Since the fallout over the GE/Honeywell matter, (in which the US and the EU competition authorities reached different decisions, even though they had the same information) some deeper competition policy differences between the United States of America and the European Community have been brought to the fore.

At the BIICL Second Annual International and Comparative Law Congress held in London, William J Kolasky, Assistant Attorney General at the Antitrust Division in the US Department of Justice, highlighted a number of differences in competition policy between the US and Europe.

In the US, the Merger Guidelines allow for an efficiency defence. However, in Europe, until recently, it was believed that efficiencies would not be used as a defence against a merger likely to create or strengthen a dominant position.

Instead it was believed that efficiencies would further strengthen that dominant position. Overcoming this divide has led to another, that is, how should efficiencies be measured. In the US, the "consumer welfare" test is applied. This test takes into account only those efficiencies that are likely to be passed on to consumers as lower prices. In Canada, the Competition Authorities adopt a combination of total welfare standard and the wealth distribution-weighting standard that was recently used in the Superior Propane case. Under this standard, the Tribunal will approve a merger if it is likely to result in higher prices as long as the cost savings exceed the deadweight loss from any reduction in output, plus any negative wealth distribution effect on poor consumers.

Fidelity rebates are rewards or discounts given to customers who purchase all, or a specified portion of, their goods from dominant firms. In the EU, fidelity rebates by dominant firms are regarded as a per se violation, except for short-term discounts and volume discounts that are justified by costs, and those that are open to all customers on equal terms. In the US, any reduction in price is viewed as a positive move towards the competitive price, as long as the resulting price is not below costs.

In terms of predatory pricing, the US follows a two-part test to determine that a practice is predatory in nature. Firstly, the alleged predatory price must be below an appropriate measure of cost (below cost pricing), and secondly, the alleged predator must be able to recoup its losses through monopoly pricing strategies once its rivals exit the market. Under the European Court of Justice, the first part of the test is also applied.

However, it views the recoupment of profits as an unnecessary element of predation. In addition, while the US has tended to use the average variable cost as appropriate measure, the European courts have tended to look at prices above average variable costs but below average total cost as predatory.

Applying the essential facilities doctrine is another area where competition policy differs between the two jurisdictions. In the US the essential facilities doctrine has been largely used in regulated utilities, in fear that overuse of it would damage incentives to innovate and invest, and would ultimately burden the competition authorities with the task of having to regulate the terms and conditions of access (given by the dominant firm to the firm seeking access). The US has refrained from applying the doctrine to intellectual property cases for this very reason. However, in Europe, two cases, the Magill case, and the IMS case, have applied the essential facilities doctrine to intellectual property.

Supporters of the essential facilities doctrine have argued that the use of the doctrine in these intellectual property cases did not undercut the incentive to invest or innovate as the cases did not involve the kind of creativity and innovation that copyright laws are intended to encourage.

Yet another area of diverging views is that of monopoly leveraging, in which a dominant firm uses its dominant position in one market to gain a competitive advantage in another. In the US, most courts have found that it is not unlawful for a dominant firm to use its dominance to gain a competitive advantage in another market unless that firm intends to entrench its dominance through leverage or it intends to establish dominance in the next market. On the other hand, in the EU it is unlawful for a dominant firm to use its dominant position in one market to gain a competitive advantage in another one in which it is not dominant, even if its conduct will not create a dominant position in the second market. This is only allowed if the dominant firm can show a legitimate business justification for its conduct. The US believes that if one allows a firm to compete in several markets, then one must also expect that firm to seek competitive advantages of its more efficient production techniques, greater ability to develop products, and reduction in transaction costs.

The fallout over the GE/Honeywell matter has opened up wide debates around these competition issues, and the US and EU competition authorities have to discuss and agree on common terms of analysis in goals and principles of competition policy.

The Efficiency Debate: Which Standard to apply?

The Canadian Competition authorities have been faced with a dilemma over which efficiency standard to apply in analysing the efficiency gains resulting from a proposed merger between Superior Propane and its rival ICG Propane. The Competition Commission found that the proposed merger would substantially prevent and lessen competition in dozens of local markets while the Competition Tribunal argued that the merger was sufficiently efficiency enhancing to allow the merger's approval. In assessing efficiencies, the Canadian Merger Enforcement guidelines stipulate that efficiencies are to be calculated using a total surplus standard. Under a total surplus standard, a merger will be allowed if the sum of producer surplus and consumer surplus is increased. It does not matter whether the producers or the consumers gain, as long as overall surplus has increased, and no loss to society has occurred. When a merger is anticompetitive it results in price increases, thereby giving rise to a redistribution effect from consumers to producers and a negative resource allocation effect.

This approach is said to be socially neutral in that it does not matter whether producer surplus or consumer surplus increases, only an increase in total surplus is required.

The Tribunal initially adopted this approach and approved the merger on the basis that the efficiencies were substantial and offset the anti-competitive effect arising from the merger. The Commission then appealed the decision to the Federal Court of Appeal who found that the Tribunal had erred in its adoption of a total surplus standard, stating that "this standard treats the negative resource allocation effect or deadweight loss, (deadweight loss is the loss to producers and consumers caused by a monopolist restriction of output) of the merger as its only effect and has thus failed in ensuring that all objectives of the Act are balanced".

It highlighted the fact that the total surplus standard treated both producers gain and consumers loss to producers as socially neutral. In this respect it ignored the deeper public interest and concerns that the Act must take into account. For example, it failed to distinguish that the shareholders or producers that are gaining from the wealth transfer may be wealthy shareholders and that the consumers who are losing the wealth are lower or middle income customers. The wealth transfer in such a situation would be seen as regressive and not progressive and hence would not be in line with the public interest concerns of the Competition Act. The Appeal Court remitted the matter back to the Tribunal for re-determination without indicating which standard should be followed.

The Tribunal then adopted the Balancing Weights Approach, which uses a specific formula to determine a weight against which consumer surpluses and producer gains arising from a transaction can be measured. The producer gains are assigned weights totalling to one, and then the weight for consumers is determined.

The balancing weight determined is compared to an appropriate weight determined through the examination of social evidence, thereby indicating whether the efficiency gains arising from the merger truly exceeds its anti-competitiveness, in light of the weights assigned to producers and consumers.

The Tribunal approved the merger on the basis that the efficiencies produced by the merger would be greater, and would offset the anti-competitive effects arising from the merger. In addition, the Tribunal also noted the inherent difficulties in adopting the Balanced Weight Approach that requires one to have sufficient evidence to enable one to measure properly the adverse effects on the merger. The Tribunal cited that it is difficult to determine who is losing and who is gaining, and in the case of intermediate products it requires one to consider the extent of pass through in order to determine the impact on the shareholders of the purchasing company, and the impact on the consumers. Furthermore, while the Balancing Standard required weights to be assigned to consumers and producers, it was extremely difficult in practice to assign weights to parties that would reflect their appropriate social standing.

Fine imposed on gas cartel

The European Commission has fined seven producers of industrial and medical gases a total of 25,72 million euros for participating in cartel activity in the Netherlands between September 1993 and December 1997. The cartel members had colluded on price increasing arrangements of gases such as: oxygen, nitrogen, carbon dioxide and argon supplied in cylinder and liquid (bulk) form and used in many industries.

The Commission gathered evidence showing that the cartel members met regularly between 1989 and 1991 to discuss price fixing arrangements and other trading conditions. They further agreed not to deal with each other's customers for a period of two to five months per year in order to implement the price increases. The trading conditions concerned rent of cylinders and the transportation costs charged to customers. The leading suppliers also agreed to introduce a delivery charge for supplies of bulk and a charge for safety and environment on supplies of cylinders.

When calculating fines on infringements of the Act, the Commission takes into account the gravity of the infringement, its duration and any aggravating and mitigating factors. It also considers any possible cooperation of the parties to the investigation. It further considers the market share and overall size of a company. The final fine does not exceed 10% of a company's annual turnover.

In this cartel, the Commission considered the fact that Hoek Loos and AGA were the two leading suppliers of industrial gases in the Netherlands. The Commission also recognised that BOC and Westfalen had played a passive role in the cartel and had not participated in all the infringements. They hence received a 15% reduction in their respective fines.

In applying the leniency rule, AGA and Air Products were granted a 25% reduction in their fines for providing additional evidence on the cartel, and for providing comprehensive explanations of documents found during inspections.

Seema Nunkoo

Policy and Research