and the nine-memberFreedom of CommerceBoard. The Antitrust Ombudsman is given broad investigatorypowers and authorizationas a negotiatorwhere business practices offend the law. The Freedom of Commerce Board rules on allegationsby the Ombudsman and is empowered only to order compulsorynegotiationsand report to the government if these negotiationsfail. The Freedom of Commerce Board gained semi-judicialpowers in 1965. In cases where negotiationsfail to correct problems resulting from refusals to deal, the Board is empowered to order the offending parties to sell products to specifiedbuyers and impose fines for noncompliance. In 1970, the Freedom of CommerceBoard was replaced by the Market Court, which was given judicial authority to enforce Sweden's antitrust and consumer protectionlegislationand was authorizedto enjoin restrictivepractices and dissolvepotentially anticompetitivemergers in 1982. A separate antitrust institution,the National Price and Cartel Office, was created to 1956 to administerlegislationrequiring that information on restrictiveagreementsbe filed with the Cartel Register. The Cartel Office monitors administrativepricing in the Swedish economy, disseminates

j_/

See C. Kim, oR. cit., p. 492.

25/

Article 5(2) states that "A restraint of competitionshall be judged harmful if, contrary to the public interest, it unduly affects the formation of prices, restrainsproductivity in business, or prevents the trade of others." See Y. Bourdet, "Policy toward Market Power and RestrictivePractices in Sweden,"Antitrust Bulletin 34, Fall, 1989, pp. 533-578.

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informationto the public, and investigatesrestrictivepractices at the request of the Antitrust Ombudsman. Resale price maintenance and collusive bidding are criminaloffenses under a per se standard (see Section IV). Otherwise, subject to a public interesttest, Swedish law prohibits vertical restraints of trade, price fixing, predatorypricing, price discrimination, excessivelyhigh prices, and exclusive dealing. The legal focus is on the conduct, not the structure,of business. Merger control, introducedin 1982 and modeled after Article 86 of the EEC's Treaty of Rome, prohibits mergers that create or strengthena dominant position."/ Mergers are judged under a broad public interest standard that encompassescompetitiveeffect, efficiencies,and regional employment. As in the United States, Sweden allows merger as a means of rationalizingthe assets of a failing firm.

Spain The centerpieceof antitrust legislationin Spain was the Restrictive PracticesAct of 1963. Articles 1 and 2 of the Act, modeled after Articles 85 and 86 of the Treaty of Rome, prohibitedconcertedpractices tending to prevent, falsify,or limit competitionor create a dominant position.17'Practicesviolating the law, such as price fixing, limitationof production or distribution,sharing of markets, eliminationof competitors (predation),discriminationagainst third parties, and tying contracts,were held to be null and void. Enforcementof the Act was executed through a complex allocationof administrativeroles among various ministries.8 The CompetitionTribunal, attached to the Ministry of Defense and headed by the Director of Competition,was authorizedto interpretand issue administrative orders and decisions enforcing the law. The CompetitionService, attached to the Ministry of Commerce and containing the Registry of RestrictiveTrade Practices,was authorized to conduct investigations. The Registry executed the provisionsregarding compulsorynotificationof potentiallyrestrictive practices, includingmergers and agreementsbetween parties controllingat least 30% of the national market in some good or service. Decisionsand orders of the enforcementagencieswere open to appeal and subject to review by the Court for the Protectionof Competition, an administrativecourt under the Ministry of Commerce. An advisory role was played by the CompetitionCouncil, consistingof representativesof the various ministries. Penalties and fines were determinedby the Competition Tribunal and formallyenforced by the Council of Ministers. The wide discretion available to the various ministriesresulted in very weak enforcement, and Spain's acceptanceof EEC membershipled to amendmentsintended to

iL/

Sweden does not have a pre-mergernotificationrequirement,hence merger control is executed after the merger has been consummated.

22/

See L. Wullearts,et. al., oR cit., pp. 149-150. Article 2.2 of the Act defined dominance in terms of one or two firm(s) experiencingno substantialcompetition.

i/

See L. Wullearts,et. al., op cit., pp. 150-151.

- 47 reconcile Spanish law with the competitionlaw of the EEC and to encompass competitivesituationsnot covered by EEC law.2 A 1988 amendment expanded the reach of Spanish antitrust law by empoweringthe Court for the Protectionof Competition to levy fines on firms for anti-competitiveconduct or agreementsand providing for the control of mergers and takeovers.19 The amendment lowered the sales share criterion for registrationto 25% and provided for prior notificationof mergers between parties whose national sales of some good or service exceed 25% or whose 1 world-widesales exceed 20 billion pesetas.!U In addition, the amendment institutedmeasures for protectionof due process on the part of defendants to antitrust investigations. More important,as in France, the Spanish government has taken steps to institute a greater reliance on competition in markets and has issued a series of orders vacating government regulationof prices.M Reducing governmentregulationeffectivelyextends the reach of Spanish competitionlaw to conduct in previouslyexempt sectors by constrainingthe 0 3' political discretionthat led to weak enforcement.

99/

When the 1963 law was passed, the many commercialsectors regulated by ministries other than Commercewere effectively exempt from the new law, Article 10 of which states, "The Court shall have exclusive jurisdiction as regards the declarationsor injunctionsfor which provision is made by this Act and its decisions.. .shall have full binding force before all judicial and administrativebodies, without preiudice (our emphasis) to the fact that the civil and criminalconsequencesensuing therefrom, and those that relate to labor matters, shall be within the jurisdictionof the appropriateauthority in each case." This provision allowed other ministries to overrule (at their discretion) the findingsand orders of the Court. See CompetitionLaw in Western EuroDe and the U.S.A., Deventer, The Netherlands,1978, SP/L/I/l.

100/ Merger control in Spain became effectiveon July 17, 1989. See Ley 16/1989, Boletin Oficial, 18.7.1989,p. 22747. 0l/ Mergers are defined to capture consolidationsof companies,acquisitions of productive assets, operating agreementsand joint venture contracts, and stock acquisitionsin which the purchaser acquires25% of the voting stock of another company. See L. Wullearts et. al., oD. cit., pp. 154-155. 102/ Price regulationwill persist in certain agriculturalproducts and services (soya and grain oils, sterilizedmilk, agriculturalinsurance), electricityand natural gas, road, railway, maritime, and air transport, and postal service. See OECD (1989),p. 198.

10/ Prior to the amendment,enforcementactivity in Spain was accelerating, as the number of new investigationswere 14, 33, and 41 in 1985, 1986, and 1987, respectively. See OECD (1989),pp. 191-192.

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IV.

CONDUCT POLICIES

To protect the vitality of competitionand defend fundamental economic freedoms, antitrust law in the ten surveyednations and the EEC prohibits certain types of private conduct. It is in the regulationof conduct that antitrust laws most share common ground. For example, each jurisdictionprohibits price fixing. The complexitiesof regulatingprivate conduct arise because competitionlaws are usually designed to promote economic efficiency,with competitionseen only as a means of encouragingefficiency. Many kinds of ostensiblyanticompetitiveconduct may enhance efficiencyor promote other national economic goals (e.g., regional employmentand exports) under certain circumstances. In practice then, antitrust prohibitionsof certain kinds of private conduct are often designed to achieve various goals, among them competition,and the scope and severity of prohibitionsgenerally reflect the national goals of the antitrust legislation. Balancing national economic and social goals also influencesthe penalties for violationsof competitionlaw. Where conduct is clearly defined and inconsistentwith such goals (e.g., refusal to deal), it may be effectively deterredby the impositionof severe monetary and criminalpenalties. Yet where the definition of conduct or its consistencywith national economic goals is less clear cut e.g., refusal to deal so as to lessen competition,a definitionthat requires an evaluationof competitiveimpact), severe penalties are inappropriate. This is because private parties are likely to refrain from conduct that is potentiallyillegal even if the conduct has potential economicbenefits offsettingharm to competition. Antitrust enforcementpolicies generally address the complex economic effects of conduct by recognizingmitigating circumstancesin judging legality. The law may regard a specific restraintas illegal per se or as illegal under a rule of reason. Generally,legalityunder the rule of reason explicitlyrecognizes that certain kinds of conduct may have efficiencyenhancing characteristicsoffsettingany harm to competition. In this circumstance,prosecutionunder the law proceeds on a case-by-casebasis and requires proof that, in light of any mitigating circumstances,the overall effect of the conduct is to harm competitionwithout sufficientlyenhancing efficiency. In contrast, perse treatmentdoes not recognizemitigating circumstancesin judging the legalityof conduct. Thus, prosecution of such conduct under the antitrust statutesrequires only proof that the conduct has occurred. Though a per se prohibitionprovides a less ambiguous and, therefore, less flexible definitionof legality, the prohibition can be conditionedon a variety of factors,so that even the per se approach can accommodateefficiency considerationsin defining legality. The relative advantagesof the per se approach to restraintsof competitionare twofold: first, ger se prohibitionis inexpensivein terms of enforcementresources,because enforcementrequires only that a complainantor enforcementauthority prove that the prohibited conduct has occurred--the

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complainantneed not address the competitiveimpact or potential efficiency of the conduct. Second, the unconditionalprohibition of conduct more clearly defines legality and thereforemay better deter attempts to exercise market power or abuse economic power. The disadvantageof the per se approach is that, in practice, it may be difficult to make allowancesfor situationsin which the prohibited conduct improves efficiencyor enhances competition. The rule of reason approach is designed, often at a considerablecost of enforcementresources, to allow the practice of efficiency-enhancing conduct in those circumstances where harm to competitioneither is absent or is offset by a contributionto other efficiencyor equity goals. In practice, whether a specific type of conduct is judged under a per se standardor a rule of reason depends on the language of the applicable statute and subsequentadministrativeand judicial decisions. Antitrust statutes can be written to encourage rule of reason treatmentby codifying the standards (e.g., economic efficiency, fairness,public interest,promotion of trade) against which the legalityof a particular type of conduct is to be judged. Where, as in the U.K. and Sweden, a statute codifies a variety of "public interest"criteria against which conduct is to be judged, it promotes a rule of reason approach to that conduct. Otherwise, Per se prohibition of specific conduct may follow from administrativeand/or judicial decisions. Alternatively,where the statutes are written in broad language, subsequentadministrativeand judicial decisionsmay provide exceptions and thereby adopt a rule of reason approach for determiningthe legality of conduct.LOV

The U.K., Japan, Australia, Spain, Korea, and the EEC require notificationand offer discretionaryexemptionsunder the antitrust laws for restrictivepractices. This is so that parties to a restrictiveagreement may apply to the antitrust authoritiesfor prior approval of restrictive agreements. Offering exemption to restrictivepractices is a strong form of rule of reason treatment and is practiced primarilywhere the antitrust statutes accommodatenational goals (e.g., export promotion)other than the maintenance of competition. In these countries,a restrictivepractices court or antitrust administratorrenders decisions on a case by case basis, weighing harm to competitionagainst other economic goals. In principle, restrictivepractices registrationhas the advantagesof providing informationabout the scope of restrictivepractices to an antitrust authority and providing for higher penalties and greater

104/ For example, resale price maintenance is generallyper se illegal in the surveyed jurisdictions,and the U.S. Supreme Court has repeatedly found resale price maintenance to be a per se violation of the Sherman Act. Yet where a supplier practices resale price maintenanceby consigning rather than selling its products to a distributor,the supplier can dictate the resale prices without violating the ShermanAct. See U.S. v. General Electric, 272 (U.S.) 476 (1926). The EEC and West Germany provide similar exceptions to their per se prohibitionsof resale price maintenance. See W. Moeschel, op. cit., pp. 532-533.

- 50 03 deterrence of unsanctionedrestrictions.L Yet there is evidence that because of the small penalties assessed for companies' failure to register restrictive practices,evasion of registrationis a common problem in many countries, includingthe U.K., New Zealand, Australia, and South Africa.)2

The restraintsof trade enjoinedunder the antitrust laws of the ten nations and the EEC generally constitutepractices by which suppliers could potentiallyexercisemarket power, impair competitionthrough the selective creationof competitivedisadvantage,or abuse a dominant position. Moreover, most of the actions taken under the antitrust statutes apply to a limited range of conduct (see Tables 4.1 and 4.2). To begin, let us distinguish horizontal restraintsbetween competing suppliers to the same market from vertical restraintsbetween (non-competing)parties in a buyer-seller relationship. The Legal

Treatment

of Horizontal

Restraints

Table 4.1: HORIZONTAL RESTRAINTS

Price fixinn - competingsuppliers, rather than setting prices independently,enter into a cooperative agreement regarding prices. Conscious parallelism - competingsuppliers, without an explicitagreement, generally set the same prices, allegedlyfor the purpose of weakening competitionamongst themselves. Restraint of output - competingsuppliers enter into a cooperativeagreement regarding output and product quality. Market division - a form of restraint of output, competingsuppliers allocate customers amongst themselves,so that each customer is served by a single supplier and cannot benefit from competition by other suppliers. Exclusionarypractices - competing suppliers employ practices that inhibit or preclude the abilityof other actual or potential suppliers to compete in the market for a product. Exchanae of information - competing suppliers exchangecommerciallysensitive information regarding price, output, quality, or any other aspect of sellingand marketing a product. Predation - one or more suppliers set prices intended to undermine the profitabilityand thereby induce the exit of one or more other competing suppliers. Restraints on entrv - one or more suppliers take actions motivated to make entry by potential competitors more difficult. Other restraints on competition- for example,suppliers enter into a cooperative agreement not to undertake certain actions of competitive value, such as advertising.

105/

High penalties deter potentially illegal conduct, even where that conduct serves efficiency or other national economic goals. For conduct judged under a rule of reason, uncertainty regarding the legality of and approval Prior registration conduct may deter that conduct. provides a means of removing the uncertaintyby deciding legalitybefore the conduct becomes effective. This reduces the likelihoodthat high penalties may chill desireableconduct by private parties.

106/ See W. Penguilley,'ComparativeApproaches to the Enforcementof Antitrust Laws Against Price-FixingArrangements,"Antitrust Bulletin, Winter, 1983, pp. 883-939.

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Unilateralor collectiveconduct weakening or restraining competition among firms in the same market is referred to as a horizontal restraint. Of the types of conduct addressedunder the various antitrust laws, none is viewed more widely as fundamentallyincompatiblewith the viability of competitionas overt or tacit price fixing and the practices that support it, such as the division of markets among producers or agreementsrestraining output among competingproducers. Price fixing enables producers in an otherwise competitive (or, at least, non-monopolistic)market to mimic the behavior of a monopolist, the result of which is that buyers pay higher prices for a smaller quantity of output. From a societalpoint of view, the elevation of prices above competitivelevels lowers economicwelfare by foreclosingcertain otherwise beneficial transactions.10

The approach taken to determine the legality of price fixing and other horizontal restraintsvaries among the ten nations and the EEC. Under the antitrust laws of the EEC, the United States, Germany, Korea, Japan, Australia, France, and Canada, horizontalprice fixing or collusivebidding is illegal per se and often attracts criminalpenalties. Prosecutionunder the antitrust laws requires only proof that competing suppliershave agreed to fix prices. In contrast, Spain, Sweden, and the U.K. judge the legality of horizontal price fixing under a rule of reason standard. In some cases, price fixing is employedunder restrictiveexport agreementsthat impose costs on foreign consumerswho are not protected by national antitrust law.iff In other cases, the acceptanceof price fixing appears to be based on the proposition that certain economicallybeneficialactivities require that horizontal competitorsfix prices. A good survey of the alleged benefits of price fixing is available from the U.K., where the RestrictivePracticesCourt records and evaluates proposed horizontal restrictiveagreementsunder a rule of reason. The 1973 Fair Trading Act judges restrictiveagreementsunder a broad public interest standard invoking a number of criteria other than efficiency. The criterion most often used by applicantsto justify price fixing emphasizesspecific and substantialbenefits for the public, such as saving customers the cost of searching for better-pricedproducts, lowering the market price by reducing

107/ This should not be interpretedto imply that price fixing does not occur under official sanction, for it certainly does. The question addressed here is, what is the nature of the legal prohibition from which exemption is sought? By price fixing, we mean explicit agreementsamong horizontal competitors. A more ambiguous form of conduct, similar to price fixing, is parallel pricing, for which competing suppliers maintain similar prices without an explicit agreement. See infra Section VI. 108/ Virtually every jurisdictionallows price fixing for exports to other countries in situationswhich would be illegal if attemptedagainst domestic buyers (see Section VII).

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the competitiverisks faced by producers,and allowing the standardizationof products. In addition, it has been argued that price fixing is a natural feature of competition in industrieswhere supplierscompete for large projects in sealed tender bidding, so that the winner suffers from "winner's curse."LOT The language of the U.K. statute requires that sanctionedprice fixing yield benefits but appears not to require that the benefits be of sufficientmagnitude to offset the adverse effects of price fixing. The arguments that price fixing can serve pro-competitivepurposes deserve discussion,because they are incorrect. It is certainly true that price fixing saves customers the cost of searchingamong suppliers for the lowest price. Similarly,price fixing removes, to some extent, the competitive latitudeof suppliers and thereby reduces the risks faced by each supplier. Nevertheless,these savings are unlikely to be large enough to offset the premium prices supportedby price fixing. Horizontal competitors have little incentive to fix prices below the monopoly level, particularlyif potential competition is unlikely to undermine the monopoly price.!L-' Moreover, price fixing reduces the competitiverisks faced only by the least efficient suppliers,for the most efficient supplierswould likely survive or thrive under competitiveconditions. That price fixing is necessary to promote the standardizationof products is clearly false, since there are many examples of economic

109/ For a discussionof British exemptionpolicy, see J. D. Klein, "Cooperationand the Per Se Debate: Evidence from the United Kingdom," Antitrust Bulletin, Fall, 1989, p. 523. The "winner's curse" refers to a theoreticalprediction that the winning bid for a prize of uncertainvalue will consistentlyoverstate the actual value of the prize, so that winning the prize is inherently unprofitable. See K. Hendricks, et. al., "InformationReturns and Bidding Behavior in OCS Auctions, 1954-1969,Journal of Industrial Economics35, pp. 517-542. June, 1987, and M. Coate, "Techniquesfor ProtectingAgainst Collusion in Sealed Bid Markets," Antitrust Bulletin 30(4), Winter, 1985. 110/ Clearly, only price fixing on a broad scale can lower buyers' search costs, since buyers can continue to search among suppliers not fixing prices. If prices are fixed at high levels by some but not all suppliers,then buyers are induced to search more extensivelyover the remaining suppliers, and search costs are likely to rise, not fall. A decline in search costs is most likely when all suppliers fix price, yet in this situation suppliershave an incentiveto charge the monopoly price, in which case, even though buyers have no incentive to search and bear no search costs, they are worse off because of the higher prices.

-

53

-

organizationswriting a broad variety of product quality standards without the use of price fixing.-Y Finally, price fixing should not be regarded as a necessary feature of industrieswhere sales are obtained through sealed-bidauctions. The "winner'scurse," if valid, would result in bidders' exiting, a phenomenon not generally observed for a variety of bidding markets. Exit would result in the elevation of submittedand winning bids to levels consistentwith positive profits. Hence, that a market relies on closed-bid tenderingdoes not imply that cooperationamong suppliers is necessary to prevent the breakdown of the market.LIn the economies surveyed,per se prohibitionof overt or tacit price fixing often extends to other horizontalrestraintssupportingprice fixing among competing firms. In general, the standard of legality is chosen to reflect the tradeoffbetween the effects of a restraint on competition and efficiency. As a rule, horizontalrestraintssignificantlylessening competitionor facilitatingprice fixing with little improvementof efficiency are most likely to be judged under a per se standard. The horizontal restraintsmost relevant in this regard include agreementsamong competing firms to allocate customers,limit geographicsales territories,exchange confidentialinformationregarding prices and output, or restrain production. -

Parallel

Pricing

Charging similar or identicalprices over an extended period of time by competing suppliers is called parallelpricing. In an antitrust context,parallel pricing is observedwhen suppliers refrain from using price

11/

The pro-competitiveeffects of standardizationflow from its potential to enhance competitionamong suppliersby identifyingfor customers and suppliers the characteristicsthat a traded product must possess. Standardizationcan promote competitionbased on productioncost advantagesand price rather than (spurious)product differentiation.

112/ Theoretically,the winner's curse occurs only when the bidders do not follow optimal (profitmaximizing)bidding strategies. In light of this and the observedviability of sealed bid auctions, the empirical significanceof the winner's curse must be questioned. See J. C. Cox and R. M. Isaac, "In Search of the Winner's Curse," Economic Inguirv 32, October, 1984. 113/ For example, concerted agreementsand (unsanctioned)cartels to fix price are per se illegal in Japan as a restraint of trade, even though other horizontal restraintsof trade are generallyjudged under a rule of reason. Similarly,agreementsto limit productionand allocate customers are also per se illegal because these agreements,though not directly fixing price, greatly facilitateprice fixing. In contrast, agreementsto limit investmentare judged under a rule of reason, as are standardizationand specializationcartels (see Section VII), which are often exempt. See Ieyori and Uesugi, op. cit., pp. 50-53.

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as a means of competitionand may be problematicbecause it can facilitate non-competitiveor monopolisticpricing. Empirically,parallel pricing sometimesoccurs in oligopoliesas a result of price leadershipin which one firm, the "price leader," announces its prices (with periodic revisions to reflect changing demand or cost conditions)and the other suppliers immediatelyfollow the pricing of the 14 leader by announcingsimilar prices. A well-knownexample is the U.S. steel industryduring the 1950s and 1960s. Typically,but not always, the largest supplier is the price leader. Yet in the steel example, the price leader was Bethelem Steel, not the much larger U.S. Steel; Bethelem was recognizedas having better marketing informationthan U.S. Steel and was on that basis the recognizedprice leader. Less often, parallel pricing is the result of simultaneousannouncementsof identicalprices by competing suppliers (e.g.Japanese beer industry in the 1980s). Simultaneousand identical pricing suggests (for lack of a better explanation)that an explicit price-fixing agreementexists among suppliers,a practice that is illegal in each of the surveyedjurisdictions. Parallel pricing is not subject to per se prohibitionsunder antitrust law in the U.S. and other developed countries,because it is not necessarilysymptomaticof non-competitiveperformancein concentrated industries,but may occur in unconcentrated,competitivesectors as well. Indeed, the perfect competitionmodel predictsparallel pricing in equilibrium (every supplier charges the same price). In the 1970s, parallel pricing and product differentiationwere cited by the FTC as evidenceof monopolizationby the major U.S. oil companies,ready-to-eatcereal suppliers,and chemical 115' In the Kellogg cereals case, the three largest cereals companies. suppliers commanded 81% of the U.S. market with rates of return twice the average for all U.S. manufacturing;yet these high profits attracted no new entrants, and the FTC sought to break up the three large companies into eight independentsuppliers. Proving a parallel pricing allegationwas difficult because parallelismcould not be attributedto a collusive agreementbut instead could result from the responses of independentsuppliers to similar competitivecircumstances. On these grounds, the FTC dropped the cases in l980-8l.)-61 Because parallel pricing has ambiguouswelfare effects and may occur in competitiveas well as oligopolisticmarkets, a Rer se prohibitionof parallel pricing would likely do more harm than good.

114/ See J.J. Rotemberg and G. Saloner, "CollusivePrice Leadership,"MIT Working Paper, March, 1988; see also D. Carlton, "The Rigidity of Prices,"American Economic Review 76, September,1986, pp. 637-658. 115/ See the FTC cases against Exxon (1973),Dupont (1973),and Kellogg (1972); see also R. Porter, "FTC vs. The Oil Industry:An Autopsy of the Commission'sShared Monopoly Case Against the Nation's Eight LargestOil Companies," 27 Antitrust Bulletin 753 (1982). 116/ Litigationagainst parallel pricing has reached similar conclusionsin Canada. See R. vs. Canadian General Electric Co., 15 Ont. 2nd 360, 406408 (1976).

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Moreover,when one considersthe specifics of enforcement,any prohibitionof parallel pricing (even under a rule of reason analysis) appears to be unworkableor has deleteriousside effects. Suppose,for example, that firms A and B serve a market for which firm A announces a price change. If firm B mimics the pricing of A, then does one sue A or B or both? For any set of specific conditionstriggeringantitrustliability for parallel pricing, a prohibitionwill be subject to strategicmanipulationby suppliers.W' Thus, any prohibitionwould introduceissues of liability that would distort the incentivesof suppliers to adjust prices as market conditionschanged. In principle,parallel pricing applies to joint conduct by suppliers;thus, the conduct can be reinforcedor, conversely,underminedby a single supplier. Due to the collectivenature of the defined conduct and the attendant liability,joint liabilityfor parallelpricing confers perverse pricing incentiveson individualsuppliers. For these reasons, even a rule of reason prohibitionof parallel pricing would likely do more harm than good. Thus, as a form of conduct,parallel pricing is not actionable on its own merits. At best, parallel pricing is useful as an indicatorthat a particularmarket may be performingnon-competitivelyand that investigation is appropriateto determine if other, actionableforms of illegal conduct (e.g. price-fixing,resale price maintenance,territorialrestraints)are occurring. That is, parallel pricing is most useful as a case-selection device for directing antitrustenforcementefforts. Generally,this is how antitrust law treats parallel pricing. Japan, Sweden, and the United Kingdom all have provisions allowing the antitrust authorities to designate particular industriesas "monopolies"or "monopolysituations,"a designationthat generally triggers investigationand (perhaps)statutory reporting requirements. Heuristically,a monopoly designationallows the authorities to treat a particularmarket as a potential problem area and to heighten their scrutiny of that market. For example, such a designationby Japan's Fair Trade Commissiontriggers a requirementthat suppliers file informationon costs to justify contemporaneousand similar price announcements.A! In some jurisdictions,where parallel pricing has triggered an investigation,the ensuing enforcementaction has prohibitedother forms of conduct that supported or facilitatednon-competitivepricing. Thus, parallel pricing is viewed only as a symptom of non-competitiveperformance. For example,base-pointpricing, a pricing system that made it easier for suppliers to monitor pricing and discounting,was viewed as a device

117/ B might be induced to follow A's pricing if doing so would result in liability on A. Even if a prohibitionapplied to B, it might be worthwhile for B to trigger a parallelpricing charge if A's penalty would be higher than B's - an example of raising rivals' costs. See S. Salop and D. Scheffman,"Cost-RaisingStrategies,"Journal of Industrial Economics,September,1987. 118/ See Ieyori and Uesugi, oR. cit., pp. 74-76 and 89-93.

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facilitatingnon-competitivepricing in the U.S. steel market and was prohibited on that basis.1l9/'

The Legal

Treatment

of Vertical

Restraints

A vertical restraintmay be broadly defined as any practice serving to confine, constrain,or inhibit the actions of two parties interacting in a (vertical)buyer-sellerrelationship(e.g., manufacturerdistributor). Price restraintsconstrainpricing directly, and non-price restraints constrain other aspects of conduct. Table 4.2: VERTICAL RESTRAINTS

Exclusive dealing - a supplier of a product sells only on the condition that the buyer not purchase competing products. Refusal to deal - a supplier refuses to sell to parties wishing to buy; similar to exclusive dealing, distinguished only by potentially different treatment under the law.a/ Resale price maintenance - a supplier supplies distributors only on the condition that the distributor sells at a price dictated by the supplier. Territorial restraint - a supplier sells to distributors only on the condition that the distributor not market the product outside a specified territory; supportive of price discrimination. A notable form of this restraint is prevention of parallel importation, for which a supplier prevents national distributors (for example, in West Germany) from shipping into another nation (for example, France). Price discrimination - a supplier charges different parties different prices under similar circumstances.h/ Premium offers - a supplier offers discounts or other inducements only to certain parties; often a form of price discrimination. Tng - a supplier enters into contracts for a product with conditions that are irrelevant or unnecessary to the exchange of the product; typically these conditions involve the purchase of other products of the supplier. Full line forcine - a form of tying, a supplier requires distributors to carry all of the supplier's products. Abuse of negotiating POSition - a supplier imposes unfair or abusive conditions in contracts to the detriment of buyers.

W

This can also be considered a horizontal restraint in the form of a boycott by competing suppliers.

b/

Price discrimination can be based on horizontal considerations such as meeting competition and can therefore be considered a horizontal restraint. We discuss price discrimination among vertical restraints because vertical restraints may be used to support (collusive) price discrimination.

Vertical restraintsmay be viewed as provisions in contracts between suppliers and their distributorsto restrain the conduct of distributors (and retailers).!M/Antitrust laws prohibit these restraintsfor a

119/ See L. Marango, "The Basing Point Decisions and the Steel Industry," American Economic Review 45, May, 1955. 120/ Contracts generally use several,mutually-reinforcing vertical restraints rather than a single restraint. For example, resale price maintenance (or any other restraint)may be enforcedby the supplier's refusal to deal with distributorswho offer price discounts. Surveying (continued...)

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number of reasons. First, vertical restraintsmay be used to support noncompetitive conduct (and the exercise of market power) by competing suppliers. For example, if colluding suppliers fix prices above competitivelevels, resale price maintenancemay provide supplierswith the means of ensuring competitive returns to distributorsand facilitatingthe detection of cheating (by suppliers). Second, vertical restraintsmay support the exercise of market power by distributors,who collectivelymay coerce suppliers to impose resale price maintenance as a form of horizontal price fixing (among distributors,not suppliers). In this form, vertical restraintsmay also impede innovationin distribution.-21Third and most interestingin an international context,vertical restraintsmay provide supplierswith the means of segmenting markets on a geographicbasis and practicing geographicprice discrimination, a scenario that representsnot only the exercise of market power by suppliersbut also the creation of competitive disadvantageamong (national) distributors. Yet vertical restraintsmay in certain circumstancesenhance economic efficiency. For example,vertical price restraintsmay be required to induce distributorsto offer costly, product-specificservices to buyers, and buyers may infer from these services that the product has high quality.Alternatively,where high mark-ups are insufficientto induce distributorsto offer product-specificservices, certain vertical restraints (e.g. refusal to deal) may serve directly as contract-enforcement devices by which suppliers

120./(.. .continued) the litigated cases involvingresale price maintenance in the U.S. between 1976 and 1982, Ippolito finds that 78% of the cases involved additionalrestraints. See P. Ippolito, "Resale Price Maintenance: Economic Evidence from Litigation,"Bureau of Economics Staff Report, Federal Trade Commission,Washington,D.C., April, 1988; see also the survey by T. Overstreet, "Resale Price Maintenance:Economic Theories and Empirical Evidence,"Bureau of Economics Staff Report, Federal Trade Commission,November, 1983. 121/ See R. L. Steiner, "The Nature of Vertical Restraints,"Antitrust Bulletin, Spring, 1985. 122/ The best-knownexample is Akerlof's 'lemons market' in which uninformed buyers rely on informationalsignals (e.g. advertisingand the provision of costly servicesby the supplier) to make inferencesabout the quality of each supplier'sproduct. Absent signalling,buyers essentially assume that all productshave low quality and do not purchase at prices sufficientlyhigh for high quality products to be profitable. The failure of the market to support the productionof high quality products is inefficientwhere buyers prefer high to low quality products. See G. Akerlof, "The Market for Lemons," Quarterly Journal of Economics 84 (1970).

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reward distributorsthat provide costly servicesand punish those that do 123/ not.-/ Whether resale price maintenance (RPM) is generally efficient or not is controversial,for both the pro- and anti-competitivetheories predict that RPM raises prices.L' Yet some case studies have found evidence that RPM was an efficientmarketing device when used by small firms promoting new products. Price discriminationitself is generally prohibitedbecause it may represent the exerciseof market power against a select group of buyers. Moreover, where the product is an input and the buyers are themselves suppliers (in a downstreammarket), price discriminationcreates or enhances selective competitivedisadvantageon the part of the buyers who are charged higher prices. Thus, either market power or dominance can provide a basis for prohibiting price discrimination. The complexitiesof price discriminationhave led to differing standards of legality. In a number of jurisdictions,such as the U.S. and the EEC, price discriminationis legal if used by a supplier to meet competition from certain other suppliers. This is because an unconditionalprohibitionof price discriminationwould likely severely chill price competition. In particular,vertical restraintsmay encourage regional entry by allowing suppliers to lower prices selectivelyto gain market share in specific markets. On such grounds, the U.S. Supreme Court further confined the (formal per se) prohibitionagainst resale price maintenance in May, 1990. Atlantic Richfield (Arco),a large, integratedoil company, offered preferential incentivesto its Californiagasoline distributorsas a means of lowering price and gainingmarket share in California. An independentgasoline distributor,USA Petroleum (with whom Arco's distributorscompeted), sued on the basis that the resale price maintenanceand measures taken to enforce it violated the ShermanAct. The U.S. Court decided otherwise,noting that:

123/ Viewed as contract enforcementdevices, vertical restraintsensure the provision of costly serviceswhere such provision is more efficiently handled by distributorsthan suppliers. See B. Klein and K.M. Murphy, "VerticalRestraintsas Contract EnforcementMechanisms,"Journal of Law and Economics 31 (October, 1988). 124/ In surveying the experienceof the U.K., Canada, Sweden, and Denmark, Overstreet (sec. VI(E)) finds that a prohibitionof RPM was often followed by significant innovationin retailing. For example, the Swedish prohibition of RPM in 1954 was followedby the developmentof high-volume,low-cost retailers such as chain stores, supermarkets,mail order retailing,and department stores; these replaced small, highcost, single-ownerretailers. Overstreet,op. cit., p. 161.

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"Low prices benefit consumers regardlessof how those prices are set and so long as they are above predatory levels, they do not threatencompetition."5 Absent barriers to entry or sales expansion,price differentials due to various conditionsof competitionare likely to be short-lived if suppliers behave competitivelyand expand to serve the customers (or areas) that are paying relativelyhigh prices. The competitiveconcern raised by price discriminationis that collusive (and discriminatory)price increases to selected customersmay be profitablewhere (non-discriminatory) price increases to all customerswould not be; thus in certain circumstances,the 1 1' For example, in exercise of market power may require price discrimination. 1957, Hokkoku Newspaper (of Japan) was enjoinedby the Fair Trade Commission from selling newspapers in Toyoma Prefectureat prices below those of identical newspapers in IshikawaPrefecture,where several strong, competing newspaperswere sold. This kind of price discriminationis consistentwith collusion to raise price on a regional basis (in Ishikawa) and is inconsistent with discriminationto meet competition--ifHokkoku Newspaperwere discriminating to meet competition,Ishikawa prices would be expectedto be lower, not higher, than Toyoma prices. According to microeconomictheory, the efficiencyof price discriminationrequires that the ability to discriminateshould induce a firm with market power to supply more output to more customers than it would without resorting to discrimination.iVIFor example, the Canadian antitrust

125/ 110 S. Ct. 1884 (1990). The Court found illegalitybut ruled that the "oil company'svertical, maximum price fixing scheme did not cause independentmarketer's 'antitrustinjury';marketer'slosses did not flow from harmful effects on dealers and customers." The 'maximumprice fixing' referredto above is resale price maintenancethrough which a supplier imposes a maximum price on distributors,a mechanism by which the supplier ensures low retail prices. Minimum price fixing, by which a supplierwould ensure that its distributorschargedhigher prices, would more likely be prohibitedunder a per se standard in the U.S. Until 1977, vertical restraintswere generally prohibited in the U.S. under a per se standard. The Supreme Court ruled in Sylvania that nonprice vertical restraintswould be judged under a rule of reason standard. See ContinentalT.V., Inc. vs. GTE Sylvania, Inc., 433 U.S. 36 (1977). 126/ See Ieyori and Uesugi, op cit. 127/ Theoretically,the impact on economic efficiency of price discrimination depends upon which of the many forms of discriminationis employed. First-degreediscriminationallows each unit of output to be priced independently. Second-degreediscrimination,slightlycruder than first degree, allows discriminationbased on the amount purchased by an individualcustomer, who, for example, might pay a lower average price for large purchases than for small. Third-degreediscrimination,most (continued...)

- 60 authorities have recently investigated allegations of arbitrage and price discrimination in the domestic automobile market.)1 It is alleged that Canadian marketing groups have been purchasing automobiles in Canada at comparatively low prices and diverting them to other nations, primarily the U.S. Auto manufacturers have allegedly reacted to this by refusing to supply

autos to the parties involved in the arbitrage--thuspreventingthe parallel imports--andCanadian marketing groups have complainedto the Canadian government. If the auto manufacturersare successfullysued for refusal to deal, the manufacturerswill likely equalizewholesale auto prices between the U.S. and Canada, thereby removing the incentive for arbitrage. Because of higher per capita income, higher wholesale auto prices, and larger market size in the U.S., non-discriminatorypricing between the two nations is likely to result in higher average auto prices and lower sales in Canada.1m Hence, price discriminationby the auto manufacturersbetween American and Canadian customers is likely to permit certain auto sales in Canada that would not occur otherwise. 130 The potential pro-competitiveeffects of vertical restraintshas led to their more lenient treatment in certain jurisdictions;for example, in 1988 the U.S. Supreme Court weakened the per se prohibitionagainst vertical restraints (under the Sherman Act) absent an explicitprice agreement among a supplier and its distributors.31 The German treatment of vertical restraints

127/(...continued) common in practice, allows discriminationbetween two or more groups of well-definedcustomers. First- and second-degreediscrimination generally raise allocativeefficiencybecause they offset the incentive of a firm with market power to restrict output. The efficiency of third-degreediscriminationis ambiguous;a necessary condition for welfare to increase is that output rise with discrimination. For a more detailed discussion, see Scherer (1980), Chapter 11. 128/ At this writing, the investigationhas not reached a finding. See OECD, CompetitionPolicy in OECD Countries. 1987-88,Paris, 1989, p. 66. 129/ If arbitragebetween the U.S. and Canada is motivated by price discrimination,then Canadianauto demand is likely more elastic than U.S. auto demand (otherwise,Canadian prices would not be less than American prices). The static model of discriminationbetween two markets predicts that chargingall customers the same price would then result in higher prices to Canadians,lower prices to Americans and a shift of auto sales from Canada to the U.S. 130/ The efficiencyof price discriminationin autos is ambiguous and depends on the relative weights assigned to the economic welfare of Americans and Canadians. Yet, from a Canadian point of view, price discrimination in autos unambiguouslyraises the economicwelfare of Canadians. 131/ See Business Electronicsv. Sharp Electronics,Supreme Court of the United States, Syllabus No. 85-1910,decided May 2, 1988. This ruling permits a supplier to impose conditionsupon distributors,including (continued...)

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is similar to, though more lenient than, that of the U.S. Formally, vertical restraintsand resale price maintenanceare illegal under German law, the former under a rule of reason and the latter under a per se standard. Yet the prohibitionagainst non-pricevertical restraints is not strongly enforced, and these are effectivelylegal and widely used.'M Japan prohibits certain vertical restraints,particularlythose imposingcompetitivedisadvantageon certain suppliers,under a per se standard. The Fair Trade Commissionhas the authority,under the 1962 Act Against UnjustifiablePremiums and MisleadingRepresentations,to limit or prohibit the offering of a "premium" (which includes price discounts)by suppliers. This authority is based on preventing "unjustifiableinducementof consumers."aY (As the U.S. court noted in the above discussion,strict prohibitionof vertical restraintscan sometimes chill pro-competitive behavior.) Otherwise,many vertical restraintsare legal in Japan. The Tokyo High Court held in 1953 that vertical restraints,without mutual agreement among competing suppliers,did not constitutea concertedactivity under the AntimonopolyAct and thereforewere not prohibited. This ruling greatly reduced the antitrustoversight of vertical restraintsamong Japanese suppliers and distributors.-1 Yet various vertical restraintshave been prohibitedunder Japan's competitionlaw as unfair business practices,usually under a per se standard, when these restraints avpear in internationalcontracts. Section 6(1) of the AMA prohibitedunfair businesspractices in internationalcontracts, and JFTC guidelineshave defined such practices to include price and quantity restrictions,tying, full-lineforcing, resale price maintenance,exclusive dealing, and refusal to deal.1351 The potential efficienciesof vertical restraintshave led Japan to consider amending its guidelinesregarding premium offers (which discouragediscounting)and parallel importationsince

L31/(...continued) resale price maintenance,as long as the conditionsare fairly applied to all potential distributors. Where restrictionsappear to have been negotiatedbetween the supplier and its distributors,they run a high risk of being judged as Rer se violations of the Sherman Act. 132/ See W. Moeschel, op. cit., pp. 532-535. For a discussionof the procompetitiveand efficiencyaspects of vertical restraintswith respect to European competitionpolicy, see J.A. Kay, "VerticalRestraints in European CompetitionPolicy," 34 European EconomicReview (1990),pp. 551-561. 133/ See Ieyori and Uesugi, op. cit., p. 296. 134/ See Ieyori and Uesugi, op. cit., p. 52. 135/ See Ieyori and Uesugi, oR. cit., pp. 60-61.

- 62 these guidelines are regarded as impeding entry of foreign suppliers into Japan. a'6 Although antitrust enforcement in certain jurisdictions relies on a rule of reason approach, price and non-price vertical restraints are often regarded as per se violations. Under French law, resale price maintenance is formally judged under a rule of reason and can in principle be sanctioned where it is not used to raise prices to buyers. Such sanctions are rare, however, and resale price maintenance is effectively per se illegal. Similar treatment applies to refusal to sell and exclusive dealing (although the latter is legal when shown to improve service). Price discrimination is per se illegal in France unless necessary for a supplier to meet competition (as in the U.S. and EEC).L37) Similarly, although Swedish competition law has a rule of reason approach, with prohibitions based on a broad public interest criterion, resale price maintenance is a criminal violation judged under a R&r se standard.1 3 1 EEC competition law is structured (through notification and exemption procedures) to treat horizontal and vertical restraints under a rule of reason, but vertical restraints that support price discrimination among member states are generally Rer se violations.3-9iThe EEC prohibition of vertical restraints is strictest towards territorial restraints and actions taken by producers to prevent the parallel importation of their goods, an enforcement position motivated by the commitment of the EEC to a common market. In general, vertical restraints that facilitate the carving out of national markets within the EEC are per se illegal, and violators are subject to very large fines such as that paid by Pioneer Electronics and its distributors (3.2 million ECU, or $2.98 million at the time) as a result of 0 territorial restraints in distribution.ii '

136/

In April, 1987, the Japan FTC issued guidelines to prevent "unjust obstruction of parallel imports by sole import distributorships." See OECD, Competition Policy in the OECD Countries: 1987-88, Paris, 1989, p. 156.

137/

See Competition Law in Western Europe and the USA, Vol. A., Suppl. 24, FR.C., Deventer, April, 1981, pp.. 61-74.

138/

See Y. Bourdet, op.

139/

See W. Moeschel, op. cit., p. 526. The antitrust laws of the EEC and the U.S. offer a common loophole for the legal practice of resale price maintenance, namely that a producer may dictate the resale price of goods sold on consignment. Therefore, retaining the title of goods throughout distribution allows the producer to dictate the resale price of such goods. Of course, such an arrangement imposes risks upon the producer that the distributor would otherwise bear.

140/

See American Bar Association, Antitrust Law Developments, Section of Antitrust Law, ABA Press, 1984, p. 573.

cit., p. 538.

- 63 EEC competition law allows a supplierto maintain exclusive national distributorsbut does not allow the supplieror its distributorsto take actions preventing the parallel importationof the supplier'sgoods (such as transshipmentby a French distributorinto a German market served by another distributorof the same brand of product). The inabilityof suppliers to prevent parallel importation,by which distributorswould engage in arbitrage to undermine price discrimination,effectivelyrenders resale price maintenanceand price discriminationamong member states infeasible in the EEC. 1'J Restraints

by Dominant

Firms and the Protection

of Competitors

In many circumstanceshorizontal and vertical restraintshave the potential to enhance efficiencyand are therefore commonlyjudged under a rule of reason standard,a finding of legalitybeing most likely where the producer imposing the restraintshas little or no market power. But where restraints are imposed by a firm that is economicallydominantor likely to possess significantmarket power, the anticompetitiveeffect of restraints is judged to be more likely and the antitrustprohibitionof restraintstends to be stricter,with Rer se treatmentoften substitutedfor a rule of reason approach. Since the definitionof dominance is somewhat complex and is decided in a case by case basis, this approach to the practice of restraints may be viewed as a truncated rule of reason. Hence, judging the legality of restraintsin a particularcase amounts to judging whether or not the practitioneris a dominant firm. For example,in the EEC the prevention of parallel or other imports,discriminatorypricing, exclusive dealing, and refusals to deal are all examples of restraintsenjoinedunder a Rer se standardwhen employed by dominant firms. In Germany, tying agreements, refusals to supply, and certain discountingpractices,normally (when practicedby small firms) judged under a rule of reason, are Rer se illegal when practicedby a dominant firm.19 As mentioned, antitrustprohibitionsof horizontalor vertical restraintsmay be motivated by the protectionof competition (under market power) or by the protection of competitors (under dominance). The prohibition most consistentwith the protectionof competitorsis that of Dredation. Predation, illegal throughoutthe surveyedeconomies,consists of pricing by a

141/ EEC law allows distributioncontracts to confine a distributor's marketing,but not its sales, to a particulararea. Hence, a resale price maintenance scheme to allocate exclusive territoriesamong distributorsand to ensure high prices in certain territories could not be enforcedby private parties owing to parallel importationfrom the low-price to the high-price territories. See American Bar Association, Antitrust Law Developments,Section of Antitrust Law, ABA Press, 1984, p. 573. 142/ See American Bar Association,op. cit., pp. 593-598; see also Moeschel, op. cit., p. 536.

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supplier to achieve the destructionof a rival rather than earn a short-run profit.113 As defined, predation is very difficult to distinguishfrom intense competitionamong rival producers,conduct that drives the efficiency of the competitiveprocess. For that reason, devising effectiveprohibitions against predation involvesmaking a fine distinctionbetween illegal conduct and conduct that not only should be legal but also is highly desirable.' Aside from being an obvious abuse, predation can encourage the exercise of market power by inhibitingentry. This is because predation may weaken incentivesto enter by creating expectationsthat a firm's entry will result in below-costpricing. This threat may be particularlycrediblewhere the predator has greater financial resources (than the prey) with which to 145- Alternatively,where the exerciseof bear the losses of predatory pricing. market power requirescollusion among several producers,predation can provide

143/ Predation requires that the predator surrender short-runprofits (by pricing below its costs) in order to realize (greater)long-run profits made available by the demise of a competitor. 144/ As the 'USSecond Circuit Court of Appeals noted in Northeastern Telephone Co. vs. ATT, "Predatorypricing is difficult to distinguish from vigorous price competition. Inadvertentlycondemningsuch competitionas an instanceof predationwill undoubtedly chill the very behavior the antitrust laws seek to promote." 651 F. 2nd 76, 88 (2nd Circuit, 1981). 145/ If predator and entrant are equally efficient, then the (smaller) entrant loses less from predation than the predator. It can then be argued that perfect capital markets (those without informational asymmetries)would offset the "deep pockets" of the predatorby allowing the entrant to finance its losses until the predator gives up. See S. Salop, "Strategy,Predation,and AntitrustAnalysis: An Introduction," in Strategy. Predation.and Antitrust Analysis, S. Salop (ed.), Federal Trade Commission,September,1981. However, the applicabilityof this argument is limited, for if the banker does not know the costs of the predator (an informationalasymmetry),then a well-fundedpredator, by persisting in predation,sends a signal to the banker (rather than the entrant) that entry is unprofitableand thereby undercuts the incentive of the banker to finance the entrant. More importantly,predation does in fact occur in the developed countries in spite of the presence of well-functioningcapital markets. Finally, in many less-than-developed countries,capital markets are regardedas highly imperfect. See B. Yamey, "PredatoryPrice Cutting:Notes and Comments,"Journal of Law and Economics 15, 1972, pp. 129-142; see also G. Saloner, "Predation, Merger, and IncompleteInformation,"Rand Journal of Economics 18, 1987, pp. 165-186.

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the means for discipliningproducerswho depart from the collusive agreement 46 1 to raise price.L All the surveyedeconomies prohibitpredation, either as an abusive practice or as an attempt to monopolize. In Japan, predation (charging"unreasonablylow prices") is regarded as an unfair business practice, with "unreasonablylow" interpretedto mean that prices are below 2 manufacturingcosts.47' Most U.S. courts have accepted proof of pricing below short-run average or marginal cost as creating a presumption that such pricing is predatory.118' The choice of this standard is based on practicalityand the proposition that pricing below short-runmarginal cost is incompatiblewith short-runprofit maximization. The difficultywith devising an adequate test of predation is that in certain circumstancescosts can be very difficult to ascertain. In addition,where operating at less than full capacity imposes significant costs on a producer, marginal cost pricing may not be an adequate guide to procompetitivebehavior.1491 Finally, the risk of chilling pro-competitive behavior through prohibitionagainst predation is most significantwhere the antitrust statutes allow private parties to bring suit. Naturally, the target of conduct that might be predatory (or might simply constitutevital competition)would have a strong incentiveto sue under the antitrust laws. The dangers of chilling pro-competitivebehavior through interdictions against predation would likely be minimized were proof required that the alleged predator and the target were engaged in sufficienthead-to-head competitionso that the predator would be able to threaten the existence of the target and that doing so would enhance the predator's ability to exercise

146/ As mentioned above, any collusive scheme, to the degree it is effective in raising prices, likely motivates certain producers to cheat on the agreementby cutting price just below the collusiveprice. For collusion to be effective,the collusive group must possess the means of detecting and punishing cheating. In this context,predation is one form of punishment. 147! Ieyori and Uesugi, op. cit., p. 99. 148/ Some US courts have recommendedthat predation require proof of intent or market power, but this recommendationhas not, unfortunately,been widely accepted. See Inglis Baking Co. vs. ITT, 668 F. 2nd 1014, 1036 (9th Circuit, 1981). 149/ Dynamic cost improvementssuch as learning curve effects may provide producers with a strong incentive to price below marginal cost as a means of realizing future cost improvements. Business studies have documented learning curve effects (i.e. decreasing average cost in response to cumulativeoutput) in a variety of industries. See A. M. Spence, "The LearningCurve and Competition,"Bell Journal of Economics 12(1), Spring, 1981. See also M. B. Lieberman, "The Learning Curve and Pricing in the Chemical Processing Industries,"mimeo, Graduate School of Business, StanfordUniversity,May, 1983.

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market power. This approach is taken implicitlyin the EEC, France, and in 15 01 Germany, where predation is viewed as an abuse of a dominantposition.

Enforcement

Standards

In principle,a particularnation's enforcementstandards depend on the emphasis and value placed on competition,the legal recognitionand treatment of potential efficiencies,and the penalties assessedviolators. Competition law generallyprohibits certain kinds of business transactionsand conduct. The enforcementof such prohibitionsoften requiresa showing that the potential for the exerciseof market power or abuse is actionable, in which case monetary and penal sanctionsmay follow. Therefore,penalties and enforcementstandards must be determinedjointly to ensure that private parties do not have an incentive to violate the prohibitionsof competition law.!Ll

In this regard, most of the ten economieshave allowed private parties to sue antitrustviolators for compensatorydamages, generallydefined as the additionalprofits obtainedby violating the competitionlaw. Absent a certainty that the violation will be detected and punished,compensatory damages do not deter, for they leave the violator no worse off than he would 5 W To provide for greater deterrence,the U.S. allows recovery be otherwise.!

150/ Note, however, that dominance does not always require the ability to exercisemarket power. See Section II, infra, and CompetitionLaw in Western Europe and the USA, Vol. A., Suppl. 24, FR. C., Deventer,April, 1981, p. 86. 151/ If the incentive to violate the law is purely financial,then, owing to strict but imperfect enforcementand (too) low penalties,private parties may have a financial incentiveto violate the law. Moreover, where private parties have the right to sue and collect damages for antitrustviolations, the magnitude of penalties determinesthe effective standard applying to conduct. Because litigationis costly for both complainant and defendant,conduct that clearly violates the law will be settled between the parties (againstthe defendant),and conduct that is clearly legal will also be settled (againstthe complainant). The litigationoption will be chosen by both complainant and defendant only where the legalityof the conduct is uncertain. Thus, litigationserves to define the limit of legal standards. In addition,high penaltiesmay expose private parties to litigationrisk and thereby induce them to constrain their conduct under a different (i.e. more stringent)standard than that intendedin the law. Thus, high penalties are fundamentallyinappropriatewhere a prohibition follows a rule of reason standard (for which legality is explicitly uncertain). See G.L. Priest and B. Klein, "The Selection of Disputes for Litigation,"Journal of Legal Studies 13(1), 1984. 152/ For a private party facing a prosecutionand loss of compensatory damages with certainty,the expected value of violating the law is zero. If prosecution is uncertain, this expectedvalue is greater than zero; thus, the party has a financial incentiveto violate the law.

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by private litigants of punitive damages,three times the amount of compensatorydamages. Moreover, due to parallel federal and state enforcement in the U.S., private complainantscan sue under state law for additional punitive damages; thus, a violator risks being sued for five times the damages 1 German law allows the caused by an antitrustviolation.L53 Cartel Office to recover civil penalties calculatedat three times the additionalprofits 1 gained through violations of certain antitrustprohibitions. 54/ Yet in most of the surveyedeconomies, the strengthof deterrence depends also on cultural factors. In Japan and Korea, public apology, a sanctionwith little practical applicationin Western nations, is a very severe penalty, often contestedby defendantsmore vigorouslythan monetary penalties. Courts and the authoritieshave sometimesviewed an order for public apology as too severe a remedy for technicalviolationsof relatively new laws.55/

153/ Typically, state antitrust statues allow for treble damages, consisting of compensatorydamages equal to injury plus punitive damages equal to double the injury. Thus, a suit pressed in both U.S. federal and state court can recover up to five times the injury, since compensatory damages can be obtained only once. See Antitrust Federalism: The Role of State Law, American Bar Association,Section of Antitrust Law, monograph 15, 1988, pp. 20-21. 154/ See W. Moeschel, op. cit., p. 527. Note that for a firm possessing market power and legally earning above-normalprofits, (a simple, static model shows that) the incrementalprofit attributableto an antitrust violation is generally less than the correspondinginjury to buyers, where injury is defined as consumer surplus that is lost due to higher prices. Where the violation allows the firm to raise its profits from competitive to supracompetitivelevels, illegal profits and injury to buyers are roughly equal. In practice, then, basing penalties on injury to buyers rather than incremental(illegal)profits more strongly deters violations (or, to mention the drawbacks,more stronglychills potentiallypro-competitiveconduct). 155/ In South Korea, the initial (and successful)appeal of a ministerial decision to the Seoul High Court admitted illegalitybut appealed only the order to apologize. The High Court concurred on the grounds of severity of punishmentand the appellant'slack of familiaritywith the law. See Wagner, op. cit., p. 500. Note, however, that in 1984, when Samsung, Gold Star, and Dae Woo fixed domestic televisionprices (in response to excess capacity and price cutting caused by U.S. import restraints),the KFTC ordered the defendantsto apologize in South Korean newspapers. See Samsung ElectronicsCo., 4 KFTC 58 (December 26, 1984).

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V. STRUCTURALPOLICIES: MERGER CONTROL AND DEMONOPOLIZATION Although the historicalfocus of antitrustpolicy has been with the regulationof conduct, structuralregulationhas in recent years become a more importantand widely used means of pursuing antitrustgoals. Structural antitrust regulation is concernedwith the control of permanent or long-run contractual relationshipsamong suppliers--primarily mergers, takeovers,asset transfers and joint ventures. These transactionsare subject to antitrust scrutiny because they can create or enhance interdependenciesamong buyers and sellers and thereby enhance the likelihoodof joint or cooperativeexerciseof market power or the abuse of economic power against small trading partners. The rationale for the antitrust oversight of market structure lies in the influence of market structureon the feasibilityand profitability of conduct inconsistentwith efficiencyand economic freedom. If antitrust regulation can encourage competitivemarket structures,then anticompetitive conduct often becomes either unprofitablefor the practitioneror incapableof achieving anticompetitiveresults. In addition, regulationto encourage competitivemarket structurescontributesto the defense of economic freedom by providing individualswith alternativesto dealing with powerful, dominant firms. The antitrust regulationof market structure complementsthe regulationof conduct, because maintainingcompetitivemarket structures attenuates the incentivesof suppliers to engage in anticompetitive 15 6' In addition,many forms of anticompetitiveconduct (e.g. price conduct. fixing) are illegal only when practicedby unaffiliatedsuppliers. Mergers and other forms of corporate affiliationessentiallyundermine the antitrust prohibitionsof these forms of conduct. Yet structuralregulationsdo not obviate the need for conduct regulations. In some markets large firms may be more efficient,more competitivein internationalmarkets, and more innovative than small firms. Thus, where economiesof scale lead to concentrated markets, the maintenance of competitivemarket structuresmay be incompatible with economic efficiency and growth, in which case conduct regulationsare likely to be more effective than structuralregulationsin inhibitingthe 7' exercise of market power or the abuse of dominant positions.15. The two basic tools of structuralantitrust policies are merger control and demonopolization. Both are designed to inhibit the concentration of economic and market power through permanent or long-term contracts among suppliers. Over time, an economic market may become more concentratedas a

156/ Conduct regulation relies on the detection of illegal conduct by the antitrust authorities. Where the detection of illegal conduct is imperfect,structuralregulations,by inhibitingmarketing concentration, raise the cost, and thereforelower the likelihoodof collusion. Also note that by "competitivemarket structure,"we mean a market with many suppliers,no one of which influencesmarket price. 157/ Note the similaritybetween this argument and that regarding the complementaritybetween antitrust policy and trade liberalization (SectionII). Trade liberalizationcan significantlyenhance competition only through its effect on market structure.

-

69 -

result of shifts in market share among incumbentsuppliers or as a result of contracts that increase interdependencies among suppliers. Merger control inhibitsconcentrationex ante by selectively prohibitingmergers or equivalentcontracts that would significantlyraise concentrationin the market. In contrast, demonopolizationinhibits concentrationex post by selectivelybreaking up concentratedenterprises in responseto evidence of anticompetitiveor abusive conduct or performance. The growing list of nations amending antitrust legislationto allow merger control illustratesthe importanceof this policy as a means of promoting competitiveconduct and efficiencyin open or liberalizedmarkets. France, Canada, Spain, Italy, and the EEC have recently strengthenedtheir merger control policies, and new merger control proposals are being considered in the U.K. and Sweden. In part, the recent concern with merger control derives from a merger wave motivatedby the coming common market in 1992, an event creating significantopportunitiesfor corporate rationalizationand expansion through merger.L-81 Merger Control

Regulations

Devising merger control regulationsrequires determining the kinds of transactionssubject to controls, the means of detecting and selecting transactionsfor investigationand possible prosecution,and the remedial measures against transactionsthat violate the competitionlaws. Merger control is available under the antitrust statutes of all the countries surveyedhere but is stronglyenforced only in the United States and Germany. Moreover,with the advent of merger control statutes among European nations, particularlythe new regulationenacted by the EEC, is it likely that merger control in Europe will be considerablystronger than in the past. Broadly speaking,the transactionssubject to merger control are those that result in the transfer of corporate decision-making. Naturally, the purchase of one company by another, resulting in the complete transfer of corporate control, is subject to merger control. More broadly, transactions short of complete merger, in which a supplier acquires the means of exerting significantinfluence on the actions of another supplier,are often subject to merger review. These includepurchases of productive assets, of voting rights through stock ownership,joint ventures involving the transferof assets or stock, and the formation of interlockingdirectoratesfor which an individual sits on the board of directors of competing suppliers. Pre-Merger

Notification

Jurisdictionscontrollingmergers and equivalentcontracts increasinglyrequire Dre-mergernotificationof proposed mergers to the antitrust authorities. This administrativemechanism allows the antitrust

158/ The merger wave is reflected in increasingnumbers of mergers in the surveyed jurisdictions. For example, between 1986 and 1987, the number of mergers increasedby 24% in France, by 10% in Germany,and by 17% in the U.K. In Canada, mergers rose from 712 in 1985 to 1082 in 1987, an increase over two years of 52%. See OECD, CompetitionPolicy in OECD Countries: 1987-1988,Paris, 1989, pp. 69; 114, 124, and 229.

- 70 authorities to review mergers and equivalent contracts prior to their taking effect and to intervene if transactions are likely to enhance the exercise of market power or create or strengthen a dominant supplier. In some countries, antitrust statutes require a waiting period during which the participants to the transaction must provide specific information to the antitrust authorities and refrain from consummating the transaction.-591During this period, the authorities can investigate transactions, select those requiring intervention under the antitrust laws, and seek injunctions preventing the transactions pending the resolution of antitrust concerns. Pre-merger notification promotes the efficient administration of merger control since intervening before a merger occurs is generally far less costly than intervening after the fact (see Table 5.1). A recent merger in Sweden, which did not require pre-merger notification, illustrates this point. In 1987 AGA AB, a carbonic acid manufacturer, purchased DFK Gas AB to gain a 97% market share in carbonic acid in Sweden.L' AGA's internal documents touted the possibility that the merger would allow the parties to increase the price of carbonic acid, a concentrated market with severe entry barriers. In response, under Swedish antitrust law, the Competition Ombudsman brought the case before the Market Court, seeking prohibition of the transaction. By this time, the two parties had taken steps to integrate their operations; hence, separating the two operations would have been extremely costly. On these grounds, although the merger would clearly create a dominant position, enhance the exercise of market power, and result in price increases in carbonic acid, the Market Court did not grant the ombudsman's request, and the merger was allowed to proceed. In this example, pre-merger notification would likely have allowed prohibition of the merger through a preliminary injunction. Only Sweden, Australia, France, and the U.K. do not require premerger notification. Instead, each maintains a national restrictive practices register to which certain restrictive agreements must be reported, and some corporate transactions must provide post-merger notification to the register. However, restrictive practices registration does not provide a means of screening proposed mergers prior to consummation. As the case of the Swedish merger (AGA and DFK Gas) illustrates, absence of pre-merger notification and an enforced waiting period makes merger control much more costly and difficult. In addition, restrictive practices registration captures fewer transactions than those of pre-merger notification because notification in a

159/

Participants to large corporate transactions must describe the nature of the transaction, the parties involved, and their annual sales of whatever goods and services they supply. In the U.S., for example, annual sales must be reported by five- and seven-digit SIC (Standard Industrial Classification) code. SIC codes do not generally constitute product markets for antitrust purposes, but they do provide a starting point for assessing the horizontal and vertical relations between the participants to a transaction. See G. Werden, "The Divergence of SIC Industries from Antitrust Markets: Some Evidence from Price Fixing Cases," 28 Economic Letters, 1988, pp. 193-197.

16Q, See OECD (1989) p. 212.

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register is requiredonly for transactionsresulting in relativelyhigh shares of the nationalmarket.W1 Thus, restrictivepractices registrationeffectively exempts small transactionsfrom merger control. In contrast, in the United States, Germany, and the EEC, small transactionsexempt from pre-merger notificationare nonethelesssubject to merger control regulations. For these reasons,merger control policies executed through restrictivepractices registrationare generally quite weak. Table 5.1: THE USE OF MERGER NOTIFICATION AND RESTRICTIVE PRACTICES REGISTRATION

Pre-Merger Notice

Post-Merger Notice

Restr.Pract. Register

U.S.

y

n

n

U.K. Germany France Japan Australia Spain Korea Canada Sweden

n y n y n y y y n

y y y n y y n n y

y y y y y y y n y

EEC

y

y

y

Nation

*

Pre-merger notification in the EEC is the result of new legislation,effectivein September, 1990, prior to which the EEC's merger control was limited to ex post treatment of mergers involvingthe abuse of a dominant position.

Owing to the variety of corporate transactionsthat may attenuate the independenceof the participants,pre-mergernotificationrequirementsare necessarily complex. The U.S., EEC, Germany,Canada, Japan, Spain, and Korea all require pre-mergernotificationbased on the size of the purchaser or the target assets, as measured by national sales or asset value.19 The size of a

161/ This not a criticism of restrictivepractices registrationper se, but only of the (high market share) criteriaused to select agreements that must be registered. 162/ In the U.K., asset transfers exceeding 30 million pounds qualify for reference to the MMC. The U.S. requirespre-mergernotification if i) the U.S. sales or U.S. assets of the acquiring and acquiredparties exceed $100 million and $10 million (in either order), and ii) the size of the transaction is at least $15 million ($25 million if the acquired party is a not a U.S. concern) or 50% of the voting securitiesof the acquired party. Canada requirespre-mergernotice if the parties have total assets or sales of at least C$400 million and the acquired party has assets or sales of at least C$35 million. Germany requires premerger notice if i) the sales of either the acquiringor the acquired party exceed DM 2 billion or ii) the sales of each party exceeds DM 1 billion. In addition, Germany requiresRost-mergernotice if the sales of the parties exceed DM 500 million. France requirespost-merger notice if i) the sales of the parties exceed FF 7 billion and ii) two parties account for sales of at least FF 2 billion. South Korea (continued...)

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firm, measured as asset value and annual sales, provides simple, unambiguous standards for pre-mergernotificationand allows antitrust scrutiny of the largest corporate transactions,particularlythose involvingmulti-product conglomerates.163/

The economies that rely on restrictivepractices registration require post-mergernotificationbased on estimatesof national sales shares created by corporate transactions. In Spain, France, the U.K., and Australia, a national sales share of 25% triggers the registrationrequirement. Germany, which previouslyrequired post-mergernotice of mergers for which competing firms would command 20% of national sales in some product, dropped this requirement in 1989 and now requires post-mergernotice where the parties have sales of DM 500 million (section23, ARC, amended). Relying on national sales share as the sole standardof pre-merger or restrictivepractices notificationsuffers from several drawbacks, primarily that of ambiguity. As shown in Section II, calculatingmarket shares for the purposes of competitiveanalysis can be very complex, involving proper determinationof the relevantantitrust market and choice of the appropriatemeasure of market share to reflect accuratelythe competitivesignificance of suppliers.!-!' Because a nation may not be a relevant antitrust market, national sales shares generally provide only a rough approximationof the market shares relevant to competitiveanalysis. For products that are traded internationally,the relevant antitrust market is larger than a single nation, and national sales shares are likely to overstate the competitivesignificanceof parties to a transaction. Conversely,where products trade in a local antitrust market (e.g., ready mix cement, newspapers,retailing operationssuch as groceries and department stores, and services such as health care and automotiverepair),national sales shares seriouslyunderstate the competitivesignificanceof the parties to a transaction. 162/(...continued) requirespre-mergernotice if the parties have assets of at least 5 billion won. Spain requirespre-mergernotice if the parties'world sales exceed 20 billion pts. Japan requires pre-mergernotice of all corporateasset transfers. Finally, for the EEC pre-mergernotice standards,see infra section 3. For the U.S., see Antitrust Law Developments (2nd.),p. 215-216; for the European nations, see the (EC) Commission'sseventeenthand eighteenth"Reportson CompetitionPolicy" (1988, 1989). For Canada, see C. Green, on. cit.; for South Korea, see S. P. Wagner, op. cit.; and for Japan, see Ieyori and Uesugi, op. cit., for the U.K., see J. Fairburn, op. cit. 163! The notificationstandardsapply for purchases of portions of voting stock sufficientto give the purchaser influenceover the conduct of a supplier. The U.S. requires notificationwhenever a purchaser gains control of 15% of a target company'svoting stock or assets. See W.F. ShughartII, op. cit., p. 220. Section 23(2) of Germany'sARC defines acquisitionsof 25% and 50% of a company'svoting stock as mergers subject to notificationrequirements.

164/ Even if potential suppliersare excluded from the market, as in European market definition, defining the market requires an assessmentof the substitutabilitybetween similar but not identicalproducts.

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Furthermore,the standards for calculating sales shares generally allow the parties great leeway in including"similar" products so as to increase the base of the (sales share) calculationand thereby lower the estimated sales shares resulting from a transaction. This invites evasion of the notificationand registrationrequirementsand renders the notification requirementmuch less effective. Because notificationstandards do not imply illegality,they should err on the side of inclusion,not exclusion,so that transactionslikely to violate competitionlaw face the notificationrequirement. Notificationstandardsbased on sales shares fail to achieve this. Aside from sales and assets standards,pre-mergernotification commonly relies on standards regardingthe percentage and voting rights of stock involved in a transaction (if applicable),the market share of the participants,the presenceof common board members, and employment levels of the participants. Pre-mergernotificationshould not be confusedwith exemption from antitrust scrutiny, for transactionsthat do not have to be reported may nonethelessbe subject to merger control under antitrust laws. Alternatively,that mergers are selected for review under a merger control procedure does not imply that they are illegal; and in fact only a very small portion of the reviewedmergers are enjoinedunder the merger control policies of the countries surveyedhere.i' However, the small portion of mergers formallycontested or prohibitedunder merger control policies understates the applicationand effect of these policies. In the vast majority of cases in which intervention occurs, resolving the competitiveconcerns is achieved through measures short of formal prohibition. Moreover, where merger control standardsare well understood,private enterpriseshave little incentive to attempt mergers or equivalenttransactionsthat clearly violate the standards. This explains the practice of disseminatinginformation (such as the U.S. DOJ Guidelines and the EEC regulations)regarding the standardsused to judge the legality of mergers.

165/ In France, for example,merger control applies only to large transactions involvinglarge firms, and transactionsnot required to file notificationare effectivelyexempt from merger control. See L. Wullearts, et. al., op. cit., p. 31. In contrast,merger control in other jurisdictionssuch as the U.S. and the EEC applies to all transactions, even those that do not require a notification. 166/ In 1987, Japan did not contest any of the 1,147 mergers notified to the Fair Trade Commission. In Germany,where merger control is relatively strict, 76 mergers have been prohibited and 143 amended or abandoned since merger control began in 1973. The annual average of 13 per year is a small fraction of the 876 mergers that occurred in Germany during 1987. In the US, 14 of the 2,256 mergers notified to the antitrust agencies during 1987 resulted in injunctiveactions. See OECD (1989), various sections.

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Merger

Control Enforcement

Standards for merger control enforcementvary widely due to differencesin the goals of the statutes. Enforcementalso varies to a lesser degree within each economy in response to periodic changes in emphasis on the role of antitrustvis-a-vis other policies and the thinking regarding the benefits and costs of increasingconcentration. Merger control in Canada, France, Spain, Korea, and the EEC has recentlybeen amended and thus has a very short history by which to judge enforcementstandards. As a rule, merger control has been most actively enforced in large economieswith considerableemphasis on internaltrade, notably the United States and Germany. In smaller economies,particularlythose oriented primarily towards internationalmarkets, merger control generally has been weak so as to encourage the formation of large firms that are regarded as more viable in internationalmarkets. In the United States, merger control enforcementhas recently focused on mergers between parties that compete in the same market, referred to as horizontalmergers. Horizontalmergers are judged, under a competitive analysis similar to that described in Section II, according to potential enhancementof the exercise of market power. Competitiveanalysis is the focus of merger review, and, in contrast to other countries,economic efficienciesdo not provide a defense of mergers likely to impede competition or enhance the exercise of market power.167/ The U.S. antitrust authorities,which are the FTC and the Department of Justice,usually intervenein mergers that significantlyincrease concentrationin an already highly concentratedmarket. DOJ and the FTC publish periodic guidelineson the concentrationlevels, stated in terms of the HHI, likely to lead to an enforcementaction. Mergers for which the postmerger HHI in the relevant antitrustmarkets is less than 1000 are unlikely to be contested. In contrast, mergers producing a post-mergerHHI exceeding 1,800 and an increase in the HHI of at least 50 will usually result in an

167/ One defense that may rescue a merger under U.S. law is the failing-firm defense, the proposition that a merger has no competitive impact owing to impendingcompetitive failure or bankruptcyon the part of one of the participants. See Bureau of National Affairs, "JusticeDepartment Guidelines,"Trade and Antitrust RegulationReport 1169, Washington, D.C., 1984. Though there is no statutory efficienciesdefense under U.S. antitrust law, there has been pressure to incorporatean efficienciesdefense into merger evaluation,and to some degree the judicial system has resorted to efficienciesarguments in reviewing enforcementdecisions. As a rule, the legal standards applied to the failing-firmand the efficienciesdefensesare very high, and these defenses seldom rescue a potentially anti-competitivemerger. See A. Fisher, et. al., "Price Effects of HorizontalMergers," CaliforniaLaw Review 77, October, 1989.

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injunctionunless other factors strongly suggest that the exercise of market power in the relevantmarkets is unlikely. For mergers resulting in a post-mergerHHI between 1,000 and 1,800 and an increase in the HHI of over 100, enforcement depends on factors other than concentrationdeterminingthe likelihoodof collusion to exercise market power. The U.S. enforcementstandardsmay be characterizedroughly in terms Where a merger leaves of the number of equal-sizedsuppliers in a market.L691 at least ten equal-sizesuppliers in the relevant antitrustmarkets, an ensuing enforcementaction is unlikely. In contrast, where a merger leaves no more than five equal-sizesuppliers in a market, the merger is regarded as likely to enhance the exerciseof market power, and an ensuing enforcement action is thereforevery likely. The U.S. approach to merger control is distinguishedby its emphasis on the joint (collusive)exercise of market power, as opposed to the unilateral exercise of market power, or abuse of dominancewith which European 170 1 merger control is concerned.

168/ An HHI of 1000 is equivalentto an industry consistingof ten equal-size firms; an HHI of 2000, to an industry of five equal-sizefirms. Generally,a merger between two competing firms raises the HHI by twice the (mathematical)product of the firms' market shares. It should be cautioned that U.S. enforcementstandards include a number of economic factors other than concentration. Because the antitrustauthorities weigh factors other than concentration(particularlythe ease of entry into the relevant market), interventionin mergers occurs less often than suggestedby the Guidelines standards regardingmarket concentration. See M.B. Coate and F.S. McChesney, "EmpiricalEvidence on FTC Enforcement of the Merger Guidelines,"paper presented at the annual meetings of the Western EconomicAssociation, San Diego, July, 1990. Coate and McChesney point out (p. 24) that concentration estimateshave been used by the U.S. FTC to select merger investigations but not to determinewhether further action is taken. 169/ A rough characterizationis appropriate,for HHIt'sare imprecise measures of the relativecompetitivestrength of competing suppliers and should be so regarded and used. 170/ U.S. antitrust enforcementis not silent regarding dominant firms, defined as one having at least 35% of a market. A merger of a dominant firm with a competitorwhose market share is at least 5% is likely to result in an enforcementaction. The U.S. definitionof dominance describes large firms in antitrustmarkets but differs from the European notion of dominance in that corporate size, financial strength, and vertical and horizontal links with other firms are not given great weight. Hence, under U.S. standards,but not under European standards, a firm that is small in absolute size can nonethelessbe characterized as dominant. Moreover, under U.S. standards,mergers involving a "dominant"firm are judged as to the exercise of market power rather than the abuse of a dominantposition (as defined in European (continued...)

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Mergers of a strictlyvertical or conglomeratenature have seldom Review of conglomerate been the object of U.S. merger control enforcement.m7'1 mergers, under a standard competitiveanalysis, is generally concernedwith potential competitionbetween non-competingfirms, so that the pricing of one firm is constrainedby the likelihoodthat the other may enter the market. V Historically,the U.S. control of verticalmergers has usually been concerned with vertical foreclosure and regulated rate evasion.173/ Recently, U.S. scholars have come to regard most vertical mergers as efficiencyenhancing, and only the rate evasion theory remains as a significantbasis for the control of verticalmergers in the U.S.1741

7ZOJ(... continued) competitionlaw). See the 1984 Merger Guidelines,"Leading Firm Proviso," section 3.12. 171/ A vertical merger is one between parties in a buyer-sellerrelationship, such as manufacturer-distributor.A conglomeratemerger is one between multiproductfirms having no horizontalor vertical competitive relationship. 172/ The analysis of potential competition,based largely on the theory of limit pricing and the competitiveeffects of potential entry, derives from the standard market power analysis discussed in Section II. The few cases relying on a legal theory of potential (rather than actual) competitionare based on evidencethat a firm outside an antitrust market restrains the actions of those in the market, or, more often, that the competitive significanceof a supplier is understatedby its share of sales. For example, in 1967 Proctor & Gamble's proposed acquisitionof Clorox was prohibitedbecause P&G was a likely potential entrant into the bleach market, in which Clorox held 49% of liquid bleach sales. See Federal Trade Commissionv. Proctor & Gamble, 386 U.S. 568, 574, 580-81 (1967). 1731 Vertical foreclosure consistsof a supplier'sintegratinginto a downstream market, refusing to carry competing goods, and thereby raising competitors'distributioncosts and raising barriers to entry. Regulated rate evasion consists of a regulated supplier's integrating into an unregulated input market, buying the input (from itself) at supracompetitiveprices, and, under cost-basedregulatedpricing (as practiced in most public utilities such as natural gas transmission, local telephone service, and power generation)passing the price premia through to downstreamcustomers. 174/ The U.S. Departmentof Justice gives efficienciesmore weight in reviewingvertical mergers. See Antitrust Law Developments(Second), 1983-1988,American Bar Association,1988. For a discussionof some of the efficienciesof vertical integration,see B. Klein, et. al., "VerticalIntegration,AppropriableRents, and the Competitive ContractingProcess," Journal of Law and Economics,October, 1978, pp. 297-326. (continued...)

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Very active merger control in Germany (and the lesser control exercised in Sweden, Spain, France, the U.K., and the EEC) provides a contrast to that of the U.S. in terms of conceptualbasis and general application. German merger control is designedprimarily to prevent mergers creating or enhancinga dominantposition. In contrast to merger control based on market power, which would view two powerful suppliers as likely participantsto collusion,the presence of a second powerful supplier reduces the likelihood of interventionunder a dominancetheory, as the second supplier is seen to 71 offset the economic power of the merging parties.0 In this sense, the market power concept supportsmore frequent interventionagainst horizontal mergers than the dominanceconcept. A concern with dominance results in stronger enforcementagainst vertical or conglomeratemergers for which the merging parties do not 1 76' currentlycompete in any relevantantitrust market. For example, in 1976 GKN/Sachs,a merger between a large, powerful firm and a dominant supplier (in "neighboring"but not identicalmarkets) was viewed as enhancing a dominant 7 ' positionand was enjoinedby the Federal Cartel Office on those grounds.

174/(...continued)

The practices of AT&T, prior to its dissolution,illustratethe relevance of vertical relationshipsto market power. AT&T, a regulated monopolist,was able to raise regulated telephone service prices by purchasing equipment from a subsidiary,Western Electric (see para. 5.48), in unregulatedtransactions. AT&T was able to raise Western Electric'sprofits to supra-competitivelevels by refusing to deal with unaffiliatedsuppliersand by purchasingWestern Electric equipment at supra-competitiveprices. AT&T was able to recover the additionalcosts, through standardcost-plus regulatorypricing, from downstreamconsumersof regulated telephoneservice. See Scherer (1980),p. 537. 175/ For example, a merger involvingMichelin, the large auto tire supplier, was allowed owing to the presence of several other large tire suppliers in the EEC. See L. Wullearts,et. al., op. cit., p. 236. 176, In 1987 the Federal Cartel Office enjoined the proposed acquisitionby Proctor & Gamble (U.S.) of Blendax (Germany),a conglomeratetransaction in which P&G and Blendax were found dominant in the German markets for, respectively,toothpasteand toothbrushes. The merger was allowed to proceed only after P&G consented to sell its German dental cleanser subsidiaryto an independentbuyer. This prohibitionwas based on dominance, in contrastto the 1967 U.S. FTC prohibition,based on potential competitionand potential exercise of market power, of P&G's purchase of Clorox. See OECD, CompetitionPolicy in the OECD Countries, Paris, 1989, p. 130.

177/ The prohibitionby the Federal Cartel Office was overturnedby the Berlin Court of Appeals but later upheld by the Supreme Court. See E. Kantzenbach,op. cit., 204.

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In Germany, merger control has increasingly been used to inhibit the joint exercise of market power. Dominance is presumed for a merger between parties with sales of at least DM 12 billion and is a rebuttable presumption in markets with high concentration ratios, for which Cl > 33% or C3 > 50% or C5 > 67%.L7)- Yet large market share is not necessary to a finding of dominance, as illustrated by the case of Rossignol, found dominant in the German ski market with an 8% market share.917/Moreover, though German antitrust law allows exemption for restrictive agreements and cartels, this balancing of efficiency against harm to competition is seldom a feature of German merger control. Though the ARC allows the Minister of Economics to overturn a merger prohibition by the Cartel Office, this discretion has seldom been used and merging parties have seldom been able to raise an efficiency defense to resuscitate an anticompetitive merger.-8/ In other surveyed economies, merger control has historically been quite weak owing to a balancing of economic efficiencies and public interest (defined in a variety of ways) against the harm to competition resulting from mergers. France, Sweden, the U.K., and Australia employ merger control policies motivated by public interest standards that account for a variety of factors other than competition, notably balance of payments, employment, and regional development. Their enforcement standards are developed politically rather than through the judicial system, and the great political discretion afforded under a multi-faceted public interest standard results in weak merger control. In France, for example, the Conseil de la Concurrence retrospectively reviews mergers for potential hindrance of competition measured against economic benefits such as efficiency and improvement of exports. As of 1988, the Commission had blocked only one transaction, a proposed merger between Cabot and Ashland found likely to create a dominant position in the French market for carbon black, an important input in the manufacture of rubber.18-1

See also section 23 of the ARC.

178/

See W. Moeschel, op. cit., p. 543.

179/

Rossignol was found to enjoy a "paramount market position" owing to the strength of its brand name in the high-quality end of the ski market. W. Moeschel, oR. cit., p. 539. Section 22 of the ARC states that a firm "has paramount market position in relation to its competitors...in addition to its share of the market, its financial strength, its access to the supply or sales markets,...its links with other enterprises, and the legal or actual barriers to the market entry of other enterprises shall in particular be taken into account."

180/

The ministerial approval of the Daimler-Benz/MBB (WuW/E BMW 191) merger in 1989 was the most controversial ministerial approval of a merger since the installation of merger control in 1973.

181/

See L. Wullearts, et. al., op. cit., p. 38.

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Up to 1982, under a similar analysis the Japanese FTC had blocked only a single merger, a transactionproposed in 1969 by Yawata Iron and Steel Company.Mg In addition, in fiscal 1987, the JFTC prohibitednone of the 1,147 mergers reported in Japan.- Examiningthe major mergers of Japan during 1958-1980providesnumerous examplesof mergers that would likely have been prohibitedunder German or U.S. merger control standards.181 Merger control in the U.K. historicallyhas been lenient, although this situationmay be changing. Between 1980 and 1986, there were 46 monopoly referencesof mergers, often on non-competitiongrounds.IU'Of these mergers, ten were subsequentlyabandoned and seventeenwere found to be against the public interest. One important impetus for a stronger merger policy (or one more oriented to competitiverather than vague public interestconcerns) was the Green Paper of 1978, which attributedhalf of a significantincrease in aggregateconcentrationin the U.K. to mergers. By 1984, merger references were based primarily on competitivegrounds,and there have been proposals to make greater use of competitiveanalysis,emphasizing the role of barriers to entry, in merger control. The advantagesof such an approachwould be a clearer articulationof merger control policy, better understandingin the private sector regarding the policy (hence,fewer abandonedmergers owing to uncertainty),and more frequent consummationof efficiency-enhancing mergers186, Before the enactment of the new law, merger control in the EEC had been surprisinglystrict in light of the inadequatestatutorytools. The fundamentalantitrust statutes of the EEC, Articles 85 and 86 of the Treaty of Rome, were not intendedas a means of controllingmergers. Article 85,

182/ See Ieyori and Uesugi, op. cit., p. 86. 183/ OECD (1989), pp. 161-162. 184/ A 1958 merger between Snow Brand Dairy and Clover Dairy created market shares of 58% in butter and 75% in cheese. A 1966 merger between Nissan Motors and Prince Motors created market shares of 63% in medium passenger cars, 36% in small passenger cars, 46% in micro buses, and 30% in small trucks. A 1974 merger between Nippon Light Metals, Nikkei Aluminum, and Nikkei Rolling created a 28% market share in aluminum. See Ieyori and Uesugi, op. cit., table 16, pp. 196-199. The OECD reports that Japanese mergers "have traditionallytaken place between parent and subsidiarycompaniesor between affiliated companies." Note that Japanese prohibitionsof affiliationsbetween competitors,in particularinterlockingdirectorates,are relatively weak compared to the other surveyedjurisdictions. See OECD, on. cit., p. 161. 185/ See S. Littlechild,"Myths and Merger Policy," in J. Fairburn and J. Kay (eds.),Mergers and Merger Policy, Oxford, 1986. 186/ See the July 5, 1984 statement of Secretary of State (for Trade and Industry) Tebbit. See also S. Littlechild,oR. cit., p. 318.

- 80 prohibiting concerted activities in restraint of competition, was originally regarded as inapplicable to stock purchases on an open market--these were regarded as a unilateral (not concerted) transaction.L)1 Moreover, Article 85 does not provide remedies adequate for merger control, instead holding illegal transactions to be automatically null and void. The difficulties of voiding a stock purchase have inhibited the application of Article 85 to merger control. 88/ Article 86, prohibiting the abuse of a dominant position, has been formally applied in only one case, Continental Can, for which a proposed merger was found to violate Article 86 by strengthening a dominant position. Nevertheless, Article 86 has been repeatedly applied to allow the Commission to intervene in proposed mergers and amend those found likely to create or 1 strengthen a dominant position.1 9/ This opportunity is available to the EEC owing to Regulation 17, which authorizes the Commission to seek interim injunctive relief, including a "hold separate order" to maintain the status quo in transactions threatening immediate and irreparable harm to

competition.Zo Though the EEC historicallyhas not required pre-merger notification, the threat of a merger being stopped in its tracks was believed

sufficient to induce parties to consult with the Commissionprior to 1911 As illustratedby the Swedish example discussed above, this is merging.L-9 not always the case, however.

187/ Article 85 does, however, apply to joint ventures. See Wullearts,et. al., op. cit., p. 219. 188/ Voiding a stock purchasewould involve finding the original sellers of the stock and returning their money, an administrativenightmare. 189/ The Commissionhas stated that dominancewill likely be found of any supplierholding a 60% market share and possessingsignificantcompetitive advantagesvis a vis smaller competitors. Moreover, at a market share of 80% or more, the European Court of Justice concludes easily that a dominant position exists. For market shares between 45% and 80%, other factors such as entry barriers must be taken into account. Yet the Commission investigated 19 cases after Continental Can under Article

86 and issued no prohibitions. See CEC, Tenth Report on Competition Policy, 1980, Point 21; Monopolkommission, Seventeenth Special Report, Sondergutachten 17: "Konzeption einer europaischen Fusionskontrolle," Tz. 85 (1989); and Hoffman La-Roche & Co. AG v. Commission (Case 85/76) (1979) ECR 461, 524.

190/ As in the U.S., the showing of immediate and irreparableharm is a very high legal standard and can be shown primarily where a transaction

threatensimmediate injury to competitorsor vertical suppliers rather than to competition.

12J./

For example, in Pilkington,the Commissionapplied Article 86 to a merger between flat glass suppliers resulting in national sales shares of 80% in the U.K. and 50-60% in Ireland, the Netherlands,and Germany. The merger was subsequentlyamended to include only the German assets. See Wullearts, et. al., op. cit., p. 235.

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Surprisingly,Korea has taken steps suggestiveof an active merger control policy. Merging parties must registerwith the Deputy Prime Minister of the Economic Planning Board, and the opportunityto deny approval of the registrationprovides a mechanism for prior approval of mergers and similar transactions. Of 550 proposed mergers (including119 horizontalmergers) registeredbetween 1981 and 1983, approval was withheld twice.9 In 1982, a merger combining 54% and 19% market shares in PVC stabilizerwas blocked.L9-3 As mentioned above, a merger of Korea's only two hydrogen peroxide suppliers, Dong Yang and Hankook,was prohibited in 1982 in spite of powerful arguments regarding export developmentby the parties (see Section II). Remedial

Measures

Under Merger

Control

In practice,many mergers and similar transactionsinvolving multi-productfirms raise a competitiveconcern over only a few products producedby the merging parties. Because a merger may offer substantial efficienciesin product lines that do not generate anticompetitiveeffects, the unconditionalprohibitionof a proposed transactionis commonly viewed as a very costly remedy. Thus, other remedial measures have been developed to allow mergers to proceed with the minimal interventionrequired to offset any harm to competition threatenedby the merger. The two most importantmeasures, divestitureand demonopolization (or dissolution),are designed to maintain or enhance competitionby breaking up a supplier into two or more independent,viable suppliers. Divestiture is generally applied prior to a proposed merger, whereas demonopolizationis usually applied to an existing,powerful supplier. The measure most often used to prevent the anticompetitiveeffects of a merger is that of divestitureof those product lines giving rise to anticompetitiveeffects.-941 Fundamentally,divestiture is designed to negate the effect of a merger on concentrationand maintain the competitivestatus -quoby creating a new competitorfrom the merging parties. Divestiture is feasiblewhere the products relevant to an anticompetitiveeffect come from a self-containedbusiness unit that can be a viable competitorafter separation from its parent. This remedy often is used where the merging parties use multi-plant or multi-unit operationsto realize economies in transportation

112/

Korean merger control is primarily designed to deal with horizontal mergers. Yet large segmentsof the Korean economy are subject to administrativecontrol, and the KFTC surrendersjurisdictionover mergers sponsoredby other governmentministries.

193! See Song Won Industries,2 KFTC 9 (15 December 1982). 194/ Similarly,where merger control applies before the merger occurs, the antitrust authoritiesmay condition acceptance of the merger on amendments not to merge competingentities, which is equivalentto divestiture. This form of divestiture is most common in practice; see, for example, the EEC's treatment of a proposed merger involving Pilkington. See Wullearts,et. al., op. cit., p. 235.

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and distributioncosts and multi-productproduction. In this case, approval of the merger is conditionedon divestitureof units or plants sufficientto sustain the previouscompetitionbetween the merging parties. To consider a few examples, divestiturehas been used in the U.S. to remedy mergers between multi-plantoperationsin matters involvingpetrochemicals, food retailing,cement, and hospitals. In addition, divestiture has been applied in the EEC where productionand distributionare segmented along national lines. Divestitureis generallynot a feasible remedy in cases for which multi-productproductionis supportedby significantcross-producteconomies of scale or scope. This can occur in product classes for which significant research and developmentexpendituresare supportedby applicationand exploitationof a common technologyto a variety of related but non-competing products. Examples include pharmaceuticals,pesticidesand certain other classes of chemicals,aerospace fasteners,commercialaircraft, and thermoplastics. Where divestitureis not feasible,other remediesmay allow mergers in pursuit of efficiencieswith minimal harm to competition. One such remedy designed to achieve effects similar to divestitureis remedial trademark and patent licensing. In principle,the anticompetitiveeffects of a merger may in certain circumstancesbe minimizedwhere proprietary technologyor marketing advantage operatesas an impedimentto entry. Remedial patent or trademark licensingalleviatesthe anticompetitiveeffects by conditioningthe merger on licensing of the relevantproducts to a third party. Remedial licensing is designed,as is divestiture,to create a new competitorthrough the transferof industrialproperty rights to an independent third party. Remedial licensinghas not proven to be a very satisfactory remedy, however, owing to the difficultiesof administeringa remedial license so as to ensure the competitiveviability of the licensee.-5 Although licensing often occurs in response to pro-competitiveincentives,merging parties seldom have pro-competitiveincentivesto ensure that technologyis adequatelytransferredto a third party. This raises two significantdifficulties with remedial licensing: (i) the merging parties may not transfer sufficienttechnologyto the licensee,resulting in the failure of the licensee, and (ii) if technologyis transferred,the licensormay charge the licensee a high royalty rate, negating the competitiveeffect of the remedial license. The second difficultyhas been obviatedby the requirementthat a remedial license carry a zero royalty rate.i'ifficultto correct, and

195/ In a study of the competitiveeffect of compulsorylicensing,Scherer concluded that "compulsorylicensingunder antitrust decrees had no significantobserved impact in reducing concentrationrelative to the changes that might have been expected in any event..." See Scherer (1977).

- 83 successfullyadministeringa remedial license generally requiresexpertise that an antitrust agency is unlikely to possess. Demonopolization In contrast to merger control policies, which are generally designedto intervene in transactionsbefore market structurehas been affected,demonopolizationis designed to lower concentrationin currently concentratedmarkets by breaking up suppliers,though forced divestiture, into multiple independentconcerns. In the U.S., demonopolizationhas been practiced under the antitrust laws only in response to dissatisfactionwith market 9 7t performanceor anticompetitiveconduct. Demonopolization,like merger control, replacesregulatory supervisionof economic conduct with market discipline. The drawbacks to demonopolizationare the extreme difficulty,high costs, and long delay required to force a divestitureand assure the viability of the divested entities. Owing to the difficultiesof ex post forced divestiture, demonopolization has become a last resort for restoring competitivestructure 1 in concentratedmarkets and has been used exclusively against monopolies.9 s The largest demonopolizationcase in history is that of the U.S. long-distancetelephonemonopoly, AT&T. In 1949, the Departmentof Justice sued AT&T for monopolizing (via vertical control) the manufactureof telephone equipmentthrough its subsidiary,Western Electric. DOJ sought, among other things, divestitureof Western Electric. The Department of Defense raised national security arguments against divestiture,and the resultant 1956 consent decree attempted to address the competitive problem through an agreementby AT&T to cease and desist from certain practices supporting foreclosureof other telephone equipmentmanufacturers. Subsequentrestrictive practices by AT&T resulted in another suit by DOJ chargingmonopolization of the telephone equipmentmarket through vertical restraint. Again, national defense argumentswere raised but this time were not given the weight accorded

197/ A demonopolizationmeasure was recommendedby Germany'sMonopolies Commissionin the Main Reports of 1976, 1980, and 1986 and was enacted into French law (Article43) allowing the Conceil de al Concurrence to apply to the minister of economicsto dissolve market dominating enterprises,including those formed by mergers formerlyapproved by the minister. In other jurisdictions,such as South Korea, which dissolved the Kukje conglomerateby calling its loans, the dissolutionof large firms may occur under a deconcentrationor deregulationprocess motivated by competitiveas well as other concerns. The dissolution of the Kukje conglomeratewas based on general competitiveconcerns raised by increasingaggregateconcentrationand on uncertaintyregarding the conglomerate'sstability and profitability(owing to its very large debt). See S.P. Wagner, op. cit., p. 475. 1298 Dissolutionwas used 32 times between 1905 and 1970 in the U.S., each time against a national or regional monopolist. See R. A. Posner, "A StatisticalStudy of Antitrust Enforcement,"Journal of Law and Economics 13 (1970).

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them in 1956. A 1982 consent decree ordered the divestitureof the 22 local telephone service companies (the "Baby Bells") and the separationof long distance service from local service.L

I 9/ The consent also ordered injunctiveremedies against the exercise of vertical control by preventing the Baby Bells and AT&T from entering certain businesses dependent on telephone transmission. Moreover, AT&T gained the right, previouslywithheld, to enter certain communications and computer businesses in competitionagainst the then-dominantIBM. See Schmidt, op. cit., pp. 448-451.

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VI. PERFORMANCEPOLICIES

Performancepolicies are used in two ways, (i) as a means of directing antitrust action against monopolizationand (ii) as a remedy that replaces anticompetitiveor abusive pricing with administrativepricing. Guiding antitrust enforcementthrough direct observationof price and output, and subsequentremedial pricing by administrativefiat, are to a degree incompatiblewith the fundamentalbasis of antitrust policy-thatprices are better determinedby markets than by governmentdecree. Countries emphasizing the decentralizeddeterminationof price and output are thereforeusually reluctant to rely on performancepolicies. Administrative

Pricing by Antitrust

Authorities

As would be expected, the jurisdictionswith the longest history of centralizedadministrativepricing are those most likely to impose price and output directivesas remedialmeasures. In particular,some reliance on economicperformance as a means of directingenforcementand devising remedies is authorizedunder the antitrust statutesof the EEC, Germany, the U.K., Sweden, Japan, Korea, and France. Korea's 1975 Price Stabilizationand Fair Trade Law was enforced primarily so as to limit excessiveprices. Articles 2 and 6 of the Monopoly Regulationand Fair Trade Act provide the minister with remedialpricing and a surcharge on a market-dominatingfirm that does not comply with an order to decreaseprices.-22 In the U.K., monopoly referencesare sometimes addressed through pricing negotiationsbetween the governmentand the subject(s) of the reference. For example, the Monopolies and Mergers Commissionissued a report attackingbasing point pricing in plasterboard,a practice that simplifies suppliers'efforts to monitor prices and may make collusionmore likely.2i In subsequentnegotiations,the MMC recommended,and the Secretary approved, a pricing scheme that allowed for transportationcost discounts.2

200/ Wagner, op. cit., pp. 472, 478, 498. 201/ Under basing point pricing all suppliers charge customers a delivered price calculated as a base point price plus freight charges from the base point to the customer. In contrast,non-cooperativepricing would result in a customerpaying a supplier the supplier'sfactory price plus freight charges. Where there are multiple, spatiallydispersed factories,non-cooperativepricing is more difficult for competitors to monitor than basing point pricing. Thus, price discounting is more likely, and effective collusion less likely, under non-cooperative pricing than under basing point pricing. See Scherer (1980), p. 329. 202/ Studies in Foreign CompetitionPolicy, Canadian Departmentof Corporate and ConsumerAffairs, Ottawa, 1976, p. 388.

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Faced with similar practices in the cement industry, the U.S. Supreme Court, rather than negotiatingover pricing, prohibitedmanufacturers from bundling the sale and transport of cement.M3J Although the antitrust statutes of the U.S. do not rule out the use of performance remedies, antitrust authoritiesand the courts have been suspiciousof administrativeviews regarding the "proper" level of price and output. As a result, performancepolicies have seldom been invoked under the U.S. antitrust statutes. The impositionof specific remedialprice levels is never used as a remedy.n1 Moreover, owing to a conviction that administrators far removed from a market are a poor source of informationregarding the proper level of price and output, antitrust enforcementin the U.S. very rarely uses high prices as a motive for interventionunder the antitrust laws.ZK/ Performanceremedies are applicableto situations involvingthe abuse of a dominatingposition under the antitrust statutes of Germany and the

203/ See U.S. v. Cement Institute,333 U.S. 683 (1948). By bundling, the supplierprovides transportationand thereby controls the freight charges that are an importantcomponent of the delivered price. In cement, bundling supportsprice discriminationand enhances the exercise of market power. The court, in preventingbundling, allowed customers to arrange and pay for transportation,thereby inhibitingprice discriminationby imposing pricing discipline (due to competitionfrom independenttrucking companies)on the freight charges previously manipulatedby cement suppliers. 204i Note, however, that the FTC has imposed output restrictionson production joint ventures (e.g. GM-Toyota). 205/ For example,unusually severe winter weather, such as occurred in the winter of 1989-90,has occasionallycaused sudden and generally shortlived regional shortages and price increases in energy sources (primarilyfuel oil and natural gas) in the U.S. Though often the subject of Congressionalhearings and attendant antitrust investigations, the shortages and resultantprice increaseshave never been addressed through an antitrust investigationand subsequentaction. The low regard accorded centralized,administrativepricing in the U.S. results in part from an historical reliance on competitionand in part from inadequateperformancewhere administrativepricing has been attempted. For example, wellhead prices of natural gas were controlled in the U.S. by administrativefiat until 1978, when the Natural Gas Policy Act introduceddecontrol in response to severe shortages caused by the setting of administeredprices at unrealisticallylow levels. Decontrol is widely viewed as contributing,along with the demise of OPEC, to declines in the real price of energy. See P. MacAvoy, "The Regulation-InducedShortage of Natural Gas," Journal of Law and Economics 14, 1971, pp. 167-199.

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EEC.26 The German Federal Cartel Office and the EEC Commissionhave attempted to remedy abuse on the part of dominant enterprisesthrough the impositionof administeredprices. Where a supplierhas a dominant position, the antitrust authoritieshave attempted to force the supplier to charge administeredprices based on prices or profit levels in similar markets in which significantcompetitionoccurs. Applying a performanceremedy in this fashion must address the difficultyof obtaining genuinely comparableobservations on which to base administrativeprices. If differentmarkets are used as a basis for comparison,then all factors influencingprice or profit levels must be taken into account, an exercise that is at best difficult and at worst impossible. In jurisdictionssuch as Germany and the EEC, where antitrust is ultimatelyenforced through the judicial system, performance remediesbased on comparisonof prices and profits between two markets have generallybeen overturnedor weakened by judicial review. This illustratesthe difficulty of devisinga defensiblecomparisonof prices between markets with and without significantcompetition. The German Federal Cartel Office brought cases of dominance and abusive pricing against the major oil suppliers in response to sudden petroleum price increases and supply shortages in 1967 and 1973.27' In the first instance,the oil companies reduced prices to avoid an abuse charge by the Cartel Office; in the second instance they did not. Responding to evidence that the price increases exceeded those justifiedby changes in the price of crude oil and that oil company profits in the Europeanmarket increasedgreatly from previous levels, the Cartel Office instituteda proceedingagainst the six major oil companies operating in Germany. At a public hearing in March/April,1974, the companies contended that the price increaseswere insufficientto cover increased oil costs. Lacking access to data on the costs of oil, and in light of the subsequentrelaxationof oil 3 8 supply and drop in oil prices, the proceedingwas terminated.

206/ In addition, the Commissionmay order remedial price decreases of dominant firms in coal and steel under the Treaty of Paris. See Studies in Foreign CompetitionPolicy, Canadian Departmentof Corporate and Consumer Affairs, Ottawa, 1976, p. 110. 207/ See I. Schmidt, "DifferentApproachesand Problemsof Dealing with Market Power," Antitrust Bulletin, 1983, p. 423. 208/ Subsequentprice increases by the oil companies were met with a temporary restrainingorder (to decrease prices) issued by the Cartel Office against British Petroleum and Texaco. This order was appealed to the Berlin Court of Appeals and overturned on the grounds that the Cartel Office had failed to show the lack of substantialcompetition required for a finding of dominance (in spite of parallel pricing by the oil companies)and abusive pricing (in spite of differentialprice increases accordedpetroleum products facing varying degrees of competition). The EEC reviewed the same matter but concluded that the oil companieswere indeed dominant suppliers in Europe. Nonetheless, (continued...)

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In the Valium case, the Cartel Office charged the Hoffman-LaRoche pharmaceuticalcompany with abusive pricing upon finding that Valium prices were 50% higher in Germany than in France or Italy and triple those in the U.K.3J9 The Cartel Office ordered price decreases for Valium and Librium to 60% and 65%, respectively,of current levels. On subsequentappeal, the ordered price decreases were adjustedaccording to a complex formula accounting for competitivepricing in similar markets, supply advantages, brand name, and research activities. In 1978 the Berlin Court again charged Hoffman-La Roche with abusive pricing, this time through joint dominancewith four other manufacturersholding among them over two-thirdsof the German tranquilizermarket. On appeal to the Supreme Court, the final decision ruled insufficientevidence to conclude abusive pricing, and the Berlin Court's order was repealed. Although some antitrust statutes provide for the use of performance regulation,both to direct enforcementactivity and to remedy antitrust violations, jurisdictionsrelying on judicial enforcement (U.S., Canada, EEC, Germany, Japan) make little use of performance-basedregulations. Antitrust enforcement and remediesbased on direct measures of market performancewould likely be useful only in certain circumstances,notably in regulatingmarkets for homogeneousproducts. In markets for heterogeneousproducts, price is only one of the means by which suppliers compete. For this reason, observed pricing is an inadequatebasis for directing enforcementefforts, and remedial price orders will seldom correct the exercise of market power or abuse of a 9 dominant position.2}1

208/(... continued) though the Commission agreed that charginghigh prices could constitute an abuse under Article 86, it was not able to find that prices were sufficientlyhigh to constitutean abuse. Regarding the additional$1 B spent by German consumers for petroleum products, the Commission (somewhatmysteriously)concluded that "This may seem like a large sum, but this additional expenditureon Germany's part is more than offset by the advantageswhich Germany has traditionallyderived from its position as an importerof refined products bought at cheaper prices on the world market, the periods of depressionon that market having in the past been considerablylonger than the periods of pressure." This opinion seems to suggest that the Commissionregards historicalevidence as showing the world oil market to be competitive. See CEC, Fifth Report on CompetitionPolicy, 1976, pp. 15-17. 209/ See I. Schmidt, op. cit., p. 426. 210/ In another case involving Hoffman-LaRoche and three other tranquilizer suppliers in 1978, the Berlin Court of Appeals had to decide whether high prices constitutedan abuse of a (jointly)dominant position. A showing that the four suppliersfaced significantcompetitionwould argue against a finding of dominance,and in fact the suppliers competed among themselvesand with other suppliers through research and developmentand product innovation. Yet because the suppliers did not compete on price, the Court found them to be dominant and ordered Valium (continued...)

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A central issue in some antitrust cases is whether market power can lead to restraint in product innovation. This issue is particularly important for applying performanceremedieswhere competitionoccurs by means other than price. Often, where innovationis rapid (as in pharmaceutical products),a new product is sold at a high mark-up that erodes quickly as the product is displaced by other new productswith lower (quality-adjusted) prices. The high mark-ups, while giving the appearanceof monopoly pricing, may in fact serve only to provide a competitive return on the R&D required to generatenew products. For this reason, imposing a pricing remedy against ostensiblymonopolisticpricing would likely weaken the incentive of suppliers to innovate and thereby undermine competitionthrough innovation. Thus, where competition is conductedby means other than price, (short-lived)high prices do not imply less-than-competitive performance,and remedialprices set by governmentdecree do not improve market performance.

210/(...continued) and Librium prices to be reduced to 76% of their current level. The administrativeprices were based on pricing in a "comparable"market by a Dutch supplier. On appeal, the Federal Supreme Court ruled this comparison to be insufficientto support the administeredprices, and the Berlin Court's order was repealed. See Schmidt, op. cit., pp. 427-428.

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VII.

90

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ANTITRUSTEXEMPTIONS

Each of the surveyedjurisdictionsweakens its antitrust law to accommodateeconomicand political goals other than efficiencyor the protection of competition. This is accomplishedin part by granting exemption from prosecution to restrictive agreementsand cartels. As a tool of competitionpolicy, cartelizationhas been practiced infrequentlyin the United States, more often in Germany, and to a greater degree in open, export-orientedeconomiessuch as Japan, Korea, the United Kingdom, France, Australia, and Sweden. In the U.K., France, Spain, and Sweden, competitionhas historicallybeen viewed as a limited means of pursuing economicefficiency and growth. Consequently,an administrative mechanism (nationalrestrictivepractices registration)for sanctioning cooperative agreementsis an importantpart of the enforcementprocess in these countries. In contrast, cooperativeagreementsin the U.S., Germany, and the EEC are less often granted administrativesanctions. These agreements, particularlyamong competing suppliers,are often subject to per se prohibitions. Although the surveyed economies share the goal of promoting economic efficiencyand consumer welfare, they do not share the view that 11 competition is always the best means of achieving economic efficiency.a Moreover, all of them restrict the scope of their competitionpolicies to allow the pursuit of trade and industrialpolicies by which they attempt to promote national economic interests in world markets. In practice, many trade and industrialpolicies advance the interests of domesticproducers (the participantsin world markets). Yet by accepting weaker conditionsof competition,the policies can impose considerableefficiencylosses and result in large net losses by the national economy. In judging cartelizationand other antitrust exemptionsmotivatedby trade and industrialpolicies, it is important to weigh the resultant anticompetitiveeffects. As we argue below, cartelizationhas significant drawbacks compared to trade policy tools such as tariffs, drawbacks addressed neither by the GATT nor (usually)by national competitionpolicies. In many cases, it is doubtful that the advantagesof cartelizationhave outweighed efficiency losses.

211/ The authors of Germany's ARC noted that "competitionis not in and of itself the goal, but rather the means for improvingefficiencyand technicalprogress...through certain necessary restrictionsof competition inherent in rationalizationagreements the premise for an increase in efficiency and an improvementin the satisfactionof consumer demands can be set." See D.B. Audretsch, "LegalizedCartels of West Germany," Antitrust Bulletin,fall, 1989, p. 581. For a further discussionby the authors of the German ARC on economicjustifications for cartel exemptions, see K. Herdzina,Wettbewerbspolitik,3rd ed., pp. 149-152.

-

Exempted

91

-

Cartels

Exempted cartels are classifiedaccording to the basis for forming the cartel (see Table 7.l).L2'Recession and depressioncartels, formed to aid producers whose market is in (respectively)short-run or long-run decline, are based on the proposition that, absent cartelization,open competition (and ensuing bankruptcyand reorganization)among supplierswill lower economic performanceor cause undue hardship on producers.L2 1 Table 7.1: EXEMPTED CARTELS

Marketine. price, and production - essentiallyprice fxing agreements among competing firms to raise prices and restrict production. Depression - firms of a specificsector make cooperative reductions in production capacitywhen that sector is in long-term decline. Similar to recession cartels. Specialization- firms producing complementaryor similar products allocate the production of these products among themselvesso as to achieve production economies of scale and scope. Rationalization- firmsjointly share services or activities so as to realize economies of scale and scope (e.g. marketing); similar in principle to specializationcartels. Recession - firms in a specific sector make cooperativereductions in output during a temporary economic recession in that sector. R&D - firms in a specificsector cooperativelydetermine the direction and funding of commercial research and development. Standardization- competingfirms agree on product quality. Exoort - firms exporting from a particular jurisdictionset prices and outputs for export in a cooperative fashion. Import - firms importing a particular item purchase that item cooperatively.

Rationalization,specialization.R&D. and standardizationcartels are all based on the premise that cooperationcan allow suppliers to realize economies of scale or other efficiencyadvantages (e.g., risk sharing) that would be unavailableabsent cooperation. Export and import cartels, aside from being used to pursue trade and industrialpolicies, can in principle enhance efficiency if they allow an unconcentratedindustryto offset the 2 4' market power of monopolisticor oligopolisticforeign trading sectors.

212/ Note that many cartels have been formed for more than one of the reasons listed. 213/ Of course, "undue hardship" is not an efficiencycriterion,though it is often raised by proponentsof restrictive,anti-competitivetrade and industrialpolicies. 2.14/ Competitiveconduct among many buyers and sellers yields efficient performance,whereas supply-sideconcentrationpromotes the exercise of market power so that equilibriumoutput falls below the optimum. This may be corrected by high concentrationamong buyers, for then price and (continued...)

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Domestic

Competitive

Effects

of Cartels

The exemption of cartels from antitrust scrutinypermits horizontal competitors to coordinate their actions on price, product development, marketing, and research and development. In certain circumstances,such coordinationpermits the cartel members to achieve a monopoly outcome rather than a competitiveone. Although such exemptionsmay yield important economic benefits, in some circumstancesthey protect the interests of a select group of domestic producers,with few offsettingeconomic gains. Application of the antitrustlaws to cartels under the rule of reason is an alternativemeans of gaining the efficiencybenefits of cooperationamong horizontal competitorswhile addressingthe circumstancesin which cartelizationdelivers economicbenefits sufficientto offset the harm to competitionand the suppression of independentaction. Certain types of cartels,primarily those allowing suppliers to realize demonstratedeconomies of scale or that support the provision of sector-specificpublic goods, such as product quality standards,are likely to enhance economic efficiency. This is particularlytrue where the size of the cartel is limited to the minimum necessary to achieve these benefits. Examples may be provided by some of the cooperationand standardization cartels of Germany.-215/ Where cooperationamong small firms allows cost

214/(... continued)

output are determinedby a bargaining process that may yield more efficient performance. On this basis, Japan applied vigorous scrutiny throughout the 1950s and 1960s to internationaltechnologylicensing agreementsaffecting the domesticmarket. See Ieyori and Uesugi, op. cit,, pp. 58-63. Moreover, the approval of export and import cartels (by MITI) requires that "disadvantageousimport conditionswill be unduly imposed due to the existenceof monopolies in export trading at the place of shipment..." Ieyori and Uesugi, op. cit., p. 147. 215/ Note, though, that standardizationcartels may have anticompetitive effects if they write product quality standards that exclude certain products even though those products would be valuable in the market. In particular,unnecessarilyrigid product quality standardsmay impede the commercializationof valuable new technologies,as they have in the U.S. with respect to a variety of building products such as plastic conduit, PVC pipe, and other applicationsreplacingmetal or stone with plastic and other building materials. See, for example,American Society of Mechanical Engineers.Inc. v. HydrolevelCorp., 456 U.S. 556 (1982), in which competing supplierswere found to have used product quality standards to exclude an innovativeentrant in the market for plumbing components. Broadly speaking,standardizationeconomizeson the informationcosts borne by buyers and, for that reason, representsa form of public good. Yet buyers are sometimes less informedabout the consequences(e.g. production costs) of prospectivestandards and thereforemust rely in (continued...)

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efficiencies,stronger competitionwith large firms may result. Yet where the size of the cartel, or its activities,goes beyond what is necessary to achieve efficiencies,cartelizationprobably does not generatedomestic benefits sufficientto offset the harm to competition. For example,depressioncartels in cyclical,capital-intensive industriesimpose higher prices on buyers in exchange for a lower degree of risk, lower cost of capital, and higher profitability. Yet such cartels, by raising profitability,also encouragehigher short-runcosts and the long-run maintenance of excess or inefficientcapacity.616For this reason, depression cartels are unlikely to be efficiency enhancing. The efficiencyeffects of rationalizationcartels in decliningmarkets are similar,with the added disadvantagethat the authoritiesgranting cartel status may not correctly identify these markets. Cartels

and Competition

Policy

Through selective exemption from competitionlaw, cartels may form to allow cooperativeagreementsto improve economic efficiency,a motive that underliesmany cartels among small and medium enterprises. Generally, the U.S. does not provide a systematicexemption to cooperativeactivities. Certain cooperativeactivities (e.g., designing industrialproduct and safety standards)are allowed through judicial discretion; otherwise,blanket exemptionssuch as cooperativeR&D must be provided by statute,and such 1 exemptionsare relativelyrare.M7

215/(...continued)

part upon suppliers (as agents) to write product standards. Due to these public good and agency aspects of standardization,the competitive issues arising with respect to standards are among the most complex in the field of competition law and economics. 216/ In cyclical, capital intensive industries,average and marginal production costs usually decline with increases in output. As a result, suppliers generallyhave strong incentivesto cut price during market downturns. This incentive is generally suppressedunder cartellization, raising actual average productioncosts in depressedmarkets. In addition, cartellization,by placing a floor under the profitabilityof cartelizedsuppliers during market downturns,lowers the risk and, therefore,the cost of capital, raises profitabilityand thereby encouragesthe maintenance of productive capacity that would otherwise, owing to inefficiencyor underutilization,exit the market absent concerted restraint of output among suppliers. 217/ In the U.S., the National CooperativeResearch Act (NCRA) of 1984 provides that R&D agreementsare not per se violationsof the Sherman Act. The NCRA requires registrationof such agreements,judges them based on their "reasonableness"in light of competitivecircumstancesin a well-definedR&D market, limits recovery under antitrust suit to single (rather than triple) damages, and excludes recovery of attorney fees and interest. This partial exemption covers only activities (continued...)

- 94 In nations maintaining a national restrictive practices register, cartels among small- and medium-size firms are effectively exempted from antitrust prosecution as long as their sales remain below the level triggering the notification requirement and they do not use cartelization for economic abuse or discrimination. The exemption provisions of Japan and the EEC, modeled after those of Germany, provide for cooperative activities, including rationalization, specialization, and standardization agreements. Exemptions are primarily extended to small- and medium-size firms, however. In the EEC and Germany, cartel exemptions must be sought from the competition authorities, whereas in Japan certain cartels, particularly those related to international trade, are sanctioned through non-enforcement agencies, notably the Ministry of Trade and Industry (MITI).18- In contrast to cartel agreements designed by the participants, MITI has the statutory authority to issue orders to cartel participants regarding production, capacity, and pricing. It thereby acts as an agent coordinating the actions of participants in officially sanctioned cartels. Cartels authorized by competition authorities often have a procompetitive basis, the realization of economies by small- and medium-size firms. The exemption statutes generally impose a variety of conditions to ensure that any gains in economic efficiency will not be lost through reduction in competition. In Germany, for example, participants in rationalization cartels must be able to demonstrate that the cartel will enhance

217/(...continued) pertinent to R&D; cooperative activities regarding subsequent commercialization are not exempted from antitrust prosecution. See T.M. Jorde and D.J. Teece, "Innovation and Cooperation: Implications for Competition and Antitrust," Cato Institute Conference, Washington, D.C.,

April, 1990. In contrast, the EEC provides blanket exemptionsfor R&D agreements, with the exemption extending to the commercializationof new products. The exemption is provided for a five-yearperiod and requires that the market shares of horizontal competitorsto an agreementnot exceed 20% for products covered by the agreement. See EEC Reg. No. 418/85, December 19, 1984, OJ 1985 L No. 53, 5. 218/ The current cartel exemption provisions of Japanese competitionlaw, initiatedwith the 1953 amendmentsof the AntimonopolyAct, have since then been modeled after those of Germany. See Ieyori and Uesugi, op. cit., p. 114. In the EEC, exemption under Article 85(3) requiresnotificationexcept for agreementsnot affecting inter-statetrade and, to a limited degree, certain RPM, R&D, and specializationagreements. Notificationimmunizes participantsfrom antitrust fines pending a ruling by the Commission. See American Bar Association,Antitrust Law Developments(Second), Section of Antitrust Law, ABA Press, 1984, p. 578.

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technical or economic efficiencyand that efficiencygains will be passed on to consumers in the form of lower prices. In Japan, exemptionprovisionsgenerallyrequire that cartel membershipbe optional, that non-membersuppliers and consumersnot suffer 2 9' Oddly, German harm, and that exemption is not unduly discriminatory. rationalizationcartels are often approvedwith price agreements,whereas such 0 agreementsare relativelyrare among Japanese rationalizationcartels.M Broadly speaking, there are similaritiesin the pattern of cartel formationbetween Japan and Germany. In both countries,the largest class of cartels has consisted of small- and medium-sizefirms. In 1980, 267 (56%) of the 481 legal Japanese cartels had been formed under the Small and Medium EnterpriseOrganizationAct of 1958; in 1986 in Germany,cooperationand conditioncartels consistingof small- and medium-size firms accounted for 186 (58%) of the 321 cartels.*1' Moreover, both nations have made extensiveuse of export cartels and little use of import cartels. In 1980, there were 66 legal export cartels 32 Audretsch finds that the greatest in Japan, and in 1986, 56 in Germany. frequencyof cartel formationin Germany has been in the stone and clay, food, textiles, and non-electricalmachinery industries,and concludes that "the propensityto cartelize in Germany may be greater in industriesthat sell homogeneousproducts with high fixed costs."M' Cartelizationin homogeneousproducts also characterizesthe experienceof Japan, where extended cartelizationhas been sanctionedfor corrugatedliner board, light steel bars, cement, spinningand polyvinyl-

219/ Ieyori and Uesugi, op. cit., p. 115. 220/ In 1986, 17 of 20 rationalizationcartels, and 20 of 44 specialization cartels, operatedwith price agreementsin Germany. Price agreements are allowed only if essentialto the firms' viability and if the cartel's total market share is less than 15%. See D. B. Audretsch, Oo. cit., p. 590-591. In 1982, only two of 13 rationalizationcartels approvedunder Sec. 24-4 of Japan's AntimonopolyAct (108 companies in copper scrap and 118 companiesin iron and steel scrap) utilized agreementson pricing. See Ieyori and Uesugi, op. cit., Table XII, p. 187. 221/ In German terminology,condition cartels allow competingfirms to share marketing informationand employ standardizedterms of business, delivery, and payment. Cooperationcartels are simply a form of rationalizationcartel. See Ieyori and Uesugi, op. cit., p. 172. See also Audretsch, oR. cit., p. 591. 222/ Ieyori and Uesugi, op, cit., p. 179. Audretsch,op. cit., p. 591. 223/ Audretsch, op. cit., p. 592.

- 96 chloride (PVC).!' Under formal market power analysis (Section II), product homogeneity and high fixed costs are regarded as contributing to the likelihood of collusion. Thus it may not be surprising that such industries have made the greatest use of cartels in Germany and Japan. Japan has formed many more depression and recession cartels than Germany. Ieyori and Uesugi report 70 depression and recession cartels in Japan as of 1982, a number of which have been renewed several times.g2 In contrast, Germany had only two depression cartels operating as of 1986.Z3' Many of the Japanese recession and depression cartels were motivated by the loss of Japan's comparative advantage in two areas: (i) textiles (to developing nations such as China and Korea), and (ii) highly energy-dependent manufacturing sectors which suffered during and after the oil market disruptions of the 1970s and 1980s. In principle, rationalization cartels can promote economic efficiency. The evidence on this issue is mixed but at least does not contradict the thesis that cartelization may have improved innovation in Japan.M2 A survey of the largest Japanese manufacturers in electronics, telecommunications, automobiles, chemicals, ceramics, steel and non-ferrous metals revealed that horizontal R&D ventures accounted for 19.1% of all research projects; moreover, innovation in Japan, as measured by the increasing proportion of patent applications accounted for by Japanese concerns, appears to have been very active.Ml The question remains, of

224/

Nakazawa, T. and L. Weiss, "The Legal Cartels of Japan," Antitrust Bulletin, fall, 1989, p. 644.

225/

Recession cartels in flax and lamie yarn were renewed five times, in hard vinylchloride tubing, four times, in sugar, four times, in discontinuous yarn, four times, in worsted yarn, six times, corrugating medium, five times, and in liner board, four times. See Ieyori and Uesugi, op. cit., pp. 184-185.

226/

Audretsch, op. cit., p. 591.

227/

Yet a variety of studies have failed to establish a consistent relation between firm size and innovation in the U.S. See W.F. Shughart II, p. 386-389. The proposition that cartelization can promote innovation is often based on the assumption that the patent law system does not adequately allow innovators to collect the rents made available by their innovation; instead, weak patent law systems allow imitators to absorb some of these rents. This suggests (to us) that strengthening patent law protection may be a viable alternative to antitrust exemption (of R&D cartels) as a means of encouraging innovation.

228/

The survey is discussed in T.M. Jorde and D.J. Teece, op. cit., p. 2324. For a general discussion of Japanese technological development, see A. Mody, "Overview of Japanese Industrial Technology Development," Industry and Energy Department Working Paper No. 6, World Bank, Washington, D.C., March, 1989. Table 5 (p. 63) shows that Japanese (continued...)

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course, whether the observed innovationwould have occurredwithout cartelization. Evidence regarding other kinds of cartels is less complimentary. One simple test of the net efficiencybenefits of cartelizationis to examine industrypricing with or without (usuallytemporary)cartelization. Audretsch compares the pricing between (rationalization)cartel members and non-members in Germany in a sample of industriesbefore, during, and after cartelization and finds that, in most cases, cartelizationled to price increases and 1 If the cartels had deliveredefficiencies reductionsin output levels.22 sufficientto offset the harm to competition,one would expect to see lower prices and higher output on the part of cartel members. Thus, Audretsch's results suggest that in most cases efficiencygains did not offset the loss in competitionunder cartelization. Yamawaki compares the inter-temporaladjustmentof profits between the U.S. and Japan during 1964-82.M/ While finding that the average profit adjustmentrate is comparablebetween the two nations,Yamawaki finds significantsectoral differencesin these rates. Of the ten Japanese sectors in which profits adjustedmost slowly, six of those were cartelizedat one time or another throughoutthe sample period (1964-1980). The speed with which profits adjust to changing economic circumstancesis viewed as a gauge of the competitivenessof a market, with profits adjusting rapidly in competitivemarkets and more slowly in less-than-competitive markets.241 That profits adjusted slowly in Japan's cartellizedmarkets suggests either that suppliers in non-competitivemarkets were more likely to resort to legal cartelizationor that cartelizationitself may have significantlystrengthened the ability of these suppliers to exercise market power. Moreover, the performanceof Japanese depressionand recession cartels has been criticizedin a number of instances. For example, the Japanese depressioncartel in PVC, created in 1983 to withdraw 24% of domestic PVC capacity, instead resulted in expanding PVC capacity. In addition, PVC marketingwas concentratedin four marketing agenciesthat continued to

228/(...continued)

patent applications,ranging in 1955 between 0.1% to 0.2% of all patent applicationsin the U.S., West Germany, Britain, and France, had increasedby 1978 to 10.1%, 8.1%, 7.3%, and 6.6%, respectively,of all patent applicationsin these four countries. 229/ See D. B. Audretsch,op. cit. 230/ H. Yamawaki, "A ComparativeAnalysis of IntertemporalBehavior of Profits: Japan and the United States," Journal of IndustrialEconomics 37, June, 1989. 231! Theoretically,free entry and exit would result in rapid adjustment of actual profits to the competitivelevel, whereas barred entry would allow excessive profits to persist over time. See I. Domowitz, et. al., "BusinessCycles and the Relationshipbetween Concentrationand PriceCost Margins," Rand Journal of Economics 17 (Spring,1986), pp. 1-17.

- 98 operate after the exemption was withdrawn in 1988.9V result sought under cartelization.

This was hardly the

Another example is provided by the Japanese scrap iron and copper cartels, created in 1955 to suppress the price of scrap imported into Japan, a net importer. When scrap prices began to rise during 1971-73, the Japanese steel industry cut its inventories. In 1973, scrap prices rose dramatically, and inventories had to be replenished at very high prices. Cartelization amplified a mistake by a single agency, the cartel, that the 74 cartel members would perhaps not have made (to the same degree) acting independently. In response, the JFTC declined to renew the scrap cartel in 1974.233/ Over time, the JFTC has shown greater reluctance to allow cartelization, and the formation rate of legal cartels in Japan has declined as a result.2N In 1963, 28% of all manufacturing shipments in Japan were covered by formal cartel agreements; by 1973 this figure had fallen to 18% and is likely less than 10% today.95- The declining role of cartels in Japanese industry is accounted for by a number of factors, among them the increasing emphasis on domestic consumption (as opposed to investment and export growth), the resultant stronger emphasis on antitrust goals, and the increasing strength of the JFTC.23

232/ Nakazawa and Weiss, op. cit., p. 650.

Ieyori and Uesugi (pp. 186-187) note that vinylchloride resin has been cartelized repeatedly (11/58 to 3/59 involving 13 suppliers, 5/77 to 8/78 involving 18-22 suppliers, and 5/81 to 2/82 involving 20 suppliers).

233/

Nakazawa and Weiss, op. cit., p. 648-649.

234/

The trend in the formation of illegal cartels is more uncertain owing to the inherent difficulty of monitoring it.

235/

Nakazawa and Weiss, op. cit., p. 643.

236/

In Japan, as elsewhere, the statutory treatment provided the pursuit of antitrust and industrial policies has been defined by judicial decisions. Two decisions strongly influenced the conduct of industrial policy vis-a-vis antitrust policy: the COCOM case of 1969 and the (oil) Production Restriction case of 1973. In the COCOM case, MITI invoked the Control Law to prohibit the export of certain strategic electronic goods. Japanese exporters wishing to exhibit at a China trade show sued on the grounds that the denial was unrelated to economic concerns and therefore unfounded in the Control Law. The Tokyo District Court accepted this argument, finding MITI's action to be unconstitutional. In the Petroleum Restriction case, MITI invoked the Control Law to recommend to oil refineries production cutbacks and prices in response to the first oil shock. The JFTC sued on the grounds that price fixing is per se illegal and prevailed before the Tokyo High Court. The Court found that the oil association did not follow MITI's directives regarding output and price and concluded that the price agreements were fully subject to the Antimonopoly Act. See M. Matsushita, "The Legal (continued...)

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-

The decline in cartelizationin Japan has been reflected in a decline in the number of cartels of various types.Y7' At its peak, generally consideredto be 1966, there were 1,079 exempted cartels in Japan, most of which (781, or 72%) were of small- and medium-sizebusinessesorganized for a variety of purposes. By 1987, the number of small- and medium-sizebusiness cartels had fallen to 226.Ml Between 1953 and 1987, the JFTC authorized 74 recessioncartels, none of them after 1982; foreign trade cartels also fell drastically,from 225 to 69 in the period 1966-82Y9i Moreover, the JFTC has placed more stringent limits on the duration of recessioncartels; for example,during 1956-61,six recession cartels were approvedwith an average durationof 23.1 months. During 1977-80, sixteen recessioncartels were approvedwith an average duration of 11.7 months.29 As in Japan, the formation of cartels in Germany has declined over time. During 1958-86,120 export cartels were formed,but only 55 were in existenceas of 1986. Only two import cartels have been formed,neither of 1 which is currently effective.A ' Of the 62 condition cartels established (all but one between 1958-63),50 were in existence as of 1986.2t There have been 33 rebate cartels regarding compensationfor special services,usually by small business, of which five were effective in 1986. In contrast to the decline in most kinds of cartels, rationalizationcartels of small- and medium-size firms have grown from one in 1974 to 136 as of 1986. In contrast to Germany and Japan, the United States has made little use of cartelizationby domestic suppliers under either competition or industrialpolicy, althoughU.S. trade policies have often resulted in cartels among foreign suppliersserving the U.S. (and other) markets. Yet legal immunity from the antitrust statuteshas been granted to a variety of activitiessuch as agriculturalcooperativesand export cartels, the latter under the Webb Pomerene (ExportTrade) Act of 1918.

236/(...continued)

Framework of Trade and Investmentin Japan," Harvard InternationalLaw Journal 27, 1986, pp. 362 and 380. 237/ It is difficult to establish the exact trend in cartelizationbecause small and medium business cartels, for example,do not always have to registerwith the government. See the Appendix in Matsushita, op. cit., p. 401. 238/ Nakazawa and Weiss, op. cit., p. 643. 239/ Nakazawa and Weiss, op, cit., p. 644. 240/ See Matsushita,op. cit., p. 385. 241/ Audretsch, oR. cit, p. 589. 242/ Condition cartels establish terms of sale but stop short of setting prices.

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100

-

The Webb Pomerene Act grants limited exemption to domestic export associationson the condition that the associationneither interferewith domestic competitionnor restrain the export trade of its members.2ff The act, to promote U.S. competitivenessagainst foreign cartels,does not immunize (international)cartel agreementsinvolvingdomestic and foreign competitors.2 - Judicial decisionshave found that the act does not grant immunity to an associationjointly operating manufacturingfacilitiesabroad, but it does immunizeprice fixing, market division,resale price maintenance, and exclusive dealing with respect to export of the association'sproducts. Webb-Pomereneexemptionrequires registrationand the filing of periodic reports with the FTC. Alternatively,any person engaged in export trade may request a Certificateof Review from the Secretary of Commerce conferringpartial antitrust immunity from the criminal sanctions and treble damages under the antitrust laws; immunitydoes not preclude recovery of actual damages and applicationof civil penalties.25 Webb-Pomereneexport cartels, though at times numerous, have generally accounted for a small fraction of the export trade of the United States. In 1958, 6.2% of U.S. exports were sold by export cartels,and by 1968 this figure had fallen to 3.7%.246

Cartels

and Industrial

Policy

Investment,technologicalinnovation,and research and development are common themes in the industrialpolicies of developed and developing nations. Moreover, policies that encourage supra-competitive pricing are often used to support efforts to increase investmentand broaden the technologicalbase of an economy. Thus a natural tension between antitrust policy and industrialpolicy exists. This tension is not surprising,since antitrustpolicies are designed fundamentallyto protect the buyers in a market, whereas industrialpolicies are generally designed to protect the

243/ See AmericanBar Association,Antitrust Law Developments,Section of Antitrust Law, ABA Press, 1984, p. 570. 244/ See U.S. v. United States Alkali Assoc., 325 U.S. 196 (1945). 245/ The Secretaryof Commerce issues guidelinesregarding the prerequisites of Certificatesof Review, which state that associationactivitiesmust not restrain or lessen domestic competition,influence domesticprices, or result in the re-importationof the affectedproducts into the United States. ABA, op. cit., p. 572. 246/ ABA, op. cit., p. 572. See also OECD, Export Cartels, Paris, 1974.

-

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247' Furthermore,a number of sellers. trade and industrialpolicies require circumventionof, or exemption from, prosecutionunder the antitrust laws.

If industrialpolicies must rely on supra-competitivepricing to encourage innovationand investment,they possess the unfortunate and perhaps undesirable side-effectof inhibitingeconomic activity (includinginvestment and innovation)in downstreammarkets. Thus, industrialpolicies that work through supra-competitivepricing may have their main effect in altering the mix of investmentamong industries,rather than increasingthe aggregate level of investment. Only where investmentand innovationin downstreammarkets are not considered desirable or significantis a restrictiveindustrialor trade policy likely to enhance innovationand investmentsignificantlyin the economy. Cartelizationhas become an increasinglyimportant tool of industrialand trade policy as the major trading nations have reduced their use of tariffs and subsidies and turned to non-tariff restraints,executed by export and import cartels, to protect domestic suppliersand thereby attempt 2 Z4J' to promote their national economic interests. The GATT provides for sector-specificcountervailingduties and anti-dumpingduties, both intended to prevent injury to domestic suppliers from "unfair"competition from foreign suppliers. Countervailingduties are tariffs imposed on specific foreign suppliers to offset competitive advantage realized through governmentsubsidy to those suppliers. Anti-dumpingduties are tariffs imposed on specific foreign suppliersbecause of price discrimination(on a national basis) resulting in a lower price in the importingthan in the exporting country. A number of cartels have resulted from countervailingduty and antidumpingactions, particularlyon the part of the EEC, the United States,

247/ In contrast to certain antitrust prohibitions,which may protect selected (usuallysmall) suppliersagainst certain (usually large) suppliers,trade and industrialpolicies typicallyprotect entire sectors from competition. Not only do the policies conflict,but so do the agencies authorized to execute those policies. For example, in 1984 the U.S. FTC approved a complex manufacturingjoint venture between General Motors and Toyota. In part, the joint venture was seen to aid Toyota in circumventingthe restrictivepolicies of other U.S. agencies. See nStatementof James C. Miller III ConcerningG.M./ToyotaJoint Venture,"April 1984, in Antitrust Trade and RegulationReport 46, 1984, pp. 727-728. 248/ By the beginning of the Tokyo Round of GATT negotiationsregarding restraints of internationaltrade, average tariffs among OECD countries had fallen to roughly 6% and were further reduced by one-third during the negotiations. See OECD, Competition and Trade Policies: Their Interaction,Paris, 1984, footnote 113.

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Canada, and Australia.MJ The sectors most often affectedhave been autos, steel, food, textiles,machine tools, footwear, and consumer electronics.zo Countervailingduty and antidumpingactions have often been resolved through voluntary non-tariffrestraint by the exportingnation, namely through orderly marketing agreements (OMAs) and voluntary export restraints (VERs). These are export cartel agreementsby which competing suppliers limit exports to a particular nation or group of nations. By definition,OMAs involve official governmentsponsorship,whereas VERs are arrangedwithout official sanction. The formation of an export cartel pursuant to trade and industrial policy does not violate the GATT and in addition is seldom covered under the national competitionpolicies of exporting and importingnations, particularly where the cartel affects only foreignbuyers who are outside the jurisdiction of the national law.2 Like tariffs and subsidies,non-tariffrestraintsdistort trade flows, attenuate competitionby increasingconcentrationin (national) economic markets, and result in economic transfersamong nations. Moreover, in many situationsnon-tariffrestraintscause greater harm to competition than equivalent tariff restraints. This is because binding non-tariff

249/ In 1984, the OECD found that most of its members reported no resort to countervailingor antidumpingduties. Only the U.S. made frequentuse of countervailingduties, with 200 investigationsconductedbetween January, 1980 and June, 1983, and 50 outstandingcountervailingduty orders as of June, 1983. Moreover, the U.S. InternationalTrade Commission conducted 135 dumping investigations(1980-1983)with 87 antidumping orders outstandingas of June, 1983. The EEC conducted 55 antidumping investigationsin 1982, most aimed at imports from eastern Europe. Canada conducted 176 antidumpinginvestigationsduring 19711982, and Australia conducted 31 antidumpinginvestigationsduring 19801981. Most of the antidumpingactions have been aimed at developed nations, with developingnations targeted in only 20% of the actions as of 1984. See OECD (1984), p. 111. 250/ OECD, op. cit., p. 51. 251/ Generally, export cartel formation and other kinds of restrictive practices do not violate the competitionlaw of an exporting'nation, whose jurisdictionusually stops at national boundaries. For some laws, legal jurisdictionis establishedonly by a showing that the goods would be reimportedback into the country and, for that reason, the restraints of trade would affect national (rather than international)commerce. The competitionlaws of importingcountries may reach the export cartels of trading partners, but antitrust immunitygenerally follows when the cartellizationoccurs under governmentdirection (OMAs). Moreover, restrainingVERs under a national competition law is difficult unless the participantsown substantialassets in the importing nation. For details, see section 8, infra.

- 103 restraintsprevent foreign suppliers from expanding output in a national market, a result not produced by equivalenttariffs.Z5 If domestic and foreign suppliersbehave competitively(with or without a restrictivetrade policy), then a tariff and equivalentnon-tariff restraint (on all imports)have similar effects on prices and output--that is, domesticprice rises by the amount of the tariff and output falls. Yet where domestic competitivebehavior is due to the presence of foreign suppliers, a sufficientlyhigh tariff or non-tariff restraintmay induce collusive pricing by domestic suppliers. Foreign supplierswould likely undermine collusivepricing given a moderate tariff, for the tariff would not prevent (foreign)sales increases in response to collusive pricing by domestic suppliers. A binding non-tariff restraint prevents this response and encouragesdomesticprice to rise by more than the equivalenttariff. This concern prompted a 1982 report by the U.S. FTC to the U.S. Departmentof Commerce regarding a countervailingduty investigationfor imports of carbon steel products to the U.S. from Belgium,Brazil, Germany, 3 1 The FTC found France, Italy, Luxembourg,the U.K., and the Netherlands.2 that the proposed countervailingduties would go so far as to remove foreign suppliers from the market and thereby substantiallyincrease industrial concentrationin domestic steel markets. Because mergers also increase concentration,the FTC drew an analogy between the impositionof duties and a merger with similar effects on concentration. The FTC concluded that such a merger would violate the U.S. Departmentof Justice Guidelinesand therefore would likely be prohibitedunder U.S. antitrust law. In spite of this observation,the action was settled by a VER among the steel suppliers of the various countries. The drawbacks of non-tariffrestraints,particularlywith respect to effects on downstreammarkets, are well illustratedby the estimated effects of VERs imposed by the U.S. in textiles, steel, and automobiles. Tarr found that non-tariffrestraints on imports into the U.S. in these three sectors caused annual economic losses to the U.S. economy of $20.9 billion.&' These losses, equivalent to import tariffs of 25% in the three sectors (in contrast to average U.S. tariffs of 3.5%), resulted in annual efficiency distortions (associatedwith output reductions)valued at $6.69 billion and

2521/ Equivalent tariffs and non-tariffrestraints are defined as those resulting (assumingcompetitiveconduct by domesticsuppliers) in equal volumes of imports into a protected domesticmarket. 253/ See PrehearingBrief of the FTC in the Matter of Certain Carbon Steel Products, CountervailingDuty Investigationbefore the Commerce Department,August 27, 1982. Z54/ See D. Tarr, "A General EquilibriumAnalysis of the Welfare and EmploymentEffects of U.S. quotas in Textiles, Autos, and Steel," Bureau of Economics Staff Report to the Federal Trade Commission,February, 1989.

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annual economic transfers to foreign suppliersvalued at $14.21 billionA5 The restraints raised imported auto prices by 23%, steel prices by 7%, and textile and apparel prices by 40%. Higher steel prices decreased steel consumptionand caused allocative losses in downstream domestic industriesbuying steel. This resulted in estimated reductionsin U.S. exports of $4.45 billion for general manufacturing,$1.08 billion for traded services, and $1.12 billion for t agriculture.The average annual cost of protecting174,000 jobs from the three restraintswas estimated to have been $120,000,or eight times the average annual earningsof domestic textile workers and three times the average annual earningsof domestic steel workers. Moreover, the gross employmentgains in the three protected sectors were largely offset by employmentlosses in non-protectedsectors (7479,000 jobs in general manufacturing,40-56,000 jobs in service industries, 16-17,000 jobs in consumer goods industries,and 13-14,000jobs in agriculture). Tarr estimates that the composition of economic losses, due both to allocative inefficienciesand quota rent transfers,varied by sector depending on the elasticityof market demand and the market response to the

255/ Though equivalenttariff and non-tariff restraintshave, by definition, similar effects on imports, they result in very different kinds of economic transfersamong domestic suppliers,domesticconsumers,and foreign suppliers. Tariffs raise the domestic price by the amount of the tariff (assumingno effect on competitivebehavior) and result in economic transfersaway from domestic consumers and to domestic producers owing to higher domesticprices. Yet foreign suppliersdo not benefit from the higher domesticprices, due to the tariff. In essence, tariffs raise the domestic price and then extract the price increases from foreign suppliers. In contrast,non-tariff restraintslimit import volume directly but allow foreign suppliers to retain resultant domestic price increases; these transfers to foreign suppliers are commonly referred to as quota rents. Tarr's estimates provide empirical support for the thesis that, as a means of subsidizingdomestic suppliers,non-tariffrestraintsare inferior to equivalent tariffs because the domestic economy retains the quota rents created by tariffs but loses some quota rents to foreign suppliersunder non-tariff restraints. See D. Tarr, op. cit., executive summary. 256/ Increases in auto and textile prices caused large output distortions because auto demand is income-elasticand textiles and apparel are highly price elastic; this effect reinforcedthe increase in steel prices by loweringdemand for products outside of the protected sectors. Moreover, the restraintsprotected only jobs in steel and textiles; in autos, dropping these restraintswould have raised domestic real income (and, therefore,the demand for automobiles)by enough to offset auto employment losses resulting from an unprotectedauto market.

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restraints. In steel and autos, each a domestic oligopoly facing (price-) inelastic domestic demand, the restraintsaffected price more than volume. For that reason, economic losses consisted largely of quota rents to foreign auto and steel suppliers.MZ In textiles, the restraintsresulted in a significantreduction of output and very high allocativelosses due to the replacementof efficient foreign supplierswith comparativelyinefficientdomestic suppliers. Tarr estimates the total adjustmentcosts (for example, from lost employment) resulting from foreign competition,to be $1.64 billion. On the other side of the ledger, the ongoing costs of the restraints (in present discountedvalue) total a stunning$106.6 billion. For these policies, costs outweighed benefits by a ratio of 65 to 1. Roughly two-thirdsof the total economic losses from restraints in steel, autos, and textilesconsist of quota rents. Tarr rightly points out that these rents can be retainedby the importing country through auctioning importationrights to foreign suppliers,a mechanism that returns the rents to 8 the importingcountry via the bids received at auction.2 Yet the restraints also created annual allocative losses of $6.69 billion. These losses represent a basic cost of trade restraintsand illustratewell that such restraints,while creating rents for specific domestic suppliers and (perhaps)

257/ Annual total economic losses attributableindividuallyto the auto and steel restraintswere $6.9 billion and $0.91 billion, respectively. Of these, $6.2 billion were quota rents to foreign auto suppliers and $0.78 billion were quota rents to foreign steel suppliers. In contrast, in textiles, for which domestic demand is relativelyprice elastic and domestic industrystructure relatively competitive,quota rents were only $7.07 billion of the annual economic losses of $13.06 billion. The distortionlosses in textileswere particularlyhigh because of the large sales response to textile restraints. See D. Tarr, op, cit., pp. 1-4. 258/ An auction would collect the quota rents if foreign suppliers,behaving competitively,bid (on a per unit basis) to supply specific volumes to the importingcountry. Yet the auctioningmechanism can easily be undermined so that it fails to collect all of the quota rents. Collusivebidding for auction rights (by, for example, a governmentsanctionedexport cartel) would depress the auction price and prevent the auction from collectingall of the quota rents. Such cartels have often been formed (there are a number of Japanese examples) to deal with trade frictions and are often legally immune from the national competition laws of both the exporting and the importing country. In 1985 the U.S. InternationalTrade Commissionfound injury of the U.S. footwear industryby imported footwear and recommendedrelief in the form of auctioned quotas, but this recommendationwas rejected by President Reagan on general anti-protectiongrounds. See AntiProtection: Changing Forces in United States Trade Politics, I.M. Destler and J.S. Odell, Institute for InternationalEconomics, Washington,D.C., September,1987, pp. 18-19.

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extractingrents from foreign suppliers,ultimatelyresult in significant aggregate losses for the economy employingthe restraints.

Trade

Unions

Of the surveyed economies,only Australia does not exempt trade unions from antitrust scrutiny, and a number of activities,particularly secondary boycotts, are viewed there as improperunion activity in restraint 9 of competition.A Organized labor for the purpose of collectivebargaining enjoys a broad immunityfrom antitrust scrutinyunder U.S. law. In addition, Germany, the U.K., Sweden, and the EEC exempt organized labor from antitrust prosecution. The exemption of organizedlabor from antitrustprosecution is seldom a feature of industrialpolicy but rather a reflectionof jurisdictionalgoals regarding the "orderly"developmentof labor markets. Nonetheless,collectivebargaining is a form of cartelizationin labor markets and can have significanteffects on competition,particularlyin concentrated industries. Prior to the passage of the Clayton Act in 1914, boycotts and concerted activitiesby labor unions, generally to achieve recognitionas bargaining agents, were illegal under U.S. antitrust law. The Clayton Act gave limited immunityfrom antitrustprosecution to concerted activities attendant to labor disputes over working conditions. Judicial decisions against unions for antitrust violations continued,and the U.S. Congress responded in 1932 with the Norris LaGuardiaAct, depriving federal courts of the right to issue injunctionsin labor disputesunless other illegal acts are committed or threatened.2f Even in competitive output markets, unionizationraises production costs through higher wages and influencesoutput prices as supplierspass these costs along to buyers. Yet unionizationcan also influence the conduct of competition. A blanket antitrust exemption allows a union to organize the workers of competing suppliers. Were the unions of competing suppliers independent,wage increases to a particularsupplier would be restrainedby the threat of losing market share to other suppliers. However, armed with a blanket antitrust exemption,affiliated unions facing oligopolisticsupplierscan negotiate interdependentlabor

259/ A secondaryboycott is one pressed for reasons other than improvements in working conditionsand wages. For example, in 1979 the Trade Practices Commissionasked for an injunctionof a boycott by the Bread Industry Employees and Salesmen'sAssociation of New South Wales. This union refused to supply bread to Sydney retailerswho were selling below the maximum price set by the New South Wales Prices Commission,an action that would have enforced a maximum price as a minimum price. See Trade PracticesCommission, op. cit., p. 19. 260/ See American Bar Association,Antitrust Law Developments,Section on Antitrust Law, ABA Press, 1984, p. 620.

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contracts so as to raise the costs of all suppliers simultaneously,thereby encouraging the joint exerciseof market power in downstreammarkets. Rather than the supra-competitivereturns of market power accruing to suppliers and capital owners as higher profits, these returns accrue to the unions as higher wages. This possibility requiresonly that the unionized suppliers collectivelypossess market power, so that competitionfrom non-unionized suppliers is incapable of eroding downstreamproduct prices. In this way, organized labor can enhance the exercise of market power by which affiliated unions expropriate the monopoly rents of such an exercise. That ongoing unionizationwould eventuallyerode the competitive restraint imposed by non-unionizedsuppliersand result in non-competitive behavior was recognizedby the U.S. Supreme Court: "Union success in organizingworkers and standardizingwages ultimatelywill affect price competitionamong employers,but the goals of federal labor law never could be achieved if this effect on business competitionwere held a violation of the antitrust laws. The Court thereforehas acknowledgedthat labor policy requires tolerance for the lessening of business competitionbased 62' on differences in wages and working conditions." Subsequentempirical researchhas confirmed the concerns expressedby the Court. Ruback and Zimmerman find that unionizationlowers the market value of the firm, and Freeman finds that unions lower profitabilityin the presence of high concentrationand barriers to entry.-? Finally, Salinger finds that market power is exercised in the U.S. economy and that labor unions capture most of the rents arising from its exercise.2In principle, the competitiveimpact of input market cartelization depends on the structure of the output market(s) and the proportion of costs attributableto the cartelizedinput. Where the output market is competitive, input cartelizationmust control enough suppliers to exert market power. Otherwise,non-unionizedsupplierswill undermine the attempt to raise the prices of the cartelizedinput. For concentratedoutput markets in which the cartelized input accounts for a small fraction of cost, the competitiveeffect in the output market is probably small, amounting only to a wealth transfer to the

261/ Connell ConstructionCompany v. Plumbers & SteamfittersLocal 100, 421 U.S. 616 (1975). 262/ See R.B. Freeman, "Unionism,Price-CostMargins, and the Return to Capital," NBER Working Paper, No. 1164, 1983. See also R. S. Ruback and M. B. Zimmerman, "Unionizationand Profitability: Evidence from the Capital Market," Alfred P. Sloan School of Managementworking paper 1451-83, 1983. 263/ See M. Salinger, "Tobin'sq, Unionization,and the Concentration-Profits Relationship,"Rand Journal of Economics, 15(2), Summer, 1984, pp. 159-171.

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cartelized input, with little effect on output. Yet where an input accounts for a significantproportion of cost in a concentratedoutput market, cartelizingthe input essentiallyundermines the antitrust scrutiny of the output market and produces the same result that would be produced by (illegal) collusion among suppliers. As a Trade Practices Commission (Australia)Report notes, "this is a complex area in which the line between industrialaction and anticompetitive conduct is sometimesblurred."M The basic purpose of a trade union, collectivebargainingover wages and working conditions,is fundamentallya restraint of trade that may serve a pro-competitiverole in providing workers with little market power (as individuals)to offset the market power of large employers in markets for labor services. Antitrust concerns are not inherent in collectivebargaining, for union affiliationslinking non-competingsuppliers do not provide a mechanism for exercisingmarket power in downstreammarkets. It is only affiliations allowing a single (exempt)union to bargain with competing (non-exempt) suppliers that may provide the union with the means of exercisingmarket power in downstreammarkets and, in effect, circumventingantitrust prohibitions 5J against restraint of trade on the part of those suppliers.M

264i Trade Practices Commission,op. cit., p. 19. 265/ At this writing, the United Auto Workers (UAW) is negotiating for a labor contractwith General Motors. It has become standardpractice in the American auto industry for the UAW to negotiate a contractwith a specific supplierand then use that contract as a standard for contracts with the other two major domestic suppliers. Each domestic supplier strives to be chosen for the "model" contract, control over which provides an effective lever for raising the costs of unionized, domestic rivals. Currently,one importantconstraint to the negotiating stance of General Motors and the UAW appears to be the competition in the automobilemarket from the non-unionizedmanufacturingplants of Honda, Toyota, and Nissan located in the U.S. This example also illustratesthe interplaybetween trade and competitionpolicies. If competitionfrom foreign suppliers constrains the exercise of market power by a powerful domestic union (controllinga critical input to domestic production),then trade restraints,by raising the cost of the foreign competitiveresponse, enhance the exercise of market power by the union. As mentioned above, direct auto imports from Japanese plants have throughoutthe 1980s been constrained by the VER in autos. See the WashingtonPost, Business Section, September 16, 1989 and preceding issues.

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VIII. INTERNATIONALANTITRUST This section discusses internationalantitrust in terms of its sole practitioner,the EEC, and compares EEC policy and the federal-state separationof antitrust policy as practiced in the U.S. The European Community defines and enforces antitrustpolicy in parallelwith the domestic antitrustpolicies of a number of its members, among them the U.K., Germany, France, Spain, and Italy. Similarly,parallel enforcementcharacterizes antitrust in the United States, where the federal antitruststatutes can be enforced,not only at the federal level by the Federal Trade Commission and the Department of Justice, but at the state level through the attorneys general of the fifty states. Internationaland domestic antitrust policies share a common economicbasis, but the practice of internationalantitrustpolicy is greatly influencedby its political context. An antitrust policy practiced by a federationor internationalmembership,to solicit the cooperationof (perhaps partially) independentpolitical states, must reconcile the often conflicting economic and social goals of the participatingstates. At the international level, conflict arises because of the economic transfersthat result from the pursuit of industrialpolicies to promote economic growth and efficiency in one nation at the expense of consumers in another. Moreover, because the exercise of market power results in economic transfers,it follows that the enforcementof competitionpolicy, which inhibits this exercise, results in (offsetting)economic transfers. Frequentlythese transfersare disproportionatelyshared by different political jurisdictions,creating conflictamong the jurisdictionsregarding enforcementof competitionlaw. A clear example is providedby a merger allowing the rationalizationof production facilitiesand creating unemployment in certain areas. Consuming jurisdictionsmay gain from this transaction whereas jurisdictionscontaining closed production facilitiesare more likely to lose, a situationcreating different enforcement incentives. For these reasons, an internationalantitrustpolicy must reconcile its practices and rules with those of the domestic antitrust and industrialpolicies of the signatorynations and, more important,must reconcile conflicts among the states regarding the enforcementof antitrust policy. An importantfeature of this reconciliationis the separation of jurisdictionbetween the federationand its member states.

The Economic Rationale for International (or Interjurisdictional) Antitrust Policy In principle, the appeal of internationalantitrust policy derives from its contributionto economic integrationand the promotion of trade among the members of a trading bloc. Owing to jurisdictionallimitations,international antitrust policy protects free trade and open competitionbetter than would individuallydifferentiateddomestic antitrust policies. Domestic antitrust policies generally are designed to protect competition in a particularnation and extend little protection (or

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jurisdiction) to consumers and producers in other nations. Jurisdictions sanctioning export cartels such as the EEC, the U.S., Germany, Korea, and Japan seldom enforce competition laws against "pure" export cartels (for which cartelized products are sold only to foreign buyers) unless the cartels affect the domestic market.6/ Certain countries such as the U.K., where competition law judges restrictive agreements under a broad public interest standard, interpret restrictive agreements harming export volumes as violations of competition law. 271 Yet judging from history, enforcement appears to measure exports by value, not physical volume, and agreements restraining physical volume and raising value are generally condoned. Current international law does not provide an effective means of preventing the exportation of anticompetitive effects through the antitrust exemption of restrictive export practices. Where restrictive practices are sanctioned or compelled by governments, as often has happened in the formation of export cartels in Japan and other countries, the practices are protected from prosecution by the principles of sovereign immunity and international comity. Otherwise, where restrictive practices may be within the jurisdiction of antitrust law in importing nations, the practitioners themselves may be

266/

The U.S., under the Webb-Pomerene Act, exempts export cartels or restrictive agreements limited to exports that will not be re-imported. Articles 85 and 86 of the Treaty of Rome have no foreign commerce clause, hence EEC jurisdiction stops at the borders of member states, except for exports to the European Free Trade Association (countries bordering the EEC) from which products might be re-imported into the EEC. See American Bar Association, Antitrust Law Developments (Second), Section of Antitrust Law, ABA Press, 1984, p. 580. In the Oil Field Pipes case (1977), the German Federal Supreme Court in Civil Matters ruled that German competition law applied only to domestic commerce, so that even a notification requirement for export cartels was beyond the jurisdiction of the Cartel Office; such a notification requirement was imposed in 1980 amendments to the ARC. See D.B. Audretsch, The Market and the State: Government Policy towards Business in Europe. Japan. and the United States, New York, 1989, p. 74. Sec. 5 of Japan's Export and Import Trading Act (1952) permits exporters to enter into any restrictive agreement, requiring only notice to MITI, as long as domestic parties are not thereby injured. Ieyori and Uesugi, op. cit., p. 318. In South Korea, Article 7 of the MFRTA allows antitrust exemption (at ministerial discretion) for activities intended to strengthen the international competitiveness of Korean enterprises. See S.P. Wagner, op. cit., p. 514.

267/

Amendments to the U.K.'s 1973 Fair Trading Act explicitly prohibit monopolization in constraint of the export of goods, in spite of a previous exemption of export cartels under the 1956 Restrictive Practices Act. See Studies of Foreign Competition Policy, op, cit., p. 381.

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outside the jurisdictionof the antitrustauthoritiesand, for that reason, enforcementof antitrust statutesmay be very difficult.2 Moreover, some countrieshave exacerbated this problem by extending statutory protectionfrom antitrustprosecutionby importing nations.-21Other internationaltrade agreements,among them the GATT, do not constrain the practice of domestic antitrustpolicies or the granting of antitrust exemptions. For these reasons,where both domestic and foreign suppliers compete in the nationalmarketplace,the domestic antitrust policies of trading bloc nations generally fail to protect either trade or the vitality of competition in the tradingbloc. Fundamentally,for those markets that are not regional or local, the encouragementof trade promotes specializationin each economic market in response to comparativeadvantage among nations. As a result, the production of goods and, therefore,the monitoringof conduct and market structure for antitrust purposes, often are not evenly distributed among nations.M' Even where domestic antitrust policies are designed to serve economic goals such as efficiency, these policies generallybalance the costs and benefits of

268/ At the Fifth InternationalCartel Conference (Berlin,June 18-19, 1990), the president of the German Federal Cartel Office opined that internationalrestraintscan no longer be adequatelycontrolledby the national antitrust authorities. 269/ A number of jurisdictions,among them the U.S., Japan, the U.K., Germany, Sweden, and the EEC, extend jurisdictionunder antitrust law to the parents of subsidiariesoperatingwithin their territory. Moreover, several jurisdictions,among them the U.S., the U.K., and Canada, have passed domestic statutes limiting the applicationof sovereign immunity to commercialaffairs. For example, on these grounds the U.S. Court of Appeals has refused to dismiss an antitrust suit against OPEC. However, a number of nations, among them the U.K. and Australia, protect domestic enterprisesfrom prosecutionunder foreign antitrust statutes. British law allows a domestic enterpriseto counter-sueplaintiffs to recover non-compensatorydamages awarded under a foreign antitrust suit. This statute negates punitive awards such as those possible in the U.S., where private parties can sue for treble damages. Australia authorizes its attorney general to sue to recover damages paid by domestic firms in foreign antitrust suits. See OECD (1984). 270/ For example, in 1982 and 1986, Japan and the United States combined for 48% and 51% of the worldwide production of motor vehicles, respectively. Western Europe accounted for 34% and 31%, respectively,with the rest of the world accountingfor 18% in both years. See "U.S. Global Competitiveness:The U.S. AutomotiveParts Industry,"U.S. International Trade Commission,USITC Publication2037, December, 1987, p. xxii-xxiii. Within the EEC, only 10% of auto parts imports into member states come from non-EEC members. Moreover, Germany supplies40% of all auto parts imports to EEC member states, followedby France (15%), Italy (7%), and Britain (7%). Op. cit., pp. 2-3.

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potentially anticompetitiveconduct only at the national level. For that reason, even if all the trading bloc nations practice an active antitrust policy and properly enforce that policy in response to national economic efficiency, forms of conduct and changes in market structureharming competition and lowering efficiencyare not necessarilyenjoined by domestic antitrust policies. Furthermore,as discussed in the previous section, industrial policies designedto promote the interestof specific domestic suppliers seldom promote allocativeefficiency. Generally,anticompetitiveconduct results in income transfers to producingnation(s),which for that reason have no incentive to enjoin the behavior. Consumingnations, althoughmotivated to enjoin the behavior, seldom have the means because of constraintson jurisdiction.M Where specializationin response to comparativeadvantage is encouraged,each nation will more often find itself in the position of a consumer rather than a producer. Thus, reliance on domesticantitrust policies alone will tend to allow trade restrictionsto the disadvantageof each trading bloc nation. The greater its specialization,and the more each nation relies on internationaltrade, the greater the disadvantageof relying on domestic antitrustpolicies and the greater the appeal of international antitrust policy. Whereas national antitrustpolicies can protect competitionwithin a nation, internationalantitrust can protect the vitality of competitionat the internationallevel and thereby promote economic integrationamong nations. Bilateral agreements regardingexchange of informationin antitrust investigationsand the mutual respect of domestic antitrust policies can offset the "balkanization"of antitrustpolicy. For example, the U.S. has bilateral treatieswith a number of nations, among them Canada, Germany, and Australia, regarding informationcollectionand internationalcooperationin antitrust matters. This cooperativeapproach of nations through bilateral negotiations is probably more effectivefor large markets such as the U.S. Such a strategywould likely hold little promise for small economies or developing nations. In game theoretic terms, the availabilityof selective national policies to promote or impede competitionin internationalmarkets presents

271/ Antitrust jurisdiction is well recognizedfor parties owning assets (e.g. a national subsidiary)within the nation administeringthe law but not for parties over whom jurisdictionwould be based on a competitive effect realized solely through imports (with, for example, national distributionby a domestic firm). In the Eleventh Report on Competition Policy (1981), the EEC expressedconsiderableuncertaintyas to whether the EuropeanCourt of Justice would uphold a claim of jurisdictionover a merger of competing non-EEC importersand further uncertainty over whether a divestiture or other remedialorder could be enforced. See Wullearts et al., op, cit., p. 250.

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the various countries with a "prisoners'dilemma", a situation in which the economicwelfare of each country depends on the actions of others. To see this, note that if the actions of other countries are taken as given, each individualcountry has an incentiveto restrict competitionin goods for which it has a comparativeadvantage,yet this strategy, pursued collectively, leaves all countriesworse off. Circumventingthe "prisoners'dilemma" requires a mechanism allowing each country to make a credible commitment to refrain from policies impeding competitionin markets for which the country has a comparative advantage and thereby harming the welfare of consumingcountries. International antitrustpolicy can be viewed as such a mechanism. By accepting a common competitionlaw governingcommerce among states, the various member states surrender the legal right to sanction certain kinds of conduct and transactionsby which they could extract economic transfersfrom other member states. General acceptanceof an internationalcompetitionlaw requires that the benefits of perpetratingrent extraction are outweighedby the costs of being a target of such extraction. In a world of free trade, in which comparativeadvantage drives industrialcommercializationand specialization, one would expect that most trading nations would benefit by making a credible commitmentto refrain from rent extraction (via industrialpolicies and weakly enforced or non-existentcompetitionlaws) in return for similar promises by their trading partners. For that reason, one would also expect that internationalantitrust policy would have considerableappeal for trading nations other than those currently observing internationalantitrust treaties (the EEC, Australia and New Zealand). The interplayamong conflictingnational interestsin defining an internationalantitrust policy is well illustratedby the experienceof the EEC member states in repeatedlyconsideringand ultimatelyapproving a common market regulation for merger control and pre-mergernotification. Clearly, the member states have very different approaches to antitrust enforcement, particularlywith respect to mergers (see Sections III, IV, V). For example, among the EEC member states, only Germany, Italy, Spain and Portugal require pre-mergernotificationand national enforcementstandardsvary greatly. New EEC regulationsmust be approvedby both the European Parliamentand the Council of Ministers.-L In the repeatedattempts to pass a Europeanmerger control regulation, the Council of Ministers generally opposed Community-widemerger control, preferring instead that the member

272' The Parliament is an elected body of 434 officialsunder representation proportionalto population. The Council of Ministers, in contrast, consists of a single representativeof each member state. The Treaty of Rome requires consultationwith the Parliamenton important Commission regulatory initiatives,and the Council of Ministers is responsible for the enactment of new EEC laws. See C.L. Potter, "CentralizedEuropean Merger Regulation:A Viable Alternative,"Virginia Journal of InternationalLaw 26(1), 1985, p. 220.

- 114 states retain merger control at the national level and that a national policy of encouraging mergers not be inhibited by Community merger control.731 In particular, France and Italy favored a regulation conditioning approval of mergers on a ruling by the Council of Ministers (consistently opposed by the Parliament), and Spain favored enforcement criteria to accommodate the potential "technical and economic progress" advantages of mergers. This position was opposed by Germany, which preferred that merger 1 control be concerned solely with the maintenance of competition.fI Finally, the U.K. favored a merger control proposal that would separate jurisdiction regarding mergers between the Commission and the member states, so that no merger would be subject to review by more than one enforcement authority.@? The final regulation represents a compromise among these conflicting points of views. Pre-notification is required only of very large mergers, and the member states share overlapping jurisdiction with the Commission.-Y Upon receiving notification of a merger, the Commission must contact national enforcement agencies, with the waiting period extended (from four to six weeks) if a national enforcement agency wishes to investigate (Article 9.2). Where both the Commission and a national enforcement agency wish to contest a merger, the Commission can delegate enforcement to the national agency (Article 9.3). Instances of EEC prohibition against national sanction of a merger are to be settled through appeal by the national government before the European Court of Justice. If the Commission fails to rule within three months, jurisdiction reverts to the national level. Notification standards under the new regulation are based on worldwide and EEC sales. The sales levels ensure that EEC pre-merger control will apply only to large firms active in commerce among member states; the

273/

French merger control enforcement is based upon a balance of the anticompetitive effects of a merger against the advantage to industrial policy goals such as the creation of large firms capable of competing internationally against, among others, those from the U.S. In Parliamentary debates regarding a merger control regulation, French representative Couste' stated, "Now, it seems to me that, without wishing to do so, the Commission has allied itself with the power of America against the necessary expansion of European undertakings." See C.L. Potter, op. cit., p. 222, fn. 17.

274/

See T. Janicki, "EG-Fusionskontrolle auf dem Weg zur praktischen Umsetzung (trans: EC merger control on its way to practical implementation)," 40 Wirtschaft und Wettbewerb (trans: Competition and Trade Regulation) 195 (1990), p. 196.

275/ T. Janicki, op. cit., pp. 195 and 202. 276/

Parties to a merger must provide notice within a week of an agreement to merge and wait three weeks after notification before consumnating the merger.

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Commissionestimates that it will review 40 to 60 mergers per year.2 The German proposal, that merger control be based on the hindering of competition by a dominant enterprise (createdor strengthenedthroughmerger), has been accepted (Article2.3). Moreover, the new regulationaccommodatesthe French, Italian, and Spanish concerns, in that transactionsinvolvingsmall parties with little ability to compete internationally(even within the EEC) are unlikely to be reviewed since sales outside a single country for such parties would likely be low. The U.K. proposal for separate jurisdiction(between the Commissionand the member states) has not been accepted, and mergers with an effect within the EEC can be prohibitedunder either national or EEC competition law. The use of an internationalantitrust policy does not ensure the achievementof allocativeefficiency, for the parallel conduct of national and internationalantitrustpolicies allows a national antitrust authority to block a transactionor prevent conduct that, although costly at the national level, is economicallybeneficial at the internationallevel. Nonetheless, internationalantitrustpolicy can provide a significantimprovement in allocativeefficiencyby preventing anticompetitivetransactionsthat would be unaddressedby national antitrust policies and, equally important,by providing nations with an alternativemeans (to industrialpolicies) of encouragingeconomic growth and development. Jurisdictional Principles Antitrust Policy

of International

and Interstate

Because international(or interstate)antitrustpolicy is designed to promote trade among nations (or states), legal jurisdictionis confined to commercebetween nations, to which the national antitrustpolicies may also apply. The jurisdictionof EEC antitrustpolicy is confined to matters that may affect trade among member nations, and that of U.S. federal antitrust policy is confined to interstatecommerce.83/ The parallel design and enforcementof antitruststatutes creates the potential for conflictbetween the antitrustpolicies of the federation and its individualmembers. As a fundamentalprinciple,in both the EEC and the U.S., the broader antitrust laws take precedenceover antitrust laws of single nations or states, in the sense that a prohibitionof conduct or practices at the interstateor internationallevel is not to be overturned by state or national antitrustlaw. Nevertheless,a finding at the interstate (U.S. federal) or internationallevel that certain conduct does not violate the interstateor internationallaw does not exclude the application of state or national antitrust law.

277/ See Handelsblatt,December 27, 1989. 278/ Note, however, that "interstatecommerce" is more broadly interpreted in the United States and covers a wider variety of goods and services, than "trade among member states" in the EEC.

- 116 In the EEC, Walt Wilhelm v. Bundeskartellamt established parallel jurisdiction between tEC and national antitrust statutes.r91 In Pilkington, the EEC reviewed a proposed purchase by Pilkington of BSN's non-French flat glass subsidiaries. Due to resultant market shares in excess of 80% in the U.K. and between 50% and 60% in Ireland, Denmark, Netherlands, and Germany, the Commission warned the merging parties that the proposed transaction would violate Article 86 of the EEC antitrust statute. Although uncontested at the national level, the transaction was subsequentl amended to include only BSN's German subsidiary and proceeded on that basis.91 Alternatively, in Ashland Oil's sale of its carbon black business to Cabot, the Commission found that the transaction would not enhance a dominant position by Cabot (the largest European carbon black producer after the merger), owing to the size of the second largest carbon black producer and to Cabot's continued dependence upon independent oil producers for inputs. The French Commission de la Concurrence, reviewing the merger to find that it would result in a dominant position in the French carbon black market, 3 prohibited the transaction in spite of the EEC's approval. 2i In the United States, a recent Supreme Court decision has expanded the rights of states to pursue parallel enforcement of the antitrust statutes. In March, 1988, American and Lucky, two large retail grocer chains, notified the Federal Trade Commission of their intention to merge.2 The FTC investigated the transaction and subsequently ordered the two enterprises to remain separate pending divestiture of certain of the grocery stores in order to remedy potential antitrust violations under the Clayton Act. The divestitures were subsequently accomplished, and the FTC gave final approval, vacating the hold-separate order, on August 31, 1988. The next day, the state of California sued in federal district court to enjoin the transaction on antitrust grounds, the suit seeking to revive the hold separate order pending the divestiture by American of all Lucky stores in the state of California. This action was upheld in the federal court, overturned on appeal, and subsequently upheld by the U.S. Supreme Court. In effect, this decision upheld the rights of states to pursue antitrust actions and remedial measures even in cases passing antitrust review at the federal level. A second fundamental principle of international or interstate antitrust is the respect accorded national economic policies when the effects are confined to the nation or state. In particular, exemption from the antitrust laws is accorded to concerns that are directed to take actions that would otherwise constitute violations of the antitrust law. Were these actions taken independently, they would subject the practitioners to

279/

Case 14/68, (1969) ECR 1; (1969) CMLR 100. oR. cit., pp. 240-241.

See also Wullearts et. al.,

280/

See Wullearts et. al., op. cit., p. 235.

281/

See Wullearts et al., op. cit., pp. 244-245.

282/

See the Supreme Court Opinion, 89-258, in re California v. American Stores Co., April 30, 1990.

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prosecution,a possibilitythat is removed once the state or nation requests or requires that the action be taken. To take a mundane example, this principlehas been affirmed in both the U.S. and the EEC in the rights of local jurisdictionsto regulate the safety, entry, and fares of local taxicab service. The use of national industrialpolicies creates an additional possibilityfor conflict in the EEC that is not present in the U.S., whose member states do not pursue industrialpolicies.- A number of EEC member states, including the U.K., France, and Germany, provide for official authorizationby the national antitrustauthoritiesor economicministry of potentiallyanti-competitivetransactionsserving national economic or other goals. Where authorizationssuch as export cartels restrain competition and trade among member states, they may violate EEC antitrust law. The potential for conflict is addressed in Articles 90 through 93 of the Treaty of Rome, which constrain the use of national economic policies that may compromisethe attainmentof a common market within the EEC or that may 1 otherwiseviolate EEC law.M4

283/ Though the fifty states can use fiscal and tax policies to attract business, they cannot sanctioncartellizationin restraint of interstate commerce. For that reason, state sanction of cartellizationin the U.S. is generally restrictedto local services, such as licensed professionals(surveyors)and taxi cab service. 284/ See Studies in Foreign CompetitionPolicy, Canadian Department of Corporate and ConsumerAffairs, Ottawa, 1976, pp. 16-22. Though little enforced by the Commissiondue to the obvious political difficulties, the EEC, with the advent of 1992, may pursue strongerenforcement of Articles 90-93 to ensure that state economic policies do not weaken the drive towards a single, common market. See Hawk (1990),pp. 24-25.

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IX.

SUMMARY

Surveying the experienceof a number of nations and the EEC suggests several tentative conclusionsregarding the design and enforcementof antitrust policies. As a rule, reliance on antitrustpolicy as a means of protecting competitionhas been greatestin relativelymature economies for which internalcompetition is an importantfeature of commerce. Thus, the strictest antitrust policies in the world are those of the United States, Germany, and the EEC. Elsewhere,smaller economieshave tended to value alternativeeconomic goals, notably industrialdevelopmentand export growth, more highly than competition and have made greater use of industrialpolicies with anticompetitiveeffects. The emphasis on goals other than competitionresults in weak antitrust policies that either exempt certain conduct from antitrust scrutiny or codify non-competitionstandardsof legality under the antitrust laws.NV Exemption from antitrust scrutiny is an extreme measure for pursuing economic goals other than competition and should thereforebe limited to economicgoals of the highest priority. A less drastic alternativeis codificationof these goals in the standardsby which legality is determined,a practice widely used in the economies surveyedhere. However, as economicgrowth rates slow and national industrial sectors reach higher levels of concentration,there is a tendency to tighten antitrust scrutinyand raise the standardsfor exemption. Although judging the effectivenessof industrialpolicy is beyond the scope of this paper, it is notable that in Japan and South Korea, and to a lesser degree in the U.K., Canada, and Spain, the anticompetitiveeffects of industrialpolicieshave led to a tighteningof the antitrust laws and a greater reluctanceto grant antitrust exemptions. The greatest commonalityamong the surveyed economies is found in the design of statutes to regulate private conduct. For example,price fixing and practices supporting it are illegalvirtually everywhere. However, administrativeenforcementmechanismsvary greatly. All jurisdictionsenforce the antitrust statutes through an administrativeagency with the authorityto conduct investigations,interpret the law, and devise remedialmeasures for violations. In every case the decisions of the agency are subject to review. In the U.K., Spain, and Sweden, review occurs at an administrativecourt, and ultimate enforcementauthority rests with a minister of economics. Elsewhere, review occurs through the judicial system. Administrativeand political enforcementprovides more discretion than enforcement through the judiciary. Judging from the Swedish and British experience, it may also provide for weaker enforcementof the antitrustlaws. In contrast, judicial enforcement,determiningthe legality of conduct through precedentialdecisions,provides more stable enforcementof antitrust law.

285/ The exemption of anti-competitiveconduct in pursuit of economic goals other than competitionhas resulted at times in relativelyweak antitrustpolicies in the U.K., Spain, Japan, South Korea, and Sweden.

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Structuralenforcementpolicies, such as merger control, are generally found only in large economies and are stronglyenforced only in the United States and Germany. Smaller economies do not practice significant merger control because of a presumptionthat large firms are better able to compete in internationalmarkets. However, structuralconcentrationbecause of lax merger control policies eventuallyraises competitiveconcerns, and most recent antitrust amendment proposals (e.g., in Canada, the EEC, the U.K., France, Spain) have tended to focus on merger control. The active control of mergers requires pre-mergernotification,for the costs of dissolving illegal transactionsafter the fact generally render merger control ineffective. Antitrust policy is best suited for protectingcompetitionamong domestic suppliers and can be effective in protectingcompetition among foreign suppliers,particularlythose with domestic subsidiaries. In this sense, antitrustpolicy is a (perhapslimited) substitutefor trade policies that permit or at least do not impede foreign competition. This is reflected in the role played by foreign competitionin market power analysis, in the use of trade policies as antitrust remedies (e.g., Canada),and in the competitive consequencesof trade and industrialpolicies. Trade liberalizationcannot encourage competitivebehavior and performance in economicmarkets that are concentratedat the internationallevel, nor does it necessarily ensure competitiveconduct as antitrustpolicy does. Thus, it is more appropriate to view antitrustpolicy and trade liberalizationas complementarymeans of pursuing economic efficiency. Tariffs, quotas, and anti-dumpingduties all reduce the scope of geographic (antitrust)markets, undermine current competitionby foreign suppliers,inhibit future entry by foreign suppliers,raise concentrationin domesticmarkets, and in these ways contribute to the exercise of market power to the detriment of domestic consumers. Of the three jurisdictionsmost active in filing dumping charges, the United States, the EEC, and Canada, the first two have relatively strict antitrust enforcement,and Canada has recently amended its antitrust laws to provide for stricter enforcement. Were this not the case, a policy of activelypursuing dumping actions would be even more costly for domestic consumers. The relationshipbetween antitrust and industrialpolicy is best illustratedby the EEC's role in promoting economic integration in Europe, by removingbarriers to trade among member states. This has been accomplished in part by providing the European Commissionwith antitrustjurisdictionover commerce among member states and by constrainingthe use of industrial policies designed to generate economic transfers from buyers in one country to suppliers in another. For example,dumping statutes are a means of protecting domestic competitors (not competition)from foreign competition. EEC law does not allow member states to file dumping charges against one another but does provide for the protection of competitorsthrough prohibitionsof price discriminationand predatory pricing. The distinctionbetween these two approaches to similar behavior (i.e., low pricing by foreign competitors) is that the standard of legalityunder antitrust law takes into account the competitiverole of pricing as a means of entering a new market. Generally, dumping proceedingsmake no such allowance.

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Cover design by Walton Rosenquist

ISBN 0-8213-1961-2