It has been known for centuries that anticompetitive practices have harmful economic effects. Adam Smith famously declared that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”. Cartels are indeed one of the most harmful anticompetitive practices and cause significant damage to consumers and to the economy as a whole. A cartel is basically a group of firms that colludes to behave like a monopolist by restricting output and raising price.
More than a century after Smith, Alfred Marshall popularized the concepts of consumer surplus, producer surplus and deadweight loss. Consumer surplus measures the difference between the price a consumer pays for an item and the price he would be willing to pay rather than do without it. Producer surplus is the difference between the market price and the lowest price a firm is willing to accept to produce a good. A deadweight loss is a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium. In economic terms, the exercise of monopoly power causes an inefficient allocation of resources by restricting output below what would be achieved by a competitive market. As a result, there is a deadweight loss in welfare. In addition, monopoly redistributes gains from consumers to producers by transferring consumer surplus to profit.
Still, laws prohibiting anticompetitive practices were slow to catch on. In 1970, only twelve jurisdictions around the world had a competition law regime. During the 1970s and 1980s, numerous economic studies were undertaken to demonstrate the harmful effects of anticompetitive practices on consumers and producers alike. These studies led to a growing awareness among both developed and developing countries that regulation is necessary to protect economies and that competition law is not intended to punish companies but that these rules are healthy for businesses too, because it keeps them on their toes. Some 130 jurisdictions have now enacted competition laws and the vast majority have a competition enforcement authority actively pursuing anticompetitive practices. Particularly the European Union and the United States have well-developed competition laws and policies that aim to prevent and penalise anticompetitive practices.
Anticompetitive practices may take the form of either collusion between competing businesses, for example to set prices or limit production, or of unilateral conduct by companies with significant market power that exploits consumers or excludes competition. In the EU, collusion is caught by Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) and abusive unilateral behaviour by Article 102 TFEU. In the US, Section 1 of the Sherman Act prohibits agreements between two or more independent entities that unreasonably restrain trade, while Section 2 makes it illegal to acquire or maintain monopoly power through improper means.
Examples of anticompetitive practices are horizontal price fixing (firms fixing prices between them, or controlling prices, discounts, rebates or credits); market division (firms dividing up customers or territories to limit the need to compete for customers); output restriction (restricting the volume of goods produced or services offered). Examples of exclusionary practices would be a dominant firm charging prices below cost; entering into a long-term exclusivity agreement with customers with no objective justification; or refusing to supply a vital input to a customer competes with it in a downstream market.
Some jurisdictions make a distinction between anticompetitive practices which are, in US parlance, “per se” illegal and those which are examined under a “rule of reason”. Under the per se rule, certain conduct is presumed to violate antitrust law, which means that no further inquiry into the practice’s actual effect on the market or the intentions of those who engaged in the practice is necessary. Under the rule of reason, the actual effect of the anticompetitive behaviour on competition is examined, and it requires a court to balance an agreement’s pro-and anticompetitive effects.
Similarly, in EU law agreements can be restrictive of competition by “object” or “effect”. Price-fixing or market-sharing agreements between competitors are examples of anticompetitive practices that are so obviously harmful that no further analysis of their economic effects is required for them to be unlawful, i.e., unless they satisfy the criteria in Article 101(3). In Budapest Bank, however, the CJEU held that the by-object restriction concept must be interpreted restrictively and applied to practices only if they reveal a sufficient degree of harm to competition to consider that it is unnecessary to investigate its effects. The Intel case demonstrates that the European Courts are prepared to annul Commission decisions if they do not undertake a thorough effects-based analysis or if their economic analysis has flaws.
