Competition Law and Competition

Recent issues of this journal have carried several articles dealing with economic aspects of the approach to competition law. The most recent, by Van den Bergh (1996), argues that "outdated economics has survived in the form of modern legal thinking. Current European competition law still has many factors which remind one of industrial economics of the 1950s and 1960s. " [FN1] He concludes that "A competition policy for the 1990s cannot rely on the economic learning of the 1960s.

" [FN2] Briones (1995) focuses specifically on the treatment of oligopoly in European competition law and compares it with other jurisdictions. He states that "The issue of oligopolies is known to be a particularly difficult one from the perspective of a structural approach to competition. " [FN3] In what follows, he analyses co-operative interaction in the form of parallel behaviour and the conditions necessary to facilitate such conduct. In the context of mergers, he concludes:

Certainly, the approach to oligopolies now takes into account more explicitly elements related to the strategies of the market players as well as conduct- related information, which are factors that perhaps played a lesser role under a purely structural approach based on a rigid interpretation of the paradigm structure-conduct-performance. [FN4] This article picks up this theme but extends it further in the context of Article 86 of the Treaty of Rome, Abuse of a Dominant Position. Here the focus is on unilateral market conduct rather than joint conduct.

It is important to recognise that often the conduct to be investigated is not an isolated action but part of a sequence of events. It is not suggested that strategic behaviour has been overlooked by the E. U. competition authorities. Indeed, several cases are referred to where strategic behaviour was an important factor. However, it is suggested that a more rigorous framework needs to be available if dominant position issues are to be properly dealt with in future. Thought needs to be given to the implications of a more routine consideration of strategic behaviour. Competition Law and Competition

Competition policy is concerned with the protection or even promotion of competition because competition generally promotes economic efficiency, the effective allocation of resources and ultimately economic growth, which in turn will benefit all participants in the economic process. There is still a strong tendency in examining competition issues to concentrate on the structural characteristics of the market in assessing the implications of conduct for competition. [FN5] The focus is on whether, given the structural features of a particular market, the conduct under consideration is likely to be anti-competitive.

However, the essence of competition is "independent striving for patronage by the various sellers in the market" [FN6] and "a conscious striving against other business firms for patronage ... " [FN7] The dilemma faced by those responsible for the enforcement of competition policy is to distinguish between conduct which represents vigorous competition and that which could be considered to be predatory or in some sense unfair or anti-competitive. Vigorous competition may drive rivals from the market.

Is this simply an example of competition at work--more efficient firms out-competing less efficient rivals? Often the answer is "yes", according to the High Court of Australia: Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective *226 competitors injuring the less effective by taking sales away. Competitors almost always try to "injure" each other in this way. This competition has never been a tort ... and these injuries are the inevitable consequence of the competition Sec. 46 is designed to foster. [FN8]

A firm's actions to prevent entry or to force rivals from the market may be of little concern from a competition perspective so long as new opportunities are continually arising for firms to initiate new rounds of strategic behaviour and if all firms have the opportunity to initiate such conduct. A competitive system is very much about getting ahead of one's rivals, thereby earning higher profits. As was said by the Trade Practices Tribunal in Australia: Competition expresses itself as rivalrous market behaviour. In the course of these proceedings, two rather different emphases were placed upon the most useful form such rivalry can take.

On the one hand it was put to us that price competition is the most valuable and desirable form of competition. On the other hand it was said that if there is rivalry in other dimensions of business conduct--in service, in technology, in quality and consistency of product--an absence of price competition need not be of great concern. In our view effective competition requires both that prices should be flexible, reflecting the forces of demand and supply, and that there should be independent rivalry in all dimensions of the price-product-service packages offered to consumers and customers.

[FN9] One of the greatest difficulties in dealing with conduct such as an abuse of a dominant position is the difficulty of differentiating between action which is pro-competitive and that which is anti-competitive. In the case of alleged predatory pricing, if the incumbent drops its prices significantly following entry, this may be necessary in order to compete with a new entrant which has better technology and hence lower operating costs and/or a higher quality product.

Sometimes, however, the basis for such conduct by an incumbent is the market power which it possesses and which enables an otherwise efficient firm to be driven from the market with the likelihood of subsequent adverse effects on consumers through higher prices, poorer quality products or poorer service. But the fact that there are difficulties in applying strategic analysis to conduct which may be in breach of competition laws, does not justify a continuing adherence to an inappropriate structural procedure for assessing behaviour.

The Structural Approach to Competition Policy In the E. U. context, the first step in finding a breach of Article 86 is to establish dominance. The ECJ, in United Brands v. Commission of the European Communities, [FN10] defined dominance as: "a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors and customers and ultimately of consumers.

" [FN11] The constraints on a firm's decision making are traditionally seen to derive from market structure, the relatively stable features of the market environment which influence the rivalry between buyers and sellers and within each group. The structural factors generally taken into account in determining whether a firm possesses market power include market concentration, the height of barriers to entry, the extent of product differentiation, and the extent of vertical integration. A structural approach to the assessment of dominance, however, takes no account of behavioural, strategic or dynamic factors (except by implication).

This structural approach can be illustrated with reference to United Brands. The Court of Justice found that United Brands had a market share of at least 40 per cent, while the next largest competitor had a market share of around 16 per cent. It was a vertically integrated operation and reliability of supply was assured through geographic dispersion. United Brands was able to differentiate its products through its finishing process which ensured a standard product and enabled it to charge a price premium of 7 to 10 per cent for its branded products.

Similarly, in Hoffman-La Roche [FN12] the Court of Justice examined market structure. It again emphasised the importance of very large market shares. Other considerations were the technological advantages of La Roche, the absence of potential competitors and La Roche's highly developed sales network, indicating high barriers to entry. Beyond this the role of behavioural aspects was ignored. *227 A structuralist approach incorporates a static, one-dimensional model where structure determines conduct which in turn leads to certain levels of performance.

Feedback effects, while sometimes acknowledged, are only rarely considered. Apparently firms simply respond to their economic environment, reacting similarly to exogenous shifts in market circumstances. The emphasis is on identifying the structural features of the market which would constrain business decisions. Again using predatory pricing as an example, generally if it cannot be established that barriers to entry are high, then it is unlikely that it will be found that the conduct is predatory.

In a structuralist model, entry barriers are without question the most important market feature in assessing whether particular conduct is likely to result in a substantial lessening of competition. Yet the absence of entry barriers is not a sufficient condition for establishing that conduct will not result in a substantial lessening of competition or will not result in a misuse of market power in the long run. While the structuralist approach does consider whether the conduct being investigated is likely to raise entry barriers, it is less likely to look more broadly at the firm's conduct, especially in other markets.

The structure-conduct-performance approach is now regarded as outdated. The Chicago School of economists rejects the view of causality from structure to conduct to performance as too simple. They argue that the linkages are much more diverse. Thus, for example, a firm which is particularly efficient may out-compete its rivals so that the market becomes more concentrated. Obviously competition policy would not want to deter efficient firms. However, recognition of backward linkages from performance to conduct and/or structure is not sufficient to overcome the deficiencies of the structure-conduct- performance framework.

Rivalry between firms is the intricate detail of commercial action and reaction which is aggregated to create the set of relationships described as the competitive process. The iterative or dynamic process by which firms implement their decisions, taking into account the responses of their rivals, their rivals' assessments and responses to their actions and so on, is an integral part of the competitive fabric. To ignore this crucial adjustment process, as the structuralist approach tends to do, and look only at the start and the finish is to ignore much that is relevant, especially for interpreting the conduct.

The structuralist approach to analysing competition issues takes a group approach (it focuses on the aggregate), but analysing market power and conduct must be done at the individual firm level. If the structural features of the market do not appear likely to facilitate the exercise of market power, the conduct is generally not analysed further. However, the conduct may ultimately alter the market structure. It might, for example, raise barriers to entry by gaining control of an essential raw material, by investing in substantial excess capacity or by threatening an irrational price response should entry occur.

Further, conduct may simply increase market concentration such that co- ordination becomes possible. This conduct may set up a sequence of responses from other market participants, as well as from the initial mover. Strategic Behaviour: What is it? Strategic behaviour refers to actions which a firm takes to improve its competitive position relative to actual and potential rivals, in order to gain a permanent commercial advantage, thereby increasing its profits. [FN13]