Competition Law and Economics

Posted on Dec 1, 2024 in Law & Jurisprudence

Competition: Protection and Control

Protecting the Marketplace

Competition is essential for a functioning market. Therefore, it must be protected from harmful behaviors and activities. The definition of adequate economic protection (distinct from legal protection) varies across different regions.

European Trend (Since 1950)

W. Fikentscher proposed a triple function of competition law:

  • Policy-Legal: Protecting the playing field in the market.
  • Political-Economic: Protecting trade relations.
  • Political-Social: Ensuring equitable distribution of assets and opportunities for all citizens.

European antitrust law generally follows this idea by incorporating social and political elements.

American Trend (Since the Sherman Act of 1891)

  • Harvard University: The Structure-Conduct-Performance paradigm suggests that market structure influences the conduct of players and affects the market. Structure is defined by the number and size of companies, ease of market entry, and business relations with suppliers/distributors. This school advocates for punishing market concentration per se, based on quantitative indices.
  • University of Chicago: This school disagrees with Harvard, arguing that mergers leading to economies of scale should not be penalized, as decentralization would increase costs and harm consumers. They prioritize consumer welfare through economic efficiency.
  • Bork, R. H.: Consumer welfare is maximized through economic efficiency. Any activity reducing the final product volume is economically inefficient and harms the consumer, thus warranting antitrust action.
  • Efficient Competition (Clarke, John M.): This concept aims to maximize the effects of perfect competition within the specific circumstances of each case. It focuses on perfecting market structure rather than attacking it, even in monopolies, as long as benefits are not compromised.

Competitive Restrictions

Competitive restrictions are acts, events, or structures that may curtail or distort market competition. Their classification varies depending on the source.

1. Companies

Behaviors

  • Agreements: Agreements (express or implied) that create market conditions different from those of efficient competition. These include agreements between undertakings (e.g., non-compete), decisions of associations, and concerted practices (e.g., price fixing).

Classification of Agreements

  • Horizontal Agreements: Agreements between competitors at the same level of production and marketing (e.g., two bakeries). These are considered most severe.
  • Vertical Agreements: Agreements between companies at different levels of the production and distribution chain (e.g., a bakery and a flour distributor). These are less serious and analyzed case by case.

Examples of Horizontal Agreements

  • Price Fixing: Interferes with the free market, where prices should be set by supply and demand.
  • Market Sharing: Dividing the market by quantity or geographic area, restricting competition.
  • Joint Purchasing: Can lead to economies of scale and restrict competition by excluding others.
  • Collective Boycott: Competitors agree to discriminate against another player.

Examples of Vertical Agreements

  • Distribution Agreements: Exclusive relationships between companies at different levels of the chain. May affect competition if it prevents other distributors from entering the market.
  • Franchise Agreements: Agreements to provide goods and services with a common style (e.g., McDonald’s). Can affect competition if entry is unfairly refused to qualified franchisees.
  • Commercial and Industrial Property Licenses: Delivering trademarks or patents to others in the chain.
  • Resale Price Fixing: Setting the price at which a product is resold. Requires individual review.

Abuse of Dominant Position (Decree 211 of 1976)

This addresses actions by companies with market power that prevent or restrict competition. Penalties are for abusing the dominant position, not simply holding it.

Requirements

  1. A company with market power capable of acting independently of competitors.
  2. Abuse of that power for personal gain.

Determining Abuse of Dominance

  1. Define the relevant market based on geographic area, product type, and time period.
  2. Assess market concentration.
  3. Analyze the conduct of market members.
  4. Examine company results (e.g., high returns may indicate barriers to entry).

Causes of Dominance

  • Ability to differentiate products.
  • Vertical integration.
  • Horizontal integration.
  • Concentrated market structures (e.g., oligopolies).

Abusive Behaviors

  • Discrimination: Different treatment based on market power. Arbitrary discrimination is abusive.
  • Predatory Pricing: Selling below average production cost to eliminate competition.
  • Refusal to Sell: Unjustified refusal due to dominant position.
  • Tying Contracts: Conditioning the sale of one product on the purchase of another.
  • Limiting Market Power or Production: Creating shortages to increase prices.

Competitive Restrictions via Structures (Mergers, Joint Ventures)

These are reviewed by supervisory bodies to prevent alterations to competition. Examples include mergers and agreements that require regulatory oversight.

Unfair Competition

A broad concept that can overlap with other regulations. It involves acts contrary to good faith, such as consumer disloyalty (confusion, deception, tying), competitor disloyalty (denigration, imitation, exploitation of reputation, violation of secrets), and market disloyalty (breaking legal rules for advantage, arbitrary price discrimination).

Chile and Competition Law

Origins

  • 1931: General Commissariat of Subsistence and Prices.
  • 1959: Law to protect competition, leading to the Preventive and Antitrust Commission and the National Economic Prosecutor’s Office.
  • Law No. 13,305: Established the offense of monopolies and the Antimonopoly Committee.
  • 1973: Decree Law 211 (DL 211), with subsequent reforms.
  • 2003: Law No. 19,911 (establishing the Court of Defense of Free Competition).

Law No. 20,361 Analysis

This law amends DL 211, focusing on the Court of Defense of Free Competition, its powers, and procedural aspects. It addresses issues like the definition of competition infringements, abuse of dominant position, and unfair competition. The law aims to strengthen the court’s independence and expertise, ensuring effective protection of free competition.

Key Changes

  • Strengthened definition of competition infringements.
  • Clarified the concept of abuse of dominant position.
  • Addressed unfair competition practices.
  • Revised the composition and powers of the Court of Defense of Free Competition.
  • Updated procedural rules for competition cases.