Ordoliberalism was the main inspiration behind EU competition law.

DanielEU-US relations have been marked by a significant volume of trade and close diplomatic ties for most of post-WWII history. Together the EU and US currently account for half of world GDP and a third of global trade (EU Commission Trade Department). The first transatlantic regulatory cooperation agreement was signed 1991 in the area of competition (Pollack, 2003, p.33). Nonetheless, despite strong efforts to achieve convergence, legal enforcement in this field is still marked by stark ideational differences on either side of the Atlantic. In this blog post Daniel Andersen argues that the US and the EU have completely opposing views on corporate monopolies, which manifests itself in the politics of anti-trust legislation, and can be traced to the economic philosophy of ordoliberalism. 

With the US and EU relying heavily on transatlantic trade, both entities should have an interest in adopting a mutual set of standards in order to better realize potential business opportunities. The major distinction in administrative enforcement in the area is whether one prioritises efficient production methods (protecting competition) or creating a level playing field (protecting competitors). It is this distinction that has led to a transatlantic divergence in competition law.

The European Commission takes up proceedings against parties suspected of breaching competition law, either on its own initiative or upon receiving a complaint. After an infringement has been found, the Commission can impose a fine on the guilty party. The decisions of the Commission can be appealed to the EU Courts (General Court and Court of Justice) (Erbach, 2014, p. 3).

The US legal framework differs by focusing on antitrust rather than competition. The laws are enforced by the Federal Trade Commission or the Department of Justice depending on the industry, but only the Department of Justice can impose criminal sanctions such as fines. Their decisions may be appealed to the US Court of Appeals and ultimately to the US Supreme Court (US Federal Trade Commission).

The relevant EU provision for this study is the Article 102 of the Treaty of the Functioning of the European Union which reads as follows (EU legal register):

“Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.

Such abuse may, in particular, consist in:

(a) Directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;

(b) Limiting production, markets or technical development to the prejudice of consumers;

(c) Applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(d) Making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”

The US counterpart, Section 2 of the Sherman Act is detailed below (Cornell University Law School, 2012):

“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.”

It is worth remarking that even though US law has a specific provision concerning the prohibition of monopolies, the authorities are ironically more lax in their enforcement than their EU counterparts. It has thus been established throughout US case law that conduct by a dominant firm specifically targeted towards maintaining their monopoly on the market should be allowed as long as it makes “economic sense”.

In the EU on the other hand, it has been ruled that undertakings enjoying a dominant position on the market have a “special responsibility” not to distort genuine competition via their conduct. The EU approach goes well together with the specific legal provisions restricting such actions (Abbott, 2005, p. 9-10).

This observation is supported by cases concerning predatory pricing (selling under market value) and bundling of products (linking purchase of items together) that have led to different outcomes on either side of the Atlantic, with the US judiciary generally being more permissive than their European counterpart (Ibid. p. 12). Whereas the EU seems more preoccupied with maintaining the internal structure of the market, the US approach prioritizes efficiencies by encouraging setting up economies of scale (for a more detailed study of comparative case law concerning US and EU monopolization cases, see Fox, 2014).

To put it simply: the EU aims to protect competitors in keeping the cost of market entry for new economic actors low, whereas the US protects competition itself, hoping that the free interplay of market powers will contribute to low prices and consumer welfare. The below graphics illustrate my point. While the economies of the EU and US are about the same size, business conditions vary greatly between the two markets (Cox, 2013; White & Case, 2014, p.11).

Daniel.1jpgDaniel2

The particularity of EU competition law may be explained through the intellectual origins of its framework. It has consequently been argued that Article 102 is a product of ordoliberalism. Ordoliberalism emerged as an economic thought from the Freiburg School in 1930s Germany. Walter Eucken, one of the founders of ordoliberalism, put forward an ideal of “complete competition”, in which no firm in a market has the power to coerce other firms within that market.

This view fits well together with the aforementioned rule of “special responsibility” established in recent EU case law, which calls on a dominant firm to refrain from
undertaking decisions which might put constraints on other market actors (Akman, 2012, p. 49-58).

Ordoliberalism was the main inspiration behind post-war German competition law. The ordoliberal thinkers were not tied to Nazism and their economic views posed an antithesis to Nazi policies. Ordoliberals counteracted the Nazi model built on public planning and cartelization by decentralizing both government and private enterprise. These aspects made their ideas bode well with the allied powers. Ludwig Erhard, the economic minister under the first post-war Chancellor Konrad Adenauer, was a major proponent of ordoliberalism, and the economic success of 1950s Germany eventually made the idea attractive on an EU level (Gerber, 1998, p. 257-265).

Post WWII US courts had been remarkably interventionist in their application of antitrust law. They generally followed the “SCP Method” which was based on the idea that the structure of the market, determines the conduct of the individual actors which drives overall economic performance. SCP advocates argued that creating a level playing field for market actors would be the key to long term economic growth (in line with the current EU approach) (Giocoli, 2015, p. 98-100).

Over the following decades the US judiciary gradually shifted away from their interventionist approach to a more “laissez faire” one, a development which to a large extent can be explained through the lens of the “Chicago Revolution”. The “Chicago School” was a group of scholars centred around Aaron Director which in the 1950s set out to challenge conventional economic policies with their neoliberal ideology. Chicago scholars opposed the SCP method and introduced the price theory as the cornerstone of their ideology. The underlying idea was that the interplay of free market powers would stabilize prices at a perfect equilibrium between producer supply and customer demand (Ibid p. 100-102).

The change in paradigm started in the 1970s when litigants discovered that more than half of antitrust persecutions were being overturned by the courts on appeal. The transformation was fully realized by the time Ronald Reagan became president, as he appointed a Chicago-leaning Attorney General and the Department of Justice antitrust division began shifting their staff from “interventionist” lawyers to “rationalist” economists (Davies, 2010, p. 76-80).

In conclusion, the legislation and enforcement of EU competition law law was shaped by a mix of political economic ideology and historical context. The German competition model was built around an antithesis-model to Nazi era policies. The success of ordoliberalism was legitimized by the impressive post war growth rates of the German economy, which influenced the adoption of ordoliberal competition provisions in the Treaty of Rome. As for the US, the antitrust laws were originally shaped in a way to secure the support of the “petit bourgeois”, but the economic downturn following the oil crisis called for a shift in policy. The election of Ronald Reagan as US president subsequently facilitated the neoliberal transformation.

Daniel is a student of the MSc in European Governance, jointly organized by University College Dublin and Utrecht University. This blog post was written as part of UCD’s School of Politics and International Relations module “Global Political Economy of Europe“.

 

Abbott, Alden F., 02.2005: “A brief comparison of European and American antitrust law”. The University of Oxford, Centre for Competition Law and Policy. The Competition Law and Policy Guest Lecture Programme. Available at: https://www.law.ox.ac.uk/sites/files/oxlaw/cclp_l_02-05.pdf

Akman, Pinar, 2012: “The concept of abuse in EU competition law – Law and economic practices”. Hart Publishing. Oxford and Portland.

Cornell University Law School, 04.01.2012: “Section 2 of the Sherman Act”. Available at: https://www.law.cornell.edu/uscode/pdf/uscode15/lii_usc_TI_15_CH_1_SE_2.pdf

Cox, Wendell, 11.07.2013: “Playing musical chairs with world economies”. New Geography. Available at: http://www.newgeography.com/content/004035-playing-musical-chairs-with-world-economies

Davies, William, 2010:Economics and the nonsense of law: the case of the Chicago antitrust revolution”. Economy and Society, Vol. 39 No. 1 p.64-83. Available at: http://www.tandfonline.com/doi/abs/10.1080/03085140903020655?src=recsys&journalCode=reso20

European Commission Trade Department, 29.04.2016: “Countries and regions – United States”. Available at http://ec.europa.eu/trade/policy/countries-and-regions/countries/united-states/

EU Legal Register: “Article 102 of the Treaty on the Functioning of the European Union”. Available at: http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:12008E102

Erbach, Georg, 27.03.2014: “EU and US competition policies – similar objectives, different approaches”. European Parliamentary Research Service. Available at: http://www.europarl.europa.eu/RegData/bibliotheque/briefing/2014/140779/LDM_BRI(2014)140779_REV1_EN.pdf

Fox, Eleanor M., 03. 2014: “Monopolization and abuse of dominance. Why Europe is different”. The Antitrust Bulletin, Vol. 59 no. 1 p. 129-152. Available at:  http://abx.sagepub.com/content/59/1/129.abstract

Gerber, David J., 1998: “Law and competition in twentieth century Europe: Protecting Prometheus”. Clarendon Press. Oxford.

Giocoli, Nicola, 2015: “Old Lady Charm. Explaining the persistent appeal of Chicago antitrust”. Journal of Economic Methodology. Vol. 22 No. 1 p.  96-122. Available at: http://www.tandfonline.com/doi/full/10.1080/1350178X.2015.1005394

Pollack, Mark A., 2003: “The political economy of the transatlantic partnership”. European University Institute, Robert Schuman Centre for Advanced Studies. Available at: http://www.eui.eu/Documents/RSCAS/e-texts/200306HMTMvFReport.pdf

United States Mission to the European Union: “The US-EU partnership”. Available at https://useu.usmission.gov/transatlantic_relations.html

US Federal Trade Commission: “The enforcers”.  Available at: https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/enforcers

White & Case, 2014: “Global investigations: Reading the practice”.  White & Case legal practice. Available at:  http://awa2015.concurrences.com/IMG/pdf/web-white-case-global-investigations-reading-the-signals.pdf

 

 

 

 

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