Competition law is not always a good thing, argues John Fingleton. If devised only by lawyers and politicians, it may end up as a tax on business; instead, economics should also underpin competition policy

Competition law appears to be in fashion. It used to be the preserve of the world’s largest economies, but more and more countries are either enacting or beefing up their capacity to deal with monopolies, cartels and other restrictions on competition.

The change over the past 20 years has been remarkable. In 1984, only a few jurisdictions had effective competition law and even fewer had merger control law. It is easy to forget that merger law arrived in the European Union (EU) as recently as 1990. Today, more than 75 countries require pre-notification of a merger or acquisition. Fines of millions of dollars are commonplace; the American and European authorities have levied penalties running into hundreds of millions of dollars. Competition authorities have blocked global deals, and remedies have touched the core of corporate strategy.

Lost in translation
The EU and the United States have raced to export competition law to other countries. Both have used financial aid and trade policy to encourage recipient countries to introduce competition law as part of broader economic reform. For many countries in South America, Asia and the former Soviet Union, competition law has been imported in this way, rather than developed indigenously. But competition law can take on a life of its own once it crosses the border.

Even within Europe, identical laws have been no protection against dramatically different outcomes. The decision depends on how competition law is interpreted, on the judges (independent expert agencies, courts or politicians), and on domestic legal procedures and rules of evidence.

Similarly, despite almost identical laws and enforcement strategies, the EU and US can come up with radically different approaches to big competition cases, as the contrasting responses to the proposed GE-Honeywell merger and Microsoft’s sales practices show. Both competition authorities care about consumers, but they differ on how they think competitors respond to something that strengthens an already-strong, or even dominant, competitor. While America is prepared to believe that rivals will respond by becoming stronger, Europe believes that rivals will be unable to compete, leaving buyers with fewer alternatives.

The potential for different judgements is even greater when the law and underlying policy objectives differ. For example, some countries misguidedly use competition law to protect “national champions”, small business or employment. Worse, some countries see it as a device to expropriate revenue from foreign firms. In this sense, exporting competition law is a bit like selling arms – the recipient won’t always use it for the purpose the seller intended.

Too much of a good thing?
A proliferating jungle of divergent competition laws imposes huge costs on international businesses. Merger filing fees are merely the tip of the iceberg. Local legal advice is usually required. In principle, advance notification of mergers is an essential part of good competition policy as mergers cannot easily be unravelled. But companies now have to notify many jurisdictions where there is no potential adverse effect on competition. Often, time limits for assessment differ, delaying deal closures. Deal structures may have to be changed to accommodate the wait, adding further costs.

The challenge for politicians is that it is difficult to design a notification threshold that offers quick legal clarity and captures domestic mergers with the potential to harm competition, while not inadvertently capturing multinationals that invest in their countries. Ireland’s most recent merger law, while reducing notifications by more than 60%, still captures too many irrelevant deals.

But these procedural differences are simply a nuisance when compared with the costs imposed by conflicting decisions. Aborting a transaction because one or a few countries prohibit it, although rare, is hugely expensive. Similarly, rolling out a global strategy where the competition assessment may occur several years later can impose damaging uncertainty. Ironically, the greatest burden is on companies whose product or marketing strategy is truly innovative or global (those which cannot easily produce different versions for different countries). For example, laws on bundling or predatory pricing may be invoked most easily against companies rolling out new product combinations or introducing a new business model.

A better way
There is an alternative to simply importing the letter of competition law and allowing it to be interpreted in a way that might be little to do with competition. Some countries are realizing that competition policy can be used to protect domestic consumers and to promote productivity and international competitiveness. Enlightened politicians realize that competition drives innovation, efficiency and a strong customer focus.

Properly implemented, competition policy driven by competitiveness should be better integrated into domestic policies such as regulatory reform, productivity and the promotion of consumer welfare. This form of competition policy involves some or all of the following elements:
decisions based on market effects on competition and not on simplistic “high-market-share-is-bad” type rules;
a conviction that consumer harm is more important than damage to competitors or the ill-defined “public interest”;
a focus on cartels where harm to buyers is greatest and least visible, often with criminal sanctions;
an increased emphasis on competition policy research and development (R&D;);
removal of politicians from decision-making;
publication of guidelines and reasoned decisions to assist compliance; and
a balanced approach to competition policy that devotes resources to tackling both private and public restrictions.

The last point is significant because traditional competition policy, with its focus on legal form, dealt almost exclusively with private restrictions on competition that could be tackled by law enforcement. The new, effects-based approach looks at the impact on the market, regardless of whether the restriction is public or private. Governments routinely restrict competition with little justification, imposing substantial, often hidden, costs on the economy. Monopolies that come from regulation are often the most stable and enduring. Good economic policy requires tackling private and public restrictions with equal vigour.

Promoting efficiency and flexibility
An effects-based approach is more likely to result in decisions that promote efficiency than the old box-ticking legalistic approach. It is also better equipped to deal with change, making it more suitable where innovation presents new analytical and evidential questions.

Some oppose an effects-based approach on the grounds that it increases legal uncertainty. For many, “flexible” is synonymous with uncertain. The more established the competition policy regime, the more change, even if sensible, is resisted in the interests of legal certainty. But this simplistic argument would most likely result in more law and higher compliance costs. In a world of multilateral enforcement, an effects-based approach increases legal certainty because it makes it more likely similar outcomes will prevail, even across differing legal systems.

It should be a top priority of policy-makers to eliminate the avoidable costs associated with the proliferation of competition. America and Europe have made strenuous and mostly successful efforts to avoid conflict; differences are rare but, as GE-Honeywell shows, can occur.

Multilateral coordination is much more difficult. Even within the US, individual states disagree with each other and the federal agencies (in the Microsoft case in 2000, for example). The complexities multiply in an international setting with sovereign states and no federal oversight.

Optimists might look to the recent reforms in the EU, where the 25 member states and the European Commission established the European Competition Network to enforce jointly EU law from May 1, 2004. The network will allocate cases to the national agency best placed to deal with it, thus increasing efficiency and avoiding duplication of costs.

Work on international convergence continues. The Competition Committee of the Organisation for Economic Cooperation and Development (OECD) has for many years brought competition authorities together with business and consumer representatives to discuss best practice in the assessment of harm to competition. This approach supports effects-based policy and outcomes. Smaller competition agencies, like ours in Ireland, find OECD outputs hugely important for domestic competition R&D.;

Another initiative is the International Competition Network which was established in 2001 to improve international co-ordination. With 76 member jurisdictions, it has already had a dramatic effect on merger notification rules, with many countries amending their merger procedures in line with the network’s guidelines.

Market power, whether in the form of international cartels or government restrictions on competition, harms business just as it harms consumers. Effective competition policy is an important instrument of good economic policy, and it is most beneficial when decisions are based on economic effects rather than simplistic formulae.

Market forces will tend to push change in this direction: countries that want to attract foreign investment and maintain competitiveness have strong incentives to balance the benefits of a competition regime with the compliance costs on business. However, the evolution towards an effects-based approach may be slow and some countries may continue to use competition policy as a trade weapon.

Larger states and international agencies can do much to help. They should not export rules that are open to differing interpretation and that may not be relevant to local needs. They should lead by example, focusing their own policy on effects-based analysis in the interests of domestic consumers and competitiveness. This provides a solid basis for developing recommended best practices that foster a consistent international approach to tackling monopolies and cartels.

International business can play an important role by supporting effects-based competition policy, especially in developing countries and those new to competition policy, and by assisting governments with international coordination. An effects-based approach would reduce legal uncertainty internationally. This may not always be in the interests of companies’ legal advisers, but would be incomparably better for business.

John Fingleton
John Fingleton has been executive chair of the Irish Competition Authority since 2000. He is a member of Ireland’s National Competitive Council, a vice-chair of the Steering Committee of the International Competition Network, and chair of the Association of Competition Economics.