Limitations of International Competition Laws
An Analysis and Proposal of Harmonization Treaty
Research Paper (postgraduate) 2010 21 Pages
Table of Contents
Section One - Generic Weaknesses
Conflict With IP Law
Slowdown Of Innovation
Section Two - Derivative Weaknesses
MNCs Torn Between Different Laws
Extraterritorial Enforcement And Regulatory Circumvention
Section Three - Foundation For An International Harmonization Treaty
Thank God for competition. When our competitors upset our plans or outdo our designs, they open infinite possibilities of our own work to us.
(Gil Atkinson, the inventor of automatic sprinklers, 1880)
Gil Atkinson speaks our mind - competition is good because it ensures the society’s motivation to develop and improve. Consequently, laws that ensure the competitiveness of a market must be entirely beneficial. I dare to ask: are we putting blinders with such a view?
In the Western perception, a Competition Law (CL) generally aims at maximizing welfare. However, it is questionable whether CLs are really as unconditionally beneficial as they are often perceived. More collectivist cultures might, provocatively stated, perceive those laws as an imposed “Washington Consensus”. Others might find that their objective is not as unbiased as commonly understood.
The major purpose of this paper is to analyse the currently implemented CLs, clarify weaknesses and distinguish between those flaws which can be healed and those which cannot. I did not focus on one CL - although maybe beneficial in scope - as a substantial fraction of the problems arise from law disharmonies across the globe. Additionally, I will present suggestions for an international CL treaty which could lead to a reduction in the number of healable flaws and the minimization of the generic flaws’ cost.
As a consequence of the success of the capitalist system around the globe, “more than one hundred countries now have national antitrust laws” (Wood 2005: 309). They slightly differ from each other in terms of goal-setting or enforcement. The four types of CLs that I am going to discuss in this paper are the Chinese Anti-Monopoly Law (AML), the United States (US) Antitrust Law, the European Union (EU) CL and the Japanese Anti-Monopoly Act (JAMA). I chose these four because they are representative of four views that I identified during my research: a socialist view (AML), a consumer-centric view (US Antitrust), a competition-centric view (EU CL) and a nationalist view (JAMA).
I will show that a harmonization of these CLs could be beneficial for a maximization of global welfare and make a proposal for the agenda that should be addressed in the WTO rounds in order to minimize the error cost of the current heterogeneous CLs and enforcement mechanisms.
The paper will be structured in the following way: Section One deals with generic, non-healable weaknesses. Section Two elaborates on healable weaknesses that are derived from differences across CLs around the globe. Section Three sums the latter up and lays the basic foundation for the development of a proposal to establish an international framework for CLs.
Section One - Generic Weaknesses
To outline generic flaws of CLs, I start with an overview of the possible goals of CLs. I will show that the economic rationale behind such laws is often unclear or transformed into a political one.
To begin with, the major purpose of the EU CL is to ensure “that competition in the common market is not distorted” (§3 (g) Treaty of Rome 1957). This target institutes a competition-centric view which implies trust in the “invisible hand” (Smith 1759) to maximize social, but not necessarily consumers’, welfare. In contrast, the US Antitrust Law’s objective is to maximise consumers’ welfare (cf. OECD Forum 2003: 2) which indicates a consumer-centric view.
The Chinese AML takes a third perspective by pursuing - among others - the prevention and restriction of monopolistic conducts, “safeguarding the interests of consumers and social public interest” and “promoting the healthy development of the socialist market economy” (§1 AML). The statement implies that the government puts a large weight on preserving socialist structures, despite adopting the successful Western capitalist system.
Finally, the Japanese AMA aims - among others - at “promoting fair and free competition, stimulating the creative initiative of entrepreneurs, heightening the level of employment and actual national income, and thereby promoting the democratic and wholesome development of the national economy” (§1 AMA). The large number of goals that relate to “national” interests implies that the AMA is supposed to support them, and not solely consumers, social structure or competition.
The multitude of different objectives and approaches makes it obvious that the rationale of the law is set heterogeneously around the globe. As Clougherty (2002: 11) finds, “Antitrust institutions can’t universally be reduced to entities strictly maximizing national welfare.” Unlike in the case of Intellectual Property (IP) protection, which creates incentives to start up more businesses, the objective of a CL seems to be ambiguous. This shadiness might be exploited by some countries to pursue political or protectionist objectives and leads to four major generic problems of CL: (A) an ambiguous economic rationale, (B) limits set by IP protecting laws, (C) threats to innovation and (D) value- or politics-dependent enforcement practices.
Manifold literature illustrates the rationale from which the law originated. The “father” of modern economic theory, John M. Keynes himself remarked that “it is not a correct deduction from the Principles of Economics that enlightened self-interest always operates in the public interest” (Keynes 1926: 36). However, the evolving literature has since then much debated whether monopoly always harms, and whether competition really always increases economic welfare.
First, it is economically unclear whether competition always leads to desirable outcomes, especially because “perfect markets may also exist under monopoly” (Stucke 2010: 15). Perfect competition is usually defined as the combination of internal cost efficiency with a pricing at marginal cost (Mankiw 2004: 58). This can also occur with only one player in the market. Of course, this monopolist player has an incentive to charge premium prices. Still, it is questionable whether the prevention of monopoly in the first place is always right. Doing so implicitly assumes that every player harms economic welfare as soon as he is, in principle, able to so. However, “it is difficult to assess the general relation between concentration and pricing” (Carlton and Gertner 2003: 9). On the other hand, it is difficult to prove that he would not because the incentive is obvious. Though most economic models make exactly that assumption, they are what they are - models. Models try to resemble reality in a simplified manner and may be flawed.
Second, many academics still disagree about what “economic welfare” really is. Stucke realizes that “no consensus exists on what constitutes economic welfare or the essential tenets of economic theory to evaluate specific business practices” (Stucke 2010: 56). Consequently, the CL authorities continue to debate about their policies’ objectives and their respective weights. Some authors find that “Antitrust authorities [...] agree that [...] the ultimate objective of antitrust regulation is to enhance consumer welfare” (Czapracka 2006: 46). This, however, seems not to be made sure by all regulations. For instance, the competition-centric EU commission defines that “the protection of rivalry and the competitive process is given priority over possible pro-competitive efficiency gains.” (Art. 82, EU Treaty). Similarly, as shown above, the nationalist and socialist views of the Japanese and Chinese laws put different weights on their objectives.
Finally, most of the CLs struggle to really define when a concentration or an action is constraining the consumer or the competition, respective to their point of view. Usually, they use the term “unreasonable” to determine a CL-relevant situation; however, “an unreasonable restraint ultimately reflects a normative judgment of what is unreasonable.” (Stucke 2010: 57).
We have seen that the economic rationale is not free from bias because it is neither clear whether competition really optimizes welfare in all situations, nor what economic welfare really is, nor how an unreasonable deviation from welfare-maximizing competition can be determined free of doubt. Following these economic considerations, I am going to analyse natural limits to CLs.
Conflict With IP Law
The first of these limits can be found in the fundamental tension between IP Law and the CL (Friedland 2009: 304).
As Carlton et al. phrase it, IP rights protect from competition “in order to create incentives [...] to innovate”, which often translates to “conveying market power” (Carlton et al. 2003: 1f.; Czapracka 2006: 75). Although the European Court of Justice (ECJ) argued that “the mere ownership of an IPR does not confer a dominant position” (Czapracka 2006: 54), most agencies “agree that IPRs combined with market power may give rise to competitive concerns” (Czapracka 2006: 47). This is especially true when they are “overly broad” because then they “not only harm competition in the short run, but also [.] innovation in the longer run” (Czapracka 2006: 47). The US Federal and Ninth Circuits agree that “IP rights do not confer a privilege to violate the antitrust laws” (Burtis et al. 2001: 9).
Therefore, with the purpose of fostering competition, CLs constrain what a monopolist can do to preserve this market power (cf. Carlton et al. 2003: 2; Czapracka 2006: 75). However, regardless of whether this objective is generally beneficial (see above) it is not simple to draw the line between these laws. For instance, as Czapracka (2006: 53) argues, the premium an IPR-made monopolist may charge could be justified through high (sunk) costs involved in the development of a product. Additionally, even if the “right” degree of intervention was found, problems might still arise from these law’s “different and sometimes conflicting means” to achieve their goals (Czapracka 2006: 75). Thus, researchers agree that “the challenge lies in the coining of clear limiting principles for application of antitrust laws to IPRs” (Czapracka 2006: 48).
Some researchers agree that this conflict constitutes a trade-off between static, or short-term, efficiency (through competition) and dynamic, or long-term, efficiency through “optimal investment in research, development and diffusion of innovation” (Carlton et al. 2003: 1). According to Czapracka (2006: 76), CLs have been over-enforced for a long time until the IP rights gained ground. Such an over-enforcement may undermine the objectives of IP (Czapracka 2006: 75). However, the background of enforcement practices differs across the globe. For instance, the EU CL authority “uses antitrust to address flaws in the IP system” (Czapracka 2006: 48), whereas seems rather self-sufficient in the US, and rather value-dominated in Japan.
Since the strengthening of one law consequently results in short- or long term inefficiencies regarding the objective of the other law, there is a debate on which regulation best balances these forces. For example, granting exclusive IPR can in the worst case “deny society the benefit of using and possessing something that all people could use and enjoy concurrently”, slow down the diffusion of ideas and follow-up innovations and prevent the “commercialization of artistic works” (Czapracka 2006: 73f.). However, given that it also conveys an incentive to innovate in the first place, “the key question is whether and how antitrust should intervene when IPRs give rise to such problems” (Czapracka 2006: 74). As Burtis and Kobayashi find (2001: 17), “allowing antitrust scrutiny of the patent holder’s statutory right to exclude would increase applications of antitrust law to potentially precompetitive conduct”. One may wonder if it triggers a domino game with undesirable outcomes.
In principle, these laws should work together, not against each other, to “maximize wealth by promoting innovation and economic progress” (Czapracka 2006: 74). Academics have developed tools to determine the wealth maximizing CL intervention that caters to this objective, for instance the “error cost framework”. Wrapped up, its idea is to “balance the full social benefits and costs of proposed antitrust interventions” (Manne and Wright 2010: 4), assuming that “optimal antitrust rules will minimize the expected sum of error costs” (Manne et al. 2010: 7) of too much or too little CL involvement.