Competition Law

Competition encourages companies to offer consumers goods and services at the most
favourable terms. It encourages efficiency and innovation and reduces prices. To be effective,
competition requires companies to act independently of each other, but subject to the
competitive pressure exerted by the others.
European antitrust policy is developed from two central rules set out in the Treaty on the
Functioning of the European Union:

First, Article 101 of the Treaty prohibits agreements between two or more independent

market operators which restrict competition. This provision covers both horizontal agreements
(between actual or potential competitors operating at the same level of the supply chain) and
vertical agreements (between firms operating at different levels, i.e. agreement between a
manufacturer and its distributor). Only limited exceptions are provided for in the general
prohibition. The most flagrant example of illegal conduct infringing Article 101 is the creation of
a cartel between competitors, which may involve price-fixing and/or market sharing.
Second, Article 102 of the Treaty prohibits firms that hold a dominant position on a
given market to abuse that position, for example by charging unfair prices, by limiting
production, or by refusing to innovate to the prejudice of consumers
Cartels
Action against cartels is a specific type of antitrust enforcement. A cartel is a group of
similar, independent companies which join together to fix prices, to limit production or to share
markets or customers between them.
Instead of competing with each other, cartel members rely on each others' agreed course of
action, which reduces their incentives to provide new or better products and services at
competitive prices. As a consequence, their clients (consumers or other businesses) end up
paying more for less quality.
This is why cartels are illegal under EU competition law and why the European Commission
imposes heavy fines on companies involved in a cartel.
Since cartels are illegal, they are generally highly secretive and evidence of their existence is
not easy to find. The 'leniency policy' encourages companies to hand over inside evidence of
cartels to the European Commission. The first company in any cartel to do so will not have to
pay a fine. This results in the cartel being destabilised. In recent years, most cartels have been
detected by the European Commission after one cartel member confessed and asked for
leniency, though the European Commission also successfully continues to carry out its own
investigations to detect cartels.
Anti-competitive agreements
Companies can distort competition by cooperating with competitors, fixing prices or dividing the
market up so that each one has a monopoly in part of the market. Anti-competitive agreements
can be open or secret (e.g. cartels). They may be written down (either as an agreement

between companies or in the decisions or rules of professional associations) or be less formal

arrangements.
Why are cartels so bad and how do you spot them?
Companies in cartels that control prices or divide up markets are protected from competitive
pressure to launch new products, improve quality and keep prices down. Consumers end up
paying more for lower quality.
Cartels are illegal under EU competition law, and the Commission imposes heavy fines on the
companies involved. Since cartels are illegal, they are generally highly secretive and evidence is
hard to find.
The Commissions 'leniency policy' encourages companies to provide inside evidence of cartels.
The first company in a cartel to do so will not have to pay a fine. The policy has been very
successful in breaking up cartels.
Why is competition policy important for consumers?
Competition policy is about applying rules to make sure businesses and companies compete
fairly with each other. This encourages enterprise and efficiency, creates a wider choice for
consumers and helps reduce prices and improve quality.
Low prices for all: the simplest way for a company to gain a high market share is to offer a
better price. In a competitive market, prices are pushed down. Not only is this good for
consumers - when more people can afford to buy products, it encourages businesses to
produce and boosts the economy in general.
Better quality: Competition also encourages businesses to improve the quality of goods and
services they sell to attract more customers and expand market share. Quality can mean
various things: products that last longer or work better, better after-sales or technical support or
friendlier and better service.
More choice: In a competitive market, businesses will try to make their products different from
the rest. This results in greater choice so consumers can select the product that offers the
right balance between price and quality.
Innovation: To deliver this choice, and produce better products, businesses need to be
innovative in their product concepts, design, production techniques, services etc.
Better competitors in global markets: Competition within the EU helps make European
companies stronger outside the EU too and able to hold their own against global competitors.

Exemption for vertical supply and distribution agreements

Certain types of vertical agreements can improve economic efficiency within a production or
distribution chain by facilitating better coordination between the participating undertakings,
leading to a reduction in the transaction and distribution costs of the parties and to an
optimisation of their sales and investment levels. Following the overall positive experience with

the application of Regulation No 2790/1999, the Commission has adopted this new block
exemption regulation.
Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article
101(3) of the Treaty on the Functioning of the European Union to categories of vertical
agreements and concerted practices.
Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) (ex-Article 81(1)
of the Treaty Establishing the European Community (TEC)) prohibits agreements that may
affect trade between European Union (EU) countries and which prevent, restrict or distort
competition. Agreements which create sufficient benefits to outweigh the anti-competitive effects
are exempt from this prohibition under Article 101(3) TFEU (ex-Article 81(3) TEC).
Vertical agreements are agreements for the sale and purchase of goods or services which are
entered into between companies operating at different levels of the production or distribution
chain. Distribution agreements between manufacturers and wholesalers or retailers are typical
examples of vertical agreements. Vertical agreements which simply determine the price and
quantity for a specific sale and purchase transaction do not normally restrict competition.
However, a restriction of competition may occur if the agreement contains restraints on the
supplier or the buyer, for instance an obligation on the buyer not to purchase competing brands.
These vertical restraints may not only have negative effects, but also positive effects. They
may, for instance, help a manufacturer to enter a new market, or avoid the situation whereby
one distributor free rides on the promotional efforts of another distributor, or allow a supplier to
depreciate an investment made for a particular client.
Whether a vertical agreement actually restricts competition and whether in that case the
benefits outweigh the anti-competitive effects will often depend on the market structure. In
principle, this requires an individual assessment. However, the Commission has adopted this
Regulation (EU) No 330/2010, the Block Exemption Regulation (the BER), which provides a
safe harbour for most vertical agreements. The BER renders, by block exemption, the
prohibition of Article 101(1) TFEU inapplicable to vertical agreements which fulfil certain
requirements. The Commission has also published guidelines on vertical restraints. These
describe the approach taken towards vertical agreements not covered by the BER.
Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) prohibits
agreements that may affect trade between European Union (EU) countries and which prevent,
restrict or distort competition. Agreements which create sufficient benefits to outweigh the anticompetitive effects are exempt from this prohibition under Article 101(3) TFEU.
Vertical agreements are agreements for the sale and purchase of goods or services which are
entered into between companies operating at different levels of the production or distribution
chain. Distribution agreements between manufacturers and wholesalers or retailers are typical
examples of vertical agreements. Vertical agreements which simply determine the price and
quantity for a specific sale and purchase transaction do not normally restrict competition.
However, a restriction of competition may occur if the agreement contains restraints on the
supplier or the buyer. These vertical restraints may not only have negative effects, but also
positive effects. They may for instance help a manufacturer to enter a new market, or avoid the
situation whereby one distributor free rides on the promotional efforts of another distributor, or
allow a supplier to depreciate an investment made for a particular client.
Whether a vertical agreement actually restricts competition and whether in that case the
benefits outweigh the anti-competitive effects will often depend on the market structure. In
principle, this requires an individual assessment. However, the Commission has
adoptedRegulation (EU) No 330/2010, the Block Exemption Regulation (the BER), which
provides a safe harbour for most vertical agreements. Regulation (EU) No 330/2010 renders, by
block exemption, the prohibition of Article 101(1) TFEU inapplicable to vertical agreements
which fulfil certain requirements.
Purpose of the guidelines

These guidelines describe the approach taken towards vertical agreements not covered by the
BER. In particular, the BER does not apply if the market share of supplier and/or buyer exceeds
30 %. However, exceeding the market share threshold of 30 % does not create a presumption
of illegality. This threshold serves only to distinguish those agreements which benefit from a
presumption of legality from those which require individual examination. The guidelines assist
firms in carrying out such an examination.
The guidelines set out general rules for the assessment of vertical restraints and provide criteria
for the assessment of the most common types of vertical restraints: single branding (noncompete obligations), exclusive distribution, customer allocation, selective distribution,
franchising, exclusive supply, upfront access payments, category management agreements,
tying and resale price restrictions.
General rules for the assessment of vertical restraints
The Commission applies the following general rules when assessing vertical restraints in
situations where the BER does not apply.
In the case of an individual examination by the Commission, the Commission will bear the
burden of proof that the agreement in question infringes Article 101(1) TFEU. The undertakings
claiming the benefit of Article 101(3) TFEU bear the burden of proving that the necessary
conditions are fulfilled.
The assessment of whether a vertical agreement has the effect of restricting competition will be
made by considering the actual or likely future situation in the relevant market with the vertical
restraints in place as opposed to what would have been the situation in the absence of such
vertical restraints.
Appreciable anticompetitive effects are likely to occur when at least one of the parties has or
obtains some degree of market power and the agreement contributes to the creation,
maintenance or strengthening of that market power or allows the parties to exploit such market
power.
The negative effects on the market that may result from vertical restraints which EU
competition law aims at preventing are the following:

anticompetitive foreclosure of other suppliers or other buyers;

softening of competition and facilitation of collusion between the supplier and its
competitors;

softening of competition between and facilitation of collusion the buyer and its
competitors;

the creation of obstacles to market integration.

On a market where individual distributors distribute the brand(s) of only one supplier, a reduction
of competition between the distributors of the same brand will lead to a reduction of intra-brand
competition. However, if inter-brand competition is fierce, it is unlikely that a reduction of intrabrand competition will have negative effects for consumers.
Exclusive arrangements are generally worse for competition than non-exclusive arrangements.
For instance, under a non-compete obligation the buyer purchases only one brand. A minimum
purchase requirement, on the other hand, may leave the buyer scope to purchase competing
goods and the degree of foreclosure may therefore be (much) less.
Vertical restraints agreed for non-branded products are in general less harmful than restraints
affecting the distribution of branded products. The distinction between non-branded and
branded products will often coincide with the distinction between intermediate products and final
products.

It is important to recognise that vertical restraints may have positive effects by, in particular,
promoting non-price competition and improved quality of services. The case of efficiencies is in
general strongest for vertical restraints of a limited duration which help the introduction of new
complex products, which protect relationship-specific investments or which facilitate the transfer
of know-how.
Economics Basics: Monopolies, Oligopolies and Perfect Competition
By Reem Heakal
Economists assume that there are a number of different buyers and sellers in the marketplace.
This means that we have competition in the market, which allows price to change in response to
changes in supply and demand. Furthermore, for almost every product there are substitutes, so
if one product becomes too expensive, a buyer can choose a cheaper substitute instead. In a
market with many buyers and sellers, both the consumer and the supplier have equal ability to
influence price.
In some industries, there are no substitutes and there is no competition. In a market that has
only one or few suppliers of a good or service, the producer(s) can control price, meaning that a
consumer does not have choice, cannot maximize his or her total utility and has have very little
influence over the price of goods.

A monopoly is a market structure in which there is only one producer/seller for a product. In
other words, the single business is the industry. Entry into such a market is restricted due to
high costs or other impediments, which may be economic, social or political. For instance, a
government can create a monopoly over an industry that it wants to control, such as electricity.
Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one
entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the
government has sole control over the oil industry. A monopoly may also form when a company
has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had
a patent on Viagra.
In an oligopoly, there are only a few firms that make up an industry. This select group of firms
has control over the price and, like a monopoly, an oligopoly has high barriers to entry. The
products that the oligopolistic firms produce are often nearly identical and, therefore, the
companies, which are competing for market share, are interdependent as a result of market
forces. Assume, for example, that an economy needs only 100 widgets. Company X produces
50 widgets and its competitor, Company Y, produces the other 50. The prices of the two brands
will be interdependent and, therefore, similar. So, if Company X starts selling the widgets at a
lower price, it will get a greater market share, thereby forcing Company Y to lower its prices as
well.

There are two extreme forms of market structure: monopoly and, its opposite,perfect
competition. Perfect competition is characterized by many buyers and sellers, many products
that are similar in nature and, as a result, many substitutes. Perfect competition means there
are few, if any, barriers to entry for new companies, and prices are determined by supply and
demand. Thus, producers in a perfectly competitive market are subject to the prices determined
by the market and do not have any leverage. For example, in a perfectly competitive market,
should a single firm decide to increase its selling price of a good, the consumers can just turn to
the nearest competitor for a better price, causing any firm that increases its prices to lose
market share and profits.