Monday, October 25, 2004

A Mini Colloquy on Competition Law in the US and EU

An unidentifiable contributor posted the following comment to my post on Trinko from last week:

"In Europe, we tend to protect potential competition, competitors and consumers, at the risk of creating a competitive disadvantage for the dominant company. The Microsoft and Coca Cola cases are typical of this.

"In both cases, what was at stake was not the protection of consumers interests (I mean, you are free of downloading a free-linux from the net if you really don't want Win XP), but rather of the competitors.

"The EU approach, in my opinion, in wrong and against the rationale of antitrust law."

Let me suggest two explanations for the difference, one institutional, the other methodological/ideological.

In the US, competition policy consists of antitrust law, rooted in the Sherman Act, and the Federal Trade Commission Act (enacted 24 years after the Sherman Act). The first deals with regulation of competition, rather than protection of competitors. The second deals with unfair and deceptive business practices, and is in part, more consumer oriented. Under EU competition law, what is separate in the US are unified, though far from harmonized. One example of the difference is that the type of shelving policies at issue in the Coca Cola case have been addressed as an unfair business practice in the snack food and cereal industries.

The question, as an institutional matter, is whether it is desirable to separate regulation of competition from protection of competitors and consumers. In the US, this institutional divide may just be an artifact of history. The passage of the Sherman Act was largely motivated by trust busting with some of the consumer protection dimensions of the law being developed later. The FTCA was aimed at regulating particular business practices that directly affected consumers and competitors. The divide in the US reflects the influence of different interest groups on the formation of two very different pieces of legislation that fall under the umbrella of competition policy. The argument could be made that the EU provides a more integrated approach to regulating the marketplace that is more pro-consumer and pro-oompetitor oriented.

Another explanation for the difference that the commentator identifies may be methodological/ideological. Economics has perhaps played a greated role in competition policy in the US, both under the Sherman Act and the FTCA. In the neo-classical form, economics lends support to competition law that is more deferential to private orderings, presumably made on the rational pursuit of self-interest. As Justice Scalia's comment in Trinko demonstrates, there is skepticism about judges being given carte blanche to second guess the decisions of private actors, even monopolists.

The problem is that no one seriously is arguing for a "carte blanche." Instead, the counterargument to Justice Scalia is that judges should intervene when the exercise of private orderings lead to third party harms. The challenge is identifying what constitutes harms. Under the antitrust law branch of US competition policy, the relevant harm is that to competition. The problem is that in the case of governmentally established or "natural" monopolies, there is no competition by definition. Justice Scalia's rejection of carte blanche resolves this dilemma by deference to monopolist or, perhaps more accurately, to Congress, which created the monopoly.

Of course, there is another position that does not lead to carte blanche (and also can be understood int erms of economic analysis). If the purpose of competition law is to benefit consumers, then judges may intervene under competition law to strike down business decisions by monopolists that do hurt consumers. That seems to be the approach adopted by the EU, as the original commentator indicates. The approach, however, is not consistent with the pro-competition, rather than pro-consumer, approach of US antitrust law.

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I think we can all agree that the EU and the US have doctrinal differences when it comes to interpreting their respective antitrust laws. I am also prepared to accept the explanation offered as to how we got to where we are under both systems. What I do not yet comprehend is how we might judge whether one approach is preferred over the other. Is promoting competition a preffered approach to promoting competitors? Does one do a better job of enhancing overall welfare in the long run over the other? What metric do we have to judge?

Posted by: R Badal | Oct 25, 2004 4:02:29 PM

As the original commentator, I'll try to answer this one.

Based on my experience, I believe that the EU's approach of antitrust gives way to political decisions.
Still, I cannot compare this with the US.

This is why I consider the US system to be better than the EU's. You can prove me wrong, though!

Posted by: F-C.D | Oct 26, 2004 3:39:05 AM

While identifying different normative starting points (such as pro-competition or pro-consumer) might be helpful in explaining broad differences in approaches between the US and EU, I do not think that settling on one normative approach is the solution. A case by case approach developed within a theoretical understanding of the relationship between markets and the state seems to me to be more sensible.

The key problem with the US approach is that it tends to be deferential to dominant positions. While economic analysis has been helpful in clarifying the meanings of market power and monopoly, we still do not have a good theory of when market power is appropriately justified by scale, business acumen, or just sheer luck. As a result, I think we get cases, like Morris in the Eleventh Circuit, which take a deferential approach to the business justification of a dominant firm, at the expense of intellectual property policy.

I am not suggesting that the EU has it right. I am, however, unconvinced that the EU approach is purely political. There is an argument to be made that the European competition policy has a useful dose of skepticism towards dominance. But it is clear that the EU case law does not demonstrate a coherent theory of when unilateral conduct is justified and when it is not. It would be helpful to have such a theory.

Posted by: Shubha Ghosh | Oct 26, 2004 2:08:50 PM

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