Critically analyse the decision of the European Court of First Instance in Airtours plc v EC Commission

Content

Introduction

I. Airtours plc v EC Commission - the Relevant Facts

II. Key Issues in the Airtours Case
A. Definition of the Relevant Market
B. Establishing Post- Merger Collective Dominance
1. Preconditions of Collective Dominance within the ECMR
2. Application of the Collective Dominance Doctrine in the Airtours Case
i. Tacit Co- ordination and Market Transparency
ii. Adequate Punishment Mechanism
iii. Marginalisation of Smaller Competitors and Consumer Reactions

III. Implications of the Airtours Judgement

IV. Prospect Revision of the ECMR

V. Assessment of the Reform Proposals

Conclusion

Bibliography

Articles

Böge, U. and Müller, E., “From the Market Dominance Test to the SLC Test: Are there any Reasons for a Change?”[2002]E.C.L.R., 23 (10), 495.

Haupt, H. “Collective Dominance Under Article 82 EC And EC Merger Control In The Light Of The Airtours Judgement”[2002]E.C.L.R. 23 (9), 434.

Nazerali, J.,“A Merger of Minds or Split Opinion - Does the European Commission address current E.U. Merger Concerns”[2002]I.C.C.L.R. 13 (12), 480

Overd, A., “After the Airtours Appeal”[2002]E.C.L.R. 23 (8) 375.

Stroux, S., “Collective Dominance Under The Merger Regulation: A Serious Evidentiary Reprimand For The Commission”[2002]E.L.R. 27 (6), 736.

Official Press Releases of the European Commission Directorate- General for Competition European Commission Press Release, 11 April 2002, Document IP/02/552, “Commission launches detailed i nvestigation into the takeover of P&O Princess by Carnival Corporation”, >http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=IP/02/552|0|RAPID& lg=EN<.

European Commission Press Release, 6 June 2002, Document IP/02/829, “Statement by Competition Commissioner Mario Monti on Court judgement on Airtours”,

>http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=IP/02/829|0|AGED&l g=EN&display=<.

European Commission Press Release, 7 November 2002, Document SPEECH/02/545, “Prof. Mario Monti European Commissioner for Competition Policy, Merger control in the European Union: a radical reform, European Commission/IBA Conference on EU Merger Control Brussels, 7 November 2002”,

>http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=SPEECH/02/545|0|R APID&lg=EN&display=<.

Other Official Documents of the European Commission Directorate- General for Competition

Commission of the European Communities, 11 December 2002, Document COM(2002) 711 final, “Proposal for a Council Regulation on the Control of Concentrations Between Under- takings“, >http://europa.eu.int/comm/competition/mergers/review/com_2002_0711_en.pdf<.

Commission of the European Communities, 11 December 2001, Document COM(2001) 745/6 final, “Green Paper on the Review of Council Regulation (EEC) No 4064/89”, >http://europa.eu.int/comm/competition/mergers/review/green_paper/en.pdf<

EC Commission, 11 December 2002, Document COM (2002) COMP/2002/1926/01, “Commission Notice on the appraisal of horizontal mergers under the Council Regulation on the control of concentrations between undertakings“,

>http://europa.eu.int/comm/competition/mergers/review/final_draft_en.pdf<.

EC Legislation

Notices

E.C. Commission Market Definition Notice 1997[1998]4 C.M.L.R. 177.

Table of Cases

Decisions of the European Court of Justice

France v. EC Commission[1998]4 CMLR 829.

Decisions of the European Court of First Instance

Airtours v. EC Commission[2002]All ER (EC) 783. Gencor v. EC Commission[1999]3 C.M.L.R. 971. Tetra Laval v. EC Commission OJ 2003 C19, p. 34.

Schneider Electric v. EC Commission OJ 2002 C56, p.15 and OJ 2002 C118, p.29.

Decisions of the E.C. Competition Commission

Commission Decision Case No. IV/M.1524 - Airtours/First Choice,[2000]5 C.M.L.R. 494.

Commission Decision Case No. COMP/M.2706 - Carnival Corporation/P&O Princess, >http://europa.eu.int/comm/competition/mergers/cases/decisions/m2706_en.pdf<.

Commission Decision Case No. IV/M.190 - Nestlé/Perrier,[1993]4 C.M.L.R. 17.

Introduction

The aim of this paper is to present and to clarify the current approach of EC Competition Law to merger cases, in particular with regard to the problem of collective dominance. I will out- line the problems arising from collective dominance in the context with the significant case Airtours plc v. EC Commission, recently dealt with by the European Court of First Instance.

Firstly, I will give briefly the relevant facts of the Airtours case (I.). Secondly I will analyse the case with regard to the criticism made by legal experts (II.) and then give an over- view on which measures are proposed in the future to eliminate the errors made (III., IV.). Lastly, I will interpret these measures and give an answer to the question whether or not these measures are sufficient to solve the present problems in context with the current EC Merger Regulation (V.).¹

I. Airtours plc v EC Commission- the Relevant Facts

On June 6, 2002, the European Court of First Instance (hereinafter CFI) released its judge- ment in Airtours v. European Commission. The CFI overruled the European Commission’s decision of September 22, 1999² which declared the take- over of First Choice by its competi- tor Airtours plc to be incompatible with the common market according to Article 8 (3) of Regulation 4064/89 (hereinafter ECMR). Airtours plc (now called My Travel) and First Choice are both U.K.- based operators for packaged tours. In the U.K., the both companies sell foreign package holidays to so- called short- haul and long- haul destinations. The acquisition envisaged by Airtours plc would have combined the second and fourth largest firms in the market for short- haul packaged tours creating the largest firm with a market share of 32%.

Main competitors at the time of the proposed merger in the short- haul holidays market were Thomson and Thomas Cook with respective market shares of 27% and 20%. The Commission found that the three tour operators Airtours/First Choice, Thomson and Thomas Cook would post- merger create a collective dominant position in the market for short- haul packaged holidays in the U.K., as they would increase their market share in this particular market from 68% before to 79% after. The Commission outright blocked the merger by applying the collective dominance doctrine, stating that the acquisition would give incentive for the three remaining operators to avoid or reduce competition between them.

II. Key Issues in the Airtours Case

On the basis of its findings, the Commission concluded that the merger would have created a collective dominant position as the three³ remaining oligopolists would have been able to coordinate the setting of capacity tacitly. In particular, the Commission took the view that the proposed transaction would:

- remove any incentive for the three remaining major operators to compete;⁴
- increase transparency and interdependence⁵ that already existed in the market of for- eign short- haul holidays and thus allowing the major operators to adopt anti- competitive parallel behaviour to the setting of package holiday capacity and respec- tive prices;⁶
- facilitate deterrence or retaliation against attempts to deviate from the parallel behaviour since, if one of the three remaining large operators decided not to restrict capacity, the other two would flood the market with capacity for the following season, thus causing prices to fall;⁷
- and finally, lead to further marginalisation of the smaller operators on the market.⁸

Airtours’ appeal before the CFI, where it challenged the Commission’s decision, was in particular based on two columns, which both asserted a defect in law. The tour operator claimed that manifest errors were made by the Commission in assessing the definition of the relevant product market in the U.K. foreign package holiday industry. Furthermore it alleged an infringement of Article 2 ECMR in so far as a new and incorrect definition of collective dominance had been applied by the Commission which lead to the wrong decision that the transaction created a collective dominant position.⁹

A. Definition of the Relevant Market

The application of Article 2 (3) ECMR on a merger case requires a proper definition of the relevant product market affected by the merger as a necessary precondition for the assessment of the effects on competition of the concentration.¹⁰ Under the ECMR, the relevant product market comprises all those products which are regarded as interchangeable or substitutable by the consumer by reason of the products’ characteristics, their prices and their intended use.¹¹ In order to define the relevant market, the substitutability on both the demand side and the supply side of the two products in question has to be determined.¹²

The Commission’s decision identifies two separate markets: The market for package holidays to long- haul destinations and that for package holidays to short- haul destinations.¹³ Airtours argued that the market definition adopted by the Commission was too narrow since the Commission's assessment of demand- side and supply- side substitutability was incorrect. Rather, the Commission should have defined it as one market, comprising all foreign package holidays.¹⁴ However, the CFI rejected the first plea of Airtours concerning the market defini- tion as unfounded. The court held, that the Commission did not exceeded the bounds of its discretion in concluding, that short- haul package holidays are not within the same product market as long- haul packages.^{15 16}

B. Establishing Post- merger Collective Dominance

1. Preconditions for Collective Dominance within the ECMR

Collective dominance¹⁷ is described as a dominant position held by several independent un- dertakings in a specific product market. It may occur if there are only a few competitors in this market, making their strategic decisions by considering the prospective conduct of their rivals. In cases of collective dominance, a non- co- operative strategic interaction between the members of the oligopoly can be found¹⁸. An agreement between the oligopolists or a form of collusive conduct, as it is for example required by Article 81(1) EC, is not necessary. In par- ticular the notion of collective dominance requires cumulative the following three precondi- tions:¹⁹

- First, each undertaking involved in the oligopolistic group must know how the other members of the oligopoly are behaving in order to estimate whether or not they are adhering to the tacitly agreed market conduct. Thus the market in question must be sufficiently transparent for each member to monitor in which direction the other members’ market conduct is evolving.
- Secondly, the situation of tacit co- ordination must be sustainable over time. That means that there must be an incentive for the members of the oligopoly not to depart from the tacitly agreed market conduct. According to the CFI this implies the presence of a retaliation mechanism which serves as deterrent to the deviation of group mem- bers who attempt to depart from the common market policy. This mechanism, some- times also named “punishment mechanism,”²⁰ secures, that each member of the oli- gopoly who makes effort to increase its market share contrary to the tacit conduct

[...]

¹ Case T- 342/99, 2002 All ER (EC) 783.

² Case No. IV/M.1524 - Airtours/First Choice, 2000 5 C.M.L.R. 494.

³ With its decision, the Commission prohibited for the first time a merger, creating or strengthening a dominant position consisting of more than two entities, sometimes also named “tripoly”, cf. Stroux, S., “Collective Dominance Under the Merger Regulation: A Serious Evidentiary Reprimand for the Commission” (2002) European Law Review 27 (6), 736 at p. 736.

⁴ Commission Decision, supra note 2 para. 55.

⁵ Ibid. paras. 111, 113, 127, 144 and 147.

⁶ Ibid. paras. 56, 170.

⁷ Ibid. paras. 147 and 153.

⁸ Ibid. paras. 73 et seq., in particular paras. 74 and 84.

⁹ Airtours v. EC Commission 2002 All ER (EC) 783 at para. 16.

¹⁰ Ibid. para 19; France v. EC Commission 1998 4 CMLR 829 para. 143.

¹¹ See E.C. Commission Market Definition Notice 1997 1998 4 C.M.L.R. 177 para. 7.

¹² Ibid. paras. 13, 15, 20.

¹³ Airtours v. EC Commission 2002 All ER (EC) 783 para. 21.

¹⁴ According to Airtours there was no demand- side substitutability from the consumer’s point of view between long and short- haul package holidays, when regarding the total travel time (consisting in the average flight time, check- in and transfers) and average prices of both holiday packages in question (see Airtours v. EC Commission 2002 All ER (EC) 783 paras. 23 and 24). If one considers only those both criteria, one could conclude that the holiday package market can not be divided into the two separate markets of long and short haul packages. Furthermore, in the opinion of Airtours, the supply- side substitutability was not properly assessed by the Commission, because it considered the fact that the aircraft used by the appellant can be used to some extend for long as well as for short- haul destinations as not sufficiently decisive to establish supply- side substitutability (see Airtours v. EC Commission 2002 All ER (EC) 783 para. 45).

¹⁵ Airtours v. EC Commission 2002 All ER (EC) 783 para. 44. The CFI followed the Commission’s point of view as it took only into account the significant difference in the average flight time (three hours on average for flights to short- haul destinations compared with eight hours on average for flights to long- haul destinations) and not the total travel time (ibid. para 27). According to the CFI, Airtours can not rely on that argument to play down the indisputable difference between average flight times, since transfer time from the airport to the resort may in fact also vary, whatever the destination (cf. ibid. para. 27). Furthermore, the CFI decided that there are no convergence between the prices for the two kinds of holiday in question to such an extent that it would have been wrong by the Commission to conclude, that the products can not be regarded as substitutes (ibid. paras. 28 et seq. in particular 31, 34 and 41). Airtours’ arguments related to supply- side substitutability were also rejected by the court. The CFI agreed with the Commission’s point of view, that the small amount of supply- side substi- tutability which existed was not sufficiently decisive, given the other findings made concerning demand- side product substitutability, to adopt a wider market definition (cf. ibid. para. 45). Here, the court referred, as well as the Commission did, to para. 13 of the Commission Notice on Market Definition 1997 ( 1998 4 C.M.L.R. 177) were, “From a economic point of view, for the definition of the relevant market, demand substitution constitutes the most immediate and effective disciplinary force on the suppliers of a given product, in particular in relation to their pricing decisions.”. Thus, the supply- side substitutability could have been remained out of consideration in the present case.

¹⁶ The terms “collective dominance”, “joint dominance” and “oligopolistic dominance” are used in European administrative and court practice as interchangeable, cf. Haupt, H. “Collective Dominance Under Article 82 EC and EC Merger Control in the Light of the Airtours Judgement”, 2002 E.C.L.R. 23 (9), 434 at p. 434.

¹⁷ Article 2 (2) and (3) ECMR does not expressly refer to a dominant position held by one or more undertakings like Article 82 EC does. It was thus initially controversial whether the provision covers also the creation or strengthening of collective dominance. But since the Commission’s decision in Nestlé/Perrier (Case No. IV/M.190 - Nestlé/Perrier, 1993 4 C.M.L.R. 17) in 1992, where it first considered that a proposed concentration would create or strengthen a dominant position within the meaning of Article 2 ECMR, there has been a con- tinuous administrative practice on the application of the collective dominance notion within the ECMR. This practice has been recognised by the European Court of Justice first in the case France v. Commission ( 1998 4 C.M.L.R. 829) where the court confirmed that the aim of achieving undistorted competition within the European Community requires that the ECMR must apply to collective dominance (ibid. paras. 169 et seq. and 221). The first case in which the CFI decided that the notion of collective dominance can be applied within the ECMR was Gencor v. EC Commission ( 1999 3 C.M.L.R. 971). Since then this has been permanent case law within the Community Courts.

¹⁸ Such non- co- operative strategic interaction is also referred to as so- called “oligopolistic interdependence”. Cf. Stroux, S. supra note 3 at p. 736.

¹⁹ See Airtours v. EC Commission 2002 All ER (EC) 783 at paras.62, 159, 193- 195; Overd, A., “After the Airtours Appeal”, 2002 E.C.L.R. 23 (8) 375 at p. 375.

²⁰ Cf. Overd, A. ibid.