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EU Competition Policy
Prof Filip AbrahamKU Leuven and Vlerick Business School
What is Competition Policy?
Competition policy has the objective of managing competition in product markets through: merger control: preventing anti-competitive mergers and
acquisitions (M&A’s) antitrust policy
preventing cartels and other anti-competitive agreements preventing abuses of dominant position
state aid control (in the EU) limiting distortions to intra-EU competition and trade resulting from
national subsidies But allowing subsidies when it is in common (EU) interest
Competition is based on the territorial principle, not on the nationality of the companies involved
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Who is in Charge? no multilateral competition authority US
long tradition focus on dominant positions and M&A’s federal government and courts in charge
Europe national governments and EU Commission subsidiarity principle: EU Commission deals
with larger and cross-border cases
Asia recent interest in control of dominant positions
and M&A’s national governments in charge
3
Why is Competition Policy Important for Business?
competition authorities can hurt companies by: blocking M&A’s, imposing fines and ordering the
repayment of subsidies negatively affecting the valuation of companies by
financial markets involving the company in a long and expensive battle
with the competition authorities causing severe reputational damage
companies should be prepared top managers should be aware of the basic rules of the
game laywers of the companies should have an expertise in
competition policy or/and the company should rely on specialized law firms
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European Fines in Recent Cases
Company Year Fine in millions of €
Sector
Intel 2009 1 006 computer chipsMicrosoft 2008 899 softwareSaint-Gobain 2008 896 car glassMicrosoft 2013 561 softwareMicrosoft 2004 497 softwareThyssen-Krupp 2007 479,8 elevatorsHoffman-La Roche 2001 462,2 vitaminsSiemens 2007 396,5 electrical partsPilkington 2008 370 car glassSasol Limited 2008 318,2 chemicalsMicrosoft 2006 280,5 software
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Anti-Trust: The EU against Microsoft
complaint by Sun Microsystems in December 1998
the ruling of the Commission on March 24, 2004 technical information for servers
bundling of Media-Player
fine of 497 mio €
court appeal for delay of sanctions rejected in 2004
December 22,2005: new fine of 280,5 mio for not complying with the ruling
September 2007: the European Court of First Instance backs the 2004 decision of the Commission
2008: fine of 899 mio € for not providing information to competitors. Microsoft appeals
2009: Microsoft accepts compromise: Windows allows choice between different internet browsers
2012: fine of 899 mio € is reduced in appeal to 860 mio €
2013: new fine of 561 mio € for breach of the 2009 compromise in Microsoft Windows 7 Service Pack 1.
several similar cases in recent cases: e.g. Google, IBM,…
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Merger Policy: Dealing with Cross-Border Mergers and Acquisitions
The “friendly” Take-over of Air Lingus by Ryanair
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Three Attempts of Take-Over
Ryanair is minority stakeholder of Aer Lingus with 29.8 % of the shares ahead of the Irish government with 25.1%
Case 1: 30/10/2006-27/06/2007: prohibition
Case 2: 8/01/2009-23/01/2009: case withdrawn
Case 3: 24/07/2012-27/02/2013: prohibition
Europe‘s largest low frills carrier 400 routes in 24 countries 51 bases, main: Dublin, Brussels South, Milan Bergamo and Stansted 305 aircraft, 62 routes out of Dublin “point-to-point”/”no-frills”
Ryanair
Ireland‘s old ”flag carrier“
66 routes ex-Ireland
3 bases (Ireland), main: Dublin
“point-to-point”/”mid frills
Aer Lingus
The Two Players
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Methods of Investigation
extensive use of standard investigative methods (questionnaires, interviews, site visit in Dublin, etc).
views from a large number of market participants inside and outside Ireland including competitors, customers, travel agents, consumer associations, public authorities and airport carriers
customer survey among passengers at Dublin airport
econometric analysis as complementary evidence regression analysis to identify the level of competitive constraints
between the merging parties and by competitors price correlation as an input to market definition
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The Relevant Market
main criterium: substitution in demand and supply
relevant product market: direct scheduled air transport passenger services
relevant geographic market “city-to-city" approach: routes between a given point (or
region) of origin an a given point (or region) of destination airports in a city/region are competing routes out of Ireland (Dublin) and London (Stansted) no significant impact of charter airlines
no separate market for "time-sensitive” passengers overlapping routes (= 46 markets in 2012 up from 35 in
2007) 12
Actual Competition: Market Shares of Passengers from and to Dublin
13
combined market shares of Ryanair andAer Lingus increased from 80% in 2007 to 87% in 2012
Actual Competition:Overlapping routes
35 overlapping routes in 2007
46 overlapping routes in 2012
market positions in the overlapping routes of Aer Lingus and Rynair strenghtened in the period 2007-2012
Actual Competition: Market Shareson Overlapping Routes in 2012
46 overlapping routes combined market share
28 monopoly routes 100%
11 routes only competition from charter airlines
7 routes - very high market shares- competition from other
scheduled carriers who often connect passengers to their network hubs (e.g. British Airways, Lufthansa and Air France)
Horizontal merger guidelines, court rulings and case law state that very large market shares of 50% or more may in themselves be evidence of the existence of a dominant market position
15
Actual Competition:Do the companies compete on overlapping routes?
Econometric analysis establishes that: Ryanair and Aer Lingus are each others’ closest
competitors on many routes Ryanair's presence is associated with Aer
Lingus charging around 7-8% lower prices when considering city-pairs and around 5% lower prices when considering airport-pairs.
Both airlines monitor each other prices and react accordingly
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Ryanair’s promotion materials
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Aer Lingus’ Promotion Materials
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Potential Competition
Irish airports are hard to penetrate for new competitors The Irish markt is a small peripheral market with limited
growth Aer Lingus and Ryanair have a strong base newcomers would face substantial sunk costs for
marketing, promotion, brand recognition EasyJet has tried and failed Several companies (e.g. BA) have left Dublin
19
Vertical Integration
The Dublin Airport is congested
There are few slots available
There is runway congestion
There is terminal congestion20
The Efficiency Defence
Ryanair claims that:consumer benefits from cost savings from economies of scale and better management of Aer Lingus
the efficiency defence is rejected because:
Cost savings to be realised on Aer Lingus according to Ryanair
Million € per annum
staff costs 75-85
aircraft costs 35-45
airport charges 2.5-3.5
improved aircraft utilization 10.5- 1.5
fuel and oil costs 5-10
maintenance costs 50-70
distribution costs 9.5-10.5
advertising 6-8
total 200-250
Aer Lingus argues it is cost efficient and disputes the estimates of Ryanair
the Ryanair model is specific and cannot automatically be imposed on another airline
the cost savings and the benefits to the consumer are not verifiable ir consumer benefits from cost savings from economies of scale and better management of Aer Lingus
Aer Lingus could achieve many of the cost savings without the merger 21
No take-off…..
Ryanair offered commitments/remedies. Final remedies consisted of: divestiture of Aer Lingus’ operations on 43 overlapping routes to Flybe giving up a number of take-off and landing slots so that IAG/British Airways
could compete on 3 routes from London to Dublin, Shannon and Cork Flybe and IAG/British Airways committed to operate the routes for three years
The Commission rejected the final commitments/remedies: insufficient counterweight to the position of the merged Ryanair-Aer Lingus entity doubt on whether the proposed remedies could be put in place in a timely
matter uncertainty about the commitment to continue operating the routes after the
three years
National case by UK competition authority: Ryanair is asked to lower its 24% equity stake in Aer Lingus to reduce anti-competitive interference in Aer Lingus’ business strategy 22
State Aid Policy in the EUDealing with National Subsidies that Distort Competition
24
25
What is a Subsidy?
governmentinvolvement
Evaluationof
Subsidies
subsidy instrument
26
What is a Subsidy?The Banking Crisis
27
What is a Subsidy? Focus on Several Instruments in the Banking Crisis
guarantees of bank liabilities
recapitalisations
impaired asset relief
support for bank restructuring 28
What is a Subsidy?Are Tax Advantages Considered as State Aid?
from an economic point of view, tax advantages can contain a subsidy element
EU has been cautious in legislating taxes first pillar issue: EU can legislate but many EU member states consider the right to tax as
a part of national sovereignty unanimity requirement for EU tax laws
recent global effort to close tax loopholes EU is increasingly using state aid policy to
force companies in paying higher taxes
What is a Subsidy?
governmentinvolvment
How big is the Subsidy?
benefit to the firm
cost to the government
Evaluationof
Subsidies
subsidy instrument
30
Size of the Subsidy of National Governments to Banking in the Post-Lehman Period
31
What is a Subsidy?
governmentinvolvment
How big is the Subsidy?
benefit to the firm
cost to the government
What Type of Subsidy? Selectivity
horizontal
sector- or firm-specific
regional
Evaluationof
Subsidies
subsidy instrument
32
Selectivity: How to “Horizontalize”Banking Subsidies?
33
Selectivity: The Double Irish overall corporate tax rate in Ireland is 12.5% double Irish tax scheme used by e.g. Apple Apple attributes global profits to its Irish
subsidiary the Irish-based subsidiary makes royalty
payments to a second Irish subsidiary managed from a tax haven with zero profit taxation
the Irish-based subsidiary from Apple makes royalty payments to the second subsidiary and claims those payments as tax deductions in Ireland
is this a selective subsidy?
What is a Subsidy?
governmentinvolvment
How big is the Subsidy?
benefit to the firm
cost to the government
What is the Objective of the
Subsidy?
What Type of Subsidy? Selectivity
horizontal
sector- or firm-specific
regional
Evaluationof
Subsidies
Does subsidy distort competition?
subsidy instrument
35
Does Subsidy Distort Competition?The Banking Case
important cross-border dimension: banks compete across national jurisdictions
member states do not internalize effects beyond their national jurisdictions
danger of subsidy wars and conflicts between member states
different ability and willingness to support banks
incentives of banks: avoid distortions between aided and non-aided banks, avoid moral hazard
36
What is a Subsidy?
governmentinvolvment
How big is the Subsidy?
benefit to the firm
cost to the government
What is the Objective of the
Subsidy?
What Type of Subsidy? Selectivity
horizontal
sector- or firm-specific
regional
Evaluationof
Subsidies
approvalprohibition
conditional approval
Does subsidy distort competition?
subsidy instrument
37
Conditional Approval in Banking: Guidelines on Rescue Aid
38
Conditional Approval in Banking: Guidelines on Restructuring Aid
39
Final Decision: Conditional Approval
40
41