Competition (Internal Market)

From Max-EuP 2012

by Jürgen Basedow

1. Concept and functions

In economic life the concept of competition refers to the conflict between economic rivals who want to optimize the results of their own market activities by appropriate action without coordination of their plans and decisions. Competition is an inevitable consequence of divergent business plans of individual actors relating to the same market. Such divergences may be reduced or even excluded by comprehensive state planning at the various levels of production and distribution as has been demonstrated by the central administration in some economic systems. However, the preferences of the individual consumers can be influenced by orders, prohibitions and advertisements only to a limited extent. The remaining and unalterable differences of demand have repercussions on the kind and extent of supply and practically exclude an effective and permanent coordination as has been shown by the experience of the socialist states in the 20th century.

Under a long-term perspective, competition is thus an inevitable and constant factor of economic life. Its intensity varies, however, from market to market and may be impacted by manifold measures of state or private origin. The antagonistic interests and preferences of economic actors are adjusted to each other in markets. In respect of quantity and quality, supply and demand are brought into balance by the price mechanism. The foundation of that process in civil law is the freedom of contract in its various forms: the freedom to use the market instead of reserving one’s own production for private purposes or of satisfying one’s demand by self-production (freedom of conclusion); the freedom to choose the contracting party; the freedom of price and of content ([[freedom of contract). It is only where these freedoms are essentially ensured that the quantities and qualities supplied and demanded may continuously be brought into balance. Competition guarantees that economic resources migrate to where they cause the greatest satisfaction of demand (allocative function) and that the market actors time and again devise new and more efficient means of production and distribution of goods and services (innovative function). This process also ensures that the revenue attained by the single actors corresponds to the social valuation of their performance. These economic functions are supplemented by a political détente: competition allows consumers to articulate their preferences and provides incentives to suppliers to satisfy them. Contrary to systems of central state planning, the scarcity of goods therefore is not perceived as a political problem to be solved by the state administration and persons who are accountable to the public at large. It is rather a private problem expressed in terms of the individual’s willingness to pay.

Competition produces its effects in markets. The size of the market may be very influential for the intensity of competition. In small markets, economies of scale may have the effect that the demand can most effectively be served by a single supplier who will be able to seek monopoly rents, thereby causing welfare losses and even aggravating social conflicts by the abuse of market power. The extension of markets beyond the traditional borders of nation states thus pursues several objectives: it is meant to further European integration by the cross-border exchange of goods and services; by enlarging demand it shall allow for a multitude of suppliers serving the market in efficient competition; and it shall curb the power of dominant firms in the interest of a depolitization of economic life.

2. The protection of competition in Union law

Union law has valued the protection of competition from the outset. The 1951 European Coal and Steel Treaty already provided for a prohibition of cartels and merger control. In accordance with the concerns prevailing in the aftermath of World War II, these safeguards were primarily meant to prevent German industry from escaping the survey of the High Authority by a new concentration of power. It was only during the application of those precepts that the idea of competition gained influence and consequently inspired the 1957 EEC Treaty in a very profound manner. The establishment of a system ensuring that competition in the internal market is not distorted was one of the objectives of the Community in accordance with Art 3(1)(g) EC. The Treaty of Lisbon has relocated this target into a Protocol on the internal market. It refers to the objective laid down in Art 3(3) EU (2007) to establish an internal market and explicitly states that this target includes a system ensuring that competition is not distorted. While this goal initially referred to the common market, the internal market (European internal market) has taken its place under the Single European Act of 1986 and, by virtue of the Treaty of Lisbon, also in the chapter on competition. In substance, the terminological modification does not bring about any change.

Union law protects competition in the internal market from state-origined restrictions (see 3 below) and from private restrictions. This occurs in a multi-layered system composed of provisions of primary and secondary Union law. The 1957 Treaty of Rome had prohibited both horizontal and vertical agreements restricting competition in Art 85 (101 TFEU/81 EC, prohibition of restrictive agreements and exemptions) and the abuse of a dominant position in Art 86 (102 TFEU/82 EC). Contrary to the Coal and Steel Treaty, the EEC Treaty did not provide for the control of mergers, but the Court of Justice has applied the aforementioned prohibitions to certain types of mergers as well, ECJ Case 6/72 – Continental Can [1973] ECR 215; ECJ Joined Cases 142 and 156/84 – BAT and Reynolds Industries [1987] ECR 4487. To avoid legal uncertainty, the Council finally enacted Reg 4064/89 which has meanwhile been replaced by Reg 139/2004. It covers all concentrations having a Community dimension (merger control).

According to Art 101(3) TFEU/81(3) EC certain agreements and concerted practices are exempted from the basic prohibition under para 1 of that provision. The exemption applies to agreements and practices which increase efficiency while allowing consumers a fair share of the resulting benefit provided that the restrictions agreed to are indispensable for those gains and do not eliminate substantial competition in the market. These conditions are met by many cooperation agreements. The Community institutions therefore soon agreed on a standardization of harmless types of agreements. On the basis of Council regulations such as Reg 19/65, the Commission has issued a number of block exemption regulations, see eg Reg 330/2010 for vertical agreements (vertical agreements in EU competition law) or Reg 1217/2010 for agreements on research and development. Further sectoral block exemption regulations cover vertical agreements in the motor vehicle sector (Reg 330/2010) or agreements in the insurance industry (Reg 267/2010). The number of such group exemption regulations has grown continuously. Where a regulation applies, the respective agreement cannot be attacked as being against European competition law, but the exemption may be withdrawn in particular cases.

The founding treaties have entrusted the Community with the enactment of implementing provisions for the enforcement of the substantive prohibitions of the treaty, see Art 103 TFEU/83 EC. At first, the Community made use of these powers by issuing Reg 17/1962 (competition law (procedure)). This instrument imposed a duty of notification for restrictive agreements upon the undertakings and reserved the competence for issuing exemptions under Art 101(3) TFEU/81(3) EC to the Commission; only notified agreements were eligible for exemption. Where national authorities or courts had to deal for example with contractual disputes and a party invoked a breach of competition law and the consequential nullity of the contract under Art 101(2) TFEU/81(2) EC, the proceedings had to be stayed until the Commission took a decision, ECJ Case C-234/89 – Delimitis/Henninger Bräu [1991] ECR I-934, para 48. Over many years, the Commission was, however, unable to cope with the heavy workload caused by the high number of exemption applications. As a compromise solution it conceived the aforementioned block exemptions and—for individual cases—so-called comfort letters. They inform the applicant that the Commission has no objections to the agreement for the time being, but that it reserves a later investigation. Thus, the legal certainty that it aimed to create was not attained.

In the light of this experience and the imminent enlargement of the internal market after the accession of numerous new Member States, the Commission urged the Council to modify the enforcement mechanism. Regulation 1/2003 replaced Reg 17/1962 and did away with the Commission monopoly on exemptions. Article 101(3) TFEU/81(3) EC is now directly applicable in all national courts and authorities. At the same time, the new instrument limited the possibilities for national institutions to apply their national competition law instead of Arts 101 and 102 TFEU/81 and 82 EC. A European competition network (ECN) was established to safeguard a uniform practice of national competition authorities in the application of Union law. More recently, the Commission has taken the initiative for an improvement of the private enforcement of competition law (competition law (private enforcement)).

3. Restrictions of competition implemented by states

Competition in the internal market can be restricted, not only by private acts of undertakings, but also by sovereign measures adopted by Member States or the Community itself. The Treaty of Rome has paid particular attention to restrictions of competition caused by Member States. The fundamental freedoms, concerning the free movement of goods (Art 34 TFEU/28 EC), the [[free movement of workers (Art 45 TFEU/39 EC), the [[freedom of establishment (Art 49 TFEU/43 EC), the free movement of services (Art 56 TFEU/49 EC) as well as the free movement of capital and payments (Art 63 TFEU/56 EC) are directed against measures of the Member States which have the effect of restricting the free flow of resources within the internal market. They are thus a legal basis for the opening of markets in favour of foreign suppliers and customers. They are an essential part of the European Economic Constitution protecting competition in the internal market against national measures designed to cut off the national market from the rest of Europe. They conflict not only with outright restrictions of import and export, but also with other measures having an equal effect including customs.

Member States may further distort competition by granting state aid (state aid law). While the prohibition of Art 107 TFEU/87 EC is primarily, but not exclusively, directed against state subsidies, numerous exceptions provided by, or on the basis of, Art 108 TFEU/88 EC limit its effect. A corresponding prohibition of subsidies afforded by the European Union itself is lacking completely. Further state-originated restrictions of competition are widespread in the form of privileges for undertakings entrusted with the operation of services of general economic interest; however, European competition law is basically applicable to them, see Art 106(2) TFEU/ 86(2) EC. Not infrequent are distortions of international competition caused by dumping practices. The Treaty of Rome had therefore authorized protective measures by the Member States affected, see Art 91 EEC. Since such practices lose their significance in open markets, this provision has been subsequently deleted. None of the founding treaties has dealt with competition in relation to public procurement although the purchasing practices of the state entities are very often guided by political, rather than economic, considerations. The Court of Justice has, however, reviewed such restrictions of competition under the fundamental freedoms, ECJ Case 305/87 – Commission v Greece [1989] ECR 1473, para 28; ECJ Case C-177/94 – Perfili [1996] ECR I-170, para 14. This has triggered comprehensive legislation by the Community on public procurement, see the consolidation in Dir 2004/17 and 2004/18.

4. Guiding principles of European competition policy

Competition policy and the application of competition law are often guided by model perceptions about the optimal organization of markets. In the pioneer phase of German and European competition law, ie in the 1950s, the balancing of economic power by competition prevailed. This objective is served by a market structure which leaves little or no power to the single market actor: perfect competition. The low market share thresholds which trigger the presumption of market dominance under s 19(3) of the German Act against Restrictions of Competition (33 per cent for dominance by a single firm, 50 per cent for collective dominance by two or three undertakings) point to the market structure as it was ideally conceived in those years. This ordoliberal approach is close to the focus on the freedom of economic actors in the neo-classical model. It does not aim at the achievement of a certain market structure, but at the conservation of individual liberties by unequivocal and general prohibitions of certain anticompetitive practices. Both approaches can be traced in German competition law and, to a lesser extent, in the practice of the European Commission and the Court of Justice over many years.

The target of perfect competition has not only proven to be unrealistic, it can also be criticized from a theoretical point of view because it assumes a final market structure which would not allow for further improvement in the efficient allocation of resources; moreover, there would be no further economic incentives for innovation. It is therefore a static model which would not allow the aforementioned functions of competition (see 1. above) to be performed. These functions require undertakings of a certain size and the possibility of self-financing on the side of the market actors. It follows that perfect competition cannot be the ideal market structure and that limited market power has to be tolerated. This would imply a wide oligopoly which would still sufficiently discipline the single market actors.

Since the 1970s a new school of competition policy has evolved mainly at the University of Chicago. The Chicago School of Antitrust no longer conceives a visible role for notions of freedom and power. The sole benchmark for competition policy and competition law is rather said to be welfare, sometimes understood as general welfare, but mostly as consumer welfare. Consumer welfare can also be promoted by anti-competitive agreements and practices insofar as they generate gains in efficiency which benefit consumers. As a consequence, the analysis of competition would therefore not look into the behaviour of market actors and its impact on market structures, but rather into the likely effects of that behaviour for consumers. This approach raises obvious prognostic difficulties for competition authorities and tribunals. In our context, it is however relevant for its influence on competition law and competition policy in the European internal market.

The European Commission has suggested, since the late 1990s, a progressive turn to a more economic approach in European competition law. This includes an increased reference to econometric models for the interpretation of open legal concepts such as market dominance. Thus, the concentration of a market will increasingly be measured in accordance with the so-called Herfindahl-Hirschman-Index (HHI) which results from the addition of the squared market shares of the undertakings of a market. Another example is the delimitation of a market by the so-called SSNIP Test (small but significant and non-transitory increase in price) which allows the identification of goods which have to be included as substitutes in the relevant market. Such economic methods have the advantage of providing a clear and empirically manageable content to general and open legal concepts like the relevant market or market dominance which require very complex considerations. It is understandable that the Commission would make use of such methods which may help to clarify the law and make it more predictable. A different issue relates to the significance of new paradigms of economic policy in the application of competition law. It is not uncommon that unamended legal precepts are interpreted, over the course of time and under the impression of changed circumstances, in the light of new purposes; this process is not limited to competition law. However, novel interpretations must keep within the limits drawn by the law in force. Articles 101 and 102 TFEU/81 and 82 EC contribute to a system of undistorted competition which is specified by the founding treaties as the ultimate goal of European competition policy. On the other hand, ‘consumer welfare’ is only enunciated in individual treaty provisions which refer to its significance, in particular in Art 101(3) TFEU/81(3) EC, but not in the prohibition of cartels laid down in Art 101(1) TFEU/81(1) EC (prohibition of restrictive agreements and exemptions) and not in the prohibition of abuses of dominant power in Art 102 TFEU/82 EC. In view of the special rank of the internal market including the system of undistorted competition as an objective of the European Community, consumer welfare cannot be allowed to impair the goal of undistorted competition. Moreover, this goal is indirectly served by the protection of a market competition structure under Arts 101 and 102 TFEU, ECJ Case C-95/04 P – British Airways 2007 ECR I-2331.


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Retrieved from Competition (Internal Market) – Max-EuP 2012 on 27 January 2022.

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