Competition Code and WTO

Meaning of certain terms

 WTO’s task is to establish an international
trading system based on a free and open market
which covers both domestic and international
market

 WTO tries to reduce and eliminate governmental

trade barriers such as tariffs and quantitative
restrictions
• WTO is based on the principles of :

1. Most Favored nation

2. National Treatment
3. Transparency
 Cross country conflicts are high because of the
weights assigned to efficiency and fairness often
differ between countries, as well as meaning of
crucial terms.

 E.g.: Export cartels

 More than 100 countries in the world have now
enacted the Competition/Antitrust laws.
 Monopoly is a situation where there is a single
seller in the market.
 In conventional economic analysis, the
monopoly case is taken as the polar opposite of
perfect competition.
 By definition, the demand curve facing the
monopolist is the industry demand curve which
is downward sloping.
 Thus, the monopolist has significant power over
the price it charges, i.e. is a price setter rather
than a price taker.
 Comparison of monopoly and perfectly
competitive outcomes reveals that the
monopolist will set a higher price, produce a
lower output and earn above normal profits
(sometimes referred to as monopoly rents).

 consumers will face a higher price, leading to

a deadweight welfare loss

 income will be transferred from consumers to

the monopoly firm
 “Cartel” includes:
 an association of producers, sellers, distributors,
traders or service providers who,
 by agreement amongst themselves,

 limit, control or attempt to control

 the production, distribution, sale or price of, or,

trade in goods or provision of services;’
 The objective of a cartel is to raise price above
competitive levels, resulting in injury to
consumers and to the economy.

 For the consumers, cartelisation results in

higher prices, poor quality and less or no
choice for goods or/and services.
 An international cartel is said to exist, when
not all of the enterprises in a cartel are based in
the same country or when the cartel affects
markets of more than one country.
 An import cartel comprises enterprises
(including an association of enterprises) that
get together for the purpose of imports into the
country.

 An export cartel is made up of enterprises

based in one country with an agreement to
cartelize markets in other countries. In the Act,
cartels meant exclusively for exports from
India have been excluded from the provisions
relating to anti-competitive agreements.
 Usually cartels function in secrecy.

 The members of a cartel, by and large, seek to

camouflage their activities to avoid detection by
the Commission.
 Perpetuation of cartels is ensured through
retaliation threats.

 If any member cheats, the cartel members

retaliate through temporary price cuts to take
business away or can isolate the cheating
member.
 Another method, known as compensation
scheme, is resorted to in order to discourage
cheating. Under this scheme, if a member of a
cartel is found to have sold more than its
allocated share, it would have to compensate the
other members.
 The first two modern competition law regimes
emerged at the end of the 19th century.
 The oldest competition statute in the western
world is Canada’s Competition Act 1889.
 Only a year later, US adopted the Sherman Act
1890.
 This US statute is generally accepted to be the
starting point of modern competition law.
 But this was not something new, but based on age
old recognized principles of common law.
(Roman legislation and Constitution of Zeno)
 Provisions related to competition law were
included in the foundational treaty of the
European Economic Community (EEC), the
Treaty of Rome 1957.
 Promotion of single market.(striking down
barriers that may deter the entry of
 Article 85 and 86 of the EEC Treaty (now 101 and
102 of Treaty on The Functioning of the European
Union (TFEU)) related to the control of anti-
competitve agreements and dominant firm abuses.
 These provisions have been used not only to
protect competition but also to build and
strengthen the internal market

 by enhancing market integration between the

Member States of the EU.
 EU institutional framework, which relies on more
highly specified legal commands and emphasises
policy development through an expert
administrative body, will be the most popular
institutional model among the world’s competition
authorities.

 EU doctrine and policy impose greater restrictions

on dominant firms.
 Antitrust rules are contained in various legal
instruments. The basic (and brief) provisions are
contained in the
1. Treaty on the Functioning of the European
Union. (TFEU) 1957.
2. Regulations by the Commission
3. Sector – Specific rules by Commission(Motor
Vehicle, Transport, Maritime etc.)
 Broadly speaking, the EU competition policy
toolbox includes rules on antitrust, merger
control, State aid, and public undertakings and
services.

 The antitrust branch aims at restoring competitive

conditions, should improper behaviour by
companies (e.g. cartels or abuse of dominance)
cause distortions of competition.
A. Comprehensive ban on anti-competitive
agreements (Article 101 TFEU):
prohibits agreements between two or more
undertakings, decisions by associations of
undertakings, or concerted practices:
1. which may affect trade between EU Member
States; and
2. which have as their object or effect the
prevention, restriction or distortion of competition
within the internal market.
B. Prohibition of abuse of a dominant position
(Article 102 TFEU):
prohibits the abuse of a dominant position by one
or more undertakings having a dominant position
in a particular market within the EU, or in a
substantial part of it, insofar as it may affect trade
between EU Member States.
 Abuses of a dominant position can be divided
into two broad categories:
1. exclusionary abuses, which have the object or
effect of consolidating and/or reinforcing the
dominant business' strength in the market place;
and
2. exploitative abuses, where the dominant business
takes advantage of the fact that neither customers
nor competitors are able to restrain its
commercial behaviour.
C. Merger control procedure

 Mergers or acquisitions can be beneficial for

companies and the economy as a whole, as they can
create efficiencies, synergies and economies of
scale.
 However, if they result in strengthening market
power or increasing market concentration, they can
also weaken competition.
 This is why certain mergers and acquisitions must
be reviewed and may not be completed until
authorisation is granted.
D. Prohibition of State aid (Article 107 TFEU)
 The TFEU contains a general prohibition of State
aid in order to prevent distortions of competition
in the internal market
 that could result from the granting of selective
advantages to certain companies.
 All direct aid granted by Member States (e.g.
non-repayable subsidies, loans on favourable
terms, tax and duty exemptions, and loan
guarantees) is banned.
E. Public services of general economic interest
(SGEIs)
 In some Member States, certain essential services
(e.g. electricity, post, and rail transport) are still
provided by public undertakings or undertakings
controlled by public authorities.

 SGEIs are economic activities of a particular

importance for citizens and which would not be
produced by market forces alone, or at least not
in the form of an affordable service available
indiscriminately to all.
European Union
v.
Google

(AntiTrust case)
 The US competition law framework is grounded
mainly in a common law methodology.
 The United States relies substantially on open-
ended statutory commands and the elaboration of
doctrine through case-by-case litigation in the
courts.
 By reason of history and modern practice,
relatively few jurisdictions will embrace this
model.
 the Sherman Act, in 1890 as a "comprehensive
charter of economic liberty aimed at preserving
free and unfettered competition as the rule of
trade.”
 In 1914, Congress passed two additional antitrust
laws:
a) the Federal Trade Commission Act, which created
the FTC, and
b) the Clayton Act.
 With some revisions, these are the three core
federal antitrust laws still in effect today.
1. to protect the process of competition for the
benefit of consumers,
2. making sure there are strong incentives for
businesses to operate efficiently,
3. keep prices down, and keep quality up.
 The Act originated out of popular concern for the
U.S. economy during a period when a small
number of corporations and individuals had
accumulated a large amount of wealth.

 Corporate organizations, unconcerned with public

interests, were spawning in large numbers:
dangerous business establishments were growing
in number and suppressing competition.
 Section 1: “every contract, combination in the
form of trust or otherwise, or conspiracy, in
restraint of trade or commerce among the several
States, or with foreign nations is declared to be
illegal.”
 Every person who shall monopolize, or attempt to
monopolize or combine or conspire with any
other person or persons, to monopolize any part
of the trade or commerce among the several
states or with foreign states
The Sherman Act outlaws "every contract,
combination, or conspiracy in restraint of trade,"
and any "monopolization, attempted
monopolization, or conspiracy or combination to
monopolize.“
 Long ago, the Supreme Court decided that the
Sherman Act does not prohibit every restraint of
trade, only those that are unreasonable.
 Gave birth to the “rule if reason”

 “No conventional restriant of trade can be

enforced unless the covenant embodying it is
merely ancillary to the main purpose of a lawful
contract, and necessary to protect the
convenantee in the enjoyment of the legitimate
fruits of the contract or to protect him from the
dangers of an unjust use of those fruits by the
other party.”
 Becoming a monopoly or achieving monopoly
status is not in itself an illegal act, but rather the
act or attempt at monopolization constitutes such
an offence.

 Hence a company that becomes a dominant force

in its industry is not per se perpetrating an illegal
act, and the lack of effective competition in the
sectoe and market occupied by the company is
not illegal
 A monopoly becomes illegal when a company
incorporated unfair means to achieve a dominant
position or when monopoly power is used to
maintain a dominant position and to exclude
competition from the market.

 Thus attaining monopoly position through

legitimate means like product superiority,
technology superiority or historical accident is
not an offence and in fact it is permitted.
 “the Act of 1890 was to protect that commerce
from the contracts or combinations by methods
whether old or new which would constitute an
interference with or an undue restraint upon it”
 “Sherman Act applies to foreign conduct that was
meant to produce and did in fact produce some
substantial effect in the United States”

 Thus, the court in this case had explicitly

recognised the “effects doctrine”
 “When a global conspiracy causes both US harm
and independent harm abroad, a private plaintiff
may not recover for that independent foreign
harm at least unless it is inextricably linked with
domestic harm.”
 The Act did not deal with corporate amalgamtions.
 It does not deal with anti-competitve mergers

 Also, the Act is not clear about the expressions

“restraint of trade” and “attempts to gain
monopoly, mean and stand for.
 Because of the uncertainty about what is legal and
not, to clear the ambiguity Congress passed by
Clayton Act, 1914
 With the passage, three routes to monopoly are
closed:
1. Prohibiting collusion
2. Monopolization including predation’
3. Anti-competitve mergers
 The clayton Act addressed:
1. Price discrimination
2. Tying and exclusive dealings
3. Mergers and acquisitions
4. Interlocking directorates.
 Section 2: Prohibits price discrimination and
would lessen competition

 Section 3: prohibits exclusionary practices such

as tying, exclusive dealing, and predatory pricing
that lessen competition

 Section 7: prohibits share acquisition or merger

that would lessen competition or create monopoly
 The language lessen the competition is generally
understood to mean that a significant price
increase becomes possible; that is; competition
has been harmed if the firms in the industry can
successfully increase prices.
 Complete homogeneity across individual systems
would eliminate valuable experimentation.

 The history of competition policy has featured a

continuing search for optimal substantive rules
and implementation methods.
 the European Union protects competitors, the
United States protects competition
 Competition policy has a strong experimental
aspect.

 Improvements in substantive standards are likely

to be achieved by an incremental process of
adjusting enforcement boundaries inward and
outward, and by assessing the consequences of
pressing for more or less intervention.
 The only way to answer basic questions about
substantive policy and implementation is to test
alternatives,

 and such testing benefits from decentralisation

that does not require consensus building across
jurisdictions for every adjustment from the status
 He has provided a three step stage framework by
which independent jurisdictions can realize the
benefits of decentralized experimentations and
promote broad adoption of superior norms.
 Decentralized experimentation within individual
jurisdictions

 SECOND STAGE:
Identification of superior substantive standards and
implementation methods

 THIRD STAGE:
Individual jurisdictions opt in to superior norms.
 This framework anticipates and welcomes
experiments that depart from the status quo and
supplies the means for promoting the widespread
adoption of superior approaches.

 A fourth step may be added i.e. individual

jurisdictions should build institutional
mechanisms that increase interoperability.