COMPETITION POLICY

Lecture Notes
Lecture 1: Economic Aims of Competition Policy and How it Works
Competition  efficiency; incentives for productivity / innovation.
Threats  anti-competitive agreements (prohibited under Competition Act 1998, EC Article 81) / mergers
(Enterprise Act, 2002), abuse of market power (CA98, ECA82), government regulations, subsidies,
protectionist etc.

OFT apply prohibitions, Competition Commission do reviews.

CP aims to avert market failure – lighter touch than regulation – need to balance stopping pro-competitive
behaviour / failure to stop non-competitive behaviour.

Horizontal agreements – hardcore (price fixing, market sharing, bid rigging etc.  criminal offence in
UK) ; tacit collusion ; joint ventures.
Private gains if neither cheating nor detection – social losses. Privately bad if discovered and proved –
fines / damages / jail. Use leniency to alter into Prisonner’s Dilemma game.

Lecture 2: Mergers
Competition is lost between the firms, and others might compete less hard. May have a shift of (e.g.
Bertrand) competition. Tacit collusion might be easier with fewer firms.

Vertical mergers involve complements, not substitutes – no anti-competitive presumption. Harm to

competition is indirect. No harm unless existing market power, and could have efficiency gains.

EC - “A concentration which would significantly impede effective competition,… in particular as a result og

the creation or strengthening of a dominant position, shall be declared incompatible with the common
market”.

Market definition – demand [and supply?] substitutability – product and geographic distinctions. US merger
guidelines- “relevant market” is a product or group of products and a geographical area in which a
hypothetical profit maximising firm would impose a small but significant and non-transitory increase in
price (SSNIP). Nestle/Perrier  are mineral water and soft drinks in the same market (EC – no), but all
mineral waters are and France is the geographical market – together with BSN owned 80% of market – EC
required divesture.
Zero-one fallacy – substitutability is a matter of degree, not all or nothing.
Cellophane fallacy
Failure to assess supply side issues
Market shares, concentration measures.
Significant adverse shift?
Conditions of entry and expansion by rivals.

Mergers with high substitutability, low mark ups, and little marginal cost reduction are of most concern.

London Stock Exchange – competitive impact in UK. Were allowed subject to packages of structural and
behavioural remedies. Threat of competition quite low anyway, because network externalities mean rarely
split between trading venues – would not give rise to a significant loss of competition – but might provide
SLC because of vertical integration of other trading services. Remedies combined structural measures and
behavioural commitments

Lecture 3: Vertical Restraints

British beer in 1980s – 6 brewers accounted for 75% British beer – owned more than 50% of pubs – many
loans ties in return for exclusivity.
Good – efficient?
1989 MMC recommended divesture of 22,000 pubs.
Types – integration/contraction, RPM, exclusive territories / dealing – selective distributing – franchising –
quantity discounts.
Can preserve market power, raise rivals costs (foreclosure), and facilitate tacit collusion.
Vertical concerns only matter when there is some market power.

EC81 – exemptions if (1) improve production/distribution or promote technical or economic progress and
(2) consumers get fair share of benefits and (3) not dispensable and (4) no elimination of competition.

Chicago challenge – promote efficiency – remove double mark-ups (have vertical pricing externality
between complements – good by merging), overcome free-rider problems (e.g. test drives – horizontal
externalities – RPM or exclusive territories may help; exclusive dealing to avoid investment externality) 
collusion risk is small, so should presume lawfulness.

VR remove secret dealings problem – will demand for cost because can not guarantee firm will not sell to
rivals at cost – exclusivity will benefit the private firm but harm the consumer.

Scale economies might allow exclusive contracts to be signed thus blocking threat from potential entrants,
as entrant needs substantial buyers to be viable  buyers collectively do better with entrant but individually
better of signing up to incumbent. Externalities among buyers. Only important with scale economies and if
contracts block entrant from gaining enough buyers to reach these – loyalty inducing is not enough.

Vertical integration of one manufacturer and retailers in a two manufacturer, two retailer model increases
market power of M2 over R2, hence could raise R2’s costs

Ice creams and freezers case (Irish – HB exclusivity) – but ice creams need freezers – could be efficient to
supply them, but then free rider problems – exclusivity could protect pro-consumer investment. But in effect
means outlet exclusivity- might have been designed to exclude competitors from market.

Lecture 4: Abuse of Market Power

EC A82 – unfair prices / trading conditions, limiting production or development to customer detriment,
applying dissimilar conditions to similar transactions (placing at competitive disadvantage), making
contracts subject to obligations that have no connection with the subject of such contacts.
US – Sherman Act – illegal to monopolise or attempt to monopolise. Monopolisation is possession of power
plus wilful acquisition or maintenance of that power  not unlawful unless anticompetitive conduct.

Abuse – exclusionary / exploitative, price / non-price, predatory pricing, margin squeeze rebate and discount
policies, exclusive dealing, tying and bundling, refusal to supply.
Market power- ability to maintain price substantially above the competitive level

Competition on the merits – protect process of competition to offer good deals to the customers  form
versus effects based approaches.
Guiding principles – profit sacrifice / no business sense ; exclusive of as-efficient rivals ; consumer harm.

Predatory pricing – low pricing to exclude rivals and then reap monopoly profits. Role for reputation effects,
signalling etc.
EC – if p < AVC then abuse; if AVC < p < ATC then only abuse if intent shown.

Tying (A can only be bought with B) and bundling (car bought with tyres). Can often be efficient (if best
way to meet consumer demand) but can also be anti-competitive (price discrimination)
Exclusion of competition – by using leverage from one market in another – making a competitor in the
bundled market exit and allowing monopolisation of both markets. Needs credible commitment to continue
bundling post entry, scale economies, imperfect competition, and non-complementary products
Maintenance of market power – if complementary – Chicago logic would welcome entrant in one sector if
more efficient, but could pose entry threat into original market. MICROSOFT – I/E bundled with Windows.
Tutorial Notes

Market definition. Should it depend on competition issue?

• Define relevant market – set of products not firms – difficult with multiproduct firm. SSNIP –
hypothetical monopolist - 5-10% rise in price – would it be profitable.
• Need demand and supply substitutability  supply: need to be able to switch easily, no considerable
sunk costs; no unsurmountable barriers to entry.
• SSNIP – own price elasticity (requires demand function, including cross price elasticity)
- Price correlation tests – prices should tend to move together over time if in the same market, but could
be caused by other things, such as varying quality, transport costs. Also some factors could correlate to
products in different markets, e.g. if imported from the same country.
- Price differences – not useful
- Temporal markets – restaurants and bars in same market at lunch but not at dinner. Also must consider
seasonal markets and multiple markets
- After markets – how to define markets when there exist primary and secondary products (cars and
spare parts)  if price of secondary product significant part of primary; probability of replacement.
• Geographical markets – shipment tests (how much going in and out), national preference
• Cellophane Fallacy – SSNIP test may not be used in non-merger cases because it fails, in that it asks
whether price could be raised above existing as opposed to competitive prices.

Detecting / deterring collusion

• Explicit / tacit.
• Price fixing – Hoffman-La Roche fined £500m in 2002 for ten year vitamins price fixing cartel
• Quantity fixing
• Market Allocation – ICI and Solvay – had explicit agreement not to enter each other’s territories, did not
enter even after agreement officially ended – fined by EC.
• Non-competitive bidding in auctions – e.g. for frequencies.
• Can investigate high prices, price parallelism, super normal profits, and signalling bidding – e.g. bid
with area codes etc. Mannesmann bid 18.18m euros; Mercury ended in 013.
• Deterrence – ex ante : black list, merger controls, Klemperer’s (2002) auction suggestions – round
numbers, simultaneous, anonymous.
• Ex post – offer leniency for those that come forward first, and criminal convictions for those found
guilty.

Practices constituting market power; problems faced when suspected; remedies used
• Vertical externalities – buy out suppliers supplier.
• Horizontal overlaps
• Manipulation of barriers to entry
• Normally problems in proof. Are lower prices pro-competitive or barriers to entry?
• General Electric and Honeywell (2001) – GE buying out Hanover – would increase market share too
much.
• US vs. Microsoft – see separate reading.