Institutional Analysis of Antitrust Policy

An Institutional Assessment of Antitrust Policy International Competition Law Series VOLUME 38 Editor-in-Chief Alastair Sutton, Visting Fellow at the Centre of European Law at King’s College, London The titles published in this series are listed at the end of this volume. An Institutional Assessment of Antitrust Policy The Latin American Experience By Ignacio De León Law & Business AUSTIN BOSTON CHICAGO NEW YORK THE NETHERLANDS Published by: Kluwer Law International PO Box 316 2400 AH Alphen aan den Rijn The Netherlands Website: www.kluwerlaw.com Sold and distributed in North, Central and South America by: Aspen Publishers, Inc. 7201 McKinney Circle Frederick, MD 21704 United States of America Email: [email protected] Sold and distributed in all other countries by: Turpin Distribution Services Ltd. Stratton Business Park Pegasus Drive, Biggleswade Bedfordshire SG18 8TQ United Kingdom Email: [email protected] Printed on acid-free paper. ISBN 978-90-411-2478-4 # 2009 Kluwer Law International BV, The Netherlands All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission from the publisher. Permission to use this content must be obtained from the copyright owner. Please apply to: Permissions Department, Wolters Kluwer Legal, 76 Ninth Avenue, 7th Floor, New York, NY 10011-5201, USA. Email: [email protected] Printed in Great Britain. Table of Contents Acknowledgements xv Preface xvii Introduction Latin American Antitrust Policy: A Concealed Utopia? xix Part I The Wellsprings of Latin American Competition Policy 1 Chapter 1 Government Intervention as the Source of Monopoly in Latin America 3 1.1 1.2 Social Utopia and Government Dirigisme: An Old Latin American Blend 1.1.1 The Utopian Quest of the Fair Price 1.1.2 Spain’s Colonial Mercantilism 1.1.3 Government Dirigisme and National Identity 1.1.4 The Mirage of Economic Autarchy Rent Seeking and Anticompetitive Restraints in Latin America 1.2.1 Government Dirigisme as the Source of Anticompetitive Restraints 1.2.2 Rent Seeking in Latin America 7 7 10 18 20 33 34 36 vi Table of Contents Chapter 2 The Adoption of Antitrust Policy in Latin America 2.1 2.2 2.3 2.4 Antitrust Policy as a Component of Latin America’s Neoliberal Reforms 2.1.1 Neoliberal Reforms: A Real Change of Spirit? 2.1.2 The Effects of Neoliberal Reforms on Market Competition 2.1.3 The Second ‘‘Institutional’’ Generation of Reforms 2.1.4 Constitutional Foundation of Latin American Antitrust Policy 2.1.5 Exemptions to Antitrust Rules 2.1.5.1 Government Immunity and Strategic Industries 2.1.5.2 State-Owned Enterprises Strategic Industries 2.1.5.3 Politically Influential Groups 2.1.5.4 Intellectual Property and Antitrust Policy 2.1.5.5 Rationale behind the Antitrust Exemptions 2.1.6 The Extraterritorial Jurisdiction of Antitrust Rules 2.1.7 Subjective Jurisdiction: Enterprises Competition Agencies: Coercive Powers 2.2.1 Capacity to Make Investigations and Inquiries 2.2.2 The Popularity of Leniency Programs 2.2.3 The Collection of Confidential Information 2.2.4 Punitive Remedies 2.2.5 Civil Remedies 2.2.6 Criminal Provisions 2.2.7 Preventive Measures and Compliance Orders 2.2.8 Capacity to Negotiate Anticipated Settlements The International Dimension of Latin American Antitrust Policy 2.3.1 South American Regional Antitrust Rules: Andean Community and Mercosur 2.3.2 Failed Multilateral Antitrust: The FTAA and WTO 2.3.3 The Advisory Role of UNCTAD and the OECD 2.3.4 The International Competition Network The Emergence of Antitrust Policy as By-Product of Latin American Antimarket Traditions 41 41 42 43 45 47 51 53 56 58 59 62 64 65 67 67 70 71 73 78 79 80 82 83 83 87 88 90 91 Chapter 3 Antitrust Economics: A Look into the Anatomy of Economic Utopia 93 3.1 94 Perfect Competition: A Utopian Market Structure 3.1.1 A Wrong Turn Changes the Face of Economic Competition 3.1.2 The Error That Gave Birth to Modern Antitrust Theory 3.1.3 The Welfare Imperfections of Monopoly 3.1.3.1 Allocative Inefficiency 3.1.3.2 Productive Inefficiency 96 99 102 104 107 Table of Contents 3.1.4 3.2 3.3 3.4 Efficiency and Antitrust Policy Goals: The Short Run versus the Long Run The Policy Implications of the Search of Competitive Equilibrium 3.2.1 A Mathematical Simplification Creates an Illusion 3.2.2 The Losses Resulting from Achieving Perfect Competition in Real-World Markets 3.2.3 Real-World Competition Needs Coordinating Institutions 3.2.4 From Short-Run Perfect Competition to Long-Run Effective Competition The SCP Paradigm and Antitrust Legal Doctrines 3.3.1 The Oligopoly Model as the Bedrock of the SCP Paradigm 3.3.2 The Notion of Barriers to Entry 3.3.3 Development of Functional Antitrust Legislation A Critical Assessment of Antitrust Equilibrium Logic vii 109 110 113 118 122 124 126 126 128 130 132 Part II Latin American Antitrust Policy: Utopia in Practice 137 Chapter 4 Monopoly Power Assessment 139 4.1 4.2 4.3 Definition of Monopoly Power Monopoly Power Assessment 4.2.1 The Antitrust Market 4.2.1.1 Definition 4.2.1.2 ‘‘Substitution’’: The Hallmark of Market Definition 4.2.2 Methodology for Assessing the Antitrust Market 4.2.2.1 Product Market 4.2.2.2 Innovation Markets 4.2.2.3 Geographic Market 4.2.2.4 Identification of the Antitrust Market 4.2.3 Measurement of Market Concentration 4.2.3.1 Statutory Market Share Thresholds 4.2.3.2 Concentration Indexes: HHi, Ci and the Dominance Test 4.2.3.3 The Mexican ‘‘Dominance’’ Index 4.2.4 Direct Evidence of Monopoly Power 4.2.5 Assessment of Market Dynamics 4.2.6 Analysis of Barriers to Entry 4.2.6.1 ‘‘Timely’’ and ‘‘Committed’’ Entry 4.2.6.2 The Analysis of Barriers to Entry in the Latin American Case Law 4.2.7 Collective Dominance Critical Assessment of Monopoly Power Analysis 140 144 145 145 146 148 149 156 157 160 164 164 167 168 171 171 175 178 181 190 193 viii Table of Contents Chapter 5 Consumer Welfare Analysis 5.1 5.2 5.3 5.4 5.5 Recasting the Problem of Social Welfare The Antitrust Dilemma 5.2.1 The Per Se Standard 5.2.2 Case-by-Case Standards 5.2.2.1 Consumer Surplus Standard 5.2.2.2 The Total Surplus Standard 5.2.2.3 Balancing Weights Standard 5.2.2.4 The Sacrifice Test 5.2.3 Optimally Differentiated Competition Rules Welfare Analysis: The Latin American Antitrust Experience 5.3.1 Ancillary Restrictions Doctrine versus Economic Efficiency 5.3.2 A Kaleidoscopic View of Economic Efficiency within Latin American Enforcement 5.3.3 The Legal Standard of Consumer Welfare 5.3.3.1 The Burden of Proof of Economic Efficiencies 5.3.3.2 Conditions Examined in the Analysis of Consumer Welfare The Flaws of Antitrust Welfare Analysis The Implications of the Utopian Perspective of Antitrust Welfare Analysis Chapter 6 Horizontal Mergers 6.1 6.2 6.3 Antitrust Rationale of Merger Control Statutory Standards of Merger Review 6.2.1 Legal Definition 6.2.2 Monopoly Power 6.2.3 Exclusionary Effects 6.2.4 Procompetitive Efficiencies Arising from Mergers and Acquisitions Merger Review: Duty to Notify 6.3.1 Mandatory Premerger Notification Jurisdictions 6.3.1.1 Argentina 6.3.1.2 Brazil 6.3.1.3 Colombia 6.3.1.4 El Salvador 6.3.1.5 Honduras 6.3.1.6 Mexico 6.3.1.7 Nicaragua 199 200 203 203 205 207 208 209 211 211 213 213 214 219 220 221 223 228 231 232 232 232 236 238 239 243 244 244 245 247 247 248 250 251 Table of Contents 6.3.2 6.4 6.5 6.6 Voluntary Merger Notification Jurisdictions 6.3.2.1 Panama 6.3.2.2 Costa Rica 6.3.2.3 Chile 6.3.2.4 Venezuela 6.3.3 Jurisdictions with No General Merger Control Merger Remedies 6.4.1 Structural Remedies 6.4.2 Behavioral Remedies 6.4.3 The Failing Firm Defense Preeminence of Short-Run Efficiencies in Merger Cases The Assessment of Merger Control Chapter 7 Horizontal Restraints 7.1 7.2 7.3 7.4 7.5 Antitrust Rationale for the Prohibition of Collusion Statutory Standards on Horizontal Restraints 7.2.1 Monopoly Power: De minimis Horizontal Restraints 7.2.2 Exploitative Effects: Hard-Core Price Fixing 7.2.3 Procompetitive Horizontal Restraints Explicit Collusion: The Role of Joint Trade Associations and Professional Guilds Circumstantial Evidence of Tacit Collusion 7.4.1 Circumstantial Indicia of Collusion 7.4.1.1 Unusual Price Parallelism 7.4.1.2 Unusually High Prices 7.4.1.3 Institutional Arrangements That Favor Collusion 7.4.1.4 The Oligopolistic Structure of the Market 7.4.2 Justification of Price Similarity 7.4.2.1 Competitors Offer Different Prices 7.4.2.2 The Competitive Dynamics of the Market Dispel Any Threat of Collusion Assessment of Horizontal Restraints Chapter 8 Vertical Restraints 8.1 8.2 8.3 Antitrust Rationale of Vertical Restraints Control Classification of Vertical Restraints: Intrabrand versus Interbrand Statutory Standards for Vertical Restraints 8.3.1 Monopoly Power 8.3.2 Exclusionary Effects 8.3.2.1 Length of the Exclusion 8.3.2.2 Use of Reinforcing Joint Strategies ix 252 253 254 254 256 258 258 259 262 265 266 268 275 276 276 277 280 286 287 291 292 295 298 298 305 307 307 308 311 315 316 317 319 320 323 323 325 x Table of Contents 8.3.2.3 8.3.2.4 8.4 8.5 The Kind of Restriction Deployed Scope and Production Stage Level Affected in the Market 8.3.3 Procompetitive Efficiencies of Vertical Restraints 8.3.3.1 Alignment of Incentives between Manufacturers and Distributors 8.3.3.2 Discouraging Free-Riding Effects among Distributors 8.3.3.3 Enabling Investments in Specific Assets Latin American Case Law: Exclusive and Selective Distribution, Resale Price Maintenance 8.4.1 Exclusive Supply 8.4.2 Exclusive Distribution 8.4.3 Selective Distribution 8.4.4 Franchising 8.4.5 Resale Price Maintenance 8.4.5.1 The Legality of Suggested Prices Assessment of Vertical Restraints Chapter 9 Unilateral Restraints 9.1 9.2 9.3 9.4 Antitrust Rationale of Unilateral Restraints Control Statutory Standards of Abuse of Dominance 9.2.1 Monopoly Power 9.2.2 ‘‘Abusive’’ Exclusionary or Exploitative Effects 9.2.3 Procompetitive Unilateral Restraints 9.2.3.1 Minimizing the Risk of Commercial Default 9.2.3.2 Development of Complementary Products 9.2.3.3 Promotion of Investments on Networks Latin American Case Law on Abuse of Monopoly Power 9.3.1 Tie-In Arrangements 9.3.2 Refusal to Deal 9.3.3 Access Denial on Essential Infrastructure 9.3.4 Raising Rivals’ Costs 9.3.4.1 Price Squeeze 9.3.4.2 Increasing Switching Costs 9.3.4.3 Exclusivity Dealings 9.3.5 Price Restraints 9.3.5.1 Price Discrimination 9.3.5.2 Price Discounts 9.3.5.3 Excessive Pricing 9.3.5.4 Predatory Pricing Assessment of Abuse of Monopoly Power 326 327 327 329 329 330 331 332 332 337 341 343 344 346 351 352 353 353 355 355 356 356 357 358 358 360 362 366 367 368 369 370 370 371 373 375 378 Table of Contents xi Chapter 10 Competition Advocacy: The Neglected Agenda 381 10.1 Regulatory Reform and Competition Policy 10.2 The Scope of Competition Advocacy 10.3 Latin America’s Competition Advocacy Experience 10.3.1 Liberal Professions 10.3.1.1 Public Notaries 10.3.1.2 Pharmacists and Drugstore Retailing 10.3.1.3 The Health Sector 10.3.2 Trade Associations 10.3.2.1 Capital Markets 10.3.2.2 Tourist Agencies 10.3.3 Government-Driven Cartels 10.3.3.1 Energy Sector 10.3.3.2 Basic Industries 10.3.3.3 Small and Medium Foodstuff Producers 10.3.4 Anticompetitive Government Measures 10.3.4.1 Restrictions Introduced by Local Councils 10.3.4.2 Definition of Technical Standards 10.3.5 The Experience of Privatized Public Utilities 10.3.5.1 Telecommunications 10.3.5.2 The Power Industry 10.3.5.3 The Railway System 10.3.5.4 Airline Carriers 10.4 Competition Advocacy and Antitrust Enforcement Compared 10.5 Assessment of Competition Advocacy in Latin America 381 383 385 386 386 387 389 390 392 393 393 394 396 397 399 399 401 404 405 407 408 409 409 414 Chapter 11 Antitrust Policy in Regulated Industries 421 11.1 Correcting Competition Failures Through Regulation 11.1.1 Open Infrastructure Access 11.1.2 Pooling Capacity 11.1.3 Time-Tabling 11.1.4 Franchise Bidding 11.2 Competition and Regulation in the Latin American Experience 11.2.1 The Electricity Sector 11.2.2 The Telecommunications Industry 11.2.3 The Railway Industry 11.2.4 The Gas and Oil Industry 11.2.5 Ports and Airports 11.2.6 Solid Waste 11.2.7 Financial Services 423 423 425 426 427 428 429 431 435 438 439 441 441 xii Table of Contents 11.3 Forms of Institutional Coordination 11.3.1 The Competition Agency Controls Sector-Regulatory Tasks 11.3.2 The Competition Agency Holds Veto Rights 11.3.3 Interlocking or Joint Decision-Making Bodies 11.3.4 Required Consultation 11.3.5 Formal and Informal Coordination Agreements 11.3.6 Formal or Informal Channels for Consultation, Advocacy, and Technical Communications 11.3.7 Consumer Advocacy within the Sector Regulator 11.3.8 Purposefully Overlapping Jurisdictions 11.4 Political Economy Issues between Sector Regulators and Competition Agencies 11.4.1 Conflictive Relationship Competition Agencies and Sector Regulators 11.4.2 A Case Shows the Need for Institutional Cooperation 11.5 Assessment of the Interface between Sector Regulation and Antitrust Policy 443 446 447 447 448 449 451 452 453 455 458 460 461 Part III Institutional Assessment of Latin American Antitrust Policy 465 Chapter 12 The Antimarket Antitrust Policy Agenda 467 12.1 The Antimarket Effects of Antitrust Policy 12.1.1 The Logic of Antitrust Policy versus the Logic of Market Processes 12.1.2 The Dynamic Nature of the Market Process 12.1.3 The Contradiction between Antitrust Assessment and Long-Run Efficiencies under Case Law 12.1.4 Overemphasis of Price Competition 12.1.5 The Problems of Balancing Efficiencies and the Rule of Law 12.2 Uncertainty in the Assessment of Market Size 12.2.1 Uncertainty about the Legal Standards of Antitrust Market Analysis 12.2.2 Limitations on the Concept of Demand Substitution 12.2.2.1 Industry Demand is Not Homogeneous 12.2.2.2 Industry Supply is Not Homogeneous 12.3 Uncertainty in the Assessment of Barriers to Entry 12.3.1 Time of Entry as Proxy: A Solution? 12.3.2 Imprecise Legal Standards of Barriers to Entry 12.3.3 The Meaning of Barriers to Entry in Dynamic Markets 468 470 472 475 482 486 487 488 492 493 495 496 497 502 506 Table of Contents xiii 12.4 The Erosion of the Rule of Law 12.4.1 The Mirage of Data Collection 12.4.2 Uncertain Standard of Proof 12.4.3 Perfect Justice versus the Rule of Law 12.4.4 The Enhancement of Government Discretion 12.4.5 The Rule of Law as a Social Welfare Goal 12.5 Conclusion: The Institutional Costs of the Antitrust Utopia 509 510 514 518 519 522 529 Chapter 13 The Institutional Weakness of Competition Agencies 535 13.1 The Marginal Role of Courts in the Antitrust System 13.2 The Mirage of Autonomous of Competition Agencies 13.2.1 Legal Charter and Reporting Duties 13.2.2 Funding, Size of Agency, Hiring Qualified Officials 13.2.3 Scope of Activity 13.2.4 Stability in Office and Qualifications 13.3 Insufficient Institutional Safeguards 13.3.1 Organizational Problems inside Competition Agencies 13.3.2 Overlapping Agencies 13.3.3 The Open-ended Wording of Antitrust Provisions 13.4 Political Interference over Competition Agencies 13.4.1 Venezuela: From Show Case to a Basket Case 13.4.2 Argentina: The Aftermath of the 2002 Economic Crisis 13.4.3 Nicaragua: The Undermining Lack of Political Support 13.4.4 Honduras: Institutional Setbacks 13.4.5 Colombia: Steady Institutionalization of Competition Policy 13.4.6 Panama: Frustration with the Judiciary Triggers Reform 13.4.7 Dominican Republic: A Hopeful Beginning? 13.4.8 Peru: The Institutional Costs of Political Interference 13.4.9 Brazil: The Need to Unify Enforcement Criteria 13.4.10 El Salvador: An Emerging Promise 13.4.11 Chile: A Workable Competition Scheme? 13.5 Trends and Prospects of Latin American Competiton Policy 13.6 Conclusion: Weak Competition Institutions Renew Government Interventionism in Latin America 536 540 541 543 549 550 553 554 557 559 560 560 564 565 566 567 569 571 571 573 574 575 578 580 xiv Chapter 14 Conclusions: Overcoming the Antitrust Utopia Table of Contents 585 14.1 The Weight of Ideology in the Shape of Competition Policies 14.2 Utopia versus Reality: The Need to Restate the Latin American Competition Policy Agenda along Institutional Lines 14.3 The Dangers of Misguided Competition Policymaking 14.4 Overcoming Trivial Debates about Economic Reforms 592 595 597 Bibliography 599 List of Figures 615 List of Tables 617 List of Cases (Alphabetical Order) 619 List of Cases (per Jurisdiction) 625 List of Statutes 637 Subject Index 643 587 Acknowledgements The list of persons to whom I would like to thank is long; all gave me important insights about statements made in previous drafts, fine points about antitrust theory, and important feedback on the vexing question of antitrust’s goals. In particular, I am indebted to Luis Tineo and Tomas Serebrinsky, from the World Bank; Russell Pitman, and Caldwell Harrop, from U.S. Department of Justice and the Federal Trade Commission; and professors Armando Rodriguez, from the New Haven University Department of Economics, and David Gerber, from the Chicago-Kent College of Law, for kindly agreeing to review selected chapters of this book. Their comments and questions were particularly helpful in clarifying my thoughts on the scope of my work, as well as fine theoretical points about antitrust policy that needed further clarification in the book. Also, my gratitude goes to Professor Steve Keen, from University of Western Sydney, who kindly authorized me to publish two illustrative graphs supporting an important critique endorsed in this book against the conventional textbook view of market competition. I have drawn important insights from competition colleagues all around Latin America. In particular, I would like to express my gratitude to Celina Escolan, Superintendent of Competition of El Salvador, for her contribution in giving me important bibliographic materials about Colonial levies imposed in New Spain (Mexico) and Chile, as well as Ana Maria Alvarez, from UNCTAD, and Marı́a Coppola, from the FTC, for all their encouragement and support. There were many friends who encouraged me to finish this book. In particular I would like to thank my publishers, Christine Robben and Eleanor Taylor, whose positive energy encouraged me to complete this book. Similarly, I am indebted to my proofreader, Jon Lahn, for his careful revision of previous drafts, extremely useful comments and above all, his special enthusiasm in this project. xvi Acknowledgements Special thanks are due to professors Mario Rizzo, Roger Koppl, David Harper, and Israel Kirzner, from NYU, as well as G.B. Richardson, from Oxford University, for all their intellectual support and inspiration in my formative academic years. This book bears their intellectual imprint on the importance of institutions in economic exchanges, which is the key factor that is missing from conventional competition policy, and which triggered my interest in writing this book in the first place. Finally, I must thank my wife Marianella and my sons, Andres and Rodrigo, for all their patience as I was stealing long hours from them to write this book. This book is dedicated to the memory of my late father, Rafael De Leon Alvarez. Preface An Institutional Assessment of Antitrust Policy: the Latin American experience critically analyzes the development and role of antitrust law and policy in one of the most complex regions of the world. This book presents an original thesis: Latin American antitrust policy reveals the search for economic utopia that underlies regulatory activity throughout the economic history of the region. Inevitably, like all governments in pursuit of utopian ideals, governments in the region have devised policies in a way that eventually undermines market institutions. Antitrust policy is not an exception to this rule. Contrary to the general consensus about the origin of antitrust policy in Latin America, as a by-product of neoliberal policies implemented in the 1990s, the emergence of this policy should not necessarily be seen as representing an endorsement of procompetitive values in the region. This book examines the conceptual premises of antitrust policy to show that they are perfectly compatible with the underlying Latin American proregulatory ethos. Several sets of facts support this thesis: the preference of merger control over other less intrusive forms of market surveillance; the timid role of competition advocacy against government acts that restrain competition; and the feeble institutional structure created to apply the policy. Above all, the actual functioning of the policy renders stable law making virtually impossible, since it is narrowly focused on attaining idealized optimal market outcomes that can never be reached. This phenomenon opens the gate to unbounded government discretion, which is exactly the opposite of what neoliberal reforms intended to attain: a playing level field for competition and prosperity to blossom. These are only a few elements that reveal the need to reassess whether the goals of antitrust policy are, in fact, procompetitive. Moreover, antitrust enforcement in Latin America has actually reproduced the blend of rent seeking, corporatism, and mercantilism that has characterized xviii Preface Latin American economic institutions throughout history. Accordingly, the policy has undermined the property rights of more entrepreneurial firms by subjecting them to the permanent threat of prosecutions triggered by less competitive firms. This dynamic works to block consumers’ access to the most efficiently produced goods on the market. To date this original thesis has not received sufficient attention, nor has it been adequately explored. The importance of the Latin America within the global political and economic arenas gives this book huge international significance and interest. Written by a leading authority on the topic, this is the first book that presents a detailed description of Latin American antitrust law and policy as it has been developed through numerous judicial opinions. The book will prove useful to a variety of audiences around the world: competition law specialists; students of the subject; policymakers and politicians in Latin America; and those whose work deals with law and economics and who wish to know more about competition law and policy in this special part of the world. Introduction Latin American Antitrust Policy: A Concealed Utopia? If the misery of our poor be caused not by the laws of nature, but by our institutions, great is our sin. (Charles Darwin, Voyage of the Beagle) The pursuit of economic development and social welfare through government intervention is perhaps the most pervasive social phenomenon of our times. Almost every government decision today bears the imprint of a deliberate quest for societal well-being, inspired by ideologies that call government intervention to put a remedy on what are perceived to be social ills. Yet, few scholars seriously look into the inner rationale inspiring such intervention. Antitrust policy is a good example of this phenomenon. Antitrust laws, customarily taken as the hallmark of free markets,1 are assumed to have historically evolved from the British Common Law (Hylton, 2003).2 The U.S. Sherman 1. In this vein, Sullivan and Harrison note (1988, p. 5): ‘‘What is clear from the legislative history of the Sherman Act is that Congress intended to incorporate and federalize the common law antitrust precedents.’’ This tradition has remained until our days: ‘‘Antitrust laws . . . are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free-enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms.’’ U.S. Supreme Court Justice Thurgood Marshall, United States v. Topco Associates, Inc. (405 U.S. 596, 610 (1972)). 2. In England, the concern with monopolies arose in parallel with the protection of economic rights. Already in the sixteenth century, the great authority on the common law, Lord Edward Coke, glossed the word ‘‘libertates’’ in the Magna Charta by citing two common law cases against monopolies, Davenant v. Hurdis (72 Eng. Rep. 769, King’s Bench, 1599) and Darcy v. Allein (77 Eng. Rep. 1260, King’s Bench, 1603), most widely know as ‘‘The Case of Monopolies’’). The common law tradition would then be revamped through antitrust laws in the late nineteenth xx AU: Could you provide the reference details of ‘‘Fray Tomas de Mercado, Suma de Tratos y Contratos (1571)’’ in the bibliography? Introduction Act of 1890, which instituted this policy in the United States, is usually associated with this tradition of protection of economic rights. It may be surprising to learn that, contrary to common belief, the first antitrust provisions ever dictated didn’t actually originate in a Common Law country as the United States. Antitrust’s oldest ancestor is found in a society that had considerably departed from endorsing free markets or encouraging the development of economic rights: The medieval kingdom of Castile. This historical fact may be surprising to some, and could perhaps be interpreted as a historical ‘‘anomaly.’’ Nonetheless, it deserves closer attention, as it will bring our focus to the central hypothesis of this book, that is, the antimarket provenance of antitrust policy. According to the history record, the development of antitrust policy is closely linked to the culture of mercantilism, corporatism, and government interventionism prevailing in the Hispanic world in medieval times, which was later bequeathed to Latin American republics. Antimonopoly provisions were already in force in Castile by the end of the thirteenth century. Alphonse X ‘‘The Sage’’ (1265) had already passed legal provisions prohibiting traders from engaging in price fixing and output restriction.3 Moreover, by 1571, Fray Tomas de Mercado refers in his book Suma de Tratos y Contratos (1571) to the ‘‘fair price, where no burdens are imposed and of the monopolies and illicit sales.’’ In this work, Mercado traces the origins of the prohibition against tactics employed by traders to avoid lowering their prices to the reign of Alphonse XI (1312-1350). In the laws governing traders, King Alphonse XI ordered governors to ‘‘punish, as required by law’’ traders engaging in price fixing. These rules were neither transient nor entirely irrelevant; on the contrary, they were in force well until the nineteenth century. Pascual y Vicente (2003) observes that according to the Guia de Alcaldes y Ayuntamientos (1847), century. The justification of antitrust laws was associated with protection against the economic power that trusts increasingly acquired in the United States during the reconstruction that followed the U.S. Civil War (1870-1900). 3. Second Law, Title 7, Fifth section of the ‘‘Seven Laws’’, entitled ‘‘Of the shortages and bids that merchants create between themselves through oaths and guilds’’ provided the following: ‘‘Shortages and bids merchants make between them, through oaths and guilds, to help one another setting the price between them, by arranging the extent of each fabric, or by fixing the weight and measurement of any goods, and no less. In a similar fashion those who fix the price between themselves of each of the things they offer in their labour [will contravene this law]. Another bid will be to prevent others from undertaking their labour, except on the condition that they do so in their companies. And even those who were stopped from finishing what they had begun theretofore [will also contravene this law]. And also those who abstain from offering their labour to others, but only to their own breed [will also be regarded to undertake shortages]. And due to the evils that follow from them, we maintain that such guilds, oaths, shortages and bids be not undertaken except with the knowledge and consent of the King, and if they [nevertheless] do so, [they will] be invalid. And that those who in the future undertake them, lose everything they get from them and be given to the King. And, furthermore, be expelled from the land forever. We also order that the local town judges consenting on these shortages to take place, or abstaining from repealing them after they have taken place or if they knew of their existence and didn’t communicate them to the King to undo them, to pay fifty pounds of gold to the King.’’ AU: Could you provide the reference details of Alphonse X ‘‘The Sage’’ (1265) in the bibliography? AU: Could you provide the reference details of ‘‘Guia de Alcaldes y Ayuntamientos (1847)’’ in the bibliography? Latin American Antitrust Policy: A Concealed Utopia? xxi which summarizes the previous Spanish regulations on the subject, local town councils in this country were vested with powers against monopolies.4 Modern antitrust scholars would have a hard time explaining how antitrust provisions were conceived in countries embracing economic mercantilism and corporatism before they appeared in countries enjoying fully blossomed free market economies. Is not antitrust policy a rational effort designed to combat such corporatism, most often expressed through cartels and similar other forms of industrial organization? Far from evidencing a commitment of the Spanish Crown in the development of free markets, the emergence of antitrust in medieval Spain suggests a puzzling hypothesis: that antitrust policy is germane to economic institutions driven by heavy State interventionism; it is not a policy guided by a desire to promote ‘‘free markets,’’ but ‘‘fair markets.’’ If anything, Spain’s medieval antitrust rules reveal mistrust—on the part of the Crown and Spanish society in general—of the capacity of markets to promote social welfare. Trading practices such as hoarding and price alignment were perceived as expressions of un-Christian greediness and other moral flaws deserving of government punishment. As a result of the suspected incapacity of the market system to correct itself, the Crown considered it necessary to step in and regulate business affairs according to Christian goals, in this case ‘‘just price,’’ laid down by public authorities. De Roover (1974, p. 181) notes: Throughout the Medieval Age and the 16th century laws were passed to align business practices in conformity with the teachings of the Church and with the code of social ethics developed by theologians and jurists. It is true that the medieval statutes often remained dead and that the abyss between established law and coercion was seldom overcome. However, whenever opportunity arose or public claims were felt, the authorities unexpectedly awoke from their lethargy and showed a sudden fervor for renewing a statute long forgotten. As long as the law was in the books, the transgressor could never be in peace; for breaching them could lead them into shackles if not the galleys. This interventionist approach toward markets would be reinforced by the general system upon which the Spaniards, and later the Latin Americans, have structured their market transactions.5 4. In an explanatory note, these guidelines literally stated as follows: ‘‘This crime—monopoly— attacks also, although indirectly, law and order. It consists of a covenant that several individuals undertake to prevent the supply of goods and commodities in towns, with the purpose of halting prices from descending. Its gravity is known of course, as well as the abhorrence that carries with it for being daughter of despicable greed. ( . . . ) The authorities who tolerate monopolies are subject to a heavy fine, according to the law which we hereby include, as the only one on the subject. . . .’’ 5. In fact, provisions similar to those contained in the Guia de Alcaldes y Ayuntamientos of 1847 passed into the commercial legislation of Latin American countries following their independence from Spain. An example of this is Art. 6 of Colombia’s Law No. 27 of 1888, which prohibited ‘‘commercial societies ( . . . ) which are directed towards the monopoly of products or any industrial branch.’’ Similar provisions were repeated in the commercial codes of other Latin xxii Introduction This hypothesis of this book contradicts what usually is believed about antitrust policy: that it represents the Magna Charta of free enterprise in Latin America, which wise neoliberal policymakers devised in order to promote market values in the region. Therefore, the hypothesis deserves further explanation. THE PURPOSE OF THIS BOOK The conventional notion of antitrust policy reflects the peculiar perception that policymakers often have about markets, which is the key focus of this book: that market competition rests on the structure of markets as well as business rivalry. In the words of Khemani (2007, p. 7): Competition policy refers to those government measures that directly affect the extent of rivalry between enterprises and the structure of the industry. In this conventional view, markets failures prevent optimal levels of competition, thereby calling for government intervention through corrective means; hence, the role of the competition authority is primarily to challenge business conduct that causes such failures. Antitrust enforcement focuses on preserving ‘‘independent’’ business decision making and controlling potential sources of market foreclosure which would otherwise limit the effective number of business operators. According to Boner and Krueger (1991, p. 1) antitrust policy is a government instrument designed to intervene in markets in order to preserve rivalry among independent buyers and sellers in relatively unregulated markets. Antitrust policy nominally plays an instrumental public interest role. In essence, this role is to restrain business conduct that reveals an exercise of monopoly power aimed at excluding competitors or exploiting consumers and clients. If markets are a means of resource allocation, then firms possessing monopoly power can snatch consumers’ rents by imposing monopolistic conditions on trade. Information asymmetries, barriers to entry, and other imperfections enable monopolists to act to their advantage. Therefore, the purpose of competition agencies is to restore optimal social resource allocation in which firms can, in principle, have unencumbered access to social resources, unless they are legitimately given to only one competitor in the market through legal means, for example, a patent, legitimate exclusive dealings, etc. Such interventions lead to lower prices and a wider array of consumer choices in the short run, that is, a situation where prices will be driven closer to marginal costs, thus ensuring the maximum welfare for consumers. In short, antitrust policy is conceived as a ‘‘corrective’’ government tool against perceived departures from optimal resource allocation triggered by market failures. American countries—yet these provisions were seldom, if ever, applied, due to alternative means of controlling trade, such as price controls, licenses and political pressure. Therefore, far from being driven by the pursuit of promoting free trade and economic freedom, these provisions were conceived, enacted and implemented in the context of deeply antimarket public policies, trade mercantilism and government dirigisme. Latin American Antitrust Policy: A Concealed Utopia? xxiii Compared to the prolific activity displayed in the field of antitrust enforcement, competition agencies only marginally address government measures that create barriers to competition, such as intrusive legislation, regulations, and bylaws. This activity, usually distinct from antitrust enforcement, is normally referred to as ‘‘competition advocacy.’’ Advocacy of procompetitive lawmaking represents only a marginal part of the activities usually conducted by competition agencies. A fundamental reason explains this phenomenon, as will be explained in this book: The antitrust policy agenda is primarily focused toward condemning business trade restraints, while it neglects the primary source of anticompetitive restraints, particularly in Latin America: that is, government regulation. Behind the misguided policy agenda, of course, lays a theoretical flaw. The theory of competition that supports antitrust enforcement does not encourage the analyst to concentrate his attention on the institutions that support and frame businesses’ investment decisions. It is not a theory that sheds any light upon the motives of entrepreneurs for deciding output or price levels; rather it is a theory focused on identifying ‘‘optimal’’ market outcomes which arise from idealized business behavior. In this light, entrepreneurial behavior is always construed as imperfect (i.e., geared toward imposing monopolistic contrivances upon other market participants) due to the very utopian assumptions about the nature of markets upon which such deduction rests. This work will highlight why the lack of interest displayed by this particular brand of competition theory rests on its preference toward predicting the result of impersonal market forces, rather than interpreting entrepreneurial behavior which gives ultimately rise to such forces. This work will explain why the ‘‘equilibrium’’ notions of competition postulated in conventional economics (i.e., perfect competition, workable competition; monopolistic competition), provide no useful bedrock for construing workable policymaking. In fact, it defeats the very purpose which this policy intends to attain, namely promoting innovation, entrepreneurship and economic growth, all of which flow from real-based business competition. Along this way, the conventional competition theory has distracted antitrust scholars into making vexed assessments about market structure, thereby consuming valuable human and financial resources which could be employed in dealing with the fundamental source of anticompetitive restraints in Latin America—and elsewhere, namely government intervention. Even worse, condemnation of business conducts has often been made at the expense of undermining the stability of the rule of law; and stable law enforcement provides the proper setting for markets to flourish. Paradoxically, antitrust enforcement has undermined the transparency of market institutions, in the name of promoting market competition. In short, instead of restating the goal of antitrust policy, as usually the critique of antitrust policy emphasizes (Bork, 1978), this book will advocate a different sort of perspective for approaching entrepreneurial conduct in the market. This book emphasizes the need of understanding market institutions, and their guiding role on competition processes; also, it underlines how antitrust policy could undermine such processes. Indeed, the emphasis of this book will highlight institutional flaw xxiv Introduction as a major cause of the failure of competition agencies to attain effective result across the region. WHY ANTITRUST IN LATIN AMERICA? The reader may by puzzled as to why I decided to explain the inconsistencies of antitrust policy in the context of the enforcement experience of Latin American countries, which is significantly less extensive than that of other jurisdictions, notably the U.S. or the European Union. The reason is simple. Since the 1980s, economic reforms allegedly geared toward insertion in the global economy have been implemented in Latin America. These reforms, best captured by the so-called Washington Consensus,6 include antitrust policy as a fundamental component of the reform package. However, recent criticism over the scope and effectiveness of such Consensus has emerged, particularly in regards to its consistency with the institutions required to support market reforms in the region. In view of such criticism, the question arises about the true commitment of antitrust policy toward the promotion of free market principles. Although scholars advocating antitrust policy insist on the promarket nature of this transformation, this position deserves further examination. One way of looking into this question is by examining the various antitrust experiences of nations in the region. As Coppola and Pittmann (2006) indicate: Latin America provides an interesting case study because although the trend may now be reversing, over the past twenty years it has been a region of neoliberal, pro-market, Washington Consensus reforms, and the question of whether governments that have given lip service to free markets have also refrained from large-scale economic intervention is a real one. Latin America also provides a rich set of experience for examination because of its diversity— seen in the dominance provisions themselves, the institutional structure of the competition agency, and the wide range of the economic importance of each country. For example, some jurisdictions prohibit practices such as excessive pricing while others do not. With respect to institutional structure and caseloads, Latin America offers a variety of experiences. Panama and Peru, for example, generally initiate fewer than 15 cases per year, while Mexico handles upwards of 200 cases each year. Similarly, in 2003, Costa Rica’s agency had fewer than 20 professionals, and operated on a budget of approximately US$200,000; in the same year the Mexican agency had 120 professionals dedicated to competition, and had a budget of approximately US$15 million. 6. We explain the scope and significance of the Washington Consensus in depth in Section 2.1.1, below. Latin American Antitrust Policy: A Concealed Utopia? xxv Providing a full account of why and how antitrust policy emerged in Latin America is bound to be controversial, due to the common beliefs and generally accepted truths surrounding the purposes addressed by antitrust policy. The conventional storyline gives us a rosy view of antitrust policy as a rational effort aimed at modernizing institutions in the region. This effort was directed by enlightened policymakers who were concerned about the potential problems arising from neoliberal reforms of the 1980s (Guasch and Rajapatirana, 1994; Khemani and Carrasco-Martin, 2008). In this account, the reforms of the 1980s, which were intended to promote market functioning, needed to be tamed in order to prevent excesses arising from unfettered market liberalization. In this picture, enlightened governments would prevent markets from failing by introducing market discipline through antitrust policy. Free markets would blossom in Latin America if anticompetitive practices adopted by incumbent market players were eliminated through targeted intervention. For example, Crampton (2003) notes: In the current delicate political and economic environment in Latin America, which has been characterised by some setbacks in the competition policy area in a number of countries, it is essential for those among us who have faith in a competition and efficiency driven economic policy to take active steps to help cultivate a renewed commitment to market reform. Presumably, these ‘‘steps’’ would take the form of antitrust enforcement. Two leading legal practitioners have recently stated: [t]he economic benefits of free competition are increasingly recognized and the need for a strong and effective competition law to underpin a competitive economy is now almost taken as a given. Thus many Latin American countries are dedicating increasing government resources, both human and financial, to establishing or developing competition laws and policy. (Ryan, Alan and K. Faden, 2007) The enforcement of antitrust policies was conceived under the naı̈ve assumption that such policies would be the logical continuation, at the microeconomic level, of economic liberalization that had already been initiated at macroeconomic level. To antitrust advocates, microeconomic reforms required ensuring that markets would function properly, free from market failures that impeded optimal resource allocation (Boner and Krueger, 1991; Khemani, 1999; Khemani and CarrascoMartin, 2008). In particular, these failures exist due to the limitations of open trade to counteract any monopolistic attempts. Rodriguez (2006, p. 163), notes the following: Free-trade skeptics argue that the benefits of increased international commerce are largely limited to the tradeables sector and certainly do not impact the price of nontradeables. Only proactive challenges to anticompetitive behavior can curtail market power abuses in the nontradeables sector; market power abuses and anticompetitive practices that would surely arise as formerly state-run monopolies and parastatals in transition and developing economies are transferred to private hands but not subject to the disciplining effect of imports and free trade. xxvi Introduction Thus, antitrust policy would make it possible for Latin American economies to improve the allocation of society’s resources by freeing them from interference arising from the manipulations of monopolies and cartels which open trade and deregulation cannot fix alone. Naturally, these scholars believe antitrust policy to be not only consistent with, but essential for, the success of promarket economic reforms. The first part of the book will concentrate on describing how antitrust enforcement emerged, contrary to common belief, as a cultural by-product of the antimarket ethos that prevailed in Latin America. It is usually assumed that antitrust policy is a complement to economic reforms, but seldom is its nature examined; close examination reveals that antitrust policy is clearly intended to create a buffering effect against extreme economic liberalization. The goal of the first part of this book is to highlight how Latin Americans have created a sort of ideological ethos guiding and justifying government intervention, and how antitrust enforcement is merely a new tool for implementing this entrenched belief. Naturally, this thinking is the by-product of rent-seeking behavior, which has eroded economic rights through the enshrinement of government dirigisme as the main driver of policymaking. Hence, governments are seldom guided by a legitimate drive toward reinforcing the property rights of individuals, but rather seek ways in which those rights may be overruled in the pursuit of the ‘‘public interest.’’ The line of reasoning developed in this book is closer to the view of those who believe that antitrust policy did not develop smoothly, as part of a rational process aimed at improving economic performance in the economies of the region, but rather that it emerged as the political outcome of resistance to economic reform by powerful interest groups who devised antitrust policy as a tool for protecting their markets from more efficient foreign competitors. Neoliberal reforms threatened the myriad of subsidies, trade protections, and barriers to competition which many local groups had enjoyed since the end of the Second World War, which gave them a preeminent economic position in the market at the expense of more efficient competitors. These domestic groups correctly perceived liberalization to be a threat to their privileged status quo; therefore, they sought ways of delaying liberalization’s economic consequences and the introduction of more competition. They viewed antitrust policy as a sophisticated instrument with which to challenge more efficient firms by raising their costs of doing business. Our concern is with the actual ideology behind policy action that undermines market functioning. Rent-seeking activity is supported on the government dirigisme ethos, which in turn is grounded on utopian beliefs about the sources of social welfare and the role of government intervention in it. This thinking encouraged neoliberal policymakers to adopt antitrust policy as a major tool of economic reforms in Latin America, without realizing their potentially antimarket effects. Explaining the antimarket beliefs prevailing in Latin America as a by-product of the search for an economic utopia will involve an exploration of the influence of history on economic institutions in the region, as well as the underlying political beliefs that have led policymakers in the region to support enthusiastically this new brand of government interventionism. Latin American Antitrust Policy: A Concealed Utopia? xxvii The analysis of this book is, therefore, focused on the intellectual foundations of antitrust policy, as well as its practical effects. We intend to show how antitrust enforcement is germane to the ideology of government dirigisme and economic mercantilism that has been practiced throughout Latin America’s history. This is important to convey a proper explanation of the influence of intrinsic cultural values in the formulation of policymaking which in the region. Our ultimate goal is to show how economic institutions governing market exchanges have changed little in the region due to the resilient government dirigisme that has been the dominant ideology in the minds of Latin American policymakers throughout history. Even in moments of brief reappraisal, such as the two last decades of the twentieth century, dirigisme dominated public policy, albeit in moments when ‘‘efficiency,’’ ‘‘liberalization’’ and ‘‘competition’’ were widely accepted as the slogan of the moment. Thus, as we will show, antitrust policy is merely a restatement, in the language of economic science, of the basic utopian tenets of Latin American political philosophy, which displays governments as the major players of economic and social development, although in this incarnation they function as regulators of the economic process rather than the key actors. Hence, contrary to general belief, neoliberalism did not change the set of values or ideas held by Latin Americans, which in turn explains their resistance to abandoning their commitment to strong government dirigisme in pursuit of distributive or social justice. To summarize, in order to explain the central hypothesis of this book—that Latin Americans adopted antitrust policy because this policy is compatible with the region’s antimarket culture—this book will explore three central issues: First, Latin Americas’ resilient quest of economic utopia; second, how antitrust policy restates the pursuit of economic utopia; and finally, how such pursuit ironically undermines property rights and the rule of law, which constitute the bedrock of free markets. LATIN AMERICA’S SEARCH FOR ECONOMIC UTOPIA The quest for a utopian society has captured the imagination of Latin Americans throughout their history. Since the Age of Discovery, Latin America’s utopianism has become a dominant ethos that conditions the relationship of Latin Americans to political power.7 7. The oldest trace of utopianism can be found in the description Christopher Columbus made in his voyages about the fair spirit of the inhabitants of the lands he discovered. In his letters to the Spanish Crown, Columbus creates the myth of a paradise in the Caribbean, an ideal that never actually existed and yet still appears today within Latin American literature. This belief influenced Thomas Moro’s Utopia (1516), and later influential writings such as Rousseau’s Discourse on Inequality (1754), which inspired the myth of the Noble Savage whose natural disposition to ‘‘compassion or pity’’ had been corrupted by civilization. This mindset inspired political revolution in Europe and later in Latin America. There is a vast literature examining the question of Utopia in the culture of Latin Americans, and its influence on political philosophy (Uslar Pietri, 1974; Rangel, 1977; Fuentes, 1992). xxviii Introduction Perhaps due to this sociological trait, Latin Americans possess a resilient cultural propensity to deceive themselves through fantastic exaggeration of reality. This phenomenon is evidenced in all aspects of their culture, from the development of legal rules that bear little or no connection with the underlying social phenomena that they are supposed to regulate to the magic realism that pervades Latin American literature. Latin American political philosophy, too, is beleaguered with utopian ideologies that misconstrue social reality and even human nature, making vain promises about how social welfare paradises can be achieved through enlightened and moral government dirigisme: Monarchical Enlightenment, Republican Positivism; Agrarian Reform; Marxist Revolution; Social Democracy; Military Nationalism; and Populism are few examples from a long list of political ideologies that have successively failed to deliver sustained prosperity to the region. Thus, policy reform is pervaded by the powerful drive toward ideological utopia that has been embedded in Latin American economic institutions since their inception. This thinking provided ideological support on the trading rules, business customs, associations and other economic institutions inside the region. This system has been resilient throughout the history of the region, and therefore it conditions the particular attitudes of Latin Americans toward political power, individual rights, and the creation of wealth. This book identifies five sources of utopian thinking, located in successive periods of institutional gestation: – the medieval scholastic concept of ‘‘fair price’’ in market transactions; – the concept of ‘‘national defense’’ inherited from mercantilism of the colonial years; – the search for ‘‘national progress’’ advocated by the scientific positivism of the nineteenth century; – the notion of ‘‘social’’ or ‘‘distributive justice’’ that dominated Latin America’s political thought during the twentieth century; and, more recently, – the search for an ‘‘efficient economy’’ heralded by neoliberals in the 1980s, of which antitrust policy is the fullest expression. All these ideological influences were present in one way or another throughout Latin American economic history, and they have all contributed to the antimarket ethos of political and economic institutions in the region. The first theme to be covered in this book, therefore, is about Latin Americas’ pursuit of an economic Nirvana throughout history; a search that bequeathed government dirigisme and institutional weakness in the region, mostly implemented through government instruments that systematically undermine the rule of law. The adoption of neoliberal reforms did not reverse this antimarket ethos; on the contrary, it was reinforced through a language of economic theory that had been absent hitherto. This policy would restate the pursuit of optimal resource allocation into a new, technocratic language of equilibrium mainstream economic models. The introduction of antitrust policy is a by-product of such intellectual milieu. Latin American Antitrust Policy: A Concealed Utopia? UNVEILING THE LOGIC OF THE xxix ANTITRUST SYSTEM Antitrust theory emphasizes the negative impact on social welfare of businesses’ potential exercise of monopoly power. In the role that is traditionally called ‘‘antitrust enforcement,’’ government authorities are called upon to curb the ultimate sources of monopoly power, namely, monopolistic businesses strategies and the concentrated market structures that give rise to them. In this role, antitrust policy seeks to ‘‘benefit society as a whole by ensuring that countries’ economies work well in permitting buyers to decide and communicate what products and services they want, and in permitting sellers to respond to this consumer demand as completely and inexpensively as possible’’ (Shelton, 1999, p. 29). The underlying assumption of this policy is that businesses have a natural inclination to develop monopoly power through anticompetitive arrangements that could eventually enable them to reap supracompetitive profits at the expense of consumer welfare. This in turn creates the need for a tool to control such market failures, which arise from excessive market concentration and insufficient business rivalry pressure. Under the traditional understanding, market competition is analyzed within static parameters, as a ‘‘situation’’ in which market competitive forces depend on the position held by firms in the market, whether dominant or not. This view perceives antitrust policy as primarily designed to challenge undesirable market concentration arising from ‘‘trusts’’ and other business strategies or corporate structures which may lessen or weaken the autonomy of economic actors in the market. This is the view of Khemani (1999), who writes: Broadly defined, competition in market-based economies refers to a situation in which firms or sellers independently strive for buyers’ patronage in order to achieve a particular business objective, for example, profits, sales or market share. Competition in this context is often equated with rivalry. Competitive rivalry may take place in terms of price, quantity, service, or a combination of these and other factors that customers may value. The issues to be explored in the conventional competition analysis are confined within the boundaries of business interaction; only at the margins do they deal with government restrictions. Business conduct is assessed in terms of its capacity to restrict the independence of firms or to exclude potentially competing firms from the market. Market concentration—expressed both in the number of operating firms within a given market and in the market share held by single operating firm—is critical to assessing whether specific economic actors wield monopolistic power (i.e., the capacity to seize consumers’ welfare). At the epistemological level, the lure of antitrust policy is rooted in the policymaker’s quest to achieve utopian optimal social welfare through targeted intervention. This idea, pervading the Latin American mindset throughout economic history, stems from the assumption that policymakers can decipher the underlying factors that comprise social reality and regulate them to attain social welfare. xxx Introduction This notion assumes that economic analysis of market exchanges can do away with the institutional links that are necessary to produce such exchanges. By ignoring the key role of institutions in economic exchanges, the economic analysis that supports policies like antitrust is doomed to represent a parallel world in which there is no consideration of the way in which individuals make their investment decisions in the market. This peculiar view of market processes has led competition agencies to search for a mare’s nest by assuming that optimal resource allocation is feasible through government legislation; that is, legal rules that prohibit certain forms of business arrangements presumed to induce suboptimal market outcomes. In doing so, policymakers set sail on a utopian journey in which they attempt to achieve optimal economic relations at little cost. Attaining perfect justice8 is therefore behind antitrust enforcement. Little attention is placed on whether such restrictive contractual arrangements, business and trade practices, and commercial routines are in fact essential for markets to function smoothly. Despite the fact that antitrust policy’s static perspective was unsupported on epistemological grounds as a means of evaluating dynamic business performance, it became the blueprint for examining market conduct in modern economies.9 In the process, policy utopia led to unwarranted government discretion, to the demise of economic institutions. IN SEARCH OF INSTITUTIONALLY SOUND COMPETITION POLICY In the conventional view, the search for a utopian allocation of social resources, understood as a new means of attaining perfect justice in economic exchanges, requires the enforcement of antitrust provisions, whose inner logic, enforcement mechanisms, and practical outcomes are all intrinsically contradictory to the natural dynamic course of market functioning. In support of this thesis, we will examine how antitrust policy has eroded property rights and contractual freedom by requiring antitrust authorities to possess a level of knowledge about market phenomena and complex causalities that is impossible to attain, regardless of efforts to improve the collection of market information. To the extent that the antitrust policy agenda promotes the emergence of rentseeking behavior through the erosion of property rights and the rule of law, it is possible to build a link between the rationale of antitrust policy and the institutional corporatism that pervades the economic culture of Latin American countries. 8. This is justice that is cost-free and takes into account the particular welfare position of each individual in society so as to equalize the condition of each individual with every other. On the concepts of perfect and cosmic justice, see n. 120 below. 9. See Section 3.2, below. Latin American Antitrust Policy: A Concealed Utopia? xxxi Ironically, the adoption of antitrust policy seems to have worked against the promotion of free market reforms.10 In other words, the introduction of antitrust policy displays an antimarket innuendo which defeats its alleged purpose; hence the need for a restatement along the premises of neo-institutional economic analysis. It is not accidental that policymakers eagerly embraced antitrust policy as a tool for improving market outcomes. The promise of optimal social welfare allocation lured policymakers into redirecting their policy goals toward the attainment of economic efficiency. They failed to realized, however, that such goal was not necessarily related to the promotion of more entrepreneurial businesses. A question examined in this book refers to the contrasting perspectives that underlies between the business and economic notion of competition. Mainstream economics exposes competition in terms of ‘‘optimal equilibrium’’ in the economic order. The most representative form of the equilibrium market, of course, is the ‘‘perfect competition’’ model; later economic theory developments, driven by the need of making a closer approach of real-based business competition, introduced the notion of ‘‘imperfect competition.’’ Equilibrium market models are conceived to explain how resource allocation of existing resources could be improved, under the assumption that market resources are limited. Allocation of existing resources and production of new ones, respectively, belong to two entirely different paradigms or views of what the economic process is about. On the one hand is the equilibrium perspective that pervades the thinking of neoclassical economics, which has been predominant in public policy since the last century. This program was inaugurated by Walras’ mathematical notion of general equilibrium (Walras, 1874), later developed by Pigou (1912) and Robinson (1934 [1942]) in their notions of the equilibrium firm and imperfect competition, respectively. By contrast, institutional models of markets are focused on a different kind of economic problem; in particular, how new resources can be developed and produced through innovation. Schumpeter’s notion of Creative Destruction popularized a dynamic, evolutionary perspective on markets, later developed by a line of thinkers working simultaneously under the research program of ‘‘evolutionary economics’’: Hayek (1948; 1978); Richardson (1953; 1960; 1996 [1972]; Competition, Innovation and 10. From a broader perspective, Vargas Llosa (2004, pp. 24-60) identifies the following antimarket institutions in Latin America: (i) Corporatism: individuals cannot claim access to economic rights, except through their membership in some rent-seeking corporation; (ii) State mercantilism: power is centralized in the hands of the State; all wealth is centralized by the State, which separates individuals from their effective property rights; (iii) Privileges: only few individuals in society have access to diminished property rights. These rights are thus fragmentary in the sense that they are not accessible to all, but only to few individuals who enjoy political connections; (iv) Wealth is transferred from the bottom-up: the economic system is structured in such way that wealth flows from the poorest sectors of society to rich minorities; and (v) Politically driven legislation: instrumental laws conceived to attain ‘‘public goals’’ in fact resulted in the economic exploitative system described above. AU: Could you specify if the citation, Hayek (1948) refers to Hayek, F.(1948a) or Hayek, F.(1948b) in the bibliography? xxxii Introduction Increasing Returns, 1996); Kirzner (1973); Nelson and Winter (1982); and Hunt (2000). This is an evolutionary perspective on market processes, that can also be traced back to Adam Smith’s metaphor of the Pin Factory, which encapsulates his notion of the Division of Labor and specialization of tasks (later developed by Young’s notion of inter-firm specialization) leading to the development of new products and services through entrepreneurial learning. Under this alternative scientific research program, markets are seen as open-ended entities which reflect, above all, the subjective expectations of entrepreneurs interacting in a complex order. A good summary of this literature on ‘‘endogenous growth’’ is found in Beinhocker (2006) and Warsh (2006). Public policies conceived in connection with this research program acknowledge the inherent inability of government to maintain the pace of market interaction. Latin American economic thinking, yielding to preexisting antimarket cultural instincts, did not hesitate to choose the antitrust ‘‘optimal efficiency’’ model, which epitomizes neoclassical economics’ view of firms as equilibrated ‘‘black boxes’’; of markets as structures that are in need of intervention when they are not in equilibrium; of social efficiency as a condition of stability where markets reach their best resource allocation possibilities; of businessmen as selfinterested economic actors in pursuit of their own welfare, at the expense of society’s. By choosing ‘‘equilibrium’’ as heuristic tool for appraising social interaction, reformist policymakers who advocated competition policy as complement of economic reform neglected a richer and more meaningful dynamic vision of market processes. This alternative vision highlights key economic problems that an equilibrium view conceals: innovation, growth and ultimately, economic development. Institutional economic theory is better suited to the pursuit of the antimarket economic utopia—which is present in the ideology of Latin American policymaking and is expressed in the search for an impossible ‘‘optimal’’ efficiency policy yardstick which associates the policy to improvements on resource allocation of existing products and best uses of technology for their production, than to easing the dynamic process through which new products come to into being from any legal or regulatory encumbrances that may hinder its natural evolution. This book will therefore highlight the foundational basis of antitrust thinking, namely, the search for an economic utopia which underlies the notion of economic efficiency, and the negative consequences that arise from attempting to attain it. As result of adopting this utopian perspective on markets, antitrust advocates have failed to attain an effective policy tool for encouraging economic development that Latin American countries are so eagerly striving for. No significant changes in the allocation of property rights resulted from economic reforms adopted in the late 1980s; public monopolies were transformed into private ones, with no significant changes in the competitive environment of privatized industries; corporativism, mercantilist and trade protectionism still largely dominate the formulation of policymaking. Last, but not least, competition agencies are largely irrelevant in the eyes of the public. In the following chapters, we attempt an institutional explanation of this phenomenon. AU: Could you check if the reference for ‘‘Competition, Innovation and Increasing Returns, 1996’’ has to be added in the bibliography? Latin American Antitrust Policy: A Concealed Utopia? xxxiii THE PLAN OF THE BOOK This book is divided into three parts. The first part, covering Chapters 1 through 3 will explore the emergence of antitrust policy as a by-product of Latin America’s antimarket utopian political and economic philosophy. Chapter 1 will explain, in historical perspective, the successive ideologies that dominated the political philosophy landscape of the region: the scholastic search of the ‘‘fair price’’; colonial mercantilism; positivistic rational government; and the search of ‘‘social justice.’’ They all have in common their explicit aversion toward capitalism, open markets and free trade; they all encouraged government dirigisme that was translated into a significant source of business rent seeking. They built the social ethos that ultimately paved the way for the emergence of antitrust policy in the region in the 1990s. From this perspective, the seeds of Latin American antitrust policy were planted a long time ago, by the core antimarket ideology that the Spaniards brought to the New World. Chapter 2 examines the tenets of the neoliberal ideology in depth; in particular, its search of economic efficiency as a renewed form of government dirigisme. We explain here why such reforms did not produce a genuine set of promarket reforms, as they disregarded the reallocation of property rights from the hands of governments into private hands, and gave preference toward attaining economic efficiency, even at the expense of overruling private economic rights. Furthermore, their advocacy in favor of antitrust policy merely reinforces the suspicion over this policy to be a disguised form of renewed protectionism. Chapter 3 explores in depth the utopian nature of the economic theory supporting antitrust policies. This utopianism stems from the vision of ‘‘competitive equilibrium’’ that underlies policy analysis, in which perfect competition (later, workable competition) is taken as the Holy Grail of market performance. This utopian vision of policymaking severely clouds the perceptions of policymakers in markets that do not resemble those markets described by the perfect competition model, which is premised on unattainable assumptions: infinite sellers and buyers; perfect information; and absolute product homogeneity. Through this lens, Latin American markets seemed to present all sorts of ‘‘imperfections’’ in need of correction via antitrust policy. This ideal shapes the goals of antitrust policy, which rest on a misconceived view of markets. In a nutshell, this misconception stems from a flawed epistemology of markets that views them as static structures, rather than organic, evolutionary, and changing processes of complex interaction between individuals who possess different aims and goals in society. The second part of this book covers Chapter 4 through Chapter 9. Here we will analyze the antitrust enforcement system as it has been applied in Latin America. This part includes an analysis of the basic antitrust methodology. Chapter 4 turns its attention to the practical enforcement of this theory, and describes the practical implementation of the antitrust utopia as reflected by case law. Antitrust laws establish a regime of control over a wide array of business practices and forms of economic organization that are considered to be potential xxxiv Introduction sources of anticompetitive restraints. These include various forms of mergers, horizontal restraints, vertical restraints, and unilateral restraints. In the following chapters, I explore the methodology of antitrust analysis and each of the enforcement areas in which it takes place. The normative implications drawn from economic theory will be exposed in their practical policy implementation. Antitrust analysis begins with an economic evaluation of the monopoly power held by firms suspected of engaging in anticompetitive restraints. Monopoly power measures the individual or collective capacity of firms to act unilaterally without being subject to actual or potential competitive discipline by other competitors. Chapter 4 explores the methodology of monopoly power analysis. Next, Chapter 5 evaluates the effects of business arrangements on consumer welfare; here, competition authorities evaluate the economic impact on social welfare of businesses that enjoy monopoly power. Social welfare analysis of anticompetitive restraints is usually dictated by legal theories rather than economic analysis; these legal theories are intensely influenced by ethical welfare standards drawn from normative economics. Consumer surplus is the most influential of these sources. This standard, as explained above, is directly concerned with the pursuit of socially efficient resource allocation. We shall focus our attention on this particular theory, as it is the most widespread among competition agencies in the region. Chapters 6 through 9 examine, in a comparative law perspective, antitrust law enforcement in each of the areas covered by antitrust policymaking: mergers, horizontal and vertical restraints, unilateral behavior, and sector-specific anticompetitive restraints, respectively. The implementation of the two-tier monopoly power/consumer surplus analysis is contingent on the expected welfare effects of each particular business arrangement under scrutiny. The inquiry into these effects is an exercise that is usually predetermined by legal provisions set forth in antitrust statutes as well as in case law. The law distinguishes between conduct that ought to be condemned automatically (or per se), and conduct that should be examined under a rule of reason approach. To put it differently, conduct analyzed under the ‘‘rule of reason’’ is conduct that deserves a full inquiry into its competitive merits. Chapter 10 examines explores the modest scope of competition advocacy, as part of the activities entertained by competition authorities to advance competitive markets. Competition agencies implement initiatives to identify and challenge government barriers to competition. These barriers create obstacles on market access and competition that usually are far more significant and decisive than market structures. This is all the more important in Latin America, due to the tradition of government interference on markets. However, competition advocacy is severely curtailed as result of competition agencies’ lack of legal powers to challenge government barriers. This chapter will explore the extent of the advocacy agenda in the region. Chapter 11 examines the interface between antitrust policy and sector regulation. This chapter underlines how political solutions have been developed in order Latin American Antitrust Policy: A Concealed Utopia? xxxv to accommodate the unstable relationship between sector regulators and antitrust agencies. Usually, problems of political rent-seeking emerge in the decision of regulating a sector, to the exclusion of antitrust enforcement. We emphasize the political conflict that underlies the conflict between competition agencies and sector regulators. This conflict reveals a rent-seeking struggle between two concurrent authorities; this view overshadows the traditional assumption that presents competition agencies as advocates of market values, while sector regulators are opposed to them. The third part of the book will examine competition policy’s performance from an institutional perspective. This section of the book is intended to convey to the reader a full view of the practical problems confronted by competition agencies in dismantling antimarket institutions. It is also intended to show the contradiction between antitrust enforcement and promarket policies, as the former erodes the rule of law, which is the essential key supporting the latter. Chapter 12 will highlight the contradiction between the preservation of property rights, which is essential for the consolidation of markets in Latin America, on the one hand, and the utopian search for optimal allocation under antitrust enforcement schemes, on the other hand. We shall focus on the impossibility for antitrust enforcers of attaining stable and predictable decisions, as required under a rule of law system. There is an intrinsic contradiction between the stability required by a rule of law system and the utilitarian, ad-hoc nature of antitrust analysis, which makes rule predictability impossible. This is primary evidence of how competition policy is misconceived as ‘‘promarket,’’ as it undermines the very foundations of the market system it is intended to protect. In this way, the policy creates a corporativist institutional setting wherein less competitive firms can successfully escape from the discipline of more competitive firms attempting to seize the opportunity brought about by economic liberalization. Next, Chapter 13 will examine the institutional weakness of antitrust institutions, as they lack the institutional accountability required to pursue policymaking in a way that preserves the rights of individuals, and are institutionally vulnerable to political interference in their policy assessment. A true rule of law system requires checks and balances to be in place. However, antitrust agencies in the region are usually in the hands of government administrative agencies that exercise adjudicative powers with effects on the allocation of property rights among economic agents; this structure limits the accountability of these agencies, as one often cannot distinguish between their prosecutorial and quasi-judicial roles. Moreover, they are often subject to political pressure from their governments, which makes them easy targets for a special form of ‘‘political capture.’’ Of course, several attempts have been made to overcome these institutional and organizational limitations, but the results are far from clear. Finally, Chapter 14 delineates the conclusions of this book. Part I The Wellsprings of Latin American Competition Policy If the Basic Principles of the Economists’ philosophical systems are treated, not as inventions of the imagination but as true axioms, then the pursuit of abstract rigor may easily be mistaken for an increase of understanding. (Loasby, 1991, p. 24) [T]he problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them. As long as this is not recognized, the investigator does a meaningless job. As soon as it is recognized, his outlook on capitalist practice and its social results changes considerably. (Schumpeter, 1942 [1950]) AU: The year given in the citation ‘‘Loasby, 1991, p.24’’ does not match with the year given in the bibliography. Please check. Chapter 1 Government Intervention as the Source of Monopoly in Latin America The introduction of antitrust policy in Latin America has to be understood against an institutional backdrop that is shaped by the antimarket ideas that prevail among policymakers in the region. Policymaking is deeply conditioned by particular beliefs about how and why market causalities take place: regulation is justified by the need to achieve some rationally constructed social welfare goal—usually, consumer welfare, which may differ from spontaneous market results. Antitrust policy is often said to reinforce free market mechanisms, yet its practical results by definition always undermine the spontaneous market results that would otherwise occur as a result of freely adopted exchanges. Altering market outcomes through rational policymaking is an old habit that emerged in Latin America a long time ago, in the formative years of the region’s institutional beliefs and economic culture, and which shaped the idiosyncrasy of Latin American attitudes toward market exchanges. At the time of economic liberalization in the 1980s, Latin Americans in general did not have a clear idea of what antitrust policy was really about. Except for a few scattered laws with negligible enforcement, Latin American policymakers had no experience to provide a frame of reference. This policy was intellectually promoted by trendy reformists who perceived it as an effective solution to the persistent lack of competition that pervaded Latin American economies after long decades of government protection from international competition. Yet the assumption that antitrust policy would somehow improve the shaky competitive condition of Latin corporations was entirely untested. After all, antitrust policy was familiar in the U.S. and in Europe, but never had been enforced on Latin American soil, except for scattered handful of laws, whose effectiveness had never been put to the test due to the preference of Latin policymakers for other 4 Chapter 1 political forms of government intervention: price controls, quotas, licenses, etc. If anything, antitrust policy was imposed as part of the Washington Consensus deal,11 which dominated the design of public policies, presumably aimed at reinforcing promarket reforms. Antitrust policy became a key component of the policy reforms advocated by the neoliberal technocrats who supported the Washington Consensus. Multilateral agencies, which endorsed these recommendations, conditioned their loans on the adoption, by recipient countries, of a ‘‘laundry list’’ of allegedly ‘‘promarket’’ policies, which included antitrust laws. As Rodriguez (2007) explains: the adoption of antitrust programs was often unilateral and top-down, imposed on nations that were unprepared and unaware of antitrust’s tortuous history in countries with wider experience, such as the U.S. The imposition was driven by the multilateral lending agencies often accompanied by carrots as well as sticks; what was typically offered was the textbook model. Ignorance, therefore, prevailed at the time that antitrust policies were introduced in Latin America. In many places the policy was simply misunderstood, perceived to be a variant of preexisting populist consumer protection models that were focused on establishing a modicum of protection via curtailments of any price increases, regardless of their economic efficiency (Lande, 1982). In instances where the domestic champions of antitrust in each country understood the nature of the policy it was typically sold to reluctant legislatures—who were apprehensive of market mechanisms—as a remedy that would allay their fears of dependence on market forces that they associated with cruelty and social abrasiveness. Those who advocated antitrust policy expressed little concern with increasing the crumbling competitive capacity of Latin American businesses, whose presence in the world market was (and still is) negligible (ECLAC, 2005, p. 63). Antitrust policies were endorsed at face value, without much attention to their inner antimarket tendencies, perhaps due to a lack of awareness of these effects. Indeed, no one seemed to question the debatable record of this policy in countries with broader experience. Antitrust policy emerged as a result of a marked concern over restrictive trade practices, which were perceived as abusive expressions of property rights and economic freedom. This rationale was similar to the one embodied in the U.S. Sherman Act of 1890 and Articles 85 and 86 of the Treaty of Rome of 1957 (today, Articles 81 and 82 of the Treaty of Amsterdam of 1997). Fairness and control of abuses in the exercise of economic freedom were from the beginning the main drivers of competition policy in these jurisdictions. In the case of the U.S. the policy was justified as a remedy to the abuses of the ‘‘trusts’’ that emerged at the turn of the nineteenth century; in the European Union it was part of the effort consciously aimed at realizing a fair economic order inspired by German Ordoliberalism.12 11. See Section 2.1, below. 12. Ordoliberalism is a school of liberalism emphasizing the need for the state to ensure that the free market produces optimal allocative efficiency. The theory was developed by German AU: Could you provide the reference details of ‘‘Rodriguez (2007)’’ in the Bibliography? Government Intervention as the Source of Monopoly in Latin America 5 In the case of Latin America, similar concerns were present at the inception of antitrust policy. In anticipation of what they perceived to be negative externalities of the economic liberalization implemented in the 1980s and 1990s, policymakers in the region gave governments tools to prevent businesses from manipulating markets to their advantage. Naturally, behind this perception of businesses as responsible for leading market functioning off the proper track lays a deep ideological belief that has seldom been addressed in the literature on international antitrust law. Usually, the adoption of antitrust policy is based on an assumption about the benefits of government intervention in market transactions; however, scholars seldom subject this belief to questioning. It is not a coincidence that the development of antitrust policy runs in parallel with the adoption of economic liberalization programs.13 The underlying assumption that unfettered market exchanges cannot deliver social good due to the selfish activity of calculating entrepreneurs runs underneath the public cry advocating government intervention in markets. Under this assumption, market malfunctions are created by systemic ‘‘failures’’ of free markets that justify government imposition of discipline on potential offenders. Thus, while businesses distort ‘‘optimal’’ market functioning, governments ensure that such ‘‘optimal’’ conditions are economists and legal scholars such as Wilhelm Röpke (who spent the Nazi period in exile in Turkey), Walter Eucken, Franz Böhm and Hans Großmann-Doerth from about 1930-1950; Ordoliberal ideals (with modifications) drove the creation of the post-World War II German social market economy and its attendant Wirtschaftswunder. Ordoliberal theory holds that the state must create a proper legal environment for the economy and maintain a healthy level of competition through measures that adhere to market principles. The concern is that, if the state does not take active measures to foster competition, firms with monopoly (or oligopoly) power will emerge, which will not only subvert the advantages offered by the market economy, but also possibly undermine good government, since strong economic power can be transformed into political power (Peacock and H. Willgerodt, 1989; Bohm, 1989; Bohm, Franz, Walter Eucken and Hans Grossman-Doerth, 1989; Moschel, 1989; Mueller-Armack, 1989; Scherer, 1994; Norr, 1995). 13. In some cases, the negative perception of economic liberalization turned into the very rationale for creating specific antitrust rules in the liberalization treaties themselves. For instance, the enactment of Mexico’s 1992 Federal Economic Competition Act was one of the commitments that the government of Mexico undertook with the U.S. and Canada to join the North American Free Trade Agreement (NAFTA). The treaty required the opening up and further liberalization of the Mexican economy, which seemed heavily concentrated in several government-owned and recently privatized monopolies and oligopolies controlled by family groups that prevented effective and open access to both domestic and foreign investors. Similarly, the adoption of DRCAFTA (Dominican Republic—Central American Free Trade Agreement between the United States and Central American countries, as well as Dominican Republic) has prompted all of these countries to adopt antitrust statutes in swift succession: El Salvador (2004), Honduras (2005), and Nicaragua (2006). Furthermore, a competition bill currently under congressional review in Dominican Republic is expected to be passed by late 2007, and the adoption of Competition legislation is anticipated in Guatemala. In all these cases, the enactment of domestic competition laws was an explicit or implicit condition on the adoption of freetrade agreements, which the United States has felt necessary to create a ‘‘playing level field’’ for its investments in the region. 6 Chapter 1 attained. This underlying ethos of antitrust policy is grounded in the search for an economic utopia: the optimal allocation of social resources, as postulated under the competitive equilibrium model of neoclassical economics. Little attention has been devoted to ideology as a major in explaining why policymakers chose antitrust policy as a key instrument in the promotion of competition. Let us examine the causes of this historical development. The adverse antimarket bias within the region is best captured by the notion of economic justice. This notion has driven the orientation of policymaking prior to, as well as after, the neoliberal reforms of the 1980s and 1990s. The concept of economic justice is present throughout successive periods of Latin America’s economic history, from the scholastic notion of ‘‘just price’’— which, together with imperial sovereignty, prevailed during the Colonial years beginning in the closing years of the fifteenth century—to independence (Circa, 1810), to the populist notion of ‘‘social justice,’’ which socialist and indigenous political movements have wielded as a flag of class struggle since the twentieth century. The notion of economic justice has become the buzzword of public policy aimed at redressing unfair social relations between economic actors in the course of trade exchanges. Such orientation has justified policymakers’ rationale in favor of government dirigisme, which was exercised through a vast array of regulatory measures as well as concessions of legal privileges and monopolies. Policymaking throughout history stages shares a consistent vision of the role of governments as seekers of the economic justice utopia, which is pursued through rational, functional legislation that enhances government’s role as the main driver of economic and social development. It is a vision that confines businesses and civil society to a marginal position within the national economy, mistrusting them for their potential to bring about deviations from socially desirable utopian objectives. In the conventional history, neoliberal reforms in general and antitrust policies in particular, appear as a hiatus of the long-standing antimarket tradition wellentrenched in Latin America’s institutional tradition. We will call this widespread belief into question by exploring the real extent of neoliberal reforms, which were focused on macroeconomic reforms, thus leaving the property rights structure of Latin American societies, characterized by ubiquitous monopolies and privileges, virtually intact. After exploring the antimarket tradition in Latin American policies, this chapter will explain the emergence of antitrust policy as the logical by-product of neoliberal economic reforms which, if anything, did not reverse, but rather carefully maintained the monopolistic structure of property rights in the region. Although antitrust policy is formally presented as a reaction against importsubstitution policies of the previous historical stage, dominated by business monopolies as a major form of industrial organization in the region, antitrust policies did not directly clash with such policies, but rather directed their artillery against market failures perceived to result from industrial concentration. This seemed to be a ‘‘promarket’’ justification for intervening otherwise spontaneous market outcomes in the name of enhancing consumer welfare. Government Intervention as the Source of Monopoly in Latin America 7 The last section of this chapter will examine antitrust policy’s concession of several forms of legal monopolies, which usually exempted from policy enforcement. This limited enforcement applies to government monopolies given to ‘‘strategic industries’’; to copyrights and patents; and to political groups excluded from policy enforcement. 1.1 SOCIAL UTOPIA AND GOVERNMENT DIRIGISME: AN OLD LATIN AMERICAN BLEND The search for the social welfare utopia underlies government dirigisme ideology in Latin America. Claeys (1987 [1989], pp. 270-271) defines the word ‘‘utopia’’ as: ‘‘a fictional account of a perfect or ideal society which in its economic aspect is usually stationary and often includes community of goods. Many proposals for social reform have included elements inspired by utopias, and most utopias at least tacitly plead for social change.’’ utopianism has adopted multiple forms throughout the history of economic thought; however, with the emergence of the liberal political economy in the eighteenth century, utopianism shifted its emphasis away from the creation of virtue and toward that of organized superfluity and affluence, often in combination with centralized economic planning and organization. Clearly, there is a link between the emergence of antimarket institutions and utopianism. This section explores the search for utopia as a recurrent theme of Latin American economic history, as well as the implications of such thinking for the design of antimarket policies in the region, particularly in connection with the way that Latin Americans conceive of the economic justice of market relations. 1.1.1 THE UTOPIAN QUEST OF THE FAIR PRICE The economic effects of monopolies received attention in the work of Spanish scholastics between the 16th and 17th centuries, in the formative years of social and economic institutions in the region.14 This school of political philosophy centered its attention on whether the King enjoyed special prerogatives to prevent individuals from abusing their economic rights in market transactions; in doing so, 14. The scholastic school began with the works of Thomas Aquinas (1226-1274) and Oresme (1320-1382) on price theory and monetary theory, respectively, and extended its influence on social philosophy well into the seventeenth century, in the writings of the Spanish ‘‘late’’ scholastics. Grice-Hutchinson (1978) left us with an image of these thinkers: ‘‘Above all, these writers were theologians and jurists whose thinking played an important, albeit secondary role in the economic and social order.’’ Rothbard (1999 [1995]) dedicates Ch. 4 of his book An Austrian Perspective on the History of Economic Thought, Vol 1: Economic Thought before Adam Smith to the late Scholastics, gathered around the so-called Salamanca school of Economics. Both Grice-Hutchinson and Rothbard agree in viewing this school as visionary forebears of the classical thinkers and of the marginalist revolution of the 1870s in economic science. 8 Chapter 1 these scholars developed a modern theory of monopolies via the discussion of the social justice of economic transactions.15 The pursuit of ‘‘fair price’’ as an objective moral standard for market transactions—from which the notion of unfair trade would emerge—was merely a reflection of a broader utopianism that characterized Christian thinking on traderelated matters. Muller (2002, p. 4) explains this phenomenon in these words: ‘‘There was no room—or little room—for commerce and the pursuit of gain in the portrait of the good society conveyed by the traditions of classical Greece and of Christianity, traditions that continued to influence intellectual life through the eighteenth century and beyond.’’ In this medieval world of scarce, fixed resources, the morality of transactions rested on the idea that ‘‘the gain of some could only be conceived as a loss to others’’ (Muller, 2002, p. 5). Hence, the morality of market transactions would be understood in light of Aristotle’s ‘‘equality of exchanged values.’’ (Rothbard, pp. 45-48) Abusing one’s neighbors through the imposition of abusive prices was regarded a form of sinful usury (turpe lucrum) (Montaner, 2002, p. 105). This notion supported the development of early monopoly theory, by creating a standard above which market exchanges could be regarded as subject to undue pressure, and hence ‘‘unjust.’’ Although monopolies were generally condemned because they raised prices above ‘‘fair prices’’ (Monopolium est injustum et rei publicate injuriosum), the scholastics had no general consensus regarding the conditions that would create fair prices. Most scholars, like Domingo de Soto (1494-1560), believed that a ‘‘fair price’’ could not be established but by government fiat, taking into account the objective ‘‘work, toil and risk’’ and the ‘‘objective’’ cost of production factors (Rothbard, p. 134) . By contrast others, such as Luis de Molina (1535-1601) or Juan de Lugo (1583-1660), believed that in the absence of price regulation, ‘‘fair price’’ would be established subjectively by common assessment—that is, free markets and the rules of supply and demand. These scholars called such a price ‘‘natural,’’ meaning a price voluntarily reached without coercion or fraud. In the absence of agreement on a theory of what constitutes ‘‘fair prices,’’ it was impossible for scholastic thinkers to develop a parallel theory of monopolies and of monopolistic conduct independent from ‘‘usury.’’ Hence, monopolies were condemned as a form of usury, but the content of the concept was never explained. 15. Scholastics were mainly concerned with the moral question of ‘‘social justice’’; they were less interested in examining the inner working of the economic system, which in De Roover’s opinion (p. 173) reveals an important analytical weakness. Social justice would be achieved both through Distributive and Commutative Justice. Distributive Justice emphasized the right of individuals to a fair share of the goods of this world—i.e., income and wealth distribution. On the other hand, Commutative Justice was concerned with mediating between individuals and was based on the notion of absolute equality. Drawing from Aristotle’s notion of the ‘‘correspondence’’ of values, Aquinas, founder of the school, thought that justice demanded that whatever economic good was exchanged be equal to what was received. Commutative Justice would thus be Aquinas’s moral blueprint in market exchanges; value theory and price theory would be interpreted according to these moral parameters. AU: Could you specify the year in the given citation, ‘‘Rothbard, pp.45-48’’? AU: Could you specify the year in the given citation, ‘‘Rothbard, pp. 134’’? Government Intervention as the Source of Monopoly in Latin America 9 As De Roover (p. 175) comments, ‘‘from these premises, the [scholastic] doctors drew the inevitable conclusion that both price discrimination as well as monopoly were evil behavior.’’16 scholastics failed to distinguish between objective social needs, which gave rise to the need to condemn unfair ‘‘usury,’’ which is imposed against the will of individuals, on the one hand, and subjective utility, on the other hand, which explains why individuals willingly accept differentiated loan conditions or price discrimination if the particular situation of the borrower or the buyer required it. Consequently, the scholastics could not present a unified vision that could oppose the King’s monopolization of economic power, which explains why increasing government interventionism was not challenged, but tolerated and even praised by Spanish intellectuals as a virtuous means of preventing usury from occurring.17 It would not be hard for them to accept the concession of state monopolies as a form of preventing abuses. For instance, Lesio considered four types of monopolies, conflating both government and private sources of monopoly: (a) Collusion among sellers to fix minimum prices; (b) monopoly arising from a privilege given by the Prince; (c) market foreclosure through the purchase of all the available supply and refusing to sell until prices rise; and (d) blocking of imports by other competitors (De Roover, 1974). Hence, the belief that fair price could only be attained in the absence of manipulations designed to extract value properly belonging to someone else through fraudulent means set the stage for legislation aimed at curbing such manipulations. Unsurprisingly, antimonopoly legislation aimed at preserving ‘‘fair prices’’ was common in Europe, and Spain was no exception, as evidenced by the quote that opens this book, which is taken from the Siete Partidas of Alphonse the Sage. The Crown assumed powers to punish traders who committed usury and other forms of monopoly restraints, which were socially despicable, as they AU: Provide year of publication for Rothbard. 16. In general, the theory of prices developed by the scholastics attempted to distinguish between prices established under duress or necessity from those negotiated freely. For instance, Buridon (1300-1358) contended that prices agreed to under duress were against the needs and utility of society; therefore, they had to be regarded as void. Based on this thinking, scholastics such as Saint Bernardino of Siena (1380-1444) believed price discrimination to be evil conduct. Later, Francisco de Vitoria (1485-1546) contended that fair prices would be established by negotiating parties, particularly in the case of luxury goods, which could be sold at capricious prices because the buyer would willingly accept the high price. Regretfully, as Rothbard (pp. 133-134) observes, De Vitoria never explained why free will disappears in case of nonluxurious goods. 17. Interestingly, as noted by McLauglin (1939, p. 125) and De Roover (1974, p. 176) the earnings of usury and monopolistic conduct, respectively, were subject to different treatment. While usury required restitution from the aggressor to the individual victim of usury, in the case of monopolistic conduct, since there was no individual victim, the aggressor was required to give charitable gifts and hand-outs to the poor, and to make donations to hospitals, as a way of repaying society its due. To the scholastics, raising prices above the real value of goods was a violation of commutative justice’s notion of equality; it was an exploitation of the fellow men which created an artificial scarcity of goods. Profits obtained through monopolistic conduct were considered turpe lucrum, as much as the profits of usury, and were subject to perpetual condemnation. All in all, however, the scholastic theory of usury was far from unified (Rothbard, pp. 136-141). AU: Could you specify the year in the given citation, ‘‘De Roover (p. 175)’’? 10 Chapter 1 contradicted the basic moral condemnation of usury and protection of ‘‘fair prices’’ in Christian medieval morality. Under these provisions, individuals could not engage in anticompetitive activities undermining ‘‘fair prices’’; however, these activities would be entirely legal if they were approved by the king. Clearly this shows that the scholastics condemned monopolies as devices for creating unfair prices; however, their understanding of fair prices included both prices established by law and ‘‘natural’’ market prices. Hence, their understanding of trade-restrictive practices would conflate monopolies that emerged from legal privileges with those that emerged from the natural behavior of the market.18 Thus, it is not surprising that scholastics viewed the creation of legal monopolies to be consistent with the pursuit of fair prices. By the same token, Spanish scholastic thinking shows the compatibility between antitrust provisions and legal monopolies. In short, the emergence of scholastic thinking, although in many ways geared toward the defense of free market principles, eventually yielded to the Christian utopia of ‘‘social justice’’ in economic transactions, which was later bequeathed to nascent Latin American societies. Regardless of their economic philosophy, in practice the inconsistencies of the scholastics’ views on the nature of monopolies would ease the way of those who called for the intervention of the Crown to prevent abuses from occurring in market transactions. Behind the façade of justice, however, lay the interest of the King in preserving control over industries that were perceived as ‘‘strategic,’’ usually for military purposes. There were a myriad of reasons for the triumph of the government dirigisme ethos in market affairs in the Hispanic world. Spain’s emergence as the first absolutist kingdom of Europe centralized political power in a way that would not be replicated in other European states. Along with political centralization would arrive the concession of economic privileges; legal monopolies were created to produce a virtuous state of affairs in which social justice would be closely monitored by an omniscient Catholic state through carefully drafted regulations. Among these regulations, antitrust provisions would prevent businessmen from abusing their privileges to the extent they were not approved by the King. 1.1.2 SPAIN’S COLONIAL MERCANTILISM Most scholars agree that the roots of Latin America’s antimarket institutional system, which favored the centralization of power and concession of royal monopolies as the main form of economic organization, are found in late Medieval Castile.19 The practical realities of military life in this kingdom were primarily 18. De Roover (1974, p. 201) observes that ‘‘scholastics do not extend their analysis and do not explain how monopoly prices are set, assuming that monopolists attempt to maximize their utility. As known, this problem was ultimately resolved by Agustine Cournot. Inasmuch the limitation of supply, scholastics maintained certain vagueness, although they repeatedly noted that monopolists restrain trade and create artificial shortage.’’ 19. Of all the Christian kingdoms that emerged on the Iberian Peninsula during the late medieval years (A.D. 1300-1500), Castile would become by far the most important and decisive kingdom Government Intervention as the Source of Monopoly in Latin America AU: Could you specify the year in the given citation, ‘‘Liggio, p. 3’’? 11 responsible for concentrating economic power in the hands of the Crown, which peaked with the marriage of Ferdinand of Aragon and Isabella of Castile, in 1469. This marriage consolidated Spain as the first European national state and marked a turning point in the development of new social institutions that eroded feudal concessions such as the fueros,20 which in other parts of Europe would lead to the development of property rights and decentralized parliamentarian institutions. The new Spanish order favored bureaucratic, mercantilist, and tax-gathering institutions typical of the new absolutist, postfeudal, monarchies that lead national states (Liggio, p. 3) . It also undermined Castile’s political dependency on the spiritual power of the Papacy, which other European kingdoms could not escape (Veliz, 1980). The centralization of power peaked in the year 1492, Spain’s annus mirabilis, with the almost simultaneous defeat of the last Muslim kingdom of Granada and the discovery of the New World just a few months later. After two hundred years of Reconquista, the proliferation of legal monopolies and royal privileges over the use of land seized from the Moors had organized the Castilian society under a weak system of property rights. Naturally, this system facilitated the emergence of centralized power around the King, and of rent seeking as the main source of wealth, in contrast with the consolidation of proto-capitalist institutions that occurred in other parts of Europe thanks to the consolidation of property rights. An illustrative example is found in the Mesta, a Castilian institution which prevented farmers from enclosing their land, favoring rich shepherds who obtained, in exchange for a tax, a concession to trespass over the land of farmers. The implementation of the Mesta inhibited the consolidation of the manorial system that constituted the basis of feudal institutions in Northern Europe, and later fully blossomed into property rights.21 for the future shape of Latin American institutions. As Kamen (2002, p. 17) notes, Castilian kings regarded themselves as leaders of a local religious crusade; naturally, after the Moors’ final defeat in 1492, they would turn their religious zeal into political imperialism in the conquest new territories in Africa, and in the Atlantic—the Canary Islands. In time, the sense of being anointed by God to spread the Catholic gospel would give this kingdom a leading position in the rule and organization of political affairs in the lands discovered overseas in the Indies; this role would never be matched by other kingdoms of Spain, notably Aragon and Catalunya. The new World would be patterned after Castilian institutions (Elliot, 2006, pp. 49-53). 20. The ‘‘fueros’’ were traditional rights and independence from taxation of the medieval nobles, freemen, townsmen, and clergy, which had their roots in Germanic legal concepts (Liggio, 1990, p. 10). 21. The Mesta was granted a monopoly on sheep migration, preventing enclosures and agricultural development in Castile, for taxation purposes (Liggio, 1990, p. 13). Thanks to the Reconquest, which had extended the frontier southwards from the Tagus River to the Guadalquivir within a century and a half, the lands of La Mancha, Extremadura, and Andalusia were opened up to shepherd activities. Great flocks of sheep owned by the king, nobles, monasteries, and towns annually passed through the sheep walks extending from León, Logroño, and Soria to the rich pasturage lands of the south. As more land was made available for shepherds, the number of sheep increased, to the immense profit of the sheep owners. From the late thirteenth century, tensions steadily mounted between the sheep owners and the towns and military orders through 12 Chapter 1 One can easily spot the ancestry of medieval institutions such as the Mesta, under which the Crown ultimately enjoyed overriding powers over the use of land, and today’s land reform schemes whereby Latin American States dictate the conditions of use under which public land is to be occupied by peasants, thus avoiding a full transfer of property rights. But the ancestry does not stop there. On a more general basis, the organization of the economy around the concession of royal monopolies would dominate the design of government policies toward trade exchanges. Strategic economic industries were expropriated by the Crown, and then granted to privileged subjects as prizes for special deeds or to reward their military accomplishments. Villalobos and Sagredo (2004, p. 17) note that ‘‘Alphonse XI established in 1338 the Ordenanza de la Renta de Salinas (Instruction on the Income from Salt Marshes), which constitutes the first enforcement of the monopolies’ regime in the Iberian Peninsula.’’ According to Mexico’s CFC (2000, p. 13), this regime forced ‘‘traders of salt to give it away to the royal appointees, who kept it in deposits and sold it directly to the vassal, purporting to curb the overt abuses of businessmen.’’ This is the institutional landscape that existed at the time of Spain’s discovery of the New World, one in which legal monopolies pervasively inhibited the emergence of proto-capitalist institutions in Spain. Naturally, the Crown’s attitude toward the business of conquest meant that the same standards would be applied to the new Hispanic societies emerging overseas. The colonial mercantilism practiced in Latin America was the natural outcome of the centralization of economic and political power by Spain’s absolutist Crown. Colonial mercantilism was a natural response to the increasing militarization propelled by the colonization of the Indies and the huge indigenous civilizations that needed to be Christianized. The military needs brought on by the colonization of the Americas reinforced the centrally planned war economy, in which the whose lands the flocks passed. In order to protect their interests the sheepmen organized an association known as the Mesta. Alphonse X (1252-1284), perhaps hoping to reduce dependence on foreign imports by developing a Castilian woolen industry, granted several major privileges to the Mesta. One can already sense in these measures the ancestor of the protectionist policies for the development of ‘‘infant industries’’ in Latin America during the twentieth century. Much debate arose over the protection of these privileges at the expense of the rights of landowners. The issues in conflict were the sheep walks themselves, the use of pasturage en route, the imposition of tolls, and the procedures for resolving disputes. In the Cortes of Seville 1252, Alfonso X affirmed the right of sheepmen to use streams and traditional sheepwalks. Because the enclosure of pasturage thwarted the sheepmen, he allowed pastures already enclosed to remain so, but commanded new enclosures to be made only in an orderly manner. The townsmen argued that the sheep inevitably damaged vineyards and fields, and they insisted that the animals be confined to the usual sheepwalks—La Leonesa, La Segoviana, and La Mancha de Montearagón. As the flocks made their way, the towns tried to levy a variety of tolls on them. Alfonso X fixed the amount of the pasturage toll (montazgo) for cattle, sheep, and pigs, and forbade the imposition of more than one toll in a given municipal district or domain of a military order. These privileges in favor of sheep owners inhibited the development of property rights in land in Spain, which North and Thomas (1970) regard as crucial in the consolidation of proto-capitalist institutions in Northern Europe, which evolved from the manorial system. Government Intervention as the Source of Monopoly in Latin America 13 conquerors, later superseded by colonial authorities, dictated compulsory rules in every aspect of daily life, including economic exchanges. Economic institutions were driven by military needs, and the Crown decided all matters related to how and when explorations of new lands would take place.22 Veliz (p. 223) thus describes the interference of the Spanish Crown in the growth of the urban culture in Spanish America: ‘‘the legalistic political climate and bureaucratic that prevailed in Spain during the 16th century, was naturally translated into laws and regulations. In this case, the scattered decrees that had been issued during the first decades of the conquest were codified under the personal supervision of Phillip II in the famous Instruccion de 1573 (‘Instruction of 1573’).’’23 The proliferation of legal monopolies was a natural outcome of this process. As the revenues needed to cover expensive religious wars in Europe depleted the Treasury, the Crown appealed to taxation and confiscation of economic rights through the concession of monopolies for the exploitation of economic activities. Thus, contrary to the widespread assumption of historians, Latin American societies did not experience any trace of decentralized feudalism, but rather were subject to centralized royal control over their business affairs.24 22. Veliz (p. 52) notes the proliferation of economic regulations: ‘‘Inevitably, the legalistic tendencies of the Spanish political tradition were reflected in a lawmaking stream that even from its own energetic inception quickly reached proportions of flooding. Already by 1,635, more than 400.000 decrees—2.500 a year since the first time that Columbus set sail to the Indies—had been promulgated. The legal mentalities of Castile regarded the incorporation of the discovered territories of the Americas and the Philippines as a great enterprise that required a conceptual and legal union. They needed a durable bond between the Crown and those new subjects, peoples of strange nature and unknown legal traditions. At the same time, they knew well that the bond should be sufficient strong as to resist the divisive tendencies of a covetous and undisciplined colonial society.’’ 23. This compilation of rules governing daily life was so meticulous as to regulate the smallest conceivable details. The first ten articles related to the selection of places for the new settlements and instructed the Conquistador to observe the native Indians of the region where he intended to found the city, in order to determine if they were ‘‘of good temperament, color, and willingness and without illnesses.’’ At the same time, the Conquistador should examine the animals and the trees, paying special attention to their size and physical state and making certain that the ground does not contain ‘‘poisonous or dangerous things’’ and that the sky is ‘‘of good and happy constellation . . . clean and benign, the smooth and pure air, without impediment or alteration . . . and temperate, without excessive heat or cold.’’ The new cities were not to be built in excessively high places, for these are difficult to reach with heavy loads and often they are exposed to rough winds, which make them less healthy. If the city was to be raised on the banks of a river, it was to be done on the eastern bank ‘‘in such a way that the sun shines first on the city and then on the water.’’ And so on, with infinite detail, the Spanish bureaucrats guided the judgment of those tanned captains who so unexpectedly found themselves bearing the responsibility of extending the Mediterranean urban civilization to the Indies.’’ 24. North (1981, p. 15) observes in this connection: ‘‘The Spanish Crown, in contrast, evolved into an absolutist monarchy. The nation state that emerged under Ferdinand and Isabella joined two very different regions, Aragon and Castile. The former (comprising Valencia, Aragon, and Catalonia) had been reconquered from the Arabs in the last half of the thirteenth century and had become a major commercial centre. The Cortes reflected the interest of merchants and played a significant role in public affairs. Indeed, had Aragon determined the future of AU: Could you specify the year in the given citation, ‘‘Veliz (p. 223)’’? AU: Provide opening quotes. 14 Chapter 1 As Veliz (1980, pp. 27-38) observes, while Europe’s feudalism favored the development of precapitalist institutions such as effective individual rights (as incarnated in the Magna Carta) by giving feudal landlords effective judicial powers over their fiefdoms and effective political pressure before the King, the Castilian colonization centralized economic and political power around the monarchy through the institution of Encomienda, thus leaving the conquistadores as mere representatives of the King for the purpose of administering the colonial possessions. This phenomenon was soon reinforced with the arrival, in the first years of colonization, of a new class of royal officials who came to the New World with the mission of administering the possessions of the King, displacing the conquistadores and their descendants as a rival political force in the Americas. This was an expected political outcome; after all, the Castilian conquest had been almost entirely financed by the Crown, and was treated accordingly as a royal enterprise, unlike the settlement of Virginia by the English, the risks of which were born entirely by the English settlers. In the territories of what would later be known as ‘‘Latin America,’’ the profits from new lands and resources were at best regarded as concessions of delegated royal power. Clearly, institutions supporting individual resourcefulness and entrepreneurship, such as property rights, could hardly develop as they had in northern Europe, or indeed, in North America. At times, economic activities were not entirely forbidden, but rather regulated under special conditions. The overall appearance of the mercantilist system is that of a vast web of laws and rules regulating trade which resulted in the concession of monopolies as a primary means of ensuring dominion over social resources.25 Such monopolies, better known as levies (‘‘estancos’’) were later brought to the American colonies. Such levies, established by royal mandate, subjected all production, manufacturing, sale and distribution of the product concerned to specific legal provisions which regulated the price, places of sale, and punishment for those who attempted to trade the product without the proper royal authorization. The Mexican CFC (2000, p. 13) notes that: the management of estancos needed the presence of officials who pledged allegiance to the king. For instance, a general director ran the monopoly of cards, and in addition to managerial responsibilities, was also in charge of all Spain, its history would have been very different. But Castile, which had been continually engaged in warfare against Moors and in internal strife, had no such heritage of strong merchant groups. The Cortes was relatively less effective and Isabella succeeded in gaining control of unruly barons and of church policy as well. A centralized monarchy and resultant bureaucracy ensued and it was Castile that determined the institutional evolution of Spain (and ultimately of Latin America, as well).’’ 25. This system strongly influenced Latin American colonial institutions, as De Madariaga (1986, p. 139) observes: ‘‘countless decrees, frequently issued at the request of this or that local interest, disturbed the natural flow of commerce. At times the driving force was protectionism in favor of some peninsular interest. At other times the desire was to give protection to one local interest of the Indies at the expense of another.’’ As a result, it should come as no surprise that, as Elliott (Elliott, 1990 [1963], p. 182) has pointed out: ‘‘in spite of the diverse gaps in the legislation, is clear that, from the end of 1530s, the principle of monopolies had triumphed.’’ Government Intervention as the Source of Monopoly in Latin America 15 dispute settlement issues as well as economic affairs. A general accountant, an expert advisor in levies, who also acted as deputy of the governor and of the accountant, a distributor of cards, a clerk, two recorders, a mayor guard, along with two sheriffs, a person responsible for the design and printing of cards, and other officials, depending on the importance of the estanco, were also part of the team. In addition, the concession of estancos was subject to detailed procedures: the King usually ordered that the concession contract be granted to the highest bidder; then the bidder signed a contract, for a given period, backed by a legal bond and two honest and wealthy warrantors. Estancos covered a vast number of industries and trades: During the reign of Phillipe IV, the number of trades subject to royal concessions was augmented: gunpowder, lead, vermilion, red ocher, sulfur, playing cards, and sealing wax (the so-called ‘‘seven windows’’) were joined by salt works, cocoa and sugar. The CFC (2000, pp. 14-15) notes that: the levies received by the Spanish Crown included the right to verify the quality of gold and silver bullion; the ‘‘diezmo’’;26 the right to coinage; the right to operate firelights; mining rights of copper, tin and lead;27 the right to charge taxes on behalf of the Crown; the right of censuses; the right to auction saleable services; the offices of chancellery; to right to sell sealed paper; the service of spears; the right of licenses; the right of sales, compositions and assertions of land and waters; the right of local stores; right of confiscations, taxes of the cochineal, indigo and vanilla; right of earnings of wine, firewater and vinegars; deposits of snow, cordovan leathers and colambres; the game of cockfighting; the gunpowder; the royal lottery; that of ninth real two; the sales taxes; the exclusive concession of rights to sell pulque, aguardiente, and other alcoholic beverages; the right of navies and breakdowns; the rights to administer the almojarifazgo28 as well as the alcabala;29 the salt works and sale of salt; use, scope of accounts, anchoring, the ballast, waif properties, the donations. How could the King’s vassals survive? The concession of estancos was paralleled by the general organization of trade around guilds (‘‘gremios’’). The records of these corporations provide historians with some of the best knowledge regarding economic activity. There were one hundred guilds in Mexico City alone. These corporations frequently dictated 26. The diezmo is a ten percent tax that went to the king on the value of goods that are arriving in traffic and ports, or came and went from a kingdom to another. 27. These rights, also known as ‘‘Real Derecho del Quinto,’’ imposed a three percent tax payment on the value of any metals found in mining activity. 28. The almojarifazgo is a customs tax to be paid for the shipment of goods entering or leaving the kingdom of Spain, or traveling between the various ports (peninsular or American) equivalent to the current tariff. It was created by Alfonso X next to the Alcabala for taxing activity generated with the development of internal and external trade. 29. The alcabala imposed a ten percent tax on any sold merchandise. 16 Chapter 1 elaborate ordinances governing their activity. The ordinances covered such matters as the conditions of labor, the interests of the consumer, of the masters, and of the Crown, and control of apprentices (who hoped to become masters). Most of the people working underneath the masters were castas, the ‘‘other’’ of colonial life. The gremios passed laws regulating their hours of work and the conditions of work. Many of these laws were never enforced, however, and the workers were terribly exploited. Gremios were monopolies and their monopolistic character proved to be a barrier to innovation. Workers belonged to religious brotherhoods, of crafts (‘‘confradı́as’’). Sometimes these were established before the gremio. They were important to the workers because they provided hospitals, processions, and burials. And, of course, they provided for group worship. Silversmiths are a good example of a gremio. By 1537, they were working in New Spain even though a 1526 order forbade them in Spanish America. The order had to be revoked, first for all the colonies except New Spain but then for New Spain in 1559. By 1685, there were over seventy silver shops in Mexico City. By 1600, there were eighty in Lima. Estancos were resilient and lasted for several centuries. For instance, monopolies granted on the production of dyes and colors granted by Charles V in the sixteenth century as canonry to the Count of Osorno—later bequeathed to the house of the Dukes of Alba and Arco—continued to be exploited by these families exclusively until the beginning of the nineteenth century. Estancos were partly given as a reward for services to the Crown, but they were also intended to influence social welfare through the intervention of the Crown; hence the specific instructions given to the grantee for their exploitation. Under the terms of the estanco contract, the bidder had the exclusive right to manufacture, exploit and trade the object levied, but could not impose prices unilaterally: these had to be agreed upon with the Crown. Therefore, although they would become a source of corruption in the long run, these instruments were perceived as a rational—utopian—tool for administering the vast empire represented by the colonies of the New World, according to the social good. The search for utopia prevailed again in the concession of these monopolies as a means of preventing economic abuses. De Roover (pp. 187,190) notes that the first mercantilists believed government intervention to be necessary in order to preserve economic freedom: ‘‘Restrictions were necessary—as the lesser evil—to prevent trade dislodgment.’’ Trading companies vested with trading privileges were set up accordingly, to regulate international trade. Simultaneously, ‘‘regulation, or government running trade, was necessary to avoid unfair competition, or ‘disorganized trade.’’’ Commenting on the long Colonial period, which extends for more than three centuries, De Madariaga (1986, pp. 140-141) argues that the ‘‘eminently ideological trait of commerce born in the ethical and religious spirit of the Spanish Crown’’ was responsible for the trade protectionism practiced in the Indies. In turn, this led to ‘‘constant intervention of state officials in trade affairs.’’ Naturally, this phenomenon conspired against the rise of institutions capable of controlling the centrist power represented by the Crown, such as property rights or economic freedom. On the contrary, the Hispanic tradition favored pervasive central planning by AU: Could you specify the year in the given citation, ‘‘De Roover (pp. 187, 190’’? Government Intervention as the Source of Monopoly in Latin America 17 means of monopoly grants, executed through a complex web of regal bureaucracy, which was perceived as necessary in order to unite the vast empire. Moreover, in the defense system of the Spanish empire, estancos were perceived as a strategic form of ensuring revenues for the Crown. This system was intended to accumulate power and riches in the hands of the Crown as a defensive mechanism against the growing presence of competing nation states—France, Holland, England.30 The Crown adopted a mercantilist policy toward the Indies during the Colonial years, which extended trading monopolies and royal charters all over its vast empire with the singular mission of extracting wealth from the colonies through high taxes and public control over mineral resources, particularly gold and silver (Adams, 1993). These policies severely curtailed the development of a broadly extended system of property rights and banished competition, instead promoting illegal trading and smuggling (De Madariaga, pp. 143-144). Nonetheless, the Crown promoted its mercantilist policies, which were considered indispensable in order to financially support the Spanish army, which needed to preserve the integrity of Spain’s vast empire. This political system of administered trade privileges, also known as ‘‘mercantilism,’’ would deny individuals the effective use of social resources by forcing them to align themselves with the ‘‘national interest’’ of the Crown, which was mainly in preventing foreigners (England, Holland, and other protestant enemies of the empire) from trading with the colonies, but also included limiting the capacity of colonies to trade with themselves. Spain’s mercantilism was intended to accumulate gold and silver in the hands of the Crown, as these were perceived to be the source of national wealth. To achieve these objectives, legal monopolies specified the conditions under which merchants could enjoy exclusivity in the exploitation of certain trade or economic activity in exchange for the payment of alimony to the Crown. Corporatism among businesses organized trade in a way that was consistent with these goals: by setting the rules of commerce with the Crown, organized guilds deprived individuals of their right to reap the benefits of conducting trade in broad areas of economic activity, or even participating in it. 30. Mabry (2002) vividly describes the implications of this official exclusionary system in colonial Latin America: ‘‘Trading was regulated in theory. There was a system of tight channels in Spain. It was the Consulado de Sevilla through which all trade to the Americas had to pass. When the Guadaquivir River silted up, the consulado was moved to Cádiz. The system was used mostly from the mid-16th century to mid-18th century. There were three ports in the New World to which ships could go. The small ships that split off from the convoy in the Caribbean were not important. There were three consulados: Sevilla, Mexico City, and Lima. Merchants who belonged to a consulado were interested in monopoly. They wanted the highest possible profit with the least amount of effort. They concentrated on luxury goods. They wanted to supply those who had money, which was a very few number. Fairs were the typical means of disclosing of the goods. It was a big fair at Porto Bello, Panama, when the fleet arrived. There was a fair at Veracruz but the Spanish moved it to the highland town of Jalapa to escape the vagaries of a tropical port.’’ AU: Could you specify the year in the given citation ‘‘De Madariaga, pp. 143-4’’? 18 1.1.3 Chapter 1 GOVERNMENT DIRIGISME AND NATIONAL IDENTITY Once the Spanish-American War of Independence (1810-1830) was over, the elites governing the newly independent republics consciously embarked on reforms aimed at overturning the institutional regime inherited from Spain. The prevailing sentiment among the nascent countries viewed the Spanish Scholastic tradition as the cause of the decline of Spain as world power. The intellectual elites ruling the new independent republics, seeking to break with the past, initiated trade reforms, following the modernization efforts initiated or promarket reformists intellectuals and politicians of the Spanish Enlightenment such as Aranda, Floridablanca, and Jovellanos.31 In practice, however, these reforms did not significantly change the antimarket bias of previous colonial policies, particularly in connection with the crucial question of entitlement to property rights. Instead of extending economic freedom to the large dispossessed masses, they kept property entitlements in the hands of the few strongmen (‘‘caudillos’’) who had won independence from Spain and the elites associated with them. The justification for preserving the control of social resources in the hands of the few, however, would shift from the metaphysical justification of the scholastics to the new, rational approach of a rising philosophical positivism. Sociological positivism, founded by August Comte (1798-1857), promised a new ‘‘science of society,’’ which would reveal the laws governing social exchanges. Under this scientific approach, governments would gain the knowledge necessary to direct social welfare through enlightened, rational policymaking activity.32 In the optimistic words of Comte (1971 [1853], p. 21) himself: ‘‘the Positive Philosophy offers the only solid basis for that Social Reorganization which must succeed the critical condition in which most civilized nations are now living.’’ Naturally, Comte’s optimist social reorganization would be conducted at the expense of individual rights, if necessary. As De la Vega (1993, p. 204) explains, ‘‘[Under positivism] social disequilibria would not correct themselves automatically, but only through an intellectual authority above and beyond individual wants. Therefore, in Comte’s perspective, the role of the state was to supervise and to arbitrate productive and creative activities, and counterbalance selfish tendencies within society.’’ 31. Attempts to introduce promarket reforms are not a new phenomenon in the region. Enlightened efforts to induce modernization in Latin America can be traced back to the appointment, in 1736, of Jose Campillo as Secretary of the Indies. In 1743 he composed a manuscript in which he attempted a full-scale reassessment of Spain’s system of government in America (Elliot, 2006, p. 232). 32. Sociological positivism was perceived as the truly scientific approach of the modern social sciences, opposed to intuitive aprioristic (theologico-metaphysical) thinking (Comte, p. 24). Under positivism, reality is understandable through the senses; this made any appreciation of the metaphysics of reality irrelevant. From then on, the vision of modernizing enlightened elites in almost every Latin American country would be focused on the diagnosis of social ills using the positivist method, especially in the fields of law and economics. Government Intervention as the Source of Monopoly in Latin America 19 Sociological positivism would find fertile soil in Latin America to flourish.33 Liberal governments aggressively embarked on broad modernization programs, particularly in the area of infrastructure (i.e., roads, railways, water supply, etc.), led by foreign investors and international capital. Economic transactions were conducted mainly through commercial custom and private law; regulation was negligible if not nonexistent; inflation was low (governments adhered then to the gold standard); trade was free from artificial encumbrances. Foreign trade was opened to facilitate the acquisition of inputs and capital, as well as to promote the exports of raw materials and agricultural commodities. Immigration was deliberately encouraged by governments in Argentina, Uruguay, and Chile, who welcomed this source of cheap foreign labor as a means of reducing the backwardness of provincial towns and as a way of stimulating the inflow of new ideas and work values (Schumway, 1993). Thus, very much like other periods of economic liberalization, the era of economic reforms inspired by the ideology of sociological positivism brought about a limited degree of prosperity in Latin American countries. Public policies inspired by positivist thinking which, roughly, extended from the 1860s until the 1920s. Not surprisingly, private investment grew exponentially, to the point of making a farming country such as Argentina the eighth largest economy in the world by early 1920s. Moreover, the new ideology had a decisive impact on the political groups who pushed for the creation of the Brazilian republic34and served as the ideological inspiration of most liberal parties in the region, especially after 1860, at the time when civil wars in the region began to subside. However, social positivism did not challenge the system of monopolies inherited from colonial times. On the contrary, the social elites preserved their economic privileges at the expense of the majority, under the new guise of ‘‘modernization.’’ For example, the appointment of Diego Benavente as Chile’s Minister of Finance (1823) did not change the promonopoly policies that had existed hitherto. His support of a legal monopoly over mercury (azogue) contradicted his avowed 33. The influence of positivism in Latin America officially began in the works of the Colombian Jose Eusebio Caro, such as ‘‘La ciencia social’’ (‘‘Social Science’’) (1850). Caro supported positivist ideas, to maintain social coherence in times of crisis. Several Brazilian authors, including Manual Joaquin Perreira de Sa, Joaquin Alexander Mauso Sayao, and Manuel Pinto Peixoto, also developed positivist ideas within universities and higher schools, although this thinking did not have any influence prior to 1850. In Venezuela, the inception of positivism can be traced back to the polemic discussion between Fermin Toro and Rafael Acevedo, both intellectuals, in 1838. After 1860, however, the influence of positivism consolidated in the region, first in Venezuela, in the speech given by Rafael Villavicencio at the graduation ceremony of the Universidad de Caracas in 1866. This influence was felt more extensively in the interpretation of the history of Mexico by Gabino Barreda in 1867, and in the 1868 book Filosofia Positiva (Positive Philosophy) published by the influential Jose Victorino Lastarria in Chile. 34. It is not a coincidence that Brazil, which gained its independence from Portugal in those years, adopted ‘‘Ordem e Progresso’’ as the motto of her national flag, thus acknowledging what was then perceived as a fundamental principle of good government. 20 Chapter 1 liberal ideas about the need to eliminate all estancos and privileges. Nonetheless, he believed that ‘‘a legal monopoly such as the one he proposed should provide a great stimulus to the mining industry, despite the fact that, indirectly, [such a privilege] would impede the extraction of silver’’ (Sagredo and Villalobos, p. 101). The colonial system of monopolies, estancos, and guilds carried on almost intact, as it represented a financial source of revenues for the State. Similarly, by 1870, the legal estanco of tobacco alone supplied between 10% and 12% of Chile’s total fiscal revenues. In fact, this monopoly would only be abolished in 1880, once a new source of fiscal revenues (a tax on nitrate exports) was found (pp. 152-156). Social positivist policies merely provided a respectable scientific disguise to a new form of government dirigisme and rent seeking promoted from the top. Indeed, the centralization of political power in the new nation states and the emergence of the ruling caudillo were phenomena that blended well with the dirigiste outlook implied by positivist thinking in the social sciences. Even worse, sociological positivism was particularly influential in shaping the views of legislators in a way that undermined any chance of making property rights available to all. The ‘‘science of legislation’’ (Loughlin, 1992) heralded by positivism essentially conceived legislation as a functional tool, at the disposal of governments, to attain whatever goals were considered to be socially beneficial. Under the new thinking, the law adopted an entirely different instrumental meaning, an expression of the collective good as declared by Parliament, which usually reflected majority rule or the privileged view of enlightened elites. Naturally, the effective control over social resources wielded by the rich landowner elites of Latin American countries would stir social unrest, which would reach new heights at the turn of the century, as we shall explain in the next section. 1.1.4 THE MIRAGE OF ECONOMIC AUTARCHY The advent of the Agrarian Mexican Revolution, along with political Marxism, shaped mass movements across Latin America at the turn of the twentieth century. These combined forces were a natural response by Latin American societies against what they perceived to be an unfair state of affairs, triggered by the ubiquitous presence of monopolies over social resources. The concept of ‘‘social justice’’35 became a familiar word in the political language of Latin America thanks to the Mexican Revolution (1910-1921), which introduced the concept to the region for the first time. This movement advocated 35. Social Justice is a concept that departs from the traditional sense, Iustitia est constants et perpetua voluntas ius suum cuique tribuere (‘‘give someone his dues’’). Hayek (1988 [1973], pp. 119-182) defines ‘‘social justice’’ as an ‘‘attribute which the ‘actions’ of society, or the ‘treatment’ of individuals and groups by society, ought to possess.’’ Hence, regardless of the particular interpretation given by political philosophy, social justice contradicts the notion AU: The order of the author names have been changed in the given citation ‘‘Sagredo and Villalobos, p. 101’’, when compared to the bibliography. Should we change this according to the bibliography? AU: Could you please provide the reference details for the given citation ‘‘once a new source of fiscal revenues (a tax on nitrate exports) was found (pp. 152-6)?’’ Government Intervention as the Source of Monopoly in Latin America 21 agrarian reform programs aimed at redistributing wealth through land reform and distribution of land to peasants. To achieve this goal, well-meaning governments representing the interests of the lower classes would be entitled to expropriate idle parcels of land (latifundios) in the hands of big land owners. However, Marxism proved to be a far more influential intellectual force among Latin Americans, both in geographical scope and political presence: Agrarian movements were confined to Mexico, Brazil, and a few other countries with significant native Indian populations. In addition, the range of political movements inspired by Marxist ideology included a wide array of mass movements, ranging from social democratic parties to Christian democratic parties, and from communist hardliners to reformist socialist parties.36 Therefore, the interpretation given to social justice under the influence of Marxism deserves closer attention. This ideology introduced the notion of exploitation through capital, which is derived from its presumption of class struggle, hitherto unknown to Latin Americans. This concept captured the attention of the of free markets and reward by merit. Under social justice, reward is received by belonging to a certain class which is considered in need of a special status (privilege). 36. This discourse would prove decisive in the constitution of social and political parties representing the exploited masses. Communist parties adopted a conventional interpretation of the Marxist-Leninist principle of creating parties representing the proletariat (peasants and workers), with the goal of promoting class struggle and social revolution. By contrast, Social Democratic parties adopted an indigenous interpretation of social-economic realities in Latin America by emphasizing how these conditions did not replicate those that had been accepted by advocates of the traditional Marxist-Leninist interpretation. Latin America was experiencing the first stages of capitalism, not the last; therefore, the conventional Leninist program of seizing power to create socialism in countries where the abuses of mature capitalism actually called for a workers’ uprising would simply not work in these backward countries. Moreover, the indigenous conditions of Latin America called for a different political strategy in the pursuit of socialism: political parties should represent the interests of all exploited members of society, besides the proletariat and workers: students, small businesses, public servants, liberal professionals, and others were also victims of the ‘‘oppressive capitalist system’’ and therefore had to be represented in the class struggle. Multiclass parties emerged out of this original reinterpretation of Marx’s philosophy in Venezuela (Accion Democratica); Bolivia (Movimiento Nacionalista Revolucionario); Puerto Rico (Partido Popular Democratico); Costa Rica (Partido Liberacion Nacional); Colombia (Partido Liberal); and Peru (Partido Aprista). In time, social democratic parties would seize the day, and aprismo (as the ideology developed by Peruvian Victor Raúl Haya de la Torre in 1924 would be called) became the ideological fountainhead of the social democratic political movements that ruled in the region during the second half of the twentieth century. The influence of aprismo derived from the vast intellectual work of Haya de la Torre in the reinterpretation of Marxist postulates in the context of the Latin American region, which he originally referred to as Indo-America, possibly overstating his own experience in his native Peru. Nevertheless the breadth and scope of his contribution to Latin American political thinking is overwhelming, even if it remains underappreciated in the region’s political philosophy literature. Finally, Christian Democratic parties were also influenced by the notion of social justice, which they brought from a different—and predictable—source: the Catholic Church. In response to the increasing communist menace, Pope Leon XIII in his 1890 Encyclical Rerum Novarum—New Order of Things—developed a fully fledged political theory in opposition to the atheist communist challenge and the sympathies it enjoyed within the working class. On the evolution and diversity of Latin American political philosophy, see Rangel (1977). 22 Chapter 1 emerging political forces, which then initiated a complete reinterpretation of the region’s history along the lines of the exploited (peasants) and the exploiting (landowners) classes. The nascent capitalist order would no longer be seen as representing the process of wealth accumulation through savings and hard effort, but rather as the result of workers’ exploitation by local capitalists allied with foreign international interests. Social justice called for a profound reform of the inequities brought about by the capitalist system of production. A powerful, enlightened state would be summoned to restore justice across unequal social classes. The oppressive alliance between the ‘‘bourgeoisie’’ and local capitalists would have to be replaced by a wise government in charge of social resources that would be distributed according to the particular needs of society, particularly the oppressed masses. Strategic industries (i.e., utilities, energy, mining, etc.) were to be nationalized. Market exchanges would be severely curtailed in order to fulfill superior development goals, and to ensure fair access to the poorest in society. Foreign trade would be restricted in order to allow infant industries to develop. In particular, in this worldview, capitalism was a tool of exploitation employed by the capitalist class against workers and proletarians. Therefore, the role of the state would be to control capital, either through massive nationalization programs that would ensure state control over strategic sectors enjoying high revenues, which would then be distributed according to social needs, or through detailed regulations imposed on the private sector, to avoid any attempts at the manipulation or exploitation of the working class. By the mid-1950s, ‘‘social justice’’ had already become the dominant ethos shaping policymaking in the region, becoming the common currency in the language of Latin America’s political mainstream. Social justice would prevail until the end of the century, even after the advent of neoliberal reforms in the 1980s. Eventually, the new ethos reinforced the natural inclination of Latin American governments to centralize political and economic power. Véliz (p. 16) explains how this centralist culture reinforced anticapitalist values across the region: Latin American society presents some traits, which in other regions, above all in the countries of the cultural area of north-western Europe, are inseparable from the consequences of the Industrial Revolution, but which here possess an origin and character undeniably pre-industrial. This pre-industrial rationalization, on which centralism relies, shaped the process of change and continuity and the pre-industrial urban culture sui generis evolved into a vast service sector akin to the bureaucratic tradition found within its habits and institutions. However, like previous ideological trends, political mass movements inspired by either agrarian or Marxist ideologies made little effort to alter the monopolistic structure of property rights prevalent among Latin American societies. Agrarian movements in the region seldom pushed for any further economic objectives beyond land redistribution. Moreover, land reform schemes themselves usually emphasized the confiscation of latifundios over giving full property rights to AU: Could you specify the year in the given citation ‘‘Veliz p.16’’? Government Intervention as the Source of Monopoly in Latin America 23 beneficiary peasants. Marxist movements, regardless of their various vintages, simply assumed that social justice would be achieved by giving the state the bulk of social resources, with the expectation that they would be wisely and honestly administered by enlightened governments on behalf of the population. Eventually, this idea proved to be dead wrong. If anything, what these movements really achieved was a mere transfer of rights from the monopolizing hands of privileged landowners to the monopolizing hands of governments. These mass movements merely introduced superficial changes in the underlying economic structure of property rights, which passed from rich landowners to the hands of the State. Consequently, consolidated oligopolies controlling land were seized by the State, a single monopoly. As in previous decades, property rights would be given to individuals according to their membership in a group or corporation, not because they were recognized as individual right holders. While the new elites represented the different interests of social classes more broadly, the system worked in a way that foreclosed the possibility that individuals could earn a place in the production system through their individual merits; success depended only on their association with a group capable of exerting political pressure on governments and seizing the wealth controlled by the latter. Latin American governments of the twentieth century distributed economic wealth, like their Spanish forefathers, by granting monopolies and privileges, laying down compulsory regulation, and impeding competition at every turn. Notwithstanding the heated revolutionary rhetoric, the monopolistic, fragmentary, and corporative structure of economic rights remained unchanged. As Vargas Llosa (pp. 61-97) explains, the antimarket soul of Latin American economic institutions was revived by the emerging mass movements that came to dominate the political scenery of the twentieth century. Regardless of their particular right-wing or left-wing ideology, all of these movements shared a similar contempt for unencumbered markets as the main drivers of economic development; therefore, they sought to curtail the market’s insufficiencies at every turn through subsidies, detailed regulation, and controls. This phenomenon is particularly noticeable in the set of policies implemented in the post-war period (19501970) in Latin America. Like previous ideologies, social justice explained Latin America’s economic backwardness as a result of systemic, underlying factors that were beyond the control of domestic governments. The region could not develop due to the pernicious effects of international capitalism, which subjected Latin American businesses to the rigors of competition, which they were not prepared for. This interpretation reproduced the same self-indulgent interpretation of economic ills as the result of the abusive or exploitative actions of others, rather than viewing them as a product of the region’s persistent incapacity for creating stable institutions and the rule of law. Let us examine how the strategy of import-substitution industrialization (ISI), which developed around this ideological theme, actually undermined the capacity of local businesses in the region to compete. AU: Could you specify the year in the given citation ‘‘Vargas Llosa’’? 24 Chapter 1 ISI policies were linked to the ideological leadership of Raul Prebisch, an Argentinean economist who headed the United Nations Economic Commission on Latin America and the Caribbean (ECLAC) from 1948 until 1962, and whose intellectual influence would prove decisive for the design of Latin American development policies between 1945 and 1980.37 Prebisch’s theory inspired a new stream of nationalist and government-interventionist policies among developing countries, particularly in Latin America. Under the influence of Prebisch’s conceptual framework of dependencia, the ruling Latin American elite endorsed the protectionist, state-guided import-substitution model across the political spectrum, regardless of their particular political ideology. This phenomenon illustrates the degree to which the ideology of government dirigisme pervaded Latin America’s political scene.38 According to Prebisch’s diagnosis (1950), Latin America’s backwardness could be explained as a consequence of its dependence on primary-sector exports, whose revenues were ultimately supplied by the capitalist centers of economic domination. His theory postulated that there exists a center composed of wealthy states and a periphery of poor, underdeveloped states. Resources are extracted from the periphery and flow toward the states at the center in order to sustain their economic growth and wealth. The poverty of the countries in the periphery is the result of the manner of their integration of the ‘‘world system’’; this view is AU: Provide year of publication for Yergin and Stanislaw. 37. Prebisch was deeply impressed by the events of the Great Depression, which lead him to reject the policy admonitions of classical economics; eventually, this rejection led him to propose an alternative explanation for the causes of Latin American underdevelopment. Prebisch’s new ideology questioned the ‘‘structural’’ causes of underdevelopment in the region, and explained underdevelopment as a result of the marginal role of Latin American economies in the world economic system. He offered a version of Marxist class warfare and applied it to the division of labor in international trade. The world economy was divided into the industrial ‘‘center’’—the United States and Western Europe- and the commodity-producing ‘‘periphery.’’ The terms of trade would always work against the periphery, meaning that the center would consistently exploit the periphery. The well-off would become richer and the worse-off would get poorer. International trade was regarded as form of exploitation effected by the powerful West and its army of multinational enterprises. Under Prebisch’s leadership, the new proto-Marxist thinking acquired a structured form, thereby enhancing its influence all over the region. 38. Yergin and Stanislaw (pp. 236-237) observe that ‘‘the traditional statist approach in Latin America was greatly influenced by what was known as dependencia or dependency theory. It rationalized state dominance—high import barriers, a closed economy, and a general demotion of the market. And from the end of the 1940s right up to the 1980s, dependencia ruled. Its origins were in the late 1920s and 1930s and the Great Depression, when the collapse of commodity prices devastated the export-oriented economies of Latin America. Meanwhile, in line with the tenor of those times, ‘national security’ became a justification for governments to take over ‘strategic sectors’ of the economy to meet the needs of the nation, not those of international investors. This led, notably, to the founding of state oil companies in a number of countries. After World War II, the shift toward a much greater reliance on the state was propelled by the emergence in the West of both the welfare state and Keynesian interventionism and by the prestige of Marxism and the Soviet Union. One other thing motivated both Latin American economists and their governments: anti-Americanism—fear of the colossus to the north, and antipathy to what were seen as exploitative American corporations in the Latin arena. ( . . . ) The dependencia theorists rejected the benefits of world trade.’’ Government Intervention as the Source of Monopoly in Latin America 25 to be contrasted with that of the free market economists, who argue that such states are progressing on a path to full integration. Under this theory the local entrepreneurial class were faced with relatively thin, underdeveloped markets, with scarce capital resources, and appeared to be defenseless against the manipulation of prices in commodities, which were essential to their income, as they would be forced to accept disadvantageous trade conditions. As Kelly and McGuirk (1992, pp. 40-41) note: ‘‘Export pessimism regarding the terms of market access and unfavorable terms of trade, played some role in persuading them to pursue an import-substitution strategy.’’ The goal of the ISI model was to lessen Latin American ‘‘dependency’’ on the international capital centers, which it perceived as a source of exploitation through disadvantageous terms of trade, in which Latin American countries exported raw materials and commodities with low value-added and imported high value-added finished goods.39 To overcome dependency on international capitalism, Latin Americans would build self-sufficient industries capable of satisfying growing consumption in Latin American economies through ISI policies, as argued by Yergin and Stanilaw (p. 237). The intervention of governments to support local capitalist interests would provide the tools for local entrepreneurs to compete successfully at the international level, after a transition period of ‘‘infancy.’’ By developing autonomous industrial capacity, Latin economies would become immune from exogenous shocks, thus overcoming their reliance on commodity exports, which were constantly threatened by price fluctuations—allegedly manipulated in capitalist centers. Hence, a fundamental tenet of the ISI strategy was the need to break the links to world trade through high tariffs on imports, export promotion subsidies, currency overvaluation, and other forms of trade mercantilism. In other words, although these policies clearly advocated for the development of Latin America, they essentially reproduced the same methodology that had already been implemented in the region by colonial mercantilism: accumulation of foreign reserves through trade protectionism with a view toward administering them under strict government control. It is not surprising, then, that domestically, these policies utilized a method similar to those employed in the past: the creation of legal monopolies preventing competition from taking place. Various ISI measures promoted such monopolies in 39. One can see in Prebisch’s Dependency Theory the influence of Marxist thinking about the alleged exploitation of capital, which in Prebish’s view is conducted by the financial centers of international capitalism against the poor periphery comprised by developing economies. This view ignored the fundamental axiom of economics, already postulated by Adam Smith (1776 [1937]), according to which the extent (size) of the market (demand) defines the scope of the division of labor, innovation and specialization possibilities; in Smith’s words, the ‘‘division of labor is limited by the extent of the market’’ (Book 1, Ch. III). It was clear that no policy advocating market fragmentation through trade protectionism, enhanced market barriers, and limitations on trade could ever achieve the minimum economies of scale necessary to overcome the levels of subsistence and generate capital accumulation. AU: Could you specify the year in the given citation ‘‘Yerlin and Stanilaw (p. 237)’’? 26 Chapter 1 the name of ‘‘promoting development’’ and ‘‘economic independence’’ from international capitalism exploitation: – Price controls. These measures provided consumers with cheaper goods, but they also meant lower-quality goods and a lack of attention on the part of businesses to other aspects of trade that would have been present in a competitive environment, such as the improvement of consumer services and client support. Price controls generally sheltered the most inefficient producers, thus restricting price competition in the regulated industry. – Detailed government regulation. Under ISI policies, government tinkering with the market would become one of the preferred ways to achieve ‘‘developmental goals.’’ These goals were identified according to the political clout of interest groups; they followed no economic rationale. For example, procurement policies (i.e., ‘‘buy national’’ requirements) made use of public sector demand to support local producers, and cost-plus pricing policies accommodated inefficient firms. Moreover, national planning advocated the use of capacity licensing, investment incentives, and trade barriers as means to regulate entry and balance supply and demand, as well as raising profitability and attracting resources to the industrial sector. Finally, exit barriers such as bankruptcy procedures protected certain groups regarded as especially vulnerable (e.g., labor) and ensured their permanence in the market, albeit at the expense of efficiency. Similarly, restrictive labor legislation, complex bankruptcy procedures, and financial bailouts discouraged exits in an attempt to conserve capital and protect workers from unemployment. – Stringent foreign investment rules. These regulations forced the local subsidiaries of multinational enterprises to comply with many specific performance requirements, limiting the capacity of these firms and preventing them from being more aggressive or more resourceful. – Nationalization of broad sectors of the economy. Many industries and activities were nationalized, in order to create ‘‘national champion’’ monopoly firms.40 However, this policy excluded private firms from the most profitable sectors of the economy (i.e., mining, energy, etc.), thereby confining those to industrial sectors with low returns. – Discretionary selection of ‘‘winners’’. Giving subsidies became a usual affair in the Latin American policymaking of the ISI years. First, governments built the infrastructure, reserved basic industries, and supplied public goods to industries which they determined to be ‘‘potential winners’’ of the competitive process. In fact, what really happened was that subsidies flew 40. As Coate et al. (1993, p. 3) put it: ‘‘In numerous Latin American economies, nationalization has long been a standard response of the government to perceived economic problems. Indeed, government ownership was initially reserved for natural resource industries such as oil (Mexico, Venezuela) and mining (Brazil, Chile), but later expanded to airlines (Mexico, Argentina, Bolivia), banking and insurance operations (Mexico, El Salvador), the telephone industry (Argentina) and even luxury hotels (El Salvador).’’ Government Intervention as the Source of Monopoly in Latin America 27 to those industries and sectors enjoying political clout. These included farming and agro-industrial processing, car-making, textiles, iron-processing, and other labor-intensive industries, which were politically sensitive. Subsidies took the form of cheap credit, tax remittances, export subsidies, and drawbacks. Subsidies also included public funding of supporting infrastructure in areas that private capital regarded unprofitable. As these measures show, ISI policies advocated strong state intervention and central planning of the economy. But in those years, government intervention was fashionable among development specialists, not only within Latin America but also overseas. In the late 1950s, Nobel laureate Gunnar Myrdal eloquently described the consensus he saw among development experts that the adoption of centralized planning, which naturally accompanied ISI type policies, was the only option a country had to overcome poverty. Myrdal wrote that ‘‘what amounts to super-planning has to be staged by underdeveloped countries . . . and grand-scale national planning [is] the policy line unanimously endorsed by governments and experts in the advanced countries’’ and that ‘‘central planning [is] the first condition of progress’’ (Bauer, 1984, pp. 19-20). Nor did these objectives clash in any way with Latin America’s pervasive tradition of statism and government intervention in the economy. Over time, these institutional traits reinforced the anticapitalist culture that advocated government redistribution of wealth and the elimination of perceived foreign dependency. Under the surface of the new ‘‘development’’ ideology of ISI policies rested the underlying cultural ethos of government dirigisme, which guided policy measures inexorably toward the effective concentration of property rights and the consolidation of renewed forms of monopolies.41 In the new utopia of ‘‘social justice’’ implemented by ISI policies, landowners and capitalists would no longer control the ‘‘strategic sectors’’ of the economy; indeed, were seen too insignificant to support the public interest. Reformist governments, in their efforts to seize the ‘‘commanding heights’’ of the economy, usually nationalized the most profitable economic sectors in the economy: the oil industry in Venezuela and Mexico; copper in Chile; the tin industry in Bolivia; telecommunications almost everywhere, and so on. Therefore, the private sector had a marginal role and did not really count in the definition of government rules. This takes us to another important conclusion about the ISI period that is relevant for our study: governments, not the business sector, were primarily responsible of creating the rules that consecrated monopolies as the ubiquitous form of market structure across Latin America. Unlike other countries outside the 41. Borner et al. (1992, p. 9) note how mainstream thinking in public policy matters associated the region’s backwardness with the alleged capitalist exploitation being exercised from abroad, and observe how policymakers developed a biased approach to reality, distorting their view of social problems and their solutions. In their words: ‘‘this intellectual bias against markets led to the development of some interesting, yet at the same time dangerous, intellectual perceptions about the Latin American development process that have resulted from this situation.’’ 28 Chapter 1 region, where businesses would cultivate political power intertwined with economic power, Latin American economies seemed to follow rules primarily set forth by governments for ideological reasons. Hence, issues of competition in Latin America are profoundly linked to poor regulation, rather than private business restraints as such. We shall come back to this problem later. Bhagwati (1994, p. 13) aptly summarizes the impact of ideology in inspiring public policies in the ISI years: In the 1950s and 1960s the South generally subscribed to malign-neglect and even malign-intent views of trade and investment interactions with the world economy. It was feared that integration into the world economy would lead to disintegration of the domestic economy. Trade had thus to be protected, investment inflows had to be drastically regulated and curtailed. The inward-oriented, import substituting strategy was the order of the day almost everywhere (whereas) the North moved steadily forward with dismantling trade barriers through GATT rounds with a firm commitment to multilateralism as well. They subscribed to the principles of multilateral free trade and of freer investment flows as the central guiding principles for a liberal international economic order that would assure economic prosperity for all participant nations. Latin Americans failed to see the inherent contradictions between the dependency theory, which inspired these protective policies, and their quest for economic and social development. Clearly, market fragmentation through trade protectionism and government regulation of markets contradicts the very notions of labor division, accumulation of capital, and specialization, all of which can only occur within broader and more open markets. Guided merely by their intuition,42 Latin American policymakers assumed that import-substitution would enable the local entrepreneurial class to expand and to reduce its costs through economies of scale and learning by doing. More importantly, these measures restated the old government dirigisme in a new fashion and, therefore, led to a similar outcome: the consolidation of legal monopolies that concentrated property rights in the hands of a few privileged businesses under the shadow of governmental activism. The protections accorded to domestic businesses pursuant to ISI industrial policies discouraged competition among private producers through licensing and other barriers to entry and exit from the market, which included the concession of legal monopolies and ownership exclusions. They transferred enormous public resources to the private sector through subsidies and financing, with stifling effects 42. Sanchez (2003) declares in this connection: ‘‘perhaps the most glaring weakness of dependency was its lack of empirical grounding. If one accepts Karl Popper’s famous dictum that in order for a theory to be scientific it must be testable and falsifiable, dependency theory can be said to be patently unscientific.’’ In particular, ‘‘Dependentistas didn’t show how the ‘actual mechanisms of dependency worked,’ so that the parts became lost in the totality.’’ Government Intervention as the Source of Monopoly in Latin America 29 on the entrepreneurial drive of Latin American businesses. Although trade protectionism brought positive growth rates into the region,43 the long-term prospects for economic development were severely impaired.44 More importantly, the systemic effect of these policies created deep distortions in the way social wealth would be allocated. The concession of privileges was self-reinforcing, as the presence of monopolistic rents created by governments encouraged the presence of rent seekers who would invest in political lobbying to preserve such monopolies. The way to make money was by making one’s way through the administrative and bureaucratic maze rather than by developing and serving markets. Concession of special privileges to some groups meant the exclusion of the majority from fair and nondiscriminatory treatment, and the erosion of the rule of law. Inevitably, this situation exacerbated the frustration of the general population, who could not reap the immediate benefits of this preferential treatment, save for the discretionary concessions of indirect subsidies such as price controls and artificially high wages. This feeling of frustration became much more evident in the wake of the financial debt crisis of the 1980s, which caused the 43. Yergin and Stanislaw (pp. 237-238) observe: ‘‘Until the 1970s, the (import-substitution) approach seemed to work. Real per capita income nearly doubled between 1950 and 1970. Over the same period, the role of the state continued to expand, as did state-owned enterprise. Tariff and other trade barriers were raised. The biggest criticism at the time was that governments were not doing enough and that they should move closer to the centrally planned model of the Soviet Union and Eastern Europe. The deep weaknesses of this system were mostly hidden—until the beginning of the 1980s.’’ 44. In the context of a world that was growing more and more interdependent, isolationist economic policies such as those advocated under the ISI model were clearly unsustainable. Of course, in the initial years, this protection made possible the remarkable growth of domestic firms; however, as Smith (1776 [1937]) had predicted, economic specialization is limited to the extent of the market, which in this case was very small indeed, given the meager size of Latin American economies, measured in terms of consumers’ purchasing power. In view of this situation, domestic businesses had no other alternative but to apply for government subsidies in order to justify their financial viability in such small markets. Trade protectionism and rigid regulations undermined the long-term capacity of Latin firms to compete, innovate, and create economic growth. A World Bank report (Frischtak, Hadjimichael and Zachau, 1989, p. 2) gives a good summary of these effects: ‘‘In some countries, as the industrial sector matured, governments removed protective barriers and increased domestic firms’ exposure to competitive forces. But in most countries, barriers to entry and exit solidified. Capacity licensing and other regulations concerning the establishment and expansion of firms ( . . . ) effectively deterred the growth of capacity and the entry of new firms. Investment incentives and procurement policies ( . . . ) prevented entry by skewing the rules in favor of dominant producers. Price controls ( . . . ) pre-empted competition and helped less efficient firms survive. ( . . . ) The infant market rationale [allowing for tariff and non-tariff protection] was turned upside down; relief from import-competition continued to be provided for mature and declining sub-sectors while new activities were penalized.’’ Although most appraisals of development policies reflect the pros and cons of government interventionism, one cannot deny that in the long run the ISI strategy tended to do more harm than good. The protective measures impacted negatively on the entrepreneurship, competitiveness, and inventiveness of most Latin firms. AU: Provide year of publication for Yergin and Stanislaw. 30 Chapter 1 previously subsidized standard of living to plummet. From then on, granting privileges and economic subsidies meant higher prices on consumer goods, the deterioration of public services, poor quality of goods and services, rising inflation, and higher taxes. As Coate et al. (1993, p. 3) note: Generally price controls are introduced to protect selected groups in the economy. For example, in Mexico and numerous other Latin countries, the urban poor are often protected by controls on food and other necessities, while some countries protect the rich by limiting the price of gasoline. In other cases, selected industries are protected by price controls on raw materials and even financial capital.’ Few noticed then that these rules entailed huge legal costs that eventually deterred further investment in the region. This was particularly damaging at a time when alternative financial sources (i.e., international lending) were quickly fading away. A perverse by-product of the ISI system of privileges was the concentration of wealth in the hands of transnational firms and government monopolies. With respect to the first group, only big firms possessing access to capital could absorb the costs imposed by the web of foreign investment regulations that was intended to forestall the ‘‘denationalization’’ of Latin American economies. Thanks to the economies of scope achieved through their multicountry operations, large multinational enterprises always enjoyed the financial muscle to overcome the transaction costs imposed by host countries in pursuit of ‘‘developmental’’ goals; by contrast, the same costs pre-empted the entry of small- and mediumsized multinational enterprises (UNCTAD Secretariat, 1994, p. 42), as well as the vast majority of domestic businesses, which could not afford to dedicate their income to expensive lobbying activities. Contrary to what was intended (i.e., overcoming ‘‘dependence’’), the self-defeating nature of these measures is clearly demonstrated by the effects of foreign investment regulations on the domestic market structure of Latin American countries. Such dirigisme resulted in awkward combinations of specialization at the firm level and diversification at the group level. Thus, the strategies followed by large conglomerates differed. Some, like cement producers in Mexico or pulp and paper processing firms in Chile, concentrated their business in one or a few production sectors, while others sought risk diversification by operating in several sectors, such as the Vicuhna group in Brazil (textiles, steel, and basic mineral industries) or Mexico’s Carso group (telecommunications, electrical conductors, and retail trade). As a result, local industries grew considerably more concentrated due to the high costs of doing business imposed by detailed regulatory requirements. Economic concentration in domestic Latin markets reached significant levels in the years immediately prior to economic liberalization. Table 1-1 shows these levels in selected Latin American countries. AU: Please provide the opening quote. Government Intervention as the Source of Monopoly in Latin America 31 Table 1-1 Industrial Concentration in Latin America Prior to 1990 Country Year Concentration Rate by Size of Establishment (100 or More Employees) (%) Argentina Brazil Colombia Costa Rica Mexico Uruguay 1984 1985 1970 1975 1988 1987 43.7 58.2 61 51.6 64.8 39.4 Source: Economic Commission for Latin America and the Caribbean, Statistical Yearbook for Latin America and the Caribbean, 1996. Moreover, interventionism induced domestic business groups to be less entrepreneurial and to be extremely concentrated in mature or natural-resource-based industries (beer and nonalcoholic beverages, cement, petrochemicals, glass and glass products, agro-industries, etc.). Their presence in high technology- or marketingintensive sectors such as automobiles, computing equipment, pharmaceuticals, or electrical and electronic industries remained very low. These groups lacked product and process innovation. Domestic conglomerates were too small by international standards to be real global partners. Due to the combination of small scale (by international standards), high concentration in mature industries, and lack of innovative drive, domestic business groups lacked the capacity to compete. To the extent that ISI policies failed to encourage domestic entrepreneurship, ISI policies actually made Latin firms more reliant on foreign supplies and inputs, due to the artificially small size of domestic markets, trade protectionism, and regulatory measures. Again, ISI policies ignored the fact that the size of markets determines the scope of labor division, specialization, and innovation, and imposed restrictions that actually made the few remaining domestic firms operating in highly protected markets more vulnerable to foreign supplies of components, parts, and inputs necessary to carry out their own production processes. By the end of the 1970s, the Latin American industrial landscape exhibited all the elements of productivity stagnation: small, fragmented markets, characterized by high industrial concentration; unsophisticated production processes that could only be maintained through government subsidies or trade protectionism; high levels of rent-seeking activity led by interest groups seeking the perpetuation of economic privileges; little innovation; lack of competition; and social exclusion. In short, it was a sure-fire recipe for economic failure. Gomez (1997, p. 228) describes this process of stagnation: By the end of the 1970s, Latin America’s highly-protected manufacturing firms had more than saturated the import substitution market for their original 32 Chapter 1 products and diversified into different industries. Some favored vertical integration, such as moving backwards from the retail sale of building materials to the production of cement, ceramic tiles, and sanitary fixtures, followed by manufacturing the sacks, cartons, and tape required for packing. Other firms combined the production of chemicals, for example, with packaging materials and food products. For the most part, however, manufacturing plants were small in scale and dependent on imports of machinery and even processed inputs. Once local-tariff and non-tariff barriers were removed in the late 1980s and early 1990s, the undersized plants proved uneconomic to operate in competition with world suppliers. Erstwhile conglomerates shed product after product and focused on their basic line. The stronger Latin American firms, together with multinational firms from outside the region, scrambled across borders to acquire discarded plants suited to their business and buy into local brands. Latin firms developed their business strategies based on mistaken economic calculations influenced by government protectionism; in the long run these assumptions proved disastrous for their business development. Firms specialized in activities whose profitability rested on regulatory barriers to foreign competitors, which represented no serious threat for them. Hence local businesses were dramatically shaken as these regulations were removed during the liberalization that took place in the 1980s and afterwards. These measures increasingly rendered local products uncompetitive and, over time, created unsustainable production inefficiencies by imposing artificial microeconomic conditions (price controls; subsidies; etc.) which could only be sustained through external borrowing, thus increasing the financial burden of governments across the region. The full costs of the old system were devastating, but remained overlooked for many years. In the second half of the 1970s, Latin American governments had been heavily negotiating sovereign loans from international lenders to finance the mounting burdens of the inefficiencies caused by their development policies, to pay for increasingly expensive oil, and to address the severe fall in the price of commodities. However, after receiving the desperately needed influxes of cash, governments in the region failed to take the measures necessary to correct the fundamental lack of productivity pervading Latin American economies. The inability of domestic economies (i.e., domestic businesses) to increase their productivity became visible when the Mexican government defaulted on servicing its foreign debt in September 1982, a phenomenon that quickly spread throughout the region.45 45. Between 1975 and 1982, Latin America’s long-term debt almost quadrupled, from USD 45.2 billion to USD 176.4 billion. Adding in short-term loans and IMF credits, the total debt burden in 1982 was USD 333 billion. Mismanagement of funds created by a perverse combination of Keynesian thinking and dependency theory resulted in a neomercantilist ideology in trade matters that set the stage for the destruction of Latin American economies. Throughout the Government Intervention as the Source of Monopoly in Latin America 33 In conclusion, for the most part of the twentieth century, central planning marked the path of government dirigisme in the region, influenced by Keynesianism and dependency theory, both of which stifled competition and economic freedom through neomercantilist trade policies.46 Economic planning; extensive nationalization of industrial sectors; compulsory licensing; imposition of high protective trade tariffs: all of these created obvious obstacles to competition. In the wake of these restraints, cartels and other forms of competitive restrictions were not only tolerated, but were actually openly promoted by the State. Latin American economies were on a course for financial collapse, which ultimately was triggered by the public debt crisis of the late 1970s, but which underscored a more profound and subtle flaw eroding Latin America’s capacity to produce competitively in the context of increasing globalization. It became obvious that ISI policies had failed to achieve sustainable growth and that economic utopia had to be sought otherwise. A new promarket thinking about economic policies emerged in the region; or so it seemed at the time. 1.2 RENT SEEKING AND ANTICOMPETITIVE RESTRAINTS IN LATIN AMERICA Problems of competition in Latin America primarily arise due to government dirigisme which, as explained the previous section, is resilient throughout the economic history of the region. If there is a distinctive feature governing economic and social relations in Latin America is the search of utopian ‘‘perfect allocation’’ of resources, regardless of whether such perfection is found in the medieval notion of ‘‘just price’’; or the ‘‘social justice’’ of twentieth century social democratic political philosophy. Indeed, this particular Latin American trait is found in the search of ‘‘economic efficiency’’ postulated under neoliberal reforms of the 1980s and 1990s, as well as in the renewed forms of ‘‘proto-Marxist populism’’ that emerged in a handful of countries since then. In the end, governments always find good excuse to justify their overwhelming presence on economic affairs, thereby substituting government fiat for market’s individual decisions. The historical account of such interventionism clearly shows that the policymakers’ 1980s, access to sovereign loans dried up, sending Latin American economies, which were trapped in huge fiscal deficits, into prolonged hyperinflation, as governments could no longer service their public debt. 46. The microeconomic effects of ISI policies against competition were amplified by the set of flawed macroeconomic policies applied by Latin American governments in the 1970s. Due to the impact of the Keynesian thinking, which was popular in those days, governments in the region endorsed public expenditure as a means of fuelling economic growth through the increase of aggregate demand. However, these measures led governments to develop resilient inflationary processes that undermined the capacity of domestic firms to plan their production efficiently. Chronic currency devaluation led governments to impose more ‘‘controls,’’ such as exchange controls, aimed at stopping the outflow of foreign reserves (which was already growing at alarming rates by the end of the 1970s) in a futile attempt to preserve the purchasing power of the national currency. 34 Chapter 1 ideology over economic affairs has not changed, but merely restated the same set of beliefs around the need of employing governments as main drivers of economic development. The centralization of economic wealth in the hands of the state also creates another major institutional flaw: society’s pursuit of rent-seeking activities rather than productive ones. Businesses cease to be innovative and direct their efforts to obtain their income through political clout. Hence, businesses develop institutional means with which to exercise such clout: trade associations, guilds and corporations. If antitrust policy is to play any procompetitive role, its activity should be directed primarily against this pernicious form of collusion that receives government support. This section examines how Latin America’s organization through rent seeking has resulted in anticompetitive government rules that consolidate the status of monopoly holders, mostly represented by government monopolies over vast sectors of the economy regarded as strategic, and to a lesser extent, private beneficiaries of economic concessions in these economic sectors. 1.2.1 GOVERNMENT DIRIGISME AS THE SOURCE ANTICOMPETITIVE RESTRAINTS OF In his empirical research Hernando De Soto (1989) highlights the economic costs of the regulatory weight in Latin America, as well as in other developing regions of the world. As a consequence of this divide, formal statutes, regulations, and constitutions actually are deterrents to more genuine and effective means of trading and promoting economic exchanges. To this extent, these rules create transaction costs that sap the trading energy of entrepreneurs, and usually condemn them to engage in low-value-added economic activities. The commonly given purpose of antitrust policy is to minimize the economic inefficiencies created in markets by anticompetitive business conduct. At a higher level, however, antitrust policy is complemented by trade liberalization and regulatory reform. Antitrust policy is intended to control firms’ anticompetitive behavior, whereas regulatory reform is aimed at minimizing market-distorting government intervention. Therefore, on a broader sense, the role of competition agencies extends beyond the realm of anticompetitive business practices, as it targets regulatory barriers (economic, social and administrative)47 that impede market competition. As a World Bank and OECD report (1998, p. 93) states: The mandate of the competition office extends beyond merely enforcing the competition law. It must also participate broadly in the formulation of its 47. Economic regulation includes government requirements that intervene directly in market decisions, such as pricing, competition, and market entry or exit. Social regulation includes government requirements that protect public interests such as health, safety, the environment, and social cohesion. Administrative regulation includes paperwork and formalities through which governments collect information and intervene in individual economic decisions. AU: Could you provide the reference details of the given citation ‘‘World Bank and OECD report (1998, p. 93)’’ in the bibliography? Government Intervention as the Source of Monopoly in Latin America 35 country’s economic policies [because they] may adversely affect competitive market structure, business conduct, and economic performance. It must assume the role of competition advocate, acting proactively to bring about government policies that lower barriers to entry, promote deregulation and trade liberalization, and otherwise minimize unnecessary government intervention in the marketplace. By freeing infrastructure industries from unjustified regulatory constraints and by keeping anticompetitive business restrictions at bay, competition policy improves market performance significantly, thereby enhancing national competitiveness. As a result, competition authorities are increasingly acknowledged as being helpful not only in giving a broader scope to regulation, but as essential actors in this process. Thus, policymakers are acknowledging the need for coordination between competition and regulatory policies in different sectors of the economy in order to strengthen the competition criteria employed by regulating authorities in the process of licensing, granting public permits, and authorization. This cooperation could prevent concentrations and monopolistic practices and could create regulations that duly consider competitive criteria. In the case of Latin America this is all the more important in light of the region’s institutional tradition of government intervention in business affairs. As Levy and Del Villar (1996, p. 4) rightly observe in this connection, in Latin America there is not only a problem of excessive regulation in key sectors, but also one relating to the promotion of regulatory reform that would foster competitive conditions in certain key sectors. For this reason, competition agencies are gradually becoming more involved in working together with the various government agencies and ministries responsible for special sectors (i.e., utilities) in a proactive way. Tensions over what agency should regulate competition matters generally result from this interaction, but these conflicts are steadily receding. Even though government regulations such as laws, decrees, regulations, bylaws, and rules are the most obvious source of anticompetitive privileges that impede, undermine or block entry to potential competitors, competition authorities have turned their back on this problem, which they treat as a marginal part of their policy agenda. These rules have traditionally reduced the scope of competition. Competition agencies have utterly failed to dismantle the antimarket institutions that have undermined competition in the region, as clearly shown by the failure of privatization to introduce a change in the competitive structure of markets. This is evidence of the lack of purpose of competition agencies, which is reinforced both in their misguided agenda against business restraints, as well as in their lack of legal power to challenge anticompetitive government rules. This is further evidence of their inability to challenge the antimarket institutions that ultimately are subject to their purview. 36 Chapter 1 1.2.2 RENT SEEKING IN LATIN AMERICA Economic theory gives us an additional explanation of the underlying incentives that motivate individuals to engage in rent-seeking activities, such as the pursuit of government monopolies, rather than productive activities through competition. Stigler (1971) and Peltzman (1976), among others, have long acknowledged the welfare loss effects caused by economic regulation. According to their theory of economic regulation, political actors and constituents are rational economic actors that use the state’s coercive power to obtain favorable legal monopolies in return for political support. Due to information and organizational costs, individuals will invest resources to gain information in order to realize their particular interests, while simultaneously being inclined to disregard the public interest. Therefore, the larger the interest group is, the smaller the benefit it will provide to each member; as per capita benefits diminish, the less likely it is that informing oneself about the impact of a regulation makes economic sense. Once they recognize their interest in the outcome of the regulatory process, individuals organize themselves into pressure groups to make effective political demands. However, the larger the group is, the easier will be to each individual to shirk his obligation to the group and free ride on the contributions of others. Therefore, it is likely that policies will emerge reducing the welfare of a majority for the benefit of a minority. This theory explains why consumers’ interests recede in the face of the interests of small political constituencies. As a large political constituency, consumers expect to obtain comparatively less benefit per capita from organizing themselves to defend competition than smaller and more compact groups such as the liberal professions or domestic industry expect to gain by doing away with competition. Compared to the former, the latter have obviously higher expected per capita returns to obtain from organizing to protect their specific interests. They accomplish this by lobbying for special rules foreclosing competition through regulation. Interest groups will present such regulation as an achievement in the name of the general public. As Zywicki and Cooper (2007, p. 12) state, ‘‘such regulation seldom will be presented to the public as what it truly is. Instead, proponents will cloak their protectionist desires in the robe of ‘consumer protection,’ proclaiming that, left to its own devices, the market will do more harm than good.’’ In doing so, they will present the ‘‘public good’’ as a compendium of welfare values that transcend mere competition or consumer choice. Consequently, this strategy enables them to conceal their real rent-seeking purpose in the name of enhancing and protecting consumers’ interests. In the words of Zywicki and Cooper (p. 12): These sorts of consumer protection concerns are often raised as a sort of ‘‘trump card’’ against all other public policy goals, such as competition and consumer choice. But, because consumer protection concerns may be offered strategically as well as sincerely—special interest groups often raise them as a AU: Could you specify the year in the given citation ‘‘Zywicki and Cooper (p. 12)’’? Government Intervention as the Source of Monopoly in Latin America 37 fig leaf for their own narrow economic benefit—they should not necessarily be taken at face value. This phenomenon is particularly strong among liberal professions and trade associations in Latin America. Due to the marginal role of the business sector in development strategy, and the import-substitution strategy followed by governments in the region, the involvement of these associations in developing new economic activities was usually followed by protections, subsidies and shelters from competition, particularly—albeit not exclusively—from abroad; accordingly, the constitutive rules governing these sectors from the very outset were designed with a protectionist bias in favor of local businesses. The monopolizing effect of these regulations was strengthened by the economic character of services as nontradeable goods. These goods enjoy a natural shelter from foreign competition, which enables economic agents operating these services to engage in anticompetitive conduct. However, the request for shelter from competition did not stop at the border. The need for protection usually extended to other, more efficient, firms in the market, in order to prevent the industry from being monopolized by large firms. As consequence of this, local industry became heavily protected through cumbersome and detailed regulation that, paradoxically, has prevented smaller firms that are incapable of financing high entry costs from effectively competing. Most often, these firms were relegated to the realm of informal trade and black markets. What is important to note here, then, is that the constitutive rules governing trading activities in business and liberal professions were usually protective, directed at consolidating incumbent participants in the market, and exclusionary with respect to potential competition. Professional associations often adopt measures limiting competition by using loopholes in laws that give them limited powers to regulate themselves. Liberal professions constitute another widespread institutional form of legal monopoly created by government intervention in the region. These restrictions are reminiscent of mercantilist guilds. Often as a result of the perception that they fulfilled a public interest role, liberal professions were legally empowered to self-regulate and to establish their own rules of ethical behavior. Self-regulation represents an easier way of creating and disseminating to the public information about the code of ethics that should apply to a given trade or business. This enables the members of that trade association or profession, who are often better positioned to know better what activities of their business would create a social loss, to define what should be regarded as ‘‘unfair’’ or ‘‘unethical.’’ Given the potential technical difficulties of identifying what is ethical and what is not, this is a wise solution provided by the law. Due to the role conventionally assigned to trade and professional associations in the region, it is not surprising that price fixing schemes organized through these associations are among the most prominent form of horizontal restraints on trade addressed by competition agencies. In these cases, far from creating information for the public about the ethical standards that should apply to their trade, the 38 Chapter 1 associations limit the alternatives otherwise available to the public, thereby creating a loss of social welfare. For example, they create cartels aimed at setting minimum rates, or otherwise limiting the supply of the service offered by the members of the association. In this case, consumers are prevented from accessing the array of choices that they could otherwise enjoy, as competition among the members of the association is blocked by the rules of the professional or trade association. Typically, liberal professions were organized through mercantilist charters that contained monopolistic restraints in the guise of technical or professional standards aimed at the protection of public interests (i.e., public health; professional codes of ethics for the provision of services; minimum quality of products sold and services rendered; and others). These restraints were in the hands of ruling corporations; they retained legal powers to dictate self-governing rules, including the imposition of sanctions and penalties on professionals who dared to challenge the established rules. In the context of antitrust theory, the restrictive measures imposed by such regulations adopted the form of: – – – – exclusions of potential noncomplying economic agents; licensing or entry requirements; collusion to fix prices and professional service fees; information exchange about output, competitive strategies, and other forms of restrictions legally authorized under constitutive charters. Trade associations followed a similar logic, seeking protection from more powerful foreign competitors by appealing to the need to develop infant domestic industries. Economic sectors typically affected by these measures include a broad array of commodities such as sugar, maize, and dairy products (particularly milk), oil and copper, and other natural resource commodities, of which Latin American countries used to be single-product exporters. Restrictive measures also applied to sectors deemed essential for individuals, such as the health sector. Here, it is necessary to pay special attention to the operation of pharmacies and drugstores, where competition used to be suppressed through price controls on medicines. Finally, there is the broader category of products frequently consumed by the general public, which were constantly subject to controls simply because of their wide consumption. The industries subjected to this type of regulation included breweries, meat processors, bakeries, restaurants, tire manufacturers, and even coffee shops. Restrictive measures adopted in these sectors included: – – – – price controls; detailed regulation of trading conditions; tariff and nontariff barriers; and other restraints on competition, such as the introduction of idiosyncratic norms and standards amounting to barriers to market entry by preventing foreign firms from competing in national markets. Government Intervention as the Source of Monopoly in Latin America 39 As the ideology of government dirigisme made further inroads in the 1960s, reaching a zenith in the 1970s, new forms of competitive restrictions were introduced through the extension of the public domain to important economic sectors of the economy regarded as ‘‘strategic’’: energy production (oil, gas, and electricity); banking and insurance; foodstuffs; telecommunications; air and land transportation; and other key economic sectors. Initially these restrictions took the form of outright nationalizations of entire industrial sectors; however, as economic liberalization progressed, these industries were increasingly privatized and subjected to the jurisdiction of sector regulators. Governments developed extensive and comprehensive sector-specific rules, particularly in major infrastructure service industries. Such industries, also referred to as ‘‘public utilities’’ or ‘‘public services,’’ include activities where consumption is indispensable for the development of modern ways of life or which provide essential inputs to many parts of a nation’s economy, such as electricity, gas, water production and distribution, solid waste management, telecommunications, cable television, mail distribution, and public transportation by air, road or rail. Usually, but not always, regulatory schemes are enacted to prevent the abuses of firms enjoying potential monopoly power in industries that are ‘‘natural monopolies,’’ or to protect some form of ‘‘public interest.’’ Restrictions in regulated industries, of course, are more intense than in nonregulated ones. Usually, competitive restrictions in regulated industries include: – Regulatory barriers, including administrative barriers to entry into a market, exclusive rights, certificates, licenses and other permits required to begin business operations, public subsidization or the granting or prolongation of monopoly rights. – Regulations that make it harder for resources to be reallocated from one sector or market segment to another. These can be considered barriers to mobility that prevent resources from being transferred into more efficient sectors or segments, and which in the end will reduce allocative efficiency. Finally, sectors that were formerly nationalized have sometimes been liberalized, while leaving in place state-owned enterprises that are nominally in competition with other economic agents, but which enjoy certain concealed prerogatives due to their government support that impede or restrict competition in the market. Anticompetitive measures that create an unbalanced competition environment in these cases include: – artificial executive interventions changing the competitive positions of certain firms through arbitrary public procurement policy decisions; – arbitrary concession of subsidies through preferential use of public funds to cover business losses; – concession of tax remittances; and – elimination or exclusion from competition through the exemption of certain activities from the scope and coverage of competition laws. 40 Chapter 1 Finally, administrative regulations issued by local executive authorities, local councils, or bodies acting with delegated governmental power, especially when the regulations relate to sectors operated by infrastructure industries, distort competition if they: limit the independence and liberty of action of economic agents; create discriminatory conditions for the activity of particular firms, public or private; or result in a restriction of competition and infringement of the interests of firms or citizens. Clearly, these limitations on competition are often encouraged by businesses in exchange for political favors. This pattern of political alliances between vested interest groups and political actors explains why it has been so difficult for competition authorities to remain politically immune from external interference. All of the measures listed above are a reflection of a perverse rent-seeking status quo between the business community and organized liberal professions on the one hand and politicians on the other, in which the latter use their political clout to maintain legal monopolies and monopolistic revenues, part of which in turn was recycled into promoting politicians whose political platform defended economic nationalism and economic autarchy. Over time, protected industries grew highly concentrated and were subject to all sorts of anticompetitive restraints. Government restrictions on potential entrants raised their costs of doing business and undermined the capacity of the network to incorporate more participants. Long-term restrictions on competition and standardization resulting from government fiats impaired the development of networks and stalled labor division and specialization. Due to past development policies implemented in the region in which trade and professional associations negotiated privileges, it is not surprising that they became a prime target of antitrust policies once institutional reform was launched. Many of the their most prominent activities (i.e., collectively fixing the profession’s income through calculated exclusions of more efficient potential competitors) were subsequently found to conflict with the new market rules. In these cases, as will be seen below, the task of competition authorities often takes a more direct form, through competition advocacy coupled with antitrust prosecution, as a result of the limited power of competition bodies to call for the open deregulation of the industries in which these associations operate, which are often protected by strong political interests. Chapter 2 The Adoption of Antitrust Policy in Latin America Contrary to popular belief, the adoption of antitrust statutes reveals Latin America’s underlying antimarket sentiment, albeit restated in the language of economic efficiency. It is not a sign of commitment to promarket policies, as is conventionally assumed. Of course, the policy would have endured a severe blow to its public perception if it had been advocated in the name of promoting legal monopolies, government discretion, and business corporatism. Yet, this is exactly what antitrust policies have amounted to. Indeed, our look into Latin America’s economic past has shown that the old ideologies underlying public policies in the region never endorsed monopolies as such. Government restraints on competition were carefully cloaked in the positive language of prodevelopment goals; the attainment of self-sufficiency; and the protection of national interests. Rent seeking has never been a popular undertaking, hence the need to conceal it in any possible way. 2.1 ANTITRUST POLICY AS A COMPONENT OF LATIN AMERICA’S NEOLIBERAL REFORMS In the 1980s, a new brand of optimism was quickly gaining ground among an intellectual elite of young technocrats educated at prestigious universities in the United States and Europe. Their presence at high official posts challenged the political status quo with respect to the economy that had been in place since the 1950s and 1960s, in which policymakers were under the spell of economic nationalism and trade protectionism. This new generation reshaped the landscape of Latin public policies. 42 Chapter 2 Neoliberal reformers advocated the implementation of an outward-oriented export-promotion model of rapid insertion into the global economy in place of the exhausted, inward-oriented import-substitution industrialization (ISI) development model. While ISI ideology maintained that governments should act on behalf of the public interest in pursuit of social justice, the neoliberal reforms replaced that goal with the pursuit of ‘‘efficient functioning of the economy.’’ These reforms were conceptualized in the so-called ‘‘Washington Consensus,’’ a term which encapsulated the set of stabilization policies necessary to drag Latin America out of the debt crisis that made the 1980s the ‘‘lost decade,’’ a decade where economic growth in the region was virtually zero. 2.1.1 NEOLIBERAL REFORMS: A REAL CHANGE OF SPIRIT? On the surface, neoliberal reforms emphasized the free play of market forces both domestically and internationally as a means to enhance Latin America’s competitiveness in the global economy. Possibly due to the triggering effect of the debt crisis, the Washington Consensus clearly gave priority macroeconomic reforms over microeconomic ones: prudent government spending to overcome inflation; fiscal balance to avoid balance of payment deficits; subsidy cuts; liberalization of prices; lowering trade barriers; and ensuring a strong currency through sound fiscal and monetary policies. According to Williamson (1990), the Consensus encompassed the following set of policy recommendations: – Fiscal discipline. Viable public finances and avoidance of budget deficits were perceived as a priority for stopping soaring inflation rates, which depleted the income of the poorest. This was in the context of a region where almost all the countries had run large deficits that led to balanceof-payments crisis and high inflation, which mainly hit the poor because the rich could park their money abroad. – Reordering Public Expenditure Priorities. This entailed redirecting expenditures in a way that would help the poor, moving away from things like indiscriminate subsidies and towards basic health and education. – Liberalizing Interest Rates. This suggested freeing interest rates, in order to induce capital saving and a healthier banking system. – Tax reform. To balance their budgets and strengthen their currencies, governments were encouraged to construct a tax system that would combine a broad tax base with moderate marginal tax rates. – Exchange policy. The Consensus proposed avoiding highly valued domestic exchange rates, in order to prevent the inflow of cheap imports into the local economy, which would retard the development of domestic industries. – Elimination of trade and investment restrictions. Governments were encouraged to eliminate these barriers in order to attract foreign investment. 43 The Adoption of Antitrust Policy in Latin America The Consensus emphasized macroeconomic reform. For instance, privatization was seen as a fiscal mechanism designed to stop the heavy drain on public funds, which were being squandered by state-owned enterprises, and used privatization to obtain hard currency that would support transitional measures towards free markets. Typically free-market strategies, such as deregulation and concession of property rights, were not carried out with determination; indeed, they played a marginal role in the Washington Consensus agenda. These measures would stimulate member countries’ exports, increase import competition and provide more reliance on market forces through regulatory reform. Neoliberal measures triggered an unprecedented concern, among Latin American countries, with making their economies responsive to the demands of increasing international competition.48 At the macroeconomic level, the overall achievements of the Washington Consensus, were significant. For example, export volume grew two times more in the 1990s under economic liberalization than during the previous four decades under the ISI model; capital inflows boomed,49 and inflation fell sharply from three-digit levels at the end of the 1980s to about 10% in 1997-1998. Macroeconomic and trade reforms generated a remarkable influx of trade and investment; the new measures lured foreign investors into the region, seeking upcoming business opportunities arising from the sale of state-owned enterprises and penetration into quickly expanding new markets. Most of these investments were in long-term ventures, but a significant amount of money was invested in the local stock exchanges, creating a new source of capital for local firms. 2.1.2 THE EFFECTS OF NEOLIBERAL REFORMS ON MARKET COMPETITION Despite their positive results, neoliberal reforms implemented pursuant to the Washington Consensus, fell short of the initial expectations of reformist technocrats and the population at large.50 48. A broad literature giving accounts of globalization and its effects has emerged over the past twenty years; see for example, Yergin and Stanilaw (1998); Norberg (2003); Bhagwati (2004); and Wolf (2004). 49. According to UNCTAD (1994), these inflows are equivalent to 18.4% of the Gross Domestic Product (GDP), compared to 6.4% in 1980 and 11.6% in 1990. 50. Support for free markets among Latin Americans is tepid at best. In comparison to a decade ago ‘‘Latin Americans expect more from the state and less from the market.’’ Thus, according to the Economist’s Latinobarometro poll, ‘‘slightly over half of respondents across the region still favour the market economy. Private business is trusted slightly more than government. And support for privatisation continues to recover ( . . . ). But many Latin Americans no longer seem to think that the market alone will bring them a fair share of the fruits of economic growth. Only 41 percent of respondents across the region think that governments guarantee equality of opportunity.’’ In fact, ‘‘Latin Americans expect more from the state and less from the market,’’ and they ‘‘want a fairer distribution of income and a state that gives greater social protection.’’ 44 Chapter 2 While the positive effects of inflation and fiscal balance abatement were undisputed, at a deeper level these changes were largely illusory because there were no actual liberalization endeavors at the institutional level, where they would have become more permanent. There were important disappointments, including low gross domestic product (GDP) and employment growth, the minimal recovery of investment coefficients, the poor dynamics of total factor productivity, and the persistence of one of the world’s worst regional income distributions. Throughout the 1990s, economic growth was much affected by the increased volatility of capital accounts, which resulted from liberalization of capital movements. Thus, while the liberalization of capital accounts opened access to the world capital markets, it also increased Latin America’s vulnerability to external shocks. More importantly, it seemed that Latin American businesses were having persistent problems in overcoming their lack of competitiveness. In particular, renewed access to international credit had not produced significant changes in the entrepreneurial drive of domestic firms, which were largely subject to the discretionary policies of domestic governments due to their lack of contacts that would enable them to profit effectively from their access to international markets. By contrast, foreign multinationals (again) seemed to be placed on a less risky standing, due to their diverse network of international links. Thus, leadership in the economic process has shifted towards firms that possessed strong international links with international markets (Reinhardt and Peres, 2000, p. 18). In this process, the largest domestic conglomerates and the subsidiaries of multinational corporations have been the most dynamic agents in the region. It is easy to see why. The international business culture of these entities has facilitated their rapid insertion into the wave of change. Thus, they have reacted swiftly to the new economic model by reorganizing and modernizing their activities, strengthening their international linkages or orienting a significant part of their production toward foreign markets, and becoming part of global production chains. All this has led firms to concentrate on their core businesses and renew their production facilities, incorporating state-of-the-art equipment, and developing sophisticated financial and managerial skills. It is somewhat difficult to generalize about the increased competitive pressure of small and medium enterprises, since they are not a homogeneous group. Therefore, their level of competition, according to Reinhardt and Peres (2000, p. 20), varies across industries and countries. Sector- and country-specific variables have played important roles in determining their performance; size has not been the only determinant of firm behavior. Due to the lack of competition from by domestic businesses, multinational enterprises have taken advantage of this opportunity. Between 1990 and 1998, the market share of sales of the 100 largest corporations in the region has increased from $ 46 to 61% (Reinhardt and Peres, 2000, p. 19). Takeovers have been a preferred Latin Americans are becoming similarly equivocal towards the market economy: ‘‘this year’s poll shows sharp falls of those responding affirmatively when asked whether this is the best economic model for their country’’ (The Economist, 2007). 45 The Adoption of Antitrust Policy in Latin America method for foreign firms to buy out large domestic firms. All this has intensified the shift in leadership from state-owned and large domestic enterprises to foreign firms. Multinational enterprises have acted by seeking regional platforms to improve the efficiency of their international systems of integrated production. For instance, the Mexican automobile industry has boomed by taking advantage of maquiladora facilities in the Mexican and Caribbean region. In South America too, traditional foreign investment seeking access to natural resources and to markets for manufactures has yielded to efficiency-seeking investments. It is also interesting to note that foreign firms, like their domestic counterparts, have invested little in developing strategic assets, such as research and development advantages. Hence, due to the lack of effective access to the most profitable sectors of the domestic economy, and the lack of competitive drive of domestic businesses, excessively reliant on government subsidies, and tariffs during ISI policies, they could not resist the competitive pressure of foreign competitors at the time neoliberal reforms were implemented. Moreover, in general neoliberal reforms did not clearly benefit the development of linkages and the development of endogenous technological capabilities, although these effects differed in intensity from country to country. However, the effects of reforms have not been negative altogether. Small- and medium-sized enterprises (SMEs)have not uniformly been losers under the economic liberalization model. On the side of the losers were SMEs in the clothing and footwear industries, which suffered heavily from foreign competition. However, they accounted for less than 10% of the total value of SME production. By contrast, domestically oriented sectors like foodstuffs have been resistant to the impact of trade liberalization, and have even driven foreign multinational enterprises out of their turf, just as Pollos Campero of Guatemala drove out the American firm Kentucky Fried Chicken, not only in Guatemala, but also in El Salvador, Nicaragua, Costa Rica, Ecuador, Honduras, and Mexico (Perez de Anton, 2002). In conclusion, neoliberal reforms failed to attain stable, long-term markets, or the sustained accumulation of capital, as was expected. On the contrary, Latin American markets are currently featured by spot cash transactions and high uncertainty. The street peddlers and informal economy represents an almost 50% of the labor force, throughout the region. The neoliberal reforms had failed the challenge they had promised (Levine, 1992). 2.1.3 THE SECOND ‘‘INSTITUTIONAL’’ GENERATION OF REFORMS In view of the failures of neoliberal reforms, policymakers who advocated them realized that a second generation of institutional reforms focused on making structural changes in the allocation of property rights was needed to attain lasting results (Naim, 1999; Holden, 2003). The popularity of neoliberal reforms was in decline. The poor performance of privatized firms operating public services, due to poor regulation, triggered 46 Chapter 2 popular resistance to neoliberal reforms, which were assumed to be responsible. The old cultural thinking about markets being responsible for social evils emerged once more. The implementation of structural-level microeconomic reforms was irregular, and in some places, reforms were even reversed. As a result of the particular conditions of the domestic political environment in each country, governments usually gave priority to reaching consensus on easier-to-pass reforms, thereby making concessions that would leave behind the more difficult institutional changes. On the whole, governments were inclined to focus on macroeconomic reforms at the expense of the more politically difficult structural reforms. Thus, fiscal discipline, moderate public expenditure, tax reform, financial liberalization, the adoption of a single competitive exchange rate, trade liberalization, and the elimination of foreign investment barriers took precedence over policies aimed at eliminating economic monopolies that operated in the highly concentrated domestic industries in the region. In the view of Alvaro Vargas Llosa (2004), true promarket reforms failed to gain political support because they merely engaged in superficial macroeconomic neoliberal changes, forgoing a substantial change in the structure of property ownership, which on the whole continued to be held collectively.51 Hence, neoliberalism did not really change the quasi-socialist pattern of government interventionism in property rights inherited from the 1960s or 1970s. However, advocates of the second generation of reforms failed to grasp the true essence of institutional changes needed. Instead of focusing on the transfer of property rights and promotion of procompetitive markets through regulatory reform, they concentrated on the pursuit of consumer welfare and economic efficient allocation of social resources. That is, they focused on the pursuit of efficient market outcomes, instead of introducing institutional changes on markets in order to enable markets to attain such goals. The result of this misguided perception would be the reintroduction of government dirigisme, ironically in the name of advancing free markets. This second generation of reforms was devised to introduce ‘‘optimal’’ regulation and adequate implementation of antitrust policy. Optimal regulation 51. In the words of Naim (1999): ‘‘This evolution had a pattern. It usually began with the increase in popularity of a general set of policy recommendations. For a while, these recommendations embodied if not a consensus, at least the views of an influential majority of academics and high level staff of the IMF, the World Bank and the US Treasury, think tanks, and assorted editorialists. Very soon, sometimes just a few months after a certain degree of comfort was attained with respect to the new set of ideas, a surprising event would cast doubts on their adequacy, and with the benefit of hindsight, some times even make them look outright silly. The new data would usually show that the main ‘lessons’ derived from the previous crises missed some important element [usually summarized in one catchy term like ‘weak institutions,’ ‘corruption,’ etc.] whose critical importance had now been clearly illuminated by the most recent crisis. It would also show that the policy goals that had become fashionable were necessary but insufficient to ensure policy stability and economic success. More reforms would be needed.’’ In other words, the Washington Consensus neglected reforms at the microeconomic level by focusing its attention on correcting trade and fiscal imbalances. The Adoption of Antitrust Policy in Latin America 47 in industries with strong network effects would ensure proper efficient outcomes, by ensuring optimal market entry in the network. Likewise, antitrust policy would deal with nonregulated sectors (and even with nonregulated activities of regulated industries) to prevent the emergence of market power which firms could wield in a monopolistic way. In pursuit of the new ideal, yet to be attained, governments should eliminate market failures, such as externalities, provide public goods, and eliminate anticompetitive business conduct through improved regulation and antitrust policies. Microeconomic analysis would become the main policy instrument for achieving these goals. Very few questioned whether the pursuit of economic efficiency and consumer welfare actually reinforced the emergence of property rights in the region. Indeed, in the light of previous experiences of government dirigisme, and in the face of such gross macroeconomic imbalances, the new proposals for efficient regulation and antitrust policymaking sounded entirely consistent with the whole notion of a promarket economic reform process. Economic efficiency would become the hallmark of economic reform in the region. Economic policies would primarily seek to create more efficient market functioning and to improve social welfare through policies aimed at achieving optimal resource allocation. From this point on, public policy would be driven by the goal of achieving the best possible allocation of social resources. The key question that we address in this book is whether the pursuit of economic efficiency is compatible with the pursuit of free markets, or whether it is merely a reiteration of the same government dirigisme that is embedded in the institutional DNA of Latin America’s antimarket culture. Historical evidence shows that far from being challenged by the neoliberal reforms of the 1980s, the Latin American ethos of government dirigisme, which nurtures business corporatism and the concession of legal monopolies, was actually continued under the new rationale of achieving optimal resource allocation through antitrust policies. This phenomenon challenges the conventional story about the emergence of antitrust policy in the region. 2.1.4 CONSTITUTIONAL FOUNDATION ANTITRUST POLICY OF LATIN AMERICAN The conventional explanation about the emergence of antitrust policy in Latin America stresses how such provisions are incompatible with the Welfare State model prevailing in the years of ISI policies. The welfarism development model subjected the economic rights of property and contractual freedom to their ‘‘social function’’—meaning, of course, government control over trade practices that lessened the ‘‘economic freedom’’ of third parties.52 In the conventional view of 52. The old constitutional principle of free trade and economic freedom endorsed by the then-newly independent Latin American countries during the nineteenth century was perceived as outdated in light of the ideology of welfarism that had prevailed since the second half of the twentieth 48 Chapter 2 antitrust advocates, the pursuit of wealth redistribution is incompatible with the alleged ‘‘promarket’’ purposes of antitrust policy. However, the condemnation of anticompetitive business restraints, albeit phrased in a rudimentary and unsophisticated manner, was regarded as perfectly consistent with the legal framework set forth in Latin American constitutions, long before neoliberal reforms took place. In fact, no constitutional changes were necessary to accommodate new antitrust laws. In the cases where this actually happened, such as in Argentina (1994); Colombia (1991); Honduras (1982) and Venezuela (1999),53 amendments to the constitutional text merely sought to redraft the constitution in order to incorporate the technical language of competition policy. However, they did not alter the status quo, which had accommodated economic regulation long before the 1980s reforms, because the understanding of property rights under such constitutional system already conditioned their effective exercise to the dictates of ‘‘public interest’’ regardless of the utopian form adopted by such interest. In short, contrary to the general assumption, antitrust policy was already present in the constitutional system of Latin American countries prior to the reforms introduced in the 1980s, although it had not been fully developed in detailed legal provisions. But that should have not prevented its development by the hand of astute judges interpreting the constitutional provisions. The lack of antitrust enforcement in those days, therefore, was not consequence of the incompatibility of the existing constitutional framework; rather, it was a by-product of public policies that made it irrelevant altogether: price controls; licensing requirements; trade protectionism; etc. Actually, the legal and constitutional framework very much provided the means to address anticompetitive behavior, should the need had arisen. As an example, Article 34 of the 1917 Mexican Constitution, Article 148 of the Brazilian Constitution of 1946, and Article 96 of the 1961 Venezuelan Constitution expressly condemned monopolies; in fact, most constitutions in the region contained similar provisions against business monopolies and unfair competition. However, prior to 1990 only a handful of countries had comprehensive, functional antitrust schemes, as stringent regulation inspired by ISI policies directed the course of trade. This regulation made antitrust policy irrelevant, though not necessarily inconsistent with the spirit of government dirigisme prevailing in those days. In fact, in this period, Argentina, Mexico, Colombia, Brazil, and Chile had already enacted general antitrust statutes. Argentina was the first country in the century, and was considered an impediment to the ‘‘social’’ forces of development. Naturally, this peculiar interpretation of property rights lessened their integrity and consistency in favor of social goals promoted through government intervention. 53. For example, Art. 42 of Argentina’s constitution, which was adopted in 1994, affirms the right to ‘‘a defence of competition against all forms of distortion of the markets’’; similarly, Art. 113 of Venezuela’s Constitution prohibits dominant positions and conducts that restraint competition. Art. 339 of Honduras Constitution prohibits monopolies, monopsonies, oligopolies, hoarding and similar conduct. The Adoption of Antitrust Policy in Latin America 49 region to adopt antitrust provisions, which were enacted in 1919 (Law No. 11210/19).54 Later, Mexico issued a Constitutional Law in 1934; Brazil in 1938;55 Colombia issued Law No. 155 in 1959; Chile enacted legislation that same year (Law No. 13305/59). However, it would not be until the second half of the 1980s that the neoliberal policies then being adopted in Latin America created the proper setting for the flourishing of competition policies. The new measures freed the economy from price controls, making price competition relevant for antitrust surveillance. To the extent that Latin American antitrust policy seeks to attain an efficient (i.e., optimal) resource allocation, the new ethos induced the creation of proper institutional mechanisms for the enforcement of antitrust’s restated version of government supervision of market affairs. Accordingly, new competition statutes were introduced in the domestic legislation of the region. Chile opened a new stage in the institutional implementation of competition statutes in Latin America in 1973, through Decree Law No. 211/73, which established the Fiscalia Economica, a body with powers to prosecute firms for engaging in restrictive trade practices. As neoliberal reforms increasingly took hold in other countries from the mid-1980s onwards, new statutes followed in quick succession: Decree Law No. 701/91 (Peru);56 the Competition Act of 1992 (Venezuela); the Federal Competition Act of 1992 (Mexico); Law No. 7472/94 (Costa Rica); and Law No. 29/96 (Panama). Similarly, countries with antitrust regimes already in place revamped them in order to make them more effective, including Colombia (Decree No. 2153/92); Brazil (Law No. 8884/94);57 Chile (Law No. 19336/94 and Law No. 19610/99); and Argentina (Law No. 22156/99, later amended by Decree No. 396/01). In the last decade, a number of countries with broader antitrust policy experience amended their legislation. These include: Brazil (Law No. 10149/00, which introduced a leniency program); Argentina (Decree No. 396/2001); Chile (Law No. 19806/02 and Law No. 19911/03); Panama (Decree Law No. 09/06 and then, Law No. 45/07); Mexico (2006) and Peru (Legislative Decree No. 1034/08). Uruguay passed Law No. 17243 in 2000, and then changed it in 2007. Other countries are currently considering further amendments of their antitrust laws; these include Colombia, Costa Rica, and Venezuela. Finally, several countries have recently adopted competition regimes for the first time: El Salvador (Legislative Decree No. 528/04), Honduras (Decree No. 357/05), Nicaragua (Law No. 601/06), and the Dominican Republic (Law No. 42/08). According to the OECD and the IADB (2005b, p. 1) there are now about eighty countries, large and small, that have some form of competition law, and the number continues to grow steadily. Estimates are that between fifteen and 54. This law was later amended by Law No. 12906/46; then superseded by Law No. 22262/80. 55. Decree Law No. 869/38, subsequently modified by Law No. 4137/62. 56. This Decree was later partially reformed by Decree Law No. 25868/92, Legislative Decree No. 788/94, and Legislative Decree No. 807/96. 57. This Law was complemented later by Law No. 9021/95 and Law No. 9470/97. 50 Chapter 2 twenty countries without competition laws are actively considering adopting one (UNCTAD Secretariat, 2004b). That trend holds in the Latin America/Caribbean region, as shown in Table 2-1. Research shows that sixteen countries in the region have competition laws58 and another five are at some stage of drafting one.59 Competition law gained increasing momentum, along with other structural policies adopted in order to support more liberalized markets.60 Table 2-1 Latin American Antitrust Laws (1970-2000) 1970s 1980s Chile (1973) Argentina (1980) 1990s Peru (1991) Venezuela (1991) Colombia (1992) Mexico (1993) Brazil (1994) Costa Rica (1994) Panama (1996) Mercosur (1996) 2000s Argentina (1999) (amendment) Uruguay (2000, 2007) El Salvador (2004) Andean Group (2005) Honduras (2005) Nicaragua (2006) Panama (2006) (amendment) Mexico (2006) (amendment) Dominican Republic (2008) Peru (amendment) Guatemala (in process) Bolivia (in process) Ecuador (in process) Paraguay (in process) Source: OAS, Inventory of Domestic Laws and Codes of Regulations Relating to Competition in the Western Hemisphere (Preliminary Report). To the competition laws listed above, which established ad-hoc enforcement agencies, it is necessary to add a large set of competition rules incorporated into laws governing specific sectors, such as telecommunications, electricity and port services. These provisions have supplemented competition laws in countries with functional antitrust enforcement agencies (i.e., Venezuela, Peru, Colombia), and have even acted as surrogates where no organic competition enforcement yet exists (i.e., Bolivia, Guatemala). 58. Argentina, Barbados, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, El Salvador, Honduras, Nicaragua, Jamaica, Mexico, Panama, Peru, Uruguay, and Venezuela. 59. Bolivia, Ecuador, Guatemala, Paraguay, and Trinidad and Tobago. 60. Rodriguez (2006, p. 163) gives an account of the quick pace of the adoption of antitrust policies in emerging economies, especially in the last decade: ‘‘As of 2004, nearly 100 countries around the world had instituted active competition policy programs, approximately half of those in the last 10 years. Competition policy programs are regularly found within the portfolio of ‘favored’ institutions, alongside bank oversight agencies, utility regulatory commissions, judicial reforms programs, anti-corruption organisms and others deemed vital to the success of market transitions in liberalizing and reforming economies.’’ 51 The Adoption of Antitrust Policy in Latin America Cases decided, too, have grown steadily, as shown in Figure 2-1. 450 400 350 300 Argentina 250 Brazil 200 Colombia 150 Mexico 100 Venezuela 50 9th yr. 8th yr. 7th yr. 6th yr. 5th yr. 4th yr. 3rd yr. 2nd yr. 1st yr. 0 Source: CADE, CFC, Pro-Competencia, CNDC. Figure 2-1 Competition Enforcement in Selected Countries As seen in Figure 2-1, competition agencies have steadily increased their enforcement in the inception years of the policy. This phenomenon largely occurred in the mid-1980s, and 1990s. All of this evidence shows that antitrust policy has gained considerable ground thanks to the neoliberal reforms introduced in the region since the 1980s. Of course, reorienting the overall regulatory ethos in favor of economic efficiency did not suppress the more severe ways of restricting market exchanges that already existed in the region, inspired by both government dirigisme and business corporatism. This phenomenon explains why antitrust laws, despite their increasing popularity, were subject to numerous exemptions and waivers. 2.1.5 EXEMPTIONS TO ANTITRUST RULES All Latin American antitrust statutes apply in principle to all economic activities. However, broad exemptions are provided for specific economic sectors, due to ‘‘strategic’’ reasons. These exemptions are a remnant of government dirigisme in the economy and living proof of the pressure exercised by interest groups. Given the significance of the share of total economic activity which is actually exempted from antitrust enforcement (more than 60% of GDP in some countries), the exemptions provide a telling example of how rent-seeking is alive and kicking in the region, wielding considerable power to influence the invisible hand of Latin 52 Chapter 2 American governments in economic affairs. Perhaps more than anything, this is evidence of Latin America’s lack of commitment to the pursuit of promarket reforms. Moreover, the concession of ample exemptions from competition enforcement is evidence that antitrust provisions in Latin America are deeply influenced by the institutional corporatism and fragmentation of property rights that have long influenced policymaking in the region. Therefore, it is unsurprising that policymakers exclude from antitrust enforcement the most salient source of anticompetitive acts in the economy: the government’s own anticompetitive laws and regulations. Table 2-2 summarizes the exemptions from antirust rules from a comparative perspective. Table 2-2 Exemptions from Antitrust Enforcement Country Exemptions Argentina No explicit exemptions in the law; however, there is a special status given to legal monopolies and strategic nationalized industries. No explicit exemptions in the law; however, there are constitutional exemptions given on the concession of legal monopolies and special status given to strategic nationalized industries. No explicit exemptions in the law; however, there is a special status given to legal monopolies and strategic nationalized industries. (i) Residential public services (e.g., electricity, water, and other household services) (Law No. 142/93); (ii) The financial and insurance sector (Executive Order 663/93). (i) Public services subject to a concession; (ii) state monopolies created by law, as long as there are special laws authorizing them to carry out specific activities such as insurance, distilling alcoholic beverages and marketing them for domestic consumption, distribution of fuel, telephone and telecommunications services, electricity, and water; (iii) municipalities, with respect both to their internal rules and codes of regulations and to their dealings with third parties (Articles 9 and 69, Law No. 7472/94; Article 29 Competition Act Regulations). Agreements negotiated by labor unions (Article 4 Competition Act). Also, there is a special status given to legal monopolies and strategic nationalized industries. Brazil Chile Colombia Costa Rica Dominican Republic The Adoption of Antitrust Policy in Latin America 53 Table 2-2 Continued Country El Salvador Honduras Mexico Panama Nicaragua Peru Venezuela 2.1.5.1 Exemptions Nationalized strategic activities or industries. However, they are subject to the law to the extent that they shelter a restriction on competition (Article 2 Competition Act). Nationalized strategic activities or industries (Article 4 Competition Act). (i) Nationalized strategic activities or industries. However, they are subject to the law to the extent they shelter a restriction on competition (Article 4 Competition Act); (ii) Labor federations duly constituted in accordance with applicable legislation to protect the interests of workers shall not be deemed monopolies; (iii) The exercise of copyrights, or patents (Article 5 Competition Act); (iv) Cooperatives and associations that engage in direct sales of their products abroad (Article 6 Competition Act); (v) Price controls imposed for strategic reasons (Article 7 Competition Act). Undertakings in strategic areas constitutionally reserved to the State (Article 3, Law No. 45/07). (i) Intellectual property rights; (ii) activities that induce efficiency; (iii) harmonization of technical and quality standards; (iv) collective brands; (v) technical development; agreements reached by labor unions; (vi) export-promotion agreements; (vii) activities promoted by the Government aimed at ensuring activities in the health and agricultural sectors (Article 4 Law No. 601/06). No explicit exemptions in the law; however, under the constitution, there is a special status given to legal monopolies and strategic nationalized industries. Agricultural producers are authorized to associate for the purpose of marketing their products. The President, through the Ministry of Agriculture and Livestock, may encourage agreements between agricultural producers and agribusinesses (Article 1 of Decree 3246/93). Government Immunity and Strategic Industries The most powerful actor in Latin America capable of achieving immunity from competition rules is, of course, the government itself. In light of the predominant role of government dirigisme throughout the history of the region, this should come as no surprise. As expected, all competition statutes grant immunity to government acts, regulations, and laws which undermine competition or otherwise create obstacles for certain economic actors, without technical justification. 54 Chapter 2 INDECOPI has decided a landmark case involving the jurisdictional boundaries between government regulation and antitrust enforcement. In the case Neptunia, S.A. and others v. Enapu, S.A. (1997), INDECOPI issued administrative guidelines stating the scope of government regulatory powers. Neptunia, S.A., an import/export trader, brought a case against Enapu, S.A., the state-owned enterprise in charge of managing sea ports, alleging the latter’s abuse of its dominant position. Enapu made a practice of suggesting to the Ministry of Transportation the levels of landing fees as well as service rates for the use of the Callao Sea Port; ultimate approval, however, was in the hands of the Ministry. The case thus involved the analysis of the powers vested in the Ministry of Transportation to approve the rates for services recommended by Enapu S.A. Under Article 18 of Enapu’s Creation Act, the Ministry of Transportation approves the service rates proposed by Enapu S.A. Accordingly, in the case brought before INDECOPI the Ministry had approved the Enapu’s rate schedule.61 INDECOPI’s Competition Commission held that Enapu’s powers merely entailed the proposal of applicable service rates; the Ministry of Transportation could always disregard Enapu’s suggested rate schedule. Therefore, INDECOPI noted, the applicable rate schedule could hardly be regarded as a business decision subject to market forces. Consequently, the rate schedule of Enapu was nothing but an administrative decision issued by a government agency (de jus imperii) and did not fall within the scope of application of the antitrust rules set forth in Legislative Decree No. 701/91. In conclusion, INDECOPI’s Commission held that government regulations are not subject to antitrust rules, even if they affect the conduct of economic activity, if they are imposed for public policy reasons different from the promotion of competition. Nevertheless, the ruling also emphasized that such regulations would not be immune from all challenges, but that they would have to be challenged by other legal means, for example, through advocacy. As OECD and IADB reported (2004c, p. 18), although there are no exceptions to the law, by its terms the antitrust law does not apply to entities that do not undertake economic activities; this provision excludes governmental entities acting in a purely regulatory manner. Neptunia is emblematic of what has become a generally accepted principle among Latin American competition agencies, namely, that antitrust jurisdiction stops where regulatory powers are lawfully exercised. However, in recent years, the scope of competition authorities’ competence has been broadening. The separation between antitrust and regulatory jurisdictions is fading away. Chile’s Article 1 of Law No. 19911/03 incorporates an interesting innovation, derived from Russia’s Competition Act, which extends the scope of antitrust enforcement to cover government acts capable of creating distortions in the market, even if the government is acting as a regulatory authority. This provision signals a reversal of Chile’s previous separation between regulatory and competition agencies. 61. Ministerial Ruling No. 429-91-TC/15.13. AU: Could you provide the reference details of ‘‘OECD and IADB reported (2004c, p.18)’’) in the bibliography The Adoption of Antitrust Policy in Latin America 55 Previously, Article 5 of Chilean Decree-Laws No. 211/73 and No. 2760/79 limited the enforcement of antitrust provisions in virtually every sector regulated by other legal provisions. These sectors included mining, oil production, public services, liquor production, health, banking, insurance, the stock market, and transport. Today, the new provision applies to discriminatory government measures that create an ‘‘uneven playing field’’ in any economic sector. Deciding what is discriminatory, however, can be difficult, and there is a potential source of conflict with legitimate regulation. The law is not interpreted as applying to governmental ‘‘output restrictions’’ in the form of nondiscriminatory quality standards or other limitations on who may enter a market. On the national level, the law has been applied to the Ministry of Transportation, the Telecommunications Deputy’s Office, the Electricity and Fuels Superintendence, the Water Supply Authority, and the Government Procurement Office. It also applies to Local Councils (OECD and IADB, 2004b, p. 33). In Chile, there are abundant judicial decisions from antitrust enforcement agencies that confirm their jurisdiction over government acts. The new Competition Tribunal has affirmed this principle: it has been argued that the complaint is inadmissible because it has merely stated reasons of convenience which the Ministry has considered in order to dictate the resolutions disputed. In this connection this Ministry concludes that it has jurisdiction to hear government acts that infringe or could infringe antitrust rules contained in Decree Law No. 211/73, even though they have been dictated without exceeding their legal powers, because these rules should respect the rules of public economic order contained in such legal instrument.62 The Chilean provision has been regarded as ‘‘very useful,’’ even though it is acknowledged that deciding when private conduct is ‘‘sufficiently’’ regulated pursuant to some other policy to warrant exclusion is itself a significant policy problem (OECD and IADB, 2004b, p. 34). The inclusion of this provision in what is commonly regarded as the most advanced regulation of competition matters in Latin America reveals the extent to which antitrust is evolving towards incorporating regulation of governmental actions with the potential to distort competition. In the past, such an inclusion would have been impossible in light of the widely held view that competition is confined to business actions and undertakings. The obvious distortions introduced by Latin American governments into competition are increasingly making governments targets of antitrust regulation. Governments are very careful not to vest competition agencies with powers that could be ultimately used against them. Competition statutes timidly vest competition authorities with the power to advocate for competition, which includes, among other things, suggesting initiatives to the government for the elimination of legal or regulatory impediments. Naturally, the efficacy of competition 62. Ruling No. 11/04. 56 Chapter 2 advocacy is severely curtailed by governments’ legal annexation of competition agencies, which is a condition that denies them access to the judicial system. This factor also underlines their marginal importance vis-à-vis other more important members of the Cabinet. We shall examine this problem extensively in Chapter 13, Section 13.2. 2.1.5.2 State-Owned Enterprises Strategic Industries Although government acts are excluded, the activities of state-owned enterprises are usually subject to antitrust provisions. For example, in Brazil, the Conselho Administrativo de Defesa Economica (CADE) has periodically been involved in merger and conduct cases involving Petrobrás, the state-owned federal hydrocarbons company. Although no conduct cases involving Petrobrás have been decided by CADE since 1999, the Secretaria de Direito Economico (SDE) recently opened an investigation into allegations of discriminatory conduct by a Petrobras natural gas pipeline company. Moreover, pending merger cases involve the acquisition of gasoline stations by Petrobras and LPG distributors from the oil company Agenzia Generale Italiana Petroli (AGIP) as well as a pipeline joint venture between Petrobras and White Martins (OECD and IADB, 2005b, p. 83). In the case Suramericana de Aleaciones C.A. (Sural) v. C.V.G. Venalum (2002), Venezuela’s state-owned aluminum producer Venalum was found guilty of discriminating between clients with no sound commercial justification and was consequently fined. Even so, Latin American antitrust laws contain specific provisions designed to avoid widening the scope of antitrust enforcement too much. For example, stateowned enterprises are not subject to control in areas regarded as ‘‘strategic.’’ These sectors vary from country to country; however, they usually represent the most profitable areas of the economy. The influence of corporatism on the shape of Latin American statutes drives policymakers to concede a special treatment to sectors or activities regarded as ‘‘strategic’’ for political (rent-seeking) reasons. This type of provision is found in the competition regime of almost every Latin American country.63 As a result, strategic areas are regulated as some form of legal monopoly. There is a variety of legal mechanisms by which immunity may be extended to a given activity; each of these mechanisms has different implications for other economic policies. Therefore, it is important to assess their impact in the political and economic context of the particular country concerned. 63. For example, Art. 4, Competition Act (Mexico). According to this provision, the functions that the State exercises exclusively in the following strategic areas shall not constitute monopolies: Postal services, telegraphs and radio telegraphy; petroleum and other hydrocarbons; basic petrochemicals; radioactive minerals and generation of nuclear energy; electric power and the activities expressly indicated by the laws issued by the Congress of the Union. Satellite communications and railroads are priority areas for national development in terms of Art. 25 of this Constitution. However, the agencies and entities that exercise powers in these sectors shall be subject to the provisions of this law regarding acts not specifically considered strategic areas. The Adoption of Antitrust Policy in Latin America 57 Under the constitutions of all countries in the region, governments may not grant private parties monopolies to carry out business activities, except under concession agreements for a given period. Under this standard provision, such monopolies can only be created through legislation, and ordinarily can only be given to governmental, semigovernmental, public, autonomous, or municipal organizations. Some recent laws, such as Chile’s (2003), have made the constitutional prohibition explicit at the legislative level; under this law, only the President of Chile may give private parties monopolies, and he may only do so if national interests are at stake. The decision must be supported by well-founded reasons, which must be confirmed by a positive report issued by the Competition Commission. In Chile, this procedure was used in the 1970s and 1980s to authorize mergers that were considered necessary for one or both of the merging entities to survive (OECD and IADB, 2004b, p. 34). Interestingly, a similar provision enabling the State to seize private assets and run them as monopolies is usually accepted under all Latin American constitutions. Accordingly, government monopolies or concessions are given to ‘‘reserved’’ or ‘‘strategic’’ sectors and those where ‘‘national security’’ reasons justify special treatment. In such cases, antitrust enforcement is either limited or simply excluded altogether. Clearly, these exemptions are driven by reasons other than economic efficiency, which are usually found in ideology or political clout; only these factors explain the breadth and scope of important exemptions from antitrust rules that have been granted to certain monopolies that were created due to tradition or for strategic considerations. These include monopolies on electricity, insurance, alcohol production, gas, telecommunications, and water supply. One example is the exemption in Mexico’s antitrust rules for nationalized strategic industries.64 This provision follows the rationale of Article 28 of the 1917 Constitution, which opens with a broadly-worded prohibition of ‘‘monopolies, monopolistic practices, [and] State monopolies’’ and then grants special monopoly treatment to activities exclusively exercised by the State, such as postal services, telegraph and radiotelegraphy, petroleum and other hydrocarbons, basic petrochemicals, radioactive minerals, nuclear energy, electric power, and the functions of the central bank in producing coins and paper currency. The recognition of these strategic sectors does not formally constitute monopolies, although from an economic and practical standpoint that is precisely what they are. Similar provisions exist in other countries of the region.65 64. Article 4, Federal Economic Competition Law. 65. For example, Uruguay’s Art. 7, Law No. 17.243 excludes ‘‘public interest’’ activities; similarly, Art. 13, Law No. 17.243 excludes public services from the scope of the law; Honduras Art. 4, para. 4 Decree No. 357/05 expressly declares the power of governments to reserve any economic activity; El Salvador Art. 2, second paragraph Legislative Decree No. 528/04 declares that ‘‘the law will not apply to economic activities exclusively (i.e., monopolistically) reserved to the State.’’ Similarly, Arts. 9 and 69, of Costa Rica’s Law No. 7472/94 exempt the following sectors from competition enforcement: insurance, alcohol distilling, fuels, public concessions, telecommunications, the telephone service, electric power, and water services. In Colombia, domestic utilities and the financial and insurance sectors are excluded. 58 Chapter 2 According to Tineo (1997, p. 8), these special regimes are established ‘‘either because the general [competition] system does not help to achieve the objectives of competition in cases of public utilities [natural monopolies] or because the social repercussions on other sectors are considered sensitive.’’ Furthermore, all constitutions in the region provide for public (i.e., government) ownership of all mines, regardless of who owns the surface land; this includes the right to explore for and exploit liquid and gas hydrocarbons. Yet government concessions do not entail a ‘‘right’’ to exploit consumers, exclude competitors, or in any other way abuse third parties. Antitrust provisions would apply if the government (or the beneficiary of a government concession) acted to abuse its monopoly. Sector regulation, such as financial regulation (e.g., the banking industry, insurance, etc.), is usually in a grey area between the jurisdiction of sectorregulating authorities and competition agencies. Traditionally, power over competition issues was given to sector regulatory agencies due to their presumed expertise in dealing with the technicalities of the sector involved. Yet this tendency is increasingly changing. In the case of a reported bank merger in Chile, it was argued that the bank supervision law exempted such mergers from antitrust law, but the applicability of the antitrust law was ultimately confirmed (OECD and IADB, 2004b, p. 34). Specific sectors and economic activities like agriculture, professional sports, labor organizations, and export activities have been expressly exempted from antitrust laws in Colombia and Venezuela. Agricultural producers’ associations, which wield considerable political power in Latin American politics, have succeeded in obtaining a special status vis-à-vis competition rules, which enables them to form cartels in their trading with agro-industrial firms. Venezuela’s National Farmers’ Association, for instance, is immune from competition prosecution; therefore, it can engage freely in price-fixing.66 Similarly, the absence of cases brought against farmers’ cooperatives in Chile raises questions about the existence of an implied exclusion from antitrust rules, although the agricultural sector is not expressly excluded from the scope of antitrust provisions (OECD and IADB, 2004b, p. 34). 2.1.5.3 Politically Influential Groups Antitrust policy yields to the political pressure of special groups, by exempting them from policy enforcement. Perhaps the most important piece of evidence demonstrating corporatism’s influence on Latin American competition statutes is the significant number of political groups whose rent-seeking activities are tolerated under these statutes. For example, labor unions are usually exempted from antitrust prohibitions against competitors collectively negotiating wages under contractual agreements. 66. See Ruling SPPLC No. 004/1993. The Adoption of Antitrust Policy in Latin America 59 Under common principles of statutory construction, there is an implied exclusion for the agreements that are inherent in those processes which is sometimes made explicit.67 Naturally, political clout, not economic efficiency, explains why labor unions are excluded from antitrust review. Moreover, professional associations used to be excluded from antitrust enforcement. The Chilean Competition Commission once declined to rule on a minimum fee schedule for engineers on the ground that labor is not subject to the law (OAS Trade Unit, 2003, p. 46). That interpretation has not been tested recently, since other laws authorize such fee schedules if they are strictly voluntary. Indeed, these exclusions have evolved over time. Today competition agencies would find the law applicable to such economic agents, who often lack the political clout enjoyed by labor unions. In Chile, as in most other jurisdictions in the region, there is no express exclusion for agriculture, and since there have apparently been no cases challenging, for example, farmers’ cooperatives, there are no decisions that explore the extent to which the extensive government regulation of farmers creates an implied exclusion. On the one hand, Pro-Competencia granted an exemption to small farmers and farmers associations willing to negotiate prices jointly with the agro-industry.68 The financial sector in Latin America has traditionally benefited from anticompetitive regulation. Throughout the region, governments sheltered their financial sectors from foreign competition through legislation carefully excluding foreign banks, thereby consolidating oligopolies in the financial sector of these countries. Antitrust laws usually drafted in a way that encompass every industry, in practice apply little if any to the financial sector, thus yielding to the special regulatory surveillance even in competition matters. However, in a recent bank merger case decided in Brazil,69 it was argued that the bank supervision law exempted such mergers from the competition law, but the applicability of the competition law was ultimately confirmed. 2.1.5.4 Intellectual Property and Antitrust Policy Intellectual property is another area where business corporatism influences the shape of antitrust policies. From an economic viewpoint, copyrights and patents give their holders market power to raise prices above marginal costs for a certain period of time, usually twenty years after the copyright or patent is granted. Thus, copyrights and patents are tolerated legal monopolies that prevent consumers from reaping the full benefits of market exchanges. In order to accommodate this regime, antitrust laws usually exempt intellectual property from the scope 67. For example, Art. 4.c Nicaraguan Law No. 601/06. In Chile there is no express exclusion for labor, but the Constitution and other laws guarantee the right to create unions and to engage in intra-firm collective bargaining. 68. Ruling No. 0004/1993. 69. See Section 11.2.7 below. 60 Chapter 2 of their enforcement. For example, the laws of Brazil, Colombia, Mexico, Panama, and Peru tolerate the concession of government licenses to protect intellectual property. Nonetheless, antitrust provisions are enforced if intellectual property rights lead to abuses of a dominant position or monopolistic practices beyond the intended scope of intellectual property laws. The interface between antitrust provisions and intellectual property is embodied in two provisions of the WTO TRIPs Agreement: Under Article 31.k of TRIPs, economic agents are prohibited from abusing their patent concessions in the market. The TRIPS Agreement does not list the specific activities that constitute ‘‘abuse’’ of patent rights under competition provisions; this is a subject left for domestic legislation to decide. The literature has identified several hypothetical cases that might be covered by this provision: (i) setting abusive or excessive prices in light of the size of the market; (ii) refusing to supply a product under ‘‘reasonable’’ conditions; (iii) discriminating in the conditions of patent use; and, in general, (iv) blocking or creating obstacles to productive commercial activities. The enforcement of this provision has taken many forms in the case law of developed countries (UNCTAD, 2002). By contrast, despite the efforts of several Latin American countries to develop this provision, there has been no case law in this field. Therefore, it is uncertain how competition agencies will construe this clause in the context of the general prohibition against abusive dominance. For instance, Argentina’s Law No. 24572 on Patents identifies particular types of patent abuse, but all of these are already covered under the general competition rules on abusive dominance, which the patent law cross-references. It appears that Brazil has adopted a more active stance in enforcing the provisions of its patent legislation concerning abusive conduct. In 2001, Brazil threatened to withdraw legal protection from three patented retroviral drugs and produce generic versions of them if producers didn’t reduce their prices by 50%. These drugs (lopinavir, nelfinavir and efavirenz) represented 63% of the $ 172 million budget allocated annually by the government to acquire retroviral drugs. In 1997, Brazil adopted special legislation to allow the government to undermine patent protection and develop generic versions of drugs if pharmaceutical companies engaged in ‘‘abusive’’ pricing. Nevertheless, this legislation only enables the government to interfere with the monopoly of the patent holder in cases of abuse; it does not define what ‘‘abuse’’ means in the context of competition provisions. Indeed, this is a delicate matter which, if not properly examined, could undermine the transparency of competition policy. In some countries, the concept of abusive dominance in the patent context has been associated with conduct whereby one patent holder excludes a competitor in an upstream or downstream market. However, it is hard to imagine a case where the patent itself is the source of illegal discrimination, since the very rights provided for under the patent enable the holder to legally exclude any unlawful imitators. This is a problem arising from the scope of the patent, which is controlled by the interpretation given by the patent office AU: Could you provide the reference details of ‘‘UNCTAD, 2002’’ in the bibliography? The Adoption of Antitrust Policy in Latin America 61 prior to the concession of the patent. It is therefore not a problem of ex-post assessment of potential anticompetitive effects by competition authorities. In addition to these problems, identifying specific cases where high prices could be construed as ‘‘abusive’’ could be extremely complicated and susceptible to misinterpretation. This task of interpretation could lead competition authorities into making policy decisions on the basis of equity, rather than efficiency considerations. This is particularly significant in Latin America, where governments are particularly inclined to regulate markets through official prices in order to favor some particular group in society. From the viewpoint of competition, there would be no substantial difference between imposing an administrative penalty against a firm that has set prices regarded as ‘‘abusive,’’ on the one hand, and setting up official prices for the same transaction on the other. Antitrust policy should define, in advance, the circumstances under which prices imposed by a patent holder would be considered to be ‘‘abusive.’’ The second provision linking antitrust policy and intellectual property deals with the anticompetitive concession of exclusive licenses under Article 40 of the TRIPs Agreement.70 Under this provision, licensing contracts may be construed as anticompetitive if they include any of the following conditions: (i) grantback provisions;71 (ii) limitations on the right of any party to challenge the validity of the license; and (iii) joint compulsory licenses whereby both parties agree to share the license. Latin American countries have developed legislation that clarifies the jurisdiction of competition agencies to examine anticompetitive restraints created by contractual licenses; however, these provisions are sometimes confusing. For example, the Andean provisions indicate that no authority with jurisdiction over intellectual property affairs will register a contractual license that includes anticompetitive restraints; this provision seems to invite the competition authorities to conduct a preliminary review of such contracts. However, this has not happened yet. On the other hand, under Chilean law, it is possible for the government to grant a compulsory license if the patent holder abuses its concession rights; this seems to be a more widespread solution among Latin American countries. Similarly, Venezuela’s Pro-Competencia has issued guidelines to clarify what conditions associated with the concession of franchises are to be considered 70. ‘‘Nothing in this Agreement shall prevent Members from specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market. As provided above, a Member may adopt, consistently with the other provisions of this Agreement, appropriate measures to prevent or control such practices, which may include for example exclusive grantback conditions, conditions preventing challenges to validity and coercive package licensing, in the light of the relevant laws and regulations of that Member.’’ 71. A typical licensing requirement in patent pools is a grantback licensing requirement whereby licensees grant back new patent rights to the pool participants. 62 Chapter 2 procompetitive. In essence, the guidelines provide that franchisees should be free to obtain products from other franchisees.72 Furthermore, Latin American case law in this field is sparse, which clearly reveals the existence of some form of hindrance to the development of legal rules concerning the control of technology licenses. This is a by-product of the legacy bequeathed by previous legislation on the transfer of technology, which created a gap that the region has not been able to overcome. In short, policymakers are reluctant to develop aggressive antitrust control over licensing contracts, as they perceive these contracts as valuable sources of foreign investment. An exception to this rule is the Argentinean case Supercanal (2001). In this case, Telered Imagen and TSC, providers of entertainment content companies, negotiated a package contract for the broadcast of sports events (Argentinean soccer, car racing basketball, and boxing) with Supercanal, a cable TV operator company. Under the terms of the contract, Supercanal was prevented from negotiating broadcasting rights separately for each individual sport. The National Business Chamber, acting as a surrogate of the competition authority, regarded this contract as anticompetitive. All in all, the record of antitrust cases dealing with the anticompetitive abuse of intellectual property in Latin America is meager (De Leon, 2001). Moreover, there is as yet no jurisprudence or decision of a competent WTO body regarding either Article 31.k or Article 40 of the TRIPS Agreement (WTO, 2008). 2.1.5.5 Rationale behind the Antitrust Exemptions Antitrust policy is said to be inspired by the attainment of the public good, as the promotion of economic efficiency allows society to make the best possible use of scarce resources. At the same time, however, Latin American competition statutes are often subject to many waivers and exemptions, allegedly based on the need to attain the public good, this time interpreted in ways that prevent such economic efficiency from taking place. Clearly, there is something wrong with this peculiar reasoning. The usual answer to this riddle states that the exemptions from antitrust policy are intended to promote some form of ‘‘superior’’ good that is consistent with market functioning. In this connection, Khemani (2002, pp. 27-33) describes the following exemptions: (i) Exemptions aimed at balancing unequal economic or bargaining power; (ii) Exemptions aimed at addressing information costs, transaction costs, and ‘‘collective action’’ problems; (iii) Exemptions that reduce risk and uncertainty; and (iv) Special sector and interest group demands. In Khemani’s view, except for the special interest group demands (case iv), which are a form of rent-seeking activity, each of these exemptions has pro-efficiency justifications, which one would need to ‘‘balance’’ with the pursuit of economic efficiency as promoted by antitrust statutes. Systematically, this approach avoids discussing the internal contradictions among goals that are said to be harmonious. 72. Guidelines for the Assessment of Franchising Contracts, G.O. 5.431 of 7 Jan. 2000. The Adoption of Antitrust Policy in Latin America 63 It may be that the real answer to this problem is that the apparent exemptions from antitrust enforcement are not in fact exceptions to antitrust policy but rather its complements. In other words, antitrust and the ‘‘exemptions’’ are supported on similar grounds of government dirigisme, and they both represent forms of administration: while antitrust provisions apply under a framework that is enforced by agencies with a certain level of institutional independence, antitrust exemptions enable the intervention of another government entity, under alternative regulatory arrangements. Perhaps the most noticeable feature that reveals the underlying corporatism behind antitrust enforcement in Latin America is the numerous exemptions granted to interest groups who command the political clout to manipulate the rules in their favor. Antitrust rules do not apply indiscriminately to all individuals in society. Rather, they apply selectively, and fall more heavily on those who are politically less capable of achieving enforcement immunity. Far from constituting evidence of the promarket orientation of antitrust provisions, the exclusion of politically powerful groups from antitrust enforcement is evidence of these groups’ preference for more stringent rules of administered trade, which they can obtain from sector regulation. This phenomenon does not necessarily speak to antitrust policy’s promarket nature—this is a conclusion that deserves further analysis on the basis of its observed effects. It does speak, however, to the rent-seeking nature of antitrust exemptions: immunities from antitrust prosecution usually facilitate the negotiation of special status (i.e., privileges) under sector-regulation rules. In the opinion of private interest groups, the sector regulators are more susceptible to manipulation, perhaps as a result of institutional tradition. The concession of a special legal status is often reinforced by the inconsistencies of the theory behind the policy. The contradictions of giving monopoly rights over patents and copyrights for procompetitive reasons underline this conclusion. Khemani (2002, p. 30), for example, advocates protecting and conferring statutory monopoly rights in respect of patented, and copyright products. In his view, this protection ‘‘is aimed at creating incentives not only for inventive activity but also for the early disclosure of inventions, and the diffusion of new ideas, products and production methods. Through such incentives, technological change and progress can be fostered and result in dynamic economic efficiencies. However, a careful balance has to be struck.’’ Under the logic of antitrust advocates like Khemani, exceptions given to patent and copyright holders from antitrust enforcement are justified on the basis of the procompetitive effects they allegedly bring about. However, like Khemani’s analysis of the general case of exemptions conceded on the basis of procompetitive reasons (2002, pp. 27-33) his analysis never states where exactly the appropriate balance lies between the beneficial effects alleged to exist on the existence of patents or copyrights and their inevitable exclusion of potential competitors. Indeed it does not explain why such monopolies would provide any benefits, contrary to ordinary ones; instead, he simply takes the debatable view that such legal monopolies provide incentives to innovators, but does not 64 Chapter 2 explain why should potential competitors, or technological followers, be legally excluded from the market. These theoretical contradictions will be addressed more extensively in Chapter 3. 2.1.6 THE EXTRATERRITORIAL JURISDICTION OF ANTITRUST RULES Antitrust laws are usually applied to any restrictive undertakings with effects on domestic markets, irrespective of the country where they originated. Therefore, the effects of anticompetitive conduct, rather than the conduct’s territorial location, are what trigger the jurisdiction of competition agencies over a given case.73 Countries that are members of regional economic groups, such as the Andean Community or Mercosur, establish special provisions for the enforcement of common antitrust rules when the anticompetitive practice produces restrictive effects on competition in the subregional market.74 These provisions on antitrust jurisdiction follow those of federal systems like the United States, where state laws apply concurrently with federal ones when anticompetitive practices occur within the market of a state. A tendency towards a broadening of the ‘‘effects’’ doctrine is evident in several countries, such as Brazil, Mexico, and Venezuela, where several cases, particularly in the field of mergers, have endorsed this legal doctrine. Effects on domestic markets are presumed to exist whenever the firms engaging in the anticompetitive conduct are legally incorporated in the country where the restriction is taking place. However, there are special cases where effects are not so easy to find. Argentina’s merger provisions, for example, provide an exemption from the requirement of filing a premerger notification for mergers involving firms with no assets or shares in Argentina; evidently, this exemption was aimed at preventing the creation of transaction costs which might inhibit foreign investments. Similar in its emphasis on the geographical situation of economic actors, Colombian law provides that a proposed merger transaction has to have an effect in 73. For example, Brazil’s Art. 2, Law No. 8884/94; Art. 2, Nicaraguan Law No. 601/06; Art. 4, third paragraph, Honduras Decree Law No. 357/05; Art. 2 of Argentina’s Art. 3, Law No. 25156/99 states that the law applies to actions undertaken outside of Argentina having effect in Argentina; similarly, Dominican Art. 3 Law No. 42/08. 74. The Andean Community (Venezuela, Colombia, Ecuador, Bolivia, and Peru) and Mercosur (Argentina, Brazil, Paraguay, and Uruguay) are treaties establishing common economic markets among these Latin American countries. Inspired by the Treaty of Rome in the European Union, both integration experiments provide for regional competition provisions. The Andean antitrust rules are embodied in Decision No. 608/05 of the Andean Community (‘‘Rules to prevent or correct distortions on competition generated by restrictive business practices’’). Mercosur’s antitrust rules are embodied in the Protocolo de Defesa da Concorrência do MERCOSUL, 1996 (‘‘MERCOSUR’s Protocol of Protection of Competition’’). Both provisions limit the scope of regional enforcement to restrictive business conduct affecting the Andean Subregion and Mercosur, respectively. The Adoption of Antitrust Policy in Latin America 65 the market(s) where the relevant economic agents (companies or undertakings) carry on their respective businesses, regardless of the type of transaction.75 Sometimes competition statutes provide for unequal enforcement in a way that favors domestic producers over consumers in foreign countries. For example, some countries76 explicitly exclude export cartels and other restrictions on competition in the export market from their territorial scope. The stated purpose of these measures is to give exporters the privilege of raising prices above marginal costs in order to recoup expenses arising from international trade risks. However, these measures are usually included in antitrust statutes for rent-seeking purposes, in order to empower exporters with a legal monopoly that cannot be challenged by consumers suffering from artificially high export prices due to monopolistic conduct. This is merely more evidence of the corporatism that favors certain groups— in this case, exporters—at the expense of other groups. 2.1.7 SUBJECTIVE JURISDICTION: ENTERPRISES Except for the exempted groups identified above,77 antitrust laws apply to all enterprises with activities producing economic effects in the relevant antitrust market. Enterprises usually include any corporate entity, and even individuals who are legally incorporated as limited liability companies, corporations, or sole proprietorships, who interact in the market either as suppliers or buyers of goods or services. Competition enforcement agencies also define ‘‘enterprises’’ on the basis of their economic, rather than legal, attributes. A consistent body of case law has developed that gives weight to the underlying economic control ultimately exercised by one firm over another through common stock or contractual agreements over formal legal incorporation. The broad extent of this definition of enterprise is evident, for instance, in Mexico, where all economic agents are subject to antitrust provisions, whether they are individuals or corporations, agencies, professional groups, trusts, or any entity that participates in economic activities. The law also applies to entities of the federal, state, or local government, subject to the exemptions granted for strategic activities, as discussed below.78 This provision is repeated almost literally in the rest of the statutes of the region.79 The personal jurisdiction of antitrust rules extends to all national and foreign enterprises, regardless of their public or private ownership or their profit-making 75. Article 4, Law No. 155/59; Art. 5, Presidential Decree No. 1302/64; Arts 45(4) and 51, Presidential Decree No. 2153/92, and Law No. 222/95 regulate this field. 76. For example, Art. 6, Competition Act (Mexico), and Art. 4.d, Law No. 601/06 (Nicaragua). 77. See Sections 2.1.5.1 and 2.1.5.3, above. 78. See Section 2.1.5, below. 79. Article 4, Competition Act (Mexico). 66 Chapter 2 ends. Thus, the laws of Latin American countries apply to all national or foreign, public or private enterprises or corporations. Competition rules apply to anyone who operates in the market, regardless of her commercial or profit-making purpose. All conduct, agreements, acts, or transactions pertaining to the production and marketing of goods and services are included. Consequently, in order to assess whether a given entity is subject to the law, competition agencies look at the economic effects, rather than the legal incorporation, of the investigated business or firm. The first generation of antitrust laws introduced in the region was initially ambiguous in this regard, but the laws were later amended to clarify the proper approach. For example, the Mexican Competition Law of 1992 was amended in 2006 to incorporate a new definition of ‘‘economic agent.’’ An ‘‘economic agent’’ was redefined to include any individual or corporation participating in the market, regardless of whether it had commercial or speculative objectives; previously, the antitrust law only applied to those individuals or entities deemed to have commercial or economic ends. Establishing the level of businesses’ autonomy is a relevant inquiry in antitrust cases involving mergers of firms or restrictive agreements affecting corporate holdings, or groups of related enterprises. Usually, merger review applies on businesses that acquire control over competitors. In such cases, antitrust authorities go beyond mere legal incorporation and examine the underlying economic structure of companies in order to establish whether there is real independence of action between the participating enterprises, or whether the activities of one enterprise should be attributed to the other in order to evaluate the case within the parameters of the legal prohibitions on restrictive agreements or mergers that may increase or consolidate a dominant position. Latin American laws usually endorse a fairly open definition of the corporate integration of two or more independent firms. The determinative element is economic control exerted over integrating firms. Control is essential for deciding whether two or more firms are genuinely a single economic entity for the purposes of antitrust review. Under antitrust statutes, control is usually understood in a broad sense, encompassing all forms (legal or informal) of decisive influence over the controlled entity.80 In order to determine whether economic control exists, Latin American rules take into account factors such as common stock ownership in the controlled firm or in a third firm, performance contracts, and even the appointment of some members of the controlling firm to the board of directors of the controlled firm. Case law in the region supports this principle. In the Mexican case Gas Supremo, SA de CV (Gas Supremo) v. Gas de Cuernavaca, SA de CV; Gas de 80. For example, Art. 32 of Legislative Decree No. 528/04 (El Salvador) defines control as the ‘‘capacity of an economic agent to influence, through the exercise of property rights or rights of use, the assets of the controlled economic agent; or through agreements that provide the controlling entity a substantial influence over the composition, voting or decision making of directive, administrative bodies, or over the controlled business’ legal representatives.’’ 67 The Adoption of Antitrust Policy in Latin America Cuautla, SA de CV; Gas Modelo, SA de CV; Compañı́a Hidro Gas de Cuernavaca, SA de CV; Gas del Sol, SA de CV y Compañı́a de Gas Morelos, SA de CV (Liquefied Petroleum Gas Distributors) (2000), the Commission treated the accused firms as a single economic group, as they were linked through common shareholders who were also members of their respective boards of directors. This principle may also be applied in other similar circumstances. For instance, trading agents operate on behalf of a principal; therefore, they are considered to act in the market jointly with the principal. Because trading agents do not bear the risk involved in these undertakings, antitrust rules treat them differently from independent enterprises that possess full autonomy to take their own risks, determine sales prices, and control other contractual conditions vis-à-vis third parties. In such cases, the determination whether business is a commissioner or agent depends on the role it actually plays, and not on the text of the agency contract. 2.2 COMPETITION AGENCIES: COERCIVE POWERS Unlike the previous wave of ineffective competition statutes dictated prior to economic reforms in the 1980s and 1990s, modern antitrust laws vest antitrust agencies with full powers to enforce the law. These powers include: (i) First, the capacity to make inquiries and investigations, including acting in response to third-party complaints; (ii) The power to impose fines and issue orders; and (iii) The capacity to force businesses to settle cases prior to final decisions. 2.2.1 CAPACITY TO MAKE INVESTIGATIONS AND INQUIRIES Competition enforcement agencies generally enjoy broad powers that allow them to investigate economic sectors or particular firms, to obtain evidence, to require cooperation with other governmental agencies, and to require evidence from private and public bodies.81 In the execution of these powers, they may request information from different sources through different legal means. These include: – affidavits of investigated firms’ managers; – information provided by the investigated firms; – testimonies of investigated firms’ customers; 81. The provisions regulating these powers are as follows: Art. 12 Argentina’s Law No. 25156/99; Art. 7 Brazil’s Competition Act; Arts 17 and 24 Chile’s Decrees-Laws No. 211/73 and No. 2760/79; Colombia’s Administrative Judicial Code; Peru’s Legislative Decree No. 807; Mexico’s Art. 31 Federal Law of Economic Competition; Art. 24 Cost Rica’s Competition Act; Art. 103 Panama’s Law No. 29/96; Venezuela’s Art. 34 Venezuela’s Competition Act. 68 Chapter 2 – testimonies of investigated firms’ employees; – testimonies of competitor firms’ managers; – documents and information seized in search of the investigated firms’ premises (warranted by a judge); – the investigated firms’ communications among each other and to their customers; – proof of meetings of the investigated firms; – press reports; – surveys of prices and customer’s preferences; – the investigated firms’ invoices and contracts. Usually these powers also comprise the capacity to enter in the premises of the investigated business. Article 35 and 35-A, Law No. 8884/94 empowers the SDE Secretary to authorize the inspection of the offices of a company under investigation. The company shall be given at least 24 hours notice, and shall not start before 6 a.m. or after 6 p.m. Also, it has the power to request a search warrant from a Judge to seize company records. Article 26 imposes fines in the event that data or documents requested by public entities acting under this Law are unreasonably denied, tampered with or delayed. Article 26-A imposes fines for any attempt to hinder, or prevent an inspection authorized by SDE or SEAE. Finally, under Article 35, a fine of BRL 21,200 to 425,000 (USD 8,270 to USD 166,000) may be imposed for preventing an official search with warrant in a company on its premises. Furnishing any information, or making any statement, which the enterprise knows, or has any reason to believe, to be false or misleading in any material sense also conveys a penalty. Costa Rica’s law sets up a fine of USD 13,500 for those who provide false information. In El Salvador, this amount is of USD 850; Article 35.3 Mexico’s Competition Act sets forth a fine of USD 138,165; finally, in Nicaragua this amount is USD 1,149. In developed countries, competition schemes generally vest antitrust enforcement agencies with broad discretionary powers to carry out raids and to compel private firms to disclose records or other data for examination. Firms avoid concealing or destroying information due to the severe penalties that result from such behavior. However, in developing countries most competition agencies, due to their subordinate position as mere administrative units within the government—no matter their formal independence—cannot request information as easily as courts can, unless they obtain such powers explicitly from their competition statute. Since competition agencies usually belong to the Executive Branch, they cannot perform a verification visit unless they have been granted a court order. Unlike competition regimes like the European Union (where dawn raids are allowed), a verification visit does not authorize the seizure of files or documents, only making copies. Furthermore, the scope of these visits is narrowed to those documents and data previously requested in obtaining the court order, which greatly reduces the chances of obtaining valuable information. AU: Please provide expansion. The Adoption of Antitrust Policy in Latin America 69 The matter is worsened by the lack of reliable official statistics and records that otherwise could be used by competition authorities in their enquiries. Kovacic (1997, p. 425) vividly recalls how: new antitrust enforcement agencies in transition economies seldom will enjoy ready access to business data needed to prove that antitrust prohibitions have been violated. In some instances, business managers in transition economies simply refuse to respond to compulsory process requests, or may assert falsely that the information demanded does not exist. Many transition countries lack smoothly functioning judicial systems that expeditiously review and enforce compulsory process requests. It may take years of litigation for the new competition agency to establish its right to obtain business records and to convince business that the country’s courts will sustain the use of a compulsory process and punish efforts to conceal or destroy records subject to a document request. At least in the early years of a new competition agency’s operations, compulsory process is likely to be an unreliable tool for obtaining important business records. Although Kovacic is correct in pointing out how the powers of newly created competition agencies in developing and transition countries are negligible compared to those of their colleagues in the developed world, it is also true that these are powers that need to be carefully assessed in light of the lack of transparency that characterizes policy enforcement in developing countries. Compared to other jurisdictions, the courts in these countries generally do not exercise judicial control with the same effectiveness and depth. Hence, it is necessary to exercise these powers with the utmost care in order to preserve the rights of prosecuted firms, as well as the institutional reputation of the competition authority itself. Competition statutes carefully draw a line between the broad powers that they usually vest upon competition agencies to perform raids on the premises of investigated firms, and the need to obtain a judicial authorization to conduct such raids, as well as the information that they can obtain from such procedures. According to the UNCTAD Secretariat (2000): [i]n many countries, including Argentina, Australia, Germany, Hungary, Norway, Pakistan, Peru and the Russian Federation, as well as in the European Community, the Administering Authority has the power to order enterprises to supply information and to authorize a staff member to enter premises in search of relevant information. However, entry into premises may be subject to certain conditions. For example, in Argentina a court order is required for entry into private dwellings, while in Germany searches, while normally requiring a court order, can be conducted without one if there is a ‘‘danger in delay.’’ The grant of power to investigate business records must be carefully drafted in order to induce firms to comply with the law voluntarily. In sum, competition agencies enjoy broad powers to collect information; however, the means of obtaining this information is a difficult issue in the competition AU: Could you provide the reference details of ‘‘Kovacic (1997, p. 425)’’ in the bibliography? AU: Please provide the reference details of ‘‘UNCTAD Secretariat (2000)’’ in the bibliography. 70 Chapter 2 enforcement debate. The use of broad powers for investigation and prosecution purposes is a sensitive issue in antitrust prosecutions because it creates a policy dilemma. On one hand, competition agencies must obtain the information they need to successfully establish whether a given business practice is anticompetitive; in order to obtain this information, they must be properly empowered by the law to obtain files, records, etc., which are not always readily accessible, or which businesses are unwilling to disclose as they may contain confidential and strategic information. 2.2.2 THE POPULARITY OF LENIENCY PROGRAMS In the search for improving the means of collecting information, competition authorities have devised ‘‘leniency programs,’’ in which prosecuted agents are invited to plead their guilt and to provide evidence against other prosecuted parties. Leniency programs are intended to induce firms to yield information that may be used to prosecute perceived ‘‘restraints,’’ particularly cartel cases. The benefits to investigated parties of leniency agreements are reductions— varying from one to two-thirds—of the applicable pecuniary sanctions, or even full immunity from sanctions, plus the right of the individual or individuals involved not to be criminally indicted. Some countries, such as Brazil and Mexico, have introduced leniency programs in their antitrust legislation in hopes of achieving analytical certainty about the nature of anticompetitive restraints. Chile’s recent proposed legislative amendments also introduce leniency rules into the antitrust system for use in the prosecution of cartels and harmful horizontal concentrations. Also, Panama’s Article 104 of Law No. 45/07 also introduced this program, thereby providing incentives on prosecuted businesses to support the investigations conducted by the competition authority, in exchange for a reduction of the potential penalties. Finally, Article 39, second paragraph of the recently amended Competition Act of El Salvador, also introduced this scheme in this country. These programs are premised on the idea that strategic interactions between cartel members can be exploited by reducing the fine for the first self-reporter (‘‘whistleblower’’) and imposing higher fines on all other cartel members, creating an incentive for each member to be the first to come forward (often described as a ‘‘race to the courtroom’’ by legal scholars). To this end, the competition authority is given the power to grant full leniency to the first economic agent who approaches it and provides convincing and sufficient evidence to allow it to determine the existence of the monopolistic practice. The economic agent must fully and continuously cooperate with the agency throughout the whole investigation and in the corresponding proceeding; additionally, it must take the necessary actions to end its participation in the monopolistic practice. If these conditions are fulfilled, the competition authority will impose the minimum fine and no judicial or administrative action shall be instituted. The Adoption of Antitrust Policy in Latin America 71 Those economic agents that do not fulfill the aforementioned requirements may still benefit from partial leniency and be eligible for fine reductions of 50%, 30%, or 20% of the maximum if they provide additional convincing evidence to the investigation. To determine the amount of the reduction in the fine, the competition authority must consider the chronological order in which the requests for leniency were filed and the evidence tendered in the leniency process. International best practices for leniency programs emphasize four principles: priority, confidentiality, transparency, and advocacy. Priority refers to the full leniency granted to the first economic agent to approach the competition authority with convincing grounds and evidence. Confidentiality implies that all information must be treated as classified—otherwise there would be little incentive to join the program and the responsible agents would instead try to evade enforcement actions. Transparency relates to the establishment of clear and objective rules that apply under the program, and advocacy relates to a continuous plan to promote not only the benefits of the program but the risks of engaging in monopolistic practices. Sometimes, as in the proposed amendments to Chile’s competition scheme, the leniency program relies more on a significant reduction in fines to the first ‘‘whistleblower’’ than on a regime of immunity, which, in fact, is granted exceptionally and has to be duly justified by the TLDC. This system, especially the reduction of or exemption from fines, finds its justification in its effectiveness for the early detection of unlawful conduct that may produce significant damage to the market, and which is difficult to detect without the help of an insider. Through increasingly popular incentive programs, such as Brazil’s leniency program, or other methods, such as Mexico’s efforts to give effective investigatory powers to the Competition Commission, Latin American nations have attempted to close the information gap that they see as affecting the effectiveness of competition agencies. 2.2.3 THE COLLECTION OF CONFIDENTIAL INFORMATION Competition laws in many countries do grant extensive powers to request information, but competition authorities are very careful in exercising such powers. The concession of powers to collect economic information from businesses has often been a matter of contention between antitrust enforcement agencies and the business community. Great care has been taken, for instance, to ensure the confidential treatment of the commercial information surrendered by firms, especially information of a competitive strategic nature. As a matter of constitutional principle, in a rule of law system, private parties and individuals have undeniable rights to privacy and to protect any information that they may regard sensitive or crucial to the competitive success of their businesses. Hence, the law must strike a proper balance that will enable a cooperative rather than conflicting relationship between businesses and the regulatory authority. AU: Please provide expansion. 72 Chapter 2 As the OECD Secretariat (2003) notes: At the same time, the manner in which an antitrust agency can and should pursue transparency is necessarily limited in the law enforcement process, for much of the information obtained in antitrust enforcement proceedings is ordinarily required (by the laws of nearly all countries) to be kept strictly confidential. An agency’s reputation for probity with respect to handling confidential information is absolutely crucial both to the agency’s ability to continue to obtain the confidential business information it needs to enforce its laws, and to the agency’s general reputation for seriousness and reliability in pursing its statutory goals. It seems that the best way of achieving this goal is to preserve the right of private parties to apply for confidential treatment of information that they consider ‘‘sensitive’’ while leaving the decision whether to grant the request in the hands of competition authorities. In any case, judicial review over the decision of the competition authority is always necessary where the competition authority acts simultaneously as prosecutor and administrative judge of prosecuted cases. In cases where these roles are clearly differentiated, leaving the competition authority as a public prosecutor who files cases before courts, there are no grounds for controversy, as the courts will always enjoy full investigatory powers to call for information disclosure as it becomes necessary without undermining the impartiality principle which is the very core of the rule of law. As expected, the concession of powers to collect economic information from businesses has often been a matter of contention between antitrust enforcement agencies and the business community. Great care has been taken, for instance, to ensure the confidential treatment of the commercial information surrendered by firms, especially information with competitive strategic value. Businesses have often protested that their fundamental rights would be violated if such information entered the public records of competition proceedings. In the Venezuelan Gases case (1997), the Appellate Court stated the principle that the parties could not be denied access to the information upon which a case would be decided if that information was essential to their defense. Therefore, at all times, antitrust enforcement agencies must strike a delicate balance between the possible infringement of privacy rights in information and the need to make business information concerning a case readily available. Information gathered by other government departments, such as the internal revenue, foreign trade, customs, or foreign exchange control authorities, if applicable, may also prove to be a necessary source of information. In order to induce parties to cooperate by submitting information, antitrust legislation provides for confidential treatment of sensitive business information. Most Latin American statutes provide for the confidentiality of commercially sensitive information submitted to competition agencies. For example, Article 31 of Mexico’s Competition Act subjects government officials to administrative penalties if they make this information public. Similarly, Article 31 of Venezuela’s Competition Act establishes the confidentiality of the information gathered in The Adoption of Antitrust Policy in Latin America 73 enforcement proceedings. Confidentiality means a prohibition on disclosure of pertinent information to the public; obviously it does not apply to the parties involved in the proceedings, as concealing such information from them would impair their rights to due process. In Peru, INDECOPI has issued clear guidelines on the collection and review of confidential information in antitrust proceedings that have been used as a reference in other Latin American jurisdictions. These standards are embodied in a document entitled Lineamientos sobre Informacion Confidencial (‘‘Guidelines for Confidential Information’’), published by INDECOPI’s Competition Commission.82 Duties to preserve the confidentiality of information are institutional incentives intended to assure businesses of the integrity of the sensitive commercial information they submit, ensuring that it will not be handed over to competitors or disclosed to the general public. The ultimate reason for preserving the secrecy of the information is to encourage businesses to surrender their commercial information to competition authorities, which is especially important in countries where official data records and statistics are deficient. 2.2.4 PUNITIVE REMEDIES The competition agency needs the power to make certain decisions as a result of the inquiries and investigations undertaken. Sanctions may include administrative fines, in proportion to the secrecy, gravity, and clear-cut illegality of offences, or to the illicit gain achieved by the challenged activity. Fines may also vary according to the type of infringement, or according to whether the infringement was committed deliberately or negligently. In Peru and Venezuela, the fine may be doubled for repeat offenses.83 In general, the lack of precise criteria to calculate administrative penalties makes the cost-benefit evaluation of possible defense strategies very difficult. Historically speaking, (and, of course, depending on the country), fines in cartel cases have ranged from 1% to 20% of a company’s turnover; the fines imposed, however, lack the necessary consistency to be taken as useful predictors of future 82. INDECOPI, <www.indecopi.gob.pe/tribunal/clc/lineamientos/lineamientos.asp>. 83. In the Sindipedras cartel case (2005), CADE imposed the following fines: (i) 20% of the yearly gross revenues of the companies that participated in the steering committee of the cartel, as reported in the year preceding commencement of administrative proceedings; (ii) 15% of the yearly gross revenues of the companies that participated in the cartel but were not part of the steering committee, as reported in the year preceding commencement of administrative proceedings; and (iii) a fine of 300,000 UFIRs12 (roughly e105,000) on Sindipedras because of its role as the coordinator of the cartel’s activities. In calculating the fine imposed on the quarry companies, CADE considered the following aggravating circumstances set forth in Art. 27 of the Brazilian Competition Act: (i) the severity of the violation; (ii) the offender’s good faith; and (iii) the extent of actual or threatened damages to open competition, the Brazilian economy, consumers, or third parties. AU: Please provide the currency name for 300,000 UFIRs12 (roughly e105,000). 74 Chapter 2 decisions. For instance, in Brazil, the extent to which penalties have been applied varies according to the involvement of firms in the competitive restraint, as has been demonstrated in several cartel cases.84 Similar considerations apply in Peru, where the initial penalty imposed upon twenty-one conspirators and the amount of each fine was not greater than 10% of their sales through the distribution centers involved in the anticompetitive conduct (slightly over USD 5 million), but was later reduced on appeal to slightly over USD 2 million. CADE has used the following criteria to calculate the fines to be imposed on the parties: (i) the seriousness of the offence, (ii) the good faith of the defendant; (iii) the economic advantage accruing to or aimed at by the defendant; (iv) the success of the conduct; (v) the degree of the damage or of the danger of damage to free competition, to the national economy, to consumers, or to third parties; (vi) the resulting negative economic effects in the market; (vii) the defendant’s economic status; and (viii) any repetition of the offence.85 Additionally, CADE has expressly stated that the amount of the fine is intended to deter the recurrence of anticompetitive practices.86 Similarly, Article 49 of Argentina’s Law No. 22262/99 establishes that the imposition of fines must take into account, among other elements, the loss incurred by all the persons affected by the prohibited activity, the benefit obtained by all the 84. In the case CADE v. Estaleiros Ilha S.A. and Marı́tima Petróleo e Engenharia Ltda, the CADE board fined Estaleiros Ilha S.A. and Marı́tima Petróleo e Engenharia Ltda for alleged unlawful bid-rigging. CADE held that there was sufficient evidence that the agreement entered into between the two companies participating in a bidding process in 1997 was detrimental to competition. The fine imposed by CADE amounted to 1% of the companies’ total gross revenues in the year preceding the performance of the anticompetitive practice. Also, in the case Ministério Público do Estado de Santa Catarina v. Sindicato do Comércio Varejista de Combustı́veis Minerais de Florianópolis e outros (Florianópolis case) the CADE board concluded that some gas stations in the city of Florianópolis (and their managers), together with the Gas Stations Association of Florianópolis and its leader, violated the Brazilian Competition Act by restraining free competition in the fuel market in the Florianópolis region. As a result of the alleged hard-core cartel behavior, the CADE board imposed a fine of 10% of the gas stations’ yearly gross revenues for the year preceding the commencement of administrative proceedings. Furthermore, in the case Ministério Público do Estado de Santa Catarina v. SINDIPETRO and others (2001) (Sindipetro/SC case), CADE found that nine gas stations in the city of Lages, their managers, and the Gas Stations Association of the State of Santa Catarina—Sindipetro/SC violated the Brazilian Competition Act by restraining free competition in the fuel market in the Lages region. As a result of the alleged hard-core cartel behavior, CADE imposed a fine of 15% of the gas stations’ yearly gross revenues for the year preceding the commencement of administrative proceedings. Finally, in the Airlines cartel case, CADE applied, by majority vote, a fine of 1% of the investigated companies’ gross revenues obtained in the relevant market affected by the anticompetitive practice (a shuttle service between the cities of Rio de Janeiro and São Paulo) in 1999 (when the practice was carried out). 85. Article 27, Law No. 8884/94 (Brazil). 86. In the Power-Tech/Mattel case (2003) involving a refusal to deal case in which Mattel Tecnologia de Informática Ltda was the investigated company, CADE applied, by majority vote, a fine of BRL 620,000 (roughly USD 326,544 at 7 Aug. 2007) based on the same method of calculation used in the White Martins case (calculation of the purported advantage obtained increased by a multiplier factor applied to that value). Initially, the reporting commissioner held that Mattel should be penalized the minimum amount set forth in Art. 23, Law No. 8884.94, given that none of the aggravating circumstances set out in Art. 27 of said statute were verified. The Adoption of Antitrust Policy in Latin America 75 persons involved in the prohibited activity, the gravity of the infraction, the damage caused, and the underlying intention. Therefore, by virtue of this provision, the fines imposed on hard-core cartels can be increased according to the listed criteria.87 Mexico follows similar criteria in determining the individual responsibility of each participating firm according to its involvement. Fines may also be expressed in terms of a specific figure or in terms of the minimum or reference salary, as in Mexico, Peru, and El Salvador. Alternatively, in Brazil or Venezuela, they are calculated in relation to the total gross revenues of the participating firm. Some countries resort to a minimum reference salary in order to keep penalties updated according to inflation rates. Furthermore, in Honduras the fine is calculated according to the revenues received from the anticompetitive restriction; an offense can be punished by a fine of up to three times the revenues obtained as a result of the infringement.88 In Peru, Legislative Decree No. 807 sets the maximum fine for anticompetitive behavior at 1000 Taxing Units. Taxing Units are set by the Ministry of the Economy and generally vary between USD 900 and USD 1,000 per unit depending upon the exchange rate. Furthermore, the laws of several countries in the region hold managers and other directors liable, in case of a breach of the law. For example, Argentina’s Law established the joint liability of directors, managers or other legally responsible representatives if the offences are committed by a corporate body; however, the law does not specify the amount to be imposed in these cases. Furthermore, these people can be disqualified from exercising their trade for a period of one to ten years. In Brazil, managers of companies involved in the collusion might have a fine imposed ranging from 10% to 50% of that applied to the company, if their participation in the scheme is proved. Similarly, in this country, trade associations that have fostered coordinated behavior, as well as other individuals (not managers) may have fines imposed from 60,000 to 6 million tax units (USD 2,460-USD 2.46 million). In Colombia, the law Following the reporting commissioner’s vote, two other commissioners also argued that the fine should be 1% of the gross revenues recorded by Mattel in the year preceding the opening of administrative proceedings. After the votes of these two commissioners, a third commissioner expressed his vote, suggesting the adoption of a different criterion to calculate the fine for Mattel. The criterion used by this commissioner considered the purported advantage gained by Mattel from the anticompetitive practices as the minimum basis for calculation of the fine and, based on the principle of proportionality and the rule of reason, the commissioner stated that the fine should not be equal to the minimum value, but rather increased by a multiplier factor in order to reach the final value of the fine, which, in this case, amounted to BRL 620,000. His arguments were accepted by the CADE board in the final decision rendered in the case. 87. In the Argentinean CNDC v. Loma Negra and others (2005), the amounts of the fines applied to the cement producers and the AFCP were: Loma Negra ($ 138,700,000, U$S 47.8 million), Minetti ($ 100,100,000, US 34.5 million), Cementos Avellaneda ($ 34,600,000, US 11.9 million), Cemento San Martı́n ($ 28,400,000, US 9.8 million) and Petroquı́mica Comodoro Rivadavia ($ 7,300,000, US 2.5 million), AFCP($ 529,289, US 182,513). In total $ 309,629,289,000, US 106.70 million. It should be mentioned that the maximum fine allowed by the law is 150 million Argentine pesos ($ 150,000,000), approximately USD 50,000,000. 88. Article 37, Legislative Decree No. 357/05. In case it is impossible to determine the amount of revenues obtained as a result of the anticompetitive restraint, the law authorizes the Competition Commission to impose the infringing firm a fine up to 10% of her annual sales. 76 Chapter 2 imposes a fine of up to 2,000 minimum monthly salary on managers, directors, accountants which authorized or executed the violations. In Costa Rica, the law provides for a fine of USD 16,500 to the accomplices of those responsible for infringing the law. In Nicaragua this administrative fine amounts to USD 1,149-USD 7,658, depending on the level of involvement of the accomplice. Table 2-3 displays and compares the positions of several countries on the imposition of fines. Table 2-3 Horizontal Restraints Antitrust Penalties Vertical Restraints Argentina 10,000 to 150,000,000 Argentine pesos (equivalent to USD 3,300 and USD 49,496,783, respectively in 2008) Same Brazil 1%-30% of gross earnings, after tax, in the year before the initiation of the administrative proceeding. Fines for recurrent violations can double. USD 230,000 maximum 2,000 times the monthly minimum wage to entities USD 150,000 Same Chile Colombia Costa Rica El Salvador maximum Also, 10% of sales for particularly egregious violations. 5,000 minimum wage units (USD 425,000 maximum) USD 230,000 maximum Illegal Mergers Failure to give notice of the operations provided for by the law could be sanctioned with a fine of up to 1,000,000 Argentine pesos a day (USD 340,136) counted as of expiry of the obligation to notify USD 24,900-USD 2.49 million (Delayed notification) Not applicable None USD 100,000 maximum maximum USD 100,000 max 5,000 minimum wage units (USD 425,000 maximum) 5,000 minimum wage units (USD 425,000 maximum) 77 The Adoption of Antitrust Policy in Latin America Table 2-3 Continued Horizontal Restraints Honduras Treble damage; alternatively 10% of gross revenue in the preceding fiscal year Mexico USD 6,975,000 (Article 35.4 Mexico Competition Act) USD 135,000 (Article 35.9: managers) Nicaragua 100-10,500 minimum wages (USD 7,658-USD 804,090). In exceptional cases, from 1%-10% of annual net sales. Panama Up to USD 1 million (Article 104.1 Law No. 45/07) plus treble damage (Article 30 Law No. 45/07) 1,000 tax units 100 tax units to managers Up to 20% of gross income, up to 40% in case of repeated violations Peru Venezuela Vertical Restraints Treble damage; alternatively 10%of gross revenue in the preceding fiscal year USD 4,077,000 (Article 35.5 Mexico Competition Act) 25-8,000 minimum wages (USD 1,915-USD 612,640). In exceptional cases, from 1%-6% of annual net sales. Up to USD 250,000 (Article 104.2 Law No. 45/07) 1,000 tax units 100 tax units to managers Up to 20% of gross income, up to 40% in case of repeated violations Illegal Mergers Treble damage; alternatively 10% of gross revenue in the preceding fiscal year USD 4,077,000 (Illegal concentration: Article 35.6 Mexico Competition Act) USD 1,812,000 (Failure to notify a concentration (Article 35.7 Mexico Competition Act) 100-600 minimum wages (USD 7,658USD 45,948 Up to USD 250,000 (Article 104.2 Law No. 45/07) Not applicable Up to 20% of gross income, up to 40% in case of repeated violations 78 Chapter 2 The tendency in Latin American countries is to increase the amount of administrative penalties, and to limit the use of personal imprisonment. The purpose of this strategy is emphasizing on deterrent measures aimed at creating a disincentive on businesses to carry out price-fixing and other similar horizontal restraints. Accordingly, penalties imposed on hard-core cartel transgressors have been increased significantly in landmark cases, such as a hefty fine imposed by the CNDC to an cement cartel in Argentina. This fine amounted a record USD 101 million. Similarly, several competition statute reforms have raised the amount of penalties assessed for antitrust infringements, particularly in the area of horizontal restraints. Chile’s 2004 amendment to the Competition Act increased the penalty of anticompetitive infractions, by imposing fines equivalent to the economic benefit obtained from the violation, the seriousness of the offence, and the past conduct of the offender. Panama’s recently approved Law No. 45/07 also increased the amount of penalties, from USD 100,000 to USD 1 million. For example, a new bill in Colombia expected to be approved in 2008 will update the amount of administrative fines from the current maximum of 2,000 minimum wage units (currently, USD 300,000) for companies and three hundred minimum wage units (currently, USD 45,000) for managers, to a maximum of 150% of the income perceived by the company or, in the event such calculation is impossible, USD 15 million and USD 300,000 for managers.89 Similarly, in Mexico, the amendments introduced to the Competition Act in 2006 incorporate increased economic penalties. Changes in this area include new provisions providing that an agent who violates the law more than once may be fined up to twice the applicable monetary amount, or up to 10% of annual sales or of total assets, whichever is greater. Also significant is the addition of a provision allowing the Competition Commission to order the divestiture of assets to eliminate monopoly power if an agent has been fined more than two times. New fines were also included for specific practices such as providing false information in a proceeding or breaching any commitment made before the Competition Commission. 2.2.5 CIVIL REMEDIES The penalty for breaching the law usually also entails a private redress of damages when the conduct affects the rights of individuals to trade, in addition to damage to society as a whole. In such cases, the affected party may seek compensation through a civil court once the competition agency has determined the existence of an anticompetitive practice. All statutes provide for civil damage actions against the infringing party, as well as the nullification of the contract or arrangement on 89. Articles 20 and 21, Law No. 195/07, which amends the Regulations in Economic Concentration and Restrictive Trade Practices. The Adoption of Antitrust Policy in Latin America 79 which the anticompetitive conduct is formally based.90 In these cases, competition statutes provide that an administrative or judicial finding of illegality will be treated as prima facie evidence of liability in all damage actions by injured persons. 2.2.6 CRIMINAL PROVISIONS Although some countries in the region set forth criminal prosecution against antitrust offences these are seldom applied. This system contrasts with the one applied in the United States, where criminal are limited to clearly defined ‘‘per se’’ unlawful conduct which is manifestly anticompetitive: price-fixing, bid-rigging, and market allocation. Only the Sherman Act provides criminal penalties (for violations of Sections 1 and 2), and infractions may be prosecuted as a felony punishable by a corporate fine and three years’ imprisonment for individuals. United States DOJ antitrust Division prosecutions of Sherman Act criminal penalties are governed by general federal criminal statutes and the Federal Rules of Criminal Procedure. Some Latin American countries like Argentina, Brazil, Chile, and Peru impose criminal prosecution and short prison for conduct regarded as extremely reckless or socially harmful.91 The power to impose imprisonment would normally be vested in the judicial authority. Terms of imprisonment may extend to one, two, three or more years, depending upon the nature of the offence. Brazil establishes imprisonment, in cases of major violations involving flagrant and intentional breaches of the law, or of an enforcement decree, by a natural person) as a preventive measure for competition violations.92 In Chile, the Prosecutor’s Office may seek criminal sanctions for violations of the competition law, but in practice this does not occur. In Costa Rica, Article 60, Law No. 7472/96 the application of criminal provisions and sanctions foreseen in the Criminal code is extended to the provision of Article 2 of the law. In these cases the National Commission for the Consumer remits the cases to the judiciary. Explaining the case of Brazil, Rosemberg and da Matta Berardo (2007) note: Criminal investigations and related judicial procedures are not necessarily linked to the administrative investigations led by the administrative competition authorities and might occur in parallel, separate or in joint or related procedures. The criminal sanction for the contemplated antitrust violations is of imprisonment (pena de reclusão) ranging from two to five years or a fine. 90. For example, Art. 44, Decree No. 2153/92 (Colombia); Art. 55 of Venezuela’s Competition Act; also, Art. 30 of Panama’s Law No. 45/07; Art. 25 of Peru’s Legislative Decree No. 701/91. Art. 51, Law No. 25156/99 (Argentina); Art. 41, Law No. 601/06 (Nicaragua). 91. Article 42, Law No. 25156/99 (Argentina); Art. 1, Decree Law No. 211/73 and No. 2760/79 (Chile); and Art. 19, Legislative Decree No. 701/91 (Peru). 92. Article 86, Law No. 8884/94. 80 Chapter 2 However: [a]s a practical matter, recent cases have ended up with the payment of fines, and in the near future there is no clear evidence that criminal condemnation for any antitrust offences is to result in the violator being nontemporarily confined. In a number of recent cases involving concerted price fixing by gas retailers, in which the agreement was coordinated by an association, the judge ordered, in the course of the proceeding, that the officers of the trade association be preventively arrested, but they were soon released. Therefore, no criminal punishment has ever been applied to any subject in Brazil, although the law establishes terms of imprisonment between two and five years. Finally, in Mexico, criminal sanctions ranging from three- to ten-year imprisonment and fines up to USD 45,000 may be levied for price-fixing or output restrictions. However, such penalties are limited to those cases involving staple consumer goods (Elizondo, 2005, p. 104). 2.2.7 PREVENTIVE MEASURES AND COMPLIANCE ORDERS Other measures usually granted to competition agencies are preventive, instead of punitive; they are aimed at preempting the negative effects of anticompetitive restraints, before they take place. Naturally, these measures entail a considerable degree of discretion; yet, they are not regarded excessive, as the party in a procedure against which such measures are imposed always enjoys the right to be heard. So, at the formal level, her right of due process is guaranteed. These measures may include preliminary orders or injunctions when there is a situation where it is difficult to restore the original conditions or if irreparable damage would be caused if the conduct were allowed to continue. All Latin American authorities wield broad powers to grant preliminary injunctions.93 In general, a competition agency may prohibit in its preliminary order the continuation of the illegal conduct or order the elimination of the current state of affairs if prompt action is required for the protection of the legal or economic interests of the interested persons or because the formation, development, or continuation of economic competition is threatened. The Competition Board may also require a bond as a condition. However, these injunctions require the approval of judges, except in the case of Chile, due to the TDLC’s judicial nature. Furthermore, failure to supply information or documents required within the time limits specified also is prohibited. Measures include administrative fines imposed for delayed compliance,94 or to those who fail to comply with an 93. For example, Art. 35 (Competition Act) Venezuela; Art. 211, Legislative Decree No. 701/91 (Peru); Art. 105, Law No. 45/07 (Panama); Arts. 42 and 43, Law No. 601/06 (Nicaragua). 94. These fines vary according to the country: Argentina: 1,000,000 pesos a day (USD 340,136 per day). Brazil: between BRL 5,000 and 100,000 daily (USD 2,050 to USD 41,000) cumulative for ninety days; Costa Rica: USD 11,000; El Salvador: ten minimum wage units (USD 850 per day); AU: Please provide the reference details of ‘‘Elizondo, 2005, p. 104’’ in the bibliography. The Adoption of Antitrust Policy in Latin America 81 obligation imposed by the law. For instance, the annexes approved in 2000 by CADE establish a fine of between BRL 500 and 10,700 (USD 195-USD 4,175) for those who do not show up to give oral testimony. Similarly, Article 35.8, Mexico’s Competition Act imposes a fine of USD 4,077,000 on those who fail to comply with an order. In Argentina, fines of up to 500 pesos a day (USD 170) may be applied to people who obstruct or hinder the investigation or do not comply with CNDC requirements. Furthermore, competition authorities may issue permanent or long-term orders to cease and desist or to remedy a violation by affirmative conduct, public disclosure, or apology. Solutions like these have been implemented in Latin America. In the Venezuelan Newspapers cartel case (1996), several newspapers (C.A. El Mundo, C.A. Ultimas Noticias, Editorial Santiago de León C.A., Meridiano C.A., El Universal C.A. y C.A. Editora El Nacional) were forced to publish an apology for creating a cartel aimed at fixing advertising rates for movie theaters. Within this framework, and as an additional measure, competition agencies may consider publishing cease and desist orders as well as final sentences imposing administrative or judicial sanctions, as competition authorities do in France and in the European Community. In this way, the business community and especially consumers will be in a position to know that a particular enterprise has engaged in unlawful behavior.95 In the case of mergers, when the competition authority considers it necessary for the merging firms to divest assets or otherwise change the terms under which the merger is negotiated, it is usually legally empowered to do so. Competition agencies may order companies to divest assets (in cases of completed mergers or acquisitions) or rescind agreements (in regard to certain mergers, acquisitions or restrictive contracts). This is the case in Mexico, where the Commission can order ‘‘partial or total deconcentration’’ of a merger. In the United States, divestiture is a remedy in cases of unlawful mergers and acquisitions. It is also to be noted that divestment powers has been applied in cases of dominant positions. In Argentina, for instance, at any time in the investigation process the CNDC can order compliance with conditions or order the cessation of conduct harmful to competition, and the party allegedly responsible can pledge to cease the actions under investigation.96 Furthermore, alternative measures are granted in the legislation of almost all Latin American countries to level the negative effects of anticompetitive restraints.97 Honduras: USD 550 to USD 830 per day; Nicaragua: USD 7,658 to USD 45,948; Panama: Up to USD 100 per day (delayed compliance). 95. Article 23, Law No. 8884/94 empowers CADE to order infringing firms to publish, at the violator’s expense, a summary sentence in a newspaper. 96. Articles 35 and 36, Law No. 25156/99 (Argentina). 97. Under Art. 23, Law No. 8884/94 violator’s can also be made ineligible to bid for contracts with state bodies. Violators can be added to the Brazilian Consumer Protection List. Compulsory licenses may be granted for patents held by a violator. Tax incentives or public subsidies may be cancelled. Finally, a violating company may be ordered to transfer or sell assets. 82 Chapter 2 2.2.8 CAPACITY TO NEGOTIATE ANTICIPATED SETTLEMENTS In some countries, competition agencies are vested with the capacity to negotiate compromises in order to avoid further expensive prosecution and preempt the imposition of penalties. Colombian competition authorities have emphasized this strategy, with a view to saving resources by avoiding cumbersome litigation, which was perceived as too demanding on the SIC’s technical capabilities and as limiting its capability to reach satisfactory decisions. The SIC’s Delegate of Competition Affairs has systematically avoided direct litigation in a significant number of cases, instead resorting to the early settlement of cases, provided that certain guarantees were given that the suspect restraints would be eliminated effectively. Two recent cases highlight the importance of preemptive settlement of cases in Colombia: In the first one, the four main supermarkets in Colombia (Éxito, Carulla, Olı́mpica, and Carrefour) were charged with abuse of a dominant position, following an accusation by their suppliers. SIC presided over a complex negotiation that ended with the settlement of the case and the signing of a ‘‘good practices’’ agreement between the main associations for commerce and industry. (Miranda, 2006, p. 74) In another Colombian case, two major credit card networks were charged with the cartelization of credit card commissions. Thanks to the new offerings made by Credibanco and Redeban, which were accepted by the SIC, the interbank commission TII used as basis for setting the commission charged by banks on retail stores for the use of Visa and Mastercard has been reduced approximately 45%. The case also ended with a settlement in which not only the investigated companies but also the banks agreed to important disclosure rules and other measures in order to guarantee that each network would set commissions independently. In Brazil, too, several mergers have been suspended pending negotiations, including the proposed acquisition of Garoto by Nestle and the acquisition of the leading Brazilian insulin producer, Biobrás, by NovoNordisk. In a transaction involving Brazilian supermarket chains Sé and Pao de Azucar, CADE used the same provision to specify the towns where the deal could not be consummated until its final decision was issued. Usually, the waiting period is imposed on transactions where the market share of the merged firms is expected to exceed 50% of the relevant market. Only exceptionally, as in the acquisition of Gatorade by Pepsico and AmBev, have the submitting parties been exempted from this requirement; in such cases the transaction is allowed to go forward at the parties’ own risk. Also, in Mexico, in the case CFC v. RPF, Rhone-Poulenc Animal Nutrition, SA de CV, (Aventis) Animal Nutrition, SA de CV (RPANM), Basf AG, Basf Mexicana, SA de CV (Basf M), HLR, Productos Roche, SA de CV (Roche), and Syntex, SA de CV (Syntex) (Vitamins Cartel case) (2002), the Competition Board accepted the compromises of the parties involved. The Adoption of Antitrust Policy in Latin America 2.3 83 THE INTERNATIONAL DIMENSION OF LATIN AMERICAN ANTITRUST POLICY International standards have been crucial in the development of Latin American antitrust policy from its very inception. Most Latin American countries were utterly inexperienced in the technicalities involved in antitrust policy; therefore, they had to acquire this knowledge from abroad, through technical assistance. International donors like USAID, GTZ, Cooperación Española, and others have generously contributed to the development of antitrust policies in the region. Of course, their generosity is not devoid of guile. Foreign investors have pressed for the creation of commercial rules similar to those they have at home, and antitrust is no exception. Despite all the discretionary powers granted to competition agencies, they were perceived to be less susceptible to political clout and friendlier to markets than the policies that used to be typical in the region, such as the establishment of official prices or the outright nationalization of economic sectors. The development of international antitrust standards has also been promoted by the globalization of businesses. The unilateral enforcement of domestic antitrust rules appears insufficient to deal with international restrictions on competition, due to the numerous exceptions granted to export cartels, sectors deemed ‘‘strategic,’’ and the disparate policy preferences of national authorities. Furthermore, national competition authorities frequently lack effective access to foreign-based information that is essential for the detection or prosecution of misconduct. They may not have jurisdiction over the businesses or individuals involved. Even if an action could be brought before the courts, there is no guarantee that the decision will be successfully enforced. The antitrust community in the Latin American region has experienced remarkable growth in the last ten years. Exchanging experiences through the internet, email, international conferences, and seminars has become common practice. More importantly, competition agencies are drawing from their increasingly shared policy enforcement culture in order to develop their own variations. Several sources have been influential in this process, some more than others. The following experiences are illustrative of the growth of international antitrust bodies. 2.3.1 SOUTH AMERICAN REGIONAL ANTITRUST RULES: ANDEAN COMMUNITY AND MERCOSUR Regional antitrust rules within Latin America are perhaps the best measure of the region’s institutional weakness in the area of economic integration. Unlike the firm stance taken by the Commission at the European level in the development of antitrust rules (and, indeed, in economic integration as a whole), there are no similar institutions within Latin America. Antitrust rules show how feeble regional bodies are in this connection. 84 Chapter 2 First, consider the Andean Community, comprised by Colombia, Ecuador, Peru and Bolivia. The Andean Community is a subregional organization endowed with an international legal status. Its members are Bolivia, Peru, Colombia and Ecuador. Chile has also expressed its intentions to rejoin the treaty soon, and with it the bodies and institutions comprising the Andean Integration System. Competition law is still in its incipient stages in the Andean Community.98 The Commission’s Decision No. 608/05 (the subregion’s competition rules) has not been enforced yet due to the political turmoil affecting supranational institutions within the Community. Yet, compared to the earlier Decision No. 285/91, it marks a breakthrough in the development of regional antitrust law. Although the Andean Secretariat has power to investigate and collect evidence from industries and governments within the Andean countries, the range of cases under its jurisdiction is very limited: it only covers cases where the anticompetitive conduct involved affects more than one national market. Cases affecting a single national market are subject to national antitrust rules. Andean rules would only apply in full in the event that there are no national antitrust provisions in place: Ecuador and Bolivia are currently covered under this provision.99 The substantive provisions of Decision No. 608/05 are similar to those of national antitrust rules. Thus, in contrast to the European experience, where the European Commission played a pacemaker role in the development of national antitrust provisions of member states, in the Andean Community it is actually the other way around: the Secretariat is expected to draw from the wider experience gained by Peru’s INDECOPI, Colombia’s SIC, and Venezuela’s Pro-Competencia. Yet, as discussed above, the development of antitrust provisions in the Andean Community has been a rather traumatic process due to political upheaval in the region. Venezuela’s abrupt departure from the Community followed a history of failures to comply with the Community’s decisions directed toward liberalizing trade. Thus, for instance, Decision No. 399/97 on International Transportation of Merchandise by Road was de facto reversed by an administrative decision of the government of Venezuela as it yielded to the pressure of transportation unions, who could not compete with their more efficient Colombian peers. This example illustrates the feeble commitment of member states to liberalization and competition. Furthermore, the formalistic interpretation of Andean rules by its internal bureaucracy negatively impacted the development of antitrust rules. While a group of Andean experts met as early as 1997 for the purpose of reviewing the obsolete Decision No. 285/91, change was blocked by the representatives of the Andean Secretariat at the meeting, who claimed that the solutions agreed to by the national experts (who, in reality, possessed much more antitrust experience) contradicted the supranational ‘‘spirit’’ of the Andean Community 98. The Andean Community is currently comprised of Colombia, Peru, Bolivia, Ecuador, and Chile. 99. See Andean Commission’s Decision No. 616/05, on the ‘‘Enforcement of Decision No. 608/05 in the Republic of Ecuador.’’ The Adoption of Antitrust Policy in Latin America 85 rules. The Secretariat’s objection was focused on the experts’ proposal to create a collective decision making authority which would include a representative of each national antitrust authority, and whose technical opinion would be binding upon the Secretariat in a given investigation. Considering that the experience of member countries (Peru, Colombia, and Venezuela) in antitrust matters was overwhelmingly superior to the Secretariat’s (whose experience was, literally, nil), the proposal would have given a practical source of technical support to the Community’s endeavors in enforcing antitrust rules. The Secretariat would not have it, though. Based on a legalistic interpretation of the Andean Community Treaty, it blocked further discussion of the issue, thereby delaying reform of Decision No. 285/91 for almost ten years. As consequence, the development of antitrust enforcement at a regional level suffered dramatically. This may be responsible for much of the disenchantment of member states with the subregional experience. The Common Market of the Southern Cone (Mercosur) provides a second example of a failed attempt at the development of regional antitrust rules in Latin America. Mercosur was created by the Agreement of Asuncion on March 16, 1991. Mercosur’s member countries are Argentina, Brazil, Paraguay, and Uruguay; Venezuela joined this agreement in 2006. The main provisions related to competition policy are in the Protocol of the Defense of Competition in Mercosur (The Fortaleza Protocol).100 Competition law development in Mercosur begun in 1994 with Decision No. 21/94 of the Council of Mercosur, entitled ‘‘Basic Elements for the Defense of Competition in Mercosur.’’101 Then, in December 1996, Mercosur adopted the Fortaleza Protocol, which was the product of a discussion process that started with the standardization agenda contained in Decision No. 21/94.102 At present, this Protocol 100. Decision No. 18/96 of Dec. 17, 1996. 101. This document laid down the basic principles for standardizing domestic legislation within the region, and for facilitating the coordination efforts of national authorities. Later, the 1995 Protocol for the Defense of Competition, approved by the Trade Council, listed certain conduct that should be prohibited in domestic jurisdictions. It also included provisions dealing with concentrations affecting more than 20% of a relevant market. The latter provision was particularly important in the economic integration of Argentina and Brazil, due to the significant increase in mergers and acquisitions between firms of these countries. The 1995 Protocol improved Decision No. 21/94. It incorporated the latter’s mandate with respect to agreements which impede, restrict, or distort competition or free access to the market in the production, processing, distribution, or marketing of goods or services. It also dealt with the abuse of a dominant position. 102. This new Protocol establishes guidelines for a common antitrust policy on the basis of the harmonization of national legislation. To begin with, it adopts a rule of reason analysis, thus avoiding the rigid criterion of per se illegality. Although the list of practices it contemplates includes price-fixing, price discrimination, and exclusive dealing, there is no real discussion of the relevant analysis to be followed. Second, it incorporates a time table for the implementation of a merger review system within the regional block. Third, it establishes cooperation mechanisms among the national competition agencies. Furthermore, the Protocol grants jurisdiction to the Committee for the Defense of Competition in those cases that have a ‘‘Mercosur Dimension.’’ However, the Protocol contemplates no supranational bodies, only a mechanism 86 Chapter 2 is pending congressional approval by each member country in order to become enforceable as national law, which reveals the true level of commitment of the national governments to pursuing a common antitrust agenda. It appears that scholars were correct in being cautious about Mercosur’s real commitment to implementing joint antitrust rules.103 This probably explains why the success of Mercosur’s competition rules has been uneven. Only Brazil and Argentina possess fully operative competition policies, and even there problems remain, as their legislation is partially incompatible. Even in the area of merger control, where clear similarities exist, the disparate experiences of Brazil and Argentina make harmonization of policies a difficult task. Over time, the vacuum left by Mercosur’s spotty antitrust enforcement has opened the way for the development of bilateral efforts aimed at bridging the gap. Consider the case of Argentina and Brazil. In light of Mercosur’s inability to develop strong antitrust rules, these two countries (armed with stronger antitrust institutions than other member states) decided to set up ‘‘the Argentina-Brazil Economic Integration and Cooperation Program,’’ under which the governments of the two countries formalized their intent to establish a Program of Cooperation in Defense of Competition in order to join national forces for their common benefit and to contribute to the effectiveness of competition policy within the context of Mercosur. The agreement provides: The type of cooperation that is the subject of this Memorandum will be coordinated, proposed, decided, and implemented by CADE, for Brazil, and by the Argentine National Commission on the Defense of Competition. In order to enjoy the benefits stemming from this Cooperation Program, the parties agree to promote an exchange of information and experiences in the field of defense of competition, including: (a) Exchanges of specific legislation, case law, and documentation; (b) Human resources training programs; (c) Exchange of information on topics related to competition policy; (d) Creation of reciprocal cooperation mechanisms, including the seminars, courses, and exchanges of technical personnel; (e) Bilateral meetings for discussion and decisions on topics related to the implementation of this Program. of guidance for national enforcement. The Protocol has to be approved by national congresses in order to become binding. 103. For example, Oliveira noted that ‘‘as usually happens in documents of such nature, the Protocol may be improved in the future, mainly from its application and, in some cases, upon the proper regulation provided for in its Article 9’’ (Oliveira, 1998a, p. 35). Moreover, Singham (1998, pp. 414-415) observed: ‘‘Despite some positive signs coming from the Protocol; for example, it looks like it will contain a workable method for dealing with export cartels; the problem with the Protocol is that it does nothing about enforcement policies, and the heart of Competition is in the enforcement policies and the application of what are essentially (and intentionally) ambiguous laws. Agreeing to harmonize and draft joint standards is not helpful unless something is done about the substance of the decision making process itself. Nevertheless, indications in the Protocol that a properly staffed agency will publish industry reports and regular policy statements are to be lauded.’’ 87 The Adoption of Antitrust Policy in Latin America 2.3.2 FAILED MULTILATERAL ANTITRUST: THE FTAA AND WTO Although diverse groups, such as the WTO, UNCTAD, the European Union, the FTAA, and the OECD, have begun to discuss how trade and antitrust policies interact and how to address anticompetitive practices, only unofficial bodies such as the OECD and the International Competition Network have proved effective in developing harmonized antitrust policy enforcement standards. Multilateral efforts to create a common ground for antitrust provisions have failed due to the implicit conditioning of multilateral antitrust negotiations on successful agreement in other negotiating groups dealing with highly sensitive issues such as intellectual property, market access, liberalization of services, and especially trade remedies (dumping and subsidies). Both the Free Trade of the Americas and the Doha Negotiating Round at the World Trade Organization are illustrative in this regard. The underlying idea of these two trade liberalization initiatives was to promote the adoption of national antitrust structures, jointly develop basic norms, and promote cooperation mechanisms that, at a minimum, provide for notification and the exchange of nonconfidential information. The issues covered by competition negotiations included the following: First, the definition of international competition principles, including: (i) the notion of ‘‘anticompetitive behavior’’ affecting international trade; a list of practices that would be considered potentially trade-restrictive (cartels, vertical restraints, international mergers, etc.); (ii) enforcement of the MFN Clause as applied to competition; (iii) inclusion of anticompetitive government rules and regulations; (iv) identification of competition goals, whether short-term allocative efficiency or long-term institutional efficiency; and (v) the inclusion of development policies, such as industrial policy. Second, competitive regulation of state monopolies, including: (i) the effect of regulatory policies on competition; (ii) controls over government trading monopolies; (iii) treatment of patents and licenses; and (iv) the role of competition agencies in promoting competition advocacy. Next, these agreements purported to include provisions dealing with cooperation between competition agencies in regard to the exchange of confidential information in competition cases. Finally, they also included provisions on trade protection measures such as antidumping and countervailing duties. These agreements were expected to be completed by 2005. Yet the gridlock between the US and the EU at the WTO on the highly sensitive issue of agricultural policy, as well as the overall lack of political will to conclude the FTAA, frustrated any further agreement in the less appealing area of antitrust policy. Evidently, all of this has severely damaged any further development of harmonized multilateral antitrust rules.104 104. Nonetheless, there are scattered competition provisions all over the WTO/GATT framework: (a) Art. XVII of GATT prohibits firms enjoying monopolies or legal privileges from engaging in discriminatory conduct in the acquisition or sale of goods and services; (b) The Safeguard Agreement forbids countries from developing or facilitating voluntary export restraint 88 2.3.3 Chapter 2 THE ADVISORY ROLE OF UNCTAD AND THE OECD UNCTAD’s efforts in the development of international antitrust provisions goes back to 1947, but like those of the WTO in this area, they initially went nowhere.105 Later, during the 1970s, the UN’s attention focused on the control of multinational enterprises. The product of this focus was the adoption, in 1980, of the Set of Equitable Principles Multilaterally Agreed for the Control of Restrictive Business Practices by the U.N. Assembly (Yacheistova, 1994). Since then, UNCTAD has organized an annual meeting of experts for the purpose of exchanging ideas and experiences from their national antitrust enforcement. More importantly, these efforts have sometimes led to cooperation programs for the benefit of countries with little or no antitrust experience. A case in point is the United Nations Program on Competition and Consumer Protection Policy for Latin America (COMPAL), a three-year Phase II Technical Assistance Program on Competition and Consumer Protection Policies for Latin America supported by SECO (Switzerland). This program will assist Nicaragua, Costa Rica, El Salvador, Peru, and Bolivia. The OECD’s Competition Committee also promotes market-oriented reform by actively encouraging and assisting decision-makers in government in tackling anticompetitive practices and regulations. The Committee is the chief international forum on important competition policy issues. Members of the Committee include senior representatives from the competition authorities in OECD countries, plus observers from a number of non-OECD countries. Even more countries participate through the Global Forum on Competition. Business and consumer representatives also participate in some Committee and Global Forum activities. agreements, market allocation, or measures with similar effects on either imports or exports; (c) GATS acknowledges that trade in services could be adversely affected by anticompetitive behavior between suppliers, and suggests the need to explore multilateral mechanisms for the reduction of its impact through bilateral cooperation between the countries concerned; (d) TRIPS contains similar provisions with respect to the impact of anticompetitive behavior as a result of franchises, licenses, or exclusive agreements for the transfer of technology. It also contemplates control over the exercise of patents in order to avoid abusive conduct by the patent holder; and (e) TRIMS also considers the adverse consequences on competition resulting from demands of performance requirements imposed on investors, as well as the potentially anticompetitive conduct of transnational enterprises resulting from the exclusive supply of inputs to their subsidiaries. 105. The 1947 Havana Charter incorporated specific rules to regulate restrictive business practices, such as the prohibition of price agreements among competitors, the fixing of sale or purchase quotas, the limitation of production, and the fixing of production quotas. The Havana Charter would have obligated the members of the proposed International Trade Organization to take appropriate measures to prevent private commercial enterprises that had ‘‘effective control of trade’’ from ‘‘restrain[ing] competition, limit[ing] access to markets, or foster[ing] monopolistic control in international trade’’ (Article 46, Ch. 5, Havana Charter for an International Trade Organization, U.N. Doc. E/Conf. 2/78 (1948), reprinted in U.N. Doc. ICITO/1/4 (1948)). The Adoption of Antitrust Policy in Latin America 89 As an OECD background paper put it: Latin America is now a major focus for the OECD’s outreach activities. Since 1996 the OECD has sponsored at least one event a year in Latin America on competition policy. High level conferences, co-sponsored with the World Bank, were held in Buenos Aires and Rio de Janeiro in 1996 and 1997. Case study seminars were held in Brasilia in 1998, in Lima in 1999, in Caracas in 2000, in Brasilia in 2001 and in Miami in 2002. These seminars, in which experts from OECD and non-OECD countries discuss competition cases originating in participating countries, are the signature product of the OECD outreach program in competition law and policy. In addition, three events specific to Brazil were held between 1999 and 2001: seminars on civil aviation and natural gas in 1999 and 2000 and a seminar in April 2001 on institutional reforms in Brazilian competition policy. Finally, in 2000 the Secretariat completed and published a comprehensive review of competition policy in Brazil, and as a part of this Latin American Competition Forum, Chile will be the second non-member country to be reviewed under the OECD’s peer review program in competition law and policy (OECD Secretariat, 2003). The OECD, together with the Inter-American Development Bank, also hosts the Latin American Competition Forum. The Forum, which promotes effective competition law and policy in Latin America, meets every year in different places and is restricted to government representatives of Latin American countries and competition officials from OECD member countries.106 The Forum promotes dialogue, consensus-building, and networking between competition policymakers and law enforcers, as well as the identification and dissemination of best practices in competition law and policy. The emphasis is on sharing experiences in a collegial setting. Participants are senior officials of Latin American competition institutions. Antitrust experts from OECD countries and international organizations are included to provide additional perspectives and experience. 106. So far, the Latin American Competition Forum has had four meetings: The First Meeting took place in Paris (Apr. 7-8, 2003). Working sessions included the following discussion topics: (a) Competition and Efficiency as Organizing Principles of All Economic and Regulatory Policymaking; (b) Competition in the LAC Banking Industry; (c) Competition in the LAC Power Sector; (d) Peer Review of Chile’s Competition Institutions; (d) Competition in the LAC Telecommunications Sector; and (e) Challenges in the Introduction of Competition in Latin America. The Second Meeting took place in Washington, D.C. (Jun. 14-15, 2004). Topics discussed included: (a) Institutional Challenges in Promoting Competition: The Experiences of Argentina; Chile; Colombia; Jamaica; Mexico; Panama; Trinidad & Tobago and Venezuela; (b) Peer Review of Peru’s Competition Law and Policy; (c) Competition Advocacy in Developing Countries. The Third Meeting was held in Madrid (Jul. 19-20, 2005), and concentrated on merger control. Finally, the Fourth Meeting of the Latin American Competition Forum was held in El Salvador on Jul. 11-12, 2006. The agenda included discussions on (a) the relationships between competition authorities and sector-regulating bodies; (b) competition policy and the financial sector in Latin America; (c) using competition to lower the costs of remittances; and (d) undertaking a peer review of Argentina’s competition law and policy. 90 2.3.4 Chapter 2 THE INTERNATIONAL COMPETITION NETWORK The ICN is an international body devoted exclusively to competition law enforcement. Membership is voluntary and open to any national or multinational competition authority entrusted with the enforcement of antitrust laws. The ICN does not have any rule-making functions. The initiative is project-oriented and flexibly organized around working groups, the members of which work together largely by internet, telephone, fax machine and videoconference. Annual conferences and meetings provide opportunities to discuss these projects and their implications for antitrust enforcement. While the ICN reaches consensus on recommendations, or ‘‘best practices,’’ arising from the projects, it is left to the individual competition authorities to decide whether and how to implement the recommendations, through unilateral, bilateral, or multilateral arrangements, as appropriate. There are five working groups comprising the agenda of the ICN: (i) the competition policy implementation group, which is in charge of identifying elements that contribute to successful capacity-building and competition policy implementation in developing and transitional economies; (ii) the cross-border cartel working group, which is in charge of identifying perceived problems arising from the alleged presence of international cartels; (iii) the fundraising working group, which is responsible for helping to generate financial support for ICN participation by competition authorities burdened with severe resource constraints; (iv) the membership working group, which is in charge of encouraging the world’s competition authorities, both national and multinational, to join the network by focusing its activities on fostering a greater understanding of the ICN, its mission and objectives; and (v) the mergers working group. The mission of the ICN merger working group is to promote the adoption of best practices in the design and operation of merger review regimes in order to: (i) enhance the effectiveness of each jurisdiction’s merger review mechanisms; (ii) facilitate procedural and substantive convergence; and (iii) reduce the public and private time and cost of multijurisdictional merger reviews. This working group consists of two subgroups: Merger Notification and Review Procedures and Merger Investigation and Analysis. The ICN seeks to provide competition authorities with a specialized yet informal forum for maintaining regular contacts and addressing practical competition concerns. It is focused on improving worldwide cooperation and enhancing convergence through dialogue. Members are national or multinational competition agencies entrusted with the enforcement of antitrust laws. Only members participate in the internal decisions necessary for the organization and operation of the ICN. The ICN’s membership comprises over ninety competition authorities from over eighty jurisdictions around the world. The ICN closely cooperates with and seeks input from existing international organizations (e.g., the OECD, WTO or UNCTAD), associations, and antitrust legal practitioners, economic consultants, industry and consumer associations, and members of the academic community. The participation of such nongovernmental The Adoption of Antitrust Policy in Latin America 91 advisors considerably enriches the quality of the ICN’s discussions and work product. 2.4 THE EMERGENCE OF ANTITRUST POLICY AS BY-PRODUCT OF LATIN AMERICAN ANTIMARKET TRADITIONS The central thesis of this book challenges a fundamental belief of Latin American policymakers: that the main purpose of government intervention on the economy is to redirect spontaneous market outcomes in order to increase economic welfare. The existence of antitrust policy, justified on these ‘‘public interest’’ grounds, stems from less obvious reasons. As this chapter shows, the adoption of antitrust enforcement in Latin America followed the set of ideological beliefs shared by neoliberal technocrats in the 1990s who, like their predecessors, sought to modernize their economies through government dirigisme. Antitrust policy, however, entailed a different form of dirigisme. This intervention was implemented in the name of enhanced efficiency, which many took for enhanced market functioning. To this extent, the introduction of antitrust policy was quickly endorsed by those who saw in the promotion economic efficiency the very essence of what markets were about: an institutional mechanism whereby scarce resources would be allocated to their optimal uses. Protecting the market mechanism from any form of contrived interference in the competitive process was perceived to be necessary; hence the need for antitrust policy. Contrary to this rosy view of antitrust policy, this book suggests an opposite hypothesis: that the policy represents a continuation of the antimarket orientation that lies behind Latin American economic institutions. Throughout the history of the region, policymakers in pursuit of unattainable goals merely strengthened the tools of government intervention, which eroded personal property rights along the way. Therefore, there is a close connection, which will be explored in the forthcoming chapters of this book, between the impossibility of attaining economic utopia through antitrust policy and the erosion of property rights, thereby undermining market institutions. This paradox illustrates the erosion of market institutions in the region brought about by disguised government interventionism. In the case of antitrust policy, interventionism is well concealed in the name of economic efficiency, the hallmark of the policy. Yet, to the extent that antitrust policy impairs property rights by subjecting them to increased government discretion, more entrepreneurial market agents become vulnerable to politically driven policy enforcement. These agents, who would otherwise concentrate on developing creative ways to satisfy consumer needs through innovation, suffer from the increased opacity of the institutional system and lessened transparency in their economic entitlements to social resources. Thus, economic agents are faced with higher transaction costs in the 92 Chapter 2 form of the legal and economic advice necessary in order to ascertain whether their entrepreneurial activity will impair the entry of potential competitors or the survival of current competitors or whether their market share will exceed ‘‘tolerable’’ market concentration thresholds. The remainder of this book will show why subjecting economic rights to the pursuit of the economic utopia promised by antitrust policy, as with any other public interest policy, entails a de facto expropriation of such rights that reallocates them from the hands of more efficient entrepreneurs to less efficient ones. Less efficient but politically connected businesses will therefore unjustly gain effective control over social resources due to misguided decisions made in pursuit of a competitive equilibrium utopia. This form of government interventionism replaces legal control with political control, thereby creating a situation in which rights entitlements derive from political influence rather than entrepreneurial drive. Under this politically driven policy, property rights are eroded, thus undermining market institutions rather than reinforcing them. The next chapter examines the utopian structure of antitrust policy. This policy emerged from the teachings of the neoclassical price theory of the 1930s, epitomized in Joan Robinson’s Imperfect Competition Model. We shall concentrate our attention on explaining how neoclassical economists adopted this conventional thinking about markets, which impacted their normative perceptions about why entrepreneurs in the market compete. In conclusion, neoliberal reforms, of which antitrust policy was a part, did not overcome the fundamental exclusion of the vast majority of Latin Americans from the benefits of economic reforms. More importantly, it translated the promarket philosophy that should have prevailed in the design and implementation of antitrust policy into one which proclaimed the virtues of competition, but in fact further developed the tools of government dirigisme in the search for an economic utopia. The next chapter will develop this hypothesis extensively. Chapter 3 Antitrust Economics: A Look into the Anatomy of Economic Utopia The Previous Chapter explained how Latin American corporatism created an intellectual climate which, throughout history, drove policymakers into adopting antimarket regulations such as price controls and other forms government intervention. The antimarket cultural climate that adopted different ideologies throughout the economic history of the region preserved a similar ethos: governments should be the main drivers of economic development; and that businesses usually act against the public interest. Neoliberal reforms did not alter this social belief; on the contrary, it provided a renewed emphasis to government interventionism, in the name of economic efficiency; antitrust policy shares this normative goal. What made economic efficiency so appealing to the Latin American imagery of social welfare? This chapter explores the underlying economic efficiency ethos implicit in antitrust analysis. My analysis will examine why the competitive equilibrium model, implicit in the conventional neoclassical approach to markets, induces the analyst to hypothesize a utopian world of idealized competition against which all market structures found in the real world are normatively assessed. This approach is the essence of Industrial Organization theory, which antitrust policy relies upon. Accordingly, the first section of this chapter will explain the basic tenets of the competitive equilibrium analysis embodied in the perfect competition model, and examine to what extent policymakers employ this model to derive normative conclusions about the efficiency of alternative market structures. Next, we will concentrate our attention on the fallacy of this analytical framework, which I believe to be meaningless for assessing real-world competition, as it rests on an idealized and static (equilibrium) picture of the world, while dynamic market 94 Chapter 3 interactions between entrepreneurs are ignored. Therefore, I argue that such analysis has no relevant use for policymaking purposes; it is a utopian pursuit devoid of practical sense. Yet, under conventional Industrial Organization theory, microeconomic analysis of markets rests on the normative premise that perfect competition is good and monopolies are evil. This belief is captured in the so-called SCP (structureconduct-performance) paradigm, which provides the intellectual backdrop of antitrust legal doctrines in the various areas covered by policy enforcement: mergers, oligopolies, and vertical restraints. We examine the basic tenets of Industrial Organization theory and its connection with antitrust doctrines in the third section of this chapter. Furthermore, this chapter will outline the structure of Latin American antitrust statutes and their endorsement of efficiency as a guiding yardstick for policymaking in the region. The last section will also explore the common thread between Latin American corporatism and antitrust enforcement in the region. 3.1 PERFECT COMPETITION: A UTOPIAN MARKET STRUCTURE Despite its claim to be a value-free science, neoclassical economics is permeated by the most value-laden distinction of all: the distinction between perfect competition and monopoly. Perfect competition, also known as ‘‘competitive equilibrium’’ depicts a market structure featuring an infinite number of market participants because (i) entry and exit from the market is assumed to be free, so that any firms outside the industry can move in at any time to take advantage of any above-normal profits; (ii) products are assumed homogeneous, so there is no brand loyalty segmenting the market; (iii) no advertising is assumed to exist; and (iv) the model assumes that information is known by everyone in the trading system, sellers and buyers alike. In other words, the model supplies the analyst with a series of assumptions that determine the results to be expected from interactions in such markets. In other words, the model conveys to the analyst a series of assumptions that predict certain expected results from economic interactions occurred under such markets. Monopoly, on the other hand, depicts the exact opposite sort of market structure: high barriers to entry; product differentiation and information asymmetries between sellers and buyers.107 The dialectic opposition between these two notions provides a yardstick for the normative analysis of markets. Katz (1996, p. 2242) observes: economics descends historically from political economy, which began as a branch of moral philosophy, and employs a language and rhetoric that in part were developed for purposes of moral reasoning. It is not surprising, then, that many technical economic terms have normative connotations in ordinary 107. See Section 3.1.3, below. Antitrust Economics: A Look into the Anatomy of Economic Utopia 95 language. Among such value-laden terms are ‘‘equilibrium,’’ ‘‘perfect competition,’’ ‘‘utility,’’ and ‘‘efficiency.’’ Accordingly, antitrust economics rests on a very simple conceptual framework: that market concentration and competitive performance are intrinsically related. This connection emerges from the underlying opposition between perfect competition and pure monopoly that supports conventional market theory, wherein perfect competition is taken as the normative standard guiding policy initiatives due to its allegedly superior allocative properties. Why did economic theory adopt perfect competition as the basic framework for an understanding of market functioning? There is a long explanation behind this particular perception of markets. This explanation is associated with the evolution of economic ideas about market interaction that emerged from the so-called ‘‘Neoclassical School of Economics.’’ This school, which in the history of economics originated in the Marginalist revolution of the 1870s, gave economics a particular shape, as it introduced the heuristic of equilibrium to the analysis of markets in an effort to make market transactions amenable to mathematical formulation, as well as to simplify economic analysis so that it could render predictions by following ‘‘economic laws’’ (Boettke, 1997). In this world of equilibrium, where prediction became the main purpose of scientific inquiry, economic analysis would be concerned with exploring the normative properties of decentralized market systems, in the sense of establishing why such market systems allocate social resources more efficiently. This system, later formalized in the ‘‘perfect competition model’’ (Knight, 1964 [1921]), would in time become the normative yardstick by which the performance of real markets would be measured. For the purposes of understanding how this model impacted antitrust policy analysis, it is necessary to examine the significance of departures from the perfect competition conceptualization of markets. Up until the 1920s, mainstream economic theory had taken a dynamic view of competition, in which producers were constantly striving to outdo their rivals. Under the influence of neoclassical equilibrium theory, this view of competition would change radically, to the point of introducing a new paradigm in the notion of competition, as usually accepted by mainstream economic science (Machovec, 1995). The new thinking of competition was captured by Joan Robinson’s (1934 [1942]) book The Economics of Imperfect Competition. This book heralded overturned previous thinking about business conduct and had a decisive impact on public policy as it pertained to market regulation. Robinson’s theory of Imperfect Competition provided antitrust policymaking with a scientific respectability that hitherto had been lacking. Robinson’s work marks a watershed moment in neoclassical economic thinking about markets and represents the culmination of an evolution in economic thinking that actually had begun much earlier, with Alfred Marshall’s publication of his landmark book The Principle of Economics (Marshall, [1890] 1949). In view of the intellectual clout of this theory on successive economic thinking about markets it is useful to trace its origins. This will give us an understanding on 96 Chapter 3 the intellectual setting in which it emerged and the sort of scientific problems that the theory was intended to solve. 3.1.1 A WRONG TURN CHANGES THE FACE OF ECONOMIC COMPETITION The formal connection between antitrust policy and economic theory properly began in the 1930s. Hitherto, antitrust policy had been a rather intuitive, inorganic collection of judicial precedents from U.S. courts ruling on business actions. This approach lacked the proper consistency; it appeared intuitive and was subject to strong criticism, especially from economists, who regarded it as devoid of serious content (Kovacic and Shapiro, 2000). Although she did not intend to fill antitrust policy’s theoretical vacuum, Robinson entirely changed this perception by developing an explanation based on economic theory of why markets are prone to develop monopolistic characteristics, and importantly, why monopoly was undesirable from a social welfare point of view. Robinson adopted a negative view of oligopolies and other forms of ‘‘imperfect competition,’’ due to her misconception of Marshall’s theory of value. According to this theory, long-run competitive equilibrium could not be compatible with increasing returns which, in the eyes of Marshall, are essential to justify the existence of monopolies in the short run. Long-run monopolies would never be stable due to the growing presence of competitive firms, which would made their way into the market thanks to cost reductions in the methods of production. These reductions, under Marshall’s theory, would be introduced in the market by innovative firms, and would be disseminated throughout the industry thanks to ‘‘external economies’’ that is, knowledge obtained by firms belonging to a particular industry. Under these conditions, no monopoly would be secure in the long run in the absence of legal impediments (i.e., legal monopolies). In sharp contrast to Marshall’s theory, Robinson postulated the monopolist firms would enjoy immunity from competition merely by assuming that, in the long run, the existence of increasing returns108 would reinforce the incumbent’s grip on the market. This view, however, was anchored in a misinterpretation of Marshall’s long-run competition theory. Marshall viewed competition as dynamic 108. The notion of increasing returns is central to understanding Marshall’s view of markets and his perception that monopoly was completely compatible with a competitive environment in the long run. According to Marshall (Marshall, p. IV.XIII.13), in the short run, firms would tend to bear increasing costs of production, thereby stimulating decreasing returns: Costs would increase together with output levels. In the long run, however, industries tend to diminish their costs, thereby allowing for increasing returns for all participating firms. Thus, Marshall’s Law of Increasing Returns states that lower production costs will accrue in the long-term equilibrium position of all industries, despite output increases. AU: Provide year of publication for Marshall. Antitrust Economics: A Look into the Anatomy of Economic Utopia 97 phenomenon, in which firms would be free to enter the market due to the absence of legal monopolies.109 In Marshall’s view the only source of monopoly that could prevent third parties from challenging the position of the incumbent firm in the market would be a government privilege creating obstacles to prevent potential participants from displaying their superior skills. Competition would emerge in the event that firms spot the increasing returns earned by incumbent firms in the market, which resulted from discovering innovative ways of reducing production costs, that is, the source of entrepreneurial profits. Therefore, increasing returns were not only compatible with the process of competition, they were necessary for competition to take place, since in their absence competitors would not have an incentive to enter the market. Of course, the assumption that increasing returns and competition were compatible could only be tenable under Marshall’s dynamic perspective on market competition. Long-run competition would be attained through the entry of new firms, who could actually challenge the incumbent’s position by using skills and knowledge gained through ‘‘external economies,’’ that is, knowledge obtained through their involvement in the industry. Why did Robinson choose an equilibrium framework for supporting her theory of competition? Robinson was lured into adopting static interpretation of competition, possibly under the dual influences of her Ph.D. thesis supervisor, Arthur Pigou, who had a fascination with Walras’ economic formalization through mathematical models, and that of her colleague at Cambridge, Piero Sraffa, who had launched a persuasive attack against Marshall’s market theory, particularly the consistency of Marshall’s long-run equilibrium with perfect competition (a static view of competition which Sraffa, also relying on Pigou’s interpretation of Marshall, mistakenly endorsed to him).110 These two influences 109. Marshall’s view of monopoly as limited to government regulation is similar to that of classical economists and the common law. O’Driscoll (1982, pp. 191-196) examines how the concept of monopoly changed in the thinking of neoclassical economics, from the previous notion of government regulation in classical economics and the common law into one which emphasized monopolists’ exploitation of demand curves. O’Driscoll considers Marshall to be the intellectual source of modern monopoly theory; however, he also acknowledges that Marshall thought of monopoly (and competition) in terms of classical economics: ‘‘There is evidence that Marshall thought of competition and monopoly in Smithian terms. He preferred defining competition as ‘Economic Freedom.’ His examples of monopoly all involved legal monopolies, although they tended also to involve scale economies (for example, gas works)’’ (O’ Driscoll, 1982, p. 197). 110. Giving a full explanation of the reasons why Robinson decided to overturn the received dynamic notion of competition would be beyond the scope of this work, yet it is essential to understand the profound implications that her work had on the development of Industrial Organization theory thereafter. It is possible that Robinson felt compelled by the trend of economic thinking in those days, which increasingly endeavored to rewrite economic theory in terms of the equilibrium analysis inaugurated by Leon Walras in Elements of Pure Economics (1874). The desire to create a ‘‘rigorous,’’ mathematically supported 98 Chapter 3 convinced Robinson to pursue an alternative theory of competition founded on the assumption of monopolistic behavior, as a situation ‘‘resembling’’ reality, which was, above all else, a theory that could be formalized in the rigorous language of mathematics. Yet, as a language, mathematics can only be applied to equilibrium models of market functioning as a set of sequential static stages; it cannot be applied to describe a flux of ongoing changing events in permanent creative evolution (O’ Driscoll and Rizzo, 1985, pp. 54-55; Beinhocker, 2006, pp. 30, 48-49, 71-72). Nevertheless, in her quest for a formal, mathematical theory of competition, Robinson adopted a static view of market exchanges where all events occurred instantaneously, and along with this, a perception of increasing returns (i.e., advertising; business reputation; economies of scale; etc.) as potential sources of monopoly behavior in the short run. Naturally, by endorsing both Walras’s (via Pigou) and Sraffa’s premises, Robinson adopted their static stance vis-à-vis economic competition. Their equilibrium viewpoint contrasted ideal optimal market allocations (under perfect competition) with real ‘‘failing’’ markets (under monopolistic market structures).111 This way of viewing the problems of competition displaced Marshall’s economic science introduced a new paradigm in economic thinking, which radically reinterpreted every economic institution explored by previous generations of scholars (Machovec, 1995). One could also see in Robinson’s work the influence of two towering figures from her student days, Arthur Pigou and Piero Sraffa. First, Robinson adopted Arthur Pigou’s notion of the equilibrium firm. This notion provided an analytical device for examining firms’ decision-making in a genuine Walrasian static-equilibrium setting. Pigou’s equilibrium firm entirely changed the essence of Marshall’s representative firm, particularly his emphasis on time as a fundamental constraint on firms’ investment decisions, which enables the analyst to distinguish market performance in the long run from market performance in the short run. Under Pigou’s approach, production decisions are assumed to happen instantaneously. Second, Robinson endorsed Piero Sraffa’s criticism of the Marshallian system. In essence, Sraffa (1925, 1926), working from a static perspective, criticized what he thought to be the contradiction between Marshall’s increasing returns and the Perfect Competition model, and thus recommended abandoning this model altogether; in place of the Perfect Competition model, he advocated working from a monopoly perspective, which is what Robinson endeavored to do by concentrating on situations other than perfect competition (i.e., ‘‘imperfect competition’’). Sraffa’s criticism of Marshall was undeserved, for Marshall never adopted perfect competition (a Walrasian static version of his long-run competitive equilibrium model) as an analytical reference in his market theory. Sraffa missed the mark, as he also examined market problems from a Walrasian static perspective that Marshall had emphatically rejected (Loasby, 1989a; 1989b). 111. Following the logic of her own argument, Robinson argued twenty years later that competition is an anomaly, if not ‘‘impossible.’’ For her, ‘‘three tendencies—the tendency for competition to make markets imperfect by product differentiation, the tendency towards oligopoly where advantages of scale exist, and the tendency for excess capacity to lead to collusion—between them leave only narrow areas where conditions are such that [perfect] competition can normally prevail’’ (Robinson, 1954, p. 254). Antitrust Economics: A Look into the Anatomy of Economic Utopia 99 emphasis on the growth of knowledge accruing in the long run due to dynamic competition.112 Moreover, Robinson’s assumption that competition would be ‘‘imperfect’’ in the inevitable event that real-market competition failed to replicate perfect competition (with the latter serving as a short-run model of utopian resource allocation), which she described in her own terms as the assumption that all producers were monopolists of their own production (as they all faced a downward-sloping demand curve), inevitably led governments to intervene in markets in order to restore the ‘‘optimum’’ equilibrium. Langlois (2000, p. 3) observes that ‘‘the idea of perfect competition carries with it a set of theories in which firms do have discretion of a sort: theories of ‘imperfect’ competition.’’ Hence, the conventional role assigned to antitrust policy. 3.1.2 THE ERROR THAT GAVE BIRTH TO MODERN ANTITRUST THEORY The paradigm introduced by Robinson, after Walras, Pigou and Sraffa, obscured other ‘‘intangible’’ aspects of competition, such as the quality of services, which were left in the dark. As Langlois (2000, p. 3) states: Thus does modern-day price theory start with firms as production functions, each one identical, and each one transforming homogeneous inputs into homogeneous outputs according to given technical ‘‘blueprints’’ known to all. One effect of these assumptions has been to reduce the margins on which firms operate to two only: price and quantity. This in turn has led to the notion of ‘‘perfect’’ competition, in which a technically desirable set of assumptions replaces the common-sense notion of competition. It is somewhat ironic, given her decisive role in providing modern antitrust with the theoretical support of economic science that it needed to secure its independence from commercial law, that years later Robinson herself acknowledged her misguided approach and declared: When I prepared Economics of Imperfect Competition on static assumptions, I took a wrong turn; the right road would have been to abandon static analysis and to reconcile the analysis with Marshall’s theory of development. (Robinson, 1951) 112. As Loasby (1989a, p. 62) observes, ‘‘Marshall’s description of the organization which aids knowledge is quite clearly the description of an imperfect market structure: indeed, it is a description of that most recalcitrant market structure-oligopoly.’’ The conflict between Marshall’s theory of economic progress and the requirements of perfectly competitive equilibrium is far deeper than Sraffa or Robinson would have imagined. Thus, ‘‘for Marshall, the problem was not that his theory of the growth of knowledge was incompatible with perfect competition, but that perfect competition was incompatible with the growth of knowledge.’’ For this reason, Robinson’s theory entailed ‘‘an exercise in the logic of long-run static equilibrium and was therefore not applicable to Marshall’s system’’ (Loasby, 1989b, p. 77). 100 Chapter 3 Later, she would reaffirm this conviction: I took the wrong turn in my analysis of imperfect competition, by concentrating on the ‘‘imperfect’’ and ignoring ‘‘competition.’’ Thus, instead of abandoning static analysis and trying to reconcile my analysis with Marshall’s theory of development, I followed Pigou and prepared Economics of Imperfect Competition on static foundations. (Robinson, 1960, p. viii) Unfortunately, Robinson’s intellectual honesty was not enough to redirect economic thinking on imperfect competition from the ‘‘wrong turn,’’ which has been pursued by conventional Industrial Organization thinking since that time. From the 1930s on, antitrust policy would develop strongly, confidently sustained by Industrial Organization theories drawn from neoclassical price theory, particularly from Robinson’s insights, which were later extended by the empirical work of Edward Mason and Joe Bain. In due time, the implications of Robinson’s perspective would have a profound impact on the way scholars viewed market interactions: By limiting its field of vision to price, quantity, and the number of firms in the industry, the price-theory model pushed the economics of antitrust toward an obsessive concern with market structure, defined by the number of firms in the industry. In this way, Robinson’s work became the inspiration for a generation of industrial organization economists who created a paradigm based on ‘‘structure-conduct-performance,’’ which in time would become the hallmark of almost all antitrust cases decided between 1950s and 1990s. Accordingly, it was on the basis of Robinson’s ideas that antitrust policy developed its theoretical foundations. The policy, which at its inception had met with criticism from economists, had finally found widespread endorsement by the academic community. Robinson’s explanation of markets as doomed to suboptimal performance was reinforced in the eyes of scholars by the devastating effects of the Great Depression, which seemed to call for government intervention to halt overall market decline and revamp industrial organization; antitrust policy thus found in Robinson’s Imperfect Competition model a fitting theoretical support, seemingly reinforced by empirical evidence.113 113. As Weber Waller (2001) explains ‘‘Two factors led to the subsequent rise of economic discourse as the predominant discourse of antitrust. The first was the utter discrediting of business thinking in the wake of the Great Depression. The Great Depression was the critical event for virtually everyone alive during this period. Apart from the devastating material effects on the lives and fortunes of millions, the Great Depression also was the preeminent intellectual influence on a generation of intellectuals and public policy makers who rejected the old tools which had failed the nation and embraced and sought new tools and a new role for Government to undo the carnage that had been wrought. [ . . . ] To fill this void, economic theory and discourse developed that allowed a more vigorous role for Government in economic matters and a new vitality for antitrust, where prior to that time mainstream economic theory had little to offer a serious antitrust enforcer. Around the time that John Maynard Keynes was supplying the macroeconomic tools for governments to adjust budgets, taxes, and spending to deal with the Great Depression, two other prominent English economists were supplying the micro-economic tools to reinvigorate antitrust theory and enforcement.’’ Antitrust Economics: A Look into the Anatomy of Economic Utopia 101 As Stigler (1988, pp. 92-93) commented: one needn’t be a hairsplitter (though it helps) to worry about whether competition exists in effective measure if there are only a few business firms in an industry. Why couldn’t and wouldn’t they agree to set highly profitable prices, especially if they didn’t fear the appearance of new rivals? And suppose, as I believe to be the case, agreement is unlikely to work at all well with ten separate firms, and hence with more than ten, what about independent rivalry if there are only two or three? [ . . . ] So economists said (to each other), let’s be certain that there is competition by requiring a vast number of rivals in a market, and call that kind of market perfectly competitive. Thus, neoclassical competition and monopoly theories that emerged in the 1930s drew economists into the new equilibrium paradigm of the emerging Industrial Organization theory. By 1934, the static vision of the firm and market competition had been firmly established in economic thought, as had the widespread misunderstanding of Marshall’s equilibrium system. Kaldor (1934 [1969], p. 46), for instance, argued with impeccable logic that ‘‘long-period static equilibrium and perfect competition are incompatible assumptions.’’ Under a dynamic theory of markets, Kaldor’s long-term equilibrium under such static bounds would never have been postulated, much less the assumption that Marshall founded his analysis on the notion of perfect competition, as Kaldor naively seems to argue. Robinson’s lead was followed by Harvard’s Professor Edward S. Mason, who promoted industry-wide studies in order to test the hypothesis that market or industrial structures determine firms’ conduct and performance. By the 1950s, the research agenda of Industrial Organization was thriving, and competition agencies were increasingly basing their decisions on such models. This research agenda attempted to develop a theory to explain why oligopolies tended to encourage collusion between firms, but failed to do so. In conclusion, Robinson’s Imperfect Competition theory marshaled economic theory in support of utopian inquiries about how close to ‘‘perfect competition’’ markets were in reality. Any firm operating in a market structure that is not in competitive equilibrium will be taken to wield certain amount of power to fix prices above marginal costs: antitrust analysis would be built upon this working assumption. Of course, this misrepresentation of reality would have profound implications for the economic theory of markets and competition, but neoclassical thinking simply ignored this issue. For neoclassical thinkers, whether neoclassical models like Robinson’s truly represented competition was beside the point: what really mattered for these scholars was the capacity of the model to deliver predictions about future outcomes arising from decentralized market systems, based on specific premises regarding the interaction of economic agents. Therefore it was only thanks to the assumptions upon which the models were constructed that economists knew that monopolist firms face falling marginal 102 Chapter 3 revenues, whereas perfectly competitive firms face constant marginal revenues.114 This led to the conclusion that, monopolies produce a lower output for a higher price, thus exploiting consumers by overcharging them. It followed that social resources are squandered as monopolies allocate resources inefficiently: they extract consumers’ rents, which could be used in acquiring alternative goods, while monopolists obtain underserved rents. Hence, thanks to Robinson’s ‘‘wrong turn,’’ the neoclassical market theory that emerged in the 1930s postulates that monopolies are objectionable because the absence of competitors in this structure allows monopolists to set prices above marginal costs. Perfectly competitive industries, on the other hand, set price equal to marginal cost. In light of this theoretical framework, the state of perfect competition became appealing to policymakers. Yet perfect competition represented, at best, a very exceptional case of realworld competition characterized by infinite firms, who possess perfect information and are driven by utility maximization. To the extent that such extreme conditions, unlikely to exist in reality, are adopted as a ‘‘normative reference,’’ the model turns into an economic utopia. Let us explore in closer detail why mainstream price theory postulates that monopolies produce such evils. 3.1.3 THE WELFARE IMPERFECTIONS OF MONOPOLY In the monopoly model, opposite to perfect competition, a single market participant serves the entire industry’s demand because the model assumes (i) that entry and exit from the market are impeded by severe barriers, such that no firm outside the industry can move in at any time to take advantage of any above-normal profits if they occur; (ii) products are not homogeneous, due to brand loyalty or other differentiating features; (iii) advertising segments the market; and (iv) market participants face information asymmetries. 114. Naturally, this apparent contradiction between monopoly and perfect competition is based on the assumption that economic activity results in downward-sloping demand curves, diminishing marginal productivity and static profit maximization, all of which are assumptions which can only hold in an equilibrium, short-run vision of markets, which is what Robinson’s Imperfect Competition notion bequeathed to economic theory. By the same token, the contradiction between monopoly and competition does not hold in a dynamic, long-run vision of markets, as Marshall ([1890] 1949) and Young (1928) clearly realized. For in a longer time span, marginal productivity may actually increase as a result of external economies. Moreover, dynamic network externalities may actually lead to price increases as more units of output are sold. Thus, the supply curve does not represent the marginal cost of production. Finally, individuals do not hold behave like automatons who make wealth-maximizing decisions based on immutable and perfectly defined constraints: on the contrary, individuals are influenced by beliefs, prejudices, ideals, short-sightedness, and ethical views which define the surrounding environment within which they decide. Furthermore, their capacity to rationalize each and every decision is severely curtailed by the limited processing capacity of the human mind, as Herbert Simon (1957) noted. 103 Antitrust Economics: A Look into the Anatomy of Economic Utopia Accepting all these assumptions, then, the question that we must ask in order to establish the expected welfare effects of the monopolistic market structure is how much output a producer would supply to the market under monopoly conditions? Consider the monopoly model represented in Figure 3-1. Total Cost Maximum Profit Total Revenue Profit MC Pm P Price > MR = MC MR Q1 Figure 3-1 Profit Maximization for a Monopoly Firm 104 Chapter 3 In contrast to a perfect competition scenario, in which each competitor supplies an infinitesimal share of an industry’s total demand curve, a monopolist supplies the industry’s total demand curve on its own. Since this curve slopes smoothly downward, the price at which its output can be sold will decrease as the quantity increases. At each point on the curve as it moves away from the origin, marginal revenues (MR) from products sold in monopoly industries decrease because consumers will be willing to pay less for additional units. Hence, marginal revenues fall faster than market price (P): the marginal revenue curve, as demonstrated in the graph, has a more pronounced slope. Producers increase their outputs when MC < MR: in this case they would be losing profit opportunities if they didn’t increase their output. In this situation, selling an extra unit of output would yield higher profits, since additional revenues would exceed additional costs. Similarly, if MC > MR, they will reduce output because the cost of the last unit sold is greater than the revenue it brings in. Regardless of the structure of the industry in which they operate, whether monopoly or perfect competition, producers fix their output at the point where they maximize their profits. This point is where marginal revenues equal marginal costs (MR = MC). Given that marginal revenues in monopoly industries fall more sharply than prices as more output units are offered to the market, price bids at each point on the demand curve will be higher than marginal revenues, thus P > MR. Similarly, prices will be higher at the maximization point, thus P > MC = MR. In other words, monopolists achieve maximum profits at a point where MC = MR. Note that prices are always higher than their maximization point, by the very nature of the monopoly model, since marginal revenues fall more steeply than prices. By contrast, perfect competition firms, guided by their profit maximization drive to fix their output at the point where MC = MR, produce their individual output at the lowest price due to the presence of infinite competitors. 3.1.3.1 Allocative Inefficiency Where does the welfare loss come from? Assume an industry in which all costs are given and available technologies are exploited to their full extent. Inefficient resource allocation exists in such a market setting if prices are above marginal costs; in this case, there is higher producer surplus, but not high enough to compensate for the loss of consumer surplus caused by higher prices charged. This situation is illustrated in monopoly industry model represented in Figure 3-2. In this industry, XY represents the market demand curve, and MC represents constant returns to scale technology. Competitive equilibrium is located at point B, which is the point where SMC = P. At this point, producers’ output is QC. On the other hand, the monopoly firm maximizes its profits at MC = MR (point D) and sells at point A. At this point, the producer charges the higher monopoly price PM; thus, PM > MC = MR.115 The monopoly price is determined 115. Note that it is irrelevant whether PM is charged by a single firm or by several colluding firms operating under constant marginal costs; their anticompetitive economic effects on the market are the same. Antitrust Economics: A Look into the Anatomy of Economic Utopia Figure 3-2 105 Welfare Losses from Monopoly at point D, as the price at which marginal revenue equals marginal cost. A monopoly firm will produce less because QM < QC and will sell its output at higher prices because PM > PC. Thus, monopolies reap revenues higher than those they would realize with perfect competition. The question that immediately follows is: where do monopolies get these revenues from? Evidently, these revenues are obtained from consumers, who are thereby forced to pay more than they would under perfect competition. This is the concept that underlies the perception that monopolies profit at the expense of consumers and require control. Monopolies, understood as firms facing downward-sloping demand, seize consumers’ share of social wealth that they otherwise—for example, under perfect competition—would not have seized. In the closed-ended world of fixed resources depicted in neoclassical economics models, social welfare is also fixed. Therefore, the question of who loses and who wins is one in which competing groups within society (consumers, on the one hand, and producers on the other hand), confront each other. These two groups are in constant struggle over who shall obtain a larger slice of the social wealth pie. Neoclassical economists thus visualize economic welfare (also known as total surplus), as the sum of consumer surplus and producer surplus. The surplus of a given individual consumer is given by the difference between the consumer’s valuation for the good in question and the price; consumer surplus is the aggregate measure of the surplus of all consumers. Similarly, the surplus of an individual producer is the profit it makes by selling the good in question; hence, producer surplus is the sum of all profits made by producers in the industry. 106 Chapter 3 All other things being equal, an increase of the price at which goods are sold reduces consumer surplus and increases producer surplus. However, as price increases, the increase in profits made by the firms (producer surplus) does not compensate for the reduction in the consumer surplus. Let us see, referring to Figure 3-2, why monopolies produce inefficient misallocations of resources: (i) They impede lower prices that would benefit consumers. These prices are a so-called ‘‘social deadweight loss’’ (represented by the triangle ABC); that is, the area bounded by segment AB in the demand line, which describes the willingness to pay of people who buy the product, and segment BC, which describes the price they effectively pay. The resources represented by this triangle are pocketed by monopoly firms. (ii) From a social welfare perspective, this area also represents the sum of producer surplus (rectangle PM-PC-A-C) and of consumer surplus (triangle X-PM-A). The net efficiency loss caused by the monopoly is given by the difference between the areas X-PC-B and X-PC-A-C, namely, by the area of the triangle ABC, which is the deadweight loss for the economy. (iii) Moreover, producers will be willing to invest resources equivalent to rectangle PM-PC-A-C in order to procure themselves a legal monopoly and the resulting profits; hence, these resources will be not be available for otherwise productive uses and be devoted to unproductive uses, that is, lobbying. With respect to the social welfare allocation produced by monopolies, certain caveats are in order: (i) The monopolist is not able to appropriate the entire consumer surplus that is lost by consumers whose willingness to pay exceeds marginal costs. However, if the monopolist were able to set a different price for each consumer (i.e., if it were able to achieve perfect price discrimination), then its profit would be equal to the whole area of the triangle XpcS. Perfect price discrimination is unlikely to occur, since it requires that the monopolist have perfect information about the willingness to pay of each consumer. (ii) Note also that, relative to monopoly, competition increases net welfare but does not bring about a state where everybody is better off (i.e., Pareto improvement), since the producer surplus shrinks in comparison with the monopoly case. This suggests that industry producers will try to lobby in favor of more protection and less competitive pressure, while consumers and users of the industry products will have an interest in backing proposals for more competition. Antitrust Economics: A Look into the Anatomy of Economic Utopia 107 (iii) A welfare loss occurs not only at the monopoly price but at any price above marginal costs. This is illustrated in Figure 3-2, in which we compare the welfare level attained when p = c with that attained under any arbitrary price where p > c. (iv) One can also see that the higher the price P, the larger the welfare loss caused by monopoly power (the triangle, which represents the loss, gets bigger as P gets close to PM), suggesting that welfare decreases as monopoly power increases. (v) Furthermore, the graphical example suggests that the deadweight loss caused by monopoly power also depends on the elasticity of market demand. If demand were perfectly elastic, the monopolist would not be able to set any price above marginal cost. Consumers would not buy the good if there was even a slight increase in price. Hence, the deadweight loss would be nil. As market demand elasticity decreases, the ability of the monopolist to charge higher prices increases, as does the resulting deadweight loss. (vi) Finally, the absolute value of the deadweight loss depends on the size of the market. The y-intercept of demand (point X) in the figure can be seen as the size of the market. If demand XY shifted in a parallel way toward the origin—that is, if it kept the same slope but had a lower intercept— then the deadweight loss associated with monopoly power would be smaller in absolute terms. Allocative efficiency assigns available productive forces and materials among the various lines of industry; in this way, economic resources are employed in tasks where consumers value their output most. The deadweight loss brought about by monopolies clearly reveals their inefficiency in allocating resources socially, as displayed in Figure 3-2. However, according to antitrust theory this is not the only sort of efficiency socially foregone as result of monopoly market structures. In short, lost output is suffered by consumers, because they would have to pay an amount above cost represented by the deadweight loss triangle; this area represents the amount above costs that consumers would be willing to pay for the lost output. Society suffers from the deadweight loss that monopolies produce. 3.1.3.2 Productive Inefficiency Monopolies also waste resources that could be used by society; this is what conventional antitrust theory refers to as ‘‘productive inefficiency.’’ Productive efficiency refers to the effective use of resources by producing at the lowest cost per unit. At the same time, however, cost savings are gains consumers enjoy in an amount equal to the area covered by the shadowed rectangle (‘‘productive 108 Chapter 3 surplus’’) in Figure 3-2. Society benefits from the productive efficiencies that accrue from trade practices or strategies that augment the productive capacity of firms or reduce their costs. In terms of social welfare, these savings represent resources which can be used elsewhere in the economy. Productive efficiency occurs when unit costs of production are minimized and firms are producing at the lowest point of the lowest short-run average cost curve, as illustrated in Figure 3-3, as follows. AU: Figure not been viewed properly. Figure 3-3 Productive Efficiency Under monopoly conditions, a monopolist chooses inefficient technologies— thereby causing social welfare losses—due to its unthreatened position in the market. The full line, representing a higher average cost curve (AC1), reflects the choice adopted by a monopoly firm, which will make little effort to improve its productive performance, internal managerial performance, etc., due to its protected position in the market. Higher prices will result in the market (MP). Competitive firms, by contrast, provide for the effective coordination of the various means of production; they achieve higher outputs with the use of fewer resources, which results in lower costs, and lower prices (CP) represented by the lower average cost curve AC2. Why is this so? Competition theory postulates that a firm facing a downward-sloping demand curve will not be threatened by more efficient firms that is, firms producing at lower costs per unit, because barriers to entry prevent them from entering the market. Under such conditions,116 monopolists will presumably remain indifferent 116. Let us not forget that Robinson never explained why monopolistic firms would not face entry from potential competitors in the long run, because she was not thinking in process or long-run terms, but in static short-run terms, that is, how far from optimality was the imperfect market at a given (i.e., present) point in time. Antitrust Economics: A Look into the Anatomy of Economic Utopia 109 to innovative modes of production that would otherwise lower costs of production, thereby creating a social loss. 3.1.4 EFFICIENCY VERSUS THE ANTITRUST POLICY GOALS: THE SHORT RUN LONG RUN AND The discussion about the welfare effects of the perfect competition model outlined above is merely theoretical and has no place except in the so-called ‘‘blackboard’’ economics of idealized model representations, where efficiency can be discussed with the precision of mathematical logic. In the real world of policymaking, however, one has to take into account the effect of institutions. This is where the conventional discussion of competition policy goals begins to be driven by normative goals, entirely devoid of any scientific character. In this conventional discussion, scholars speculate about what particular goal they believe a given jurisdiction endorses. In addition to the impeccable ‘‘elegance’’ of the neoclassical economics framework described, in the particular case of competition policy, legal scholars endorsing this view also believed their theory of markets and competition would be amenable to the needs of predictability and legal certainty demanded by a system based on the rule of law. From this perspective, this book examines whether efficiency goals, such as consumer surplus, are consistent with the stability demanded by a rule of law system, which is the bedrock of any market system. We take consumer welfare to be the hallmark of antitrust policy, due to its general acceptance as a guiding principle of regulatory and competition policy (Crampton, 2003). Although productive efficiencies are part of the conventional welfare calculation, under neoclassical market analysis they play a marginal role in comparison to the role of efficiency in resource allocation. The persuasive power of the theorems of Welfare Economics, stating that every competitive equilibrium is a Pareto optimum, and every Pareto optimum can be supported by a competitive equilibrium, directs the attention of analysts to the question of the resource allocations that result from alternative market structures; it does not focus on the question of cost savings attained by more productive market structures, much less the issue of alternative political or ethical goals. This is consistent with the equilibrium framework laid down by Walras. In the closed system of equilibrium, thinking about efficiency is inevitably linked to resource allocation. As Richardson states: ‘‘Formal welfare theory is concerned essentially with the logic of resource allocation; it sets itself to find what distributions of resources satisfy a stipulated criterion while being consistent with certain postulated objective conditions, such as preferences, production functions and the like’’ (Richardson, 1960, p. 123). Antitrust analysis is bound to emphasize the negative effects of suboptimal resource allocation on consumer welfare; on the other hand, productive efficiencies are only intuitively incorporated into the net consumer welfare calculation. 110 Chapter 3 As a result their inclusion is often met with strong resistance from competition authorities, who regard them as mere allegations devoid of hard proof. 3.2 THE POLICY IMPLICATIONS OF THE SEARCH OF COMPETITIVE EQUILIBRIUM At the epistemological level, the lure of economic efficiency is rooted in the policymaker’s quest to achieve utopian and optimal social welfare through targeted government intervention (in the field of economics, see Rizzo, 1980; Hayek, 1988). This idea stems from the assumption that policymakers can attain a complete picture of the underlying forces that shape social reality and regulate them to attain optimal social welfare.117 Of course, policymakers generally acknowledge this goal to be unattainable; hence, they make do with attaining second-best objectives, namely, to improve markets’ performance by intervening in them and eliminating market failures.118 Antitrust scholars, for instance, usually argue that they no longer use perfect competition as a normative standard, due to the rigidity of its assumptions. Instead, they employ the concept of a workable competition model, which is intuitively seen as being closer to reality due to its key assumption: asymmetric information. This assumption helps economic models to resemble more closely what we intuitively perceive reality to be: an interaction where information about markets is distributed unevenly. To this extent, workable competition relaxes the stringent perfect information assumption that underlies the perfect competition model. Yet this counterargument also suffers from the same intellectual fallacy as does the attempts of replicating utopian perfect competition on real markets. This fallacy is related to the lack of information confronted by the analyst, in order to properly examine the long-run behavior of market competition. Both models are conceived to examine short-run market-allocation problems, because the information needed to make such calculations is more readily available than that needed to examine prospective long-run competitive equilibrium. The evolutionary essence of markets dictates that in the long-run market information permanently changes, 117. By the 1940s, Clark (1940, p. 241) had already noted that ‘‘[t]he conception of ‘perfect competition’ has itself for the first time received really specific definition and elaboration. With this has come the realization [sic] that ‘perfect competition’ does not and cannot exist and has presumably never existed. . . . What we have left is an unreal or ideal standard which may serve as a starting point of analysis and a norm with which to compare actual competitive conditions. It has also served as a standard by which to judge them.’’ In the 1970s, Hayek (1976, p. 66) indicated with regard to the Perfect Competition model that ‘‘this ideal case came to be regarded as the model and was used as a standard by which the achievement of competition in the real world was judged.’’ More recently, Klein (1990, p. 420) confirmed the importance of the Perfect Competition model for antitrust purposes by indicating that ‘‘of all the various analytical toolkits that constitute contemporary political economy, perhaps the most important model for the economist is the model of perfect competition.’’ 118. On the theory of the second-best, see Baron and Myerson (1982). Antitrust Economics: A Look into the Anatomy of Economic Utopia 111 contrary to the assumptions of both the perfect competition and workable competition models, where information is always available to the analyst, regardless of being asymmetric or complete. Hence, in real markets, information is not an exogenous asset that can be traded, or measured, but it is endogenously produced by economic agents themselves, and therefore only they can interpret it subjectively according to their respective particular plans. In other words, relaxation of the assumptions of the working competition model does not bring them any closer to reality, because the information which is produced in order to make the interaction possible emerges from the assumptions drawn by the model maker; in other words, the model does not solve the very basic and real problem of where do economic agents get their information from and how they act upon it. Information is simply treated as an exogenous asset provided by the model maker. In the real world, however, information is not given by an external source, but is sought, acquired, interpreted, and processed by economic agents themselves, sometimes at very high—institutional—costs. Those who support economic efficiency and consumer welfare base their views on the welfare properties of the perfect competition model: if such a model embodies the optimal competitive equilibrium, it follows that policy initiatives should aim at achieving such a state. However, this line of thinking disregards the cost of attaining perfection. This is why such thinking has been branded as a ‘‘Nirvana’’: if one takes into account the costs of attaining this optimality, it becomes clear that no such optimal state really exists.119 One can easily see the traces of Sowell’s notion of ‘‘cosmic justice’’ (Sowell, 1999) or Epstein’s ‘‘perfect justice’’ (1995, p. 38) in the Nirvana of economic efficiency. Both notions assume that justice can be individualized so as to level the welfare condition of each individual to that of the rest of society, and that such an exercise entails zero costs. Similar concerns arise in antitrust policymaking.120 The implications of this contrasting view for normative standards are decisive. Under the perfect competition models, by implication, real-world businesses are subject to a permanent state of failure in comparison with optimal idealized perfect competition. It is no coincidence that Oskar Lange (1964), the most renowned economist to advocate economic socialism, shared the antitrust regulator’s contempt for imperfectly competitive markets due to their less-than-optimal allocative properties. 119. Demsetz (1969) referred to this as the ‘‘Nirvana Fallacy’’: the intellectual error of considering the possibility of perfection, but ignoring how hard it is for the authority to obtain the necessary information to make this a reality. The tendency of anyone succumbing to this intellectual error is ‘‘to consider his neighbor’s garden always greener.’’ Thus, compared to Nirvana, reality always appears to be full of ‘‘market failures.’’ 120. As Nobel Prize winner Stigler (1988, p. 94) commented: ‘‘If only markets with a vast number of traders are perfectly competitive, and if markets with few traders are called oligopolistic [literally, ‘‘few sellers’’], that suggests that these latter markets are not competitive, as well as not perfectly competitive . . . the suspicion of small numbers was gradually reinforced by the antitrust cases.’’ 112 Chapter 3 Indeed, his conclusion was inescapable: Since perfect competition can only found in the imagery of the ideal world of equilibrium, the capitalist system is, by definition, a less desirable choice than economic socialism.121 In conclusion, antitrust policy is conceived in terms of Nirvana thinking to the extent that it employs the idealized perfect competition model (or reinterpretations of this model, such as the workable competition model) as a normative reference for implementing all of its practical recommendations at the policy level. This policy was conceived of as a government instrument for intervening in markets in order to preserve rivalry among independent buyers and sellers in relatively unregulated markets. Antitrust intervention is driven by the need to correct perceived market failures; the role of the authority is primarily to challenge business conduct causing such failures. Antitrust enforcement focuses on preserving ‘‘independent’’ business decision making and controlling the potential sources of market foreclosure, which would otherwise limit the effective number of business operators. Hence, the conventional notion that the policy promotes competition by preventing economic concentration (e.g., trusts); collective suppression of business independence or concerted action (e.g., cartels); or unilateral behavior which somehow excludes or raises impediments to third parties seeking to join the market (e.g., abuse of dominance, monopolization). Naturally, such intervention rests on the assumption that antitrust enforcers know exactly the nature and relevance of market failures for the industry under review. Policymakers do not address the problem of how information about opportunity costs drives businesses’ investments. Neoclassical economics models take this fact for granted. Richardson (1960) showed the inconsistency of such assumption; he demonstrated how in a static world of equilibrium it is logically 121. In Lange’s words ‘‘the possibility of determining the distribution of incomes so as to maximise social welfare and of taking all the alternatives into the economic account makes a socialist economy, from the economist’s point of view, superior to a competitive regime with private ownership of the means of production and with private enterprise, but especially superior to a competitive capitalist economy where a large part of the participants in the economic system are deprived of any property of productive resources other than labor. However, the actual capitalist system is not one of perfect competition; it is one where oligopoly and monopolistic competition prevail. This adds a much more powerful argument to the economic case for socialism. The wastes of monopolistic competition have received so much attention in recent theoretical literature that there is no need to repeat the argument here. The capitalist system is far removed from the model of a competitive economy as elaborated by economic theory. And even if it conformed to it, it would be, as we have seen, far from maximizing social welfare. Only a socialist economy can fully satisfy the claim made by many economists with regard to the achievement of free competition’’ (Lange, 1964, pp. 106-107) (Author’s italics). Of course, Lange assumed that in operational terms such a goal could only be achieved by nationalizing production and giving the respective orders to public officials in charge of running state-owned enterprises in order to achieve free competition. In the absence of extreme government intervention, there is no question that he would have seen in antitrust policy a perfectly logical device to achieve the socialist allocative goals he advocated, by prosecuting firms unwilling or incapable of behaving as social welfare dictates. Clearly, from the policy viewpoint the underlying logic in both cases is similar: governments must intervene in order to achieve the optimal resource allocation impeded by market failures such as those arising from monopolistic competition. AU: In the same quotes maximise and maximization (ise and iza) is used. Shall this be retained? AU: No Italization is indicated in the quotes. Antitrust Economics: A Look into the Anatomy of Economic Utopia 113 contradictory to simultaneously assume perfect knowledge and decentralized decision making.122 By contrast, under the assumption that economic agents search for information which is not given by a God-like external source, but endogenously produced by them, the normative assumptions about arrangements entered into to facilitate the production of such information are entirely opposite. The analyst does not evaluate these arrangements in light of some idealized form of transaction that facilitates perfect or workable competition. Instead, the analysis focuses on the merits of the institutional arrangements that enable individuals to gather the information they need to take their own actions. In other words, the analysis shifts to the institutional quality that makes market exchanges possible, rather than comparing such exchanges with an external, idealistic optimal reference. In this alternative analysis, therefore, institutions matter. Industrial organization theory that supports antitrust policy is grounded on the opposite assumption; that is, institutions are ‘‘given.’’ From this recognition such theory draws a basic analytical inference: perfect competition and monopoly belong to two idealized extreme models, each of whom conveys opposite market structures. Each of these models is built on opposite assumptions about the sort of information that economic agents possess. In perfect competition all individuals possess perfect information about the goods and services traded and are able to profit from such information; while under the monopoly model information is asymmetric and possessed by a single firm. Welfare implications arise from this dual perspective, as will be seen in the next section. 3.2.1 A MATHEMATICAL SIMPLIFICATION CREATES AN ILLUSION Antitrust thinking is grounded on the belief that industrial concentration resulting from asymmetric information is bad for competition. But where does that conviction come from? 122. Richardson (1998 [1956], 1998 [1959]) noted that in order to be compatible with the assumptions of the standard perfect competition theory, the long-run supply curve had to be interpreted in the sense of assuming perfect forecast not only in product prices but factor prices. Yet, under the atomistic premise of the standard perfect competition theory, this knowledge is unavailable to entrepreneurs, because forecasting total planned supply requires forecasting the plans of competitors and clients, which in their turn depend on the supply plans of the forecasting firm. Keynes postulated in his ‘‘Beauty Contest model’’ that this problem is one of infinite regress, since firms’ expectations of other firms’ expectations result in an endless hierarchy of expectations: ‘‘Professional investment may be likened to those competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of other competitors, all of whom are looking at the problem from the same point of view’’ (Keynes, 1964 [1936], p. 156) (Emphasis is the author’s). In counter guessing situations, additional information may eliminate ‘‘initial’’ uncertainty, but it will also reshape initial goals and redefine original plans thus creating a further source of uncertainty for other market actors. As O’ Driscoll and Rizzo (1985, p. 73) contend, ‘‘further information has not eliminated uncertainty, but has merely transformed it to a higher level of counter guessing.’’ 114 Chapter 3 Conventional neoclassical economics supports policymakers’ view of the market. This static perspective, initially expounded by Cournot (1838), and later reinterpreted by Robinson’s Imperfect Competition model (1934), showed that, in comparison to a monopoly, a duopoly results in prices that are lower while the output is greater; following this logic, Cournot concluded that in the presence of infinite producers, the entry or exit of a marginal firm in the market has a negligible incremental effect on the total output produced. Under these conditions, maximum profit is achieved when market price equals marginal costs. At this point society receives the highest possible benefits and the cost of providing such benefits is at its lowest: this is the perfection of the Perfect Competition model, because firms will not earn above what consumers would pay: no welfare loss results from society’s point of view. In other words, under the theory of utility maximization the price paid for a commodity represents its marginal contribution to community welfare. Therefore, social welfare is maximized when the marginal cost of production equals the price for which a commodity is sold (P = Mc). This occurs under perfect competition. By contrast, in monopoly markets, price exceeds marginal cost (P > Mc). The question that follows is why perfect competition leads to these results. The model supplies the analyst with a series of assumptions that determine the results to be expected from interactions in such markets. The key question is how much output a producer would supply to the market under perfectly competitive conditions. Business profits increase provided that marginal income exceeds marginal cost. If marginal profit—that is, difference between marginal income and marginal cost—is positive, firms will have an incentive to increase production; on the contrary, if marginal costs exceed marginal income, they will reduce production. Consider the perfect competition model represented in Figure 3-4. AU: Please provide the reference details of ‘‘Cournot (1838)’’ in the bibliography. AU: Please check the year of the given citation ‘‘ Robinson’s Imperfect Competition model (1934)’’. It is listed as ‘‘1934 [1942]’’ in the bibliography. AU: Figure not been viewed properly. AU: Please provide the source for the figure. Figure 3-4 Profit Maximization for a Perfectly Competitive Firm 115 Antitrust Economics: A Look into the Anatomy of Economic Utopia In perfectly competitive markets, economists assume that for each pricetaking firm, marginal revenue and price are identical: each firm is so small that it cannot influence the market price individually. If any firm increases its price above the market equilibrium level it will instantaneously be expelled from the market (it will no longer find any consumers), while if it lowers its price below market equilibrium it will be swamped by all consumers of the commodity demanded. Hence, each perfectly competitive firm in the market faces an individual flat demand curve in which marginal revenues are constant and total revenues increase steadily in a straight line (see Figure 3-4). At the output level Q1, market price (marginal income) equals marginal cost; at this level, the producer achieves maximum profit. To the left, marginal costs are lower than marginal income; hence, the producer will lose the opportunity to maximize her income. To the right, the producer’s marginal cost will exceed marginal income, resulting in a loss. Producers, then, will maximize profit at the point where MC = MR = P; in other words, the interest of consumers (lowest prices) and producers (highest profits) will converge. This is why, under perfect competition, markets achieve maximum output production at the least possible price, as the Table 3-1 shows. Table 3-1 Quantity 1 2 3 4 5 6 7 8 9 10 11 Revenues under Perfect Competition Price = Marginal Income (USD) Marginal Cost (USD) 30 30 30 30 30 30 30 30 30 30 30 20 18 16 15 17 19 22 26 29 35 40 Marginal Revenues (USD) 10 12 14 15 13 11 8 4 1 5 10 Total Revenues (USD) 10 22 36 49 62 73 81 85 86 80 70 Note that the supply of individual firms will correspond to their marginal cost curves, since P = MR. Regardless of what the level of demand is, their individual supply will always be equal to MC. Due to the presence of infinite competitors, individual producers will be forced to accept the price imposed under such conditions, which will be the lowest possible price the market can provide to consumers, since each individual firm will be forced to produce at the point where MC = MR. Thus, the supply curve 116 Chapter 3 for the industry (resulting from the mathematical addition of each individual firm’s output) represents the marginal cost of production for all individual firms in a given industry. Thus, the sum of individual firms’ marginal costs will represent the supply curve for the industry, which in turn will also represent the added marginal revenues of all producers (SMC = SMR = Q). Given that P = MR = MC for individual firms, their addition will lead to a point in which social welfare will be maximized. At this point, the social wants of consumers (expressed in P, a price which infinite consumers are willing to pay), and the social cost of production of the amount supplied by infinite firms (which, let us recall once more, will maximize their revenue), will reach an equilibrium where no one will lose. Since demand equals supply in equilibrium, the marginal benefit of the last unit consumed equals its marginal cost of production; therefore, social welfare will be at its highest. Clearly, this vision of markets rests on pure mathematical logic. Under Cournot’s logic, as market structures move closer to perfect competition (achieved by adding more competitors), social resource allocation will improve. By the same token, as market structures become more and more concentrated (i.e., fewer competitors), social resource allocation will become less efficient. To understand why this analysis is flawed, it is necessary to draw our attention to the subtle, yet very important assumption that underlies in Cournot’s model, namely, that the firm in a perfectly competitive market is so small relative to the overall market that it cannot influence its course: its impact is negligible, or as economists usually put it, infinitesimal. Following Cournot’s logic, naturally, each firm has to behave as a price taker, in the sense that it cannot decide unilaterally what price consumers will pay in the end. Thus the market under ‘‘perfect competition’’ will be the opposite of a pure monopoly market, where firms restrict their output to unilaterally dictate terms under which consumers will pay higher prices. This is possible because monopoly firms face a downward-sloping demand curve, so that prices exceed marginal revenues (P > Mr). Under these conditions, monopoly firms are able to price their goods at a point higher than the ideal point where consumers would otherwise maximize their welfare. Under perfect competition, by contrast, no such wealth transfer occurs. In perfectly competitive markets, prices equal marginal revenues and both are equal to marginal production costs (P = Mr = Mc); therefore, firms must yield to the price set by the market. This price will force firms to produce efficiently so that their marginal revenues will be equal to their marginal costs (Mr = Mc); otherwise they will be expelled from the market. This is why, on paper, perfect competition appears desirable whereas monopoly does not. The implicit assumption is that, due to their infinitesimal market share, firms operating in perfectly competitive markets must take whatever price they are offered; the effect of their business decisions is therefore negligible. Naturally, the welfare implications of this binary (monopoly v. perfect competition) rest on the assumption that such a duality does, in fact, exist; in particular, it rests on the assumption that, at the market price, perfectly competitive firms face Antitrust Economics: A Look into the Anatomy of Economic Utopia 117 flat demand curves, as illustrated by the sequence of individual-firm demand curves under alternative market structures represented in Figure 3-5. Individual demand = Total demand Total demand Individual demand $30 $30 100 50 Individual demand of a monopoly firm 100 Individual demand of a duopoly firm Total demand Total demand Individual demand Individual demand $30 $30 30 100 Individual demand of an oligopoly firm Figure 3-5 100 Individual demand of a perfectly competitive firm Individual Demand under Alternative Market Structures The sequence shows the position of an individual firm, in a transition from a monopoly market (1) into one in which it shares the market with another firm (2); into one in which it participates with several other firms (3); and finally, into a market in which it faces the competition of infinite sellers. But are individual demand curves ever really flat? As the conventional theory postulates, perfectly competitive firms are so small that they do not change their output in response to a change in output by other firms. However, if a single firm happens to increase its output by one unit, the total industry output should also increase by one unit, because other firms will not react to the change in output by a single firm. This means that individual demand curves could never be flat, because under the very assumption underlying the model, an 118 Chapter 3 increase in the supply of one firm will increase total market output, causing market prices to fall. The only way individual demand curves could be flat would be if, in the event that one firm increased its output, all other firms reduced their output to compensate for the increase: only then would the market supply curve stay the same and the price remain constant. In other words, the assumptions underlying the perfect competition model are mutually inconsistent. Either firms operating in such markets do not face flat demand curves in the event of an output increase by another firm in the market (for the price would then fall, albeit infinitesimally), or prices do not fall in the event of an output increase. Naturally, the second choice implies that individuals operating in perfectly competitive markets do not follow the same logic of economic behavior that applies to other markets. Faced with this inconsistency, we are forced to conclude that flat demand curves are as real as unicorns. 3.2.2 THE LOSSES RESULTING FROM ACHIEVING PERFECT COMPETITION IN REAL-WORLD MARKETS Advocates of the conventional market theory would defend the conventional use of perfect competition by arguing that one should not criticize the assumptions of the model, but its predictive power. Milton Friedman states in his largely popular paper The Methodology of Positive Economics (1953, pp. 166-177) that assumptions about reality are irrelevant to identifying a good theory: what matters is the amount of empirical evidence that supports working hypotheses.123 Yet, it is unquestionable that in the world of policymaking, much as in the world of business, individuals act on the basis of their beliefs. The belief about markets being optimal at perfect competition has driven antitrust policymaking throughout the twentieth century, and indeed, influences policymaking in Latin America today. Hence, the question that follows is what happens if we insist on imposing perfect competition standards on real-world firms. To put it differently, what is wrong with a policy that insists on judging real-life situations under idealized standards of ‘‘perfection’’? Let us see how firms operating under perfect competition would fare if we dropped the assumption that they confront a flat demand curve. Let us see how they fare if, as we have already established, they operate in markets where price is greater than marginal revenue (P > Mr). Again, the assumptions of the perfect competition model indicate that Mc = Mr = P. Individually, perfectly competitive firms produce a level of output that maximizes their profit; but collectively such firms produce at a loss, because they will be forced to sell at a price where P ¼ Mc, which is lower than the price which would maximize their profits (Mc = Mr). This loss is a cost of firms acting without coordination. Acting independently from one another (in accordance with 123. Against this opinion, Coase (1991 [1996]) argues that ‘‘the assumptions we postulate in economics be realistic.’’ The discussion about ‘‘realism’’ is one of the most extended ones in economic methodology and is beyond the scope of this book. Antitrust Economics: A Look into the Anatomy of Economic Utopia 119 the assumptions of the perfect competition model), perfectly competitive firms will be unable to seize profits from market opportunities, since these profits would only accrue at a point where prices paid by the market actually exceed marginal cost. Instead, perfectly competitive firms will undercut their competitors by forcing them into a price war. In this case they will be forced to sell at a higher level of output where supply (marginal cost) and demand (price) intersect, a point that, from the viewpoint of the individual firm (under our realistic assumption that P > Mr), will yield collective losses for everyone. To see this more clearly, consider the losses incurred by a firm under perfect competition, as illustrated in Figure 3-6. Total Cost A Pm Total Revenue B Pc Profit AU: Please provide the source for the figure. Price C’ Pm B’ Pc MC A’ MR Figure 3-6 Losses of the Perfectly Competitive Firm 120 Chapter 3 As this figure shows, if firms were forced to charge perfect competition prices at point B, where total supply (the sum of Mc) and total demand intersect, they would individually obtain lower profits than they otherwise would if they charged (monopoly) prices above marginal revenues (C’- B’). At point A, firms would maximize their profits; past this point, their profits would diminish. Clearly, the addition of losses would lead everyone in the market into a loss (assuming, of course, perfect information). As Keen (2004, p. 99) explains, firms in perfectly competitive markets would face a loss because, in these markets, marginal costs exceed marginal revenue, in contrast to monopoly markets where the opposite is true. The only possible explanation for profit-maximizing, perfectly competitive firms producing at a higher level of output and lower price is that they are irrational. The only possible way for firms to make profits is for them to collectively coordinate their actions in such way so as to avoid losses. In short, antitrust policy enforcement brings about market losses, as it forces individual firms to sustain losses on the false assumption that, under perfect competition, they would produce optimally. Antitrust policy thus ignores the fact that real businesses usually need to forecast what other firms will do in order to avoid losses (i.e., costs) that would otherwise impede them from attaining the best entrepreneurial outcomes. These losses are collectively avoided through varying forms of association, rivalry, or coordination. Rivalry, which in conventional economic thinking appears to be the only possible form of competition, is merely one form of social collaboration in which entrepreneurs obtain signals about the relative value of scarce resources being bid upon by other entrepreneurs. Policymaking needs to address practical issues faced by flesh-and-blood individuals in their ordinary transactions. In order to do so, it needs to rest on sound economic theory, that is, theory that is somehow related to the phenomena it explains. By contrast, the perfect competition model is a futile imaginary device that does not explain how markets achieve optimality except by postulating that all relevant information in the system is already known by economic agents, before it has in fact passed to them. To put it differently, it assumes that the problem of collective coordination among economic agents has already been solved, without telling us how. Yet knowing how economic agents coordinate their actions is the key to achieving the optimality the model seeks: to this extent, the model is totally hapless. In short, the perfect competition model is untenable because it rests on the flawed assumption that firms maximize their profits individually without being affected by what other firms do in the market, and that the optimal production level is attained without considering the collective market outcome. For if, in accordance with economic theory, we assume that economic agents are profitmaximizers, there is no reason why we should expect that, collectively, they would be willing to make losses. For this reason, the perfect competition model has no practical relevance to policymaking; moreover, it leads the analyst to misunderstand the motives of firms Antitrust Economics: A Look into the Anatomy of Economic Utopia 121 that participate in the market. By taking perfect competition as an ideal reference for how the world should be, policymakers mistakenly see the results of imperfect information as ‘‘failures,’’ or ‘‘costs’’ of the economic system that enlightened policymaking can easily spot and eliminate.124 In the real world, where equilibrium is not gained by mere analytical postulation but through coordinative actions undertaken by entrepreneurs who lack knowledge about their optimal course of action, these so-called ‘‘failures’’ are in fact essential institutional means whereby they can obtain the necessary knowledge to induce them to action. In other words, these institutional ‘‘failures’’—from the conventional antitrust viewpoint—are in fact instrumental means that are necessary in order to coordinate the market system at all. Richardson (1960, p. 39) noted the pervasive effect of this model on the mindset of market analysis. Thus, the perfect competition model: undoubtedly stood, for many people, as an ideal or model form of organization—strictly speaking only a logical as opposed to an ethical ideal, although this distinction was not always sharply made. It does not seem to have been recognized that the fact that ‘‘imperfections,’’ in some forms and degree of strength, are clearly an obstacle to adjustment, does not entitle one to conclude that it would be best if [market] ‘‘imperfections’’ were absent altogether. Yet the pedagogic convenience of perfect competition, and its suitability as a base for extensive formal and mathematical elaboration, gave the system a central place in theoretical discussion. Richardson correctly points to the key paradox introduced by the mathematical notion of perfect competition: that to attain such a condition in a market with many interacting firms, one has to reject the premise of rationality upon which such model is built. For perfect competition can only be attained if economic agents 124. Loasby (1982, p. 113) observes in this connection: ‘‘Once in equilibrium, economic agents take no action that is not fully prescribed by the parameters of the system. . . . Such an analytical program produces misleading prescriptions for policy. Those prescriptions are derived from the study of a system that is fully adjusted (i.e., perfectly competitive markets) to existing data and in which there is no expectation that this data could ever change: thus any elements that might be necessary to recognize and respond to change are strictly superfluous. Once everything is agreed—and within analytical convention, finally agreed—there is no further need for any of the apparatus of inquiry, communication, and control which might have been required to secure agreement. It is all to be condemned as (according to taste) organizational slack, x-inefficiency, wastes of competition, or monopolistic misallocation. There is not even any reason for the existence of firms.’’ Later, he (Loasby, 1991, p. 25) insisted in this argument: ‘‘The rather obvious difficulty in applying the elegant formulation (implicit in the First Theorem of Welfare Economics) is not just that neither Pareto optima nor competitive equilibria are likely to be attainable; it is that outside the world of the model they cannot even be defined.’’ In a similar sense Schumpeter (p. 84) had already noted: ‘‘The problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them. As long as this is not recognized, the investigator does a meaningless job. As soon as it is recognized, his outlook on capitalist practice and its social results changes considerably.’’ AU: Provide year of publication or Schumpeter? 122 Chapter 3 renounce their pursuit of a situation in which P > Mc, and put up with another in which P¼Mc. However, a situation like this would never entice them to invest in the expectation of obtaining future profits, that is, of covering their marginal costs with higher revenues. To take into account the conduct of rational firms whose actions are dictated by the premise that prices must exceed marginal costs (P > Mc), it is necessary for us to reconsider the received notion of competition built upon the false duality of idealized market structures, between which firms presumably command varying degrees of monopoly power, depending on their place in the continuum. 3.2.3 REAL-WORLD COMPETITION NEEDS COORDINATING INSTITUTIONS The perfect competition model contradicts reality because it assumes that firms do not react to each other’s behavior. Yet, this is exactly what businesses do in the real world. Consider the situation faced by a firm such as Pepsi in the soft-drink market. Pepsi must be as attentive to its competitors’ moves in the market as it is to its customers’ demands. It must see how Coke and other competitors perform in the market; what new products they advertise; what control they have over their distribution networks; what productive capacity they have to satisfy the market; the ease with which they can reach the market; what level of confidence Coke’s consumers have in its products; and so forth. In a dynamic setting, firms do not act against the market in isolation: they place themselves in a strategic setting in which they take into consideration the simultaneous moves of their competitors, suppliers, clients, and customers in order to make their investment decisions. From one perspective, these are indeed competitive moves, as they are intended to challenge competitors in the market, but from another perspective, they also can be regarded as coordinative strategies aimed at avoiding overproduction. The real economic problem of interacting firms in the market is, then, how they coordinate their activities in the event of a change caused by a single firm’s decision to increase (or decrease) its output; it is of no use to pretend that coordination does not exist (or that it has been already ‘‘understood’’ and ‘‘worked out’’ by other firms). We shall come back to the fundamental problem of how economic agents develop their expectations about the conduct of other firms. The problem I want to emphasize at this point is that the perfect competition model is not only unrealistic, in the sense that it does not take into account this feature present in reallife markets, but that it is also internally flawed, since it is based on two mutually exclusive assumptions. On the one hand, the model postulates that in the event of an increase in supply by one firm, the individual demand faced by perfect competitors would remain flat. At the same time it contends that prices would fall in the event of a market output increase, a situation in which total demand would decrease (even if infinitesimally) rather than remaining flat. In short, the demand curve faced by individual firms, contrary to the assumption made by the perfect competition model, can never be flat; instead, it is infinitesimally sloped. Yet, mathematically speaking, infinitesimal does not mean zero, Antitrust Economics: A Look into the Anatomy of Economic Utopia 123 as the model assumes. The summation of infinitesimally negative-sloped individual demand curves will result in a downward-sloping collective (i.e., industry) demand curve. Conversely, if the assumption made by the perfect competition model were true (i.e., the slope of individual demand curves is zero), then the addition of these curves would result in an industry demand curve with a slope of zero (i.e., flat). Therefore, the alleged distinction between firms operating in perfectly competitive markets and those operating in imperfectly competitive markets is untenable. All firms will set their prices at a level which is above the point at which marginal revenues and marginal costs are equal. In other words, all firms will behave as monopolists, even if operating in highly decentralized markets, though they will do so on an infinitesimal scale. It is evident that the crafters of the perfect competition model tried to simplify reality in order to isolate and better examine its constitutive forces, but in the course of doing so, they created a skewed reality out of mathematical-logical deductions that distorted the very forces that the analysis intended to examine. The virtual reality embedded in economic models can be useful, so long as it preserves the essential traits of the phenomenon that it purports to analyze.125 The question is whether the competitive equilibrium model does so. The answer is obviously negative. By assuming that individual firms under perfect competition face flat demand curves, and that firms would become price takers regardless of any increase in total output, the drafters of this model took away the most important trait of competition as we know it: firms do not act in isolation, but rather they take into account what other firms do in the market in which they compete. No individual firm would increase its own output without paying due regard to the expected reaction of other firms. The coordination of expectations—which drives business decisions—becomes the key economic problem to be addressed. Although the problem of coordination in economic transactions was first described by F.A. Hayek in his seminal paper Economics and Knowledge (1937), it was not until G.B. Richardson’s work Information and Investments (1960) that the inner contradictions of the perfect competition model as a normative yardstick for public policy were thoroughly exposed. Richardson noted that the very assumptions of the perfect competition model, encapsulated by the notion of ‘‘perfect knowledge,’’ were inherently contradictory. The assumption of perfect knowledge (i.e., knowledge which is evenly shared by everyone in the market) denies individuals any chance of achieving perfect competition. Why is this? It is because, if the knowledge needed for individuals to attain perfect competition were equally and perfectly shared by all individuals in 125. Popper contended that it is impossible to verify the Perfect Competition model, given that the essence of ‘‘models’’ is that they are metaphysical statements. If this is the case, then we will have to accept the implications of the model as a matter of logical deduction, and admit that the world may reach a state of perfect competition. In this case, however, it is crucial for the model to replicate the world. But this is not so simple, as models in economics are merely tools for expressing certain relationships in mathematical terms. Reality, as Popper has indicated, is a nonverifiable issue, and therefore beyond the realm of science (Papineau, 1996, pp. 290-324). 124 Chapter 3 the market (as the perfect competition model postulates), no one would be able to seize the profit opportunity which is opened by a gap in information about investments’ returns created under market changing conditions: ‘‘a general profit opportunity, which is both known to everyone and equally capable of being exploited by everyone, is, in an important sense, a profit opportunity for no-one in particular; it will create the incentive to invest only provided some people are less able to discern it, or to respond to it, than others’’ (Richardson, 1960, p. 57). In short, institutions are needed to convey market information, but paradoxically they subject markets to information assymetries that lead markets away from perfect competition. Does such imperfect competition make markets less competitive? Let us attempt to answer this question in the next section. 3.2.4 FROM SHORT-RUN PERFECT COMPETITION EFFECTIVE COMPETITION TO LONG-RUN The perfect competition model creates an illusion of business behavior that is never real, for all firms—even those whose influence on prices is infinitesimal—truly behave as monopolists. In other words, there is no qualitative link between the welfare effects of these firms and those who command large chunks of the market. All of them price their goods above marginal costs in order to obtain profits. The irrelevance of market structure on the performance of markets is further clarified if we reconsider the basic premise of antitrust theory, that is, that monopolies produce welfare losses because they have higher costs than firms operating under competitive conditions. To understand why, consider the following Figure 3-7a and 3-7b, respectively. Figure 3-7 The Cost Advantage of Monopolies Suppose that while firms operating in a more competitive industry (represented on Figure 3-7a) have marginal cost c, a less competitive industry (shown on Figure 3-7b) would operate at a higher cost c’. This implies that under monopoly conditions, firms will maximize their profits at point A’, where prices are higher and quantities are lower as compared to point A. Producers’ cost savings are represented by Box 2, which clearly is smaller than Box 1, due to higher production costs c’. These wasted cost savings in monopoly industries would otherwise be reflected in the price of consumer products. Of course, it should not be forgotten that under the postulates of the Imperfect Competition Model, costs are higher in monopoly industries exhypothesi. In reality, however, this is not necessarily so: in the long run, from a dynamic perspective, industries may reduce their production costs due to external economies, despite having fewer competitors, thanks to Marshallian ‘‘external economies.’’126 Only by taking a ‘‘wrong turn,’’ which Robinson 126. See Section 3.1.1, above. AU: Please provide Figure 3-7 Antitrust Economics: A Look into the Anatomy of Economic Utopia 125 herself recognized as such, are we lead to conclude that productive efficiencies are defined within a short-run time frame, in which fewer firms exist. Although scholars are careful enough to warn about the abstract nature of graphs such as the ones we have used here,127 and that this form of welfare assessment does not include dynamic effects in the long run,128 they tacitly accept their premises, inasmuch as these relationships are based on assumptions drawn from the Imperfect Competition model, as explained above. This realization is of the utmost importance for the discussion contained in the following chapters, particularly in the analysis of neoclassical economic constructs in the legal assessment of anticompetitive restraints. Conventional antitrust models assume that productive efficiencies arise from lower production costs which represent the present technological state of the art, instead of the future technological possibilities made possible by innovation. Profit-maximizing monopolist firms are assumed to prefer employing cheaper technology, increasing costs and prices, and imposing underserved costs on consumers. Mainstream economics postulates a notion of productive efficiency that centers on the maximization of value that firms can achieve individually in their production process, given the present state of technology and natural resource endowment—that is, in the short run. This notion of efficiency does not consider Marshallian external economies, that is, the learning that accrues over the long run from being a member of a given industry. As indicated above, the entrepreneurial learning process is the main source of cost reductions in the long run, which conventional neoclassical models explicitly leave out of the picture. Naturally, this omission is bound to have major consequences for the limitations of neoclassical models in the analysis of competitive restraints, as we shall later see. Productive efficiency is found in any activity by a business firm that adds production value. This optimal situation implies that firms are using the least costly labor capital and land inputs available; employing the best available technology; exploiting all potential economies of scale; and minimizing the waste of resources 127. Bork, for instance, indicates that consumer welfare graphs merely illustrate relationships and therefore do not quantify such relations; for this reason, they should not be taken literally (Bork, 1978, p. 108). 128. Motta (2004, p. 19) states that: ‘‘the concept of welfare should not only be interpreted in a static sense but also in its dynamic component. In order words, future welfare matters as well as current welfare. Imagine the hypothetical case where firms in the industry have already paid their fixed costs and a competition authority is systematically able to impose price equal to marginal cost. This being the lowest possible price, it would maximize welfare in a static sense. However, one would not have the firms in the industry make any investment in such a situation, as they would anticipate that at a price equal to marginal cost they would not make any profit and hence they would not be able to recover any fixed cost associated with an investment. As a result, in such a hypothetical situation future welfare will be reduced, as new products would not be introduced, innovations would not be made, and the quality levels of goods and services would not be improved.’’ 126 Chapter 3 in their production processes. In short, firms are using the best production processes available. 3.3 THE SCP PARADIGM AND ANTITRUST LEGAL DOCTRINES Based on the premises laid down by the ‘‘polar’’ models of perfect competition and pure monopoly, Industrial Organization later developed particular intermediate market structures where some level of monopoly power exists. As Viscusi, Vernon and Harrington (2000 [1995], p. 81) argue: More relevant to antitrust policy is the intermediate case, where economies of scale are more moderate relative to market demand. For example, it may be imagined that the size of the automobile market is only large enough to support three or four firms, each producing at the minimum point on its long-run average cost curve. This situation would give rise to an industry of three or four firms, or an oligopoly. The factor differentiating oligopoly from perfect competition and monopoly is that the small number of firms creates a high degree of interdependence. Each firm must consider how its rivals will respond to its own decisions. The ‘‘intermediate case’’ gives rise to alternative models of market structure that provide the blueprint for antitrust policy enforcement. Antitrust policy centers on the theory of oligopolies, which epitomizes such ‘‘intermediate case’’ between polar extremes of perfect competition and pure monopoly. This market structure facilitates the development of monopoly power, imposed collectively through horizontal coordination (collusion) between competitors, or through vertical restraints or unilateral behavior of a firm that individually enjoys monopoly power and therefore can dictate its terms to other market players. The theory of oligopolies provides the intellectual backdrop to antitrust legal doctrines, in the several areas covered by policy enforcement: mergers, oligopolies and vertical restraints. In the language of antitrust literature, oligopolistic market structure is best captured by the so-called ‘‘structure-conduct-performance’’ (‘‘SCP’’) paradigm, which we explain in the next section. 3.3.1 THE OLIGOPOLY MODEL AS THE BEDROCK OF THE SCP PARADIGM In shaping her Imperfect Competition Model, Joan Robinson brought back Cournot’s theory of oligopoly (Loasby, 1989b; Corley, 1990, pp. 84-87). This model postulates a market structure characterized by the presence of a small Antitrust Economics: A Look into the Anatomy of Economic Utopia 127 number of sellers who dominate an industry as well as the following factors: (i) firms operate under imperfect competition; (ii) the demand curve is kinked to reflect inelasticity below market price and elasticity above market price; (iii) the product or service firms’ supply is differentiated; and (iv) barriers to entry are strong. Figure 3-8 illustrates such a market structure. Figure 3-8 Oligopoly Market Under the assumptions of the model, the best option for the oligopolist is to produce at point E which is the equilibrium point and, incidentally, the kink point. Above E, demand is relatively elastic because all other firm’s prices remain unchanged. Below E, demand is relatively inelastic because all other firms will introduce a similar price cut, eventually leading to a price war. As a result of fierce price competition, firms utilize nonprice competition in order to generate greater revenue and market share. Oligopoly theory postulates a scenario where firms, seeking to restrict their output, align their commercial conduct, thereby developing monopoly power that enables them to set prices above marginal costs. The goal of antitrust policy is to prevent businesses from gaining or exercising monopoly power; this commitment is at the core of prohibitions against exploitative conduct. Under the rationale of antitrust policy, the ultimate reason for prohibiting cartel behavior as an ‘‘exploitative practice’’ is to preempt any attempts by monopolist firms to extract consumers’ rent. The oligopoly model became the hallmark of antitrust analysis, and decisively contributed to the development of legal doctrines upon which policy decisions rested. This model, which emerged as an intermediate description of the neoclassical duality between pure monopoly and perfect competition epitomizes the SCP paradigm. According to this paradigm, market structure, business conduct and economic performance are intrinsically related. Significantly, the paradigm makes competition appear contingent to the structure of markets, or to the business strategies implemented by competitors in the market. Under the SCP logic, business strategies aimed at aligning the conduct of competitors are reprehensible due to their effects on market performance. An agreement among competitors to eliminate independent action enhances their collective monopoly power vis-à-vis consumers and clients, because firms engaging in such anticompetitive arrangements will not face any market discipline from alternative producers. Government intervention through antitrust policy ensures the effective independence of market participants, thereby pushing prices down to marginal costs. Therefore, antitrust legislation confronts any attempt to restrict output by means of coordination, agreements, or similar arrangements with harsh penalties. AU: Please provide Figure 3-8 128 Chapter 3 Table 3-2 Cournot’s Duopoly Classification of Oligopoly Models Bertrand’s Oligopoly Monopolistic Competition Stackelberg’s Duopoly Interacting firms Interacting firms Interacting firms Several or many simultaneously sellers each produce move sequentially. simultaneously similar, but slightly choose quantities. choose prices. differentiated products. Each producer sets its price and quantities without affecting the marketplace as a whole. Oligopolistic models developed the conventional view of ‘‘intermediate,’’ ‘‘realistic,’’ business conduct situated between ‘‘idealized’’ perfect competition and pure monopoly. To this extent, the economics profession would assess business strategies undertaken in ‘‘imperfect’’ oligopolistic markets primarily through the lens of oligopoly theory. In this way, variants of this model supported antitrust prosecutions of cartels and other forms of collusion. In sum, conventional oligopoly theory represents the crux of antitrust analysis. 3.3.2 THE NOTION OF BARRIERS TO ENTRY Robinson postulated that each firm is a monopolist of its own production (Robinson, 1934 [1942], p. 5), so each firm in the oligopoly model behaves like a monopolist, and charges monopolistic prices. This is an important trait to note, since economic agents, under the oligopoly model, do not act coordinately, but are represented as taking individual decisions with disregard to what other competitors do in the market. However, to derive these conclusions, Robinson’s oligopoly model rested on the assumption that oligopolists were somehow protected from third-party competitors. Thus, monopoly firms face a negatively sloped demand curve of their product, so they charge prices above marginal revenues (P > Mr). Of course, Robinson’s system of Imperfect Competition rests on its assumptions about the nature of demand. It is a demand curve conditioned by the existence of substitutes, where consumers’ preferences are well defined. Unlike Marshall, who clearly foresaw changes in demand resulting from changes in underlying consumer preferences as the short term evolved toward the long term, Robinson did not solve this riddle. Nor did she clarify what sort of preferences would enable economic agents to reach ‘‘optimality.’’ She simply assumed that businesses manipulated individual preferences to their benefit—that is, engaged in monopolistic conduct—and that this explained eventual changes in the system. Antitrust Economics: A Look into the Anatomy of Economic Utopia 129 More significantly, Robinson’s notion of monopoly rests on the assumption that no potential competitors will be able to undercut the incumbent monopolist’s price increases. Although she did not directly explain why, one of her followers in the United States, Joe Bain (1956), addressed this issue head-on. He suggested that pricing theory should take account of two relatively neglected factors, namely time and potential entry. Today’s price might be governed by tomorrow’s profit targets, while the threat of competition could well be as effective in determining business conduct as the current market structure. He both categorized barriers to entry and showed how firms facing various heights of barrier could hold prices above minimum unit costs without encouraging entry. Although his definitions of barrier heights and the small size of his sample in the empirical sections of his work attracted criticism, in the opinion of Corley (1990, p. 88) ‘‘his work demonstrated how research of this kind could test and refine theories.’’ Barriers to entry are therefore essential to the entire intellectual foundation of Robinson’s theory (and her followers’). Where barriers to entry are substantial, monopoly firms will be able to set prices above the ideal point where consumers would otherwise maximize their welfare. A recent OECD report (2006, p. 9) endorses this perspective in the following terms: entry barriers may retard, dampen, or nullify the market’s usual mechanism for checking market power: the attraction and arrival of new competitors. If a merger will substantially increase concentration to the point where a competition agency is concerned about anticompetitive effects, for example, entry barriers matter because competition will not be reduced if new firms would enter easily, quickly and significantly. The traditional approach to entry involved a search for barriers to entry that make it unlikely that new firms will choose to construct capacity to participate in a given market. Bain (1956), for example, defined barriers as advantages of established sellers over entrants, while Stigler (1968) considered barriers to be costs of producing at various output levels incurred by entrants but not incurred by existing firms. Thus, product differentiation could serve as a barrier under Bain’s definition, but would generally not be a barrier under Stigler’s definition. Overall, the determination whether barriers existed often turned on the definition of barriers used in the analysis. Finally, the traditional approach to entry ignored the time required for entry to occur. There is no settled definition about entry barriers, as the notion has evolved along with economic theory. As noted by the OECD (2006, p. 9): Arguments among economists over how to define barriers to entry began decades ago, however, and they have yet to be settled. In general, the term means an impediment that makes it more difficult for a firm to enter a market. A controversy has persisted, though, about the types of impediments that should qualify as ‘‘barriers to entry.’’ Some scholars and practitioners have argued that an obstacle does not count as an entry barrier unless it is something 130 Chapter 3 that the incumbent firms did not face when they entered. Others contend that an entry barrier is anything that hinders entry and has the effect of reducing or limiting competition, regardless of its other characteristics. A number of other definitions have been proposed over the years, but so far none of them has emerged as a clear favorite, at least not among economists. 3.3.3 DEVELOPMENT OF FUNCTIONAL ANTITRUST LEGISLATION The assumption of firms being monopolists of their own production, stable consumer preferences, and economic barriers of entry are all essential to distinguish Robinson’s notion of monopoly from the traditional common-law notion of monopoly, which refers to the legal or government-created obstacles to competition through regulations, laws and decrees.129 It is on this basis that the theory of monopoly endorsed by antitrust theory essentially developed the central idea of monopolies being postulated by the presence of barriers to entry. The notion of entry barriers had a profound impact in the functional perception of antitrust policy that developed from then on. The idea that functional legislation could dismantle or counteract economic (as opposed to legal) barriers to entry lured legal scholars into endorsing antitrust policy as a means to achieve such ends. Antitrust policy was merely a step away from identifying all possible situations involving some degree of monopoly power, inferred from the premises of Robinson’s Imperfect Competition model, as potential cases of illegitimate business behavior. All legal prohibitions against various sorts of restraints on 129. In England, the notion of monopoly under the Common Law had been established in two cases, Davenant v. Hurdis and Darcy v. Allein (see n. 1, above). Darcy v. Allein was an early landmark case establishing that it was improper for any individual to be allowed to have a government monopoly over a trade. This case involved a monopoly on playing cards. Queen Elizabeth had granted a monopoly to Ralph Bowes, who sold it to Edward Darcy. Darcy then discovered that Thomas Allein was making and selling cards himself. He sued, and although Lord Coke did not believe in monopolies, he was duty bound, as Attorney General, to argue for Darcy in defence of the queen’s power to grant monopolies. In fact, Coke, although he argued in court for the monopolist, used the report of Darcy v. Allein to assail them, because monopoly was against the common law, since it was against the liberty of the subject. . . . It tends to the impoverishment of divers artificers and others, who before, by the labour of their hands in their art or trade, had maintained themselves and their families, who now will of necessity be constrained to live in idleness and beggary. According to Coke’s report, the monopoly was struck down for violating the Magna Charta, which Coke believed was the fountainhead of English liberties. Thus the monopoly was against the common law, and against the end and scope of the Act itself; for this is not to maintain and increase the labours of the poor card makers within the realm, at whose petition the Act was made, but utterly to take away and destroy their trade and labours, and that without any reason of necessity . . . but only for the benefit of a private man, his executors and administrators, for his particular commodity, and in prejudice to the commonwealth. Coke’s landmark and pioneering rulings drove the English Common Law tradition of regarding economic liberty in a political sense, as freedom from monopoly. From then on, monopoly would be considered an illegal government privilege in the British Isles (Stigler, 1982). AU: Please confirm the footnote cross-reference. Antitrust Economics: A Look into the Anatomy of Economic Utopia 131 competitors’ rivalry and potential entry in the market are a logical implication of this premise. Functional legislation is designed to attain the utopian values embodied in the intellectual premises of the policy; they are a purposive effort aimed at achieving the socially welfare-enhancing values rationally inferred from the view of oligopolies as market structures that are doomed to fail, in that they will produce suboptimal resource allocations. Ordinarily, antitrust statutes include an omnibus provision prohibiting ‘‘any act in any way intended or otherwise able to produce [anticompetitive restrictions] even if such effects are not achieved.’’130 The forbidden effects are (1) to limit, restrain, or in any way injure open competition or free enterprise; (2) to control a relevant market of a certain product or service; (3) to increase profits on a discretionary basis; and (4) to abuse one’s control of a market, which prohibition does not include control achieved through ‘‘competitive efficiency’’ (OECD and IADB, 2005b, p. 14). In other words, these statutes apply to every undertaking, type of conduct, agreement, act, or transaction involving the production, marketing, or distribution of goods and services. Hence, the range of possible conduct covers virtually every conceivable form of business cooperation that may be capable of limiting the degree of autonomy of the participating firms. Of course, a finding of anticompetitive effects requires something more than just positive evidence of the exclusion of a potential competitor or a limitation of rivalry between competitors. Antitrust analysis involves a two-tiered approach in which competition agencies first assess the capacity of the firm or firms in question to successfully engage in anticompetitive restraints (i.e., monopoly power), and then consider the anticompetitive effect on third parties, whether consumers or competitors, of the business strategy under review (i.e., ‘‘exploitative’’ or ‘‘exclusionary’’ effects). These types of business strategies and arrangements are relevant to antitrust analysis because they create what antitrust theory brands as ‘‘exclusionary’’ and ‘‘exploitative’’ effects in the market. This classification reflects the main objectives of antitrust: first, preserving businesses’ decision-making independence, and second, preventing undue exclusion of competitors. Regardless of their particular contours, competition laws are all designed to preserve structurally decentralized markets that are closer to the ‘‘ideal’’ of competitive equilibrium. Consequently, the conventional academic distinction between ‘‘behavioral’’ or ex-post control of anticompetitive undertakings such as cartels, vertical restraints, or market monopolization, on the one hand, and ‘‘structural’’ ex-ante control of restrictive conduct in the form of mergers and acquisitions, on the other hand, is deceptive and reveals a superficial view of markets. In other words, regardless of the varying forms of restrictive arrangements between firms, the chief concern of antitrust analysis is their potential capacity to 130. For example, Art. 5, Venezuela’s Competition Act, or Art. 20, Brazil’s Law No. 8884/84. 132 Chapter 3 restrict market rivalry. Antitrust analysis is focused on the ability of anticompetitive conduct to influence market outcomes; therefore, it looks to the economic effect in the market of the conduct in question. These effects may be either output restriction or the actual or potential exclusion of competitors from the market. Finally, competition agencies evaluate the economic efficiencies likely to result from the practice against the actual or prospective competitive harm. Business restraints usually covered under antitrust legislation are deemed to restrict competition provided that additional conditions are met—in particular, the presence of monopoly power and, in those countries that have not incorporated the per se/rule of reason distinction in their legislation, the lack of economic efficiencies. In this way, antitrust analysis provides the explanatory economic backdrop against which authorities can deduce the intended purpose of business practices, be it the imposition of a monopolistic constraint on competitors or consumers, or the introduction of economic efficiency into the production process. 3.4 A CRITICAL ASSESSMENT OF ANTITRUST EQUILIBRIUM LOGIC The antitrust analytical framework recreates a ubiquitous utopian vision of economic welfare under which gives sense to all prohibitions of business restraints. Within to this utopian framework, the negative attitude toward business arrangements stems from the competitive equilibrium model, according to which perfectly competitive markets allocate resources in a way that maximizes societal welfare. Equilibrium lost due to market failures could be anticipated or restored, as the case may be, through antitrust corrective (or regulatory preventive) measures. These models are utopian because they cannot explain how optimality can ever be reached without enabling individuals to employ strategies that negate the very assumptions upon which the models rest: allowing businesses to exchange information about markets (at the expense of impeding rivalry), or excluding potential competition (at the expense of making markets more concentrated, a move away from perfect competition’s full decentralization). Moreover, these models can only work if one makes the heroic assumption that all information about decentralized preferences, tastes, and individual plans is actually centralized in the hands of some ‘‘outsider’’ to the social system (i.e., the government). Of course, the utopian vision centered on the notion of ‘‘optimal welfare resource allocation’’ is a by-product of the mainstream equilibrium view of markets that pervades antitrust theory and Industrial Organization economics, both founded by the followers of Joan Robinson’s theory of Imperfect Competition. The influence of Robinson’s Imperfect Competition theory on the development of modern antitrust economics is paramount. From Robinson’s theory the idea emerged that firms may develop ‘‘market power,’’ enabling them to impose price increases without succumbing to competitive pressure from actual or potential rivals. Given the very postulates of Robinson’s theory (i.e., that producers Antitrust Economics: A Look into the Anatomy of Economic Utopia 133 permanently face a negatively sloping demand curve), it follows that producers are monopolists of their own production, able to manipulate prices and outputs at will. The very assumptions of the theory construct a framework in which the result— market failure—is inescapable. The notion of ‘‘market power’’ evolved from Robinson’s model of Imperfect Competition. Robinson’s idea that a group of oligopolists could impose prices above marginal costs on consumers without facing any competition from adjacent markets, immediately suggested the capacity of the former to impose their conditions unilaterally in the market. The notion of market power reflected this belief: In antitrust economics, market power is a market failure which occurs when one or more of the participants has the ability to influence the price or other outcomes in some general or specialized market. The most commonly discussed form of market power is that of a monopoly, but other forms such as monopsony, and more moderate versions of these two extremes, exist. Market participants that have market power are sometimes referred to as ‘‘price makers,’’ because they have the power to impose price increases above competitive levels. Indeed, raising prices above marginal costs is a common feature in all market power definitions, under antitrust economic literature.131 Monopoly power thus turned out to be the central factor in establishing the capacity of firms to undermine competition; it became a major component in determining whether business arrangements are exploitative, exclusionary, or capable of forestalling long run, dynamic competition. In turn, monopoly power is contingent to market concentration: ‘‘In assessing the reasonableness of horizontal and vertical restraints, high market shares are often thought to suggest market power, and low market shares its absence. Moreover, horizontal merger analysis is commonly thought to rely on a relationship between increased market concentration and higher prices’’ (Baker, 2006, p. 3). This chapter highlighted how this peculiar vision emerged in the course of the evolution of economic ideas. Robinson’s notion of the equilibrium firm (borrowed from Pigou) caused the then-nascent industrial organization theory to abandon 131. <www.investordictionary.com/definition/market+power.aspx>. Other definitions provide that: ‘‘[Market power] is the ability of a firm to raise prices or market inferior products while excluding competition that constitutes monopoly power.’’ Monopoly power is by definition the ability to control (that is to raise) prices without inducing entry and expansion (Franklin, McGowan, and Greenwood, 1985, p. 165); ‘‘. . . substantial evidence was introduced at trial that [original equipment manufacturers of personal computers] would not shift to another operating system, even if the price of Windows rose significantly’’ (Franklin and Rubinfeld, 2000); ‘‘Economists usually define market power as the power to raise price above competitive levels’’ (David and Schmalensee, 2000). ‘‘Market power is usually stated to be the ability of a single seller to raise price and restrict output . . .’’ (Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 503 (1969). ‘‘Market power comes from the ability to cut back the market’s total output and so raise price’’ Ball Memorial Hospital, Inc. v. Mutual Hospital Insurance, Inc., 784 F.2d 1325, 1335 (1986). ‘‘. . . a firm is a monopolist if it can profitably raise prices substantially above the competitive level’’ U.S. v. Microsoft Corp., 253 F.3d 34, 22 (2001). 134 Chapter 3 Marshall’s organic, evolving view of firms as ‘‘trees in a forest,’’ each possessing its own individuality and entrepreneurial capabilities, as well as the notion of the ‘‘representative’’ firm that reflects the characteristics of the population of firms as a whole rather than the characteristics of any particular firm. Instead, the emerging ‘‘theory of the firm’’ of price theory, upon which Industrial Organization would adopt, assumed that all firms are identical, with identical costs, technological endowments, etc., and are simply aggregated in order to obtain an overview of the industry. Since, under this conventional view, business activity is measured according to variables of price and quantity, it follows that competition theory cannot measure other very important factors present in day-to-day competition. As a result of this view of markets Robinson restated equilibrium analysis through her notion of ‘‘imperfect competition,’’ albeit from the perspective of static monopoly, as Sraffa had suggested. Modern price theory would henceforth concentrate on appraising resource allocation in light of alternative market structures, the most influential of which, of course, would be Robinson’s. Thereafter, public policy arising from these theoretical assumptions was biased against increasing returns as a potential source of monopolistic power. To put it in the language of antitrust theory, these would become ‘‘barriers to entry’’ to potential third-party competitors.132 Now it can be clearly seen that this misconception was influenced by a widespread misunderstanding of the creative, ongoing nature of markets. As a result of this wrong turn, neoclassical economic theory would prove incapable of deciphering the conduct of a given firm in light of the conduct of the rest of the market’s participants. In such cases, the Imperfect Competition model seemed unable to deliver any answers, as it described the decisions of single firms in respect to their own production. It said nothing about entrepreneurs’ decisions taken in response to the output decisions of other firms. Competition, conceived of as an entrepreneurial decision-making process triggered by the action of other firms, was simply absent from such explanations. In an attempt to fill this theoretical gap, neoclassical economists have paid attention to game theory models, particularly since the 1980s.133 Not surprisingly, these models have become part of U.S. antitrust policy since that time; they are now being noticed by the antitrust community outside of the U.S. Still, the new analytical tools fall in one way or another into the same assumptions that weaken the analytical ability of neoclassical mainstream price theory to deliver meaningful conclusions about competition. First, like conventional economic models, game theory models assume the existence of 132. See Section 4.2.6, below. 133. As Foss notes, ‘‘. . . game theory came to the ascendant as the premier fashionable tool of ‘microtheorists,’ and it has certainly not lost that position, as inspection of virtually any mainstream journal will confirm. Thus, what may be the major mainstream theoretical advances in the 1980s and 1990s, such as the theory of contracts and the theory of auctions, have been almost completely driven by game theory methods. Moreover, game theory has invaded political science and biology’’ (Foss, 1999). Antitrust Economics: A Look into the Anatomy of Economic Utopia 135 common knowledge among economic agents;134 in reality, entrepreneurs are faced with permanent and resilient uncertainty about the moves of other entrepreneurs. Second, game theory models assume that market information will be processed and acted upon in the same way by different individuals;135 real world markets, however, are comprised of creative entrepreneurs whose beliefs are contingent on their previous experience, which is why they may well act differently under similar constraints. Finally, game theory models assume that individual utilities are quantifiable in supposedly objective pay-offs, which is a restatement of the old neoclassical—and discredited—welfare assumption: that individual utility is susceptible to interpersonal comparisons.136 Indeed, ‘‘sometimes game theory presents excesses that not even proponents of the more extreme versions of general equilibrium theory would engage in, such as the common assumption that agents, even in very complex settings, can coordinate on any desired equilibrium’’ (Foss, 1998b, p. 16). Clearly, game theory restates the equilibrium perspective: if rational players have commonly known and identical beliefs about all other players’ strategies, then those beliefs are consistent with some equilibrium in the game. The fundamental flaw in both conventional neoclassical ‘‘equilibrium’’ competition models, a la Robinson, and game theory/equilibrium models stems from their silence on the essential problem of how individuals form the beliefs that they act upon in the market. Hence, the only possible way to conclude that such individuals may eventually reach equilibrium is by unfounded assumption. The policy question remains, therefore, unanswered: whether this omniscient outlook on market functioning comports with the logical implications of the situation of real entrepreneurs, who are forced to live in uncertainty. It is evident that neither Imperfect Competition nor game theory gives us any explanation of the need for institutions, which are in fact necessary in such an uncertain business environment. It seems that these theories (upon which antitrust theory rests) are unable to capture a fundamental feature of businesses’ real lives. Despite this inadequacy, antitrust theory chose to follow conventional oligopoly theory, which simply erased every trace of competition, uncertainty, and institution-building, and instead assumed the structure of Cournot’s oligopoly model (via Robinson), which defied the logic of real-based competing firms in 134. ‘‘Common knowledge’’ is an approach to expectation formation that may be represented by the following sentence: ‘‘Jack knows that Jill knows that Jack knows. . . . that X’’—an infinite sentence. For a discussion of some of the problems of common knowledge. One problem with common knowledge is that small deviations from it can completely change outcomes (Foss, 1999). 135. Economic theory refers to this phenomenon as ‘‘constant aligned beliefs’’: Rational people who have access to completely identical information cannot develop different thought processes with respect to the issues that the information concerns—an idea that does not square easily with the Austrian emphasis on the active and creative mind (see e.g., Lachmann, 1986). 136. See n. 186, below. AU: defied or defined? 136 Chapter 3 the world. Interestingly, Herbert Simon (1976, p. 140) referred to this model as ‘‘a permanent and ineradicable scandal of economic theory.’’137 Let us now see how this ‘‘theoretical scandal’’ influenced the shape of antitrust policy in Latin America. 137. Cournot (1838) presented a model of duopoly in which each party must form conjectures about the actions of the other party. Implicitly, this means that each player is forming conjectures about the conjectures of the other player, leading to an infinite regression paradox: I think that you think that I think. As Koppl and Rosser (2002, p. 339) rightly state, ‘‘The ‘reflexivity’ of such situations defies logical closure. Self-reference leads to paradox, not always or inexorably, but easily and often. Cournot resolved the problem by having each simply assume that the other’s behavior would not change. Such devices are common in economic theory and amount to arbitrary limits to the rationality of the agents, but they amount to bounds on the rationality of agents, as was noted by Herbert Simon (1976) in discussing the Cournot model.’’ Part II Latin American Antitrust Policy: Utopia in Practice There are many things in the real world that violate the correspondence that should exist between the competitive solution and Pareto efficiency. Many things in the real world violate such correspondence: imperfect information, inertia and resistance to change. (Bator, 1958) Policy discourse no longer focuses on whether economics should guide antitrust policy; that debate was settled long ago. The pressing question today is how. Which theories from the vast, diverse body of industrial organization economics should courts and enforcement agencies use to address antitrust problems? (Muris, 2003) Chapter 4 Monopoly Power Assessment Previous chapters emphasized the theoretical considerations behind the utopian ethos of antitrust policy. Antitrust policy appears as a major policy instrument that is supported by the utopian belief that decentralized markets perform better from a societal point of view. Naturally, this idea stems from the assumption that, except under exceptional circumstances, no form of industrial organization other than competitive equilibrium can deliver optimal welfare results. Any market structure that fails to resemble this model is seen as inherently promoting anticompetitive business restraints, since this market structure will enable market players to fix their prices above marginal costs. Of course, this conclusion is possible thanks to the assumption that ‘‘sub-optimal’’ markets will be composed of monopolistic firms, each of which faces a negative sloped demand curve of her own production. Therefore, antitrust analysis is founded on two related assumptions: If businesses operating in perfectly competitive markets are forced to become price takers, it follows that firms operating in less-than-perfectly competitive markets are in a position to wield influence over price transactions. Such firms are price makers: they can set prices above marginal costs, thereby influencing market outcomes to their benefit. Monopoly power wielded by price makers, therefore, becomes a key focus of antitrust analysis. This chapter will explore the implications of these assumptions; in particular, it will examine the assessment of monopoly power in the hands of businesses operating in the market as this concept interpreted in Latin American case law. The opening part of this chapter will discuss the contrasting definitions of market power and dominance that are found in the region’s national antitrust statutes. Our emphasis in this section will be on highlighting the irrelevance of the legal distinction between these two concepts. 140 Chapter 4 Next, our attention will focus on the definition, as well as the substantive analysis of monopoly power, which is addressed in the second section of this chapter. There, we will examine the economic components of monopoly power: the scope and dimension of market size, the intensity of market dynamics, and the existence of barriers that limit competitors’ entry into the market. We will concentrate on the interpretation given to each of these elements by case law in the region. This will be useful in examining competition agencies’ use of antitrust methodology as a tool for assessing market competition. Finally, this chapter assesses the main traits of monopoly power as identified by Latin American competition agencies. This section will make some critical observations on the problems of antitrust methodology as a means of evaluating competition in the marketplace, particularly in connection with the nature of competition in Latin American economies. 4.1 DEFINITION OF MONOPOLY POWER Following the conceptual outline of the SCP paradigm,138 competition agencies usually endorse the view that unlawful behavior arises from enterprises’ attempts to acquire monopoly power. Continuing an old division between European competition law and U.S. antitrust rules, some jurisdictions refer to ‘‘dominance,’’ while others use the term ‘‘market power’’ to refer to the position of a firm that is facing a downward-sloping supply curve. For the sake of simplicity, we shall merge these two notions into one: ‘‘monopoly power.’’ Monopoly power describes a situation where a price maker in the market, due to its economic might, can disregard competition from other market participants. The basic trait of a firm enjoying monopoly power is her capacity to affect social welfare. For instance, Ordover and Saloner (1989, p. 539) define monopoly power as follows: ‘‘circumstances in which single firm strategies may,’’ or ‘‘are likely to,’’ ‘‘have adverse effects on welfare.’’ Of course, whether social welfare is affected depends on the cogent definition adopted under the policy. Although there are no uniform opinions in this regard, antitrust analysis usually assumes welfare maximization to take place in the short run and therefore, examines the existence of monopoly power as it reveals itself in the present.139 138. See Section 3.3, above. 139. Economic analysis is increasingly reconsidering the short-term notion of social welfare that has pervaded antitrust policymaking throughout the twentieth century. New economic thinking about markets is viewing these as evolutionary institutions, where the role of policymaking requires adaptation depending on the time frame within which social welfare is assessed, whether long run or short run. It is due to this reason that Van Siclen (1996) notes that the traditional notion of monopoly power remains imprecise, because it does clarify under what context it is supposed to be construed. In this words, ‘‘this definition anticipates a welfare maximization objective without clarifying the relative weights of static and dynamic efficiencies.’’ We shall later examine the problems arising out of this imprecision. Monopoly Power Assessment 141 Due to their analytical emphasis on the problems of short run resource allocation, antitrust scholars usually rely on proxies such as market shares, or industrial concentration levels in order to differentiate between the notions of market power and dominance. At any event, both notions stem from the basic idea whereby monopoly power empowers a firm to apply prices above marginal costs—that is, another implication of Robinson’s Imperfect Competition theory. ‘‘Market dominance’’ is most commonly associated with the freedom enjoyed by a single firm (and, more exceptionally, by a small group of significant market players) from the competitive discipline otherwise imposed by other competitors, as well as the control they wield over upstream or downstream trading partners. Generally, antitrust laws relying on this concept do not prohibit suppliers from maintaining a dominant position in the market, but only from abusing that position. Monopolists do not have to achieve a pure or quasi-pure monopoly in the relevant market; they only have to eliminate enough competition to enable them to impose a monopolistic price increase. Generally, market dominance is regarded as a more extreme form of market power, as reflected in the different safe harbors generally employed in Europe versus those compared to the U.S. European competition authorities use market share as an indicator of likely market power. The definition of market dominance varies significantly between countries. In general, however, the two key factors in a finding of market dominance are (i) a relatively high market share of no less than 35%, and often 50% or more and (ii) there must normally be significant barriers to entry into the relevant markets occupied by the dominant firm. The emphasis on the number of players in the market dominance analysis is somewhat diminished in the market power analysis, where the question of potential competition from outsiders is given more weight.140 140. The European Court of Justice established the notion of dominance in the Continental Can case (1973), stating that: :Undertakings are in a dominant position when they have the power to behave independently, which puts them in a position to act without taking into account their competitors, purchasers or suppliers. That is the position when, because of their share of the market, or their share of the market combined with the availability of technical knowledge, raw materials or capital, they have the power to determine prices or to control production or distribution for a significant part of the products in question. This power does not necessarily have to derive from an absolute domination permitting the undertakings which hold it to eliminate all will on the part of their economic partners, but it is enough that they be strong enough as a whole to ensure to those undertakings an overall independence of behavior, even if there are differences in intensity in their influence on the different partial markets.’’ Later, it reaffirmed this idea in the United Brands case (1978), where it held that a dominant position is ‘‘a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of consumers.’’ The notion of dominance is markedly ambiguous, and this feature likely reveals its distributive welfarism. The wording explicitly refers to an ability to prevent effective competition and an ability to behave independently of three sets of market actors; however, as Van Siclen (1996) notes, the notion thus defined is too broad: it basically emphasizes the general 142 Chapter 4 In market power analysis, the presence of significant barriers to entry is more important for analytical purposes than it is in the analysis of dominance. Barriers to entry allow incumbent firms to engage in restrictive practices and maintain supracompetitive (i.e., monopolistic) prices, either individually or together with other firms. From the market power perspective, firms in competitively atomistic, structured markets where no barriers to entry exist have virtually no conduct options; they are ‘‘price takers.’’ Under competitive market structures firms will be price takers and will strive to minimize their costs in order to sell closer to marginal costs. This price-taking behavior in turn results in superior market performance. However, firms in highly concentrated markets can take advantage of a variety of conduct options, many of which may yield very poor market performance. Collusive output restriction in search of higher profits would be a prime example.141 The distinction between market power and dominance is also reflected in the distinction between structural and dynamic factors influencing competition that is found in economic literature.142 Korah (1994) contrasts the more technically driven US antitrust enforcement, based on the notion of market power that emerged from the teachings of industrial organization, with the European style of competition policy, which stresses political considerations associated with its purported protection of small entrepreneurs as well as the integration of national markets.143 point that a dominant firm’s strategies do not change much with changes in the strategies of the other market actors. 141. In the Dupont case (1956), the United States Supreme Court defined market power as ‘‘the power to control prices or exclude competition.’’ The notion of market power as applied in the United States emphasizes the capacity of as firm to impose on consumers a nontransitory and significant price increase above competitive levels for a significant period of time that cannot be challenged by actual or potential competitors. (1992 U.S. Department of Justice Horizontal Merger Guidelines) According to Sullivan and Harrison (1988, p. 219), ‘‘market power is a measure of a firm’s ability to raise prices above competitive levels, without incurring a loss in sales that more than outweighs the benefits of the higher price.’’ Goldman and Corley (2000, p. 5) observe that market power refers to the ability of firms to influence prices, quality, variety, servicing, advertising, innovation or other aspects of competition, but note that ‘‘it is usually assessed primarily in terms of the parties’ ability to set prices above competitive levels for a sustained period of time.’’ 142. To some, the notion of a dominant position reveals a ‘‘structural’’ stance towards market relations, whereas market power denotes a ‘‘dynamic’’ perspective in which firms constantly attempt to monopolize markets. Guasch and Rajapatirana (1994) note: ‘‘Market power is dependent on the relative size and structure of the market (e.g., number of competitors, ease of entry, contestability extent, trade barriers, and availability of present or potential substitutes). Dominance is based upon the absolute size of the producing firm, its links to inputs and other output producing industries, and its influence in and by the international market.’’ Boner and Krueger (1991, p. 10) define market power as ‘‘the ability to vary price without suffering large variations in sales, fundamentally due to a lack of alternative products.’’ 143. Thus, market power is a concept borrowed from economic theory, whereas market dominance is a legal concept developed by the European Commission and the European Court. Market dominance is a concept influenced by political considerations of ‘‘fairness’’; therefore, the antitrust schemes that apply the criterion of dominance tend to stress the need to preserve multiple and independent outlets rather than the achievement of economic efficiency, which Monopoly Power Assessment 143 Whether a Latin American country adopted the concept of market power or dominance appears to have depended on whether the country followed the U.S. or Europe in matters of competition policy, which was determined at the time that the country adopted an antitrust policy and was influenced by the source of technical antitrust assistance that the country received.144 The list of countries in the region adopting either system is as follows: – Market power countries: Mexico, Nicaragua, Costa Rica, Panama, and Honduras.145 – Market dominance countries: Argentina, Brazil, Colombia, El Salvador, Peru, as well as the Andean Community competition legislation.146 Some countries combine the concepts of market dominance and market power in a rather confusing way. For example, Article 13 of Venezuela’s Competition Act has a section devoted to ‘‘abuses of a dominant position,’’ combined with a range of prohibitions condemning unilateral conduct which do not require such dominance, but merely the elimination of effective competition.147 Regardless of the standard adopted by the legislation, it is worth mentioning that competition agencies in the region tend to interpret and apply market dominance and market power in the same way. 144. 145. 146. 147. could eventually diminish multiplicity in favor of fewer, but more efficient, firms in the market. By contrast, the concept of ‘‘market power’’ has been fully developed under industrial organization theory and is therefore considered to be politically neutral. Thus, dominance has a political dimension that is lacking in the economic notion of market power. This feature is a result of the goals of economic and political integration underlying the treaties of Rome and Amsterdam, which represent the foundation of the European Union. These differences lead, in Korah’s opinion (1994), to the application of the concept of dominance to situations not covered by the notion of market power, for example, the capacity to exclude other firms, efficient or otherwise, also known as the power to foreclose markets. By doing so, the Commission can control the strategic behavior of a firm that attempts to foreclose the market from its competitors. If these competitors are in fact efficient, then control by the Commission may increase consumer welfare. Finally, Motta (2004, pp. 40-41) assigns market power a central role in the economics of competition law; in his view this notion ‘‘refers to the ability of firms to charge prices above marginal costs’’ whereas the notion of market dominance ‘‘does not have a clear equivalent in economic terms, but can be interpreted as a situation where a firm has a large degree of market power, which allows it to charge prices which are ‘close enough’ to those that a monopolist would charge.’’ It may be that Nicaragua is an exception to this rule. For almost a decade (from 1994 until 2003), Germany’s GTZ (Gesellschaft für Technische Zusammenarbeit) provided considerable financial and technical support for the development of antitrust policy in Nicaragua, yet the legislation finally passed in 2006 essentially reproduces the structure of the Mexican Federal Economic Competition Act, which in turn draws heavily on the market power notion, the rule of reason analysis, and other notions imported from the U.S. antitrust system. Articles 10, 11, 12 and 13, Competition Act (Mexico). Article 2, Law No. 25156/99 (Argentina); Art. 45.5, Decree No. 2,153/92 (Colombia); Arts. 4 and 5, Legislative Decree Law No. 701/91 (Peru). Articles 6, 7 and 8, Venezuelan Competition Act; Art. 14 of this statute lists the elements required in order to demonstrate the lack of ‘‘effective competition’’ (i.e., market power). 144 Chapter 4 In the beginning, Latin American agencies differentiated between the notions of market power and dominance, possibly due to the relatively straightforward means of measuring the latter, usually through market share thresholds.148 Today, competition authorities are no longer differentiating between market power and dominance, which is a distinction that is increasingly meaningless in light of the international convergence of principles in this field toward a unified notion that we term ‘‘monopoly power.’’ The relevant question is, rather, how monopoly power is established in specific cases. In other words, we must ask whether a finding of unilateral capacity to influence the market takes into account a number of factors, including: the firm’s market position and its market share; whether the firm’s market share is permanent; the market position of competitors and their ability/potential to compete; buyer power; barriers to entry; persistently high profits; high degree of excess capacity relative to competitors; durability of market power; the nature of the market (e.g., a bidding market); the entity’s ability to price or act independently of rivals; the relationship between intellectual property rights and dominance/market power; conditions that facilitate collusion; and the behavior of economic agents. 4.2 MONOPOLY POWER ASSESSMENT Most national jurisdictions follow the guidelines for the measurement of monopoly power established by the 1992 U.S. Horizontal Merger Guidelines which in time would become the international standard for measuring market size in antitrust proceedings.149 This analysis comprises several stages: (i) identification of the scope of the relevant market; (ii) measurement of market concentration, in order to establish whether the investigated firm commands a market share above authorized legal thresholds; (iii) identification and assessment of barriers to entry imposed on potential competitors; (iv) the determination whether one firm exercises single monopoly power or whether firms jointly exercise collective dominance. The following sections will examine each of these elements. 148. According to Singham (1998, p. 385), ‘‘dominance is much easier to prove than monopoly under Section 2 of the U.S. Sherman Act. As such, dominant firms are precluded from excessive pricing, and so forth. Examples of dominance (dominance) abound, whereas those of market power are comparatively rare.’’ 149. The European Commission adopted the SSNIP in the Nestle/Perrier case (1992), which was later officially adopted in the Commission’s Notice for the Definition of the Relevant Market (1997); Canada adopted the test in its 1991 Merger Enforcement Guidelines <http://strategis. ic.gc.ca/pics/ct/meg_full.pdf>; New Zealand’s 1996 Business Acquisitions Guidelines Monopoly Power Assessment 4.2.1 145 THE ANTITRUST MARKET Antitrust analysis begins with the measurement of the relevant market in which the investigated firm(s) operate(s). This is a crucial step in the monopoly power inquiry. As Baker (2006, p. 1) notes: Throughout the history of U.S. antitrust litigation, the outcome of more cases has surely turned on market definition than on any other substantive issue. Market definition is often the most critical step in evaluating market power and determining whether business conduct has or likely will have anticompetitive effects. A finding of monopoly power requires an assessment of the scope of the market in which the conduct being examined takes place. 4.2.1.1 Definition Competition analysis begins by examining the antitrust market in which restrictive conduct allegedly takes place—but what are antitrust markets? The ‘‘antitrust market’’ consists of the area of competition or rivalry in which two or more firms participate. Antitrust markets are defined by the scope of potential or actual transactions between buyers and sellers in connection with certain goods. These transactions include transactions in goods perceived by consumers to be substitutes. Substitutability, as will be explained below, rests squarely on consumers’ perception that competing goods are equally capable of satisfying their needs. Under the conventional ‘‘box markets’’ approach that prevails in antitrust methodology, substitutability depends on price considerations almost exclusively. The European Commission (1997) has explained the purpose of market definition in antitrust analysis as follows: Market definition is a tool to identify and define the boundaries of competition between firms. It allows establishing the framework within which competition policy is applied by the Commission. Thus, monopoly power can only exist within a bounded spatial area, and between competing products presently traded in the market. Recent developments have expanded the notion ‘‘competing products’’ to include imminent innovations that could pose an effective challenge to incumbent products traded in the market. To this point, innovation markets have not been acknowledged in Latin America, perhaps due to the lack of cases involving sectors of high innovation, which are rare in Latin American industry. Furthermore, the notion of innovation is an awkward fit with the rather structured notion of ‘‘box markets’’ that prevails under conventional antitrust conventional theory, which we shall discuss below. <www.comcom.govt.nz> and Australia’s 1993 Market Dominance Guidelines (Telecoms) also adopt this standard. 146 Chapter 4 At any rate, defining the scope of ‘‘antitrust markets’’ is perhaps the most important step in establishing the first condition of illegal conduct, namely, a likelihood that it has been carried out by enterprises capable of influencing the market at will. A joint report (OECD, CADE and IBRAC, 1998, p. 18) stresses this point, stating that: Market definition is usually the first and often the most important task in competition analysis. All calculations, assessments and judgments about the competitive implications of any given conduct depend on the size and shape of the market affected. An enterprise may have a large share of a relatively small market, in which case it may be a dominant firm and give rise to competition concerns, or the relative size of the market may be sufficiently large and no one firm could be considered dominant. Merging firms may compete against one another in a single market, in which case their merger could be anticompetitive, or they may operate in separate markets, in which case there would be less cause for concerns. The definition of markets in Latin American antitrust legislation and guidelines closely replicates the international standard. According to Venezuela’s Guidelines for Economic Concentrations, the relevant market ‘‘refers to the smallest group of products in which suppliers, if they acted as a single firm (hypothetical monopolist), could influence prices, quality, variety, service, advertising innovation and other competitive conditions in a steady way.’’ The recent ‘‘Internal Guide for the Analysis of Horizontal Concentration Operations’’ (2006) in Chile defines an antitrust market as follows: ‘‘the smallest geographic area in which a hypothetical monopolist can impose and maintain a small but significant and non-transitory increase of price on a group of products, commercialized at the time of the analysis.’’150 A similar definition has been adopted in all Latin American jurisdictions.151 The main purpose of market definition is to identify, in a systematic way, the competitive constraints on the firm under review. Under the antitrust SCP paradigm, these constraints largely depend on the presence (or absence) of competitors who can challenge any strategic move and subject the firm to effective competitive pressure. Evidently, in this analysis, the feasibility of substituting competitors becomes the main problem that must be addressed. 4.2.1.2 ‘‘Substitution’’: The Hallmark of Market Definition Antitrust markets are conventionally assessed in terms of products substituted within a geographic area. Substitution, then, is the essential determinant of antitrust markets. 150. <www.fne.cl>. 151. See Argentina’s Ruling No. 164/2001 (‘‘Lineamientos para el Control de las Concentraciones Económicas’’); Brazil’s Joint Directive SEAE/SDE No. 50 of Aug. 1, 2001 (SEAE/SDE Horizontal Merger Guidelines). Monopoly Power Assessment 147 This feature is not accidental. Under Joan Robinson’s Imperfect Competition model, monopolists face a downward-sloping demand curve to the extent that they face no potential or actual substitutes for the products they supply to the market. Hence, the size of the market where a prospective monopolist can enjoy ‘‘dominance’’ or ‘‘power’’ is intrinsically connected with the existence of such substitutes.152 Accordingly, under the notion of substitution emphasized by antitrust policy the likelihood of substitution depends on whether consumers and suppliers are capable of perceiving and offering alternative consumption options, respectively. Antitrust analysis takes into account all close substitutes for the products or sources of supply available to customers; this exercise identifies what products and producers or suppliers compete with each other, as well as the degree of fungibility between the products from the consumer viewpoint. The assessment of substitution is beset by complex questions. Markets are typically defined in terms of the smallest group of products and the minimum geographical area in which it is possible to profitably increase prices. Nevertheless, there may be cases in which it is more appropriate to define broader markets. For instance, it is possible to make an exception to the ‘‘smallest market’’ principle in order to include substitute products or geographical areas at the market frontier which do not allow a hypothetical monopolist to impose a permanent price increase, and which obviously compete, as a fact of commercial life, with the products of the antitrust market. To illustrate the complexity of these issues, an OECD, CADE, and IBRAC joint report (OECD, CADE and IBRAC, 1998, p. 21) lists the questions that can arise as follows: – – – – – What is the concept of the relevant market? What kind of empirical evidence is necessary to properly identify a market? What are its empirical dimensions, geographic or otherwise? How does one define markets in the service sector? Why is there a divergence between the notion of the relevant market among business people and among competition officials? Unlike other areas of antitrust policy, where Latin American countries lack a common view, the assessment of market size is remarkably similar across the board. In accordance with international standards,153 the ‘‘antitrust market’’ is 152. For more on Joan Robinson’s influence on the development of conventional competition theory, see Section 3.1.1, above. 153. Under the U.S. Department of Justice Horizontal Merger Guidelines, a ‘‘market is defined as a product or group of products and a geographic area in which it is produced or sold such that a hypothetical profit-maximizing firm, not subject to price regulation, that was the only present and future producer or seller of those products in that area likely would impose at least a ‘small but significant and non-transitory’ increase in price, assuming the terms of sale of all other products are held constant’’ (U.S. Department of Justice, 1997). Under European standards, ‘‘a relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, 148 Chapter 4 the field of trade in which competition is restricted, together with the corresponding geographic area, defined in such a way as to encompass all reasonably substitutable products and services and all immediate competitors to which consumers may resort to if the restriction or abuse triggers a significant increase in prices. The accepted method for evaluating substitution is to approach the analysis from the demand-side, in order to determine the extent to which purchasers would readily switch between alternate products or sources of supply. This is what the antitrust literature refers to as the ‘‘SSNIP—Small but Significant Non-Transitory Increase in Price—Test.’’ 4.2.2 METHODOLOGY FOR ASSESSING THE ANTITRUST MARKET The ‘‘SSNIP-Test’’ applied by the U.S. Horizontal Merger Guidelines has become common currency throughout the region in determining the relevant market, in terms of both geographic and product dimensions. The purpose of this test is to determine whether there are other competitors capable of offsetting or counteracting the actions taken by the alleged monopolist. The focus of the analysis is on the problem of how long a firm can maintain a price increase such that it would be sustainable, given its monopoly power in the market thus defined. Usually this methodology begins by asking a simple question: Could a hypothetical monopolist of the investigated product profit by a small but significant nontransitory price increase? In other words, could such a monopolist make durable profits if she maintained such a price increase permanently for a period of no less than a year, assuming that the price of other products remained unaltered? A price increase would be profitable only if the monopolist could make more money from loyal consumers who keep on purchasing the product than what it would loose when consumers switched to other products. Thus, if the hypothetical monopolist’s price increase would be profitable (i.e., it could be maintained for more than a year), the process stops there, and the relevant market is identified. In this case, products are considered to belong to the same relevant market, and the analysis is complete. Conversely, if the hypothetical monopolist’s price increase is unprofitable, this is construed as indirect evidence of competing products whose presence disciplines the hypothetical monopolist’s attempts to increase price. The analyst, then, has to add the products to which consumers would switch in the market, and the process is repeated every time the analyst finds that a small and nontransitory increase in the prices of the products under consideration would cause consumers their prices and their intended use.’’ Geographic markets, in turn, ‘‘comprise the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighboring areas because the conditions of competition are appreciably different in those areas’’ (European Commission, 1997). Monopoly Power Assessment 149 to switch to alternative products. Whenever that occurs, all of the added products are included in a single antitrust market. 4.2.2.1 Product Market How does antitrust analysis assess both the product and geographic scope of markets? It may be difficult for competition agencies to directly ascertain the views of end consumers about substitute products. Interchangeability or substitution depends on subjective values and judgments, such as how consumers perceive the functional properties of the competing products, their physical appearance, and their basic resemblance. The practical identification of these elements may be contingent on the particular set of data evaluated or the methodology used to assess these values. For instance, analysis of product features (e.g., physical appearance, form, shape, color) and intended uses allows competition authorities, as a first step, to narrow the field of possible substitutes. However, product characteristics and intended use are insufficient to allow a conclusion as to whether two products are demand substitutes. Functional interchangeability or similarity in characteristics may not in themselves provide sufficient criteria because the responsiveness of customers to relative price changes may be determined by other considerations as well. For example, there may be different competitive constraints in the original equipment market for car components than in the market for spare parts, thereby leading to the conclusion that these are two markets rather than one. Conversely, differences in product characteristics are not in themselves sufficient to exclude demand substitutability, since this will depend on how customers value them. Consumer preferences dictate whether products from different firms are interchangeable with one another. If they are interchangeable, the analysis should broaden the size of the antitrust market in order to include all substitute products (as perceived by consumers) including, of course, the one produced by the firm which is under investigation. Product differentiation makes market definition cumbersome because it forces the analyst to identify which products exert discipline over the pricing of others. Defining the relevant product market can be difficult when products are differentiated, as is normally the case. Businesses constantly endeavor to differentiate the products they sell from competing ones in order to catch the attention of buyers. In this case, one product possesses some feature that sets it apart from others in the perception of consumers. If competition analysis reveals a high degree of substitutability between the products examined, then it could be argued that they belong to the same market, and that one should expect one product to exert discipline over the pricing of the other. As the European Commission (1997) states: From an 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. A firm or a group of firms cannot have a significant impact 150 Chapter 4 on the prevailing conditions of sale, such as prices, if its customers are in a position to switch easily to available substitute products or to suppliers located elsewhere. Basically, the exercise of market definition consists in identifying the effective alternative sources of supply for the customers of the undertakings involved, both in terms of products/services and geographic location of suppliers. In assessing substitution, questions that are relevant to the identification of the market in which a hypothetical monopolist operates include: What products could consumers use? Are there any alternatives, and where could consumers obtain them? What would be the differences in terms of cost, convenience, and competitiveness of such alternative products? The types of evidence competition authorities usually consider relevant in assessing whether two products are demand substitutes include: (i) (ii) (iii) (iv) (v) (vi) Evidence of substitution in the recent past Views of competitors Consumer preferences Characteristics of products and geographic locations The view of industry experts Barriers and costs associated with switching demand to supply substitutes. Let us see each of these elements of the demand-substitution analysis. (i) Evidence of substitution in the recent past In certain cases, it is possible to analyze evidence relating to events in the recent past or shocks in the market that offers actual examples of substitution between two products. When available, this sort of information will be fundamental for market definition. If there have been changes in relative prices in the past (all else being equal), the reactions in terms of quantities demanded will be determinative in establishing substitutability. The launching of new products in the past can also offer useful information when it is possible to precisely analyze which products lost sales to the new product. The response of buyers to changes in relative prices in the past can be quantitative and systematic, as with econometric estimates of demand elasticities, or econometric analyses of natural experiments involving a change in market structure. Buyer responses can also be anecdotal. For example, a firm’s manager may be able to testify on the results of marketing experiments done in the past, with a price increase. Other market participants (e.g., clients, suppliers, competitor businesses), may have an understanding of which competitors reacted upon a price increase, thereby effectively specifying the participants in a candidate market, whether those firms collectively lost share following a price increase, and which firms benefited the most from buyer substitution (Baker, 2006, p. 15). Monopoly Power Assessment 151 (ii) Views of competitors Analysts look at other sources of information, such as corporate strategy plans and marketing documents, to discover how the firm believes consumers would react to price increases, the identity of its perceived competitors, and how competitors and consumers have behaved in the past. Usually, competition authorities take into account marketing studies that the investigated companies have commissioned in the past and that are used by the companies in making decisions about the pricing of their products and/or marketing actions. Consumer surveys on usage patterns and attitudes, data from consumers’ purchasing patterns, the views expressed by retailers, and, more generally, market research studies submitted by the parties and their competitors are taken into account to determine whether an economically significant proportion of consumers consider two products to be substitutable, taking into account the importance of brands for the products in question. As Owen (2003, p. 65) reports, in the Venezuelan Indoor Tanning case (2000), the existence of multiple brands in the market was important in reaching the conclusion that the prosecuted firm was not liable and should not be subject to sanctions. The case arose in August 2000, when Circuitrón Equipos Electrónicos requested authorization to enter into an exclusive contract to use the trademark Solar Express, which provides ‘‘controlled indoor tanning’’ services. After examining the requirements set forth in the law regarding the authorization of such contracts and considering factors such as the developing nature of the market for controlled indoor tanning, the variety of trademarks, the existence of commercial establishments providing substitute services, and the fact that there were few barriers to entry, Pro-Competencia deemed that the contract would not restrict free competition. In the Colgate Palmolive/Kolynos acquisition case (1994), dealing with the proposed acquisition of Kolynos do Brasil S.A. by The Colgate Palmolive Company, Brazil’s Competition authority, CADE, held that the merger could not proceed due to high levels of concentration in the toothpaste market. The Colgate Palmolive Company sought to acquire Kolynos, the largest toothpaste producer in Brazil. The operation would have given Colgate control of about 75% of the Brazilian toothpaste market. In examining the relevant market, CADE found that there were four product markets in the oral health care industry, and that the merger would have entailed anticompetitive effects in only one, the toothpaste market. Colgate, on the other hand, claimed that the relevant market was the entire oral healthcare market. The discussion focused on the demand-side, that is, which market consumers perceived to be the most relevant: the oral health care market as a whole, or the toothpaste market. CADE decided that the merger could proceed in the toothbrush sector but not in the toothpaste market, due to the fact that the Kolynos brand had a strong reputation in the market, creating barriers to entry which limited the size of the market. In accordance with this decision, the acquisition could proceed only on the condition that Colgate abstained from using 152 Chapter 4 the Kolynos brand name for four years or granted a twenty-year license to another company. Significantly, the market definition analysis in this case relied on cross section demand studies. (iii) Consumer preferences Buyer surveys may provide evidence as to the likely response of buyers to price changes. Such surveys may be formally sampled, through carefully drafted questions; or they may be informal, based on customer interviews. The purpose of these surveys is to collect the opinion of buyers on their consumer preferences. In the case of consumer goods, it may be difficult for competition authorities to directly gather the views of end consumers on substitute products. Marketing studies that companies have commissioned in the past and that are used by companies in their decision-making process with regard to pricing of their products and/or marketing actions may provide useful information for the authorities’ delineation of the relevant market. Consumer surveys on usage patterns and attitudes, data from consumer’s purchasing patterns, the views expressed by retailers, and more generally, market research studies submitted by the parties and their competitors are taken into account to establish whether an economically significant proportion of consumers consider two products to be substitutable, taking into account the importance of brands for the products in question. Unlike preexisting studies, these studies are not prepared in the normal course of business to assist in making business decisions. In Peru, INDECOPI considered consumer preferences to be strong evidence in support of a cartel hypothesis. This approach was established in the Poultry case (CLC (ex officio) v. empresas avı́colas) (1997), which is considered to be INDECOPI’s most important oligopoly case to date. The case involved several Peruvian poultry firms and their trade association, who engaged in what amounted to pricefixing by agreeing to prevent new entry into the Peruvian market, to exclude some existing competitors, and to limit the availability of live poultry for sale in order to raise or maintain prices. The cartel agreement was preceded by the overproduction of chicks (baby chickens), which had depressed prices. The case centered on the question of whether the antitrust market was international, as alleged by the defendant firms. This case illustrates that the nature of some domestic industries can exclude foreign competition. In Peru, consumer tastes dictate that the domestic market for live poultry cannot be substituted with frozen imported poultry. In the 1990s, domestic poultry producers took advantage of this to form a long-running cartel that gave producers unfairly high profits. In the absence of foreign competitors to undermine the cartel and drive down consumer prices, INDECOPI concluded that it was not, due to high barriers to entry found in consumer preferences: the unique nature of the Peruvian poultry industry prevented international competitors from playing a major role. Specifically, some 80% of the total chicken production in Peru is traded live and only 20% is slaughtered chicken. Most slaughtered chicken is sold in refrigerated form to supermarkets, and there is a small market for frozen Monopoly Power Assessment 153 chicken, which is traded mostly in the southern highlands of the country. The only opening for international trade is in the market for frozen chicken in the South, which is a small segment of the overall chicken market. The lack of international competition made it easy for domestic Peruvian producers to organize and operate a cartel based on price-fixing through output controls on poultry. The cartel included nineteen firms trading in the market for live chickens who developed anticompetitive mechanisms to suppress and eliminate competitors in the markets of metropolitan Lima and Callao. Similarly, in reviewing the Postobón/Quaker merger case (2004), Colombia’s SIC narrowed the relevant market to include only energetic beverages in accordance with consumer tastes. In this case, SIC not only barred the transaction, but also launched an investigation in order to establish whether the parties had closed the transaction before SIC approved the deal. It must be noted that under Colombian law, economic integrations have to be cleared by the competition authority before they produce effects in the market. The failure to notify authorities of a transaction is considered a breach of the competition law that will result in fines to the companies. If SIC comes to the conclusion that the transaction must be prohibited, a judge may decide that the deal is absolutely void due to an illicit purpose, which has important economic consequences under the Colombian Civil Code (Miranda, 2006, p. 74). Competition authorities often contact the main customers of the companies involved in an inquiry in order to gather their views on the boundaries of the product market, as well as most of the factual information needed to reach a conclusion about the scope of the market. They usually ask consumers whether they would switch to another product in the event of a price increase. Thus, the scope of a product market might be narrowed if there are distinct groups of customers. A distinct group of customers for the relevant product may constitute a narrower, distinct market when the group could be subject to effective price discrimination. This will usually be the case when two conditions are met: first, it is possible to identify clearly which group an individual customer belongs to at the moment that the relevant products are being sold, and second, trade among customers or arbitrage by third parties is not feasible. Consumer reaction to price increases, for example, was a central issue in the Newspaper Cartel case (1999). On March 6, 1999, the four largest newspapers in the city of Rio de Janeiro simultaneously raised their prices by 20%. In this case, aside from evidence pointing to the unexplained coincidence of the price increases, which were accompanied by the publication of almost-identical notes justifying the price increases, the SEAE took the position that although the four newspapers targeted different consumers—two of them on the low-end and the other two on the high-end—they nonetheless competed among themselves. Therefore, a small but significant and nontransitory price increase would have been enough to divert sales from one to the other. CADE found the firms guilty of acting as a cartel because of the coincidence of price parallelism with the publication of the editorial notes explaining the price increase, together with the lack of a plausible explanation for increasing prices at 154 Chapter 4 the same time and at the same rate. The act of proportionally raising prices was intended to maintain the segmentation of the public among the papers (high-end and low-end), preventing the diversion of the demand from one to another and allowing each newspaper to keep its market share. In the proposed merger of detergent soap brands between Procter & Gamble and Colgate (2004), Colombia’s SIC objected to the transaction based mainly on the Fab brand. SIC had initially determined that the relevant market was comprised of laundry products for washing garments and clothing, including both powder detergents (i.e., liquid, bar, and powder) and bar soap (synthetic as well as natural). However, at the last moment SIC decided to narrow the relevant market to the market for powder detergents, disregarding the broader market definition proposed by the companies. The adoption of a narrower definition was apparently caused by SIC’s perception that only a handful of people used bar soap as their main input for washing garments. Based on a contrived interpretation of consumer preferences, SIC narrowed the product market to those products used in washing machines, although people who used washing machines were a minority of Colombian consumers of powder soap (merely 25.1%) of all Colombian consumers of powder soap. The existence of informal markets is a particularly interesting feature deserving attention in Latin American antitrust enforcement. Compared to the usual ease of obtaining information about consumer preferences and their willingness to substitute products in the event of a price increase, the specific features of Latin American economies have prompted competition authorities to conduct their market analysis while taking into consideration the existence of an informal economy. In the Mexican case Chicles Canel’s, S.A. de C.V. v. Chicles Adams, S.A. de C.V. (1996), the Commission emphasized in its assessment of market size the existence of ‘‘formal’’ and ‘‘informal’’ market segments created by the use of different marketing techniques. Thus, following a complaint by Canels, the Commission found that several brands of Warner chewing gum (i.e., Adams) were sold in both segments at different prices. The Commission concluded that the primary sale of Clarks’ chewing gum in the ‘‘informal’’ segment of the market was indicative of a sales and competitive strategy, not of the existence of two separate markets. (iv) Characteristics of products Competition agencies may infer the likely substitution patterns in response to a price increase from information about the nature and features of products and geographic locations known to matter to consumers. Quantitative methods of inferring the distribution of the valuations buyers place on unobservable product characteristics from data on market shares and buyer characteristics can be employed for this purpose (Baker, 2006, p. 16). Also, information about the geographic distribution of customers; of their age or sex group; or their particular preferences as social minorities, could bear useful information on the market definition. Monopoly Power Assessment 155 (v) The view of industry experts This group comprises the opinion of industry consultants, trade press reporters, trade association executives, or former industry executives in the industry. As Baker (2006) notes, ‘‘the reliability of this evidence can be assessed by examining, among other things, whether the experts are in a position to gather direct information about buyers, and whether they base costly business decisions on that information’’ (p. 17). (vi) Barriers and costs associated with switching to potential supply substitutes There are a number of barriers and costs that might prevent competition authorities from considering two prima facie substitutes as part of one single product market. It is not possible to provide an exhaustive list of all the possible barriers to substitution and all possible sources of switching costs. These barriers or obstacles have a wide range of causes. In their decisions, competition authorities have been confronted with obstacles that include: regulatory barriers or other forms of state intervention; constraints arising in downstream markets; the need to engage in specific capital investment or loss of current output in order to switch to alternative inputs; the location of customers; specific investment in production processes; learning and human capital investment; retooling costs or other investments; and uncertainty about the quality and reputation of unknown suppliers. SSNIP analysis evaluates the likelihood of a production shift within a reasonable time, usually a year. Among the elements relevant to this determination, competition authorities look into factors including: excess capacity; similarity of production processes or technologies; and sunk investment requirements. There is a discussion about the convenience of considering supply-side factors at the stage of market definition. CRA (1997, p. 2) explains the issue as follows: ‘‘No competition authority knows quite what to do about the supply-side. The problem is that if we define the market only on the demand-side, we may find that due to supply-side substitutability even a monopolist of a relevant market could not raise prices. But if we take account of the supply-side at the market definition stage, then were do we draw the line between supply-side substitutes and potential entrants?’’ This is a vexing question that has found no clear answer. In the U.S., there has been controversy about giving consideration to supply substitution. Some courts in this country have expanded markets when the monopoly would likely not be profitable after also accounting for the incentive of outside sellers to begin producing and selling within the candidate market (Baker, 2006, p. 7). However, the main focus of the SSNIP test in this country is on demand-side substitution, which follows from the fact that the Merger Guidelines define the hypothetical monopolist as ‘‘the only present and future supplier’’(Section 1.0). Hence, competition agencies in the U.S. account for supply substitution either in the identification of market participants or the evaluation of entry conditions. 156 Chapter 4 In the European Union, by contrast, supply-side substitutes whose ‘‘effects are equivalent to those of demand substitutes in terms of effectiveness and immediacy’’ will be included in the market definition. By contrast, supply-side that requires additional investment and time will be treated like potential entrants and will not be included in the market definition. The classic example is the production of varying qualities of paper used in publishing. They are not substitutes for consumers, but existing suppliers can readily use production capacity to supply different grades. In the case Dalgety/Quaker Oats (1995) the European Commission found that supply substitution between firms producing catfood and dogfood was immediate (i.e., only twenty minutes to change the ingredients); accordingly, it defined the market as all petfood, even though one cannot feed dog food to cats. Thus, it all amounts to a discretional evaluation of timing and difficulty, whether to consider some firm to be a potential entrant rather than a supplyside substitute. Supply substitution between products A and B depends critically on the ease with which existing production capacity can be shifted from one product to the other. An indication of this may be the fact that some firms already produce both A and B using the same facilities. Latin American agencies usually do not clearly distinguish whether consideration of supply-side is made in the context of market size analysis or as part of the entry barriers analysis. 4.2.2.2 Innovation Markets The definition of product markets also considers the speed of technological changes and innovative products and processes. In this connection, products that may emerge as a result of short-term innovation will also be as regarded substitutes for the purposes of market definition. Innovation leads to lower transportation costs, enhanced efficiency in distribution networks, alternative means of production, and other substitute options for consumers and producers. The concept of innovation markets has not been extensively applied in Latin American case law. This may be due to the tendency of antitrust scholars, which is also reflected in the U.S. case law, to confine this doctrine to high-tech industries, which are rather scarce in Latin America. Yet a more fundamental reason may be found in the intellectual sources of antitrust policy, which emphasize a short-term price approach to the evaluation of market restraints, rather than a long-term innovation perspective on the competition process. Naturally, this ideological bias leads competition authorities to disregard long-term processes that are usually associated with innovation and business discovery. By definition, it is almost impossible for the analyst of short-term market conditions to predict long-run trends; and it is even more difficult it is to establish what products, not yet ‘‘there’’ in the market, may become effective competitors of present products. Hence, the analyst is inevitably inclined to disregard this mode of analysis. Monopoly Power Assessment 157 In this context, it is not surprising that the concept of ‘‘innovation market’’ has not made significant inroads even in one of the most experienced antitrust jurisdictions in the world, namely, the United States.154 4.2.2.3 Geographic Market Once a product market is identified, competition authorities examine the scope of the geographical market where the conduct being investigated takes place. As a result of enhanced technologies, reduced tariff barriers, deregulation, and privatization brought about by the globalization of world economy, it may be difficult to determine the size of the geographic market with precision. This is particularly relevant in the case of the rather small open economies of most Latin American countries. On the basis of the evidence gathered, competition authorities will define a geographic market that could range from local to global. There are examples of both local and global markets in past decisions of Latin American competition agencies. For instance, in the Newspaper Cartel case (1999),155 where both the SDE and the SEAE concluded that the simultaneous 20% price increase among the four largest newspapers in the city of Rio de Janeiro had impacted consumers, the market was local in scope. Similarly, in the Mexican Liquefied Petroleum Gas Distributors case (2000), the geographic dimension of the relevant market was limited to the state of Morelos, since this state has a limited capacity to substitute other energy sources for LP gas and there is difficulty in obtaining or transporting LP gas from other states. The types of evidence that competition authorities consider relevant in reaching a conclusion as to the geographic market can be categorized as follows: (i) Past evidence of diversion of orders to other areas (ii) Basic demand characteristics (iii) Views of customers and competitors 154. The doctrine of innovation markets has been discussed in the area of patents and antitrust. The DOJ/FTC ‘‘Antitrust Guidelines for the Licensing of Intellectual Property’’ at § 3.2.3, state: ‘‘An innovation market consists of the research and development directed to particular new or improved goods or processes, and the close substitutes for that research and development.’’ The ‘‘innovation market’’ construct is primarily a way of evaluating potential future productmarket competition by looking at current R&D efforts rather than at the future product-market competition itself (Shapiro, 2005, p. 10). 155. In this case, it is interesting to note that competition agencies usually do not assess market size in cartel cases, due to their per se illegal treatment. According to the per se doctrine, the conduct becomes illegal once it occurs, regardless of the market power involved or the conduct’s competitive effects. Of course, the purpose of the market definition inquiry is to make examination of these effects possible. In Brazil, however, some initial appraisal of market size may be necessary in order to identify whether the 20% threshold for a finding of market power is satisfied. Similarly, Latin American countries treat all restraints, horizontal restraints included, as subject to a competitive analysis (see Section 7.2, below); naturally, in these cases, it is necessary to measure markets in order to establish whether competitors wield a joint monopoly power capable of undermining competition; more fundamentally, market definition 158 Chapter 4 (iv) Geographical pattern of purchases (v) Trade flows (vi) Barriers and switching costs. (i) Past evidence of diversion of orders to other areas In certain cases, evidence of changes in prices between different geographic areas and the resulting reactions of customers may be available. Generally, the same quantitative tests used for product market definition can be used in geographic market definition, keeping in mind that international comparisons of prices may be more complex due to a number of factors, such as exchange rate movements, taxation, and product differentiation. (ii) Basic demand characteristics The nature of demand for the relevant product may in itself determine the scope of the geographical market. Factors such as national or regional preferences, preferences for national brands, culture and lifestyle, and the need for a local presence have a strong potential to limit the geographic scope of competition. (iii) Views of customers and competitors In the evaluation of geographic markets, the elements of analysis usually include demand characteristics, such as the importance of national or local preferences, current purchasing patterns of customers, and product differentiation and brands. This allows the analyst to determine whether companies in different areas really do constitute an actual alternative source of supply for consumers. For instance, in the Alcool Cartel case (2000), the SEAE concluded that alcohol was the relevant product market and the geographic scope of the relevant market was all of Brazil, since alcohol produced in the central-south region was sold all around the country. Where appropriate, competition authorities will contact the main customers and competitors of the parties under investigation in order to gather their views on the boundaries of the geographic market as well as most of the factual information they require to reach a conclusion about the scope of the market, so long as these views are backed by sufficient factual evidence. Questionnaires are usually sent out during the preliminary investigation phase in order to gather data. (iv) Current geographical pattern of purchases An examination of customers’ current geographical pattern of purchases provides useful evidence as to the possible scope of the geographic market. is necessary in order to determine whether investigated firms are competitors for the purposes of the prohibitions on horizontal restraints. Monopoly Power Assessment 159 (v) Trade flows/pattern of shipments When the number of customers is so large that it is not possible to obtain a clear picture of geographic purchasing patterns, information on trade flows might be used as an alternative, provided that the trade statistics with a sufficient degree of detail are available for the relevant products. Trade flows, and provide useful insights and information for the purpose of establishing the scope of the geographic market, but are not in themselves conclusive. (vi) Barriers and switching costs If necessary, a further inquiry into supply factors will be carried out to ensure that companies located in different areas do not face impediments to selling their products on competitive terms throughout the whole market. This analysis usually involves an examination of what is required in order to establish a local sales presence in an area, the conditions of access to distribution channels, the costs associated with setting up a distribution network, and the existence or absence of regulatory barriers arising from public procurement, price regulations, quotas and tariffs limiting trade or production, technical standards, monopolies, freedom of establishment, requirements for administrative authorizations, and packaging regulations. The absence of trade flows does not necessarily mean that the market is at most national in scope. Barriers isolating the national market have to be identified before concluding that the relevant geographic market in such a case is national. Perhaps the clearest obstacle to a customer diverting its orders to other areas is the impact of transport costs and transport restrictions arising from legislation or from the nature of the relevant products. The impact of transport costs will usually limit the scope of the geographic market for bulky, low-value products, keeping in mind that a transportation disadvantage might also be compensated for by a comparative advantage in other costs (such as labor costs or raw materials). Access to distribution in a given area, regulatory barriers still existing in certain sectors, quotas, and custom tariffs might also constitute barriers isolating a geographic area from the competitive pressure of companies located outside of that area. Significant switching costs in procuring supplies from companies located in other countries are an additional source of such barriers. The New Holland N.V. and Case Corporation case (1999) provides examples of the complexity involved in the definition of geographic markets. In this case, New Holland acquired Case Corporation, creating a new company named Case New Holland. The merger took place abroad, but both firms had subsidiaries in Brazil and the merger had an impact in the Brazilian market; therefore, it was subject to Brazilian jurisdiction and was reported to competition authorities in Brazil. New Holland was a Dutch company controlled by Fiat, in the business of industrial machinery, particularly tractors, harvesters, and other agricultural equipment. Case Corporation was a North American firm in the same line of business. 160 Chapter 4 The transaction resulted in a horizontal concentration in the markets for of tractors, mowers, harvesters, and other construction equipment. Geographically, CADE defined the relevant market as national and provided several reasons why imports were not a viable option, including the importance of technical assistance after sales, customs barriers, and the difficulty of financing the equipment, which is rarely paid for up front due to its high costs. There is no independent importation in this market since, even when there is no domestic production, the only firms that import products from abroad are those already established in Brazil, which are able to provide technical assistance services. CADE’s analysis of the degree of concentration concluded that there was no increase in the monopoly power of the firms in the relevant market for tractors or in the relevant market for mowers, which was not considered significant enough for a detailed analysis. In the market for harvesters, in addition to the rivalry of other competitors, low barriers to entry would also prevent the new firm from increasing prices. Finally, in the relevant markets for other construction equipment, CADE determined that the operation would not result in an increase of the monopoly power of the firms due to potential competition from noncommitted entrants that owned multipurpose plants in Brazil. Since no anticompetitive risks were identified in the transaction, CADE unanimously cleared the merger without even examining the efficiency argument presented by the parties. In the United States and in Europe, however, the market for agricultural equipment is larger, and in each plant the firms produce a different product, which increases the profitability of their investment. The European and U.S. competition agencies, therefore, required the divestiture of a number of plants dedicated to the production of specific products as a condition of their approval of the transaction. 4.2.2.4 Identification of the Antitrust Market Price assessment occupies a paramount place in the determination of product substitutability; hence, it is crucial for the assessment of monopoly power. The magnitude of buyer substitution in the event of a price increase must be compared with the magnitude of price cost margins in order to determine whether a price increase would be profitable were firms to act collectively as a single seller, and thus whether to define a market. (i) The 5% to 10% price increase assessment The analysis explores whether it is reasonable to expect substitution in response to changes in relative prices. In the event of a price increase, would customers of the parties switch their orders to companies located elsewhere or selling alternative products, in the short term and at a negligible cost? The responses of customers and competitors to a relative price increase of more than 5% for the products under consideration in the relevant geographic area are taken into account when they are backed by sufficient factual evidence. Monopoly Power Assessment 161 If potential customers and clients are not willing to shift their purchases, then the investigated firm is deemed to belong to a different antitrust market than the producers of potential substitute products. There is a common misconception about how should the SSNIP test apply in such evaluation. Usually, it is assumed that the SSNIP test asks whether products A and B are in the same market. This is not true. Market definition is about the competitive pressure that different products impose on each other, so a central question is often whether two specific products are in the same relevant market. This way of presenting the issue could mislead the analyst, because the answer ultimately depends on which product the SSNIP test starts from. Depending on the choice of products where the investigation is focused, competition agencies may obtain asymmetric market definitions, no matter their focus on the same group of products.156 Also, a common explanation of the logic of the SSNIP test is that it asks whether consumers would switch from product A to B after a 5% to 10% price increase in A. This perception could lead competition agencies into defining markets in a very narrow sense; the focus on switching from product A to be may lead to an undue emphasis on the cross-price elasticity of demand between A and B. This is an incorrect approach to the question of substitution. Cross-price elasticity actually is only a surrogate that should be applied exceptionally. Let us recall that under Robinson’s Imperfect Competition model a seller is a monopolist of its own production. A logical conclusion derived from this premise is that the demand for each product depends on its own price, and on the disposable income of consumers; therefore, it does not depend on how many consumers switch to alternative products, even if these are close substitutes. In short, substitution is not measured with reference to the sales lost to product B; but with reference to any foregone sales lost by monopolist seller of product A. The own-price elasticity is what determines the degree to which the hypothetical monopolist in A will increase the price. Only if it is found that the monopolist would not impose a 5% to 10% price increase do cross-price elasticities become relevant again, in determining which product is the closest substitute that should be taken to be under the control of the hypothetical monopolist. Also, it is important to note that the 5% to 10% price increase assessment applies to all products controlled by the hypothetical monopolist. This statement needs further clarification. The common assumption is that being an iterative process, the SSNIP test should incorporate all products under the control of the 156. For example, if the competitive issue arises in relation to product A, this product should form the starting point for the SSNIP test. The question is then whether a hypothetical monopolist of A would impose a sustainable price increase above 5%-10%. If the answer is negative, then product B should be included in the market. However, if the test starts with product B, the answer does not necessarily have to be the same. There may be situations where a hypothetical monopolist for A cannot increase price (hence the market is AB), whereas a hypothetical monopolist for B can, resulting in a B-only market. 162 Chapter 4 hypothetical monopolist that can be attributed under successive rounds of evaluation. Thus, if in the first round it emerges that the hypothetical monopolist of product A would not sustainably increase the price by 5% to 10%, then the closest substitute, product B, should be included in the market. Then, the test should be applied again to the hypothetical monopolists of products A and B. This statement, however, does not mean that the price increase should apply to both products; it may be the case that the SSNIP test is already satisfied as result of the price increase in the smaller market, that is, that comprised by a single product. Under the SSNIP test, the relevant market is ‘‘no bigger than necessary,’’ or to put it differently, it is the smallest market in which a monopolist can increase price, as emphasized by the 1992 US merger guidelines (Section 1.0). To clarify this important point further, consider the situation where the competition authority examines the effects of a merger between two producers of product A. Let us assume that the first round of the SSNIP reveals that a hypothetical monopolist of A would not sustainably increase prices by more than 5% to 10%. In this case, the SSNIP test would indicate necessary to incorporate product B, the closest substitute, under examination. The hypothetical monopolist, then, would be able to raise prices further, because under a broader market definition, it would not be as concerned as before about sales being diverted to B. In this new situation, let us assume that the price increase is 14%. Clearly, in this situation, A faces a competitive pressure from B alone, because as soon as competition from B is eliminated, the price of A will increase above 10%. The SSNIP is therefore satisfied, and B should be included as a product competing with A. In this situation, it does not matter whether the price of B, once the merger takes place, increases 2% or 20%. What matters is that the monopolist of market AB could impose sustained price increases above 5% to 10% on product A, which ultimately is the product originally submitted for evaluation. There are a number of quantitative tests that have been specifically designed for the purpose of delineating markets. These tests include various econometric and statistical approaches: estimates of elasticities and cross-price elasticities of demand for a product; tests based on similarity of price movements over time; the analysis of causality between price series; and similarity of price levels and/or their convergence. Case law reflects this administrative approach. Competition authorities take into account the available quantitative evidence that is capable of withstanding rigorous scrutiny in order to establish patterns of substitution in the past. In the Nestlé/Garoto case (2002), CADE noted that the econometric studies demonstrated a high cross-elasticity of demand among the various market segments for chocolates and among the different brands, leading to the conclusion that the relevant market was chocolates of all forms (excluding homemade items) in the Brazilian national market. CADE also noted that imports were not a significant factor in the market and that there were barriers to new entry because of difficulties in securing wholesale distribution. This was the first case in which the defendants, as well as the competitors that initiated the case, presented quantitative analysis from the beginning in order to define the relevant market. Monopoly Power Assessment 163 (ii) Price assessment in highly inflationary economies In light of the high inflation affecting some Latin American countries, the 5% price increase threshold should be relaxed to take into account the local reality. Competition agencies in the region usually take a flexible approach; however, no alternative threshold has ever been established. Even though inflation affects general, not relative, price levels, frequent price increases under inflation are common, thereby allowing a 5% increase in prices to go unnoticed. In high inflationary contexts, as real prices change significantly due to government controls and high inflation rates, it becomes increasingly difficult for competition authorities to establish substitutability (and therefore, market size) (Khemani and Dutz, 1995, pp. 21-22). Today, on the whole, most Latin American countries enjoy more stable fiscal and monetary policies than they used to, but the fact remains that competition policies are quite difficult to enforce in the midst of unstable macroeconomic policies. To the extent that some countries of the region, particularly Venezuela, Argentina, Bolivia, and Nicaragua are increasingly returning to old-fashioned government dirigisme, which is particularly noticeable in their efforts to take away the autonomy of their respective central banks, there is a clear risk that such policies may negatively impact the effectiveness of antitrust policy. In such cases, criteria such as the ‘‘ability to raise prices unreasonably’’ could be hard to apply in economies with resilient high inflation rates. For this reason, while the U.S. Horizontal Merger Guidelines regards the ability of a hypothetical monopolist to profitably impose a ‘‘small but significant and non-transitory’’ 5% price increase as one of the most important criteria in defining an antitrust product market, it is necessary to conclude that in Latin America this criterion could face practical implementation problems in the presence of high inflation levels. (iii) Special problems arising from market measurement The paragraphs above describe the different factors that may be relevant to market definition. This does not mean that in each individual case it will be necessary to obtain evidence on and assess each of these factors. Often, in practice, the evidence of a subset of these factors will be sufficient to reach a conclusion. Definition of the relevant antitrust market is riddled with complications arising from the assessment of both product and geographic substitution factors. Sometimes competition authorities have pursued cases that affect adjacent markets, regardless of the lack of monopoly power in the relevant market. In the merger between Televisa and Acir (2000), the FCC analyzed a proposed merger between Televisa, one of two television consortia in Mexico, and Grupo ACIR, a producer of entertainment content whereby Televisa was to hold 50.01% of the shares of the new group. The relevant market was defined as advertising sales in radio. Even though concentration indices did not surpass the Commission’s thresholds, the fact that Televisa played an important role in other substantially related markets was taken into consideration in the Commission’s 164 Chapter 4 decision, as it would give Televisa an important bargaining position in the merged firm and would grant it an advantage over its competitors, who would not be able to offer advertising sales in other media, specifically television and magazines. Finally, many product markets may coexist in a single geographic market. In the merger Aventis Pharma, S.A., and Rhone Poulenc Rorer de Venezuela, S.A. (2000), the representatives of these companies requested the opinion of Pro-Competencia regarding the restrictive effects of the proposed merger. Nine relevant markets were determined to exist—all within Venezuelan territory—for various types of drugs, such as antihistamines. Pro-Competencia concluded that, given the large number of players (both laboratories and substitute products), the merger would neither create nor reinforce a dominant position in any of the relevant markets in question. 4.2.3 MEASUREMENT OF MARKET CONCENTRATION Once the competition agencies have identified the relevant market, the next step under the SSNIP methodology is measurement of market participants’ shares of the antitrust market. Although, in modern analysis, this factor is not in and of itself a decisive measurement of monopoly power, competition authorities often give paramount importance to this indicator as a proxy for monopoly power, possibly due to its quantitative nature. The overall appraisal of market shares changes depending on the nature of the market under examination. In an industrial goods market, the analyst should pay attention to the firm’s productive capacity for the relevant product, since production capacity is the most important factor in establishing a firm’s significance in most markets of this type. By contrast, in a consumer product market, the analyst should examine the value of a firm’s sales. Since the brand is essential in consumer markets, the capacity to sell will be a more accurate measure of the firm’s capacity to influence the market. Finally, in the natural resources market, the best measure of market significance is the quantity of resource reserves, given price volatility and production levels. In the forthcoming sections, we will evaluate the particular quantitative thresholds beyond which competition agencies assume the existence of monopoly power. 4.2.3.1 Statutory Market Share Thresholds The significance antitrust analysis attaches to market shares has changed over the years. Competition agencies once relied on fixed market share thresholds as proxies for measuring monopoly power. However, domestic laws have adopted alternative thresholds that diverge considerably from each other. To highlight the intensity of this divergence, it is illustrative to examine the opinions of different authors from different sides of the Atlantic. Monopoly Power Assessment 165 A market share of less than 35% (or 60% in a joint dominance case) will generally be seen as indicating the absence of market power or dominance, while market shares above this level will normally prompt further examination. In addition, a single firm with a market share in excess of 50% will be regarded as prima facie dominant. Thus, concerns about the abuse of a dominant position arise at levels lower than the 70% market share commonly identified in U.S. antitrust jurisprudence. For instance, according to Whish and Sufrin (1993, p. 294), the EU Commission usually considers a dominant position to exist when a firm has a market share of 40% to 45%, while dominance cannot be ruled out when market shares are in the range of 20% to 40%. By contrast, courts in the United States ‘‘consistently find market shares of 80-90 percent and higher to be sufficient to conclude that the defendant is a monopolist. They also consistently find market shares of less than 50 percent to be insufficient. A majority of courts are reluctant to find sufficient monopoly power when the market share is less than 70 percent’’ (Hovenkamp, 1986, p. 106). Other antitrust commentators in the United States (American Bar Association, 1992, pp. 213-214) say that market shares above 70% are generally considered to convey monopoly power and that a market share of less than 40% virtually precludes a finding of monopoly power. Latin American competition agencies initially adopted a rigid approach to this problem; this preference may have been a reflection of the legalistic approach to the interpretation of antitrust statutes that prevailed at the time. In the early years of their antitrust experience, Brazil, Argentina, Colombia, and Chile had a predominantly rigid perspective on market share thresholds. Brazil, for instance, set up a 20% market share as prima facie evidence of market power. Similarly, Honduras Competition Act left the Competition commission to decide a fixed market share above which monopoly power is to be presumed. Competition authorities in these medium-to-large Latin American economies usually relied on quantitative measurement of market share in order to deduce monopoly power; indeed, this measurement of market shares was regarded as prima facie evidence of monopoly power. The reliance of some Latin American jurisdictions on market shares as prima facie evidence of monopoly power is no doubt a reflection of their attentiveness to the European competition system, which formerly used to give a paramount importance to this factor.157 At the time when most Latin American antitrust statutes were adopted, Europe’s competition enforcement authorities placed greater 157. European policy enforcement no longer attaches such importance to market shares. Today, in evaluating how significant market shares are, the Commission examines historical trends, that is, the time period over which high market shares have been held, and the market context, including the rate of growth of the market. It may be helpful by way of illustration to highlight the European experience in this regard. The CEC states in its XXIst Report that ‘‘high market shares can be an indication of the existence of a dominant position’’ and that ‘‘current market shares normally, but not necessarily, reflect future competitive strength.’’ Moreover, there are ‘‘many cases that have not been blocked despite having high post-merger market shares and substantial increases in market share. Notable examples include Alcatel/Telettra, Varta/Bosch, 166 Chapter 4 emphasis on the likelihood of actual entry, buyer power, and availability of supply alternatives. Countries like Brazil have traditionally emphasized market share control as a determinant of market power. For example, in the Nestlé/Garoto case (2002), market shares were decisive in CADE’s decision not to authorize the transaction. According to their calculations, in the market for liquid chocolate coating Nestlé would have acquired a 100% market share, whereas in the segment of solid coating, the company’s share would have increased from 16.3% to 88.5%. Nestlé and Garoto were top two choices of consumers in the market for other chocolate products. This opinion was reinforced by the fact that Lacta, the main competitor of the applicants, lacked the idle capacity or incentive to challenge a likely price increase. Accordingly, following its 20% rule, CADE rejected the merger application as presented and ordered Nestlé to sell Garoto or equivalent assets to a competitor with up to a 20% share of the chocolate market. Under a modern approach, market shares are no longer prima facie indicators of monopoly power; instead, concentration levels determined by alternative indices, such as the Hirshman-Herfindahl (‘‘HHI’’), Concentration index (‘‘Ci’’), and dominance tests, set the standard for antitrust examination of market concentration.158 In the next section our analysis will focus on the practical operation of these tests. Hence, the emphasis Latin American competition agencies place on market shares as a determinant of market power is changing; today, the evaluation of monopoly power is preceded by an assessment of the market size, but, in keeping with the trend of general antitrust analysis, this is only the first step. Clearly, this is a consequence of the evolution of international standards towards a less rigidly structural perspective on competition enforcement. Today, market shares and concentration indexes are merely seen as indicators of competition, which ultimately depends on other factors. Therefore, although the legislation of countries like Brazil sets forth a fixed percentage of market share (20%) above which monopoly power is presumed to exist, the antitrust authority may change this presumption with respect to specific sectors of the economy. However, in practice CADE always engages in a casespecific analysis, and has neither invoked the 20% market control presumption nor exercised the power to alter that percentage for a specific market. As a practical matter, a market share below 20% is presumed to be evidence of the absence of monopoly power (OECD and IADB, 2005a, pp. 18, 20). Therefore, the Brazilian case is today rather exceptional within the region. With the sole exception of Honduras,159 all other countries have abandoned the DuPont/ICI, Nestlé/Perrier, Courtaulds/SNIA, Renault/Volvo and ABB/BREL’’ (Neven, Damien, Robin Nuttal and Paul Seabright, 1993, p. 104). 158. Interestingly, this trend reproduces the one observed in the U.S. In the U.S., the original (1968) DOJ merger guidelines used market shares, in particular CR4. It was only with the appointment of William Baxter to head the Competition Division that the HHI replaced CR4, a change that was reflected in the 1984 guidelines. 159. Article 8, Legislative Decree No. 357/05. Monopoly Power Assessment 167 notion of monopoly power that relies exclusively on the market share of the investigated firm. Today, competition agencies in the region regard market shares as circumstantial evidence among many other factors that indicate the presence of monopoly power. A preferred technique is to treat market shares as safe harbors below which firms will be presumed to hold no monopoly power. For instance, an extensive investigation of the healthcare industry undertaken in the mid-1990s by Argentina’s CNDC led it to conduct an in-depth study of the Argentine healthcare market and to issue a set of guidelines for competition in the industry. The guidelines provide a competitive analysis of various practices found to exist in the industry and set out safe harbors (generally below 25% of a relevant market) within which certain collective activities by both providers and purchasers are presumptively permissible. In the Phillip Morris/Nabisco merger case (2000), the CNDC authorized a merger on the basis that the resulting merging firm would control a market share of less than 20% of the chocolate candy market. Similarly, under Chile’s Guide for the Analysis of Horizontal Concentration Operations, the National Economic Attorney (NEA) will not challenge a concentration as a possible abuse of monopoly power if the market share of the entity resulting from the transaction is below 35%. This is a clear indication of how Latin American agencies, with few exceptions, have departed from their previous rigid approach towards regarding market shares as prima facie indicator o monopoly power. 4.2.3.2 Concentration Indexes: HHi, Ci and the Dominance Test Latin American countries, in place of market share measurement, overwhelmingly use market concentration levels as yardsticks of monopoly power. The Hirschman-Herfindahl Concentration Index (HHI) is the preferred method for measuring market concentration levels, particularly in cases involving mergers and acquisitions. The HHI index is calculated by summing the square of the market shares, expressed in percentages, of all the firms in the market. The range of concentration levels under this index spans from 0 to 10,000. The HHI can be very small when markets are composed of many small firms, or can be as high as 10,000 when there is only one firm. The index is calculated by taking the market shares of the respective market competitors, squaring them, and adding them together (e.g., in the market for X, company A has 30%, B, C, D, E and F have 10% each and G through to Z have 1% each). If the resulting figure is above a certain threshold, then economists consider the market to have a high concentration. This threshold is considered to be ‘‘0.18’’ in the United States, while the European Union prefers to focus on the degree of change. For instance, a change of ‘‘0.025’’ when the index already shows a concentration of ‘‘0.1’’ may raise concerns. Over the years, as antitrust analysis grew more sophisticated and competition authorities reasserted their confidence in policy enforcement, the HHI has gained growing acceptance within the region. Therefore, it can be stated confidently that 168 Chapter 4 the HHI method of assessing market concentration now prevails in most Latin American countries. Sometimes, however, competition agencies employ alternative ways of calculating market concentration. One example of this is the use of the Ci Index in Chile, as well as Brazil in merger cases.160 The ‘‘Ci’’ index measures the combined market share of the top four, five, six, or eight firms (‘‘i’’ is a variable that can be 4, 5, 6 or even 8) in a given market. It is calculated by simply adding the market shares of the ‘‘i’’ largest firms in the market. The increasing adoption of market concentration indexes in place of statutory market shares, as indicators of monopoly power, shows that competition authorities are gaining more experience and became more analytically sophisticated. But these methods are not devoid of complications, as the development of the Mexican Dominance index shows. 4.2.3.3 The Mexican ‘‘Dominance’’ Index Despite its popularity among competition agencies in Latin America, conventional market concentration indexes suffer from an important methodological flaw that impairs its relevance for measuring monopoly power in antitrust procedures. Both the HHI and the Ci indexes focus on the size of each market participant relative to the rest; therefore, they assume that each firm will have a capacity to influence the market proportionate to its size relative to rest of the market participants (Garcı́a Alba, 1999, p. 62). Methodologically, the enforcement of such standards in Latin American countries, particularly the HHI thresholds seems inadequate in light of the immense disparities of size (hence, of market competitors) between the U.S. on the one hand and any Latin American economy on the other. Compared to the U.S., which is the economy that the Guidelines concentration indexes were designed to measure, these economies are considerably smaller in size, as represented by Table 4-1. According to this source, the U.S. economy is about eight times larger than its closest Latin American competitor (Brazil), and 600 times larger than the economy of one of the smallest (Honduras). Of course, there is no particular reason to assume that geographical markets (used, along with product markets, in determining HHI), are coincident with national boundaries; however, in Latin America this is very often the case due to high trade barriers, transportation costs, distribution and marketing costs. The size of the U.S. economy overshadows that of any country in Latin America, indeed, it surpasses that of the region, considered as a whole. 160. Under Brazil’s antitrust legislation, a combined market share of the top four firms (C4) that exceeds 75%, combined with an increase in market share of more than 10% as a result of the operation, gives rise to an investigation by the competition agency. Also, a merger that makes it possible for a company to increase its market share to 20% or more, which also increases the risk of a unilateral price increase, will be investigated. 169 Monopoly Power Assessment Table 4-1 Gross Domestic Product: U.S. and Latin America (2006) GDP 14000000 12000000 10000000 8000000 6000000 4000000 2000000 a el ru zu ne Ve a m Pe a na Pa Ni ca ra gu ico as ex M r ur do Ho nd ca Ri El Sa lva a a Co st m bi ile lo Ch Co Br az il ina ge nt St d ite Un Ar at es 0 Source: CIA. The World Factbook (2007). In the light of these disparities, it is obvious that one cannot draw the same conclusions from the HHI thresholds in Latin American economies as one might in the context of the U.S. economy. Since Smith’s insightful remarks on the connection between the level of specialization in an economy and the size of the market,161 we know that the number of competitors (reflecting the specialization of labor) in a given economy should increase based on the size of the economy: small economies can only support a few firms, as aggregate demand is expected to be small, whereas large economies further the division of labor, increasing the number of competitors. Owen (2003) supports this view. Clearly, the thresholds set forth in the U.S. Horizontal Merger Guidelines for measuring whether markets are ‘‘moderately’’ or ‘‘highly concentrated’’ simply do not conform to the realities of Latin American economies. In order to overcome this problem, Mexico applies a different threshold than the one contained in the U.S. Horizontal Merger Guidelines. As discussed above, in the U.S., the Guidelines establish a presumption of illegality for mergers whose postmerger HHI exceeds 1,800 when merger-induced changes in the index exceed 100 points. By contrast, in Mexico, the Commission looks for a postmerger HHI of 2,000 and a change of at least 75 points; in essence, it gives less importance to the 161. To put it in Smith’s (1776 [1937], pp. Book I, Ch. III) words: ‘‘the Division of Labour is limited by the Extent of the Market.’’ 170 Chapter 4 existing number of firms in the market and more significance to relative changes in market concentration levels. In our view, given the significant disparity between the economies of the United States and Mexico—the former being almost ten times larger than the latter—it seems that the standards applied by the Mexican Commission to measure the competitive effects of concentration are still too high. Mexico’s ex-commissioner of competition Garcia Alba has developed a dominance test which has been applied in some cases in this country.162 The main difference between the HHI test and the dominance test is that, while the former invariably increases when two or more market shares are joined together, the dominance test does not necessarily reach the same outcome. This test proposes a rivalry analysis. That is, in cases where the index is negative, the merger would be able to bring about a more competitive market structure because the newly formed enterprise would have grown to a size equal to other existing competitors on the market, and therefore would be able to compete on an equal footing. Furthermore, it would decrease the probability of collusion, since after the merger there would be one more ‘‘large firm’’ to be included in the collusion assessment. On the other hand, if the index were positive, it would be an indication that a problem with respect to the competitive structure might arise. As Ten Kate (2006) explains ‘‘when two small firms merge in the presence of a third big firm, the dominance test tends to decrease whereas the HHI would increase. When all firms in the market are of equal size, the dominance test coincides with the HHI. It is the inequality between firms that makes the former different from (larger than) the latter.’’ Ten Kate adds that the dominance test is not an industrial concentration index in the proper sense of the word, in light of the fact that it may decrease following a merger. Hence, he regards it as ‘‘a hybrid between a concentration index and an inequality index.’’ When two small firms get together in the presence of a bigger one, concentration increases but inequality decreases, and the net effect may be negative. The greater the industrial concentration the higher the outcome of the dominance test, but the more equal the firms are, the lower the dominance test becomes. Ten Kate concludes that ‘‘the adoption by the Commission of the dominance test as an additional tool for merger control reflects the intuitive belief that two small firms make a stronger competitor for a third big market player by joining together than by staying apart. Such a merger is presumed not to lessen but to 162. According to Ten Kate (2006) ‘‘out of 54 mergers with horizontal aspects and with only few product overlaps that were cleared during the period 1998 to 2003, 42 didn’t surpass at least one of the thresholds for the dominance index. In most of these cases there was a decline in that index. However, for thirty of them HHI thresholds were not surpassed either, so that the involved mergers would have enjoyed a presumption of legality anyway. For the remaining seven cases the dominance index declined while the HHI thresholds were exceeded. This might lead one to suspect that it was the dominance index that triggered authorization. Such a conclusion would be premature, however, because there were also 4 mergers that were cleared in spite of the fact that both the HHI and dominance thresholds were surpassed. Altogether it seems fair to say that the dominance index has had some, albeit a moderate, influence in Mexico’s merger regime.’’ 171 Monopoly Power Assessment enhance competition. Therefore, whenever a merger induces a decrease in the dominance index, even though the HHI increases significantly, the Commission establishes a presumption of legality.’’163 4.2.4 DIRECT EVIDENCE OF MONOPOLY POWER In Latin American countries, market concentration has usually played a paramount role in the identification of monopoly power in merger cases. Case law usually emphasizes market concentration as prime element to consider. However, competition agencies may choose not to support their monopoly power finding on market concentration evidence, if direct evidence of monopoly power is available. According to Baker (2006, pp. 3-4), such direct evidence may include evidence from demand elasticities. For example, this is the case where a group of firms chooses to raise prices when demand grows inelastic. Also, this is the case where other factors besides possession of a given market share indicate that price changes are inexplicable save for the monopoly power hypothesis. In the 1996 Mexican case Chicles Canel’s, S.A. de C.V. v. Chicles Adams, S.A. de C.V. for example, Warner Lambert, improperly seeking to displace Canels in the chewing gum market through predatory pricing, launched a new brand, ‘‘Clark’s,’’ and sold it below its total average cost. The Competition Commission stated that the proper assessment of monopoly power requires that full consideration be given to all the factors set out in the law and the influence they exert on the market and competition. Thus, although Warner’s market share was lower in volume than Canels, the former had greater weight in terms of value. This was consistent with Warner’s ability to set prices unilaterally in both formal and informal market segments and with the existence of barriers to entry. 4.2.5 ASSESSMENT OF MARKET DYNAMICS In antitrust analysis, a predominant market share does not necessarily give competitors monopoly power. The HHI concentration index has traditionally been treated as yielding a prima facie determination of monopoly power, which is complemented by the analysis of actual competitive dynamics. Whether firms 163. It is important to note that TenKate still considers the HHI to be superior to the dominance test: ‘‘the validity of the arguments in favor of the dominance index hinges on the welfare standard adopted for merger assessment. If this standard is total surplus, it is desirable to employ an index with an outspoken negative association with total surplus, as the dominance index is claimed to be. If it is consumer welfare, on the other hand, it is preferable to use an index associated with price, such as the HHI.’’ Also ‘‘the dominance index is not as reliable a statistic for social welfare as its proponents suggest.’’ 172 Chapter 4 are capable of raising prices unilaterally also depends on what other competitors in the market can do in response to the actions of their competitor. The analysis of actual competition, therefore, takes into account the conduct of other competitors present in the market. This is usually referred in the literature as the synergy of the relevant market, also called ‘‘market dynamics.’’ Competition analysis, therefore, examines a market’s internal dynamics as revealed by a historical review of the industry. In particular, it examines how business culture, tradition, and innovation have shaped competition within the market. It also examines whether there is sufficient power in the hands of clients such that any monopolistic attempt would be negated by their actions. Antitrust analysis as applied throughout Latin America considers several factors in the measurement of market dynamics: (i) (ii) (iii) (iv) (v) prices v. product differentiation; distribution and variation of market shares among competitors; credible competitors; past history of anticompetitive restraints; countervailing bargaining power. Let us examine each of these elements: (i) Prices v. product differentiation Competition authorities first look into consumer preferences in order to establish whether price or product differentiation is the main factor driving consumers’ preferences in the market. This is important to know at the outset, because the dynamics of competition are entirely different in markets where price is the main factor guiding consumers’ decisions, as compared to markets where consumers prioritize product differentiation. In markets where products are undifferentiated (such as commodities), price competition dictates consumer’s choices; hence, any attempt to increase prices would meet effective resistance from consumers who would switch their purchases to cheaper brands. Conversely, product differentiation makes it more difficult to counteract price increases by firms who would obtain a dominant position through a merger; in this case, antirust authorities may conclude that it is possible to impose price increases easily. For example, the competitive behavior of firms operating in the laundry detergent market resembles that of firms in commodities markets, since cost-saving concerns, not quality, drive consumers. In countries experiencing long recessions, these preferences may change as average consumers see their income deteriorate and become more conscious of price reductions than they were previously. The evolution of demand is a very important factor to assess in order to determine whether actual competition exists in a market. If demand is stagnant, it is likely that consumers will value price relatively more than other product attributes. Any attempts to increase price will be confronted with stronger resistance by consumers. Monopoly Power Assessment 173 (ii) Distribution and variation of market shares among competitors This is an important indicator of the intensity of existing competition. Even with a market share in excess of the legal dominance threshold, the incumbent firm may not be dominant provided that there are one or more competitors in the market with a relatively large market share that are capable of effectively constraining the incumbent’s ability to exercise a decisive unilateral influence. In addition to the likelihood of a postmerger price increase, the competition agency will examine whether market competition is dynamic, that is, whether the market shares of participating firms constantly vary. Dynamic competition analysis may show, for instance, that the market is characterized by unstable market shares, or that new entries or expansions of smaller undertakings have been successful. In order to assess whether the variation of market shares is significant, competition authorities may adjust the time span of their analysis in accordance with the structure of the market. Thus, they may choose to analyze the change in market shares for a period of four to five years in markets characterized by large-scale, long-term, and irregular contracts. By contrast, with respect to other markets an analysis of data drawn from a relatively shorter period of time may suffice. As a rule, more dynamic markets are characterized by more efficient competition; therefore dominance in such markets is less probable. High variation of market shares indicates the presence of dynamic competitors in the market. Variation in market share rates acquires a different meaning depending on the overall economic context in which it occurs. For instance, in countries experiencing significant economic recession, variation in market shares occurs at the expense of competitors’ positions rather than as a result of market growth: this is a clear indication of competitive rivalry. Potential future shifts in market shares are also relevant in the analysis carried out by competition agencies. The problem here is to gauge the real possibility that existing restrictive arrangements will increase the market shares of incumbent firms, thereby enhancing the competitive impact of their restrictive strategies. Competition agencies ask whether restrictive arrangements could forestall the entry of potential rivals and reduce their chances of taking over a share of the market from the incumbents. (iii) Credible competitors Competition agencies examine whether credible strong competitors exist in the market. The presence of strong competitors, enjoying economies of scale due to control over a significant distribution network, may be a disciplining factor against any attempts to increase prices. In this connection, several variables are examined, such as investment levels in infrastructure development, hoarding capacity, the development of new productive capacities, and existing inventories. 174 Chapter 4 A key element of this analysis is whether incumbent firms possess idle productive capacity. The ability of potential rivals to increase their market share will to a large extent depend on whether incumbent firms can rapidly increase their productive capacity, and also on whether the capacities currently used to supply one market can be readily transformed to supply another market. Incumbent firms producing at 100% of their capacity will display an obvious interest in flooding markets with their output; therefore, they will provide a high degree of competition. In CLICAC v. Gold Mills de Panamá S.A. and others (2003), the Panamanian competition authority charged the four main wheat flour mills and their trade association with absolute monopolistic practices, namely price-fixing and market division. CLICAC noted that the firms had maintained an excess of idle capacity (25%) in justifying its position. Similarly, in Loma Negra and others (2005), Argentina’s CNDC invoked the same factor as a key element of its finding of collusion in the cement industry of this country. Moreover, whether competitors are credible also depends on the presence of any competitive advantages gained by the incumbent firm over existing rivals thanks to intellectual property rights or other legal claims. These include technological advantages achieved through patents; a well-known trade mark or company name that is valued by consumers; favorable conditions for access to sources of raw materials as a result of long-term supply contracts; efficient and well-organized distribution systems; a high degree of vertical integration (e.g., the operation of a proprietary distribution network or transport fleet); and extensive financial resources or the ability to spread risk to other areas of business. These and other factors may facilitate the incumbent firm’s efforts to maintain and increase its market share while at the same time limiting the chances that other competitors will increase their respective market shares. Again market shares are important prima facie evidence to assess the capacity of competitors to become credible competitors. In the Mexican Coca-Cola/Cadbury case (1999), in addition to the large market shares held by both merging companies, the Commission took into account the fact that Coca-Cola’s closest competitor, PepsiCo, had a market share of 18% while the remainder of the market was divided among small- and medium-size firms. Finally, competition agencies examine whether competitors in the market possess specialized productive capabilities; if they do, then it is more likely that price increases would follow a merger. For example, manufacturing some products, such as high-tech goods, requires special skills, and competition is driven mainly by entrepreneurial efforts aimed at increasing core capabilities. One factor relevant in this analysis is the amount of investment in research and development (R&D). (iv) Past history of anticompetitive restraints Competition agencies also look into the competitive history of the industry under examination in order to determine whether there is a previous history of anticompetitive restraints. 175 Monopoly Power Assessment Under international standards, this element of the analysis looks to the past conduct of the firm suspected of engaging in restrictive conduct. However, in Latin American case law the inquiry into the history of anticompetitive restraints has been understood to include the conduct of other firms belonging to the same industry. In both Argentina’s Loma Negra and others (2006) and the Venezuelan case Pro-Competencia v. Cemex and others case (2003), the competition agencies noted the prior record of anticompetitive restraints in the relevant industry and treated it as circumstantial evidence of anticompetitive conduct. (v) Countervailing bargaining power Competition agencies will also analyze whether merging firms have clients capable of counteracting any attempts to increase price. This is an important factor which requires consideration of the role of distribution channels in forestalling any attempted price increase. Accordingly, competition agencies examine the structure of the distribution network in the relevant market in order to assess the capacity of merging firms’ clients to avert price increases. It is necessary to establish, for instance, whether there are independent retail stores with undisputed bargaining power to counteract any attempts to raise prices. These include large wholesale stores and supermarket chains, as well as independent supermarkets and small- and medium-sized retail stores. In analyzing the acquisition of several productive assets and the proposed licensing of Johnson & Johnson’s trademark Favor by Unilever N.V. (1996), Pro-Competencia examined whether the presence of customers with bargaining power was proof of competition in the relevant market. In addition to market dynamics, competition agencies treat the existence of barriers to entry as a crucial element in the monopoly power assessment. Even though it holds a significant share of the market, a firm is not necessarily dominant if no barriers exist (or the barriers are insignificant) to prevent other competitors from entering the market and effectively challenging the incumbent firm. And conversely, where the barriers to entry are significant, the incumbent firm may be protected from competition and therefore be capable of exercising a decisive unilateral influence even when its market share is not absolutely large, provided that it is large relative to the market shares of its competitors. In the next section, we examine the implications of the analysis on barriers to entry. 4.2.6 ANALYSIS OF BARRIERS TO ENTRY Measurement of barriers to entry is a key element of antitrust analysis. As noted by OECD (2006, p. 9): Barriers to entry are important because they are relevant in virtually every kind of competition case that does not involve a per se offence. It is necessary to consider entry barriers when assessing dominance, when determining whether 176 Chapter 4 unilateral conduct might deter new firms from participating in a market, and when analysing the likely competitive effects of mergers, to name a few examples. In merger reviews, for example, competition authorities usually base their analysis of monopoly power on changes in the degree of market concentration and on the existence of barriers to entry. Barriers play a prominent role since competition authorities will not object to a concentration, regardless of the degree of market concentration that results, as long as there are no barriers to entry. Therefore, if a merger would likely increase concentration substantially, entry barriers matter, because competition will still exist so long as firms can enter easily, quickly, and significantly. Consequently, agencies seeking to block a merger usually need to show that barriers to entry make quick, significant entry unlikely. Similarly, establishing the presence of substantial barriers to entry is usually necessary in order to prove that a high market share translates into monopoly power in monopolization or abuse of dominance cases. Furthermore, barriers to entry play an indirect role in determining market concentration, since potential competitors are usually treated as though they are actual competitors if barriers to entry are low enough to enable them to enter quickly. Finally, barriers to entry are essential to determining the capacity of a cartel to effectively impose supra-competitive prices on consumers. Clearly, then, identifying barriers to entry has important implications for antitrust analysis. For antitrust authorities, the significance of barriers to entry lies in both the increased likelihood of a finding of monopoly power when they are present, and their role in determining whether a proposed merger should be challenged. Barriers to entry may be either structural or strategic. Structural barriers, also called ‘‘absolute cost advantages’’ are associated to basic industry conditions, such as cost and demand. They exist when firms already in the market experience lower costs at every output level than would be available to potential entrants. A firm has an absolute advantage over other competitors where it has a right or a possibility to use certain assets or resources while its potential rivals do not have such a right or possibility, have no access at all to the assets or resources in question, or have the possibility of obtaining them only at a price much higher than that paid by the incumbent firm. These cost advantages come from several sources: exclusive control of production techniques via either patents or trade secrets (new entrants would be subject to royalty charges or to the higher costs of relatively inefficient production techniques); exclusive ownership of scarce resources (entrants would be required to pay discriminatory input prices or to use lower quality, higher cost resources); enjoyment of capital market advantages (incumbent firms have access to investment funds at preferential interest rates). Strategic advantages are associated with the conduct of the firm, which creates impediments to potential entrants into the market. Sometimes it is possible to quantify these kinds of barriers because it is known in advance how much it will cost to build an efficient plant or to purchase necessary Monopoly Power Assessment 177 inputs. Strategic barriers, on the other hand, are tactical actions (e.g., exclusive dealings) intentionally created by incumbents, presumably for the purpose of deterring entry. As an OECD report (2006, p. 10) states: ‘‘ A barrier to entry does not have to prevent firms from entering a market forever in order to affect competition and consumer welfare; sometimes merely retarding the arrival of new firms is enough. Therefore, entry conditions are usually analysed from a dynamic, rather than a static, perspective.’’ Depending on whether they emphasize market structure or market dynamics in competition analysis, competition agencies have differing views on the assessment of barriers to entry. Thus, competition authorities apply their own variants of the Bain and Stigler definitions of barriers to entry.164 The European Union, for example, defines them as ‘‘specific features of the market, which give incumbent firms advantages over potential competitors.’’165The United Kingdom’s Office of Fair Trading (the OFT) states that: [e]ntry barriers may be broadly defined as any feature of a market that gives incumbent firms an advantage over potential entrants, such that incumbents can persistently raise their prices above (or reduce quality below) competitive levels without new firms entering the market.166 Australia holds that a barrier to entry is ‘‘any feature of a market that places an efficient prospective entrant at a significant disadvantage compared with incumbent firms.167 As with the evaluation of market concentration, these views tended to be situated at opposite extremes in the first years of antitrust enforcement in Latin America; one group of countries, led by Brazil, and to a lesser extent Argentina, tended to neglect potential competition as a factor disciplining business behavior. At the same time, a second group of countries, led by Peru, emphasized potential entry as key factor conditioning competition in the relevant market. Today, however, these positions have converged significantly; now, barriers to entry are an important analytical tool employed by competition authorities. Competition agencies’ central concern in measuring barriers to entry is determining whether they are high enough to prevent other firms from entering the market if the suspected monopolist increases prices. This includes those firms that do not currently produce in the market, but would produce substitute goods if prices were to rise. How do competition agencies in Latin America assess barriers to entry? Some countries, such as Brazil or Venezuela, have their own standards for evaluating 164. See Section 3.3.2, above. 165. European Union, Guidelines on the Assessment of Horizontal Mergers under the Council Regulation on the Control of Concentrations between Undertakings (2004). 166. United Kingdom, Mergers: Substantive Assessment Guide (2002). 167. Australia, Merger Guidelines (1999). 178 Chapter 4 entry; however, these are largely modeled on the U.S. Horizontal Merger Guidelines (U.S. Department of Justice, 1997) and the European Merger Guidelines (European Commission, 2004). Under these guidelines, timely entry is more relevant than examination of entry at all. As the OECD (2006, p. 10) states: ‘‘Entry analysis goes beyond asking whether entry barriers exist and whether entry could conceivably occur. Typically, it also asks whether entry would occur and, if so, whether it is likely to happen quickly enough and be substantial enough to fix the anticompetitive problem that is central to the case.’’ 4.2.6.1 ‘‘Timely’’ and ‘‘Committed’’ Entry Competitive markets require the presence of committed competitors who will enter should the opportunity arises, and can do so within a short period of time, usually two years. There are three elements that must be evaluated in order to determine whether committed entry would deter or counteract a negative effect on competition: (i) Easy entry (ii) Profitability of committed entry (iii) Effectiveness of potential entry. Let us see each these conditions, which must be met in order for firms outside the market to be considered potential entrants. (i) Easy entry The existence of potential entrants can undermine competition authorities’ belief that a firm possesses monopoly power. Their mere existence indicates that the suspected monopolist would not be able to raise prices in a significant and nontransitory manner. However, entry must be likely, not merely possible. In order to identify potential candidates for entry, competition authorities generally question company officials. If entry appears likely, but no specific firm is interested in entering the market, then it is possible that a barrier to entry exists but has not been identified. The competition agency will examine whether entry is ‘‘timely, likely, and sufficient’’ to defeat a price increase; in other words, whether entry is ‘‘easy.’’ Whether entry is timely or not will depend on the particular features of the relevant market. According to the guidelines, entry is easy if it is ‘‘timely, likely, and sufficient in its magnitude, character and scope to deter or counteract the competitive effects of concern.’’ Where innovations are fairly quickly introduced in the market, the new participants may be expected to overcome the barriers to entry comparatively rapidly, making entry more likely. Also, evaluation of entry takes into account the responses of potential suppliers to price increases. An entirely new entry will normally be more time-consuming than entry from a neighboring market for a number of reasons: the need to obtain Monopoly Power Assessment 179 design and construction permits, to design and construct buildings, order equipment, hire and train the employees, appoint distributors, etc. Firms that could easily switch into production without significant delays or investments are considered to be ‘‘in the market’’ even thought they have zero current market share; these are generally referred to as potential entrants.168 Competition agencies usually examine whether entry can achieve significant market impact within a timely period (usually within a two-year period). (ii) Profitability of committed entry Secondly, competition agencies assess whether committed entry would be profitable, and consequently would be a likely response to a merger with competitive effects. Entry must be effective to be meaningful, meaning that new participants must be able to readily and significant affect the product price. Therefore, committed entry must be profitable. Firms operating in neighboring markets could enter the market sufficiently rapidly by adjusting their already-available equipment to the new market. This possibility is regarded as supply substitutability when defining the relevant market. The effectiveness of entry will also depend on whether or not the new market participants would successfully take over a share of sales and the market from the existing market participants. When considering the possibility of entering the market, a business compares the expected revenues to be made upon entering the market with expected costs of entering the market and the sunk costs related to exit from the market (which may become necessary in the event that the entry proves unsuccessful). The prospects for market growth are also important when assessing the success of entry into the market. For new market participants, growing rather than static or shrinking markets are more attractive, since the absence of sharp price or profit declines facilitates adjustment to the market conditions. In addition, when assessing the efficiency of entry into the market, it is important to determine whether the new participants with their capacities will be able to enter the market at a scale sufficient to restrict the ability of the business to behave unilaterally in the market. (iii) Effectiveness of potential entry The competition agency will examine also whether entry is sufficient to return market prices to their premerger levels (or to counteract the attempted monopolization, in cases of restrictive conduct). 168. European and U.S. rules in this area differ slightly. Under European rules, entry refers to potential responses by suppliers that may require a longer period of time to penetrate the market, as compared to the readiness of substitute products. Hence, they are not considered part of the relevant market, but their potential competition is considered to be ‘‘present,’’ disciplining incumbent firms. 180 Chapter 4 In this analysis, the agency not only establishes the existence of a range of barriers and the advantages they confer on the existing market participants vis-àvis new entrants, but will also try to assess the size of such barriers and the objective possibilities of market entry. Where market barriers to entry are low, entry into the market in response to a competitor taking advantage of its market position would be effective, and it is likely that prices would return to their premerger levels. When assessing whether entry into the market may be efficient, exact and detailed information may be difficult or impossible to obtain. The competition body will base its assessment on all available evidence. The competition body may ask the businesses operating in the market and potential rivals to express their views on the market barriers to entry and the possibility of entry in order to assess the duration of the entry. The competition body will also inquire into the costs of effective entry, for example, the costs necessary to take over a 5% market share, or the costs required to produce as effectively as the incumbent firm. Potential competitors may include: businesses in other sectors of the economy using similar production technology; businesses using similar distribution methods that could begin the production or purchase of the relevant product; and businesses manufacturing the relevant product in other geographical markets. When assessing the possibility of market entry, the competition body will also take into account the facts related to market entry (whether successful or not) in the industry’s recent history, such as: facts evidencing the entry into or the withdrawal from the relevant market (or a market close to it), documented plans to enter the market, and documents providing evidence of the duration or method of entering the market. While analyzing the facts related to market entry, it is important to clarify whether previous entry has been effected by investing in new capacities, by acquiring a supplier already present in the market, or whether it was an entry by companies producing similar products into the new product or geographic market. The absence of new market participants does not necessarily mean that entry is comparatively difficult. It may be the case that the market is highly competitive and that there is no excess profit to attract any new producers to enter the market. What factors are usually considered at this stage of the analysis? The U.S. Horizontal Merger Guidelines define a sophisticated model of entry which incorporates data on both market structure and expected competitor behavior into a qualitative profitability algorithm (Coate and Rodriguez, 2000). Information on sunk costs and minimum viable scale is crucial to the Guideline analysis, along with data to determine whether the entrant could profit from entry at the minimum viable scale. The first stage of the entry analysis must identify sunk costs in order to show that the market is not contestable (since contestable markets have no sunk costs, entry must be considered likely in response to any opportunity). For markets with sunk costs, the analysis then focuses on the minimum viable scale necessary to compete, using data on the size of the existing firms and technological requirements. Monopoly Power Assessment 181 Next, additional information on growth and other potential sales opportunities is collected to complete the analysis. Entry is assumed to be profitable if the new firm could enter with an efficient plant and quickly capture the market share necessary to maintain operations at the minimum viable scale. The market share analysis would start with an assumption of a 5% base share and then add a portion of the available growth in sales, the business potentially available from any large buyer, and the likely accommodation from existing firms. Competition agencies differ on the time frame that should be used for the market share analysis, but either a period of few years or a period reflecting a product introduction schedule based on the historical facts in the industry would seem reasonable. If the entrant could set up an efficient-scale plant, entry could profitably occur and anticompetitive pricing would be unlikely. The actual entry intentions of potential entrants do not enter the analysis; as long as the entry is profitable, it is assumed that some firm will enter. 4.2.6.2 The Analysis of Barriers to Entry in the Latin American Case Law All Latin American Competition agencies acknowledge the key role of barriers to entry; however, the definition of an entry barrier is usually vague. For example, Brazil’s Guideline for Economic Analysis of Horizontal Mergers (SDE and SEAE, 2001) defines barriers to entry as ‘‘any elements of the market that create a disadvantage to a competitor in relation to the existing players.’’ The broad definition of barriers to entry promotes the consideration of a myriad of structural and dynamic elements, depending on the normative—ideological—bias of the enforcing agency. Usually, competition agencies examine the following barriers of entry: – – – – – – – – – – – Scale economies Sunk costs Government restrictions Access to essential production factors Access to capital Timing costs Idle productive capacity Durability of goods Presence in the market Exclusionary conduct Network externalities and lock-in effects. (i) Scale economies Scale economies imply the reduction incumbent of average production costs through an increase of production volumes; they are a barrier to entry whenever demand restricts entry to an integral number of firms, each of a minimally 182 Chapter 4 efficient scale. Thus, if a product were produced under cost conditions such that larger rates of production would entail lower average cost per unit, only one firm could survive. Where economies of scale are characteristic of a certain type of economic activity, a new market participant would immediately seek a large market share. However, this also implies an enhanced entry risk, as more abundant resources are required and sunk costs are more extensive. Furthermore, it is more likely that the response of the existing market participants to market entry attempts will be more aggressive. In the conventional logic of the SCP paradigm, these factors may impede the entry into the market. (ii) Sunk costs Some competition agencies look into unrecoverable sunk costs which could be lost in the event of a shift from one market to another. In this inquiry, competition analysis takes into account adjustment costs; the time required to recoup the necessary investments; whether costs are effectively ‘‘sunk’’; and the ability to convert infrastructure and equipment to alternative uses in the event of exit from the market. Sunk costs represent costs incurred when entering the market that cannot be recovered when withdrawing from the market or by selling, leasing, or making other use of the production resources necessary for the economic activity in question. Representative examples of sunk costs include investment in a trademark, goodwill, reputation, etc. For example, the reputation of the existing market participant may constitute a barrier for new producers to enter the market, as potential entrants will be forced to invest heavily in advertising and other marketing strategies in order to overcome it. Advertising and investments in brand or trademark development are important indicators of the ease of entry because of the information asymmetries that they generate between potential entrants and the incumbent’s customers and clients. If a potential entrant needs to undertake considerable advertising investments in order to enter the market, the competition authority may well conclude that this is evidence of the existence of significant barriers to entry to potential competitors. An example of the importance of trademarks as barriers to entry in merger analysis is the Argentinean Grupo Bimbo/Fargo case (2004). This merger, approved with conditions in 2004, was the core of an international transaction in which Grupo Bimbo, one of the largest international baking operations in the world, acquired Fargo, another bakery products manufacturer. Fargo had been in receivership. The CNDC analyzed the effects of the merger in Argentina in two markets: industrial black and white bread and the baker’s shop market. In the former, the resulting company would have a market share of 79% after the merger and in the latter, 62%. Notably, the CNDC found that there were significant barriers to entry in these markets, which included the well-established brands of the two firms, which would be costly to duplicate, and the large excess production Monopoly Power Assessment 183 capacity that would be held by the resulting firm. The Commission concluded that the merger would have significant anticompetitive effects, and while the parties contended that the transaction would produce efficiencies, the Commission decided, pursuant to the consumer welfare standard that governs efficiency analysis under the law, that the savings would not be passed on to consumers. A part of the acquisition had already been consummated abroad, however, and the Commission declined to require the transaction to be unwound. It did require the divestiture of one baking plant operated by the parties, as well as a brand name and a distribution system. The Commission further ordered that the parties could not complete that part of the transaction which had not been consummated and that they could not integrate their operations in Argentina until the divestiture was accomplished. Another example of the relevance of barriers to entry associated to branding is found in the Mexican Coca-Cola/Cadbury case (1999). In addition to its discussion of market dynamics, examined above, the CFC determined that although there were no legal barriers to entry, such as restrictions on foreign investment and ownership, the economic barriers were significant. Coca-Cola had an extensive brand portfolio with a high market value, reinforced by its remarkable ability to advertise its brands and strengthened by its distribution network, which was the largest in the country. This infrastructure would be of great strategic value to the merged entity in strengthening its monopoly power in the carbonated drinks market. Moreover, Coca-Cola’s practice of granting territorial exclusivity to distributors barred the entry of new Coca-Cola distributors in the same geographic area. Based on these findings, the Mexican Competition Commission determined that the merger would substantially diminish competition in the carbonated drinks market. It would allow the merged entity to: (i) unilaterally fix prices and restrict supply; (ii) foreclose competitors from the relevant market of carbonated drinks; and (iii) engage in monopolistic practices. On these grounds, the acquisition was blocked. The amount of the sunk costs depends, on the one hand, on the technologies used in a given sector of economy and/or the requirement of extremely specialized physical capital (e.g., when a firm may produce a product only after buying a plant or a machine that is subsequently impossible to sell or use for the production of other products). On the other hand, sunk costs are also determined by the behavior of the existing market participants (e.g., expenses for advertising or research and development). These costs are required in order for the existing market participant to enhance demand for its production. Thus, by increasing sunk costs, the existing market participant may enhance the risk associated with entry into the market and increase its competitiveness vis-à-vis other existing competitor firms. (iii) Government restrictions Patents and copyrights may grant their holders an absolute advantage with respect to other potential competitors, who are prohibited from producing or selling products by using the intellectual property owned by others. An incumbent firm enjoys 184 Chapter 4 an absolute advantage with respect to other undertakings if it produces at lower costs than are available to potential competitors thanks to an efficient technological process protected by an intellectual property right such as a patent. Accordingly, competition agencies examine whether there are legal restrictions, permits, authorizations, licenses, intellectual property rights, or foreign trade regulations that restrict the sale of substitute products in the relevant market to a limited number of applicants while preventing others from obtaining access. Government resolutions and other legal acts impede entry into the market, thereby directly or indirectly limiting the number of competitors in the market. Even the application of technical norms and standards (e.g., standards related to health and safety) to all businesses may impede entry and protect incumbents where the standards and their application have been established on the initiative or requirement of the incumbent market participants. In Latin America, government restrictions often entail a key absolute advantage due to the ubiquity of government restrictions limiting the entry of potential competitors into the market. Tariffs, for example, are often reviewed by competition agencies. In Argentina’s Fecliba v. Roux Ocefa, Rivero and Fidex (1998) three pharmaceutical laboratories were investigated for allegedly agreeing a price increase for their physiological serums during the first months of the year 1995. The investigation started due to a private complaint filed by a hospital association (Fecliba) of the Province of Buenos Aires. This case, as explained bellow, is a very important precedent, since the CNDC established, for the first time, a structured and detailed doctrine regarding tacit collusion. According to the CNDC’s analysis, the relevant market was composed of two types of physiological serums with a high degree of homogeneity that were marketed by the laboratories in Argentina. Furthermore, the CNDC concluded it was a contestable market since the barriers to entry were low and there were no barriers to international trade (such as tariffs). Aside from the investigated firms, there were five other laboratories that operated at a national level, as well as laboratories that sold the serums at a regional level and imported Brazilian serums. Finally, the CNDC argued that, according to economic theory, low barriers to entry and the viability of international trade in a good makes price-fixing innocuous, since an increase of price will attract new local and international competitors. By contrast, in the cement cases Pro-Competencia v. Cemex and others (2003) and CNDC v. Loma Negra and others (2005) both Pro-Competencia and the CNDC held the view that high barriers to entry (sunk costs, vertical integration, economies of scale, and the idle capacity of incumbents) and the difficulties of international trade due to the nature of the product in question made entry cumbersome for potential competitors, thereby limiting the market to Portland cement. (iv) Access to essential production factors Competition agencies also assess whether competitors can access production inputs such as specialized labor, capital goods, technology, and raw materials. A firm enjoys an absolute advantage over other firms when it has at its disposal Monopoly Power Assessment 185 (or it owns) essential resources (assets or equipment) required for the production or provision of a specific product or service (e.g., a port—or part of it—for shipping services, or fixed telephone lines for telecommunications services) while potential rivals do not have a right to use these resources, or their right to use them is restricted. Furthermore, a barrier also exists when it would be overly expensive or inexpedient for a potential rival to develop (or install) such a production resource. In particular, antitrust analysis explores the relative ease of access to these inputs in order determine the difficulty of beginning production of the relevant product. There are a number of factors relevant to this determination, for example: whether operating manuals for the production of the relevant product are easily accessible to the public; whether there is considerable literature on plant standardization; whether there is need for specialized labor or technology in the investigated industry; whether there is considerable R&D effort required in order to develop new products that will attract consumers’ attention; and whether superior products belonging to the same market impede the development of cheaper alternative products. (v) Access to capital An important strategic advantage in Latin American countries is access to capital; therefore, it is usually taken into consideration by competition authorities in the region. The incumbent market operator may have better financing possibilities than a potential entrant. A well-established reputation in the market reduces the risk of investment in an incumbent firm and allows it to secure better financing terms. An incumbent entrepreneur may also have more market information and, as a result, may be able to develop a better business plan. Higher financing costs (related to borrowing or issuing securities) may make entry by a potential rival more difficult even when the costs of attracting the necessary financing are not sunk costs. However, financing possibilities do not necessarily constitute a barrier to the entry into the market where the potential participants are relatively large or produce a large range of products and have the ability to distribute the risk to other business areas, and also, where possible, to rent the necessary equipment. Large capital requirements become an entry barrier when minimum efficient scale is quite large, vertical integration is essential, or the production process is highly capital-intensive. This variable requires an examination of how significant the investment costs are in the production of goods or services in the relevant market. The key question asked by competition agencies in the region is whether access to capital (i.e., banks, lending agencies, and lenders) is a viable option for new entrants? For example, Mexican antitrust provisions169 takes into account ‘‘capital requirements,’’ that is, financial costs or the costs of developing 169. Article 11, Competition Act Regulations (Mexico). 186 Chapter 4 alternative funding channels. It also considers ‘‘whether financial markets are efficient,’’ that is, whether conditions of ‘‘limited access to financing’’ exist. (vi) Timing costs Another entry barrier may be the time needed to collect the relevant information, attract capital, construct production premises or install equipment, develop goodwill, promote a trademark or company name, develop an efficient distribution system, and so forth. Even where the market is attractive to new participants, the incumbent market participant may maintain its position for a sufficient period of time to ward off competition. This is especially true of economic activities characterized by economies of scale, where entry into the market is a lengthy process due to the high costs of the necessary production resources. (vii) Idle productive capacity Competition agencies also take into account the presence of excess or idle productive capacity in the industry under consideration, which may be capable of offsetting any attempted price increase in the relevant geographical market. (viii) Durability of goods Durability of goods is also another factor taken into consideration by competition agencies. Firms operating in markets for durable goods such as cars, appliances, business equipment, electronic equipment, home furnishings and fixtures, housewares and accessories, photographic equipment, recreational goods, sporting goods, toys, and games, will face stronger competition, and will invite the presence of more competing firms, given that consumers may be able to defer their purchases and await the entrance of new firms. Therefore, the existence of a stock of used durable goods could be used to discipline the pricing of new goods. (ix) Presence in the market Next, strategic advantages resulting from initiating business operations before other competitors is considered to generate barriers of entry. An early start in the market facilitates the business to acquire the ability to affect the development of the market, for example, by reducing or entirely eliminating the possibility for others to enter the market. A competitor already operating in the market will normally have more abundant information about the existing production costs than its potential rival, and this information, costly to finance may make entry more difficult by becoming itself a sunk investment cost. Lack of information by itself may become a barrier in cases where the production technology is complex and collection of information may involve extensive sunk costs for R&D or acquisition of practical expertise. Monopoly Power Assessment 187 In the Brazilian Nestlé/Garoto case (2000), CADE took into account the presence of both Nestlé and Garoto in the market, and blocked the transaction based on the apparent high barriers to entry that led to significant monopoly power for the merged firm. In this case, Nestlé tried to acquire Garoto in a market with three major players (Nestlé, Garoto and Kraft/Lacta). In one of the markets (for chocolate topping), the combined market share grew to about 95%, with the remaining 5% belonging to a producer from Argentina. Barriers to entry were analyzed thoroughly. It became clear to CADE that, although the entrant could be a large corporation, the costs of marketing and distribution (considering that Brazil is a very big country with infrastructure problems) would make it very difficult to have a return on the investment. It is also important to note that in this market there is very high fidelity to known brands and tastes. It takes many years for a new brand to be accepted by customers: in fact, of the sixteen leading brands, the newest was eleven years old. Another barrier to entry in this market is a diversified portfolio of brands and products, a condition imposed on any company in order to find outlets for its products. This specific problem was faced by both Marsh and Hershey’s in their attempted entries into the Brazilian market. (Gringberg, 2007) In sum, the factual elements used to identify the existence of barriers to entry include all the actions undertaken by firms in order to produce and sell in a market, including: planning, design, and management; obtaining legal authorization and complying with regulatory requirements for operating in the market; building up productive infrastructure; and the promotion, distribution, and marketing of goods. (x) Exclusionary conduct Finally, certain business practices may contribute to barriers to entry due to their exclusionary effects. Vertical agreements, predatory actions, and refusal to sell are among these practices. The competition agency also examines whether essential assets favor the position of incumbent firms in such a way as to foreclose the market to potential entrants. Thus, the agency assesses the restrictions firms face in terms of access to consumers. This involves a careful evaluation of the structure of distribution channels, as well as the strategies of market participants in marketing their goods. The information gathered will reveal whether distribution channels are diverse and allow any firm in the market to distribute its product. For example, do potential competitors have access to a rented transportation fleet, or do they have to develop their own? Trademarks are also considered to be a potential source of market foreclosure. Here, the type of product is crucial. For example, if products are commodities, consumers will not be particularly loyal to established brands, enabling potential competitors to enter the market more easily. Competition agencies look at marketing strategies that suggest that the presence of products in the market depends in large part on the capacity of competitors to finance or provide funds to resellers such as supermarkets, shops, or mom-andpop stores, in order to ‘‘buy’’ a particular space on the shelves where the products 188 Chapter 4 are displayed. Research indicates that that the success of a product sold to the consumer is defined at two particular moments: first, when the consumer decides what to buy (when the consumer stands before the shelf), and when the product is used. Therefore, the arrangement of products on the shelf is an important factor to consider. Of course, whether this factor emerges as a barrier to entry or not depends on the capacity of a given firm to pay for such a marketing strategy. Refusal to supply inputs may also constitute a barrier to market entry. For instance, where a producer of raw materials or resources that are used for the production of another product refuses to supply its production to new producers of that particular product, and alternative raw material or resource sources do not exist or it is not feasible to secure an alternative supply, new producers will be precluded from entering the product market even where no other barriers to entry exist. This is particularly a concern when there is a vertically integrated incumbent and a nonintegrated entrant must rely on the incumbent for an input. Finally, barriers to entry may emerge from ‘‘predatory’’ actions. In these cases, an incumbent firm in the market prevents a potential competitor from entering the market by lowering its prices below the level of its average variable costs. This strategy is intended to force the competitor to suffer financial losses that cannot be sustained. Certain business practices may contribute to create barriers to entry due to their exclusionary effects. Vertical agreements, for example, between the producer operating in the relevant market and distributors or retailers may impede the entry of a new producer in a certain geographical area even in the absence of any essential barriers from the production viewpoint. Where the existing producer concludes numerous exclusive purchasing agreements with distributors or retailers, the new producer may find itself deprived of the ability to market its production in light of significant barriers to the producer distributing its own production. This problem is illustrated in the case Cámara de Asistencia de Empresas Farmacéuticas (CEAF) v. Colegio de Farmacéuticos de la Provincia de Buenos Aires (Pharmaceutical Association of Buenos Aires case) (1999). In this case, the CNDC reached the conclusion that the Association had created a barrier to entry due to exclusivity contracts that had given it control over 60% of the outlets in Buenos Aires. CNDC imposed a fine of USD 72,000 against the Association for abuse of dominance. In addition, the new producer may be impeded from entering the market by, for instance, an exclusive sale agreement between raw material suppliers and the incumbent market operator, or by agreements in which a dominant manufacturer of a refrigerated or frozen product provides a free refrigerator or freezer to small shops, but only on the condition that they not stock its competitors’ products in that refrigerator or freezer. Since small shops tend to have only one of these, this type of agreement has often been found to be exclusionary. Cases addressing these issues in Latin America include Costa Rica’s case Coca-Cola v. Pepsi Cola (2001). In this case, Coca-Cola was found guilty of using soft drink freezers at mom-and-pop stores as a means of foreclosing the market to her competitors. In this case, Embotelladora Panamco Tica S.A., Coca-Cola’s bottling company Monopoly Power Assessment 189 used exclusive contracts to prohibit retailers from offering space in such freezers to her competitors. A similar restrictive effect may result from cases of vertical integration, where, for example, one supplier has control over a larger share of the production and distribution stages. (xi) Network externalities and lock-in effects In the view of economists (Shapiro [1996]; Shapiro and Varian [1999]) barriers to entry may be particularly detrimental in ‘‘network industries.’’ Network industries are those in which consumers are linked to one or more virtual or real networks. On the one hand, real networks include, for example, activities in the telecommunications and transport sectors, conducted through telephone, computers, roads, rail, and electricity networks. On the other hand, virtual networks are comprised by users share the same technology; this is the case of network users of Macintosh computers, networks of users of Sega video games equipment, network users of VHS video equipment, network users of DVD video appliances, etc. Network industries have a tendency to display a positive feedback in terms of size; that is, the larger the network, the more attractive to buyers will be; thereby increasing the prospect of future growth. Evidently, this phenomenon creates ‘‘barriers’’ on alternative networks that cannot sustain growth. Network industries, based on high technology, such as computer software, characteristically evolve at an accelerated technological pace. Accordingly, companies located in these industries, supported by innovative technology, market entry is inevitable; hence it is impossible to hold monopoly power for a long time. This feature explains the intense dynamism of industrial and commercial strategies observed in these markets. However, a counter-argument developed by some economists (Shapiro [1996] and Shapiro and Varian [1999]; Nicolaides [2000]) supports the idea that the growth of a network makes it increasingly difficult for users of such network to switch to a new product that is incompatible with it. This is known as ‘‘network effects.’’ Such scholars note that businesses operating in this sector constantly raise barriers through ‘‘lock-in’’ strategies. The first strategy is to refuse a new entrant any compatibility with the incumbent’s standard technology, thereby delaying or impeding altogether the development of new standards based on the technology supported by the potential entrant. This is achieved through the imposition of contractual obligations in the licensing of patents, trade secrets or copyrights, to prohibit any user of the standard technology from improving such technology or such properties of the installed system, which would otherwise enable the migration of a number of loyal users to a new network. This strategy makes it more difficult for the new entrants to attract consumers into their own network. Even software updating, as well as the introduction of new generation technology, makes it more difficult for competitors to maintain their products compatible with the dominant technological network. Such mechanisms prevent new 190 Chapter 4 entrants from threatening the incumbent firm’s position as the market leader. Another strategy rests on launching prereleases of new products compatible with the standard network, in order to discourage consumers from switching to another network. Prereleasing new products or updated versions of existing ones lures consumers into maintaining a technology which is not ‘‘optimal.’’ Hence, competition agencies examine whether the information of prereleased products is accurate, so that consumers’ decision not to switch is based on real improvements, rather than vague promises with remote chances of being implemented. Accordingly, antitrust scholars believe that such conduct, which is primarily directed towards retaining and expanding the installed users’ base, is particularly restrictive. Market foreclosure strategies like these are likely to enhance the monopoly power of incumbent technological leaders in the software industry. The existence of network externalities and lock-in effects was raised by SDE in the Brazilian case Microsoft I (1998). In this case, SDE accused Microsoft of foreclosing the market for the sale of software in Brasilia though exclusive arrangements to sell Microsoft’s software products negotiated with TBA Informatica Ltda. CADE examined whether Microsoft’s sale strategy, based on giving preferential conditions to Large Account Resellers (LARs) was intended to foreclose the market. Also, the lock-in problem was later examined again in the case Paiva Piovesan Engenharia & Informática Ltda., v. Microsoft Informática Ltda (Microsoft II case) (2002). In this case, the Brazilian software house Paiva Piovesan accused Microsoft, which trades the personal finance software ‘‘Microsoft Money,’’ of impeding the competitiveness of her software program ‘‘Finance for Windows,’’ through tying arrangements and through strategies aimed at raising Paiva Piovesan’s access to distribution channels. CADE examined whether tying and exclusivity arrangements imposed by Microsoft on her clients excluded Paiva Piovesan from the market. CADE did not find any objections to this conduct, despite Microsoft’s monopoly power, because there was no evidence that Microsoft had imposed an obligation upon independent distributors not to sell Paiva Piovesan’s products; or to tie ‘‘Microsoft Money’’ to the sale of other Microsoft’s products. Nevertheless, CADE presented the question of lock-in, as a case of potential entry barrier which could prevent the presence of alternative competitors. 4.2.7 COLLECTIVE DOMINANCE A new legal doctrine that emerged in the European rules provides for the case when not one, but several firms together hold monopoly power jointly (also known as collective or joint dominance). Collective dominance exists where a group of firms coordinate their actions without entering into an explicit agreement. This doctrine has sometimes been likened to that of ‘‘conscious parallelism’’ and/or ‘‘tacit collusion.’’ Monopoly Power Assessment 191 In Latin America, the concept of collective dominance or joint monopoly power is new. For instance, it was only expressly incorporated in Panama’s Competition Act of 2006.170 Firms may develop joint dominance where a group of unaffiliated firms possess market power even though no single member of the group is dominant by itself. This situation emerges where, first, there is no efficient competition between the group and the remaining businesses in the market operating outside the group, and, second, where the members of the group do not compete efficiently among themselves. A group of firms that collectively possesses market power may be able to coordinate its actions in a manner that allows the market price to be profitably increased above noncoordinated price levels without the firms entering into an explicit agreement. Firms in an oligopoly market normally base their decisions on how their rivals have behaved in the past. In addition, firms recognize that their current decisions may affect their rivals’ future reactions. The fact that firms recognize these interactions over a longer time period causes competitive response strategies to become more complex. It is possible for firms to act in a ‘‘consciously parallel’’ fashion, thereby achieving higher profits than would be the case in a competitive environment. To infer collective dominance, competition agencies will consider the following factors: – – – – collective possession of a large share of the relevant market; the potential for parallel behavior; the existence of barriers to entry; and other factors. (i) Collective possession of a larger market share Collective dominance is assumed to exist where two or three businesses hold the largest shares of the relevant market and these shares jointly account for more than a significant market share (approximately around two thirds of the market), while the relative market shares of other businesses are significantly smaller. Under these circumstances, there is a fairly high probability that such businesses, taken as a whole, may operate in the market sufficiently independently with respect to other business and may not compete efficiently among themselves. Joint monopoly power may also exist in cases where the largest shares of the market are held by more than three businesses, or where a group of businesses hold less than two thirds of the market, if there is strong evidence that this group of businesses is capable of exercising a unilateral and decisive influence on the market. 170. Article 17, Law No. 45/07 (Panama). 192 Chapter 4 (ii) Parallel behavior In examining whether or not the members of this group of businesses are competing efficiently among themselves, the competition agency will seek to establish whether the businesses are operating in a parallel manner. Any evidence that the alleged coordinated behavior is intended to increase price or is engaged in for some anticompetitive purpose will be relevant to the effective competition inquiry. The competition agency will investigate whether firms follow each other by acting in the same manner and avoiding competition between themselves, in particular by performing analogous and restrictive actions with respect to other businesses. Parallel behavior is more likely when a smaller number of firms together controls two thirds or more of the market, where there are no significant differences (asymmetry) between market leaders, the product is homogeneous, the market is transparent, and interfaces between competitors allow them to obtain information from each other and to monitor each other’s actions in the market. When analyzing the possibility of parallel conduct, the competition body will analyze the following factors: (i) group symmetry; (ii) the nature of the product; (iii) market transparency; and (iv) links between firms. (iii) Barriers to entry in joint dominant In joint dominance cases, there are three sources of competition that can defeat the profitability of a price increase. These are (i) competition from existing rivals outside the allegedly dominant group; (ii) competition from potential rivals (i.e., entrants) outside the allegedly dominant group; and (iii) competition from within the allegedly dominant group. Therefore, lack of competition within the group is necessary to establish control, or monopoly power, by more than one firm, as compared to the case of a single dominant firm. In the Argentinean American Express v. Visa case (1997), American Express claimed before the CNDC that Visa and MasterCard had negotiated a rule imposing an automatic exclusion of any bank willing to issue the American Express card or Discover Card in Latin America. The commission held that instruments enabling payment to be postponed comprised the relevant market, which would include not only the market for credit cards but also the market for debit cards (i.e., American Express). To establish joint market power between Visa and MasterCard, the CNDC held that the strong reputation enjoyed by both Visa and MasterCard enabled them to erect an entry barrier against new competitors wishing to hire banks to issue their own credit cards, making the exclusionary rule they had negotiated with the banks effective. Thus, in CNDC’s opinion, Visa and MasterCard enjoyed monopoly power due to their joint reputation. CNDC’s measurement of the relevant market in order to ascertain the existence of monopoly power was unconvincing, since it didn’t incorporate crucial considerations that gave American Express a commercial advantage; for instance, its users pay no regular interest at the end of the billing period, unlike the users of Monopoly Power Assessment 193 Visa or MasterCard. More importantly, CNDC considered a business’s reputation as a barrier to entry. In a prospective, long-term appraisal of market relations, business reputation serves consumers by providing them with a clearer appraisal of what to expect from otherwise unfamiliar firms. (iv) Other factors Other factors are also relevant in ascertaining the existence of collective dominance. Competition agencies consider, for instance, whether clients or consumers enjoy sufficient countervailing power to offset any attempted abuse. They also consider any particular facts of the case that indicate that members of the group have acted to inhibit intragroup rivalry. In short, competition agencies investigating alleged group dominance are guided by the same criteria applicable to cases where a single business is alleged to have a dominant position. However, in group dominance cases, the criteria are applied to both competition between the allegedly dominant group and other business in the industry, and to competition within the allegedly dominant group itself. 4.3 CRITICAL ASSESSMENT OF MONOPOLY POWER ANALYSIS Let us conclude this chapter by examining some of the specific features of Latin American antitrust methodology towards monopoly power analysis. International antitrust guidelines have recently underlined the role of entry barriers in the evaluation of monopoly power. As noted by OECD (2006, p. 9) ‘‘( . . . ) establishing the presence of substantial entry barriers is usually necessary to prove that a high market share translates into market power in monopolisation or abuse of dominance cases.’’ Nonetheless, in practice, Latin American agencies rely strongly on market concentration measurement and neglect the analysis of entry barriers. Indeed, this inclination is seen in the policy enforcement conducted in other regions of the world with a similar tradition of strong government intervention, which led to develop dominant players in each industrial sector. While it is true that in the conventional analysis of all Latin American agencies market concentration is only one among many factors to take into account in the assessment of monopoly power, it is also the case that domestic agencies are inclined to give preeminence to it, if only because it is the only element of antitrust analysis that can be quantitatively assessed.171 Therefore, monopoly power is usually found to exist if market 171. Why does monopoly power hold such a preeminent place in competition enquiries? The answer lies in Robinson’s Imperfect Competition theory, as embodied in the structureconduct-performance paradigm, both of which were examined in the previous chapter. As discussed in that chapter, under Imperfect Competition theory, the basis of Competition 194 Chapter 4 concentration increases beyond a certain level. This level is either predetermined by some statutory threshold, such as Brazil’s statutory 20% market share threshold or, more often, deduced on a case-by-case basis with reference to some indexes such as the HHI, the ‘‘dominance index’’ or the ‘‘Ci.’’ Yet determining market concentration on the basis of these indexes is usually highly intuitively, notwithstanding their apparent solid foundations. After all, the information that it is used to calculate market concentration in any of these methods is based on a contrived view of consumer preferences, which is highly open to discussion, as we will see later in this book.172 In short, however, monopoly power inquiries usually concentrate on the existence of market concentration, and are inclined to downplay the analysis of the impact of entry barriers as a whole. Indeed, in the course of establishing whether a given business strategy is anticompetitive, it seems that antitrust analysis gives an extraordinary weight to the question of what is the market share possessed by the economic agent conducting the strategy and how much concentrated is the antitrust market where she interacts; compared to the essential question of whether there are any adverse consequences of the strategy assessed, so to qualify it as ‘‘anticompetitive.’’ In general, one can see a consensus towards adopting concentration indexes such as the HHI, and the Ci indexes; even decided efforts to adapt them to the particular conditions of Latin American markets, as the ‘‘dominance index’’ clearly shows. Overall, this way of assessing market competition not only overstates the role of market concentration, as determinant of competition, but also entails a real hazard of misdirecting policy enforcement into targeting industries that are inevitably concentrated due to various economic factors: economies of scale; demand size; high transaction costs; supply limitations; and so on. At this point, it is necessary to underscore the significance of the historical background within which Latin American industrial sectors have emerged. Given how public policy was structured in the past—with governments organizing whole industries and productive activities around chambers of commerce, trade guilds and professional associations—it is not uncommon to find public policies with a inquiries is the comparison of real ‘‘imperfect’’ markets, where allocation of resources is suboptimal, with ideal ‘‘perfect competition.’’ Thus the theory avoids a substantive explanation of the underlying factors that cause entrepreneurs to behave the way they do in the market. Whenever markets depart from the optimal resource allocation that would exist under conditions of perfect competition, it is assumed to be the result of the businessman’s maneuvering in order to be closer to a monopoly situation in which he can set prices with impunity, free from the pressure of other competitors. This version of events implicitly assumes that any departure from the position of optimality is driven by a wicked purpose, namely, to ‘‘extract’’ consumers’ rents. Hence, the role of legal findings in competition matters is diverted from the analysis of the harm actually caused by businesses in the market to the assumption that businesses permanently conspire to pick consumers’ pockets. 172. See Section 12.4.5, below. Monopoly Power Assessment 195 promonopolistic orientation that favor the development of legal or quasi-legal monopolies in the market. Often, they are established through privileges granted to specific firms based on special conditions such as nationality, working requirements, and other performance requirements. This is the case with respect to foreign firms, whose conduct is often subject to performance standards. More frequently, this is true of local businesses and traders, particularly of those running recently privatized state-owned monopoly enterprises. These firms generally enjoy legal privileges and government concessions, particularly in sensitive sectors such as utilities and public services. These cases present a key policy challenge to competition agencies in the region, in view of their theoretically acquired perspective of concentration being a by-product of monopolistic behavior operating under imperfect competition conditions. This view overstates market ailments and underemphasizes the anticompetitive effects of government actions. Determination of market power not only rests on the measurement of market size. Competition agencies sometimes skip this step with the aid of persuasive direct evidence. Market power or anticompetitive effect can be demonstrated directly, through means other than inference from number, size distribution, and other characteristics of firms. For example, anticompetitive effect could be argued in the event that price increases are demonstrably unrelated to higher costs or product quality improvements. Market power may be inferred from direct evidence, such as the case where a group of firms raise price when demand grows less elastic. Yet, as we shall explain later, there are significant problems arising from the assessment of economic evidence in order to establish the conditions required for successful identification of anticompetitive practices. On a more general level, the methodology of antitrust policy underscores the view of structural markets conveyed under Robinson’s Imperfect Competition model, clearly delineated by demand-substitution possibilities as well as entry barriers. Naturally, the problem with this theoretical framework arises from the lack of coincidence between this perception, and that of entrepreneurs interacting in the market: whereas the model assumes that consumer preferences comprising demand are stable, a longer run perspective of markets will immediately display the opposite. Robinson’s theory represented a watershed in the history of economic theory that marked the perception of regulatory policy, as well as that of competition policy. Since then, competition authorities and the business community acquired contrasting perceptions of what the product market is. On the one hand, business people, as direct participants in the market process, perceive competition as a constant struggle for adaptation, selection, and innovation, where the boundaries between product markets are blurred and constantly evolving. Therefore, their definition of markets usually includes the concept of innovation, in which competing products are constantly created, displacing less efficient ones. Also, product differentiation is intrinsic to the competitive process, which permanently drives entrepreneurs to find new niches of unserved consumer needs. On the other 196 Chapter 4 hand, competition authorities, as outsiders to the economic process engaged in by firms, perceive markets as more or less structured ‘‘pigeonholes,’’ which can be objectively measured through mathematical analysis. This difference in perception leads businesspeople to see multiple markets where competition authorities see only one. The source of this divergence is more fundamental than it may appear at first; it lies in the very teachings of economic theory and industrial economics. As discussed above, the conventional view of economic theory, grounded in the concepts of equilibrium and perfect competition, portrays the standard antitrust market as ‘‘a box in which competitive effects are measured’’ (OECD, CADE and IBRAC, 1998, p. 19). Visualizing markets as ‘‘boxes,’’ however, does not enable us to observe the dynamic texture that newer approaches to markets emphasize. Thus, for example, innovation markets are not included in the conventional structural notion of ‘‘box markets.’’ In a dynamic perspective on markets, product differentiation is seen as a natural by-product of market evolution; therefore, innovation markets should be considered in defining the relevant market. A group of antitrust experts have noted that: A substantial degree of product differentiation may be a sign of a healthy competitive economy since businesses may respond to competitive opportunities and challenges by developing new products and differentiating current ones. Alternatively, firms may seek or create niches sheltered from the competitive storm, by making or emphasizing differences in features or quality in order to attract particular kinds of consumers. All in all, the process of innovation and differentiation (should be) deemed to be welfare enhancing (OECD, CADE and IBRAC, 1998, p. 19). The crux of the matter is that monopoly power cannot be determined by a single factor, as it includes many elements and a broad range of criteria. There are no absolute rules for weighing each of these elements; this is a trait that is seen not only in Latin America, but generally, worldwide. As noted by the European guidelines on the definition of the relevant market (1997): The criteria to define the relevant market are applied generally for the analysis of certain behaviors in the market and for the analysis of structural changes in the supply of products. This methodology, though, might lead to different results depending on the nature of the competition issue being examined. For instance, the scope of the geographic market might be different when analyzing a concentration, where the analysis is essentially prospective, than when analyzing past behavior. The different time horizon considered in each case might lead to the result that different geographic markets are defined for the same products depending on whether the Commission is examining a change in the structure of supply, such as a concentration or a cooperative joint venture, or issues relating to certain past behavior. (European Commission, 1997) Monopoly Power Assessment 197 Yet, it is not the only element of monopoly power analysis subject to alternative interpretation. Neven et al. (1993, p. 103) note in this connection that, ‘‘like the US authorities, the European Commission CEC has applied its measures of concentration in a very flexible and discretionary way.’’ As I explain in Chapter 12, such flexibility is one of the characteristic traits of antitrust policy in Latin America which, in fact, undermines its transparency. Chapter 5 Consumer Welfare Analysis The previous chapter examined the first question arising from the framework of analysis laid out by utopian antitrust policy: whether firms operating in the market are capable of manipulating markets thanks to their monopoly power. However, antitrust analysis is not completed once the capacity of a firm or firms to unilaterally impose conditions or otherwise behave without the discipline imposed by effective (or workable) competition is established; it must also establish the anticompetitive nature of the conduct under review. Antitrust rules concentrate their attention on the net effects of anticompetitive restraints. After all, the goal of these rules is to protect competition in the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources. Inferences drawn about the monopoly power held by a firm in the market only provide an indirect proof of the likelihood that her conduct conveys anticompetitive effects. However, the analysis of such effects is far from straightforward. Agreements that restrict competition may at the same time have procompetitive effects by virtue of efficiency gains. Efficiencies may create additional value by lowering the cost of producing an output, improving the quality of the product, or creating a new product. When the procompetitive effects of an agreement outweigh its anticompetitive effects the agreement is on balance procompetitive and compatible with the objectives of antitrust rules. The net effect of such agreements is to promote the very essence of the competitive process, namely to win customers by offering better products or better prices than those offered by rivals. This chapter will provide an overview of the comparative antitrust doctrines that assess the welfare effects of anticompetitive restraints: balancing output restrictive effects on the one hand, and procompetitive welfare-enhancing effects on the other. In particular, we shall explore the pursuit of economic efficiency and consumer surplus, which is the most widespread of these goals among antitrust agencies in Latin America. 200 Chapter 5 Special attention will be paid how on the alternative welfare standards employed by competition authorities to assess the net effects of anticompetitive restrictions ultimately lead to different policy solutions, which are all limited by the same epistemological flaws that undermine the capacity of any antitrust system to deliver stable results and predictable policymaking decisions. This is consistent with the policy’s utopian quest. Even though the basic parameters of antitrust policy are defined by their resemblance to the parameters set forth under competitive equilibrium, Industrial Organization has evolved since Joan Robinson first postulated her Imperfect Competition Theory in the 1930s. Empirical evidence has shown that certain behaviors, which appeared anticompetitive in Robinson’s conceptual framework, nevertheless entailed benefits to consumers that could not be dismissed as ‘‘anomalies’’ of the mainstream theory but demanded closer inspection of the theory itself, and eventually, a full reconsideration. The development of theories about ‘‘free riding’’ effects in the seemed to justify exclusive distributorships whose effects restrained potential competitors, and created barriers to entry. The presence of cases combining both restrictive and procompetitive effects made antitrust analysis far more complex than mere market concentration assessment analysis suggested at first. Consumer welfare analysis became a fundamental part of the economic analysis of the anticompetitive effects of business restraints and strategies. 5.1 RECASTING THE PROBLEM OF SOCIAL WELFARE Traditionally, antitrust scholars have extensively debated on whether the goals of this policy should pursue economic efficiency, thus promoting consumers’ goals, or whether it should pursue equitable goals, including the promotion of producers’ interests. In other words, they discuss whether competition policy should protect competition or competitors.173 Motta (2004, pp. 22-30) classifies competition law objectives taken from different jurisdictions worldwide, which reflect these two alternative policy orientations. These goals include (i) the defense of smaller firms; (ii) promoting market integration; (iii) economic freedom; (iv) fighting inflation; (v) fairness and equity; (vi) social reasons, such as avoiding economic recession; (vii) political reasons; (viii) environmental reasons; and (ix) strategic reasons involving industrial and trade policies. This author, however, challenges these goals, because there are alternative policies better designed for addressing such concerns that deal with these objectives ‘‘at the root of the problems’’ (p. 22). In fact, it may even be counterproductive to support a systematic use of antitrust policy geared towards helping small and medium enterprises because difficulties such as lack of proper infrastructure and imperfect markets; or promoting market integration at all costs, as these goals may create a per se rule prohibition on price discrimination 173. For a review of the literature on the goals of antitrust policy see (De Leon, 2001, pp. 66-82). Consumer Welfare Analysis 201 among countries, or between traders which ‘‘in some circumstances might even work (paradoxically) against the objective of market integration’’ (p. 23).174 In light of the fact that such a kaleidoscopic array of competition policy goals would inevitably entail arbitrary choices from policymakers, some scholars, notably those from the University of Chicago (Posner, 1976 [1980]; Bork, 1978; Epstein, 1982), advocate the pursuit of consumer welfare as competition policy’s ultimate goal. These authors claim that any other goals would lead the interpretation of competition policy astray, because no consistent rulemaking activity can take place if income distribution issues are the focal point of the policy. Administering these goals requires competition authorities to make wealth transfer assessments among competing groups (i.e., consumers and producers); such an assessment inevitably makes policy implementation murky and less predictable because it involves ethical and subjective preferences. What appears ‘‘fair’’ and ‘‘equitable’’ today will depend on the particular ethical preferences of whoever is in charge of administering the statute. Hence, any judicial decisions based upon these standards would inevitably lead competition agencies to make discretionary policy choices, which would be inconsistent with the predictability required by the rule of law.175 The advocates of consumer welfare are right in pointing out the weaknesses of alternative, nonefficiency goals as inherently intuitive, in the sense that there is no objective way of verifying whether such goals have been attained in order to provide the policy with a minimum degree of certainty. However, the dilemma presented by these scholars—choosing between consumer welfare or an alternative welfare goal—is far-fetched. Under the interpretation of the Chicago antitrust school, the choice of consumer welfare as the sole goal of antitrust policy seems sensible. After all, any other objective seemingly presents the analyst with choices that are impossible to make without undertaking 174. The list goes on: economic freedom might contradict economic efficiency (p. 23); it seems doubtful that ‘‘competition law might efficiently be used to fight inflation’’ (p. 24); fairness may not work well with efficiency goals, because if only the most efficient firms stay in the market, ‘‘this is beneficial for a community as a whole, as it will bring market prices down to the benefit of consumers’’ and ‘‘limiting the ability of larger firms to charge lower prices would damage welfare’’ (p. 26). Other normative goals are even further away from ensuring the economic welfare of society. 175. In Bork’s opinion, for example, while it is true that any output restriction entails a wealth transfer from consumers to monopolists, these occur between undifferentiated groups of consumers (since, after all, monopolists are consumers too, albeit of a different kind). Thus consumer welfare calculus does not deny the possibility of accepting that income distribution occurs in the market as result of output restrictions; however it draws a clear dividing line between such transfers and those carried out between individuals, where the particular income of each person is assessed in order to improve her personal position in the market. For Bork, seeking economic welfare ensures transparent, predictable policy enforcement, consistent with the rule of law, because such a criterion forces authorities to consider allocation problems that affect consumers as a class rather than as individuals. Thus, ‘‘the [consumer welfare model] addresses the total welfare of consumers as a class. It says nothing of how shares of consumption should be allocated through changes in the distribution of income’’ (Bork, 1978, p. 110). 202 Chapter 5 a considerable degree of discretion. In their view, measuring consumer welfare becomes a question of economic logic. The matter seems to be unsolvable, because under any other policy choice but consumer welfare the preference given to one group in society will be done at the expense another: Yet, the dilemma presented by the Chicago School seems to exist too in case of choosing consumer welfare ass the objective of antitrust policy. In this case, wealth distribution effects also are made, albeit in the reverse: producers will be forced to charge prices equal to marginal costs, thereby forcing them to sustain losses in their transactions (i.e., to forego a higher income that would otherwise accrue from charging prices above marginal costs).176 By contrast, if the policy is aimed at protecting the interests of producers, this will be at the expense of consumers, who would have to put up with the supra competitive prices imposed by producers on them. Naturally, a discussion framed in these terms leads to a dead-end road. It will be a matter of subjective preference for the policy maker to decide what group should deserve the benefit of receiving a larger share of social resources through antitrust policy. The conventional discussion about antitrust goals, therefore, creates a conundrum for policymakers to decide individual cases: should the policy give preference to the net consumer welfare-diminishing effects of output restrictions created by business strategies or should they treat these strategies with a more benevolent eye, as these organizational arrangements reduce production costs in the longer run? Our discussion about the need of distinguishing between the short run static efficiency and the long run dynamic efficiency,177 will lead our discussion into another entirely different direction, which transcends the conventional policy dilemma thus presented: whether short run output restrictions are necessary to induce investments which benefit consumers through the innovation and production of new goods and services that, in the absence of such investments, would not be produced, in the long run.178 Recasting economic efficiency from the short-run allocation problem to the production of long run dynamic efficiencies requires us to change the nature of the social welfare problem into a totally different light from that of antitrust policy.179 In our view, the real dilemma faced by competition agencies is this: how can policymaking facilitate the production of long run 176. See Section 3.2.2, above. 177. See Section 3.1.4, above. 178. In Bork’s (1978, p. 122) words, ‘‘to carry out its mission, antitrust must classify varieties of profit-maximizing behavior with respect to their probable impacts upon consumer welfare. Obviously, only three relationships are possible, and these correspond to three quite different ways of making money. A business may seek to increase its profits by achieving new efficiency (beneficial); by gaining monopoly power and restricting output (detrimental), or by some device not related to either productive or allocative efficiency, such as a bookkeeping advantage or some wrinkle in the tax laws (neutral).’’ 179. In Section 5.4, below, we explain the flaws of the conventional short-run dilemma faced by the notion of economic efficiency, as applied under antitrust procedures, most often under the guise of a ‘‘consumer surplus’’ standard. Consumer Welfare Analysis 203 efficiencies that induce economic actors to undertake such investments at all? In other words, how can competition policy encourage businesses to make investments in order to build the entrepreneurial capabilities necessary for them to compete through innovative cost-reduction means? 5.2 THE ANTITRUST DILEMMA To understand the sense of antitrust policy in Latin America, it is necessary to recall that the notion of consumer welfare endorsed by this policy is primarily focused on short-run allocation problems arising from presumably monopolistic business behavior. Antitrust policy has to solve a dilemma, namely, how to strike a balance between a conduct which allegedly reduces consumer welfare with another that apparently enhances it in the short run. Consider the following example, taken from an OECD report (2006, p.10): Based on agencies’ experience, it seems that some of the behavioural factors that allow firms to have large market shares in differentiated good industries are also factors that are considered to establish the existence of barriers to entry. In other cases, however, factors that point toward the existence of barriers to entry are also exactly the factors that are deemed to foster vigorous competition. Advertising, for example, is often considered to promote competition by increasing the amount of information available to consumers. ‘‘Too much’’ advertising, however, is sometimes deemed to be a barrier to entry when it effectively imposes an obligation on entrants to advertise their products to a similar extent. Is advertising an activity that businesses undertake to compete more aggressively in the market, or, instead, is it a barrier to entry intended to exclude potential competitors from the market? Similar questions can be posited upon all business strategies which in the market give entrepreneurs a competitive advantage vis-à-vis their competitors: exclusive supply or distribution arrangements; franchising; joint ventures; resale price maintenance; assignment of territories to dealers; and other business conduct intended to create some form of economic organization between businesses and other economic agents. 5.2.1 THE PER SE STANDARD Several legal doctrines have been applied to determine the restrictive nature of business conduct according to the balancing assessment required under the consumer welfare analysis. Sometimes the law dispenses the analyst from making such calculus in favor of policy expediency. An example of this is the so-called, per se rule. Under this legal standard, ‘‘there are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue 204 Chapter 5 are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use’’ (Author’s italics).180 Under antitrust theory, per se prohibited practices have hardly any compensating benefits, which is what explains why they are regarded illegal without further examination on the merits of the case. Khemani and Dutz (1995, p. 21) regard naked price fixing as ‘‘the core area of concern in existing competition laws,’’ presenting ‘‘the greatest need for penalties.’’ Similarly, Boner (1995, p. 42) argues: Reforming economies are often advised to give high priority to the prosecution of price fixing. These agreements are highly unlikely to hold collateral efficiencies that would otherwise justify them. This view follows the structural bias of the antitrust system whereby market concentration is inherently wrong and market atomization is inherently right. Under the logic of the SCP paradigm conduct alignment between competitors cannot be seen as anything but a way of increasing monopoly power that each firm separately would not enjoy. Following this logic, competition authorities of jurisdictions with greater antitrust experience (notably, the U.S. and Europe) often condemn naked price fixing, regardless of its declared economic purpose, as they are used to relying on the precepts and assumptions of Industrial Organization theory, which simply assumes the underlying purpose of these arrangements. In the beginning, courts established a per se illegality rule for ‘‘naked’’ price fixing and other business arrangements regarded as ‘‘inherently’’ restrictive of competition. These arrangements, under the per se standard, were presumed to have negative welfare effects as a matter of law. However, courts could not avoid the vexing problems of determining the social welfare effects of all other business arrangements not deemed per se illegal. Therefore, they had to develop standards for analyzing these restrictions and their mixed effects on social welfare. The per se rule, which in the 1950s through the 1970s used to be quite popular among U.S. antitrust enforcers due to its alleged certainty and low enforcement costs,181 Moreover, the per se standard increasingly 180. Northern Pacific Railway v. United States, 356 U.S. 1, 5 (1958). 181. In Northern Pacific (1958), the U.S. Supreme Court stated explicitly the legal distinction between per se and rule of reason practices: ‘‘This principle of per se unreasonableness not only makes the type of restraints which are proscribed by the Sherman Act more certain, to the benefit of everyone concerned, but it also avoids the necessity for an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, in an effort to determine at large whether a particular restraint has been unreasonable—an inquiry so often wholly fruitless when undertaken’’ (Northern Pacific Railway v. United States, 356 U.S. 1 [1958]). ‘‘[P]er se analysis offers a number of potential benefits. Rule of reason litigation can be very expensive for both the judicial system and the litigating parties. From a social perspective, this expense is essentially wasted when the challenged conduct is unlikely to yield any benefits, and per se condemnation saves resources. Moreover, indecisive and protracted condemnation lacks deterrent value, an issue of some consequence when a practice in most instances is likely to result in competitive harm. In contrast, a categorical rule creates clarity for businesses and is more likely to be observed. AU: Provide closing quotes for ‘‘[P]er se analysis offers. . . . Consumer Welfare Analysis 205 came to be perceived inflexible and harsh. Its scope has been diminished sensibly, due to the changes in economic theory that have been reflected by the courts (Kovacic and Shapiro, 2000; Pera and Auricchio, 2005). Unfortunately, the per se rule is frequently confused with the welfarediminishing effects of hard core restraints, usually treated under such legal rule in the aforementioned. It is all to often forgotten that the per se rule is an operational legal rule that is intended to reduced the administrative implementation costs of competition policy. As result of this confusion, competition agencies often adopt a rigid interpretation of the statutes, and prosecute conducts that entail productive efficiencies, because they also entail some form of conduct formally listed as ‘‘hard core.’’ We refer to this problem in Section 7.2.2, below. 5.2.2 CASE-BY-CASE STANDARDS Today, courts are confronted with the challenge of deciding individual cases on a case-by-case basis under a rule of reason standard. Therefore, they have been drawn into the discussion of what is the appropriate welfare standard for legally appraising business restraints. As explained in Section 3.1.3, above, economic efficiency has multiple meanings in economic theory: allocative, productive, and dynamic. The role of courts in evaluating business restraints from the viewpoint of competition is dictated by their selection of a legal standard for social welfare that emphasizes any of the three modalities of economic efficiency. Clearly, this dilemma does not increase the predictability of the antitrust enforcement system. We need to know, then, what exactly economic welfare means in the context of antitrust analysis. Those who advocate economic efficiency will inevitably be forced to determine whether the deadweight loss suffered by consumers due to lost output is compensated for by the gains resulting from cost-reduction resulting from productive gains brought about by restrictions on rivalry or exclusionary tactics. From the social welfare viewpoint, it is clear that if the latter is larger than the former, there will be a net gain resulting from the business practice (such as a As the Supreme Court has concluded, ‘‘[P]er se rules tend to provide guidance to the business community and to minimize the burdens on litigants and the judicial system of the more complex rule-of-reason trials . . .’’ (Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. at 50 n. 16). Thus, even while acknowledging that per se rules may not achieve total precision, the U.S. Supreme Court has seen value in the deterrence, guidance, and resource savings that they provide. ‘‘For the sake of business certainty and litigation efficiency, we have tolerated the invalidation of some agreements that a full blown inquiry might have proved to be reasonable’’ (Arizona v. Maricopa County Medical Society, 457 U.S. 332, 344 [1982]). The per se status appears to convey a degree of certainty inasmuch as it condemns output restrictions. Yet, the evolution of case law dealing with practices formerly prohibited per se and now examined under a rule-of-reason approach reveals the intuitive concern of judges, who perceive that an outright prohibition of certain manifestations of monopoly power lacks the flexibility to acknowledge the many cases in which output restrictions would bring about productive efficiencies that would increase net social welfare. 206 Chapter 5 merger, vertical restraint, etc.); if it is not, then the undertaking will result in a net social loss. The key problem is how competition authorities can determine whether the deadweight ‘‘triangle’’ is bigger or smaller than the cost savings ‘‘rectangle.’’182 It is true that, at the theoretical level, it would be possible to correct this shortcoming by simply weighing the increase in consumer welfare caused by the efficiencies of the conduct against the reduction in consumer welfare caused by the exclusion of rivals (or output restriction). This is consistent with the economic theory behind antitrust enforcement. The models of perfect competition and monopoly represent idealized market situations in which there is either full or no consumer surplus. Intermediate cases comprising the bulk of day-to-day antitrust work by definition involve mixed consumer welfare effects. However, in practical policymaking it is not possible to make such a calculation. This impossibility not only stems from the lack of a reliable model to make such a calculation, for no oligopoly model provides a precise methodology for dealing with business restraints having mixed welfare effects. Hence, there is no methodology for dealing with this balancing exercise between productive and allocative efficiencies. The impossibility of such calculation follows a theoretical impossibility of making interpersonal utility between individuals. Individuals have their own goals in life; therefore, one cannot compare the well-being of one individual against the harm caused on another, as a result of a given policy measure.183 Moreover, even assuming the possibility of such interpersonal calculations of utility, this evaluation is made in reference to the current conditions of the economy; therefore, they will be outdated as the conditions of the market change, thanks to the entry of new competitors and market innovation. In other words, the calculus of social welfare will inevitably change, if we take into consideration the long run of markets. In this broadened context, many decisions which seemingly 182. See Figure 3-5. In this connection Bork (p. 108) states: ‘‘The consumer welfare diagram must not be taken literally, as if one could read correct decisions off the graph paper. It merely illustrates a relationship; it does not quantify it.’’ Hence, it would be misleading to take the cost-benefit consumer welfare analysis literally, for this would be ‘‘an invitation to ad hoc balancing with no explicit or commonly understood algorithm.’’ 183. The impossibility of interpersonal comparisons of utility has been discussed in detail by Rothbard (1956). For a more recent discussion, see White (1995, pp. 138-140, 144 and 146). Lionel Robbins was the first scholar to criticize such a comparison on normative grounds: ‘‘The theory of exchange does not assume that, at any point, it is necessary to compare the satisfaction which I get from the spending 6d. on bread with the satisfaction which the baker gets by receiving it. That comparison is a comparison of an entirely different nature. . . . It involves an element of conventional valuation. Hence it is essentially normative’’ see Robbins (1935, pp. 138-139). In a contrary opinion, Sen observes that ‘‘for reasons not altogether clear, interpersonal utility comparisons were then regarded as being themselves ‘normative’ or ‘ethical’. The popularity of that view is perhaps traceable to the powerful endorsement of that position by Lionel Robbins’’ (Sen, 1987, p. 30). Consumer Welfare Analysis 207 harm consumers’ interest in the short run are compatible with their well-being, as they make it possible the emergence of market innovations. What standard should competition authorities impose? Is it possible to establish a normative standard which will deliver stable and predictable policy decisions in order to support the claim that antitrust policy is consistent with the rule of law? The precise determination of the welfare effects of business restraints in particular cases has been subject to intense debate among scholars. A kaleidoscope of differing views about economic welfare measurement exists; this diversity of views inhibits the development of a stable rule of law. The literature usually deals with the problem from the point of view of the intended effects of antitrust laws (i.e., antitrust policy goals). Two types of analytical tests have been proposed for this purpose: (i) case-bycase standards and (ii) rule-based tests. One the most hotly contested issues in antitrust enforcement is the determination of what method will be used to weigh deadweight losses resulting from output restrictions against cost savings accruing from productive efficiencies. 5.2.2.1 Consumer Surplus Standard The most popular version of efficiency in the antitrust literature and case law is consumer welfare, also known as consumer surplus. As Pera and Auricchio (2005, p. 1) contend: The debate in the late 80’s among enforcers and academics has finally led to the view that competition law should primarily aim at an efficient working of the market, in order to maximize consumer benefits. In turn, this convergence has led to the general acceptance of consumer welfare as the standard for the evaluation of restrictive practices.184 In a narrow sense, ‘‘consumer welfare’’ should focus on the effects of the conduct on consumers in the relevant market. In this view, supported by many scholars, (Lande, 1982, 1988; Jacobson and Dorman, 1991, 1992, pp. 151-153; Salop, 2005) antitrust liability ultimately turns on whether the seller will have monopoly power over consumers purchasing the output of the relevant market. Under this approach, for the efficiencies defense to succeed, customers should not lose because of the restrictive conduct, whatever form it takes. In particular, prices should not substantially increase, relative to what they would be absent the undertaking. Moreover, consumer surplus should not decrease. This approach has the advantage of limiting the efficiency defense to restrictive practices that are Pareto-improving: nobody in society is worse-off, and at least some (presumably the producers) are better off. Producers would be free to enjoy the efficiency gains generated by the suspected restrictive conduct. At the same time, customers would be no worse-off, and 184. Also see the European Commission’s approach in the Guidelines on Vertical Restraints (OJEC C 291 of Oct 13, 2000, 1). 208 Chapter 5 might be better off, in terms of the prices they pay. There would be no uncompensated transfer of wealth from one group to the other. This approach is also relatively simple to implement. The focus, from the customer end, is on the level of prices. For example, in a merger investigation, for the ease of administration, a price index for the merged firm could be constructed, as a weighted average of all the products sold by the premerger firms. For the efficiencies defense to be successful, the competition agency could require a showing that it is likely that this price index will not increase for a given period of time postmerger. Those who oppose the consumer surplus standard say is that it is too stringent: relatively few business undertakings would be saved under it. The difficulty is that, absent a combination of high price elasticity of demand and low incremental costs, it is commercially rational for a merged firm with newly increased market power to raise prices. The consumer surplus standard is used in three of the main international jurisdictions: the United States, the European Union, and the United Kingdom. 5.2.2.2 The Total Surplus Standard Others (Williamson, 1968; Bork, 1978; Rule and Meyer, 1988; Rule, 2005; Heyer, 2006) think that consumer welfare is a broad concept that refers to the welfare of all consumers in society (i.e., producers included). In this view, antitrust laws should be applied in a way that maximizes society’s wealth as a whole. According to this standard, better known as ‘‘total surplus,’’ as long as the efficiency gains (usually productive efficiencies) from a restrictive undertaking outweigh the efficiency losses from any resulting lessening of competition (usually allocative efficiency losses), the undertaking should be permitted.185 In Section 3.1.3.1, above, we explained that total surplus is the sum of consumer surplus and producer surplus. Some authors object to total surplus on the grounds that it is too broad, thereby leaving the possibility that restrictive business activity will be wrongly authorized on the basis of the net benefits to producers. Thus, the total surplus standard ignores the income redistribution consequences of the business conduct. A substantial lessening of competition is normally accompanied by a significant nontransitory price increase: indeed, this is the measure used by competition agencies and many others. This redistributes income from the firm’s consumers to the firm itself.186 The total surplus standard assumes 185. Significant lessening of competition may also result in reduced incentives for productive and dynamic efficiency gains. 186. In turn, the increased revenues will be passed on, in part to employees through higher salaries and benefits, and in part to shareholders through an increase in earnings that is translated into increased share prices. The magnitude of the ultimate gain is an empirical matter. To simplify the discussion, we refer to shareholder effects and do not discuss employee effects. This has no impact on the arguments advanced. Consumer Welfare Analysis 209 that, if efficiency gains are positive, the ‘‘winners’’ of the redistribution could compensate the ‘‘losers’’ and still be better off. This is the well-known KaldorHicks criterion for welfare maximization (Posner, 1976 [1980], p. 23). 5.2.2.3 Balancing Weights Standard This test weighs the welfare benefits to the defendant and compares it against the static welfare costs caused by the harmful effects of the conduct on its rivals. The balancing weighs standard narrows the market-wide balancing test by weighing the benefits to the defendant against the welfare costs resulting from the increase in monopoly power on its rivals, focusing on the calculation of welfare effects on those directly involved in the situation under examination. For example, in an analysis of exclusive dealing, the law enforcer would compare the defendant’s increased output against its rivals’ reduced output. In a predatory pricing case, the law enforcer could compare the increased welfare of consumers of the defendant’s product as a result of the defendant’s conduct with the welfare reduction imposed on its rivals’ consumers. Therefore, the standard would not require a balancing of productive efficiencies or long-run dynamic welfare effects, but merely a static market-wide balancing. As Melamed (2006, p. 387) contends, for all its virtues, such a balancing test would still pose insurmountable problems for the development of a stable rule of law. Defendants would bear a costly informational burden that would considerably limit their business initiatives. They would be challenged in conducting their business in real time because they would not know whether their actions were legal. Moreover, such a rule would deter firms from investing and innovating, because these actions could exclude competitors from the market and thereby subject them to antitrust enforcement. Melamed concludes categorically that ‘‘any market-wide balancing test, whether dynamic or static, is in tension with the notion that antitrust law should not condemn, and indeed should promote, aggressive competition on the merits ( . . . ) even if rivals are harmed by it.’’ Posner (1976 [1980], pp. 194-195) has suggested enforcing antitrust law only against conduct that would exclude an equally efficient rival. However, Melamed (p. 388) disagrees, because such a rule would not clearly define the concept of a ‘‘less-efficient-rival,’’ especially in the case of firms that produce a range of products. Moreover, efficiency may change over time, as firms learn and develop scale economies. How, then, should competition agencies apply such a legal standard? Should they consider a rival ‘‘less than efficient’’ or should they take into account its long-run cost curve and conclude that it is ‘‘more than efficient’’? Some competition agencies, like the Canadian Competition Tribunal, use ‘‘balancing weights.’’187 Essentially, income redistribution effects will be considered in the efficiencies defense. The weight to be given to a dollar of income 187. Commissioner of Competition v. Superior Propane Inc. (2001), 11 C.P.R. (4th) 289 (Apr. 4, 2001). 210 Chapter 5 distribution, relative to a dollar of efficiency gain, is to be determined in light of the circumstances of the situation, and may depend on the different socioeconomic status of customers and shareholders. Indeed, it is possible that different weights should apply to different classes of customers. Attempts to attach different weights to impacts on different socioeconomic groups have a long history. For example, the issue has long been debated in appraisals of developmental projects in developing countries. Unsurprisingly, and following their own cultural bias, Latin American competition agencies usually adopt a weighted balancing standard, although they seldom acknowledge this fact.188 In theory, this approach is attractive, allowing the flexibility and discretion to take into consideration the circumstances of each case. In practice, however, this very flexibility and discretion leads to significant disadvantages. First, how are the different classes of affected customers and shareholders to be determined? If weights are to vary according to income levels or socioeconomic status, how many categories should there be, and what are the cutoff levels? Should other factors, such as geographic location, be important? To the degree that some of the costs or benefits flow to employees, rather than to customers or shareholders, should these be identified and weighted separately? Second, should losses and gains be weighted differently? This suggestion follows from the finding in behavioral economics that on average people are more concerned by a loss than by a gain of equal magnitude. Third, once the categories are chosen, how are the weights to be selected? Should benefits to one category receive one and a half times the weight of benefits to another category? Twice the weight? Three times the weight? Is there a risk that the process of choosing weights would become highly politicized? Fourth, before the weights can be applied, gains and losses must be measured for each category. Presumably it is the final balance of these gains and losses that is important. But such measurements require large quantities of information that might be very difficult to obtain. These considerations lead us to conclude that, while the balancing weights approach has many attractive features in theory, in practice it would be extremely difficult and controversial to implement. Furthermore, it would create considerable uncertainty among parties contemplating a merger. Since the weights might vary from case to case, existing case law would be of limited use in reducing this uncertainty. Over and above the practical difficulties of implementation, one has some reservations about the moral justification for the balancing weights approach. Essentially, its underpinning is a utilitarian one, whereby it is acceptable for certain members of society to lose, as long as others gain more. Note, however, that this approach does not require the winners to actually compensate the losers; they must only have the ability to do so. The losers remain losers. 188. See Section 5.3, below. Consumer Welfare Analysis 211 Again, competition agencies (and businesses) face the problem of insufficient knowledge to reach any meaningful conclusion on whether a given situation meets the relevant standard: reaching such a conclusion ‘‘would require firms to know a great deal about their rivals and the ability of the rivals to respond in the marketplace’’ (Melamed, p. 388). 5.2.2.4 The Sacrifice Test Melamed (p. 389) suggests focusing on the actual conduct of firms: ‘‘Under this test, the decision maker weighs the costs and benefits of the conduct to the defendant.’’ The conduct should be regarded anticompetitive if it makes no sense from a business standpoint. Two basic inquiries are necessary in order to assess a given situation under this standard; first, it is necessary to ask whether a practice is profitable to the defendant in light of its incremental costs and benefits. Under this test, costs are the avoidable costs incurred by the defendant as a result of the conduct, including opportunity costs. The benefits are variable cost savings realized by the defendant; revenues from additional units of goods or services sold by the defendant; and increased revenues attributable to quality improvements and the resulting increase in demand for the defendant’s goods and services. Second, it is necessary to ask whether the conduct enables the defendant to gain additional monopoly power. The test is referred to as the ‘‘sacrifice test’’ because it implies that even conduct that excludes rivals is lawful if it is profitable on its own terms. If, on the contrary, the defendant is sacrificing profits as part of an exclusionary strategy to obtain monopoly power, with no economic compensation, the conduct is unlawful. Melamed explicitly excludes from this standard conduct that cannot be explained by the short-run expectation of business profits, even though there may be such an expectation in a long-run perspective. Thus, this standard is based on the nature of the conduct, not on its timeline. Under this standard, the competition authority simultaneously assesses both short-run benefits and costs derived by the defendant. The obvious advantage of the sacrifice test, in terms of predictable implementation, rests in its adoption of the point of view of the business as a normative yardstick, instead of replacing it with arbitrary social welfare calculations based on interpersonal comparisons of utility. However we must ask whether the antitrust agency is in a good position to measure businesses’ costs and benefits? Opportunity costs are represented by foregone alternative courses of action. They are subjective and personal. Moreover, they can only be weighed by the party who bears them. How can competition agencies measure someone else’s opportunity costs? 5.2.3 OPTIMALLY DIFFERENTIATED COMPETITION RULES The alternative to the case-by-case approach is to develop a rule-based approach. A rule-based antitrust policy scheme is based on optimally differentiated 212 Chapter 5 competition rules. Popofsky (2006), for example, opposes the adoption of a single unilateral balancing test and instead favors consideration of different tests for particular types of potentially exclusionary conduct. Similarly, Christiansen and Kerber (2005) propose a model of optimally differentiated rules in which the marginal reduction of the sum of error costs (representing the marginal benefit of differentiation) equals the marginal costs of tailoring each rule to achieve optimal results in particular cases. In their view, antitrust policy should focus less on assessing the positive and negative effects of individual cases and work with (more or less) differentiated rules. In this approach, antitrust policy makers should not take into account all of the costs and benefits involved in each case, but rather seek to minimize the sum of the costs of enforcement errors and transaction costs overall. The costs of enforcement errors include the costs of condemning and deterring welfare-enhancing conduct and the costs of not condemning welfare-reducing conduct. Transaction costs include both enforcement costs and compliance costs, that is, the costs of figuring out what conduct the law permits and what conduct it prohibits and of taking steps to modify conduct to account for legal risks (Melamed, p. 383). In practice, this approach would call for tailoring specific rules for specific types of conduct. For example, competition authorities could make one rule applicable to price cutting that takes account of the legal policy considerations applicable to such conduct, a different rule for exclusive dealing agreements that reflects a different balance of legal policy considerations, and so on. However, this rule presents intractable implementation problems. To begin, how can enforcers establish what ‘‘error costs’’ are in a given case? Error compared to what? As Melamed (p. 384) states: ‘‘the real world is usually more ambiguous than such abstractly defined categories.’’ This methodology would invite disputes about what type of conduct is involved, in order to pinpoint the specific rule that should apply to it. For example, competition authorities would have to decide whether a price reduction conditioned on the purchase of certain other goods is to be regarded as predatory pricing subject to predatory pricing rules, a tying agreement, or something else. Virtually all business conduct involving productive efficiencies would invite multiple simultaneous classifications, depending on the observer’s point of view, such as price cuts tied to capacity expansions; software bundles; refusals to share trade secrets; and patent pools, to name a few. Thus, except for naked price fixing cases (which are already prohibited as a matter of law), competition authorities would have a very difficult time determining how to classify the conduct at hand. In other words, to reach socially efficient antitrust decisions, competition agencies would have to possess better knowledge than that provided by the market itself. Moreover, they would have to have such knowledge before it has actually materialized, because only under such circumstances could they claim that, thanks to their intervention, the market did not reach its natural suboptimal outcome. They would need to establish, for instance, that by outlawing an exclusive distribution agreement, they would in fact increase social welfare. The question is, naturally, how could they obtain such superior knowledge ex ante? 213 Consumer Welfare Analysis Thus similar problems to those encountered under a balancing approach would arise. In practice, optimally differentiated rules do not avoid the knowledge limitations of practical antitrust enforcement, but merely move the problem one step further, to the stage at which conduct is classified. It is another, more elaborate, form of blackboard economics used to gauge market transactions. 5.3 WELFARE ANALYSIS: THE LATIN AMERICAN ANTITRUST EXPERIENCE 5.3.1 ANCILLARY RESTRICTIONS DOCTRINE ECONOMIC EFFICIENCY VERSUS Ever since the problem of balancing was first adumbrated in the famous U.S. Supreme Court decision in the Addyston case (1898),189 courts have struggled to balance the pro- and anticompetitive effects of particular restrictive agreements. The efficiency-balancing criteria identified above are ultimately applied to agreements with output restrictive effects. The analytical framework of antitrust policy, therefore, acknowledges that restrictive agreements may generate objective economic benefits that outweigh the negative effects of the restriction of competition. These agreements are ancillary, because their output-restricting effect is ancillary to the true, main, nonrestrictive goal. The concept of ancillary restraints covers arrangements whose main objective is not anticompetitive, but certain restrictions are necessary to materialize them. These arrangements introduce output restrictions but these are subsidiary to the objectives sought by the undertakers. If the main portion of an agreement, such as a distribution agreement or a joint venture, does not have as its object or effect the restriction of competition, then restrictions that are directly related to and necessary for the implementation of that transaction, are considered ancillary. However, the legal doctrine of ancillary restraints has been understood in some countries as an exemption from the enforcement of antitrust rules. Ancillary restraints are thus understood as restrictions necessary for the implementation of a nonrestrictive transaction or activity. If on the basis of objective factors it can be concluded that without the restriction the main nonrestrictive transaction would be difficult or impossible to implement, the restriction may be regarded as ancillary, that is, objectively necessary for its implementation. If, for example, the main object of a franchise or a joint venture agreement is not to restrict competition, then restrictions that are necessary for the proper functioning of the agreement, such as obligations aimed at protecting the uniformity and reputation of the franchise system, also fall outside the antitrust rules. 189. U.S. v. Addyston Pipe (1898) (6th Cir. 1898, 85 fed, 271). 214 Chapter 5 It is difficult to see how, in this interpretation, ancillary restraints can effectively be distinguished from anticompetitive restraints, prior to the balancing of its welfare effects in the market. In order to establish whether an agreement is ancillary, the competition authority would have to establish whether the restrictions it entails are ‘‘necessary for the implementation of the main transaction and [are] proportionate to it’’ (European Commission, 2004). But how can competition agencies achieve this goal without assessing the full effects of the agreement in the market? In practice, the assessment of restraints on competition is an integral one; attempts to separate ancillary restraints from primary conduct would inevitably result in arbitrary decisions. 5.3.2 A KALEIDOSCOPIC VIEW OF ECONOMIC EFFICIENCY LATIN AMERICAN ENFORCEMENT WITHIN An alternative to the formalistic approach that distinguishes based on the question of ancillary/primary restrictions is grounding the discussion within the framework of the explicit objectives set forth in Latin American antitrust statutes. Most of these statutes refer to the ‘‘protection of competition,’’ through the ‘‘prohibition of monopolistic practices’’ and protection of ‘‘economic efficiency’’; these statutes refer to the means of attaining the ultimate goals of the policy rather than the ultimate goals themselves. This is the case of several Latin American countries including Argentina, Chile, Costa Rica and México, Panama, Peru and Venezuela. A few statutes adopt more precise wording and refer explicitly to the ultimate goals of the antitrust laws. For example, Brazil refers to the protection of consumer interests and the ‘‘social role’’ of property; Colombia emphasizes ‘‘free choice,’’ ‘‘freedom of economic activity,’’ and ‘‘variety of prices and qualities.’’ In view of the imprecision of competition statutes’ general statements about the protection of efficiency, the guiding criteria of antitrust policy in Latin America are very much subject to interpretation and dispute. Some countries adopt a balancing standard, whereas others clearly seek a consumer surplus standard. Finally, there are even those that adopt a multi-objective approach in which fairness goals (e.g., economic freedom, the social role of property, etc.), are combined with economic welfare goals. This ambiguity is not only found across jurisdictions, but is even found within countries themselves. A good example of this ambiguity is displayed in the policy enforcement of Chile, notwithstanding its long tradition and wide experience, which possibly ranks highest in the region. In this country, sometimes the TDLC has imposed sanctions to parties based on the infringement of competition authorities’ decisions rather than on causing harm to competition in strict economic terms. This might be affirmed in regard to some decisions by the TDLC on vertical restraints and vertical integration cases, which are based on the violation of former Consumer Welfare Analysis 215 rulings.190 Moreover, the TDLC acknowledged in one case, that the violated ruling pursued a goal different than economic efficiency, notably, the protection of small and medium sized enterprises in the retail pharmacies industry.191 The consideration of goals other than economic efficiency among the TDLC’s decision criteria is increasingly becoming exceptional, however. This may occur particularly in regard to decisions pronounced by the former Commissions that still have effect today, though they do not necessary follow a strict economic efficiency goal: In this sense, sometimes the TDLC has imposed sanctions to parties based on the infringement of competition authorities’ decisions rather than on causing harm to competition in strict economic terms. It is possible to identify the harm to consumer welfare as an additional element for condemning a conduct, as the TDLC concluded in Laboratorio Knop Ltda. v. Farmacias Ahumanda S.A. et al. (2005); in other cases, the protection of consumer surplus has been considered too.192 Allocation efficiency has been explicitly used (e.g., as an argument for dismissing a refusal to supply claim in motion pictures distribution).193 Moreover, the TDLC assessed dynamic efficiency and innovation in the conditional approval of a merger, in a highly concentrated market, where the industry was highly technological and the convergence phenomena was also likely to take place.194 Finally, the absence of direct protection for small and medium sized enterprises, when there is no harm to competition in terms of economic efficiency, has been explicitly stated in several cases on the supermarket industry, as for instance, FNE v. D&S S.A. and Cencosud S.A. (2008).195 190. For example, the case Labbé, Haupt y Cı́a. Limitada contra Shell Chile (2007), where it condemned a gasoline wholesaler to pay a fine of USD 150,000 for violation of Rulings Nos. 435 and 438 concerning vertical restraints in gasoline distribution (overturned by the Supreme Court, Sep. 25, 2007, file 3506-2007); or Ruling No. 15/2006—TDLC, Aug. 3, 2006, where, reviewing in a consultative procedure a franchising contract, in spite of the absence of competition violations, it ordered injunctive relief, repeating an old and unchanged precedent about the fairness of the arbitration clause (nomination of the arbitrator). 191. The TDLC, in the case FNE v. Abbott Laboratories de Chile Ltda. et al. (2005) fined pharmaceutical laboratories with several fines between USD 6,000 and USD 48,000 for the violation of a general instruction of transparency on trade conditions and price discrimination for wholesales; confirmed by the Supreme Court. Later on, in a consultative procedure, pharmaceuticals requested before the TDLC the abrogation of the general instruction on transparency. The TDLC dismissed this petition while stating, among other precepts, that ‘‘the goal of this general instruction was to enhance competition of pharmaceuticals sales to final consumers, and that was the reason why the publicity of prices and other commercial terms was required. Thus, more transparency was achieved and so was the possibility for small retail-pharmacies to compete fairly with big-retail-pharmacies-chains was enhanced’’ (Ruling No. 12/2006, Jun. 13, 2006, Gr. 3 ). The 2004 OECD/IDB peer review had previously identified this general instruction as fairness oriented (p. 23-24). 192. For example, Asociación Chilena de Seguridad y del Instituto de Seguridad del Trabajo against Ruling No. 1.288—Antitrust Commission (2004). 193. For example, UIP Chile Ltda. y Andes Films S.A., against Ruling No. 1.277—Antitrust Commission (2005). 194. Ruling No. 1/2004—TDLC, May 25, 2004. 195. The court stated that ‘‘the use of buying power [understood as asymmetric bargaining power] could only affect competition negatively when it permanently influences the aggregate supply of products, whether by the reduction of quantities, retail price increases or the reduction of research and development investments’’ (Gr. 104). 216 Chapter 5 Table 5-1 Efficiency Goals of the Competition Legislation AU: Please provide crossreference for Tables 5-1 and 5-2 in the text. Country Purpose of the Competition Act Argentina To guarantee the proper functioning of the markets, ensuring free competition and sanctioning behaviors that limit, restrict or distort competition or that constitute abuse of market position in a way that could adversely affect the general economic interest. To set out antitrust measures in keeping with such constitutional principles as free enterprise and open competition, the social role of property, consumer protection, and restraint of abuses of economic power. To promote and defend free market competition. Any attempt against free competition in business activities shall be corrected, prohibited or repressed in the manner prescribed by law. To ensure compliance with the provisions on the promotion of competition and restrictive trade practices in domestic markets in order to accomplish the following goals: to improve the efficiency of the national production system; to ensure that consumers have free choice and access to markets of goods and services; to ensure that enterprises may participate freely in the market; and to ensure that there is a variety of prices and qualities of goods and services in the market. The prevention and prohibition of monopolies, monopolistic practices, and other restraints on efficient market operation; and the elimination of unnecessary regulations affecting business. The Law is intended to protect the competitive process through the prevention and elimination of monopolies, anticompetitive practices and other restraints on the efficient operation of markets for goods and services. The purpose of the Law is to protect and secure the process of free economic competition, eradicate monopolistic practices and other constraints on the efficient functioning of the markets for goods and services, and safeguard the greater interests of consumers. To eliminate monopolistic, controlling, and restrictive practices vis-à-vis free competition in the production and marketing of goods and the provision of services, allowing free private enterprise to develop so as to maximize the benefits for users and consumers. To promote and protect the exercise of free competition and the efficiency that benefits the producers and consumers; and to prohibit monopolistic and oligarchic practices and other means that could impede, restrict, falsify, or limit the enjoyment of economic freedom. Brazil Chile Colombia Costa Rica Mexico Panama Peru Venezuela Consumer Welfare Analysis 217 In practice, the analysis performed by Latin American competition agencies is rather intuitive and does not measure efficiencies in order to balance them against output restrictions, systematically. Competition agencies look into whether cognizable efficiencies enable cost reductions that allow a firm to produce a product with fewer resources, or produce a superior product using the same resources. If efficiencies exist, a firm can reduce its costs and offer lower prices to consumers. In light of the differing language of the relevant statutes, the multiplicity of policy goals, and the various meanings attached to the notion of efficiency, it is more useful to see how legal practice treats specific cases of business restraints than to appeal to abstract guiding principles with little or no capacity to deliver any predictability on the enforcement system. Latin American competition agencies usually apply similar standards to those enforced under the European Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings (2004).196 Under these standards, there are various types of efficiency gains that can lead to lower prices or other benefits to consumers. Often competition statutes197 list the following efficiencies: – savings resulting from economies of scale that enable the firm to receive greater volume discounts in the purchase of inputs; – reduced costs resulting from joint production or improved integration of production facilities; – significant reduction of administrative, sales, or other fixed costs; – transfer of technology either in production or market knowledge; – plant specialization; – improved supply logistics that will reduce transportation costs; and – scope economies resulting from participation in a network. Table 5-2 Procompetitive Arrangements and Latin American Competition Laws Country Procompetitive Horizontal Restraints Argentina The law does not specify examples of ‘‘procompetitive’’ reasons that could justify restrictive arrangements. Procompetitive arrangements are authorized individually, through a general ruleof-reason analysis. The law does not specify examples of ‘‘procompetitive’’ reasons that could justify restrictive arrangements. Procompetitive arrangements are authorized individually, through a general ruleof-reason analysis. Brazil 196. European OJ C 31, Feb. 5, 2004. 197. Article 14 Regulations Legislative Decree No. 528/05 (El Salvador); Art. 23 Regulations Law No. 601/06 (Nicaragua); Art. 6 Law No. 45/07 (Panama). 218 Chapter 5 Table 5-2 Continued Country Bolivia Chile Colombia Costa Rica DR El Salvador Honduras Mexico Procompetitive Horizontal Restraints No specific reference is made to ‘‘procompetitive’’ reasons that could justify restrictive arrangements. Procompetitive arrangements are authorized individually, through a general ruleof-reason analysis. The law does not specify examples of ‘‘procompetitive’’ reasons that could justify restrictive arrangements. Procompetitive arrangements are authorized individually, through a general ruleof-reason analysis. Standardization of rules, research and development, and the use of common facilities are exempted (Article 49, Decree No. 2153/92). The law does not make reference to ‘‘procompetitive’’ reasons that could justify restrictive arrangements. There is no structured ruleof-reason aimed at balancing welfare benefits and costs of individual cases; nevertheless, the competition agency considers the merits of individual cases. Activities that are complementary or needed to carry out an integration or association that promotes innovation or productive investments (Article 7.1, Law No. 42/08). Resource savings that would enable the firm to produce the same amount of the product at a lower cost or an increased amount of the product at the same cost; lower costs attained through joint production; significant reduction of administrative costs; the transfer of technology in production or market knowledge; and a reduction of production or trading costs resulting from the expansion of an infrastructure or distribution network (Article 14, Regulations of the Law). Improvements in the conditions of production, distribution, supply, marketing, trading, and consumption of goods and services (Article 9, Decree No. 357/05) In addition, resource savings that would enable the firm to produce the same amount of the product at a lower cost or an increased amount of the product at the same cost; lower costs attained through joint production; significant reduction of administrative costs; the transfer of technology in production or market knowledge; and a reduction of production or trading costs resulting from the expansion of an infrastructure or distribution network (Article 6, Regulations of the Law). The law does not make reference to ‘‘procompetitive’’ reasons that could justify restrictive arrangements. Article 16, Regulations of the Law (2007) provides for a structured rule-of-reason aimed at balancing welfare benefits and costs of individual cases, but limits such cases to economic concentrations. Among the conduct 219 Consumer Welfare Analysis Table 5-2 Continued Country Nicaragua Venezuela 5.3.3 Procompetitive Horizontal Restraints considered ‘‘efficient’’, this provision includes: Resource savings that would enable the firm to produce the same amount of the product at a lower cost or an increased amount of the product at the same cost; lower costs attained through joint production; significant reduction of administrative costs; the transfer of technology in production or market knowledge; and a reduction of production or trading costs resulting from the expansion of an infrastructure or distribution network. Harmonization of technical and quality standards, adoption of collective brands, and joint cooperation in technical development (Article 4 of Decree No. 601/06). Another provision recognizes resource savings that would enable the firm to produce the same amount of the product at a lower cost or an increased amount of the product at the same cost; lower costs attained through joint production; significant reduction of administrative costs; the transfer of technology in production or market knowledge; and a reduction of production or trading costs resulting from the expansion of an infrastructure or distribution network (Article 23, Regulations of the Law). Restrictive conduct is exempted so long as it does not restrict output and so long as it provides consumers with a fair share of the benefits resulting from the restriction (Article 18, Competition Act). Article 10.6, Regulation No. 1/93 provides for a structured rule-of-reason analysis of vertical restraints, requiring that the authorized agreements improve the production, trading, distribution of goods, or performance of services. Article 14, Regulation No. 1/93 also recognizes the following as ‘‘class exemptions’’: Uniform enforcement of general trading behavior, including supply and payment trading customs; research and development; agreements that promote the division of labor; export agreements; intellectual property rights; exclusive supply; exclusive distribution; and franchises. THE LEGAL STANDARD OF CONSUMER WELFARE How do Latin American competition agencies assess the compensating effects of economic efficiencies in the assessment of the Consumer Welfare standard? In the following chapters198 we will address this problem with reference to particular 198. See Section 6.2.4, Section 7.2.3, Section 8.3.3, and Section 9.2.3, respectively. 220 Chapter 5 classes of anticompetitive restraints. However, it is possible to draw some common approach for the overall problem of how efficiency is assessed under consumer welfare analysis. 5.3.3.1 The Burden of Proof of Economic Efficiencies Provided the conduct examined is not per se prohibited, those claiming efficiencies must demonstrate them. In particular, they need to show that the proposed undertaking will reinforce their capabilities for producing, manufacturing, and marketing products. Moreover, they need to show that there is no other way to obtain such efficiencies but through the proposed transaction, merger, or restrictive business practice. The antitrust statutes of some countries impose a rule that has been interpreted by competition agencies, as establishing a per se standard, notably on horizontal restraints aimed at fixing prices, reducing output or allocating markets. In these cases, the interpretation of these competition agencies is that those who allege the restrictive effects of business practices are exempted from showing the practices’ lack of justifying efficiencies. The defendants, nonetheless, must show the efficiencies of their restrictive agreements, and their consumer welfare increasing effects. Most of the information that would allow the competition body to assess whether a restrictive undertaking will bring about the sort of efficiencies that would enable its clearance is solely in the possession of the parties involved. It is, therefore, incumbent upon them to provide in due time all the relevant information necessary to demonstrate that the claimed efficiencies are specific and likely to be realized. Similarly, in merger cases, it is up to the merging parties to show to what extent the efficiencies are likely to counteract any adverse effects on competition that might otherwise result from the merger. This rule actually contradicts the usual principles of legal evidence applied in the region, which is one of the reasons why courts are in a constant struggle with competition agencies. The normal principles state that claimants are always required to support their accusations with factual evidence. In the case of antitrust, however, this is not possible, since the anticompetitive nature of the challenged business practices is inferred from economic theory; not from ‘‘objective’’ facts. In light of this problem of ‘‘incommensurability,’’ no party to an antitrust procedure is in position to ‘‘show’’ that further evidence is required to prove the anticompetitive nature of any business restraint. The discussion about evidence is turned into mere allegation of competing theories and hypotheses best explaining the case presented, in the eyes of the contending parties. Hence, if an agreement appears particularly restrictive in light of the precepts of economic theory, it is likely that judges will not require the plaintiff to support her allegation with factual evidence about its restrictive effects (i.e., lack of efficiencies). Therefore, cost reductions that happen to result from anticompetitive reductions in output are not usually considered as efficiencies benefiting consumers. Conversely, if an agreement is of a type usually held to be efficient (e.g., distributorships), the plaintiff will likely be required to bear the onus of proof. Consumer Welfare Analysis 221 Possibly due to this imprecision, competition agencies adopt a practical approach to this issue, requiring evidence from the person best placed to obtain it. Often, competition agencies themselves are the ones who have the initial burden of proof; companies have to prove efficiencies only after significant harm to competition has been proven. Consistent with the focus on whether efficiencies will lead to a net benefit to consumers, cost efficiencies that lead to reductions in variable or marginal costs are more likely to be considered relevant to the assessment of efficiencies than reductions in fixed costs because the former are, in principle, more likely to result in lower prices for consumers. 5.3.3.2 Conditions Examined in the Analysis of Consumer Welfare Under consumer welfare standard usually applied by Latin American competition agencies efficiency enhancing effects of restrictive agreements must deliver clear benefits to consumers in the short run. In terms of legal doctrine, this means that social welfare benefits should meet three conditions: (i) expected benefits should be specific; (ii) they should be quantifiable; (iii) they should be readily transferable to consumers. (i) Social welfare benefits should be specific to the anticompetitive restriction Efficiencies are relevant to the competition assessment when they are specific; that is, when they are a direct consequence of the restrictive arrangement (e.g., a proposed merger) and cannot be achieved to a similar extent by less anticompetitive alternatives. In these circumstances, the efficiencies are deemed to be inextricably linked with the merger and thus merger-specific. It is for the merging parties to provide in a timely fashion all the relevant information necessary to demonstrate that there are no less anticompetitive, realistic, and attainable alternatives of a nonconcentrative nature (e.g., a licensing agreement, or a cooperative joint venture) or of a concentrative nature (e.g., a concentrative joint venture, or a differently structured merger) that preserve the claimed efficiencies. The competition body only considers alternatives that are reasonably practical in light of the business situation faced by the merging parties, taking into account established business practices in the industry concerned. (ii) Efficiencies should be quantifiable Furthermore, efficiencies have to be verifiable such that the competition body can be reasonably certain that the efficiencies are likely to materialize, and be substantial enough to counteract the output restrictive potential or actual harm to consumers. The more precise and 222 Chapter 5 convincing the efficiency claims are, the better the competition body can evaluate the claims. This is generally interpreted to mean that the longer it will take for the efficiencies to materialize, the less weight the competition authority can assign to them. This implies that, in order to be considered as a counteracting factor, the efficiencies must be timely. Hence, competition agencies have a tendency to give weight to efficiencies when they are quantifiable. Where reasonably possible, efficiencies and the resulting benefit to consumers should therefore be quantified. When the necessary data are not available to allow for a precise quantitative analysis, it must be possible to foresee a clearly identifiable positive impact on consumers, not a marginal one. In general, the more temporally remote the onset of the efficiencies, the smaller the probability that the competition body will regard them as real and deserving of weight. Evidence relevant to the assessment of efficiency claims includes, in particular, internal documents that were used by the management to decide on the merger, statements from the management to the owners and financial markets about the expected efficiencies, historical examples of efficiencies and consumer benefits, and premerger studies by external experts on the type and size of efficiency gains, and on the extent to which consumers are likely to benefit. (iii) Transferable to consumers Economic efficiencies must be deliverable to consumers in the form of output increases or price reductions. The parties claiming the existence of such efficiencies must provide clear evidence that such transfer would be effective in the short run. This standard may be extremely cumbersome to apply, in light of the potentially diverging views between the antitrust enforcing agency, usually concentrated on achieving short-run efficiency, and the prosecuted business, whose corporate strategies are usually geared towards achieving long-run efficiency.199 A case that highlights this potential conflict is D&S and Falabella (2008), possibly the best known case ever decided in Chile. In this case, the TDLC blocked the merger between one of the mail Chilean retail companies (Falabella) and the most important supermarket chain (D&S), arguing that the important risks to competition could not be compensated by sufficient and effective alleviating conditions; department stores; malls; and related consumer credit, under the concept of ‘‘integrated retail.’’ The TDLC did not explain how to construe the efficiency standard, in the context of the argument, presented by the merging parties, that the efficiencies they claimed to exist in the proposed merger would actually be transferred on to consumers. This would have clarified the scope of a legal defense 199. See in detail, Section 12.1.3, below. Consumer Welfare Analysis 223 against the challenge of restricting competition through a merger (indeed, through any other form of restriction). In this case, the court simply considered that the merging parties did not explain why the alleged procompetitive efficiencies involved in the merger could be transferred to consumers. Hence, the TDLC interpreted the consumer surplus standard in an extremely narrow sense. 5.4 THE FLAWS OF ANTITRUST WELFARE ANALYSIS Antitrust scholars have struggled to find ‘‘unifying principles’’ of welfare analysis. However, this is a quest that has proven elusive. The problem underlying these proposals lies in their assumption that output restrictions and the welfare efficiencies they may bring about can somehow be compared; in other words, the assumption that a cost-benefit calculation is somehow feasible. Due to the impossibility of this calculation, these theories inevitably end up advocating rules of thumb, tiebreakers, and other forms of intuition that cannot possibly deliver any stability to the interpretation of the law. Under this framework, typically, antitrust decisions examine whether inefficiencies would be linked to output reduction, leading to ‘‘deadweight’’ losses. Similarly, they check to see that these allocative distortions are not compensated for by productive efficiencies which would enable society to make improved used of its actual technologies and available economies of scale. Consistent with these labels, antitrust policy clearly seeks lower prices and a wider array of consumer choices (consumer surplus), or to improve the combined welfare of producers and consumers (total surplus), in the short run. Consumers would benefit from antitrust intervention to the extent that it brings prices closer to marginal costs. Thus, under antitrust policy, economic efficiency is primarily understood as a condition that enhances welfare through improved resource allocation. Of course, as we have seen in the previous chapter, efficiency gains are also understood in a productive sense; yet, these are short-run efficiencies that rely on the present state of technology, which firms could achieve through larger production runs and increased economies of scale. A problem emerges due to the nebulous understanding of the concept of ‘‘productive efficiencies.’’ In order to distinguish between short-run improvements on productive use of technological capabilities already available to businesses, on the one hand, and technological capabilities that would emerge in the long run as consequence of Marshallian external economies (i.e., learning within the industry), we have differentiated between these two terms, and called the second group ‘‘dynamic efficiencies.’’ While in conventional antitrust welfare analysis competition agencies focus their attention on productive efficiencies, it neglects dynamic efficiencies, due to the impossibility of measuring them. Even though some authors (Korah, 1994; Pera and Auricchio, 2005) do not expressly make a distinction between short-run productive efficiencies and 224 Chapter 5 long-run dynamic efficiencies, they intuitively perceive the gist of this problem and correctly refer to the ex post nature of the analysis of output restrictions, which are easily seen in the limitation of rivalry or short run increases in prices, and, on the other hand, the ex ante evaluation of the benefits accruing from dynamic effects, which is obviously more difficult, and highly speculative, since it is made before the effects are readily visible. The revised 1997 version of the U.S. Horizontal Merger Guidelines, states in this regard a similar view: Efficiencies are difficult to verify and quantify, in part because much of the information relating to efficiencies is uniquely in the possession of the merging firms. Moreover, efficiencies projected reasonably and in good faith by the merging firms may not be realized. Therefore, the merging firms must substantiate efficiency claims so that the Agency can verify by reasonable means the likelihood and magnitude of each asserted efficiency, how and when each would be achieved (and any costs of doing so), how each would enhance the merged firm’s ability and incentive to compete, and why each would be merger-specific. Efficiency claims will not be considered if they are vague or speculative or otherwise cannot be verified by reasonable means. The problem underlying this statement ultimately rests on the nature of the information required by the competition authority to support the alleged existence of efficiencies in a merger or indeed any other business restraint. Dynamic efficiencies cannot be compared to output restrictions because they belong to two different dimensions of market analysis: while the analyst perceives the negative effects of output restrictions retrospectively, in the past (i.e., how many competitors were excluded, or how much prices were increased as result of the undertaking), the benefits resulting from dynamic efficiencies are only perceived prospectively, in the future. In this analysis, competition agencies are bound to overemphasize the importance of past evidence of potential or actual market exclusions (or price increases). Statistical evidence of past ‘‘inefficient’’ behavior takes precedence over all other considerations, particularly the presence of prospective dynamic efficiencies emerging through market interaction. These endogenous dynamic efficiencies are perceived as intuitive, hypothetical, and not supported by empirical evidence, because their existence can only be inferred on theoretical (logical) grounds or by comparative institutional assessment. Indeed, due to their endogenous nature, they cannot be measured through empirical evidence, which has not yet been produced. Hence, it is impossible to determine through statistical means whether such dynamic prospective efficiencies would justify an immediate reduction of welfare.200 200. We shall refer to this problem, in connection to the limitations imposed on the evidence of anticompetitive restraints, under antitrust procedures. See Section, below. AU: Provide cross-reference for Section in footnote 200. Consumer Welfare Analysis 225 This is why dynamic efficiency gains, such as innovation and improved use of technologies, may be important, but they are typically very hard to quantify.201 Therefore, notwithstanding express recommendations directed towards considering their relevance in competition analysis, competition agencies are inclined to disregard them, as their efforts to measure their impact are rather intuitive. A case in point is, again the 1997 revised U.S. Horizontal Merger Guidelines. Besides the efficiencies resulting in lower prices, these guidelines take into consideration efficiencies that are expected to materialize in ‘‘improved quality, enhanced service, or new products.’’ However, the listing of such efficiencies, compared to the precision of those leading to lower prices,202 is rather vague: the Guidelines do not provide specific examples of these, but merely state that ‘‘efficiencies also may result in benefits in the form of new or improved products, and efficiencies may result in benefits even when price is not immediately and directly affected.’’ This mode of analysis biases the policy against a full assessment of the role of corporate strategies and business constraints whose short-run effect is to limit market rivalry, to promote competitors’ exclusion, and to block their entry in the market, but which in the long run are indispensable for ensuring cost reductions and external economies that are essential for a firm to compete successfully. Not surprisingly, the Industrial Organization ideology that justifies the public interest role of antitrust policy is biased against the long-term efficiencies derived from business organization, due to its emphasis on short-term price competition, competitive equilibrium, and consumer welfare promotion (resource-allocation static efficiency). In short, then, the main problem with all the cost-benefit balancing standards discussed above is that they become purely intuitive, since there is no feasible way of quantitatively determining the net effects of business conduct due to the difficulties of measuring prospective productive efficiencies. 201. Yet, the existence of such efficiencies rests on different means of evidence. Certainty about their existence emerges not only from sensory evidence; it is largely and significantly a by-product of our intellectual understanding of the world. Such world is featured by a constant growth of knowledge that triggers economic progress. This is an evolutionary process of change, which cannot be assessed with reference to a particular point within such evolution. This concept, adumbrated in Adam Smith’s notion of Division of Labor (Smith, 1776 [1937]), later extended by Alfred Marshall’s ideas about externalities and his value theory (Marshall, [1890] 1949), and Allyn Young’s notion of inter-firm division of labor (Young, 1928), is fostered by the permanent emergence of increasing returns spotted by alert entrepreneurs, and complemented by external economies which prompt incessant learning among firms that belong to a particular industry. To review the important contribution of these scholars in economic thinking about competition and the market, see Section 3.1.1, above. 202. The Guidelines refer to the cases where (i) merger-generated efficiencies may enhance competition by permitting two ineffective (e.g., high cost) competitors to become one effective (e.g., lower cost) competitor; (ii) in a coordinated interaction context, marginal cost reductions may make coordination less likely or effective by enhancing the incentive of a maverick to lower price or by creating a new maverick firm; and (iii) in a unilateral effects context, marginal cost reductions may reduce the merged firm’s incentive to elevate price. 226 Chapter 5 This impossibility is even more evident in light of the solutions that have been proposed to overcome this key flaw of antitrust analysis. For example, Bork (1978) advocates the use of (neoclassical) price theory as a way of giving the balancing analysis some predictability. Under this theory, certain conduct is obviously welfare diminishing because, given the implicit assumptions of the models under which output restriction is described as a monopolistic misappropriation of consumers’ rent by means of price hikes induced by monopoly businesses that control the market, it immediately follows that some correction is needed to redress such ‘‘social harm.’’ Under this standard, when weighing the cognizable efficiencies against anticompetitive harms, competition agencies should consider whether the efficiencies are sufficient to offset the potential of the agreement to harm consumers in the relevant market, for example, by preventing price increases.203 However, Bork’s test fails to identify a method for balancing compensating efficiencies against output restrictions. Indeed, he avoids the issue altogether by contending that a case-by-case analysis in which productive efficiencies would be directly introduced into the welfare calculation would ‘‘plunge antitrust enforcement into economic extravaganzas’’ since ‘‘making the existence and size of efficiencies a matter for proof ( . . . ) misleads the courts and the enforcement agencies into thinking that such direct proof is the only way efficiencies can be taken into account in antitrust litigation’’ (Bork, 1978, p. 124). Therefore, efficiency defenses ‘‘cannot measure the factors relevant to consumer welfare, so that after the economic extravaganza was completed we should know no more than before it began’’ (p. 124). Thus, ‘‘it is the quantification of the productive efficiency factor that renders the problem utterly insoluble’’ (p. 127). In light of the intuitive nature of productive efficiencies, Bork postulates his heroic conviction that certain practices do not deserve a case-by-case analysis because they obviously belong to the realm of the garden-variety pricefixing ring, and therefore their negative welfare effects should be left for price theory to decide.204 203. In Bork’s (p. 108) words, ‘‘. . . there need not always be a trade off. In most cases, ( . . . ) economic analysis will show that one of the areas does not exist, and decision of the case is, therefore, easy. Some phenomena involve only a dead-weight loss and no, or insignificant, cost savings. That is the case with the garden-variety price fixing ring.’’ In such cases, ‘‘output is restricted . . . but there is no downward shift of costs.’’ These practices, which economic theory perceives as particularly damaging to social welfare, are regarded as automatically, per se, ‘‘illegal.’’ By contrast, conduct whose net consumer welfare effects are ambiguous is scrutinized under a rule of reason. Under this rule, evidence of the economic circumstances in which the conduct takes place is necessary before it can be outlawed. Despite their negative effects in terms of output restriction, these practices also clearly offer productive efficiencies deserving of consideration. 204. Bork (p. 122) defends price theory as the prime method of competition analysis due to the lack of a second best choice. Thus, ‘‘the best developed branch of price theory is the theory of the ways in which firms may profit by interfering with allocative efficiency. Though we know something of the subject, there is no comparably clear, reliable, and general theory of the ways in which they may create productive efficiency.’’ Consumer Welfare Analysis 227 Leaving the competitive analysis of business conduct to price theory, of course, relieves the analyst from having to do the analysis himself, but at the expense of accuracy and justice. Indeed, what Bork proposes is no less intuitive for law enforcers, as his proposal would lead to competition agencies predetermining, under the influence of price theory, what practices are likely to restrict output and what practices are likely to bring efficiencies into the economic system. Yet why should we assume that price theory can actually make consistent social welfare analyses? Neoclassical price theory is based on idealized representations of economic behavior (e.g., homo economicus) which can hardly be found in the real world where antitrust policy operates; indeed, its assumptions are intended to simplify the world in order to make (neoclassical) economic analysis feasible. Since there is no connection between what the models preach about markets and the individual entrepreneurs who actually operate in them, it follows that the normative recommendations of price theory about what entrepreneurs should do in the market are entirely misplaced. Hence, there is no way in which legal rules can be grounded in price theory. Therefore, it is not surprising that despite all of his support for using price theory, Bork has to rely on tiebreakers (i.e., intuition) that would indicate that the law should not intervene in cases where price theory indicates that net consumer welfare effects are unclear and inconclusive. The adoption of such rules of thumb reflects his failure to address the shortcomings underlying the use of price theory. Similarly, Williamson proposes adopting qualifications to the balancing model, in order to take into account timing, incipiency, weighting, and technological progress.205 Unfortunately, none of these qualifications provides us with a clear normative yardstick for judging practical cases. Under the balancing test, it is not possible to measure welfare effects by estimating price, cost, and quantity or output under the conditions existing before and after the output restriction; consider the time dimension of each (duration and discounting to present value); and compare both to a hypothetical but-for 205. According to the first qualification, competition analysis should take into account the time frame in which the analysis takes place. Some practices change their profile depending on the perspective adopted by the analyst. In the case of a merger review, for example, the analyst may reach different conclusions depending on whether he considers the immediate effects of a merger or its effects in the long run. Thus, a merger may have net positive effects in the short run, such as cost savings exceeding the deadweight loss, but if one considers the possibility of alternative organizational strategies in a long-run perspective, then the perception of the merger will change altogether, as it may appear that the same cost savings could have been achieved without incurring the deadweight loss resulting from the merger. The second factor, incipiency, calls for deterring embryonic trends towards greater market concentration early on, as they could possibly lead into increased monopoly power. Third, Williamson proposes weighting the effects of restrictive undertakings not only on the participating firms, but to all firms belonging to the same class. This reflects the potential cooperation that could develop between them. Finally, it may be important to incorporate technological progress into the balancing inquiry, due to the need to give proper consideration to changes in market structure that technological change may cause. 228 Chapter 5 world in which the conduct did not take place. Melamed (2006, p. 381) rightly concludes that: Efforts to shortcut the process by substituting intuition or educated guesses for precise calculation would reduce transaction costs but also would move the analysis along a continuum from probably impossible precision toward arbitrary decision.’ Moreover, due to the society-wide scope of the market-wide balancing test, in which the welfare implications of competitive strategies for other competitors (as well as for consumers) must be accounted for, firms react by abstaining from aggressive forms of competition that might be construed as ‘‘restrictive.’’ Thus, ‘‘competition on the merits’’ may be seriously undermined, as legitimate business success can easily be conflated with attempts to obtain monopoly power. The impact of this utilitarian methodology of analysis is significant, due to Latin America’s culture of legal positivism. Judges, attorneys, and jurists in the region are not inclined to question or challenge the utilitarian arguments underlying antitrust policy’s balancing criteria. Either they reject them by avoiding discussion of the substantive issues, for example, by concentrating on procedural flaws, or they yield to the economic theory postulated by the competition authority to justify its prosecution. Therefore, legal practitioners are poorly equipped to offer resistance to the utilitarian overtone of antitrust policy, according to which property rights should yield to government intervention due to perceived ‘‘market failures.’’ Establishing an inner consistency of antitrust analysis requires a closer look at so-called social welfare cost-benefit analysis; that is, we need to approach this matter through economic rather than legal reasoning. But it is possible to carry out this analysis in a stable, predictable way? 5.5 THE IMPLICATIONS OF THE UTOPIAN PERSPECTIVE OF ANTITRUST WELFARE ANALYSIS The flaws of antitrust welfare analysis highlight the broader contradictions of the policy, which impair the stability of market institutions. The very conceptualization of antitrust policy, as an instrument designed for maximizing social welfare, contradicts the very nature of market institutions which the policy is intended to support. Here lies a logical contradiction that antitrust advocates can hardly ignore. Market institutions emerge in a context where information necessary to make markets work is not available to economic agents. However, in order to postulate any model featuring social welfare maximization, antitrust theory is forced to endorse a heroic assumption, namely, that economic agents, acting individually somehow know to collectively maximize social welfare, but they deliberately choose not to, presumably to reap monopolistic benefits. In this calculus, naturally, social welfare appears always to diverge from individual welfare. In a complex world, social preferences needed to make such maximization welfare calculus are impossible to establish, not only due to the impossibility of Consumer Welfare Analysis 229 making interpersonal calculations of utility; but more significantly, to the impossibility of identifying welfare in an intertemporal framework. Business strategies that today seem to impair social welfare, because they restrict output, may be needed to ensure investments that will provide for long-run dynamic efficiencies which will provide consumers with an enhanced quality of life. The problem ultimately lies in the fact that the legal rules are contingent on the very definition of competition adopted by the authority. This definition is based on the particular formulation of social welfare that the competition authority endorses. Most often, social welfare is understood in terms of the short-run allocation of existing social resources. Naturally, under this view, no market structure other than perfect competition can deliver optimal welfare results. Yet, in light of the obvious contention, that is, that perfect competition is, ex hypothesi, an idealized market situation which seldom, if ever, materializes in the real world, antitrust advocates content themselves with attaining workable competition, in which businesses are expected to attain optimal performance within the constraints of the available technology. In other words, optimality accrues whenever businesses are capable of managing their productive factors optimally. Yet whether perfect or workable competition, they both reiterate the same utopian mindset in which social welfare is somehow maximized because the analyst possesses all the information required from consumers to attain consumer surplus. This analytical utopian premise highlights the fundamental flaw of antitrust policy: its misconceived diagnosis ultimately leads to policy recommendations that undermine the institutional development necessary for economic progress. Stable institutions bring about added economic value. In order to seize such increasing returns—and bring about competition—entrepreneurs must organize their knowledge production process through adequate business arrangements that ease the transfer of knowledge. In the world of perfect competition, institutions are unnecessary because market information is assumed to be spread throughout the economic system. In the real world of business competition, however, this assumption is untenable. Imagine what would happen if information about a profit opportunity was really available to everyone at the same time. If everyone was equally well-placed to seize such a profit opportunity, it is likely that no one could reap the resulting increasing returns. Hence, institutions are needed to ensure that profit opportunities are accessible to only a few. Contradictory as it seems, institutions enable market functioning because they restrict access to the most creative, entrepreneurial, and hardworking firms. They do so by organizing the transmission of knowledge through adaptation and coordination of their core capabilities, thereby enabling the value-added process to take place (Richardson G., The Organization of Industry, 1996 [1972]). Dynamic efficiencies, then, are devised as long-run mechanisms that enable knowledge transmission to take place and diminish transaction costs, uncertainty, and opportunistic behavior (Joskow, 2002, p. 105). They are efficiencies that can only be understood in long-run dynamic settings, as mechanisms devised by entrepreneurs to organize their economic 230 Chapter 5 activities in the most productive way. These institutions are necessary to avoid coordination problems between individuals who possess different capabilities that need to be arranged and organized in order to bring about new products, innovations, and ways of delivering goods and services to the market. This coordinated activity enhances consumer welfare in a much more meaningful and comprehensive way than the standard price-based short-run resource-allocation perspective of antitrust policy could ever acknowledge. Thus, antitrust analysis examines these arrangements from a short-run resource-allocation perspective: under this perspective the efficiency problem is whether firms in the market produce at their best technical capacity, not whether assets can be combined to allow the creation of new products and added value. Naturally, these divergent ends create considerable confusion among competition agencies, who usually examine productive efficiencies intuitively. Antitrust policy’s pursuit of consumer welfare is genetically embedded in the policy as the only possible way of reconciling positive Imperfect Competition theory with its normative search for optimal resource allocation and productive efficiency. Antitrust advocates, however, mistakenly assume that such theory can provide a framework for the stable development of legal rules, simply by assuming that no other goal but economic efficiency can deliver stable results. A glimpse into the case law of jurisdictions with wider antitrust experience such as the U.S. or the E.U. displays how legal standards on business behavior that used to be considered ‘‘per se’’ prohibited no longer apply. Such conclusion does not follow, however. As discussed above, lack of attention to dynamic efficiencies produced in the market inevitably leads policymakers to make contrived short-term calculations of welfare that can only be supported by idealistic or utopian assumptions about what social welfare is. In other words, it is a permanent invitation to the exercise of unbounded discretion over business affairs. In order to develop stable rules of law, antitrust analysis must provide firm conclusions and clear guidelines about the legality of business conduct. Unfortunately, this is easier said than done, because the theoretical tools of antitrust analysis do not provide the necessary means to establish the intrinsic restrictive or nonrestrictive character of a given arrangement. Chapter 12 will explain why employing different definitions of consumer welfare in antitrust analysis inevitably leads to the erosion of the rule of law. Chapter 6 Horizontal Mergers The search for utopian—perfect—competition is clearly reflected in the structural control of market concentration, which antitrust agencies implement preventively. Mergers antitrust provisions reflect the assumption that economic concentration undermines market competition because it contradicts the premises of the perfect competition model. Our attention will be focused on the priorities of each nation’s policy on mergers; on identifying concentration thresholds considered tolerable in each jurisdiction; and on assessing the different criteria that are used to evaluate economic efficiencies as a potential balancing element weighing in favor of merger approval. Merger control is seen as the main preventative tool against excessive market concentration that could evolve into monopoly power in the hands of a few dominant firms. This chapter outlines the merger control schemes applied in Latin America. The fact that this policy tool was not introduced simultaneously in all domestic jurisdictions in the region, coupled with changing opinions about the usefulness of this policy tool, has created notable differences in the approach of each country, as evidenced by the relevant legal provisions. This chapter will later shift its attention to exploring these differences, explaining the reasons for differing domestic approaches. In the first part of this chapter, we shall discuss the economic foundations of merger control as they are presented under textbook Industrial Organization theory; next, we shall explore the scope of merger legal rules, in particular the jurisdiction of competition agencies in Latin America over these undertakings; then we shall examine the economic factors taken into account in reviewing a merger transaction. Finally, we shall look to the case law to explore the remedies imposed by competition authorities in order to counter the negative effects of these undertakings. This chapter will end with an assessment of the merger system in Latin America. 232 6.1 Chapter 6 ANTITRUST RATIONALE OF MERGER CONTROL The oligopoly model provides the rationale for antitrust merger control. The purpose of this control is, essentially, to control the risk that a reduction in the number of independent traders in the market—brought about by a merger or acquisition—could lead to enhanced monopoly power or dominance. Again, the underlying assumption is clear: a reduction in the number of competing agents in the market could lessen market performance, unless obvious procompetitive efficiencies are also produced. Antitrust scholars are inexorably guided by the logical implications of the conventional antitrust Nirvana view. Thus, Khemani and Dutz (1995, p. 25) discuss the potential negative effects of mergers. In their opinion, horizontal mergers among two or more firms in the same line of business reduce the number of competing firms and increase market concentration, while vertical mergers among firms engaged in different stages of production may close sources of inputs or distribution channels to competitors, and conglomerate mergers among firms in diversified or unrelated businesses may lead to cross-subsidizing and reciprocal arrangements that limit competition. Boner and Krueger (1991, pp. 68-84) argue that ‘‘merger control and other structural regulations are designed to preserve the independence of suppliers and to prevent corporate transactions that would substantially eliminate competition.’’ These structural regulations fill the ‘‘gaps’’ in ‘‘conduct’’ prohibitions, gaps which, in Boner’s opinion, would allow monopolists to utilize mergers as corporate strategies to elude cartel prohibitions: ‘‘[in the absence of] structural regulation, mergers would allow competing suppliers to co-ordinate pricing policies; this conduct would otherwise be illegal’’ (Boner, 1995, p. 44). It is obvious why merger control is probably the area of antitrust policy in which structural concerns are most prominent. The purpose of this control is to anticipate what levels of market concentration, in each industry, would be likely to facilitate monopoly power, or dominance, as the case may be. 6.2 STATUTORY STANDARDS OF MERGER REVIEW 6.2.1 LEGAL DEFINITION As seen in the previous section, under conventional Industrial Organization theory, mergers are likely to increase the monopoly power of the merging firms and decrease both consumer surplus and total welfare because they either eliminate an actual competitor (i.e., horizontal mergers) or could foreclose the entry of firms operating either upstream or downstream by taking over their provider or by acquiring a dominant presence in those markets (i.e., vertical mergers). Competition agencies review whether the merger or acquisition grants the resulting entity the unilateral power to impose anticompetitive condition on the market without being challenged by actual competitors. In other words, they Horizontal Mergers 233 examine whether the concentration under review has the effect of excluding other economic agents from the market, raising barriers to potential entrants, or enabling economic agents to engage in anticompetitive undertakings. Like general antitrust analysis, merger review begins with the measurement of monopoly power. Accordingly, competition agencies check whether the merging firm would acquire the unilateral capacity to exclude competitors or raise prices, or alternatively, whether the merger would enhance the potential for collusion in the industry. Monopoly power analysis represents the first stage of merger review; this analysis emphasizes the presumed unilateral or multilateral effects of mergers reviewed. A difference arises with the monopoly power analysis of other anticompetitive restraints. In cases involving abuse of dominance or monopolization, the alleged harm has already occurred; therefore, the entry question is often backwardlooking: Did new competitors enter in the market, thus counteracting any harm to competition? That makes the analysis easier because it focuses mainly on whether entry was sufficient.206 By contrast, in merger cases, the question is whether it will likely be sufficient or how long it will take for that to happen. Although the same types of entry factors are considered in merger and nonmerger cases, a major difference is that the alleged harm in most merger cases is prospective. Thus, the entry question is whether and when a merger will induce enough entry to substantially mitigate the merger’s potential anticompetitive effects. National antitrust provisions throughout the region are fairly similar in their definitions of mergers and acquisitions subject to review: (i) the merger, acquisition, combination, consolidation of two or more formerly independent businesses through any act, contract, agreement or undertaking; (ii) when an economic agent who already has control over an economic agent acquires direct or indirect control of more economic agents; or (iii) any other act or agreement that gives one economic agent control over the assets or otherwise influences in a decisive way the administration of a business.207 206. Of course, the allegedly unlawful conduct may still be ongoing at the moment the competition agency’s begins an investigation or prosecution. In these cases, the competition agency’ analysis cannot be exclusively retrospective, but needs to be focused also in the present, even in the future. Consider the case of predatory pricing, where consumers are not harmed until the recoupment phase begins, so the entry analysis may need to be forward-looking if that phase has not started yet. Some prediction will be necessary if, for example, competition agencies ignore whether entry that has already occurred will turn out to be sufficient to solve the competitive problem. 207. For example, Art. 25, Law No. 601/06 (Nicaragua); see also, Art. 22, Decree No. 126/06— Regulations of Legislative Decree No. 528/04 (El Salvador); or Art. 11, Legislative Decree No. 357/05 (Honduras). 234 Chapter 6 The notion of economic control is standard under international antitrust principles. It is intended to cover all possible means of exercising influence on the decision of controlled economic agents.208 Mergers involve a permanent change in the economic organization of the businesses involved, which will no longer be independent but will act jointly, regardless of the legal form such a union adopts. Hence, temporary associations are usually exempted from antitrust rules, such as: (i) joint ventures for the purpose of developing a particular joint project209 or mere corporate restructuring (even if it entails the acquisition of shares);210 (ii) other forms of stock acquisition not intended to impose control over the business decisions of another firm;211 (iii) lastly, some statutes exclude from premerger notification and approval obligations the acquisition of a single company by a single foreign company that did not previously possess assets or shares of other companies in the host country.212 208. See Section 2.1.7, above. 209. See Art. 26, third paragraph, Law No. 601/06 (Nicaragua); Art. 21, third paragraph, Law No. 45/07 (Panama) also, Art. 11, second paragraph, Legislative Decree No. 357/05 (Honduras). 210. Article 22, Decree No. 126/06—Regulations of Legislative Decree No. 528/04 (El Salvador) defines corporate restructuring as the acquisition of stock carried out by a business already possessing 98% of the capital stock in the acquired firm during the previous three years. 211. Examples of these transactions abound: First, acquisitions of companies in which the buyer already possesses more than 50% of the shares. It also includes the acquisition of bonds, debentures, and nonvoting shares or companies’ debt securities. Next, acquisitions of voting securities of an issuer, when at least 51% of the voting shares are owned by the acquiring person prior to such acquisition, are also considered exempt. Moreover, acquisitions solely for the purpose of investment of voting securities are exempted, if, as a result of such acquisition, the securities acquired or held do not exceed 10% of the outstanding voting securities of the issuer. Also, acquisitions of voting securities are exempted, if, as a result of such acquisition, the voting securities acquired do not increase, directly or indirectly, the acquiring person’s percent share of outstanding voting securities of the issuer. Moreover, acquisitions, solely for the purpose of investment, by any financial institutions of voting securities pursuant to a plan of reorganization or dissolution are exempted; as well as assets in the ordinary course of its business. Finally, exemption provisions also include operations carried out by financial institutions or insurance companies, the normal activities of which include transactions and dealing in securities for their own account or for the account of others, holding on a temporary basis securities which they have acquired with a view to reselling them, provided that they do not exercise voting rights with respect to those securities with a view to determining the competitive behavior of the issuer of such securities or provided that they exercise such voting rights only with a view to preparing the disposal of all or part of the issuer or its assets or the disposal of those securities and that any such disposal takes place within one year of the date of acquisition. 212. Article 22, Regulations of Legislative Decree No. 528/05 (El Salvador); also, Art. 8, Regulations of Law No. 25156. This type of transaction refers to the acquisition of domestic or foreign companies by a foreign company that is not active in the national territory or that has direct or indirect control over related companies. The rationale behind this exemption is the de minimis effect on competition in the host market of such transactions. Thus, the operation would simply involve the entry of a new competitor into the relevant market and the departure of another, without market shares or concentration being modified. Horizontal Mergers 235 Premerger notification and review is intended to identify the underlying motives of the purported transaction before any of its effects have actually materialized in the market. Given that this prospective analysis necessarily rests on a considerable amount of speculation, most merger review procedures entail a review of several economic variables: (i) the value of the transaction and of the assets involved; (ii) the identification of the relevant market, both product and geographic; (iii) the dynamics of competition, in terms of number of competitors, production capacity and product demand, regulatory constraints, and the like; (iv) barriers to entry; (v) market concentration levels; (vi) efficiencies accruing from the concentration; and eventually; (vii) whether one of the merging firms would go bankrupt if the merger does not take place. Competition agencies normally reduce this complex multivariable analysis into two basic stages: First, they establish their own jurisdiction over transactions exceeding certain thresholds of quantitative relevance; these are merger transactions whose significance in the economy is such that any changes in the structure of the underlying market as a result of the merger may compromise competition severely. Latin American countries use different criteria to assess quantitative relevance in merger analysis. Some of the criteria are: whether the merger exceeds certain output volumes; the market shares of the merging firms; and annual volume of sales. Merger review is a multistep process enabling both competition authorities and petitioners to balance the expected monopoly power resulting from a merger undertaking against the economic efficiencies that are expected to emerge from it. This analysis is very similar to the sort of economic analysis used to measure whether competition has been undermined as result of restrictive business practices. The criteria used to review economic concentrations are fairly similar across all Latin American jurisdictions.213 The following conditions must be satisfied in order for the merger to be blocked: – merging firms must develop joint monopoly power; – the merger is likely to exclude competitors either in the upstream or downstream market; and – there are no improvements in consumer surplus; that is, no procompetitive effects or productive efficiencies follow from the merger. Let us examine each of these conditions. 213. See, e.g., Art. 28: Regulations of Law No. 601/06 (Nicaragua); Art. 21: Regulations of Legislative Decree No. 528/04 (El Salvador); Art. 16, Decree No. 357/05 (Honduras); Art. 9, Decree No. 1302/64 and the SIC’s Internal Rules (Colombia). 236 6.2.2 Chapter 6 MONOPOLY POWER Competition authorities consider whether it is reasonable to expect price increases following a merger, regardless of how other competitors react to such an increase; essentially the question is whether the merging firms possess monopoly power, either in the form of a dominant position or another substantial restriction on competition. Conventional industrial organization theory thus assumes that mergers increase monopoly power due to the elimination of competing firms, thereby increasing the capacity of merging firms to unilaterally impose their commercial conditions upon competitors and clients. As indicated in Section 3.1.1, above, this is an assumption that arises from Joan Robinson’s pioneering Imperfect Competition theory, which later evolved into a myriad of models describing the behavior of oligopolies. Whether this theoretical description is valid or not need not concern us here: conventional antitrust analysis simply makes an inference from the theory of oligopolies which, it will be recalled, emphasizes that decreasing the number of competitors in a given market brings the market closer to a monopoly market. Hence, industries that are already concentrated will see competition reduced as result of the enhanced concentration resulting from the merger, while those fragmented industries in which each firm has only a small market share will not be affected by a merger, and the merger’s impact on prices will be minimal. Motta (2004, p. 234) summarizes this theory: ‘‘In general ( . . . ) the merger increases (by some degree) market power of the merging firms, which in turn will increase prices’’ (our emphasis). The conclusion is inescapable: ‘‘because they increase market power, mergers which do not entail efficiency gains hurt consumers and society at large.’’ Thus, market concentration is typically what drives the assumption about the dubious impact of mergers on competition. Where market participants are not very numerous and where they produce (sell) products that are close substitutes, the consummated merger may significantly impede competition in the relevant market by removing important competitive restrictions with respect to one or several market participants, even where the merged firm does not enjoy the largest share of the market and there are no grounds to presume that, following the implementation of the merger, it will be easier to behave in a parallel manner and coordinate actions. As result of these elements, statutory standards on mergers usually distinguish between horizontal and vertical mergers, and place the former under closer scrutiny. Horizontal mergers are particularly subject to screening review due to their presumed harmful effects on competition, since there is an elimination of independence between market competitors. By contrast, vertical mergers usually are justified on efficiency grounds, since they enable the integration of downstream outlets with manufacturing firms. Furthermore, elimination of independence between the firms participating in the merger would be the most direct consequence of the merger. For example, prior Horizontal Mergers 237 to the merger, if one of the firms increased prices it would have lost part of its sales to the other. Mergers eliminate the discipline that otherwise independent businesses would impose upon competitors. Furthermore, the completed merger may affect other businesses operating in the same market but not participating in the merger. Once the participants in the merger increase prices, part of their lost demand may be taken over by competing businesses that, in turn, may find it profitable to increase prices. In light of the weakening of competitive restrictions, prices of firms not participating in the merger may significantly increase in the relevant market, even though no dominant position of a single undertaking is being created or strengthened. By anticipating such behavior by its competitors, the firms involved in the merger may be more motivated to increase prices. In order to establish monopoly power, merger review requires the positive determination of the following elements: (i) product market; (ii) geographic market; (iii) market concentration; (iv) entry conditions; and (v) analysis of market performance. In other words, establishing whether the restriction on competition will be significant requires consideration of the following: whether the undertakings participating in the concentration hold large market shares; whether they are close competitors; whether the buyers have limited abilities to shift to another supplier; whether the merged undertaking is capable of impeding the development of competitors; whether the concentration in question forecloses a major competitor from the market; and other factors. In general, these factors are examined according to the guidelines applicable to general competition analysis already identified in Section 4.2, above. However, the inquiry has its particularities due to the prospective nature of antitrust analysis in merger cases; for instance, due to the lack of reliable prices to support the conclusion that future monopoly power would increase, competition agencies rely heavily on market concentration numbers. When concentration will establish or strengthen a dominant position or substantially restrict competition in a market, competition agencies can refuse their authorization of the merger and/or impose obligations on the businesses or individuals involved to perform actions specified by law. The dominance of a single undertaking created or strengthened as a result of the merger is one basis to believe that the concentration may substantially restrict competition in the market. As discussed in Section 4.2.7, the concept of a dominant position includes the case of collective dominance; therefore, the assessment of the consequences of a concentration is very often based on the establishment of the dominant position. In the case of mergers, monopoly power analysis requires examination of anticipated ex post levels of market concentration, especially in cases of horizontal mergers. Indeed, market concentration is the most important, albeit not the only, proxy for measuring monopoly power. Determining market concentration involves prior determination of the antitrust market size using the SSNIP methodology, as explained in Section 4.2.2, above. Competition agencies have expressly indicated that the concentration levels resulting from a merger do not represent the final word on the concentration being 238 Chapter 6 reviewed. However, concentration levels are an important quantitative reference, which acquires even more significance if other arguments lack such quantitative support. International standards for competition rules recommend ending a review if there is a low concentration level, because in such a case the merger is unlikely to lessen competition substantially. Competition authorities measure the concentration levels resulting from mergers by taking into account the combined market share of the participating firms. Each country calibrates its own policy standards according to its particular view of the importance of various factors vis-à-vis the competitive process. As noted in Section 4.2.3.2, above, Latin American countries usually apply conventional standards of industrial concentration measurement, notably the Hirschman-Herfindahl Index (HHI). However, some countries, such as Brazil and Chile, use the Ci methodology. Mexico applies a dominance index, which is different from the previous two.214 Moreover, some countries identify fixed market shares resulting from the proposed concentration, above which an economic agent is regarded as possessing monopoly power. Brazil and Panama are good examples of this practice. Brazil’s Competition Act states that ‘‘any agreements that limit or reduce competition, including mergers whose consequence is a market share higher than 20% in the relevant market’’ must be approved by CADE. Similarly, Panama’s CLICAC has defined a fixed market share (40%) above which market concentration is presumptively prohibited. Finally, besides examining actual competition, competition agencies will look into the strategic position of potential competitors and examine whether they pose a threat to incumbent merging firms that could deter a particular type of anticompetitive price increase. Hence, if entry is easy and timely, rendering any sustained price increase attempts futile, competition agencies should end the merger review process. On the other hand, if the potential for entry is insufficient to enforce price discipline, then serious competitive concerns will arise. 6.2.3 EXCLUSIONARY EFFECTS In addition to checking market concentration levels, competition agencies review the particular synergy of the relevant market, also called market dynamics. This stage of the merger review analyzes whether the merger in question is likely to increase prices in a more concentrated market. Under antitrust theory, in the absence of efficiency gains, the overall effect of a merger is to reduce consumer surplus. Mergers increase the likelihood of poor market performance by effectively reducing the number of competitors. This general theory has two concrete applications in the field of mergers: first, the 214. See Section 4.2.3.3, above. 239 Horizontal Mergers case in which the merger might allow the merged firm to unilaterally exercise monopoly power; and second, the case in which the merger facilitates the development of collusion. Under the logic of antitrust, these arrangements are seen as strategies for achieving market power through higher market shares by acquiring a rival (horizontal mergers) or substantial access to the downstream or upstream market (vertical mergers). Antitrust policy became particularly active in challenging mergers and acquisitions in the 1950s, by extending the market power doctrine to vertical acquisitions of suppliers and clients. Entrepreneurs usually undertake mergers and acquisitions in order to gain quick access to a new market by seizing control of a local firm that is better positioned to exploit local knowledge (i.e., business connections, profit opportunities, etc.) The U.S. Horizontal Merger Guidelines state that if two merging firms currently sell the closest substitute products and other firms cannot quickly position a substitute product in the affected market niche, prices could rise. Adverse competitive effects can stem from either collusive or unilateral behavior on the part of the merging firms. If the analysis suggests that both collusive and unilateral theories of market performance point to continued competition, the investigation should be closed. In the enforcement experience of the European Commission’s Competition Authority, actual competition clearly represents an essential factor in analyzing a merger involving high market shares. This factor is given more weight than barriers to entry; thus, high market shares have been qualified in many different ways. The Commission has considered a variety of additional factors, such as the structure of supply and buyer power, and has paid less attention than U.S. authorities to the possibility of collusion between firms. Looking into the inner dynamics of a market allows a better assessment of how much business culture, tradition, and innovation have shaped competition in the relevant market. In Section 4.2.5, above, I indicated that the following factors are relevant to the measurement of market dynamics: (i) the presence of credible competitors; (ii) whether the main attribute of the market is price or product differentiation; (iii) variation of market shares; (iv) special capabilities of firms participating in the market; (v) past history of anticompetitive restraints; (vi) evolution of demand; (vii) the existence of independent distribution channels; and (viii) the countervailing bargaining power of clients. 6.2.4 PROCOMPETITIVE EFFICIENCIES ARISING ACQUISITIONS FROM MERGERS AND If merging firms are reasonably expected to develop monopoly power, competition agencies must determine whether there are significant economic efficiencies involved resulting in direct benefits to consumers that cannot be obtained otherwise, and whether market output will be significantly reduced. In other words, they 240 Chapter 6 examine whether the merger increases the efficiency of the merging firms; in this case, the net effect on welfare of the merger is ambiguous, as the rise in monopoly power can be outweighed by the price decrease that may result from efficiency gains. If the costs exceed the benefits, competition agencies are likely to impose special conditions in order for the undertaking to be approved. As discussed in Section 3.1.3.2, above, in economic theory, efficiencies are understood as cost reductions enabling a firm to carry out its productive activities using fewer resources. Efficiencies enable firms to reduce their costs and offer lower prices to consumers. From this point of view, mergers usually display welfare enhancing procompetitive efficiency effects. The most obvious one is, of course, their positive effects on increasing management capabilities through corporate reorganization. Mergers allow for the expedient change of incompetent executive teams, as is clearly seen when failing firms are acquired. In other cases, strategic business units are located in the country where the proposed merger will take place. The merged business will normally possess better productive capacity, larger market share, and a greater ability to avoid any competitive pressure and raise prices than any other undertaking participating in the concentration. Hence, competition authorities also take into account the well-grounded explanations of the merger participants concerning efficiencies that are beneficial to consumers, provided that they are an integral part of the merger and can be verified. In general, the following efficiencies are associated with merger undertakings: – – – – – – Introduction of technological improvements Capture of economies of scale Improvements in product supply Improvements in human resources management Cost savings resulting from integrating new activities in the firm Development of enhanced negotiating leverage. Let us examine each of these efficiency effects, and how they contribute to social welfare improvement: (i) Introduction of technological improvements Restrictive conduct may be needed to introduce or implement technical improvements in the production process as well as the shared know-how that results. This enables the development and adoption of more efficient production standards, resulting in the improvement of product quality. Consumers may benefit from new or improved products or services, for instance those resulting from efficiency gains in the sphere of R & D and innovation. A joint venture company set up in order to develop a new product may bring about the type of efficiencies that the antitrust enforcers can take into account. Expanding entrepreneurial capabilities through complementary investments provides added value to consumers in several ways, including new ways of addressing consumer needs, new benefits, new packaging, innovative advertising campaigns, etc. Horizontal Mergers 241 (ii) Capture of economies of scale Mergers enable increased scale, lower costs, joint portfolio value, and improved consumer value by combining the joint position and expertise of the merging companies. The combined company will be able to offer retailers a more diverse mix of brands, a stronger pool of consumer and shopper knowledge, and a broader, deeper expertise in marketing. These are complementary capabilities in marketing, innovation, selling, scale, go-to-market capability, and branding. Finally, it enables the development of economies of scope from combined marketing efforts. Moreover, these undertakings enable the aggregation of the merged firms’ clients. This strategy enhances the acquiring firm’s available customer base for output increases, enabling the production of increasing returns through addition of clients and increased brand recognition. Increased market size enables increases in product specialization and development of capital goods methods of production. The possibility of producing with increased economies of scale facilitates the reduction of long-run total median production costs; these reductions enable producers to reduce the prices of consumer goods. In addition, enhanced production makes diversification of production feasible, thereby improving the access of consumers to a wider array of consumer goods. Thus, restrictive conduct may enable the acquiring party to supply new products to the market. (i) Improvements in product supply Enhanced shipping resulting from the addition of new lines of consumer goods reduces freight and distribution costs. In turn, it is possible to better allocate resources for the transportation of goods from factories or warehouses to retail points. In this way, cost reduction will favorably impact consumers’ retail prices. (ii) Improvements in human resources management Restrictive conduct often targets losses incurred by former management in the use of productive resources. These include human resources, the management of which may be improved through enhanced operational control, enhanced marketing and logistics procedures, the creation of a common sales task force, etc. Joint efforts in this regard may improve the financial capacity of the acquiring firm to develop effective marketing and sales policies. (iii) Cost savings resulting from integrating new activities in the firm These include reduced transaction costs associated with contracting for inputs, distribution, and services that were previously performed by third parties. For example, in a merger case, cost savings in production or distribution may give the merged entity the ability and incentive to charge lower prices following the merger. These cost savings also include the reduction of fixed costs such as legal fees, external counsel in tax and 242 Chapter 6 financial matters, etc. One of the most important efficiencies arising out of a merger and acquisition is the creation of administrative, technical, and operative efficiencies. Restrictive practices often result in other productive efficiencies, including product, plant, and multiplant savings in both variable and fixed costs. Both variable and fixed costs are usually relevant to the analysis of efficiencies because both generate producer surplus; however, some jurisdictions (such as the European Union) tend to downplay fixed costs, since only variable (i.e., marginal) cost savings create an incentive for the firm to cut prices. Moreover, horizontal mergers enable a better control of total market supply, which is essential to achieving improved control of prospective changes in total market demand; these changes are often and sharp in Latin America due to high inflation rates in the region, which affect consumers’ purchasing power. (iv) Development of enhanced negotiating leverage As a result of the merger, the participating firms often obtain economies of scale, as a result of which they can negotiate volume discounts, price reductions, and improved commercial and financial conditions in their transactions with dominant or monopolist input suppliers or service providers enjoying monopoly power. This may have an impact on cost reduction in, for instance, advertising campaigns. Often, in conventional antitrust thinking, the mere enhancement of leverage is perceived as a wealth transfer from consumers to monopolists; only when there is countervailing power is enhanced leverage likely to be actually welfare enhancing. In Venezuela, the exemption of farmers from antitrust rules was supported by this view215 as an ex ante remedy devised to counter the monopoly power of the agro-industry. Notwithstanding the explicit inclusion of the efficiency clause for merger procedures, under antitrust laws in the region,216 in practice merger analysis does not consider procompetitive efficiencies because most cases are decided on the basis of whether they increase monopoly power. A notable exception to this rule is the Venezuelan merger Johnson & Johnson/Bayer merger transaction (2003), which involves the industry of insecticides, bug killers, and nonfarming pesticides. In this case, Johnson & Johnson filed a petition for clearance of its 215. Ruling SPPLC No. 0004/93. 216. Article 22, Law No. 45/07 (Panama), for example, indicates that ADECO will issue a favorable decision on those merger petitions that entail economic efficiencies, such as (i) improvements on production, trading or marketing systems; (ii) promotion of technological or economic progress; (iii) improvements on industrial competitiveness and (iv) advancing consumers’ interests. Similar proviso such as this one are contained in the laws of other Latin American countries. Horizontal Mergers 243 intended acquisition of Bayer’s assets involved in the production, manufacturing, marketing, sale and distribution of nonfarming pesticides and insect killers. The combined market share of both firms in the relevant market was significant (63%), and barriers to entry were high. Nonetheless, Pro-Competencia approved the concentration based on the following factors: – the relevant geographical market extended to other Andean Group countries (Colombia, Ecuador, Peru and Bolivia), and was not confined to Venezuela; – competitors, even if they were few, mostly dealt with wide product portfolios, enabling them to compete on the basis of their lower advertising costs; – local consumers enjoyed great bargaining power; – the products subject to acquisition were sensitive to price changes; – the products were also sensitive to the purchasing power of consumers (which has since deteriorated due to the prevailing economic crisis); – the undertaking ensured sufficient economic efficiencies. Here ProCompetencia emphasized the role of the concentration in enhancing Venezuela’s export capacity of insecticides to the Andean Group. Efficiencies may increase the incentives for merged entities to increase their production and reduce prices, thereby lowering the risk that they will coordinate their conduct with other remaining competitors in the market or unilaterally increase prices. 6.3 MERGER REVIEW: DUTY TO NOTIFY Premerger control is usually exerted through preemptive authorization procedures, which per se invites a higher level of control over the reviewed transaction. This fits well within the prointerventionist ideological bias of Latin American competition authorities, who regard many of these transactions as a cover for attempts to gain monopoly power. As in other areas of antitrust enforcement, there is not a single, uniform system of merger review in place in the region. In principle, there is broad consensus in the region about the benefits of subjecting mergers and acquisitions to review, but beyond this, unanimity vanishes. Even comparatively smaller economies such as Honduras and El Salvador, with no prior antitrust enforcement experience and few resources to waste on expensive surveillance, have adopted merger control regimes in their legislation. Nonetheless, from a procedural perspective, Latin American merger control schemes show considerable divergence. This is a result of diverging views on the need to control such undertakings; policy preferences; the perception of industrial concentration as a deterrent of competition; the existence of alternative means of promoting competition from potential entrants (e.g., through trade policy); and local realities. 244 Chapter 6 Some jurisdictions have set up premerger notification procedures in which merging firms are required to file a notification prior to the final execution of the merger agreement, or a few days after the closing. These jurisdictions include Mexico, El Salvador, Nicaragua, Honduras, Brazil, Colombia, and Argentina. Another group has a voluntary premerger notification regime, whereby firms are free to notify, but the competition authority is also empowered to review whether transactions that have not been notified create dominant positions. Countries in this group include Panama, Venezuela, Costa Rica, and Chile. Finally, some countries do not have a general premerger control regime, although sector-specific laws may establish one. Peru and Uruguay are the two countries in this minority group. The economic assessment of mergers and acquisitions usually focuses on the economic impact of the undertaking; this is determined in reference to quantitative thresholds, above which the transaction is regarded as significant and therefore deserving of review. Fixed thresholds indicate the level of significance attached to the merger under each country’s legislation, and are usually based upon a fixed amount calculated in absolute terms (i.e., the combined volume of business of the merging firms), or in relative terms (i.e., whether the resulting market share exceeds some predetermined threshold). 6.3.1 MANDATORY PREMERGER NOTIFICATION JURISDICTIONS In all jurisdictions with mandatory premerger notification schemes, notification must be filed before the transaction closes, or when it takes effect. The following countries establish a premerger notification regime in their antitrust laws: 6.3.1.1 Argentina – Notification thresholds. – The threshold for mandatory notification of a business concentration corresponds to a total volume of business of 200 million Argentine pesos (USD 66,274,762 as of July 7, 2008), below which the companies involved do not have to notify authorities of the merger.217 The following transactions are exempted: (i) acquisitions of assets involving a price less than 20 million pesos (USD 6,627,476 as of July 7, 2008) over a period of one year and (ii) acquisitions of assets involving a price less than 60 million pesos over a period of three years (USD 19,882,428 as per July 7, 2008). – Clearance deadlines (Stage 1/Stage 2).218 217. Article 2, Decree No. 396/2001 modifying Art. 8, Law No. 25156/99. 218. Ruling No. 40/2001. Horizontal Mergers 245 – Once a merger petition has been filed, the CNDC should rule within fortyfive days; this period may be interrupted by requests for further information about the transaction. After this term expires, the CNDC should make its decision, whether placing conditions on the merger or denying it. After that time span, if CNDC has not resolved the matter, the operation will be tacitly authorized. In 2001, Resolution No. 40/2001 approved a fast-track proceeding to streamline the analysis and resolution of economic concentration operations. The stages of resolution of operations were established taking into account the application forms that the companies involved must submit, since they reflect the degree of complexity of the operation. Thus, three time-spans of 15, 35, and 45 days are established for their resolution, depending on the degree of complexity of the transactions. In any case, the CNDC can request that the information in the forms be completed or supplemented by additional data, which can prolong the proceedings beyond the established periods. – Statute of limitations. – Notification of a merger must be filed within a week after the transaction closes, measured either from the date of publication of the purchase offer, or from the date of acquisition of a controlling interest. – Penalties (failure to notify).219 – Failure to notify the CNDC of transactions covered by the law can be sanctioned with a fine of up to 1,000,000 Argentine pesos per day (USD 331,374 as per July 7, 2008) counted from the expiry of the period in which notification is supposed to occur. – Regulated sectors.220 – Finally, the regulations governing review procedures for economic concentration operations provide that in cases that involve state-regulated companies, the CNDC should require the regulating agency to issue a report with a well-founded opinion on the economic concentration proposal. This report, not binding on the CNDC, should indicate the transaction’s impact on competition in the respective market and on compliance with the regulatory framework. 6.3.1.2 Brazil – Notification thresholds.221 – In Brazil there are both compulsory postmerger notification and voluntary premerger notification procedures; however, postmerger notification is in fact a procedural choice given to applicant parties in the event that they miss their premerger filing. Notification is required if the concentration creates a 219. Article 46.d), Competition Act. 220. Article 16, Competition Act. 221. Articles 54-56, Law No. 8884 and Ruling 15/98. 246 Chapter 6 combined market share exceeding 20%, or if any party to the transaction had a worldwide turnover (annual gross revenues) exceeding 400 million Reais (USD 249,426,319 as of July 7, 2008). The filing fee is 45,000 Reais (USD 28,060 as of July 7, 2008). – Clearance deadlines (Stage 1/Stage 2). – Resolution No. 15/98 was enacted to eliminate unnecessary bureaucracy by creating a two-step decision-making process, permitting a fast track for simple cases and standardizing the notification form and types of competitive data to be provided. There are no exemptions from the obligation to file a postmerger notification. The Ministry of Justice (SDE), after receiving the notification, forwards copies to CADE and the Office of Economic Monitoring (part of the Ministry of Finance). Then, a CADE member will be assigned to the investigation. The Office of Economic Monitoring (SEAE) publicizes the notification and gives interested parties fifteen days to reply, then holds a preliminary hearing. More information may be requested, or alternatively, CADE may choose to accelerate the proceeding. All of the authorities involved render opinions and then the CADE Council makes a final ruling. The law provides that the authorities have 120 days to review the transaction and grant or deny approval. This term is subdivided as follows: thirty days at SEAE; thirty days at SDE and sixty days at CADE, and its running is interrupted every time the authorities issue official letters asking for further information. – Statute of limitations Parties may choose to make a postmerger filing, in which case filing must be made no later than fifteen days after closing. If the parties choose to make a premerger filing, this must be made within fifteen working days after the date of the first binding document executed between the parties. A letter of intent will suffice for this purpose. Notification must be submitted to the Ministry of Justice. – Penalties (failure to notify) Delayed notification carries a penalty between 60,000 and 6 million tax units (USD 24,900 to USD 2.49 million). The amount of the fine depends on considerations such as the size of the companies, whether there is evidence of an intent to avoid merger notification, and the harm to competition caused by the failure to comply. In recent cases, the fines imposed have been in the range of USD 70,000. Ultimately, the course of action taken by the authorities in order to avoid the anticompetitive effects of a given transaction depends on the way the parties chose to file their merger notification. If the parties submitted a premerger notification, CADE may recommend measures that would offset the anticompetitive effects foreseen in the transaction. If, instead, the parties chose to submit a postmerger notification, CADE has the authority to prohibit the transaction in its entirety, to approve the proposed transaction on the condition that the parties restructure it to avoid anticompetitive Horizontal Mergers 247 consequences, to approve the transaction subject to other conditions, or to order that an anticompetitive transaction be unwound. 6.3.1.3 Colombia – Notification thresholds222 Businesses are subject to notification requirements when the merging parties’ combined market share exceeds 20%. Also subject to notification are transactions involving a combined asset value exceeding 50,000 times the minimum wage (approximately 13 billion pesos (USD 7,543,064 as of July 7, 2008). – Clearance deadlines (Stage 1/Stage 2)223 Once the filing has been submitted for review, the SIC has thirty working days to reject the proposed merger. Failure to issue a ruling within this period is regarded as an implicit approval of the merger. – Statute of limitations Colombian merger regulations do not set forth precise timing requirements for the filing of notification of a merger proposal, but the companies should notify the Superintendency of Industry and Trade (SIC) before the transaction is completed and after the meeting of shareholders has taken place where the transaction is voted and approved. – Penalties (failure to notify) Failure to file for approval when filing is required will give rise to penalties of up to USD 260,000 on companies and USD 40,000 on the directors who have authorized, performed, or allowed the transaction. Furthermore, if all legal requirements are not met, the merger will be considered null and void. 6.3.1.4 El Salvador – Notification thresholds224 All concentrations between firms that (i) have combined total assets exceeding 50,000 minimum wage units (USD 4.25 million) or (ii) have total income in excess of 60,000 minimum wage units (USD 5.1 million) are subject to notification requirements. 222. Section 7(2) of the SIC’s Internal Rules (Circular única). 223. Article 4, second paragraph, Law No. 155/59. 224. Article 33, Competition Act and Art. 19 Regulations. 248 Chapter 6 Total assets represents the sum of each participant’s assets. Total income is obtained by adding the sums resulting from product sales and services rendered by the participant firms during their most recent fiscal year, once deductions for discounts and taxes have been made. – Clearance deadlines (Stage 1/Stage 2)225 The competition authority will issue a decision within ninety calendar days of the receipt of the petition. Once the petition is received, the Superintendency may request additional information, in the event that it is needed; such information may be submitted within fifteen days. On the day after the additional information is submitted, a ninety-day period will begin, for the substantive review of the case. If no objections are raised at the end of this period, the transaction will be automatically approved, in the event that it is not expressly approved by an official resolution. – Statute of limitations226 The law establishes a five-year term for filing petitions concerning obligations related to the Competition Act, so the firm has five years to notify a merger or acquisition. – Penalties (failure to notify)227 The Competition Act imposes an administrative fine of up to 5,000 minimum wage units (a maximum of USD 425,000). – Regulated sectors228 The competition authority will give its opinion on economic concentrations carried out in regulated sectors. These include the financial system; pensions; stock exchanges; electricity; telecommunications; civil aviation; and port authority. The opinion of the authority will be binding. 6.3.1.5 Honduras – Notification thresholds229 The law does not establish a quantitative threshold for premerger notification of economic concentrations subject to the Competition Act; rather, it refers this 225. 226. 227. 228. 229. Article Article Article Article Article 35, Legislative Decree No. 52, Legislative Decree No. 38, Legislative Decree No. 36, Legislative Decree No. 13, Decree No. 357/05. 528/04. 528/04. 528/04. 528/04. Horizontal Mergers 249 matter to the Commission for decision. Although the Commission has not yet defined quantitative thresholds, the Act requires the Commission to establish thresholds according to the following standards: (i) amount of assets involved; (ii) market share affected; and (iii) sales volume. – Clearance deadlines (Stage 1/Stage 2)230 Following the receipt of the petition, the Competition Board may, if necessary, require additional data or information within ten working days. Once this information is collected the Board will examine the petition within the next forty-five days which will begin once the additional information, if any, is submitted. If there are no objections raised at the end of this period, the undertaking will be automatically approved. However, if there are objections, the Board will notify the petitioner so that the petitioner can offer new arguments or evidence concerning the objections within the next fifteen days. The Board will then render a final decision within the next fifteen days. – Statute of limitations231 If notice of the economic concentration was not submitted for premerger review, the Board will initiate proceedings within three months of the date the transaction was carried out or the date it became publicly known. – Penalties (failure to notify)232 The Board will impose a penalty equivalent to treble damages, that is, three times the damage caused by the transaction. In no case can the penalty exceed 10% of the gross revenue earned by the prosecuted firm in the preceding fiscal year. – Regulated sectors233 Although the Competition Act contains no specific provision on the jurisdiction of the Board over mergers involving regulated sectors, a general provision laid down in Article 3 of the Act clearly subjects all matters related to competition to the purview of the competition authority, even if they occur in economic sectors regulated by special laws. 230. 231. 232. 233. Article Article Article Article 53, Decree No. 357/05. 15, Decree No. 357/05. 37, Decree No. 357/05. 3, Decree No. 357/05. 250 Chapter 6 6.3.1.6 Mexico – Notification thresholds234 Notification is required for all mergers that affect competition in trade and industry if: (i) the value of the transaction or series of transactions exceeds 12 million minimum wage units (USD 48 million); or (ii) the transaction results in the accumulation of 35% or more of the worldwide assets or equity of a Mexican entity whose assets or annual sales exceed 12 million minimum wage units (USD 48 million); or (iii) the parties’ worldwide assets or annual sales exceed 48 million times minimum wage units (USD 191 million) and the transaction implies an additional accumulation of assets and capital stock in excess of four million eight hundred thousand times the general minimum wage in effect in the Federal District.235 – Clearance deadlines (Stage 1/Stage 2)236 Once the Commission receives the notification, it must decide whether to request further information within twenty calendar days beginning on the day the notification is received. If it does, then the petitioners must respond to the Commission’s request within fifteen calendar days. This period may be extended when duly justified. Once information gathering is completed, the Commission must issue a decision within forty-five calendar days. In the event that there are justified objections, the Commission may extend the investigation for another sixty days. – Statute of limitations237 Notification must occur within one year after the concentration has been carried out. – Penalties (failure to notify) If there is a failure to file, the firm may face fines (up to USD 300,000), and the transaction may be declared null and void. – Regulated sectors Competition rules govern most specially-regulated areas; however, special rules apply to banks and the telecommunications sector. 234. 235. 236. 237. Article 20, Federal Competition Act of 2006. Articles 16-22, Federal Competition Act of 2006, and the 1998 Regulations of the Law. Article 21, Federal Competition Act of 2006. Article 22, Federal Competition Act of 2006. Horizontal Mergers 6.3.1.7 251 Nicaragua – Notification thresholds238 All concentrations (i) exceeding a combined market share of 25% of the relevant market or (ii) between firms whose combined income exceeds 642,857 minimum wage units (USD 50 million) are subject to the notification requirement. The methodology for calculating the gross turnover of each participating agent is established under Article 30 of the Regulations. Under this provision, the Competition Board will take into account all assets and pretax earnings periodically or occasionally received during the last fiscal year, whether in cash, goods, or compensation received from sales, leasing, or any other activity, as well as real estate, capital gains, and any other assets. – Clearance deadlines (Stage 1/Stage 2) After the application has been filed, the Director of Mergers will issue a preliminary decision within thirty working days and the President of the Competition Board will then issue an authorization within five working days.239 If the Board determines that there is a threat to competition, the Director of Mergers will open an investigation for another ninety working days to receive and hear additional evidence, and then will prepare a recommendation (i.e., a draft decision) for the President’s review within a period not to exceed sixty working days. Upon receiving the file (i.e., the next working day), the President will issue a final decision within thirty working days.240 – Statute of limitations241 The Competition Act does not establish a particular statute of limitations applicable to the notification requirements for economic concentrations. A general term is provided for all anticompetitive restraints, which is five years beginning from the resolution issued by the Competition Board. However, there is a gap in the law for concentrations that have not complied with the requirement of notification, since in such cases there cannot be a resolution by the Board, ex definitione. In such cases, one interpretation may be that no statute of limitations ever applies, which, in the light of the regime applied to other anticompetitive restraints (where a statute of limitations does exist) would certainly be harsh and possibly unconstitutional. 238. 239. 240. 241. Article Article Article Article 25, Law No. 601/06. 38, Regulations of Law No. 601/06. 39, Regulations of Law No. 601/06. 38, Regulations of Law No. 601/06. 252 Chapter 6 – Penalties (failure to notify) Under Article 46(c) of the Competition Act, the Competition Board may impose a penalty of 100-600 minimum wage units (USD 7,658-USD 45,948) for failure to notify. – Regulated sectors According to Article 37 of the Regulations, when concentrations are undertaken in areas regulated by sector-regulating laws, the Competition Board will request from the sector regulator the information necessary to ascertain their competitive effects, in order to adopt a decision concerning the merger. 6.3.2 VOLUNTARY MERGER NOTIFICATION JURISDICTIONS In contrast to the countries discussed in the previous section, Panama, Costa Rica, Venezuela and Chile have a voluntary notification scheme. Countries lacking mandatory premerger notification schemes usually rely on ex post assessment of potential market abuses arising from increased market concentration. Interested parties are free to decide whether to bring their operation to the attention of the competition authority.242 Typically, countries that lack a compulsory premerger notification regime do not have specific thresholds for determining which transactions must be brought before the competition authorities. Usually, however, merging firms consider whether their operation enhances monopoly power beyond the admitted statutory level or the legal limits set forth under administrative practice. For example, under the Panamanian competition scheme, firms are not required to notify the competition authority of their merger transactions; nevertheless, they will usually do so if the market share of either merging company exceeds 40% of the antitrust market, or if the resulting firm acquires a market share of 10% or more when the combined market share of the top four market agents exceeds 65%. Similarly, in Chile there are no general thresholds under Competition Act.243 Nevertheless, the ‘‘Internal Guide for the Analysis of Horizontal Concentration Operations’’ uses the Hirshman-Herfhindal Index (HHI) to establish ‘‘recommended’’ thresholds which businesses should acknowledge.244 242. For example, Art. 23, Law No. 45/07 (Panama) explicitly states that interested economic agents may notify their economic concentrations to the competition authority. Venezuela’s Competition Act, on the other hand, does not explicitly empower interested parties to decide whether to notify or not, but it does not contain an obligation to notify either. 243. In Chile, the Competition Act does not require mandatory pre- or postmerger notification. According to Art. 38 of Law No. 19733 (subsection 1), merger notification is only mandatory for transactions involving the media, such as newspapers. 244. These guidelines state that the NEA will not scrutinize concentration transactions if (i) postmerger HHI is under 1,000; (ii) postmerger HHI is between 1,000 and 1,800 (moderately Horizontal Mergers 253 As a general rule, although these countries lack premerger notification requirements, hence, specific thresholds for determining which transactions must be brought before the competition authorities, these agencies regularly carry out preventive analyses of such transactions through their own investigations, or through requests made before the courts. Moreover, competition agencies in these countries exert surveillance over the potential consequences derived from merger and acquisition operations. For example, Chile’s Tribunal de Defensa de la Libre Competencia (TDLC) may review any transaction if the National Economic Attorney (NEA) or any interested party initiates consultation or files a suit. Countries with voluntary notification schemes usually employ two different kinds of procedures, depending on whether the investigation was initiated by the competition office itself or whether the competition office was required by a court to investigate a certain transaction. In Chile, for example, the first type of procedure, where the investigation is initiated by the NEA office itself, has a series of steps that may result in a decision to start a contested or noncontested procedure before the court. This procedure can last for 120 to 150 days, depending mainly on the nature of the transaction and the promptness with which the NEA receives information requested from private companies and public authorities. The second type of procedure has its own steps, which are simpler than the first, and the period of time it takes depends solely upon the amount of time given to the NEA by the court. 6.3.2.1 Panama Panamanian antitrust law in prohibits economic concentrations that diminish, restrict or impair in an unreasonable way, free competition in respect of similar, equal or substantially related goods or services.245 The law does not explain what is the notion of ‘‘unreasonable’’; however, one can ascertain a clear intention to limit the jurisdiction of ACODECO, the competition authority, to cases that are not justified on economic (i.e., efficiency) grounds. In this regard, the law explicitly states that: at the time of verifying the effects of the acquisition or merger, the authority may take into account whether the concentration promotes an increase in the production or distribution of goods and services within the domestic or international market; whether it promotes technical or economic progress, or whether it promotes competitive development of an industry or a sector.246 concentrated), and the HHI increases by less than 100 with the merger or (iii) postmerger HHI is over 1,800 (highly concentrated), and the HHI increases by less than 50 with the merger. Moreover, this guide states that the NEA will not challenge a concentration on the basis of possible collusion if the estimated concentration of the four largest companies remaining the market after the concentration transaction (the CR4 index) is below 65%, or if the estimated market share of the merged or concentrated entity is under 10%. 245. Article 21, second paragraph, Law No. 45/07. 246. Article 21, first paragraph, Law No. 45/07. 254 Chapter 6 – Clearance deadlines (Stage 1/Stage 2) Interested parties are required to submit information about the merging parties; their financial statements; their market shares and other relevant information.247 Once the information is received, and if necessary, ACODECO will require further information within twenty calendar days.248 A final decision must be made within sixty days after the filing, counting from the date the information is complete; if no decision is reached, the concentration will be deemed to have been approved.249 The merger may be approved, approved with conditions, or challenged. – Statute of limitations ADECO may bring an action within three years after the closing of the transaction.250 6.3.2.2 Costa Rica Costa Rica has a general framework for the control of mergers and acquisitions. Article 16, Law No. 7472/94 provides a general definition of economic concentrations. There is no mandatory premerger notification requirement, but the competition agency is free to review the anticompetitive effects of transactions that have created a monopoly position in the market. In other words, Costa Rican legislation regards concentration activities as subject to relative prohibitions, and subjects them to an ex post, rule-of-reason analysis. 6.3.2.3 Chile In the field of merger control, it is interesting to note that the uncontested proceeding, modified in 2004, has been playing a major role in the antitrust system and is considered an efficient voluntary merger control tool. Mergers and acquisitions that may raise antitrust concerns are increasingly being voluntarily submitted to the TLDC by the parties involved. The main advantages of this procedure are the following: (a) In the event that the transaction is approved, and it is executed in compliance with the specific terms and conditions set out by the TLDC (if any), there is no antitrust liability; (b) once an uncontested proceeding begins, a contested one may not be initiated; (c) the Supreme Court cannot amend a decision made by the TLDC in an uncontested proceeding; it can only review the terms and conditions set out by the TLDC in approving the proposed transaction, whereas in a 247. 248. 249. 250. Article Article Article Article 110.1, Law No. 45/07. 110.2, Law No. 45/07. 110.3, Law No. 45/07. 25, Law No. 45/07. Horizontal Mergers 255 contested proceeding the Supreme Court has broad authority to modify the TLDC’s decision; and (d) under this procedure there are no penalties, so the possibility of a fine is nonexistent. In Chile, both the Competition Act and the nonbinding Internal Guide for the Analysis of Horizontal Concentration Operations251 regulate mergers. The guide, prepared by the Fiscalia Nacional Economica (Office of the NEA), is intended to provide companies with information about the main analytical methods and internal procedures followed by the NEA to review merger transactions. The Competition Act provides for voluntary merger consultation before the Competition Court through the public procedure established in Article 31. The law does not provide for mandatory merger notification. There are exceptions that provide for mandatory premerger consultation for certain firms and markets established by decisions of the TDLC and the former competition commissions. Any interested person, as well as the NEA, can challenge a merger before the TDLC if they believe that the operation prevents, restricts, or hinders free competition or tends to produce such effects. Parties may choose to prevent challenges by initiating a voluntary consultation before the TDLC. After a voluntary consultation has been filed, it is not possible to challenge the transaction through a contested procedure.252 Article 32 of the Competition Act encourages the parties to file a voluntary consultation, as it provides that the contracts or agreements executed or formed in accordance with TDLC’s decisions cannot be considered to be in violation of the Competition Law, unless a new decision of the TDLC, based on new information, qualifies the same contracts or agreements as anticompetitive. If this occurs, the contract or agreement can be considered a violation only from the moment the new ruling is announced or published. Premerger notification to the competition institutions is required only for transactions involving television and radio.253 In contrast to the premerger notification regimes of other countries, there are no predefined thresholds in Chile’s regime qualifying or exempting transactions from the jurisdiction of the competition rules; therefore, whether a merger is subject to the rules will depend on the specific characteristics of the merger and market conditions. – Clearance deadlines (Stage 1/Stage 2) The Competition Act does not prescribe any specific review period. However, ex ante reports must be issued by the TDLC within thirty days of a request. 251. This guide, as such, is not binding law. It is only intended to disclose the methods by which the NEA usually analyzes merger and concentration transactions. It does not provide certainty to the market that a particular transaction will or will not be subject to investigation by the NEA; it merely provides certain parameters that should allow companies engaging in concentration transactions to foresee the probable analysis that the NEA will perform. 252. Auto Acordado No. 5/2004. 253. Article 38, Freedom of Opinion and Speech Act (Law No. 19733). 256 Chapter 6 While the Act does not provide specific periods, the Internal Guide defines the steps for merger analysis: (i) once the NEA has knowledge of a possible concentration operation, it will obtain information that is generally available to the public; (ii) within seven days a preliminary report, only for the NEA authorities, will be issued; (iii) the NEA, within three days of receiving the report, will decided whether to continue with an investigation; (iv) the investigation will begin with a request for information by the NEA office to the competitors involved in the operation, their clients, and also public authorities; (v) with the information that has been received, the NEA office will issue a report within sixty days; this period of time can be longer if the NEA office decides that it needs more information; and (vi) the NEA will decide, in light of the report, if it will institute court proceedings. – Statute of limitations If the merger is challenged before the TDLC by any interested party or by the NEA on the grounds that the operation prevents, restricts, or hinders free competition or tends to produce such effects, the TDLC may issue an injunction to prohibit the closing of the transaction while the proceeding is ongoing. The transactions that require ex ante reports from the TDLC cannot be executed without a favorable decision. – Penalties (failure to notify) As consultation is voluntary, there are no penalties for not filing. Nevertheless, as stated above, a merger or acquisition, while not subject to prior consultation, can be considered an infringement of the Competition Act if it prevents, restricts, or hinders free competition or tends to produce such effects, in which case the parties can be penalized. – Regulated sectors Concentrations in certain industries and economic activities require approval by other governmental agencies. These include transactions in the media, banking, and electricity sectors. Also, in accordance with a decision of the previouslyexisting competition authority, there are specific restrictions in the port sector.254 6.3.2.4 Venezuela In Venezuela, economic concentrations are regulated under Article 11 of the Competition Act, Regulation No. 2 on Mergers and Acquisitions, and the Guidelines on Mergers and Acquisitions. The vague wording of the Competition Act (1992) made it necessary to develop secondary legislation (1996) in order to avoid legal 254. Ruling No. 1045 of the former Competition Commission. Horizontal Mergers 257 uncertainty about the powers of Pro-Competencia in this field, which eventually had to be resolved through litigation. Ruling SPPLC No. 00039/99 allows Pro-Competencia to provide advisory opinions to merging firms prior to the transaction. Merging firms, if so they wish, may submit the transaction to Pro-Competencia for guidance. The agency must in turn explain in detail the reasons why a proposed merger may be illegal and the consequences to which the firms would be exposed if they decided to continue with the transaction. There is still a great deal of skepticism about the interpretation of the law that Pro-Competencia must overcome. For business defendants, the law allows firms to merge freely, while Pro-Competencia may apply after-the-fact scrutiny under the ‘‘abuse of a dominant position’’ standard. – Notification thresholds The Venezuelan merger regime, though, like other voluntary notification regimes, is so conceived for the benefit of businesses, as it enables them to decide whether they would like to obtain assurance from the competition agency that they be not prosecuted afterwards. Hence, the system set forth under the law establishes clear guidelines on what levels of economic relevance are needed for an operation of this kind to be checked. Businesses may notify when the aggregate sales of the firms involved exceed the equivalent of USD 1.8 million. There are no filing deadlines. Nevertheless, firms may be subject to postmerger review if the transaction involves companies with a combined net turnover of 120,000 tax units (USD 2,044,576 million) and the merger has an impact in Venezuela.255 – Clearance deadlines (Stage 1/Stage 2) Administrative procedures last four months; this period may be extended by two months. There are no suspension effects involved; a pending review does not suspend the proposed transaction. Of course, parties assume the risk that the competition authority will raise objections at the end of the review period that may cause the transaction to be de facto blocked, or even reversed. – Statute of limitations The statute of limitations runs for one year after the transaction closes. – Penalties (failure to notify) As consultation is voluntary, there are no penalties for not filing. Nevertheless, if a transaction is later found to have restricted competition, Pro-Competencia may impose administrative fines and orders. 255. <www.procompetencia.gov.ve>. 258 Chapter 6 – Regulated sectors Special rules apply to the calculation of acceptable thresholds for the level of concentration for companies operating in the financial and telecommunications sectors. 6.3.3 JURISDICTIONS WITH NO GENERAL MERGER CONTROL Finally, some countries, such as Bolivia, Peru and Uruguay, do not have specific merger control procedures in their statutes. In these jurisdictions, concentrations are only prosecuted ex post if they create a dominant position in the market. Bolivian rules on economic concentrations are at an embryonic stage. There are no specific provisions under Law No. 1600/94 for regulating economic concentrations arising from takeovers or other forms of acquiring control over a business. Article 18 of this law applies only to specific sectors regulated by law; it does not apply to other economic sectors. Under Chapter V of Supreme Decree No. 24504/97 interested parties may request the opinion of the appropriate Sectorial Superintendent regarding the viability of their merger undertaking. However, the Superintendent can only issue an advisory opinion with no further legal binding effects. In Peru, the only sector with prior notification mechanisms for concentration operations is the electrical power sector, where notice is required for transactions involving firms whose market share exceeds a 15% threshold (for horizontal concentration operations) or a 5% threshold (for vertical concentration operations).256 The Peruvian legal framework provides that mergers and acquisitions of companies performing activities of production, transmission, or distribution of energy will be subject to prior authorization from the Free Competition Commission. The Commission has another thirty working days to assess the operation. Where necessary, this period can be extended for an additional thirty days. 6.4 MERGER REMEDIES Due to their potential effects in multiple markets, competition authorities may need to tailor specific conditions for each merger in accordance with its particular economic circumstances. Competition authorities may adopt two sorts of remedies: (i) Structural remedies that directly alter the allocation of property rights, including total or partial divesture of an ongoing business; or (ii) Behavioral remedies that set constraints on 256. Law No. 26876/97, Competition Law for the Electricity Sector. Horizontal Mergers 259 the merged firm’s property rights, such as restraints on the ability to enter into specific contractual arrangements designed to alter the competitive capacity of the participant firms. Gonzaga Franceschini (2004, p. 4) explains that the paradigm structureconduct-performance leads merger analysis procedure imposing all sorts of conditions on the operations of merging firms and such conditions may have a structural or behavioral nature. CADE has created the Agreement to Preserve the Reversibility of the Transaction (APRO) for cases involving high market shares or in which there is a threat to competition. In general, notification can occur after the transaction, and transactions are not suspended while being evaluated. Pursuant to an APRO, however, CADE can freeze a transaction if a final prohibition would be impossible, or very difficult to implement. Thus the APRO can be seen as an exception to general rule that transactions under review are not suspended, freezing the transaction until clearance. The difference between an injunction order and an APRO is that, under an APRO, the conditions under which the transaction is frozen can be negotiated within certain limits. (Gringberg, 2007) In fact, the two-tiered classification presented above is misleading, since both forms of remedy lead the dirigisme-influenced policymaker to make structural changes in the market, in the sense of replacing spontaneous outcomes with contrived ones. Both sorts of changes, in the end, represent alternative means of tinkering with economic agents’ standing to compete in the market. This is further evidence of the extent to which competition agencies in the region are geared toward reintroducing government interventionism through the back door. The implementation of merger remedies, as we will see in the sections to follow, undermines the stability of economic agents, as policy decisions rest on mere intuition about the potential future effects of these undertakings. We shall concentrate our attention on this specific, yet crucial, problem. 6.4.1 STRUCTURAL REMEDIES Given that mergers may have different effects according to the particular markets affected, competition authorities may propose selected divestment of assets to solve potential or actual competition problems. Structural remedies are related to the assets involved in the transaction; these measures realign the assets with the goal of restructuring the undertaking’s perceived anticompetitive effects. Competition authorities must ensure that divested assets are acquired by an active competitor in the market; this competitor should have access to all the elements of the business that are necessary for the business to act as a viable competitor in the market. This includes both tangible and intangible assets, personnel, supply and customer lists, third-party service agreements, technical assistance, and so forth. Structural measures include divestiture of brands, production facilities, and productive units; usually these actions are enforced in operations involving more 260 Chapter 6 than one market. Thus, the obligation of divestiture extends to merging firms whose assets do not raise competitive concerns, due to the existence of economies of scale or network effects (Motta, 2004, p. 266). Mexico’s experience provides some examples of structural measures. In Mexico, the Competition Commission has been active in accepting merger transactions but imposing structural conditions. Four cases are illustrative: the first one, the Guinness-Grand Metropolitan case, was about a merger of alcoholic beverage manufacturers that would create a firm with a 65% share in the whiskey market, requiring divestiture of Metropolitan’s ‘‘J&B’’ brand. Similarly, in the Sara Lee— Canon case the Commission found that an acquisition would produce a firm with a 56% share of the hosiery market, requiring divestiture of certain brands and productive capacity. Next, in the Monsanto-Cargill case the Commission established that the acquisition of Cargill’s assets would produce a firm with a 60% share in the hybrid corn seed market and a 56% share in hybrid sorghum seeds; Monsanto was required to divest itself of a hybrid seed production plant in Mexico, cease using Cargill’s trademark, and grant a five-year license for the production of seeds under the Cargill name. Finally, in the Assa Abloy-Phillips case, the competition authority ruled that an acquisition of four Phillips brand lines would give Assa Abloy a dominant position in market for padlocks and similar products, requiring divestiture of two brands. In all of these cases, productive assets, brands, or production lines were divested following a recommendation from the competition authority. Structural remedies face important implementation problems due to the fact that the acquiring firm has obvious incentives not to sell divested assets to a competing firm that might then threaten its position. This is compounded by potential information asymmetries that weaken the position of the firm acquiring the assets, which may be unaware of what assets are crucial to effective competition in the industry. Therefore, the selling firm may try to diminish the commercial value the assets by, for instance, transferring strategic personnel, disposing of certain brands, patents and activities, or not properly maintaining production plants. Moreover, competition agencies are not inclined to consider the effects of their remedies in the context of market dynamics; therefore, they have a natural tendency to underestimate the presence of potential competitors who may enter into the market due to the merger. These problems were all present in the Venezuelan Pepsi v. Coca Cola, (Soft drinks) case (1996). On August 19, 1996, Pepsi’s subsidiary in Venezuela (Pepsicola Panamericana C.A.) filed a complaint against a proposed transaction in which Pepsi’s domestic bottler, Hit de Venezuela bottling companies (Cisneros Group), switched its allegiance to Coca Cola after a fifty-year business relationship with Pepsi. Pepsicola complained that Hit made it difficult for Pepsi to remain in the soft drink market, as the agreement between the Hit de Venezuela bottling companies and Coca Cola would prevent Pepsi from remaining in the market, and alleged that Hit’s actions constituted a boycott. Pepsi further alleged that a ‘‘conspiracy’’ existed between the bottling companies and Coca Cola in violation of Article 10 of Venezuela’s Competition Act. It also maintained that the transaction constituted Horizontal Mergers 261 an economic concentration and abuse of a dominant position in violation of the Competition Act. Finally, Pepsi argued that by suddenly terminating its contract with Pepsi, the bottling company had created a situation of unfair competition prohibited by the Competition Act. Under the terms of the agreement with Hit, Coca Cola agreed to acquire 50% of the bottling business. The acquired assets included eighteen bottling plants, distribution facilities, and a number of soft drink brands, including Hit. Up to that point, Pepsi had a premerger share of the carbonated soft drink (CSD) market of 82%, while Coca Cola was second with a mere 10.8%. Pro-Competencia dismissed Pepsi’s allegations of cartelization, unfair competition, abusive conduct, and exclusionary behavior. However, it found a violation of the merger provision contained in Article 11 of the Competition Act. Because the transaction gave Coca Cola control over the bottling facilities of Pepsi’s former business partner, it was understood as an acquisition of a rival’s assets that created a dominant position in the CSD market. Furthermore, the concentration of brand name flavors that occurred was deemed anticompetitive, as were the obligations set forth in the exclusive distribution agreement between Hit and Coca Cola. Pro-Competencia chose to impose both structural and behavioral remedies. First, it forced Coca Cola to divest its trademark Hit to a trust, to be used by a third party. Coca Cola was further ordered to choose and reserve for itself one brand name in each category of flavor and to place the remaining brand names in a trust, so as to make the other brands available to other economic agents in the market. Second, Pro-Competencia ordered the bottling company (Hit) and Coca Cola to alter their agreements in a way that made the essential bottling facility available to other competitors so as not to foreclose the market. This obligation also was extended to all existing exclusive distribution agreements and any contracts that may be entered into in the future between Coca Cola, Hit de Venezuela, and Pepsicola Panamericana, and the concessionaires and points of sale, or any other participant in the soft drink distribution chain. Finally, Pro-Competencia fined each of the companies an amount commensurate with their share of the relevant market.257 The need to continue a commercial relationship between the seller and the acquiring firm (which may arise, for instance, in the case of the supply of strategic inputs or technical assistance) may create an adverse dependency for the acquiring firm which structural divestiture measures alone cannot solve. Furthermore, it is likely that divested assets will end up in the hands of less competitive firms. Less competitive firms have a higher financial incentive to 257. Oddly enough, Pro-Competencia avoided declaring the Hit-Coke agreement null and void under Art. 49 of the Competition Law; it also rejected Pepsi’s request to dissolve Hit-Coke’s illegal association with a view to restoring competitive conditions in the CSD market. Both of these are remedies that would have naturally followed from Pro-Competencia’s finding of a breach of Art. 11 of the Law. 262 Chapter 6 acquire divested assets, due to the higher reward they can expect from their use, which is a consequence of their higher profit expectation; after all, vis-à-vis more aggressive competitors who may carry a costly pricing policy, less competitive firms adopting a softer pricing policy may expect to earn higher financial rewards from divested assets. Competition authorities have tried to counteract these problems by amending the terms of proposed remedies in such way that the full commercial value of divested assets is preserved and equal opportunities are given to all firms competing in the market. Yet structural remedies confront competition authorities with a conundrum: their tinkering with market mechanisms is driven by a desire to homogenize the conditions offered to all in the market. Through their tinkering, however, they may encourage collusion due to the fact that divested assets increase symmetry between the buyer and the merging parties. In other words, the creation of a viable firm requires vesting it with a proper allocation of divested assets, yet at the same time, such an allocation will support the conditions that may facilitate collusion after the merger. Naturally, these potentially contradictory results require simultaneous consideration of both the unilateral, procompetitive effects and the procollusive, potentially output restrictive effects of mergers. However, balancing the two tests is always somewhat arbitrary, as it is based on the personal perceptions of the authorities in charge. Although Motta (2004, p. 268) states that ‘‘remedies should be accepted, and the merger proposal cleared, only if both tests are satisfied’’, it is hard to see how competition authorities can do so in a consistent, transparent manner. 6.4.2 BEHAVIORAL REMEDIES Behavioral remedies create a network of contractual commitments that ensure a level playing field for competitors through the use of some key assets, inputs, or technologies that are owned by the merging parties. These measures impose obligations that address the restrictive effects of the transaction. Behavioral remedies include compulsory licensing of technology to a rival, shortening the length of a contract governing the use of an essential asset, or the elimination of an exclusivity clause for a certain term or in favor of some customer, thus opening markets for distribution and supply. These remedies require permanent surveillance; therefore, they consume a great deal of competition agencies’ resources. Moreover, competition authorities must know the sector very well in order to craft a remedy for the particular problem identified. Sometimes finding the right solution can be a vexing problem. For instance, vertical integrations may restrain market access to a downstream firm, yet such restraints may be necessary for maintaining the integrity and efficiency of the service provided. Foreclosure can adopt several forms, from simply refusing to supply an input to less obvious restrictions such as increasing prices, changing financial terms, reducing accessory services, delaying supplies, reducing quality, and so forth. Horizontal Mergers 263 Similarly, enabling adequate access to a particular technology may prove extremely difficult, given the conflicting incentives of the incumbent merging firm and the potential competitor. The Argentinean case Liberty Media International Inc./Cablevisión S.A. (2000) provides an example of the application of behavioral remedies. In this transaction, Liberty Media International Inc., United Global Com Inc., and Hicks Muse Tate & Furst would collectively increase their participation in Cablevision S.A.—the largest cable company in Argentina—to 50%. The transaction was authorized without conditions after the first two groups promised the CNDC and the Secretariat that they would (i) proceed with an already-planned termination of a joint venture agreement with an important competitor in the sports programming area; and (ii) offer their own programming products to cable companies other than those controlled by the Hicks Muse group (Petrantonio, 2002, p. 22). Another case in point is the merger between Quinsa and Ambev (2002). This brewing industry merger, approved with conditions in 2003, was one of the most controversial mergers in the recent history of Argentina. The transaction involved the acquisition by Ambev, headquartered in Brazil and one of the largest brewers in the world, of Quinsa, local subsidiary of the Quilmes group, the largest brewer in Argentina (Quilmes also had operations in Bolivia, Paraguay and Uruguay). Quilmes had a market share in Argentina of about 65% and Ambev’s was about 15%, resulting in a combined market share of about 80%. This increase in concentration was of obvious concern, and the CNDC also concluded that barriers to entry in the relevant markets were high. Barriers to entry included the significant brand loyalty in the industry, the need for an effective distribution system, which was difficult to create, and the significant excess capacity of the parties. The parties claimed that the merger would produce significant efficiencies, some of which the CNDC found credible. The Commission found the merger to be anticompetitive, but did not disapprove it completely, permitting it to go forward with conditions. It required the divestiture of two brewing facilities and four brand names, and also required certain distribution commitments. The market share represented by the brands to be divested was approximately equal to the increase in concentration that would result from the proposed merger. The Commission also required that the divestiture be made to a new entrant, not to an existing competitor. The parties were given a period of one year to complete the divestiture. There are some who feel that it would have been better to block the merger entirely. In any case, due to the intervention of a third party, the divestiture had not occurred as of early 2006. Another Argentine brewer sought to acquire the assets to be divested but was not permitted to do so because of the requirement that they be sold to a new entrant. That party went to court to challenge the CNDC decision. Initially, the court of first instance issued an order suspending the divestiture process until its decision was final. It then denied the third party’s petition, but the petitioner appealed. A court of appeals sustained the decision of the court of first instance, but the third party appealed to the Supreme Court. The injunction against completing the divestiture 264 Chapter 6 remained in effect. In April 2006 the Supreme Court rejected the appeal, deciding the case in favor of the CNDC, and the one-year divestiture period again began running. Conditional approval of mergers and takeovers has become an important aspect of merger control, and provisions providing for conditional approval have increasingly been incorporated into the competition laws of developing countries. The importance of Quilmes lies primarily in its international dimension and in the way that the competition authority seemed to have taken into account the portfolio effect of the merger in addition to the traditional market share analysis. The importance of alleged anticompetitive practices in the brewery sector and a proliferation of mergers and acquisitions are also demonstrated by the existence of similar cases in other developing countries. For example, in the brewing industry, the compilation of extensive portfolios of brewing and other beverage products has been motivated in part by a need to satisfy customers’ demands for a one-stop shop as well as the need to obtain economies of scale in distribution. Often, one of the main competition concerns in the brewing industry is that a merger would lead not only to an oligopolistic market structure, but also to the concentration of a portfolio of leading brands in the hands of few (often one or two) players, competing against a number of weaker nonportfolio operators. Brazil’s Colgate Palmolive/Kolynos acquisition case (1994) reflects this trend. In this case, CADE noted that anticompetitive effects would arise in the toothpaste market due to the fact that the Kolynos brand had a strong reputation in the market, which created a barrier to entry. Accordingly, it decided that the acquisition could proceed only on the condition that Colgate abstain from using the Kolynos brand name for four years, or in the alternative, grant a twenty-year license to another company. The merger was approved with restrictions by CADE based on the argument that the Kolynos trademark created a huge ‘‘entry barrier’’. In light of this barrier to entry, CADE approved the operation on one the following alternative conditions, to be chosen by the parties: (i) to suspend, for four years, the use of the Kolynos brand name; (ii) to license, for twenty years, the use of Kolynos brand name to a competitor with less than 20% of the market or a new entrant; or (iii) to sell the Kolynos trademark. The parties should also allow the licensor or the buyer part of its production facilities. The acquiring company chose the first alternative and suspended the marketing of the Kolynos trademark in the toothpaste market, launching a new brand name, Sorriso. In short, Colgate had to endure the loss of investments undertaken by the acquired firm, AHPC, and the loss of expected sales, which in an extreme case would have certainly frustrated the purpose of the merger operation. Besides the obvious losses imposed on Colgate’s shareholders, it is likely that these losses were also passed on to consumers in the form of higher consumer prices. Each particular market may warrant a unique solution that requires the Competition authority to exercise close and permanent monitoring. Horizontal Mergers 265 Finally, the nature of remedies changes according to the particular situation at hand. Latin American countries have seldom imposed structural remedies alone on merger undertakings; rather, they usually negotiate a blend of both structural and behavioral remedies in order to clear a merger transaction. 6.4.3 THE FAILING FIRM DEFENSE Antitrust provisions also take into account the likelihood that the firm being acquired will go bankrupt or become insolvent in the absence of the merger or acquisition. The rationale of such provisions is that, if a firm goes bankrupt, the market loses a competitor, just as it would occur, following a merger. Consequently, there is no net effect on competition resulting from a merger under these exceptional circumstances. One example of this approach is the Venezuelan Pinco Pittsburg/Corimon merger case (1994), which proved to be one of the cases in which the credibility of Pro-Competencia as a competition regulator was severely damaged. The case of involved the merger of two major paint producers, PincoPittsburgh (with a 25% market share) and Corimon (with a 28% market share). The merging parties alleged that Pinco-Pittsburgh was not a competitor any longer as its financial standing was close to bankruptcy. For Pinco-Pittsburgh to remain in business, it had to merge with a healthier firm. In addition, the transaction was planned on the brink of the severe banking crisis, price controls, and currency devaluation in which Venezuela was immersed in 1994. In a controversial decision, Pro-Competencia, using the U.S. market power approach based on the degree of concentration, challenged the merger. Pro-Competencia issued a decision holding that the Corimon group would not be allowed to buy Pinco as planned due to the high concentration levels expected as result of the proposed transaction. Naturally, the price of Pinco’s shares plummeted due to this decision. Six months later, Pinco declared bankruptcy. In light of this development, Pro-Competencia hurriedly issued a second decision authorizing the transaction based on a bankruptcy waiver provision that did not exist in the Venezuelan competition legislation at the time the original decision was issued. Later, Pinco sued Pro-Competencia before the Supreme Court of Justice for inflicting a huge financial loss. Eventually, the case was dismissed by the Supreme Court on procedural grounds. Furthermore, recent amendments of competition statutes are increasingly introducing the concept of failing firm, as a defense from antitrust prosecution in merger investigations. A case in point is the recent amendment of the Panamanian competition system, which introduced the failing firm exception in the analysis of economic concentrations.258 258. Article 21, fourth paragraph, Law No. 45/07 (Panama). 266 6.5 Chapter 6 PREEMINENCE OF SHORT-RUN EFFICIENCIES IN MERGER CASES Mergers and acquisitions play a fundamental role in a market economy. They ensure that social resources are transferred from the hands of those who value them less to those who value them more; to this extent, assets in the hands of merged firms acquire added value simply by transfer to the hands that value them most. Furthermore, mergers ensure that efficient corporate executives displace inefficient ones, as measured by the value of the acquiring firm’s stock, which increases after the merger takes place. Similarly, mergers may be the only way of restructuring industrial sectors in order to restore their minimal scale of returns. This is particularly relevant in Latin America, where large scale is compounded by the overinvestment made before economic liberalization. For decades, businesses enjoyed monopoly rents in isolated captive markets. This phenomenon led industrial sectors to grow beyond their real sustainability. For this reason, once liberalization gets underway, potentially merging companies usually experience excess capacity, which lowers prices, due to sunk investment costs. If firms are not allowed to merge, they may put pressure on their governments to obtain nontariff protection. In such an event, social welfare would decrease. Hence, mergers are particularly helpful in Latin America as a means of restoring industrial sectors to their optimal size. However, a look at the case law immediately shows that merger analysis is almost exclusively driven by market concentration considerations, and that competition agencies pay lip service to the analysis of these efficiencies. The number of cases abound. An example of the relevance of market concentration as a component of merger analysis is found in the Mexican Coca-Cola/ Cadbury case (1999). In December 1998, The Coca Cola Company (TCCC) and Cadbury Schweppes, Plc (CS) notified authorities of their intention to carry out a merger. The transaction involved TCCC’s purchase of several brands that were the property of CS, in two relevant markets: carbonated drinks and bottled natural water. Both markets had a national geographic dimension. In its determination of TCCC’s degree of monopoly power in the carbonated drinks market, the Commission took into account a number of factors, among them the fact that the carbonated drinks market is highly concentrated, that TCCC’s market share of 64.4% would increase to 71% as a result of the transaction, and that these concentration indices surpassed the Commission’s thresholds. In Venezuela, two business combinations were approved on the basis that market concentration did not increase, because the merging parties were not competitors. First, in the Polar/Golden acquisition case (1994), a line of soft drinks was purchased by brewing company, Polar, seeking to make inroads in the soft drink market. Next, in OralB/Laboratorios Substantia acquisition case (1996), Oral B acquired a presence in the toothbrush market. By contrast, in the Sociedad Anónima Organización Coordinadora Argentina (OCA)/Correo Argentino S.A. acquisition case (2001), the CNDC advised the Horizontal Mergers 267 Secretariat to block the merger between the Argentine Post Office concessionaire Correo Argentino S.A. and the leading private postal operator, OCA. There were smaller competitors in some of these service markets, but the merging firms had the largest and most comprehensive networks. They were the first and second choices of most consumers of these services. The Commission concluded that the increases in concentration unacceptably high (over 7,500 points on the HHI) in at least ten relevant markets and that it was difficult to enter these markets, in part because of significant economies of scale. The Commission attempted to estimate the costs to consumers that could result from the merger, and concluded that they could range from USD 18 to 55 million per year. The Commission rejected the efficiency claims made by the parties, saying that the estimates were not quantified and were too imprecise. The parties abandoned the merger before the Secretariat could issue its resolution. In Colombia, the first merger authorization case was the Philip Morris/ Coltabaco acquisition case (2004). Following the acquisition of Coltabaco, Marlboro (Philip Morris) increased its market share from 3.5% to 51.8% in the relevant market. Given that the acquiring firm’s initial market share was negligible, the SIC found that no significant change occurred in the market structure; in other words, the transaction amounted to a mere change of shareholders with no substantial competitive effects. In the SabMiller/Bavaria acquisition case (2006) similar considerations prevailed. Although Bavaria enjoyed a clear supremacy in Colombia’s beer market (99%) the SIC did not see the transaction as implicating competitive issues, as there was no increase in market share and contractual commitments remained fairly open. Procter & Gamble-Gillette acquisition (2004) also involved similar considerations. Procter & Gamble merely acquired Gillette’s brand of shaving cream and razors. While the petitioners argued that economic efficiencies would result from the transaction, they also correctly noted that no increase of monopoly power had occurred because the product markets occupied by P&G did not overlap with Gillette’s markets. Accordingly, the SIC cleared the transaction without imposing conditions. The SIC also approved the merger between Televisa/Editora Cinco, the latter being Colombia’s leading publisher in the arts and crafts segment. In this case the SIC approved the transaction subject to the condition of the sale of a magazine in the ‘‘family’’ market segment. Although most significant cases are approved (approximately 90%), it is also true that competition authorities are extremely zealous about subjecting these undertakings to premerger review due to their presumed negative effects on consumer welfare. Case law often prohibits mergers and acquisitions that would have increased production value and brought about increasing returns simply because they increase market concentration. Similarly, case law shows that mergers and acquisitions are usually accepted on the basis that they create no monopoly power in the hands of merging firms, or alternatively, they do not increase such monopoly power any further. 268 Chapter 6 Thus, like the other areas of antitrust enforcement (i.e., horizontal restraints, vertical restraints and unilateral conduct), the existence of monopoly power dominates the analysis of merger control. Possibly the reason of this phenomenon stems from the emphasis placed on avoiding short-run welfare losses, to the detriment of long-run social improvements that firms can only make thanks to the supra-competitive earnings they obtain in the short run. Evidently, this mindset leads regulatory agencies to adopt a jaundiced approach toward mergers and acquisitions. These transactions effectively reduce the number of operating competitors in the market, particularly in case of horizontal mergers; therefore, they drive markets further away from the competitive equilibrium model. Antitrust enforcement could easily take these transactions to be consumer welfare diminishing. Jatar and Tineo (1998) retrospectively examine the adverse consequences of adopting a rigid structural approach in the field of merger control: In the Pinco Pittsburgh case, Pro-Competencia was exposed to the hardships of merger analysis in a transition economy. Since many firms are on the verge of exiting the market because of structural changes or simply contradictory policies, a flexible approach based on dynamic (efficiencies and market entry and exit, among others) rather than on static (degree of concentration and market power) considerations should prevail in the analysis. This is particularly salient in countries such as Costa Rica, Panama, and Venezuela, where competition statutes contain provisions that are too vague to allow any consistent merger enforcement (Tineo, 1997, p. 20). In these countries, the lack of settled criteria for distinguishing between ‘‘restrictive’’ and ‘‘proefficiency’’ merger transactions has caused competition agencies to overstate the relevance of the degree of market concentration resulting from mergers. These countries have adopted ad-hoc solutions to overcome this problem. 6.6 THE ASSESSMENT OF MERGER CONTROL Merger control has acquired such importance in the region that it has threatened to displace other forms of antitrust control, such as provisions against abusive dominance and horizontal anticompetitive restraints. To this extent, Latin American antitrust policy could be largely considered a ‘‘merger control policy.’’ Merger control is quickly becoming the most important tool of antitrust enforcement efforts among Latin American competition agencies in the region. Countries such as Peru and Chile, which in the past had made a point of not having merger control as part of their antitrust policy framework have second thoughts today. Countries with previous experience in enforcing these provisions, such as Argentina, Brazil, and Mexico, are increasingly relying on this particular form of enforcement. New members of the Latin American antitrust club such as El Salvador, Nicaragua, and Honduras, have introduced merger control from the inception of their national antitrust policies. Some commentators have noted that Latin American antitrust enforcement agencies are increasingly adopting Horizontal Mergers 269 this mode of market surveillance. (Adler, Martı́n-Alegi and Clanton (Eds.), 1999; Khemani, 1999; Martinez, 2002) The experience of national agencies reveals that, after a cautious beginning, enforcement tends to shift toward more aggressive control of mergers and acquisitions. The resources of competition agencies in this second stage are usually extensively devoted to this area of antitrust enforcement. In countries dominated by a structural policy agenda, it is not surprising that economic concentration, the subject of merger control, is perceived as a market failure that threatens competition. Interpreted in light of the theoretical underpinnings of antitrust theory, economic concentration diverts markets from optimal decentralization, where the number of economic agents in the market is infinite and their decisions are made independently. Under this approach, the reality of Latin American markets, where wealth is notably concentrated, appears to be a problem in need of government correction. The popularity of merger control contradicts the objectives of streamlined government that are usually associated with the promotion of markets through elimination of red tape and bureaucracy. Merger control drains resources from both applicants and competition agencies. A 2003 survey from PriceWaterhouseCoopers (2003) and an ICN report (ICN, 2004) illustrate all the costs that parties must absorb in order to comply with such requirements. According to the first survey, Brazil is the slowest jurisdiction in authorizing mergers under review (around 11.9 months in average). Compulsory premerger notification requirements, coupled with the excessively low thresholds for economic significance imposed on merger transactions in some countries such as Venezuela and Argentina have driven this phenomenon. Antitrust decisions that unnecessarily block mergers result in a loss of social value, measured in terms of monetary losses, failure to integrate capabilities and skills, and foregone innovations. Therefore, they impose on merging parties significant transaction costs on the entry, which could deter the entry of potential competitors in the market, thereby restraining competition rather than reinforcing its promotion. (PriceWaterhouseCoopers, 2003) From a utilitarian perspective, despite its popularity, the benefits of merger review for the competitive process are rather slim. Gonzaga Franceschini (2004, p. 1) explains: Unquestionably, most of the works developed by competition defense bodies are concerned with mergers, (which provokes) an enormous and useless waste of effort ( . . . ) Mergers that would potentially cause substantial effects in the markets are submitted to such a slow analytical process that they result in ( . . . ) anachronistic artificial decisions, usually becoming a paradox to what market reality demands, even a rejection to their own scientific laws. Perhaps all of these reasons suggest the need to reconsider the adoption of merger control as a mechanism of antitrust surveillance. In this regard, Rodriguez (1996) suggests forgoing merger control during transitional periods of economic reform, mostly due to the lack of convincing evidence of the advantages of this form of market control. The effects of mergers in market processes, even under the AU: Could you please provide the reference details of ‘‘PriceWaterhouseCoopers (2003)’’ in the bibliography. 270 Chapter 6 conventional structural analysis, are usually found to be beneficial, as they allow market agents to reap productive efficiencies that would never materialize in the absence of organizational integration. Some Latin American countries have taken note of the dangers implicit in the adoption of merger control in their antitrust systems. This is particularly true in those Latin American countries where the public attitude toward free markets is stronger, where the introduction of premerger review has been delayed. Still, their caution toward this policy is rather intuitive, as the logic of the conventional economics inexorably points to the opposite direction, that is, the convenience of adopting merger review in order to control market concentration. Guided by this intuitive preference, some countries like Peru prefer less intrusive means of market intervention to premerger control schemes. In these countries, mergers and acquisitions are prosecuted only if they create a dominant position in the market. In this case, competition authorities review the ex post effects of the undertaking under abuse of dominance provisions. Yet, of all areas of antitrust enforcement, merger control is perhaps the most popular one. For example, after a quiet beginning in 1993, the Mexican Competition Commission has shifted its attention toward merger control, devoting the bulk of its resources to this activity. Merger control in Mexico accounts for twice as many cases as monopolistic practices and other restrictions combined. As Rowat (1995, p. 16) argues: The bulk of the [Mexican competition] Commission’s activity has been devoted to merger cases based partly on the fact that the pre-notification requirement provides an effective way of generating cases. This is reflected in Figure 6-1 below: Source: CFC Annual Reports. Figure 6-1 Mexico: Merger versus Conduct Review (1994-2006) Horizontal Mergers 271 In 1993-1994, the Mexican Competition Commission received fifty-two merger notifications and prosecuted forty-five cases. In addition, it opened twentytwo investigations into monopolistic conduct. In 1994-1995 there were 109 notifications, an increase of 27% from the preceding year, compared to seventeen cases involving restrictive practices. This divergence has grown sharply over the years, as the agency has grown more experienced and involved in this field. Today, the agency reviews five times more mergers than other competitive restraints. Moreover, in the recent reform of Mexico’s Competition Act, the premerger control procedure was also amended to substantially increase the filing thresholds by 50% in order to focus on transactions most likely to raise competitive issues in the market. The amendments also contemplate early termination of merger screening in cases that clearly do not have adverse effects in the relevant market. The amendments now provide for the analysis of any ‘‘related markets’’ potentially implicated in a merger, in order to determine whether the proposed transaction might have any anticompetitive effects in these markets. In the past, the Competition Commission would only regularly screen the market in which the transaction was taking place, but would not necessarily perform a formal analysis of the overall effects that the transaction may have on related markets. Before the amendments, mergers that required approval were not subject to any waiting period and the parties involved could consummate the transaction at once; now, the amendments have empowered the Competition Commission to order, within a ten business-day period following the premerger filing, that the parties refrain from consummating the transaction until the Competition Commission has authorized it. In the event that no resolution is issued, the parties may implement the merger at their own risk, as there is no specific penalty for not waiting. Additionally, any merger subject to notification which has not yet been cleared by the Competition Commission cannot be recorded before the Public Registry of Commerce, the consequence being that some acts undertaken as part of the merger might not be enforceable against third parties. In making these changes, the amendments restate the principle that leads competition agencies to concern themselves with merger operations in the first place, namely, the belief that concentration dictates competition. There are certain merger operations that could create undue economic concentration in the market; therefore, they deserve closer scrutiny. Similarly, in Brazil, according to Mattos (1997, p. 6): CADE has focused its work, since 1994, more on mergers than on anticompetitive conduct, which is consistent with the international trend. ( . . . ) This can be seen by the low level of anti-competitive conduct judged relative to the stock of such cases at CADE in 1996, 23 per cent compared to the same statistics for mergers which reached 59 per cent. AU: Please provide the reference details of ‘‘Mattos (1997, p. 6) in the bibliography. 272 Chapter 6 Au: Please provide in-text citation for Figure 6-2. Source: CADE Annual Reports. Figure 6-2 Brazil: Merger versus Conduct Review (2000-2007) These numbers are even more staggering: the number of merger cases decided in the years 2000-2004 was between thirteen and twenty-two times greater than the number of cases dealing with other monopolistic practices. Legal reform of Argentina’s merger review is increasingly emphasizing merger control as the primary mode of antitrust prosecution. In particular, legal reform is adapting notification thresholds in order to filter out those transactions perceived to be irrelevant for antitrust purposes. Venezuela has taken a more balanced approach to its enforcement policy. Nevertheless, mergers are an important part of its work, even though premerger notification is not mandatory.259 Differences in the resources devoted to merger control are explained by the particular policy agenda followed by each competition agency. Countries that are particularly active in the control of mergers are dominated by a structural approach toward antitrust policy, which is absent in countries where competition is associated to dynamic evolving market events. In most countries, merger review is becoming a major tool of policy enforcement among competition agencies. The relatively straightforward criteria for the analysis set forth under quantitative legal thresholds make it easy for competition agencies to exert control on businesses. Moreover, compared with the fuzziness of 259. In 1993, Venezuela’s Pro-Competencia authorized five out of six merger proposals, while it examined thirteen cases involving restrictive conduct; in 1994 it decided seven merger cases and seven cases on restrictive undertakings; in 1995, it decided ten merger cases compared to nine prosecutions of restrictive conduct (Pro-Competencia (1994) and Pro-Competencia (1996)). Horizontal Mergers 273 economic analysis of business efficiencies, which is always subject to dispute and interpretation, or the long-run results expected from competition advocacy initiatives, premerger control offers an easy way of presenting undisputed performance results before the public opinion. The popularity of merger review is, therefore, associated with Latin American competition agencies’ emphasis on the control of monopoly power. Clearly, due to the ideological underpinnings of the Imperfect Competition theory, market concentration takes precedence over all other economic factors affecting economic performance, in particular, over long-run efficiencies. We will return to this problem later in this book.260 260. See Section 12.1.3, below. Chapter 7 Horizontal Restraints Under the utopian logic of antitrust policy, horizontal restraints between competitors represent the most obvious departure from the optimal world of perfect competition: Two or more competitors agree to eliminate their business autonomy in order to raise their prices above marginal costs, thus depriving consumers of their fair share of economic welfare. In the absence of any collateral or ancillary procompetitive benefits, it is not surprising that such agreements are unanimously condemned in antitrust legislation as a certain source of anticompetitive restraints. However, this chapter will not examine whether government control of horizontal restraints is consistent with a promarket setting. Instead, it will highlight how difficult is for competition agencies to ascertain ‘‘naked collusion,’’ which competition agencies regard as the most pernicious form of anticompetitive restraint. The case law identifies countless criteria as ‘‘circumstantial evidence’’ of undue collusion between competitors. Our discussion of the problems associated with the identification of naked restraints will also indirectly reveal the difficulties of reaching a stable rule of law, consistent with a promarket institutional setting. This chapter will explore the treatment of collusion and other horizontal restraints in Latin American antitrust legislation and case law. Horizontal anticompetitive restraints include every undertaking, arrangement, contract, agreement, and even parallel behavior that eliminates or otherwise distorts business rivalry between two or more firms operating in the same antitrust market. The first section of this chapter will examine the common features underlying the analytical approach of antitrust authorities to horizontal restraints, and the common distinction between undertakings solely intended to restrict output, usually in the form of ‘‘naked price-fixing,’’ and other horizontal restraints on competition that create additional ‘‘procompetitive’’ effects. This section will explain how case law in the region effectively distinguishes between these statutory 276 Chapter 7 standards despite the difficulties of introducing this two-tiered classification into the legal culture of Latin American courts. The second section of this chapter will deal with the assessment of legal and economic evidence of collusion and other horizontal restraints. This section is intended to give the reader a sense of the practical difficulties encountered in the analysis of horizontal restraints, as well as the attempts of legal theory to solve them through the inclusion of the ‘‘plus factors’’ doctrine. Our examination of the case law will also illustrate the broad discretion of the courts in this area. 7.1 ANTITRUST RATIONALE FOR THE PROHIBITION OF COLLUSION Antitrust legal theory is premised on the notion that participants in oligopolies are prone to engaging in collusive activities in order to enhance collective monopoly power. A discussion of collusion, therefore, revolves around the sort of indicia that demonstrate the existence of explicit collusion or tacit parallel behavior, both of which have similar effects. Early static models of oligopoly suggested that attempts to coordinate pricing would often break down because of the incentives for an individual firm to deviate from the agreement. The idea was that individual firms would often face too strong an incentive to cheat by selling additional output at the higher (collusive) price, thereby leading to the breakdown of the collusive pricing policy. Coordination of pricing is considered likely only in industries that are highly oligopolistic, where products are close substitutes or homogeneous, where barriers to entry exist, and where firms face similar cost conditions (making it easier to detect cheating). These premises formed the theoretical foundation for antitrust legal theories of collusion and horizontal restraints. More recent theories of collusion based on game-theory models examine this phenomenon in a dynamic context. The new models examine the conditions under which pricing behavior may be collusive when firms are viewed as making decisions over a number of sequential time periods, in contrast to the single-period approach of earlier static models. 7.2 STATUTORY STANDARDS ON HORIZONTAL RESTRAINTS For antitrust purposes, horizontal restraints include every combination, whether formal or informal, written or not, which enables two or more businesses operating at the same level of trade to align their conduct, in order to eliminate their previous autonomy. Antitrust statutes take an economic approach towards horizontal restraints. The analysis emphasizes whether business formerly acting in the market as 277 Horizontal Restraints independent economic units, no longer do. Also, the concept excludes from these arrangements the case of firms belonging to a common economic group.261 International standards emphasize three elements to be evaluated in the assessment of restraints on competition, including horizontal restraints: – monopoly power; – exclusionary or exploitative effects; and – procompetitive effects. These elements each play a role in the legal treatment of horizontal restraints in all Latin American antitrust statutes. Sometimes the law requires evidence of the restrictive effects of horizontal arrangements; in other cases, such as naked price-fixing, such evidence is not required. The following sections will examine the legal treatment of horizontal arrangements. 7.2.1 MONOPOLY POWER: DE MINIMIS HORIZONTAL RESTRAINTS Under the standard of per se illegality as it is effectively applied, competition authorities simply examine whether market rivalry among two formerly independent businesses has been diminished in order to conclude that they have colluded with the intention of imposing prices above marginal costs. Of course, this conclusion is only possible if the colluding firms collectively enjoy monopoly power sufficient to influence the market. Hence, a key criterion for assessing the existence and effects of horizontal restraints, especially hard-core cartels, is whether the participating parties hold sufficient collective monopoly power to act independently of their competitors in the market. Therefore, once competition authorities establish through economic and factual indicia that two or more competitors have explicitly or implicitly agreed to fix prices, divide markets, or allocate customers, they turn to the second step of their analysis, namely whether the parties have the combined capacity to influence the market, which is best known as monopoly power. There is a great deal of confusion about the need to prove the existence of monopoly power in order to establish the capacity of colluding firms to subvert competition. If one follows the logic of the Imperfect Competition model, it is evident that no manipulation of prices is possible without monopoly power. Indeed, the very purpose of collusion is, from this perspective, to attain collective monopoly power that could not be achieved individually. Yet antitrust laws are unclear on this issue, because they sometimes conflate the existence of the agreement between competitors, which in some cases (i.e., naked price-fixing) are prohibited automatically per se as a matter of law, 261. See Section 2.1.7, above. 278 Chapter 7 with the capacity of the agreement to produce effects in the market, which is a factual problem. In FNE v. Air Liquide Chile S.A. and others (2006), the Tribunal de Defensa de la Libre Competencia (TDLC) did not focus on the existence of market power. This was the basis for an objection in the dissenting opinion of one of its members, who noted that proof of dominance was necessary to qualify the parties’ conduct as an infringement of the competition law. Merely one year later, moreover, in FNE v. Isapre ING S.A. (2007) the majority held that proof of dominance was a sine qua non for qualifying conduct as anticompetitive, while two dissenting members considered this interpretation to be flawed, arguing that collusion and abuse of a dominant position are two essentially different forms of infringement. In practice, determining whether colluding firms have monopoly power to influence the market and evaluating whether there is sufficient evidence of price-fixing are done simultaneously in the course of competition investigations. Therefore, competition agencies evaluate the size of the relevant market in order to determine whether firms are competitors at all, and at the same time determine their combined power, which is relevant in the event that there is positive evidence of collusion between them. Some statutes set forth statutory thresholds that are more stringent than the ordinary market power inquiry and will find violations even where there would likely not be market power. This is the case in Brazil, with its 20% threshold. For example, in 1993 CADE brought a case against the Sindicato Brasiliense de Hospitais, which involved the Brazilian union of hospitals. The union published price schedules, which formed the basis for the allegation of collusion. In her defense, the union alleged that only 20% of the hospitals in the Federal District were affiliated with the union, and that therefore that they could not be characterized as forming a cartel. Indeed, the publication of the schedules was intended as a guide for small establishments that were not in a position to keep qualified accounting staff of their own. Moreover, the schedules were voluntary and merely specified minimum and maximum rates. However, CADE found that the adoption of a price floor may have been a way of disguising an agreement on price. Nevertheless, CADE found that a violation of the economic order had occurred, because the Sindicato’s decision to publish the schedule revealed her intent to influence the market. Finally, the argument that only 20% of the hospitals had joined the union was irrelevant, because the expected economic consequences for nonmembers were very likely to cause them to align their prices with the established price levels.262 262. CADE’s guidelines provide no special treatment for small firms, although Art. 170 of the Constitution specifies that one principle guiding the economic order shall be ‘‘due regard’’ for the ‘‘preferential treatment [of] small enterprises organized under Brazilian laws and having their head-office and management in Brazil.’’ Because CADE does not apply a per se analysis, however, even horizontal agreements among small firms will rarely involve the requisite market power to run afoul the law (OECD and IADB, 2005a, p. 20). Horizontal Restraints 279 In practice, other countries that have no fixed threshold follow a similar standard, inasmuch as they prohibit horizontal arrangements regardless of whether their practical implementation extends to all or only a part of the relevant market. In the jurisprudence of these countries, what matters is the alignment itself rather than the size of the market affected or the monopoly power wielded. For example, in the Venezuelan Premezclados de Concreto case (1993), ProCompetencia dismissed the defendants’ argument that the price schedule jointly established by the prosecuted firms had never been effectively enforced, and that, in fact, some of the parties had never complied with it. A similar argument was made in the Cámara Costarricense de Corredores de Bienes Raı́ces (CCCBR) case (2002), which centered on whether fixed commissions set forth in the CCCBR’s Code of Ethics had been effectively imposed upon member traders involuntarily. The CCCBR argued that the Code was merely intended to guide the decisions of each member, not to become a compulsory mechanism; moreover, that it was intended to set ‘‘objective margins’’ that would ease any conflict of interests. Finally, it argued that agreeing in a Code of Ethics was a normal course of action under the constitutional right of association. COPROCOM, Costa Rica’s Competition Commission, took the view that CCCBR’s argument was rethorical, because the fixed commissions were not merely guidelines for chamber members, but actually acted as a compulsory mechanism, since any nonabiding member would be either fined or expelled from the chamber. Under the formal logic of antitrust policy, this interpretation is entirely correct: it does not matter whether price-fixing resulted from mere guidelines or from compulsory rules. However, rather than focusing on the issue whether the commissions were optional or compulsory, the Commission should have emphasized that the Chamber controlled 100 percent of real estate services in Costa Rica; therefore, it effectively held monopoly power. This control was the result of different factors, including the existence of government barriers to entry (such as official requirements to work as a real estate trader) as well as the legal status of the Code of Ethics and the existence of effective sanctions imposed upon members for violations of the Code, including expulsion from the CCCBR. In short, the approach to the question of monopoly power is, in practice, what differentiates those countries that apply an explicit per se rule to horizontal agreements from those who do not. In the former case, no additional proof is necessary once the agreement is established, whereas in the latter case, evidence of collective monopoly power is necessary. This is the case in Brazil, for example, where proof of market power is necessary to establish an infringement of the competition law. As the OECD and IADB (2005a, p. 20) have stated: ‘‘In fact, in cartel cases, CADE assumes that anticompetitive effects exist once the existence of market power is demonstrated.’’ Thus, in countries where the rule of reason applies to every type of restrictive conduct, the application of the rule to horizontal restraints has less to do with the verification of productive efficiencies than with proof of the existence of monopoly 280 Chapter 7 power among the participating firms. In the context of horizontal agreements, Latin American countries pay lip service to the need to investigate productive efficiencies without actually incorporating them into their analysis. 7.2.2 EXPLOITATIVE EFFECTS: HARD-CORE PRICE FIXING Under international standards, antitrust provisions presume the anticompetitive effects of certain horizontal restraints. In other words, the law distinguishes between agreements whose sole purpose is price-fixing (also known as ‘‘naked price-fixing’’) on the one hand, and horizontal agreements whose purpose is not price alignment but rather some other objective (which may or may not involve increasing monopoly power), on the other. Under the logic of the Imperfect Competition theory, naked price-fixing cannot have any purpose but the enhancement of monopoly power between the colluding parties at the expense of consumers, who suffer exploitation either through reduced supply or increased prices. Therefore, it is not necessary to produce factual evidence of the anticompetitive effects of these agreements; rather, the law assumes such effects. Other horizontal agreements, by contrast, require factual evidence of their competitive effects before they can be condemned, as they could in fact increase productive value through complementary dealings that are part of a broader arrangement. A positive finding of an anticompetitive horizontal restraint requires the competition authority to conduct two inquiries. The first is to establish the existence of an agreement between competitors that limits their independence of action. In the second inquiry, the authority must ask whether the agreement is intended merely to align prices or to divide markets or clients, or whether it brings any added value to the joint activity conducted by the parties to the agreement. Of course, competition authorities can only deduce the intent of the parties after examining the inner nature the arrangement itself. After all, agreements that align prices could entail complementary benefits that justify the whole exercise for productive efficiency reasons. How do competition authorities in Latin America deal with this analysis? There are no settled solutions to this problem. Some laws in the region establish a list of ‘‘automatically prohibited’’ agreements, the presence of which nullifies any other benefit tied to the transaction.263 In this case, the competition agency merely examines whether the particular arrangement under review matches any of those listed as prohibited ‘‘per se.’’ Countries that take a per se approach include the following: Mexico, El Salvador, Nicaragua, Honduras, Costa Rica, and Panama.264 263. The list of prohibited agreements usually includes the following: price fixing; market division or customer allocation among competitors, bid rigging, and boycotts. 264. Article 9 of the Competition Law (Mexico) prohibits four categories of hard-core horizontal agreements among competitors: price fixing, output restriction, market division, and bid Horizontal Restraints 281 A second group of countries, by contrast, requires a full examination of the horizontal agreement in order to establish whether it conflicts with the general objectives of the law. The legislation of these countries conditions the prosecution of every type of conduct on the conduct’s actual or potential economic effects in the market, even hard-core cartels. These rules simply adopt a general approach whereby all anticompetitive behavior is subject to a rule-of-reason analysis. Thus, the competition authority conducts a full analysis of all agreements in order to balance their restrictive and welfare-enhancing effects before reaching any conclusions about their anticompetitive effects. This group includes Argentina, Brazil, and Peru. It is not clear whether, in the future, countries in the region will move towards a system of automatically prohibited horizontal restrictions, thus endorsing a dual per se/rule-of-reason system like the one prevailing in the United States, or whether they will endorse a system of full competitive assessment of each restraint in which welfare-enhancing effects are to be considered even in the most obvious naked price-fixing cases. On the one hand, competition agencies in countries with a system of ‘‘automatically prohibited restrictions’’ have confronted severe complications in defending their decisions, due to the reluctance of appellate judges to accept the restrictive effects of agreements at face value, by mere economic inference, without any factual evidence that such restraints have undermining effects on the economy. Take the case of Mexico. Interpretative issues regarding the scope of the ‘‘automatic prohibitions’’ forced a revision of the competition statute in order to clarify the legal effects of such prohibitions. These changes were made after several cases were brought before the appellate courts challenging the Commission’s view that automatically prohibited conduct has no possible economic defense.265 Similar interpretative issues arise under the competition laws of El Salvador, Nicaragua, Honduras, and Costa Rica,266 which are largely modeled after the Mexican Competition Act. rigging. Art. 9 also specifies as unlawful certain particular kinds of conduct within those categories. For example, the price fixing clause prohibits information exchanges for the purpose or effect of fixing or manipulating prices; the output restriction clause prohibits commitments relating to the volume or frequency with which goods and services are produced; the market division clause covers potential as well as existing markets; and the bid rigging clause covers agreements respecting both participation in auctions and establishment of the prices to be bid. Similarly, Art. 25, Legislative Decree No. 528/04 (El Salvador); Art. 18, Law No. 601/06 (Nicaragua); Art. 5, Decree No. 357/05 (Honduras); Art. 11, Law No. 7472/94 (Costa Rica); and Arts. 12 and 13, Law No. 45/07 (Panama), prohibit horizontal restraints involving the aforementioned conduct, which is regarded prohibited as a matter of law. 265. Certain vertical restraints that were previously included in the Regulations of the Competition Act are now explicitly included in the Act, such as: predatory pricing, fidelity discounts, crosssubsidies, and price discrimination. Their inclusion will ensure that such practices are not challenged as illegal and will allow the Commission to combat such practices effectively. 266. Article 25, Legislative Decree No. 528/04 (El Salvador); Art. 18, Law No. 601/06; Art. 5, Decree No. 357/05 (Honduras) and Art. 11, Law No. 7472/94. 282 Chapter 7 On the other hand, however, life has not been easier for competition agencies in countries where the legislation does not provide for automatic illegality. In these countries, competition agencies are required to conduct a full competitive analysis which competition agencies sometimes elude it to save their scarce resources. That, however, causes complications and a severely erratic administrative jurisprudence, which lessens the stability of the competition law system. That is the case of Venezuela, where Pro-Competencia gave horizontal price-fixing a per se treatment without having a clear legal mandate to do so.267 However, this criterion, embodied in landmark decisions such as Premezclados de Concreto (1993) and Aga de Venezuela/ Gases Industriales (1997), was initially reversed by the Appellate Court due to the court’s unwillingness to acknowledge the validity of ‘‘automatic’’ illegality. Despite the insistence of Pro-Competencia in treating these arrangements as per se prohibited, this opinion has never been explicitly endorsed by the Appeal Court. Argentina brings us another example of a country that does not condemn horizontal restraints on an automatic basis. In this country, all restrictive behavior must affect the ‘‘general economic interest’’ in order to be condemned;268 hence, under Argentina’s Competition Act, hard-core cartels have no special status. However, the legal standards developed in the case law are contradictory. Until recently, the CNDC had distinguished between conduct potentially capable of restricting competition (ilı́citos de peligro) and conduct that required proof of restrictive effects on the market (ilı́citos de resultado); the CNDC had stated this principle in the case A. Gas S.A. c/AGIP Argentina S.A. In practice, this amounted to establishing a two-tier per se/rule-of-reason classification. However, in an appeal of the resale price-maintenance case VCC S.A., Multicanal S.A., Cablevisión T.C.I C.I. and others s/Ley 22.262 (2005), the Supreme Court of Justice abolished the previous two-tier distinction and mandated a full rule-ofreason approach to all conduct under the competition statute, by requiring plaintiffs to prove the exclusion of competitors (i.e., market effects) In Brazil, a similar uncertainty prevails. In the opinion of most commentators and CADE itself, competition rules require a rule-of-reason analysis (even though this is not stated expressly) because it requires verification of a violation of the economic order.269 Therefore, no agreement can be considered per se illegal; examination of the economic context in which the conduct takes place is essential for determining whether the intent to restrict competition really existed and whether restrictive effects actually resulted. However, recent developments have created some confusion regarding whether Brazil is actually moving towards adopting a rule that automatically 267. Article 10 of the 1992 Competition Act does not explicitly condemn horizontal price fixing, or for that matter any other form of collusion, as a per se prohibition. On the contrary, Art. 5 of this statute creates an omnibus prohibition that encompasses all forms of anticompetitive restrictions set forth under particular prohibitions such as the one contained in Art. 10, explicitly requiring proof of harm or damage on economic competition. 268. Article 2, Law No. 25156/99. 269. Article 20, Law No. 8884/94. Horizontal Restraints 283 prohibits naked price-fixing. As discussed above, competition rules in this country contain general language providing that ‘‘any act in any way intended or otherwise able to produce the effects listed below, even if any such effects are not achieved, shall be deemed a violation of the economic order.’’ The specified effects are (i) to limit, restrain, or in any way injure open competition or free enterprise; (ii) to control a relevant market of a certain product or service; (iii) to increase profits on a discretionary basis; and (iv) to abuse one’s market control. Given that controlling a relevant market through ‘‘competitive efficiency’’ would not be regarded as anticompetitive, it follows that a full competitive analysis is needed in such cases. The remaining types of conduct, however, would be considered automatically prohibited to the extent that they are capable of limiting competition, controlling a relevant market, or increasing profits in a discretionary fashion. To clarify the matter, in 1999 CADE issued enforcement guidelines for the interpretation of Articles 20 and 21 of Law No. 8884/94 as attachments to CADE Resolution No. 20. The appendices to the resolution establish a standard analytical scheme for restrictive practices. Appendix I contain definitions of anticompetitive practices, which are classified into horizontal and vertical categories. Horizontal practices are defined as those constituting ‘‘an attempt to reduce or eliminate market competition, whether by establishing agreements between competitors in the same relevant market with regard to prices or other conditions or by adopting predatory pricing.’’270 However, these rules have not succeeded in clarifying the fundamental problem, that is, whether the practices listed under Article 20 are considered automatically prohibited. In Peru, the jurisprudence has also been erratic. In 1997, INDECOPI’s Competition Tribunal explained Article 6’s application to horizontal restraints in a number of ‘‘precedents of mandatory compliance’’ (decisions that are specifically declared to be binding precedents and are published as de facto rules). Relying exclusively on the writings of United States Appellate Court Judge Robert Bork, the Tribunal held that price-fixing is ‘‘per se’’ illegal when it is ‘‘naked,’’ but should be judged by the ‘‘rule of reason’’ when it is reasonably related to a potentially procompetitive integration.271 It also said that agreements in the per se category are condemned without regard to whether (i) they have, or are even capable of having, an actual harmful effect, or (ii) may in some sense be 270. Four categories of such practices are given: (i) cartels, which involve agreements between competitors controlling a substantial part of the relevant market ‘‘regarding prices, production and distribution quotas and territorial division, in an attempt to increase prices and profits jointly to levels that are closer to monopolistic levels’’; (ii) other horizontal agreements, which involve ‘‘only part of the relevant market and/or temporary joint efforts aimed at achieving a higher level of efficiency, especially productive and technological efficiencies’’; (iii) illicit practices of professional associations, which involve ‘‘any practice that unreasonably limits competition between professionals, mainly price-fixing practices’’; and (iv) predatory pricing, which involves pricing ‘‘below the average variable cost’’ to eliminate competitors, in market conditions that would permit the costs of the predatory scheme to be recouped through subsequent price increases. 271. Ruling No. 206/97. Specifically, the mandatory precedent declared that ‘‘Price fixing and market division agreements shall be illegal per se when they are intended to restrict 284 Chapter 7 reasonable. INDECOPI clearly stated the distinction between conduct subject to a per se versus a rule-of-reason approach as follows: According to the provisions of Legislative Decree Law No. 701/91, pricefixing, market allocation, production quota allocation, and production limitation or control must be sanctioned on a per se basis. In other words, the existence of the prohibitive practice, in and of itself, constitutes an administrative infraction to which the legally stipulated sanction must apply. In that sense, in order to determine that the infraction has occurred, it is not necessary to take into account the detrimental effects of the practice on the market, or the degree to which it is reasonable, i.e. the fact that the practice is or is not of such a nature to produce the detrimental effects mentioned.272 This approach is generally consistent with international practice, which increasingly condemns hard-core cartels as illegal on a per se or absolute basis. In the Automobile Insurance case (2003), however, the same Tribunal concluded that this approach was not legally correct under the Free Competition Law.273 The new case involved price-fixing in the automobile insurance industry, and the Tribunal held that although cartel agreements are presumed by law to harm the general economic welfare, defendants must be given an opportunity to prove that their agreement did not have that effect. This decision is said to be compelled by Article 3 and necessary to reconnect Peruvian practice with its European origins by giving cartel members the same opportunity they have under Article 81(3) and European Regulation No. 1/2003. Although the OECD and IADB (2004c)) criticized this decision and questioned whether ‘‘it would have any real effects on INDECOPI’s cartel cases’’ it did introduce a new approach to the interpretation of cartel cases, subjecting them to a ‘‘truncated’’ rule of reason. Under this rule, the agreement was condemned after a finding that there was a lack of competitive competition (i.e., when they are pure or naked cartels). On the other hand, the price fixing and market division agreements that are ancillary or complementary to an agreed association or integration and that have been made to improve the economic activity shall be analyzed caseby-case to determine if they are rational or not. In case they are not considered to be rational, they shall be deemed illegal. If, depending on the economic activity to be analyzed, it is concluded that the integration agreed among the companies is essential for that activity to be carried out, then such integration agreement, as well as the restrictions on competition that would arise therefrom in order that such activity can be carried out, shall be allowed. However, when the integration is considered to be beneficial but not essential to carry out such economic activity, then the integration agreement and the ancillary or complementary agreements that restrict the competition shall be permitted only if they meet the following three conditions: i) the agreement fixing prices or dividing market is ancillary to a contract integration; that is, the parties must be cooperating in an economic activity other than the elimination of rivalry, and the agreement must be capable of increasing the effectiveness of that cooperation and no broader than necessary for that purpose; ii) the collective market share of the parties does not make the restriction of competition a realistic danger; iii) the parties must not have demonstrated a primary purpose or intent to restrict competition. When these three conditions are not met, the agreement shall be considered to be unlawful.’’ 272. Ruling No. 0001/97—INDECOPI-CLC and Ruling No. 276/97-TDC. 273. Ruling No. 224/03. AU: Could you please provide the reference details of ‘‘OECD and IADB (20004c)’’ in the bibliography. Horizontal Restraints 285 justification, without enquiring into monopoly power or the other elements of ‘‘full-blown’’ rule-of-reason analysis. This approach (Muris, 2000; 2001) is similar to the approach taken in recent cases in the United States dealing with the rule-of-reason treatment of horizontal restraints, as decided in FTC v. Indiana Federation of Dentists (1986) and FTC v. California Dental Association, (1999). Despite the practical difficulties that arise from assessing the full competitive effects of anticompetitive restraints, it seems unlikely that a plain system of automatic prohibitions will prevail. It is more likely that competition agencies in such a system will have to bring prima facie factual evidence that shows the restrictive effects of agreements under review, even in cases that belong to the category of naked price-fixing. In short, it is likely that a ‘‘truncated’’ rule of reason will prevail in this field of law. Resilient cultural forces play a fundamental role in judges’ interpretation of the scope of antitrust provisions. Latin American countries face an enforcement dilemma when it comes to the endorsement of a legal standard that automatically condemns certain kinds of horizontal agreements. The introduction of antitrust rules in the region is usually considered to be a fundamental change in the conventional view of the law applicable to economic relations. For the typical Latin American judge, the introduction of antitrust law, a discipline that is deeply influenced by utilitarian thinking, is alien to the legal culture in which she has developed. A system of automatic prohibitions is not easily reconcilable with fundamental principles embedded in the legal culture of the region. A rule that establishes an automatic prohibition effectively prevents the affected parties from showing their innocence before the law, which could be construed as violating constitutional principles of due process. Moreover, Latin American antitrust case law pays heed to the principles of law as much as to economic analysis. Under these legal principles, no man can be held accountable for a crime without legal evidence; everyone has a right to show the economic efficiency arising from an arrangement, even if it is among those conceptualized as ‘‘naked price restraints.’’ In short, the per se/rule-of-reason distinction, drawn from economic theory, cannot override the constitutional right to a fair trial defined by due process, the right to be heard, and the presumption of innocence. In this insistence on the importance of due process, one can see the influence of the natural law principles that drive Latin American legal culture. These principles stand in contrast to the utilitarian principles underlying the law and economics approach to antitrust policy endorsed by judges in the United States and Europe. It has been exceedingly difficult for competition authorities in the region—usually sharing the same utilitarian approach as their counterparts overseas—to convince Latin American judges that certain business behavior should be regarded void and illegal automatically. Therefore, a trend towards broadening the application of the rule of reason to output-restrictive arrangements seems to have gained considerable ground in the region, as some countries are having difficulty convincing courts to recognize the full implications of the per se treatment. AU: Could you please provide the reference details of (Muris, 2000; 2001) in the bibliography. 286 Chapter 7 7.2.3 PROCOMPETITIVE HORIZONTAL RESTRAINTS International competition standards usually examine the competitive effects of all horizontal restraints that enhance economic efficiency and bring about (dynamic) ‘‘procompetitive’’ effects in the economy. Cooperation between competitors is justified insofar as it provides the proper setting for the development of productive valued-added business activities. Let us recall that economic organization between cooperating entrepreneurs facilitates the division of labor, and with it, the possibility of reaping increasing returns in hitherto unexploited market niches. Competition law standards, however, are not as attentive to the positive effects of further division of labor as they are to the increased utilization of existing productive capacities through improvements in productive efficiency. Hence, under antitrust laws productive efficiency is what justifies the development of cooperation between competing firms. This cooperation may take the form of improved integration of business capabilities; innovation promotion; alternative cost-reducing methods of production or trading and marketing; research and development agreements; development of complementary or joint capabilities through joint ventures; standardization of production; and other similar arrangements. Certain classes of horizontal agreements are customarily regarded to be ‘‘efficient,’’ such as: (i) (ii) (iii) (iv) information agreements, development of joint products or systems, R&D, and joint ventures. Procompetitive effects of anticompetitive restraints embed in these agreements are usually assessed individually. However, the legislation of Colombia and Venezuela provides for the possibility of authorizing cases through class exemptions in the regulations. Under this system, modeled after the European regime of ‘‘block exemptions’’ set forth under Article 81(3) of the Treaty of Amsterdam, the agency will consider their arrangement nonactionable if it conforms to the provisions of the regulation. Firms entering into arrangements listed in these exempted classes enjoy a presumption of innocence; therefore, they place the burden of proof on the plaintiff, who would need to show the inefficiency of output restrictions resulting from the arrangement. However, the rigidity of this scheme, which requires full regulatory amendments to adapt to new economic circumstances, has triggered changes in the legislation of the European Union itself.274 274. The technique used by the European Commission is to declare illegal under Art. 81(1) of the Treaty of Amsterdam agreements that should have been considered legal under a rule-ofreason analysis (due to their pro-consumer welfare effects), and then authorize them under the exemption provided for under Art. 81(3). This procedural solution, aimed at centralizing Horizontal Restraints 287 Moreover, its adoption has been marginal among Latin American competition agencies, which prefer to use guidelines rather than cumbersome class regulations for exempting procompetitive restraints. Therefore, competition agencies in the region conduct individualized ex post rule-of-reason assessments of competitive restraints.275 Finally, as discussed above, one can see a general evolution towards enhancing the efficiency clause which exempts horizontal restraints that enhance economic welfare through economic efficiency, although there is a great pressure to exclude naked price-fixing from the list of acceptable horizontal restraints. In practice, competition agencies in the region apply a truncated rule of reason in their analysis, whereby they examine the welfare effects of anticompetitive restraints, even hard-core restraints, though they review these effects more superficially than they would in a full-blown rule-of-reason analysis. This is logical if one considers that hard-core anticompetitive effects can be identified only once the analysis is carried out. As for the substance of the welfare analysis implicit in the rule of reason, as discussed elsewhere,276 the treatment of efficiency in the case law is erratic and does not show a clear sense of purpose. 7.3 EXPLICIT COLLUSION: THE ROLE OF JOINT TRADE ASSOCIATIONS AND PROFESSIONAL GUILDS Trade associations and professional guilds allow a significant reduction in communication costs and facilitate coordination of businesses within the relevant industry. This is especially so if there is an explicit record of the association’s meetings where AU: Provide section crossreference number for footnote 276. interpretive power in the hands of the Commission (Korah, 1994, pp. 148-149), was implemented through a notification system. It was not intended to replicate the U.S. per se/rule-ofreason system, which is a decentralized scheme implemented through complaints and official investigations presented before judges. These are all instrumental considerations that affect whether it makes sense to contemplate a system of antitrust assessment that condemns certain practices without any possibility of redemption based on their pro-competitive effects. From this point of view, it seems that the U.S. system is more attuned to the ongoing evolution of economic thinking, where the definition of procompetitive efficiencies is permanently changing. The cumbersome centralized system based on a notification system of potentially anticompetitive restrictions, was abolished in 2004 by Regulation 1/2003 (Council Regulation (EC) No. 1/2003 of Dec. 16, 2002 on the implementation of the rules on competition laid down in Arts. 81 and 82 of the Treaty). 275. The difficulty of adopting the class exemption regime lies in accommodating such a system within the framework of civil law upon which Latin American laws are based. Under the principles of administrative law in this legal system, the legal status of the interested party applying for an exemption would not change unless there was an express decision on her particular case. In other words, it is necessary to conduct a full rule-of-reason analysis of the merits of the particular transaction. Therefore, a system of ‘‘class exemptions’’ would hardly confer any benefits on the interested party, as it would bring about no changes on her legal status. 276. See Section below. 288 Chapter 7 commercial policies and strategies have been discussed; if so, this is tantamount to an open confession of collusion. If, on the contrary, association members have not engaged in discussions of trade or commercial policies, competition agencies regard this membership in a trade association as mere circumstantial evidence, in need of further evidence to produce a successful prosecution. Although Latin American competition agencies have consistently prosecuted trade and professional associations for engaging in price-fixing agreements, they seldom rely exclusively on the existence of a trade association between the suspect firms to deduce the existence of collusion. Aside from membership in a common trade association, allegations of collusion between two competitors in oligopolistic markets have sometimes been based on market concentration, parallelism, and product homogeneity. In fact, membership in a business association could be interpreted in both a restrictive and a procompetitive way: after all, the presence of competitors in a trade association could limit the success of collusive endeavors, because information exchanged would be passed on to firms who might then be better prepared to undercut colluding firms’ profits by snatching a portion of the market more easily. Hence, creating a trade association is not necessarily more useful for collusive purposes than, say, meeting in a hotel regularly in order to fix prices. However, membership in a trade association eases the burden of proof, since it is usually the case that association members jointly achieve high levels of market concentration. In the Premezclados de Concreto (ready-mixed concrete) case (1993), Venezuela’s Pro-Competencia took into account the existence of a trade association to which the firms belonged. In the Peruvian case Comité de Molinos de Trigo de la Sociedad Nacional de Industrias and others (1995) which involved an investigation against price-fixing in the Wheat Flour Industry that led to increases in the price of bread, INDECOPI set forth its criteria for investigating parallel conduct. This case involved an independent investigation against the Association of Bakery Plants, the Association of Flour Millers of the National Society of Industries, and eighteen milling companies for fixing the price of wheat flour. In July 1995, Mr. Gilberto Hinojosa, the representative of the Association of Bakery Plants, issued a public statement through the press in which he suggested that the price of bread should be increased. INDECOPI launched an independent investigation of the bases for the statement. After a preliminary review, the Commission accepted the promise made by Mr. Hinojosa to refrain from making any further statements on the price of bread, since such statements would constitute a recommendation which was prohibited under Article 6 of Legislative Decree Law No. 701/91. The Commission thereupon brought its investigation of the bakery plants to a close. The association settled the case by agreeing not to make any more suggestions about the price of bread, and in exchange it was not fined. However, the Commission held that, following a ‘‘price war,’’ eleven of the companies investigated had reached an informal agreement which was later put into effect to set the price of wheat flour at a fixed level which was different from the level that Horizontal Restraints 289 would be dictated by effective competition. Eleven producers were found to have ended the price war through a price-fixing agreement, and each was fined about USD 50,000. Six years later, in the case CLC (ex officio) v. Asociación Peruana de Seguros, El Pacı́fico Peruano Suiza Compañı́a de Seguros y Reaseguros, Generali Perú Compañı́a de Seguros y Reaseguros S.A., y otros; (Insurance companies) (2002), INDECOPI’s Free Competition Commission prosecuted the Peruvian Association of Insurance Companies (APESEG) for engaging in price fixing in the market for mandatory traffic accident insurance in the period between December 2001, and February 2002. In three similar cases initiated against the medical profession, the Colombian Superintendencia de Industria y Comercio (SIC) clearly stated the limits of negotiated agreements with monopolistic intent. In the Colombian neurosurgery association case (1995), the General Assembly of the Atlantic Section of the Colombian Neurosurgery Association decided that its members would suspend services to all insurance and prepaid medical care companies in Baranquilla, with whom it had not reached an agreement on the payment of professional fees at the levels established by the Association in the Professional Fees Manual. The second case involved the Colombian Radiology Association. Every year, the Association assigned a peso value to various regular and special radiology examinations, based on operational costs and the normal working hours required; this was published in the Association’s list of basic rates. Finally, in the Colombian Association of digestive endoscopy case (1997) SIC established that, every year, the Association had adopted a method to determine the hourly rate for providing professional services in the field of digestive endoscopy, which involved assigning so-called relative value units to each medical procedure, and a peso value to each unit. This was published in the list of hourly medical rates for digestive endoscopy procedures. Brazil has been quite active in prosecuting cartels facilitated by trading and professional associations. In the Steel cartel case (1996), representatives of the Brazilian Steel Institute met with officials of the SEAE and informed them that its members intended to increase the prices of flat rolled steel products by certain specified amounts on a specific day. The SEAE informed the companies that such an increase would amount to an anticompetitive practice. The companies decided nonetheless to implement the price increase. CADE condemned the companies because the simultaneous price increase could not be explained as a case of mere oligopolistic interdependence. In addition, although CADE didn’t consider the meeting to be direct evidence of collusion, the Commissioners understood that it constituted a strong indication that there had been previous meetings among the companies to discuss matters before actually discussing them with the government. Next, in the case SDE ‘‘Ex officio’’ v. Sindicato Brasiliense de Hospitais (1997), CADE imposed a fine against a group of hospitals in Brasilia, due to their decision to align the prices of medical services. This conduct was supported by common tariff schedules. 290 Chapter 7 In the Association of Alcohol Producers case (1999), the question about exchange of information was essential. This case involved the formation of ‘‘Brasil Álcool,’’ an association of alcohol producers, with the aim of exchanging information in order to facilitate joint selling in foreign markets. The program was disclosed under the merger regulations and was not approved by CADE, which in turn discussed whether it should initiate proceedings to investigate the possibility of the existence of a cartel. Furthermore, in the Sindiposto cartel case (2002), CADE condemned the association of fuel retailers in Goiânia, as well as its president, for cartel activity. The authorities took into account the existence of uniform price increases, which took place after a representative of the trade association publicly defended an ideal price for a litre of gasoline in Goiânia. In addition, transcripts of telephone recordings revealed conversations between the retailers and trade association representatives, in which they agreed on prices and profit margins, on common dates for price increases, and on how such concerted practices would be monitored. In the more recent Association of Fire Extinguisher Manufacturers case (2004), the SDE ordered an association of fire extinguisher manufacturers in Brasilia and its member companies to terminate an agreement whereby the association published an annual statement of ‘‘average variable and fixed costs of production,’’ and members determined their retail prices by imposing a 30% mark-up on each cost item. Also under investigation in this case was the association’s conduct in successfully lobbying the municipal government in Brasilia for an ordinance under which only members of the association were permitted to sell fire equipment in Brasilia. In the case SDE ‘‘ex officio’’ v. Indústria e Comércio de Extração de Areia Khouri Ltda and others (Sindipedras) (2005), CADE found that seventeen quarry companies and the São Paulo State Crushed Rock Mining Industry Association— Sindipedras—violated the Brazilian Competition Act by restraining free competition in the crushed rock market in the São Paulo metropolitan region. The purported cartel initiated its activities in the mid-1990s (sometime between 1994 and 1996), became fully fledged in 1999, and ceased its activities in 2003 after a dawn raid by the Economic Law Office of the Ministry of Justice (SDE) with the cooperation of the Federal Public Prosecutor’s Office and the federal police on the premises of Sindipedras, which resulted in the seizure of documents relating to the cartel. Also in 2003, the SDE opened administrative proceedings to further investigate the alleged anticompetitive practices of the quarry companies and Sindipedras. In particular, CADE found software programs which gathered data relating to clients, quotations, and prices in the hands of Sindipedras, the association responsible for organizing the cartel. Accordingly, the Competition authority fined Sindipedras, as well as more than twenty companies, for cartel activity in the market for crushed rock. Fines ranged from 15% to 20% of the companies’ gross revenues in the year prior to the investigation, depending on whether the company had participated in the ‘‘Management Committee’’ of the cartel. Finally, in 1996, Colombia’s SIC filed a case against the Union Colombiana de Empresas de Publicidad (UCEP). The UCEP is a business association Horizontal Restraints 291 representing the nation’s advertising enterprises. The Superintendency claimed that the association had fixed the commission that advertising firms charge their clients at 17.65% by means of collective recommendations to their member agencies stating that ‘‘UCEP agencies may not reduce the agency commission or the alternative means of compensation to compete.’’ (OAS Trade Unit, 1999). 7.4 CIRCUMSTANTIAL EVIDENCE OF TACIT COLLUSION All Latin American antitrust laws are broad enough to include within their scope any form of horizontal restriction that possesses anticompetitive effects; therefore, tacit collusion or conscious parallelism are also within the scope of antitrust laws, despite the silence of some statutes about the legality of these practices. The problem of prosecuting tacit collusion is factual: due to rules of evidence prevailing in Latin America, it is necessary to prove such cases on the basis of circumstantial evidence, which is always contentious and debatable. Competition agencies usually concentrate their attention on finding evidence of the parties’ intention to limit their independence of action. The persuasive ‘‘force’’ of such evidence usually depends on the authority’s views on what constitutes alignment of behavior in cases where exploitative conduct takes the form of collusion among competitors or resale price maintenance. A common question applicable to all conduct classified as ‘‘exploitative’’ is whether there the facts indicate that imposing prices above marginal costs is feasible. Given that it is unlikely that a firm will confess to being a participant in a cartel arrangement, competition authorities usually look to circumstantial evidence in order to prove the existence of an agreement between competitors regarding prices, output, or market division. Moreover, competition authorities do not look at a single indicator, but a combination of economic factors. There are several reasons for this: price data might not be easily available; there is frequently disagreement about the monopoly price of the industry; and it is debatable how close sale prices must be to an industry’s monopoly price in order to be regarded as ‘‘supra-competitive.’’ For these reasons, competition authorities in the region usually do not rely on a single factor to create an inference of collusion; rather they analyze the evolution of the industry over time. Competition agencies thus examine the conduct of competing firms whose prices in the market change simultaneously in the same direction. Under antitrust law there is a difference between conscious parallelism and gentlemen’s agreements or concealed cartels. Competition enforcement throughout the region has acknowledged gentlemen’s agreements and other forms of tacit understanding between competitors as a concealed form of cartelization which deserves to be condemned in the same way as overt cartels. Conscious parallelism (also called ‘‘price parallelism’’) alone cannot support any conclusion about the existence of an anticompetitive agreement, for there may be many reasons for an apparent alignment of prices between several firms (e.g., similar input costs) 292 Chapter 7 other than the cartel hypothesis. In fact, under the ideal conditions of the competitive equilibrium model, prices would be parallel, since none of the infinite producers could raise prices about marginal costs. Therefore, parallel pricing needs to be complemented by other circumstantial evidence before being considered anticompetitive. Latin American statutes usually adopt a broad definition of anticompetitive arrangements that facilitates the inclusion of any form of arrangement that undermines competition, as a practice potentially subject to prosecution. Technically, this is usually achieved through an omnibus provision that includes every form of arrangement capable of weakening competition under the scope of the law. For example, Article 5 of Venezuela’s Competition Act prohibits, any ‘‘conduct, practices, agreements, conventions, contracts, or decisions that impede, restrict, falsify, or limit free competition.’’ Similarly, Article 1 of Argentina’s Law No. 25156/99 prohibits acts or conduct, related to the production and exchange of goods or services, whose intent or effect is to restrict or to distort competition, and those that constitute an abuse of a dominant position, such that they can damage the general economic interest. Similar provisions abound elsewhere in other antitrust statutes all over the region. 7.4.1 CIRCUMSTANTIAL INDICIA OF COLLUSION Competition authorities often consider parallel pricing and market share stability to be prima facie evidence of collusion, yet this is not enough. Competition authorities acknowledge that in many cases high price correlation does not necessarily indicate a collusive outcome. For this reason, they usually require evidence of ‘‘plus factors,’’ an approach that follows U.S. case law (Viscusi, Vernon and Harrington, 2000 [1995], pp. 130-131). Scholars usually list an array of economic indicia that allow competition agencies to spot a cartel. Correa (2001) distinguishes between factors supporting the existence of a cartel agreement on the one hand, and factors affecting the execution costs of an agreement on the other.277 In turn, Korah (1994, pp. 4245) emphasizes market barriers to entry and small numbers of competitors.278 277. The first group includes indicia such as: the high market share enjoyed by the members of the agreement; inelastic demand; and substantial entry barriers (e.g., regulatory barriers, sunk costs, and economies of scale). The second category contains factors that influence the costs expended by the cartel to monitor its performance and penalize any potential deviant members. The indicia belonging to this group include: product homogeneity; market concentration; the presence of numerous buyers; whether prices are known by other cartel members; and whether cartel members are members of a trade association. 278. In Korah’s view (1994, p. 43): ‘‘In industries with only a very few producers, whether worldwide or in a small local market protected by the cost of freight and other entry barriers, suppliers may be able to raise prices above the competitive level without making any price fixing agreement.’’ Cartels seldom last unless the number of participants is very small or they are backed by state intervention, because each participant finds it attractive to circumvent the Horizontal Restraints 293 Finally, Kovacic (1993) highlights the likelihood that collusion would take place, given the conditions prevailing in the market and the absence of alternative explanations.279 Plus factors are often drawn from indirect evidence of the surrounding market conditions in which the alleged agreement is carried out; this evidence relates to the underlying structural conditions within the relevant industry that, from the perspective of oligopoly theory, facilitate collusion among competitors. Such evidence includes the number of competitors involved in the agreement; the existence of clients with significant market power to demand concessions from producers; and the lack of barriers to entry. Indirect evidence is not tangible, but provides evidence of collusion through the conclusions drawn by investigators on the basis of their particular economic hypotheses regarding market causalities. Proof of parallel behavior requires no outright confession; the inference of restrictive behavior stems from indirect evidence—economic facts. Hence, competition authorities must appraise these facts according to the particular circumstances within which an exchange is carried out. According to civil procedural rules applied in the region, judges must appraise this evidence according to the following standards: (i) Observed parallel conduct (e.g., parallel prices) together with circumstantial evidence will constitute proof of collusion if the evidence shows that the conduct in the market was contrary to the laws of supply and demand; (ii) In investigations into price-fixing practices, proof is mainly circumstantial, that is, based on a set of elements which, taken together, compared to each other, and reviewed as a whole, lead to the conclusion that the infraction was committed. This means of proof is provided for in civil procedure codes throughout the region; and (iii) Taking into consideration the totality of the evidence, and inferences of the existence of price-fixing that can be drawn from the evidence, it may be concluded that a period existed in which prices were set by agreement if this conclusion is consistent with economic analysis. prohibition imposed by the cartel agreement and expand her output by discreetly selling at a lower price than that agreed to with her competitors. Her list of cartel indicia includes: a reduced number of participants; government support; easy monitoring and swift punishment of deviants; and finally, clients’ lack of ability to influence the conduct of cartel members. 279. In Kovacic’s opinion, such factors include: the existence of a rational motive inducing defendants to behave collectively; evidence of actions that would be contrary to the interest of defendants in the absence of a joint strategy; evidence of market behavior that cannot be explained rationally, except as the outcome of concerted action; a prior record of anticompetitive behavior among the investigated firms; the existence of meetings and other forms of direct communication between investigated firms; the defendants’ use of tactics that would facilitate a cartel; structural characteristics of the industry that facilitate collusion; and industry performance that suggests that collusion is likely. AU: Could you please provide the reference details of ‘‘Kovacic (1993)’’ in the bibliography. 294 Chapter 7 These criteria have been consistent in the cases decided in the region. For example, in Brazil, parallel pricing is merely prima facie evidence of cartelization that needs to be complemented with circumstantial and economic evidence.280 In addition, in the Venezuelan decision Aga de Venezuela/Gases Industriales (1997), the Appeal Court (Corte Primera de lo Contencioso Administrativo) reaffirmed the plus factors doctrine by declaring that evidence of cartelization must be evaluated under the provisions of reasonableness (sana critica), which is widely acknowledged in the legal principles applied in Latin America.281 Some statutes have even included explicit reference to the use of the sana crı́tica standard by competition agencies, as is the case of El Salvador.282 Generally, it is usually found in the general principles of law laid down in civil procedural codes across the region. The principle of sana critica has eased the adaptation of the U.S. plus factors doctrine into the administrative enforcement of competition laws in Latin America. However, in some competition schemes, such as Brazil’s the antitrust plus factors doctrine has made its way into statutory law. Item I-1 of the Appendix of Resolution No. 20/99 specifies structural factors that can bring about the creation of cartels: a high degree of concentration; barriers to entry for new competitors; product and cost homogeneity; and stable conditions of costs and demand. 280. In the Newspaper Cartel case (1999), CADE charged Rio de Janeiro’s four largest newspapers with cartel activity (the companies simultaneously raised prices by 20%). On the day of the price increase, all four newspapers published identical notes to justify the increases and referred to the newspaper’s trade association as the organizing agent of the price increase. CADE fined each company 1% of its annual revenues. In its assessment, the SEAE noted the various legal indicia supporting the existence of a cartel as well as economic evidence showing that the simultaneous price increase by the four largest newspapers in the city of Rio de Janeiro was aimed at maintaining market segmentation, thus preventing the diversion of demand from one to the other and allowing each newspaper to keep its market share. Among these indicia, the SEAE noted: (i) the remarkable coincidence with respect to the date and the percentage of the price increase; (ii) the four papers published almost identical notes justifying the price increase; (iii) all the notes explaining the raise mentioned the owners’ trade association in Rio de Janeiro, suggesting that this concerted practice had been facilitated by the association. The SEAE brought a report to the SDE, which then decided to carry out preliminary inquiries on the matter. The evidence gathered by the SDE corroborated the SEAE’s findings and was the basis for the opening of an administrative procedure to investigate the existence of a cartel. The administrative procedure was sent to the SEAE for examination. Finally, CADE found the economic agents to be organized as a cartel. 281. Under this principle of reasonableness or ‘‘sana critica,’’ courts must support their decisions on both logical inference as well as empirical verification of the surrounding world. According to Couture (1990, pp. 22-23), such logical inference rests on ‘‘a priori, immutable truths, preceding all sensorial experience,’’ whereas facts are contingent on time and space; thus judicial evaluation supported by sana critica will be permanent and immutable in one sense while variable and contingent in another. Moreover, the empirical assessment of the judicial evaluation will depend on the temporal and spatial circumstances within which judges are situated. Thus, a valid decision requires evaluation of factual evidence taking into account the particular circumstances within which it takes place. 282. Article 45, Legislative Decree No. 528/04. Horizontal Restraints 295 Case law and competition statutes in the region283 explicitly list the following circumstantial indicia of collusion: (i) Unusual price parallelism: High and steady price correlation that cannot be explained as a variation of production factor prices; parallel allocation of volumes and clients; unusually simultaneous and similar public bids. (ii) Unusually high prices: A price differential between the domestic and export markets that cannot be explained on the basis of tax payments, and other costs. (iii) Institutional arrangements that favor collusion: The existence of mechanisms to oversee the conduct of participants of the agreement; and other exchanges of information through meetings and contacts. (iv) The oligopolistic structure of the market: A reduced number of market participants; high barriers to entry and inelastic demand; and the presence of legal or administrative barriers to entry. (v) No alternative explanation exists for the parallel behavior. Let us examine how these factors have been incorporated in the case law of the region. 7.4.1.1 Unusual Price Parallelism Unusual price parallelism may take the form of statistically high price correlation over an extended period of time; simultaneous allocation of volumes, which creates a similar restrictive effect of high price correlation; or concerted public bids. In all these cases, successful prosecution rests on the defendants’ lack of an alternative explanation to the cartel hypothesis. Significant and steady price correlation between competitors is usually the first element that triggers the suspicion of competition agencies about the possible existence of collusion. In order to gain credibility as evidence of collusion, price correlation must be positive (e.g., price changes are effected in the same direction), significant, and steady (e.g., it must take place for an extended period of time, usually more than a year, and in no case less than six months, except in cases of unchanged demand). Usually, but not necessarily, this element is proven by statistical evidence of high price correlation between the companies under investigation. Venezuela’s Pro-Competencia has usually looked at high price correlation as prima facie evidence of cartelization. In the Sopresa-Panamco case (2000), Pro-Competencia filed suit against Panamco (Coca-Cola) and Sopresa (Pepsi Cola), two bottling companies, for agreeing to limit their advertising campaigns at supermarkets in an effort to reduce the promotion margins formerly given to supermarket chains. Pro-Competencia considered several elements in addition to the small number of firms (2) in this duopolistic market. These elements included 283. For instance, Art. 12, Honduras Regulations of Legislative Decree No. 357/05; Competition Regulations, and Art. 20, Nicaraguan Regulations of Law No. 601/06. 296 Chapter 7 the remarkable parallelism observed in the evolution of prices, in spite of marked differences in the firms’ respective production costs, the exchange rate, and interest rates. Pro-Competencia began its investigation of Sopresa CA, Pespicola’s bottler, and Panamco de Venezuela S.A., in 1999, after supermarkets received letters from the bottlers that, as a result of their timing and similar content, led to allegations of collusive practices.284 Similarly, in Pro-Competencia v. Cemex and others (2003) Pro-Competencia brought a formal prosecution against Venezuela-based cement producers Lafarge, Cemex, Cementos Andinos, Cementos Catatumbo, and Cementos Caribe, alleging the existence of parallel conduct to fix prices and allocate markets. ProCompetencia placed considerable emphasis on the ‘‘similar’’ price increases between the investigated parties, based on a correlation of prices index developed by Pro-Competencia. The early Colombian cartel case of PVC Gerfor S.A., Ralco S.A. Tuvinil De Colombia, S.A and Fábrica Nacional De Muñecos—Jorge H. Bernal y Cı́a Ltda. (1994) involved similar considerations. The preliminary investigation found that the firms’ price lists for 1994 and 1995 contained identical prices for similar products manufactured by the four companies. This justified the allegation that the prohibition on fixing prices had been violated.285 The Superintendent decided to close the investigation prior to its completion by accepting the terms of the guarantees given by the legal representatives of the companies investigated. Specifically, PVC Gerfor S.A. guaranteed that: (i) the behavior investigated had already been suspended; (ii) it would not happen again; and (iii) it would publish its own price list, avoiding any action that violated the legislation on free competition. Moreover, Ralco S.A. guaranteed that its price lists would be independent and that every time a new price list was issued, it would send a copy to the Superintendent’s Office. Finally, Tuvinil de Colombia S.A. promised to respect the legal provisions prohibiting price-fixing agreements and to inform the Office of the Superintendent of its reference price lists. In the Petroperu case (1997), Rheem and Envases Metálicos S.A., who were suppliers of Peru’s oil company, Petroperú, were accused of agreeing on prices and/or volume conditions offered to their client. Peru’s Competition authority, INDECOPI, declared that although there was no direct documentary evidence of agreements between the defendants, ‘‘a series of circumstances arose within a specific time frame, with respect to a specific buyer, and after a period of vigorous price competition, that do not in the least appear to be consistent with truly 284. Pro-Competencia found that the soft drink bottlers Panamco de Venezuela S.A., Sopresa and their subsidiaries, Presamir, Presaragua, and Presandes, had restrained free competition. Therefore Pro-Competencia ordered the immediate suspension of joint and simultaneous identical discounts on carbonated drinks, and the holding of new, independent negotiations on the percentage of the discounts given to supermarkets, hypermarkets, or other special customers who were part of the affected relevant market. Panamco de Venezuela and Sopresa were fined Bs 288,764,687.17 (USD 429,869) and Bs 163,643,724.08 (USD 243,608) respectively, in light of the extent of this restrictive practice and the harm caused to consumers. 285. Article 47, letter a), Decree No. 2153/1992. AU: Bs or BSR. Horizontal Restraints 297 competitive conditions—they can only be explained as the result of a prior agreement between the impugned companies.’’ The indicia assessed by INDECOPI included: (i) The commencement of the suspected anticompetitive behavior simultaneously with Petroperú’s call for quotes in October 1995; (ii) Identical prices quoted by both companies on three different occasions (October 1995, February and March 1996); (iii) A reduction in the volume of cylinders offered to Petroperu to roughly 50% of Petroperu’s requirements by both Rheem and Envases Metálicos S.A. in three consecutive orders; and (iv) The fact that, over the previous three years, these companies had submitted quotes to Petroperú offering all of the cylinders required in a clear situation of competing prices. Thus, INDECOPI focused on the apparent parallelism that existed between colluding firms over a given period of time, noting that the suspected conduct could not be explained by any means other than the cartelization hypothesis. Cartelization may also adopt the form of market share allocation of sales, with a view of aligning prices indirectly. In the Proquinsa case (1997), INDECOPI examined the existence of parallel conduct arising from collusion between Proquinsa S.A. and Silicatos S.A for price-fixing and market allocation, consisting of an agreement to organize their purchase volumes. Until September 1994, there were only two companies in the local market producing and selling sodium silicate: Proquinsa and Silicatos S.A. Subsequently, a third company, Vidrios Solubles S.A., entered the market, which resulted in a reconfiguration of the market shares held by the companies and a period referred to by the companies as a ‘‘price war.’’ From April 1993 to November 1994 the investigated companies recorded fairly similar prices, in terms of the trend in average price levels for sodium silicate. However, from December 1994 until the time that Silicatos S.A. stopped operating, the differences in prices of the companies increased relative to the preceding period. With regard to sodium silicate sales, volumes, and income from sales to the largest consumers from 1993 to December of 1994, Silicatos S.A. and Proquinsa recorded fairly similar volumes and income. From these indicia, INDECOPI concluded that from August 1993 to at least October 1994 Proquinsa and Silicatos S.A. had coordinated their market behavior by means of price fixing and customer allocation—more precisely, allocation of the volumes required by each customer—thus restraining the free play of supply and demand. This was clearly demonstrated by the establishment of prices different from those that had been charged in a competitive situation, the simultaneous modification of prices, and by similar shares of sales volume and income generated by the production and sale of sodium silicate. Finally, unusually similar prices may emerge in public bids. Panama’s Liquid Oxygen case (2001), discussed by Fernandez (2005), established that the prosecuted firms colluded to organize their purchases of industrial oxygen. In their bids, the losing firm systematically bid 5 cents USD below its rival, and bidding firms took turns being the winner and loser respectively. To support its case, the CLICAC used a model of cooperation based on game theory, under which the statistical correlation between the conduct of firms was almost one. The CLICAC obtained a favorable decision in the court of first instance. AU: Please provide the reference details of ‘‘Fernandez (2005)’’ in the bibliography. 298 7.4.1.2 Chapter 7 Unusually High Prices Price differentials between export and domestic markets have been interpreted as evidence of intentional cartelization. This evidence is problematic because it ultimately rests on whether the competition authority uses a representative export market in order to draw a comparison, which is a highly discretionary exercise, as shown in the following cases: In Pro-Competencia v. Cemex and others (2003), Pro-Competencia construed price differentials between domestic and export prices as evidence of cement producers’ monopolistic intent to exploit Venezuelan consumers. Leaving aside the fact that Pro-Competencia’s determination was made on the basis of the small, unrepresentative markets of the Antilles (thus ignoring much more representative markets, such as Colombia or Mexico, where prices were even higher than Venezuela’s),286 the conduct of cement firms could also be construed as an attempt to penetrate export markets before other competitors did, which is a healthy sign of competition rather than collusion. 7.4.1.3 Institutional Arrangements That Favor Collusion Institutional arrangements favoring collusion between competitors may be more or less formal. Sometimes they take the form of businesses, professional, or trade associations; in other cases, they involve an ad-hoc mechanism that is implemented with a view towards regularizing the exchange of information. Under the U.S. FTC/DOJ Guidelines for Collaboration among Competitors, which Latin American agencies usually follow, the anticompetitive essence of a cartel stems from the nature of the information exchanged by market agents; indeed, some information exchanges are actually procompetitive and thus deserve encouragement through trade association activity. Competition agencies often authorize, and even encourage, the exchange of information and publications by trade associations; insurance markets are a good example of this practice. To what extent does antitrust case law consider information exchange between members of a trading association to be a potential target for further prosecution? Overall, the guidelines acknowledge that information exchange between competing firms raises the likelihood of collusion on certain competitive variables such as price and production volume. The chief issue is determining the nature of the information subject to exchange between competitors. Competitors may lawfully exchange information on technology, know-how, or intellectual property; these exchanges may be even essential for obtaining procompetitive effects through product innovation, as in joint R&D activities. Moreover, the exchange of individualized information about a competitor is 286. Pro-Competencia did not even include transportation costs and additional freight costs, which would have actually rendered export prices higher than those prices charged in Venezuela. Horizontal Restraints 299 more likely to raise anticompetitive concerns than aggregate or joint information about a group of competitors. Information exchanges between competitors are subject to the following rules: Competition agencies are concerned with information exchange that removes or reduces business uncertainty among competitors as to their individual courses of action. Hence, information exchanges regarding prices, output volume, costs or strategic planning present a greater threat of anticompetitive effects than an information exchange that has no relationship whatsoever to factors capable of affecting competitive alignment. Exchange of information between competitors is limited to information that does not compromise what the conventional thinking regards as ‘‘competitive or strategic behavior of firms in the market.’’ Hence, exchange of information about prices, clients, markets, output and the like is usually outlawed. Competition agencies usually authorize the exchange of information which is procompetitive, that is, information related to the statistical review of past prices. On the other hand, information that is related to the competitive strategies that members intend to pursue in the future is prohibited. The way information is obtained is irrelevant for antitrust prosecution purposes; hence, it is irrelevant whether the information has been obtained through a formal device (e.g., agreement, contract, etc.) or informally. Competition agencies will likely conclude that information exchanged among competitors is anticompetitive, provided that additional factors point to the existence of a cartel. In CNDC v. Loma Negra and others (2005), one of the most important elements of indirect evidence turned out to be the competitively sensible exchange of information between the cement companies through their trade association (the Association of Portland Cement Manufacturers—AFCP). The AFCP operated a statistical information exchange system by which each associated cement company sent the AFCP information on its production and quantities of cement sold, with a high degree of detail. Every month the defendants furnished the system with information about production output, and sales by localities, by province, and also on a national scale, by type of client (public sector, private sector, and export), by package (bags and bulk), and by means of transport (by truck, railroad, sea, waterway and internal consumption). In some cases the AFCP also processed information on cement sales (quantities) on a weekly basis. The information exchanged had a recent character, in the sense that it referred to the months immediately previous to the production of the information. After processing all of this information, the AFCP gave the companies the production and individual sales information of all of the associated companies. In this way, each company knew strategic commercial information about its competitors. The shared information was classified as ‘‘confidential.’’ The statistical system was improved throughout the investigation period, displaying an increasing degree of sophistication, while the information disclosed through the official publications of the AFCP was becoming more and more sparse. The System was designed to produce data that allowed a comparison of the market share of each company and its evolution over time. In addition to definite sales numbers, the statistics included provisional sales, which demonstrated that the companies needed the 300 Chapter 7 provisional numbers to adjust more perfectly to the agreement, since the definite numbers were produced with a delay of only a month. In conclusion, the implementation of an exchange of information with the aforementioned characteristics could only be fully explained by the need to control the execution of an anticompetitive agreement in the cement industry. Information exchanges about future pricing policy (e.g., discounts, costs, trading and marketing or trading conditions, fees, or future deliveries) are likely to be regarded as anticompetitive. In the case Pro-Competencia (ex officio) v. Venepal, Surfit Cartón de Venezuela, Venezolana de Cartones Corrugados, Cartonerı́a del Caribe, Servicios de Corrugados Maracay y Corrugadora Suramericana (ProCarton) (2003), Pro-Competencia regarded as anticompetitive the exchange of information about pricing policies and discounts between competitors in the paper processing industry. The same considerations apply to information about future production plans. Information about past business conduct or performance is not likely to be regarded as anticompetitive (e.g., historical statistical data shared or produced by trading or business associations). This information includes information on output and sales, as long as this information is aggregated for the whole industry, is historical, and does not threaten the market’s future competitive performance. This principle was stated in the case Pro-Competencia v. Suramericana de Espectáculos (Cinex) y Cines Unidos C.A., (Movie cinemas case) (2004), in which Pro-Competencia stated that: ‘‘exchange and dissemination of information through trading associations ( . . . ) in connection with output and sales presents no objection if it refers to aggregated data where businesses are not individualized and is available to all businesses of the industry concerned and the public in general.’’287 On the other hand, the exchange of information about future business conduct or business strategies will likely be regarded anticompetitive. Additionally, information exchanges regarding confidential transactions are likely to be considered anticompetitive. In conclusion, the anticompetitive nature of information exchange will very much depend on the general context in which the exchange takes place, as well as on the individualized nature of the information shared. Sometimes, competition agencies look into the existence of a contractual arrangement as circumstantial evidence of collusion. In this context, joint 287. Cinex and Cines Unidos are two major Venezuelan film distribution companies that also own a vast network of movie theatres in Venezuela. These firms were found to have colluded in the prices they charged to customers at movie theatres. Pro-Competencia found that these two firms had exchanged specific information about box-office revenues and movie attendance; this information exchange had occurred within the context of the ASOINCI (Venezuelan Association of Movie Theater and Film Interests). Similarly, Pro-Competencia found that Cines Unidos had documents revealing box-office price adjustments to be applied both by Cines Unidos and Cinex before the price increases went into effect. Horizontal Restraints 301 purchasing arrangements or trading and marketing mechanisms have been regarded as evidence of a restrictive oligopoly. – Joint representation agreement as evidence of collusion. In the Argentinean Axle and others case (1997), five valve manufacturers (Vaspia, Forargen, Tidar, Errepol, and Metalúrgica VG) were accused of colluding through Axle SA, which was appointed by the manufacturers as their joint commercial representative. Axle took charge of sales and was responsible for providing information on the sales conditions, the supplier, and the price to be paid for the product for each specific valve order. The case began with a complaint made by several liquefied gas fractionating companies and was later continued on an ex officio basis by the CNDC. In addition to economic factors such as the low level of differentiation among the products in question and the pronounced parallels in the evolution of their prices, the CNDC paid particular attention to the existence of a restrictive joint commercial representation agreement, as well as the fact that prices had actually decreased once the unified commercial representation had been abandoned, as a result of the entry of new competitors. From the evidence gathered, the CNDC determined that the agreement between competing manufacturers and their appointed distributor constituted a collusive practice of sufficient magnitude to restrict competition, thus causing harm to the general economic interest. In the view of the CNDC, the shared distribution system established by the defendants created the basis for a common pricing policy and other forms of collusion by weakening the functioning of market mechanisms and hindering the functioning of the incentives inherent to competition. Venezuela also followed a similar path early on. Already in 1993, ProCompetencia had forced the dissolution of the Distribuidora Venezolana de Azúcares, C.A. (DVA), based on the anticompetitive nature of its operating consignment system. This represented a pioneering approach to horizontal anticompetitive restraints in the sugar refinery industry. DVA was a common-stock company formed by sugar mills operating in Venezuela. According to a joint agreement among the sugar mills, the DVA was a front for selling sugar at the retail level under commission contracts. The retail price of sugar was accordingly made uniform throughout the Venezuelan market. The scheme ensured that all sugar mills would enjoy transportation and have their sugar sold at the retail level. Presumably, the retail price of sugar decreased in high-consumption urban towns, while it increased in distant places. Early in 1993, Pro-Competencia pressed for the dissolution of DVA. – Joint trading and marketing agreement as evidence of collusion. The case Corporación Televen C.A., v. R.C.T.V, C.A., and Corporación Venezolana de Television, C.A. (Venevision) (Televen) (2005) also involved an oligopoly in which participating firms set up a common marketing scheme. Televen made a formal complaint against Venevision and Radio Caracas Television alleging 302 Chapter 7 exclusionary practices, boycott, and agreements to fix fees and marketing conditions in the advertising market. The plaintiff, which is a relatively small TV channel, alleged that Venevision and Radio Caracas Television, which are the most popular and oldest TV channels in Venezuela, were making arrangements to exclude Televen from the national advertising and TV investment market by coordinating programming, sharing market thru-fees, and making agreements on prices and marketing conditions for advertisers. The alleged conduct included making contracts in the presale season which limited advertisers’ rights to contract with Televen. Televen also alleged that both channels were associated with a company named Sercotel, which collected payments from advertising clients and then shared it between the two channels. Both channels argued, among other things, that they didn’t make agreements to share the market; quite to the contrary, a key piece of evidence in support of their position was the rapid change observed in TV ratings (market shares) which, they argued, actually disproved the plaintiff’s case. Nevertheless Pro-Competencia decided that there were indeed exclusionary arrangements, since the evidence demonstrated the sharing of advertising revenue and the existence of an agreement between RCTV and Venevision to allocate the advertising market. Furthermore, Pro-Competencia found that the preferential benefits that RCTV and Venevision had offered to the advertisers in the presale seasons, conditioned on exclusivity, constituted an exclusionary practice. A similar case was brought in Panama. In 2005, the CLICAC began an investigation of Medcom, RCM, TVN, and FeTV, for fixing purchasing prices of monitoring services for advertising investments. – Joint Board of Directors. Finally, in some cases a contractual device facilitating collusion is found to exist in the joint appointment of common directors or executive board members. In the Panamanian case CLICAC v. Gold Mills de Panamá S.A. and others (2003), the CLICAC filed its first suit alleging absolute monopolistic practices against several milling companies. The CLICAC alleged that the defendant companies had agreed to fix sale prices, to exchange information for that purpose, to limit production, and to divide the market. Direct evidence revealed that representatives from each firm had signed a document in March 1994 whereby they fixed the prices of wheat flour and divided the market by assigning a maximum quantity of production. However, this document was not admissible evidence since the document was signed before the competition law was in force (November 1996). Hence, the CLICAC justified its petition through indirect evidence: i) a high correlation of prices observed between November 1996 and the trial; ii) the market shares had remained steady since March 1994; and iii) the firms had maintained an excess of idle capacity (25%). Most importantly, however, it was proved that their agreement had been monitored by an accountant hired by Moltrigo (Molineras de Trigo), a firm whose capital stock was comprised by the prosecuted firms. This accountant monitored the quantities and prices corresponding to each cartel member. Horizontal Restraints 303 – The existence of a public device facilitating collusion. Competition agencies have found unlawful certain corporate arrangements aimed at exchanging information among members. Examples of such conduct include code sharing arrangements, black lists, and even statistical sharing—practices which are very common in industries where information is necessary to develop stable expectations amidst significant business planning. Sometimes, colluding firms jointly use public devices such as mass media to share information, which is perceived as clear evidence of their intention to act jointly. The Mexican Competition Commission took such a stance in the Pasteurized milk case (2000). Following a newspaper advertisement published in October of 2000 announcing an increase of 50 cents per liter in the price of pasteurized milk nationwide, the Mexican Competition Commission suspected the possible existence of absolute monopolistic practices in the production, distribution, and sale of mass-produced milk. An ex officio investigation was therefore launched in an effort to identify alleged absolute monopolistic practices, consisting of collusion among economic agents involved in the processed milk market in order to fix sale prices. Furthermore, the establishment of code sharing agreements which enable competing firms to share information about their respective clients’ needs, preferences, past requests, tastes, etc., is common in industries where product standardization is essential for providing a better quality service. In the Panamanian Airline Code sharing case (2000), the court agreed to hear a suit filed by the CLICAC accusing Compañı́a Panameña de Aviación, S.A. (COPA), Sociedad Aeronáutica de Medellı́n Consolidada (SAM), and Aerovı́as Nacionales de Colombia (AVIANCA) of engaging in relative monopolistic practices. The grounds for the suit was a code sharing agreement signed by the defendant companies that CLICAC considered to be a violation of Law No. 29/96, insofar as it constituted a monopolistic practice that undermined free and open economic competition and harmed consumers by shutting out competitors or potential competitors. In the Sindicato Brasiliense de Hospitais case (1993), involving the publication of price schedules by the Brazilian union of hospitals, the union alleged that only 20% of the hospitals in the Federal District were affiliated with the union, and that therefore that they could not be characterized as a cartel. Indeed, the publication of the schedules was intended as a guide for small establishments that were not in a position to keep qualified accounting staff of their own. Nevertheless, CADE found that a violation of economic order had occurred. Although the schedules were voluntary and merely specified minimum and maximum rates, CADE found that the adoption of a floor price may have been a way of disguising a price schedule, because the schedule was published. CADE took publication as an indicator of Sindicato’s intent to influence the market. Finally, the argument that only 20% of the hospitals had joined the union was irrelevant, because the expected economic consequences inflicted on nonmembers were very likely to result in their own alignment with the set price levels. 304 Chapter 7 Similarly, the Brazilian Airline Cartel case (2000) rested on much the same rationale. In August 1999, several newspapers reported that five days after the chairmen of Brazil’s four major airlines had met at a hotel, ticket prices for service on the heavily traveled Rio de Janeiro/São Paulo route increased simultaneously by 10%. In addition to the hotel meeting, the investigation showed that the companies had an efficient electronic tool for coordinating prices and monitoring price increases and market allocation. ATPCO, the computerized airline price data system maintained by the Airline Tariff Publishing Company enabled such coordination. This system is a database of the rates charged by the 700 largest airlines around the world. The companies argued that by monitoring the system daily, they became aware on August 6th of 1999 of a price increase published by the leading airline that would become effective three days later. SEAE concluded during its preliminary investigations that although it was possible, it was highly unlikely that the uniform price increase had resulted from the airlines simply observing the ATPCO system without previously exchanging information. Significantly, the supposed leader posted its price and less than one hour later a second airline also posted its 10% increase. According to the airlines themselves, it takes at least 35 minutes to update the system, and in practice, it usually takes much longer. A company could configure a price change notice so that, for an initial threeday period, the change could be viewed only by other airline companies and not by consumers or travel agents. The posting company was thus able to abort the change if competitors failed to follow suit. This feature of the ATPCO system had earlier been attacked by the U.S. Department of Justice, but system modifications arising from that case had been implemented only in North America. SEAE concluded that the use of first-ticket dates on the ATPCO system was potentially harmful for competition in the airline industry. The system increased the potential for market coordination without reducing consumers’ search costs or creating better conditions for comparison. In September 2004, CADE determined that the four airlines had colluded to raise prices. Each carrier was fined 1% of the revenue earned on the affected route during 1999 and was enjoined from fixing prices and from posting price adjustments in advance. The Ripasa/Suzano/VCP case (2004) involved the formation of a consortium between Suzano and Votorantim (VCP), two major Brazilian paper producers, to administer and exploit the output capacity of Ripasa, the third major player in the market for paper in Brazil. The SEAE and the SDE expressed special concern with the possibility that the joint operation of Ripasa could lead to unlawful information exchanges between the parties to the consortium. The agencies recommended to CADE that a ‘‘Chinese wall’’ should be created inside Ripasa to ensure that Suzano and VCP would not exchange sensitive information such as price, output, costs, and strategic planning. Also, they recommended that an independent third party should be directly responsible for managing Ripasa. Finally, the agencies proposed the creation of a ‘‘Special Regime,’’ granting full access to the Brazilian Horizontal Restraints 305 competition authorities to the Ripasa facility without previous notice to the parties. A final decision on the case is still pending. In the Premezclados de Concreto (ready-mixed concrete) case (1993), Venezuela’s Pro-Competencia considered a joint fax signed by the prosecuted firms as prima facie evidence of collusion to fix prices. This fax, bearing their commercial logos and circulated among their respective clients, scheduled a price increase and set up common commercial terms in the sale of ready-mixed concrete that would be put into effect on the same date. In the Poultry case (CLC (ex officio) v. empresas avı́colas) (1997), INDECOPI’s investigation found that a conspiracy had been explicitly managed through a so-called ‘‘statistics committee’’ run by the poultry industry. In the Insurance case (CLC (ex officio) v. Asociación Peruana de Seguros, El Pacı́fico Peruano Suiza Compañı́a de Seguros y Reaseguros, Generali Perú Compañı́a de Seguros y Reaseguros S.A., y otros) (2003) INDECOPI had similar concerns. Aside from price parallelism, there was evidence that showed that the insurance companies had entrusted a common actuary to calculate the risk premium of the insurance and that they had unanimously approved the technical note elaborated by the actuary, together with the percentages that would be used to calculate administrative expenses, issuance fees, and earnings. Additionally, notifications sent to the Superintendency of Banking and Insurance Companies on behalf of eight member companies of the Peruvian Association of Insurance companies were signed by the same actuary and had identical content. These notifications recorded, for every classification of vehicles, equal surcharges for the expenses of external management (10%), internal management (12.5%), profit margin (5%), issuance fee (3%), and VAT (18%). Moreover, six member companies of the Peruvian Association of Insurance Companies had issued advertisements which offered insurance to the public at the same prices as those that were reported to the Superintendence of Banking and Insurance Companies. Finally, the companies approved a reduction in price from USD 60.00 to USD 55.00 and had later agreed to reduce the minimum premium they would charge by the same proportion (8.33%) for private cars. The case demonstrates the Commission’s reliance on further evidence of collusion beyond mere price parallelism, as well as attention to the common scheme (i.e., hiring the same actuary to calculate premium discounts) set up by the insurance companies through the assistance of their trading association. 7.4.1.4 The Oligopolistic Structure of the Market The structure of the market plays a fundamental role in competition authorities’ assessment of the likelihood of collusion. Several factors are assessed in this context: (i) reduced market size; (ii) high barriers to entry; (iii) inelastic demand; and (iv) product homogeneity. Reduced market size means also that the number of competitors is fewer. This factor facilitates mutual supervision so that no single firm deviates from the agreed 306 Chapter 7 joint course of action. A significant share of the industry’s output in the hands of the colluding businesses is usually taken as an indicator of collusion. The more restricted the geographic scope of the relevant antitrust market, the more likely it is that suspect firms enjoy a high market share. Similarly, high barriers to entry are another element taken into consideration by competition authorities. The likelihood of entry into the market makes incumbent firms less inclined to entertain collusion. In the Argentinean Liquid Oxygen case (2002) the investigation, begun in 2001, was prompted by complaints from hospitals that they were unable to secure contracts for liquid oxygen from competing suppliers. Usually they received bids only from their incumbent supplier; otherwise, when competing bids were submitted, the incumbent was usually the low bidder. The complaints caused the Secretariat for Competition, Deregulation, and Consumers Defense (the predecessor to the Secretariat for Technical Coordination) to instruct the CNDC to begin an investigation. The market for this product was highly concentrated, and entry was difficult. There were effectively only four suppliers. The CNDC conducted dawn raids on the four companies, which were highly effective in producing strong documentary and electronic evidence of customer allocation and price-fixing over a five-year period. The four respondents were fined a total of USD 24.3 million. This approach was reaffirmed in CNDC v. Loma Negra and others (2005). In this case, the CNDC ‘‘found’’ that the cement companies in that country had colluded in fixing the price of cement. In their defense, the prosecuted cement firms pointed to the industry’s large installed capacity as well as low returns and price reductions in the industry; however, the CNDC dismissed these arguments. The CNDC’s views were unquestionably influenced by its perception of the Argentinean Portland cement market (the relevant market in this case) as being oligopolistic, characterized by high concentration levels; few firms in the market; high barriers to entry; low product substitutability; and low import competition. In the Brazilian Federal District case (2002), the SEAE submitted an analysis as part of an administrative procedure initiated by the SDE that investigated SinpetroDF, the trade association of the fuel retailers of the Federal District. The investigation concerned two actions: first, the obstruction of the entry of a competitor in the fuel retail market of the Federal District; and second, the refusal to sell refined diesel oil in the Federal District. The SEAE’s report examined the conditions of the retail market that facilitated coordination among competitors. These conditions included the similarity of costs, output, and corporate objectives, high barriers to entry resulting from regulations in the Federal District, and inelastic demand. Similarly, in two cases involving liquid oxygen, competition agencies in Venezuela and Argentina, respectively, reached the conclusion that collusion had taken place, since the market was highly concentrated and there were significant barriers to entry. These factors suggested that firms supplying liquid oxygen had agreed to coordinate their prices. Both Gases Industriales (1994) and Praxair Argentina et al. (2005) involved firms in the liquefied oxygen industry. ProCompetencia and the CNDC relied on the fact that these firms had established a trade association, but the most important evidence was economic: similar price 307 Horizontal Restraints schedules, which were the natural outcome of the control of supply by firms producing liquid oxygen; the low level of differentiation among the products in question; and the pronounced parallels in the evolution of their prices. Product homogeneity is another factor considered by competition authorities in their evaluation. Industrial Organization theory assumes that price competition is the main driver of entrepreneurial activity. By contrast, whenever the main competition variables are factors other than price—for example, post sale service, quality, and others—colluding firms face more incentives to break with the cartel, because it is attractive for them to increase their sales by manipulating such variables. One of the circumstantial factors supporting the conviction of several trading firms in the Argentinean Axle and others case (1997) was the low degree of differentiation of the products involved. Similarly, in the case Cámara Argentina de la Construcción, Delegación Entre Rı́os. v. Cooperativa Entrerriana de Productores Mineros Ltda. (Arenera case) (2003), the Argentinean Construction Chamber, ‘‘Entre Rios’’ Delegation, and Cooperativa Entrerriana de Productores Mineros Ltda (Cooperative of Mining Producers) were found guilty of cartelizing the sale of sand to the City of Paraná. In this case, several producers of sand used in construction in the city of Parana formed a cooperative through which they jointly sold their production during the period 1999-2001. The evidence disclosed that the price of sand had dropped significantly prior to the formation of the cooperative, and that the purpose of the arrangement was to restore the price to former levels. The Commission ordered the termination of the joint price setting arrangement and fined the sand producers a total of USD 450,000. 7.4.2 JUSTIFICATION OF PRICE SIMILARITY The second important factor that competition agencies consider in investigating collusion is whether there is any alternative explanation for the high correlation between prices aside from collusion. This evidence essentially draws from the inference made upon the Imperfect Competition theory which states, as said above, that the only sensible explanation for price information exchanges is the existence of an agreement to collude and enhance monopoly power. Prosecuted firms can avoid the imposition of penalties for infringement of the competition rules by showing that their allegedly parallel prices are not in fact similar or parallel, or by showing that although the prices are similar, the competitive dynamics of the market dispel any threat of a collusive agreement between competitors. 7.4.2.1 Competitors Offer Different Prices Competition agencies often uphold defendants’ contention that effective collusion has not taken place if the prices charged to consumers differ due to rebates and discounts. Firms may argue, for instance, that the payment conditions offered by 308 Chapter 7 competitors are different or that prices do not increase simultaneously or in accordance with a pattern. In the case of CNDC v. Duperial S.A. and Compania Quimica S.A. (1985), the CNDC concluded that no collusion existed due to the existence of different payment conditions, different volume rebates, and the absence of restrictions on the election and change of providers of phtalic anhydride. A similar conclusion was reached in La Casa del Grafito v. Rich Klinger y Bruno Cape (1989), where the CNDC concluded that the investigated firms applied different conditions of payment and that the quality of the product varied. In the Petroperu case (1997), Rheem and Envases Metálicos S.A., who were suppliers of Peru’s oil company, Petroperú, were accused of agreeing on prices and/or volume conditions offered to their client. Peru’s Competition authority, INDECOPI, declared that although there was no direct documentary evidence of agreements between the defendants, ‘‘a series of circumstances arose within a specific time frame, with respect to a specific buyer, and after a period of vigorous price competition, that do not in the least appear to be consistent with truly competitive conditions—they can only be explained as the result of a prior agreement between the impugned companies.’’ Such circumstances were essentially related to the existence of a duopoly in the market which, in the opinion of INDECOPI, eliminated transaction costs thereby easing the potential for agreements between prosecuted firms. In the Municipalidad de Lambayeque case (1997), a case filed by the Lambayeque Local Council against several interprovincial passenger transportation companies alleging price-fixing and market allocation, INDECOPI considered whether market conditions would in some way facilitate collusion. The relevant market conditions included the small number of suppliers and the indispensable nature of the public transportation service for the Chiclayo— Lambayeque route, which was characterized by inelastic demand. In other words, passengers would continue to use the service despite price increases, given the imperative need to accept the offer of transportation at the higher rate. INDECOPI noted that there was no evidence of simultaneous increases. On the contrary, the case file showed that the increases in the transportation ticket prices occurred at different times. Based on this evidence, INDECOPI dismissed the case. 7.4.2.2 The Competitive Dynamics of the Market Dispel Any Threat of Collusion Various reasons related to the competitive dynamics of the market may dispel the menace of collusion and are therefore considered by competition agencies to be a deterrent to any anticompetitive restraints. This is the case, for instance, when the goods of each firm are so qualitatively different that they belong to different antitrust markets; when prices tend to decrease; when market shares are variable and the market is expanding; when markets are not undersupplied; and when there is competition from imports and the entrance of new competitors. Horizontal Restraints 309 Prices may be similar due to the oligopolistic interaction of competitors, which is not necessarily related to the existence of an agreement between them. In this case, an economic theory other than collusion explains the similarity of prices observed in the market. Several factors indicate such oligopolistic behavior: the first is the existence of a price leader whose actions are replicated by follower businesses because they are forced to, rather than because they are engaging in tacit collusion. – The existence of a price leader in the market. The actions of a more efficient firm in the market influence the strategic responses of less efficient competitors. Price leadership describes a situation in which one company, usually the dominant competitor among several due to its superior productive efficiency, leads the way in determining prices, with the others soon following. In the long-run price leadership could have a negative impact on the dominant firm. Over time, as the supply from the fringe (smaller) competitors in the market increases, the residual demand of the dominant firm decreases. In such a scenario, if the dominant firm intends to continue as the price leader in the market, it can do so only at the cost of decreasing its supply to the market, consequently sacrificing its market share. If it is not addressed, the gradual loss of market share could see the once dominant player lose its position of dominance in the market. In Pro-Competencia v. Cemex and others (2003), the prosecuted cement producers argued that Pro-Competencia had misconstrued the case by endorsing the wrong economic explanation of observed similarities between cement prices charged by cement producers in each geographical region of Venezuela. Thus, no price collusion between them existed, but rather, more efficient players in each region forced follower firms to adapt to their prices.288 Pro-Competencia disregarded the price leadership explanation by concentrating on a faulty measurement of the market which overstated the econometric correlation of prices between cement producers in Venezuela. 288. Dominant firm price leadership models describe price leadership in industries where the distribution of firm sizes is highly skewed, resulting in a dominant firm that exists alongside a competitive fringe of much smaller firms, typically supplying a relatively standardized product. The fringe suppliers are small individually but may have a significant share of the market collectively. The dominant firm sets its own price on the basis of industry demand not served by the fringe suppliers, thereby providing a price umbrella for the latter. Market performance then depends on relative costs and ease of market entry. If there are barriers to market entry, the dominant firm will be able to charge supra-competitive prices, though this power will be moderated by the presence in the industry of the competitive fringe. Since it acts as price-setter, the dominant firm’s price cuts will be matched by the competitive fringe. On the other hand, if barriers to entry are low, the price leader’s ability to exercise monopoly power will be constrained by the entry (or threat of entry) of additional fringe suppliers. 310 Chapter 7 – Competitors face similar production costs. Similar changes in the price of production factors may explain why observed price changes are similar. Defendant firms have often appealed to this line of argument, though not always successfully. In the case of CNDC v. Duperial S.A. and Compania Quimica S.A. (1985), both investigated firms argued that their similar prices were caused by their similar cost structure. Although CNDC dropped the case for other reasons, it specifically rejected this argument due to the existence of other relevant cost differences, such as differences in usage of the capacity and transport costs. Similarly, in Pro-Competencia v. Cemex and others (2003), Lafarge, one of the defendant cement firms, argued that similar nominal price changes were caused by the high inflation rates (75%) prevailing in Venezuela from 2000 to 2003, which impacted a large portion of the costs involved in the production of cement, such as real wages and foreign inputs like maintenance equipment, production silos, and others. Again, this argument was rejected by Pro-Competencia. – Changes in market shares Competition agencies have emphasized changes in market shares as evidence that collusion does not exist. This factor was essential in the case of La Casa del Grafito v. Rich Klinger y Bruno Cape (1989), where the CNDC analyzed the variations in the market share of competing firms. Similarly, in Alberto Dupuy v. VCC and Cablevision (1995), the CNDC concluded that the presence of new competitors dispelled any suspicion of collusive behavior. – Decrease in profit margins. Income stabilization indicates the existence of likely collusion between firms. Collusion is fundamentally aimed at stabilizing competing firms’ income, regardless of the differing production costs between more efficient and less efficient firms. Competition agencies usually consider whether income is stable among firms suspected of colluding. Brazil’s SEAE developed a method of analyzing cartel complaints in the gasoline retail market that takes into consideration pricing behaviors and profit margins. This three-pronged method, which serves as an initial filter for cases. Prosecutions will be conducted only if complaints meet the following conditions based on economic analysis: First, the profit margin tendency is examined. If the profit margin has decreased, the market is considered to be operating under competitive conditions, in which case the complaint is dismissed. Second, the SEAE analyzes whether any profit margin increase is linked to the reduction of price dispersion. If not, the case is dismissed. Third, if there is a profit margin increase, the SEAE investigates whether the margin and price dispersion trends follow the same pattern within a Horizontal Restraints 311 geographical area. If they do, the case is dismissed. Therefore, the SEAE prosecutes cases only if there is a margin increase linked to the reduction of price dispersion not following the state-wide pattern. In these cases, the SEAE continues with the investigation, trying to gather more evidence through the investigative methods allowed by Brazilian law, such as inspections, dawn raids, and wiretapping. 7.5 ASSESSMENT OF HORIZONTAL RESTRAINTS Contrary to the development of antitrust principles applied in other jurisdictions, notably the United States and the European Union, there are no clear legal standards in Latin America concerning horizontal restraints, particularly on ‘‘naked price-fixing.’’ While antitrust agencies usually attach undeniable welfarediminishing effects to these restraints, and develop means to prevent these conducts form taking place, legal rules applied by appeal courts usually require evidence of their anticompetitive effects. Accordingly, a clash of views usually arises within the law enforcement system that subjects the policy to highly unsettling effects. This conflict is also expression of a deeper debate between the economic and legal perspective of cartels, which is yet to be solved. Administrative agencies are increasingly distinguishing between cartels and noncartel agreements, noting that noncartel agreements entail fewer anticompetitive effects and more procompetitive benefits and therefore require ‘‘a more judicious application’’ of the rule of reason, appeal courts are moving in the opposite direction by challenging this distinction. Since price-fixing, market division, and output restriction between competitors entail a degree of coordination among traders that deviates from the Nirvana of competitive equilibrium, antitrust economists give little meaningful consideration to horizontal restrictions, whose effects are assumed ex-hypothesi. Antitrust scholars seldom acknowledge that the purpose of this strategy is focusing on simple cases that would demand fewer resources from competition agencies. In other words, it is a strategy aimed at saving resources devoted for enforcement purposes; it has nothing to do with the legal standard that should apply to horizontal restraints, ‘‘naked’’ price-fixing in particular, in view of its restrictive effects. Antitrust economists simply elude this question, which is not legal but economic in nature. This reason explains why antitrust economists usually condemn naked price-fixing in harsh terms, since it is perceived as the most ‘‘obvious’’ case deserving prosecution. Therefore, the consensus among economists usually is not about the presumed effects of cartels, but instead, it is about the elements needed to presume the existence of such naked price-fixing. In light of the fact that the anticompetitive effects of such restraints are implied as a matter of law, the legal discussion of this conduct focuses on the legal indicia that are necessary to prove its existence, rather than the conduct’s implications, which are assumed as a matter of law. The analysis of whether or not these arrangements embody justifying efficiencies is preempted 312 Chapter 7 if the authorities find that it is a ‘‘hard-core’’ restraint, without any further inquiry. Therefore, the question about the short- versus long-run procompetitive (i.e., efficient) effects of these arrangements is simply ignored. Appeal courts, however, usually have a different view of this matter. These entities are reluctant to adopt into their decision making process what they perceive to be alien Common Law principle. Under the Civil Law principles applied in the region one cannot deduce the welfare-diminishing effects of a business undertaking without giving the defendant a fair change to challenge such a presumption. Intuitively, appeal courts think the term ‘‘cartel’’ can only apply once the effects of the cartel have been proven, while prosecutors want to identify a cartel and then presume its effects. Actually, those who support the two-tier distinction between per se and ruleof-reason analysis, on the grounds of its alleged expediency, still run into complications, as the very existence of naked price-fixing arrangements depends upon a considerable amount of circumstantial evidence which competition agencies are forced to collect. The number and weight of circumstantial evidence can differ considerably depending on the choice of the competition authority in charge of the prosecution. Hence, their per se prohibition can only be determined once the competitive effects of the conduct have been assessed. The only difference between the per se rule, as applied, and the rule of reason is the inquiry into productive efficiencies. However, in light of the imprecision and analytical intuition surrounding the determination of long-run dynamic efficiencies, the analysis of each type of conduct does not differ much in practice. As evidence of the practical complications that such a system could bring, consider the cases of Venezuela and Colombia. These countries tried to circumvent the complications arising from administering a rule-of-reason scheme by giving certain practices a per se treatment. However, this strategy has backfired in both countries. In June 2004, a Colombian appellate court held that a finding of restrictive conduct can only be made when the conduct affects freedom of entry, freedom of choice, price variation, or the efficiency of production. In other words, it required a verification of the effects of the conduct. This court decision overturned a decision of the Superintendency of Industry and Trade. In Venezuela, the Corte Primera de lo Contencioso Administrativo decided on appeal that full evidence of the restrictive nature of an agreement is necessary in order to conclude that it has anticompetitive effects. It is not a mere coincidence that judges in both countries have been reluctant to concede a per se treatment to naked price-fixing restraints. For them, the conclusion about effects the effects of a cartel is a question of fact; it is not a matter of law. Of course, antitrust scholars blame on the judges’ lack of ‘‘sophisticated economic training’’; but, as we have already seen,289 there is usually more than one explanation behind the conduct of entrepreneurs, as it all depends on the analytical framework used to examine markets. Naturally, the recognition about 289. See Section 3.1.4, above. Horizontal Restraints 313 long-run productive effects of any business conduct undermines the very foundations of the antitrust edifice. In some Latin American countries, hard-core cartels are not subject to a higher standard of proof than any other anticompetitive conduct (De Quevedo, 2000). In other countries, however, evidence of multiple concurrent and complementary indicia supporting the existence of hard-core horizontal restraints is required in order to make the prosecution’s case conclusive. In general, under Latin American standards, no single piece of circumstantial evidence is enough to support the conviction of a prosecuted firm; moreover, it is necessary to link all indicia to the theory that a cartel exists. If the circumstantial evidence supports an alternative theory (e.g., price leadership) the case must be dropped. In practice, therefore, all sorts of conduct, ‘‘naked’’ price-fixing included, bear some form of preliminary evaluation of their effects on the relevant market before the competition agency decides whether they contravene the law. In other words, the distinction between ‘‘naked’’ and ‘‘procompetitive’’ horizontal restraints is a conclusion that is usually reached after economic evidence for and against economic efficiencies has been assessed. Therefore, economic theory dictates whether anticompetitive horizontal restraint exists or not. Hence, economic theories are fundamental to construing positive evidence of the existence of anticompetitive restraints. This is confirmed in a submission made by Brazil before the OECD: The jurisprudence shows that CADE admits indirect evidence as proof to punish a cartel. Nonetheless, some qualifications are appropriate: First, in all previous cases, CADE has indicated that it is important to exclude the ‘‘price leadership’’ explanation for the price parallelism; and second, although the indirect evidence available in the cases were important to indicate the existence of illegal behaviour, CADE didn’t punish the firms exclusively based on that. In the cases referred above, in addition to the economic evidence, some circumstantial event was associated to the price parallelism. (CADE, 2006) Other countries in the region follow similar standards. Therefore, the ‘‘parallelism plus’’ theory is widely supported in case law throughout the region. No single piece of economic evidence, alone, is enough to persuade competition agencies about the existence of cartel conduct. In particular, parallel pricing alone merely indicates conscious parallelism, but full proof of collusion requires more than that. Further inspection of factual elements is necessary in order to establish the existence of business restrictions. Yet the effect of additional elements of proof is contingent on the interpretation that economic theory gives to them. Economic facts are causal explanations provided by the economic theory that the competition agency adopts. Thus, the combination of several elements of circumstantial evidence does not settle the matter. Unlike other judicial proceedings, where circumstantial evidence is essentially objective in the sense that its existence cannot be disputed by third parties, economic evidence supporting antitrust investigations does not easily yield to such objective assessment. On the contrary, economic evidence is usually contingent on AU: Could you please provide the reference details of ‘‘(De Quevedo, 2000)’’ in the bibliography. AU: Could you please provide the reference details of ‘‘(CADE, 2006)’’ in the bibliography. 314 Chapter 7 the particular causal hypothesis outlined by the analyst in connection with the situation alleged to be ‘‘anticompetitive.’’ The lack of settled legal standards on horizontal restraints has led scholars to treat them very intuitively. Consider the following statement from the OECD Secretariat (2005b, p. 5) acknowledges this difficulty in these terms: ‘‘The OECD’s reports on hard core cartels have all included some ‘popular’ evidence of cartels’ harm, because such evidence, though anecdotal and sometimes indirect, can be useful in gaining the attention of laymen and in showing that cartel members know that their conduct is both harmful and illegal.’’ It is puzzling to think of any sort of ‘‘anecdotal’’ stories as a source of legal evidence, yet in the eyes of the OECD Secretariat, it seems plausible to let competition agencies rely on popular outcry as ‘‘popular evidence’’ in order to ‘‘find’’ such hard-core cartels. This finding reveals the lack of precise legal standards in the field of horizontal restraints that are common to other areas of antitrust policy. This feature highlights the erosive effect of this policy on the market institutions, as it weakens the predictability legal rules, which is necessary for businesses to know their legal status vis-à-vis this policy. The practical impossibility of accurately establish the legal status of a company undertaking a horizontal conduct deemed to be restrictive, but justifiable under the criteria of economic efficiency, creates an obvious burden or transaction cost that, far from encouraging firms to compete in the market, inhibits them from doing so; more on this topic in Chapter 12 of this book. AU: Could you please provide the reference details of ‘‘OECD Secretariat (2005b, p. 5)’’ in the bibliography. Chapter 8 Vertical Restraints This chapter will explore another highly controversial area of antitrust enforcement: vertical restraints. Vertical restraints encompass a broad range of business strategies that foreclose competitors’ access to the market. However, unlike horizontal restraints, vertical ones are not necessarily viewed as welfare-diminishing activities, as they are necessary to carry out business in an uncertain business world. Under the logic of the competitive equilibrium models, these arrangements displace potential competitors from downstream or upstream markets. This chapter will explain the difficulties of reaching stable legal rules in the field of vertical restraints: this phenomenon will highlight the practical problems of attaining a stable rule of law system in this area of law, which reinforces our suspicion about the antimarket orientation of antitrust policy, contrary to what its supporters advocate. Like other business restrictions, vertical restraints entail both output restrictions and productive efficiencies. The evolution of economic theory has decisively influenced the opinion of competition authorities in the sense of making them aware of the benefits of productive efficiencies created through vertical restraints, in sharp contrast with the old view, which would condemn every form of market foreclosure as anticompetitive. More recent approaches underline the procompetitive role of vertical restrictions that entrepreneurs negotiate with independent suppliers and clients in order to reap increasing returns. Usually, producers do not carry out all activities that are necessary to make their products available to consumers; labor division normally imposes certain limits on them, so that some activities beyond their core capabilities are outsourced by independent firms. Outsourcing firms are hired to produce at comparatively lower production costs compared to extending production within the firm. Similarly, outsourcing intermediaries, wholesalers, and retailers enables businesses to reach consumers more effectively, compared to developing those capabilities 316 Chapter 8 within the firm. Independent contracting is needed to reduce transaction costs (Coase, 1937). However, in order to make these arrangements stable and rewarding, they often need to ensure the exclusivity of production in favor of the contracting parties. Hence, they need to foreclose other potential market competitors (e.g., suppliers) from plying their own trade. Hence, vertical restraints are defined as ‘‘restrictions imposed by manufacturers/providers of products and services in a certain market (‘market of origin’) on vertically related markets, downstream or upstream along the production chain (the ‘target market’).’’290 Vertical restraints are to be distinguished from so-called ‘‘horizontal restraints,’’ which are agreements between horizontal competitors. Vertical restraints are agreements between firms or individuals at different levels of the production and distribution process. These arrangements can take numerous forms, ranging from a requirement that dealers accept returns of a manufacturer’s product to the obligation imposed on retailers not to sell below a given price (resale price maintenance). Vertical restraints may adopt the form of exclusionary conduct against actual competitors, as well as foreclosure against potential competitors. Vertical restraints may lead to anticompetitive exclusionary conduct if it raises rivals’ costs in downstream markets (e.g., predatory pricing and exclusionary clauses). They include various forms of abuse of dominance and monopolization (e.g., refusal to deal or to supply or price discrimination through promotions and discounts). In a similar fashion to the lack of settled criteria to assess the legality of horizontal restraints, the standards applied on vertical restraints differ considerably from country to country, possibly due to the lack of agreement at the level of economic theory regarding this type of arrangement. 8.1 ANTITRUST RATIONALE OF VERTICAL RESTRAINTS CONTROL The theory of oligopolies291 also provides the rationale for antitrust enforcement against vertical restraints. In antitrust analysis, only conduct by firms enjoying monopoly power—or a dominant position—should be challenged by antitrust authorities. Although, in principle, antitrust policy does not seek to increase, or even preserve, the number of firms in the market, it does examine whether certain vertical practices do in fact raise rival’s costs and make their continued presence in the market more difficult, thereby enhancing the monopoly power of a market competitor. Hence, it would regard as beneficial the presence of more participants in the market, and a wider the array of consumer choices, as opposed to fewer participants and choices. This is not surprising, since the 290. Appendix I of CADE Ruling No. 20. 291. See Section above. AU: Provide section crossreference in footnote 2. Vertical Restraints 317 structure-conduct-performance paradigm leads the analyst to assume that competition will be more intense in markets comprised of more firms since such markets will be closer to the ideal normative standard of perfect competition. In this regard, competition policy focuses on ensuring that market structure promotes the existence of more independent outlets. This is the rationale for condemning practices, known as exclusionary practices, that inhibit or preclude the ability of other suppliers—existing or potential—to compete in the market for a product. Exclusionary practices encompass a wide array of vertical restraints imposed by providers and suppliers on downstream firms, such as distributors or final consumers, that are aimed at raising rivals’ costs of competing in downstream markets (e.g., predatory pricing and exclusionary clauses). They also include various forms of abuse of dominance and monopolization (i.e., refusal to deal or to supply, or price discrimination through promotions and discounts or exclusion from the use of an ‘‘essential facility’’). The inclusion of exclusionary practices in the taxonomy of anticompetitive conduct follows the same logic that underlies the prohibition of exploitative conduct: monopoly power held by the incumbent firm in the market would increase due to the exclusion of actual or potential competitors; in this way, a firm operating in the upstream market may impose restraints in the conduct of the a operating downstream, or vice versa. These restraints may take a variety of forms, but many commentators agree that two broad categories exist: (i) restraints that prevent a competitor from selling its product (foreclosure or interbrand restraints); and (ii) restraints that limit a retailer’s freedom to resell the product (intrabrand restraints). Foreclosure or interbrand restraints limit the ability of competitors to offer products or services to potential customers. One example of this is the tie-in arrangement, which forces buyers to acquire goods or services from the supplier of another good, thereby excluding competing third parties from offering their products. Intrabrand restrictions, in turn, can be further classified as either price or nonprice restraints. The first group consists of those restrictions that directly affect the price of goods charged by the downstream firm, such as price discrimination. The second group includes restraints that impact the method of sale and extent of products offered, such as exclusive purchasing or dealing agreements, exclusive dealership or distribution agreements, territorial and customer restrictions, and refusals to deal. 8.2 CLASSIFICATION OF VERTICAL RESTRAINTS: INTRABRAND VERSUS INTERBRAND Exclusionary practices may adopt the form of limitations imposed by the upstream firm in the production chain on the downstream firm or vice versa. In turn, such limitations may convey anticompetitive effects between brands (‘‘interbrand’’ competition) or they may restrict competition between distributors of the same brand (‘‘intrabrand’’ competition). 318 Chapter 8 Interbrand restrictions (Figure 8-1) foreclose a competitor with another brand from selling its product in the market; therefore, they require the presence of at least two competing firms in the upstream market. Figure 8-1 Interbrand Restrictions AU: Please provide Figure 8-1. In this particular case, Producer 2 is foreclosed from market access to consumers, who are subject to the conditions imposed by Producer 1, because he has negotiated retail contracts with 100% of the retailers. These arrangements are imposed against competing producers, via market foreclosure. On the other hand, intrabrand restrictions restrict competition between retailers that sell the same brand; therefore, they could exist even if there was only one manufacturing firm in the upstream market. Examples of intrabrand restrictions include: – Price restrictions, such as resale price maintenance, directly affect the price charged for goods by the downstream firm. – Nonprice restrictions include restraints that affect the method of sale and the range of products offered, such as exclusive purchasing or dealing agreements, exclusive dealership or distribution agreements, territorial and customer restrictions, and refusals to deal. Intrabrand restrictions are exemplified by the case of one upstream manufacturer that uses vertical contracts to discipline its retailers, as shown in Figure 8-2. Figure 8-2 Intrabrand Restrictions Exclusive distribution and exclusive customer allocation are examples of vertical ‘‘intrabrand restraints.’’ These are agreements whereby the supplier agrees to sell his products only to one distributor for resale in a particular territory or for resale to a particular class of customers. In these agreements, the distributor is usually also limited in his active selling in other exclusively allocated territories or to other classes of customers. Nonprice vertical exclusions may adopt the form of restrictions on the territory in which or the customers to whom the buyer may sell. This hard-core restriction relates to market partitioning by territory or by customer. Distributors must remain free to decide where and to whom they sell. Under international standards, there are exceptions to this rule, which, for instance, enable companies to operate an exclusive distribution system or a selective distribution system. Under these agreements (i.e., exclusive dealings), the buyer is induced to deal with only one seller’s products. Exclusive dealings prevent other potential distributors or suppliers from competing in the market for the product concerned. These arrangements have been considered monopolistic if in force for long periods (Burke, Genn-Bash, and Haines, 1988, pp. 162-166). Exclusive distribution agreements may reduce intrabrand competition and lead to market partitioning, which may facilitate price discrimination between AU: Please provide Figure 8-2. AU: reference not listed in bibliography. Vertical Restraints 319 different territories or between different customers. When applied by several suppliers in the same market, such agreements may also facilitate horizontal collusion, both at the level of suppliers and at the level of distributors. In sum, vertical restraints essentially exclude actual or potential competitors from the market. This may occur either in a positive way—for example, by granting a special status to some business-related firms in the market as opposed to others—or in a negative way, such as by denying certain inputs and supplies to some clients. Some scholars (Boner, 1995; Curiel, 1996, p. 15) adopt a negative perspective toward vertical restraints such as these, influenced by Robinson’s Imperfect Competition model. In their view, they may enhance or consolidate a major participant’s market power by facilitating collusion among established firms in upstream or downstream markets or by encouraging market foreclosure—that is, the elimination of incumbent or new competitors from the market. Moreover, these commentators consider vertical restraints control particularly important in Latin American countries, since in comparatively small economies, these restraints would likely worsen the entry conditions of potential competitors into markets that already have few competitors. Hence, they are in favor of a harsher treatment of vertical restraints in reforming economies such as Latin America’s that would expand legal prohibitions to encompass cases where there is no market dominance. For example, Boner (1995, p. 44) argues that incorporating a less flexible definition of the abuse of dominant position doctrine is highly desirable because it would relieve the competition authority from dealing with the rather vexing problem of economic efficiency, and concentrate the antitrust artillery on the size of firms in order to establish over the merits of the case. Thus, they argue, competition authorities should outlaw vertical conduct that is implemented by large, dominant suppliers, and tolerate it from other suppliers. Let us see under what circumstances such arrangements may constitute practices that contravene antitrust provisions laid down in Latin American statutes. 8.3 STATUTORY STANDARDS FOR VERTICAL RESTRAINTS Vertical restraints can be imposed through contractual means or simply by business strategies that create an exclusionary effect on third parties. Therefore, such restraints encompass all conduct that has an exclusionary effect in the market, that is, conduct that drives competitors out of the market, regardless of the nomenclature or legal form adopted. Hence, for the purposes of examining Latin American case law, we will be concerned with whether a business undertaking reduces the number of effective market competitors and facilitates the concentration of market power in the hands of a firm, thereby leading markets into a suboptimal position as far as social resource allocation is concerned. AU: reference not listed in bibliography. 320 Chapter 8 Although, in principle, antitrust policy does not seek to increase, or even to preserve the number of incumbent firms in the market, it does examine whether certain vertical practices raise rivals’ costs and make their survival more difficult. Hence, it would regard with benevolence the existence of more participants in the market and a wider array of consumer choices, as compared to fewer competitors and choices. Again, the Imperfect Competition Model influences the perception toward market organizational arrangements in ways that insistently emphasize the short run reduction in the number of rivals over their long-run cost reduction effects. Following this logic, competition is expected to be more intense in markets where such vertical organizational arrangements impose fewer constraints upon firms operating in adjacent upstream or downstream markets. In this regard, antitrust policy endorses the premises of optimally functioning competitive equilibrium models (i.e., atomistic industrial organization) as it ensures that market structure promotes the existence of more independent outlets. This is the rationale for condemning endeavors that inhibit or preclude the ability of other suppliers—existing or potential—to compete in the market for a product, which are known as exclusionary practices. Under international standards, the anticompetitive nature of vertical restraints is established when the following three concurring conditions are satisfied: – the undertaking firm must hold monopoly power (market power or dominance); – the undertaking must exclude competitors in the upstream or downstream market; and – the exclusion must be unjustified, that is, it should bear no economic efficiencies. In the next section we shall explore the legal standards applied to vertical restraints in Latin American case law. 8.3.1 MONOPOLY POWER The law of vertical restraints usually requires demonstrating the existence of monopoly power in order to demonstrate the illegality of such cases. Such power may be imposed through contractual means between two noncompeting firms, or unilaterally, through the imposition of onerous or arbitrary conditions deemed to be ‘‘abusive.’’ Therefore, despite the differing local terminology applied to this phenomenon, be it ‘‘vertical restraints’’ or ‘‘unilaterally abusive conduct,’’ a comparative survey of Latin American jurisdictions shows them to be equivalent for practical purposes. The legality of vertical restraints rests on the degree of monopoly power of either firm entering into the agreement. Sometimes, antitrust statutes countries exempt vertical agreements if the supplier of the goods or services at issue does not have a market share exceeding 20%. This is particularly noticeable in those Vertical Restraints 321 countries employing the concept of ‘‘market dominance’’ rather than ‘‘market power,’’ such as Brazil.292 Other countries attach key importance to market shares, although they avoid tying themselves to a predetermined threshold. In an opinion concerning the nonexclusive distributorship of petrochemical products in several Latin American countries, Chile’s Competition Tribunal, the TDLC, implicitly acknowledged market share as a determinative factor in measuring dominance, although it didn’t state a fixed threshold applicable to all industries, but rather examined the issue on a case-by-case basis.293 Mexico has followed the same pattern. As the OECD and IADB Peer Review (2004a, p. 271) reported: In 2000, responding to a complaint from PepsiCo and two Mexican soft drink companies, the CFC commenced an investigation of contracts between Coke and thousands of small retail outlets under which the stores limited themselves to selling Coke brands in exchange for a free refrigeration unit or store sign. Coke enjoys a 72 percent market share of the soft drink market in Mexico, and the CFC concluded in 2002 that the contracts were unlawful. Thus the crucial factor, again, was possession of a high market share. Following international best practices, Latin American countries have increasingly been incorporating other elements besides the market share controlled by firms engaged in the restriction in measuring market power. In recent years, even in countries like Brazil or Argentina, where market dominance is the usual supporting criterion in showing the capacity of firms to subvert competition, market shares are taken as guiding yardsticks rather than fixed thresholds or safe havens below which no prosecution against entertaining firms is possible.294 292. In countries such as Brazil, for instance, vertical agreements are effectively eliminated as a class because CADE makes no distinction between the ordinary degree of market power required to establish vertical violations involving nondominant firms, and the heightened degree of power required to find a monopolistic abuse. Hence, since 2000 CADE has decided no vertical cases, and instead has addressed them under abuse of dominance cases (OECD and IADB, 2005a, p. 20). This trend has also consolidated in Venezuela, where unilateral practices in the form of market abuse are not always easily distinguished from vertical restraints, causing enormous confusion in the policy enforcement process. 293. Ruling No. 16/2006/TDLC, involving a distributorship contract between Exxon/Mobil and Brenntag. According to this contract, Exxon/Mobil would endorse a list of ‘‘designed clients’’ to its contracting party, Brenntag, who would then become the latter’s clients. Moreover, certain ‘‘reserved clients’’ would not be served by Brenntag, as they would continue to be directly served by Exxon/Mobil. Essentially, the TDLC authorized the deal because the market share affected by the transaction was merely 12.6%. Thus ‘‘the Tribunal considers that effective competition exists so that the contract will generate no competition problems.’’ 294. Below a certain threshold, antitrust statutes usually presume that participating firms lack monopoly power; naturally, this is an assumption that factual evidence can refute. In other words, the 30% threshold does not work as a safe haven below which economic agents are free to engage in restrictive conduct, much less hard-core restrictions (which will always be prosecuted, no matter the market share involved). Nor does a market share above the threshold of 30% create a presumption of illegality. This threshold serves only to distinguish those agreements that benefit from a presumption of legality from those that require closer examination. 322 Chapter 8 The other elements that are usually considered in the analysis of monopoly power include, as we have seen already in Section above, the following: (i) Distribution of market shares among competitors; (ii) the changing of distribution of market shares over a period of time or market share stability; (iii) foreseeable changes in the market structure; (iv) the existence of market barriers such as absolute or strategic advantages. We refer the reader to that chapter for a more detailed discussion. Legislation in the region usually requires that firms undertaking vertical restraints have monopoly power in order for the restraint to be found to have anticompetitive effects; case law in the region has supported this principle consistently. For example, in the early Valer case (1992), CADE decided that an exclusivity agreement could only harm competition if the undertaking firm had market power. In this case, Valer, a meal voucher company, had entered into an exclusivity agreement with some supermarkets, and decided to reduce the period for which supermarkets had to wait to get cash for meal vouchers that they received from customers. In turn, these supermarkets agreed to accept only Valer meal vouchers. The issue debated was whether Valer’s intention was to dominate the meal voucher market and whether the contract entailed anticompetitive effects in the relevant market. In its decision, CADE found that, despite the high concentration in the relevant market, Valer had no market power Valer had a reduced market share because only a few supermarkets entered into Valer’s exclusivity agreement, and the barriers to entry were low. Therefore, in the absence of market power, CADE inferred that Valer’s intention had not been to restrict competition. Likewise, Argentina’s CNDC considers the existence of vertical restraints to be dependent on the existence of market dominance. As Argentina’s OECD and IADB Peer Review (2006, p. 14) states, in this country: AU: 2006 reference not listed in bibliography. vertical restraints are encompassed within Sections 1 and 2 of the competition law, as noted above. The CNDC lists only three vertical cases as having been resolved in the 2001-05 period, none of which resulted in sanctions. Many of the CNDC’s dominance cases involved vertical practices, however. . . . Peru has adopted a similar stance toward such agreements; thus, ‘‘until this year, the Free Competition Commission has apparently taken the position that vertical restraints never harm competition unless one of the parties has a dominant position, and it had an unwritten but recognized policy of refusing to scrutinize vertical restraints under Article 6.’’ (OECD and IADB, 2004c, pp. 25-26) In the Costa Rican Farmex case (1997), COPROCOM decided not to impose a penalty on Farmacias ESO S.A. due to its lack of market power. The business had been accused of restricting competition in the market through a strategy of labeling the products they distributed with the retail price and imposing other conditions on their distributors. However, the Competition Body determined that the firm had no market power. Although ESO held approximately 85% of the market concerned, this calculation didn’t take into account the sale of pharmaceutical products to the Costa Rican Social Security system, which purchased nearly 75% of the relevant AU: 2004c reference not listed in bibliography. Vertical Restraints 323 product, since the trading and marketing mechanisms used in the social security submarket were different from those used by pharmacies. 8.3.2 EXCLUSIONARY EFFECTS How do competition agencies reach conclusions about the exclusionary effects of vertical restraints? This process usually involves some evaluation of factual evidence. Sometimes competition provisions include a list of indicia which competition agencies consider as circumstantial evidence of the conduct.295 International guidelines296 may be useful in establishing the real purpose of vertical restraints, through examination of particular aspects of the agreement being investigated, including: – – – – 8.3.2.1 length of the exclusion; use of joint business strategies to reinforce the exclusion; the kind of restriction deployed; and the scope of the market affected. Length of the Exclusion Timing is a very important factor to be considered in the evaluation of the foreclosure effects of vertical restraints; hence it is considered to be circumstantial evidence under competition law evidence rules. Under the competition rules of El Salvador, for instance, a finding that a vertical restraint is anticompetitive will depend on whether the restraint excludes a potential or actual competitor from the market for a period of time longer than what it is conventionally justified under business customs.297 Noncompetition obligations shorter than one year entered into by companies with no monopoly power are generally not considered to give rise to appreciable anticompetitive effects. Noncompetition obligations between one and five years entered into by companies with no monopoly power usually require a balancing of pro- and anticompetitive effects. Noncompetition obligations exceeding five years are not considered necessary to achieve the claimed efficiencies for most types of investments. If there are efficiencies, they are generally not considered sufficient to outweigh the foreclosure effect. Hence, indefinite noncompetition obligations which extend for several years are not authorized under a rule of reason analysis. 295. For example, Art. 13 of the Regulations of Legislative Decree No. 528/04 (El Salvador); Art. 21 of the Regulations of Law No. 601/06 (Nicaragua); and Art. 5 of Agreement No. 001/07 Regulations of Legislative Decree No. 357/05 (Honduras). 296. Commission notice of Oct. 13, 2000: Guidelines on vertical restraints [COM(2000/C 291/ 01)—OJ C 291 of Oct. 13, 2000]. 297. Article 13.a) Regulations of Legislative Decree No. 528/04 (El Salvador). 324 Chapter 8 International standards provide guidelines in this field. In the European Union, for example, noncompetition obligations are acceptable when their duration is limited to five years or less, or when renewal beyond five years requires the explicit consent of both parties and no obstacles exist that hinder the buyer from effectively terminating the noncompete obligation at the end of the five-year period. The fiveyear limit for noncompete obligations does not apply when the goods or services are resold by the buyer ‘‘from premises and land owned by the supplier or leased by the supplier from third parties not connected with the buyer.’’ In such cases the noncompetition obligations may be of the same duration as the period of occupancy of the point of sale by the buyer. Following these standards, some countries, such as Venezuela, prohibit obligations that extend for more than five years;298 including noncompetition obligations that are tacitly renewable beyond a period of five years. In Reasa and Grupo Q (2008), the Competition Commission of Honduras recently decided a case involving the acquisition of a car dealer by a competitor. The sale involved a contractual clause whereby the seller was prohibited from setting up any other car dealership, regardless of the firms names represented. The commission reduced the scope of the contractual prohibition, thus limiting the clause to firm names (i.e., Acura and Toyota) formerly traded by the seller. In Brazil, the timing issue was addressed in two landmark cases: Miller Brewing (1995) and Anheuser-Busch (1996). CADE imposed restrictions on the conditions contained in exclusive distribution agreements negotiated by these major U.S. brewing companies with two of Brazil’s brewers. In essence, CADE ordered that the exclusivity agreements, which were to last for twenty years, should be scaled back to two years. This two-year period was based on the assumption that without such an agreement the U.S. brewer could have built a brewing plant itself. These decisions highlight the discretionary nature of limits on the duration of contractual arrangements, as no economic justification was given for the decision to fix the contractual period at two years. In 2002, CADE addressed a contract between S.A White Martins (‘‘WMC,’’ formerly Liquid Carbonic Corp.) and Ultrafértil, a petrochemical company. Ultrafértil’s manufacturing processes generated (as a by-product) the main input used by WMC for the production of carbon dioxide gas (CO2). The contact gave WMC exclusive rights for ten years to all of the by-product generated by Ultrafértil. A potential entrant into the CO2 production market complained that the contract was a device for precluding new entry. Observing that WMC had dominant power in CO2 production and that no input source other than Ultrafértil was available, CADE agreed that the contact was anticompetitive due to its long duration. WMC was fined BRL 24 million (USD 9.4 million), an amount equal to 5% of its gross sales in the year preceding the complainant’s petition. On the whole, Latin American competition agencies have not extensively developed the legal rules in this area. However, it is conceivable that this situation could change in the future, as antitrust laws are becoming increasingly relevant in ordinary 298. Articles 1.f) and 5.c) of Ruling No. 036/95 (Venezuela). Vertical Restraints 325 policymaking. Beyond the time limits imposed on vertical restraints, several questions arise as to the specific conditions under which they may be imposed. 8.3.2.2 Use of Reinforcing Joint Strategies The negative exclusionary effects of vertical restraints can be reinforced when certain nonprice restrictions, such as exclusive dealing, are coupled with price restrictions, such as resale price maintenance. Similarly, they are worsened when several suppliers organize their distribution in the same market in a similar way (parallel networks of similar agreements). In particular, single branding (noncompete obligations) or selective distribution can create a cumulative foreclosure effect. Vertical restraints are usually used jointly, as part of a broader strategy aimed at reinforcing the exclusion of potential competitor. Where the supplier provides the buyer with a loan or provides the buyer with equipment which is not relationship-specific, this in and of itself is normally regarded as foreclosing the market when coupled with other conditions. Territorial restraints associated with exclusive distributorships sometimes prevent one of the parties from selling in a particular market. For example, exclusive territory arrangements limit the capacity of the buyer to resell products within the bounds of a given geographical territory. Antitrust theory holds that these restraints could be an attempt to disguise other monopolistic practices, such as discriminatory pricing (Boner, Roger and Krueger, R., 1991, p. 56). Also, the combination of exclusive distribution or exclusive customer allocation with exclusive purchasing increases the anticompetitive risks of market partitioning and price discrimination. Exclusive distribution/exclusive customer allocation makes it more difficult for customers to take advantage of possible price differences for a certain brand. The combination with exclusive purchasing also hinders distributors from taking advantage of price differences. Requiring the exclusive distributor to buy its supplies of a particular brand directly from the manufacturer eliminates the possibility for the distributor to buy the goods from other exclusive distributors. This combination of agreements is therefore unlikely to be exempted unless there are clear and substantial efficiencies leading to lower prices for all final consumers. Regrettably, there are no clear guidelines to determine the real intent behind exclusionary conduct. Foreclosure and leveraging the effects of exclusionary practices limit the ability of competitors to offer products or services to potential customers; however, they may also be aimed at enhancing the efficiency of the distribution of a product. Therefore, one has to look at case law in order to establish whether a case would be construed as demonstrating a monopolistic intent or, by contrast, whether it would be regarded as efficient conduct that enhances the added value in the distribution chain. Noncompetition obligations imposed on the buyer for a period after the termination of his contract are usually tolerable if the obligation is indispensable to protect know-how transferred by the supplier to the buyer and is limited to the point of sale from which the buyer has operated during the contract period. 326 8.3.2.3 Chapter 8 The Kind of Restriction Deployed For most vertical restraints, competition concerns only arise if there is insufficient competition between brands. Hence, interbrand restrictions are generally considered more harmful than intrabrand restraints. However, in the absence of sufficient interbrand competition, restrictions on intrabrand competition may significantly restrict the choices available to consumers. They are particularly harmful when more efficient distributors or distributors with a different distribution format are foreclosed from the market. Moreover, due to their foreclosure effects, exclusive agreements totally foreclose the market to potential entrants; hence, these arrangements are generally worse for competition than nonexclusive arrangements. For instance, under a noncompetition obligation the buyer may only purchase and sell one brand, whereas a minimum quantity requirement (i.e., typically an intrabrand restriction) leaves the buyer some leeway to purchase competing goods. Similarly, vertical restraints are in general more harmful in relation to branded products than in relation to nonbranded products. Where a supplier and a buyer who are not in a dominant position both have to make relationship-specific investments, the combination of noncompete and exclusive supply agreements is usually justified. Foreclosure is less likely in case of homogeneous and intermediate products and more likely in case of heterogeneous and final products. Exclusive supply agreements for homogeneous intermediate products are likely to be exempted so long as neither the supplier nor the buyer is in a dominant position. The distinction between branded and nonbranded products will often coincide with the distinction between intermediate products and final products. Vertical restraints are presumed to be exclusionary if they are negotiated between competitors. When several suppliers appoint the same exclusive distributor in a given territory or for a given customer class, such multiple exclusive dealerships may increase the risk of horizontal collusion, particularly in highly concentrated markets. For instance, an agreement between two cement producers, active in different markets, whereby each producer becomes the exclusive trader and distributor of the other producer’s cement in his home market, is not considered a ‘‘vertical’’ but a ‘‘horizontal’’ restraint. The competition concern in such cases is a possible restriction of competition between two competitors. On the contrary, if the agreement were nonreciprocal then it would be regarded as ‘‘vertical’’ provided that the buyer is not a competing manufacturer but only a competitor of the supplier at the distribution level (i.e., the manufacturer sells his products both directly and via distributors). In Brazil, Resolution No. 20/99 encompasses both exclusive purchasing/ supply and exclusive distribution agreements. These agreements are subject to review whenever they introduce collusive behavior leading to a cartel in the upstream market and whenever they increase barriers to entry to outsiders, thus enhancing the incumbent’s market power. CADE does not expressly acknowledge, for instance, that exclusive purchasing agreements will never result in foreclosure of the downstream market and that exclusive distribution will never foreclose the 327 Vertical Restraints upstream level, provided that such an agreement is not coupled with exclusive purchasing. Further, Resolution No. 20/99 does not say whether the length of the exclusivity agreement would be considered a relevant factor, nor does it clarify whether exclusive distribution agreements can only diminish competition downstream when interbrand competition is weak. Another exclusionary effect arises in the sale of competing brands in a selective distribution system. If the supplier were to prevent his appointed dealers from selling specific competing brands, this restriction would be regarded as restrictive, and therefore unacceptable, unless clear efficiencies were demonstrated. However, the transfer of substantial know-how, as, for example, in the case of franchising, usually justifies the imposition of exclusive purchasing for the duration of the supply agreement. 8.3.2.4 Scope and Production Stage Level Affected in the Market The scope of the market affected is relevant in the evaluation of foreclosure effects. The higher the share of the total market covered by a single branding obligation, the more significant foreclosure is likely to be. It is difficult to identify precise standards in this matter, as the case law in Latin America constantly evolves. Nevertheless, some general principles could be stated. For instance, in the case of agreements where the buyer is induced or obliged to make a significant share of his purchases of a particular type of product from one supplier, it is assumed that this arrangement could foreclose market access to other suppliers who may have difficulties expanding in or entering the same market. Noncompetition obligations require the buyer to purchase from the supplier (or from a business designated by the supplier) all or a significant part of the buyer’s total requirements. Such obligations prevent the buyer from purchasing and selling competing goods or services or limit such purchases or sales to less than a small share of the buyer’s total purchases or sales. The foreclosure effect may be considerably increased if several suppliers apply noncompete obligations in the same market. This may make the market more rigid and also facilitate horizontal collusion between competitors. Foreclosure is less likely in the case of intermediate products and more likely in the case of final consumer products. For final products at the wholesale level, the risk of foreclosure depends on the type of wholesaling and the barriers to entry at the wholesale level. There is no risk of foreclosure if competing manufacturers can easily establish their own wholesale outlets. 8.3.3 PROCOMPETITIVE EFFICIENCIES OF VERTICAL RESTRAINTS A third element examined by competition agencies in their competitive assessment of vertical restraints is whether they result in economic efficiencies that increase consumer welfare. If procompetitive effects outweigh anticompetitive 328 Chapter 8 exclusionary effects, competition authorities should authorize such arrangements; as a general rule, this is the case in practice. Vertical restraints often bring about efficiencies that increase consumer welfare in the long run, as they induce entrepreneurs to make investments that will increase the range of products and services offered in the market. Vertical restraints enable the preservation of value in the distribution chain which would be dissipated if no restrictions were imposed on any potential competitor in the market. When agreements ensure supra competitive profits to some distributors, these are encouraged to preserve and improve the quality of the distribution chain by incorporating additional services for the benefit of consumers and clients, even though these profits are feasible at the expense of all available potential distributors which in theory could provide the service. Producers, too, benefit from vertical restraints, as they enable them to acquire the tools for outsourcing services and a stable stream of inputs. From the perspective of the so-called Theory of the Firm (Williamson 1975, 1985) these arrangements restrict the freedom of action of retailers and distributors; they entail benefits for consumers, since they eliminate negative incentives that could undermine the relationship between producers and distributors. The first of these incentives arises in the context of the so-called the ‘‘principal-agent relationship,’’ whereby the principal (i.e., the manufacturer) hires an agent (i.e., distributors or retailers) to undertake a commercial investment, under circumstances that cannot be easily controlled by the former. It is unlikely that the distributoragent would carry out the necessary expenses to increase the sales of the manufacturer’s products, unless it is given a temporary monopoly to sell the manufacturer’s brand on such region. The distributor-agent requires such contractual exclusivity to prevent being curtailed by nonauthorized sellers who would be in better terms to sell these products at lower prices, given their lack of financial commitments for investing in increasing the marketability of the manufacturer’s products. Furthermore, the manufacturer also needs the distributor’s assurance that it will comply with certain conditions necessary to increase the marketability of her products; otherwise it is likely that she will hold back her own investments to increase her own production, thus reducing her output in the long run. In the end, consumer welfare will diminish, unless both the manufacturer and the distributors set forth in advance contractual obligations to align their behavior, which will solve their problems of uncertainty about each other’s commitment. Under conventional antitrust theory, contractual restrictions such as exclusive dealing might allow a firm enjoying monopoly power to deter entry into that market by foreclosing a crucial input or access to a distribution network or by making it more difficult for the entrant to obtain such input. Thus, possession of monopoly power in adjacent markets may create the possibility of influencing either downstream or upstream markets. This theory has changed over the years, as new explanations emphasize the efficiency gains resulting from such restrictions. Economic theory supports the following procompetitive effects of vertical restraints: (i) aligning incentives between manufacturers and distributions to AU: reference not listed in bibliography. Vertical Restraints 329 eliminate double marginalization externalities; (ii) discouraging free-riding effects; and (iii) facilitating investments in specific assets. 8.3.3.1 Alignment of Incentives between Manufacturers and Distributors According to economic theory, vertical relationships between two independent firms create externalities such as ‘‘double marginalization.’’ Assuming both firms, manufacturer and distributor, maximize their respective profit, each one will charge a price that will be monopolistic vis-à-vis their respective cost. Therefore, both firms will end up charging consumers a price which is too high, thereby discouraging sales. From their joint point of view their optimal solution would have been to charge a lower, agreed price, which is equal to the sum of the profits made by the upstream and downstream firm. A way of dealing with the ‘‘double marginalization’’ problem is through establishment of resale price maintenance, whereby the manufacturer imposes on the retailer a resale price, or a price ceiling. Alternatively, manufacturers can impose minimum quota obligations on the retailer, with the aim of reducing the price to the optimal joint level, thus producing the same effect as resale price maintenance. Resale price maintenance may be inadvisable when markets are subject to great uncertainty. Such a strategy dilutes consumers’ exposure to price shocks; however, it affects retailers’ profits, especially if prices need to be adjusted in order to offset high costs. 8.3.3.2 Discouraging Free-Riding Effects among Distributors Horizontal externality problems arise between several distributors operating in the same retail market. These externalities may reduce the optimal provision of services provided by retailers who belong to the distribution network. If retailers of a brand cannot appropriate the benefits accruing from their investments in the provision of added services, those services will be discouraged due to the presence of nonexclusive retailers selling the same brand. As result, both consumers and the manufacturer will suffer losses: consumers will be deprived of services that would have reduced their costs of searching information in the market, and the manufacturer will likely sell fewer units of the product. Hence, a solution would be for the manufacturer to negotiate exclusive distributorships with its retailers within predetermined territories. Naturally, this strategy will preempt potential nonexclusive dealers from selling within the geographic market so determined, but at the same time it will discourage their potential rent seeking activities. In this way, the authorized dealer could prevent nonauthorized dealers from selling the product without making the necessary investments to expand the knowledge of the product among consumers. Exclusive dealing might push a retailer to sell a brand more aggressively than it would if it spread its marketing effort among different brands, thereby increasing long-run competition (Motta, 2004, p. 335). 330 8.3.3.3 Chapter 8 Enabling Investments in Specific Assets Vertical restraints may facilitate an adequate framework for dealing with assetspecific investments. High sunk costs will enable investments only if there is certainty that commitments have been made by other parties. One party may be required to make heavy investments in exchange for a return several years ahead. In this regard, long-term contracts are only one way to ensure control by the firm responsible for complementary investment. There may be other ways of ensuring compliance and further control, such as establishing special price conditions or penalties, or alternative forms of foreclosure.299 Another solution, when the risks are high (say, due to faulty contractual enforcement procedures), is to set up a more intimate form of cooperation than a contract. The two companies might form a subsidiary in which they both possess equity interest, or they might decide to merge. In this way compliance is ensured through common stock, and the expectations of the firms involved will not be diminished. Obviously, under this corporate form parties would still be related under a contractual bond, but such a link would be more complex in nature, and reinforced by more severe conditions than a simple contract. The more the vertical agreement involves relationship-specific investments, that is, investments made in connection with the agreement that lose their value upon termination of the agreement, the more justification there is for vertical restraints. For instance, relationship-specific investments by a supplier generally justify a noncompete obligation for the time period necessary to depreciate the investments. According to Klein (1991), obtaining control over outlets may be essential for ensuring entrepreneurial certainty. Long-term contracts to buy and sell certain quantities at certain prices are unlikely to be more than a subsidiary means by which complementary investments would be coordinated. In cases where contractual bonds are unreliable, entrepreneurs may believe that only through direct control over the firm responsible for making some complementary investment will they be fully assured of compliance. This is also the case when specialized components at a fixed price are negotiated. A closer relationship between firms engaged in complementary activities provides higher levels of experimentation aimed at increasing opportunities for further specialization and division of labor. Vertical integration thus ensures entrepreneurs of obtaining a minimum amount of complementary capabilities needed to exploit a given market. Vertical mergers and long-term distribution contracts are usually necessary to overcome institutional unpredictability created by contractual breaches among 299. It is important to note that contractual formality is contingent on the level of certainty and the length of time that parties can foresee it lasting at the present time. In fact, contractual form is irrelevant. Frequently, those entrepreneurs who cannot rely on the wording of a contract must rely on alternative means. The most common of these is the analysis of past behavior, which involves knowledge that cannot be quantified. Goodwill and reputation convey tacit entrepreneurial knowledge about quality, quantity, and other details about supply that cannot be fully specified, and therefore cannot be furnished by contract. AU: reference not listed in bibliography. Vertical Restraints 331 independent contractors, which may cause distribution breakdowns or production delays. They improve the acquiring firm’s control over the operations of the acquired firm. Through varying degrees of vertical integration, all of the contractual forms discussed above represent institutional means whereby outlet dealers are encouraged to make investments to specialize and differentiate themselves from the rest. Consider the case of franchises: franchisee A will invest to differentiate himself from franchisee B by geographical location; similarly, exclusive dealers will invest in differentiating themselves from dealers of different brands; finally, vertical mergers will seek higher efficiency levels through operational cost savings, which in turn will lead to specialized units within the merged firms to further specialize their complementary capabilities. 8.4 LATIN AMERICAN CASE LAW: EXCLUSIVE AND SELECTIVE DISTRIBUTION, RESALE PRICE MAINTENANCE Vertical restraints are addressed in the legislation of almost all Latin American countries. Those countries whose laws do not include an explicit reference to contractual agreements between firms that have a vertical relationship deal with vertical restraints under abuse of dominance provisions. Competition laws throughout the region subject all vertical restraints to a ‘‘rule of reason’’ under which adverse competitive effects must be demonstrated by circumstantial economic evidence supplied by the plaintiff. There are exceptional cases; the law of some countries places the burden of proof on the defendant to prove the legality of the vertical restraint, which is presumed to lack economic efficiencies. Unlike hard-core restraints, however, where the law does not allow for the possibility of proving economic efficiencies, in these cases, factual evidence of the efficiency of the agreement can rebut the presumption of illegality. At all times, competition rules impose specific conditions on three types of vertical restraints: noncompete obligations during the course of a contract; noncompete obligations after termination of a contract; and the exclusion of specific brands in a selective distribution system. When these conditions are not fulfilled, these vertical restraints are examined with special attention. All Latin American countries are converging toward applying a rule of reason analysis to vertical restraints. Even Chile has changed its former per se prohibition of vertical restraints. In the early years, all agreements regarded as ‘‘forbidden conduct’’ were essentially illegal per se, without distinction; however, in recent years, this policy has changed rapidly. Today, this country has reversed its longstanding policy, to the point that ‘‘it is now widely accepted that they are not harmful—and are probably efficient—if the firm imposing them does not have market power.’’ (OECD and IADB, 2004b, p. 220) 332 8.4.1 Chapter 8 EXCLUSIVE SUPPLY Exclusive supply agreements oblige or induce the supplier to sell a particular good or service only one buyer in the relevant market for a specific use or for resale. They generally take the form of industrial supply agreements for intermediate products. Such exclusive supply agreements foreclose the relevant market to other buyers. The greater the share of the market affected by an exclusive supply agreement and the longer the duration of the exclusive supply agreement, the more significant the foreclosure effects are likely to be. Monopoly power is necessary to designate exclusive distribution agreements as anticompetitive restraints; thus, the stronger the position of the supplier, the more problematic is the loss of intrabrand competition. Exclusive customer allocation is particularly unlikely to be exempted above the usual market power threshold (20% of market share) unless it leads to clear and substantial efficiencies. If the buyer has no market power in the downstream sales market, then normally no appreciable negative effects on competition can be expected. However, negative effects could arise when the buyer holds a 20% market share, which is prima facie evidence of market power in the downstream sales market and on the upstream purchase market. Naturally, competition agencies seldom rest alone on high market shares to conclude the existence of market power. An important element considered in the Brazilian Microsoft case (2004) by the competition body was Microsoft’s control of 90% of the relevant market. Furthermore, exclusive supply agreements for less than five years entered into by nondominant companies usually require a balancing of pro- and anticompetitive effects, while agreements exceeding five years are considered not to be acceptable, even in the case that the undertaking parties claim the presence of economic efficiencies. In other words, in these agreements competition agencies usually take the view that alleged efficiencies are not sufficient to outweigh their foreclosure effect for most types of investments. Foreclosure of competing buyers is unlikely where these competitors have similar buying power. In such a case, foreclosure could only occur for potential entrants, especially when major incumbent buyers enter into exclusive supply contracts with the majority of suppliers on the market (the cumulative effect problem). Exclusive supply agreements normally lead to efficiencies when the buyer is required to make relationship-specific investments. 8.4.2 EXCLUSIVE DISTRIBUTION Under exclusivity distribution agreements producers agree to supply their goods only to one downstream firm in a certain geographical area. Like in all vertical restraints, possession of monopoly power is crucial. Where the exclusive distributor has buying power—if, for instance, he becomes the exclusive distributor for Vertical Restraints 333 the whole or a substantial part of the market at the retail level—the foreclosure of other distributors may have a serious anticompetitive effect. Exclusive distribution at the retail level is more likely to lead to anticompetitive effects than exclusive distribution at the wholesale level. This is especially so when retail territories are large and final consumers have little possibility of choosing between high-price/high-service and low-price/low-service distributors. The reason for this lies in the fact that exclusive distribution is likely to be coupled with dominance or market power in the case of final consumers, compared to wholesale retailers who may wield considerable countervailing power (e.g., Walmart). Hence, at the wholesale level, appreciable anticompetitive effects are unlikely when the manufacturer is not dominant and the exclusive wholesaler is not restricted in his sales to retailers. Exclusive distribution normally leads to efficiencies, such as: (i) eliminating potential free riders from the system; (ii) opening producers’ effective access to new markets by profiting from the local knowledge of incumbent dealers; and (iii) facilitating sales promotion of products while simultaneously rationalizing distribution. In these cases, exclusive distribution is justified, as investments by distributors are required to protect or build up the brand image. This applies in particular to new products, complex products, and products whose qualities are difficult to assess. In such case, moreover, the combination of exclusive distribution and a noncompete obligation may help the distributor to focus on a particular brand. If this combination does not lead to foreclosure (see the single branding section below), it is exempted for the whole duration of the agreement. Exclusive customer allocation normally leads to efficiencies where distributors are required to make investments in specific equipment, skills, or know-how to adapt to the requirements of their customers. The depreciation period of these specific investments indicates the justified duration of an exclusive customer allocation system. In general, the case is strongest for new or complex products and for products requiring adaptation to the needs of the individual customer. Efficiencies are more likely for intermediate products, that is, when the products are sold to different types of professional buyers. Allocation of final consumers is unlikely to lead to efficiencies and is therefore unlikely to be exempted. Case law in Latin America has been unsettled. In general, competition agencies have supported the legality of exclusive distributorships, provided that there are efficiencies involved; yet, it is not clear why they would declare the existence of efficiencies in some cases and denies them in others bearing similar factual elements. In the case of Argentina’s SADIT and others v. Massalin Particulares and others (1997), the Argentine Society of Independent Tobacco Distributors (SADIT) filed a complaint against Massalin Particulares S.A. (MPSA), on the grounds that these firms had set up a restrictive scheme for the distribution and selling of cigarettes. Under this scheme, exclusive territorial distributorships were imposed, thus denying independent sellers the possibility of selling their own competing brands. 334 Chapter 8 This case analyzed the imposition of exclusivity clauses on wholesale cigarette distributors in the federal capital and Greater Buenos Aires area by MPSA and Nobleza Piccardo, and the resulting exclusion of the independent subdistributors from the market. However, CNDC ruled that the investigated firms had not abused their dominant position because each faced strong competition from the other competitor, and therefore neither of them could act in isolation to impose conditions on consumers. As revealed by the investigations, cigarette distribution in the interior of the country had for many years been carried out by the two manufacturer’s exclusive distributors, which supplied, either directly or through subdistributors, the different points of sale in those areas. In contrast, in Buenos Aires, distributors sold the products of the two companies, with subdistributors also being used in many cases. In March 1997, MPSA changed its distribution system and divided the metropolitan area into twenty-nine areas, setting up one exclusive distributor in each. A few days later, Nobleza Piccardo adopted a similar system and awarded exclusive areas to thirteen distributors. One of the clearest results of the new system was the disappearance of the independent subdistributor, since the contractual relationships between the manufacturers and their distributors in both cases required the latter to supply retailers directly. However, the factual evidence indicated that the change in the distribution system was not aimed at, nor did it have the effect of, increasing the market power of the manufacturing companies or hindering entry by new competitors. The possibilities for anticompetitive discriminatory pricing among the different submarkets into which MPSA and Nobleza Piccardo divided the market were restricted by the tax authority’s control over the prices set for cigarettes. In addition, the exclusivity agreements were understood to be part of a competitive strategy on the part of the companies that was intended to save costs, improve product quality and reliability, and offer incentives for more efficient trading and marketing. Accordingly, the CNDC decided that the exclusivity arrangements in this case favored competition, and that transfers of income among producers, distributors, and subdistributors could affect private interests but not the general economic interest, since consumers’ disposable income had not changed under the modified system. An entirely different outcome was decided in the similar case Phillip Morris v. Chilena de Tabacos S.A. (Chiletabacos) (2005). Here, the TDLC ruled that Chiletabacos, a dominant player, had imposed artificial strategic barriers to entry against Phillip Morris, which were imposed on top of the structural ones. These barriers were contained in the exclusive contracts that Chiletabacos negotiated with independent outlets for the display and sale of cigarettes. Therefore it ordered not to include these barriers in future contracts. The court imposed the defendant company a fine. In Colombia, the Competition Body has been particularly active in the control of vertical restraints arising from exclusive distribution agreements in the auto Vertical Restraints 335 industry. In 1994, Compañı́a Colombiana Automotriz, S.A., one of Colombia’s major automobile assembly plants (producing Mazdas) was investigated for undertaking certain vertical restrictive practices with its downstream dealers. The company was accused of negotiating price discounting agreements, setting the conditions for the discount prices, and fixing a standard interest rate on loans. The SIC closed the case after it received guarantees that the contracts would stipulate free market prices and that dealerships would be left free to sell the products to the public based on their own cost structure. Retail sales prices for vehicles and spare parts, as well as for maintenance and repair services, were eliminated. Also, with respect to market division, only geographical restrictions necessary to ensure timely delivery of warranty and maintenance services would be allowed. The new contracts eliminated exclusive privileges based on the geographic location of the dealership’s showroom. Later, in 1997, three cases were opened regarding the conditions negotiated between major automobile plants and their network of dealerships. In General Motors Colmotores S.A. (GMC) and its dealerships, Hyundai Colombia Automotriz S.A. and its dealerships, and SOFASA S.A. and its dealerships, respectively, the SIC opened investigations when it was established that certain privileges had been given by each company to its respective company network, including: (i) imposing suggested prices for its vehicles, spare parts and accessories, to be used by the dealerships as sales prices; (ii) conditioning the supply of a product on the acceptance of additional obligations unrelated to the purpose of the contract; (iii) demanding product exclusivity, as the dealerships were prohibited from acquiring, promoting or selling new automotive vehicles, spare parts, or accessories other than those supplied by the distributor; (iv) establishing territorial restrictions on the dealerships; (v) reserving to the distributor the exclusive right to sell to certain clients mentioned in the agreement; (vi) committing the dealerships to share advertising costs with the distributor, which would plan and carry out advertising programs according to its own criteria and prohibiting the dealerships from using material that was not approved by the distributor company. After guarantees were given that the dealerships would eliminate suggested standardized price lists, each case was closed. However, the manufacturer would retain the right to inform its dealerships of any market studies, including the product’s position within its segment of the market. Also, restrictions on advertising, systems for internal control, accounting, inventories, and sales and supply of spare parts were all to be eliminated. The manufacturer only would retain the right to examine and check the inventory of the dealership’s stock, its facilities, and the dealership’s books and records during regular working hours. As for the restrictions on dealership territory, this restriction was accepted, provided that certain clauses making customer service more efficient were included, such as those needed for preserving the trademark’s image. These included, for example, clauses requiring distributors to maintain minimum investments for improvements on the distribution chain; maintaining minimum space in stores; giving training sales personnel, and the like. 336 Chapter 8 Latin American case law has dealt with exclusive distributorships in several industries, including consumer goods, such as the beer and soft drinks industry, and infrastructure industries that have been recently demonopolized, such as oil and gas. Several cases highlight the ambivalence of competition authorities toward these arrangements: In 2001, Pemex Refinación was involved in two proceedings before the Competition Commission regarding the distribution and trading and marketing of oils and lubricants for automobile use in gas stations and self-service stations. Pemex Refinación is a subsidiary of the state-owned petroleum company, Pemex, and the latter has a constitutional monopoly over petroleum, but not oils and lubricants, since in 1990 they were taken out of the ‘‘strategic’’ area and subjected to the jurisdiction of the Competition Act. However, Pemex Refinación imposed exclusivity clauses in its supply and franchise contracts with gas and self-service stations forbidding them from selling oils or lubricants other than Pemex’s brand, or those of participating entities, like Mexicana de Lubricantes, S.A. de C.V. (Mexlub). During the proceeding, the Competition Commission found that Pemex Refinación had committed relative monopolistic prices in contravention of the law and impaired the free market access of other oil and lubricant companies. Although the investigation disclosed that minimum distances between stations were not a condition in the franchise agreement, Pemex did use them as criteria in granting franchises. The investigation also revealed that the number of gasoline stations in the country was below the number that would exist under competitive conditions, and that the franchise agreement included a subfranchise agreement that restricted the complementary products that a gasoline station could sell, as well as its working relationships with third parties. This clause in the agreement represented an important barrier to entry for downstream competitors by effectively eliminating gasoline stations as a potential distribution channel. The Competition Body concluded that Pemex had to reduce its discretion in setting the terms of its agreements and make the granting of franchises a more transparent process, both to foster an increase in the number of gasoline stations and to prevent possible anticompetitive practices. Accordingly, Pemex was ordered to modify its contracts’ exclusivity clauses. Pemex Refinación accepted responsibility and carried out negotiations with the Competition Body, which eventually led in June of 2004 to the signing of a coordination agreement whereby artificial barriers to entry were eliminated and which allowed the diversification of businesses. The agreement ensured that the franchise granting process would be nondiscriminatory, would eliminate criteria that limited the number of stations and the distance between them in a given geographic area, and would allow the transfer of franchises among owners. One of the immediate effects of this agreement was a significant increase in the number of stations. Between 1994 and 2005, the number of gas stations doubled. Exclusive dealing contracts in beverage distribution have been a recurring issue for the Mexican Competition Commission. In beer retailing, the commission commenced an investigation in 1999 of the major breweries Grupo Modelo Vertical Restraints 337 (Modelo) and Cervecerı́a Cuauhtémoc Moctezuma (CCM, a subsidiary of Femsa) for entering into contracts with state and local authorities that mandated exclusive local distribution of their brands. The companies settled in 2001 by agreeing to terminate the contracts. That case did not, however, address other exclusive contracts that the brewers had directly established with retailers. 8.4.3 SELECTIVE DISTRIBUTION Selective distribution agreements are a variant of exclusive distribution agreements. Under selective distribution arrangements, distributors are selected on the basis of certain predetermined criteria, which may be focused either on quantitative targets or qualitative standards. These agreements may reduce intrabrand competition and, particularly where several suppliers impose selective distribution, foreclose certain forms of distribution and facilitate horizontal collusion between suppliers or buyers. Selective distribution agreements based on quantitative selection criteria that have the effect of limiting the number of authorized distributors according to their capacity to sell a minimum amount of goods. These agreements will pose a serious threat on intrabrand competition if the supplier holds monopoly power. Antitrust rules usually condemn these agreements if new distributors capable of adequately selling the products in question, especially price discounters, are prevented from accessing the market. Foreclosure of more efficient distributors may also become a problem when there is buying power, in particular where a strong dealer organization imposes strict selection criteria to suppliers. However, where a nondominant supplier is the only one in the market applying selective distribution, quantitative selective distribution agreements are normally tolerated when the nature of the products in question requires selective distribution to ensure efficient distribution. Selective distribution normally leads to efficiencies where investments by distributors are required to protect or build up the brand image or to provide pre-sales services. In general, efficiencies are strongest for new products, complex products, and products whose qualities are difficult to assess. Selective distribution agreements that are based on purely qualitative selection criteria, that is where distributors are selected only on the basis of objective criteria required by the nature of the product, such as training of sales personnel, are generally tolerated by competition rules as long as the selection criteria is applied uniformly and without discrimination, and accordingly, no predetermined limit is fixed on the number of authorized distributors. International standards are increasingly considering the issue of joint dominance in vertical selective distribution agreements. The problem arises when the main suppliers of the market all apply selective distribution. Under competition standards, no problem is likely to arise where the coverage rate exceeds half of the market, so long as the aggregate market share of the five largest suppliers is below 50%. Where the coverage rate exceeds half of the market and the five largest 338 Chapter 8 suppliers hold more than 50% of the market, serious competition concerns may arise if the five largest suppliers all engage in selective distribution. Where the aggregate market share of the five largest suppliers exceeds 50%, they should not impose conditions on their appointed distributors that seek to ensure that they will not sell the brands of other specific competitors. Case law in Latin American has usually given paramount relevance to the possession of monopoly power, as a factor that raises competitive concerns. By contrast, efficiency considerations are given marginal consideration. In the case VFG -Vitrofibras de Venezuela C.A. v VFG-Sudamtex C.A. (Vitrofibras) (2002), Venezuela’s Pro-Competencia determined that the selective distributorship of fiber glass negotiated by VFG Sudamtex with three appointed distributors was illegal under the terms of the Competition Act, because the agreements excluded a newcomer to the market, Vitrofibras. Sudamtex’s monopoly power was evident, in light of her position as the only national provider of fiber glass. However, the arguments focused on the question of efficiencies alleged by Sudamtex, resulting from her business model based on an exclusive distributor network. In her decision, Pro-Competencia noted VFG Sudamtex’s lack of a ‘‘formal, written policy’’ for the selection of selected exclusive distributors, as an indicator of Sudamtex’s intention to select her distributors discretionally, thereby excluding Vitrofibras from the market. It failed to note that such policy was nevertheless existent, inasmuch all the selected distributors complied with similar commercial terms (i.e., storage capacity, training, vehicles, and most importantly, proven business performance). Furthermore, Pro-Competencia did not consider that selected distributors chosen by VFG Sudamtex had a long-established relationship (more than fifteen years; in contrast with Vitrofibras’s short presence in the market—less than a year); nor it considered the obvious disadvantages the newcomer presented to the manufacturer in terms of distribution networking, infrastructure, training, and creditworthiness. This policy is also applied in other countries in the region. In Brazil, has consistently prosecuted exclusive distributorships that could increase the monopoly power of the supplier firm. In the case SDE ‘‘Ex Offı́cio’’ v. Microsoft Infomática Ltda and TBA Informática Ltda (TBA) (Microsoft I case [1998]), CADE held that Microsoft’s licensing marketing model unlawfully restricted the distribution of Microsoft brand software and associated computing services. The case was triggered by an advertising published in the newspaper ‘‘O Globo,’’ by IOS Informática Organização E Sistemas Ltda, an independent reseller of Microsoft’s products. IOS accused Microsoft of giving contractual exclusivity to TBA for the sale of her products to the Federal Government. CADE examined the way that Microsoft defined her policy toward selected distributors, such as TBA. Microsoft had established a system of ‘‘Large Account Resellers’’ (‘‘LARs’’) for sales to substantial corporate customers. LARs were restricted to a specified geographic area, but a given area could be served by multiple LARs, depending on how many distributors met Microsoft’s requirements for LAR status. AU: reference not listed in bibliography. Vertical Restraints 339 Microsoft would appoint regional LARs based on the specific technical, commercial, and financial capabilities of its partners. In 1998, just one reseller had the capabilities to be named an LAR in Brasilia, and another reseller filed a complaint against this practice. Microsoft itself had changed this model already in 1998, with the appointment of a Large Account Reseller for Brasilia; in 2002 it reaffirmed this model change with the end of the regionalization of resellers. In the Federal District (Brasilia) geographic area, only one firm, TBA Informática (‘‘TBA’’), satisfied the LAR qualifications. Microsoft attested in letters to the federal government that TBA was the sole firm authorized to sell Microsoft software and associated services to all federal agencies (including those located outside Brasilia). As a consequence, the bidding procedures normally required for federal agency purchases were waived with respect to purchases from TBA. In examining Microsoft’s arrangement with TBA, CADE concluded that the relevant product market was the sale or licensing of software and computing services to the federal government and that the relevant geographic market was national. In this market, Microsoft was found to have a dominant 90% share. In CADE’s view, Microsoft’s action in creating TBA’s exclusive position was unlawful. By eliminating bidding procedures in sales to the government, the consumer welfare benefits of intrabrand competition were diminished without sufficient offsetting efficiencies in a market where interbrand competition did not exist. Government procurement officials were denied the opportunity to choose among competing providers not only of Microsoft software but of associated computer services as well.300 CADE was equally unconvinced by Microsoft’s proffered efficiency justifications. Microsoft asserted that exclusivity prevented free riding on the trading and marketing efforts of other resellers. CADE replied that Microsoft itself shouldered the bulk of trading and marketing efforts in Brazil and that TBA’s own efforts were directed toward promoting TBA’s trademark, not Microsoft’s. Besides, Microsoft had authorized multiple LARs to operate in other geographic areas. CADE’s negative view of Microsoft’s efficiency justifications was aggravated by Microsoft’s claim that the exclusive status accorded to TBA had not been deliberately intended, but had simply resulted from the application of neutral LAR qualification standards. CADE found instead that Microsoft had engineered the criteria to assure that only TBA could qualify. CADE asserted that the freedom 300. Microsoft argued that it could choose to become involved in its own distribution and sell directly to the federal government, and that therefore interposing TBA as an exclusive distributor did no economic harm. CADE objected to this, that the system established by Microsoft for government sales involved distribution through an exclusive intermediary, not direct sales by Microsoft. CADE observed that when a monopoly producer sells through a single distributor, the final price is higher and total output lower than when a monopoly producer sells directly to the purchaser. CADE concluded that a decision to create an exclusive distributor obligated Microsoft to establish maximum resale prices or otherwise ameliorate the inefficient ‘‘double-monopoly’’ effect that would otherwise arise. 340 Chapter 8 of a producer to establish a distribution system and choose distributors didn’t include ‘‘the prerogative to do it in a discriminatory manner.’’ CADE concluded that Microsoft’s true objective in establishing TBA as the exclusive distributor in the Federal District was to evade government bidding procedures, and concluded that the conduct by Microsoft and TBA constituted a restraint on competition under Article 20 I, an abuse of dominance under Article 20 IV, and an agreement to secure an improper advantage in public procurement under Article 21 VIII. Microsoft was fined 10% of its revenues from licensing Microsoft products to the Brazilian federal government, while TBA was fined 7% of its billings to the government for Microsoft products and associated computing services. A similar case decided by Mexico’s CFC in the soft drinks industry, emphasized on the need of monopoly power in order to establish a breach of the law. In the case Pepsi-Cola Mexicana, SA de CV (PCM) and others v. The Coca-Cola Company and others (2005), the Competition Commission examined the exclusive contracts negotiated between Coca Cola and its distributors. CFC established that 83% of retail stores have exclusivity with Coca Cola and the remaining 17% is with the PCM. Moreover, Coca Cola has a market share of 72% of the soft drinks market nationwise. Exclusive contracts are set orally with a term of one to two years. In short, competition agencies in the region consider contractual exclusion to be monopolistic if it is conducted by a firm that holds monopoly power. Cases decided in favor of businesses in this field almost entirely rest on the lack of factual evidence to support the accusations of the claimant;301 they are not based on the allegations of procompetitive efficiencies which, unquestionably, competition agencies are reluctant to consider in the light of firms that already enjoy monopoly power. There is only one exception that stands out. In the case Toyota (1998), Venezuela’s Pro-Competencia held that exclusivity may be necessary to preserve the value of distribution chains, even in case where firms enjoy monopoly power. In 1997, Toyota decided to change its traditional policy of selling replacement parts to independent distributors, in order to develop a just-in-time inventory policy. Under the new policy, Toyota refrained from selling replacement parts to unauthorized retailers, thus creating ex-ante monopoly profits in favor of Toyota’s authorized retailers. In return, a closer business relationship with a limited number of dealers could provide Toyota with a better assessment of the timing schedules necessary for the replacement of used parts within the industry, as Toyota could acquire a better knowledge of the dealers’ commercial needs for replacement parts. In this way Toyota could make better plans for sensibly reducing its stocks, and with it, financial costs associated to large inventories. In the end, a limitation in the number of dealers reduced consumer prices in the long run. Pro-Competencia regarded this explanation as a reasonable justification based on 301. A case in point is Paiva Piovesan Engenharia & Informática Ltda., v. Microsoft Informática Ltda (Microsoft II case) (2002); about this case, see Section, below. AU: Provide Section cross-reference. Vertical Restraints 341 economic efficiency considerations that, naturally, were only demonstrable in the long run. In this case, Pro-Competencia decided that the exclusion of unauthorized retailers was legitimate, no matter its dominance in the market, because of the efficiencies expected to accrue to the development of markets. 8.4.4 FRANCHISING Franchise agreements are vertical agreements containing licenses of intellectual property rights, in particular trademarks and know-how for the use and distribution of goods or services. In addition to the license, the franchiser usually provides the franchisee, during the life of the agreement, with commercial or technical assistance. The license and the assistance are integral components of the business method being franchised. In addition to the provision of the business method, franchise agreements may contain a combination of vertical restraints concerning the sale of the products concerned, such as selective distribution, noncompete obligations, exclusive distribution, or weaker forms of these restrictions. These restrictions encompass trade names, brand logos, store layout, and the form and content of advertising. These arrangements are usually coupled with additional efficiencies or provide for some other social good, such as foreign investment promotion. This fact has led many jurisdictions in the region to tolerate these business arrangements regardless of their obvious standardizing effect. In particular, the obligations discussed below are generally considered to be necessary to protect the franchiser’s intellectual property rights; therefore, they are legal on the basis of the efficiencies delivered to consumers. Franchising contracts can include an obligation on the franchisee not to engage, directly or indirectly, in any similar competing business. This obligation does not apply to the franchisor, which is free to grant more franchising licenses. A Brazilian case in point addresses this issue. In the McDonald’s case (2002), the Secretariat of Economic Law (SDE) of Brazil filed a proceeding against McDonald’s corporation following accusations by twenty-eight Brazilian franchisees that the multinational U.S. fast-food company was abusing its dominant position. The members of the Association of Independent Franchisees of McDonald’s (AFIM) accused McDonald’s of including abusive, anticompetitive clauses in its franchise contracts, engaging in illegal subleases, and abusing its economic power. Franchisees objected to McDonald’s decision to open its own restaurants near existing franchisees, who were consequently faced with direct competition from McDonald’s-owned outlets. The high rents charged by McDonald’s—as much as 24% of gross sales—were another cause of dissatisfaction among franchisees. In addition, nearly all the premises in which restaurants were located were rented directly from McDonald’s. The corporation undertook property development itself so that it could ensure standardized interior and exterior layouts and choose the locations it wanted. McDonald’s was reported as saying that the franchises involved in the case were having difficulty meeting the terms of their contracts and that the cases should not 342 Chapter 8 have been referred to competition authorities, as this was a private contractual matter (Global Competition Review, July 8, 2002).302 In general, it is efficient to establish prohibitions on the sale of competing goods or services by franchisees, as long as the obligation is necessary to maintain the common identity and reputation of the franchised network. In such cases, the noncompete obligation may last for the whole duration of the franchise agreement. Therefore, these restrictive clauses are usually permitted because they enhance economic efficiency. Due to their efficiency-enhancing effects, franchises are not seen as openly anticompetitive devices, perhaps because they are regarded as tools of foreign investment. The more important the transfer of know-how, the more likely it is that the vertical restraints will be regarded as efficient by the competition authority. This fact has led many jurisdictions in the region to allow these business arrangements. Sometimes, however, franchises are prosecuted as instruments that facilitate abusive dominant conduct or otherwise restrict vertical competition. Franchising restrictions are usually allowed as long as they do not conceal a per se illegal arrangement such as a hard-core cartel. Venezuela’s Lineamientos para la Evaluacion de Contratos de Franquicia (Guidelines for the Evaluation of Franchising Contracts), provide that these agreements will not be considered anticompetitive if they render economic efficiencies for the benefit of consumers. Yet even in such a case, the authorities might accept contractual conditions in a franchise situation that would not be acceptable in an exclusive distribution agreement, such as tighter control by the franchiser over retail prices. Evidently, efficiencies are apparent in franchise contracts, due to the provision of additional services and know-how, that are not present in exclusive distribution agreements; for this reason, they are tolerated. In an opinion requested to the Chilean Competition Comission in 1994, this authority noted that franchising contracts are not anticompetitive, because the contractual restrictions imposed by the franchisor to the contractor (franchisee) running the business, ‘‘tend to provide a better service; protected by a trademark, in a highly competitive market as fast food ( . . . ) hence, the reason why this authority has authorized in the past these franchising contracts. . . .’’303 This opinion reaffirmed a previous opinion issued in 1993, and was again confirmed in 1999.304 302. This case reveals the complications that arise in reviewing the competitive effects of franchises. Conflicts involving franchise contracts have little effect on interbrand competition; hence, in principle they are not subject to competition review. Yet, one particular point raised by this case deserves a more careful investigation: whether McDonald’s control over the locations and premises around its restaurants could be used to restrict entry of rival brands in order to eliminate potential competitors. In particular, a borderline case could arise if McDonalds decided to operate its restaurants itself while using predatory tactics against its own franchisees. 303. Ruling No. 1083/94 Esso. 304. Ruling No. 875/93 Infoland and Ruling No. 1082/99 Texaco, respectively. Vertical Restraints 8.4.5 343 RESALE PRICE MAINTENANCE Resale price maintenance (‘‘RPM’’) is a common form of exploitative vertical restriction affecting prices at the retail level; hence, this practice is usually classified as a kind of exploitative output restriction. Under this arrangement, a supplier sets a final downstream price at which retailers must sell. RPM may impair competition by encouraging cartel behavior among producers (as it eases price monitoring) and by foreclosing new players from entering the market. RPM may facilitate the creation of barriers to entry to downstream firms and enhance the producer’s market power. A supplier is not allowed to fix the price at which distributors can resell his products. However, the imposition of maximum resale prices or the recommendation of resale prices is normally not prohibited. Usually, they approach this behavior under a rule of reason analysis, requiring evidence of its competitive effects. Under Article 21 of Brazil’s Competition Act, for instance, resale price maintenance may be illegal whenever it has the purpose or effect of either limiting or injuring free competition or abusing a dominant position in the relevant market. Similarly, Article 12 of Venezuela’s Competition Act prohibits such behavior. In countries with wider antitrust experience, such as the U.S., the former per se treatment of this conduct has changed into a rule of reason analysis. This is due to the efficiencies of retail price management associated with the reduction of transaction costs between retailers and suppliers, as well as other efficiencies such as improvements in brand image. These efficiencies allow small firms to compete with larger ones, which normally are in a position to obtain discounts with producers. Although, competition agencies are increasingly acknowledging such efficiencies, they are still reluctant to disregard their previous views on the anticompetitive effects of RPM. This is exactly the rationale that Chile’s Competition Commission in 2001, in a decision against Toyota. In this case, Toyota fixed minimum resale prices for original replacement parts. The Commission acknowledged the efficiency that could accrue from resale price maintenance and that in this case there was vigorous competition in the automobile market; but it decided that consumers do not have a choice when buying original replacement parts and that therefore, the efficiency benefits (such as better service) were insufficient in this particular case. Two members dissented on the grounds that the automobile market was competitive and the restraint promoted efficiency and consumer welfare (OECD and IADB, 2004b, pp. 220-221). In the antitrust literature, some discussion is devoted to the comparison between resale price maintenance and suggested retail prices. Guided by its emphasis on market restrictions between competitors, rather than the external competitive pressure generated by the threat of outsiders, antitrust analysis has been unable to distinguish clearly between these two practices.305 305. Other obligations include (i) an obligation on the franchisee not to acquire financial interests in the capital of a competing undertaking if such acquisition would give the franchisee the power 344 Chapter 8 Suggested prices are intended to consolidate markets around a single retail price. Under antirust logic, this is usually viewed as an expression of concealed cartel conduct, which resellers impose on the provider through concealed manipulations. In order to establish the competitive effects of this behavior, competition authorities usually look to the following circumstantial evidence: First, the market position of the supplier is the main factor in assessing the possible anticompetitive effects of recommended or maximum resale prices. The stronger the supplier’s position, the higher the risk that a recommended resale price or a maximum resale price will be followed by most or all distributors. Second, authorities evaluate whether the supplier operates within an oligopoly market. In a narrow oligopoly where there are few suppliers in the market, the practice of using or publishing recommended or maximum prices may facilitate horizontal collusion between the suppliers by exchanging information on the preferred price level and by reducing the likelihood of lower resale prices. 8.4.5.1 The Legality of Suggested Prices It is not clear what exactly distinguishes RPM from mere suggested prices. Some countries, like Brazil, Nicaragua, and Venezuela, treat RPM as a type of vertical restraint, whereas others, like Panama, have considered it a variant of cartel conduct. Similarly, some countries focus their analysis on whether retail prices are suggested or enforced. Let us review some decisions in this area. In the Kibon case (1992), Brazil’s SDE filed an administrative proceeding against the ice-cream manufacturer Kibon under the assumption that the price schedules it presented to its retailers constituted a violation of the economic order because they led to the adoption of uniform conduct. CADE concluded that the price list contained suggested retail prices and did not constitute retail price maintenance. In reaching this conclusion, CADE collected data from market participants and also examined Kibon’s market power in order to analyze this conduct under a rule of reason standard. CADE found a high level of interbrand competition, weak barriers to entry, and atomistic supply, which would make the imposition of price lists and monopolistic use of market power by Kibon virtually impossible. However, CADE’s decision was still grounded in formal to influence the economic conduct of the competing undertaking; (ii) an obligation on the franchisee not to disclose to third parties the know-how provided by the franchiser as long as this know-how is not in the public domain; (iii) an obligation on the franchisee to communicate to the franchiser any experience gained in exploiting the franchise and to grant it and other franchisees a nonexclusive license for the know-how resulting from that experience; (iv) an obligation on the franchisee to inform the franchiser of infringements of licensed intellectual property rights, to take legal action against infringers, or to assist the franchiser in any legal actions against infringers; (v) an obligation on the franchisee not to use know-how licensed by the franchiser for purposes other than the exploitation of the franchise; and (vi) an obligation on the franchisee not to assign the rights and obligations under the franchise agreement without the franchiser’s consent. Vertical Restraints 345 considerations, insofar as it emphasized the consensual nature of the list, which only purported to suggest prices. This led one commentator to conclude that if the agreement had a clause providing for the enforcement of the price list, CADE would have ignored the other indications of fierce competition in the market to rule Kibon’s conduct illegal. (Rocha e Silva, L., 2000) However, Resolution No. 20/99 requires CADE to undertake a rule of reason analysis that considers the economic context in more detail. Moreover, in the Costa Rican case Coca-Cola Femsa (2004) debated the legality of designated list of prices to consumers. Like Farmex,306 a key question in this case was Coca Cola’s alleged dominance in the market (85%) for distribution and cooling at retail stores. COPROCOM imposed an administrative fine of USD 159,445 on Coca Cola, for violating Article 12.b of Law No. 7472/96, which prohibits resale price maintenance. Essentially, Femsa, Coca Cola’s bottling firm, had violated this provision when it forced its distributors and retailers to apply its designated list of prices to final consumers. Legally, Femsa could only suggest these prices, not impose them. COPROCOM also ordered Femsa to take whatever actions were necessary to prevent the list of suggested prices from being displayed publicly and to make clear to its contractors that these were suggested, not compulsory, prices. The case was linked to another alleged violation of Article 12.a, dealing with exclusivity clauses. According to the facts of the case, Coca Cola forced its resellers to exclude other competitors (notably, Pepsi-Cola) from using its freezers at retail stores and from using its vending machines. Accordingly, they received a fine of USD 79,722. A similar case was decided in Venezuela in 1996 along the same lines. Other countries, like Mexico and Panama, regard suggested pricing as a variant of cartel conduct. Hence, these countries refrain from looking into the issue of market power; instead, they focus on whether there was any communication between the firms involved. Mexico regards suggested prices as absolute monopolistic practices; accordingly, the Mexican Commission does not make distinctions based on the level of market power wielded by the participating firms. In the Tortillas case (2000) this became very clear. In January of 2000 the Competition Commission became aware of the fact that Club Cadena Maı́z Tortilla, S.A. de CV (Camato) had suggested that its affiliated producers and mill operators establish a selling price for corn tortillas in Mexico City of four pesos per kilogram. Under Article 5, second paragraph, of the Regulations of the Competition Act, recommendations made by trade associations or organizations to their members with the intention or the effect of increasing or manipulating prices point to the existence of absolute monopolistic practices. Such practices are prohibited by Article 9, first paragraph of the Regulations. Accordingly, the Competition Commission initiated an ex officio investigation to determine whether absolute monopolistic practices were involved. Camato is a company made up of producers, mill operators, and producers of fresh corn tortillas. This enterprise consists of 17,000 producers and mill operators who meet 306. See Section 8.3.1, above. AU: reference not listed in bibliography. 346 Chapter 8 the demand of 10% of the domestic market and more than 5.8% of the more than 12,000 tortilla makers in Mexico City. The tortilla makers who are associated with Camato are not a single economic agent and they compete with each other. Consequently, the instructions or suggestions given by the organization to tortilla makers concerning the price of tortillas constituted an absolute monopolistic practice. Camato argued in its defense that it was not an industry organization or association but a society of merchants. Although Camato is by law a for-profit entity, this did not prevent it from having certain characteristics of a trade association. For the purposes of the Regulations, Camato was the instrument through which monopolistic practices were carried out. According to the petitioners, the suggestion of a price did no harm to consumers, because the prices were not unreasonable. Under the provisions of the LFCE, however, it is a monopolistic practice to fix, increase, agree on, or manipulate prices, regardless of whether these prices rise or fall. In light of these facts the Competition Commission determined that Camato had committed an absolute monopolistic practice. It was ordered to cease the practice and to pay a fine. The Competition Commission also ratified its response to the motion for reconsideration that had been filed. In the absence of collusion, tortilla makers would have been free to price their products, and millions of consumers of tortillas in the metropolitan area of the Federal District would have had more suitable choices. In conclusion, RPM prosecutions are common among commercial chains due to the nature of their commercial activities. However, there is no clear legal standard beyond the recognition that RPMs are compulsory in nature and more stringent in comparison to mere suggested prices. From an economic standpoint, however, both practices serve the same purpose. Therefore, legal rules in these cases do not clearly distinguish between the two, beyond recognizing the coercive element involved in RPMs. The standard of legality is based on the assumption that RPMs induce the cartelization of retailers; hence, they will likely restrict output at the retail level. Yet, the demonstration of such restrictive effects is essentially linked to the possession of market power by the undertaking party. Here is what separates RPM from horizontal collusion: while the proof of collusion among horizontal traders is founded upon the existence of information exchanges, in RPM cases, given the vertical nature of the conduct, such evidence is not helpful due to the very structure of the conduct. Hence, competition agencies rely on evidence of market power, rather than examining the substantive core of such arrangements. 8.5 ASSESSMENT OF VERTICAL RESTRAINTS In the U.S. case law, vertical restraints had long been examined under what has been referred as: ‘‘inhospitality tradition.’’307 This tradition began to recede after 307. According to this theory, any restriction on freedom of competition from firms would be at least suspicion, if not illegal per se. In the populist era of antitrust (the zenit of the Vertical Restraints 347 the U.S. Supreme Court decision Continental T.V., Inc. v. GTE Sylvania Inc. (1977). In this case, the court ruled that a vertical arrangement to restrain trade made between a manufacturer and a retailer should be examined in its merits, under a rule of reason standard.308 Latin American competition agencies endorse a rather indulgent view toward vertical restraints; thereby advocating a rule of reason standard on these conduct. In this recent view, these restraints overcome a market failure whenever they internalize externalities that arise when downstream enterprises ignore the effect of their actions on upstream profits. In this approach, vertical restraints have a positive role in aligning misplaced incentives that could endanger ‘‘efficient’’ resource allocation between suppliers and distributors or retailers, due to faulty assignment of property rights. Such skewed incentives discourage parties from undertaking investments that would increase the overall efficient performance of markets. The recent theory is moving away from a rigid approach that used to regard vertical restraints as mechanisms for displacing downstream competitors, squeezing consumers, or abusing monopoly power; instead, the theory is increasingly viewing them as mechanisms that facilitate entrepreneurs’ efforts to organize their production, sales, and distribution through outsourcing and independent contracting in a way that is less expensive than vertically integrating these activities within the firm. In general, most antitrust statutes within the region reflect the view that vertical restraints should be examined under a rule of reason analysis. Thus Mexico,309 Costa Rica,310 Panama,311 and Venezuela312 tolerate these agreements 308. 309. 310. 311. 312. ‘‘inhospitality tradition’’) non-standard contracts might have been found illegal per se for limiting the freedom of traders. In the modern era, however, they are likely to escape per se treatment because the contracting firms can offer plausible efficiency justifications. Meese (2005, 2006) examines how the U.S. case law has curtailed such tradition since the Sylvania ruling. Continental, a small distributor of television sets in northern California, objected Sylvania’s exclusive distributor policy, which relied on appointing exclusive distributors for designated territories. The exclusivity imposed a limitation on Continental’s restriction on his freedom of action, to distribute Sylvania’s television sets. The Court, however, did not agree with Continental’s view. In her view, the interbrand competition (i.e., between different producers of television sets), was very strong as Sylvania had no monopoly power in this market. On the contrary, the strategy of limiting the action of appointed distributors to specified regions was rather a survival strategy: in this way, the policy ensured that distributors concentrated their attention on marketing and selling Sylvania’s products, thus avoiding the presence of ‘‘free riders.’’ Sylvania, therefore, had no intention of monopolizing the market. This principle was later reproduced by the European Court of Justice in Pronuptia v. Schillgalis (1986) on the analysis of a franchise contract. Naturally, this change of legal standard generated a considerable debate among the international antitrust community, including, of course, that of Latin America. Article 10, Federal Law of Economic Competition (Mexico). Article 12, Law No. 7472/94 (Costa Rica). Article 17, Law No. 45/07. Article 4, Regulation No. 1/94. AU: reference not listed in bibliography. 348 Chapter 8 provided that they ‘‘promote economic efficiency by overcoming market failures.’’ (Khemani, R.S. and Dutz, M., 1995, pp. 22-23) Even Chile, which formerly applied a per se standard to vertical restraints, has recently changed its stance by relying on economic analysis of these practices. However, by large, a practical implementation of such rule of reason analysis is yet to be seen among Latin American competition agencies. These are still largely influenced by the structural bias against vertical restraints. No matter their formal adoption in the domestic legislation of all Latin American jurisdictions, in practice competition agencies still have severe shortcomings in dealing with vertical restraints in individual cases. Like in other areas of antitrust enforcement, economic efficiencies are easy to identify ‘‘at the blackboard,’’ yet their particular identification in a given case depends on the specific surrounding economic circumstances within which the conduct takes place. That leads the authority to associate the effects of the conduct examined with the position of the firm that initiated it, thereby conflating the monopoly power with the anticompetitive effects of the conduct analyzed. In other words, the authority has a tendency to conflate the anticompetitive effects derived from business strategies, with the monopoly power in possession of the investigated conduct. In the end, the analysis is focused on whether the firm has monopoly power or whether it does not. This phenomenon is clearly seen in the rationale behind cases such as Brazil’s SDE ‘‘Ex Offı́cio’’ v. Microsoft Infomática Ltda and TBA Informática Ltda (TBA) (Microsoft I case (1998) or Venezuela’s VFG -Vitrofibras de Venezuela C.A. v VFG-Sudamtex C.A. (Vitrofibras) (2002), both examined above. In both cases, determining whether there was an infraction in the way manufacturers selected their distributors, ultimately relied on their monopoly power; not in the merit of the vertical conduct investigated, which could be explained under a perspective of dynamic markets and promotion of long-run productive efficiencies, as the case Toyota (1998) explained. Unfortunately, cases like Toyota are extremely rare, due to the internal logic of antitrust theory. These contradictions in the decision-making process shows that the rule of reason is far from being settled in the region in respect to each class of restrictive conduct. Clearly, the standard of legality ultimately will depend on the particular position held by the investigated firm (usually, its market share), rather than on the merits of its conduct. We refer to this problem again in Section, below. Consequently, the assessment of productive efficiency in vertical restraints, like in other areas of Latin American antitrust policy, is still largely unsettled, due to the intuitive approach of competition agencies, which is in turn a consequence of their emphasis on monopoly power issues in antitrust investigations. Hence, although much ink has been spilled over the question of efficiencies, judicial cases still reveal a complete lack of clarity and uniformity on this question, which impairs the predictability needed to develop a rule of law. This flaw impairs the capacity of competition agencies to reduce the exaggerated role attributed to monopoly power in antitrust analysis, and more generally, to improve antitrust balancing-test analysis. AU: Provide Section crossreference. Vertical Restraints 349 Therefore, case law emphasizes that in the absence of monopoly power, vertical agreements that contain restrictions to competition may be considered to improve the production and distribution of goods and services. However, notwithstanding the efficiencies generated, the accepted view is that vertical agreements can also have anticompetitive effects, particularly if they result in market foreclosure, restrict price competition or result in the partitioning of markets. Whether or not the franchise agreement might raise competition concerns, depends on its nature or formulation, or on the structure, market size or market power. Thus, for instance, RPM would apply if parties have market power. Vertical restraints are accepted if there are overriding countervailing benefits such as an improvement in efficiency or the promotion of research and development. It appears therefore that there is a lot of similarities in the way vertical agreements are dealt with in the different jurisdictions. For example, it is accepted that although vertical agreements are efficiency enhancing they can also have anticompetitive effects. It is also evident that in most of these jurisdictions, the use of the rule of reason is more prominent when dealing with franchise agreements, as their output restrictive effects is tied to visible efficiencies that increase consumer surplus. Due to similar reasons, competition agencies usually adopt a lenient position toward vertical restraints linked to IPRs, because they not only enhance efficiency but are imposed to protect the know-how or the investment incurred by the franchisor. Evidently, the only case that concerns competition agencies is whether the misuse of IPRs creates or reinforces monopoly power. Finally, the legal treatment of vertical restraints associated to prices is less obvious. Some countries still continue to regard RPM as a per se violation whereas in other countries the trend indicates that this conduct may be authorized when there are clear public benefits. Suggested prices are acceptable to most competition authorities in that they communicate information to consumers and franchisees about quality, brand image, services, etc., and do not force resellers to fix their prices vis-à-vis consumers. Chapter 9 Unilateral Restraints Latin American antitrust laws usually contain the concept of single firm exploitation of monopoly power or the use of improper means of attaining or retaining monopoly power. These concepts are variously called ‘‘abuse of a dominant position’’ or ‘‘monopolization’’ or ‘‘misuse of market power,’’ or some similar term. This chapter will examine the array of unilateral conduct undertaken by firms enjoying monopoly power for the purpose of forcing the exit of rivals, or deterring the entry of potential ones. We refer to this conduct by the generic name of ‘‘unilateral restraints.’’ The treatment of unilateral restraints is particularly revealing of antitrust policy’s structural innuendo. In light of the high concentration of domestic industries in the region, control over unilateral restraints exercised by dominant firms seems to be a priority of competition authorities. Otherwise, leaving firms with monopoly power to act at their will could impair the development of downstream and upstream complementary industries and lead to the exploitation of consumers and clients. Competition agencies concentrate on targeting bottlenecks created by dominant players in a given industry on firms operating in downstream or upstream industries; this is the rationale for controlling such behavior. Undue exercise of unilateral abusive monopoly power is prohibited because its effects are perceived to convey the same welfare diminishing effects as other anticompetitive restraints: loss of output and increase in the price of goods for consumers. Like previous chapters dealing with other anticompetitive restraints, this chapter will not examine whether the intrinsic logic behind government control over unilateral restraints contradicts the goal intended to be attained by the policy, that is, the promotion of promarket institutions. This chapter will merely examine how legal standards applied to this type of anticompetitive restraint reproduce similar imprecise legal standards to those that are reflected in the approach to other types of restrictions. 352 9.1 Chapter 9 ANTITRUST RATIONALE OF UNILATERAL RESTRAINTS CONTROL In Latin America, competition agencies have raised issues related to dominant firms enjoying monopoly power. This is not mere accident, as previous government policies limited the number of market participants in each industrial segment, thereby causing industries to become concentrated. Unilateral conduct is often linked to firms that used to operate as state-owned enterprises, and therefore, were sheltered from both domestic and international competition. However, under the inspiration of the Washington Consensus precepts, many privatized industries were not given a competitive legal framework once privatization had taken place. Given that governments often preferred to maintain the antimarket regulatory environment of privatized state-owned enterprises operating under legal monopolies, competition issues often emerged, as firms operating under conditions of legal monopoly or quasi monopoly often implemented practices aimed at the anticompetitive exclusion of competing firms operating in upstream or downstream markets. Exclusionary behavior resulting from dominance has acquired special significance in the competitive management of privatized utilities such as water supply, electricity supply, transportation, telecommunications, and similar industries. In these industries, new developments in economic theory emphasize the network and lock-in effects of ‘‘network industries.’’ According to these theories, entrants may be discouraged from entering a market in which the firm enjoying monopoly power operates because of network externalities. Therefore, dominant firms attempt to extend their reach beyond their original markets, into upstream or downstream adjacent markets, by forcing competitors out of these markets. The preeminence of multiproduct firms that enjoy a considerable degree of vertical integration in activities characterized as natural monopolies presents regulators with important challenges in ensuring a competitive environment at all levels of the relevant industry. Antitrust scholars see in the exercise of unilateral restraints a particularly perverse modality of anticompetitive restriction. Unilateral restrictions may adopt several different forms; yet, legal standards on these conducts are unsettled. Some believe unilateral restraints conceal a monopolistic intention to increase monopoly power, through strategies aimed at increasing entry costs of potential competitors, to the detriment of consumer welfare. By contrast, others estimate that such strategies are inevitable exclusions that firms must impose in their usual dealings with clients and suppliers, which reflect the realities of the market. Also, these conducts may be efficient as they make it possible for entrepreneurs to reap increasing returns, increase the quantity of sales, and reduces production costs. Let us examine these problems more in detail, in the light of the Latin American experience. Unilateral Restraints 9.2 353 STATUTORY STANDARDS OF ABUSE OF DOMINANCE Unilateral anticompetitive restraints imposed by firms enjoying monopoly power may adopt the form of price and nonprice restraints; similarly, it can take the form of exclusionary conduct directed against competitors, or exploitative conduct directed against consumers. Under international standards, proof of unilateral anticompetitive restraints requires positive evidence of the following elements: – the firm under investigation must hold monopoly power (dominance); – the investigated conduct must exclude competitors in the upstream or downstream market; and – the conduct must have no procompetitive effects; in other words, the effects of the conduct impair consumer surplus and bring about no procompetitive effects or productive efficiencies. 9.2.1 MONOPOLY POWER In order to be subject to prosecution, unilateral anticompetitive conduct should be implemented by firms enjoying monopoly power. Monopoly power ranks top at the list of priorities examined by competition agencies in the region, in order to establish the legality of unilateral conduct. Case law in Latin America requires monopoly power as a prerequisite for labeling certain conduct as anticompetitive. As seen in Section 4.1 above, the concept of monopoly power embraces both the European notion of dominance and the U.S. concept of market power. For practical purposes, there is little difference between them, vis-à-vis the capacity of businesses to engage in illegal restraints under antitrust theory. Assessing monopoly power in unilateral restraint cases involves similar terms to other anticompetitive restraints. First, monopoly power is assessed with reference to a defined market; that is, a firm has monopoly power only with respect to a market. Identification of the scope of the relevant market, however, may be difficult in cases involving unilateral conduct. Although the structure of vertical restraints usually undermines competition in a downstream or upstream market different than the one where the firm enjoys monopoly power, sometimes it may be the other way around. For example, in the Peruvian case Tele 2000 v. Telefónica del Perú Telecoms Operator Applying Automatic National Roaming, the telecom sector regulator, Osiptel, decided that although Telefónica had no dominant position in the antitrust market (i.e., Lima), it was capable of imposing conditions unilaterally, and therefore Osiptel imposed a sanction.313 313. In Peru in 1995, Telefónica had a monopoly in fixed telephony for national and international calls. This monopoly had been established in the agreement between the Peruvian government and Telefónica formed when Telefónica won the public concession offered by the Peruvian government in 1993. Furthermore, Telefonica had a concession to operate the mobile 354 Chapter 9 Market definition in an abuse of dominance case is slightly different from that in a merger case because the dominant firm may already be pricing at the monopoly profit-maximizing level; therefore, it may be impossible for the competition authority to establish with certainty what the competitive price yardstick is. In view of this impossibility, competition agencies wield a broad degree of discretion in evaluating the size of markets occupied by a dominant firm. Most often they emphasize the physical properties of possible substitutes, as well as observable differences in end uses or consumer preferences, switching costs and institutional barriers. However, sometimes they examine the hypothetical effects of removing a competitor, in order to examine whether the dominant firm would act differently. If it would act differently, the firms supply the same relevant market; if not, they do not. Finally, other agencies use a constructed ‘‘competitive price’’ rather than the prevailing market price as the reference price for market definition, to avoid falling into the so-called ‘‘cellophane fallacy.’’ In the end, it is clear that choosing the ‘‘correct’’ method is largely discretionary, which brings into question the validity of the SSNIP methodology. We shall examine this problem extensively in Section 12.2.1, below. Once the relevant market is defined, antitrust analysis turns its attention to the firm’s competitive status. As explained above,314 this analysis begins with a positive determination of monopoly power in the hands of the investigated firm. Competition agencies assess market concentration either with reference to the firm’s own market share or with reference to the aggregate concentration of the market. Under Brazilian standards, for instance, tying by a supplier with more than a 20% market share in the market of the tying product or the market of the tied product is unlikely to be exempted unless there are clear efficiencies and a fair share of these efficiencies is passed on to consumers. At the same time, they evaluate market dynamics, which takes into account the evolution of competition in the relevant market, including foreseeable competition and market structure changes, and the dynamics of competition, such as, for example, whether prices or other attributes are the relevant competition factor in the market. Finally, the analysis considers the existence of barriers to entry, including the existence of sunk costs (particularly in association with economies of scale and scope and product differentiation, with the latter often related to advertising or marketing expenditures or to patents, trademarks or other intellectual property). telephony network in Lima—a concession acquired when it bought CPT—and in the rest of the country—a concession acquired when it bought ENTEL. In this case, Osiptel indicated that even if Telefónica didn’t have a dominant position in the relevant market, Telefónica had a dominant position in the market outside Lima. As a result, Osiptel said that Telefónica transgressed the neutrality principle because it used its dominant position in the market outside Lima to generate advantages in the Lima market. Telefónica, as the operator outside Lima, provided Telefónica’s clients in Lima with access to automatic national roaming, while it gave TELE 2000’s clients access to manual roaming. TELE 2000 could not compete with this offer because only Telefónica could provide it. 314. See Section 4.2.3, above. AU: Please provide the expansion of SSNIP. 355 Unilateral Restraints Similarly, they examine government-erected statutory or regulatory barriers (e.g., international trade barriers, mandatory standards, industrial incentives, and other policy interventions), and the possible use of strategic behavior by incumbents to discourage entry (including raising rivals and its own costs). Other criteria that may be applied include the existence of barriers to expansion by rival firms, other firms’ market shares, access to capital, the existence of large buyers, the degree of vertical integration, and the occurrence of abuse. 9.2.2 ‘‘ABUSIVE’’ EXCLUSIONARY OR EXPLOITATIVE EFFECTS Under international standards, simply possessing monopoly power, a dominant position, a jointly dominant position, or a position of substantial market power is not illegal; antitrust rules require firms enjoying monopoly power to undertake some abusive behavior before they can be subject to penalties. Abusive conduct is usually classified, according to its effect on other economic agents, as exploitative or exclusionary. Hence, a single firm enjoying monopoly power may exploit consumers or interfere with the competitive process (e.g., by raising barriers to entry) against competitors. However, some authors emphasize that these effects do not depend on the action of firms alone, but rather on the particular environment in which the firm acts. In this view, the abusive effects of unilateral behavior depend on the evaluation of the surrounding economic circumstances, including the duration of the exclusion; the combination of several joint business strategies to reinforce the exclusion; the modality of the restriction; and the scope of the market affected. As Van Siclen (1996) notes, a firm’s strategy typically consists of a bundle of interrelated behaviors—for example, maximum resale price maintenance and exclusive territories agreements with distributors—so that separating out a particular behavior from the bundle of behaviors and analyzing it may result in finding a harmful effect where there is none, or finding no harmful effect where one exists. Thus, the definition of abusive conduct rests on the particular objectives of antitrust law. If economic efficiency is the main objective, then welfare-reducing actions should be considered to be abusive. If, alternatively, fair trade is the main objective, then taking advantage of a better bargaining position may be considered abusive. Other possible objectives—pluralism, promotion of small businesses, etc.—would each imply a set of actions that hamper their achievement and therefore would be considered abusive. 9.2.3 PROCOMPETITIVE UNILATERAL RESTRAINTS Unilateral restraints, like other restrictive business conduct, may cause two opposite effects in the market, depending on the theoretical magnifying glass used to examine them. On the one hand, these restraints will likely limit output 356 Chapter 9 or induce the exclusion of competitors, which is clearly detrimental to consumer welfare. On the other hand, these shortcomings may be justified on the basis of the efficiencies they introduce in the production process. Unilateral restraints could bring about the following procompetitive efficiencies: – reduction of commercial default risk; – development of complementary products; – promotion of investments on networks. 9.2.3.1 Minimizing the Risk of Commercial Default Under the contractual theory of the firm developed, among others, by Klein and Leffler (1981) and Klein and Murphy (1988), there may be risks of nonperformance where the costs of withdrawing from a transaction are low to one party and high to the other. One solution these authors propose is to increase contractual prices. A necessary and sufficient condition for performance is the existence of prices sufficiently above salvageable production costs so that the nonperforming firm loses a discounted stream of rents on future sales that is greater than the wealth increase from nonperformance. This theory explains why firms may engage in conduct that appears to be exclusionary, discriminatory, or exploitative, yet is intended to offset businesses’ risks in the event of commercial default. Naturally, these risks increase in transitioning and developing economies, due to the resilient flaws of the dispute resolution system and allocation of property rights in courts. Due to the ineffectiveness of Latin American courts in protecting property rights, businesses face higher risks of commercial default, inducing them to impose more stringent commercial conditions on their transactions, or to privilege those counterparts with whom they have a stable trading relationship. Some discounts are created to compensate for the risks and costs of capital recovery when investing in informal or highly atomized markets. These barriers are necessary for financing—hence the call for exclusivity periods, long concession terms, and the like. Investors, investment bankers, and short-term revenuemaximizers in government will naturally all argue for barriers to entry to lower the cost of capital when privatizing infrastructure firms or issuing concessions to build new facilities. Monopoly rights do lower the cost of capital and make financing easier. But they do so by shifting risk to customers, not by reducing overall risk. In the last century, investments not protected by barriers to entry were nevertheless funded. 9.2.3.2 Development of Complementary Products Development of complementary goods is the natural outcome of the specialization of production, which follows the division of labor (Smith, 1776 [1937]). Tying obligations produce efficiencies arising from joint production, joint distribution, or from the fact that the supplier can sell the tied product in larger quantities, thus AU: reference not listed in bibliography. AU: Please provide complete reference details for Klein and Leffler (1981) and Klein and Murphy (1988) in the Bibliography. Unilateral Restraints 357 lowering the expenses of trading and marketing a product which is relatively unknown to the consumer. Tying agreements enable firms to offer complementary goods as packages. This is beneficial for consumers inasmuch as it reduces their information search costs; it also encourages producers to entertain further divisions of labor and, to seize increasing returns from undervalued markets by creating new goods and products that can easily fit into the market standard. Also, they add value to products traded in the market by supplying goods and services that consumers perceive to be complementary. This is the case of warrants ‘‘imposed’’ on buyers of a given product, whose validity is conditioned to certain contractual obligations; for example that the purchased product receives maintenance or service at the dealer’s authorized stores. In these cases, producers enhance their goodwill, as they will control the ‘‘brand name’’ by providing postsale services; in exchange, consumers obtain assurance of the quality of the services provided. As markets diversify, the preferences of consumers grow more sophisticated, thus triggering more differentiation. However, differentiation usually grows from a basic product which, if commercially successful, evolves into standards comprised of complementary appliances. Development of the PC standard, for example, triggered the production of complementary products and services: software applications; digital music; online services; and so on. Tying arrangements may be the natural response of markets to this phenomenon. By linking one product to another, businesses reduce the time that consumers would have had to spend in the search of ‘‘packages’’ of products that best satisfy their needs. However, the supplier of the tying product needs to demonstrate that these positive effects cannot be realized equally and efficiently simply by requiring the buyer to purchase products satisfying minimum quality standards. 9.2.3.3 Promotion of Investments on Networks Unilateral restraints such as refusals to deal or discrimination may be justified to preserve increasing returns, which are necessary to maintain the quality of the network operated by an incumbent firm. Competition authorities should assess whether the incumbent firm is engaging in a monopolizing attempt by charging a ‘‘premium’’ on access prices for independent firms operating in downstream markets. There is no easy answer in such a case. Discrimination, for example, may be necessary to lure incumbent firms into making necessary investments for the preservation of the network infrastructure, or to compensate for sunk costs incurred. Also, there may be commercial reasons supporting discrimination against some firms, such as diverse capital costs; prudential risks; business volume; and others. However, the need to preserve the incumbent’s economic incentives to maintain the network seldom justifies the enactment of regulatory barriers to entry. Some have advocated such regulatory barriers on the basis that an unsustainable or suboptimal outcome may result from the competition for a natural monopoly under a policy of free entry. For instance, network externalities may create either 358 Chapter 9 excess inertia (too little investment while firms wait for others to invest in expanding the network) or excess momentum (too much investment as firms try to establish an advantage by moving first). These arguments for barriers to free entry in natural monopolies reflect concerns about undersupply or excessive costs of service delivery. 9.3 LATIN AMERICAN CASE LAW ON ABUSE OF MONOPOLY POWER Let us see how case law in the region deals with four types of business practices regarded as ‘‘abusive’’: – – – – 9.3.1 Tie-ins Refusals to deal Price restraints Raising rivals’ costs. TIE-IN ARRANGEMENTS Tie-in arrangements condition the availability of one product on the purchase of other goods or services. In addition, the term includes ‘‘full-line forcing,’’ which is a form of tying where the manufacturer requires the distributor to carry all its products. These arrangements take place whenever buyers are forced to acquire goods or services from the supplier of another good, thereby excluding competing parties from offering their products; in this way, the theory goes, a given firm operating in one market extends its ‘‘clout’’ into another. The first product is referred to as the ‘‘tying’’ product and the second as the ‘‘tied’’ product. Tying agreements may lead to market foreclosure. Tying may also lead to supracompetitive prices and to higher barriers to entry in the markets of both the tying and the tied product. The monopoly power of the supplier in the market for the tying product is of primary importance in assessing possible anticompetitive effects. However, case law has changed the legal standards on tying arrangements. In previous years, tieins were regarded as illegal, as exemplified in the Brazilian cases Xerox (1991) and Sharp (1991), both decided by CADE. In these cases, the defendant firms were found guilty of forcing consumers to accept the maintenance services they provided as a condition for the use of other supplies they produced, despite the fact that each company lacked market power. In the more recent Vesuvius case (1999), however, CADE stated that tie-in arrangements can only be regarded as illegal when a firm possesses market power in the relevant market. Forgioni (1998, p. 139) also argues in the same direction. In his view, under the terms of Brazil’s Competition Act, tying arrangements require market power on the part of the firm engaged in tying. Brazil’s Resolution No. 20/99 requires CADE to adopt an economic approach to these AU: Please provide the expansion of CADE. AU: Please provide complete details for Forgioni (1998, p. 139) in the Bibliography. Unilateral Restraints 359 business arrangements, focusing on the existence of market power of the firm imposing the restriction, and acknowledging the possibility that such arrangements may produce efficiencies in the economic system. This resolution complements and ratifies the important policy change in the treatment of these arrangements, moving away from CADE’s past policy, which required no monopoly power to support a finding of illegality. While some authors (Salomao, 1997, p. 226) think that tying should be illegal regardless of market power, they are clearly in the minority today. Where tying is combined with a noncompete obligation for the tying product, this considerably strengthens the position of the supplier and increases the likelihood of appreciable anticompetitive effects of tying. Also, tying cases are usually regarded as anticompetitive where a majority of suppliers apply similar tying arrangements (creating a cumulative effect) and where the efficiencies are not passed on to the consumer. So long as the competitors of the tying supplier are sufficiently numerous and strong (i.e., the firm engaging in tying has no monopoly power), no appreciable anticompetitive effects can be expected, as buyers have sufficient alternatives that allow them to purchase the tying product without the tied product, unless other suppliers are also engaged in tying. Anticompetitive effects of tying are less likely where buyers have significant buying power. Conversely, they are regarded illegal if they are conducted by firms who enjoy monopoly power. In the case Unión de Cervecerı́as Backus y Johnston S.A.A (en adelante Backus) v. Compañı́a Cervecera Ambev Perú S.A.C., INDECOPI’s Competition Tribunal examined a case involving Backus, a brewer of beer (and soft drink firm) whose acquisitions over the last few years have made it the only Peruvian brewer. One of the world’s largest brewers has filed a complaint alleging that Backus’ ‘‘bottle exchange program’’—under which buyers receive a credit when they return bottles and buy more—is an abuse that prevents it from being able to enter the market through investment rather than imports. The tribunal held that the conduct did not constitute an abuse; nevertheless, there was no property right assigned to the form of the bottle, but rather, the competitive distinction between breweries rested on the identification logos stamped on the bottle’s surface. A similar decision was reached in Alpes C.A. v. Royal C.A., decided by ProCompetencia in 2000. The case involved a claim against Alpes, a large water bottling company who had a dominant position in the Venezuelan market. In this case, a competitor claimed that Alpes had abused its dominant position by forcing clients to use their branded bottles, thus changing the traditional industry practice of bottling in nonbranded generic bottles. Thus, the competitor claimed that this was a tying strategy that excluded competition of less powerful competitors. Pro-Competencia did not find a restriction in this strategy; on the contrary, it interpreted it, in a dynamic sense, as an efficient way of seizing the increasing returns available from branding, which resulted in the improved standardization and identification of products, a natural by-product of the evolution of the water bottling market in Venezuela. Antitrust scholars take tie-in as a particularly damaging conduct in network industries, where monopoly power could be maintained thanks to high barriers to AU: Please provide complete details for Salomao, 1997, p. 226 in the Bibliography. 360 Chapter 9 entry resulting from lock-in effects and network externalities.315 In these industries, antitrust agencies usually hold the view that a firm enjoying monopoly power could impose her power even in other markets different from that which is under investigation. The question was raised in Paiva Piovesan Engenharia & Informática Ltda., v. Microsoft Informática Ltda (Microsoft II case) (2002); although Microsoft was acquitted, thanks to the factual evidence of the case. In this case, the Brazilian software house Paiva Piovesan accused Microsoft, which trades the personal finance software ‘‘Microsoft Money,’’ of impeding the competitiveness of her software program ‘‘Finance for Windows,’’ through tying arrangements and through strategies aimed at raising Paiva Piovesan’s access to distribution channels. In particular, Paiva Piovesan noted that Microsoft: (i) had tied her ‘‘Microsoft Money’’ software program to the ‘‘Microsoft Office for Small Business’’ package; (ii) had distributed 250,000 free copies of her Microsoft Money software, through the financing of Banco do Brasil as well as an unknown amount of the software through the Caixa Econômica Federal, for free distribution to the Caixa’s clients; (iii) it had restricted access of Paiva Piovesan products by imposing a prohibition upon her own major independent distributors of software. The CADE held the view that Microsoft had not violated Brazil’s Law No. 8884/94. First, there was no evidence that Microsoft had imposed an obligation upon independent distributors not to sell Paiva Piovesan’s products; on the contrary, Microsoft’s contracts with such distributors did not impose any exclusivity obligations. However, the decision seemed to maintain the same legal standards as in Microsoft I, in the sense of outlawing exclusive distribution exercised by a dominant firm. 9.3.2 REFUSAL TO DEAL Competition theory usually applies the term refusal to deal to unilateral behavior that dominant firms impose on buyers and clients, obstructing their access to the supply of products or services that they need for their own business operations. Naturally, this conduct is usually found in industries where legal monopolies or government concessions are given to firms which then acquire unilateral market power. These include utilities such as gas supply, electricity, telecommunications, and others. Of course, they also include other industries in which no legal concession exists, but where market power is nevertheless acquired due to high barriers to entry. Finally, the term is also applied in situations involving the undue or abusive exercise of intellectual property rights. These rights (i.e., patents, copyrights) vest incumbent firms with monopoly rights that may be used abusively, especially where they confer monopoly power on the incumbent firm due to the nature of the dispute involved. Refusal to deal is not illegal if it is carried out by a firm that lacks monopoly power. Case law reproduces the same standards as in other areas of antitrust: a 315. On the notion of network externalities and tie-in as barrier to entry, see Section 4.2.6.2, above. AU: Please note that there is a year discrepancy for (Microsoft II case) (2002) in the Bibliography. Unilateral Restraints 361 refusal to deal is regarded illegal if it is conducted by a firm enjoying monopoly power. Hence, efficiency considerations are overruled in favor of structural considerations. Thus, when markets are competitive and multiple suppliers effectively compete in price, quality, or advertising, even refusals to supply that are not supported by objective and reasonable general rules may be regarded as legal, so long as the potential buyer has feasible alternative sources of supply, that is, as long as the investigated firm holds no monopoly power in the market. In the Brazilian Columbia Tristar case, Columbia Tristar, United International Pictures, Fox, and Warner Brothers, were accused of refusing to supply first-run motion pictures to Rio Grande, an exhibitor with theatres located in the city centre of Natal. This would allegedly benefit its sole competitor, the major Brazilian exhibitor group (Severiano Ribeiro), which had theatres in the biggest shopping mall in Natal. The defendant suppliers alleged that first-run motion pictures were distributed to the firms best positioned to offer consumers the best facilities and, therefore, to provide the best returns. They also contended that the performance of both distributors and exhibitors depended on box office revenues, and that therefore the increasing number of theatres posed an additional advantage to the very competitive distribution business. CADE held that no supplier enjoyed a dominant position, since the market was extremely volatile due to its dependence on the success of the motion pictures released. CADE ruled that the choice of the suppliers to benefit the best-equipped exhibitor, Severiano Ribeiro, which was in a position to attract more consumers and therefore generate more revenue for the suppliers, was reasonable. CADE could infer that the distribution market was atomistic and that the barriers to entry were extremely low. In CADE’s opinion, a refusal to deal was illegal only if performed by a firm enjoying a dominant position, since a refusal to deal is harmless to competition if there are alternative suppliers. The CNDC reached a similar conclusion in the Asociacion de Clinicas y Sanatorios de la Provincia Entre Rios case (2002). In this case, a private clinic, Instituto Medico Uruguay S.A., claimed that the association refused to incorporate it in its list of medical service suppliers. Since the association held 80% of the market, the CNDC deduced its monopoly power. The CNDC recommended the imposition of a USD 300,000 fine based on the finding of monopoly power alone. A more recent decision, later reaffirmed in the case Ricardo Raúl Barisio/Cı́rculo Odontológico Regional de Venado Tuerto (2001), maintained more explicitly that any conduct, by which a firm with over 50% control imposed barriers or contractual clauses impeding other providers of professional services from competing, would be considered illegal. In D&S v. Rosen, Chile’s former Competition Commission declared that refusals to deal are legal if the general conditions applied by the dominant supplier are objective and reasonable. Objectivity requires that the conditions be imposed without the discretion of the supplier. In Chile, a producer or seller that operates through an establishment open to the public must supply to every person that accepts the general conditions imposed by the supplier. However, the Commission AU: Please provide the expansion of CNDC. AU: Please note the year discrepancy for Asociacion de Clinicas y Sanatorios de la Provincia Entre Rios case (2002) in the Bibliography. AU: Please note the year discrepancy for Ricardo Raúl Barisio/Cı́rculo Odontológico Regional de Venado Tuerto (2001) in the Bibliography. 362 Chapter 9 has cleared certain refusals on some objective grounds, such as when safety standards are not met by would-be distributors.316 Usually, refusal to deal is reasonable (i.e., efficient) whenever the law imposes the relevant conditions; whenever market efficiency justifications are present, such as the need to preserve the goodwill, quality, or image of the product; or whenever the means of distribution are mandated by law or economic rationality. But again, this is a consideration of lesser importance in antitrust analysis, because the latter is focused on the existence of monopoly power above any other consideration. As evidence of this tendency, case law has developed the so-called ‘‘essential facilities doctrine,’’ which is intended to regulate the conduct of firms that hold monopoly power, particularly in their commercial dealings with suppliers and clients. In the next section we examine this particular case. 9.3.3 ACCESS DENIAL ON ESSENTIAL INFRASTRUCTURE Antitrust literature in the United States has articulated the so-called ‘‘essential facilities doctrine’’ in the context of refusals to deal imposed by firms enjoying monopoly power (Lipsky and Sidak, 1999). The ‘‘essential facility’’ doctrine is a subset of the so-called ‘‘refusal to deal’’ doctrine, which places limitations on a monopolist’s ability to exclude actual or potential rivals from competing with it. The doctrine is one long-standing limitation on the general rule that a firm has no obligation to deal with its competitors (OECD, 1996). Under this doctrine, competition agencies control dominant firms’ behavior to prevent them from extracting rents from downstream consumers or operating businesses by blocking their access to the network or infrastructure without proper technical or economic justification. A firm enjoying monopoly power may preemptively block access to scarce facilities or resources required by a competitor. For example, the firm(s) enjoying monopoly power may be able to bid up the price of a scarce input to the point where entry is unprofitable. Such a strategy may be profitable to the dominant firm(s) despite the higher price it pays for the input, because it avoids the dissipation of profits that entry would bring. The competition goal is preventing firms from abusing their position or otherwise engaging in monopolistic behavior which may deter potential competitors from entering the market or cause present firms to exit unfairly. Thus, competition agencies have developed a notion whereby access to a resource controlled by a dominant firm may that may become ‘‘essential’’ for downstream (or upstream) industries, must be ‘‘open’’ to any connecting firm which meets the minimum technical standards required for the network to function adequately. In the case Distribuidora Del Sur (2006), involving the electricity sector, the Salvadorian Superintendency of Competition imposed a U.S. USD 25,560 fine 316. Ruling No. 109/91. AU: Please provide the complete details for Lipsky and Sidak, 1999 in the Bibliography. AU: reference not listed in bibliography. Unilateral Restraints 363 against Del Sur, a domestic subsidiary of AES, Corporation for raising obstacles against Abruzzo’s attempt to supply electrical power to an urban development project. Del Sur, a dominant player in the distribution, trading and marketing of electricity, forced Abruzzo to change its activities from marketing to distribution as a condition for allowing Abruzzo to connect to the electricity grid. Alternatively, the dominant firm(s) may raise its rival’s costs by preempting low-cost inputs, forcing the rival to use higher-cost inputs. Even if this strategy did not result in the exit of the rival, it could be profitable for the dominant firm if it resulted in the rival being a less effective competitor, allowing the dominant firm to increase its own prices. In wholesale or input markets, for example, buying up a product to prevent the erosion of price levels could raise rival’s costs by increasing or maintaining the prices at which the rival must purchase its inputs. The same result can be obtained by the dominant firm requiring or inducing a supplier not to supply a rival. This can increase the price at which the rival purchases its inputs and may exclude the rival from the market completely. Preemption can also take the form of acquisition or control of the supply of a necessary input for production, such as production sites or facilities that are not easily replicated. An illustrative case of raising barriers to essential inputs is given in the Venezuelan case RCTV C.A. y C.A. Venezolana de Televisión v. AGB Panamericana de Venezuela de Medición S.A. (AGB) (1999). RCTV, a TV operator, sued AGB for allegedly creating market barriers in favor of a competitor, Venevisión. In defining the potential effects of the alleged behavior, Pro-Competencia took the view that AGB’s activity in fact provided a useful service by encouraging innovation and a better use of social resources in a long-run perspective. Ordinarily, TV companies define the spaces available for advertising a year in advance, but this mechanism may prove too rigid for smaller advertising companies whose need to segment available TV spaces is not satisfied under that scheme. AGB’s activity could enable more information about the exact value of TV spaces all year round, encouraging smaller TV companies to offer better conditions for advertising spaces to advertising agencies and making a better use of TV space as a ‘‘social resource.’’ Thus, such information would enable the growth of new markets for placing ads for different products and enable smaller advertising agencies to negotiate TV space for their products. Sometimes the limitations imposed on access to essential resources take the form of governmental permits. This problem was raised in the Mexican Gas Supremo v. Gas de Cuernavaca, Gas de Cuautla, Gas Modelo, Compañı́a Hidro Gas de Cuernavaca, Gas del Sol, and Gas de Morelos (Liquefied Petroleum Gas Distributors case) (2000), In this case, Gas Supremo filed a complaint against six gas distributors for delaying its construction of a storage plant for liquefied petroleum (LP) gas distribution in the municipality of Yautepec, Morelos. The six defendants held permits to distribute LP gas through storage plants in several municipalities in the State of Morelos. Gas Supremo contended that the construction delay was a case of raising rivals’ costs. In particular, the Commission found that Gas Supremo had taken more than eighteen months to install its plant and begin operations (instead of the expected 364 Chapter 9 six months) because the defendants had sought administrative prohibitions banning the works, alleging various risks. The Mexican Competition Commission found that the person acting as a proxy for the defendants was also acting as a proxy for people who had requested similar administrative bans against Gas Supremo in the state of Puebla. Hence, the defendants were aware of their proxy’s actions and were able to profit from Gas Supremo’s delayed entry into the relevant market. The Commission resolved that the accused were guilty of raising rivals’ costs of entry into the market, a relative monopolistic practice, and fined them accordingly. In this case, like in other cases involving unilateral monopolistic behavior, the Competition Commission regarded monopoly power as essential to qualify the conduct as illegal. The lack of substitutes in the relevant market, together with the high market shares held by the defendants in every municipal district in which they competed with Gas Supremo, led the Commission to find the existence of substantial monopoly power. Many cases involving essential facilities have arisen in infrastructure industries, particularly in the telecommunications industry.317 An illustrative case is CANTV Servicios, decided by Venezuela’s Pro-Competencia in 2000. Although Pro-Competencia did not explicitly refer to the ‘‘essential facilities’’ doctrine, it found that Compañı́a Anónima Nacional Teléfonos de Venezuela (CANTV) had engaged in anticompetitive abuse of a dominant position because it discriminated between internet companies downstream. Under the privatization contract, CANTV enjoyed a legal monopoly over telephone service, which these companies operating downstream needed to provide their own service. CANTV was prosecuted for refusing to give these providers network numbering options which enable network connections from anywhere in the country for the cost of a local call. ProCompetencia ruled that such behavior imposed discriminatory conditions on Internet service providers operating downstream in the market. The competition agency decided to impose a fine of 1,875,904,272.00 bolivars, the equivalent of 1.3% of the company’s budget in 1999. In addition, it issued a series of orders requiring that CANTV offer providers terms of purchase similar to those it gives CANTV Servicios. A similar case was decided by Chile’s TDLC, in the case Voissnet S.A. and FNE v. Telefónica CTC-Chile (2005). In this case, Voissnet accused Telefonica of foreclosing her access to the Internet, through contractual clauses and manipulation of IP Voice ports. The Competition Tribunal ruled against Telefonica and imposed a fine of USD 1.2 million. Finally, in the case Avantel, S.A. v. Teléfonos de Mexico, SA de CV (Telmex) (2001), Avantel filed a complaint against TELMEX in respect of the nationwide markets for interurban telecom transport or resale traffic, and the interconnection or access for the provision of long-distance service, in both cases domestically. These are intermediate services that long-distance carriers obtain from Telmex in order to complete long-distance connections. Telmex is the only carrier providing 317. See Section 11.2.2, below. AU: Please provide the expansion of TDLC. AU: Please note the discrepancy in year for Avantel, S.A. v. Teléfonos de Mexico, SA de CV (Telmex) (2001) in the Bibliography. Unilateral Restraints 365 the nationwide intermediate services, needed for other carriers to provide longdistance services, a market in which Telmex also competes. Avantel complained that TELMEX has an offer whereby clients with a minimum monthly 10-minute consumption on long distance under the ‘‘Lada Direct Plan’’: (i) obtain at no cost digital connections without any installation costs and install payments for two years; (ii) can make free connecting longdistance phone calls; (iii) obtain preferential rates and discounts from any other plans already joined by the client. However, to obtain these benefits, the ‘‘Lada Direct Plan’’ requires the client to sign a two-year contractual exclusivity commitment. Avantel objected the plan on the grounds that it could not financially compete with it, due to the reduced profit margins under long-distance telephone. Such cases are complicated for competition agencies to handle, because the key competition issue is not only whether the incumbent firm enjoys monopoly power, but also what technical standards are necessary for incumbent firms to operate in the network, as well as how many firms can be given access to the network without undermining its efficiency. Determination of consumer welfare is linked to technical requirements needed to preserve the network itself. This is a task for which competition agencies are poorly prepared, and therefore it is common for competition agencies seek the assistance of sector regulators in cases where the industry is regulated. In view of these difficulties, and due to the traditional economic culture of Latin American economies, which is geared towards regulating prices, there has been the transformation of the ‘‘essential facilities’’ doctrine into a device which could have negative implications for the long-run welfare of consumers. For example, in the case Aero Continente S.A. v. Banco de Crédito del Perú (2002), decided by INDECOPI, serious questions arose about what constitutes an ‘‘essential facility.’’ The case involved a dispute between Peru’s only airline and the branch of a bank located in Puerto Maldonado, an isolated town in Peru’s jungle area. After concerns were expressed that the airline was involved in illegal drug trafficking, the bank asked the airline for information regarding the sources of its funds. Instead of complying, the airline closed its account, but two years later it produced the relevant paperwork and asked to open a new account. The bank refused, and the airline filed a complaint alleging abuse of dominance. INDECOPI’s Competition Commission refused to accept the complaint, and INDECOPI’s Appeal Tribunal reversed the Commission’s decision and referred to the bank branch as an ‘‘essential facility.’’ Also, the Tribunal ruled that the bank branch could not simply refuse to open an account without examining the proffered documentation. In this case it is debatable how the bank branch could be considered an essential facility (or in any way dominant). First, there is another bank in town (albeit a branch of the National Bank, which had much higher charges). Even if the other bank was not a realistic alternative, there was no showing that the airline needed an account at a bank branch in that town and no explanation of the refusal’s competitive effects. The decision seems to many to have more of a regulatory flavor (a ban on refusals to deal by banks) than a basis in competition principles. 366 Chapter 9 Refusal to deal may be particularly problematic in network industries (Internet, telecommunications, etc.), where access to connecting lines or main operator’s services is necessary for downstream operators. Antitrust usually regulates access conditions to the network so as to avoid ‘‘abusive discrimination.’’ More recent literature on the New Economy has adapted the essential facilities doctrine into the so-called ‘‘essential networks’’ doctrine, under which there are no substitutes, for technological reasons such as platform incompatibility. Although this doctrine is gaining ground, in Latin America it is still in its incipiency. Access should be open at any technically feasible point in the networks. Nondiscrimination should be timely, in the sense that no unjustified operational delays should prevent newcomers from connecting to the network. Also, nondiscrimination requires applicable rates to be cost-oriented. Abusive conduct is more likely the more bundled the industry is. Networks requiring the bundling of many complementary products or services are likelier to shield the position of incumbent firms; therefore these markets will favor anticompetitive conduct. Competition bodies should get advice from independent, technically oriented bodies (usually, but not only, sector regulators) to resolve disputes regarding appropriate terms, conditions, and rates for interconnection within a reasonable period. Competition agencies usually look into the conduct of major supplier(s) in order to impede them from engaging in or continuing anticompetitive practices, such as anticompetitive cross-subsidization, the use of information obtained from competitors with anticompetitive results, or the withholding of timely technical information needed by competitors. However, like other antitrust prohibitions, competition agencies have a difficult time in distinguishing abusive monopolization of the essential market infrastructure from necessary exclusions of downstream firms arising from legitimate business and commercial reasons. In practice, they are inclined to rely on the monopoly power finding; accordingly, little attention is paid upon the question of economic efficiencies resulting from such conduct. 9.3.4 RAISING RIVALS’ COSTS The most obvious form of vertical restriction is exclusionary conduct aimed at raising rivals’ costs. These restrictions exist when suppliers refuse to deal with specific clients in order to impose higher prices or onerous conditions on them, or to exclude them from a downstream market where they compete with the services or products delivered by the suppliers’ integrated firms. A firm enjoying monopoly power may undertake a number of strategies that raise the costs of a rival, rendering the rival a less effective competitor. By increasing certain costs of a rival, the dominant firm can induce the rival to raise its prices, allowing the dominant firm to profitably increase its own prices. This strategy will be profitable provided the ultimate price increase raises the dominant firm’s revenues sufficiently to offset the costs of the strategy. Similarly, the dominant firm Unilateral Restraints 367 may also undertake a number of strategies that have the effect of eliminating existing competitors from the market, or of deterring entry by excluding current or potential rivals from the inputs necessary to compete. This may involve raising a rival’s costs to the point where the rival is unable to remain in the market, but may also include preemptively blocking key facilities to deter entry. Again, such a strategy will be profitable for the dominant firm, provided the costs of the strategy are offset by the ultimate increase in revenue, or by the prevention of lost revenues due to entry. There are various means by which a dominant firm can raise its rivals’ costs or exclude a rival from inputs or facilities. 9.3.4.1 Price Squeeze First, due to its operations on two levels of the distribution system, a dominant firm may raise the price of an input to a competitor operating only at the downstream level thus squeezing the competitor’s profit margin. This strategy, commonly known as a ‘‘price squeeze,’’ may increase rivals’ costs. However, this is an enforcement concern only when it harms both competitors and competition. Vertically integrated firm(s) may be more efficient in distribution than nonintegrated firms. As a result, it may be difficult for a nonintegrated firm to compete with an integrated firm in the downstream market for reasons that have little to do with squeezing. Also, the acquisition by a supplier of a customer that would otherwise be available to a competitor of the supplier, or the acquisition by a customer of a supplier that would otherwise be available to a competitor of the customer, may impede or prevent competitors from entering into the market, or force the exit of present competitors out of it. Acquisition of a supplier by a dominant firm can allow the dominant firm to raise the price a rival must pay to obtain a key input. Alternatively, acquisition of a supplier can allow the dominant firm to deny access to the newly acquired supplier’s products, requiring a rival to purchase inputs from other suppliers at a higher price. Acquisition of a supplier can, through raising a rival’s costs, make the rival a weaker competitor, and may even exclude a rival from the market. Acquisition of a supplier can also have the effect of prohibiting entry by denying entrants the inputs needed to compete. An illustrative case in this field is the Venezuelan case TV Cable Orión C.A., Parabólicas Service’s C.A., Cable Corp TV C.A. and ACC Comunicaciones, Supercable and the Cámara Venezolana de Televisión por Suscripción (Cavetesu) v. Enelven, Enelco, Enelbar, Eleval, Cadafe and her subsidiaries: Elecentro, Eleoriente, Eleoccidente, Semda y Cadela (TV Cable) (1999). In this case, Pro-Competencia imposed a fine against Elecentro and Cadel for excluding Cable TV operators Cable Corp. TV C.A. Cable TV and Orion, from two regional antitrust markets. Both Elecentro and Cadel are electric companies operating in two important provincial cities. These companies, who are owners of electric posts, which Cable TV operating companies rent in order to wire their customers, decided to increase their rental fees above the Consumer Price Index, as 368 Chapter 9 they had done in the past. Pro-Competencia found that such strategy was aimed at excluding their tenants from the market for Cable television services. A similar case was recently decided by TDLC in Chile. In the 2008 case FNE v. Empresa Electrica de Magallanes, S.A. (2008), the Court found Empresa Eléctrica de Magallanes S.A., EDELMAG guilty of abusing its dominant position in the electric service in the town of Puerto Williams, Region XII, to unreasonably raise the tariffs to its users. The verdict was based on that EDELMAG increased fares above the pricing indexing formulas contained in its concession contract, without any justifying change in the legal circumstances justifying the price increase. The company was punished with a fine of 400 UTA ($ 173 million approx.). The court also ordered the utility company to immediately cease the behavior. 9.3.4.2 Increasing Switching Costs Another form of raising rivals’ cost consists of engaging in activities that limit rivals’ or potential entrants’ ability to attract customers by increasing customers’ switching costs. Such costs may arise from technology, contracts, or other practices that make it costly for a customer to switch to an alternative supplier. One example of this behavior is where a firm enjoying monopoly power adopts product specifications that are incompatible with the products of a rival. Such incompatibility can have the effect of limiting the number of customers willing to purchase from the rival. Similarly, long-term contracts with automatic renewal provisions may create switching costs, thus foreclosing entry. An exclusive buying arrangement with even a subset of consumers may foreclose entry if, as a result, not enough customers are available to an entrant to justify entering. This principle was later reaffirmed in the case SDE ‘‘Ex Officio’’ v. Matec Ltd. (2004),318 Matec, an affiliate of Ericsson, had unlawfully refused to sell component parts for the Ericsson MD 110 Telephone System. Independent companies offering telephone system maintenance contracts claimed that they would be unable to compete effectively in the MD 110 market without access to replacement parts. In a 2003 decision, CADE defined two relevant markets: maintenance services for the MD 110 telephone system and system replacement parts. In the former market, Matec had more than a 90% market share at the time of the violation, and in the latter, Matec was a monopolist. CADE found that Matec had unlawfully foreclosed competition in the market for system maintenance services because competing companies could not operate without access to replacement parts. The foreclosure of competition reduced consumer welfare because the affected telephone system purchasers were ‘‘locked in’’ to the MD 110 phone system by high switching costs. Competition at the point of sale of telephone systems was inadequate to forestall a market failure in the case of the federal government, which was a prime MD 110 customer. Government 318. See OECD and IADB, 2005a, p. 25. Unilateral Restraints 369 procurement rules prohibited the government from selecting any bid but the lowest, without regard for postpurchase service costs. In this case, CADE reaffirmed its doctrine on the ‘‘lock-in’’ effects created by firms enjoying monopoly power, on their vertical relationships, which had already been established in the case Microsoft II (2002).319 9.3.4.3 Exclusivity Dealings A number of CADE decisions have examined exclusionary practices aimed directly at horizontal competitors. In the case Participações Morro Vermelho Ltda., v. Condomı́nio Shopping Center Iguatemi e Shoping Centers Reunidos do Brasil Ltda (Iguatemi) (2004). In this case, Shopping Center Iguatemi had imposed an exclusivity clause in the lease contract between this company and tenants, which hindered the tenants located in Shopping Center Iguatemi from operating in other shopping centers located in the city of São Paulo. Iguatemi had a 30.9% share of shopping centre store rental revenues in the relevant geographic market in São Paulo and a 29% share of revenue from shopping centre sales. CADE concluded that Iguatemi had sufficient monopoly power to restrain competition among shopping centers by means of the exclusivity provision. CADE held that the Iguatemi shopping centre in the city of São Paulo violated Article 20 by forbidding its tenants from opening locations in any other shopping centre in the city. Therefore, it imposed a fine equal to 2% of Iguatemi’s gross revenues. This case was followed in early 2005 by a similar exclusivity case against Shopping Centre Norte (SCN). In the controversy between Condomı́nio Shopping D v. Center Norte S/A—Construção, Empreendimento, Administração e Particapação, again, CADE examined an exclusivity clause negotiated between Shopping Center Norte and its tenants that imposed a prohibition on the latter to operate in a radius of one thousand meters from the shopping centre. SCN, which had a 69.6% share of store rental revenues and a 71.6% share of store sales revenues in its market, prohibited tenants from operating another outlet within one thousand meters of the SCN site. CADE found this condition to be an unduly restrictive and fined SCN 1% of gross revenues. In the Venezuelan case Pro-Competencia (Ex Officio) v. Banco Venezolano de Crédito SACA and Promotora Buenaventura, C.A. (Buenaventura Mall) (1998), Pro-Competencia opened an ex officio prosecution against allegedly exclusionary tactics displayed by a business enjoying monopoly power, the Banco Venezolano de Credito (BVC). It is interesting to note that Pro-Competencia reached the conclusion that BVC had monopoly power in the relevant market as the sole provider of financial services in the Mall Buenaventura. To exclude potential competitors, BVC negotiated with the Mall’s condominium owner in order to prevent other banks from servicing the Mall. 319. See Section 4.2.6.2, above. AU: There is a discrepancy in the year for Microsoft II (2002) shown in citation and the bibliography. Please clarify which one to follow. AU: There is a discrepancy in the year for Participações Morro Vermelho Ltda., v. Condomı́nio Shopping Center Iguatemi e Shoping Centers Reunidos do Brasil Ltda. (Iguatemi) (2004) shown in citation and the bibliography. Please clarify which one to follow. AU: Please provide the complete details of (Buenaventura Mall) (1998) in the Bibliography. 370 Chapter 9 9.3.5 PRICE RESTRAINTS 9.3.5.1 Price Discrimination Given the preeminence of monopoly power in the assessment of competition agencies, applying different prices to clients and customers for orders placed under similar commercial circumstances is regarded as anticompetitive behavior, as long it is displayed by a firm enjoying such power. This conduct is regarded as anticompetitive since suppliers can discriminate if they are able to restrict their output depending on the customer, which is possible if they enjoy market power. In other words, discrimination has been construed as a clear sign that the supplier is restricting his output to a particular customer. Price discrimination refers to the sale of goods or services at prices not corresponding to differences in the cost of supplying them. Price discrimination occurs whenever the producer uses its market power to fix different prices for the same product or service, discriminating against individuals or groups of purchasers, acquiring consumer surplus and raising its profits. However, it may be efficient to charge differently for the same services for higher-volume consumers or at different times of the day. The most important price discrimination case in this area is Argentina’s case CNDC v. Yacimientos Petroliferos Fiscales, S.A. (YPF case) (1999). This case, decided in 2000, was initiated ex officio by the competition authority after it conducted an in-depth study of the market for liquid petroleum gas (LPG). The investigation was prompted by steady increases in the price of LPG, an essential source of energy for many residences, in the mid-1990s. The relevant market was determined to be the bulk supply of LPG nationwide. The supply of LPG was effectively fixed, as it was a by-product of the production of natural gas. YPF was the former state-owned petrochemical firm. It was found to be dominant in all phases of LPG production and supply, including natural gas production, refining, storage, and transportation. Entry was considered to be difficult, and imports were not then a constraint on domestic producers. The conduct that was the subject of the case was YPF’s practice of exporting what was considered to be a disproportionate amount of its production at prices that were lower than its domestic prices. Moreover, its export contracts prohibited the re-importation of the product. The competition authority concluded that this conduct was harmful to the general economic interest and therefore unlawful. The Commission ordered YPF to cease its price discrimination between the domestic and export markets and also to eliminate the prohibition of reimportation in its export contracts. Under the law that applied to the case, YPF could be fined an amount equal to 120% of the gain that resulted from its unlawful conduct. The CNDC imposed a hefty fine on YPF. The Commission’s decision, which was accepted by the Secretariat for Industry, Commerce and Mining, was upheld by the Supreme Court of Argentina. Unilateral Restraints 9.3.5.2 371 Price Discounts Notwithstanding the usual prohibition of price discrimination, most discounts are commercially and economically justified, due to their welfare-enhancing effects. Discounts compensate for the risks and costs of capital recovery associated with investing in informal or highly atomized markets. These barriers are necessary for financing—hence the call for exclusivity periods, long concession terms, and the like. Investors, investment bankers, and short-term revenue-maximizers in government will naturally argue for barriers to entry to lower the cost of capital when privatizing infrastructure firms or issuing concessions to build new facilities. Monopoly rights do lower the cost of capital and make financing easier. But they do so by shifting risk to customers, not by reducing overall risk. In the last century, investments not protected by barriers to entry were nevertheless funded. And today, new investments in competitive segments of network industries also are being financed, such as power plants in competitive markets in Argentina, Chile, and the United Kingdom. Discrimination is justified (i.e., efficient) if it is carried out due to commercial risks. Discounts may be necessary for a myriad of reasons: (i) to align and improve incentives for the improvement of sales logistics; (ii) to realize increasing returns created by high volume purchases; (iii) to improve the advertising capacity of clients, in order to improve information levels for consumers; and (iv) to give discounts to clients presenting lower financial or commercial risks. These are all efficiencies that justify commercial discrimination. One case that is pending at INDECOPI’s Tribunal (Depósito Santa Beatriz S.R.L., Eleodoro Quiroga Ramos S.R.L. y Comercial Quiroga S.R.L. v. DINO S.R.L. [Construction Materials] (2003) involves the claim that a firm that sells construction materials has abused its dominant position by engaging in price discrimination between affiliated and unaffiliated firms and by tying the sale of cement to the sale of construction materials. The Commission found that the firm has a dominant position but rejected the claim of abuse, finding that the price discrimination was justified in light of the services provided by affiliated firms and that there was no tying arrangement. By contrast, price discrimination is illegal if no particular justifications support the discrimination. Two Venezuelan cases illustrate the scope of discriminatory practices. In the cases Proquim v. Venezolana de Terminales C.A. (Venterminales) (1998) and the case Proquim v. Ávila Quı́mica C.A. y American Natural Soda Ash Corporation (Ansac) (1999), Pro-Competencia sustained the claims of abuse of a dominant position filed by Proquim, a local distributor of dense soda ash, against American Natural Soda Ash Corporation (ANSAC). Proquim filed a complaint against ANSAC for offering it dense soda ash at prices substantially higher than the sale price in Venezuela. It also objected to the agreements ANSAC had with its Venezuelan clients which included the requirement that they notify ANSAC of any better offers for the sale of dense soda ash from 372 Chapter 9 other suppliers. At the same time, Proquim had filed a claim against Venterminales, the operator of a port where all the dense soda ash consumed in Venezuela was unloaded. Venterminales was accused of charging Proquim substantially higher prices for unloading dense soda ash imported from Europe than the prices charged to ANSAC. Pro-Competencia ruled that ANSAC and Venterminales had a dominant position, since 98% of the dense soda ash consumed in Venezuela came from ANSAC, and this product passed through the port of Venterminales. ProCompetencia found Venterminales guilty of abusing its dominant position on the basis of evidence showing that it had charged substantially less to a competitor of Proquim that was a subsidiary of ANSAC without technical reasons for this discrimination. Pro-Competencia imposed a fine of about USD 100,000 on Venterminales. ANSAC reached an agreement with Proquim under which it began selling to Proquim and promised to modify its agreements with local purchasers. In order to be legal, discounts must be objective, public, and nondiscriminatory. It is unclear what exactly makes a discount objective, public, and nondiscriminatory. In the Televisa and Acir merger case (2000), the Commission expressed its concerns about Televisa’s common sales practices. In 1997, a large fraction of Televisa’s advertising sales were made under its Plan Frances (French Plan). The Plan offered a price guarantee and bonus advertising time to clients who paid in advance for a certain amount of advertising time in Televisa’s TV networks and media for the subsequent year. This practice amounted to Televisa’s bulk packaging of its advertising sales in different media (e.g., it offered discounts on radio advertisements if the client bought advertisements in magazines or TV). The Commission regarded these activities as a barrier to entry, and objected to the merger between Televisa and Acir. Promotional schemes are legal as long as the promotions are limited in time, retailers are free to join them, and the sale prices are above costs. In Chile, the ChRC accepted some promotional schemes in the Compañı́as Cervecerı́as Unidas and Savory (Nestlé) case (1998) that sought to offer a discount that would reach the final consumer. Uniform promotions do not ensure immunity from antitrust prosecution. The Colombian Superintendency of Industry and Trade initiated the Comunicación Celular S.A. (Comcel) and Celular Movil de Colombia (Celumovil) case (1995) on the grounds of abuse of dominance and price fixing. Although the firms charged the same rates for connection, basic service, and call minutes, they also charged the same discriminatory rates to a certain class of customers, and high administrative barriers to entry existed in the market. Ironically, the two companies were absolved of the discrimination charges but they were found guilty of acting as a cartel. Similarly, concessions of performance bonuses or rewards, when granted by firm(s) possessing monopoly power, could be construed as anticompetitive. In the Argentinean case CNDC v. Aerolineas Argentinas and Aerolineas Austral (1997), these companies were forced to modify an agreement that provided variable bonuses based on the amount of tickets for these two airline carriers sold by travel agencies. The CNDC alleged this conduct illegally excluded actual competitors from the market. AU: There is a discrepancy in the year for Autogas S.A.I.C./ YPF S.A.—YPF Gas S.A.(2000) in the citation and bibliography. Please clarify which to follow. AU: There is a discrepancy in the year for Compañı́as Cervecerı́as Unidas and Savory (Nestlé) case (1998) in the citation and bibliography. Please clarify which to follow. Unilateral Restraints 9.3.5.3 373 Excessive Pricing In Latin America, most abuse of dominance cases have dealt with discriminatory prices, rather than excessive prices, although in the early years of antitrust enforcement the latter were given some attention in jurisdictions with particularly strong history of price controls. Confusion about the objectives of antitrust policy often arises in the light of Latin America’s resilient tradition of government dirigisme, particularly in the field of price controls. The public opinion, is easily led into assuming the purpose of antitrust policy to be price regulation, rather than a mechanism intended—at least in theory—to promote price competition. Hence, political pressure is usually made upon competition agencies, to restore some form of price controls. For example, in Brazil a Congressional Inquiry Commission that examined the pharmaceutical industry in 2000 requested the SDE to investigate allegations of abusively high drug prices. Under Article 30 of Law No. 8884/84, the SDE must initiate an administrative proceeding at the request of the Senate or House of Representatives without first conducting a preliminary inquiry. Accordingly, the SDE opened about sixty abusive pricing proceedings involving more than 1,500 drugs. After the investigations had languished for several years, the SDE organized a special task force in 2003 to deal with the project, with a particular focus on employing economic analysis to define relevant markets. However, no conclusions emerged from these proceedings. In 2005, the SDE sent fifteen of these cases to CADE. However, CADE’s position on abusive pricing reflects the view that antitrust enforcement should not focus on a firm’s allegedly high prices but rather on illegitimate accretions of market power that permit abusive price increases. In January 2001, CADE considered abusive pricing charges against two natural gas distributors in the state of Rio de Janeiro. CADE concluded that the distributors had not acted unlawfully merely by raising prices because the increases fell within the range permitted by the state utility regulator. Similarly, in Chile, Representative Julio Dittborn et al. filed a complaint against Metro S.A., a passenger transportation company, for abuse of dominant position upon applying an excessive fare raise as of February 1, 2001. The Commission, in its statement of reasons, deemed that Metro S.A. has not committed an abuse of dominant position in the passenger transportation market of Greater Santiago and that its fare increase was not intended to eliminate, restrict, or restrain free competition within the meaning of the competition rules. Consequently, the complaint was dismissed. In other countries, however, the attempts to investigate claims of ‘‘abusive pricing’’ have been few and far between. In Autogas S.A.I.C./YPF S.A.—YPF Gas S.A. (2000), for instance, Autogas SAIC, a firm providing transportation services, denounced YPF, S.A., a liquid gas producer, for abusing its dominant market position. Allegedly, YPF, S.A. imposed abusive prices on its clients while simultaneously reducing prices to her subsidiary YPF GAS S.A., thereby enabling the latter to engage in predatory pricing against its competitors. This strategy was intended to exclude YPF GAS’s competitors from the market. However, CNDC declined to impose a fine on either YPF or YPF GAS, on the basis that no predatory AU: There is a discrepancy in the year for Autogas S.A.I.C./ YPF S.A.—YPF Gas S.A.(2000) in the citation and bibliography. Please clarify which to follow. 374 Chapter 9 prices had been charged by the latter, since the prices it actually charged were higher than those of its competitors. Few Latin American countries have included explicit provisions on excessive pricing in their laws, possibly due to the difficulties of implementing such a rule. An important question is the definition of ‘‘excessiveness’’ and how the definition relates to costs, profits, and degree of uncertainty. For example, can high costs result in high prices without a finding of ‘‘excessive’’ profits? Is ‘‘excessive’’ relative to the price under perfect competition with free entry and no uncertainty, that is, minimum average cost, or relative to price in a perfectly contestable market, or relative to the price that maximizes total efficiency subject to all costs being covered, so-called Ramsey prices? Finally, does excessive pricing by a dominant buyer have a corresponding concept of excessively low prices offered by a dominant buyer?320 Yet the economic tradition of price controls remains in even the most committed promarket competition authorities of the region. Consider the case of Chile, perhaps the most fervent embracer of neoliberal reforms in the region. Recently, the TDLC imposed a fine against what deemed to be ‘‘abusive prices.’’ In the case FNE v. LAN Airlines S.A. and LAN Cargo S.A. (2007), the TDLC ruled against the air carriers, for abusing their dominant position in the air cargo market with destination Punta Arenas. In particular, the court noted the anticompetitive effects in the market imposed on customs warehousing in that city arising from the imposition of excessive prices against users of warehousing services. In particular, the court noted that the effective prices charged by LAN and LAN Cargo upon importers for air cargo had not been reduced after the entry of Fast Air, a company wholly controlled by LAN, dedicated to offer warehouse services at the airport Carlos Ibáñez del Campo. Until then, there was only one warehouse provider, EPA, offering warehousing services in this market. EPA, however, was located 21 km away from the airport; therefore importers had to transport their merchandises from the airport to EPA’s facilities. The cost of this transportation, however, was included in the air cargo fees charged by LAN. The case arose once LAN decided not to cover the costs of land transportation of goods, but actually charged these costs separately. Moreover, the fees LAN charged for FastAir’s warehouse services are 400% higher than EPA’s. The TDLC interpreted this situation to be ‘‘abusive,’’ and ordered LAN to pay a fine; also, it ordered a full restructure of air cargo fees from the airport Carlos Ibáñez del Campo to EPA’s warehouse. The TDLC also proposed the President of 320. As an OECD Progress Report (OECD (ed.), 2000: p. 21). entitled ‘‘Antitrust Policy and Regulatory Reform in Brazil’’ states: ‘‘. . . CADE and SDE have taken a conservative view of abusive pricing cases under Law No. 8,884/84, generally declining to initiate such cases. Most competition experts agree that this is the correct approach. Abusive pricing is very difficult to identify—what are the proper measures of costs; what is an acceptable level of profit?—and even more difficult to control—what is the ‘correct’ price; how will it be administered? Competition experts prefer that a competition agency focus on the underlying market structure or exclusionary conduct that can permit a dominant firm to reap excessive profits.’’ AU: Please provide the expansion of EPA. Unilateral Restraints 375 the Republic, through the Ministry of Finance, to instruct the National Customs Service, to make any necessary regulatory changes and appropriate steps to promote free competition among companies that operate customs warehouse inside and outside the halls of the airports in the country. The situation of Peru is also illustrative, and it is not uncommon to see the INDECOPI being involved in controversies where the question of price control arises.321 In a case involving the pension funds market that apparently involved price fixing and excessive pricing, INDECOPI accepted the price fixing claim, but instead of positively rejecting the excessive pricing charge, it treated the second complaint as if it alleged price fixing and a tying arrangement, then rejected the tying claim that had never been made. On appeal, the Tribunal reversed the Commission’s decision and made it clear that the law does ban excessive pricing. As noted by an OECD and IADB report (2004c, p. 27), ‘‘this language caused a controversy because it was seen as a reversal of precedent, a hint of possible price controls to be imposed by INDECOPI, and a signal that INDECOPI was being controlled by the government.’’ Although the Tribunal eventually stated that it merely intended to reject the Commission’s failure to rule on the excessive pricing claim, the controversy continued because some regarded the clarification as a pretext for backing away from an unexpectedly controversial decision. Even those who are less suspicious of the Tribunal’s intent are troubled by what they see as decisions that are unpredictable and not well reasoned. 9.3.5.4 Predatory Pricing Predatory pricing is an exclusionary tactic whereby firm enjoying monopoly power lowers its prices below costs, so to exclude competitors from the market. Once this goal is achieved, the firm raises its prices once rivals have been disciplined or have exited the market. However, conventional economic analysis has a hard time in distinguishing this conduct from competitive behavior. Consequently, a key consideration in determining that low prices are in fact predatory and may lead to a substantial lessening of competition is whether the market is characterized by high barriers to entry. Predatory pricing involves selling at a price below some measure of cost in order to harm a competitor. Article 21(4) of Nicaragua’s Law No. 601/06 Regulations clearly defines predatory pricing as systematic sales below total medium costs or occasional sales below variable medium costs during a continued time. Predatory pricing can be profitable to firms possessing monopoly power; it is harmful to competition if they are able to maintain or enhance their market 321. One of the controversies concerns whether the Peruvian Competition Act bans ‘‘excessive’’ (or ‘‘monopolistic’’) pricing. One difference between Art. 5 of the Competition Act and Art. 82 of the Treaty of Rome is that the former does not list excessive pricing as an abuse. The omission is clearly deliberate, and although a 1996 amendment to the article added a reference to ‘‘other similar cases,’’ it seems to have been generally accepted that the law did not ban excessive pricing. AU: Please note that there is only 2004a and 2004b in the Bibliography list but 2004c is cited in the text. Please clarify. 376 Chapter 9 dominance, giving them the ability to recoup their losses from the predatory campaign. This could be achieved by eliminating a rival, if barriers to entry would prohibit or discourage potential entrants from constraining the dominant firm from increasing prices postpredation. In the absence of such barriers, predation may be profitable if it deters potential competitors from entering the market for fear of a repeated predatory episode. Such a reputation for predation may also deter entry into other markets in which the dominant firm operates, thus increasing the incentives to engage in predation. Often predatory pricing is practiced by incumbent firms as a strategy to deter or counteract the attempts of potential competitors seeking entry into the market. The goal is to discipline the target entrants to persuade them of the punishment they will suffer if they insist on competing with the incumbent firm. The goal is not to eliminate or exclude an annoying entrant, but rather to dissuade it from continuing a competitive practice, for example giving discounts. Of course, the net result could well be the same as the elimination of a rival. Possibly due to the traditional bias of Latin American officials against aggressive price competition, the invocation of predatory pricing has become popular among competition agencies in the region, especially at the retail level in the consumer goods industry. Thus, although the standards of evidence are high, they have not prevented competition agencies from actively prosecuting these cases. Some Latin American statutes contain explicit provisions on predatory pricing. These include Honduras,322 Nicaragua,323 and Panama.324 It is hard to make a distinction between predatory pricing and competitive pricing. Both strategies, at least initially, involve lower prices. Hence, branding one strategy as either predatory or competitive very much depends on the interpretation of the subjective intent behind the visible facts which, on their one, can be construed either way. Monopoly power is necessary for a finding of predatory pricing. No firm without such power will be found to have engaged in such behavior. In the Argentinean Chamber of Stationery and Bookshops v. Supermercados Mayoristas Makro S.A. case (1997), the Chamber instituted a complaint on the grounds that the defendant had developed a predatory pricing policy by selling certain stationery products below cost. With this conduct, it was alleged, Makro was attempting to gain monopoly power. The investigations showed that Makro held 7% of the relevant market, and therefore had little market power. The Commission decided that Makro should not be prosecuted. Predatory pricing occurs when firms set their prices below costs. In Costa Rica’s FERJISA S.A. v. Abonos Agro S.A. case, FERJISA lodged a complaint against Abonos Agro S.A. for alleged predatory pricing in the sale of industrial tubing. The competition agency decided that the Deputy Manager of Abonos Agro S.A. had announced to the company’s customers a unilateral decrease of 12.5% in 322. Article 7(6), Law No. 357/05 (Honduras). 323. Article 19(h), Law No. 601/06 (Nicaragua). 324. Article 14(7), Law No. 29/96 (Panama). Unilateral Restraints 377 the price of round, rectangular, and square industrial tubing. FERJISA alleged that this act constituted an absolute monopolistic practice. The Committee determined that it was not possible for this act to be an absolute monopolistic practice, since by definition such practices require two or more economic agents in competition with each other, or agreements between companies at the same level of the production process. However, the Committee decided that, based on the facts set forth in the complaint, a preliminary investigation should be conducted to determine whether there was sufficient evidence to justify the initiation of a regular administrative procedure to investigate the alleged relative monopolistic practice known as predatory pricing.325 In analyzing the company’s profits from this product, it was determined that they fluctuated between 22.56% and 27.60% of gross revenues prior to the announcement, and subsequently fell to between 12.06% and 19.31%. In each of the relevant months it was observed that the company sold its products at a price in excess of costs and that a margin of 12% was acceptable for national firms of this type. The Commission rejected the case for lack of evidence justifying the initiation of administrative procedure against the impugned company. The costs used to assess the existence of predatory pricing are total average costs. In Mexico, the Competition Commission brought a case against Warner Lambert for predatory pricing in the chewing gum market. Warner Lambert, improperly seeking to oust Canel’s from the chewing gum market, launched a new trademark (‘‘Clark’s’’) and sold it below its total average cost. In 1998, the Commission found that Warner Lambert had substantial power in the chewing gum market, with a market share between 65% and 73% and the power to control price. The Commission also found that Warner Lambert’s prices were persistently below average total cost, and that Canel’s, its principal competitor, had lost measurable market share as a result of Warner Lambert’s conduct. Although the Commission imposed a fine and injunction, it was later overturned and remanded by a reviewing court. In 2002, however, the Commission issued and reaffirmed a new resolution restating its original determinations. The costs involved in the calculation should be those applicable to the relevant market examined. One of the most important predation cases considered by CNDC was the Impsat case (2004). The complainant, a provider of data transmission services, alleged that one of the incumbent landline services was pricing its competitive services below cost. The principal issue was the measurement of the relevant costs, and specifically the extent to which the costs of operating the incumbent’s landline network should be attributed to the cost of the data transmission service. The Commission took a conservative view of the relevant costs, excluding those network costs associated with the provision of basic telephone service. It concluded that the incumbent’s prices were not predatory. In Comercializadora el Mar S.A. v. Jogaymex S.A (1997), Comercializadora lodged a complaint based on alleged predatory pricing in the distribution of candy in Mexico by the company Dulces Montes S.A. de C.V., and the distribution of 325. Article 12(f), Law No. 7472/94 (Costa Rica). 378 Chapter 9 marshmallows by the company Dulces Beny S.A. of C.V. Examining the price lists of foreign companies, the costs of importation, freight, and duties, and profit margins, the Committee considered whether the defendants had engaged in the relative monopolistic practice of predatory pricing. It was determined that the facts could indeed be so characterized. The Commission determined that the relevant product market was that classified under SIC category 3119, ‘‘Fabrication of cocoa, chocolate, and candy.’’ The Committee also determined that the market segments concerned were chocolates, candy, marshmallows, and chewing gum. The relevant geographical market was determined to be the national market, since the companies distributed their products to companies throughout the country. It was taken as a proven fact that there were no significant barriers to entry in these product markets and that a great many companies were competing in the market, each with several brand names within the market. The Committee reached the conclusion that agents wishing to enter and compete in this market would have to make a large investment in order to do so. Based on the documents furnished by the parties and other documents obtained during the investigation, the Committee determined that the accused company didn’t have substantial power within the market. Consequently, the complaint was directly rejected. In a 2003 case, CADE considered a predatory pricing claim involving the sale by Merck Company and its Brazilian subsidiary of vacuum tubes for collecting human blood samples. CADE found no violation because Merck’s prices generally exceeded average variable cost and because Merck did not have sufficient market power to assure the recoupment of losses associated with the alleged predation. 9.4 ASSESSMENT OF ABUSE OF MONOPOLY POWER In general, the interpretation of unilateral anticompetitive restraints suffers from much of the same ambiguity that affects legal principles applied in other fields of antitrust enforcement. This phenomenon is most noticeable in the endeavors of competition agencies to distinguish those cases that represent legitimate exclusions of less efficient firms from those in which firms seek to increase their monopoly power or abuse it. Case law has evolved considerably in this field, similarly to other areas of antitrust policy. From a very rigid policy that condemned unilateral restraints even if they were undertaken by firms lacking monopoly power, recent decisions are increasingly requiring such condition in order to establish a positive finding of illegal unilateral restriction. Competition agencies are still deeply reluctant to endorse a full rule of reason inquiry over these conducts, which heavily resound as ‘‘abusive.’’ Clearly, like other forms of anticompetitive restraints, the prohibition on unilateral anticompetitive behavior suffers from the same logical flaws as other prohibitions imposed upon horizontal and vertical restraints, as well as the control of horizontal mergers. As will be recalled, the intervention of antitrust authorities in Unilateral Restraints 379 each of these cases follows the assumption that market competition ultimately rests upon the power of the incumbent firm (monopolist) to force consumers to pay prices above marginal costs. However, no explanation is given about how such a policy can endure without enticing potential or actual competitors to challenge the incumbent firm in the market. The notion of ‘‘monopoly power’’ is therefore self-explanatory, in the sense of conveying an explanation about an economic phenomenon—that is, the power to exclude competitors—which is implicitly taken to exist by virtue of the assumptions of the model within which the concept is defined. As a result, similar to other areas of antitrust enforcement, the determination of the effects of abuse of dominance is a question of fact, but facts are determined by the utopian perception developed under the competitive equilibrium paradigm. As result, decision making is excessively dominated by the identification of monopoly power, while little attention is placed on whether the business behavior in review holds economic efficiencies that ultimately bring about enhanced benefits for consumers in the long run. Thus, many practices that seem ‘‘abusive,’’ inasmuch as they exclude firms from downstream or upstream markets, are necessary in order to make markets operational. In short, legal standards concerning abuse of monopoly power are far from being settled. In the beginning of their enforcement experience, some competition agencies in Latin America, no doubt yielding to the dual influence of the Nirvana of economic welfare prescribed by the competitive equilibrium model and the search for utopian regulation inherited from the institutional background of Latin American economic culture, were particularly active in identifying cases dealing with excessive prices. Brazil was probably the foremost example of this early trend, which only lasted for few years. Hence, it is merely a matter of the antitrust authority’s intuitive perception about what the ‘‘inner’’ intent of the firm is. No abstract cost-benefit analysis is possible in practical policymaking, because one has to take into account the particular objectives sought by both parties to the arrangement. Thus, the rule of reason becomes an exercise of pure administrative discretion regarding what the parties to a restrictive agreement really seek. This is the reason why there is no fixed legal standard for different sorts of ‘‘abusive’’ restraints. Intuitively, antitrust authorities adopt a more lenient view towards franchises than they do towards tiein arrangements, because they ‘‘perceive’’ more efficiencies in the former (e.g., know how and technology transfer). In short, no stable legal principle can arise in the enforcement of antitrust policy on unilateral restraints due to the discretion vested in enforcing agencies to qualify business practices as ‘‘restraints.’’ Due to the lack of clear and stable legal standards, competition authorities are driven to case-by-case tinkering with the market, in search of the perfect ad-hoc ‘‘balance’’ between output restrictions and procompetitive efficiencies embedded in the unilateral conduct. The impossibility of attaining such a balance in a stable and predictable way leads antitrust enforcement to focus on structural rather than dynamic concerns; hence, market power—or dominance, as the case may 380 Chapter 9 be—seems to prevail over efficiencies as the guiding policy criterion. Thus, as with other conduct we have discussed, policymaking seems to be wavering between tolerating these arrangements whenever there is no market power or dominance in the market and treating them under the per se illegal standard. No recorded case involving unilateral conduct has been resolved yet on the basis of the efficiencies associated with the conduct. In any event, efficiency-promoting unilateral conduct should not be taken as an ‘‘abuse,’’ even if it excludes competitors from the market and it is carried out by a firm in possession of monopoly power. However, the firm must show that a fair share of the attendant cost reductions is passed on to the consumer. Therefore, the conduct is therefore normally not exempt where the retailer is able to obtain, on a regular basis, supplies of the same or equivalent products on the same or better conditions than those offered by the supplier that applies the restrictive practice. Chapter 10 Competition Advocacy: The Neglected Agenda In the course of our explanation about the real policy agenda that underlies antitrust policy, Chapter 12 focuses on how the search of the antitrust utopia undermines the rule of law, which is the basis of market institutions. The utopian pursuit of perfect markets is complemented by another utopian belief, that of enlightened governments who will pursue such the social good, and are given powers to interfere with economic functioning of markets, allegedly for the ‘‘social good’’ or ‘‘public interest’’ reasons, a problem which we examine in Chapter 11. In this chapter we examine why the opposite is often true in Latin America. In particular, we focus our attention on explaining how institutional demise is accompanied by the emergence of political centralization around governments and rent seeking as a prevalent mode of social relations. 10.1 REGULATORY REFORM AND COMPETITION POLICY Competition authorities are often confronted with political interests who press to obtain monopoly rents through price controls and entry licensing requirements. It is likely that businesses operating in these sectors will be tempted to maintain such conventions informally; by doing so they are not necessarily acting maliciously, but are simply following a customary rule that materialized after years of following official directives. To a great extent, the reluctance of businesses to compete is byproduct of prior interventionist policies that have influenced the Latin American business culture. The OECD (2006, p. 11) highlights the obstacles created by legal monopolies and other regulatory barriers on competition: In regulated sectors, licensing procedures, territorial restrictions, safety standards, and other legal requirements may unnecessarily deter or delay entry. 382 Chapter 10 In some cases, these regulations seem to be the result of lobbying efforts by incumbents to protect their businesses. In other cases, incumbents find ways to take advantage of existing, complex regulations to thwart entry, such as by using the laws as the basis of litigation against entrants. Competition agencies in Ireland, Mexico, the United Kingdom, and the United States, for example, have published reports that highlight such problems in various markets including banking, contact lenses, federal auctions, and wine. The activity of competition agencies has also combined antitrust action with deregulation, trade liberalization, and privatization. Experience over the last fifteen years has shown that antitrust action alone has proven insufficient to dismantle government trade restrictions. This contradicts the initial assumption of antitrust advocates, under which strong antitrust action is advisable whenever it becomes impossible to dismantle government regulatory barriers or where informal customs against competition survive deregulation initiatives. The costs of enforcing antitrust rules have often frustrated the endeavors of competition authorities, either due to the inadequacy of their own resources to pursue a broad antitrust policy agenda, or due to the doubts of the judiciary about supporting competition law enforcement rather than an interventionist public law policy agenda. Actually, it is the other way round: competition agencies have learned that reforming regulatory rules may be a necessary prerequisite to the initiation of antitrust action, in order to establish procompetitive technical standards and to eliminate monopolistic clauses and practices whose only purpose is transferring rents from consumers into the pockets of guilds and trade associations. In short, like other areas of policy making in Latin America, competition advocacy is not what it seems to be at surface: economic deregulation is necessary to create a favorable promarket setting in which firms can compete freely. By contrast, antitrust enforcement appears to be tool of heavy handed dirigisme that is incompatible with the dynamism of unfettered markets. There is a clear ideological innuendo in this, deeply ingrained in the cultural tradition of Latin America. In the first part of this book we examined how Latin America’s antimarket ethos actually promoted the development of antitrust policy as a buffering mechanism against extreme liberalization, rather than becoming a complementary part of liberalization. The hypothesis about the impact of evolving economic ideas throughout Latin American economic history that we advanced in Chapter 1 links the pursuit of successive Nirvanas to the resilient pattern of government dirigisme prevailing in the region; however, far from being opposed by the business community, such government intervention was gleefully welcomed as the price to be paid in exchange for enjoying the opportunity to conduct rent-seeking activities, thus avoiding the pressure of market competition. In other words, in the Latin American economies, the consolidation of monopoly privileges emerged as a by-product of the pursuit of rent-seeking activities. Competition Advocacy: The Neglected Agenda 383 Competition agencies have found it difficult to disengage themselves from their innate inclination to seek Nirvana, which is implicit in the approach of conventional antitrust policy. Competition prosecutions vest competition authorities with power over businesses affairs. On the other hand, entrepreneurs, as in other areas of economic policymaking, see government intervention through competition law as an opportunity to enjoy an undeserved advantage in the market by nullifying competition and accusing more efficient competitor firms of ‘‘attempted monopolization.’’ Moreover, under conventional economic analysis, the quality of the legal framework in which market interaction takes place is merely a given constraint. Therefore, it is not within the scope of the attention of economic scholars, whose paramount concern is determining whether market outcomes, in light of their given structural conditions (property rights allocation included), depart from the optimal Nirvana position—which they always do, ex-hypothesi. This pattern explains why competition agencies have preferred to continue their search for Nirvana, in the new form of antitrust enforcement, rather than to deal with the practical restraints on competition created by government and private legal monopolies. Nevertheless, competition agencies intuitively perceive the negative effects of overly burdensome regulation. Hence, an increasingly important share of their work is devoted to assessing the anticompetitive effects of government regulations. This role, which competition authorities began to take during the deregulation wave of the 1970s in the U.S., has progressively taken hold of the work of competition agencies. Yet, the progress made thus far remains unconvincing. This is demonstrated by the meager quota of cases dealt with by competition agencies and the feeble powers they have been given to deregulate the economy, compared with their prosecution powers against ‘‘business restraints.’’ In addition, the very nature of competition agencies as organs of government limits their effective possibilities, which are limited to mere ‘‘competition advocacy.’’ Let us examine these shortcomings more closely. 10.2 THE SCOPE OF COMPETITION ADVOCACY As stated by a report from the International Competition Network (ICN, 2002, p. 2) competition advocacy is intended to counteract the pressure of interest groups who seek government intervention as a way of advancing their own interests by preventing competitive measures from being implemented. This could act as deterrent to the lobbying endeavors of such interest groups, by making it more expensive for them to convince policymakers and society about the benefits of their preferred measures. Thus, the social resources that interest groups otherwise invest in obtaining shelter from competition will be spared for other uses. Zywicki and Cooper (2007, p. 14) observe that ‘‘in the context of [economic theory of regulation] models, by subsidizing the collection and dissemination of 384 Chapter 10 information, advocacy increases consumers’ efficiency in mounting political pressure.’’ Thus, ‘‘competition agencies help otherwise scattered consumers overcome their natural organization costs, which would otherwise discourage them from challenging anticompetitive government measures introduced at the request of private interest groups.’’ According to the definition coined by the Advocacy Working Group of the ICN (2002), competition advocacy ‘‘refers to those activities conducted by the competition authority related to the promotion of a competitive environment for economic activities by means of nonenforcement mechanisms, mainly through its relationships with other governmental entities and by increasing public awareness of the benefits of competition.’’ Under this definition, competition advocacy ‘‘refers to all activities of the competition authority that do not fall under the enforcement category.’’ Also, it identifies to whom competition advocacy is directed and the purpose sought to be achieved: both government agencies and society are subjects of advocacy. Competition agencies can limit or expose the harm to social welfare created by government measures that hinder competition, as is the case, for example, when a government agency specifies the prices to be charged by taxis in a certain geographic area (ICN, 2002, p. 2). These government measures in an economy usually prevent the entry of newcomers into the market, thus generating a legal monopoly in favor of incumbent firms. Activities falling under the definition of competition advocacy include: – Advising governments on competition matters. – Identifying procompetitive regulatory reform strategies. – Providing advice on government measures that might foster anticompetitive practices and associated resource misallocation. – Outreach activities to educate the public directly through the media and seminars. – Providing economic advice on the potential anticompetitive effects of both existing and proposed legislation. – Giving advice to judges on the economic effects of their legal precedents and case law, particularly those that might foster anticompetitive practices, and generally informing judges and legislators about competition policyrelated matters. AU: 1998 reference not listed in bibliography The competition advocacy role has gained increasing recognition as part of the core activities of competition agencies worldwide. As a World Bank and OECD (1998, p. 93) report states: the mandate of the competition office extends beyond merely enforcing the competition law. It must also participate broadly in the formulation of its country’s economic policies [because they] may adversely affect competitive market structure, business conduct, and economic performance. It must assume the role of competition advocate, acting proactively to bring about government policies that lower barriers to entry, promote deregulation Competition Advocacy: The Neglected Agenda 385 and trade liberalization, and otherwise minimize unnecessary government intervention in the marketplace. However, advocacy has been least effective in those countries where it is needed the most. The reason for this is simple: in developed countries such as the United States or the European Union competition authorities do not act in isolation, but enjoy the full support of institutions created to protect economic freedom and markets, particularly the courts; moreover, the quasi-judicial nature of competition authorities in these countries frees them from government political interference. This is not the case in Latin America, where competition agencies are almost unanimously government agencies ascribed to some ministry, who depend on the latter in all respects, from their organization to their budget. Additionally courts are usually incapable of examining the economic issues involved in competition litigation, much less on subtle economic questions of rent seeking and consumer welfare extraction through legal means. On the contrary, they usually rely on the so-called ‘‘public interest clause,’’ according to which government encroachment on property rights is almost invariably justified, due to the public interest that it represents. It is not surprising that the record of competition agencies in promoting competition, judged by the number of cases examined as well as by the effectiveness of regulatory reform, is meager. 10.3 LATIN AMERICA’S COMPETITION ADVOCACY EXPERIENCE The perceived need to introduce competition into legal reforms has progressively extended to different areas of the economy. Due to the preeminent mercantilism prevailing within Latin American economic institutions, government restrictions are pervasive and encompass almost all sectors and industries. Similarly, the experience of competition advocacy in the region includes different initiatives, among them the following: – controlling mercantilist strategies governing liberal professions and trade associations; – aligning government concessions with procompetitive principles; – minimizing government discretion in regulatory standards; – introducing competition principles in politically sensitive industries such as agriculture; – privatizing utilities and infrastructure industries according procompetitive standards; – reducing red tape and bureaucratic restrictions. As noted above, the experience of promoting a more competitive environment has created, in the case of Latin America, a special blend of competition advocacy and antitrust enforcement, given the limited powers granted to competition enforcers to carry out the first function more effectively. 386 10.3.1 Chapter 10 LIBERAL PROFESSIONS Competition agencies have had a highly uneasy relationship with liberal professional associations due to the political clout traditionally enjoyed by the latter, which has often encouraged them to entertain anticompetitive restraints. Initially, these associations gained the upper hand in their conflict with competition agencies. Following a legalistic interpretation of their competition statutes, competition authorities were initially reluctant to challenge the restrictive agreements undertaken as a result of the clout of professional regulations due to the alleged public interest nature of these agreements, which was usually declared in the special legislation authorizing the agreements. The restrictive interpretation given by competition authorities to their own mandate against restrictions introduced by liberal professional associations was probably a defensive strategy intended to avoid the overwhelming political clout of the latter. Thus, for instance, in Chile, the Competition Commission once declined to rule on a minimum fee schedule for engineers on the grounds that to the agreement was not within the scope of the Competition Act.326 In the interpretation of the Commission, engineering was a profession exempted from antitrust enforcement that was instead governed by labor regulations. Thus, the service tariff issued by the Chilean National Association of Engineers did not constitute a cartel in the opinion of Chilean competition authorities. Today the position of the Chilean Competition Commission would be entirely the opposite, and would likely find the competition statute applicable in such a case. Indeed, this is not only the position of Chile; other countries in the region have begun to change their approach radically on this issue. In 1999, Pro-Competencia filed three cases against the Venezuelan Bar Association, the Venezuelan Association of Public Accounting, and the Venezuelan Association of Engineers for setting minimum service fees, allegedly pursuant to legal authorization.327 In all these cases, in addition to the antitrust suits, a public policy report was prepared to show the evident anticompetitive effects of such restraints in the form of higher prices and lower-quality services. Procompetitive advocacy initiatives are usually followed by a countervailing pressure to maintain privileges through the interpretation of sector-specific laws. Several cases illustrate the stiff reaction of professional bodies against procompetitive initiatives by competition agencies. 10.3.1.1 Public Notaries In Public Traders of the Mexican Federal District v. the Association of Notaries Public of the Federal District et al. (OAS Trade Unit, 1999), the public traders of the Federal District filed a complaint before the Commission concerning a group of notaries public, as well as several government authorities of the capital. 326. Ruling No. 6/1974. 327. Rulings Nos. 011/1999, 015/1999 and 014/1999, respectively. Competition Advocacy: The Neglected Agenda 387 The subsequent investigation found that the individual notaries, the Association of Notaries, and the Public Property Registry helped to impede competition and free access to the market, the individual notaries through outright monopolistic practices, the Association of Notaries through relative monopolistic practices, and the Registry by means of administrative restrictions. This case shows how difficult it is to open up sectors to competition that are traditionally reserved to specific professional associations. Despite the interpretation of the Public Traders Law by the Secretariat of Commerce and Industrial Development (SECOFI) to the effect that public traders could certify transactions involving real estate and powers of attorney, the notaries took joint steps to unduly reserve the market for themselves. The Public Registrar simply decided not to accept documents certified by public traders. The Competition Commission ruled that such measures constituted outright monopolistic practices, prohibited by Article 9.iii of the Mexican Competition Act. As a corrective step, the Commission, in addition to penalizing those in violation of the law, ordered the Public Registry to agree to record documents certified by public traders, pursuant to the interpretation of the Law of Public Trading issued by SECOFI. 10.3.1.2 Pharmacists and Drugstore Retailing It seems that the exposure of liberal professions to economic globalization is quickly rendering restrictions like these futile. This is causing professional associations to react quite harshly against any deregulation attempts suggested by competition agencies. A case in point was the Pharmaceuticals retail cartel case (1993), in which the Venezuelan retail pharmaceutical sector was liberalized in 1993, following a recommendation issued by Pro-Competencia. The reform of the pharmaceutical sector offers an example of Pro-Competencia’s regulatory reform actions. The professional Association of Pharmacists was instrumental in lobbying for government policies that imposed administrative and legal barriers to entry. These took the form of undue restrictions on pharmaceutical activity, such as setting a minimum distance between pharmacies (250 meters); this provision prevented pharmacies from forming part of larger stores. Restrictions were also imposed on the sale of over-the-counter medications to licensed pharmacists, and on the number of pharmacies authorized by the Association’s fixed schedules to open for extended hours. Finally, these administrative rules imposed red tape on those who tried to open a new pharmacy. Pro-Competencia successfully proposed to the Cabinet a reform of these regulations in order to make them consistent with competition standards. Regulations governing the sector were amended by the Cabinet. However, the legal basis on which the Pharmacists’ Association supported its restrictive regulations was not amended, which enabled the Association to carry on with its anticompetitive restraints. In the first Venezuelan Federacion Farmaceutica de Venezuela case (1992), this professional association reacted to the competition authority’s initiative by calling for a boycott of all pharmacies and pharmacists who took advantage of the 388 Chapter 10 new, expanded opportunities by opening up new stores, selling nonprescription drugs in nonpharmaceutical stores, and keeping late hours. The Association of Pharmacists also made public and private pleas to the President of Venezuela to stop the reforms and to fire the Superintendent of Competition. They also published a manifesto in the newspapers in which, on behalf of the Association, all members were threatened with suspension of their licenses were they to accept any positions at the new entrants’ facilities. Pro-Competencia immediately opened an investigation at the end of which the Association was found to have engaged in collusive behavior to boycott competitors that operated by the new rules. In the meantime, the Association had started a public campaign arguing that the new regulations and Pro-Competencia were ‘‘conspiring against the pharmaceutical profession’’ and damaging the ‘‘health of the country.’’ At the end of the investigation, the association was ordered to publicly revoke its threats. When it did not comply with the order, the Association was fined. An appeal followed and the courts sustained Pro-Competencia’s decision. The public followed this case closely. This case was followed by another decided in 1996. This time ProCompetencia prosecuted again the Federación Farmaceútica de Venezuela for its insistence on fixing retail prices and allocating markets through prearranged collective schemes for opening and closing pharmacies throughout the country. According to Articles 3, 9, and 20 of the Regulations on Pharmaceutical Establishments: (i) only fully accredited pharmacists could establish, operate, reopen, and move pharmaceutical establishments (Article 3 of the Regulations); (ii) persons wishing to establish pharmacies (Articles 9 and 3 of the Regulations) had to be pharmacists; or (iii) pharmacists had to own at least 75% of the shares of the company wishing to establish a pharmacy (Article 20). Pro-Competencia concluded that Articles 3, 9 and 20 issued by Federación Farmacéutica de Venezuela were anticompetitive under the terms of Articles 6 and 9 of the Competition Act. Finally, in the case of INSACA v. Federación Farmacéutica de Venezuela and Colegio de Farmacéuticos del Distrito Federal (2000), INSACA filed a complaint against the Federación Farmacéutica de Venezuela (Venezuelan Pharmaceutical Federation) and the Colegio de Farmacéuticos del Distrito Federal y Estado Miranda (Association of Pharmacists of the Federal District and the State of Miranda), alleging that the Regulations on Pharmaceutical Establishments issued by the Federación Farmacéutica de Venezuela contained articles restricting free competition, and that the Colegio de Farmacéuticos applied certain allegedly restrictive clauses of these regulations. Pro-Competencia concluded that the practices of the Colegio de Farmacéuticos del Distrito Federal y Estado Miranda in applying the aforementioned Regulations on Pharmaceutical Establishments were anticompetitive; Pro-Competencia therefore levied a fine of USD 5,539.86 against the Colegio de Farmacéuticos del Distrito Federal y Estado Miranda, and a fine of USD 10,602.90 against the Federación Farmacéutica de Venezuela. In so doing, it took into account the fact that they had previously engaged in practices that hindered free competition, as evidenced in rulings SPPLC No. 0004/1992 and SPPLC No. 033/1996, respectively. Competition Advocacy: The Neglected Agenda 389 Other countries have followed the footsteps of Pro-Competencia. The Honduran Competition Commission recently opened an investigation against the National Association of Pharmacies and several individual drugstore chains and pharmacies for eliminating discounts previously offered on medicines.328 This action has been accompanied by a full report on the current state of barriers to competition in this sector, especially those pertaining to minimum distance requirements for the establishment of new pharmacies. However, the outcome of this case is still uncertain, as the Competition Commission has not yet exerted pressure upon the cartel conduct of the Association of Pharmacies, which has preempted more aggressive competitors from making further price discounts on the price of medicines.329 Similarly, in the Asociacion de Famaceutas de Buenos Aires case (1999) Argentina’s CNDC imposed a USD 140,000 fine against the Association of Pharmacists of Buenos Aires for its restrictive conduct aimed at raising barriers to entry against new competitors. 10.3.1.3 The Health Sector Interestingly, many anticompetitive restrictions seem to be more stringent in the health sector. Countries like Brazil and Argentina are particularly reluctant to introduce competition in this sector; instead, they often vest professional associations with self-regulatory powers which often promote anticompetitive restraints. As Vezza (2004, p. 4) explains, referring to the Argentine model: The form of self-regulation in carrying out the medicine profession in Argentina places professional medical associations in a quasi-governmental role. The government vests them with the role of certifying medical doctors, under each jurisdiction. Medical associations organize these powers into their own internal statutes and by-laws, as well as include additional provisions under which the medical profession is to be conducted. Each doctor has to possess a certificate and must abide by the provisions laid down under it, in order to conduct her profession. Some of these rules promoted under the code of ethics of the Argentinean Medical Association exceed the scope of controlling the professional license and refer to professional fees and advertising, two of the most common forms of competition between firms in a market. AU: reference not listed in bibliography Several cases in Brazil and Argentina illustrate this phenomenon. In Brazil, an important case in the health sector was Sindicato dos Hospitais case (1992), involving the Sindicato dos Hospitais, Clinicas, Casas de Saude e Laboratorios de Pesquisas e Analises Clinicas do Estado de Pernambuco. In this case, price schedules were used by companies in the sector to set prices and rates 328. Farmacias en libertad para ofrecer descuentos, Diario El Heraldo, May 9, 2007, <www.heraldohn.com>. 329. Farmacias no podrán dar más del 25 por ciento de descuento, Diario El Tiempo Digital, Sep. 28, 2007, <www.tiempo.hn/>. AU: reference not listed in bibliography 390 Chapter 10 for health services provided by members, leading to the adoption of uniform conduct that damaged competition. The rate schedules were deemed to be instruments for the creation of cartels. Even though the union didn’t challenge CADE’s contention that the schedules had facilitated the alignment of prices, it did contend that their use was not mandatory for the members. The utilization of price lists by medical associations has also received attention, with cases decided against professional groups of anesthesiologists in Goiás, doctors in Piauı́, and urologists in Ceará. The National Federation of Private Insurance Companies of Brazil brought a complaint against entities and companies providing services in the health care field organized through the Associacao Medica Brasileira (1996). These companies were said to be denying service, or encouraging denials of service, to users of group health care plans that had not agreed to adhere to the fee schedule set by the Asociacao. The association published, and recommended that plans follow, a schedule of medical and hospital service fees. CADE ordered the association to refrain from imposing such tariffs among its members. In Argentina, the CNDC has received a significant number of complaints against price fixing (minimum professional fees for medical services) and exclusive behavior. These include the Argentinean Anesthesiologist Association case (1983); Neuquén’s Medical Association case (1988); and Rosario’s Urologist Association case (1988). In Panama’s case CLICAC v. Gold Mills de Panamá S.A. and others (Medical Oxygen) (2000), the Competition Commission initiated an investigation of perceived anticompetitive restrictions of bidding conditions in the market for medical oxygen. In 2000, the CLICAC engaged in an investigation of absolute monopolistic practices in connection with a 1998 public bidding to supply medical oxygen required by the Social Security Institute (CSS), in which several companies participated. The case was brought to trial, and the Ninth Civil Court imposed a fine upon the investigated companies in 2004; the companies agreed to pay in 2006. The CLICAC took part in a later public bidding for medical oxygen, in order to ensure that competition rules observed throughout the process. 10.3.2 TRADE ASSOCIATIONS Cartels are the most common form of anticompetitive practice in the services sector, usually facilitated by the strong presence of associations and labor unions. Examining the Brazilian service sector, for example, Salgado (1995, p. 29) highlights the influence of labor unions and associations in fostering cartel behavior through information exchanges among their members. This fact is crucial to a proper understanding of service sectors, which often are not concentrated, but are nevertheless organized by associations, often protected by law, that disseminate information and facilitate restrictive behavior. Competition authorities in the region are very active in the prosecution of cartels undertaken by trade associations that, through directives and collective AU: reference not listed in bibliography AU: references not listed in bibliography AU: reference not listed in bibliography Competition Advocacy: The Neglected Agenda 391 recommendations, lead their members to engage in ‘‘de facto’’ violations of the law. This expediency in the prosecution of horizontal restraint cases arising from the collusion of businesses within the framework of trade associations (i.e., collective decisions agreeing to limit competition among the members of the union or association) is a result of competition authorities’ awareness of the rent-seeking conduct often engaged in by such associations in the past. Detecting and prosecuting tacit collusion may prove difficult due to constraints on evidence gathering. Furthermore, even when evidence is successfully collected, the disclosure of such evidence is subject to severe limitations imposed by confidentiality requirements. This may explain why cases involving formal decisions by trade and professional associations abound in the experience of the region’s competition authorities. The challenges of collecting information may lead competition agencies to rely on membership in a business association as a factor explaining parallel prices. Therefore, it is not surprising that such cases have been popular among enforcing agencies throughout the region. Price fixing often arises in liberal professions due to the legal grant of selfregulatory powers; thus, any party attempting to charge different rates is frequently subject to exclusion and punishment by the disciplinary tribunal of the relevant professional association. One acute problem in this regard has to do with arrangements by competitors in a given industry to standardize their products. The standardization of the web of production may impose unexpected or unnecessary costs on potential entrants, yet it may also be necessary to enhance scale economies among producers (thereby reducing their costs per unit), develop shared capabilities, and deliver consumers the minimum quality they expect from the products they purchase. It may be necessary to intervene—albeit carefully—through antitrust enforcement in these situations, in order to distinguish a necessary standardization from an unnecessary one. In the cases of AVAVIT (Association of Tourist Agencies) and the Camara Venezolana de la Industria del Cine y del Video (Association of Movie Theaters), Pro-Competencia grounded its analysis on the existence of a trade association that provided firms operating in these sectors with a forum for arranging their price lists and aligning their business conduct. In Peru, INDECOPI’s Free Competition Commission has systematized the conventional practice by setting an important binding precedent, which was subsequently endorsed by the Competition Tribunal.330 Trade associations are now subject to the rules of free competition, according to which trade entities have an obligation to observe the rules regulating the exercise of free competition when their activities have even an indirect relationship to the conduct of economic activities by their members. Specifically, INDECOPI stated: Although the aims of these entities may include the collection and dissemination among their members of various kinds of information on the sector to 330. Ruling No. 276-97-TDC. 392 Chapter 10 which they belong and the conduct of market studies, they may be found to have engaged in practices restricting competition, and prohibited by Articles 3 and 6 of Legislative Decree Law No. 701/91, if they limit the freedom of action of their members or make recommendations or establish conclusions in advance, so as to elicit uniform behavior in the market by their members. Similarly, they may also be found to have engaged in practices prohibited by Articles 3 and 6 of Legislative Decree Law No. 701/91 when, in any way, they instigate, divulge, notify, control, perform, or finance any activity contributing to the conclusion of an anti-competitive agreement or decision adopted within the association by its members. For this reason, competition agencies devote considerable attention to the analysis of the behavior of industry and trade associations in their collection of information, reciprocal checking of price quotations, reduction of secrecy, and facilitation of collusion. There are several examples of successful competition advocacy associated with the anticompetitive performance of professional or trading guilds: 10.3.2.1 Capital Markets Economic liberalization was successfully introduced in the Venezuelan capital markets sector (1992) thanks to the advocacy of Pro-Competencia. The banking and securities sector in Venezuela had traditionally been subject to close regulation; however, this situation slowly began to change in the early 1990s with the liberalization of interest rates. However, in spite of the liberalization efforts made by the government, other areas remained severely restricted to foreign—and domestic competition. Consequently, in those days the securities markets were, to a large extent, still protected from external competition. Under the law regulating the sector, the members of the Stock Exchange had to agree on a fixed Commission that had then to be approved by the Venezuelan Securities and Exchange Commission. Accordingly, Pro-Competencia communicated its concern about these anticompetitive rules to the Securities and Exchange Commission, which agreed to revoke any former regulatory action that could interfere with the free pricing of stock brokers’ services. A similar case was decided in El Salvador, in 2007. The Competition Authority brought an investigation against several trading companies at the Stock Commodity Market for allegedly adopting an agreement for fixing minimum commissions in the provision of brokerage service. In the case of agreement sorghum and open operations, the agreement took effect from October 1, 2006 to date, and for the conventions of staple rice, white corn and registration of troops, the agreement took effect from January 1, 2007 to date (Superintendencia de Competencia (es officio) v. Lafise Agrobolsa De El Salvador, S. A.; Interproductos, S. A.; Sbs, S. A. Y Granos Continentales, S. A.) (2007). Competition Advocacy: The Neglected Agenda 393 In addition to the administrative fine imposed upon the trading companies, the Competition Authority, recommended BOLPROES (the Commodities’ Exchange institution) to promote transparency and competition within the Commodities’ Exchange. 10.3.2.2 Tourist Agencies Competition enforcement in the region has also been particularly active in reviewing the links between firms investigated for price fixing and their membership in a trade or industrial association. This has been the case with respect to commissions charged by tourist agencies acting as intermediaries for the sale of airline tickets in the wake of deregulation caused by Internet airline ticket sales. In the past, consumers were forced to purchase tickets from these operators, and airline companies were severely restricted in their ability to sell directly, as they had no immediate access to consumers. This limitation enabled tourist agencies to charge a fixed Commission (usually 10%) on the price of airline tickets, supported by government intervention. In Panama and Venezuela, respectively, tourist agencies complained when governments eliminated such commissions at the request of the competition authorities, in light of the new status quo created by Internet purchases of airline tickets. In conclusion, due to past development policies, trade, and professional associations have frequently become instruments facilitating horizontal restrictive behavior among their members. This behavior was noticeable from the moment competition law was implemented in the region. Since then, competition agencies have tended to regard professional and trade associations as subject to competition law to the degree that they undertake economic activities. Accordingly, they have been subject to sanctions to the extent that their decisions, recommendations, and any of their activities result in, or could result in, restrictions on, or distortions of, free competition. 10.3.3 GOVERNMENT-DRIVEN CARTELS Latin America’s economic mercantilism traditionally adopted the form of laws and regulations reflecting the political pressure of interest groups that were unwilling to compete: workers, peasants, farmers, and even consumers are but a few examples of these groups. These protective mechanisms acted as hidden subsidies that sheltered interest groups from potential entrants’ competition; to the extent that they transferred wealth from consumers to the producers’ pockets, they entailed distributive policies that could only be justified on grounds, such as the protection of lesser competitive industries that followed the rationale of import substitution industrialization (ISI) policies.331 331. See Section 1.1.4, above. 394 Chapter 10 In other instances, cartels were promoted by indirect means, as a by-product of price controls implemented at the retail level. In these cases, the prime target of protection was, of course, the consumer’s purchasing power—these policies were often implemented in high inflationary environments. Whether these policies succeeded in their primary goals should not concern us here (in any event, they didn’t); what matters to us is their effects on market competition. Price controls eliminated price competition at the retail level, but also indirectly at the producer level, as the price of production inputs was immediately subject to regulation in order to ensure the artificial profitability of businesses at the retail level in order to prevent the disappearance of the regulated product from the market. Thus, price controls at the end of the supply chain triggered further regulation at all other intermediate levels, thereby eliminating competition from the entire chain of production. In competition advocacy efforts, it was clear that deregulation at the retail level had to be accompanied by measures aimed at eliminating competitive restrictions all along the productive chain. Competition agencies have emphasized the need to free the economy of such constraints. To the extent that industrial policy induced businesses to organize themselves in cartels, therefore, it played an important role in the virtual elimination of competition from the economy, similar to the role that foreign trade policy played in eliminating competition from abroad. Due to the political sensitivity of advocating procompetitive initiatives, the role of competition authorities, although severely restricted, acquires particular interest in basic strategic industries, usually heavy ore, energy, and mining. Cartels at the production level were promoted to foster the development of indigenous industries, particularly in sectors regarded a ‘‘strategic’’—energy and infrastructure. The oil distribution sector seemed an especially fit candidate for cartelization. 10.3.3.1 AU: reference not listed in bibliography Energy Sector Due to the notorious government involvement in the energy sector, usually heavily regulated by governments for ‘‘strategic’’ reasons, it is unsurprising that competition agencies have sought to dismantle anticompetitive government restraints in this sector. However, until now, this sector remains heavily controlled by the State. Several cases illustrate this point. First, in the case DPDE ‘‘ex offı́cio,’’ v. Rede Gasol (Grupo Cascão), Rede Igrejinha, SINPETRO/DF-Sind. Com. Var. Derivados Combust. e Lubrificantes/DF (1994) (Sinpetro/DF case), the SEAE, Brazil’s competition authority in charge of market investigations, submitted, in February of 2002, its analysis in a case involving Sinpetro-DF, the trade association of the fuel retailers of the Federal District. The investigation focused on suspected anticompetitive restrictions affecting the geographical market of the Federal District, in particular, the obstruction of the entry of competitors in the fuel retail market. With respect to the allegation of entry blockage, the SEAE’s report concluded that Sinpetro-DF tried to influence the drafting of legislation to block competitors (e.g., a large Competition Advocacy: The Neglected Agenda 395 group of hyper-markets) from obtaining permits to build fuel stations in certain areas, such as the parking lots of supermarkets, hyper-markets, and shopping centers. Based upon economic indicia, the SEAE concluded there was enough evidence of a cartel and recommended the imposition of fines on Sinpetro-DF and two chains of retailers in the Federal District. More importantly, it recommended that CADE inform the Legislative Chamber of the Federal District about the anticompetitive effects of the law that blocked the entry of supermarkets and hyper-markets into the fuel retail market. However, the draft of the bill proposed by Sinpetro-DF became law in January of 2000, and since then, supermarkets and hyper-markets have been banned from opening fuel stations in their lots. Furthermore, in the mid-1990s, a Chilean case involved the introduction of competitive conditions in the natural gas pipeline between Argentina and Chile. The ChRC issued proposals to ensure that the transportation and distribution of gas was conducted under competitive conditions. The Commission limited the concentration of cross-shareholding among the corporations engaged in transportation and distribution, as well as their biggest customers, to 15% in order to avoid their individual control of upstream or downstream companies. Similar limits were established in the energy sector, and particularly in the electricity market. Also, a 15% cross-shareholding cap was established between distributors in different geographic areas to avoid horizontal integration. Furthermore, the Commission provided that a gas concession should not be granted on an exclusive basis. Finally, with respect to network access, it required the operator to facilitate interconnection among the different networks in a given area to avoid tying customers to a particular supplier. As for the supply itself, it had to be offered under public, nondiscriminatory conditions, and the Commission was vested with powers to regulate and establish prices. Thus, instead of free competition, the sector is subject to regulation, notwithstanding the fact that consumers would clearly benefit from competition, rather than regulation administered by the State. Next, in Panama, the CLICAC prepared a study providing an assessment of competition in the Panamanian fuel distribution industry. The objective of this study was to assess the level of competition existing in Panama’s fuel distribution industry, based upon observed prices and volumes directly transacted in the market between 1993 and 1997. On a scale from 0 (perfect competition) to 1 (collusion), the study estimated the level of competition at 0.3, which suggested that the industry was relatively competitive. The CLICAC did not make a recommendation for a full-scale liberalization of this sector. In Mexico as well, the CFCM has negotiated the conditions for introducing competition in the distribution of gasoline. This sector was in the hands of Pemex, the Mexican state oil company, until recently. Today, Pemex retains legal monopoly rights over oil exploitation, but no longer has similar rights in downstream industries, such as gasoline distribution and sale. The CFCM studied the gasoline market and found that there were less than four thousand retail sellers in the whole country, that the geographic distribution of gasoline stations was uneven, and that few gasoline stations had very important market shares. Service quality was low, 396 Chapter 10 and there were no rules providing for the opening of new gas stations. Also, there were many artificial barriers to marketing complementary products and services, such as goods and beverages, inside gasoline stations. In order to modernize the sector, the Competition Commission negotiated with Pemex to create precise criteria for the establishment of contracts between PemexRefinacion and those individuals interested in operating gasoline service stations. The agreement provided for several measures aimed at promoting the transparency of the industry, including: (a) setting clear, simple requirements for applications for and acquisition of contracts to operate new gasoline stations; (b) establishing a commitment on the part of Pemex-Refinacion to enter into contracts with anyone interested in opening new gasoline stations, provided that they met certain technical, safety, environmental, and image specifications; (c) eliminating restrictions on the number of gasoline stations that can be opened in a specific area and any distance requirements that may have existed in the past between stations; (d) establishing that supply contracts between Pemex-Refinacion and third parties may be freely traded in a secondary market provided that the former is duly notified; and (e) eliminating the sub-franchising system, thus allowing the marketing of all goods and services in gasoline stations, other than prohibited products such as alcohol or explosives. These guidelines were later published in a ‘‘Simplified Program to Establish New Gasoline Stations’’ (Levy and del Villar, 1996, p. 7). It is expected that these principles will introduce competition in several ways. First, since the guidelines provide incentives to increase the number of gas stations, consumers will bear lower costs either because waiting times at stations will decrease, or because distances between stations will shorten. Second, service quality will improve by widening the range of goods that consumers will be able to buy. Third, there will be new opportunities for those interested in opening up new gasoline stations. All of this will enable increased price liberalization in this market. Castañeda (2003, p. 13) comments on how efficient advocacy against Pemex (the public owned Mexican oil enterprise) led to opening the retail market. PEMEX forced retailers to set retail service stations within a certain distance from one another; it also negated the possibility for retailers to diversify by setting up convenience stores and other businesses. In light of the former, the Competition Commission ordered PEMEX to remove all these restrictions. After seven years, the number of retail service stations has grown by over 50%; stations have been modernized and diversified by investing in convenience stores, motels, repair shops, and other related businesses. 10.3.3.2 Basic Industries Latin American governments have consistently regulated and encouraged legally protected cartels in the so-called ‘‘basic industries’’ (oil production and distribution; heavy industry, etc.). Hence, it is not a coincidence that conflict arises between competition agencies and these regulations. Two cases illustrate this conflict. Competition Advocacy: The Neglected Agenda AU: reference not listed in bibliography First, in SDE v. CSN, Usiminas and Cosipa (1999), CADE found the steel producers Usiminas, CSN and Cosipa guilty of price fixing and fined the firms USD 26,521,061 (which corresponded to approximately 1% of their revenues in 1996). The evidence in this case was uncontroversial, since representatives from the firms themselves and their trade associations attended a meeting with the SEAE in 1997 to declare that they would simultaneously increase their prices by a specific amount on a specific date. Until 1994, meetings such as these were permitted and relatively common, due to the Ministry of Finance’s authority to administer price controls. During the meeting, however, the firms were warned that under the new regime an agreement to fix prices was illegal and that should they attempt to jointly raise the prices for steel, they would be prosecuted for cartel formation. Second, In the Aluminum Cartel case (1994) reported by the OAS Trade Unit (2003, pp. 28-29), five firms were accused of fixing prices of primary aluminum. In July of 1991, they agreed to a formula that all of them would adopt to fix prices. This mechanism should only have lasted ninety days, since the prices that had theretofore been dictated by the Brazilian government were liberalized in November of the same year. However, this pricing procedure continued to be used by these firms even after the Brazilian government stopped determining the prices the steel producers should charge. When the Brazilian Competition Law went into effect in 1994, the adoption of any concerted practice among competitors became subject to sanctions by CADE. Thus, the fact that the government had set the prices for primary aluminum until 1991 did not eliminate the liability of the firms that continued to use those measures after liberalization. Frequently, these cases result from government encouragement, since governments often regard cartelization as a convenient tool to organize production among small and medium enterprises, or because of the ‘‘social’’ role that the members of the cartel play. Often these groups are associated with the production of agricultural foodstuffs. These sectors are highly protected by political interests, and therefore, antitrust prosecution is severely restricted. 10.3.3.3 AU: 1999 reference not listed in bibliography 397 Small and Medium Foodstuff Producers Governments in the region have been particularly active in encouraging and protecting cartel development in industries regarded as socially strategic. For example, in case Union of Tortilla Processing Maquiladores reported by the OAS Trade Unit (1999) in Mexico, the Union of Tortilla Processing Maquiladores of the Mayan Region entered into a cartel to divide markets among competitors at the request of the municipal government. The syndicate and other nonorganized producers agreed on steps and promoted measures to maintain exclusive rights in areas where each tortilla processor had customarily operated in the past under regulations that had since been repealed. Pursuant to this scheme, the parties attempted to prevent tortilla distribution in the municipality by two businesses, thus curtailing the development of competition promoted by deregulation. 398 AU: reference not listed in bibliography AU: reference not listed in bibliography AU: reference not listed in bibliography Chapter 10 The Competition Commission found that the joint action of the businesses, together with the conduct of the municipal authority, constituted a violation of Article 28 of the Constitution. Such action delays the growth of a more efficient market, discourages improvements in services, jeopardizes freedom of industry and trade, and is harmful to consumers. For these reasons, the Commission recommended, in addition to penalties imposed on the parties that the government of the State of Quintana Roo refrain from participating in or supporting similar actions in the future. Another case is Costa Rican National Association of Rice Processors, et al. case (1999). In the rice industry, the Commission decided to initiate an enquiry that led to an administrative proceeding against members of the National Association of Rice Industries for alleged violations of the Law for the Promotion of Competition and the Effective Defense of the Consumer. At issue was an agreement not to buy rice from national producers and to pressure them into preventing other economic agents from accessing the market. When such practices are verified they constitute absolute monopolistic practices. The Competition Board ordered the imposition of a fine against the rice processing companies that participated in the events under investigation, having determined that they had indeed engaged in absolute monopolistic practices. The violation having been demonstrated, the Commission imposed sanctions. The Board also concluded that they had engaged in an unlawful boycott. Furthermore, in the case Comité de Molinos de Trigo de la Sociedad Nacional de Industrias and others (1996) which involved price fixing in the Wheat Flour Industry, INDECOPI opened an investigation against a cartel in the Wheat Flour Industry that led to increases in the price of bread. This was a seminal case, dealing with the pricing of an important product for the masses, which was instrumental in winning broad acceptance of the central role of a competition authority in arbitrating public disputes over the impacts and fairness of anticompetitive activities. Prior to this case being brought, it was common for political intervention to be used to control prices. INDECOPI was able to meet with actors on both sides of the ideological divide (i.e., the consumers and the Wheat Flour Industry) to discuss the complaint and the legal issues, and to successfully explain the role for INDECOPI as referee in the market, in order to ensure the effectiveness of competition law and policy. After that, it was possible for INDECOPI to investigate and conclude the case without political interference.332 In all of the cases discussed in this section, the preferred course of action was antitrust prosecution, which often failed to achieve its aims or was significantly delayed. For example, in the case CLICAC v. Gold Mills de Panamá S.A. and others (2003), the indicted parties finally reached an agreement with ACODECO (CLICAC’s successor) to pay USD 100,000. The case had already obtained the adverse rulings of both the Court of First Instance and the Appeals Court. To delay 332. <www.crdi.ca/es/ev-119906-201-1-DO_TOPIC.html>. Competition Advocacy: The Neglected Agenda 399 payment of the fine, the firms initiated an Interpretation Petition (Recurso de Casación) before the Supreme Court of Justice, which was denied; then they introduced an Extraordinary Petition (Recurso de Hecho) based upon the alleged misinterpretation of facts by the Competition Board. The agreement was reached in June 2006, that is, nine years after the beginning of the investigation. To circumvent these difficulties, competition agencies sometimes advocate the deregulation of the sector, but these initiatives often lack the necessary persuasive or coercive power to be carried out successfully. 10.3.4 ANTICOMPETITIVE GOVERNMENT MEASURES Competition agencies often develop initiatives aimed at limiting government regulatory powers by clearly defining the realm of legitimate ‘‘public interest’’ intervention, and setting forth guidelines for its rational implementation. For instance, they may identify the cases where government intervention creates an unjustified barrier to economic freedom, or upsets the conditions within which entrepreneurs operate, with no apparent ‘‘public interest’’ justification. A very important competition advocacy role is the revision and control of anticompetitive regulations. Illustrative cases have arisen in several sectors. 10.3.4.1 AU: reference not listed in bibliography Restrictions Introduced by Local Councils Local councils, due to their institutional responsibilities in establishing operating conditions for businesses in their local communities, are often responsible for creating undue market entry restrictions. Several cases illustrate this phenomenon. An illustrative case evidencing this liaison between potential violators of competition rules and political authorities is the Colombian case Gasocaña Ltda., Norgas S.A. and another (1997), in which the three companies investigated agreed on the sale prices of propane gas in a meeting held on November 16, 1993. This agreement was officially registered in the office of the Mayor of Ocaña. Four witnesses signed the agreement, including the treasurer of the Ocaña consumers’ association. When the agreement was signed, a Ministry of Mines and Energy ruling was in force establishing the maximum prices for sales to the public of propane gas for home delivery; however, the Municipality of Ocaña was excluded from this regulation. A ruling of the Municipal Pricing Committee was needed in order to set prices. The Committee had to be composed of the mayor or secretary of the town council, and the manager of the Agricultural Agency or, in his absence, a delegate of the governor. The gas distributors and other persons who entered into the agreement usurped the Committee’s functions, and the meeting of the gas distributors to agree on prices was not legal. The Mayor of Ocaña requested that the investigation be closed. Among other issues, he pointed out that the agreement had been rendered null and void a month after its signature because the Ministry of Mines and Energy had issued a ruling 400 AU: reference not listed in bibliography Chapter 10 determining the price of gas for the Municipality of Ocaña. As the action for which the investigation had been undertaken had ceased, it was closed, and no sanctions were imposed on the companies and persons under investigation. Furthermore, on Peru’s Council of Trujillo decision (1997), INDECOPI declared void an order of the Council of Trujillo, a local council, requiring taxis to be painted yellow and black, since the council did not justify this measure on rational grounds. It was determined that the council’s order created an unjustified market barrier through government intervention. Similarly, competition agencies have examined the effects of local council taxes on economic activity, and have followed a similar analysis of their economic rationality in order to determine whether they are legitimate and justified in the name of the ‘‘public interest.’’ For example, INDECOPI has examined the conditions for the issuance of licenses to operate in various markets. In the Miraflores taxation case (1997) particular, it found that the payments required by the Miraflores Council on the sale of alcoholic beverages were illegal, since they were not authorized by any particular statute. Therefore, the tribunal found that the council had imposed an unauthorized barrier to economic activity. INDECOPI’s further developed the criteria for reviewing whether government intervention is legitimate from a social welfare viewpoint: – First, the affected party should provide evidence that the restrictive government measure did not comply with the legal steps and formalities necessary for its adoption. – Also, it is necessary to show evidence that the measure is discriminatory, arbitrary, excessive, or somehow disproportionate to achieve its purported goals. – If the previous conditions are satisfied, then the government is required to show that the measure is justified on ‘‘public interest’’ grounds. To do so, it has to show the benefits of the measure for the community. – In addition, it has to show that the expenses or burdens on those subject to the measure are reasonable in light of the social objectives sought, and that the decision taken was one of the least expensive alternatives among many vis-à-vis the objectives sought. – Finally, the competition agency must balance the private costs generated by government measures curtailing economic freedom with the potential or actual public benefits in order to establish whether the measure was rational from an economic viewpoint. AU: reference not listed in bibliography In other Latin American countries similar views have been established. The Panamanian case Penonomé carnival board (2000), supports this conclusion. In March 2000, CLICAC filed an administrative law action before the courts against a ruling issued by the Carnival Board of the Municipality of Penonomé and by the municipal council itself. Cervercerı́a Nacional and Cervercerı́a del Barú had competed for the concession to sell beer for the duration of carnival. In view that Cerveceria Nacional had been awarded the concession, the ruling declared that the ‘‘temporary stands and tents that are set up for the duration of Carnival shall sell AU: reference not listed in bibliography Competition Advocacy: The Neglected Agenda 401 only Cervercerı́a Nacional’s products.’’ Moreover, the ruling had imposed an exclusion against Cerveceria del Baru to sell beer not only at the places where the Carnival takes place, but in all the towns of the municipality. Clearly, the measure undermined the ability of other sellers to compete freely, and is detrimental to consumers, who for the four days of Carnival will not have the opportunity to choose among alternative products, brands, quality, and prices. Moreover, the measure was overreaching and lacked any other purpose except causing a harm upon competition. A similar case was investigated in Mexico, in 1999. The CFC initiated an ex officio investigation of the markets for beer distribution and sale throughout the country, in order to determine the existence of any monopolistic practices in the form of contracts with state, municipal, and ejido authorities, among others, for the exclusive right to distribute beer. Where exclusivity agreements are made for the sale of particular goods or services with any party, even a public authority, consumers are deprived of possible alternatives. Both companies ultimately agreed to abandon exclusive distribution practices. Furthermore, in 2000, the CFC decided to recommend the State Government of Sinaloa eliminating the authorization requirements for the transport and sale of pasteurized milk and ultra-pasteurized milk, which had been imposed, in addition to national requirements imposed by the Secretary of Agriculture (Authorizations required by the Local Government of Sinaloa). Another case, decided by Chile’s Competition Board in December 1980, held that it was illegal for the government to require that any firm interested in applying for public works construction contracts as a contractor must have a civil engineer, an architect, or a civil builder as a partner. Likewise, the Costa Rican competition board has given advice to the government on the elimination of regulations that distort competition. In a recent decision, the Commission recommended the elimination of Executive Decree No. 27464, whereby tax payments on vehicle imports are subject to discriminatory conditions affecting individual rights. 10.3.4.2 Definition of Technical Standards Competition agencies collaborate with governments in defining rational technical standards to be implemented through regulation. Again, INDECOPI has developed extensive guidelines defining the conditions for introducing government measures without impairing the behavior of economic actors in the market (Caceres, 1998). These guidelines state the criteria that governments should use for balancing private costs with the public good from a rational economic standpoint. Also, Pro-Competencia has proposed several initiatives for the deregulation of the economy. For example, it has proposed draft legislation creating a Commission for the deregulation of the economy through the simplification or elimination of red tape and excessive bureaucratic permit-trading activities. In the Mexico City International Airport case (2000), the Ministry of Communications and Transport (SCT) requested an opinion from the Competition AU: reference not listed in bibliography AU: reference not listed in bibliography 402 Chapter 10 Commission about the existence of competitive conditions in the provision of mechanical passenger boarding equipment, in the form of telescopic walkways or gateways, mobile gates, and aerocars, for Mexico City’s International Airport (AICM). In August 2000, the Commission determined that there were no reasonable competitive conditions in the provision of these services. The relevant market was defined as the provision of airport services for mechanical passenger boarding equipment, which allows loading and unloading of passengers from airport terminals to aircraft, in three modalities: telescopic walkways or gateways, mobile gates, and aerocars. The Commission did not regard these as substitutes, even if, on the supply side, substitution was technically feasible, because the demand for them limited the possibility of substitution due to airport operation rules, the type of flight, and aircraft characteristics. In addition to the common barriers outlined above, in its analysis of barriers the Commission considered coordination effects as a barrier to entry, such as the space and logistical problems that would arise if a new supplier were to participate in the relevant market. It also weighed the convenience of a sole supplier of telescopic passageways from the point of view of airport operations as another barrier to entry. The Commission recommended that administrative requirements regulating airport operations either be eliminated or toned down, particularly with regards to seniority, frequency, and takeoff and landing allotments. Similarly, in the Grupo Aeroportuario del Centro Norte case (2000), the SCT and the Committee to Restructure the Airport System requested an opinion from the Commission about the existence of competitive conditions in the supply of complementary services to the airports that make up Grupo Aeroportuario del Centro Norte, SA de CV (GACN). In August 2000, the Commission found that there were no reasonable competition conditions in the supply of these services, including the lease, use, and rights of access to infrastructure that enable agents to offer complementary services in the airports that comprise the GACN. The relevant market included each airport’s services, leases, and use of infrastructure as well as the rights of access needed in order to supply complementary services. The geographic dimension was limited to the airports that comprise the GACN. The Commission determined that concession holders belonging to the GACN had substantial monopoly power, based upon the existence of excess capacity in GACN airports and evidence that complementary services could only be purchased when entering into leasing contracts for the use of airport infrastructure with the corresponding concession holder. Further competition issues dealing with barriers created by technical standards arose in the Low-alcoholic content beverages case (2004). Industrias Vinı́colas Pedro Domecq, SA de CV (Pedro Domecq) submitted a request for consultation with the Competition Commission on the effects of a communication issued by the Municipal President of Loreto, Zacatecas. The communication notified grocery stores authorized to sell low-alcoholic content beverages in closed containers that the authorization was limited to beer only. In addition, it warned them that verification visits would be carried out and that any infringement would result in sanctions. Pedro Domecq stated that the acts of this municipal authority affected AU: reference not listed in bibliography AU: reference not listed in bibliography Competition Advocacy: The Neglected Agenda 403 its production and marketing of Caribe Cooler and Spirit, whose alcoholic content was lower than that of beer. It also noted that the local authority’s decision may have been the result of longstanding traditions in the market and a lack of awareness about the Regulation for Sanitary Control of Products and Services and Mexican standard NMX-V-046-NORMEX-2002 on Alcoholic Beverages— Label, Classification Definitions and Terminology, which categorize beverages in terms of their alcoholic content. According to this classification, the lowalcoholic content category covers all beverages within the range of 2% to 6% alcohol per volume, and not just beer. In response to the request for consultation, the Competition Commission’s opinion was that the municipal authority’s communication had the effect of hindering access to grocery stores and placing the providers of low-alcohol beverages other than beer at a disadvantage. In its answer, the Commission also clarified that its opinion was limited to the effects of the communication and not its original object or intent. Pedro Domecq filed a complaint against the Municipal President of Loreto, Zacatecas (West, 2005, p. 176). In the Temixco case (2003), the ‘‘Regulation of Mills and Tortillerı́as in the Municipality of Temixco, Morelos,’’ set minimum distance requirements as a condition for tortillerı́a licenses issued by the municipal government. In November 2003, the CFC issued an opinion to Temixco’s municipal president expressing the need to modify or eliminate articles from the regulation, as they obstructed free market access and unreasonably favored established businesses. Similarly, in the opinion on the legality of the Regulations for Opening Operating Nixtamal Mills, Tortillerı́as and Similar Activities (2004),333 the CFC noted the restrictions to open new establishments in Salvador Alvarado, Sinaloa, imposed by the Sinaloa Local Council. These restrictions included requirements to set up new establishments with a minimum distance of 400 meters from any other similar establishment in the downtown area, and 500 meters in the rest of the municipality. For street selling of tortillas, licenses were granted to the closest tortillerı́a or in accordance with routes defined by the local tortillerı́a association. In August 2004, the Commission issued an opinion to the Municipality of Salvador Alvarado establishing the anticompetitive effects of this regulation, and urging them to prevent geographical market allocation. In the case Ayuntamiento de Angostura, Sinaloa (Ayuntamiento de Angostura) y de la Unión de Vendedores Ambulantes del Municipio de Angostura, Sinaloa (Unión de Vendedores) (Street Sellers’ Union) (2003), the Commission found that the municipal government and the local union of street sellers of Angostura, Sinaloa had agreed not to authorize persons from other municipalities to sell their goods in the streets of La Angostura. As part of the agreement, the government only issued licenses to members of the Union. In February of 2004, the Commission issued an opinion to the government of La Angostura, advising it to cease actions that obstructed the competitive process and free market access. 333. File IP-09-2004. AU: reference not listed in bibliography AU: reference not listed in bibliography AU: reference not listed in bibliography 404 Chapter 10 10.3.5 AU: reference not listed in bibliography THE EXPERIENCE OF PRIVATIZED PUBLIC UTILITIES The failure of competition agencies to challenge the antimarket institutional setting that makes competition impossible in Latin America is most visible in the privatization of public assets. Policymakers place a strong emphasis on the decisive role of competition agencies in privatization processes. The Nobel prizewinner Stiglitz (1999, p. 16), for instance, states: while competition may well lead to privatization, the opposite is not true. On the contrary, a privatized monopoly will often attempt to use its money and political influence to stifle reforms, especially ones that threaten to introduce greater competition. The result is that rents are transferred from the public sector to the private sector, with little gain in efficiency, prices, or service. Then, he adds: Some countries have actually gone in the wrong direction: to attract private interest, they have given away temporary monopoly rights. This is a fundamental mistake: In some cases, this policy was the result of a confusion of the objectives of restructuring ownership (privatization), which is not to raise revenues—that should be an incidental benefit-, but to enhance efficiency. Granting or perpetuating monopolies undermines overall efficiency and innovation in the economy. However, such admonitions have not been followed in reality. Thus, although many Latin American competition agencies have express surveillance powers over the privatization process, these powers are merely advisory.334 Moreover, in the instances where competition agencies have rendered an adverse opinion against the privileged conditions of a given privatization process, they have been bluntly ignored. Vargas Llosa (2004, pp. 264-265) makes an excellent summary of how public monopolies went private without changing their monopoly status, which was transferred unchanged. At best, a particular form of corporatism, state mercantilism, privilege, wealth transfer replaced another (p. 245) in which ‘‘a new elite, comprising both domestic and foreign interests linked to the exporting sector and financial circles replaced the previous elite of statist officials’’ (p. 249). This is not surprising, since the purpose of privatization was never to create a private competitive economy, but merely to solve a problem of balance of payment, that is, the shortage of hard currency created by the inefficiency of state-owned enterprises. Legal monopolies were preserved to increase the attractiveness to potential investors, thereby obtaining a higher price for the privatized assets. Hence, ‘‘the transition from economic nationalism to the so-called ‘neoliberalism’ 334. Under Art. 2, Decree No. 2153/92 Colombia’s SIC can provide advice on the privatization process. Similar provisions exist in the Mexican scheme. In Venezuela, Pro-Competencia has developed a scheme whereby the agency advises other public entities involved in privatization. Competition Advocacy: The Neglected Agenda 405 was a transition in the possession of assets but not in the treatment given to property rights’’ (p. 250). Examples of privatization processes that transferred monopoly rights from the public to the private sector abound. 10.3.5.1 AU: reference not listed in bibliography Telecommunications First, in the telecommunication industry, government monopolies were transferred to private hands: Mexico’s Telmex was sold to the CARSO group, owned by Mexican businessman Carlos Slim; Peru and Argentina sold their respective monopolies to Spain’s Telefonica; and the Verizon group took part in the privatization of Venezuela’s CANTV. In all these cases, the governments preserved monopoly rights for more than ten years in the public use phone market; this monopoly was particularly important for controlling the—then emerging—market for Internet services. The consequences of preserving legal monopolies were disastrous, and revealed the true feeble commitment of governments to competition advocacy, as well as competition agencies’ lack of independence to pursue their own procompetition agenda. A case in point was the failure to deal with TELMEX, Mexico’s monopoly telephone company. This case proved to be a resounding institutional failure, revealing the weakness of the Mexican competition system, which, paradoxically, is one of the most stable one in the whole region. Telmex had enjoyed a legal monopoly since its privatization in 1990 It had systematically blocked competition in the sector by foreclosing downstream competitors’ access to its telephone network. Interconnection problems were a major obstacle in the development of downstream industries such as internet services and communication industries integrating value-added services. In view of the Commission’s evident hesitancy to deal with the case, U.S. firms asked the U.S. government to bring a claim before the WTO, denouncing Mexico’s failure to comply with its international obligations under General Agreement on Trade in Services (GATS). The U.S. government asserted that Mexico was blocking competition and allowing its dominant carrier TELMEX to levy interconnection rates fixed at levels far above cost. The case made international headlines and became the first antitrust case ever decided by a WTO dispute panel (WTO Secretariat, 2004). The panel resolved the matter in favor of the United States’ claim that Mexico had anticompetitively facilitated exploitative prices as well as a cartel that raised the price of completing cross-border telephone calls in Mexico and thereby harmed trade and competition. In particular, it decided that Mexico had not met its GATS commitments since it failed to ensure that Telmex, as a major supplier, provided interconnection at cost-based rates to United States suppliers for the cross-border supply of the basic telecommunications services at issue. Moreover, the panel held that Mexico had not met its GATS commitment to take ‘‘appropriate measures’’ to prevent anticompetitive practices, since it had retained measures that required anticompetitive conduct among competing 406 Chapter 10 suppliers which, alone or together, were major suppliers of the services at issue. This case and other unsuccessful actions brought against established monopolies showed the depth of the Commission’s weakness in dealing with anticompetitive restrictions. In view of these setbacks, amendments to Mexico’s antitrust law were introduced in 2006. In Chile, the key competition issue in this industry is whether competition would be impaired if local telephone companies were permitted to offer longdistance service. This problem has emerged intermittently since the privatization of the industry took place, in 1988, mainly due to the attempts of Telefonica, owner of Compañia de Téléfonos (CTC), (the local telephony services provider), to gain control of Empresa Nacional de Telecommunicacion (ENTEL), (the domestic and international long-distance service provider). By 1993, the Supreme Court had concluded that local and long distance should not be separated, because doing so would be difficult and developing technology seemed likely to eliminate the rationale for such separation. It ruled, however, that entry into a new market must be by a separate corporate subsidiary.335 A later amendment to the law added the Commission’s principles, beginning with the obligation of the local service provider to establish a ‘‘multicarrier system’’ so that the user could choose his or her long-distance provider. In 1998, the Commission concluded that national and international long-distance service no longer needed price controls. Later (2001), the competition institutions also determined how the telecom regulator allocates spectrum in the mobile telephony market. In this capacity, the Antitrust Commission further ordered that the regulator use an auction to decide which firms should obtain rights to the spectrum. Competition problems arising since the recent reform of the Competition Act (2004) have primarily dealt with interconnection issues. The first one, decided in 2004, concerned the approval of a merger between two cable operators. The proposal was subject to the condition of the merger offering open, nondiscriminatory access to broadband internet services, at competitive prices.336 The second case, Voissnet S.A. and FNE v. CTC (2006), involved a fine imposed against a telephone company for abuse of dominance. In this case, the telephone company, in the interest of protecting its business, denied wholesale clients the use of its broadband platform to render IP voice service. The TDLC ordered the company to modify the restrictive clauses. It is true that Competition Commissions were active in some countries, such as Chile or Venezuela, where the competition authorities have influenced the regulation of telecommunications through targeted orders and decrees ordering 335. The Antitrust Commission set up the long-distance market through its Resolution No. 389/ 1989. The rationale held in this decision eventually supported the issuance of Supreme Decree No. 189 of Subtel (1994), regarding the long-distance multicarrier system. Today, the multicarrier system is regulated under the Telecommunications Act (Arts. 24 bis and 26). 336. Ruling No. 1/2004; TDLC, Oct. 25 2004. AU: reference not listed in bibliography Competition Advocacy: The Neglected Agenda 407 competition, especially in connection with the definition of optimal tariffs;337 they also actively participated in the drafting of regulation promoting competition in the sector. Similarly, the Superintendency of Competition of El Salvador took a decision in the Cable TV case (2006)338 in which it ordered the electricity and telecommunications sector regulatory agency (SIGET—Superintendencia General de Electricidad y Telecomunicaciones) to develop precise legal rules aimed at regulating the status quo between cable operators and their foreign cable programming companies in order to preempt any abuses. But these developments occurred at a later stage, precisely in response to the perceived excesses of incumbent firms exploiting their monopoly rights, usually after the damage had been done.339 Moreover, in the few instances where they were sanctioned, these practices were then appealed, and sometimes even reversed. 10.3.5.2 The Power Industry In the electricity industry, exclusive rights were given to foreign investors in Peru, Venezuela, Bolivia, the Dominican Republic, Nicaragua, and Chile. Again, the activity of competition agencies has been extremely tolerant towards the concession of exclusive rights. In 1997, the Chilean competition body dismissed a petition to break up a dominant conglomerate in the sector, Enersis, an enterprise that vertically integrated power generation, transmission, and distribution. Rather than ordering divestment, the competition agency was content with issuing ‘‘competition guidelines.’’340 In 2007, the court approved a petition of two electricity generating companies to obtain authorization to jointly build and operate five hydroelectric central stations in the South of Chile. The authorization set 337. For example, in the CANTV Servicios case (2000), Pro-Competencia imposed a fine against CANTV for tariff discrimination against Internet service providers operating downstream. A key consideration in this case was the dominance CANTV possessed in the public use phone market, due to its exclusive rights arising from the privatization contract. 338. Furthermore, the decision suggested that the sector regulator exempt cable operators from any requirement imposed by foreign cable programmers as a prerequisite for obtaining a license that was not established under the Telecommunications Act. It also demanded that that such contracts be registered before SIGET and that they be subject to the Salvadorian legislation on telecommunications, including dispute resolution mechanisms between contending parties. 339. Before privatization took place, there were two state-owned phone companies in Chile, Compañı́a de Teléfonos de Chile and Entel. The first had a monopoly on local telephone services while the second had a monopoly on long-distance service. Privatization of these companies was conducted separately. The liberalization of long distance phone service was conducted thanks to a reform of the General Telecommunications Act (1994). This process was initially triggered by the Competition Board’s Ruling No. 389/93, in which the Board, at the request of CTC, a dominant firm operating in the local phone market, held that in order to participate in the long distance market CTC would have to do so through an independent entity, so that access charges (e.g., transfer costs) could be easily identified. In addition, access charges to local providers could not discriminate among different firms; therefore, they would need to be fixed by the authority, and reflect direct costs, so as to do away with all forms of cross-subsidies from the long-distance phone service. 340. Ruling No. 488/1997; Antitrust Commission. 408 Chapter 10 parameters to determine the transference price among consultants and the new joint venture; it ordered that the transmission facilities pricing (or prices paid by third parties) should be based on objective, and nondiscriminatory basis. Also it ordered that all contracts for the transmission line design should consider a minimal period to receive petitions of line transmission capacity from independent parties.341 Bolivia’s SIRESE has approved all the consolidations of legal monopolies in the generation, distribution, and marketing of energy that it has considered without ever raising any objections based on its powers to oversee competition. Eventually, the response in favor of promoting competition came from legislators rather than from competition agencies themselves: the laws regulating these sectors refer to the need to avoid excessive concentration at levels where competition is possible. The competition agency of Chile didn’t act against Enersis, but rather proposed that the government amend the applicable legislation to allow the sector regulating authority to fix tariffs and access prices, upon the recommendation of the Competition Board (or to deregulate at its request, in the event that fixed prices are deemed no longer necessary).342 Eventually, this recommendation led to the adoption of Law No. 19674, which authorizes the Ministry of Economy, Development, and Reconstruction to fix prices for other services rendered by electricity companies, whether or not they are utility concessionaries, in the event that the competition board determines that there are no competitive conditions for setting a free tariff regime. Similarly, the Peruvian Supreme Decree No. 27-95-ITINCI of October 19, 1995 prohibits firms with a network operating concession (covering all stages, i.e., the generation, distribution, or transmission of electricity) from entering into partnerships with other firms dedicated to the same activity. Naturally, legislation prohibiting concentration is not the best regulatory solution because of the rapid changes observed in the industry, which threaten to leave these laws outdated. But again, they are the natural response to the inability of competition authorities to deal with competitive restrictions. 10.3.5.3 The Railway System The railway systems of Bolivia and Argentina were sold as private monopolies; a single company exploited each of the routes; cargo transportation remained to be subject to monopolies, supported by powerful labor unions. The involvement of competition agencies does not necessarily ensure that dynamic competition will be preserved; sometimes it works the opposite way. In Brazil, to carry out the privatization of the federal railway system, the system was divided into six parts and given to private companies. CADE determined that the specific market structure of each segment called for restructuring passenger and cargo transportation using different criteria. CADE noted that passenger transportation, as compared to cargo, was more competitive, since there were other means of passenger 341. Ruling No. 22/2007; TDLC, of Oct. 19 2007. 342. Ruling No. 531/1998. Competition Advocacy: The Neglected Agenda 409 transportation available in the towns with access to the railway network. Hence, both quality and prices were conditioned by direct competition from other means of ground transportation. Cargo transportation, by contrast, required rebuilding or repairing public roads and other means of transportation in order to create viable competition. In view of the lack of competition from other networks, CADE concluded that railway cargo transportation is a natural monopoly; therefore, special conditions should be imposed to prevent private operators from blocking consumers’ access on the basis of the ‘‘essential facility doctrine.’’ As a SELA report (1999) noted, the experience of CADE in this sector did not reflect very much concern over the entry or exit of private railway operators. Rather, it concentrated on regulating the conduct of the firms already in the market in a manner aimed at maximizing social welfare. 10.3.5.4 Airline Carriers Finally, Aeroperu was sold to Aeromexico, together with exclusive international routes. A comical case is the privatization of Viasa, Venezuela’s nationalized air carrier. Due to mismanagement, it became a target for privatization when new government policies were adopted in 1989. Iberia, the Spanish flagship carrier, was the favored bidder in August 1991, competing against KLM, Viasa’s past partner. Iberia apparently milked the airline by stripping its assets, (some Venezuelans point to this as one of Viasa’s causes of bankruptcy) and the Spanish airline itself was nearly bankrupt (the Spanish government claimed, during Iberia’s own privatization, that it was worth just one peseta in 1996 before a massive rescue operation was put underway). While it could be argued that it was not wise to sell a government-owned money-losing company to another government-owned money-losing company, changing the old ways of Viasa was an uphill battle. Iberia at some point was facing the same future as Viasa. At no point did anyone involved in the privatization suggest the need to make either Viasa or Iberia more competitive for the benefit of consumers: the main concern of all those involved was preserving the workers’ jobs. 10.4 COMPETITION ADVOCACY AND ANTITRUST ENFORCEMENT COMPARED The question that arises is whether antitrust enforcement is a rather expensive and cumbersome way of dealing with such restrictions that could be eliminated overnight through targeted regulatory reform. Competition advocacy has proven ineffective to push through the immense reforms needed to open up Latin American economies. The notion of regulatory reform is broader in scope than mere competition advocacy. Regulatory reform emphasizes the need to create the institutional conditions that will ensure competitive creativity, transparency, and a minimum level playing field for business. It therefore transcends the conventional market surveillance role, and it focuses on 410 Chapter 10 facilitating the interaction between government and society through the design of procompetitive institutions. Mere advocacy of competition has been insufficient to address the complexity of regulatory design, which has demanded not only the elimination of regulations encumbering trade exchanges, but also the introduction of new, promarket regulations. Often, at this second stage, competition agencies have lacked the power to promote such initiatives with success. Although still marginal, the activity of Latin American competition authorities in promoting regulatory reform is gaining importance in the creation of the favorable institutional conditions that enable market functioning. This is giving governments a new sense of purpose in their regulatory activities. This role needs to be consolidated if competition is to gain real support in the region. In short, almost since their inception, Latin American competition agencies have been involved in active procompetitive restructuring of industries through deregulation, privatization, and trade liberalization. But in the process, they have recognized that this contribution has been too limited. Competition agencies have come to realize that legal changes are difficult to implement through a mere ‘‘advisory’’ role. Many vested interests have undermined the effectiveness of competition policy by resisting institutional changes through political clout. Dealing with these shortcomings requires increasing the profile of competition authorities, both through improvements in their policy strategies and through institutional reform. Comparing the effectiveness of competition advocacy to antitrust enforcement is not easy. Determining to what extent the prosecution of monopolizing business activity accruing from legal privileges is effective in creating a playing level field, as compared to the elimination of government barriers that create such monopolizing incentives, is counterfactual: it requires comparing how competitive markets would be in the absence of such government monopolies and quasi-monopolies. This question can only be answered by looking at cases where competition has flourished after deregulation has taken place. In these cases, however, the likely effects of hypothetical antitrust prosecution would be indeterminate, for obvious reasons. However it seems clear that regardless of all the talk about the need to promote competition advocacy in Latin America, it remains the Cinderella of competition policy. The numbers are eloquent in this regard: on average each jurisdiction devotes less than a fifth of its personnel to this activity than antitrust enforcement. Indeed, compared to the vast resources allocated to antitrust enforcement, the resources allocated to advocacy activities are meager. An illustration of this is the organizational management of each type of activity: whereas antitrust enforcement is usually conducted by the operational teams of the respective competition agency, advocacy is usually delegated to the legal counsel units, which are far less equipped, and usually are in charge of other general legal tasks. Latin American competition agencies have pursued extensive antitrust agendas that have delivered scant results in terms of competition advocacy. Moreover, the quantitative measurement of the impact of deregulation is questionable, since Competition Advocacy: The Neglected Agenda 411 the development of competition is not only associated with freedom of entry into formerly regulated markets, but also with the entrepreneurial drive of businesses themselves, which is often conditioned by the entrepreneurial culture of the country concerned. Indirectly, however, one can see how effective deregulation would be in promoting competition in the market by looking at the reaction of the business and professional associations who enjoy the benefits of such anticompetitive privileges. Viewed from this perspective, the previous section highlighted how competition agencies often met stiff resistance from professional associations enjoying self-regulatory powers, including pharmacists, attorneys, notaries, and engineers. It is also possible to gather some information from the political factors behind the limitations imposed on the ability of competition boards to request the elimination of regulatory and quasi-regulatory barriers that undermine the development of a procompetitive business environment. It is to this question that I now turn my attention. Although, until recently, the advocacy function has not been mentioned expressly in competition statutes, it has become one of the most significant activities of competition agencies throughout the region. During their early days, a great deal of the agencies’ time and effort was oriented toward advocacy functions. Competition agencies frequently pushed for deregulation initiatives, opposed government actions contrary to competition policy, and proposed legislative reforms. These actions proved to be critical to the pursuit of competition policy goals. This advocacy activity had no precedent in Latin America and proved to be instrumental in fostering the liberalization process. However, the question arises: How well equipped is Latin American competition agencies to deal with the requirements of carrying competition advocacy effectively? Latin American statutes usually vest competition agencies with an advisory role to promote regulatory reform, in addition to the usual powers to undertake antitrust enforcement. Some statutes are even quite explicit in vesting competition agencies with this mandate, such as the statutes of Costa Rica and Nicaragua. However, in practice these powers are merely nominal unless the agencies are given full legal standing to challenge anticompetitive legal rules before the courts. The case of Costa Rica is illustrative. The Competition Act in this country devotes its introductory section to regulatory reform, but leaves the power to carry out this function in the hands of the Cabinet, not the Competition Board. Unsurprisingly, this is one of the Latin American countries where regulatory reform has made the least progress. For example, Article 3 sets forth guidelines for government agencies on the control and regulation of the economy. This provision also applies to existing regulations. However, these guidelines cannot overrule restrictions on competition and freedom of trade imposed under ‘‘special statutes,’’ ‘‘international agreements,’’ or, more generally, provisions required to preserve health, national security, the environment, or standard procedures. Similarly, Articles 5 and 6 set forth the conditions under which the Cabinet may eliminate price controls or other restrictions on trade. These provisions are supplemented in 412 Chapter 10 Article 7, which establishes the conditions for the provision of services related to trade, and Article 8, which lays down the conditions for the functioning of standard-setting bodies. All of these provisions either confirm the general conditions set forth in Articles 3 and 4 in particular areas or supplement the system by laying down specific requirements. At most, the Competition Board can make a cost-benefit analysis of regulations restricting competition under Article 4, but the power to remove the obstacles ultimately remains with the Cabinet. Clearly, these powers are still too limited to allow a successful deregulation process, because the ultimate source of power to eliminate restrictions on trade lies with the legislative branch, and not the competition agency. The case of Costa Rica, along with Nicaragua343 and Panama is exceptional; most competition statutes in the region do not even mention extensive competition advocacy powers and refer to advocacy merely in passing. A clear explanation for this fact lies in the perception that competition advocacy is a minor concern compared with the antitrust enforcement agenda to be carried out by competition authorities. This is evidently linked to the theoretical underpinnings of antitrust theory which, as we have seen above, stress the negative role of business strategies and other market failures, while minimizing the importance of restrictions introduced by government regulation. The tendency of competition advocacy to take a back seat to enforcement is also linked to the institutional constitution of the authorities and the role they play in the promotion of competition, broadly understood. Thus, competition advocacy seems more effective in the case of those agencies whose institutional setup makes them more independent from governments, regardless of their formal constitution as a government entity, such as Peru’s INDECOPI. This agency has been given surveillance power over all consumer affairs, thereby making it a surrogate political representative of consumers through legal means. In a country where consumers are otherwise unorganized and politically dispersed, this is an effective means of providing the competition authority with a means to engage in competition advocacy. Competition advocacy has also worked reasonably well in nongovernmental agencies, such as Chile’s Competition Court. In Chile, the Court has full standing to challenge anticompetitive legal restrictions. These powers are usually respected by other agencies, largely due to the judicial nature of the Court. Finally, the success of competition agencies in the region has depended on a firm policy agenda, along with political clout, which is not necessarily based upon formal legal powers granted by the relevant competition statute. This is true in the case of Pro-Competencia, in the periods 1992-1994 (when the authority had important political support from the Cabinet, due to the personal relationship between the Chair of Pro-Competencia and the Economic Cabinet) and 1998-2000, with respect 343. See Arts. 3 through 6 of Law No. 7472/94; Art. 16, Nicaragua’s Law No. 601/06; Arts. 195 through 198 of Law No. 45/07 (Panama). Competition Advocacy: The Neglected Agenda 413 to the implementation of competition in key sectors recently opened to competition, such as telecommunications and electricity. Competition advocacy has been neglected as a policy instrument to be implemented systematically in place of antitrust enforcement; its effectiveness has rested more on the personal attitude of policy enforcers than on formal legal empowerment. Competition agencies usually lack the legal power to do anything other than conventional antitrust enforcement. Sometimes the power to advocate for competition is granted, but frequently these powers are very limited and are restricted to the formulation of recommendations to other executive agencies, with no binding effects on law enforcers. Competition agencies often have no legal standing to challenge anticompetitive actions by other governmental agencies in court, yet these may become the most damaging of all anticompetitive factors due to their scope and size. Therefore, agencies lack the effective power to stop government policies with a negative impact on competition. If anything, the legal system actually undermines competition advocacy’s effectiveness by making the force of competition agencies’ procompetitive suggestions contingent on the ultimate decision of Congress and cabinet members, whose institutional interests are not necessarily (or even usually) aligned with the needs of competition.344 Government agencies have their own policy agenda and are subject to political pressure from different vested interests; there is no particular reason why they should follow the advice of competition authorities. Indeed, they usually do not pay heed to the advice of competition agencies, which is why competition agencies usually have to make their policy suggestions known through the mass media and the Internet in order to rally support from the public. Competition advocacy programs have been designed taking into consideration the needs of developed countries, whose institutional mechanisms (particularly, judicial control over government acts and anticompetitive legislation) have usually been more effective than those of developing countries. This would explain why competition advocacy carried out by competition authorities in developed countries is not binding, since it is normally assumed that gross violations of the freedom to compete in the market would be deemed unconstitutional or unlawful and subjected to judicial control. It is unsurprising, then, that competition 344. For this reason, Evenett (2006, pp. 8-9) suggests thinking of competition advocacy as a system with suppliers and recipients of advice, rather than characterizing it in terms of the activity of one particular government agency, namely, the competition authority. Competition advocacy would thus become part of the policy agenda of any government entity dealing with competition issues. Accordingly, ‘‘to the extent that the activities of a government’s foreign trade and transport ministries fall within the scope of competition advocacy, then the competition authority may well believe it has the right to comment on the influence of foreign regulations that influence market outcomes at home and on international negotiations that have direct implications for domestic and foreign regulation. ( . . . ) Governments and legislatures may want to take this into account when designing a competition advocacy function.’’ Even so, such a scheme fails to create a binding system whereby procompetitive suggestions are carried out. 414 Chapter 10 agencies are prevented from challenging anticompetitive decisions adopted by other government agencies before the courts, due to the need to preserve the integrity of the constitutional division of powers. Commenting the limitations on the U.S. Federal Trade Commission’s advocacy program, Zywicki and Cooper (p. 14) note: advocacy only can inform the debate and suggest appropriate action; it cannot compel action. Although advocacy provides regulators with information concerning the likely economic consequences of a policy choice, the FTC is not a constituent. FTC opposition to an unwise or protectionist piece of legislation, therefore, is not the same as constituent opposition because the FTC cannot provide political support in the form of votes or campaign contributions. By contrast, in developing countries, there is a need to place more power in the hands of competition agencies. Clearly, a mere recommendation is not enough to create a procompetitive business climate in environments where entrenched cultural traditions run counter to such goals. Although competition agencies have tried to overcome these limitations through antitrust enforcement, this is not enough to offset the intense anticompetitive incentives created by government rules for the conduct of businesses, who will always find it easier to appeal to rent-seeking behavior than to compete with rivals out in the market. 10.5 ASSESSMENT OF COMPETITION ADVOCACY IN LATIN AMERICA Given the methodological emphasis of competition agencies on problems of short-run allocation (i.e., price competition, allocative welfare, etc.), competition analysis largely ignores regulatory reform, as this is part of the long-run policy agenda. This is not to say that consideration of the promarket quality of rules is altogether absent from the policy agenda of competition agencies. On the contrary, there is a great deal of attention paid to the regulatory obstacles created by government rules that raise entry barriers and impede the flourishing of market competition. Rather, the problem is the lack of political will to vest competition agencies with effective powers to deal with these obstacles head-on. Instead of vesting them with powers to overrule anticompetitive legal barriers, legal reforms implemented thus far have refrained from giving competition agencies any express powers beyond mere ‘‘advisory’’ functions. Latin American competition agencies have expended a good deal of effort increasingly supporting competition advocacy initiatives. Yet, this activity is still largely compromised by the antitrust enforcement emphasis of competition agencies, which leaves competition advocacy activities a mere marginal place among the policy activities conducted by competition agencies. Competition Advocacy: The Neglected Agenda 415 Competition statutes have not vested competition authorities with adequate powers to introduce procompetitive principles in the design of new regulations. In fact, rival regulatory agencies have been created with special surveillance powers in regulated sectors, such as utilities. Although this trend is increasingly being reversed in competition statutes, where competition authorities are regaining regulatory powers, the creation of effective powers to identify and overrule regulations that create market barriers is a different matter. Very often, competition bodies in the region still focus their advocacy activity on arduous and often fruitless negotiations with other governmental agencies, which is all the more difficult due to the fact that these agencies normally pursue interests that do not involve preserving competition. The effectiveness of competition authorities is still a long way from becoming adequate to deal with complex regulatory reform issues, where the elimination of legal obstacles could change the competitive dynamics of the market affected almost overnight. Yet it is advocacy that would be necessary to trigger significant procompetitive changes in the region, to a much more significant extent than antitrust prosecution. As Zywicki and Cooper (p. 18) emphatically state, ‘‘advocacy is almost certainly a more cost-effective means than enforcement to attack state-imposed barriers to competition.’’ Similarly, Maskus and Lahouel (2000, p. 599) share a similar view: ‘‘The most effective competition policy would be continued liberalization of these restrictions, buttressed by safeguards against higher private entry barriers being substituted for lower public entry barriers’’ (author’s emphasis). To them, this conclusion is supported by the observation that many of the most significant restrictions on competition come from public subsidies, state monopolies, exclusive rights, commercial policies, restrictions on foreign direct investments and rights of establishment for service providers. Recent amendments of competition statutes have emphasized the advocacy role of competition agencies as a way of inducing promarket regulatory reforms. However, these amendments do not really address the fundamental limitation on the ability of competition agencies to undertake this task more actively: their dependence on national governments. Instead, reforms merely touch upon superficial issues. Take, for example, the amendments introduced to the Mexican Competition Act in 2006. The amendments increase the power of the Commission to challenge anticompetitive regulations and activities of government agencies, whether federal, state, or local, that create interstate trade barriers expressly prohibited by the Mexican Constitution and the Competition Act. Previously, the Competition Commission could investigate these practices and issue a declaration ordering their suspension, which could be challenged by the affected state agency before the Supreme Court of Justice. Over the years, many such cases were investigated, and the Supreme Court of Justice finally declared this exercise of authority to be unconstitutional, as an agency belonging to the Executive Branch could not be entrusted with a constitutional control mechanism. The solution provided by the reform of the Competition Act, however, did not give the Commission full powers to challenge these regulations, in order to AU: reference not listed in bibliography 416 Chapter 10 overcome any questions raised by other constitutional agencies. Instead, it left the Commission without meaningful powers but declared that from now on, the Commission shall convey her opinion to the competent agency of the Federal Executive Branch or the attorney general, as the case may be, in order for the latter to file a corresponding constitutional claim. In other words, it basically left things as they were beforehand. Nevertheless, the importance of competition advocacy forced the Commission to adopt creative means to pursue this activity, regardless of its lack of authority to directly confront anticompetitive regulations. As an example of this advisory authority, in 2005 the Competition Commission issued opinions on reduced entry barriers in the gasoline retail market. In the telecommunications sector, it issued opinions on the promotion of competition in long-distance phone services, the reduction of barriers to entry for broadband services and other wireless users, and the enhancement the competitive effects of telecom network convergence. It also issued opinions in connection with government initiatives for new legislation such as the Telecommunications Law and Radio and Television Law, the Law to Promote the Book and Reading, the Commercial Practices Law, and the Airport Law. In view of their failure in these areas, what can Latin American competition agencies do to improve their standing in their societies? Latin American competition agencies could enhance their competition advocacy role despite the lack of a legal mandate to do so by developing creative promotional initiatives aimed at showing the extent to which laws and current policies are in fact rent-seeking devices that benefit the few at the expense of reaching optimal solutions from society’s point of view. Also, these solutions would reduce the role of political actors in organizing the economy and relegate them to ensuring the effective protection of property rights. One example where political rent seeking has created major legal obstacles to competition is the trade in agricultural goods. Traditionally, this sector has enjoyed significant protection from Latin American governments, for whom farmers represented an important constituency to support their political rallies. The way in which the agricultural sector was organized, as described above, predominated in many Latin American countries, forcing competition agencies in the region to promote competition in a highly anticompetitive cultural environment. Given the political tension surrounding public policy initiatives affecting the agricultural sector, the introduction of competition principles has not been an easy task at all. Let us explain the nature of the problem affecting this sensitive sector before explaining how the introduction of procompetitive regulatory reform has increased the efficiency of the sector. In the past, governments used to provide aid through high subsidies for specific crops and official minimum prices on harvests. In this way, they ensured minimum price levels for farmers. These prices were negotiated on a bilateral basis with the agro-industrial processing companies, thereby encouraging block negotiations between farmers and agro-industry regarding the price of crops. To avoid distortions in the bargaining power of either side (especially the farmers), Competition Advocacy: The Neglected Agenda 417 governments intervened to fix prices for crops every year, and consequently, resources were allocated ‘‘from above.’’ In brief, prices and quantities were routinely fixed in agreements between two cartels negotiating in a situation of bilateral monopoly—the national association of farmers, and the business association representing the processing industry. This scheme of allocating resources was, of course, highly inefficient, and frequently led governments to disappoint the farmers’ expectations of keeping minimum prices at the time of harvest. At other times, companies in the agro-industry were forced to buy at artificially high levels. This scheme led to the frustration of all involved. When economic liberalization began, agro-industry processors often attempted to break the bilateral monopoly by negotiating directly with individual farmers. However, this encouraged abusive conduct by dominant industries that took advantage of information asymmetries, eroding the negotiating power of farmers. However, due to the governments’ open encouragement of all concerned to engage in anticompetitive conduct, it was very difficult to attempt to promote competition through conventional ‘‘competition policy’’ means. In some countries, agriculture is specifically exempted from antitrust enforcement, and is subject to a special trading status. For this reason, a more comprehensive approach, emphasizing regulatory reform, was necessary. In Venezuela, for example, liberating the agricultural trading system from the shackles of a tradition of heavy government intervention through setting prices has been achieved by a ‘‘carrot and stick’’ policy. On the one hand, Pro-Competencia granted an exemption to small farmers and farmers associations willing to negotiate prices jointly with the agro-industry.345 In this way it could counterbalance the discriminatory practices of the monopolist processors (e.g., a single company was buying 70% of the corn produced in the country) toward the highly atomized farmers, since the exemption would enable the farmers to agree on and negotiate prices in a concerted manner. At the same time, Pro-Competencia took a proactive role in advocating a requirement that the different processors announce individually and publicly, before the planting season, the price at which they would be willing to buy crops. Since the announcement was to be made at the time of planting, farmers could decide what to plant in light of a guaranteed price for different crops. Together with these efforts, Pro-Competencia initiated a plan with the Ministry of Agriculture and the Stock Exchange to create the financial instruments to develop and strengthen a market for agricultural products. The creation of a commodities exchange market illustrates a positive way in which competition agencies can support market reforms. In conclusion, competition advocacy has been regarded as a self-contained policy that is complementary to antitrust enforcement, rather than a substitute; hence, one can exist independently from the other. Governments in the region have usually established special commissions with the task of deregulating the 345. See Section 2.1.5.3, above. 418 AU: reference not listed in bibliography Chapter 10 economy, prior to the introduction of competition policies, with a view to entrusting them with the special powers or political clout to perform these activities. This is the case in Mexico, where the Unidad de Desregulación Económica of SECOFI (Secretarı́a de Comercio y Finanzas) was established from 1991 until 1993, when its functions and powers were taken over by the then newly created Comisión Federal de Competencia (CFC, 1996). Similarly, in Costa Rica, Decree No. 26262-MEIC created an ad-hoc Commission comprised of members of the Congress, the Presidency, the Competition Authority, and other public institutions (Sittenfeld, 1998, p. 8). Once these deregulation programs were completed, competition agencies were called upon to follow up on this work, albeit with limited effectiveness. This erroneous approach has undermined the possibility of further exploring the potential of competition advocacy. Perhaps a way of overcoming this standstill is to define an effective advocacy agenda. If the competition agency decides to start an active competition advocacy program, but has limited resources, it will have to decide how to allocate its advocacy resources. It may be possible to create significant benefits by the use of ‘‘quick hit’’ advocacy aimed at egregious regulatory decisions, but it is also possible that other agencies or private groups will effectively discourage the most obviously anticompetitive and inefficient regulatory proposals. Perhaps the most attractive targets for competition advocacy are regulators in sectors that are at the beginning of, or in the midst of, significant reforms. One way to identify such targets is to monitor regulatory reform efforts in other countries. In most cases, technologies are similar across countries; therefore, a sector that becomes a focus for regulatory reform in a few countries is a good candidate for review in other countries as well. Another useful targeting technique is to identify sectors that operate competitively in many countries, but are monopolized in other countries. Once a sector has been chosen by the competition agency for competition advocacy efforts, there are numerous specific approaches that can be useful. They include formal comments, academic research, conferences, testimony, speeches, and editorializing in the press. Success with any of these approaches is not assured, but it is more likely if the competition agency has developed its own expertise about the targeted sector and has built up its reputation as an informed and reasonable commentator. Developing and maintaining expertise is not a short-term proposition. It initially requires learning about the sector, contacting existing experts to obtain their views about critical issues, monitoring developments in the sector, both domestically and in foreign countries, and participating in ongoing policy forums regarding the sector. Where possible, a good starting point is to focus on the competition agency’s core mission areas, such as monopoly power and incentives to innovate and to minimize costs. Interestingly, Zywicki and Cooper (p. 18) note that, in the U.S. experience, competition advocacy ‘‘may be less conflictual and more susceptible to compromise than enforcement through litigation.’’ This is not the case in Latin America; to be sure, antitrust prosecution of private interest groups has been traumatic enough, but competition advocacy, due to its potential effectiveness AU: reference not listed in bibliography Competition Advocacy: The Neglected Agenda 419 in dismantling legal monopolies overnight, has created enormous political uproar from affected groups. In this connection, the U.S. FTC experience may well be a useful model. This agency implemented a competition advocacy program that focused on the electric power industry. Because of the large size of the sector, technical changes that supported the development of competition at the generation stage of production, and the completion of regulatory reforms in several other sectors, the electricity sector was a natural candidate for competition advocacy work when the U.S. FTC was reevaluating its competition advocacy program in the mid-1990s. Focusing the advocacy program on electricity involved several steps. These steps have positioned the U.S. FTC to encourage electricity sector regulators at the federal and state levels to focus on competition issues in the restructuring process. The U.S. FTC’s efforts have been recognized by sector regulators in several judicial decisions and by Congress, such as when it formally included the U.S. FTC in the list of agencies advising Congress on electricity competition issues. The first step in the process was the development of a sound understanding of the sector and the existing competition issues affecting it. This was accomplished by conventional information-gathering, discussions with a variety of industry participants (including former U.S. FTC staff), and the input of academics involved in economic research on the sector. The end product of the first stage was the identification of major issues being considered by policy makers, observers and interested parties. The second step was to identify a subset of issues on which to develop positions for potential competition advocacy. In making the selection, a key consideration was the presence of competition or consumer protection aspects of the issue that matched the U.S. FTC’s mission areas. On this basis, the selected issues were unbundling, open access to transmission services, efficient transmission pricing, recovery of stranded costs, and monopoly power at the generation stage of production. This selection proved to be apt because these issues have been at the centre of electricity restructuring in the U.S. As a result, development of positions on these relatively few issues allowed comments on many occasions to both national and state sector regulators. The third step in the U.S. FTC competition advocacy development effort involved creating a visible presence in the ongoing policy debate. Elements of this effort included joining the national association of sector regulators, attending and presenting at workshops and hearings, participating in the policy formation process within the administration, and leading efforts to bring together the staffs of interested competition and sector regulatory agencies periodically in order to discuss industry issues. Having developed an active presence in the policy debate, the FTC staff’s next step was to establish the means to monitor changes in public concern regarding controversial topics in the industry. This allowed the advocacy presentations and comments to remain both relevant and engaged with industry experts and interested groups. A final step was to leverage the information and perspectives from competition advocacy into related law enforcement activity, merger analysis in particular. Litigation activity was enhanced by the prior 420 Chapter 10 competition advocacy effort. And just as importantly, the litigation effort gave increased credibility to the competition advocacy presentations because litigation gave competition advocacy staff access to documents and analyses of firms in the industry that confirmed advocacy positions and that were often not accessible to the sector regulator. This experience provides useful guidelines to follow to enhance the effectiveness of advocacy initiatives in Latin America. Targeting specific sectors may focus the policy endeavors of competition agencies on practical aims, rather than expending them in futile struggles with private groups which, after all, often enjoy greater political clout. Creating a system of effective antitrust advocacy would require creating a different institutional setting for the enforcement of competition policy. Such a scheme would not necessarily pervert or distort the way in which powers are ordinarily separated within the state, or eliminate the constitutional separation of powers; rather, the solution is to give competition agencies in developing countries a constitutional status above that of the government and legislature. Perhaps the only country that is undergoing this way in the region is Chile, as mentioned in the later.346 346. See Section 13.4.11, below. Chapter 11 Antitrust Policy in Regulated Industries In previous chapters we have seen how antitrust’s pursuit of utopian market allocation through government dirigisme mechanisms induces policymakers to focus their attention on market concentration and related structural considerations, thereby neglecting the very dynamic process of competition as it unfolds from entrepreneurs’ creative activity. By so doing, the policy contributes to the concentration of effective economic rights in the hands of less entrepreneurial competitors, who can actually raise legal barriers against more competitive ones by claiming that the policy protects them from firms enjoying monopoly power. As result, the benefits of economic liberalization are nullified and renewed forms of corporatism emerge, to the benefit of those firms who can succeed in bringing antitrust prosecution against more efficient firms. Ultimately, the foundation for the implementation of antitrust policy is the misleading search for utopian resource allocation. The search for optimal resource allocation (allocative efficiency) is doomed to undermine property rights. Moreover, taking into consideration productive efficiency does not clarify the extent to which such rights are to be lawfully enforced, as it requires policymakers to qualify them at every point. These policy flaws are also present in the realm of sector regulation. As in the case of antitrust policy, economic regulation seeks to attain optimal market outcomes in the presence of what are perceived as failing markets. Like antitrust, economic regulation considers the source of such ‘‘failures’’ to be entirely related to less-than-optimal structural market conditions. The policies differ, however, in the means by which they seek to attain these objectives. Whereas antitrust policy challenges a predefined set of business restraints by intervening ex-post facto in the exercise of property rights, economic regulation allocates property rights ex ante in a way that maximizes an industry’s 422 Chapter 11 performance. But their logic vis-à-vis the rationale for intervention in spontaneous market outcomes is the same: the search for a utopian equilibrium where allocation of resources is optimal. More specifically, regulation appears necessary to redress the undesirable allocation arising from ‘‘natural monopolies.’’ A market is a natural monopoly if the socially optimum quantity (where marginal cost equals the price) can be produced at a lower average cost by a single firm than by two or more firms. A natural monopoly may stem from scale economies in production technology or from network effects if there are severe obstacles to interoperability between separate networks operating in the same market. Network effects exist when the value of a service to each customer increases as the number of customers increases. Thus, achieving optimal rights allocation is contingent on the underlying nature of the products or services traded within the industry. Hence, it is necessary to analyze the nature of the regulatory problems involved in infrastructure industries to see how regulation could be improved through competition policy. In this way, we can establish a benchmark from which we will be in a position to evaluate international experiences and propose optimal methods of regulation and allocation of responsibilities between competition and regulatory authorities. Under the conventional theory of regulation, the introduction of competition in infrastructure industries is presented in static terms, as a question of the structure of the market. Given the postulates of sunk costs or network externalities, competition in the market eventually disappears, as some firms develop increasing returns that enable them to exclude other participants in the market. Given the conceptual impossibility of the existence of competition in markets characterized by such postulates, the role of regulators is to counteract markets’ natural tendency to fall into market failures by organizing (i.e., regulating) the allocation of rights between potential entrants and incumbent dominant firms. These theoretical questions underlie the uneasy relationship between antitrust policy and economic regulation. Basically, antitrust law and policy and economic regulation aim to defend the public interest against monopoly power. However, the simultaneous presence of two different types of agencies can cause friction, despite their shared objective. Although both provide the government with tools to pursue its economic objectives, they vary in scope and types of intervention. Competition law and policy and economic regulation are not identical. Therefore, it is important to identify the precise scope of both regulation and competition policy, as this will untangle a very confusing and messy situation. Such distinctions and clarifications are necessary for efficient enforcement, which will facilitate the promotion of the policy goals sought (i.e., competitiveness). Virtually all Latin American antitrust statutes expressly exclude legal conduct required by law, including private action authorized by government regulations or official decisions. Thus, some laws give competition agencies jurisdiction over all economic sectors except those considered strategic under other laws. Usually, these exceptions include the banking sector, telecommunications, TV, radio, public transportation, energy, water and sewage, and any industries regulated by other government entities. Antitrust Policy in Regulated Industries 423 In general, the basis for this exclusion is a concern that applying antitrust law could greatly interfere with other government regulation. It is generally acknowledged that the jurisdiction of competition authorities ends where government regulation begins, but the borderline is not always clear. Indeed, competition laws seldom address this issue, which is often left to administrative interpretation. In this chapter we explore the nature of this relationship in the context of the Latin American region. 11.1 CORRECTING COMPETITION FAILURES THROUGH REGULATION Currently, economic regulation is ubiquitous in the region and has largely replaced political regulation of strategic sectors. Regulatory regimes are enforced in a vast array of industries including utilities such as telecommunications, electricity, railways, and natural gas; services such as civil aviation, ocean shipping, insurance, banking, inter-city bus transportation and trucking, and tourism; politically sensitive industries such as radio and television broadcasting, cable television, agriculture, pharmaceuticals, radioactive minerals, and alcoholic beverages; and numerous others. Regardless of their particular features, competition authorities can stimulate the competitive process in all these sectors when firms in a regulated sector abuse their privileges to the detriment of consumer interests and the efficiency of firms that use their regulated services. The interactions of competition agencies and sector regulators occupy a central place in the institutional development of competition policy in Latin American countries. Competition agencies and sector regulators share a common objective in regulated industries: to improve economic performance by preventing monopoly power and avoiding inefficient regulations. Regulators usually implement three types of regulatory arrangements whereby competition is maximized within existing networks: open access, pooling, and time-tabling arrangements. Which type is suitable for a particular network industry depends on the technical characteristics of the goods and of the networks through which these goods are provided. 11.1.1 OPEN INFRASTRUCTURE ACCESS Open infrastructure access occurs when allowing competition in one segment of an industry requires ensuring access to the remaining natural monopoly bottlenecks, provided that there is available capacity. If, for instance, the owners of a gas pipeline have no interest in supply to downstream consumers, it will always pay for them to allow access to additional gas suppliers. When capacity constraints are binding, rationing of access (interconnection) to the bottleneck will be needed. Competition for the network will be achieved by selling rights to infrastructure capacity to competing firms on a nondiscriminatory basis. 424 Chapter 11 This interconnection can be achieved efficiently without regulation, but the owners of the facility may receive monopoly profits; whether this is the case or not will depend on the technical availability of alternative suppliers, as determined by the competition authority. If interconnection charges on bottleneck facilities are found to be monopolistic, then such profits may be subject to price regulation, in which case optimal interconnection prices might be set by the sectorregulatory agency. Competition issues may thus arise, for instance, when the incumbent owns some of the competing supply facilities (power plants, gas fields, long-distance telephone transmission facilities, etc.). In principle, it seems unjustified to allow the incumbent firm to raise prices with a discriminatory intention. Yet such an intention is not always readily discernible. In the absence of regulatory barriers to entry, competition authorities are required to exercise the utmost care in establishing whether there are any grounds for invoking the ‘‘essential facilities’’ doctrine, whereby open access is granted to any potential entrant requesting access from a supplier of a key input for production in the downstream industry.347 Again, provided that there are no regulatory barriers to entry, competition authorities should assess whether the incumbent firm is attempting to act as a monopolist by charging a ‘‘premium’’ on the access prices charged to independent firms operating in downstream markets. There is no easy answer in such a case. The power to discriminate, for example, may be necessary to lure incumbent firms into making necessary investments for the preservation of the network infrastructure, or to compensate for sunk costs incurred. Also, there may be commercial reasons for discrimination against some firms, such as diverse capital costs; prudential risks; and business volume, among others. However, the need to preserve the economic incentives of the incumbent to maintain the network seldom justifies the enactment of regulatory entry barriers. Some have advocated such regulatory barriers on the basis that an unsustainable or suboptimal outcome may result from competition for a natural monopoly under a policy of free entry. For instance, network externalities may create either excess inertia (too little investment while firms wait for others to invest in expanding the network) or excess momentum (too much investment as firms try to establish an advantage by moving first). These arguments for barriers to free entry in natural monopolies reflect concerns about undersupply or excessive costs of service delivery. Other arguments for entry barriers have little foundation, however. Some parties will argue that such barriers are required to maintain subsidies. Certainly, cross-subsidies can be sustained only if competition is somehow limited and cherry-picking is restricted. But the same subsidy can be provided explicitly, funded by competition-neutral sources. 347. See Section 9.3.3, above. Antitrust Policy in Regulated Industries 425 Others argue that barriers are necessary for financing—hence the call for exclusivity periods, long-concession terms, and the like. Investors, investment bankers, and short-term revenue-maximizers in government will naturally argue for entry barriers to lower the cost of capital when privatizing infrastructure firms or issuing concessions to build new facilities. Monopoly rights do lower the cost of capital and make financing easier. But they do so by shifting risk to customers, not by reducing overall risk. In the last century, investments not protected by entry barriers were nevertheless funded. And today, new investments in competitive segments of network industries also are being financed, such as power plants in competitive markets in Argentina, Chile, and the United Kingdom. Thus, an incumbent firm protected from competition by regulatory entry barriers will likely become a dominant player operating bottleneck natural monopolies in the upstream market and will be able to exploit its monopoly power, raising prices for infrastructure access in order to exclude competitors in the nonmonopoly segments of the network. To prevent such discriminatory behavior, regulators may impose access obligations and match-pricing principles, such as forcing the incumbent to pay a price for transport equal to the price it charges its competitors. If such limits cause the owner of the bottleneck facility to try to exploit monopoly power in the competitive segments of the market, there may be a case for imposing limits on vertical integration and separating ownership from other parts of the system. Again, this would be a determination for a Competition authority to make. If they decide to do so, then they may impose dissuasive pecuniary and nonpecuniary sanctions. Open access regimes are found in many gas pipelines in Europe and the United States. Furthermore, parts of telecom networks are under open access regimes, including long-distance satellite communications, parts of the major carriers’ long-distance networks, and the local loop in systems where there is competition in long-distance services. Similarly, open access is found in the electricity sector, in the use of common carriers and joint facilities such as transmission lines. 11.1.2 POOLING CAPACITY Sometimes it is difficult to define, adjust and enforce rights to the network capacity of the infrastructure; as a result, selling rights to network capacity becomes burdensome. For example, in a power system, the capacity used or unused at any moment in any part of the system is a function of all physical flows throughout the system, not of bargaining or individual transport decisions, so it may not be practical to define capacity or access rights. Instead, it becomes practical to use a central dispatch system that optimizes system flows, instantaneously matching supply and demand. Open access is ensured since winning bidders will always be dispatched. Pooling is inspired by the ‘‘single-buyer’’ model, where an entity—typically the government—buys all electricity from producers and sells it to distributors. 426 Chapter 11 However, although it establishes a common mechanism for the purchase of energy, the model allows market risk to be shared among participants instead of being borne exclusively by the government, which acts rather like an auctioneer than a buyer. With long-term contracts set through the Pool, price uncertainty will be broadly restricted to electricity traded in the free, short-term market and bilateral contracts between generators and large consumers. Indeed, the Pool is aimed at captive consumers, such as households and small businesses, while large consumers are allowed to buy electricity directly from generators on a competitive, customized basis. Large consumers are also free to invest in generation, selling the energy that exceeds their needs. Their role is thus central to ensuring an adequate balance between supply and demand. When they identify the risk of excess investment, they are likely to purchase from the Pool, while indications of shortages will stimulate plans for new investment. In the same vein, mediumterm contracts involving large consumers will complement the information derived from short-term markets that tend to reflect mainly high-frequency changes in the level of water reservoirs rather than medium-term expectations about the pace of supply and demand. Pooling systems are being used in electricity systems throughout the world and in gas systems in the United States and the United Kingdom. In these industries, pooling is feasible due to the homogeneity of the product supplied through the network. 11.1.3 TIME-TABLING If the product received by customers is differentiated, then pooling is not feasible, because connection between one point and the other in the network may be subject to particular needs. Airlines, railways, and telecom services have in common that network optimization is more complex than making total inflows match total outflows. In these industries freight, passengers, or callers need to reach a particular customer or point in the network. If rights to use railway tracks were defined and allocated to multiple parties, secondary trading should yield the optimal set of paths through the network (i.e., the set that maximizes welfare given producers’ and customers’ valuation of the service). The optimal set of paths forms the optimal delivery schedule or timetable (delivery of person or good x to point y at time z). The issue is, then, whether an optimal timetable can be generated through decentralized bargaining. Because the value of each right to use a segment of track at a particular time depends on what happens with all adjacent segments (all segments are indirectly adjacent to all others), a single, optimizing smart market may be needed. The sector regulator should define the technical conditions for the allocation of rights to participate in the network (i.e., to use railway tracks, or airport slot facilities, or a telecom network) while competition authorities should see to it that competitors can access the network effectively, should they meet the technical standards. Antitrust Policy in Regulated Industries 11.1.4 427 FRANCHISE BIDDING One way of introducing competition in markets perceived to be prone to slipping into natural monopolies is to set up a monopoly franchise and auction it off to the bidder offering the lowest price to consumers. However, monopoly franchises, once they are given, involve regulation. Prices and related terms of the franchise are adjusted in response to events. In this arrangement, businesses compete to win a position in a given market; to put it differently it is not in the market, but for the market. Regulators either subject the franchise to periodic auction or use traditional price regulation. Periodical auctions are used where there are no significant sunk costs. However, if there are significant sunk costs, asset valuation may be necessary, since assets will need to be transferred at the end of the franchise; in such a case, regulation to identify the optimal price may follow. Defining the optimal price will depend on the particular industry concerned. For example, in the electricity sector, price regulations are required to prevent abuse of a dominant position in transmission and distribution, and RPI-X, described below, has proven to be a good instrument to encourage efficiency improvements, provided that the x factor entices the dominating firm to behave efficiently. In essence, RPI-X employs price caps that allow individual utilities (or companies) discretion over all investment and operating decisions. Under this modality of regulation, utility operating firms realize all gains from efficiencies achieved beyond the established benchmark up until the next regulatory review. RPI-X regulation has not only been employed in the electricity sector, but also has been applied to the recently privatized telecommunications, natural gas, and water industries. By contrast, the traditional ‘‘rate-of-return’’ regulation (also called cost-of-service regulation) essentially allows companies to pass through those costs which are deemed necessary by the supervising regulatory body to ensure that an adequate level of service is provided to end users. During periodic regulatory reviews, expenditures that are deemed appropriate by the regulatory body are added to the base rate. To insure that appropriate levels of capital investment are undertaken, supervising regulatory bodies (in the United States, these are generally state public utility commissions) estimate appropriate rates of return for the regulated utility, based in part on the cost of capital to the utility. By contrast, in the telecom sector, the introduction of stringent price caps and competitive markets induces telecommunication companies to search for ways to reduce cost in order to stay competitive and to earn profits for their shareholders. Latin American governments have introduced regulation where economies of scale are high due to scheduling, as in the case of urban bus transport or solid waste collection services. In these industries, they have considered the competitive award of monopoly franchises to be efficient. Repeated franchise bidding can provide a good level of competition without a need for extensive regulation as long as sunk 428 Chapter 11 costs are not important. There has been a positive experience with competition in all of these transport industry segments. 11.2 COMPETITION AND REGULATION IN THE LATIN AMERICAN EXPERIENCE The surveillance of competition authorities has expanded insofar as competition has been introduced into sectors formerly subject to high sunk costs and network externalities. Naturally, this creates obvious jurisdictional tensions with regulatory agencies, who insist on maintaining their own jurisdiction, based on their own interpretation of the endurance of natural monopoly conditions or other political factors that justify their regulatory presence. The tension between Latin American competition and regulatory agencies remains centered on the question of what discipline should be imposed on the natural monopolist dominant supplier for interconnection to the relevant network. Governments should ensure interconnection with a major supplier for competitors at any technically feasible point in the network. The parameters of the obligation to ensure interconnection are that it be made at any technically feasible point, on a nondiscriminatory basis and in a timely fashion; that the rates be costoriented; and that there be sufficient unbundling, so that competition is promoted ex ante. For this purpose, governments must make available an independent, technically oriented body to resolve disputes regarding appropriate terms, conditions, and rates for interconnection within a reasonable period. A major supplier controls an essential facility for which there are no or few competitors and which cannot be feasibly substituted in order to provide a service. Therefore, governments must take and maintain appropriate measures for the purpose of preventing major suppliers from engaging in or continuing anticompetitive practices, such as anticompetitive cross-subsidization, the use of information obtained from competitors for anticompetitive purposes, or withholding timely technical information needed by competitors. Competition agencies should, however, distinguish abusive monopolization of the essential infrastructure market from necessary exclusions of downstream firms arising from legitimate business and commercial reasons. The involvement of competition authorities in regulated sectors has mainly taken the form of antitrust prosecutions against the ‘‘abuses’’ of a ‘‘dominant carrier’’ such as blocking the interconnection of potential downstream businesses; an increasing stream of cases has been initiated on the basis of the ‘‘essentials facilities’’ doctrine, whereby any infrastructure so defined must made available to any potential applicant who meets the minimum required technical standards. By contrast, competition advocacy initiatives aimed at opening up spaces to infrastructure competition have been less successful, possibly due to the reluctance of regulatory commissions to yield their jurisdiction to competition agencies. In this section we explore the scope of competition in selected Latin American regulated sectors controlled by dominant suppliers. Antitrust Policy in Regulated Industries 11.2.1 429 THE ELECTRICITY SECTOR Typically, power generation and transmission was one of the most heavily regulated sectors in many countries due to its ‘‘strategic’’ position as a key input of downstream industries. Governments used to dictate detailed regulations concerning the choice of inputs, minimum capacity requirements, size and type of new capacity, and selling prices to different types of consumers. However, these regulations have changed considerably in the last decade. Technical advances and the realization that it is rather the transmission network than the generating capacity that constitutes a natural monopoly have modified regulatory policies toward the industry. Electricity generation and transmission is vital for promoting competitiveness because of its strategic role as a key input to all other sectors. In the past, electricity generation entailed substantial economies of scale, with thermal (including nuclear) power stations tending to become increasingly large. That situation has changed in recent years due to technological advances and the abundance of natural gas, which have made it feasible to build technically and economically efficient generation capacity at relatively low scales of operation and with relatively low capital costs per delivered unit of electricity. This has introduced a new factor into the calculus of entry costs and enlarged the potential scope of competition. Thanks to these changes, several countries have changed their regulatory regime since the early 1980s with the aim of easing entry restrictions and introducing elements of competition in the determination of electricity prices. The most radical changes have involved the establishment of competition in power generation at both the wholesale and retail level. Reforms have been undertaken in the United Kingdom, New Zealand, Norway, and Sweden. More modest reforms in the United States and in Japan have permitted some competition at the wholesale level, while competition in the provision of new capacity to the grid has been established in Italy and Canada. A number of other countries are in the process of introducing greater competition. The old monopoly-based regulatory system is only operating in a few OECD countries today. The effects of regulatory reform have been significant. Regulatory reform in the United Kingdom has been accompanied by a sharp reduction in costs, while spot prices have come down significantly in Norway, partly because of overcapacity and possibly because of the fragmented structure of the electricity-generating industry. Experience across the OECD suggests that end users have gained from reform through lower average prices for electric power and, in many cases, increased opportunities to shift usage to off-peak periods and receive better service. In addition, substantial efficiency gains have been made by enhanced competition in generation and supply, corporatization and privatization, as well as the introduction of more efficient pricing structures. Regulatory reform has also contributed to innovation. In Latin America, the power industry has also been subject to important regulatory reform with a view to promoting dynamic competition. The changes 430 Chapter 11 introduced reveal a variety of policy solutions, even though basic general guidelines remain in place. In principle, there exists a deep concern over the question of ‘‘natural monopolies,’’ especially those in the control of the power grid. Hence, the laws regulating these sectors refer to the need to avoid excessive concentration at levels where competition is possible. For example, the Peruvian Supreme Decree No. 27-95-ITINCI of October 19, 1995 prohibits firms enjoying a network operating concession (covering all stages, i.e., the generation, distribution, or transmission of electricity) from entering into partnerships with other firms dedicated to the same activity. Other countries, such as Chile, follow a more lenient approach. In 1997, the competition body dismissed a petition to break up a dominant conglomerate in the sector, Enersis S.A., that vertically integrated power generation, transmission, and distribution.348 In 1997, Chile’s Competition Board cleared Enersis’ acquisition of a water company (Agua Potable Lo Castillo, now Aguas Cordillera).349 Despite the clearance, the Board recommended that the conglomeration of public utility concessions should be subject to closer government surveillance. As a result of this resolution, the government later passed the Sanitary Services Act, prohibiting water companies from integrating with gas, electricity, and/or local telephone companies in the same concession area if they serve more than half of the population in that area. This provision also contains restrictions on horizontal integration with other water companies. In the 1980s, the structure of Chile’s electrical sector began to change considerably as result of deregulation and the privatization of the former state-owned enterprise Endesa. This firm controlled over 70% of generation, the electric grid, and a substantial part of the rights to water supply. Concentration was completed due to Endesa’s acquisition by Enersis, which already controlled Chilectra Metropolitana, Chile’s main electricity distributor. These circumstances influenced the evolution of the sector and generated a good deal of the conflicts that still pervade the sector. Between 1992 and 1997 there was considerable public interest in whether the Competition Board would force Endesa to separate its electricity generation and transmission activities. The Board proposed that the government amend Mining Sector DFL one-eighth to allow the sector regulating authority to fix tariffs and access prices upon recommendation of the Competition Board (or to deregulate at its request, in the event that fixed prices are deemed no longer necessary).350 Eventually, this recommendation led to the adoption of Law No. 19674, which authorizes the Ministry of Economy, Development and Reconstruction to fix prices for other services rendered by electricity companies, whether or not they are utility concessionaries, in the event that the competition board determines there are no competitive conditions that would allow a free tariff regime. 348. Ruling No. 488/1997. 349. Ruling No. 494/1997. 350. Ruling No. 531/1998. Antitrust Policy in Regulated Industries 431 The Board also issued some guidelines for enhancing competition in this sector. First, it stated, the authority should pass a regulation to eliminate some loopholes in this market. Second, the company engaged in the transmission business, Transelec, should own its assets rather than possessing a mere tenancy. Finally, distribution companies should offer energy through bids in order to enhance transparency and avoid discrimination. However, the involvement of competition authorities in the regulation of the power sector has somewhat been limited. This may be due to the perception, still broadly held, that regulatory issues in the industry dominate over ‘‘open competition,’’ which would call for the intervention of competition authorities. 11.2.2 THE TELECOMMUNICATIONS INDUSTRY Similarly, in the telecom sector, technological progress has changed the cost ratio of this industry significantly. In the past, high sunk costs and substantial economies of scale arising from building networks limited market access to the provision of telecom services. Most governments therefore regarded this industry as subject to natural monopoly conditions, which justified public ownership or strict regulation or both. Legal monopolies were also often justified to provide incumbent firms with incentives to build infrastructure necessary for connecting remote areas to the national grid at a reasonable and geographically averaged price.351 Technological change has effectively removed the natural monopoly character of many segments of the telecom market. Advances in microelectronics have made bulk telecom possible without transmission through networks and are now making it possible to use cables intended to send TV signals as transmitters of data and voice telephony. The relatively low cost of fiber-optic cables has meant that several electricity and water companies, that is, companies with existing grids, can profitably install parallel networks for high-volume customers. However, for competition to operate effectively, these operators have to have access to the basic telephone network. At the international level, traditional statutory barriers to entry and price regulations have given way to new regulatory structures since the early 1980s. Regulatory reforms in OECD countries have progressed at a different pace in the traditional segment of the telecom market, fixed-network-based voice telephony, which remains by far the most important part of the overall market. Entry to the mobile telecom market is subject to licensing, and most governments have 351. Until comparatively recently, telecommunications was virtually synonymous with voice telephony between hand sets via a cable network. The structure of the industry was typically a regulated public or private monopoly. Growing demand for data transmission services between fixed points encouraged the creation of private supplies of these specialized networks, and the development of digital technology, which allows transmission of text and images as well as sound, has completely changed competitive conditions in the industry. Technological progress in the provision of radio telephony (especially cellular digital telephony) has further raised the potential for competition in the industry. 432 Chapter 11 permitted some competition in the market. Prices in this market segment are generally not regulated by the government. Most member countries have fully liberalized the markets for equipment and value-added services (e.g., voice mail). Legislative changes have introduced tougher competition, as entry is permitted into local markets and artificial barriers on vertical integration between local, long distance, broadcasting and cable operators are being abolished. Little progress has been made at a multilateral level to reduce barriers to international trade in telecommunications, with WTO members failing to reach an agreement in this area. However, there is an increased recognition that telecommunications services are tradable across countries. The domestic liberalization of telecommunications markets is de facto also opening up international markets, as the most common barriers to international telecommunications are exclusive monopoly rights, usually to publicly owned operators, as well as price controls that usually involve pricing communications at very high margins above cost. Technological progress has reduced entry costs for newcomers, whose presence has placed pressure upon governments to implement more aggressive deregulation in this sector. The new political economy of the industry has driven many governments in the region toward eliminating legal monopolies in many segments of the industry. Regulatory changes in the industry have been uneven across Latin America. These changes have eased entry restrictions substantially in some countries, such as Guatemala, Nicaragua, and El Salvador, while core telecommunication activities remain the exclusive rights of a public monopoly in Costa Rica. In between these extremes, many countries, such as Argentina, Venezuela, and Mexico, have preserved legal monopolies after undergoing privatization processes for fiscal reasons. Therefore, in these countries, the transfer of public ownership into private hands did not encourage dynamic competition in the industry, which maintained monopoly rights almost intact. Moreover, the varying regulatory schemes in this industry are equally evident in the uneven introduction of competition principles. Some countries are more open to the involvement of the competition agencies in regulating the sector, as in the case of Venezuela, where the Comision Nacional de Telecomunicaciones (Conatel) asked for the advice of Pro-Competencia in preparing the Telecommunications Bill, which was passed by Congress in 2000. This legislation defines the functions of both entities in cases involving anticompetitive behavior in the sector: Pro-Competencia retains its full power to prosecute restrictive behavior in this sector by assessing whether access to the telecom grid has been blocked by the incumbent dominant firm, whether tariffs or other conditions set by the dominant firm are abusive, whether merger operations restrict competition, and whether firms are engaged in any other restrictive undertaking, such as a cartel. In any of these situations, CONATEL must supply the data necessary for facilitating the work of Pro-Competencia, and must determine the existence of wrongdoing on the basis of the opinion issued by Pro-Competencia. In the exercise of this authority, Pro-Competencia ruled against the Venezuelan telephone company, Compañı́a Anomima Nacional de Telefonos de Venezuela (CANTV), holding that it had Antitrust Policy in Regulated Industries 433 abused its dominant position (which resulted from a legal monopoly) over downstream Internet operating companies who competed with Cantv.net, in the CANTV Servicios case (2000). In Mexico, privatizations and license auctions form a substantial part of the Competition Commission’s involvement in telecommunications. The criteria applied by the Commission to approve the participation of potential bidders are very similar to those applied in merger review. Given the scarcity of the radioelectric spectrum, this resource becomes an essential input in the generation of several telecommunications services, particularly of fixed wireless telephones. It is important that its allocation be assigned according to competitive principles. In this connection, the Commission must approve those companies wishing to participate in spectrum auctions. In making this decision, the Commission must consider the relevant market(s) affected by the auction, the characteristics of the applicant companies, and the efficiencies of their acquiring the auctioned frequencies. In addition, the Commission must establish the maximum amounts of radiospectrum frequencies to be acquired by each company in an auction. For this purpose, the commission carries out an analysis of concentration indexes similar to those applicable to merger cases. Other countries engaged in the revision of the legal framework regulating the telecommunications sector, such as Costa Rica, have vested regulatory bodies with special powers to investigate restrictive behavior, thus taking these powers away from competition agencies. It is also important to note that political economy considerations are important in defining the ultimate shape of regulatory schemes, as demonstrated by the experience of the telecommunications industry.352 In Mexico, telecommunications was the first infrastructure sector to be liberalized; it preceded the Competition Act and therefore missed important competition considerations in its design. In 1990, the government privatized Telmex, the Mexican telecommunications monopoly. The concession granted the privatized telecom firm, Teléfonos de México, SA de CV (Telmex), a six-year exclusivity (monopoly) period for long-distance telephony in order to increase the sale price of the firm and thus government revenues, to rebalance tariffs, and to increase network deployment. Moreover, the exclusivity period granted to Telmex gave it a first-mover advantage in telephony and increased barriers for new entrants, who have been unable to gain critical mass to recover their investments. These measures have resulted in Mexico consistently being ranked among the most expensive OECD countries, with the lowest penetration rates, in telephony markets. Because of the inherited market structure and regulatory design, sector and competition regulators face special challenges in trying to impose effective mechanisms that can control the incumbent’s monopoly power. In addition, Mexico’s regulatory framework is not yet fully adapted to accommodate technological convergence, thus hindering the possibility of increasing inter-network 352. See Section 11.2.2, below. 434 Chapter 11 competition; regulatory frameworks and concession schemes remain segmented and treat services, such as broadcasting, data, and telephony separately, according to the network involved. Moreover, operators have not yet been authorized to provide a full range of Information and Communications Technology (ICT) services. As a result of poor regulation and government interference, the dominant firms that are typical of Latin America’s telecommunications industry face insignificant competition in the fixed phone segment (e.g., basic phone services). Thus, basic phone services are often controlled by one company, simply because governments ensured legal monopolies to the winning parties after the bidding for privatization had taken place. Licenses for second operators are a recent phenomenon, which has been prompted in many cases by the force of public opinion. In Venezuela, for instance, CANTV enjoyed a legal monopoly from 1992 till 1999. In Mexico, Telmex holds an uncontested, legal, and dominant position for the same reason, despite the increasingly concerned public opinion. In a 1998 case,353 the Federal Commerce Commission (FCC) determined that Telmex possessed substantial monopoly power in five telephony markets: local service; access to local networks; national long distance; intermediate long distance or inter-urban transmissions; and international long distance. The Commission employed a conventional antitrust analysis based on economic indicia.354 In April 1998 Telmex appealed the Competition Commission’s decision, which was nevertheless sustained355 Telmex also opened an injunction (amparo) action with the judiciary branch, and in May 2001, the First Collegiate Tribunal granted it, leading to a new CFCM determination.356 Two months later, Telmex 353. Files AD-41-97 and RA-36-2001. 354. The Commission’s findings with respect to the relevant markets were (a) Local service (Almost 100% market share, plus high barriers to entry, including large investments to establish a local public network and large advertising investments to establish a trademark). (b) Access to local networks (Almost 100% market share, plus entry barriers consisting of the huge investments required to duplicate Telmex’s local wire network, which provides access to final users). (c) National long distance (Over 70% market share. Barriers to entry included sunk costs such as the financial and timing cost of building a network and advertising expenses for new entrants). (d) Intermediate long distance or inter-urban transmissions (Telmex’s market share was 83%. Barriers to entry included high economic and financial cost of building an optic fiber network as well as the time required for building this network. The Commission found, nevertheless, that this barrier to entry was likely to be overcome over the medium term). (e) International long distance (74% market share plus the following barriers to entry: concession holders required local and international interconnection services and the availability of a network (either owned or leased) that was connected with the local loop. In addition, regulatory barriers restricted entry to international ports, since only long-distance service providers may request Cofetel’s (Mexico’s Telecom Authority) authorization to operate international ports. Cofetel’s rules further limited entry by requiring, among other things, that long-distance concession holders prove that they have connected cities located in at least three states using their own infrastructure and that they have undertaken at least one interconnection agreement with a foreign operator authorized by Cofetel). 355. File RA-15-98. 356. File AD-41-37. Antitrust Policy in Regulated Industries 435 appealed CFCM’s decision and the Commission decided not to address this appeal. In April 2004, Telmex obtained another injunction, and in July the Plenum reconfirmed its May 2001 decision. As long as Telmex delays the validation of the CFCM’s determination, price and other regulation by Comisión Federal de Telecomunicaciones (COFETEL) and SCT cannot come into force under Article 63 of the Federal Telecommunications Act. This situation may be considered a barrier to entry, since a level playing field will not exist as long as entrants face an incumbent with significant monopoly power. In fact, the Mexican experience shows how important is for competition authorities to become involved in the regulation of utilities in network industries. Years after privatization, the development of this company has been limited, and even though there has been an expansion in the services provided, there still is a large unsatisfied demand. The low quality of the services and the inability of the company to repair failures in the system have prompted numerous complaints from customers. Similarly, the company offers few products and costs are high. In order to improve the status quo, CFCM investigated the sector and concluded that opening it to competition was the best course of action to meet the objectives of enhanced efficiency and economic growth. In order to design the market-opening process, the Commission, together with the corresponding regulating authority and the Ministry of Communication and Transportation, has played an important consulting role within the government. In Chile, the ChRC introduced the Guidelines for the Operations of Telecommunications Service Suppliers in order to promote competition principles in the telecommunication sector.357 These guidelines define the conditions for the longdistance operations of concessionary carriers. In accordance with these guidelines, vertically integrated firms must preserve a separate legal status, so that transfer costs and other economic data arising out of their links are clearly identified. Tariffs applied to carriers accessing the network must be nondiscriminatory, and will be determined by the authority according to direct costs, in order to eliminate cross-subsidies between long-distance operations and local ones. Similar guidelines appear in most telecommunication laws recently introduced in Latin America. 11.2.3 THE RAILWAY INDUSTRY Rail infrastructure was traditionally considered to be a natural monopoly. In most countries, any operator seeking to run rail services between two points has the choice of only a single provider of infrastructure. Thus regulations are needed to govern the terms and conditions of access to bottleneck rail facilities. The access problem is especially vexing if several railroad firms compete in the sale of final services and one is the monopoly owner of the track and other essential 357. Ruling No. 389/1993. 436 Chapter 11 infrastructure facilities. In a variety of market settings, the holder of bottleneck rail facilities has incentives to behave restrictively and handicap its rivals. The basic premises of railroad regulation, established many decades ago under entirely different market conditions, have become obsolete. This regulation was guided by the view that railroads held a monopoly (or near monopoly) on long-distance land transport—a condition that, if it ever existed, disappeared long ago. Today, two procompetitive principles should guide regulatory reform in railroads: First, regulatory impediments to adequate revenues should be eliminated. This should mean not a guarantee of profitability, but an opportunity to generate competitive earnings. Indeed, in a regime of deregulation without general subsidies, a key element in protecting the public interest is eliminating regulation that interferes with the rail network’s financial viability. Second, the competitive market should serve as the model for regulation. In other words, regulatory restraints should be imposed or maintained only if market forces are insufficient to enforce competitive behavior. Market forces will contain prices for most rail services in most countries. Indeed competition for railroad traffic can be fierce. Where railroads do not dominate markets, they should be granted freedom in pricing. Where intramodal, intermodal, geographic, and product competition is weak or nonexistent, market forces may fail to prevent excessive prices. The resulting monopoly power is the basic justification for regulating rail rates and earnings and is the basic task for regulators. Conversely, where competition is absent, competition authorities intervene to correct any imbalances. Competitive issues frequently arise as result of long-term contractual engagements. Under a conventional approach, long-term arrangements block access to the infrastructure if there are no alternative suppliers. An illustrative case is Colombia’s case Empresa Colombiana de Vı́as Férreas and Drummond Ltda (Ferrovı́as) (1994). The case began with a complaint brought by coal mining businesses in Colombia’s northern region against Ferrovı́as, alleging that the contractual conditions negotiated between Ferrovias and Drummond Ltd. were biased and excluded other coal mining businesses which were competitors of Drummond. Ferrovı́as is a state-owned company and the only operator of the rail transport system in Colombia. In 1991, this company contracted with Drummond Ltd. to ship coal along the La Loma-Santa Marta line, which is part of the national rail system. The contract was for thirty years and contained obligations concerning the annual amount of coal that could be shipped by rail. According to the contract, Ferrovı́as was required to obtain written permission in advance from Drummond if there was any chance that Ferrovias’ guaranteed service level would be threatened by any contingency. The Superintendencia de Industria y Comercio (SIC) concluded that Ferrovias held a dominant position as the sole operator of the national rail system, and that the contractual terms in question discriminated against Drummond’s potential and current competitors. In SIC’s opinion, Drummond would always enjoy a preference for using the rail system, in the sense that it would have first choice of Antitrust Policy in Regulated Industries 437 schedules and train routings. The case was closed after Ferrovias offered guarantees that it would renegotiate the contract with Drummond to amend the offending clauses, particularly Drummond’s first choice of train schedules and routing, and the clause requiring Drummond’s prior written consent before leasing the rail services to third parties. The SIC took into account the need to ensure Drummond’s competitors fair access to the network, but also (although this was not specifically stated) the fact that the restrictive clauses negotiated between Drummond and Ferrovias prevented further development of complementary services and products. However, the decision did not clarify what complementary products and services were these. However, this conventional approach misses long-run efficiencies that may be necessary to ensure the functioning of the infrastructure network. Long-term contracts for rail service offer shippers protection from the exploitation of future captivity by a single railroad, particularly if such contracts can be negotiated when shippers are making their investment and location decisions. The costs of such decisions are often sunk, making it difficult for shippers to make competitive adjustments when facing higher rail rates. Thus regulations should focus on shippers caught in the transition to a privatized, less regulated rail system. This type of situation reveals the conflict between rate protection for shippers and rate flexibility for railroads, and highlights the need for regulatory intervention to strike the proper balance. Thus regulatory reform should give railroads substantial flexibility in pricing and industry structure. Regulatory issues such as cost allocation, demand-based differential pricing, regulatory protection for captive shippers, and access to rail infrastructure cut across sectors, meaning they also arise in electricity, telecommunications, ports, and (to a lesser extent) water. A critical issue for efficiency is the criterion used to set rate ceilings for captive shippers—that is, where the railroad has market dominance. Although rate ceilings derived from fully distributed costs are inimical to the public interest, economically rational ceilings can be obtained from stand-alone costs. These are the costs of serving any captive shipper or group of shippers that benefit from sharing joint and common costs as if the shipper or group were isolated from the railroad’s other customers. The stand-alone cost method finds the theoretically maximum rate that a railroad could levy on shippers without losing its traffic to a hypothetical competing service offered by a hypothetical entrant facing no entry barriers or by a shipper providing the service itself. The stand-alone cost test does not apply—and cannot be made to apply without disastrous consequences—if railroads are not allowed to abandon unprofitable facilities or services. If that freedom is denied, a railroad cannot earn adequate revenues from its potentially remunerative activities. For that reason, it is unwise for public policy to limit the freedom of railroads to abandon uneconomic services unless public funds are provided to defray the costs of those services. Competition agencies in Latin America often participate in assessing the competitive conditions under which railway services operate. Due to the 438 Chapter 11 difficulties of intervening at the moment when privatization takes place358 competition agencies make recommendations at postprivatization stages, such as the permanent surveillance of competitive conditions in the railway industry. In this sense, the Mexican Competition Commission decided in 2004 two opinion requests from parties participating in the auction of a concession to provide the suburban railroad passenger transportation service on the route from Cuautitlán, State of Mexico to Buenavista, Mexico City. The concession also includes the possibility of extending the service coverage to three additional routes within the Valley of Mexico urban area. The participants were two groups of firms. One group was composed of Alstom Transport, SA; Alstom Transporte, SA de CV; Ingenieros Civiles Asociados, SA de CV; Controladora de Operaciones de Infraestructura, SA de CV; Inverse, SA de CV; and Grupo Hermes, SA de CV. The second group was composed of Construcciones y Auxiliar de Ferrocarriles, SA; Inversiones en Concesiones Ferroviarias, SA; and Autobuses Estrella Blanca. The relevant market was defined as the railroad passenger transportation service on the route Cuautitlán, State of Mexico-Buenavista, Mexico City, covering the expected additional routes. The CFCM took into account the fact that the current transport service providers within the relevant area (bus and minibus) would be possible competitors for the suburban railroad in short segments for passengers not placing a premium on time. However, at the same time, there would be some complementation between both kinds of transport services. The Commission also took into account the fact that any possible market power of the auction winner would be counteracted by two factors: competition for the market, and specific measures included in the concession agreement to limit freedom in pricing and restrictions of service supply. The Commission issued a favorable opinion to both participants.359 11.2.4 THE GAS AND OIL INDUSTRY Governments usually perceive energy as a ‘‘strategic’’ resource whose trade deserves scrutiny and regulation. The most rigid form of regulation is, of course, nationalization. However, as liberalization got underway in the 1990s, Latin American governments eased on up their approach toward the energy sector, to the point of making antitrust intervention feasible. It is, therefore, not surprising that regulatory provisions at the extraction level are followed by relatively open liberalization in the retail fuel market. Moreover, this situation has driven competing firms into a permanent state of quasi-alignment in liberalized downstream segments of the industry, thereby calling for antitrust surveillance to prevent anticompetitive initiatives from taking root. Hence, competition agencies have been particularly active in dealing with price coordination 358. See Section 10.4.1, below. 359. File LI-06-2004. Antitrust Policy in Regulated Industries 439 between gas distributors and retailers. For example, in CNDC v. Juntas vecinales de Bariloche/Expendedores, distribuidores y/o vendedores de GLP envasado (2003) Argentina’s CNDC decided that four distributors of bottled liquid petroleum gas in the city of San Carlos de Bariloche had agreed to fix prices of bottled gas during a brief period in 1998. The evidence in the case was circumstantial. The respondents Repsol Gas, YPF Gas, Shell Gas, TotalGas, and Cooperativa el Bolson were fined a total of USD 150,000. Brazil, too, has been particularly active in prosecuting cartels in this industry. In the case Department of Justice of the State of Pernambuco versus Union of Retail Stores of Petroleum-derivative products and Convenience Stores of the State of Pernambuco—Sindicombustı́veis/PE and its controllers Romildo Ferreira Leite and Joseval Alves Augusto (2004), the Department of Justice of the State of Pernambuco brought a complaint before competition authorities, following a uniform, abnormal and inexplicable increase in the price of gas in the city of Recife, capital of the State of Pernambuco. Throughout the investigation, it was verified that the majority of the gas stations’ prices had a sudden and uniform increase. Moreover, minutes of meetings in the Union Sindicombustı́veis constantly mentioned the prices of gas in the city. The Administrative Council for Economic Defense (CADE) imposed the Union Sindicombustı́veis a fine equivalent to 15% of its total revenue; as well as a fine of 15% of the whole value of the fine imposed to Sindicombustı́veis on the controllers Romildo Ferreira Leite and Joseval Alves Augusto. Other cases involve the control of a dominant firm in the sector whose activities are regarded as abusive, particularly attempts to close market entry to potential competitors with a view to raising prices above marginal costs. In 1998, Argentina’s YPF was accused of charging anticompetitive discriminatory prices for bulk liquefied petroleum gas (LPG) between Argentine and foreign buyers, as well as prohibiting foreign buyers from re-importing LPG into Argentina. In the CNDC’s view, YPF faced no material competition in the bulk LPG market because of barriers that limited the entry of new companies and restrictions on LPG import transactions; these factors supported its market dominance. CNDC determined that the competition law should penalize the conduct as severely as possible based on the nation-wide scope of the conduct, the number of homes affected, and the economic benefit obtained. Accordingly, the CNDC ordered YPF to cease the abuse of its dominant position and imposed the highest fine ever imposed on an Argentine company (USD 109,644,000). 11.2.5 PORTS AND AIRPORTS Both Venezuela’s Pro-Competencia and Peru’s INDECOPI have regarded legal concessions of seaport and airport services to private parties (a widespread practice in Latin America) as a key element in determining the existence of a dominant position in abuse of dominant position cases. 440 Chapter 11 In the Aeropuerto Maiquetı́a case (1999), Venezuela’s Pro-Competencia found that the Simón Bolivar International Airport (Maiquetı́a) had abused its dominant position by favoring the state-owned air carrier Avensa at the expense of its main competitor, Aeropostal, but decided to impose no sanctions, as the airport voluntarily ceased the discrimination. Nevertheless, this case illustrates how competition principles can be used to ensure that fair access is given to companies operating in airports. Similarly, in the Venezuelan SCAT v. Consorcio Guaritico-Guaritico III (Puerto El Guamache) (1999), Pro-Competencia found that Consorcio Guaritico, the company running the port, refused to renew a contract with one of its operators, which was a competitor of one of its subsidiary companies in providing disembarking and storage services inside the port. Consorcio enjoyed a dominant position in the management of the port as a result of a government tender bidding process. Pro-Competencia imposed a fine against Consorcio for its abusive conduct. In the International Airport Jorge Chavez’s Parking Lot case (1995), the Peruvian Association of Consumers and Users (ASPEC) filed a complaint against Los Portales S.A. and the Peruvian Corporation of Airports and Commercial Aviation S.A. (CORPAC) for abuse of their dominant market position in the management of the parking lot at the Jorge Chávez International Airport. In July 1993, CORPAC granted the concession for the management of the aforementioned parking lot to Los Portales S.A. The concession included de facto control over entrance to the airport for vehicular traffic. ASPEC brought a complaint against CORPAC and Los Portales S.A. for forcing the public to pay for parking privileges in order to enter the airport area with their vehicles and also for requiring users to pay a minimum parking fee for stays of two hours or any fraction thereof. The Commission held that a distinction must be drawn between the concession for the parking lot, on the one hand, and the vehicular entrance to the airport on the other, since the latter is a free-access public road which should be subject to no restrictions other than for the purpose of security checks. The Commission held that it was not permissible to condition entrance to the airport on the use of the parking lot, and that generally recognized commercial standards were violated when a minimum parking fee was charged for the first two hours or any part thereof. In light of the damage caused to users of the airport, a fine equivalent to fifty tax units was imposed on each of the parties against whom the complaint was brought. In Mexico, the CFCM examined the privatization of the Mexican port system. In particular, the commission was involved at the public offering stage and in designing the conditions under which privatization would take place. During 1995-1996, the government granted operating rights in several ports for terminals and premises for the handling of cargo, as well as three terminals for passenger cruise ships, and the administration of the ports of Acapulco and Puerto Vallarta. In all of these cases, the commission stressed the need to preserve competitive conditions in operating the service and to prevent the imposition of artificial entry barriers, unfair displacement of competitors, and monopolistic prices. As part of its Antitrust Policy in Regulated Industries 441 analysis, CFCM identified the relevant market in each case and the concentration levels before privatization (SELA, 1999, p. 36). 11.2.6 SOLID WASTE Solid waste collection is another area where competition agencies are increasingly asserting their jurisdiction, although the traditional municipal management of these services has delayed the effective supervision of competition agencies. Certain countries have made inroads into the procompetitive regulation of solid waste collection services. In the Peruvian case PETRAMÁS S.A.C. v. Empresas de Servicio Municipal de Limpieza de Lima (ESMLL) (1995) involved a complaint brought against the Small Company of Workers in Solid Materials S.C.R.L. (PETRAMAS) against the Municipality of Metropolitan Lima and the Municipal Cleaning Services of Lima (ESMLL) for practices restricting free competition. The Municipality of Lima and ESMLL had agreed that ESMLL would have the exclusive right to provide solid waste storage services in their sanitized storage facilities. All companies providing solid waste removal services in the different districts of Lima were obligated to deposit their solid wastes in the ESMLL’s sanitary facilities. In order to maintain this privilege, the Municipality of Lima instituted a tax for the service of ESMLL so that anyone wishing to dispose of solid wastes in a sanitary facility owned by a third party was required to pay the price which the owner of that other facility charged in addition to a tax for the ESMLL service which he did not use. Because of this double cost, clients preferred to use only the ESMLL facility, even though another company might offer a lower price or better sanitary conditions. Petramas is the owner of a sanitary facility that fulfills all the requirements necessary for the storage of solid wastes. However, the exclusivity that ESMLL enjoyed prevented potential clients from using the services of Petramas. The INDECOPI’s Competition Commission noted that the parties against whom the complaints had been lodged had engaged in a practice that restricted free competition and which was tantamount to the creation of a monopoly protected by the levying of a tax; therefore, the Commission imposed a fine of fifty tax units against ESMIL. 11.2.7 FINANCIAL SERVICES In the banking and financial services industry, it is sector-regulatory agencies that hold political leverage, and therefore sector regulators have tended to win in their jurisdictional conflicts with competition agencies. However, this trend has begun to recede in recent years. A divided judgment in a case involving a merger in the Brazilian insurance sector reveals the potential conflicts that arise in sensitive sectors such as this. In the case Banco Finasa de Investimento S/A and Zurich Participações e Representações the proposed merger AU: reference not listed in bibliography 442 Chapter 11 involved two insurance companies, in which Zurich Brasil Seguros S/A would acquire 26% of the total shares of Brasmetal Industrial S/A, a holding of the Finasa Group. The relevant market was defined as the national insurance market and the merged entity’s postmerger market share would be 12%. CADE understood that this operation would not substantially alter the structure of the relevant market and that there was no risk that the new firm would exercise monopoly power, either unilaterally or in collusion with the other insurance companies in the market. Therefore, the majority decision cleared the merger. Although apparently simple, this transaction raised fundamental questions regarding the separation of insurance and antitrust regulation in Brazil and it divided the commissioners of CADE. The majority ruling analyzed two issues in its verdict: whether it was within CADE’s authority to examine mergers in the financial system, and whether the report of the Federal Attorney’s Office, which determined that the Central Bank of Brazil was the body in charge of any matters concerning financial institutions, was applicable to CADE as well. The majority held that since CADE is an independent administrative agency that cannot be subjected to political or governmental influence, its decisions could not be revised by any other administrative organ. Hence, the report of the Federal Attorney’s Office would not bind CADE. The ruling also highlighted the fact that the Brazilian Law No. 8884/94 is applicable to every sector of the economy, and that it does not establish any exceptions by which certain mergers need not be submitted to CADE. The decision stressed, however, that this interpretation of the law was compatible with the regulatory role performed by the Central Bank. The central issue in this case was whether there was a conflict between the jurisdictions of CADE and of the Central Bank. The majority ruled that there was not, and that the two organisms are in fact complementary to each other: the Central Bank is responsible for the prudential regulation of the financial sector, according to its powers listed in Law No. 4595/64; while CADE has an adjudicative role in the prevention and repression of abuse of economic power, as provided by the Brazilian Competition Law. Therefore, the interpretation provided by the Federal Attorney’s report sought to resolve a conflict that in reality did not exist. The majority decision aimed to harmonize the application of Laws No. 4595/64 and No. 8884/94 and established that the Central Bank should provide the abstract rules that will set the conditions for competition in the financial sector. The Central Bank would, then, be responsible for implementing clear, ‘‘per se’’ controls. This is significantly different from the control that CADE exercises, where anticompetitive impact is verified in each case. Consequently, certain behaviors deemed illegal by the prudential regulation may or may not be considered anticompetitive, and vice-versa. The majority opinion concluded that every transaction in the financial sector must, therefore, continue to be evaluated by CADE. The President of CADE, Mr. Grandino Rodas, and the Commissioner, to whom the case was initially assigned, Ms. Hebe Romano, dissented in the case. The dissenting voters argued that CADE was not authorized to analyze operations in the financial sector. According to Mr. Grandino’s and Ms. Romano’s opinion, 443 Antitrust Policy in Regulated Industries there was in fact a conflict between the powers of CADE and of the Central Bank and that, since the Federal Attorney’s report was applicable to CADE as well, the tribunal was not competent to evaluate the acquisition of Brasmetal Industrial S/A by Zurich Brasil Seguros S/A. 11.3 FORMS OF INSTITUTIONAL COORDINATION Perhaps the most significant feature of the relationship between sector-specific regulators and competition authorities is the lack of a single pattern, either across countries or even within a single country. A wide range of factors, such as the social and economic context, the legal system, and the political leverage of the entities involved, may influence the allocation of tasks. The structure of the regulated industry is also an important factor that influences the choice of regulatory framework, such that more than one approach might be employed within a country. Table 11-1 displays the diversity of powers and functions allocated between sector regulators and competition authorities in Latin America. Table 11-1 Jurisdiction of Competition Agencies over Regulated Sectors Country Sector Regulation Argentina Competition Agency Jurisdiction None Brazil (i) Water Regulator; (ii) Civil Aviation Regulator; (iii) Telecommunications Regulator; (iv) Cinema Regulator; (v) Electric Energy National Regulator; (vi) Petrol Regulator; (vii) Supplementary Private Health Care Regulator; (viii) Aquatic Transports Regulator; (ix) Terrestrial Transports Regulator; (x) Sanitary Vigilance Regulator; and (xi) the Central Bank of Brazil. Concurrent Chile (i) Sanitary Services Authority; (ii) Telecommunications Regulator; (iii) Energy and Gas Authority; (iv) Nacional Energy Commission; (v) Stock and Insurances Authority; (vi) Superintendency of Banking and Financial Institutions. Concurrent 444 Chapter 11 Table 11-1 Continued Competition Agency Jurisdiction Country Sector Regulation Colombia (i) National Hydrocarbon Agency; (ii) Energy and Gas Regulatory Commission; (iii) Water Regulatory Commission; (iv) Telecommunications Regulatory Commission; (v) Television National Commission; (vi) Civil Airline Authority; (vii) Ministry in each sector. Concurrent Costa Rica (i) National Authority of Public Services; (ii) Banking Regulator; (iii) Stocks Market Regulator; and (iv) Pension Funds Regulator. None, except for the Workers Protection Act No. 7523 for the specific case of pension operator companies mergers and their regulations. Dominican Republic (i) Dominican Institute of Telecommunications (INDOTEL); (ii) National Energy and Electricity Authority; (iii) Central Bank; (iv) Antidumping and Subsidies Commission; (v) National Intellectual Property Rights Office; (vi) Safeguards Measures Office. Concurrent (Article 3 Law No. 42/07) El Salvador (i) Electricity and Telecommunications Superintendency; (ii) Financial Sector Superintendency; (iii) Pension Funds Superintendency; (iv) Securities Superintendency; (v) Maritime Authority; (vi) Civil Aviation Authority. Exclusive jurisdiction, on competition issues (Article 2: Legislative Decree No. 528/04) Honduras (i) National Electric Energy Enterprise; (ii) National Telecommunications Commission; (iii) Potable Water Service Entity; (iv) Insurance and Banking National Commission. Concurrent (Article 3: Legislative Decree No. 357/05) 445 Antitrust Policy in Regulated Industries Table 11-1 Continued Country Sector Regulation Competition Agency Jurisdiction Mexico (i) Federal Telecommunications Commission; (ii) Energy Regulatory Commission. Exclusive jurisdiction, on competition issues (Article 3 Competition Act) Nicaragua (i) Instituto Nicaragüense de Telecomunicaciones (TELCOR); (ii) Instituto Nicaragüense de Energı́a (INE); (iii) Instituto Nicaragüense de Acueductos y Alcantarillados (INAA). Concurrent jurisdiction. The law includes the mandatory coordination between PROCOMPETENCIA and the various sectoral regulators in order to solve issues on anticompetitive practice in these markets. The regulators are forced by the law to consider a decision from PROCOMPETENCIA, before solving cases related to competition. Panama Public Services National Authority. The Public Services National Authority takes into consideration free competition principles and obtains approval from the authority before enacting a rule bound to affect a regulated market. (It has no jurisdiction on antitrust matters). Peru (i) Organismo Supervisor de Inversión Privada en Telecomunicaciones (OSIPTEL); (ii) Organismo Supervisor de la Inversión en Energı́a (OSINERG); (iii) Organismo Supervisor de la Inversión en Infraestructura (OSITRAN); (iv) Superintendencia Nacional de Servicios de Saneamiento (SUNASS). Concurrent 446 Chapter 11 Table 11-1 Continued Country Venezuela Sector Regulation (i) Telecommunications Authority (Conatel); (ii) Financial Sector Regulator (Sudeban); (iii) Insurance Industry Regulator (Sudesec); (iv) Electric Energy Industry; (v) Gas and Energy Industry Regulator (ENAGAS); (vi) National Civil Aeronautic Institute. Competition Agency Jurisdiction Concurrent Source: UNCTAD, 2007. A closer examination of the international experience dealing with the relationships between competition authorities and sector regulators shows a remarkable variety of possible outcomes: – – – – – – consolidation of sector-regulatory functions under the Competition agency; the Competition agency holds veto rights; interlocking or joint decision-making bodies; required consultation; formal and informal coordination agreements; formal or informal channels for consultation, advocacy, and technical communications; – consumer advocate inside the sector regulator; and – purposefully overlapping jurisdictions. Let us review each of them separately. 11.3.1 THE COMPETITION AGENCY CONTROLS SECTOR-REGULATORY TASKS The most complete form of coordination between competition agencies and sector regulators is to merge their powers within a single agency; an example of this form of coordination is Australia’s Australian Competition and Consumer Commission (ACCC). The ACCC is the product of a long, twenty-year process of gradual privatization of services such as telecommunications and electric power. Finally, in 1993, the government initiated a cross-sectoral approach to infrastructure access, thereby placing competition functions involving sectoral agencies within the purview of the competition authority. The Competition agency has a major role in the infrastructure access regime and is even responsible for pricing infrastructure access. Some members of the staff Antitrust Policy in Regulated Industries 447 specialize in specific sectors, and commissioners specialize in managing a sector group. The agency is responsible for carrying out directives from the government in addition to its rulemaking and adjudicative responsibilities.360 No country in Latin America has taken a similar approach by creating sections within the Competition authority that are responsible for sector regulation. 11.3.2 THE COMPETITION AGENCY HOLDS VETO RIGHTS One step short of giving competition agencies sector regulation powers is to give them veto power over decisions taken by the sector regulator. For example, in some government systems, cabinet-level ranking for a Competition agency gives the agency potential veto power over anticompetitive proposals from sector-regulatory agencies and affords the Competition agency a direct avenue of appeal to the highest levels of decision making within the government. For example, The Korean Fair Trade Commission has cabinet-level standing that has allowed it to take a leading position in regulatory reforms and privatization as well as to block anticompetitive proposals from other ministries. In Peru, INDECOPI’s Market Access Commission is in charge of examining government measures that impair competition. Thanks to this approach, INDECOPI enjoys considerable leverage in its competition advocacy efforts before the government. However, the Competition agency may have to exercise this veto right with discretion in order to avoid being viewed as obstructionist. There is a risk that the veto right will be removed if it is overused. This is exactly what happened to Colombia’s SIC in the aftermath of the Aces-Avianca case discussed above. 11.3.3 INTERLOCKING OR JOINT DECISION-MAKING BODIES Overlapping decision-making bodies with participants from competition agencies and sector regulators may be an effective source of coordination. Mexico, for instance, has developed Intersecretarial Committees with representation from sector-regulatory agencies and the Competition agency. Since 1993, the Competition Commission has actively participated in the design of the Telecommunications Law and several related regulations, mainly through the relevant Intersecretarial Committee. Similarly, in 1999, the Competition Commission 360. Yet Australia has kept a regulatory authority in markets that are now potentially competitive. This is due to the rather negative restructuring experience of neighboring New Zealand in regulating its telecom sector. The case in point was a dispute over interconnection pricing offered by the incumbent firm Telecom to an entrant, Clear Communications. The dispute was litigated for four years before a statement of the government’s views favoring lower interconnection charges persuaded the parties to come to agreement. Australia concluded that courts using general competition approaches, as in New Zealand, may not be well-positioned to deal with these conflicts efficiently or quickly. 448 Chapter 11 started participating in the design of an airport privatization plan through another Intersecretarial Committee. In Australia, too, there are overlaps in the memberships of the Competition agency and sector regulators. Chairpersons of various commonwealth and state economic sector-regulatory agencies are also associate members of the ACCC, and certain members of the ACCC are appointed as associate members of the Australian Communications Authority and the Australian Broadcasting Authority. This helps to bridge the ‘‘knowledge gap’’ that can arise when competition, economic, and technical regulators are separate bodies. 11.3.4 REQUIRED CONSULTATION Some countries require sector regulators to incorporate in their own decisions the perspective of competition authorities. This requirement gives the Competition agency an identified and specific opportunity to put forward its best arguments and information regarding the impact of proposed regulations on competition. The United Kingdom has introduced a compulsory competition assessment in each regulatory impact assessment. The cabinet office assessment involves first determining if there are potentially significant effects resulting from a regulation, and secondly, in-depth analysis of such effects. The Office of Fair Trade has published its own ‘‘Guidelines for Competition Assessment.’’ A competition impact statement is a separate analysis of the potential anticompetitive effects of a regulation prepared by the regulatory agency. This can prompt the regulator to consider more explicitly how competition effects are likely to balance against other effects. A blatantly defective competition impact statement could be subject to judicial review in some jurisdictions. Ideally, the competition impact statement requirement encourages the sector regulator to incorporate competition concerns into its policymaking process. The hope is that substance will follow form if the sector regulator has been dismissing competition concerns in the past. Portugal has institutionalized the ability of the Competition authority to urge a nonmandatory program for increasing competition on the government as a whole (which can affect the sector regulator through new laws or government initiatives). The ‘‘Recommendation put forward to Government’’ is a legal instrument entrusted by law to the Competition Authority. Given its nonbinding nature, this initiative has to be combined with appropriate persuasive efforts. Essentially, the Recommendation instrument allows the Authority to present to the government (and to other public institutions) measures—mainly legislative ones—to boost competition. The success of this instrument depends largely on its acceptance by the government. These guidelines have been endorsed in Latin America. For instance, in Venezuela, Pro-Competencia has undertaken examination of various specific sectors in order to identify their regulatory constraints and propose procompetitive measures. Their recommendations (known as ‘‘Public Policy Reports’’) are Antitrust Policy in Regulated Industries 449 nonmandatory, but have nevertheless been extremely useful in supporting procompetitive economic reforms. The sectors that have been examined include electricity; telecom; agriculture; liberal professions; distribution; retail services; oil and gas; land transportation; and water supply. Pro-Competencia disseminated the contents of these reports through the media, including press, television, and the Internet. From 1998 to 2000, ProCompetencia extensively publicized the goals of these recommendations before and after their promulgation. This effort was instrumental in sensitizing consumers, as well as the government, to the benefits of market opening. In general, the news and opinion columns in the media were very supportive of Pro-Competencia’s position. The government and the Authority usually received ‘‘good press.’’ Argentina has a legal requirement of consultation between the Competition agency and sector regulators, but the requirement applies to the Competition agency rather than the sector regulators. In investigations led by the Competition agency, the sector regulators must be consulted if the investigation involves a firm in a regulated sector. Competition agency officials have analyzed numerous activities of economic concentration in sectors such as telecommunications, transport and distribution of electricity, transport of gas, shipping services and infrastructure, airport services, and others. In these and other cases, according to Law No. 25156, the CNDC must request the opinion of the corresponding regulatory organization. 11.3.5 FORMAL AND INFORMAL COORDINATION AGREEMENTS If the Competition agency and a particular sector regulator interact regularly, one method of bolstering coordination and information sharing is to formalize the interaction. A memorandum of understanding is one type of formal agreement that states explicitly how two agencies agree to interact. Such agreements could establish the order in which the agencies decide matters in which they have overlapping jurisdiction or conditions under which agencies agree to share information in matters in which both are involved. El Salvador has developed guidelines for negotiating formal agreements between the Superintendencia de Competencia and sector-regulatory agencies that have been established under legislation specifically authorizing and encouraging such coordination.361 These guidelines, entitled the Manual de mecanismos de coordinación con entidades reguladoras de sectores de la economı́a (‘‘Manual of coordinating mechanisms with sector-regulatory entities’’), sets forth provisions that facilitate cooperation, avoid duplication of effort, and ensure consistency in decisions related to competition issues. The agreements encompass information sharing, authorization of forbearance when another agency is already dealing with a matter involving competition issues, and mandatory consultation when an agency is taking up a matter already being considered by another agency. 361. Article 8 Regulations, Legislative Decree No. 528/04. 450 Chapter 11 Another form of coordination through forbearance applies in Canada. In general, markets subject to regulation are not subject to antitrust scrutiny because defendants can use a ‘‘regulated conduct defense.’’ The sector regulators in Canada can, or in some cases must, ‘‘forbear’’ from regulating if the market is likely to accomplish the same objectives as the regulatory regime. The Competition Bureau has held that once a sector-regulatory agency has declared that it will forbear from regulating, the ‘‘regulated conduct defense’’ no longer applies. Hence, coordination occurs because the Competition agency asserts jurisdiction only after the sector regulator effectively stops regulating. A similar form of coordination is used in Hungary. In evaluating complaints against a regulated firm, the Competition agency assesses whether the action in question is one that is required of the firm by the sector regulator or one over which the firm has discretion. In the former situation, the Competition agency will not take action against the firm. In the latter situation, the Competition agency has jurisdiction. An example of an informal agreement between a sector regulator and a Competition agency is found in the area of telecommunications mergers in the U.S. Both the Department of Justice and the FCC have merger review authority in the telecommunications sector. The Department of Justice reviews telecommunications mergers using the same standards that it applies to other mergers—it challenges a merger if it believes that it will substantially lessen competition. The FCC also reviews mergers on the basis of competitive effects, but the FCC’s general standard is that it will not approve a merger unless the merger enhances competition. The FCC also applies other public interest standards in its merger reviews. Over the course of time, the FCC has, in general, waited to conclude its competition analysis until after the Department of Justice has completed its assessment. When the Department of Justice has challenged a merger and the challenge is settled, the FCC sometimes incorporates the terms of the settlement into its own requirements for approving the merger. This arrangement helps to minimize the risk that the decisions of the agencies will be inconsistent with respect to the same aspects of a proposed telecommunications merger. The convenience of this informal arrangement has been strengthened by institutional factors. First, merging parties must notify the DOJ about a proposed merger thirty days before the proposed merger date. There is no requirement for premerging filing before the FCC. Hence, the Competition review process is sometimes well underway before its starts at the FCC. Furthermore, the Competition review is generally completed before the merger because the competition agencies strongly prefer to stop an anticompetitive merger before it is consummated. This preference flows from the common failure of postmerger divestitures to restore competition to its premerger state. Finally, there are no time constraints on the FCC decision process, and the merging parties must receive FCC approval in order to merge. To date, this informal arrangement has avoided sharp analytical inconsistencies between the competition analysis of the DOJ and the FCC. However, not all efforts to foster coordination and cooperation through formal agreements prove to be successful. For example, the Spanish delegation to the 1999 Antitrust Policy in Regulated Industries 451 OECD roundtable on relationships between competition agencies and sector regulators reported that tensions continue in these interactions in Spain, despite the formal arrangements for consultation that have been implemented. 11.3.6 FORMAL OR INFORMAL CHANNELS FOR CONSULTATION, ADVOCACY, AND TECHNICAL COMMUNICATIONS Informal networks of friendship, common experience, professional training, and political affiliation are common means by which government agencies coordinate their work. Some of these arise spontaneously and without purposeful direction from agency decision makers and managers; however, an agency can foster or suppress these informal channels of communication and coordination. For the purpose of advancing coordination between the Competition agency and a sector regulator, the Competition agency should recognize and support the development of informal channels, as long as this is done in a way that is consistent with protection of proprietary information. Mexico provides an example of consultation and advocacy that is permitted, but not required by law. The Mexican Competition Act stipulates that entities of the public administration, such as the COFETEL, can consult the Competition authority on any matter related to competition or free markets. As the OECD (2004a, p. 70) states: One example . . . involved Telcel’s 2001 application to expand the uses permitted for its existing spectrum concession. The [Competition Commission] was able to express an opinion in that proceeding only because COFETEL decided to seek the Commission’s views as a matter of discretion. And although COFETEL imposed some conditions on the expansion of Telcel’s concession, ostensibly to address the competitive concerns articulated by the [Commission], no explanation was provided for COFETEL’s treatment of the [Commission’s] opinion. No such explanation was required because the [Commission] was not a party. Similar nonmandatory consultations have taken place between competition authorities and sector regulators in Brazil. CADE and ANATEL (the telephone sector regulator) have established a working group to address the potential problems presented by overlapping jurisdictional provisions. CADE has indicated that, since 2000, the two agencies have successfully developed a cooperative working arrangement under which ANATEL assumes the role of the SDE (the Economic Law Office in the Ministry of Justice) and the SEAE (the Secretariat for Economic Monitoring in the Ministry of Finance) in merger cases involving telecommunications services. Under the arrangement, ANATEL conducts the investigation and provides a technical opinion, while CADE renders the final judgment. With respect to cases dealing with restrictive conduct, by contrast, ANATEL shares concurrent jurisdiction with the SDE and the SEAE, so that any one or all three of those agencies may perform investigative functions and present AU: 2004a reference for OECD not listed in bibliography 452 Chapter 11 recommendations to CADE. Over the years, CADE and ANATEL have signed several written cooperation agreements, each of which has subsequently expired. The procedures for interaction between ANATEL and both the SDE and the SEAE are not well developed, consisting primarily of informal contacts between agency staff members. 11.3.7 CONSUMER ADVOCACY WITHIN THE SECTOR REGULATOR Some countries have made consumer welfare quite visible in the activity of sector regulators by creating an advocacy unit within the agency that has the independent ability to bring issues to the attention of the agency’s decision makers. The internal consumer advocate’s office is one potential point of contact with the Competition agency. And contacts through the consumer advocate’s office can be easier for the Competition agency because it is less likely that there will be ex-parte rules that limit discussions between the consumer advocates and the Competition agency. Yet these agencies have not been overly successful in bringing consumer welfare concerns into the operations of regulated industries. Often, this is due to a different interpretation of consumer welfare applied by the consumer advocate’s office, which may in fact undermine competition rather than enhance it. For instance, many of these consumer representatives propose rate freezes which may undermine the long-term investment necessary to enhance and preserve the quality of services offered in the network. The institutional arrangement of placing consumer advocates within regulatory bodies is common among state sector-regulatory agencies in the U.S. Indeed, there exists a National Association of State Utility Consumer Advocates (NASUCA) that meets regularly at the conventions of the National Association of Regulatory Utility Commissioners (NARUC). This institutional advocacy arrangement is less common in national government sector regulators, but it does exist within the Postal Rate Commission. These offices are intended to represent consumer interests before the sector regulator. This can be done either directly or by channeling the input of consumer groups to the sector regulator. The rationale for these offices is that consumer interests are more difficult to organize because they are diffuse, especially compared to producer interests. One purpose behind the formation of these organizations is to help improve the balance of input that the regulator receives so that the regulator will not drift toward suppliers’ interests due to a lack of input from consumers. Ideally, the positions taken by internal consumer advocates should echo the consumer welfare approach taken by competition agencies. However, this does not always prove to be the case. For example, in the U.S., state consumer advocates appear to focus primarily on lowering shortterm prices for consumers, even if this is likely to create inefficiencies and potential monopoly power problems in the long run. A case in point is the debate over the prices for provider-of-last-resort (POLR) services. These are regulated services that remain in place when retail customers are free to select an alternative supplier. Antitrust Policy in Regulated Industries 453 Often, state consumer advocates have supported fixed prices for POLR service that do not account for changes in underlying costs, fuel costs in particular. State consumer advocates have generally opposed changes in POLR pricing agreements that would allow adjustments for fuel costs on the basis that consumers benefit from these lower prices. In contrast, the competition agencies have generally concluded that below-market POLR prices ultimately harm consumers by creating inefficient pricing signals and preventing the entry of alternative suppliers. 11.3.8 PURPOSEFULLY OVERLAPPING JURISDICTIONS The opposite of formal coordination and clear distinctions in jurisdiction is fostering situations in which competition and sector-regulatory agencies can come into conflict. Ironically, by making potential points of conflict more numerous, the need for coordination can become more obvious. If the agencies rise to the challenge of coordination, the lack of formal distinctions in responsibilities can result in cooperation and informal divisions of work. The United Kingdom is a nation in which substantial opportunities for conflict between the competition agencies and sector regulators exist. There are seven sector regulators that share concurrent power in the area of competition with the Office of Fair Trading (OFT). By and large, however, conflicts have been avoided. One major factor contributing to this favorable result is the fact that the OFT handles all mergers (except for large utility mergers, which are referred to the Monopolies and Mergers Commission). At the same time, there are understandings on how the sector regulators’ views will be taken into account by the OFT. On nonmerger competition matters, their jurisdictions are concurrent, but there are formal or informal consultation arrangements between the OFT and the sector regulators. Another factor promoting coordination between competition agencies and sector regulators is the fact that the sector regulators are more likely to address competitive concerns through their authority to grant or revoke licenses of suppliers than through litigation. Hence, conflicts are avoided to some extent by the use of different forms of intervention in the market. Argentina’s experience highlights why coordination can be a significant issue even if the Competition agency and the sector regulators have authorities that appear to be distinct. In Argentina, there is no jurisdictional overlap, but practical experience shows that it is sometimes unclear whether a problem, such as a complaint about a possible anticompetitive practice, falls under the jurisdiction of the competition law or the regulatory framework of a specific sector. Usually, the jurisdiction of the sector regulator needs to be cleared first, before the Competition authority is given full powers. Thus, according to Law No. 25156/99, the CNDC asserts its full jurisdiction over anticompetitive practices originating in the violation of tax and social security laws or regulatory standards; however, in order to do so, relevant sector regulator has to establish that a violation has occurred. Moreover, in merger cases, for instance, the CNDC has to ask for the 454 Chapter 11 opinion of the relevant regulatory body, and some ex officio investigations into specific economic sectors have been requested by the regulatory agency. Generally, the central question facing a Competition agency when it must intervene in a sector of economic activity where another public regulatory agency has authority is the existence of competition issues. Such issues may take the form of possible anticompetitive behavior, the assessment of mergers, or a market investigation. Of course, in changing institutional environments, such as those typically found in Latin American countries, it is more likely that intermediate, transitional situations will emerge. Thus, over time, the technical (or economic) distinction between regulated sectors and those left open to competition can often be blurred. For example, in telecommunications, technical decisions regarding spectrum use and accompanying decisions about licenses profoundly affect the intensity of competition in the sector. The determination of reasonable access conditions and their enforcement is an issue in which both the Competition authority and the industry regulator have some degree of competence. Jurisdictional conflicts also occur as a result of ambiguities in the law as to whether sector regulation or competition law takes precedence with regard to competition issues. Therefore, the jurisdiction of competition authorities and sector-specific regulators is vexed with uncertainties as to what each one should do. Thus, frictions may arise due to differences in the policy agendas of sector regulators and competition authorities, respectively. Table 11-2 Jurisdiction of Sector Regulators and Competition Authorities Sector Regulator Competition Authority Mandate – Substitute for lack of competition – Broad range of socioeconomic goals – Technical issues required for operating the natural monopoly segment – Protect and enhance competition – Economic efficiency goals – Competition issues arising from unfettered business conduct Approach – Ex-ante prescriptive approach – Impose and monitor behavioral conditions – Ex-post enforcement (except for merger review) – Impose behavioral remedies (except for merger remedies) AU: Please provide cross-reference for Tables 11-2 in the text. Source: Adapted from UNCTAD Secretariat (2004b). In practice, the resolution of overlapping jurisdictions will depend on which authority is judged to be the more effective of the two with respect to the specific problem under consideration. In essence, two factors come into play in this decision: the procompetitive ideology of the sector regulator and the existence Antitrust Policy in Regulated Industries 455 of entrenched sectoral interests organized through the sector regulator, prior to the competition authority’s assertion of jurisdiction. The interface between competition and regulation has become blurred in the experience of some Latin American countries whose competition statutes vest competition agencies with surveillance powers over sectors formerly subject to the exclusive jurisdiction of sector-regulatory agencies. 11.4 POLITICAL ECONOMY ISSUES BETWEEN SECTOR REGULATORS AND COMPETITION AGENCIES The increasing penetration of competition policy into realms formerly reserved for sector-specific regulatory agencies reveals that economic regulation in Latin America has grown more sophisticated and more complex. The effects of this dynamic, however, have been uneven across the region; they have depended on the institutional context of antitrust enforcement. In countries where general competition authorities had been set up prior to regulatory reform (Mexico, Venezuela, Brazil, Argentina, Colombia, Peru), the jurisdiction of regulatory agencies has yielded to competition agencies. By contrast, in countries where there is no general Competition authority (e.g., Bolivia and Paraguay) or where it has feeble powers (e.g., Uruguay), the power of regulatory authorities over antitrust issues is much more noticeable and significant. The foregoing reveals that the institutional void created by the lack of a specialized Competition agency to administer the antitrust rules has been filled by regulatory agencies. This phenomenon demonstrates the increasing attention given to antitrust issues in Latin America, regardless of the flaws in the process of building institutions for adapting to the transition to market economies. The existence of political economic factors deeply influences the procompetitive outcome of sector regulation. These factors are usually related to the potential capture of sector regulators by regulated industries, and their influence in delaying procompetitive reforms in the sector concerned. To a large extent this is likely to occur whenever the Competition authority is still in its formative stages or simply does not exist. In many instances, sector regulators’ existence preceded that of the Competition authority and they were given responsibility for competition issues in their respective sectors. Even in cases where new sector regulators have been created only recently, for example, after deregulation and privatization have taken place, countries have chosen to assign competition responsibilities to sector regulators as a means of infusing competition principles into the sector-regulatory regime and thus supporting a consistent application of competition policy across the economy. In this connection, Mexico and Bolivia are illustrations of opposite extremes. Bolivia developed sector regulation through Law No. 1600/94 (Sector Regulation System Act—Sirese) which provided the umbrella legal framework for the development of sector regulators in water supply, telecom, road transport, oil and 456 Chapter 11 gas, and the electricity sector. An integrated system would be coordinated through a General Superintendency that would be in charge of supervising individual Sector Regulators. Under Sirese’s system, sector regulators are in charge of competition policy matters in each of their sectors. Given the uneven state of development of each sector regulator, competition is comparatively more advanced in the telecom sector—where cases have even been tried and decided—than in the electricity sector. Competition in the water supply, road transport, and oil and gas sectors is absent altogether. Furthermore, an independent Competition authority has yet to be established; no integrated competition policy is expected to arise. In fact, all attempts at introducing competition regulation have been opposed by sector regulators, who perceive that such attempts could well undermine their surveillance powers in their respective sectors. By contrast, Mexico took carefully designed measures to implement structural reform beginning in the early 1990s. In 1990, the Analytical Unit of Administrative Barriers (Unidad de Analisis de Barreras Administrativas) at Secretarı́a de Comercio y Finanzas (SECOFI) was created; this unit undertook a broad review of all administrative and regulatory measures creating obstacles to trade. This initiative preceded the Competition Commission, whose creation in 1993 was followed by grants of broader power to deregulate every economic sector of the country. The Mexican competition legislation provided the Competition Commission with an important role in the design and implementation of sector-specific regulatory mechanisms. First, it empowered the Commission to give its opinion on changes in other laws and regulations that concern competition. Often the communication and coordination between the Commission and other authorities on these matters takes place through one of the Intersecretarial Committees. In practice, the opinions and recommendations of the Commission are usually followed by the relevant authorities. Second, a number of sector-specific laws and regulations explicitly provide for a role for the Commission. These are, principally, the Seaport Law, the Law on Roads, Bridges and Road Transport (both enacted in 1993), the Navigation Law of 1994, the Railroad Services Law, the Federal Telecommunications Law, the Civil Aviation Law, and the Airport Law (all enacted in 1995), and the regulations on natural gas and on pension funds (enacted in 1995 and 1996, respectively). These provisions vest the Commission with the power to determine how competitive a market is through monopoly power measurement. Thereupon, the relevant regulator may impose or abolish extra regulations. The Commission is also given the power to authorize economic agents to participate in privatization bids or in public auctions for concessions, licenses, and permits. The supportive role of the Commission in the design of regulations has preempted actual conflicts between regulations and competition policy. Contradictions that could give rise to legal uncertainty have largely been avoided and redundancies have been reduced in order to create a clear separation of functions and tasks between the agencies. Antitrust Policy in Regulated Industries 457 Like Mexico, Venezuela also set up a Competition authority (Pro-Competencia) prior to the creation of sector-regulatory agencies. Beginning in 1992, ProCompetencia developed an intense competition advocacy agenda which resulted in the reform of sectors such as drugstore retail sales; liberal professions; fuel distribution and retailing; agriculture; electricity; and telecommunications. ProCompetencia’s uneven success was clearly linked to the existence of organized vested interests in various sectors, many times channeled through the sector regulators. Such was the case in the banking sector, whose members gained full support from the government when they abstained from filing for merger review before the Competition agency during the merger wave in the year 2000—which, incidentally, caused the resignation of the head of Pro-Competencia. The banking regulator’s support of the industry members against Pro-Competencia was decisive in the outcome of the quarrel between the banking sector and the competition authority. The existence of sector regulators with entrenched interests is demonstrably decisive in the allocation of tasks given to competition authorities. The privatization of the telecom industry in Mexico (1993) and Venezuela (1991) took place before the creation of competition authorities. Interestingly, in both cases, the privatization of the state telephone monopoly (Telmex in Mexico, Cantv in Venezuela) preceded the current sector regulation law and so avoided important competition considerations in the law’s design. For example, Telmex was granted a concession over the preexisting nation-wide telephony network and a six-year period of exclusivity over long-distance telephony. Venezuela’s Cantv was given a ten-year period of monopoly rights over long-distance telephony. As a result of the lack of an independent sector regulator and of monopoly rights, incumbent firms wielded their power to block potential reform. As Hilke (2006) states: Between 1990 and 1995, the Telmex concession led the sector’s liberalization. There was no independent sector regulator and the regulatory framework ruling telecommunications continued to be the 1934 Law of Means of Communication. Because key structural and regulatory decisions in this sector were designed prior to the creation of the Competition Agency, the sector has faced a number of regulatory challenges, especially regarding competition. The main allegations concern a lack of effective mechanisms to control the exercise of the incumbent’s monopoly power in the regulatory framework. Regulatory delays have favored the permanence of Telmex’s market position in telephony markets. It is clear that the position taken by the Competition authority in sector regulation matters is closely related to when the authority was created and began active advocacy efforts; when the authority predates regulation, it tends to play a larger role. This is possibly so because the sector-regulatory policy agenda is not fully developed and vested interests are not well organized. In such circumstances, is AU: reference not listed in bibliography 458 Chapter 11 possible for the Competition authority to influence the sector through procompetitive recommendations. Brazil and Venezuela provide an example of the procompetitive results of setting up competition policy schemes prior to sector regulation. In Brazil, the creation in 2002 of the National Agency for Surface Transportation (ANTT) with responsibility for regulating freight railway services and interstate and international bus transportation did not pose a problem for the introduction of competition in this sector, possibly due to the fact that Brazil’s competition scheme had been instituted long before, in 1994. Thus, in the same year that ANTT was set up, an agreement was reached with the SEAE (the Secretariat for Economic Monitoring in the Ministry of Finance) calling for information exchange, joint analysis of techniques for applying competition principles to sector-regulatory issues, and discussion of methodologies for tariff regulation. There are also provisions dealing with cooperation in competition law enforcement proceedings (including joint investigations). CADE and ANTT adopted an agreement in 2003 with similar terms but with a particular focus on cooperation to avoid conflicts between competition law enforcement and sector-regulatory decisions. In Venezuela, a similar agreement was entered into in the year 2000 between Pro-Competencia and the newly created telecom regulator, CONATEL, for the exchange of information and handling of cases in the sector involving competition. In fact, Pro-Competencia had been highly involved in the preparation of the telecom bill that led to the creation of CONATEL since 1998. As a result, the telecom legislation grants the Competition authority powers to survey the competitive conditions of the sector, initiate proceedings, and prepare draft decisions concerning particular cases, which the telecom sector regulator has to abide by. In sum, political economy considerations clearly influence the role of competition authorities in successfully exerting full surveillance over the competitive conditions of a given industry or sector, particularly with respect to which agency—the sector regulator or the competition authority—takes precedence in setting the regulatory agenda for the sector. 11.4.1 CONFLICTIVE RELATIONSHIP COMPETITION AGENCIES AND SECTOR REGULATORS Usually, the conflicts between regulators and competition authorities over these issues receive a lower level of attention and are confined to discussions among public officials, in which the solutions to issues such as the scope of jurisdiction, decision-making processes, and basic objectives are beyond the reach of anybody involved. At times, this conflict transcends the usually low levels of public attention and reaches more important proportions. When this occurs, it becomes the subject of legislative review, as a consequence of which the fundamental relationship between agencies is subject to scrutiny and potential change. Agencies must Antitrust Policy in Regulated Industries 459 then decide whether to advocate for changes in the fundamental relationship, which can have significant effects in the future. Furthermore, there is a risk that potential cooperation will be lost if expected changes do not take place. Spain is a case in point. In this country, the overlapping jurisdiction between the Tribunal de Defensa de la Competencia and sector-regulatory agencies in the field of merger review has finally been settled through legislative action. The need to harmonize the law with European Union principles has also influenced the process. Recently, the government has proposed withdrawing merger control authority from sector regulators.362 In Peru, the 1991 competition legislation did not contemplate merger review. Later, however, such review was introduced in the law creating the energy sector regulator. Today, new legislation is being proposed in which merger review would extend to all industries, but it is unclear whether this change would affect the powers of electricity sector regulator to review mergers in that sector. In the end, coordination between competition authorities and sector regulators is defined more through custom and local practice than rational design. Therefore, attention must be given to timing in the creation of new competition agencies. Competition agencies should be established as far in advance of privatization as possible, even if their formal powers do not come into effect immediately. This gives competition agencies time to familiarize themselves with their new responsibilities, to establish their offices, and to undertake any necessary training. It also provides assurance to consumers that their interests will be protected after privatization and gives potential investors an opportunity to assess the regulatory system before formulating proposals. Most new regulatory agencies can expect a challenging infancy. Besides mastering complex technical issues, competition agencies must establish new and often difficult working relationships with political authorities, regulated firms, consumers, and other stakeholders. In countries in which the requisite skills are scarce, enforcement experience is limited, and there is little tradition of independent public institutions, the challenges can be daunting. Furthermore, life is not made easier for a regulator if privatization remains politically contentious and if the first public evidence of its effects is a price increase allowed by the regulator. To meet these challenges, regulators must have adequate training—not only in such traditional disciplines as law, finance, and economics, but also in negotiation analysis, media relations, and the like. The relation of competition authorities to sector regulators is crucial for implementing competition policy successfully because of the enforcement powers that they enjoy in their respective sectors. It is important, then, to establish their degree of interdependence; otherwise, acute jurisdictional disputes may erode the credibility of the competition promotion scheme as a whole. 362. <www.globalcompetitionforum.org/regions/europe/Spain/Arituclopercent20Elpercent20 Pais.pdf>. 460 11.4.2 Chapter 11 A CASE SHOWS THE NEED FOR INSTITUTIONAL COOPERATION A 2002 merger case in Colombia’s airline industry illustrates the dangers of institutional conflicts between the competition agencies and sector regulators. Aces and Avianca, then Colombia’s two main airlines, decided to merge as part of a corporate strategy to enhance their ability to compete in the fast-changing Latin American airline industry. However, the Superintendencia de Industria y Comercio (SIC), Colombia’s competition authority, rejected the deal, which it perceived to involve severe anticompetitive effects. In particular, the SIC found that after the merger, the airlines would achieve a joint dominant position in the airline market and would therefore unduly restrict competition. In spite of the SIC’s opposition to the deal, the petitioners took their case to the Civil Aviation Authority, which took charge of the matter. Meanwhile, the Superintendent of Trade and Industry tendered his resignation after making public his objections to the deal. In the midst of this controversy, the Aviation Authority said it had reached its decision after looking at the technical and commercial profile of the Colombian aviation sector and its position in the international market. It also accepted a ‘‘failing industry’’ defense initially rejected by the Superintendent. Additionally, the airlines proposed a set of undertakings, including a ‘‘code of consumer rights,’’ which were accepted and are now in force. Although this case reveals the SIC’s lack of political leverage, which is common among competition authorities, it also shows an excessive zeal in the interpretation of antitrust provisions that eventually undermined the competition authority’s position. While in principle the Superintendency was correct in identifying the merger’s risk of creating a dominant position, as airline mergers and alliances can reduce competition and enhance monopoly power, it failed to take into consideration Avianca’s precarious financial position, which was a key factor justifying the deal. International best practices generally enable petitioners to invoke failingfirm considerations in support of the approval of mergers that might otherwise be considered anticompetitive. From this perspective, mergers involving failing firms will enhance general welfare either by increasing the efficiency of existing capacity, redeploying that capacity to more socially valuable uses, or preserving jobs and as well as other socially beneficial impacts. Airline mergers and alliances can allow airlines to lower cost and enhance demand by rationalizing the combined networks and expanding the scope and quality of their services. The relative balance between efficiency and anticompetitive effects must be carefully analyzed, and there is no simple test to ensure that the former will prevail over the latter as a result of a merger. In the airline sector, various remedies intended to offset anticompetitive effects, such as provisions ensuring access to computer reservation systems, access to airport facilities, and an obligation to connect with different airline carriers, are currently employed by competition authorities. Similarly, in the event of dominance emerging from a merger, remedies such as divestiture of slots are useful tools to counterbalance any potential anticompetitive effects. Misled by the conceptual implications of the Imperfect Antitrust Policy in Regulated Industries 461 Competition view, the SIC considered none of these options, but rather focused its attention of the issue of market concentration. This case severely damaged the image of the competition authority. In the view of Miranda (2002), for example, the Aces/Avianca decision ‘‘substantially undermined the position and reputation of the competition authority, and contributed to the splitting of merger control between several administrative authorities.’’ In a similar vein, the UNCTAD Secretariat (2003, p. 17) stated: ‘‘The case is also illustrative of the need of sustained cooperation between competition authorities and sectoral regulators, and harmonization of various national policy objectives.’’ Merger control in Colombia is today in the hands of SIC, the Superintendencia de Bancos (regulatory authority for the financial sector), and Aerocivil (Colombia’s Aviation Authority). This case reminds us that the harmonization of various national policy objectives is an essential component of successful competition policy; once again, this illustrates the need for sustained cooperation between competition authorities and sector regulators. 11.5 ASSESSMENT OF THE INTERFACE BETWEEN SECTOR REGULATION AND ANTITRUST POLICY From a general economic perspective, competition authorities should assess regulatory barriers to competition incorporated in economic and administrative regulation. The way in which this competition analysis is conducted, in the experience of different countries, is often fraught with political economic issues, and competition authorities are often overpowered unless there is a strong political commitment to raising their leverage in overseeing regulatory restrictions. Otherwise, regulatory reform is left to sector authorities, whose activities are not necessarily related to the pursuit of competition, as a matter of policy. From the particular perspective of developing countries, it should be stressed that market structure often raises serious concerns about enhancing efficiency through regulatory reform and opening regulated industries (i.e., utilities) to competition. Often, economic liberalization is undertaken jointly with privatization of such utilities. Until recently, government ownership of natural monopolies was the most common form of intervention in these sectors. However, governments are increasingly questioning the idea that natural monopoly conditions justify the existence of regulatory barriers. Technological evolution, together with a more favorable opinion toward market allocation in these sectors, is paving the way toward increased liberalization. Governments are realizing that stringent regulation and state ownership could erode investment incentives as well as the overall efficient management of these industries. From their outright nationalization of economic sectors in the 1960s and 1970s, Latin American governments have evolved toward the adoption of regulatory regimes in which private firms run utilities subject to progressively less stringent regulatory conditions. This is clearly observable in the case of AU: 2003 reference not listed in bibliography 462 Chapter 11 telecommunications, where technological innovation has brought about a clear reduction of production costs, thereby inviting more competitors to enter the market. Naturally, stimulating further competition by pressing for the liberalization of such industries when the time is ripe is a challenge for competition authorities, which is usually achieved through their institutional involvement in the regulatory activities carried out by sector regulators. In Latin America, the introduction of competition in regulated sectors in the last decade has been largely driven by technological innovation in the respective industry. Moreover, the financial reforms laid down by the Washington Consensus quickly put pressure to liberalize these industries and introduce reforms to their ‘‘public service’’ regulatory regimes. Therefore, as it had occurred in other regions of the World, governments in the region progressively experienced a pressure to open their utility sectors to competition, both by privatizing them as well as adapting a increasing procompetitive regulatory environment. The vertically integrated structure of utility industries that had been encouraged under ISI policies was increasingly subject to pressure. Generation and commercialization of electricity; the provision of wireless telecommunications services, as well as Internet and the commercialization of gas are merely few examples of the impact of regulatory changes in the outlook of these industries. However, in this exercise, governments restrained the introduction of competition through close regulatory scrutiny, where entry conditions and terms were established in detail, thus creating obstacles to new entrants. This is clearly seen in the experience of the telecommunication sector in Venezuela and Mexico, as well as in the electricity sector of Argentina and several Central American countries, where privatization was not followed by deregulation, much less by increasing the surveillance of competition agencies. On the contrary, Latin American governments frequently decided to exclude antitrust enforcement from these sectors,363 and provided competition agencies with few powers to promote procompetitive measures in these sectors, as explained above.364 As concluded by Zhang et al. (2005), performance improvements in sector utility industries are closely related to the quality of regulation; privatization alone does not ensure significant improvements in these industries. Privatization and regulation do not lead to obvious gains in economic performance, though there are some positive interaction effects. By contrast, introducing competition does seem to be effective in stimulating performance improvements. Yet, despite the consensus about the advantages of keeping political interference away from enforcement activity, institutional arrangements between competition authorities and sector regulators are diverse, due to the political tension that exists between the two groups. Hence, optimal regulation should ensure more than mere full accountability and independence from the executive branch of government; it should be particularly careful to draw the scope of action between these groups of regulators in a way that institutions are genuinely geared toward 363. See Section 2.1.5.1, above. 364. See Section 11.3, above. Antitrust Policy in Regulated Industries 463 procompetitive reform. Regulatory reform should acknowledge that isolation from political interference, alone, does not ensure agencies’ optimal performance; it is necessary to clearly define the scope of their respective tasks in order to avoid duplicative activities and institutional clashes with adverse effects on their institutional credibility, as shown in the Colombian Aces-Avianca merger case discussed above. However, it is difficult to eliminate this tension. Perhaps a solution is to integrate both competition agencies and sector regulators into the process of economic reforms. It is no coincidence that competition agencies have obtained a higher leverage in countries where sector regulator interests are not fully developed, and businesses actively cooperate with the liberalization efforts, in order to avoid the political economy problems that usually emerge between these entities.365 Hilke (2006, pp. 15-18) identifies several scenarios: (1) firms in the industry and the regulator are opposed to increasing competition; (2) the sector regulator leads regulatory reforms, but industry incumbents oppose increasing competition; (3) the sector regulator is increasingly retreating from the introduction of competition; (4) the sector regulator is increasingly yielding to the pressure of regulated firms to fold new technology into the sphere of regulator. Sector-specific enforcement of competition policy principles may lead to inconsistencies. Consequently, in the event that they are vested with law enforcement powers, sector regulators should always consult with competition authorities before adopting any initiative. There are clear economic advantages to subjecting infrastructure industries (or segments thereof) either to regulation or to competition. Accordingly, there are no economic reasons for a potential conflict of jurisdiction between the regulatory and competition authorities, since cost advantages clearly delineate the appropriate division of the field. Sector regulators should join in whenever competition at market entry points, in the network, and between networks proves unfeasible, due to high sunk costs, high transaction costs, or economies of scale. Of course, innovation permanently puts pressure upon such ‘‘natural monopolies’’ through substitute products or services that in time may become rival standards. However, in order to regulate markets in the short run, there is no question that the economics profession usually endorses cost advantages as a standard for allocating tasks between competition agencies and sector regulators, which thereby provides us with settled criteria for allocating tasks between competition agencies and sector regulators. In any case, it is important to qualify these theoretical economic standards with the political economy problems that emerge in practical policy enforcement. International experience shows us the influence of other factors in the decision to either regulate exchanges in a given market or industry or to leave them subject to economic competition. Once sectors become subject to the control of regulatory authorities, a political market emerges whereby the entrenched interests of both 365. See Section 11.4, above. AU: Reference not listed in bibliography. 464 Chapter 11 regulators and regulated firms resist deregulation (and the subsequent surveillance of competition authorities). Technological innovation puts pressure on regulators to deregulate the sector concerned, but this does not necessarily occur immediately. This phenomenon explains why competition agencies have greater leverage in countries where deregulation took place before competition policy agencies were created. In these countries the mandatory powers of sector regulators were already eliminated, or significantly reduced, at the time that the broadly based competition law was adopted. Sector regulators in these countries usually conduct regulatory supervision over the remaining areas subject to their purview in close cooperation with competition authorities. In contrast, competition agencies created in countries with no previous deregulation experience often confronted severe jurisdictional disputes with sector regulators, as the latter were particularly reluctant to yield their surveillance powers to what they perceived as small technocratic agencies lacking the technical knowledge necessary for regulating a specific industry. Nevertheless, the dominant pattern for the distribution of roles between competition agencies and regulatory agencies in Latin America is rarely one whereby competition authorities simply replace regulatory agencies. Part III Institutional Assessment of Latin American Antitrust Policy I acknowledge that the antitrust laws are flexible and that they are adaptable to changing circumstances. But this flexibility and adaptability are strong assets, rather than liabilities. (Bingaman, 1994) Chapter 12 The Antimarket Antitrust Policy Agenda A quick look to antitrust case law in Latin America immediately displays the imprecision its legal doctrines; the apparent inclination of rule enforcers to diverge in their views of similar cases; and the unsteady opinions of judges toward business arrangements that formerly seemed to be unquestionably welfare diminishing. What makes antitrust law so volatile and unpredictable? This chapter will explain why the rule of law cannot materialize under antitrust policy, because of the policy’s underlying normative assumptions. These are assumptions that hardly, if ever, businesses meet in their actual market exchanges. Because of this dissonance between what the policy expects from businesses, and what actually they can do, the policy inevitably becomes geared toward undermining the very foundations of market exchanges. This tension emerges particularly visible in the conflicting notions that antitrust enforcers, on the one hand, and businesses on the other hand, possess toward the notion of economic efficiency. Economic efficiency is the key economic notion that supports antitrust legal decisions rest; it constitutes the very gist of the policy goals. Yet, no single definition of economic efficiency exists, and that leads policy enforcers into discussing, on strict moral grounds, what particular blend of efficiency, what social welfare standard, should be imposed through antitrust policy on market relations.366 Naturally, this phenomenon makes antitrust legal standards to appear always unattainable; and contingent to the particular normative opinion of decision makers; not objective analysis of facts. The imposition of unattainable normative standards, in turn, vests antitrust agencies with unlimited administrative discretion, which makes judicial review technically impossible. 366. See Chapter 5, above. 468 Chapter 12 The impossibility of making objective assessments leads antitrust agencies to drop a serious inclusion of efficiencies in the antitrust analysis; and to overemphasize the identification of monopoly power on investigated firms. Latin American case law confirms the unrelenting tendency of antitrust agencies to focus on the monopoly power element, in the view of their incapacity of to accommodate economic efficiency meaningfully in their antitrust analysis. The expected rule of reason analysis, which most Latin American statutes demand from competition agencies, effectively turns into a mere formality. Policy enforcement directs the attention to other questions, such as the existence of potential or actual competitors; the level of market concentration and other indicia related to the measurement of monopoly power. This chapter will conclude with an explanation on how the incapacity to develop a stable rule of law from this procedure translates into murky and questionable property rights, as their integrity ultimately hinges on the particular opinion of a policymaker, rather than on the (rule of) law. In this way, the policy contributes to the concentration of effective economic rights in the hands of less entrepreneurial competitors who can actually raise legal barriers against more competitive ones by claiming that the policy protects them from more ‘‘powerful’’ firms. As result, the effects of economic liberalization are cancelled out; instead, new forms of corporatism emerge in the form of less efficient firms who can succeed in bringing antitrust prosecutions against more efficient firms. 12.1 THE ANTIMARKET EFFECTS OF ANTITRUST POLICY The advocates of antitrust policy emphasize the promarket orientation of this policy. In their view, this policy reinforces market mechanisms because it eliminates business and government restrictions on trade which entail ‘‘market failures.’’ A closer institutional analysis of this policy, however, reveals that its policy objectives are inconsistent with the practical means used to achieve them. The source of this inconsistency ultimately rests on the futility of measuring real market outcomes against competitive equilibrium, as shown above.367 In the attempt of replicating (even getting closer to) the idealistic conditions laid down in the competitive equilibrium model, antitrust advocates persistently see in every form of business or economic organization a potential source of anticompetitive restraints, that either exclude competitors or impose conditions that would have not existed in the absence of it. This biased picture of business relations induces policymakers into taking action against fundamental market institutions; notably, property rights and contractual freedom. These institutions support business arrangements needed to produce long-run efficiencies; businesses’ dynamic adaptation to competitive changes; and the private rules that entrepreneurs need to plan their investments and generate productive innovations. 367. See Section 3.2, above. The Antimarket Antitrust Policy Agenda 469 Antitrust enforcement undermines the emergence of property rights, as key institutions of market competition. Its decision making logic makes government assessments about the assignment of those rights among economic actors, entirely discretional, and not liable for judicial review. This phenomenon extinguishes the entrepreneurial drive toward innovating and creating new ways of reducing productive costs, because economic rewards in this synergy no longer arise from entrepreneurial ability to outdo competitors in the market process; but rest entirely on the alignment of their business conduct to the theoretical premises of those in charge of administering the policy. Since those theoretical premises deny the very purposes of business behavior, which is geared to the seizure of increasing returns and opportunities of making supra-competitive profits, the administration of the policy inevitably clashes with the internal functioning of the market process. Economic rights are effectively allocated by competition authorities through other means different from entrepreneurial drive. Instead of fostering entrepreneurship, antitrust policy creates a renewed form of Latin American corporatism, in which less competitive firms are protected against more efficient firms, who are said to have ‘‘monopoly power.’’ The lack of correspondence between what businesses do and what antitrust policy expects them to do is responsible for defeating the alleged policy’s competition promotion objectives. People negotiate under certain institutional restrictions, because trading with countless people is unfeasible for entrepreneurs; it is cheaper to limit trade to few traders, that is those who can actually deliver at lower costs, thus ensuring the former an effective seizure of increasing returns. Yet, antitrust policy imposes her judgments based on the opposite assumption, that is, the more entrepreneurs in the market, the better. This way of viewing market relations subjects businesses to a permanent state of suspicion before the prosecution agencies; more specifically, it will examine why no certain and stable rule of law can emerge in any area of antitrust enforcement thus conceived. Antitrust policy blames market failures such as monopoly power abuses, for resource misallocation, suboptimal efficiency or consumer welfare harm; however, this reasoning is circular. Antitrust agencies challenge certain business arrangements because they take them to be restrictive; yet, they hold this view because in the economic models they use to reach such contempt business restrictions are taken to be anticompetitive, that is against the assumptions of models that purportedly depict the business world under idealized assumptions that the world will never meet, anyway. In our view, the conventional antitrust interpretation about business restraints is ill-conceived because it begs the question of the purpose that such restrictions have in real worlds. It simply ignores that entrepreneurs are not free to carry out certain business arrangements which appear to be ‘‘welfarediminishing’’ at the blackboard; they are institutions necessary for inducing them to invest. In their investment decisions economic agents are constrained by two essential factors, time and uncertainty. These two factors underpin every business decision, and therefore are relevant for antitrust policy inquiry. In light that entrepreneurs take their investment decisions with regards to the time in which 470 Chapter 12 they expect to obtain profits, it is very clear that such profits never accrue in the short run. The economic goals of antitrust policy, therefore, cannot be conditioned to short-run considerations, which is never to be expected from entrepreneurs’ decisions. Yet, antitrust agencies overlook this phenomenon; as result, the dissonance created between what the law expects businesses to comply with, and what the latter are actually willing to do in order to preserve their profits, inevitably diverges. 12.1.1 THE LOGIC OF ANTITRUST POLICY OF MARKET PROCESSES VERSUS THE LOGIC The antitrust methodology integrates legal doctrines with economic principles. Legal cases are supported by economic analysis, which advocates of competition see as strength of the scheme, due to the incorporation of ‘‘neutral’’ economic concepts supported by empirical, quantitative verification. However, reliance on such economic principles has weakened antitrust analysis when it comes to exploring alternative understandings of competition beyond the premises that underlie the structure-conduct-performance paradigm. It is all too readily forgotten that the vision, or paradigm, of competition prevailing in contemporary antitrust policy is an inherited view that has a specific context within the history of economic ideas; therefore, it is constrained by the beliefs, assumptions, and, most importantly, the research agenda of economic science. Antitrust analysis takes the Imperfect Competition theory from which Industrial Organization emerged as a valid premise for asserting a fundamental link between concentration and performance, which ‘‘justifies’’ antitrust enforcement. Antitrust statutes prohibit business practices to the extent that they are oriented toward a) reducing the effective number of market participants already in the market, or b) impeding potential competitors from ‘‘entering’’ the market, and antitrust legal theories give support to these goals. Business practices are checked if they limit rivalry in the market (the doctrine of collusion); if they impose seemingly excessive conditions upon clients and consumers (the doctrine of abuse of dominance or market power); if they exclude competitors from the market (the doctrine of exclusion); or if they prevent competitors from entering into the market as well as driving firms out of the market (the doctrine of predation). These are all market situations that Industrial Organization theory regards contemptuously; therefore, they are prohibited or controlled through government intervention. In practice, an analyst’s understanding of these concepts hinges on his particular theoretical perspective on market functioning. Thus, phenomena such as ‘‘effective competition,’’ ‘‘monopoly power,’’ and ‘‘markets’’ adopt a structural meaning in the eyes of those who perceive competition as a structural phenomenon whose existence depends on a sufficient number of independent businesses in a given market. Structurally-minded analysts are more likely to attach more relevance to market concentration measurement; to privilege quantitative data over qualitative attributes; and to give heed to market shares and measurable ‘‘entry The Antimarket Antitrust Policy Agenda 471 costs’’ like sunk costs, economies of scale, and capital requirements. Likewise, they will be inclined to disregard qualitative, intangible elements such as strategic business moves. Conversely, if the analyst conceives competition as a dynamic process in which the competitor is permanently driven to seek new information, they will emphasize market dynamics in their analysis. They will, for instance, incorporate a time element in their analysis of the ‘‘antitrust market,’’ thereby assessing the potential exchange of goods and services not only in terms of the goods and services actually exchanged (i.e., the ‘‘product’’ market) or the spatial realm in which those goods are traded (i.e., the ‘‘geographic market’’), but also in terms of the likely emergence of new innovations (i.e., the ‘‘innovation market’’). Furthermore, they will avoid interpreting barriers to entry as absolute impediments to competition; instead they will look into their capacity to delay market entry for a finite period of time. Clearly, under Industrial Organization theory, identifying monopolistic behavior is a difficult task for antitrust law enforcement authorities due to the practical difficulties of discovering the subjective intentions of businesspeople using notions like ‘‘monopoly power,’’ ‘‘antitrust market,’’ and others, whose meaning and practical application ultimately rely on the analyst’s personal understanding of market causalities. Every step of an antitrust investigation is contingent on the analyst’s personal interpretation of the observed phenomena. Under these conditions, establishing with certainty what an ‘‘acceptable’’ market restriction is often proves a daunting task for antitrust policy enforcers. The problem is that legal evidence in this field, in the absence of an outright confession, almost invariably rests on economic indicia, which is more proof that economic theory is, in the end, what organizes competition authorities’ interpretations of market phenomena. As it happens, economic theory is far from settled in this field (as is the case in every field). Under modern economic theory, markets are examined through dynamic models which often justify the need to restrict rivalry at one level in order to induce further investments at another, even if that investment adopts the form of short-run savings. For example, a restriction may seek to avoid further losses in price wars in order to promote competition in the long run through diversified production. Therefore, any conclusion that, for instance, horizontal arrangements are inherently anticompetitive is certainly far-fetched and premature, because it is ultimately a product of the analyst’s perspective, which may privilege short-run allocative efficiency or long-run dynamic efficiencies. Ultimately, the difficulties of antitrust analysis stem from the inherent contradictions of the Imperfect Competition theory that it is based upon. Imperfect Competition failed to develop a theory of oligopolies that could shed some light on the reasons that firms conduct their business the way they do. In other words, the conventional oligopoly theory is a nonstarter inasmuch as it assumes that firms act in isolation in the market, whereas the policy implications drawn from any oligopoly model are to be imposed in markets where various firms simultaneously coexist, compete and collaborate. Yet the conventional oligopoly theory dismisses such contradictions and assumes that a firm’s behavior is actually conditioned by its particular position 472 Chapter 12 in the market alone. Significantly, it does not consider the framework of expectations in which firms conduct their business, even under the very assumptions of implicit collaboration introduced by the oligopoly model. In order to understand the conduct of entrepreneurs in the market we cannot do away with the perceptions and expectations that market agents develop about what other market agents will do or will not do in the marketplace. Competition analysis is not concerned with this fundamental issue, which is the very feature that would explain why, in the first place, firms would be willing to adhere to a common, anticompetitive restrictive discipline. Hence, mistakes in the assessment of market size are recurrent and go beyond mere ‘‘technical’’ problems, despite attempts to improve information collection. The reason for this analytical flaw lies in the way the analysis is conceived, which renders any market measurement virtually impossible. The introduction of leniency schema or improvements in the treatment of confidential information does not overcome the fundamental limitation of antitrust analysis either. The source of the problem is not linked to the insufficiency of market data, but in the sort of conclusions about market causalities that the analyst can meaningfully draw from observed empirical phenomena. This is a problem that is not quantitative, but qualitative; it is not technical, but epistemological. This problem is as follows: Legal proceedings require a positive determination of the existence of restrictive conduct, which entails an exploration of the intentions of the undertaking party. However, the identification of truly monopolistic undertakings for the purpose of imposing legal liability depends on futile objective appraisals of collected data that are meaningless for identifying the real purpose of entrepreneurial activity, whose dynamic welfare effects will take place in the future, not in the past. This is an epistemological flaw that affects the essence of antitrust analysis. The conventional analysis does not give the regulator any meaningful knowledge about the ‘‘causes’’ of entrepreneurial activity because it is simply not concerned with this problem, only with assessing the short-run economic welfare effects arising from an obvious fact: entrepreneurs do not (and will never) operate at socially optimal levels. A closer inspection of the neoclassical economic models underlying antitrust analysis clearly reveals that they have no interest in discovering the intentions of entrepreneurs. They all assume what those intentions are according to the particular type of market in which the analyst assumes that the entrepreneur is operating, whether it is closer to or farther from the Nirvana of equilibrium. 12.1.2 THE DYNAMIC NATURE OF THE MARKET PROCESS Markets are not static, but evolutionary institutions. Such simple insight has profound implications that are neglected by antitrust advocates. Perhaps the The Antimarket Antitrust Policy Agenda 473 most important of these has to do with the understanding of the benefits accruing from market interaction: while the analysis of antitrust focuses in the immediate short-run allocation of social resources; market positive returns only emerge in the long run. The utopian equilibrium view of the competitive equilibrium paradigm, leads competition agencies to overemphasize the short run of market exchanges, and the monopoly power of firms operating in suboptimal markets; by the same token, they underemphasize dynamic efficiencies that accrue in the long run. As a result, they demonstrate a structural analytical bias toward markets that evaluates business conduct according to the economic might of the firm engaging in the conduct and neglects the potential merits of the restriction other market participants. The natural inclination of competition agencies is either to mistakenly regard productive efficiencies as beyond the scope of the antitrust calculation or to underestimate them. As a result, output restrictions always appear more threatening and pervasive than the benign efficiencies they are weighed against. Optimal economic welfare, the goal most often associated with antitrust enforcement, represents an idealized condition where no net costs exist; by contrast, market agents are bound to operate in circumstances where they must face costs in the course of their activities, in order to seek profits. This reveals a profound misconception about the interplay of short-run costs associated with entrepreneurial activities and the efficiencies that such costs bring about in the form of long-run dynamic efficiencies. This is an epistemological limitation of antitrust analysis, a reflection of its notorious bias toward emphasizing short-run market allocation. This bias toward the short run, bequeathed by Joan Robinson’s static Imperfect Competition model, has endured in antitrust analysis, despite all efforts to give the discipline some awareness of the problems of ‘‘market dynamics.’’ In the end, these efforts have made no significant progress; rather, they have made equilibrium analysis more complex. Consider the standard approach followed by competition authorities, that is, the use of price theory in order to establish the net positive welfare effects of a business undertaking. The price theory test requires significant efficiencies that reduce a firm’s costs so much that the firm’s optimal price actually falls, even though the conduct demonstrates (or increases, in the case of mergers) a firm’s monopoly power. Only then can consumers claim to have received some immediate benefit from the business undertaking, so that competition agencies can approve it. Evidently, such a situation is quite rare in practice, since the very existence of the short-run output restrictions embodied in business undertakings indicates that some degree of price increase is likely to follow. Therefore, the test becomes biased against due consideration of productive efficiencies, which always seem incapable of balancing, much less outweighing, output restrictions. This flawed mindset stems from competition agencies’ mistaken equation of two dissimilar, incommensurable categories (Fereyabend, 1970): observed market output restrictions, which create allocative inefficiencies, on the one hand, and long-run, not-yet-visible dynamic efficiencies on the other. 474 Chapter 12 Guided by their conventional static approach to productive efficiencies, competition agencies fail to see the inherent compatibility between monopoly power and the production of long-run dynamic efficiencies. Rather than viewing them in the context of a learning process that creates a positive spill-over (i.e., externalities) to other market participants, thereby reducing total costs in the industry, competition agencies are inclined to condemn such efficiencies as the very material instrument that enables a business to monopolize markets. For instance, seizing scale economies enables one firm, in extreme cases, to displace all other competitors from the market. Clearly, this sort of efficiency would lead to market monopolization. Short-run productive efficiencies are more likely to be seized through improved management of the firm; under these conditions firms will use the best technology available and use existing resources most efficiently, thereby causing production levels to reach society’s production frontier. Significant cost savings arises, however, due to innovation and learning accruing from Marshallian external economies. Under these conditions, businesses develop skills that enable society to move the production frontier outwards. These cost savings are not attainable through improvements in the management of existing resources, but rather through improvements and innovation in production processes that bring about entirely new resources and products. In Marshall’s view, productive efficiencies are not related to the individual firm’s cost function, but are industrywide. Competition analysis takes productive efficiencies verifiable in the short run to be the counterpart of output restrictions, while in fact such efficiencies could only be compatible with market foreclosure or output restrictions if we visualize them in the long run, as a mechanism that will create today the incentive for firms to invest in the production of future returns. In other words, such efficiencies can only be understood in a dynamic, longrun sense, as by-product of Marshallian external economies, that is learning processes that enable firms to produce at increasingly lower costs. Therefore, the tendency of competition agencies is to consider any competitive advantage, such as economies of scale, as a source of monopoly behavior, rather than perceiving it as a source of long-run productive efficiencies. Robinson’s wrong turn, as discussed above, essentially led antitrust thinkers to believe that any exploitation of scale economies is bound to lead to monopoly power, because it did not consider the impact of Marshallian external economies on cost reductions. Again, these external economies develop only in the course of time, in the long run. Under the conventional equilibrium view, all analysis of productive efficiencies remains confined to the evaluation of benefits that the analyst assumes will be obtained from an improved use of existing technology or surrounding economic circumstances, such as economies of scale. No consideration is given to new, unforeseen uses resulting from entrepreneurial discovery (i.e., innovation). The failure of competition agencies to acknowledge the long-run nature of dynamic efficiency biases the whole exercise of antitrust analysis. Williamson long ago noted the danger of such imbalanced welfare calculation. He stated The Antimarket Antitrust Policy Agenda 475 that ‘‘if neither courts nor the enforcement agencies are sensitive to [including productive efficiency in the calculus], the system fails to meet a basic test of economic rationality. And without this the whole enforcement system lacks for defensible standards and becomes suspect’’ (Bork, p. 109). In short, the essential impossibility of the balancing test lies in the fact that it attempts to balance two incompatible (incommensurable) entities—short-run output restrictions and long-run Marshallian dynamic efficiencies. An improper antitrust analysis of dynamic efficiencies renders the analyst liable to overemphasize the significance of output restrictions by consistently finding the existence of ‘‘uncompensated’’ monopoly power. This perception is reinforced by the fact that the actual presence of measurable quantitative restrictions on output contrasts with the merely hypothetical, intuitive nature of shortterm productive efficiencies. It is natural that the opinion of the competition authority is biased in favor of those elements that it can observe readily and directly. It is no wonder, then, that antitrust enforcement overestimates the negative effects of short-run allocation over the positive effects of long-run dynamic efficiencies created by a transaction.368 In order to highlight the incapacity of antitrust theory to assess long-run productive efficiencies arising from business strategies, let us consider the case of naked price fixing, which is considered by antitrust scholars as the most pernicious conduct of the antitrust lot. 12.1.3 THE CONTRADICTION BETWEEN ANTITRUST ASSESSMENT LONG-RUN EFFICIENCIES UNDER CASE LAW AND Guided by the tenets of industrial organization theory, antitrust policy seldom, if ever, admits the possibility that simple (‘‘naked’’) price alignment can increase the welfare of consumers. These agreements are usually condemned as per se prohibited because of the emphasis placed by antitrust theory on the short-run effects of such conduct. Yet in a dynamic long-run perspective on economic welfare, it is possible for price alignment to positively impact consumer welfare. Consider the case of several producers of a particular product for which demand begins to fall relative to productive capacity, with the result that the prices 368. In other jurisdictions, the same criticisms have been made about the way competition agencies conduct their analysis. For example, Korah (1994, pp. 56-57, 267-284) emphatically criticizes the European Commission’s reluctance to give ancillary restrictions a paramount role in competition analysis, thus overemphasizing the ‘‘ex post’’ consequences of past restrictions rather than stepping on the toes of the parties involved in a transaction, whose ignorance about future market conditions causes them to negotiate some restrictions on competition ‘‘ex ante,’’ in order to induce them to trade at all. Similarly, Bork (1978) criticizes the U.S. competition agencies for overreaching by interpreting their mandate beyond what was in fact the ‘‘real intention’’ of the framers of the Sherman Act (in Bork’s opinion), that is, to make consumer welfare the goal of antitrust policy. These criticisms, however, fail to see that this problem is linked with the self-defeating nature of competition analysis, and see it as a failure of competition agencies to implement the competition agenda. 476 Chapter 12 previously charged now exceed marginal costs. In these circumstances each entrepreneur is tempted to lower his price so as to divert trade from rivals and thereby ensure that his firm is working at full capacity. However, if this policy was followed by all, the outcome would be large excess supply. Each firm would fail to increase its own share of total sales, and would find that the increased output it had produced and hoped to sell at a price below its previous level could not in fact be sold at that price. It would have to put up with a larger stock or apply a further price cut. Prices would fall well below marginal costs, and entrepreneurs would sustain heavy losses, depending on the elasticity of demand for the product (in comparison with that of other competitors) and on how large the price cut was. The competitive equilibrium model assumes that this fall stops at the point where prices equal marginal costs (i.e., perfect competition), but in the world of uncertainty in which entrepreneurs interact, this situation reinforces itself: in the absence of any communication between entrepreneurs, further price cuts will result in larger stocks and an inability to place products in the market even at the reduced price. Evidently, taken to the extreme, sheer uncertainty (i.e., no information exchanged between competitors) joined with price competition would result in a massive misallocation of social resources. Moreover, prices depend on the fluctuations introduced by the very uncertain nature of business expectations about the way that a change in prices will be interpreted by other competitors in the market. One seller may wish to raise prices but be afraid to do so in case others do not raise their price as well, or he may not want to trigger a price war by lowering his prices first. Entrepreneurs thus develop certain codes to preempt destructive behavior. For instance, they are inclined to maintain their prices when capacity exceeds demand, in the expectation that their rivals will act likewise. Fear of retaliation is the main driver of such conduct. This explains why in markets where homogeneous products are traded (i.e., sugar, cement, etc.), competitors tend to avoid price-based competition. Instead, they compete on intangible factors that are more difficult to replicate, such as service, delivery, etc. (as it were, ‘‘elasticity’’ of these attributes is lower). Price competition is effected, at any event, in the long run, and it is based upon long-run efficiency cost reductions. Thus, prices do not remain unchanged, but they yield to cost variations and changes in demand. The key factor guiding price competition is the competitive strategies followed by competitors in the long run (e.g., development of superior capabilities). Meanwhile, in the short run, competition is based upon services, quality, and customer service. Perhaps it is for this reason that competition agencies worldwide are increasingly reducing the scope of the per se prohibition against horizontal agreements. In Latin America, however, some recent antitrust statutes have incorporated dynamic efficiency as the qualifying criterion, which may enable restrictive undertakings without immediate compensation to consumers when they promise long-term benefits. For instance, Article 9 of Honduran Competition Act considers ‘‘efficiency improvements’’ such as ‘‘improvements in the conditions of production, distribution, supply, marketing and consumption of goods and services.’’ The Antimarket Antitrust Policy Agenda 477 However, case law in the region is still profoundly influenced by the conventional per se treatment of naked horizontal restraints. Latin American antitrust policymaking, being driven by the Imperfect Competition model, assumes that the likelihood of anticompetitive restrictions is greater in industrial sectors where homogeneous products are traded, because the ‘‘real world’’ markets in these industries will clearly depart from the assumptions of the ‘‘ideal’’ equilibrium (perfect or workable) competition model. Any simultaneous price increase will inevitably be regarded with suspicion. As it happens, antitrust prosecution it is more likely in these industries as compared to others, simply due to the influence of the Imperfect Competition model. Under antitrust rules, however, what matters is short-term competition. The Alcool Cartel case (1999) is a case in point. In May of 1999, 181 alcohol producing firms established an association, the Brazilian Alcohol Exchange (BBA) that would sell under exclusivity agreements all the output of its members for three years. These firms together produced 85% of all the alcohol in the south, southeast, and central-west regions of Brazil, though individually they had under 3% of the national market. The BBA would complement the existence of another association, Brazilian Alcohol (Brasil Álcool), created to store its members’ excess capacity, which amounted to approximately 15% of their total output. The alleged motivation for the creation of these associations was a response to the deregulation of the sector, which drove prices below the average costs of production. This was supposedly a temporary crisis caused by excess capacity that would be corrected in two or three years’ time with the expansion of the consumption of alcohol. The SEAE determined that the parties were in fact forming a cartel.369 Under a dynamic market process perspective, however, this conclusion is unwarranted. In the absence of the associations, in the SEAE’s view, the sector would have likely adjusted to reflect the different productivity levels of the firms. The least efficient would probably have left the market, and others would merge, but the sector as a whole would have survived. However, this is counterfactual, since it relies on mere speculation about what would have happened if circumstances would have been different. One could also hypothesize the an alternative outcome: that an industrywide downward spiral spurred by excess capacity could have caused prices to plummet below efficient levels, thereby inducing everyone out of the market, not merely the least efficient firm. By 369. The SEAE’s report indicated that the creation of the BBA had kept prices artificially high, and that when the government had stopped dictating the prices of alcohol in Feb. 1999, the market had immediately started reflecting the excess capacity through lower prices. Moreover, from Feb. through May 1999, prices had fallen 33.9% for the producer and 16.8% at fuel stations, while prices for gasoline had increased by 14.1%. The first increases in the prices for alcohol had only occurred in May, when the BBA began operating, and since that time they had increased by 216.5% for producers and 73.1% for the final consumer. The SEAE concluded that the existence of the BBA and Brasil Álcool facilitated coordination among the firms, restricting competition and ultimately harming consumers. These associations reduced the member firms’ incentive to improve their production techniques, as any increase in price would necessarily benefit all the producers, regardless of how efficient they were. 478 Chapter 12 maintaining higher prices during a certain period, these associations prevented a collapse of the industry in times of unexpected shock. Moreover, provided that the alignment between member firms was temporary and confined to prices, there was no reason to believe that they would have restrained themselves from competing in other key areas of the alcohol business: distribution; marketing, better consumer service at stations; and many more. The question determining the existence competition (or lack thereof) was not whether price alignment existed but whether other potential entrants were significantly prevented from entering the market, or whether actual firms were impeded from offering other complementary services, during the time of the price agreement. These are the issues usually left aside by competition agencies, due to their analytical emphasis on price alignments. Cases decided in other countries followed a similar rationale. In the Argentinean Chamber of Construction case (2003), the chamber was prosecuted and fined, despite their contention that ‘‘reasonable prices’’ had been agreed to in order to prevent a ‘‘price war.’’ This argument seemed, to CNDC, entirely contrary to the rationale of antitrust policy. Under conventional antitrust principles, this is correct. However, the case might have taken on a different appearance if the CNDC had focused its attention of the absence of entry barriers, rather than on the agreement itself. If the CNDC had taken this approach, it could have determined whether, in the absence of entry barriers, such ‘‘reasonable prices’’ were in fact monopolistic. Under conditions conducive to market entry, in the event that prices were set above competitive levels it would be reasonable to think that new competitors would enter the market and impose discipline on the incumbents. Alas, the CNDC said nothing about entry barriers in its decision. Two cases, Venezuela’s Pro-Competencia v. Cemex and others (2003) and Brazil’s Sao Paulo—Rio de Janeiro Airline Cartel case (2003), show how the short-run allocation notion of competition employed by antitrust authorities may impinge upon the functioning of industries where short-term price competition is irrelevant and firms compete instead based on intangible factors such as service and quality. In the cement case, it would have been very hard for Pro-Competencia to admit that competition exists in this market because prices and market shares are stable. Of course, price competition would have been eliminated; but under a market process perspective, this is merely one—and probably the least important form of competition. Customer service and quality is possibly even more important as a competition driver; after all, trading of a homogeneous product, such as cement, forces traders to differentiate themselves in those intangible aspects of competition that cannot be easily replicated by competitors. Moreover, price competition almost entirely rests on the economies of scale that traders enjoy. Thanks to price stability it is possible for firms to concentrate on building their long-term competitive advantages; this is what eventually makes them price leaders in their local markets. This reveals the wide gap existing between the way that businessmen interpret their own actions, which they view as procompetitive in the long run, and the views of antitrust authorities, which highlight short-term resource allocation inefficiencies resulting from what they perceive to be explicit The Antimarket Antitrust Policy Agenda 479 agreements to fix prices. Pro-Competencia disregarded the long-run dynamic efficiency justification behind the price leadership explanation, namely, that producers trading homogeneous products usually compete on intangible attributes which are more difficult for competitors to replicate: postsale services, maintenance, prompt delivery, individualized attention, etc. Prices, on the other hand, are not the main competition drivers, because competitors can easily reproduce them. Price competition is over the long run: dynamic efficiencies play a key part in the overall competitive process as cement producers closer to cement production plants will increasingly enjoy a competitive advantage. This is hardly an advantage that can easily be passed on to consumers in the short run; however, this difficulty does not mean that long-run efficiencies do not exist. Similarly, Brazil’s SEAE attributed a uniform increase to the computerized system of the Airline Tariff Publishing Company (ATPCO). To reach this conclusion, it focused on proving price information exchanges in order to confirm the existence of collusion among airline carriers. However, the SEAE’s emphasis on price information exchanges is pointless. Let us assume, for the sake of the argument that firms did collude to fix plane ticket prices. Would competition be impaired due to this? In a wider theoretical perspective focused on the long run, fixing plane tickets would certainly have a minimal impact on the fate of competition of the industry. First, as in the cement industry, price competition is not the main driver of competition among airline carriers, albeit for different reasons. While in the cement sector, product homogeneity drives firms to differentiate them based on the provision of intangible services (e.g., attention to particular clients’ needs, customer service, timing of delivery, etc.), in the airline industry, services are usually standardized, so airline carriers ordinarily compete in the pursuit of long-run efficient cost reductions; only exceptionally they do concentrate on price schedules. In the short run, however, competition is based upon services, quality, and customer attention: bigger and better-equipped hubs, availability of connecting flights, immediate and automatic dispatch of luggage, etc. Competition, then, is about developing superior efficiency through better management of services, identifying particular client’s needs, etc., while increasing the reach of connections through cooperation with other airlines (e.g., mile reward clubs and sharing international hubs). Pricing in local markets does not determine the competitive conditions of the whole industry, whereas better outreach and easier flight connections do. In the airline industry, huge investments are needed to meet high fixed costs (e.g., sunken investment costs due to acquisition of an airline carrier fleet, payment for government permits, construction of maintenance facilities, etc.). Evidently, this requires any market participant to fix prices-above-marginal cost in the short run, so as to recoup them in the long run. Whether this is a permanent situation or just temporary does not depend on the inner intentions of the incumbent firms (who would not enjoy being a monopolist?) but on the existence of enough barriers imposed on potential competitors. If these barriers are government-created (e.g., entry licenses, route permits, etc.) then antitrust authorities should not pick up the 480 Chapter 12 wrong suspect, that is, the private firm and if they are not, why blame the incumbent firms, rather than anyone else who is unwilling to take on the risk of investing in such a changing industry? In support of this argument, one can easily see the huge positive social welfare impact created by the elimination of excessive government regulation in the airline industry. Deregulation of the domestic airline industry in the U.S. in the 1970s, led to the emergence of many more airline carriers than ever before; enabled better customer service through the development of efficient ‘‘transportation hubs;’’ and lowered airline fares significantly (Viscusi, Vernon and Harrington, 2000 [1995], pp. 316, 575-576, 589-597). Similarly, in the case Pro-Competencia (ex officio) v. Panamco de Venezuela S.A. (Panamco); Sociedad Productora de Refrescos y Sabores, S.A. (Sopresa) and Presamir, Presaragua y Presandes (Sopresa-Panamco) (2003), soft drink bottlers Panamco de Venezuela S.A., Sopresa, and their subsidiaries, Presamir, Presaragua, and Presandes, contended that their behavior was a classic example of competitive, rather than collusive, oligopoly. Dynamic game theoretical models of retaliation explain the evolution of some markets toward a quasi-standardization of commercial terms. Avoiding retaliation does not necessarily mean, as standard oligopoly models assume, that firms will not compete. Rather, they may avoid competition in certain areas of their business behavior, particularly prices, and concentrate on areas in which competition is harder to replicate, such as services and the promotion of intangible goodwill. The prosecuted firms alleged that commercial conditions negotiated with supermarkets and hypermarket chains had evolved over one hundred years toward standardization of commercial terms, yet competition remained in distribution chains and investments in advertising, placement of products on shelves, and promotions. As for prices, the industry had evolved from a monopolistic structure toward oligopoly. However, Pro-Competencia disregarded these arguments and ordered the immediate suspension of joint and simultaneous identical discounts on carbonated drinks, as well as new, independent negotiations on the percentage of discounts and credit terms given to supermarkets, hypermarkets and other special customers who were part of the affected market. Panamco de Venezuela and Sopresa were fined in light of the extent of the restrictive practice and the harm caused to consumers. No consideration was given to the likely dynamic efficiencies arising from standardization of commercial terms, reduction of transaction costs, and concentrating investments on the development of quasi-exclusive distribution chains. Instead, Pro-Competencia concentrated its attention on whether competing traders had given discounts simultaneously. In the Correo Argentino S.A. v. Sociedad Anónima Organización Coordinadora Argentina (Postal Services case) (2001), this approach led Argentina’s competition body to disapprove a merger request application by the two largest postal services companies. In this case, the parties competed nationwide in several postal services, including basic letter delivery, telegraphic services, money transfers, business services, small package delivery, high security delivery, and international courier services. There were smaller competitors in some of these markets, but the The Antimarket Antitrust Policy Agenda 481 merging firms had the largest and most comprehensive networks. They were the first and second choices for most consumers of these services. The Commission concluded that the increases in concentration in these markets were unacceptably high and that it was difficult to enter these markets, in part because of significant economies of scale. The Commission attempted to estimate the costs to consumers that would result from the merger and concluded that they could range from 18 to 55 million USD per year. Postal services in Argentina were partially regulated, but the only services for which prices were set were letters, telegrams, and small money transfers. Section 16 of the competition law provides that when a merger occurs in a regulated industry, the sector regulator must provide a report to the competition authority on the competitive effects of the transaction. In this case, the National Communications Commission provided such a report detailing the anticompetitive effects of the proposed transaction. The proposed merger was disapproved. It is interesting to note that the Commission rejected the efficiency claims made by the parties, saying that their estimates were not quantified and were ‘‘too imprecise.’’ Instead, it took the conventional short-run antitrust approach, according to which economies of scale were the very source of monopoly profits that the merging parties were waiting to reap after closing the deal. Had the Commission taken a longrun perspective, it would have seen such economies of scale as the very reason to encourage the firms to merge and create a profitable postal business, which would have delivered added value to consumers in the form of a wider array of products, and possibly price discounts—provided, of course, that no entry barriers were imposed. In the Anheuser-Busch/Antartica merger review case (1997), Brazil’s CADE applied a potential competition doctrine that raised a clear presumption against the transaction, as it assumed the increased concentration resulting from the merger to be anticompetitive. Under this theory, the acquisition of a leading firm might reduce competition by eliminating the acquiring firm’s impact on competition (perceived potential competition) or might reduce the prospect of future entry into the market (actual potential competition). Based on this theory, CADE blocked the intended joint ventures between Miller Brewing Company and Cervejaria Brahma (to produce Miller Genuine Draft in Brazil) and between Anheuser-Busch and Antartica (to increase the presence of Budweiser in the country) respectively. In particular, CADE interpreted the association between Anheuser-Busch (a former potential competitor) and Antarctica (a leading Brazilian brewery) as raising anticompetitive concerns, because their agreement provided for discrimination clauses and market segments in which both companies were active. The structural interpretation of the competitive effects of the deal (that is, inquiring into the market shares that would result from the deal) totally ignored that the fact that market shares were notorious for shifting over time. For example, in the period from 1989 to 1995, Brahma’s market share declined from 50.3% to 46.6%; similarly, Antarctica’s market share had declined from 40.8% to 31.9%. Clearly there was a competitive threat to the leading firms from existing competitors. Nonetheless, CADE declined to give proper weight to this piece of evidence, which showed 482 Chapter 12 how companies were actively competing through development of capabilities and core efficiencies. Instead, it embraced the conventional short-run allocation view by applying a dubious potential competition doctrine. In the proposed acquisition of Digitel by Cantv (2005), affecting the Venezuelan telecom industry,370 these flaws were visible in full. On November 21, 2005, Compañı́a Anónima Nacional Teléfonos de Venezuela (CANTV), Venezuela’s oldest telephone company, announced its intention to purchase Corporación Digitel, C.A., for USD 450 million from Italy’s Telecom Italia Mobile (TIM). The merger came about after significant changes had occurred in Venezuela’s telecommunications market. These changes were triggered when Movistar (the leading Spanish telecom company) acquired Telcel, Venezuela’s second-largest mobile phone company (the largest being Cantv’s Movilnet). In order to counteract Movistar’s deep pockets, Cantv offered to buy Digitel, the third-largest mobile operating company. In this way, Cantv expected to gain a competitive advantage over Movistar by acquiring Digitel’s superior technology. However, Pro-Competencia announced that they would not authorize the acquisition because it would lead to the creation of a duopoly in Venezuela. Like most antitrust decisions, on the surface, this decision seemed sensible enough. On closer examination, however, it was a deeply flawed decision that may have harmed the very consumers it was meant to protect. The frustrated deal blocked Cantv, from adding some 1.3 million subscribers, raising its total to 4.3 million and surpassing Telcel (now Movistar), which had 3.7 million lines. It would have also strengthened Movilnet’s competitive position against the onslaught that was expected when aggressive marketer Telefónica de España finalized its purchase of Telcel, by giving the former clear dynamic efficiencies in the form of economies of scale and scope for serving more customers. Digitel, meanwhile, saw its market share shrink from 12.7% to approximately 10.0% (representing just 1.0 million lines). Although this firm had the best technology of any of the companies, it did not have the deep pockets necessary to compete effectively in the ongoing clash of giants. Moreover, it was having financial difficulties and was in no position to make the capital investments needed to compete toe-to-toe with Cantv and Movistar. In the Nestle/Garoto case (2002), CADE also found that no efficiencies would compensate for any price increases arising from the intended merger between the two firms. In no way did CADE explain how it reached such a conclusion: it simply reached this conclusion as a result of its perception that a 58% market share in the hands of the firm that would have resulted from the merger was intolerable. 12.1.4 OVEREMPHASIS OF PRICE COMPETITION Competition law’s overemphasis of output restrictions leads analysts to accept a simplistic structural analysis of collusion in which the likelihood of collusion depends on: (i) the capability of a group of firms to reach an agreement on 370. <www.procompetencia.gov.ve/Opinion%20Publica%20Cantv-Digitel.htm>. The Antimarket Antitrust Policy Agenda 483 terms of coordination that are profitable to its members; and (ii) the ability of the group of firms to detect deviations and punish any firm violating the agreement. Laundry lists of structural and behavioral factors, such as those discussed above,371 have been used to deduce the existence of cartel behavior, just as conclusions about the likely competitive effects of a merger are significantly influenced by concentration. Although these laundry lists include factors such as information, pricing patterns, heterogeneity and market characteristics, the analysis does not explain how these lead to collusive outcomes. Alternative explanations to market concentration may predict whether a collusive outcome will result or whether market competition will prevail: the threat of technical innovation, for instance, may prove a powerful stimulant to competition. A merger between a leading firm and a fringe firm with the newest and best technology could cement the position of the leading firm and allow for some type of collusive price leadership. On the other hand, a merger between two large competitors could have no effect on competition if innovative firms drive the competitive process. Moreover, the power of big or sophisticated competitive buyers is also relevant in this calculation; hence, in addition to evidence of anticompetitive effects of a merger or anticompetitive conduct by major players, there must be additional evidence that it would likely diminish competition, as, for instance, would be the case if the merger extinguished the buying power of one firm (Coate and Rodriguez, 2000, p. 6). Instead of viewing competition as a complex phenomenon in which both price and nonprice strategies are intertwined, antitrust authorities overemphasize price competition as the main driver of competition in market transactions. Nonprice competition (i.e., quality, services, etc.) virtually disappears from antitrust analysis, being entirely overshadowed by price elasticity calculations.372 In this way, the mission of antitrust analysis is to gauge whether supra-competitive prices have been caused by monopolistic behavior, and little regard is given to the likelihood that additional nonprice benefits can accrue from the undertaking being examined. 371. See Section 7.4.1, above. 372. Schumpeter (pp. 84-85) criticized the exaggerated emphasis of neoclassical price theory on price competition by noting that: ‘‘Economists are at long last emerging from the stage in which price competition was all they saw. As soon as quality competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted from its dominant position. However, it is still competition within a rigid pattern of invariant conditions, methods of production and forms of industrial organisation in particular, that practically monopolizes attention. But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control, for instance) competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is as much more effective than the other as a bombardment is in comparison with forcing a door, and so much more important that it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly; the powerful lever that in the long run expands output and brings down prices is in any case made of other stuff.’’ 484 Chapter 12 Price competition is paramount in the context of a given set of products among which consumers choose; this only occurs in short-run analysis, as the analysis typically begins by showing the number of competitors, level of production, etc., that would exist if the market were to reach its ideal competitive equilibrium and then pointing out why any other combination, involving a different point on a given demand curve, would harm the firm’s profits position (Earl, 1995, p. 148). By implication, this logic induces the analyst to brand firms departing from such shortrun equilibrium as antisocial or monopolistic, because ex definition deviation from equilibrium would harm the consumers, as it would reap part of their rent. In short, this approach would confront consumers’ interest with the firm’s, because competition agencies would only look into the welfare effects resulting from price manipulation. By contrast, competition analysis that is focused on the long-run does not consider price competition to be an essential factor because prices are not even representative of finished products that would maximize consumer choices. In the long-run process view of competition, firms are more concerned with making achievements in quality and productivity, process innovations, marketing innovation, and product innovations, which would enable entrepreneurs to step into new markets before their competitors do. The significance of price competition will vary depending on the stage of development of the market. In early stages in a market life-cycle, buyers will be poorly informed about the point of having the product, and concerned about its reliability and whether it will become accepted as the industry standard. At this early stage, the power of brands is quite relevant, as compared to price discounts. Later on, when the product has become increasingly homogeneous and when information about its design and manufacturing has leaked out and become widely known, brand names may count for little as signals of quality and reliability, and price competition may become more attractive to consumers (Earl, p. 149). In short, the lack of understanding of long-run dynamic efficiencies usually distorts the competitive outlook of business undertakings in the eyes of competition authorities. Rather than looking at competition as a complex process that entails both cooperation and rivalry between competitors, they overstate the extent to which rivalry is necessary to a truly competitive market. Seizure of increasing returns is another motivation for business conduct that is usually overlooked by competition authorities, due to their short term, structural analytical bias toward market competition. In a dynamic, long-term perspective on competition, increasing returns are the very source of competition, as they provide the profit incentives that drive entrepreneurs to seek innovative organizational means and enter into a diverse array of institutional arrangements with other firms in order to seize those profits. In the long run, returns of scale would eventually lead to fewer firms in the market, even a single firm in the industry, if there were no external economies enabling other firms to learn and create their own increasing returns by spotting profit opportunities in undervalued market niches. However, this is not necessarily wrong or welfare-diminishing. As Marshall ([1890] 1949) indicates, external The Antimarket Antitrust Policy Agenda 485 economies are an essential source of knowledge that is at the disposal of potential entrants, thus ensuring that competition will be present. External economies enable new competition to enter the market. Young (1928) indicates that this source is also a powerful driver of competition within industries. However, this is not an issue that competition agencies care much about. Due to their emphasis on price competition, they reach misguided conclusions about the current state of competition in Latin America. In their eyes, every form of arrangement appears as a contrived manipulation of markets to eliminate potential downstream or upstream competitors. Their conventional view usually conflates the natural growth of firms and healthy seizure of increasing returns with monopolization of the market. It is assumed that bigger firms will be better positioned to take hold of increasing returns, due to their increased financial might; not to their superior entrepreneurial skills to reap them.373 What they fail to see is that Latin American markets are usually small, with fewer firms in control of large chunks of the market due to causes that may not be associated with the monopolistic conduct of firms which, as explained here, but to the costs they must bear in order to do business in the market. By overcoming such costs, businesses can reduce prices and increase their array of products through investing on developing new ones. The problem of antitrust analysis is that it rests upon a cogent notion of competition which takes as a fact that businesses’ aim their actions at preventing others from doing something, rather than exploring new ways of satisfying consumers, in a legitimate attempt to increase profits. In other words, it is a policy that rests on the idealized assumption about the behavior of firms at competitive equilibrium, whose actions are taken to be normative guidelines of the real world competition, where firms constantly aim their actions at excluding others from the market. Hence, economic growth resulting from the exploitation of increasing returns does not affect the level of dynamic competition that other firms are capable of displaying so long as no artificial restrictions are introduced on the capacity of entrepreneurs to spot and exploit new profit opportunities. These restrictions are imposed through the legal system in the form of exclusions, prohibitions of trading, conditioning trade on certain limitations, and so forth. 373. The conventional perception fails to distinguish between the meaning of both increasing returns and returns of scale. Increasing returns depend entirely on the development of some market niche that is systematically under-valued—a discovery that will be dependent on the satisfaction of other consumer preferences, rather than on the firm’s capacity to affect markets. Returns of scale, by contrast, refers to the individual capacity to obtain financial benefits from the size of the firm’s operations. These benefits accrue from a less rapid increase in production costs relative to increases in output as the number of units produced rises. Thus, while increasing returns are associated to the supra competitive profits that an entrepreneur can expect from discovering a new market niche, returns of scale are associated to plant size. In other words, returns of scale are the likely consequence of the entrepreneur’s discovery of a new, promising market niche; by contrast, increasing returns do not necessarily accrue if the entrepreneur develops a large plant size exploits in an industry growing old, where profits are being dissipated by the presence of many other competitors. 486 12.1.5 Chapter 12 THE PROBLEMS OF BALANCING EFFICIENCIES AND THE RULE OF LAW Antitrust analysis overlooks the role of long-run efficiencies in promoting dynamic competition; hence, they are bound to emphasize short-run allocation efficiencies in the form of price reductions or output increase. In fact, the assumption of the benefits accruing from short-run efficiencies induces them to adopt legal standards of per se prohibitions, usually applied on hard core cartels, which even require no evidence of any anticompetitive effects in the market, which are simply assumed ex lege. Interestingly, however, the narrower scope of per se prohibitions has broadened the array of conduct to be considered under a rule of reason standard. As a general matter, the rule of reason dominates throughout the region.374 Accordingly, legal concerns about respect for due process are leading to increased emphasis on the evaluation of the anticompetitive effects of business restraints under the rule of reason. Yet, there is a resilient difficulty of finding a uniform criterion to make the rule of reason analysis in a way that it does not overlook the importance of economic organization needed in the short run to seize increasing returns that are needed to attain long-term efficiencies needed for businesses to compete in the market successfully. In view of this impossibility, antitrust analysis cannot reach uniform decision making concerning the areas of antitrust enforcement: horizontal and vertical restraints, as well as economic concentration. Usually, antitrust standards require from businesses evidence that the efficiencies claimed by defendants of antitrust prosecutions, are passed on to consumers in the immediate short run. As evidenced in the Chilean case D&S and Falabella (2008) there are serious problems involved in practical enforcement of this rule.375 As result of this difficulty, antitrust agencies usually abandon their attempts of reaching a consistent rule of reason, and focus their attention, somewhat intuitively, on the ‘‘quantitative’’ aspects of the SSNIP analysis, namely, the finding of ‘‘monopoly power.’’ In other words, in the light of the impossibility of making objective assessments about economic efficiencies, monopoly power analysis assumes the paramound role in the competition analysis. This is, for instance, the strategy adopted by the Chilean Competition Tribunal (TDLC). In its latest rulings has interpreted the law in a way that collusion lies halfway between the pure per se and the rule of reason. According to the TDLC, firms engaging in collusion are to be condemned if they collectively 374. Newer competition statutes, as well as recent amendments on existing ones are giving more emphasis to the efficiency reasons that compensate output restrictions. This is the case, for example, of the explicit reference made in Art. 5 of Law No. 45/07 (Panama). This provision sets forth an efficiency clause by which any act or agreement that increases economic efficiency and does not prejudice consumers will be not considered anticompetitive. Similarly, article 4, Law No. 601/06 (Nicaragua) exempts efficient agreements from the scope of the competition statute. Other examples of statutes that incorporate the efficiency clause, and concrete examples are found in Section, above. 375. See Section 5.3.3.2, above. AU: Should be paramount? AU: Provide section cross-reference. The Antimarket Antitrust Policy Agenda 487 possess market power regardless of whether or not their actions led to competitive injury.376 Yet, as we shall see in the next sections, it is also impossible for them to obtain uniform decisions on the questions involved such monopoly power determination. This problem impairs the transparency of the policy at both the measurement of market size and the assessment of entry barriers. Let us examine these problems separately. 12.2 UNCERTAINTY IN THE ASSESSMENT OF MARKET SIZE Do markets have a size? In the logic of antitrust analysis, the whole point of measuring market size is to establish whether firms enjoy single or collective monopoly power. For this reason, the attention of scholars (Coate and Rodriguez, 1999; 2000) is largely focused on how to correct and improve the SSNIP methodology at this crucial step.377 In this opinion, the problem of the antitrust methodology arises in connection with the measurement of the ‘‘antitrust market’’ in which the monopolistic conduct allegedly takes place. In practice, this is always a source of contention between the competition authorities on the one hand and investigated parties on the other, because the analytical boundaries for such measurement are poorly defined. Let us recall that monopolistic behavior arises in the event that market prices charged by suspected firms are above marginal costs. Hence, the antitrust methodology is geared toward emphasizing the role of prices in the competition analysis. Antitrust analysis of market size overemphasizes price behavior as a determinative factor of product substitutability. Yet, this emphasis on the price factor is exactly what makes market size measurement is patently imprecise. Coate and Rodriguez (1999, p. 6), note that competition authorities have a tendency to misapply the 5% to 10% market definition price test. Market definition depends in large part on hypothetical responses to a significant and nontransitory price increase of all the firms in the potential market. Following the U.S. 376. While in the case of Chile the TDLC is close to internationally applied norms, the lack of clarity in the rule leaves open the possibility of wide variation of interpretation of the law. For example, from the point of view of prosecuting cases, the competition agency not only must have evidence that demonstrates that the anticompetitive practice existed, as international standards would require, but also must prove that the colluding companies possessed market power and that their actions allowed them to exercise such an abuse of dominance. 377. For instance, one of the problems these authors note is the inherent tendency of antitrust analysis to misperceive the scope of the antitrust market, because it has a tendency to mismatch both product and geographic markets. However, the evaluations of product market and geographic market are conducted sequentially. As a result, a failure to identify product markets properly may impair the definition of geographic markets. 488 Chapter 12 Horizontal Merger Guidelines, competition authorities in Latin America generally use a 5% to 10% price increase as a standard.378 However, in our view, the problem of the SSNIP methodology is not merely technical but epistemological. The real question is whether this analysis is meaningful at all for the purposes of determining the competitive position of firms in the market. 12.2.1 UNCERTAINTY ABOUT MARKET ANALYSIS THE LEGAL STANDARDS OF ANTITRUST The problems arising with the definition of the antitrust market are not confined to technical flaws, which could be corrected with more information about what the competition price is. Reliance on price substitution brings about another, and more fundamental problem related to the identification of the price to be used as reference to measure price substitution, hence, identification of market size. This problem touches upon a vexed problem of antitrust analysis, namely, how can the analyst establish whether prices charged by firms in the market are the byproduct of monopoly power? Regardless of whether they are competitive or are true monopolists all firms will be found to be unable to raise price profitably from currently observed levels, since under the premises of the model they will already have established a profit maximizing price for themselves. Therefore, the SSNIP methodology will fail to separate the true monopolist that does exercise market power from the firm that does not have monopoly power. This problem was raised by the so-called ‘‘Cellophane Fallacy.’’ In the ‘‘cellophane’’ case,379 the U.S. District Court and the Supreme Court majority considered the question of monopoly power by asking ‘‘can du Pont raise its price profitably for cellophane?’’ and, finding that du Pont would lose too many customers if it tried to do so, decided that du Pont did not have market power and that the relevant market therefore had to be the broader ‘‘flexible wrapping materials’’ market (as du Pont had argued) and not the narrower ‘‘cellophane’’ market (as the DOJ had argued). The SSNIP analysis rests on the assumption that it is possible to measure market size based on measurement of demand elasticities and cross-elasticities. 378. There are many cases in which, due to market rigidities, customers would not switch between suppliers, and even less so between products, even if prices were to climb by more than 5%-10%. In the view of Coate and Rodriguez, then, proper analysis of the 5%-10% threshold would require proceeding the other way around: instead of assessing whether prices increase beyond the threshold, increase the price margin until behavior would change, and see what that level is. These authors suggest that, if customers appear unwilling to switch to a rival’s product, then the analyst should consider revising the magnitude of the price increase or the scope of the market perceived in order to obtain meaningful results. The goal of the analysis is to identify what proportion of customers will switch to other products in the same potential market in response to a price increase. 379. U.S. v. E.I. du Pont de Nemours & Co., 351 U.S. 377 [1956]. The Antimarket Antitrust Policy Agenda 489 To make an accurate assessment of such market size, one needs to measure these elasticities at the competitive price level to avoid the Cellophane Fallacy. However, if one needs to identify the competitive price level before demand elasticities are measured, how do we really know that such price is the competitive one? In other words, how can one define a relevant market before reaching a conclusion about the existence of monopoly power? Also, why bother to define a relevant market and undertake the rest of the monopoly power analysis if one already knows what the competitive price is and thus can compare it to the current price, so to determine that a firm has monopoly power? Clearly, the problem raised by the fallacy stems from the impossibility of measuring the size of the relevant market without possessing any referential price to do so. Estimated demand elasticities and cross-elasticities, by themselves, cannot be used to define a relevant market, particularly in monopolization cases.380 In some circumstances it may be sensible for economists to consider all of the elements of the monopolization case and to develop an internally consistent analysis that aligns with the available factual evidence before reaching a final conclusion about the scope of the relevant market. Antitrust experts (White, 2005; Nelson and White, 2003) consider, for example, ‘‘performance’’ evidence to understand how a market is structured and/or directly determine if a firm has monopoly power. Recognition of the Cellophane Fallacy suggests that the SSNIP methodology is best viewed as an organizational methodology for the presentation of evidence, rather than as a rigid set of sequential steps that must be undertaken in order. In practice, the fallacy has led competition agencies to adopt a harsher position against investigated businesses in antitrust cases. Recognition of the Cellophane Fallacy has made it harder for defendants to obtain early dismissal of cases, since competition agencies easily reach the conclusion that there are significant factual issues that need to be resolved before finding that a defendant lacks monopoly power. Of course, due to the lack of a clear analytical basis from which to derive any conclusions about the existence of a given antitrust market (hence, monopoly power), such analysis becomes highly intuitive. Hence, antitrust enforcing agencies are never satisfied with the information received from market prices to support a prosecution against a firm. The analytical flaw that ultimately impairs the SSNIP method stems from the impossibility of establishing the level of ‘‘competitive prices,’’ in order to establish whether monopoly power does exist. The only way of deducing the existence of monopoly power is through indirect evidence of such power, which is usually highly subjective and unreliable. 380. The fallacy only arises in monopolization cases, where actual prices charged by businesses are taken to entail some degree of monopoly power. In merger cases, the problem is the opposite, that is, actual prices charged by firms are deemed to be competitive, and the question is whether future and hypothetical prices resulting from the merger will remain so. 490 Chapter 12 Antitrust agencies place their expectations in the improvements of data collection to complement price information about demand cross-elasticity. This information includes interviews of clients, corporate documents, trade publications, industry statistics, financial data and changes over time of output, prices and profitability (‘‘time series analysis’’). Yet, in the light of the absence of a reliable methodology for the assessment of monopoly power, all additional information will suffer from the same flaw: that the analyst will have no objective ‘‘competition price’’ available to use as reference for ascertaining whether the investigated firm enjoys monopoly power. In the absence of an objective assessment of the market competition authorities fill the gap with their own subjective assessment, which often does not correspond to the perception of consumers. They conflate consumer preferences with their own preferences. A case in point is Colombia’s P&G—Colgate Palmolive premerger filing case (2004). In this premerger filing by Procter & Gamble (P&G) before Colombia’s SIC relating to the acquisition of Colgate’s soap brand portfolio, the competition authority declined to authorize the acquisition due to the SIC’s perception that P&G’s powder soap brands belonged to a different product market than industrial powder soap brands. In essence, the SIC’s decision depended on its interpretation of ‘‘evidence’’ that poor Colombian households did not use laundry machines. In its interpretation of the evidence, the SIC failed to acknowledge that, while about 70% of Colombian households lack laundry machines, they nonetheless use the same powder soap, albeit in a bucket. The decision turned on the analysis of the competitive effects of an undertaking involving the exchange of certain brands in the Fabric Home Care (FHC) industry between P&G and Colgate Palmolive. The FHC industry is comprised of three distinct kinds of products used for laundry purposes, namely, powder, bar and liquid detergents, cleaners, and bleach. The applicant claimed that the relevant antitrust market was comprised of all products used for laundry purposes, including powder, bar, and liquid detergents. The Colombian competition authority (SIC), on the other hand, identified powder soap used in laundry machines as the product market in this case; as a result, it concluded that P&G had a dominant position in the market. Yet, the data collected showed that all sorts of soaps, whether powder soaps or bar soaps, were perceived by consumers as possessing similar properties and functional purposes, that is, washing laundry; in other words, they were considered substitutes for one another. P&G argued that the SIC had misinterpreted the functionality of bar soap in assigning this product to an independent antitrust market. Furthermore, P&G contended that the SIC did not use accurate data to define the market. In Colombia, only 25.1% of households use laundry machines; yet the SIC contended that the correct figure was 62% of the market. The difference between the two estimates lies in the methodology used by each party. The SIC used data from one study in which researchers interviewed 900 people in four large cities (Bogotá, Medellı́n, Cali and Barranquilla); the petitioners used a statistical study that incorporated 24,090 interviews conducted all around Colombia. The Antimarket Antitrust Policy Agenda 491 Another case will further illustrate the problem of substitution in antitrust market analysis. In the controversial Nabisco case (1996) involving the merger of two producers of saltine crackers, Venezuela’s Pro-Competencia adopted the questionable view that the relevant product market was limited to saltines rather than the broader market of snacks in general, as the merging firms argued. In the opinion of Pro-Competencia, the evidence showed that, unlike other snacks, consumers regarded saltines as a healthy food substitute for meals. The basis of this ‘‘evidence’’ was never revealed in the decision. In a Venezuelan case involving advertising in the Caracas subway system—K Exteriores Publicidad vs C.A. Metro de Caracas (Caracas Metro case) (2001)—a complaint was filed against Sygnos y Gráficos Nomencladores Sygno, C.A., and C.A. Metro de Caracas, for allegedly engaging in anticompetitive practices by imposing conditions on the sale of advertising spaces in Caracas subway cars, which became permanent barriers to entry in the relevant market (defined as the market for advertising in modular units in the cars of the subway system). Pro-Competencia ordered the termination of the practice. It also ordered that a public bid, public offer, or other mechanism be used to award the advertising space in the future. In this case the definition of the relevant market may have been unduly narrow because of the existence of innumerable outlets for advertising spaces that compete with the spaces allocated in the subway system. In view of the amount of time spent in traffic jams in Caracas, it is reasonable to think that advertising space is much more effective above the surface than in the subway system. Pro-Competencia never documented the reasons why it had confined the market to the advertising spaces available in the subway system we can only suppose hat its officers are active users of the system, unlike the majority of Caracas’s commuters, who use ground transportation. In the Venezuelan case Pepsi v. Coca Cola, (Soft drinks) case (1996), as Coate and Rodriguez (1999, p. 11) observe, Pro-Competencia did not consider marginal consumers, only average ones. For example, it did not conduct a price test, which would have shown whether consumer patterns would have changed in the event of a price increase. This would reveal what portion of the market consisted of price-sensitive consumers. The agency only looked at the graphical presentation of price data in order to reach its conclusion that the prices of the alternative beverages were unrelated. There was no attempt to compensate for changes in factors that affect either supply or demand, nor did the decision factor in the behavioral consequences of price controls and the generalized price control regime. These authors contend that in this case it would have been informative to conduct a consumption data review for different beverages throughout the 1990s in order to establish shifts linked to changes in relative prices that would have indicated that the markets were actually broader than Pro-Competencia determined them to be. Thus, the agency concluded that the prices of different beverages were not related; instead, it found that there were six different antitrust submarkets within the carbonated soft drink market. 492 12.2.2 Chapter 12 LIMITATIONS ON THE CONCEPT OF DEMAND SUBSTITUTION Due to their assumption that consumer preferences are stable, competition agencies are inclined to misconstrue product substitution in their assessment of market size. Naturally, this inclination leads the analyst to overstate the possibilities of substitution among existing firms in the market while neglecting potential competitors. Coate and Rodriguez (2000, p. 8) rightly argue that antitrust analysis focuses on the responses of firms already competing in the market in order to measure market size; however, competition analysis should focus on the response of marginal entities, which means including many more competitors. Demand substitution is the central factor in conventional market size assessment;381 the possibility of switching products is dictated by stable consumer choices which are supposed to remain the same over time. These stable preferences delineate markets with clear and differentiated products, which are then referred to the alleged monopolistic conduct of a given economic agent. However, from the long run, dynamic perspective advocated in this book, markets are not viewed as closed-ended boxes which the analyst can measure according to settled econometric standards. The assumption of prices-above-marginal costs that underlies the analysis of monopolistic behavior can only take place in idealized static markets, where information is known by the analyst because he assumes to possess it in full. If he does not have it all, he assumes that it is due to someone else’s fault; he does not consider the possibility that such acquisition is, simply, impossible, due to the very subjective nature of market information. Led by the assumption that the SSNIP analysis can operate because information is somewhere ‘‘out there’’ waiting to be seized and processed, antitrust scholars endeavors are then directed toward examining substitution possibilities among products already existing in the market. The problem with this approach stems from an obvious fact: antitrust authorities cannot know whether observed prices are prices that exceed marginal costs, because market information is not static, but changes from one moment to the next. The SSNIP analysis is only possible ‘‘on the blackboard,’’ and rests on the assumption that production costs which are employed in economic analysis to draw these conclusions, are objective—that they are equally valuable to anyone; yet, in the business world, entrepreneurs make investment decisions or refrain from doing so based on their particular subjective costs, which cannot be translated to third parties. Reliance on the abstract ‘‘prices-above-marginal (objective) costs’’ yardstick can easily lead the competition authority into a tautology: the observed price of product A is assumed to be above marginal costs, merely because no alternative product substitution exists between product A and other products B, C or D, leading to the conclusion that the investigated firm holds monopoly power. 381. See Section 4.2.1.2, above. The Antimarket Antitrust Policy Agenda 493 In fact, the analysis should proceed the other way around: firms impose pricesabove-marginal costs, which is why no substitution takes place. Competitive prices, on the other hand, would enable such substitution to occur. The problem for the static analysis, however, is determining what price should be considered ‘‘competitive’’ in order to have a standpoint from which to conclude that product A has been priced above marginal costs. The only possibility is by postulating monopoly power in the hands of the individual investigated firm. Hence, any firm automatically will be suspect of antisocial, anticompetitive behavior when it has a competence that enables it to produce a good or service that is more reliable or has higher quality and hence, is worth 5% or more (Hunt, 2000, p. 255). Fundamental problems arise from the nature of market size analysis, based on the examination of product substitution. Joan Robinson’s Imperfect Competition model conceptualized firms enjoying monopoly power as monopolists of their own production; thus, facing negatively sloped demand curves. This assumption, coupled with the existence of ‘‘barriers to entry,’’ explained the capacity of monopolists to act unconcerned to their competitor’s reaction, in the event of a price increase. Substitution possibilities were limited by steadiness of consumer preferences. Resting on these assumptions, competition analysis proceeded to define markets on the basis of product substitution possibilities. The analysis of substitution through the use of the mechanical evaluation of cross demand elasticity compares the prices of alternative products. In this view of markets, prices are mere snapshots of the preferences of consumers at a given point in time. However, consumer preferences are never steady but permanently evolve, as consumers change their perception on the properties of alternative goods and services; these perceptions change due to several reasons: product testing; advertising; changes in the commercial reputation of the manufacturers or retailers; the experience of other consumers, and other similar ways. The use of price elasticity, however, drives the attention of the analyst away from market dynamics. Demand and supply curves do not exist and cannot exist in real life in the way antitrust analysis usually depicts them. The assumption that a homogeneous product is traded does not follow the notion that entrepreneurs are constantly striving to differentiate themselves in order to seek and seize increasing returns resulting from the division of labor. The assumption of a homogeneous commodity requires the existence of both homogeneous industry demand and industry supply. However, at the very least, these cases are rather exceptional in real life. 12.2.2.1 Industry Demand is Not Homogeneous Homogeneous industry demand requires homogeneous tastes and preferences. Conventional economics assumes this possibility due to consumer choice theory. Under this theory, individuals’ choices are driven by indifference curves determined by a diminishing marginal rate of substitution (Hicks, 1939), their consumer 494 Chapter 12 preferences are thoroughly defined,382 and their behavior is rational and welfaremaximizing (Earl, 1995, pp. 34-66). However, contrary to the idealized assumptions of the competitive equilibrium model, in real markets demand is heterogeneous and permanently in flux. They are entirely opposite to the notion of ‘‘photograph’’ of the market, postulated by mainstream economics. In fact, modern economics today has abandoned the premises of the conventional system of rationality where Robinson’s Imperfect Competition Model rests. The new scientific research agenda proposes today an alternative ‘‘behavioral’’ perspective for approaching economic behavior. This thinking, founded by Herbert Simon (1957, 1959), is fertilized with concepts drawn from other social sciences different from neoclassic (mathematical) economics: psychology, anthropology, and sociology.383 In the view of behavioral economics, industry demand is heterogeneous because consumer preferences are not steady. Consider the axiom of reflexivity that governs neoclassical consumer preference, namely, that a bundle comprised by three oranges and two apples is as preferable as a bundle comprised by two apples and three oranges; in real life, however, consumers do perceive differences between seemingly similar goods and services based on quality (e.g., not all apples and oranges are equally desirable); location (e.g., the bundles may be available in different shops, with differences in the costs of getting access to them); the time at which the bundles are available (e.g., a shopper may prefer fruit from a particular store with more convenient opening hours); and consumers’ particular circumstances. Naturally, similar criticisms undermine the effective application of the two other axioms (completeness and transitivity), and similar caveats affect the assumptions of rational, welfare-maximizing behavior, for individuals are selfinterpreting creatures who constantly picture the world in which they live according to their beliefs, passions and prejudices.384 382. In conventional economics, rational consumers are assumed to act on their preferences following these behavioral axioms laid down under the subjective expected utility (SEU) model. SEU model was given axiomatic foundations by von Neumann and Morgenstern (1944) and extended by Savage (1954). This model is based on assumptions regarding the decision maker’s preferences regarding a choice set. These assumptions include completeness, reflexivity, and transitivity. The model assumes that the consumer would choose the alternative that offers the highest utility. Through marginal analysis, the negatively sloped consumer demand curve is derived from the consumer’s utility function which is based on SEU model. In economics, the SEU model had been the dominant model of consumer choice. Its axioms have been challenged and there is a debate about its status as a positive or normative model and the extent to which it could be generalized to explain individual choice behavior. See Dubas and Jonsson (2005). 383. It would be beyond the scope of this book to explain in detail the tenets of behavioral economics. In general, see Earl (1995, pp. 67-102). 384. Berlin (1962, p. 1) stressed that human beings (whose interaction constitutes the subject matter of the social sciences) are self-interpreting creatures: ‘‘Men’s beliefs in the sphere of conduct are part of their conception of themselves and others as human beings; and this conception in its turn, whether conscious or not, is intrinsic to their picture of the world.’’ The Antimarket Antitrust Policy Agenda 495 Human beings are not computers programmed for taking binary decisions according to a predetermined code of instructions when presented with two or more choices, as naively assumed under the neoclassical analysis which underlies antitrust policy. Individuals choose differently, following patterns and rules of thumb that make their life simpler. If the rules (i.e., the code of instructions) do not provide them with a solution for the problem at hand, they will change them, rather than insisting on finding a solution within such narrow set of rules. In the words of Earl (1995 p. 67): Life may therefore be seen as the processing of information followed by actions that entail the working through of procedures selected from menus of possible procedures by the rules according to which the information processing has been done. Decision-makers either completely implement their chosen procedures and then bring into play further procedures for deciding what to do next or, if problems are encountered, they switch to other procedures that their information-processing rules deem more suitable for handling the situation. Competition agencies seldom record these changes in their assessment of consumer preferences, because under the conventional assumptions, preferences are taken as stable: otherwise it would be impossible to construct any economic model from them, with a view of making market predictions. Yet, in real-life markets, consumers are permanently changing their views about products they purchase. Hence, in the market analysis advocated in the new thinking on the behavior of economic agents, intra-industry demand is substantially heterogeneous and dynamic: consumer preferences differ greatly within a generic product category and are always changing (Hunt, 2000, pp. 108-109). This assumption is certainly closer to real life than the opposite, conventional view of industries trading with homogeneous goods. 12.2.2.2 Industry Supply is Not Homogeneous Under the assumption of conventional economics, homogeneous supply requires firms to be combiners of homogeneous and perfectly mobile resources using a standard production function, that is, a technology that enables them to combine the factors of production to produce a product. Each unit of labor and capital is identical with other units, and all units can move without restrictions among firms within and across industries. However, in real life, supply differs greatly within a given industry: the firms in most industries cannot be described by the cost curves associated with homogeneous and perfectly mobile resources and standard technology. Resources are significantly heterogeneous across firms because entrepreneurs will organize them in a creative, unique way, according to their particular strategies for enhancing value (i.e., seizing increasing returns). Similarly, they are imperfectly illiquid; they are not commonly or easily bought or sold at the marketplace. (Hunt, pp. 128-130) In short, ‘‘all modern theories of the firm assume (often implicitly) that capital 496 Chapter 12 assets possess varying attributes, so that all assets are not equally valuable in all uses’’ (K. Foss; N. Foss, P. G. Klein, S. K. Klein, 2001, p. 7). Now, if differentiation is a pervasive feature of both market demand and supply, it follows that the antitrust concept of a firm enjoying monopoly power thanks to its capacity to dictate prices in homogeneous markets, (see Figure 3-1 Profit Maximization for a Monopoly Firm), is untenable. In this graphic representation, the notion of price competition is meaningless (Hunt, p. 254). Hence, competition agencies err when applying their analysis, which is based on the implicit assumption that consumers, based on indifference curves, shape their demand in such way that they choose goods and services according to their perceived utility. The analytical flaws of the SSNIP can hardly be corrected through more empirical data, whether drawn from direct price substitution, or from indirect sources. In sum, from the viewpoint of the legal process, this indeterminacy about the methodology to be employed in assessing market size leaves competition agencies with qualitative measurements about interchangeability based on the wavering opinion of focus groups, and sometimes nothing more than intuition. In the absence of objective measurements, competition agencies are inclined to conflate their own perceptions about product interchangeability with the markets’. 12.3 UNCERTAINTY IN THE ASSESSMENT OF BARRIERS TO ENTRY Antitrust analysis cannot determine, on the merits, whether a given market arrangement constitutes an effective ‘‘barrier to entry’’ in the sense that it creates illegitimate impediments or otherwise forecloses the market to third parties. As result, it turns away from the evaluation of the entry issue itself and instead focuses its inquiry on whether the alleged exclusion is being carried out by a dominant firm in the market. In this way, monopoly power, rather than entry, becomes the crucial factor in triggering antitrust sanctions. This outcome is not accidental. The analysis of entry barriers carried out under conventional economics emphasizes the existence of obstacles that impede entry into the market. The market is conceived as a box or closed-ended idealized space in which products are traded within certain geographical boundaries. Naturally, from this perspective, it follows that entry barriers are to be conceptualized as impediments that limit the possibility of substitution among either competing products or geographical territories. The conceptualization of entry barriers, however, leads the analysis into a dead-end road, because there is no possible way of evaluating such substitution in an objective way, that is, detached from the views of economic agents themselves. Given the practical existence of heterogeneous markets, in which industry supply varies, and consumer preferences permanently overlap and change, there is no objective way of establishing product or geographic substitution. The Antimarket Antitrust Policy Agenda 497 It is for this reason that scholars have failed in reaching a uniform definition of ‘‘barriers to entry.’’ As an OECD report (2006, p. 9) acknowledges: ‘‘[t]he concept of barriers to entry is important in many areas of competition law and policy, but the question of exactly what constitutes an entry barrier has never been universally resolved.’’ Accordingly, it is not surprising that doctrinal discussion focuses on which particular notion of entry the competition authority endorses; once this is established, and then the rest of the logical implications follow in determining whether a given firm has been forced out of the market. In the end, antitrust analysis becomes influenced by the particular version of the structure-conduct-performance (SCP) paradigm embraced by the antitrust authority, be it Bain’s (i.e., structural) or Stigler’s (i.e., behavioral). Thus, one can see that competition agencies today are interested in strategic as well as structural barriers. Their analysis concentrates on determining how long, in light of business strategies, it would take for potential competitors to enter the market should a supra-competitive price increase occur; however, they also regard structural obstacles as potentially undermining entry into the market. The foregoing illustrates how discretionary antitrust analysis is and why it has a negative impact on institutional predictability. In the past, because of their structural view of markets, economists attempted attain predictability by developing indexes to measure market concentration, but they where unsuccessful. Today, time delays are regarded as a more important measure in establishing whether barriers to entry are significant. Let us see whether this new assumption is tenable. 12.3.1 TIME OF ENTRY AS PROXY: A SOLUTION? In the absence of uniform meaning, each authority will apply its own interpretation of what economic phenomenon constitutes a barrier to entry, thus adjusting the outcome of the antitrust inquiry to the cogent notion chosen, instead of interpreting facts according to a notion known in advance. Naturally, this imprecision has to do with the nature of legal analysis on antitrust matters, where economic facts are perceived through the economic theories that policymakers choose to examine markets, a selection which is ultimately discretional, as we shall see later in this chapter.385 Scholars have reacted to this critique by evading the problem altogether. Carlton, for example, notes ‘‘the interesting question for competition authorities is not whether price will eventually equal the competitive level after entry occurs, but how long it will take for that to happen’’ (OECD, p. 10). Salop (1986) also notes that the longer entry would take to accomplish, the less likely fear of entry is to deter an incumbent from raising its prices. This is true because incumbents not only have more time to earn supra-competitive profits in the interim, but they would also have more time to adjust their pricing between the time an entrant begins to enter and the time it completes its entry and becomes an effective competitor. 385. See Section 12.4.4, below. 498 Chapter 12 Antitrust scholars therefore suggest that time of entry, rather than entry itself, is what should become the focal point of attention in the analysis of market restraints. The relevant time period is that which is required not only to accomplish entry itself, but to gain enough sales to become a significant competitive force in the market. It may take a substantial length of time, for example, not only to build new manufacturing plants, but to overcome buyer inertia or preference for a previously established brand and win enough customers to have a downward influence on the incumbent’s price. Yet, what length of time is enough to consider that entry delay is illegitimate? After all, the very presence of an incumbent in the market creates an obstacle for the newcomer, in the sense of presenting him with a competitive challenger to overcome. Each industry will have its own specific requirements, whose knowledge creates delays for a new firm entering the market. The OECD (2006, p. 10) notes the difficulties on setting specific statutory timeframes to use as reference in this connection: ‘‘There probably is no perfect place to draw a line between significant and insignificant delays, but many competition agencies have chosen two years as the appropriate benchmark in their guidelines’’ (Author’s emphasis). Usually, two years is taken as a reasonable limit for a timely response from outside firms. It is conventionally accepted that if entry takes place within a year, then barriers to entry are insignificant; if entry takes place between one and two years, then they are moderate; and if it takes longer, they are considerable.386 In fact, most competition agencies conduct factual and flexible case-by-case investigations of entry conditions rather than engaging in formulaic or purely abstract inquiries into what constitutes a barrier to entry. Therefore, although two years is usually cited in guidelines and manuals as a reasonable time for entry the fact is that this measure may be superseded by other factors based on a case-by-case determination. In other words, competition authorities seldom, if ever, establish how long entry of a given firm into the market must be delayed in order to qualify as an ‘‘entry barrier.’’ This conclusion is reaffirmed in the evaluation of case law. Two merger cases in Brazil’s retail market illustrate the difficulties faced by SEAE and SDE in correctly assessing barriers to entry to the supermarket industry. In the merger between Bompreço Bahia S.A. and Petipreço Supermercados Ltda., (2005) the company Bompreço Bahia SA acquired the company Petipreço Supermarkets Ltda., owner of six stores, supermarkets and hypermarkets, located in the cities of Salvador and Lauro de Freitas, in the state of Bahia. The size of the product market was defined as integrated sales services, offered by supermarkets and hypermarkets. The geographical size was defined in terms of three markets: the city of Salvador was divided in two markets (Markets 2 and 3), while the city of Lauro de Freitas was regarded as the third geographic market (Market 1). The shares, after the operation, the three markets examined were found to be in: market 1 to 74.50%; market 2 to 69.66% and market 3 to 59.33%. For the three 386. See Section 4.2.6, above. The Antimarket Antitrust Policy Agenda 499 markets concluded that there was no effectiveness of the rivalry able to inhibit a possible abuse by the company Bompreço. Also SEAE conducted the analysis of the conditions of entry. For markets 2 and 3 concluded that ease of entry could counteract Bompreço’s exercise of monopoly power. Meanwhile, the same does not occur in relation to the market 1. Thus, undertake an analysis of the efficiencies generated by the transaction. However, bearing in mind that these are presented in vague and without proof, it was considered that the net effect of the merger is negative. However, in July, 2004, CADE approved the merger on the condition that the parties sell one of their stores in the relevant town. In September, 2004, a large supermarket (Atacadao) opened halfway between the two stores owned by the merging parties (one of which was the store that CADE had ordered them to sell). Due to this entry, the parties petitioned CADE to reconsider its decision, and in August 2005, CADE approved the merger without restrictions and cancelled the obligation to sell one of the stores. It is fortunate that CADE reconsidered its previous decision, but the very entry of the new competitor showed that CADE’s previous conclusions grossly overestimated the existence of barriers to entry. In the Peralta Comercial e Importadora Ltda case (1999), Companhia Brasileira de Distribuição (CBD) better known as Pão de Açúcar (a supermarket chain that perennially vies for first place in the Brazilian supermarket industry with Carrefour), attempted to merge with Peralta, (a medium-sized supermarket chain, although it ranked among the top twenty chains). The merger was submitted for review in 1999. Based on its calculation of Minimum Efficient Scale387 in the industry, the SEAE concluded that entry was difficult in four towns. In these towns, the markets were characterized as highly concentrated, without effective competitors, and with small sales opportunities, all of which could make entry more difficult. Accordingly, the SEAE recommended approval of the operation subject to certain restrictions with respect to towns mentioned above. However, because nearly six years elapsed between the beginning of the merger operation in February 1999 and January 2005, when the proceedings reached CADE, the reporting commissioner determined that it would be appropriate to re-examine the original conclusions about barriers to entry in light of what had actually happened in the intervening time. Interestingly, CADE found that there had been a number of entries in the towns discussed above, except for the town of Cubatão. The SEAE’s conclusions about the existence of barriers had proven wrong ex-post facto. 387. The minimum efficient scale (MES) is the output for a business in the long run where the internal economies of scale have been fully exploited. It corresponds to the lowest point on the long-run average total cost curve and is also known as the output level of long-run productive efficiency. The MES is rarely a single output level—more likely it is a range of output levels at which average cost is minimized where the firm achieves constant returns to scale. The MES will vary from industry to industry depending on the nature of the cost structure in a particular sector of the economy. 500 Chapter 12 In September 2005, CADE approved the merger without restrictions based upon the entry of competitors in three of the towns and the finding that in Cubatao, where no entry had occurred, the effective rivalry was strong enough to reduce CBD’s market share. Again, CADE acknowledged that SEAE’s conclusions regarding barriers to entry were overstated. Other examples clearly show how the competitive analysis conducted by Brazilian competition authorities has consistently overestimated the significance of barriers to entry in retail markets. Analyzing mergers ex post allows CADE to reconsider some criteria adopted by the investigative bodies by investigating what really happened to the postmerger market. In any case, the assessment of competition clearly led to a systematic overvaluation of barriers to entry. Brazil is far from the only country in the region that has demonstrated analytical problems in its competition analysis. In the Venezuelan Pepsi v. Coca Cola, (Soft drinks) case (1996), ProCompetencia declared Coca Cola’s intended asset acquisition of the Hit bottling company and brands, as well as the exclusive distribution agreement between the parties, illegal on the grounds that it increased Coke’s market share from a mere 10.8% of the carbonated soft drinks (CSD) market to at least 82%. However, ProCompetencia’s decision was marred by multiple flaws, including the failure to engage in a technical analysis of barriers to entry as antitrust methodology (e.g., the U.S. Horizontal Merger Guidelines) would require. In addition to other errors (such as relying on the analysis of data from average consumers rather than marginal ones), Pro-Competencia utterly failed to consider the ease of entry in this market, and determined that ‘‘diet’’ and ‘‘regular’’ CSDs comprised separate antitrust markets. In particular, it failed to weigh the potential competitive influence of supply-side responses from competitors who were positioned as likely entrants. If the competition agency had considered whether the most likely entrants could have responded to a price increase within a year by using their existing plants or adding productive capacity without the expenditure of substantial sunk costs, it would have had to conclude that there was more than enough competitive strength in the market to counteract an exercise of monopoly power. Pro-Competencia mistakenly concluded that brand-name advertising was an insurmountable barrier to entry; in doing so, it failed to see that the relevant question was not the effort required of a completely new entrant in the market, but rather the existence of likely entrants, such as Pepsi. Indeed, after fifty years in the Venezuelan market, it is hard to argue that Pepsi would be forced to make the sort of investment in advertising that Pro-Competencia deemed to be an insurmountable barrier to entry. As events unfolded, the market proved to have more than enough competitive capacity to respond to Coke’s move: thanks to its strong brand name, Pepsi easily reentered the market by allying with Polar Group, a wellestablished local beer manufacturer and distributor (Coate and Rodriguez, 1999, pp. 11-12). More recently, in the Cantv-Digitel merger review case (2006), ProCompetencia denied the parties’ merger petition, finding that the fact that potential competitors usually had to negotiate interconnection agreements with Cantv The Antimarket Antitrust Policy Agenda 501 constituted a barrier to entry. The argument is a disingenuous one, inasmuch as there was no reason that Conatel (Venezuela’s telecom sector regulator) could not regulate interconnection agreements if needed. Until now, there has been no need, inasmuch as Cantv has negotiated approximately one hundred such agreements, and only on six occasions has the other party found it desirable to ask Conatel to become involved in the negotiations. Pro-Competencia’s study hardly mentioned the two most formidable barriers to entry at this time—Conatel’s reluctance (or refusal) to grant potential competitors easier access to the network and the huge sums involved in an effort to establish a nationwide service. The study also gave too little weight, in our opinion, to the fact that Cantv’s ‘‘dominant position’’ was and is something of a myth. The company is being forced to compete in almost all of its businesses. For example: (i) Telcel (its main competitor) has installed some 600,000 ‘‘fixed-line’’ wireless phones in areas served by Cantv’s copper and optical cable network; (ii) Cable TV companies are already offering internet service and are contemplating entry into the fixed-line market; (iii) There are eight companies that compete with Cantv for international long-distance telephone service (not including voice-over-internet services), six offering domestic long-distance service, and five offering local ‘‘fixed-line’’ telephony. Cantv may still be the volume leader in most of these categories but, as might be expected, it is facing the stiffest competition in its highest-profit areas. In the view of some scholars, the flaws of these decisions can be traced to a deficient evaluation of barriers to entry that is ultimately rooted in a failure to correctly apply the standard techniques of competitive analysis. In this connection, under the U.S. Horizontal Merger Guidelines, the evaluation of a merger’s anticompetitive effects requires supporting evidence of actual entry. However, the responses collected from firms in the market on how difficult entry is may represent the subjective opinions of businesspeople about their interest in entering the market rather than the necessary information about scale economies and sunk costs, which is what determines the existence of barriers to entry under antitrust analysis. Coate and Rodriguez (1999, p. 7; 2000, p. 19) believe that these flaws can be corrected through appropriate adherence to the guidelines.388 However, in our view, these examples present a deeper question about the compatibility of the analysis with the material analyzed. In practice, the very conceptualization of barriers to entry is what leads the analysis off the track. At the end of the day, it is irrelevant whether we ask, as Carlton does, how long it will take for a supra-competitive price to drop after entry occurs or merely whether 388. In the view of Coate and Rodriguez (2000, pp. 19, 20) the U.S. Horizontal Merger Guidelines offer enough safeguards to prevent any misuse: ‘‘instead of asking for intentions, the Guidelines focus on relevant information and then deduce the answer on ease of entry from the weight of the evidence.’’ Therefore ‘‘as Competition accepts more sophisticated models of entry, it is important to focus on the correct question of what the entrant could profitably do rather than the hypothetical responses of readily identifiable firms.’’ Thus they conclude that, ‘‘by applying the Guideline techniques, the analyst can obtain a reasonable answer to the hypothetical entry question.’’ 502 Chapter 12 entry will occur at all. In the end competition authorities will end up giving preference to their own blend of obstacles for entering into the market and will brand them so, to the detriment of alternative explanations. For example, the analyst cannot decide whether a particular exclusive supply contract, which is by definition oriented toward the exclusion of all third parties, would be competitive if it is negotiated for less than two years, in comparison to one which is negotiated for a longer period. There is no objective way of identifying anticompetitive effects in such contract, but with reference to economic factors, all of which exogenous to a particular time frame. These include: the position (i.e., market share) held by the signing parties; the number of clients; the presence of actual competitors; the speed of technological change in the industry; the changing pace of consumer preferences; and any other factor which is deemed to be relevant. To put it differently, the natural inclination of competition authorities is to support their cases by selecting whichever approach fits its own interpretation of the case. For this reason, the requirement that competition authorities examine whether entry will be ‘‘likely, timely, and sufficient’’ to remove concerns about possible anticompetitive effects is a statement devoid of any practical content. 12.3.2 IMPRECISE LEGAL STANDARDS OF BARRIERS TO ENTRY In light of the uncertainty surrounding what exactly is a barrier to entry, competition authorities employ a combination of criteria in their examination of entry barriers, but they are all confronted with the same flaw: the impossibility of identifying with precision what factors should be considered in the calculation of restrictive effects caused by barriers to entry. The antitrust literature has been unable to solve this problem. For example, Schmalensee ([2004, pp. 471, 473], quoted by OECD, 2006, p. 39) has proposed that the height of entry barriers can be assessed simply by measuring the amount of sunk costs that potential entrants would need to incur. This method would be consistent with the goal of protecting consumer welfare. The smaller sunk costs are, the lower the market price will be, and thus the higher consumer welfare will be. In principle, Schmalensee’s method appears to provide a fair account of the relevance of sunk costs on entry; however, on closer inspection it does not provide any meaningful policy guidance, because knowing the magnitude of sunk costs does not tell much about the relative context which policymakers must decide upon. Consider sunk costs estimated at USD 10 million, necessary to build a cement producing plant. Are these costs ‘‘too high’’ or ‘‘too low’’? The answer to this question depends on the particular financial position of potential entrants, which is influenced by their own investment decisions in the cement industry as well as in any other industry. One firm might consider it worthwhile to risk such funds to enter in the cement market if expected returns are above such amount plus variable The Antimarket Antitrust Policy Agenda 503 costs. Other firms may find it excessive to bear such financial risk. Furthermore, a firm may change her decision to invest USD 10 million in a cement plant, if there are alternative industries or ventures offering better returns in exchange for less risk. Hence, ‘‘it would be impossible to construct generally applicable indexes that offered policy guidance based on the level of sunk costs alone. ( . . . ) Entry barrier analysis may simply need to be too case-specific for reliance on either general quantitative guidelines or a single statistical indicator’’ (OECD, p. 40). Salop (1986, pp. 551-552) has proposed a method aimed at overcoming the problems arising from drawing untested conclusions out of mere hypotheses about entry, particularly in light of cases where factual evidence seems to contradict theory. Salop’s method is intended to devise a mathematical way to measure entry barriers, which he classifies in four categories: (i) cost and demand advantages; (ii) time to entry; (iii) sunk costs; and (iv) economies of scale. For example, competition agencies can compare the relative costs of both the incumbent and the entrant firm, in order to establish how much discount entrants should provide to offset perceived differences in quality in comparison with incumbent firms resulting from cost and demand disadvantages, such as restricted access to intellectual property rights and other resources, reputational effects, and brand loyalty. For instance, if the incumbent’s costs are 15% below an entrant’s, or the entrant must offer a 15% discount to overcome brand loyalty to the incumbent’s product, then the entrant would be unable to stop the incumbent from raising its price by, say, 10%. Similarly, competition agencies could measure the total sales a hypothetical new entrant would need to achieve in order to earn a sufficient rate of return on its invested capital to justify its entry, or as Salop calls it ‘‘minimum viable scale’’ (MVS) (Salop, 1986, pp. 551, 563). If such MVS cannot be reached, then the entrant’s average costs will be too high to give it a satisfactory return. High MVS s will discourage new entrants from entering in the market. Salop’s methodology does not provide competition enforcement with clear policy guidelines to quantify the impact of entry barriers, no matter its seemingly mathematical formalization. Consider the case of a patent which, in Salop’s view, provides the incumbent with a cost advantage vis-à-vis its potential competitors. How can a competition agency calculate whether the costs resulting from the protection of the incumbent’s patent right are X percent higher or lower than that of a competitor? Indeed, in view of absolute prohibition imposed upon nonpatent holders to use such technology, can a new entrant hypothetically invest funds to overcome such absolute barrier to entry? Are these costs related to the development of new products that can effectively compete with the original one (‘‘inventing around the patent’’), without triggering a law suit for alleged infraction of patent rights? Similarly, his analysis of MVS is contradictory. The smaller MVS is, the more likely it is that entrants can reach viability without being so large that they irritate incumbents and cause them to cut their prices (OECD, 2006, p. 42). Such price cuts 504 Chapter 12 are exactly the result that is needed for entry to be considered ‘‘sufficient,’’ but they would reduce entrants’ profit margins and thereby increase their MVS, making entry less attractive. In other words, Salop’s analyses postulates a tension between sufficient entry and attractive entry. The lack of defined criteria, naturally, undermines the rule of law. Competition agencies, of course, find the lack of a specific criterion convenient, in order to provide for more ‘‘flexibility.’’ As noted by the OECD (2006, pp. 9-10): In recent years, several competition scholars have concluded that the debate about entry barriers should be considered irrelevant to competition policy. What matters in actual cases, they argue, is not whether an impediment satisfies this or that definition of an entry barrier, but rather the more practical questions of whether, when, and to what extent entry is likely to occur. Most, but not all, competition agencies in OECD countries agree with that view. Some, however, have found that having a precise definition of entry barriers is helpful. In New Zealand, for example, lower court decisions would have posed problems for the competition agency if higher courts had not adopted a clear definition of entry barriers. In Latin America, the imprecision about the notion of entry barriers is well exemplified by the case of Brazil’s CADE, perhaps the most experienced antitrust agency in the region. A paper submitted by Brazil to explain its domestic policy regarding barriers to entry, embodied in the Guideline for Economic Analysis of Horizontal Mergers and in CADE’s Resolution No. 20, stated that: emphasizing the asymmetry between incumbents and entrants, the Guideline adopts the Stigler perspective. However, the same Guideline lists some examples to be considered as barriers that reveal the underlying Bain’s approach:389 (a) sunk costs; (b) legal or regulatory barriers; (c) resources exclusively available to established firms; (d) economies of scale and scope or both; (e) degree of interaction in the production chain; (f) consumers’ loyalty to existing brands; and (g) threatened reaction of established competitors, as mentioned in the SEAE paper. (OECD and IADB, 2005a) Where horizontal mergers are concerned, competing Bainian and Stiglerian views are mingled together in the practical enforcement of Brazilian antitrust rules thus far. Furthermore, CADE Resolution No. 20 takes a similar approach to the analysis of antitrust violations: With respect to conduct, Resolution No. 20, which is considered as a guideline for violations analysis, tries to clarify the concept: In view of the existing entry restrictions, a Competition analyst must evaluate the probability of firms outside the relevant market entering such market quickly enough and with an output rate sufficiently high to compete with established firms. Sometimes 389. See Section 3.3.2, above. The Antimarket Antitrust Policy Agenda 505 Stigler’s approach is useful, according to which barriers to entry would lie in asymmetries between established firms and potential entrants. The entry barrier would be the costs which must be borne by the entrant, but not by the established firm. However, the Resolution does not end the debate and lists as examples of barriers the list proposed by Bain, including economies of scale. According to the cited Resolution, the assessment of barriers is based on the probability that the potential players that are outside of the defined relevant market will enter and start working in a way sufficiently fast and with a quantity sufficiently high to contest the existing firms—a definition fully consistent with Bain’s approach. So, in the end, one is left with confusion as to whether it is actually Bain’s or Stigler’s definition that underlies the Brazilian approach to such a sensitive area of antitrust enforcement. The uncertainty of the Brazilian rules for the assessment of barriers to entry in particular cases is replicated in other jurisdictions. Frequently, the interpretation of entry barriers changes depending on the executive team in charge of the competition authority. For instance, between 1994 and 2000, Peru’s INDECOPI adopted a dynamic method for the analysis of monopoly power. In the Poultry case CLC (ex officio) v. empresas avı́colas (1997), INDECOPI brought a case against several processed chicken-meat producers for aligning prices, marketing conditions, and levels of production, thereby raising entry barriers and attempting to exclude incumbent competitors. INDECOPI defined the market as consisting of those competitors who were concerned about a potential ‘‘over-supply’’ of live chickens. The investigated firms were afraid of an excessive supply, in INDECOPI’s opinion, since they all belonged to the same relevant market. The Tribunal for the Defense of Competition noted that: ‘‘The language used (in these communications) reveals a common concern by the attending firms (to the meeting) and a common valuation of the consequences of the announced ‘over-supply’’’ (INDECOPI, 1999, pp. 141-142). Accordingly, INDECOPI’s monopoly power determination not only considered structural elements such as demand substitutability, but also dynamic elements such as firms’ perceptions regarding their competitors. This perspective seemed to follow from INDECOPI’s general philosophy toward anticompetitive restrictions, which was then heavily influenced by the Chicago School of Economics and its contempt for both government restrictions and structural antitrust analysis. As a report (OECD and IADB, 2004c, p. 14) stated regarding this period: To some extent, INDECOPI’s preference for promotion over coercive action (except in striking down anti-competitive government regulations) manifested the generally accepted approach to introducing competition law and policy, but it also reflected what may sometimes have been excessive reliance on ‘‘Chicago School’’ theories, and some experts argued for a more proactive, law enforcement approach. 506 Chapter 12 Since 2000, INDECOPI’s opinion regarding antitrust restrictions has changed considerably. Similarly, Venezuela’s position toward entry barriers has wavered over the years. Prior to 1998, Pro-Competencia took a tough approach to mergers and acquisitions as well as structural barriers to entry. Between 1998 and 2000, the agency was lead by a new superintendent who overhauled the structural views that guided the agency in its first years, adopted a flexible view on mergers, and emphasized a dynamic view of barriers to entry. A case in point was a merger in the agro-industrial sector. In April 2000, AgrEvo de Venezuela, S.A., requested an opinion on the potential restrictive effects of an acquisition of Rhone Poulenc’s line of agrochemical products. Pro-Competencia’s analysis determined that the dynamics of competition in the relevant markets, where there were companies that were larger and had a wider variety of products than the merged entity, suggested that such an acquisition would not create or reinforce a dominant position in any of the markets in question. After 2000, the interpretation of competitive restrictions was again influenced by the structural approach toward antitrust economics of the new executive team. By no means is such confusion confined to Latin American competition authorities. On the contrary, it is a widespread feature of antitrust enforcement all over the world.390 Naturally, the differing notions of entry results in a complete lack of a stable legal standard in connection to the significance that in a particular case the competition authority should take into account to examine entry barriers. Hence: The idea that ease of entry is a trump must be applied with care, particularly when committed entry is at stake. Blind application of the doctrine may encourage courts to analyze the height of entry barriers in the abstract and not recognize that entry is relevant only to the extent that it cures the anticompetitive problem at issue. As a result, it may lead courts to presume that a firm that could enter the market likely would find it profitable to do so. Yet, when entry requires significant sunk investments, its profitability is a matter for analysis, not presumption. (OECD, p. 43) 12.3.3 THE MEANING OF BARRIERS TO ENTRY IN DYNAMIC MARKETS It is not coincidence that antitrust policy lacks a settled definition of entry barriers. After all, the inspiration source of Bain’s notion of entry (i.e., Robinson’s Imperfect Competition model) never bothered to explain why potential entrants would abstain from offsetting the attempts of incumbent monopolists to raise prices above marginal costs. Robinson simply postulated the exclusion of such potential competitors, in order to make allowance for the notion of a monopolist who faces a downward sloped demand curve, without any threat from outsiders. 390. See Section 4.2.6, above. The Antimarket Antitrust Policy Agenda 507 It was the only way her model could actually acquire inner consistency (i.e., explain why monopolists attain supra-competitive profits). The problem of the conventional antitrust view about entry barriers stems from the implications drawn from Robinson’s theory: any received preferential market condition or strategy aimed at reaping increasing returns inevitably creates a barrier against the firms that have not been as acute or willing to venture themselves into what seems to be a risk entrepreneurial move. From this perspective, almost any entrepreneurial move will be understood as an attempt to enhance existing monopoly power. Indeed, any entrepreneurial effort to outdo competitors is, by definition, an effort aimed at creating a barrier to entry into the market. The natural outcome of exercising entrepreneurial skills, creativity and innovation is to satisfy consumer needs better than competitors do. Innovation implies devising more efficient ways of satisfying consumers; novel forms of reducing production costs, in order to seize increasing returns in market niches that had been hitherto undiscovered. Naturally, business A’s success in developing a product that satisfies such needs, drives consumers away from businesses B, C and D, thus forcing them to find new ways for regaining consumers lost to the first entrepreneur. This dynamic perspective is hardly reconciled with the structural logic of antitrust policy. Consider the ambiguous position that antitrust supporters have over the development of new technology. On the one hand, it is undeniable that technological development renders consumers obvious benefits. On the other hand, however, such development may impair the possibilities of potential competitors. This contradiction was evident in the position of CADE’s judge Castellanos Pfeiffer, stated in the case Microsoft II (2002). In the examination of the alleged restraints introduced by Microsoft in the sale of her financial application product, ‘‘Microsoft Money,’’ through appointed exclusive distributors. Pfeiffer noted how it was almost inevitable to expect that Microsoft would engage in monopolistic behavior, since there was a great incentive to enhance the effects of network externalities arising from Microsoft’s control of the market for the operating system Windows, in order to control the market of financial applications. This monopolistic behavior is, allegedly, implemented through multiple strategies designed to foreclose the market to potential competitors: ‘‘Lock in;’’ launching prereleases; exclusivity commitments; use of property rights; etc.391 From the above analysis, CADE concluded, as a matter of fact, that the gains obtained by Microsoft in the competitive market for financial applications, to provide the additional 97 Money to customers of the package Office SBE, did not entail anticompetitive effects. The fundamental reason to reach this conclusion was the lack of factual evidence incriminating Microsoft in any of the foreclosure strategies listed above. Microsoft showed that it preserved consumers’ choice for purchasing non-Microsoft financial applications, if they wanted so. However, the 391. See Section 4.2.6.2, above. 508 Chapter 12 case also left a very clear legal standard, supported on the theoretical premises outlined above. The question, then, is whether these business strategies are really intented to foreclose the market, or whether they are inevitable undertakings in the context of a dynamic business world. Kelly (1998) observes that firms operating in the ‘‘new economy’’ (i.e., technology industries) operate in ways they do not in the ‘‘old—industrial—economy’’ through strategies that are inevitable in the context of the quick speed of change that features such industries. In his words: The new rules governing this global restructuring revolve around several axes. First, wealth in this new regime flows directly from innovation, not optimization; that is, wealth is not gained by perfecting the known, but by imperfectly seizing the unknown. Second, the ideal environment for cultivating the unknown is to nurture the supreme agility and nimbleness of networks. Third, the domestication of the unknown inevitably means abandoning the highly successful known—undoing the perfected. And last, in the thickening web of the Network Economy, the cycle of "find, nurture, destroy" happens faster and more intensely than ever before. Although Kelly does not explicitly refer to the question of monopolies, one can infer from his argument that such tactics in the ‘‘new economy’’ are not expressly intended to become monopolistic. They are just inevitable strategies in a business world which is subject to quick pace of change. Hence, the understanding of barriers of entry is intrinsically subject to the particular notion of markets advocated by antitrust analysis. Given the theoretical spin of the Imperfect Competition model, which depicts real markets as static structures where competition is dictated by the number of operating firms at a given point in time, it is not casual that the notion of barriers of entry remains understood in a similar structural way. In the conventional approach, the implicit assumption is that analysis can establish the optimal degree of entry that an industry can possess so that the analyst can then conclude whether there are viable opportunities for competitors to penetrate the market, creating effective competition, in a given case. In other words, the analytical problem of barriers to entry and market size measurement stems from the perspective adopted by conventional economics in considering these factors as impediments to—or failures of—competition, defined in light of an idealized perfect competition setting, inasmuch they regard these barriers as obstacles to the number of firms that, ideally, the industry should support. By contrast, in a business world which is conceived as changing, evolutionary and in permanent motion, the notion of entry is entirely different: it is associated to the possibilities that a stable system of rules facilitate on entrepreneurs, to innovate, create new products and processes, and increase the value of their production through the division of labor, both intra firm as well as inter firm. Therefore, in a dynamic competition setting entry itself is not the relevant issue in determining whether firms can compete; rather it is the entrepreneur’s capacity to create anew The Antimarket Antitrust Policy Agenda 509 new products that challenge the competitive position of incumbent firms. In other words, the capacity to compete is dictated by endogenous factors within the firm (i.e., its capabilities and resources), rather than exogenous factors imposed by the market. In a dynamic competition assessment, where entrepreneurs are free to specialize, innovate, and undertake labor division, the impediments that would inhibit their capacity to compete are not related to the presence of exogenous conditions, whether measured on a temporal basis or not. Rather, entry is contingent on the economic freedom that businesses possess to carry out their activities. From this perspective, only legal monopolies should be regarded as barriers to dynamic entry, because they impose a restraint on the capacity of entrepreneurs that cannot be overcome through innovation. From this perspective, competition agencies should look into the existence of regulatory restraints, or quasi-regulatory restraints (i.e., professional association restrictions supported by the law) in order to determine whether barriers to entry truly exist in the market. In the event of uncertainty regarding what exactly constitutes an entry barrier in a particular case, the analysis of competition agencies intuitively shifts toward assessing whether the incumbent firm(s) in the market enjoys sufficient monopoly power (i.e., market share) to displace a potential entrant. Naturally, market shares means very little under a dynamic competition perspective, in which the position of a given firm may be challenged at any time by a more entrepreneurial competitor. For this reason, competition agencies often miss the point when they insist on applying standards such as ‘‘significant’’ delay, or ‘‘likely, timely, and sufficient’’ entry into the market, to establish the existence of a ‘‘barrier.’’ These vague standards are doomed to invite unbounded discretion to interpret antitrust provisions. 12.4 THE EROSION OF THE RULE OF LAW The previous sections highlight the inner tension between the normative view of antitrust policy and the internal logic of the market process. The next sections will examine how the imposition of the former’s normative standards on the latter, inevitably undermine the rule of law. This problem begins with the optimism placed by antitrust enforcement on the collection and use of statistical data, as a tool to support economic theories around market conduct. In view of this optimism, antitrust enforcers overlook the knowledge limitations imposed by such data, which explains past conduct; it does not address the key question about the entrepreneurs’ motives for undertaking restrictive business arrangements with effects into the future. In view of this knowledge limitation, antitrust agencies are doomed to take their interpretations of market causalities as objective facts; not as mere subjective hypotheses explaining why businesses act in a certain way. Naturally, that leads antitrust enforcers to impose uncertain standards of proof about anticompetitive restraints, in their policy enforcement endeavors. 510 Chapter 12 Eventually, the impossibility of ascertaining what standards of conduct abide to competitive legal standards induces antitrust enforcers to decide matters based on cost-benefit calculations, entirely deprived from the information they need to attain any ‘‘optimal’’ allocation under such standard. In other words, they are driven into making an impossible quest for attaining perfect justice in each case. Naturally, that utopian effort ends with the unlimited enhancement of government discretion in deciding what business behavior is ‘‘competitive’’ and what it is not. Breaking with this antimarket logic is only possible through reassessing the social welfare role of the rule of law. The purpose of such a rule, as will be seen, is connected with businesses’ goals, rather than the particular efficiency goals sought by antitrust enforcers. Before getting there, however, let us begin our analysis by exploring the foundational source of the misconception that eventually leads antitrust enforcers, armed with their best intentions, to undermine the rule of law. 12.4.1 THE MIRAGE OF DATA COLLECTION Antitrust policy looks into the past for statistical information about prices, in order to develop inferences about prospective business behavior. For example, Areeda and Hovenkamp (2002, para. 420b, quoted by OECD, p. 43) note: ‘‘The only truly reliable evidence of low barriers is repeated past entry in circumstances similar to current conditions. Indeed, repeated entry during a period of competitive prices makes entry even more likely in response to future attempts at monopoly pricing.’’ Also, a popular idea among antitrust supporters is to regard past profits as indicator of the existence of entry barriers. The existence of supra-competitive profits indicates that barriers are high, and therefore, that entry is unlikely. True enough, many supporters of antitrust are cautious about deriving unwarranted conclusions about past conduct. For example, Baker (1997, pp. 353, 365) adopts a more careful position with respect to using past entry to make predictions about the feasibility of future entry into the market. The OECD (2006, p. 44) also expresses a cautious position in this regard: It is important to remember, though, that previous incidences of actual entry do not necessarily prove that it was easy, that it was competitively meaningful, or that it is likely to take place again. The price effects, if any, from past episodes of entry need to be examined, as does the viability of the entrant and its experience in trying to gain market share. (Also,) ‘‘( . . . ) evidence of persistent supra-competitive profits ( . . . ) is generally consistent with, but neither necessary nor sufficient for, a finding that barriers are high and that entry is therefore unlikely. Similarly, evidence of a persistent lack of supracompetitive profits is generally consistent with, but neither necessary nor sufficient for, a finding that barriers are low and that entry is therefore easy. For instance, a firm may simply have been adept at spotting an emerging The Antimarket Antitrust Policy Agenda AU: Please provide the end quote. 511 trend in consumer demand. If it created a new market, developed it, and made substantial profits for a few years, but those profits then attracted the attention of other entrepreneurs who figured out that they could easily enter the same market, there would be a record of high profits despite easy entry conditions. By the same token, low profits do not automatically indicate easy entry, as demonstrated by the earlier example of regulation that restricts the number of firms in a market. These cautious notes, however, do not influence the methodology of antitrust analysis, which is forced to rest on the appraisal of past conduct, because it is the only possible way in which it can deliver any meaningful predictions within its own terms. The purpose of antitrust analysis is, after all, establishing whether past conditions of the market (i.e., entry barriers, structure, prices, etc.) suggests us that economic organization today (i.e., mergers, contracts, business strategies, etc.) will have an anticompetitive effect in the future. A consequence of the assumption that past exchanges can tell us anything about future investments is the overwhelming emphasis placed upon enforcement methods devised for obtaining market data. These include, or example, implementing leniency and confidential treatment provisions implicitly rests on the assumption that competition agencies face a knowledge problem that is eminently quantitative; that is, they lack sufficient information to make reasonably wellinformed decisions. Similarly, recent developments in the use of quantitative information for measuring market size, particularly quantitative measurement of cross-elasticity of demand in assessing product substitutability, have been heralded in Latin America as a healthy development in antirust policy. For example, Salgado (1999, pp. 33-34) has praised Brazil’s effort to incorporate quantitative tools for measuring market size. In her words: ‘‘one of the main trends we could see ahead is the evolution of techniques to clarify, using quantitative methods, their appropriate scope, and especially, simulations of scenarios of sharing those benefits with consumers.’’ Under international antitrust standards quantitative analysis is the gold standard to follow in the measurement of markets. Latin American antitrust advocates are endorsing this trend, which they perceive as a healthy development toward eliminating what they perceive as a lack of rigor in antitrust analysis. The nature of the information that is needed in order to assess market competition makes consistent antitrust analysis impossible. While the information that authorities can collect from economic agents is restrospective, objective, and parametric, market competition is a process that is grounded in the prospective planning of market agents based on subjective and holistic knowledge. Hence, no matter how much information is gathered from economic agents, market competition is based on the qualitative interpretation of the action of other market agents rather than on the mere collection of statistics about past market conduct. Empirical data collection is not enough to give competition agencies more knowledge about the causal relationships underlying entrepreneurial actions because data does not explain why entrepreneurs decide to act in the way they 512 Chapter 12 do. After all, additional information will be constrained by the theoretical boundaries of the vision of conventional economics, whose interest is in predicting market outcomes and comparing them with idealized optimal worlds where resources are perfectly allocated. Schumpeter (p. 85) criticized this perspective, in the following terms: [Conventional] economists who, ex visu of a point of time, look for examples in the behavior of an oligopolist industry . . . and observe the well-known moves and countermoves within it that seem to aim at nothing but high prices and restrictions of output are making precisely that hypothesis. They accept the data of the momentary situation as if there were no past or future to it and think that they have understood what there is to understand if they interpret the behavior of those firms by means of the principle of maximizing profits with reference to those data. Therefore, looking into past business behavior in order to ascertain the future trends of the market will not yield more knowledge about market causalities, in any of the relevant fields of antitrust assessment. First, it will not furnish the analysis with information about future trends in the behavior of consumers. What appears to be fashionable today, it may well not be tomorrow. As Sowell (1980, p. 204) states: ‘‘the basic problem in these definitionof-product issues is that substitutability is ultimately subjective and prospective, while attempts to define it must be objective and retrospective.’’ Second, looking into the past will not predict what entry barriers will be significant tomorrow. As the OECD (2006, p.) notes: Previous instances of entry do not necessarily prove that it was easy, that it was competitively significant, or that it is likely to take place again. Moreover, current potential entrants may not face the same market conditions that previous entrants faced. By the same token, long periods without entry do not necessarily prove that entry barriers are high, or that significant entry is unlikely in the future. Instead, such patterns may indicate that a market is very competitive (or that it is in decline) and that it has therefore been unattractive to potential entrants. Nevertheless, the history of entry in an industry can occasionally provide useful information about the likelihood and nature of entry in the future. If market conditions have not changed appreciably since the historical period being used for comparison, for example, then it may make sense to draw some inferences about what is likely in the future based on that period. While such evidence may be relevant, though, it is usually considered inadequate for making final conclusions. Finally, and more significantly, quantitative information gathered from statistics will never tell us what long-run productive efficiencies will be generated in the future thanks to the operation of what appears today to be restrictive arrangements. By the same token, it is impossible to support the efficiencies that one can expect to result from these arrangements, because their productive efficiencies will only emerge over the long run. The fact that they cannot be quantitatively The Antimarket Antitrust Policy Agenda 513 measured and then balanced against welfare costs at the present time does not minimize their significance for the production process, however. Evidence of these efficiencies is based upon an understanding the role of corporate structures and business arrangements in building the entrepreneurial capabilities that firms need to generate productive efficiencies that enable them to compete successfully over the long run. However, it is not possible to quantify such dynamic efficiencies because there is no way of directly measuring them in the present. Hence, the antitrust price theory test has no choice but to intuitively take their future existence for granted, or simply deny it, thereby ‘‘[moving] the analysis along a continuum from probably impossible precision toward arbitrary decision,’’ as Melamed (pp. 380-281) correctly notes. In practice, competition authorities develop an inherent analytical bias against dynamic efficiencies that are alleged by defendants but are not readily demonstrable through empirical evidence. Finding empirical evidence about the existence of productive efficiencies turns into a permanent, unachievable quest, because by its nature the task given to competition authorities is essentially unfeasible: such efficiencies only emerge in the long-run development of the particular case under examination and can only be alleged through referential comparison to the outcome of other ‘‘similar’’ cases. The dispute between competition agencies and prosecuted parties, then, becomes an argument over whether the case at hand is in fact similar to other cases that have already demonstrated dynamic long-run efficiencies. In short, competition authorities face a ‘‘knowledge problem’’ Objective quantitative data that can be collected from market agents, (e.g., market output, production and distribution costs, etc.) does not necessarily give them any ‘‘knowledge’’ about how market agents perceive their costs relative to alternative choices to be carried out in the future. This is what economics refers to as ‘‘opportunity costs.’’ Governments cannot assess such opportunity costs due to their subjective nature, which is intrinsic to the perception of the economic agent who bears both its benefits and costs. Whereas government agencies rely on statistics embodying historical information, market agents make their investment decisions on the basis of subjective expectations, which enable them to make tentative appraisals of the future condition of markets. Therefore, entrepreneurial knowledge is always contingent on the surrounding circumstances in which entrepreneurs operate, a tentative, uncertain expression of a world that may become real only if entrepreneurs are correct in their forecasts. Entrepreneurial assessments of the market are personal, subjective, and intuitive: they are constructed according to entrepreneurs’ specific goals. Thus the knowledge informing entrepreneurial decisions is not fixed or immutable. On the contrary, it is a permanent guessing exercise about how the future will unfold; it is constantly evolving. Therefore, it becomes apparent that, in epistemological terms, the knowledge on which entrepreneurs base their investment decisions has nothing to do with the information that is collected and used in antitrust proceedings against restrictive entrepreneurial business practices and decisions. 514 Chapter 12 12.4.2 UNCERTAIN STANDARD OF PROOF Antitrust decisions about monopoly power are based on theories; not hard facts. The empirical verification of market causalities, which is the very purpose of antitrust legal findings, does not rely on judges’ sensory perceptions, but on their particular interpretations (i.e., theories) of the ultimate reasons underlying market causalities. In other words, economic facts are contingent on the particular economic theories accepted by decision makers. As Sowell (1980, p. 203) colorfully puts it: [t]here is usually nothing in antitrust cases comparable to finding someone standing over the corpse with a smoking pistol in his hand. Objective statistical data abounds, but its interpretation depends crucially on the definitions and theories used to infer the nature of the prospective process which left behind that particular residue of retrospective numbers. Thus, one cannot directly conclude, on the basis of mere observations of economic data, whether contracts are ‘‘restrictive’’ or not, because such effects depend on the concurrence of complex, simultaneous, and intertwined entrepreneurial decisions by multiple entrepreneurs attempting to coordinate their actions. This determination depends on the surrounding conditions of the markets in which firms operate. In the evaluation of ‘‘surrounding conditions,’’ good economic theory is essential to determine ‘‘prima facie’’ whether some wrong has resulted. Faulty economic theory leads the analyst in competition cases to draw faulty conclusions about the causal connection between events; this makes the use of circumstantial evidence a self-reinforcing mechanism.392 Hence, in order to determine whether a restriction on competition has occurred, the analyst must carefully discard alternative hypotheses whose explanatory power is exceeded by a more plausible explanation. This is why the persuasive value of circumstantial evidence in competition cases is closely linked to the preliminary ‘‘prima facie’’ plausibility of the central hypothesis (i.e., that price correlation is the result of an agreement, or alternatively, of some third factor). Otherwise, the analyst (i.e., the competition authority) is inclined to yield to the temptation of taking into account only evidence that supports its theory while discarding evidence that challenges it. In this way, the rule of 392. A clear example of this is found in the Peruvian case Proquinsa y Silicators S.A. (1997). In this case a central factor in the conclusion that the parties had agreed to exchange information about prices was the nature of the market in which the parties traded. Given that the relevant market was comprised of specialized industrial consumers, INDECOPI concluded that no sensible explanation had been given for recurring information exchanges about prices. The documents presented revealed an unfettered exchange of information between prosecuted firms. In INDECOPI’s view, that situation was ‘‘relatively uncommon’’ in a market where transactions did not occur daily, but in response to orders from specialized industrial consumers. This behavior is even more suspect in a market where there is a system of direct sales without intermediaries or distributors in a position to share information about prices and where sales occur on the basis of price quotes requested by customers. The Antimarket Antitrust Policy Agenda 515 law is eroded by the whim of the administrative agency and due process is compromised. Antitrust policy cannot support its conclusions with empirical evidence because of the inherent difficulty of objectively assessing the ‘‘intention’’ behind individuals’ investment decisions in the market. It is not possible for third parties (i.e., government authorities) to interpret empirical ‘‘observable’’ facts in an objective, undisputed way, for the very reason that the facts, alone, do not convey any ‘‘meaning;’’ it is economic theory that ‘‘unfolds’’ their meaning. Accordingly, any discussion about the effects of investment decisions is only possible at a higher level, that is, the inner consistency of the theory. Therefore, in antitrust proceedings, an objective determination of guilt is impossible due to the fact that judges do not rely on hard facts but on economic hypotheses in order to infer the existence of anticompetitive conduct. In antitrust proceedings, the discussion, then, boils down to the endorsement of a particular economic theory. As a result, it is inevitable that the determination of guilt in antitrust proceedings shifts from the discussion of hard evidence to the inner logical consistency of economic theories supporting different findings. As a result of this indeterminacy, it is impossible to accumulate enough information to reach any conclusion as to whether there exists enough evidence to support a positive finding of anticompetitive restrictions. For example, complaints against alleged cartels will always be investigated, even if the investigation is based upon on circumstantial evidence, regardless of its strength. Depending on the findings derived from this investigation, the authority in charge will decide which path to take, be it to continue with the preliminary investigation or to submit the case to formal prosecution.393 393. A good example of this phenomenon is found in the Venezuelan Cement case (2003). In this case, Pro-Competencia emphasized the observed ‘‘high price correlation’’; however, it did not note that these ‘‘observations’’ were collected in a flawed manner. Pro-Competencia had calculated an overall index of prices combining the prices of all regional markets into a single nationwide measure, and concluded that a high price correlation existed within this national index, ignoring the fact that it had acknowledged in previous administrative decisions that geographical markets for cement cannot extend beyond 150 km due to transportation costs. In short, it conveniently left aside a decisive factor: that cement markets in Venezuela are not nationwide, but region wide. Hence, Pro-Competencia’s inference about high price correlation was flawed, because it should have measured regional market prices instead of conflating inter-regional market prices into a single national measure. Moreover, high price correlation does not ‘‘prove’’ the existence of a price agreement. Mere statistical correlation of simultaneous price increases over time can be indicative of a third factor; theoretically, competition authorities should take into account the possibility of such a factor, but in practice their natural inclination is to support their own theory, which is usually that an anticompetitive price agreement exists. Indeed, in the Venezuelan cement case, there was a more powerful explanation for high price correlation than the collusion hypothesis, namely, the currency devaluation of the Bolivar over the relevant period (around 40%), which made price increases appear to be simultaneous over time. In this industry, production costs are highly dependent on the exchange rate, thus increasing the likelihood of simultaneous price increases in response to inflation rates. Thus, Pro-Competencia misconstrued the nature of the high price correlation it had found. Inflation, not the alleged agreement, was responsible for the simultaneous price 516 Chapter 12 As Meese (2005, p. 21) contends: Modern antitrust policy has a ‘‘love hate’’ relationship with non-standard contracts that can overcome market failure. On the one hand, courts have abandoned various per se rules that once condemned such agreements outright, concluding that many non-standard contracts may produce benefits that are cognizable under the antitrust laws. The prospect of such benefits, it is said, compels courts to analyze these agreements under the rule of reason, under which the tribunal determines whether a given restraint enhances or destroys competition. At the same time, courts, scholars, and the enforcement agencies have embraced methods of rule of reason analysis that are unduly hostile to such agreements. In particular, courts and others are too quick to view such agreements and the market outcomes they produce as manifestations of monopoly power. In sum, the evaluation of economic facts in antitrust proceedings ultimately rests on economic hypotheses rather than hard, ‘‘objective’’ facts. These hypotheses are subjective ex definitione; therefore, they cannot be assessed consistently. Due to their biased analysis of economic evidence, competition agencies naturally develop a tendency to disregard economic hypotheses about observed market phenomena that contradict their initial findings regarding observed data. Thus, for instance, if an antitrust authority begins to suspect the existence of a cartel based upon a given piece of information (parallel pricing, low costs, etc.), it becomes very hard for defendants to rebut such a presumption (hypothesis); indeed, given that plus factors are not arithmetically added, it follows that no amount of economic data will necessarily suffice to overcome an adverse perception.394 Everything boils down to the particular outlook of the antitrust authority and the qualitative weight attached to each piece of evidence. increases revealed by the statistical price correlation found by Pro-Competencia. Inflation is a fundamental phenomenon to consider in antitrust enforcement in countries with high inflation levels because of its distorting effects on the calculation of production costs. Pro-Competencia chose not to attach any relevance to this obvious factor. 394. The Televen v. Venevision and Radio Caracas Television case (2005) is a good example of this tendency. Televen, a relatively minor TV channel, alleged that Venevision and Radio Caracas Television, the oldest and most popular channels in Venezuela, were driving it out of the ratings market by several courses of conduct that included agreeing on programming, market sharing, and allocation of advertising slots. Additionally, Televen claimed that the two competing channels had arranged the conditions for commercializing their advertising spaces through contracts that had limited Televen’s chances of contracting for advertising space in the presale season. Televen also alleged that both channels were associated with a company named Sercotel, which collected the payments that advertisers were making for the companies’ advertising spaces and then shared it between the two channels. Pro-Competencia found that the mere joint ownership of Sercotel by Venevision and RCTV was sufficient evidence of intent to engage in cartel behavior. The defendants alleged that Sercotel had been set up to collect payment from debtors—in other words, that it was an efficient business practice permitted under the competition rules. Moreover, RCTV and Venevision’s decision to grant special treatment and discounts to potential clients in the negotiation of advertising spaces The Antimarket Antitrust Policy Agenda 517 Naturally, no certainty follows from such an exercise and no evidence can provide competition agencies with enough information to decide a case. Accordingly, businesses are subject to sheer unpredictability as to how many indicia must be found in order to prove restrictive conduct. In light of the indeterminacy that surrounds antitrust prosecutions, it is inevitable that this flaw will also affect the assessment of the administrative fines to be imposed in addition to the finding of a breach of the antitrust rules. Hence, as Rosemberg and Da Matta Berardo (2007) point out: The fact that the Competition Law does not fix any formula to calculate the administrative penalties to be imposed on companies condemned for cartel violations (i.e. there are no sentencing guidelines) makes the cost benefit evaluation of possible defensive strategies very difficult. Historically speaking, fines for cartel cases have ranged from 1 percent to 20 percent of a company’s turnover; fines applied, however, lack consistency to be taken as a pattern of decisions capable of giving indications for future decisions. In sum, case law in the region is uniform in requiring plus factors in addition to proof of parallel behavior; however, it does not say how many plus factors are needed to fully establish the existence of anticompetitive conduct. Despite the presence of all the economic indicia discussed in the aforementioned cases, competition agencies are reluctant to merely add them arithmetically in order to establish the existence of a cartel; something else is needed, an ‘‘X’’ factor. All that can be said is that under sana critica, judges will assign value to every single piece of proof in accordance with the merits of the case and his or her logic and experience. Through the ‘‘sana crı́tica,’’ judges appraise the facts before them and link them through economic reasoning (i.e., theory) in order to give them a plausible interpretation. This is a serious flaw of every antitrust assessment, namely that ‘‘economic facts,’’ in the end, are not ‘‘facts’’ which can be readily and objectively perceived, but economic hypotheses, based on alternative modes of reasoning, in which ‘‘facts’’ are ‘‘found’’ to the extent that conventional economic theory supports them. This fundamental problem makes antitrust analysis particularly troublesome, especially in cases that rest upon economic evidence. In conclusion, competition agencies are fundamentally restricted from knowing what businesses’ intentions are, because these intentions are inferred from an idealization of what prices would have been if the optimal Nirvana of in the presale season was a legitimate business practice—indeed, it was highly competitive conduct. Key evidence to support their theory was the significant changes observed in TV ratings (market shares) over the years, a fact which, under oligopoly theory, actually disproved the plaintiff’s claim. Pro-Competencia ignored this evidence and imposed stiff penalties on the alleged transgressors—the highest ever imposed. The case illustrates the weak position of economic actors, who are defenseless in the face of the particular hypothesis endorsed by the prosecuting agency. In this case, there was no way of countering Pro-Competencia’s view on cartels and arguing that the mere creation of a partnership does not necessarily betray an intent to form a cartel if it is not accompanied by other crucial evidence (e.g., steady market shares). 518 Chapter 12 competitive equilibrium had ever existed. At the same time, they cannot determine this optimal price through direct evidence, since in the real case under examination, ex-hypothesi competition is missing. They can only infer these intentions through indirect evidence, by making causal inferences about market conduct, which are unavoidably arbitrary (as they are tentative explanations about reality, not reality itself). These cases reveal how competition agencies are thus forced to rely entirely upon price theory in order to infer the nature of a reality that it is not directly observed. Therefore, their conclusions will unavoidably be based upon conjecture, not hard facts, because price data cannot measure prospective dynamic efficiencies that are not ‘‘there’’ yet; in fact, prices are quite irrelevant in the measurement of prospective efficiencies, because dynamic efficiencies are usually expressed in quality and service improvements rather than price competition. This epistemological limitation is hard to overcome; as a result, antitrust policy becomes biased against proper assessment of dynamic efficiencies, while at the same time emphasizing output restrictions. 12.4.3 PERFECT JUSTICE VERSUS THE RULE OF LAW From a cost-benefit perspective such as the one applied under the antitrust methodology, it is obvious that attaining social economic welfare through maximization of individual cases would require authorities to investigate cases indefinitely. Epstein (1995, pp. 37-42) has branded this effort as a quest for perfect justice. As a goal of policymaking, perfect justice requires rooting out error in every case, regardless of the costs involved. Similarly, Sowell (1999, pp. 27-42) refers to cosmic justice, or justice that is cost-free and takes into account the particular welfare position of each individual in society so as to equalize the condition of each individual with every other. The costs of attaining cosmic or perfect justice in the market would make such efforts unfeasible because prosecuted firms would always be one step away from reaching the price/output relationship that is necessary to attain perfection (i.e., competitive equilibrium): by definition, such perfection is utopian. Furthermore, competition authorities can never know what market conditions are necessary for attaining optimal allocation, because such optimality is, in any event, related to future events (i.e., prospective dynamic efficiencies), that have not yet unfolded, therefore, they are not disclosed to the analyst ex ante facto. Sowell notes the impossibility of attaining cosmic justice, on the grounds that it is impossible to devise an ideal standard of equality that would achieve perfection for every individual, given the costs involved in such efforts. In other words, this mindset is entirely utopian. In his words: ‘‘with justice, as with equality, the question is not whether more is better, but whether it is better at all costs.’’ This phenomenon affects the very essence of legal analysis of observed market phenomena. In the absence of any reference point for what is ‘‘good’’ or ‘‘bad’’ economic behavior (since such reference is contingent on a notion of prospective The Antimarket Antitrust Policy Agenda 519 dynamic welfare which is unknowable at the time that competition agencies conduct their investigations), competition agencies are led into making ad-hoc interpretations of market phenomena that are not subject to judicial control. In other words, the futility of seeking such a goal is that the process erodes the very institutions (such as the rule of law, which is necessary for markets to function at all) that it seeks to promote. It is not a coincidence that Latin America, as a region, has one of the lowest rankings of international competitiveness measured by any standard (O’Driscoll Jr., Feulner and O’Grady, 2006). In fact, attempts to attain perfect justice conflict with conventional legal principles on the legal treatment of evidence. In all legal proceedings, circumstantial evidence allows the judge to infer the existence of an unknown objective fact from the coordinated collection of known facts through a legal principle of reasonableness, according to which judges assign value to every single proof in harmony with the merit of the process and their logic and experience (in Latin America, this is known as the ‘‘sana critica’’).395 However, unlike other areas of law, in antitrust proceedings, economic ‘‘facts’’ are understood within the context of the theory that gives them explanation; in other words, they are not objective, in the sense of being perceived by anyone in a similar way through sensory experience. On the contrary, their existence is contingent to the economic theory that provides their ‘‘meaning.’’ Hence, price increases, output reduction, exclusion of competing businesses through contractual means, and so on. These are all events whose objective appearance reveals nothing about the monopolistic intention of the actor who undertakes them. It may well be that the exclusion of a competing firm from the market is the very condition of another’s success, for they are both competing for the same client: in it of itself this is not evidence of the first business’s intent to engage in monopolistic conduct. For example, a contractual device binding distributors to an exclusivity agreement by its own terms does not reveal the ‘‘purpose’’ of the entrepreneur, whether it is to increase or diminish social welfare. On its face it merely reveals a fact, to wit, the exclusion of a client’s rival, or the preferential (even discriminatory) treatment given to a supplier firm over its rivals. Any further inquiry into the intentions underlying such arrangements would require a proper understanding of the motives that cause a supplier to request exclusivity from its dealers, yet these motives are not readily visible by simply looking into the structure of a contract. 12.4.4 THE ENHANCEMENT OF GOVERNMENT DISCRETION Measured against the standards of predictability found in any rule of law system, antitrust policy clearly fails the test. 395. On the principle of ‘‘reasonableness,’’ see n. 249, above. 520 Chapter 12 As discussed above, monopoly power assessment and balancing net consumer welfare effects cannot be carried out in a way that guarantees the requirements of the rule of law. The existence of prior factually similar cases decided in a similar fashion—a precondition for the rule of law to emerge—demands that decision makers follow precedent regardless of the expected future effects. By contrast, antitrust decision making does not look to precedents to create stability, but rather uses an unpredictable set of economic theories to decide cases based on their expected future effects. Under the assumption that the system should promote wealth maximization, perfect information is required in order to attain the goals required by the maximization standard. Rizzo (1980, p. 641) argues that the case for the wealthmaximization norm rests on the unrealistic assumption of near-perfect information. So long as most economic analysis of business practices pursuant to the law is carried out under the rule of reason, it relies on simplified partial equilibrium models, and trying to trace the effects of a law in the real world it is next to impossible. ‘‘In fact, unless we can acquire a great deal of information about the interrelations between markets, we cannot know if such improvements bring us closer or farther from optimality’’ (p. 641). Outside of static long-run equilibrium, disequilibrium prices make measuring the efficiency of different states of the world very difficult. In the world as it exists, shadow prices are not apparent, and it is not even obvious what to count in our measurement of net wealth (p. 643). Prices may indicate consumer valuation at the margin, but to consider net wealth we need to measure consumer surplus, and we have no way of measuring the value of inframarginal units. Stringham (2001) makes the case that judges will be unable to measure the costs and benefits associated with various outcomes. Although judges can observe past prices, they are historical artifacts that do not necessarily have any relationship to current market conditions. Judges, as imperfect agents, will have a difficult time evaluating what they think various individuals are willing to pay in cases that differ from past events. Judges need to predict not what they would be willing to pay under different circumstances, but what others would be willing to pay under different circumstances. The likelihood of deciding according to a balancing cost-benefit analysis rather than legal principle appears odd under general principles of law applied in the region; these principles usually confine discretional administrative assessments of objective facts (Fernandez, 1994, pp. 83-89). However, under the methodology of antitrust, legally relevant facts are not objectively stated, but subjectively hinge on the particular conceptual framework of economic theory endorsed by the enforcing authority. Hence, antitrust analysis will inevitably appear highly uncertain and difficult to subject to judicial control. It is not surprising, then, that as Gutierrez (2008, p. 82) states, different countries judge common anticompetitive wrongs according to different legal standards, in spite of their similar condemnation of collusion. Thus, in similar airline cases decided in Colombia, Panama, and Argentina, respectively, the outcomes differed: While in Colombia the firms were absolved because the justifications The Antimarket Antitrust Policy Agenda 521 given by the prosecuted firms were credible in the eyes of the SIC, in Panama the airlines were fined because the authority could not find an alternative explanation for price alignment other than the existence of an agreement between prosecuted firms. Finally, in Argentina, the firms were absolved because they did not have a dominant position. The problem becomes even more complicated when we realize that anyone pretending to decide a case under this methodology has to consider all possible states of the world. To determine the economic consequences of their decisions, judges would need to know the structure of the demand curves for every imaginable circumstance. But are judges up to this task? As we have seen above,396 the task is impossible. The structure of industry demand is heterogeneous, meaning that not one, but several, simultaneous demand curves overlap and cross one another. Subjective costs determine these heterogeneous demand curves. Therefore judges cannot know how much each party would be willing to pay (or bribe) to obtain various outcomes (Block, 1995, p. 87). Without knowing willingness-to-pay, judges may not reach the wealth-maximizing solution. In a criticism this author makes against the utility maximizing property rights theory postulated by Coase-Demsetz, he developed this argument further: [Coase-Demsetz theory] will not do. Allowing judges such wide discretion is highly problematic because this will render personal and property rights highly uncertain. Further, Coase is making the normative claim that under conditions of positive transactions costs whether (any crime) should be legal or not should depend on judicial determination as to the costs and benefits involved in a given specific instance. But the judges simply have no way of knowing which the worse harms are; therefore, any attempt on their part to interpersonally compare utilities in this way is ultimately arbitrary (Mises 1966; Rothbard 1962; Buchanan 1969; Buchanan and Thirlby 1981). Indeed, to champion a philosophy of rights with such implications bespeaks a certain moral opacity. (Block, 2000, p. 67) If judges are unreliable in this respect, giving them discretion to decide cases based upon costs and benefits will make property rights uncertain and erratic, thereby comprising the foundation of the market economy. It is clear that the substantive question regarding predictability turns out to be whether welfare effects can actually be identified in similar cases in a similar manner, that is, whether antitrust policymaking can be done in a predictable manner. If one takes the words of experienced antitrust scholars such as Kovacic and Shapiro (2000), there does not seem to be much room for optimism about achieving a predictable rule of law in this field. In their words: For the future, two related challenges confront the 1990s approach to antitrust enforcement, capable as it is of generating various results. One is for 396. See Section 12.2.2, above. 522 Chapter 12 economists and attorneys to devise analytical techniques that accurately identify complex business practices as being pro-competitive or anti-competitive. The second is to adapt such techniques to formulate rules that are suited to the capabilities of enforcement agencies and courts and give the business community a stable and predictable base for designing business plans. (Kovacic, William and Carl Shapiro, 2000, p. 58) However, even in the United States, after more than a century of antitrust enforcement, the Supreme Court’s position on the question of what sort of consumer welfare antitrust policy protects is ‘‘opaque’’ (Rosch, 2006). Clearly, there is a fundamental flaw in antitrust thinking. Regardless of whether conduct is evaluated under a per se or a rule of reason standard, this two-tiered system has failed to deliver predictable and stable outcomes, such that the business community can enjoy a stable and predictable basis for designing business plans. Presumably this failure will continue for the next one hundred years. In the light of the preceding considerations, it seems that a new paradigm of legal and economic analysis for dealing with trade restrictions is necessary. It is not surprising that the pursuit of cosmic or perfect justice through antitrust rules usually leads competition authorities to engage in targeted social engineering, thereby achieving exactly the opposite of what competition policy is intended to do: allow markets themselves to decide social resource allocation. In the words of Sowell (1999, p. 40): [t]hose pursuing the quest for cosmic justice have tended to assume that the consequences would be what they intended—which is to say, that the people subject to government policies would be like pieces on a chessboard, who could be moved here and there to carry out a grand design, without concern for their own responses. But both the intended beneficiaries and those on whom the costs of those benefits would fall have often reacted in ways unexpected by those who have sought cosmic justice. 12.4.5 THE RULE OF LAW AS A SOCIAL WELFARE GOAL Perhaps one of the hottest debates in antitrust policy is about the goals that the policy should enforce, whether consumer welfare or other social welfare goal.397 This is a misleading debate that follows a long standing discussion within normative economics, that is, whether the normative goals of government policy should be dictated by efficiency or equity standards. It is a debate that concentrates on abstract goals, and pays too little attention to the practical effects of the policy. If one looks into the effects of policy enforcement, the answer about the desirability of antitrust descends from the realms of abstract normative economics into a more pragmatic domain, that of 397. See Section 5.1, above. The Antimarket Antitrust Policy Agenda 523 the preservation of stable institutions. A pragmatic perspective thus emphasizes on whether the policy does help to promote stable institutions. Predictability is the very essence of the rule of law and the latter is essential for economic progress. There has been a lengthy discussion in economics about the advantages of establishing and enforcing clear, property rights and the dangers of tinkering with them by interfering with their voluntary exchange in the market. However, neoclassical economics is not interested in explaining the conduct of market agents themselves in the context of societal rules. Therefore it is inherently unsuited to integrate the analysis of societal rules into market exchanges, particularly of property rights, due to its methodological emphasis on predicting the outcome of market forces. Hence, one can see a gap in the research agenda of conventional economics insofar the examination of institutions is concerned. It is only as the by-product of the negative experiences with interventionist policies that scholars have turned their attention to the role of institutions and property rights in market exchanges. Today, economic science is more concerned about the role of stable institutions in economic development than ever before.398 Arthur (2000) has aptly summarized the institutional conditions necessary to achieve a stable rule of law in developing countries. These are: (i) Provision of clear direction to facilitate voluntary compliance and effective enforcement; (ii) Prevention of arbitrary and retroactive imposition of liability; (iii) Enforcement of legal rules consistently with previous similar cases; (iv) Predictability; (v) Restriction of legal rules to specific issues, thereby avoiding broad or excessive regulation; and (vi) Confinement of legal rules to the institutional competence of the decision maker; in other words, the law must not place excessive knowledge constraints upon the enforcing authority in order to decide individual cases. The notion of the rule of law provides us with a normative reference whose benefits are overwhelmingly undisputed by academics and policymakers, especially as an underlying condition allowing for economic development in developing countries. The causal connection between rule-bound policymaking and economic development has long been emphasized in economic science.399 In accordance with this principle, economic policy should focus on providing a framework of general legal rules, and beyond this, it should refrain as much as possible from intervening in the market process. Smith (1776 [1937]) conceived of his division of labor and the working of the Invisible Hand in a system of freedom protected by the law. In the context of economic reforms, macroeconomic reforms were not enough to ensure the institutional prerequisites needed to spur economic development. 398. The literature linking economic progress to institutional stability is vast, and can only be sketched in this work. 399. The literature is long and has been developed by several authors: Hayek (1955, 1959, 1973); Carothers (2003); Rodrik, Subramanian, and Trebbi (2004); North and Thomas (1970); North (1990); North (1994); Kaufmann (2002). 524 Chapter 12 A recent article (The Economist, 2008) highlighted the problem in the following terms: Economists became fascinated by the rule of law after the crumbling of the ‘‘Washington Consensus.’’ This consensus, which was economic orthodoxy in the 1980s, held that the best way for countries to grow was to ‘‘get the policies right’’—on, for example, budgets and exchange rates. But the Asian crisis of 1997-98 shook economists’ confidence that they knew which policies were, in fact, right. This drove them to re-examine what had gone wrong. The answer, they concluded, was the institutional setting of policymaking, especially the rule of law. If the rules of the game were a mess, they reasoned, no amount of tinkering with macroeconomic policy would produce the desired results. The rule of law requires a high degree of predictability and strict limits on the discretion of authorities; therefore the form of economic policies is crucial for their effectiveness. Economic policies should primarily seek to establish and apply the rules rather than to assess the economic merits of behavior in specific cases. Rules enhance the chances of achieving an order in which individuals pursue and attain their goals because they reduce the spectrum of potential courses of action that would emerge in a situation of total uncertainty: ‘‘[I]n order to pursue goals and make plans it is necessary to have a system of property rights that is clearly defined and that each individual can count on into his foreseeable future. Any involuntary alteration of a given property rights structure will necessarily interfere [ . . . ]’’ (Cordato, 1980, p. 402). Individuals can plan their investments more easily if they know in advance the legal consequences of their actions; anticipation of costs and benefits will enable better economic planning of their activities. Therefore legal uncertainty—defined as a low probability of success in predicting what is allowed and what is not—can be a serious problem for efficiency in a market economy. In light of our present discussion, the task is to determine whether antitrust policy can be enforced in a way that fulfils the aforementioned standard of predictability required under the rule of law, thereby becoming an institutional tool for the promotion of economic growth, or whether its inner functioning causes it to become a tool for enhancing unfettered government intervention and a source of rent seeking. Contradictory decisions often populate the various areas of antitrust enforcement. Gutierrez (2008, p. 82) notes in this regard: Interestingly, in different countries, common deeds realized in the same market by the same agents had diverse outcomes before the CAs and courts. In spite of the fact that Latin American jurisdictions prohibit collusion in similar terms, the different enforcement approaches and standards of proof adopted in each jurisdiction produced dissimilar judgments. Consider the case of the complaint made by a Costa Rican commissioner (Cantillo, 2005), who objected to the interpretation given by an appeal courts in a case involving collusion between airline carriers to reduce travel agencies’ The Antimarket Antitrust Policy Agenda 525 commissions. The court let the airline companies go unpunished despite what he considered to be an obvious case of cartelization. Yet, a case sharing similar factual foundations (Asociación de Agencias de Viajes de Buenos Aires AVIABUE v. United Airlines Inc., American Airlines Inc. y British Airways Plc) had been decided by Argentina’s CNDC in exactly the opposite way—in favor of the travel agencies, against the airline carriers, on the basis of the efficiencies that commission reductions brought about for consumers’ welfare.400 Similarly, Gutierrez (p. 82) notes the contradictions between the outcomes of administrative decisions in cases decided in different countries, all of them involving price collusion of airline carriers. Thus: i) in Colombia the firms were absolved since the Superintendent considered the firms’ justifications were credible and their simultaneous conduct was a mere coincidence; ii) in Panama the airlines were fined since the authority found no justification—other than collusion—for the airlines’ conduct; and iii) in Argentina the firms were absolved due to the fact that they didn’t have a dominant position, pertained to different relevant markets, or their explanations were plausible. Such contradictions are not confined to horizontal restraints, or to decisions adopted between several competition agencies; it can also happen within a single jurisdiction, as seen in the contradictory decisions Pro-Competencia (ex officio) v. Toyota de Venezuela C.A. (1998) and VFG -Vitrofibras de Venezuela C.A. v. VFGSudamtex C.A. (2002), decided by Venezuela’s Pro-Competencia. Yet, virtue is in the eye of the beholder. What advocates of the rule of law see as a flaw, antitrust advocates regard it as a virtue. One of the assets of antitrust policy, in the eyes of its advocates, lies in its flexibility and adaptability to changing economic circumstances. Yet the flexibility of the ‘‘experimental element’’ is precisely the flaw that undermines its transparency, which is fundamental for guaranteeing the integrity of the rule of law system. As Kovacic (2005, p. 5) comments: The process of formulating competition policy frequently requires public antitrust authorities to make difficult judgments amid uncertainty about the competitive significance of various forms of business conduct. Will a merger of two significant rivals retard or increase competition? Are the restrictions that limit the freedom of participants in a joint venture reasonably necessary to ensure the development of a new product? Are the business justifications offered to support a refusal to deal or an exclusive contract genuine or contrived? Decisions of these types can be difficult even in ‘‘routine’’ matters, and they can be especially challenging when rapid technological change, 400. CNDC file 064-002835/2000 (c. 552). Actually, this case reaffirmed a previous one, decided three years earlier, in the same industry. Asociación Argentina de Agencias de Viajes y Turismo (AAAVYT) v. Junta de Representantes de Compañı́as Aéreas (JURCA) y empresas de transporte aéreo de pasajeros. 526 Chapter 12 deregulation, or other dynamic forces complicate the analysis of competitive effects [ . . . ] The formulation of policy amid uncertainty gives a substantial experimental element to government enforcement. Stability of rule making is not incidental to market functioning: on the contrary, it is an essential trait that enables its proper functioning. Only through stable rules will prices reflect the true intensity of individuals’ preferences, thereby facilitating the allocation of resources to their highest-valued uses (i.e., economic efficiency). Antitrust is no exception to this foundational rule of any rule of law system. Many of the problems underlying the assessment of antitrust policy stem from the lack of a common normative ground from which to judge the policy. Scholars have presented discussions of antitrust goals that are often based on abstract normative yardsticks such as consumer surplus (efficiency) or fair trading (equity). However, these abstract standards suffer from a severe flaw: in the end, their acceptance is a matter of ethical, not scientific, preference. All forms of economic efficiency entail acceptance of a common premise—that the position of individuals in the economic system ultimately can be subordinated to the interest of ‘‘society,’’ the latter being construed in accordance with a particular utility aggregation formula devised by social analysts. The very existence of multiple concepts of economic efficiency (Pareto allocative; Kaldor-Hicks allocative; productive efficiency; efficiency ‘‘X;’’ etc.) highlights the misunderstanding of those who take this concept as a reliable normative standard by which to appraise economic relations. Naturally, if we base the evaluation of antitrust policymaking on the personal, ethical, and utilitarian preferences of the analyst, we make the evaluation dependent on the personal motives of policymakers, rather than society’s. Hence, we adopt an alternative starting point for the analysis of antitrust policymaking. Instead of arguing in favor of a particular abstract or exogenous normative ethical standard, this chapter looks to the endogenous effects of the policy upon the economic system. By changing the nature of the problem to be addressed, our conclusions about the implications of the policy will be shifted from focusing on the consistency of individual cases with the particular exogenous normative standard chosen to evaluating the realistic effects of the policy on the transparency of the institutional setting in which firms interact. In this alternative approach, the success of economic liberalization is not measured by its capacity to improve market outcomes, so that they align with economic efficiency standards; instead, it is measured in terms of its capacity to preserve and expand the rule of law, which is the bedrock of institutional stability and transparency (O’ Driscoll Jr., Feulner and O’Grady, 2006, pp. 2-3). In a nutshell, this chapter will show why it is impossible for antitrust policy to succeed, given that its effective application undermines all traces of predictability from the market system, thereby undermining the market’s very foundations. This is so because it is impossible for the policy to consistently establish the positive existence of anticompetitive trade restrictions. The Antimarket Antitrust Policy Agenda 527 Due to this inconsistency, the practical effects of antitrust policymaking are quite the opposite of what it is supposed to achieve. Antitrust policymaking undermines the transparency of the institutional setting where businesses interact, thus weakening property rights and creating opportunities for less competitive firms to engage in rent seeking by challenging the market position of firms accused of using monopolistic power. Ultimately, the utilitarian nature of the economic welfare standard vests whoever is in charge of enforcing the policy with discretion to determine unilaterally whether consumers obtain a ‘‘fair’’ share of the benefits made possible by competitive restrictions. In the end, it is the decision maker’s theory about market causalities (i.e., his personal opinion) that will prevail over any alternative economic explanation of observed facts, because under utilitarian standards, the desirability of a policy is judged on the basis of its results, which in practice can only be assessed discretionally by law enforcement authorities. Judging the success of a policy on the basis of its capacity to achieve its goals creates problems because, as Rizzo (1985, p. 873) reminds us, ‘‘a utilitarian or balancing framework would require us to trace the full effects of each (tentative) judicial decision, and then evaluate it against the particular utilitarian standard adopted.’’ Thus, property rights are inevitably diminished by the aggregate welfare calculation that is implicit in the balancing test applied by antitrust authorities. The utilitarian maximization of social welfare combines the position of individuals into an aggregate welfare formula where property rights become collectivized: individual entitlements simply cease to exist in the aggregate calculation. The conventional casuistic antitrust analysis inherently undermines the structure and integrity of property rights in the economic system; it takes control over social resources away from economic agents and gives it to antitrust officials, who will assign entitlements on the basis of their social welfare calculus. For these reasons, Epstein (1982) notes how difficult it is to construct a normative system that bases its criteria for judgment exclusively on an aggregate measure of social satisfaction, whether stated in the form of utility, welfare, or wealth. He specifically points to the difficulty of reconciling antitrust postulates with the notions of property rights and corrective justice. On the surface, the methodology of antitrust policy appears to be supported by a set of stable economic and legal principles that provide a reliable basis for policymaking. Thus, a joint report (OECD, CADE and IBRAC, 1998, pp. 21-22) states that: In an attempt to limit biases in market definition, competition analysts have sought to agree on certain common methods for defining relevant markets applicable to different types of competition cases. The existence of commonly accepted methods for defining relevant markets makes competition analysis fact-intensive and relatively objective. However, the same report immediately acknowledges that: ‘‘nevertheless, the process of market definition is still reliant on individual interpretation and judgment . . . . Particular definitions of relevant markets are highly sensitive to 528 Chapter 12 circumstances, interpretation, and judgment and should not be ascribed an undeserved degree of generality’’ (Author’s emphasis). The report just quoted, however, does not mention the inherent impossibility of antitrust policy delivering stable results in order to attain consistent interpretations about the size of relevant markets in antitrust investigations. Naturally, without stable results, all players involved are unable to forecast any likely enforcement outcome arising from their business activity vis-à-vis competition rules. The rule of law ceases to exist. Thus, the working of antitrust policy is inherently associated with ad-hoc decision making that undermines the rule of law system. First, regardless of the apparent agreement on ‘‘certain common methods,’’ there seems to be no way to define the relevant market in a way that is nondiscretionary. No matter how much information is collected from various sources, such as sellers, buyers, and intermediaries, antitrust analysis remains highly discretionary. Legal control over the substantive merits of antitrust cases is impossible to achieve, due to the subjective nature of the knowledge upon which entrepreneurs make business decisions in the market, which is denied to third parties no matter how much economic data is collected from the market. Furthermore, the identification of social welfare in accordance with the utilitarian standard of economic welfare is impeded by the very essence of the utilitarian rule, since business conduct can only be evaluated in light of a future end point at which markets will attain competitive equilibrium. Given that this end point is located in the future, it is impossible for anyone to ascertain exactly how and when such a prospective state of affairs will, in fact, come about. Human foresight of future events is always tentative and therefore prone to error. For these two reasons, it is impossible for a stable, predictable rule of law to emerge. In the absence of clear legal principles to follow, antitrust enforcement becomes an exercise of mere intuition about the restrictive nature of business arrangements. In this exercise, personal interpretation of the net consumer welfare effects of the conduct, with no real basis in objective knowledge, fills the interpretative void created by the nature of the analysis. These problems emerge because authorities are confronted with an insoluble knowledge problem: that they are asked to anticipate (ex ante) the full implications (ex post facto) required for the utilitarian cost-benefit calculation involved in the market-wide welfare-balancing analysis. Accordingly, in light of their lack of the knowledge that would enable them to rule according to the merits of the cases examined, they are forced to make arbitrary interpersonal calculations of utility, precluding the stability required by any rule of law. Thus, there is no objective ‘‘balancing’’ test in which the net welfare effects arising from a given business undertaking are measured according to a fixed normative measuring stick. Instead, competition authorities substitute intuition for factual assessment of the substance of the cases before them. In some cases, they will accept output restrictions and monopoly power due to the net welfare effects they perceive as arising from the conduct examined, whereas in other cases, The Antimarket Antitrust Policy Agenda 529 they will not. Everything depends on the particular theoretical outlook of the authority on causal relationships in the market. Due process requires that the principles used to decide a case rest on consistent analytical foundations. Only when markets are accurately defined can it be established whether business conduct has harmed them or not. ‘‘Justice cannot take place in a competition case if markets are not clearly defined’’ (OECD, CADE and IBRAC, 1998, p. 19). Perhaps the ultimate solution is not so much based upon improving the methodology of antitrust analysis as on changing the problem to be solved entirely. In other words, to propose approaching competition policy from a radically different perspective, in a way that corresponds to our conventional notion of what competition is about, namely, a process of permanent searching for consumers’ tastes and needs. This should lead us into framing competition policy from an entirely different perspective, which we shall explore in the next chapter. 12.5 CONCLUSION: THE INSTITUTIONAL COSTS OF THE ANTITRUST UTOPIA Antitrust agencies correctly perceive that the need to preserve the rule of law is associated to the development of stable rules. However, in order to achieve such rules, economic data collected from economic agents and the market seems to be never enough to get a full view of the motives behind a given business strategy under review. It seems that the logic inspiring their decisions forces antitrust agencies to be always short of proper information to decide their cases. Usually, the lack of statistic official data as well as businesses’ intent to conceal selfincriminating information get the blame for the poor information which is perceived to dominate antitrust proceedings. In order to overcome these problems, new reforms in competition statutes are giving competition agencies increased powers to collect and process information. These include powers for conducting dawn raids, collection of information from economic agents, treatment of confidential information, and leniency programs. The purpose of these initiatives is obtaining more quantitative statistical and economic information about markets, to enable competition agencies a better assessment of the purpose behind business restraints; the existence of market power; or the existence of horizontal agreements per se prohibited. Clearly, antitrust policymakers are placing their emphasis on improved analytical skills through programs destined to enhance the collection of information in antitrust proceedings. Mexico’s 2006 amendments to the Competition Act, for instance, specifically targeted the information-gathering problem. Before the reform, the Commission routinely encountered difficulties when requesting information necessary to its investigations, and it was also customary for parties to provide limited or inaccurate information. To efficiently fight cartels and monopolistic practices in the course of law enforcement investigations, the Commission is now empowered to make verification visits to economic agents under investigation. 530 Chapter 12 The development of leniency and immunity programs in the area of hardcore cartels is also noteworthy. Latin American authorities are increasingly prosecuting the local end of global cartels in tandem with authorities in Europe, North America, and Asia. As a result, parties must carefully consider making a leniency or immunity application in Brazil and other countries as well as in the USA or EU. Mexico has also introduced leniency provisions in the amendments to its Competition Act. One of these relates to vertical agreements subject to a rule of reason analysis and mergers that are not disclosed as directed, while the other applies to horizontal agreements that are per se illegal in Mexico. Consensus is emerging on the need to introduce more quantitative measurement in the definition of the relevant market. This is assumed to limit the discretion of competition authorities in evaluating market concentration, and thereby monopoly power. However, economic analysis is becoming more complex, especially in the analysis of market size, where the use of econometric tools is not always reliable enough to gauge consumers’ subjective tastes and preferences. The analytical problems undermining the consistency of antitrust enforcement, however, are ultimately related to the very assessment of business behavior, and the quick assumptions of monopolistic conduct it infers upon economic agents. The assumption that objective information can be gathered arises from the very way in which the conventional analysis formulates the problem to be addressed by competition authorities: to find the optimal competitive equilibrium yardstick against which market conduct is to be assessed. Once this is achieved, it is relatively easy to deduce the parametric distance of economic agents from the ideal state of the market. However, this line of inquiry is futile, because it leads the analyst to examine idealized conditions that were not realized by businesses, or to ask what conduct would have allowed competitive equilibrium to accrue. By contrast, a meaningful inquiry should focus on exploring the reasons for businesses’ activity, asking why they engaged in an activity that appears anticompetitive. The subjective intent of businesses may reveal a fine line separating conduct that is intended to be competitive from that which is motivated by a monopolistic intent: for example, reducing prices may be a sensitive response of highly competitive firms rather than a monopolistic attempt to drive competitors out of the market. Yet the adoption of an idealized normative reference point for market assessment inevitably leads the analyst into seeing market strategies as monopolistic devices that undermine competition as it should have been under the competitive equilibrium solution. Hence, competition agencies fail to ascertain whether the business conduct under review is ‘‘monopolistic’’ rather than ‘‘competitive,’’ which is the very purpose of antitrust laws. This is clearly reflected in the sort of information that competition authorities expect to obtain in their market assessment. The information obtained by competition authorities is retrospective in the sense that it is based upon statistical data about what businesses did in the past, how they assessed their competitive position, how much output they produced, etc. By contrast, the information relevant for competition purposes is prospective, in the sense that it encompasses the potential The Antimarket Antitrust Policy Agenda 531 courses of action of all those agents that may impact the entrepreneur’s decision to produce certain amount of output. Moreover, price information gathered by competition agencies is parametric, in the sense that it considers the possible combinations that are needed for economic agents participating in the market to achieve competitive equilibrium. An assumption in neoclassical models of perfect competition is that all agents are price-takers. That is, they take prices on the market as parametric data. If everybody takes prices as given, nobody is left to change the prices. So, for example, in general equilibrium theory, one has to assume the existence of an auctioneer to oversee the auction process. No trading, consumption, or production can take place outside of the equilibrium. Asymmetric information, for example, conveys the idea that the analyst can determine the amount of information that is needed by less advantaged market agents in order to push the system into competitive equilibrium. Prices are parametric insofar they are assumed to convey a single vector, namely, the options of traders about alternative quantities; they say nothing about the qualitative factors influencing traders’ choices. Moreover, parametric prices are static, so that the analyst can use them in algebraic equations. In contrast, market competition is based upon information that is not parametric, but holistic and evolving, in the sense that it considers multiple factors in the decision of traders besides quantity, such as quality, time, and opportunity; this information is in permanent flux, as market agents constantly change their perceptions about the alternative uses of resources according to the perceptions of everybody else in the system. Finally, statistical data gathered by competition agencies is assumed to have universal value because it is regarded to be objective, in the sense that it can be understood and appraised by anyone in the same way. This information, which furnishes mathematical models, is deductive, i.e., drawn from logical reasoning based upon certain premises about rational conduct. In particular, the most important of these premises is perfect knowledge, or asymmetrical knowledge, depending on whether the analysis uses the workable competition model or the perfect competition model. Perfect knowledge is omniscient about the potential courses of action that individuals are to adopt, which in turn are constrained by the assumptions of the model. The analyst can never be mistaken, so long as he follows the logical implications drawn from the model that he uses to appraise reality. This intellectual reasoning resembles that of a mathematician; in his thinking, market outcomes are predetermined or bounded by the premises upon which his rests his analysis. By contrast, competition processes rest on information which is subjectively perceived by market participants. This way of perceiving relevant information about the market rests on the unique personal perception of entrepreneurs about the alternative costs of adopting competitive strategies, and is usually referred to as information about opportunity costs. The subjective nature of this sort of information primarily is supported on conjectures about what other economic agents will do or abstain to do in the market (Hayek, 1937; 1948; Richardson, 1960). Hence, it is information that cannot be quantified, because each individual would have a personal assessment of it. 532 Chapter 12 This information about entrepreneurial motives is essentially conjectural, because it is information that reflects entrepreneurs’ subjective valuations of alternative uses of production factors. In other words, it is information about entrepreneurs’ opportunity costs, the costs of foregoing the second best option, which they renounce in order to take whatever business decision they take. So entrepreneur Jones decides to invest 30% of his earnings in advertising his product, rather than improving his production plant. Such information can only be appraised in the context of Jones’ particular preferences, which are contingent on the particular economic circumstances within which he adopts his decision and on his subjective perception of those conditions. These circumstances, however, depend in turn of the actions of other economic agents (i.e., on their own entrepreneurial actions, also subject to subjective opportunity costs), thus creating a complex system in which isolating the individual preferences of the acting agent becomes impossible. This is a fundamental problem that reveals an epistemological inconsistency, because antitrust proceedings are based on information that is not about motives, but is information inferred from the logical implications of the particular antitrust model which is used to appraise the case at hand. Yet entrepreneurs act without any consideration of whether their actions conform to such ideal models; they act, instead, on information which is speculative, and always at risk of error. In other words, since their actions do not depend entirely on them, but on their need to respond to an array of other entrepreneurs’ decisions, it seems far-fetched to derive any conclusions about their alleged intentions to monopolize the market based on the mathematical models of perfect or workable competition. Thus, the flaws of antitrust analysis ultimately stem from relying on statistical data which is different from the sort of information used by entrepreneurs to support their investment decisions. From the viewpoint of the circumstantial evidence required to support a legal ‘‘finding,’’ antitrust analysis cannot establish from directly observable evidence whether the intentions of competitors are anticompetitive. The complexity of the real world is such that many factors concur in causing observed economic phenomena. Prices may vary for several reasons other than the alleged existence of an agreement between firms to fix them above competitive levels. Econometric statistics evidencing price correlation do not provide any knowledge about the intentions of competitors, because price correlation may be due to other external factors that have little to do with the existence of explicit or tacit agreements between competitors. Antitrust enforcement is thus confronted with an impossible task: finding objective anticompetitive restrictions based upon information that is subjective by nature. Economic interaction, in fact, is about market expectations; it is about beliefs about what other firms might or might not do. Tentative speculation about future strategies of other businesses dictates actions in the market. Yet, antitrust assessment is based upon retrospective, objective, statistical information. This is a fundamental problem of ‘‘incommensurability,’’ that is attempt to compare two categories that are not liable to comparison. The evidence in antitrust The Antimarket Antitrust Policy Agenda 533 cases is economic in nature; this means, in essence, that there is no objective fact the existence of which is confirmed through the senses, but mere inferences, deductions, and assumptions of the analyst, in which his or her particular views and ideas about market causalities play a fundamental role. Hence, antitrust economic theory transforms circumstantial evidence into sufficient proof by linking otherwise isolated facts into an elaborate chain of suppositions and predictions that depend on what economic theory predicts will be the future state of the market under certain postulated conditions. Richardson (1960) showed us the fallacy implicit in such thinking. He illustrated that the perfect competition model, which epitomizes this static perspective, cannot tell us how under its premises (i.e., perfect information) equilibrium can ever be attained in reality. This model tells us that the choices necessary to achieve optimal equilibrium are already ‘‘made,’’ thus assuming (one could say, evading), rather than explaining, how individuals can in fact ‘‘get there.’’ The competitive equilibrium view of markets does not provide a sound basis for policymaking aimed at promoting competition, simply because it assumes that the economic organization needed to attain equilibrium is entirely irrelevant, yet it is precisely such institutions (such as contractual devices; reputation; informal arrangements; and market standards) that embody the very purpose of antitrust analysis. It is these arrangements that are meaningful for policymaking purposes, yet this is what competition theories disregard in their models by focusing the attention of the analyst on a Nirvana competition state to which all other market structures are compared. Competition agencies are confronted with a fundamental problem when deciding what market outcomes are ‘‘optimal.’’ Optimality occurs under ideal market allocation conditions that ex hypothesi can never be possible to ascertain directly from observed market data. Only idealized, arbitrary inference can do the job. Ultimately, determining antitrust liability is not a matter of putting forward objective factual evidence in support of a given position; it is a speculative inquiry (theory) that inevitably creates a presumption of guilt for suspected parties, inasmuch as their economic organization always, to some degree, involves a departure from Nirvana, either by restricting output between its participants or by excluding potential competitors. The search for perfect justice puts competition agencies into the predicament of collecting an endless amount of statistical data about past behavior in order to show the prospective restrictive effects of market undertakings, without realizing the epistemological impossibility of this reasoning. Business decisions are taken prospectively, using pure speculation about what future conditions of the market will be: past behavior is merely illustrative of adopted courses of action that are permanently subject to review—and change—by entrepreneurs. But the search for perfect justice fostered by the antitrust utopia possesses devastating effects on the rules that guide entrepreneurs in their business decisions (i.e., the rule of law). Without any guidance about the real monopolistic intention of entrepreneurs, antitrust agencies cannot do anything else but speculate over their particular view of the net welfare effects of the business conduct under review. 534 Chapter 12 These effects are deduced from the utopian reference to competitive equilibrium rather than by any objective, circumstantial evidence that emerges from observed statistical information. This is a fundamental epistemological flaw affecting antitrust analysis, which no amount of economic data can overcome. More importantly, such reasoning undermines the balanced assessment of rights that should prevail in a rule of law system. Chapter 13 The Institutional Weakness of Competition Agencies The previous chapter highlighted the endogenous factors explaining why competition policy is geared toward undermining the rule of law. In this chapter we turn our attention to the exogenous institutional factors that put a constraint upon the activity of competition agencies. Understanding these factors is crucial in order to assess the array of likely outcomes one can expect from competition policy enforcement. Even if we assume that enforcing agencies possess vision and sense of purpose—an assumption that we questioned in the previous chapter, institutions, that is, the rules of the game, do matter. Political institutions are vested with powers to override individual rights in case the latter interfere with the utopian collective ‘‘public’’ goal. Like previous utopias pursued in the region, antitrust makes governments responsible for achieving the collective goals served by this policy. To do so, governments set up administrative agencies vested with the independence required to carry out their supervisory role. However, institutional independence is not defined by the mere formal enactment under the competition statutes, but is conditioned by complex interests expressing the realpolitik of power. In this chapter we concentrate our attention to the problems arising from the inner structure of competition agencies, and leave aside other public choice explanations about the real work of competition agencies (McChesney and Shughart, 1995). Our analysis will focus on whether it is realistic to expect competition agencies to be truly independent, given their submission to the political authorities with whom they must interact, due to their constitution as government agencies. In certain institutional settings characterized by interventionism and corporatism, such as those found in Latin American countries, trade-offs between institutional credibility and government intervention are particularly crucial. However, 536 Chapter 13 competition agencies suffer from a lack of credibility from the moment of their inception.401 In light of the many factors that affect their institutional competency, the question that arises is whether competition agencies are capable of promoting competition effectively and impartially, given their government adscription. This chapter explores why government competition agencies are poorly suited to accomplish transparent, impartial, and effective competition policymaking. Despite efforts to endow them with autonomy and freedom of action, competition authorities are called upon to address highly sensitive matters that the highly politicized climate of Latin American policymaking has not been able to overcome; as result, to a greater or lesser degree, their actions are doomed to fail. These flaws become even more problematic in light of the policy commitment placed upon the shoulders of competition agencies to advocate for competition within the government, a task for which they lack the necessary institutional independence and powers to make a credible effort. In short, this chapter will address the extent to which competition agencies in Latin America are capable of overcoming their institutional and organizational constraints in order to tackle government restraints on competition, a move that would enable them to become a major force for institutional change in their societies. 13.1 THE MARGINAL ROLE OF COURTS IN THE ANTITRUST SYSTEM The first question that arises in the institutional examination of the competition system is the role played by courts in it. Under a rule of law system subject to checks and balances, courts have a leading role in deciding over the allocation of property rights; they are in fact the natural guardians of economic rights, and therefore are best-situated to defend them. The emergence of regulatory agencies in the twentieth century, however, changed the foundations of the separation of powers, thereby restating the roles of both the government and the courts in the adjudication of such rights. Since 401. As Castañeda (pp. 2-4) explains, governments and courts in the region ‘‘have difficulty making credible commitments upon which firms and markets can base a stable set of expectations’’ because ‘‘only rarely Latin American governments have undertaken sweeping market reforms that can keep the necessary momentum and depth to fully consolidate; and even if such reforms were deep enough, then procedural legislation and inertia cause courts to take a long time to digest substantive changes.’’ As a result, ‘‘weak enforcement agencies typical of the Latin American region undermine policy and strengthen the real power of prominent monopolists. All these items, compounded by sudden swings in public policy objectives in the region, create a formidable hurdle for effective enforcement, therefore firms systematically question the stability of law and policy, and expectations are low. However, like in all learning and maturing processes, this obstacle will be less important if—a big if—effective enforcement of sound policy—an even bigger if—comes of age.’’ The Institutional Weakness of Competition Agencies 537 the emergence of such agencies, courts were confined to a marginal, indeed almost invisible role, of deciding about individuals’ economic rights (Galligan, 1990). The development of an ideology supporting government interventionism favored the preeminence of government regulatory commissions as expedient instruments for dealing with highly sophisticated economic problems that could not be handled well by members of the judiciary due to their lack of training on microeconomics. Of course, antitrust policy was not immune from this trend: the technical complexity of the field quickly revealed that courts were ill-suited to enforce the policy aptly. In general, courts are perceived to be unfamiliar with the economic substratum underlying market functions; their decisions frequently rely on formalities and ‘‘black letter’’ law rather than a substantive examination of the economic issues involving market competition. Judges are seldom familiar with the principles of market functioning that would give substantive foundation to their rulings, or able to understand the complexity of economic antitrust analysis. Instead, they depend on the old concepts of administrative law, which is formal, devoid of economic analysis, and particularly biased by a positivistic interpretation that often favors government intervention. Moreover, the courts perceived economists as driven by policy goals potentially threatening social justice. The natural inability of courts was reinforced by a legal tradition that has regarded economics as a field entirely devoid of connection with the ‘‘science of law.’’ This is well reflected in the tensions arising between competition agencies and appeal courts. Antitrust agencies, especially in their nascent years, strongly believed that policy enforcement had to be left to government units, rather than judges unqualified to deal with the vexing details of microeconomic analysis. Although judges are adequate adjudicators in competition cases, their background does not include the cross-disciplinary training that is required to understand the technical concepts used by economists. This natural bias in favor of a positivistic legal approach was reinforced in Latin America because of the Civil-Roman Law legal system prevailing in the region.402 402. Merryman (1989) explains that unlike their counterparts in Common Law countries, judges in countries within the Civil-Roman Law tradition, are regarded mere public servants devoid of any powers to create law; their powers are confined to mere interpretation of the law laid down by the Parliament. This perception impacted the development of regulatory agencies in countries belonging to each legal system. Cohen Tanugi (1985, pp. 110-111) contrasts the emergence of regulatory agencies in Common Law countries, which are the outcome of negotiations to give a special status to specific interests in society, such as consumers (the case of antitrust), ethnic minorities, environmentalists, and so on; with the development that occurred in France (and other Civil Law countries) where intervention has been made through the ambiguous and generalized concepts of intérêt général or the service public. He writes: ‘‘Aux Etats-Unis . . . les divers intérêts affectés par telle ou telle politique d’une agence administratif ont acquis le droit de participer à la formulation de cette politique par des procédures contradictoires formalisées, et de s’assurer un contrôle judiciaire sur l’équlibre réalisé entre les intérêts concurrents par l’Administration’. By constrast, in France: ‘Le concept central et fondateur du droit administratif francais, comme de la rhétorique politique, est celui de l’ intérêt général. Cést lui que sous-tend et légitime les notions de puissance publique et de service public, critères ayant historiquement servi à déterminer, à leur tour, la compétence du 538 Chapter 13 In the case of Latin America, technical incapacity was compounded by the general disrepute of the judiciary as an institution. The judicial system in the region is widely perceived to be in a state of crisis because it cannot fulfill society’s basic expectations of its role to order social relationships and to resolve conflicts. Economic agents have low expectations of the reliability of the system for delivering justice. ‘‘A climate of distrust and frustration permeates the system as has been acknowledged by virtually every sector of society including private individuals, the business community and system insiders like judges and lawyers’’ (Dakolias, 1995, p. 168). Practical experience with policy enforcement seems to confirm this view. Courts are usually inclined to decide antitrust cases on formal or procedural grounds in order to circumvent what it is perceived to be a difficult economic analysis. This is clearly reflected in the wide variety of standards followed by appeal courts. One standard of review looks for major departures from the language of the authorizing statute or from judicial precedents. If an agency veers too far afield on either basis, courts are likely to invalidate agency decisions; part of the basis for such rulings is the set of decisions made by other agencies that have already been reviewed by the judiciary. Moreover, the grounds for appeal are usually limited to errors of fact or of law, including the failure to follow a required process. Appellate bodies are generally not permitted to reconsider the merits of the decision and substitute their own judgment. Courts usually give priority to issues of due process rather than to the economic evaluation of the substantive merits of the case. Predictably, the control currently exercised by courts over the substance of antitrust policy making is limited to mere procedural questions, which judges feel better trained to deal with. Tineo (1997, p. 32) explains as follows: Given the history of official arbitrariness and disregard for due process, the acts of the competition agencies are highly vulnerable to the application of strict legal standards. Just as the courts tend to give precedence to form over substance, so the agencies are for their part very apt to favor substance over form, with the result that efforts to ensure the proper functioning of markets are often frustrated by failure to understand the circumstances in which the law is to be enforced. In view of the attitude of the courts toward antitrust cases, it is not surprising that antitrust scholars are inclined to express patronizing attitudes toward the role of courts in antitrust cases. For example, Kovacic (1997, p. 421) suggests constraining the involvement of the existing judiciary in the application of the law, by measures such as the creation of ad-hoc tribunals specializing in economic law or special divisions within the existing judiciary to handle antitrust matters. juge administratif et l’applicabilité du droit administratif. C’est parce que la puissance publique et le service public représentent et défendent l’intérêt dénéral qu’ils soivent bénéficier du statut exorbitant que leur confère le régime administratif. On retrouve ici, à un autre niveau et au profit de l’executif cette fois, la théorie que fonde la souveraineté de la loi, comme expression de la volonté générale.’’ The Institutional Weakness of Competition Agencies 539 These reasons explain why competition enforcement was vested upon administrative government agencies. With the exception of Chile and Panama, the rest of Latin American antitrust enforcement agencies have been based on the ‘‘Administrative Model’’ of the European Union. Under this model, the European Commission is in charge of prosecutions of infractions against the competition statute. Competition agencies thus remain under the jurisdiction of the executive branch of the government. A comparative survey of the institutional structure of competition enforcement agencies in the region reveals that these are generally administrative government units located at the Ministry of Industry or the Economy. Thus, unlike other jurisdictions with longer competition enforcement traditions, Latin American countries have generally adopted administrative systems of enforcement, delegating the task of implementing antitrust policy to specialized administrative agencies within the government. Legal culture indirectly influenced the decision to create administrative agencies within governments for the promotion of competition. Latin American countries possess established systems of administrative law regulating the activities carried out by governments. Given this tradition, the creation of administrative units for the promotion of the new antitrust policy was regarded as a natural move, consistent with the logic of vesting governments with powers to implement economic reform. Hence, most jurisdictions in the region follow administrative procedures for the analysis of anticompetitive practices. Professional bias also played a role in leaving courts aside as prime enforcers of antitrust rules. Government technocrats thought that only well-trained government officers could cope with the economic concepts that underlie antitrust, because, compared to the conservative legal culture pervading the judiciary, the former group is much more receptive to policy reform initiatives. Furthermore, the structure of administrative agencies has certain advantages for achieving antitrust goals which are not found in the judiciary. For instance, the agency can combine its accumulated technical expertise with the flexibility of administrative discretion. In Latin American courts, the adjudication process of antitrust faces difficulties due to a lack of independence and human resources capability. Yet, there seems to be a paradox between the need to ensure highly qualified antitrust enforcement, which is aimed at ensuring technical independence, and the lack of practical independence in deciding competition matters which arises when competition agencies are subject to control by the executive branch of government. Competition agencies are zealous about their formal independence, which is expressed in several ways: competition authorities usually are the final decisionmaking authorities within the government, meaning that no political influence is exerted directly in individual cases; furthermore, they enjoy vast prosecution powers, including the freedom to choose which firms will be prosecuted, what economic sectors to survey, etc. Regardless of these signals of formal independence, their functioning depends to a large extent on their governments’ whim. Even in cases where antitrust enforcement agencies are set up through independent legal incorporation, membership in the executive branch of government—as opposed, for example, to the judiciary—influences their practical functioning decisively. 540 13.2 Chapter 13 THE MIRAGE OF AUTONOMOUS OF COMPETITION AGENCIES The inability to subject antitrust decisions to effective judicial review has induced the framers of antitrust policy to look into alternative ways of ensuring effective checks and balances in the implementation of the policy. A joint OECD, CADE and IBRAC report (1998, p. 16) identifies a long list of corporate governance standards a competition authority is expected to fulfill, including appointment of members, their tenure, the agency’s legal powers, and its institutional effectiveness. These standards emphasize internal controls built into the structure of the competition authority itself as a way of ensuring the authority’s effective independence of action.403 These standards highlight policy performance as the key problem behind the question of institutional autonomy. In the sense usually attached to it by antitrust scholars, institutional autonomy is understood as the effective capacity of the agency to make decisions and carry them out (Przeworkski, 1995, p. 77). Autonomy relates to the need of the state to create an operative atmosphere at a certain time, so that the body in question meets pre-established goals.404 The generation of such an operative atmosphere depends on structural, institutional, and political factors. The interest in making these bodies as autonomous as possible is related to problems arising from an abrupt change to a high degree of economic freedom. The lack of an efficient competition agency, in an environment with a 403. These standards address the following issues: Do competition authorities operate independently from outside pressures, either from public or private agents? Are competition officials chosen on the basis of professional criteria? Are competition officials protected from the possibility of arbitrary removal from office? Do competition authorities enjoy relative financial independence and autonomy regarding staffing policies? Are there strict legal provisions against conflicts of interest? Do competition legislation and authorities have clear, nonconflicting objectives, such as achieving economic efficiency? Is the decision-making process transparent? Do concerned parties have a right to be notified that formal action under competition provisions has been initiated? Do interested parties have the right to controvert (by proof) any fact that bears on the issue at hand? Is it the case that no fact, no forecast (in competition cases that require forecasting market developments), no technical argument, nor any issue of liability, is conclusively presumed against any party? Has all information considered by administrative authorities been lawfully obtained? Do competition authorities possess the necessary tools for gathering sufficient information and conducting appropriate investigations? Are competition authorities required to construct a record of evidence and to render a decision based on the record? Are competition authorities required to make every effort to preserve the confidentiality of the information supplied to them as part of an investigation? Is the staff of the agency subject to strict legal provisions designed to protect confidentiality? Are sanctions commensurate with gravity of violation committed? Is impartial review of decisions available? 404. The term ‘‘autonomy’’ is closely related to the concept of ‘‘bureaucratic insulation.’’ According to Nunes (1996), bureaucratic insulation is the process of protecting the regulatory agency against interferences deriving from public or other intermediate organizations. When the government promotes the bureaucratic insulation of a particular body, it seeks to protect it from inherent uncertainties in broader institutional spheres such as congress, political parties or private demands, in order to ensure that it meets governmental objectives considered ‘‘technical’’ by the executive. The Institutional Weakness of Competition Agencies 541 high degree of economic freedom in which direct state control mechanisms are supposedly weakened, might lead to instability and exacerbate the economic players’ sense of uncertainty, thus negatively influencing investment rates. In the view of antitrust advocates, the institutional independence of competition agencies rests on four pillars: – possession of an independent legal charter; – financial autonomy in the provision of funds and management of its own resources; – tenure stability in the appointment of competition policy officials; and – involvement of several government bodies in the appointment of the competition authorities. 13.2.1 LEGAL CHARTER AND REPORTING DUTIES To enjoy effective independence in establishing their policy agenda independently from external intervention, international best standards emphasize the need of giving competition agencies a separate legal incorporation from other public entities, and particularly from the government. Operational independence is usually set forth in specific provisions that separate competition agencies from the rest of the government.405 Competition agencies require functional independence from governments to pursue their own course of action and define their own strategies for achieving the goals set forth in competition statutes without external interference. In the usual conduct of their activities, competition authorities must be free from the requirement of ex ante authorization from a superior political authority (e.g., the Ministry of Trade and Industry), which should be replaced by mere ex post reporting duties. International best practices vest competition authorities with immunity from political control by the government, usually through the minister with responsibility for production, trade, industry, or more generally, economic affairs. In the exercise of their functional independence, decisions from competition authorities are not subject to administrative review, but only to judicial review.406 Table 13-1 gives a comparative view of the independence of a sample of Latin American competition authorities, in terms of the adoption of independent legal charters and the scope of their reporting duties. 405. This is the case of Panama’s Art. 84 of Law No. 45/07, which endows the ACODECO an independent legal identity, and functional independence. In addition, Art. 23 of Mexico’s Competition Act, provides the Comisión Federal de Competencia with technical and operative autonomy, and autonomy to issue rulings; the commission is a semi-autonomous administrative agency in charge of enforcement of the policy and is a dependant of the Secretariat of Economy. Finally, according to Art. 19 of Venezuela’s Competition Act, Pro-Competencia has operational autonomy. 406. Article 53 of Venezuela’s Competition Act indicates that the decisions of Pro-Competencia can only be appealed before administrative courts. Decisions of the Chilean Antitrust Commission (today, the competition court, or TDLC) could only be appealed before the Supreme Court (Art. 19, Decrees Laws No. 211/73 and No. 2760/79). 542 Chapter 13 Table 13-1 Legal Charter and Reporting Duties Competition Authority Argentina Brazil CNDC SDE/SEAE— CADE407 Bolivia Chile SIRESE NEP—TDLC Colombia SIC Costa Rica COPROCOM Dominican Pro-Competencia Republic (Commission) El Salvador Superintendency/ Council of Competition Honduras CDPC Mexico CFC (administrative board) Nicaragua Pro-Competencia Panama Peru Venezuela ACODECO—Civil Courts INDECOPI Pro-Competencia (Superintendency) Reporting Duties Government Surveillance Ex ante Ex post Secretary of Commerce SEAE: subordinated to the Ministry of Finance; SDE: subordinated to the Ministry of Justice; and CADE: associated with the Ministry of Justice. Yes N/A No reporting duties Supreme Court of Justice Ex post Ministry of Development (MD) No reporting duties Ministry of Economy, Industry and Trade No National Council No Ministry of Economy No No Ministry of Trade Secretariat of Economy Ex post Ministry of Development, Industry and Trade (MIFIC) Supreme Court of Justice Ministry of Industry Ministry of Light Industries and Trade (MILCO) No No Ex ante 407. The Brazilian Competition Policy System (BCPS) is composed of the Secretariat for Economic Monitoring (SEAE), the Secretariat of Economic Law (SDE) and the Administrative Council for Economic Defence (CADE). SEAE and SDE have analytical and investigative functions while CADE is an administrative tribunal. CADE’s decisions can only be reviewed by the courts. The Institutional Weakness of Competition Agencies 543 The UNCTAD Secretariat (2000, pp. 33-34) advocates a ‘‘quasi-autonomous or independent body of the Government,’’ as the ‘‘most efficient type of administrative authority.’’ To be efficient, such an authority should have ‘‘strong judicial and administrative powers for conducting investigations, applying sanctions, etc., while at the same time providing for the possibility of recourse to a higher judicial body.’’ In suggesting this model, UNCTAD acknowledges that ‘‘a dominant trend in most of the competition authorities created in the recent past (usually in developing countries and countries in transition) is to award them as much administrative independence as possible.’’ UNCTAD emphasizes that ‘‘[t]his feature is very important because it protects the Authority from political influence.’’ From the viewpoint of their legal incorporation, Latin American competition agencies take the form either of government superintendencies or commissions; only exceptionally competition statutes provide for a decentralized system where the competition agency acts as public prosecutor, but decisions are ultimately rendered by specialized courts. Thus, at one end of the spectrum, one can find Argentina’s Comision Nacional para la Defensa de la Competencia (CNDC). This agency is only an advisory body and its decisions must be ratified by Secretary of Commerce within the Ministry of Economy and Production. Hence, in paper, at least, is the least independent competition entity of the region: Her role is merely technical (Coloma, 1997, p. 3). At the other extreme, the Chilean Competition Tribunal created by a recent amendment of the Competition Act (2004) is an independent entity and has its own staff, whose members are chosen for their competence and paid for two to three days of work per week. The composition of the Tribunal de Defensa de la Libre Competencia (TDLC) also reflects the particular flavor of Chile’s competition policy, which is highly influenced by the judiciary, departing from the traditional administrative agency/prosecutor model in place in the rest of the Latin American countries. Does legal incorporation provide independence to competition agencies? The answer is: Only to the extent that it is coupled with other institutional factors. While an independent legal incorporation enables the competition agency to dictate its decisions in accordance with its own policy priorities, it is no less true that there are subtle ways of influencing its decisions, and that mere legal incorporation is not an assurance of its institutional insulation. 13.2.2 FUNDING, SIZE OF AGENCY, HIRING QUALIFIED OFFICIALS Funding influences nearly every major issue facing a new competition agency; therefore, it is a key problem in an agency’s institutional development. The availability of financial and human resources is necessary to enable agencies to offer a high quality service, so that they gain credibility in the eyes of society. Competition agencies should enjoy budgetary and functional independence; they need to be assured of the provision of funds for their effective functioning and, above all, to have effective independence from governments in their activities. 544 Chapter 13 One of the first tasks in the successful management of competition agencies is to determine the amount of funding needed. Their expenses encompass the salaries of competition officials, administrative personnel, expenses related to the use of infrastructure services, buying office equipment, and hiring experts. Kovacic (1997, pp. 418-419) calculates the expenses associated with creating a rudimentary communication and information-processing network for a new antimonopoly service at around USD 80,000 to USD 100,000. However, this number is entirely arbitrary, as this range cannot be calculated for all cases, and depends on other considerations. Indeed, a look into the amount of funding granted to small competition agencies of the region regularly exceeds USD 1 million. The estimated funding of Latin American competition agencies is displayed in Figure 13-1. Sources: OECD. Figure 13-1 Funding of Latin American Competition Agencies (USD per Year/Personnel) The foregoing reveals the significance of the budget yearly allocated to each national competition agencies, divided by number of personnel working at the respective institution. As this chart shows, the allocation of funds to competition agencies is higher in countries that have adopted the Washington Consensus policies more decisively (El Salvador, Mexico, Peru); compared to countries that have returned to policies supporting government dirigisme (Argentina, Venezuela). This phenomenon reveals that government support is also a condition for the success of the institution. Possessing an independent legal charter may become a mere The Institutional Weakness of Competition Agencies 545 formality if the competition authority lacks funds to carry out its own policy agenda, or if it is required to ask for government funds from a political authority (e.g., the Ministry of Trade and Industry). Budgetary independence plays a fundamental role in ensuring the effective independence of the agency from political interference. The amount of funding is ultimately dependent on the scope of the policy agenda, which in turn determines the number of employees the agency should have and what the employees’ qualifications should be. A review of agencies around the world yields no clear answer to this question. With respect to the size of agencies, there are enormous differences. The Russian Federation’s Competition agency is by far the largest, with roughly 2,000 employees; the two U.S. federal agencies have a total of roughly 1,000 people doing antitrust work. Other examples range from Japan (with c. 530 employees), to the European Commission (c.500), Turkey (c. 300), Canada (c. 250), Mexico (c. 150), Brazil (c.350), Sweden (c. 120), Hungary (c. 100), Honduras (c. 25), El Salvador (c. 30), and Venezuela (c. 25). There is no magic formula for determining the number of staff members required by an agency. Many factors affect this decision: the responsibilities of the agency, the climate in which it must discharge those responsibilities, and its strategies for performing those tasks. It is difficult to identify optimum sizes for competition agencies in countries with vastly different economic circumstances and legal structures. Indeed, in small economies one might ask how one would go about deciding that five, ten, or hundred employees are sufficient to staff an effective competition agency in the context of a particular country. As a general proposition, ‘‘small is beautiful.’’ Overstaffing can dilute an agency’s professional focus and increase the direct costs of enforcement. It can also increase the indirect costs of regulation if the staff engages in unnecessary enforcement activities in order to justify its size. For these reasons, a sound general principle is to keep the permanent agency staff as small as possible, engaging consultants to assist with specialized tasks. Moreover, competition authorities have different views concerning the basic qualifications of the competition officials they hire. Policy enforcement requires personnel with a mix of skills in such fields as economics, finance, law, and engineering, as well as the character and integrity to resist improper pressures and inducements. People with these attributes are scarce in many reforming countries, and those who do have them will often receive attractive job offers in the business world. Therefore, attracting and retaining well-qualified staff often requires exempting agency staff from restrictive civil service salary rules. Of course, if the country also has a lucrative private competition law sector, competition authorities also offer other alternative incentives. So they pay people less at the beginning of their careers because they anticipate transitioning into private sector jobs where their agency experience will be compensated. In the United States, most professional competition employees are attorneys, due to the particularly litigious nature of competition enforcement in this country; in order to carry out their economic analysis, both the DOJ and FTC also employ many economists with doctorates, and civil investigations at both agencies are handled by attorney/economist teams. In contrast, the EU’s DG-Competition 546 Chapter 13 employs a broader mix of attorneys, economists, and generalists hired by the Commission on the basis of rigorous competitive examinations. Other agencies have varying combinations of attorneys, economists, generalists, and—in many transition economies—engineers, reflecting some combination of the government culture of the particular country, the legal system in which the antitrust agency must operate, and the going salary rate for different types of professional employees. The costs of hiring professionals are an important factor to consider. As reported by OECD (2003, p. 9), the limited resources faced by Venezuela’s then (1991) recently-founded competition agency, Pro-Competencia, forced the first chairman of the Venezuelan competition agency to hire a relatively small number of young economists and attorneys who would be both content with the relatively low salaries available and dedicated to the agency’s mission of spreading a culture of competition among a public long accustomed to extensive government intervention in the economy. However, the cohesion of this group proved to be resilient and created an enduring corporate culture. Personnel rotation is a daunting problem for competition authorities everywhere, due to the much higher salaries paid in the private sector for qualified attorneys and economists, compared to those paid by the government. Accordingly, highly valued employees often leave the competition agencies for private law firms and economic consulting firms. However, this is only the case in countries with well-developed markets for competition specialists, such as the U.S., EU, Canada, and other developed countries. In developing countries, personnel rotation is actually not very high, due to the absence of a sophisticated market for competition experts. In any event, the lack of an attractive salary package is usually offset by the provision of interdisciplinary training, course fees, and other collateral benefits. Finally, a new agency will need money for a sound physical plant, modern telecommunications and computer systems, including Internet access, and a library of relevant legal and economic literature. Sometimes, as in the case of the new South African agency, funding for such facilities will be provided. But very often, some or even many of these things will be lacking, and the antitrust agency’s performance may suffer. Sometimes, lending agencies such as the World Bank and other international donors provide funds for the initiation of competition agencies’ activities. This is been the experience of El Salvador (2005), Honduras (2006), and Nicaragua (2007). Regrettably, competition agencies in Latin America have been unsuccessful in overcoming their structural limitations to obtain funds from independent sources other than governments. In order to compensate for these shortcomings, some competition statutes formally allocate a budget independent from that of the ministry to which the competition agency is administratively attached. However, this provision is often subject to the reallocation of funds from other programs or the creation of new revenues—a difficult task in any context, and one that will tend to limit the resources that a competition agency can expect to receive. The Institutional Weakness of Competition Agencies 547 Competition agencies have special difficulties in obtaining independent sources of revenue by collecting service fees. Due to the litigious nature of the services they render, they cannot charge the beneficiaries of these services (i.e., consumers) with duties or levies. Although some countries have awarded their competition agencies a portion of the fines they collect in enforcement actions, this is always problematic, because ‘‘it may give the antitrust agency incentives to take inappropriate actions in order to augment its budget, and whether that is true in any particular case, it might be thought by the public (including the business community) to taint many of the agency’s actions’’ (OECD Secretariat, 2003, p. 9). Moreover, in contrast with sector regulatory agencies, competition enforcers cannot obtain their income from levies on consumers or from regulated firms, due to their horizontal reach across indeterminate industries. Except in the case of premerger filing (where services are linked to a nonlitigious activity), imposing direct levies on firms is unlikely, because it is not possible to discriminate between firms that would be subject to the surveillance of the agencies, and those who would never be subject to it. Furthermore, competition agencies are often prevented from accessing other funding sources, such as NGOs. General tax revenues are the main source of competition authorities’ financial resources; inevitably, these rules place competition authorities in a permanent state of underfunding. This is partly due to the overall perception that these agencies are merely small specialized regulatory boutiques with no relevant policymaking role. In light of the funding problems faced by competition agencies, some scholars have suggested earmarked funding as an alternative way of ensuring that agencies have a reliable source of income and thus as a safeguard of agency independence. Table 13-2 displays a selected group of countries and compares their competition agencies’ sources of funding. Table 13-2 Financial Autonomy Country Financial Autonomy of the Competition Agency Argentina Brazil Bolivia Chile Colombia Medium High N/A High Medium Costa Rica Dominican Republic Medium Medium Financial Sources Government Budget Government Budget N/A Government Budget Government Budget; taxes levied on commerce and industrial chambers; duties collected from IPR’s registry. Government Budget Government Budget 548 Chapter 13 Table 13-2 Continued Country Financial Autonomy of the Competition Agency El Salvador High Honduras High Mexico Nicaragua High High Panama Peru High High Venezuela Medium Financial Sources Government Budget; donations from international cooperation entities; earnings from the sale of publications (Article 20). Government Budget; donations from international cooperation entities; earnings from the sale of publications. Government Budget Government Budget; intergovernment cooperation; Collection of merger analysis duties; earnings from publications (Article 6). Government Budget Duties collected from procedures initiated before INDECOPI; duties collected from IPR’s registry; Funds received from international cooperation; amounts collected from imposed fines; donations. Government Budget In order to address these issues, some countries have sought to maximize the resources provided to competition agencies by finding special sources of funding. Newer competition legislation is enabling competition authorities to earn income from ‘‘earmarked funds’’ or ‘‘user fees.’’ For example, for some years, the United States competition agencies’ appropriated funds have come from the premerger notification filing fees received by the agencies (though much of this revenue is used for other government purposes). Other countries (e.g., Romania) impose user fees for processing applications for exemptions in particular transactions. In Brazil, collected merger filing fees are earmarked for the benefit of CADE (OECD and IADB, 2005a, p. 14). Furthermore, as will be explained in detail in the next section, the development of multitask competition authorities enables funding from collateral activities related to the surveillance of markets. For example, the Superintendency of Industry and Trade (Colombia) is also in charge of enforcing consumer protection policy, intellectual property rights protection, and technical standards registry fees. Similarly, the Institute of Competition Protection and Intellectual Property (Peru) enforces consumer protection policy, intellectual property rights, technical The Institutional Weakness of Competition Agencies 549 standards, and legislation on bankruptcies. Finally, Panama’s competition authority, ACODECO, is also in charge of enforcing consumer protection policy. All of these collateral activities ensure these entities sufficient funds (and political standing) to cover their competition activities. This solution acknowledges the fact that political considerations do influence budgetary allocations, giving more funds to politically attractive areas (i.e., consumer protection), which then subsidize antitrust enforcement within the agency. In conclusion, countries where the independent provision of funds is not ensured (e.g., Venezuela and Argentina) policy enforcement independence is politically undermined by budgetary restrictions; by contrast, independence is ensured where the provision of funds is not jeopardized by the government. 13.2.3 SCOPE OF ACTIVITY An important issue in the institutional development of competition authorities in developing countries is whether competition agencies should deal exclusively with enforcing antitrust policy or whether they should become involved in collateral areas such as unfair competition (e.g., false advertising); consumer protection; intellectual property; antidumping; and the setting of technical standards. This is a question that is often downplayed in the literature, yet it is very relevant to the institutionally weak competition agencies of developing and transition economies. There are advantages to placing competition authorities under the shelter of broader multitask agencies. These agencies are more efficient in ensuring economies of scale in the evaluation of markets, integration of capabilities, operational cost savings and fin the application of consistent criteria in the allocation of rights. In addition, the competition agency’s expenses are more likely to be covered through budgetary allocation if the authority is also in charge of consumer protection policy, which is politically sensitive; alternatively, the budget may be enhanced through service fees charged for patent or copyright registration. Clearly, this regime strengthens competition agencies vis-à-vis their respective governments by enhancing their freedom of action. This is the model that has been followed in Peru, Colombia, and Panama. By contrast, specialized competition agencies are subject to greater political intervention, as abundantly demonstrated in Venezuela, Argentina, Mexico, and Costa Rica. Whether competition laws vest enforcing authorities with authority over multiple areas of policy enforcement is one aspect that interacts with other institutional factors in defining their level of institutional independence. The specialized Chilean competition court is a good example of this. Although this court is a specialized institution, that condition is actually reinforced by its immunity to political interference, which is the by-product of Chile’s long-standing respect for the role of specialized entities in running the economy of the country. It is, therefore, a conviction that arises from cultural beliefs: this shows how the overall institutional backdrop plays a fundamental tune in this melody. 550 Chapter 13 Table 13-3 displays a sample of different competition agencies and compares their inner structure and jurisdiction. Table 13-3 Scope of Activities Country Jurisdiction Argentina Brazil Bolivia Chile Colombia Antitrust Policy Antitrust Policy Antitrust Policy Antitrust Policy Antitrust Policy, Consumer Protection, IPRs, Unfair Competition Antitrust Policy, Consumer Protection, Unfair Competition Antitrust Policy, Unfair Competition, Competition Advocacy Antitrust Policy Antitrust Policy Antitrust Policy Antitrust Policy, Competition advocacy, unfair competition Antitrust Policy, Consumer Protection Antitrust Policy, Consumer Protection, Unfair Competition, Antidumping, IPRs Antitrust Policy, Unfair Competition Costa Rica Dominican Republic El Salvador Honduras México Nicaragua Panama Peru Venezuela The enforcement experience of some countries has prompted them to streamline the activities originally assigned to competition agencies. For example, Panama’s Law No. 45/07 eliminates the former jurisdiction of the competition authority over the administration of antidumping and countervailing duties. Under the amendments, the new authority remains in charge of both competition policy and consumer protection matters. The reason behind this streamlining may lie in the inner difficulties of reconciling antitrust and antidumping policies, which may conflict due to their alternative goals: in the case of antidumping policy, the goal is the protection of domestic industry, whereas in the case of competition, the goal is the protection of consumer welfare. 13.2.4 STABILITY IN OFFICE AND QUALIFICATIONS Another Expression of competition authorities’ independence is the means by which their leaders are appointed, as well as their tenure. Appointment and removal procedures are usually subject to special conditions. Often, candidates to head The Institutional Weakness of Competition Agencies 551 competition agencies must meet a minimum age requirement, as in Venezuela (30 years); Mexico (35 years); Argentina (30 years); and Brazil (30 years). The tenure in office of the members of the authority varies from country to country. At present, members are appointed in Panama for five years, in Argentina for four years, and in Mexico for ten years. Appointees may only be removed in exceptional circumstances.408 In Brazil the appointment is for two years. In countries such as Argentina or Peru, members can be reappointed indefinitely, but in Brazil they may be reappointed only once. Legislation in several countries provides a process for removing from office a member of the competition authority who has engaged in certain actions or has become unfit for the post. For example, in Mexico a member can only be removed if he or she is charged and sentenced for a severe misdemeanor under criminal or labor legislation. In Argentina, removal can be based upon a failure to meet the obligations of a member of the competition authority. The procedure for removal varies from country to country. In some cases, independence is ensured by the appointment of representatives from different branches of government. On this account, Chile’s TDLC has the highest degree of autonomy. The new court established under the 2003 Competition Act has five members—lawyers and economists—and is characterized as a special and independent jurisdictional body, subject to the supervision of the Supreme Court of Justice. The TDLC and the Office of the National Economic Attorney (NEA) are the present enforcement authorities of the Chilean antitrust system. In many countries, the law leaves the appointment of the Chairman and the members of the Commission to the congress. In other countries, this task is left to the head of the government, usually the President. Exceptionally, however, this authority is granted to a government official, usually a minister or other high governmental official. In Argentina, the President of the Commission is an Under-Secretary of Commerce, and the members are appointed by the Minister of Economics. Some legislation establishes the internal structure and the functioning of the authority as well as rules for its operation, while other laws leave such details to the authority itself. Furthermore, most statutes require professional expertise and impose ethical standards. The members of competition agencies are often required to be either attorneys or economists.409 Several laws establish the qualifications that any person should have in order to become a member of the authority. For example, in Peru members of the Multi-sectorial Free Competition Commission must have a professional degree and at least ten years of experience in their respective field. In Brazil, members of the Administrative Economic Protection Council are chosen from among citizens recognized for their legal and economic knowledge and unblemished reputation. 408. Article 27, Competition Act. 409. Article 19, Law No. 7472/96 (Costa Rica); Art. 8, Law No. 25,156/99 (Argentina); Art. 4, Law No. 8884/94 (Brazil). 552 Chapter 13 Moreover, in a number of countries the legislation states that members should not have interests that would conflict with the functions to be performed. For example, a person should not have any financial or other interest likely to prejudicially affect his functions. This prohibition extends to ownership, chairmanship, or membership on the board of management or the supervisory board of any enterprise, cartel, trade industry association, or professional association. These provisions are included in the legislation of all Latin American countries. In addition, the presidents, vice-presidents, senior officials, and members of the agency usually may not pursue other activities for profit other than activities dedicated to scientific, educational, artistic, authorial, and inventive pursuits, or activities arising out of legal relationships aimed at linguistic and editorial revision. They may not serve as senior officials of a business organization or as members of a supervisory board or board of directors. The only exception in Latin America is Costa Rica, where competition commissioners can take part in profit-seeking activities. Table 13-4 provides a comparison of several countries in connection with the tenure and length of mandate of competition authorities. Table 13-4 Eligibility and Tenure Tenure + Renewal (Years) Argentina 6þ3 Brazil 2þ2 Chile 6þ6 Colombia 4 Costa Rica 4 þ 4 El Salvador 5 Eligibility Criteria for Membership to the Decision-Making Body 2 lawyers and 2 economists; 5 years experience Candidates must be prestigious attorneys or economists 3 attorney (including the Chairman) and 2 economists National Prosecutor must be an attorney Experience in matters germane to the law 1 lawyer, 1 economist and 2 professional with university degrees in matters germane to the law 30 years old; university degree in economics, law, management; 5 years experience (Article 9) Appointing Authority National Congress National Congress President of the Republic (1); Central Bank (2); Supreme Court (2) President of the Republic President of the Republic, following recommendation from the Ministry of Economy, Industry and Trade. President of the Republic 553 The Institutional Weakness of Competition Agencies Table 13-4 Continued Tenure + Renewal (Years) Eligibility Criteria for Membership to the Decision-Making Body Honduras 7 30 years old; university degree in economics, law, social sciences and management; 5 years Experience. University degrees in matters germane to the law; 30-75 year old At least, 1 lawyer and 1 economist (Article 7); 30-75 year old; university degree in economics, law, management; 5 years experience (Article 9) Mexico 10 Nicaragua 5 Panama Peru 5 5 years experience INDECOPI’s 5 years professional Chairman: 5 experience Magistrates: 1þ1 Venezuela 4þ4 30 years old Appointing Authority National Congress President of the Republic President of the Republic appoints; National Assembly ratifies. Candidates are nominated by: Superior Council of Private Enterprises (1); Council of Small and Medium enterprises (1); Ministry of Trade and Industry (1) (Article 7) President of the Republic Ministry of Industry appoints INDECOPI’s Directorate members Ministry of industry, at the request of INDECOPI’s Directorate appoints Magistrates of INDECOPI’s Tribunal President of the Republic Yet, regardless of the existence of legal provisions providing for tenure and strict conditions of appointment, competition authorities are usually subject to pressure and legal measures that undermine their stability in the post. 13.3 INSUFFICIENT INSTITUTIONAL SAFEGUARDS A major problem affecting the capacity of antitrust agencies to deliver predictable decisions consistent with a rule of law system is their structural incapacity to 554 Chapter 13 constrain the wide discretion accorded to them in the interpretation of economic data. This is clearly visible in three areas: (i) internal organizational problems; (ii) overlapping jurisdictions of multiple agencies; and (iii) the open-ended wording of antitrust provisions. 13.3.1 ORGANIZATIONAL PROBLEMS INSIDE COMPETITION AGENCIES Competition agencies enhance their reputation for independence through a higher level of predictability in the decision-making process. However, this is not an easy goal to attain. The effectiveness of antitrust policy depends on ensuring that enforcement procedures integrate the three prosecutorial stages (i.e., investigation, prosecution, and adjudication), while balancing effectiveness with the preservation of impartiality in decision making. In ensuring both ends, it is fundamental that the authority have the necessary powers, while also guaranteeing the professionalism of the officials handling the cases and the impartiality of those deciding them. One very important aspect is the decision-making role of the competition authority. The question is at what level does dispute resolution takes place; or, to put it differently, what is the decision-making level of the authority. It is a single body headed by a Superintendent, or is it a Commission integrated by a collective body of appointed commissioners? Furthermore, what are the powers of the competition authority? Are they powers to initiate and decide cases, or are they merely powers to investigate and bring prosecutions forward to the attention of courts? Sometimes the law vests competition agencies with powers to delimit the scope of economic rights of contending parties in a controversy. In this role, the competition authority is given a full status as decision maker. Alternatively, the law may endorse the competition authority with a prosecutorial role, where the role of the agency is mainly inquisitorial and limited to the submission of a case before an independent court, which will render a decision upon the arguments presented by both the prosecutor, and the investigated party. Naturally, in the end, courts are the ones responsible for defining the scope of economic rights under antitrust laws. Like all countries subject to the Civil-Roman Law legal system, public policies like antitrust are enforced through government administrative agencies, whose decisions are reviewed by courts at the judiciary level. With the notable exception of Chile and Panama, where antitrust cases are conducted by a public prosecutor, in all other Latin American countries government officials conduct the policy, whether they are collective decision-making commissions or single decision-making superintendencies. Table13-5, below displays the remarkable variety of organizational enforcement structures prevailing in Latin America. 555 The Institutional Weakness of Competition Agencies Table 13-5 Structure of Competition Authorities in Latin America Competition Authority Argentina CNDC Brazil SDE/SJC—CADE Bolivia SIRESE Chile Colombia NEP—TDLC SIC Costa Rica COPROCOM Dominican Republic Pro-Competencia (Commission) El Salvador Superintendency/ Council of Competition Honduras CDPC Mexico CFC Nicaragua Pro-Competencia Panama ACODECO—Civil Courts INDECOPI Peru Members of the Rule Making Board 7 Magistrates (Article 18, Law No. 25156/99) (yet to be appointed, to replace current 5 commissioners— Articles 6 through 16, Law No. 25156/99) 7 members (Articles 4, Law No. 8884/94) President (1) Commissioners (6) N/A Magistrales (5) Superintendent (1); Delegate Sup. (1) Commissioners (5) (Articles 18-27, Law No. 7472/94) 5 commissioners (Article 20, Law No. 42/08) Superintendent (1); Directors (2) 3 commissioners (Articles 20 and 22, Decree No. 357/05) 5 Commissioners (Articles 23-29, Competition Act) President (1); Directors (2) Manager and a Deputy for antitrust matters Directorate (3) (Article 4, Decree Law No. 25868/92); Magistrates of INDECOPI’s Tribunal: 6 vocals Nature of Functions Adjudicative Commission Adjudicative Commission Adjudicative Sector Regulator Prosecutor/Court Adjudicative Superintendency Adjudicative Commission Adjudicative Adjudicative Superintendency Adjudicative Commission Adjudicative Commission Adjudicative Commission Prosecutor/Court Adjudicative Commission AU: Should be Magistrates? 556 Chapter 13 Table 13-5 Continued Competition Authority Venezuela Pro-Competencia (Superintendency) Members of the Rule Making Board Nature of Functions (Article 11, second paragraph, Decree Law No. 25868/92) Superintendent (1); Adjudicative Deputy Sup. (1) Superintendency Competition agencies are usually structured around administrative government agencies. Due to the involvement of governments in setting up antitrust policy in countries lacking previous experience in the field, it is not surprising that administrative agencies predominate in the region. Here one can see the legacy of government interventionism that underlies the antitrust philosophy. By and large, most competition systems in the world are enforced by adjudicative administrative government entities. These authorities not only prosecute; they also allocate economic rights according to their conception of competition. Although each prosecutorial stage is clearly dissected and distinguished in order to ensure due process, in practice this distinction becomes blurred, as the same enforcing officials usually participate at every stage of the investigation. In Peru, for example, the competition authority is an administrative commission that investigates, prosecutes, and decides cases. However, a specialized administrative tribunal on competition enforcement reviews its decisions, thereby providing external controls. El Salvador has a mixed system wherein a superintendent, who is in charge of investigations and prosecution, is also member of the Council, the decisionmaking body.410 Of course, from the point of view of exerting more government interventionism, government administrative agencies are a better choice compared to the more balanced approach of prosecutorial systems. Administrative entities may enjoy more flexibility in enforcement actions because they handle the entire antitrust case from investigation to final disposition. However, consolidating these activities under a single authority may introduce rule-of-law problems because of the personal involvement of the prosecuting authorities in the investigation. In this model, the decision-making authority also acts as prosecutor, a combination of roles that is highly difficult to reconcile with the need to preserve due process, impartiality, and the rule of law. Normally, competition agencies created under this dual model develop regulations and bylaws in which the separation of roles is achieved through internal separation into different administrative units. The potential lack of protection of individual rights in a system where one body determines the outcome at all stages there may cause problems, especially in 410. Respectively, (Arts. 13, 6 and 14.a), Decree No. 528/04 (El Salvador). The Institutional Weakness of Competition Agencies 557 a country that lacks experience implementing a particular policy. It is clear that formal separation is often undermined by reality, in which investigating and prosecuting officials and decision makers all belong to the same administrative authority. It may be very difficult for the same people who carry out an investigation and bring a case against a business not to find the investigated party guilty as charged. This may create considerable uncertainty in the business community and have negative effects on further investment. That has undermined the transparency of antitrust policy, as it is implemented by governments, usually pursuing their own agenda which, as we have seen in Chapter 12, it is not easily accountable under the standards imposed by the rule of law. Prosecutorial systems rely on courts for the effective implementation of policy. Under this model, competition agencies present cases before courts, either specialized or nonspecialized; courts become the effective adjudicative entities. Perhaps the most important institutional advantage of the prosecutorial model over the alternative administrative adjudicative competition authority model rests on the sense of functional independence conveyed. Chile stands out as the only country where the law enforcement is in the hands of a public prosecutor who brings cases before the Tribunal de Defensa de la Competencia, which is an entity clearly detached from the government structure, in terms of its members and the procedure for their appointment before the agency.411 Panama’s competition enforcer, ACODECO, also enjoys prosecutorial powers that have been increased in the Law No. 45/2007. 13.3.2 OVERLAPPING AGENCIES In order to maximize their impact, competition schemes must rely on coherent institutional coordination. This coordination does not always exist, since competition policy is a new field that is sometimes addressed by giving new powers to government entities already in existence. Problems of political economy may lead to the granting of parallel jurisdiction over antitrust cases to multiple agencies. Brazil and the U.S. are two examples of this phenomenon. Competition enforcement in Brazil is carried out by CADE (an adjudicative commission) and the SEAE and SDE (prosecutorial agencies). The SEAE and SDE are governmental bodies administratively subordinated to the Ministry of Finance and Ministry of Justice, respectively, whereas CADE, as mentioned before, is an independent governmental agency. The SEAE and SDE issue nonbinding technical reports, the latter mainly based upon a legal standpoint, and the former mainly based upon an economic point of view. Both mergers and antitrust investigations are subject to technical analysis performed by the SEAE and SDE, which are thereafter forwarded to CADE for judgment. CADE is the ultimate competition body, rendering final decisions on antitrust cases. 411. See Section 13.2, above. 558 Chapter 13 The problems of conflicting decisions are shown in the Brasil Álcool S.A., Copersucar Armazéns Gerais S.A. and others (Alcool cartel case) (2003). In this case, the defendants notified CADE, the SEAE and the SDE under the Brazilian merger provision,412 but their transactions were analyzed differently by each of the three agencies. The SEAE evaluated the transactions separately, classified the parties’ conduct as collusion, and recommended that the operations be blocked. The SDE did not find that the parties were engaged in cartel formation and analyzed the operations separately under the merger provision. The SDE, however, recommended that the operation should be blocked and that the Public Attorney should be recommended to investigate the case. Finally, CADE did not even evaluate the parties’ conduct and evaluated the operations jointly under the merger provision. The tribunal decided to block the transactions but did not find it necessary to order the Public Attorney to investigate the case. This case illustrates why, in Brazil, there is currently proposed legislation that is designed to remodel the competition law system. It entails a broad-ranging revision of Law No. 8,884 that would combine the SDE and CADE; add new institutional elements to CADE’s structure; and redefine the role of the SEAE in the competition regime (OECD and IADB, 2005a, p. 14). Bolivia is another example of the problems of a decentralized competition model. Antitrust policy in Bolivia lacks uniformity, largely because it is not administered by a centralized competition authority. In the absence of a central authority, the policy is implemented through several, often overlapping, sector regulators. The regulation of five specific sectors of economic activity (essential services, electricity, hydrocarbons, transport, and telecommunications) is undertaken by separate superintendencies, overseen by the agency SIRESE.413 Each sector regulator has multiple legal mandates, of which promoting and protecting competition is one. As result, sector-specific rules dominate antitrust enforcement. In particular, Title V of Law No. 1600/94 (‘‘Provisions on competition and defense of competition’’), which creates SIRESE, contains several provisions dealing with specific anticompetitive practices, including the following: (i) anticompetitive agreements, contracts, decisions, and concerted arrangements such as: price fixing; limiting output, markets, supply sources or investments; or development of similar anticompetitive practices; (ii) abusive practices, including price discrimination and other nonequitable business practices; output limitation or restrictions imposed on supply sources, markets or on technical development; exclusionary conduct; and tying contracts; and (iii) mergers. This provision provides for the nullification of such agreements and imposition of fines.414 However, the sector regulators have yet to elaborate specific regulations implementing these provisions. As result, the development of competition rules has been uneven, depending on the degree of involvement of the particular regulator in competition issues. For example, SITTEL (the telecommunications 412. Article 54, Law No. 8884/94 (Brazil). 413. Law No. 1600/94. 414. Articles 20 and 21 of Law No. 1600/94, respectively. The Institutional Weakness of Competition Agencies 559 regulator) has been quite prolific in developing consistent rules for problems of access to infrastructure415 as well as the development of antitrust principles. Title XIV ‘‘On Antimonopoly Provisions and Exclusivity Privileges’’ of Supreme Decree No. 24132 sets forth specific prohibitions against providers of telecommunications services tying their services to the acquisition of equipment, shares, or any other payment that is not part of the fixed tariff.416 In short, of the assignment of responsibility for competition issues to sector regulators has downplayed the role of antitrust policy as a driver of overall policy activities, since sector regulators, naturally, feel more familiar with the logic of regulation than competition principles. Sector regulation has taken precedence over competition provisions, thereby rendering a general antitrust statute pointless, and fragmenting competition policy implementation into separate economic sectors. 13.3.3 THE OPEN-ENDED WORDING OF ANTITRUST PROVISIONS Due to the perception that the governmental nature of competition agencies provides too few institutional checks and balances, policymakers seek alternative ways of pursuing transparency in antitrust policymaking. One way of achieving this goal is to allow competition agencies to develop policy guidelines to clarify the purpose of antitrust rules. Thus, competition agencies should make it a priority to explain—to the public at large, to affected businesses and, not least, to their own staff—what their priorities are, how they investigate and make decisions, and the reasoning behind their enforcement and policy decisions. According to general principles of administrative law, competition authorities may interpret their own rulings and create policy guidelines. This rule making activity is perceived as adequate to give substance to what, in principle, would appear to be general competition standards devoid of specific relevance to particular cases. Thus, for example, an abstract definition of ‘‘monopoly power’’ does not help much in guiding practical policymaking; it is necessary to know how the competition authority in charge would interpret the constitutive economic elements of such a broad definition. An agency usually does this through formal regulations, speeches, media interviews, or by posting material on its website. There are readily accessible written guidelines, regulations, or other public guidance on these matters. In numerous developing and transition economy countries, competition agencies have set good examples for other government agencies in all these respects. For example, as a senior Brazilian Competition official recently stated: CADE ‘‘has been working very hard to build a new kind of institution based upon transparency, predictability, accountability, and simplicity. These principles are our cornerstone and guide a process of reputation building’’ (Salgado 1999). 415. Supreme Decree No. 26011. 416. Article 245, Supreme Decree No. 24132. 560 Chapter 13 Moreover, the advocates of guidelines note that future changes in the interpretation attached to administrative activity render them potentially useful, as they allegedly bind the authorities to follow administrative precedent. In this way, they become accountable to the public in general. In part, issuing guidelines in areas such as procedures, mergers and acquisitions, exclusive dealings, and franchises, has solved this problem satisfactorily. For example, Venezuela’s Pro-Competencia has issued instructions on the interpretation of the Exemptions Regime (Instructivo 1/1993), and the disclosure and approval of mergers and acquisitions (Instructivo 2/1994). In addition, competition statutes usually vest the competition agency with powers to issue ‘‘opinions’’ that clarify the legality of an actual or potential undertaking in connection with a particular firm.417 Notwithstanding these efforts, guidelines and opinions provide little help for the development of a rule of law system. Given that the understanding of the wording of competition statutes is contingent upon the particular ideology or economic theory embraced by the enforcing agency, it is of little use to rely on guidelines or opinions that ultimately will rest upon or reflect this particular opinion about market causalities. In the event that the incoming antitrust authority does not agree with the guidelines of its predecessors, it will simply change them. Furthermore, no guidelines can provide the stability rendered by a binding rule of law, which forces the judge to yield her own preferences to what previous decisions have already stated in connection with a debated point of law. An example of this problem is illustrated by the diverging opinions about the scope of the rule of reason. We refer the reader to Section 7.2.2 above for several illustrations of this problem. 13.4 POLITICAL INTERFERENCE OVER COMPETITION AGENCIES A country analysis of the competition policy experience in Latin America sheds light upon the great difficulties of competition agencies to pursue an independent, technically oriented policy agenda. Several examples in the region show how competition agencies are unable to overcome the pressure of their respective governments, yielding to objectives alien to the promotion of competition welfare. This is most evident in cases where policy agenda of competition agencies clashes with the distributive-oriented goals of general government policy. 13.4.1 VENEZUELA: FROM SHOW CASE TO A BASKET CASE Venezuela is the best illustration of the vulnerable state of competition authorities. Venezuela’s Competition Act formally vests Pro-Competencia, the competition 417. This is the case of Art. 24. 7 Competition Act (Mexico); Art. 21 of Regulation No.1 (Venezuela); Art. 24 f) Law No. 7432/94 (Costa Rica); Art. 103.10 Law No. 29/96 (Panama). The Institutional Weakness of Competition Agencies 561 agency, with functional independence. This agency is led by a superintendent and a deputy superintendent, both appointed by the President of the Republic for a four-year term. Indeed, the appointment of the head of the agency for a fixed tenure was one of the institutional innovations introduced by the Competition Act in Venezuela’s public sector; beforehand, public appointments of all government posts were subject to the discretion of the President. Other institutional features set forth in the Act, which in time would prove decisive, did not favor the independence of the competition agency. For example, the entity was administratively attached to the Ministry of Trade and Industry (today, Ministry of Light Industries and Commerce) for budgetary purposes. That left the formal statement of the law of the Pro-Competencia being a ‘‘functionally autonomous agency’’ seriously impaired. During the 1990s, Pro-Competencia enjoyed a remarkable record of stability and professionalism among competition agencies in the region. Separate internal divisions were in charge of legal advice, mergers and acquisitions, research, press relations, and administrative support. Case law combining highly sophisticated legal and economic analysis steadily brought a fresh air into legal practice, where lawyers grew curious about this new field of legal practice that seemed to reshape the traditional principles of administrative law. Similarly, a new generation of economists became aware of the relevance of microeconomics and regulation, two fields that until then had yielded to the study of macroeconomic, particularly in the form of Keynesian thinking. As policy enforcement progressed, it became more sophisticated. In time, the agency left its initial emphasis on hardcore cartel prosecution, and diversified its enforcement efforts, focusing on complex economic concentrations and abuses of dominant positions. The efficiency-oriented goals of the Competition Act were aligned with those of neoliberal economic reform. The wording of the Act clearly emphasizes ‘‘promotion and protection of free competition and the efficiency in favor of manufacturers, merchants and consumers’’ (Article 1). Accordingly, ProCompetencia presented business practices that prevent, restrict, falsify, or limit economic freedom. Pro-Competencia reached a zenith in 2000 with the passage of the Telecommunications Act. This piece of legislation contemplated a crucial role for the competition authority in the telecom sector, thus acknowledging its institutional respectability and leverage. Since then, however, the increasing political turmoil in the country has finally inhibited the former role of the agency in the country. The reversal of free market policies in Venezuela heralded a decline and a de facto dissolution of the agency. The passing of a new constitution in December 1999 severely undermined the constitutional market principles that had supported the very existence of the competition policy, and this phenomenon was noticed by the government almost immediately. The government perceived the agency as a neoliberal foe, whose presence in the public eye undermined its revolutionary agenda. Accordingly, it instructed the 562 Chapter 13 Ministry of Trade and Commerce to scrutinize Pro-Competencia’s actioins and impose restrictions on its budget in case of the latter’s departure from the instructions laid by the government. In the year 2001, a new Superintendent appointed by government initiated a change in Pro-Competencia’s policy agenda that increasingly eroded the high profile of the agency. Accordingly, the agency initiated a full reinterpretation of its previous efficiency-oriented doctrines, in favor of a policy oriented toward the protection of inefficient small businesses, particularly of those who were closely associated to the new elite of high government officials and businesses associated with it. Cases initiated for government authorities seeking public exposure, multiplied. Three cases entirely divorced from international best standards epitomize ProCompetencia’s new chartered course. The first case involved an alleged cement cartel. Pro-Competencia v. Cemex and others (2003) was a case triggered by a request of the Minister of Trade and Industry, which prompted Pro-Competencia to initiate an ex officio investigation immediately. To understand the rationale behind the decision to bring a case before the attention of Pro-Competencia, one has to look at the political considerations that were present in the decision. The construction industry in Venezuela enjoys a high political profile, due to its capacity to induce employment of unqualified workers (around 50% of the total labor force). Therefore, the political control of this industry was a sensitive issue for the government, who saw in Pro-Competencia a perfect instrument to achieve such goals. Pro-Competencia yielded to this pressure and opened a formal prosecution on the basis of mere ‘‘high correlation’’ of prices, and the fact that another similar case had been prosecuted and fined ‘‘in India’’ (!). In the Corporación Televen C.A., v. R.C.T.V, C.A., and Corporación Venezolana de Television, C.A. (Venevision) (Televen v. Venevision) (2005) case Pro-Competencia imposed the highest penalty ever imposed against any firm (averiguar monto) in a cartel case. Televen, a relatively minor TV channel, alleged that both Venevision and Radio Caracas Television, the second-and first-largest TV channels nationwide, were driving it out of the ratings market by undertaking several actions, including agreeing on programming, market sharing, and agreeing on price. Televen also claimed that the two competing channels had arranged the conditions for commercializing their advertising spaces through contracts that had limited Televen’s chances of contracting in the presale seasons. Furthermore, Televen alleged that both channels were associated with a company named Sercotel, which collected the payments that the advertisers were making for the advertising spaces, and then shared it between the two channels. Besides the obvious productive efficiencies that arose from information savings from sharing accounts of clients, several public appearances of the Superintendent before the media revealed the political subtext of the case. It was obvious that the government sought to impose financial pressure and political harassment upon RCTV and Venevision, widely acknowledged as independent media TV stations, and highly critical of the government. To do so, it used Pro-Competencia as the implementing device. Unsurprisingly, once the decision was issued, Venevision abandoned the AU: actioins or actions. The Institutional Weakness of Competition Agencies 563 independent editorial line that had been perceived as political opposition in government quarters. On the other hand, RCTV decided to stay on, as a result of which it was recently shut down for resisting the government’s political pressure to change its antigovernment editorial line. Finally, the political innuendo of Pro-Competencia’s decisions emerged again in the proposed acquisition of Digitel by Cantv (the Cantv-Digitel merger case). CANTV, a subsidiary of U.S.-incorporated Verizon, was Venezuela’s most important telecommunications company. Due to Venezuela’s socialist-oriented public policy guidelines, this firm operated in a ‘‘strategic’’ sector. Although the blocking of the merger was supported on technical grounds (high market shares accruing in the relevant market, increasing Verizon’s already considerable market power), it was clear that the case had a political motivation. There were significant doubts about the technical justifications arising from the high speed of innovation in this market, coupled with CONATEL’s reluctance to grant any more concessions for potential competitors. Thus, the government actually imposed obvious barriers to competition by market participants. In the end, Pro-Competencia made CANTV pay a huge price by foregoing the opportunity to acquire top-of-the-line technology to meet Movilstar’s (a subsidiary of Telefonica de España, S.A.) aggressive competition, which had recently entered the Venezuelan market. In addition, the government barrier to CANTV’s competitive strategy created an incentive to abandon the market and yield to the political pressure of the government. In response, management was seeking a way out by offering CANTV shares to a potential buyer. In February 2007 the government decided to nationalize CANTV. The outcomes in these cases (RCTV’s closure in 2007; CANTV being nationalized in 2007; Cement companies being nationalized in 2008) show the obvious political overtones of both cases tried before Pro-Competencia, as well as the extent to which the competition authority has been co-opted by the government political clout. To complicate matters worse, in the year 2001 the National Assembly took a decision to introduce new competition legislation along the new lines of the socalled Bolivarian revolution. A review of the proposed changes will give the reader a flavor of the direction of these interesting revolutionary reforms. The most obvious one is the title of the proposed new legislation. After some review, the National Assembly resolved to change its title to the ‘‘Anti-monopoly, Anti-oligopoly and Promotion of Fair Competition Bill.’’ The formal structure of the Competition Bill follows the basic model established in the 1992 Competition Act, with a general prohibition of anticompetitive behavior joint with a wide range of particular prohibitions. Nevertheless, there are major proposed changes, including: (i) public entities are immune from antitrust enforcement; (ii) a new undefined ‘‘prohibited conduct,’’ is introduced in addition to horizontal restraints, vertical restraints, abuse of dominance, and mergers; (iii) the notion of ‘‘fair competition’’ replaces that of ‘‘effective competition’’; (iv) administrative penalties are increased from 10% to 35% of gross income; 564 Chapter 13 (v) sector-specific exclusions from the law are provided for; and (vi) criminal penalties, including imprisonment are introduced in the law. The Venezuelan experience demonstrates the dangers that afflict antitrust policies and agencies in institutionally weak countries. In Venezuela’s case, it is evident that the agency has become a tool of political pressure against the business community. The possibility that antitrust policy would be converted into a retaliatory political instrument was surely beyond the wildest dreams of policymakers who introduced it in the 1990s. The Venezuelan case shows the inability of market-oriented competition authorities to survive in instances where the government’s overall economic policies run counter to such objectives. Other experiences in the region support this view. 13.4.2 ARGENTINA: THE AFTERMATH OF THE 2002 ECONOMIC CRISIS Competition Policy in Argentina is the oldest in Latin America. The first competition statute in this country was passed in 1919 (Law No. 11210/19), possibly taking inspiration from the U.S. antitrust Sherman Act. However, this law was never implemented effectively in view of the government policies implemented then, which clearly employed more direct means of controlling the economy. A law passed in 1980 (Law No. 22262/80) initiated a new state of affairs, which was consolidated in the 1990s, due to the introduction of neoliberal reforms. This law created the CNDC as a specialized unit at the Secretary of Commerce. The CNDC initiated a process of institutionalizing competition policy, as shown in the technical sophistication of case law. By 1999, a new law introduced a new institutional structure, headed by a competition court, with full independence from the government. However, Argentina’s competition policy plunged into severe institutional disruptions following the 2002 economic crisis. The government saw in this crisis an opportunity to seize control of the increasing autonomous institutions, such as the Supreme Court, as well as other technically oriented agencies institutions that had been implemented in the 1990s under neoliberal reforms. Competition policy would be a victim of this development. To begin, the government resisted calls for appointing the judges that had been nominated under the new Competition Act, thereby leaving competition institutions under a de facto status quo. The gross delay in appointing judges to the Competition Tribunal as mandated by the 1999 Competition Act reveals how reluctant the government has been to give competition institutions an independent quasi-judicial structure, which could threaten its own obvious desire to maintain a strong grip on the economy. Moreover, the agency’s budget allocation was seriously reduced; unnecessary control over merger authorizations was imposed; and has shown a total disregard for the competition-advocacy activity of the CNDC. In fact, the CNDC did not even dare to raise objections to the price control policy enforced across the economy by the government since 2002. 565 The Institutional Weakness of Competition Agencies Clearly, there are important institutional constraints on their ability of CNDC to act independently from government direction. Although the CNDC continues to operate, several circumstances indicate that it lacks institutional support to pursue a consistent proconsumer-welfare competition policy, as mandated under the law. The UNCTAD states the following, in connection with CNDC’s actual institutional standing: Although in 2005 there was a project aimed to introduce law amendments and to create the National Tribunal for the Defence of Competition, it could not proceed because all the issues were refused in the Parliament. Recently (2006), another project currently under negotiations is being analysed in Parliament and the CNDC. The amendment will strengthen the institutional framework and promote competition culture within the country. Another area of attention is the relationship with regulatory bodies. Section 16 of Law No. 25156 has a special provision that applies to mergers in regulated sectors. In the event that such a merger is proposed, the CNDC ‘‘shall require from the relevant State Institution a report and considered opinion on the economic concentration proposal concerning its impact on competition in the respective market or on its compliance with the relevant regulatory framework.’’ However, in the light of the failed efforts to introduce competition in privatized utilities, it appears that such provision is not consistently pursued. Again, the lack of political clout is evident. In short, the competition agency’s subordination to government policy has been reinforced by the impact of national economic policy on the country. Economic crisis, combined with the presence of a government that clearly opposes promarket policies, has undermined Argentinean competition institutions severely after a promising start in the 1990s. It is not a coincidence that all initiatives aimed at reinforcing competition institutions in this country have faced stiff resistance from the government. Just to illustrate, consider the unjustified delay in appointing the magistrates of the Competition Tribunal that was created in 1999. It is clear that the government has blocked any progress toward independence in the implementation of the policy. At present, the policy is still executed by the CNDC, whose decisions are subject to the review of the Secretary of Commerce, who is a nontenured government official, subject to removal at any time. 13.4.3 NICARAGUA: THE UNDERMINING LACK OF POLITICAL SUPPORT After several failed attempts that span for more than a decade, Nicaragua recently passed Law No. 601/06, and has just enacted Regulations of the Competition Act (Presidential Decree No. 79/06). The adoption of the Competition Act was preceded by several reports on the state of competition in specific sectors. A study prepared by IFC—FIAS in May 2003 entitled Nicaragua: Competitividad, Atracción de Inversiones Extranjeras Directas y rol de la Polı́tica de Competencia developed a methodology of competition analysis 566 Chapter 13 in the following markets: dairy products; beverages and soda drinks; fisheries (prawn and crayfish processing sectors); and land transportation. In regard to these sectors, the methodology explored the perception that cartels affect the milk and beverages industries. Similarly, vertical agreements are thought to be important influences in the prawn and crayfish processing sectors. The perceived degree of competition is very low in the transportation sector, which is particularly important for many exporters and the rural population. Government measures to tackle anticompetitive practices are seen as being fairly weak in Nicaragua. Therefore, this study reinforced the view that competition agencies must possess broad powers to advocate competition, prior to antitrust enforcement. Further studies were developed by the COMPAL Program418 on the state of competition in the flour, oil, and sugar markets, with direct implications for the purchasing power of the poor. Further steps for implementing competition policy in Nicaragua were expected from the new Sandinista Government (2007-2012). These included the appointment commissioners of Pro-Competencia, the national competition agency; the development of a consultation process with stakeholders concerning the promotion of competition; the development of the institutional capacity to implement competition policy; the development of a strategic plan for the years 20072011; and the training of Pro-Competencia’s officials in competition law. However, the Sandinista party has not favored competition policies, and only supported the passing of the competition law at a very late stage, when it was inevitable. Actually, in a move that reveals the government’s real opinion about competition policy, it recently ordered a revision of the Competition Act to increase the number of commissioners in charge of the authority, in order to change the internal correlation of votes within the Commission, against the balanced voting system that prevails in the revised Competition Act. Under the current system, decisions integrate the opinion of the business community, the academia and the government. It is not surprising that, as yet, the Commission has failed to issue a decision, even though it is already two years old. 13.4.4 HONDURAS: INSTITUTIONAL SETBACKS Honduras passed its Competition Act early in 2006 (Legislative Decree No. 357/06). The Honduran legislation follows international standards; including a distinction between per se and rule of reason conduct; thus restrictive practices may be prohibited due to their ‘‘nature’’ (Article 5) or their ‘‘effect’’ (Article 7). The law also provides for competition-advocacy powers (Article 34) and even premerger control (Articles 11 through 19). Before 2005, competition policy was not a priority in the agenda of Honduran governments. The adoption of competition policy in this country was the result of 418. About COMPAL, see Section, above. AU: Provide cross-reference for Section in reference 18. The Institutional Weakness of Competition Agencies 567 signing on to the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) in 2005. Like El Salvador and Nicaragua, Honduras was pressed to adopt competition regulations that complemented promarket investment rules. In fact, FIDE, Inversion y Exportaciones (Export Investments’ Fund), acted as a sponsor in charge of designing the competition bill and further institutional implementation of the law; this agency disbursed the funds provided by the World Bank for the development of the basic institutional setting for competition policy at the end of 2006 and early 2007. Although the Comisión para la Defensa y Promoción de la Competencia (CDPC) begun its activities a mere year ago, it has already launched important initiatives for the dissemination of the policy among stakeholders in the country. In late November 2006, a national conference on competition policy heralded the beginning of enforcement activities. Again, in January 2007, a colloquium before the Association of Honduran Economists drew the attention of the mass media to the significance of this agency. However, the activity of the agency has carefully avoided any challenge to the significant and obvious cartels that undermine the economy of Honduras. Internal studies point to the existence of extensive cartel structures in the sugar industry, diary products, liberal professions, and many others. However, the only prosecution launched by the CDPC since its creation, in the drugstores retailing industry, ended with a reduced administrative fine, despite the opinion of the CDPC’s technical unit in charge of the investigations. The significant reduction in the fine imposed in more than 50% of the initial estimate, did not prevent the infringents to appeal the decision, of course. This phenomenon reveals the precarious political position that the commissioners correctly perceive that is affecting CDPC’s further institutional consolidation. To illustrate this vulnerability, the government has called the CDPC to ratify its policy of ‘‘price stabilization,’’ which is merely a policy to ensure price reductions through organized cartels. In view of the CDPC’s reluctance to endorse such a policy, the competition authority runs into the risk of either being neglected from key government decisions or, even worse, being subject to direct control by the government. Although cases have not yet been initiated, it is expected that the CDPC will initiate investigative proceedings in the cement sector due to cartel allegations; it also has an important competition-advocacy agenda in the long-delayed liberalization of the pharmaceutical retail market. Other markets are also subject to current scrutiny, including credit cards, telecommunications, agricultural prices, and beverages. 13.4.5 COLOMBIA: STEADY INSTITUTIONALIZATION OF COMPETITION POLICY Colombia enacted its first antitrust legislation in 1959 (Law No. 155/59). However, these rules were not enforced due to the stifling effects on market competition of import substitution policies and detailed government regulation of business affairs. AU: infringents or infringements. 568 Chapter 13 Colombia had to wait more than three decades in order to implement antitrust rules effectively. Changes introduced in Colombia’s development model, particularly in economic policy, made antitrust enforcement feasible. Like other Latin American countries, the introduction of antitrust rules was regarded a measure to correct the potential excesses of economic opening and trade liberalization. Thus, in 1992, the Cabinet passed Decree No. 2153/92, based on the 1959 Antitrust Act, providing a proper regulatory framework for the implementation of antitrust legislation. Decree No. 2153/92 vests the Superintendency of Industry and Trade (SIC) with effective powers to handle competition-related matters. SIC is in charge of controlling anticompetitive and unfair trade practices, applying consumer protection laws and administering the trademark and patent registry. SIC is an administrative authority; however, in 1998 it was given judicial authority to decide unfair trade and consumer protection cases. During the first decade of policy enforcement, SIC was particularly concerned with issues involving vertical restraints, dominant positions and unfair competition. The most notorious cases involved the provision of services and goods by dominant players, particularly exclusive dealerships in the automobile distribution market.419 Notwithstanding these successes, SIC’s authority has been undermined by the government in sensitive matters, such as mergers. An example of this is the resignation of the Superintendent in 2003, following a disagreement over a controversial decision that blocked a merger between the two main airlines of Colombia, which was simply ignored by the Civil Aviation Authority, which was ratified by the President of the Republic.420 However, competition policy has steadily become more stable, as economic policies have clearly emphasized the need for less direct government control through ex ante price controls, and has emphasized on ex post competition remedies. Also, the support in favor of formalizing competition policy along modern international standards has induced a revision of the legal instruments supporting 419. In the cases against General Motors Colmotores S.A. (GMC) and its network of dealerships (1997); Hyundai Colombia Automotriz S.A. and its network of dealerships (1997), and SOFASA S.A. and its dealerships (1997), respectively, an investigation was opened when it was established that certain privileges had been given by each of these distributors to their respective networks, including (i) imposing suggested prices for its vehicles, spare parts and accessories, to be used by the dealerships as sales prices; (ii) conditioning the supply of a product on the acceptance of additional obligations unrelated to the purpose of the contract; (iii) demanding product exclusivity, as the dealerships were prohibited from acquiring, promoting or selling new automotive vehicles, spare parts and accessories other than those supplied by the distributor; (iv) establishing territorial restrictions on the dealerships; (v) reserving to the distributor the exclusive right to sell to certain clients mentioned in the agreement; (vi) committing the dealerships to share advertising costs with the distributor, who would plan and carry it out according to its own criteria; moreover, the dealership could not use material that was not approved by the distributor. 420. This conflict is summarized in Section. AU: Provide cross-reference for Section in footnote 20. The Institutional Weakness of Competition Agencies 569 this policy. In 2005 the National Congress issued Law No. 962/05, which mandates the application of the rules of civil procedure to unfair trade cases tried before SIC. This was a long-awaited reform that will for sure bring stability and clarity to unfair competition cases that were previously tried in accordance with a mixture of administrative and civil procedures, which raised a great deal of procedural and constitutional issues that distracted the authority from the main substantive questions that unfair trade cases pose. A new antitrust statute, already under review by Congress, is intended to introduce important changes to the current competition institutions, as follows: (i) Centralization of competition enforcement. SIC will be vested with exclusive powers to enforce general as well as sector-specific competition provisions in the utilities, banking, and financial services sectors, including insurance, transportation and ports, and other sectors subject to specific regulation. This will entail full-scale revision of the powers currently allocated to sector-specific regulatory authorities in these areas, such as the Superintendency of Public Utilities, the Superintendency of Banks, the Superintendency of Ports and Transportation, and even the Aeronautic Authority; (ii) Lengthening of the statute of limitations for antitrust violations from three to six years; (iii) Establishing a time limit for preliminary investigations which currently can run for years without being closed or formally opened; (iv) Restricting the time for the proposal of settlements. The new law will require that in the event that the investigated party decides to offer SIC a settlement, it will only have the opportunity to propose it during the first stages of the procedure, so that SIC does not have to go through the whole process only to be faced with analyzing a settlement proposal at the end; and (v) Creation of a leniency program. Finally, the new law is also considering the adoption of a Leniency Program, which would help SIC in its fight against hardcore cartels and other anticompetitive practices. Under this program, SIC would be allowed to grant leniency to cartel members who have breached the Competition Law or continue to be in violation of it by engaging in absolute monopolistic practices, so long as a final resolution has not yet been issued at the close of an investigative procedure. These institutional changes are intended to give SIC a higher profile in the surveillance of competitive conditions in Colombia’s economy. It will also help SIC to solve the important cases it is now handling in a more effective way. 13.4.6 PANAMA: FRUSTRATION WITH THE JUDICIARY TRIGGERS REFORM Like the rest of the Latin American countries, Panama adopted its antitrust policy after adopting promarket measures and liberalizing price controls. Chronologically, 570 Chapter 13 this process took place during Panama’s negotiation for accession to the World Trade Organization (WTO) from 1995 to 1997. When Law No. 29/96 was passed, CLICAC, the competition authority, designed a communications strategy focused on several industries and aimed at several interest groups of Panama’s powerful business community. Moreover, it organized a large number of seminars designed to explain the law to members of the courts, lawyers, economists, trade unions, and consumers. However, the competition agency could never overcome the limitations imposed by the lack of understanding about the subject, which was new in this country, as well as the perception of inactivity that the public opinion felt, coming from a dirigiste regime where the government presence was ubiquituous at all levels of society. Moreover, competition policy severely suffered from the lack of commitment of judges in charge of implementing the policy. Judges were poorly trained in the nuances of the policy. As result, the public became increasingly impatient with the lack of progress perceived in CLICAC’s prosecutions, which were felt to find deaf ears in the judiciary. Due to their inadequate institutional structure, Panama’s competition institutions were recently overhauled by Decree Law No. 09/06 (today, Law No. 45/07), which amended Decree Law No. 29/96. In this country, due to perceived flaws arising in the implementation of the policy, a new single competition authority, the Autoridad de Proteccion al Consumidor y Defensa de la Competencia (ACODECO), replaced the CLICAC, Panama’s former competition body comprised of three commissioners. ACODECO is an authority chaired by a single Manager, under whom there are two national directors, one for competition policy matters and the other for consumer protection matters. The Competition Authority remains a public, decentralized entity with operational autonomy, and it is no longer attached to the Ministry of Commerce and Industry for budget allocation purposes. In fact, it will be controlled by the National Audit Authority (Contralorı́a); this fact speaks to its independence vis-à-vis the government. The amendments are intended to simplify the decision-making process within the Commission, in light of the CLICAC’s difficulties in reaching consensual decisions to prosecute cases before trial courts. However, the prosecutorial role of the agency, which is an important feature of the CLICAC remained unchanged in ACODECO. Under the amendments, the new Authority remains in charge of both competition policy and consumer protection matters. The amendments are intended to simplify the decision-making process within the Commission; however, it remains to be seen whether the institutional reforms introduced will produce effects. The addition of responsibilities for enforcing consumer policy in addition to competition policy threatens the interest of the Autoridad, in what perceives to be a highly sophisticated policy field, with no immediate political rewards. The agency runs the risk of being dragged into consumer policy matters which provide no real support for a more competitive environment across the Panamanian economy. The Institutional Weakness of Competition Agencies 13.4.7 571 DOMINICAN REPUBLIC: A HOPEFUL BEGINNING? The Dominican Republic has recently adopted a Competition Act (Law No. 42/08) pursuant to its international commitments arising out of several free trade agreements negotiated with the European Union, Canada, Chile, and CAFTA. This statute provides important innovations in the scope and conceptualization of competition rules. To begin, the Act vests the competition authority, Comisión Nacional de Defensa de la Competencia (‘‘Copro-Competencia’’) with powers to simplify rules, to deregulate the economy, and to subject government subsidies to promarket disciplines. Moreover, the business competition rules envisaged in Law No. 42/08 are confined to agreements (Article 5) and abuse of dominant position (Article 6). Hence, no provisions on mergers are included in the law, possibly reflecting the government’s wise decision of maximizing scarce public resources by concentrating its policy agenda in the most obvious restrictive cases, that is, cartel prosecution. Given that the commissioners have not been appointed, the commission has not yet been integrated. Hence, it is too early to decide what course policymaking will take in this country. Nevertheless, the clear technical precision of Law No. 42/ 08 is a promising indication of the potential success of the policy. 13.4.8 PERU: THE INSTITUTIONAL COSTS OF POLITICAL INTERFERENCE Like other Latin American countries, Peru has a long tradition of trade protectionism, ‘‘import substitution,’’ and substantial governmental involvement in the economy. These factors precluded sustained economic growth by cutting off foreign investment, while wasting domestic resources by subsidizing inefficiency. By the late 1980s, Peru had a rapidly declining GDP and a four-digit inflation rate. The ensuing economic crisis led to the imposition of market reforms in 1991. Although competition policy had been making inroads in Peru since the mid1980s (Supreme Decree No. 467/85 had tried to clamp down on monopolies), competition law and policy acquired full endorsement as result of the broad economic liberalization reforms initiated in 1991. The first operational competition statute passed was Legislative Decree No. 701/91. This statute prohibits abuse of a dominant position and cartel-like business practices. However, some sector-specific exceptions were allowed, and no general merger review provisions were adopted. Later, Legislative Decree No. 807/96 modified the competition rules. The aim of the antitrust law is to eliminate monopolistic practices and prevent restrictions on free competition in the production and marketing of goods and services. ‘‘Monopolistic act’’ is understood as any act that constitutes an abuse of a dominant position or any conduct that limits, restricts, or distorts free competition. 572 Chapter 13 Unlike other competition agencies in the region, which were created once economic reforms were complete, Peru’s INDECOPI was carefully conceived and structured at the beginning of such reforms. Its institutional structure is different from that prevailing in other countries; in Peru, antitrust matters are merely one of the many areas of promarket reform gathered under the purview of INDECOPI. Other areas include consumer protection, intellectual property rights, antidumping and subsidies policy, market access, and technical barriers. Due to its alignment with the promarket objectives of the government’s economic strategy, INDECOPI enjoyed strong presidential support at its inception. The agency soon became a powerful force for reform within Peru and one of developing world’s most articulate competition advocates. Moreover, the institutional design of the agency was conceived to maximize its effects. Peru’s free competition and market access laws represent the core of competition law and policy—the banning of anticompetitive conduct by enterprises and the key principle that governments should not restrict economic activity more than is necessary to achieve other social goals. The breadth of INDECOPI’s mandate has helped the agency as a promoter of competitive markets in a broad sense, but many of its activities—particularly those concerning bankruptcy, the standardization and accreditation process, and intellectual property protection—are much less closely related to core competition policy issues than many other government activities, such as creating interconnection rules or privatizing state assets, over which INDECOPI has no authority. All these factors contributed to INDECOPI’s auspicious beginning. The diversity of cases decided, the top quality of its leading team, the financial and technical support it received, and the high profile of the agency within the government highlighted the clarity of purpose sought. However, the close political linkage of INDECOPI to Alberto Fujimori’s government eventually became a liability once the government was overthrown in 2000. From then on, INDECOPI suffered from successive changes in its leading executive team and even its professional staff. For instance, qualified personnel abandoned the agency in late 2004, when a new President took office. In all, twenty-one professionals abandoned the agency in the course of a sixty day period, severely damaging the reputation and credibility of the authority. The OECD and IADB peer report on Peru (2004c, p. 64) highlight this problem: Although Indecopi is nominally an independent agency, it has no legal protection for its independent status, and the independence of its quasijudicial units has not always been respected. Indecopi now reports to the President of the Council of Ministers, rather than any Ministry. This system may be satisfactory vis-à-vis Indecopi’s Presidency and Board insofar as they oversee the agency’s administrative, investigative, analytical, and promotional units. It is not unusual for agency officials in charge of these activities to be removable at will and thus subject to some degree of government influence. Notably, although the former pro-Chicago School approach of leading authorities at INDECOPI was severely curtailed due to their retirement from the agency, one The Institutional Weakness of Competition Agencies 573 cannot say that the overall purpose of the authority was abandoned altogether. On the contrary, the same promarket commitment endured afterwards. 13.4.9 BRAZIL: THE NEED TO UNIFY ENFORCEMENT CRITERIA Brazil enacted its first antitrust statute in 1962 (Law No. 4137/62). This law set up the Conselho Administrativo de Defesa Economica (CADE) (Administrative Council for Economic Defense). However, like other countries in the region, competition policy remained ineffective until the advent of neoliberal reforms in the early 1990s, with the adoption of the Real Plan421 and other macroeconomic stabilization reforms. These reforms paved the way for the introduction of competition policy in most sectors of the Brazilian economy. Antitrust policy in the modern sense began in 1994, with the adoption of a new competition law (Law No. 8884/94). This law vested CADE with broad powers, as well as institutional autonomy to enforce the law. Moreover, aside from CADE, two other government agencies—the SDE (Secretariat of Economic Law— Ministry of Justice) and the SEAE (Secretariat for Economic Monitoring—Ministry of Finance)—are vested with advisory and investigative roles, respectively, in policy enforcement. Cases are begun in the SDE, and then are subjected to preliminary investigations and administrative proceedings before the file is submitted to CADE for final decision. Brazil has made important efforts to institutionalize its competition enforcement scheme in accordance with international standards; accordingly, it has made improvements in the quantitative analysis of markets; increased institutional coordination between CADE, the SEAE, and the SDE; and implemented a more balanced policy toward cartels and mergers. Rosemberg and da Matta Berardo (2007) note how the international community acknowledges that antitrust enforcement in Brazil has improved: the OECD stated that the Brazilian competition authorities have ‘‘made substantial headway during the past five years in implementing sound competition policy in Brazil’’ However, there is still much uncertainty arising from the centralization of competition institutions around the government. Rosemberg and da Matta Berardo (2007) explain: The number of cartel investigations in Brazil tends to increase, if we consider that the authorities are keeping their focus on getting more convictions, so as to support their competition-advocacy campaign. The adoption of the marker system for leniency applications is likely to lead to enlargement of the anticartel enforcement activities. Nonetheless, there is a political element which must be taken into account when discussing future trends in competition 421. The Real Plan (Plano Real, in Portuguese) was a set of measures taken to stabilize the Brazilian economy in early 1994, under the direction of Fernando Henrique Cardoso as the Minister of Finance, during the presidency of Itamar Franco. 574 Chapter 13 policy in Brazil for the next few years: even though CADE is composed of seven independent commissioners with a fixed term, both the SDE and SEAE are hierarchic and linked to the Ministry of Justice and the Ministry of Finance, respectively, and the indications of the ministries (and consequently those of both secretariats) depend on a political element, and are not only strictly based upon technical aspects. The maintenance of the focus on fighting anti-competitive conduct performed by the authorities is not assured. This state of continued uncertainty as to the future of competition policy in Brazil can only be resolved by means of an institutional reform of the existing structure of the competition authorities, which would require a change in the competition legislation. For this purpose, there is currently a bill before Congress, which proposes substantial modifications of the Competition Law, especially with regard to structure of the competition authorities and merger control proceedings. But there is still too much uncertainty as to whether this bill will actually be enacted. 13.4.10 EL SALVADOR: AN EMERGING PROMISE El Salvador stands out as an exception within the Central-American region, an example of the energetic drive that can characterize competition policy when it is supported by political will. In the aftermath of the Chapultepec Peace Accords (1992), the country embraced an energetic neoliberal agenda, as the reconstruction strategy, following the destructive civil war that had enraged the country in the 1980s. During the 1990s, El Salvador liberalized many sectors and privatized some state enterprises. Around the same time, discussions began on the adoption of a competition law. In recent years, the debate on the need for a competition law came to the fore. A Competition Promotion Commission was established within the Legislative Assembly to consider draft proposals for a competition law, and this concluded with the adoption of the Act. More recently, El Salvador joined DRCAFTA, which opened up Salvadorian domestic markets, although some key sectors, like sugar, remain sheltered from competition. However, it still took a decade before competition policy would be adopted; this phenomenon was due to the subtle reluctance of the right wing governments to affect private interest and privileges of the ruling group. Eventually, a Competition Act (Legislative Decree No. 528/04) would be adopted. This law created the Superintendencia de Competencia (Competition Superintendency) with broad prosecutorial and advocacy powers. More recently, the government passed the Regulations of the Competition Act in order to clarify the scope of prohibited business conduct, as well as procedural aspects involved in the implementation of the Act. The Superintendency has taken a vigorous enforcement of the law, and that has enhanced its widespread respect within the country, particularly within the business community, as well as abroad. The agency has already prosecuted two wheat milling companies in The Wheat Flour cartel case (2008), which affected the The Institutional Weakness of Competition Agencies 575 wheat flour industry, as well as an abuse of dominance entertained by several fuel distributing companies, in the 2006 case. ASDPP v. Chevron Caribbean Inc., Esso Standard Oil, S.A. Limited, Shell El Salvador, S.A. Also, it has identified potential abuses of dominant positions in the cement industry, where prices are among the highest in the region. In the market for beer, a single firm supplies the entire national market, managing twenty different brands and the nationwide distribution system for beer. Concerns have also been raised about potential price fixing in the markets for petroleum and sugar. Finally, small-and medium-sized enterprises have complained about being the target of other anticompetitive practices, including predatory pricing. More important, the Superintendency received a high rank at the OECD peer review finalized early in 2008. However, not even the Superintendencia is spared from initial troubles in consolidating its policy. The allocation of the national budget did not even include payment for the Superintendencia’s basic operating infrastructure or the wages of professionals attached to the agency. This financial support actually came from international cooperation agencies and institutions such as the USAID, the IADB, and the World Bank. More importantly, in the event of a victory of the left-wing Frente de Liberacion Nacional (FLMN) at the national elections forthcoming in the beginning of 2009, there is no assurance that the work of the Superintendency will be maintained, as is expected that economic reforms will be reversed. 13.4.11 CHILE: A WORKABLE COMPETITION SCHEME? Chile has the oldest effective antitrust policy in the region. The legal framework of competition enforcement in Chile has existed for more than forty years; the first legal provisions about competition and market access date back to 1959, when the first the Competition Commission was established under Law No. 13305/59. However, as in other Latin American countries, antitrust policy only began making sense under the umbrella of economic liberalization, which in the case of Chile was initiated—albeit somewhat timidly—in 1973, as part of a program to roll back the previous government’s steps toward a state-planned economy. The enactment of Decree Law No. 211/73 thus heralded a new era for antitrust policy in Chile, which thus became a pioneer in the region. In the first years of practice, the Competition Commission acted cautiously and tended to focus on market foreclosures such as vertical restraints, which were perceived as per se anticompetitive restraints in those days. Enforcement resources were initially small, and enforcement was neither particularly vigorous nor a major part of Chile’s reform program, which emphasized trade liberalization, privatization, and deregulation. However, as an OECD and IADB report (2004b) states, it was precisely due to its relatively low-key approach and its consistency with Chile’s general free market orientation that competition law enforcement became an accepted, if not central, part of Chile’s legal and economic regulatory system. 576 Chapter 13 After democracy was restored in 1989, Chile’s centre-left government continued the overall orientation of competition policy from previous years, focusing on promoting a major ‘‘pro-growth agenda.’’ This agenda, developed by the government and the private sector, stressed procompetitive regulatory reform. This priority shielded policy enforcement from the setbacks experienced in other Latin American countries by creating the necessary institutional conditions for improved competition law enforcement. Other parts of the first agenda item included regulatory reform in key areas, such as telecom and electricity; other agenda items included reforms in areas (such as capital markets) that could also benefit competition and efficiency. Forty years after the competition system was introduced, however, it became evident that it had outlived its usefulness. Due to the institutional limitations of the Competition Commission, the policy yielded a diminishing impact on the overall economy. Progress in Chile’s economy, coupled with the increased sophistication of competition case law, called for new, strengthened institutions. The surprising independence and productivity displayed by the Competition Commission (the former Competition Authority)—surprising in that that some members were members of government ministries, all were unpaid, and all members worked only one half-day per week—was not enough to ensure an efficient level of policy management. In view of this, a new competition statute was passed in 2004. The new law eliminated the two tier scheme setting of a Antitrust Commission (Comision Resolutiva) and the Preventive Commissions (Comisiones Preventivas), entities that, with the support of the National Economic Attorney’s Office (NEA; in Spanish, the Fiscalia Nacional Economica or FNE), were in charge of resolving contested matters and engaging in consultation. Chile’s Competition Tribunal, the TDLC took over the role formerly entrusted to the Dispute Settlement Commission and Preventive Commissions. After its judges were sworn in, the TDLC formally started its work on May 13, 2005. The judiciary-based nature of Chile’s antitrust system makes it unique among the rest of Latin American countries. In this country, the TDLC is an independent jurisdictional body comprised of five members, subject to the supervision of the Supreme Court of Justice. The TDLC and the Office of the NEA are the current enforcement authorities of the Chilean antitrust system. The NEA, among other functions and duties, is empowered to initiate investigations to ensure the correct application of the Competition Law; to request and gather information deemed necessary for investigations; and to request that the TDLC initiate antitrust enforcement procedures. Like courts in other Latin American countries, the new court has developed a sophisticated economic analysis, in contrast to the rigid legal standards found in the administrative decisions of the old Commissions. As noted by a OECD and IADB Report (2004b): The main difference that may be noted when comparing the decisions of the court with those of the ‘‘old’’ Commissions is the relevance and sophistication The Institutional Weakness of Competition Agencies 577 of their economic analysis, now an essential and key issue in all court decisions. In this way, Chilean Competition law and policy has continued to develop mainly through the analysis of individual cases, but under a trend of solid and modern economic principles as guidance. Since the enactment of the 2004 reforms, the government, academics and the private sector have thoroughly analyzed the operation of the TDLC in light of its goals. In addition, the current state of affairs in the Chilean economy, which in the past years has seen significant mergers and acquisitions (both in terms of raw numbers and magnitude), has raised the importance of antitrust issues on the legal agenda. Competition regulation and enforcement in Chile continues to evolve. The most important lesson to be drawn from the Chilean experience is the power of endogenous growth and learning from experience in developing a self-confident competition policy. The capacity to devise policy priorities stands out as one of the most significant products of this experience. A notable example of this capacity, which shows the potential of competition policy in other Latin American countries, is the evaluation of competitive conditions in specific infrastructure sectors. Chilean authorities have been particularly active in highlighting the anticompetitive effects resulting from market foreclosure exercised by upstream dominant firms upon firms operating downstream. Indeed, the competition institutions have been much more impressive in their work with infrastructure monopolies than they have in traditional law enforcement against firms operating in markets that could and should be competitive. In part, this is the natural result of their focus on infrastructure monopolies—a focus that, so far, may have been better for Chile’s economy as a whole. In part, however, it appears to reflect other considerations, many of which are being addressed but still merit further attention. In the infrastructure sectors, Chile and its competition institutions have been at the forefront of competition policy generally. A case decided by Chile’s Competition Commission once prohibited the national telecom regulator from allocating additional spectrum to the two firms it had chosen and ordered it to hold an auction instead. Since that time, the involvement of the Competition Authority in regulated sectors has been significant: For instance, regulators in the telecom and electricity sectors are not authorized to set tariffs unless the Commission has found that the market is not competitive; in one instance, the Commission’s ruling that local telephony services were not competitive laid out six provisions aimed at creating a genuinely competitive market. Chile’s competition system illustrates the possibilities of a fully developed competition scheme in a developing country. For instance, it is notable that even representatives of Chilean business interests seem to believe that the competition institutions need more funding so that they can act more promptly without sacrificing the quality of their analysis. In addition, although the competition institutions’ cautious approach to problems other than infrastructure monopolies seems in some respects to have 578 Chapter 13 furthered the acceptance of competition enforcement, competition law and policy are not likely to make their maximum contributions to Chile’s productivity unless enforcement begins to address a wider range of industries and becomes more proactive and aggressive in challenging all forms of conduct—mergers, monopolization, and cartels—with substantial actual or likely anticompetitive effects. It has been suggested that the tradition of caution, including an apparent reluctance to find violations and to impose fines, has in part reflected a view in Chile that economic offences against the public are not serious and that the costs of monopoly may not exceed the costs of competition law enforcement. A combination of general competition advocacy (explaining the costs of monopolies and cartels) and enforcement guidelines (explaining the Office’s increased focus on economic efficiency) should help reassure academics, the private sector, and policymakers that the benefits of vigorous competition enforcement in Chile will far exceed the costs. 13.5 TRENDS AND PROSPECTS OF LATIN AMERICAN COMPETITON POLICY Although it is fair to give credit to the significant stock of institutional experience gained by competition agencies in Latin America after fifteen years of operation, domestically, competition authorities with few notable exceptions are largely perceived as small, specialized boutiques with no significant role in policymaking. This is particularly the case where the overall government policy conflicts with the consumer welfare enhancing objectives of competition agencies. Competition authorities have little political leverage, as reflected in the amount of public resources devoted to them by national governments. This is partly consequence of the preeminence of government objectives, and political consensus inspired by rent seeking, no matter the existence of well-developed competition statutes establishing fully functional competition agencies. Clearly, Latin America is far from overcoming its resilient tradition of government dirigisme, explained extensively in Chapter 1 of this book. But also, the institutional challenge of competition agencies is consequence of their in becoming more ‘‘visible’’ and useful to their respective societies. One can see here the negative influence of foreign technical advice, which usually neglected the underlying Latin American institutions where the policy was expected to produce results. Guided by such naı̈ve advice, competition agencies ventured into a demanding policy agenda with little impact in their societies. Antitrust enforcement has not reflected the need to identify a streamlined competition policy agenda that minimizes efforts and maximizes results; instead, it has forced competition agencies to make costly policy choices. This is well illustrated by the experience of Venezuela’s Pro-Competencia during the years 1994-1997, in which around 75% of its operational resources were dedicated to the examination of mergers, which were the main target of the authority due to the policy priorities of those in charge. In turn, only about 20% of the authority’s operational resources The Institutional Weakness of Competition Agencies 579 were devoted to ‘‘simpler’’ horizontal cases and competition-advocacy issues. Although statistical data about the effects of antitrust enforcement are still scarce,422 recent quantitative research studies (Hylton, Keith and Fei Deng, 2006, p. 1) indicate that more intensive merger or dominance law enforcement produced no obvious increase in measured competition intensity. Castañeda (2003, pp. 4-5) argues that the lack of clarity about their role has encouraged competition agencies to adopt a conceited self-image, in which they usually attempt to play the ‘‘hero’s role in law enforcement.’’ For instance: (a) Mexico’s competition statute provides that complaints, once admitted by the agency, should be handed over to defendants for rebuttal through a procedure in which the agency should play the role of an impartial judge by hearing evidence and arguments offered by the parties and issuing its corresponding ruling on the merits of the case, which can be appealed afterwards; (b) the agency designed implementing regulations (that in turn were formally implemented by the President of Mexico in 1998) that granted the agency a monopoly on the plaintiff’s role, relegating the complainant to the role of a mere aide during the proceedings; (c) the implementing regulations—in my view without economic rationale or legal foundation—also created a procedure where the agency must conduct pretrial ex officio ‘‘investigations,’’ which in fact have become biased fishing expeditions. The result: defendants, when the ‘‘heads up’’ signal is sent by the agency through its information requests, immediately resort to the courts at the start of the pretrial procedure to obtain injunctions against the agency; since the agency lacks the proper resources to pay for complex econometric studies and expert opinions, its rulings are often poorly reasoned and backed with little empirical evidence. Defendants then enjoy several opportunities to resort to courts so that effective enforcement can easily be thwarted. The Mexican experience is similar to that of other Latin American countries. Furthermore, policy demands are especially burdensome in cases involving vertical restraints and mergers and acquisitions, because they require evidence of the economic impact on affected parties. In general, the need to show economic harm will create an additional burden on the shoulders of competition authorities. Castañeda (2003, p. 12) observes: Another trend of concern in Latin America is the obsession of some agencies with complex vertical conduct cases that have been considered to carry 422. Nicholson (2004, p. 1) notes that ‘‘a relative dearth of analytical research accompanies [the] proliferation of antitrust studies and the increasing role of transnational governance. Empirical investigations into the causes and consequences of international antitrust policy lag behind these global trends, in large part suffering from a lack of quantification.’’ For instance, a comprehensive survey conducted by the World Economic Forum is limited to a relatively subjective and simple valuation of the broad category of antimonopoly policy. The results are published in the Global Competitiveness Report 2001-2002. 580 Chapter 13 considerable efficiencies even in the US (exclusive dealing, price discrimination, price predation), whilst only few cartelization cases are pursued. Such cases are often ill researched and their impact on the real world is uncertain. Why not focus on real threats to efficiency, like horizontal behavior and, most importantly, structural advocacy investigations? Perhaps the most noticeable feature of this still-unfinished period is the agencies’ failure to impose their procompetition agenda on the broader society, partly due to their own confusion about what exactly such agenda means. Unquestionably, this is what affects Latin American competition policy the most. Latin American competition policy still faces a notorious credibility deficit within society, which puts the agencies in a position of near-irrelevance in the process of influencing broad policymaking in a procompetitive way. To a great extent, these difficulties are ultimately related to the very definition of the competition policy agenda, which still is dominated by the search for an economic utopia, in the process eroding the rule of law in exchange for meager practical results. Competition agencies are, of course, aware of their limited role in public affairs, which is why they have undertaken steps to overturn it. However, all these initiatives rest on the assumption of the basic premise: the validity of the antitrust paradigm implicit in the enforcement of competition laws across Latin America. Therefore, they have taken measures that do not really solve the deep analytical flaws of antitrust analysis. On the contrary, they reinforce the conventional analysis of market power, which is based in the collection of quantitative information. Hence, the efforts of reform are primarily aimed at solving what is perceived to be a problem for the adequate enforcement of antitrust policy, namely, data collection and persuasion over economic agents to direct their actions in the market. Little attention is paid to the unfathomable problem of economic efficiencies, the analysis of which remains to be largely intuitive. And finally, of course, the relative neglect of competition advocacy as a primarily tool of competition promotion, which is left as a diminished tool for advancing competition. 13.6 CONCLUSION: WEAK COMPETITION INSTITUTIONS RENEW GOVERNMENT INTERVENTIONISM IN LATIN AMERICA Antitrust scholars argue that the success of the policy rests in the general public’s perception that it is a technical field demanding the judgment of experts and impartial authorities. Although it is undeniable that impartiality in decision making is a condition for the development of stable rules, such impartiality is not necessarily achieved through increased autonomy from governments; nor is it entirely desirable. To begin, impartial decisions, in the light of the important shortcomings of the SSNIP to attain stable decision making, are almost impossible to attain. The Institutional Weakness of Competition Agencies 581 More importantly, however, is the question of whether it is entirely desirable to preclude competition agencies from any relationship with their governments, for the sake of preserving their institutional autonomy at any cost. If anything, empirical evidence shows that in Latin America, competition agencies that attempt to avoid any contacts with their governments are almost surely end up becoming irrelevant public offices condemned into social oblivion. Optimal institutional design must ensure a fair balance between the demands of political insulation and the need of maintaining a constructive, flexible relationship with the governments, as main policymakers of the country. The agency must be perceived as a fair adjudicator of rights, but also, an effective one. Due to their status as part of the government, competition agencies face a daunting task in ensuring these two objectives simultaneously. The obvious priority given to enforcement of competition policy against business restraints, as opposed to those created by government, should not be a surprise, given that competition agencies were created as specialized agencies of the government and subject to the government’s clout. Their powers to advocate the elimination of government restrictions are meager and subject to limits resulting from the constitutional principle of separation of powers. The assumption that the autonomy of competition agencies would be a warrang for the success of the policy implementation efforts denotes the typical patronizing attitude of many advisers who judge economic reforms within the boundaries of the well-established checks and balances that exist in the developed world. In these countries, competition courts enjoy full powers to exert judicial review, and governments respectfully abide to their rulings. This way of thinking is the result of the way in which economic reform was undertaken in Latin America in the 1990s. The intellectual technocratic elite pressing for reform strongly believed that the economic reform effort was to be a series of enlightened targeted changes to the legislation governing economic relations. Often, laws were passed under the pressure of international lending organizations that endorsed neoliberal reforms, without close attention of the institutional setting within which these reforms were to be implemented. On the contrary, it was naively believed that policy success would be attained by merely observing certain basic organizational conditions, that is, independence, transparency and accountability of regulatory and antitrust institutions. Interestingly, a World Bank report (Kessides, 2004) recently criticized this view: One point is clear: Effective regulation requires more than formal requirements for independence, accountability, and transparency. Many governments are unlikely to observe the spirit of the law and implement proper, consistent regulation— especially if their initial ownership of reforms was weak and their acceptance of reforms was influenced by external pressures and loan conditions. In Latin America, clearly, institutional independence of competition agencies is far from real. However, this phenomenon should not be taken as a disadvantage; in fact, in view that all significant policy decisions influencing the allocation of property rights are decided by governments, one can easily conclude that the AU: Should be warrant? 582 Chapter 13 ‘‘autonomy’’ of competition agencies may in fact become a toll rather than an advantage, as it places competition agencies beyond the realm of policymaking centers of influence. In fact, it is naı̈ve to pretend that competition enforcement agencies can escape the pressing dependence arising from their membership in the bureaucracy of the government. Thus, matters such as budget allocation and staff appointment; labor matters such as holidays, bonuses, and permits; acquisition of equipment; internal administrative affairs; and many others are usually handled through the uniform procedures of the ministerial offices to which the competition agencies report. Their ‘‘independence’’ is often confined to the decision-making process involving the adoption of rulings that enforce the competition statute, and at a formal level, in making decisions about policy enforcement. Even here there are many hidden factors that influence such processes powerfully. Hence, their true independence of action is usually restrained by the pressure coming from public officials’ vested political interests, perhaps more so than by the pressure exerted by the private sector—except for those instances in which businesses act as political actors, for example, trade associations asking for exemptions or relief from the competition statute. The evidence shows that competition agencies in the region have yielded to the interference of their respective governments at every clash. Several examples confirm this view: The resignation of the Pro-Competencia’s superintendent in 2000 in Venezuela, following a conflict with the ‘‘revolutionary’’ views of Hugo Chavez on the direction of competition policy replicates in a comparable dimension the resignation of SIC’s superintendent in 2002 in Colombia, following a disagreement over the merger of two airline carriers. Similar outcomes occurred in Peru, after five years of successful policy implementation by Indecopi’s Executive Director, due to the support received during Fujimori’s years. The case of Argentina is even more telling: after eight years of passing a new competition law creating an independent tribunal, the Peronist administration has refused to appoint the new judges, in a move to prevent the constitution of an independent competition agency. Clearly, in order to overcome these limitations and provide competition agencies with a proper institutional toolkit, competition agencies should be given a new legal incorporation, outside of the government’s purview. An example in the right direction is Chile’s new TDLC; this case reveals the possibilities of competition agencies to develop an autonomous policymaking, even if constrained by shortage of resources. The lesson is clear: declaring institutional independence from governmental oversight is easier said than done. Although antitrust statutes have accepted the principle of independence by safeguarding a number of minimum institutional prerequisites such as functional independence from the government, sufficient financial resources, and technical expertise, competition agencies are far from winning their effective independence, particularly in countries where national governments defeat the very purpose of having a competition policy at all by enacting policies inspired by political populism and other antimarket values. The Institutional Weakness of Competition Agencies 583 Competition agencies in developing countries should take care not to break all their political ties with the government. In other words, operational independence should not be confused with institutional isolation. In the experience of developing countries, competition agencies have fared better when they have enjoyed political support from their governments. Additionally, closer political links with the government are useful for competition authorities in that they allow them to be permanently involved in the decision-making process at the cabinet level, which usually has significant effects in the creation of procompetitive rules for businesses. The success of competition-advocacy endeavors is often tied to the political clout enjoyed by competition authorities. Hence, competition authorities should not yield all of their political contact with the government in the pursuit of their own policymaking. Thus, there are advantages and disadvantages in sharing overt political links with the government in office. One advantage of the closer relationship with the government is the likelihood of effective involvement in regulatory reform initiatives. Regulatory reform is probably the single most important contribution that a competition authority can make to the transition process. However, competition authorities can also interfere with the government’s objectives, because their proposals may contradict many of the government’s anticompetitive policies. To ensure a fruitful relationship, safeguards must be established to preserve the independence of the competition authorities, in financial and functional terms, as well as in their recommendations on regulatory reform. European competition rules enable the Commission to evaluate legal restrictions arising from government subsides and public aid; similarly, most recent Latin American competition statutes vest competition authorities with powers to judicially challenge anticompetitive regulations enacted by governments. Chapter 14 Conclusions: Overcoming the Antitrust Utopia Definitions do not yield any knowledge about the real world, but they do influence impressions of the world. (G. Stigler Memoirs of an Unregulated Economist) An antitrust law in the works will reduce retailer speculation that has contributed to an increase in Ecuador’s inflation rate. (Rafael Correa, President of Ecuador, 2008) Neoliberal policy reforms introduced in the region in the 1980s were implemented in the belief that a rational approach toward policymaking could significantly improve the economic performance of Latin American economies by eliminating government discretion and political interference in business affairs, eliminating the set of rules and institutions that made free markets impossible. The hallmark of these reforms was economic efficiency, which was expected to bring Latin Americans wealth and sustained development (Levine, 1992). These reforms raised great hopes about raising Latin America’s economic performance. The coming of elite young technocrats to fill key government posts brought a sense of optimism to Latin American public affairs. It seemed as if, for the first time in its history, the region had decided to do away with its tradition of mercantilism and social exclusion. It was believed that the collapse of communism, represented by the symbolic fall of the Berlin Wall, had extinguished the last of the political utopias and that a healthy dose of realism and economic rationalism would hitherto influence Latin American economic policies. In time, these hopes would prove to be overly optimistic. Merely fifteen years after these events took place; the region is witnessing a quick resurgence of political populism and the reintroduction of government dirigisme. 586 Chapter 14 Although some authors (Gruben and Alm, 2007) believe this new trend to be confined to a few countries and a small segment of the overall population of Latin America, there seems to be a growing concern that the opposite may be true. An international journal of current affairs (The Economist, 2006) described the rising political wave created by left-wing populism in the region as Latin America’s soul battle, and more recently has interpreted this phenomenon as revealing a marked change in the political mood of Latin American constituencies toward free markets (The Economist, 2007). Somewhere along the way, social forces produced a backlash that has left the region in a great state of confusion about its future. Indeed, a great deal of confusion arose from the lack of a proper understanding of the scope of reform and the way in which Latin Americans would endorse it. Early on, antitrust policy was viewed as a key element of this rationally oriented policy reform agenda. Latin American antitrust policy is not new in the region, but it certainly received a huge endorsement in the late 1980s and early 1990s, as a byproduct of neoliberal reforms implemented throughout the region. Many took this policy, then, as a clear commitment to the new promarket ethos that intended to open Latin American economies to international capital and trade flows. Latin American technocrats presented the neoliberal reforms of the 1990s as a radical shift of public policy from inward-looking import substitution policies to an outward-looking export promotion model of development. This statement actually became a half-truth, as the fundamental institutions necessary to make this policy turn sustainable did not materialize. The Washington Consensus did not bring a change in the social perception about the need for government dirigisme, or the consequential erosion of property rights. What in fact happened was a more subtle change of direction in the way government dirigisme would be exerted. Significantly, control over property rights, which was a sine qua non condition for reaping the benefits of enhanced access to international markets, remained essentially concentrated around those enjoying political favor, as they had been previously, thus leaving most Latin Americans out of the globalization game. Several factors reinforce this conviction. First, governments neglected to grant property rights to all of society, confining privatization to small groups. Instead, they were contented to open trade barriers and stabilize their budgets in order to achieve macroeconomic equilibrium. The institutional change needed for markets and competition to flourish did not take place thoroughly. Only a few sectors were beneficiaries of economic reforms, while others embraced new forms of protection, remaining regulated just as they were before. The case of antidumping policies, which reinstated trade protectionism through a subtle defense of ‘‘unfair trade practices,’’ is a telling example of this bogus conversion. Antitrust policy is no more and no less than the by-product of the same intellectual environment that led the macroeconomic economic reforms. Yet, it represented one step further in the refinement of the policy goals that actually inspired reform, which in the Washington Consensus, appear somewhat intuitive: maximize consumer welfare through improved markets. Conclusions: Overcoming the Antitrust Utopia 587 The pursuit of utopian economic efficiency represents an impossible quest that has left a particular imprint on economic policy. More importantly, it is a major cause of the erosion of market institutions, notably, property rights, as they are forced to yield in the presence of the welfare maximizing cost-benefit analysis that characterizes neoliberal economic policy. Antitrust policy epitomizes better than any other policy the preeminence of the utilitarian calculus over property rights allocation. To the extent that this policy is given free discretion to limit property rights on the basis of utopian social goals, antitrust policy is no different from previous—failed—Latin American development policies. Understanding the inner nature of antitrust policy requires us to evaluate the policy against the institutional backdrop in which the policy emerges. In the case of Latin America, this backdrop is comprised by mercantilist customs, business corporatism, proliferation of legal monopolies, and preeminent government dirigisme. Those who advocate antitrust policy as a tool that effectively challenges these barriers to market development should support their claim with empirical evidence to this effect. An assessment of antitrust policies in the region suggests that they restate the government intervention practiced prior to reform, albeit in a more sophisticated technical form, to the extent that they reassign market participants’ economic rights according to an artificial formula of economic welfare devised by a government official that is imposed on spontaneous market outcomes. 14.1 THE WEIGHT OF IDEOLOGY IN THE SHAPE OF COMPETITION POLICIES This book examined how important it is to take into consideration the ideological biases of policymakers in charge of reforms, which may be even more important than the actual reform policies themselves. The ethos prevailing among the policymakers who conducted economic reforms in Latin America clearly was influenced by their resilient pursuit of an economic utopia. In implementing reforms, Latin Americans followed the natural instincts dictated by their government dirigisme ideology and pursued the mirage of utopia offered by neoclassical market theory as a reinterpretation of their previous social welfare objectives, albeit expressed in a technical fashion. Economic welfare utopia would be implemented through economic laws directed ‘‘from the top,’’ conveniently passed by decision-making authorities according to a carefully drafted set of authorizations and power delegations (i.e. the Parliament; the Cabinet; competition agencies; etc.). The policy agenda would seek to implement competitive equilibrium; hence, policy measures would inevitably concentrate on tinkering with market structure in order to prevent industries from increasing their concentration beyond certain limits or thresholds; similarly, business cooperation would be regarded a suspicious behavior, that conceals a monopolistic innuendo; and market allocation, instead of economic dynamic efficiency, would be taken as an accurate measure of market performance. 588 Chapter 14 The regulatory perspective developed by governments through the conventional economics approach was implemented through targeted legislation that sought to prevent ‘‘class market failures,’’ which were perceived as likely to occur in free market competition. Naturally, this approach led to the fragmentation of rights, as it vested competition agencies with unfettered administrative discretion to decide over individual cases, without any substantial judicial control, which was absent due to the lack of interest and economic training of judges, and above all, due to the very essence of the policy agenda, which was ultimately decided on ethical principle (i.e. consumer surplus), rather than on scientific reason. This approach suited the institutional backdrop within which these reformers had developed. As we have explained, for historical reasons, rent-seeking is ubiquitous in Latin America; economic and political power is the key of social wealth. By contrast, economic competition is not only seen unrelated to the production of wealth but culturally perceived as a nuisance, if not a subtle menace to be reckoned with, as it distracts resources from policy goals perceived to be more important from the ‘‘social’’ viewpoint. Whether the view of the antitrust analyst conflates that of society, this is beside the point. Hence, it is inevitable that the competition policy agenda sets sail amidst numerous exceptions directed to cover those ‘‘more important’’ goals, as evidenced in the flimsy powers vested in competition agencies to challenge ‘‘government monopolies’’ and anticompetitive regulations. Naturally, as state corporatism is characterized by an asymmetric distribution of decision-making mechanisms administered by a nominal state in response to the political pressure of private interests (i.e. businesses, corporations, workers, liberal professions, etc.), demands by social groups are neutralized through co-opting practices, which in turn generate a number of regulatory policies, such as rentseeking. This blend of statism, neomercantilism, and corporatism pervades all aspects of Latin American economic institutions; hence, the task entrusted to competition authorities is immense, to say the least. In short, Latin American corporatism follows an organizational format imposed ‘‘from above’’ by governments, and was institutionalized prior to the consolidation of industrial capitalism or any autonomous social movement. Thus, political centralism is the distinctive feature of Latin American societies, which is reflected in the historical tradition of weak governments imposed prior to and independent of any social movement. Government dirigisme, under the alibi of the pursuit of economic utopia, developed purposive legislation that implemented a blend of rent-seeking, corporatism, and mercantilism that characterized Latin American institutions. In such a context, economic players must confront two significant traits of Latin American nations: first, societies characterized by extreme social and economic inequality, resulting from a dearth of opportunities to participate in the economy; and secondly, low institutional consistency and credibility in the public sector. In this region, in contrast to developed countries, institutional arrangements are such that players lack equal decision-making possibilities in the formulation of consensual public policies. Conclusions: Overcoming the Antitrust Utopia 589 Therefore, like other institutions in the region, wealth was transferred from the poorest to the richest. These traits would be embedded in the general economic framework of neoclassical antitrust theory. In order to implement this system, antitrust statutes are structured in a way that essentially scrutinizes any form of cooperation between independent economic agents, either between competitors or between economic agents located at different stages of the production process. Since the statutes place constraints on business coordination, they make it more cumbersome for entrepreneurs to combine their mutual capabilities in order to develop new products or processes wanted by consumers. Of course, such coordination is only prohibited after a review process has taken place; however, this does not prevent antitrust laws from becoming an obstacle to the activity of entrepreneurs, who must shoulder the legal expenses associated with obtaining advice about whether the conduct they pursue could somehow be construed as limiting competition or could exclude potential competitors from the benefits arising from a contractual relationship with a dealer, a distributor, or a supplier. Naturally, insofar as these impediments curtail entrepreneurs’ drive to improve their own welfare through innovative products or production processes, it is to be expected that the income that is generated by exploiting the market is directed toward the real beneficiaries of antitrust laws, who act almost exactly as rent-seeking legal monopolists do: barriers against new competing products or processes capture the welfare that would go to consumers (and producers who legitimately profit from their own creativity) and place it in the hands of less efficient firms, who are thus protected by antitrust provisions. Usually, the beneficiaries are less entrepreneurial firms who cannot compete in the market against more efficient firms due to their economies of scale, access to finance, or simply their greater innovation and dexterity in arranging productive resources in a way that outdoes competitors. Bork (p. 159) and others have argued that ‘‘[m]isuse of courts and government agencies is a particularly effective means of delaying or stifling competition.’’423 423. Competitors may rely on government restrictions for a variety of reasons. Abuse of government processes presents a very different trade-off of risks and benefits than aggressive price cutting for several reasons. First, unlike predatory pricing, it frequently is likely to succeed, because the exclusionary effect often operates by force of law. Second, by comparison with predatory pricing, it may cost little to attempt. Finally, and most fundamentally, the conduct does not in any way resemble ‘‘competition on the merits.’’ False statements to government agencies are not susceptible to any justification. They cannot be explained in terms of the defendant’s effort to increase output or improve product quality, innovation or service. Some staff members of the FTC have described abuse of government processes as an example of ‘‘cheap exclusion’’—exclusionary conduct that is ‘‘cheap’’ both in the sense that it is inexpensive to attempt, and that it has little positive value to consumers because it lacks any cognizable efficiencies (Creighton, 2005; Creighton, Hoffman, Krattenmaker and Nagata, 2005; OECD Secretariat, 2005a, pp. 4, 7; Coppola, Maria and Russell Pittman, 2006, p. footnote 22). AU: Provide page range also. 590 Chapter 14 There are important differences between ordinary legal monopolies and those concealed and protected under antitrust prohibitions, because the former are defined for a certain period of time, whereas antitrust prohibitions are applied on a temporary basis—so long as market conditions are such that they favor the possession of a dominant position in the market by potential competition law infringers However, this factor does not alter the overall flow of income from the hands of more entrepreneurial firms—who, in the absence of legal constraints, are to be expected to capture a larger chunk of the market—to the hands of less entrepreneurial firms, who use antitrust prosecution as a deterrent against more competitive firms. All antitrust prohibitions are aimed at limiting entrepreneurial coordination that departs from the assumptions of the competitive equilibrium model. Since any conceivable form of business cooperation adversely affects the idealized conditions of perfect competition (and workable competition) to the extent that the firms involved hold market power, it follows that all forms of cooperation fall under the purview of antitrust prohibitions. This particular view of antitrust policy and enforcement is consistent with the pursuit of economic utopia in Latin America. This ideological orientation manifests itself in several ways: first, the protection of local industries against bigger foreign competitors (the utopia of economic nationalism); second, the protection of the state from private economic power (the utopia of mercantilism); third, the protection of small businesses against bigger firms (the utopia of capital dissemination); and finally, the search for a fair price in economic transactions (the utopia of ‘‘fair price’’). It is not surprising that antitrust law would be welcomed by Latin American policymakers, based on their false assumption that the policy would improve market functioning in the region. Rather than expressing a true commitment to a market economy, the introduction of antitrust policy in Latin America shows that the new ethos brought about by the institutional reforms is far from reaching a definition, and that old-fashioned ways of policymaking are at least dormant, if not yet reborn. Perhaps the lesson to be learned is that institutional reform in Latin America may require much more than the introduction of straightforward measures aimed at setting up new regulatory agencies throughout the region. It may require a change in the philosophy that underlies the general approach to policy implementation. Hence, a meaningful discussion about competition policy goals should be recast in different terms than the usual debate over whether the policy should pursue efficiency versus equity-oriented goals. It should explore whether policy reforms conceal government dirigisme behind their promarket façade, or whether their public interest overtone is in fact a renewed form of social dirigisme. As far as antitrust policy is concerned, the claim that the policy induces genuine market outcomes through purposive legislation seeking to overturn contractual agreements and entrepreneurial freedom is, at best, debatable. The ambiguity of the normative goals found in antitrust literature created a setting in which competition agencies were vested with broad discretion to conduct Conclusions: Overcoming the Antitrust Utopia 591 their enforcement activities, and made them immune from effective judicial control. Even the pursuit of consumer welfare, which is taken to be the most precise and transparent of antitrust goals, suffered from this basic flaw. In the context of Latin American antimarket institutions, it is likely that such normative ambiguity was the reason why the policy became attractive to policymakers in the region. Corporatism relies on the flexibility of legal rules to yield to particular interest, to the detriment of the general interest. This is possible as long as the normative goals of the policy are so ambiguous that, in the end, everything depends on which particular interpretation of economic welfare competition agencies choose to apply. Hence, it was almost inevitable that policymakers would endorse, in the name of protecting the welfare of consumers, an interpretation of competition policy goals that would eventually bring about the erosion of institutional conditions that were essential for the market to function at all, namely, the rule of law. Therefore, it was not a coincidence that reformist policymakers looked upon antitrust policy as a tool for filling the policy gaps they perceived in neoliberal macroeconomic reforms. Inspired by two seemingly contradictory objectives— equity, on the one hand, and efficiency on the other—the efficiency-oriented policy goals sought under antitrust policy seemed to be the very opposite of previous distributive policies that were emphasized during the years of Import Substitution policies and economic nationalism. One can only speculate about the ultimate reasons for lawmakers’ preference of antitrust over more direct means of market control. The appeal of the microeconomic policies inspired by neoliberal reforms, with their special reliance on price theory and elegant mathematical models of market conduct, certainly were very persuasive to policymakers, who developed a highly idealized picture of market functioning in which priority was given to scientific mathematical models predicting market outcomes, while ‘‘fuzzy’’ social institutions played a marginal role. In the context of such scientific analysis, the analysis of the welfare effects of alternative market models, such as perfect competition, monopoly, and their intermediate variants, would also adopt a formalistic and idealized overtone. Models predicting the welfare effects arising from various forms of ‘‘monopolistic’’ behavior inspired antitrust legal doctrines, which eventually were imposed by courts or legislation. Interestingly, the new language of technocrats promoted government intervention to protect markets from market failures caused by imperfect information coupled with monopolistic contrivances. The intervention of governments in markets would be presented in the respectable language of economic science, perceived to be ‘‘neutral’’ and exclusively guided by scientific principles. Competition policies introduced by Latin American policymakers would adopt a technical shape and methodological sophistication that had not been seen before. In contrast to the earlier rules governing business abuses—which, in those limited cases where they were actually prosecuted, were related to vague ‘‘unethical’’ commercial practices—the new enforcement of antitrust rules would adopt the highly sophisticated methods of economic science, in the 592 Chapter 14 interest of ‘‘precision’’ and ‘‘objectivity’’ in decision making. In the standard version of this story, predictable, objective scientific inquiry became the main driver of antitrust policy, to the benefit of businesses, which thereafter were subject to transparent and predictable business rules. All of these reasons encouraged Latin American policymakers to conceive of competition policy as a set of disciplines aimed at targeting business behaviors that they perceived as deviations from the idealized ‘‘optimal’’ legal standard of economic efficiency. In their particular view of economic rights as confined to the few and subject to intermediaries, the adoption of a policy geared toward controlling ‘‘market failures’’ was entirely consistent with the structure of property rights. 14.2 UTOPIA VERSUS REALITY: THE NEED TO RESTATE THE LATIN AMERICAN COMPETITION POLICY AGENDA ALONG INSTITUTIONAL LINES The first part of this book analyzed antitrust policy’s contrived analytical opposition between perfect competition and monopoly market structures, and the normative implications of this contradiction. Monopolies are taken to diminish social welfare and misallocate social resources by extracting from consumers a higher share of their wealth; by contrast, perfect competition represents the best possible allocation under present technological constraints. Surrogate models such as the workable or effective competition model do not alter this conclusion, but merely make competition analysis more complex. These models are grounded on the assumption that the perfect competition model cannot be found in ‘‘reality’’; yet, the epistemological flaws invalidating the latter also apply to the former: thus, like the perfect competition model, the effective competition model also endorses the mistaken welfare duality between perfect competition and pure monopoly. Naturally, under such logic, antitrust policymaking is funneled into seeking consumer welfare, primarily through the improvement of short-term resource allocation. The attention of competition agencies is, therefore, focused on challenging output-restrictive conduct that somehow undermines the natural capacity of individuals to attain socially optimal resource allocation. Of course, there are natural impediments to competitive equilibrium aside from monopolistic behavior. Markets are more or less concentrated due to the presence of structural factors such as technological constraints, scale economies, sunk costs, and asymmetries that undermine the spontaneous, even flow of information across the economic system. These factors change according to the nature of the products exchanged in the market as perceived by consumers, as well as the complexity of the production processes needed to produce such goods and services, their asset specificity, etc. Yet the existence of such natural restraints does not change the logic of competition authorities, whose role ultimately is to decide whether business behavior encourages further economic concentration in an unjustified way, that is, beyond Conclusions: Overcoming the Antitrust Utopia 593 markets’ natural obstacles, thereby lessening the structural capacity of markets to attain improved social welfare. At this point, antitrust theory cannot escape the logic of its conceptual premises. If individuals are assumed to introduce trade restrictions for the sake of attaining a higher income, it follows that the first point of inspection should be how easy it is for them to do so, given the presence of certain structural market conditions. In other words, competition authorities cannot determine what the economic impact of business conduct is by directly looking into it; they must infer such effects from a series of factors arising from the market setting in which they operate. It was inevitable that market concentration would become the prime focal point of attention for competition authorities. Robinson’s theory of Imperfect Competition directed economic analysis into a ‘‘wrong turning’’ where market dynamics was eclipsed by structural considerations about product substitution possibilities and firms being monopolists of their own production, which made market concentration to appear primarily responsible for the existence of market competition. Although industrial organization theory today has relaxed the analytical premises of the competitive equilibrium model into the more ‘‘dynamic’’ workable competition model, the intellectual premises of the Imperfect Competition model are still intact. Therefore, policymakers cannot escape the structural logic of the conventional price theory that supports policy enforcement, which underlies in this model. Competition authorities are not relieved of the need to examine whether suboptimal allocation is caused by structural factors which, in the first place, reveal the existence of some degree of injury to economic welfare. Naturally, the identification of competitive effects in a given undertaking is made more complex by the evaluation of productive efficiencies, which competition authorities incorporate into their analysis in order to make a fuller appraisal of the social welfare lost due to business contrivances. The evaluation of dynamic efficiencies, as explained in Chapter 2, emerged as a by-product of the ongoing revision of antitrust doctrines, whose implementation challenged undertakings that intuitively seemed necessary for avoiding practical problems of market interaction. Such problems arise in the context of real-life individuals, whose business activity is usually marked by uncertainty, lack of trust, and resilience, in contrast to the founding premises of the perfect competition model, which is based on the assumption that individuals possess all relevant information in the market and that their choices are rational. This contradiction is a major problem for the design of competition policy in Latin America. The ultimate goals of institutional reform in Latin America are entrepreneurial creativity, innovation, and economic growth. Consequently, policymaking activity should be judged by how effective it is in fostering these goals. As this work shows, the conventional notion of competitive equilibrium underlying antitrust policy not only has little to do with these goals, it is actually counterproductive to the creation of a policy truly committed to their realization, as it concentrates on imposing enforcement decisions that prevent these objectives from being attained. 594 AU: Could you provide the reference details of ‘‘Addleson (1994, p. 97)’’ in the bibliography? Chapter 14 The goals of antitrust policy are geared toward attaining ‘‘optimal’’ resource allocation which, as seen above, is an objective that cannot be construed in a stable way, consistent with the rule of law. Regardless of whether the policy pursues Pareto efficiency and perfect competition or other goals, such as the protection of small firms or the preservation of political values regarded as socially valuable, it entails a departure from the spontaneous market outcomes that would occur without interference. The erosion of the rule of law resulting from the arbitrary choice between policy objectives creates a lack of transparency in government regulation, thus limiting the ability of market agents to predict the rules and routines that effectively govern their investment decisions in a complex, evolving market order. Hence, antitrust policy is essentially not much different from the other policies that have supported government intervention in the region in the past, which, in the name of promoting economic growth, led to market restrictions and economic privileges at every step. Compared to these regulations, of course, antitrust presents itself as a policy that employs a normative appraisal of market behavior based upon a conventionally accepted theoretical framework. As a practical matter, however, it produces similar results. These practical results should come as no surprise. Regarding markets as imperfect structures or states of affairs, incapable of reaching an ideal normative standard, defines a special mind-set or logic in policymaking that always leads to the same conclusion, regardless of the particular social welfare standard sought— namely, that purposive government regulation can improve market outcomes. Such an appraisal of regulation, based upon a misleading closed-end perception of market phenomena and a utopian view of regulation, is ultimately responsible for leading many earnest advocates of economic development in the region, both before and after neoliberal reforms, to propose measures that are ultimately inconsistent with market development. These arguments simply show the need for something more than a restatement of the current paradigm, and indeed more than a few mere amendments of the current neoclassical explanations of market behavior. We need a new paradigm from which to derive a novel appraisal of markets and their implications. Rather than presenting new solutions, a new paradigm would force us to explore new questions, new problems, and an alternative way of looking at social phenomena. As Schumpeter (pp. 91-92) contends: ‘‘our argument, framed to refute a prevalent theory and the inferences drawn therefrom about the relation between modern capitalism and the development of total output, only yields another theory, i.e. another outlook on facts and another principle by which to interpret them.’’ It would call for a taxonomy, in the words of Addleson (1994, p. 97): ‘‘the economists’’ meaning of competition requires a taxonomy, not a definition; and a taxonomy needs a framework. Wubben (1995, p. 107) is even more assertive, contending that what is needed is a new epistemology. A renewed focus of competition agencies demands a full reconsideration of the purpose of competition policy as a whole. A fundamental reappraisal of market functioning is necessary for this purpose. Competition agencies need to reconsider AU: Could you provide the year in the given citation ‘‘Schumpeter (pp. 91-92)’’? AU: Could you provide the reference details of ‘‘Wubben (1995, p. 107)’’ in the bibliography? Conclusions: Overcoming the Antitrust Utopia 595 their conventional beliefs on the issues involved before attempting to reshape reality with instruments of social engineering. Naturally, this is an exercise of self-awareness and discretion which calls upon the social engineer to resist the temptation of tinkering with the world, attempting to shape it according to his taste. Learning to reconsider their basic assumptions is a difficult lesson for policymakers, since it is easier to simply plunge into social engineering, even though it is doomed to failure. 14.3 THE DANGERS OF MISGUIDED COMPETITION POLICYMAKING The antitrust methodology applied by Latin American enforcement bodies follows international standards applied elsewhere. Of course, there are differences between the enforcement methods of countries whose antitrust system is based on the U.S. system and those who seek inspiration from the Europeans. However, in light of the policy convergence between these two systems, former differences within the region are increasingly vanishing, and Latin American countries are moving toward the adoption of similar antitrust policy enforcement standards. What are these enforcement standards? It is possible to identify certain common principles of antitrust analysis in general, which are applicable to every type of business undertaking considered to be potentially anticompetitive. Latin American competition authorities share their emphasis of regarding monopoly power as the paramount factor in assessing every anticompetitive restriction. These agencies may determine that monopoly power exists when market concentration remains above certain thresholds. Market size measurement, usually calculated through demand side substitution, therefore, becomes the key determination of antitrust analysis. Market size calculation, aimed at identifying market concentration, however, is merely one method of establishing monopoly power, even if it is a favorite one. Market concentration, therefore, is a key analytical step for assessing monopoly power. International antitrust guidelines usually acknowledge the need of employing market concentration thresholds with caution. These guidelines advocate a more flexible in their simultaneous use of alternative competition methodologies for measuring market concentration. Moreover, the numbers drawn from concentration indexes, today no longer command the same persuasive power about the existence of monopoly power in particular cases; concentration indexes are only used to give the authorities prima facie evidence of a market concentration increase. To a certain extent, one can see in the enforcement of Latin American agencies a conscious effort to depart from the analytical rigidities of the first years of policy inception. Today, Latin American countries adopt a practical approach in their use of concentration assessment methodologies. The reliance seen today on the Hirschman-Herfindahl index (HHI) or the Ci methodology shows that policymaking is replacing the previous reliance on fixed market share thresholds set forth by 596 Chapter 14 the law. A case in point is Brazil, where SEAE uses three concentration measures to identify the strength of a collective dominant position. They are: Ci, the HHI, and the ‘‘dominance test.’’ Although this country is still dominated by the 20% market share threshold, one can see a more flexible and practical approach toward the analysis of market concentration. Indeed, this tendency is also seen outside the region. For instance, in the United States, the HHI concentration thresholds set forth in the 1992 U.S. Horizontal Merger Guidelines are not enforced in a rigid manner.424 However, flexibility should not be taken as total departure of the basic structural bias of the policy. No matter the alleged dissatisfaction with the use of market concentration as proxy of monopoly power, competition agencies largely endorse this perspective, as extensively shown in case law. This phenomenon is perhaps unavoidable. The impossibility of measuring ‘‘contestability’’ in quantitative terms forces the analyst into making assessments of competition that are perceived ‘‘intuitive’’ and devoid of scientific character. Clearly, market concentration is the only factor within the antitrust methodology susceptible to quantitative measurement; this increases its appeal. Hence, as Ten Kate (2006) observes: ‘‘In spite of widespread discontent with structural approaches to the control of mergers and acquisitions, most competition authorities around the world continue employing industrial concentration indexes as a first screen for merger approval, and the most commonly used measure is the Hirschman-Herfindahl index (HHI).’’ Accordingly, HHI ratios above 1,800 automatically trigger alarms at competition agencies quarters. For this reason, merger enforcement emphasizes the technical analysis of numerical data; also this is why restrictive practices are disregarded if entertained by firms lacking monopoly power, and why, by the same token, will be closely looked into if they are conducted by firms enjoying monopoly power. For this reason, though the analysis of ‘‘contestability’’ has gained relevance somewhat over the years, the HHI index becomes a paramount point of emphasis. Similarly, one important factor is the ‘‘structure’’ of the market that results from the merger or acquisition examined, in order to prevent merged firms from concentrating 424. This is confirmed by a review of a sample of seventy horizontal mergers investigated between 1982 and 1987, which reveals that in many respects, the Merger Guidelines are applied with more leniency than their text suggests (Coate and McChesney, 1992, pp. 277-293). Thus, although low HHI’s are conclusive for merger approval, high HHI’s on their own are far from sufficient for a merger to be challenged. For example, of the forty-nine mergers in this sample with postmerger HHI above 1,800 and increases above 100, only twenty-two were challenged, whereas the Guidelines imply that all such mergers will be challenged in the absence of strong mitigating factors. Indeed, of the thirteen mergers with postmerger HHI’s greater than 3,000 and increases greater than 1,000, only six were challenged. This evidence suggests that U.S. Competition authorities—which are a reference point for competition authorities in the region—have used concentration measures mainly to identify the absence of potential monopoly power; that is, as a screening mechanism, rather than a rule of decision. It also shows that the role of concentration as prima facie evidence of monopoly power has been rather weak. AU: The spelling of ‘‘Ten Kate’’ is given as Tenkate, A. in the bibliography. Please check. Conclusions: Overcoming the Antitrust Utopia 597 production in such way that the market ‘‘looks’’ more ‘‘imbalanced’’ in the view of competition authorities. Yet, looking into high concentration numbers or market shares in order to deduce the existence of potential threats to competition misleads the analyst about the causal connection between concentration and competition. Such a thought could be particularly harmful as policy guideline in Latin America, where governments, not markets, are responsible for high market concentration levels. There is an obvious threat involved in the very conception of the policy. The small size of Latin American markets inevitably leads them to concentrate around few producers, thereby enabling the latter to seize economies of scale necessary for survival. Yet, these economies are seen as the very sources of ‘‘barriers to entry’’ favoring the execution of anticompetitive restraints. Hence, the emphasis placed on market concentration as hallmark of competition policy could easily divert policy enforcement to attain the utopian goals of ‘‘economic efficiency,’’ at the expense of sacrificing business arrangements that are necessary to deal with high transaction costs, and other institutional flaws present in the region. Competitive firms could suffer the effects of a misguided policy, which cannot distinguish the historical source of monopolies in the region that is, governments. In Latin America, high concentration ratios and a lack of competition have resulted from a combination of government policies, including quantitative import restrictions, perverse foreign exchange policies, and price controls. After the liberalization wave of the eighties and nineties, one natural response of Latin corporations to the new institutional incentives was to merge and concentrate on their core businesses, thus abandoning highly diversified peripheral activities that were only sustainable in the presence of protectionist government measures. These companies reduced their participation in industries where their market share was small in order to expand in their core markets where they were already large. As a result of this tendency, concentrations are often very high. Some firms have had a long history of growth as a result of government protection rather than efficiency. Furthermore, changing market conditions due to trade liberalization and regional integration may lead to important potential changes in markets in which companies are trying to restructure through mergers. 14.4 OVERCOMING TRIVIAL DEBATES ABOUT ECONOMIC REFORMS In a wider perspective, this book confirms the hypothesis that the benefits of free markets only materialize in societies where property rights are widely extended and governments are restrained from tinkering with market outcomes. Antitrust policy runs exactly counter to these norms, as it impairs market transparency because of its internal mechanisms. These conclusions lead us to advocate a more cautious approach toward the rationale of economic reform conducted in the 1980s and 1990s in Latin America. 598 Chapter 14 On the surface, neoliberal reforms seemed to introduce a radical change in the normative approach toward markets and regulations, but in practice it delayed substantive institutional reforms through policies that, rather than supporting reforms, actually reenacted government dirigisme by alternative means. The policy debate about such reforms avoided the substantive discussion of whether the recommended policies actually worked toward the consolidation of market institutions, by adopting them without examining their content. There has never been any serious questioning of those who claimed, from the increasingly dubious premises of neoclassical normative economics, that consumer surplus or economic efficiency represents an accurate measure of societal welfare. More importantly, very few noticed that such policies merely sought impossible utopias that undermined the very foundations of incipient market institutions (e.g., property rights) in the countries that they were supposed to be helping. Instead, the policy debate revolved around fancy slogans: a ‘‘first generation’’ of ‘‘macroeconomic’’ reforms that presumably needed a ‘‘second generation’’ of reforms centered on the ‘‘microeconomic’’ functioning of Latin businesses. Why a given policy should be in either stage was never explained. The majority of the people in reforming countries had limited exposure to the benefits of economic liberalization because they were seldom, if ever, given property rights. Thus, despite the first generation of reforms, the majority of the people remained trading in black markets, illegally building shantytowns on public land, and holding precarious rights to social resources. Despite the wave of privatization that dismantled much of the previous economic nationalism implemented through inefficient state-owned companies, the concentrated structure of property rights remained largely unchanged, as public monopolies were transferred intact into private hands, thereby making the emergence of competition difficult, if not impossible (Vargas Llosa, p. 246). The monopolized structure of property rights remained virtually intact throughout the region; in particular, the exercise of property rights by economic agents was contingent on their membership in trading corporations, rather than being considered a personal and individual entitlement. Economic reforms neglected the key issue of the structure of property rights, which remained fragmented and concentrated in a few hands. What happened, in fact, has been the increasing confusion of the reform agenda, which now suffers from exhaustion, and is challenged by neopopulism throughout the region. 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Fairfax, VA: George Mason. List of Figures Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure 2-1 3-1 3-2 3-3 3-4 3-5 3-6 3-7 6-1 6-2 13-1 Competition Enforcement in Selected Countries Profit Maximization for a Monopoly Firm Welfare Losses from Monopoly Productive Efficiency Profit Maximization for a Perfectly Competitive Firm Individual Demand under Alternative Market Structures Losses of the Perfectly Competitive Firm The Cost Advantage of Monopolies Mexico: Merger versus Conduct Review (1994-2006) Brazil: Merger versus Conduct Review (2000-2007) Funding of Latin American Competition Agencies (USD per Year/ Personnel) List of Tables Table Table Table Table Table Table Table Table Table 1-1 2-1 2-2 2-3 3-1 3-2 4-1 5-1 5-2 Table Table Table Table Table Table Table 11-1 11-2 13-1 13-2 13-3 13-4 13-5 Industrial Concentration in Latin America Prior to 1990 Latin American Antitrust Laws (1970-2000) Exemptions from Antitrust Enforcement Antitrust Penalties Revenues under Perfect Competition Classification of Oligopoly Models Gross Domestic Product: U.S. and Latin America (2006) Efficiency Goals of the Competition Legislation Pro-Competitive Arrangements and Latin American Competition Laws Jurisdiction of Competition Agencies over Regulated Sectors Jurisdiction of Sector Regulators and Competition Authorities Legal Charter and Reporting Duties Financial Autonomy Scope of Activities Eligibility and Tenure Structure of Competition Authorities in Latin America List of Cases (Alphabetical Order) Aero Continente S.A. v. Banco de Crédito del Perú ................................ Aga de Venezuela/Gases Industriales........................................................ Airline cartel ............................................................................................... Airline Code Sharing.................................................................................. Alberto Dupuy v. VCC and Cablevision ................................................... Alcool cartel................................................................................................ Alpes C.A. v. Royal C.A............................................................................. Aluminum cartel.......................................................................................... American Express v. Visa .......................................................................... Anheuser-Busch .......................................................................................... Anheuser-Busch/Antartica .......................................................................... Argentinean Chamber of Stationery and Bookshops v. Supermercados Mayoristas Makro S.A............................................................................ ASDPP v. Chevron Caribbean Inc., Esso Standard Oil, S.A. Limited, Shell El Salvador, S.A. ........................................................................... Asociación Argentina de Agencias de Viajes y Turismo (AAAVYT) v. Junta de Representantes de Compañı́as Aéreas (JURCA) y empresas de transporte aéreo de pasajeros .......................................................... Asociación de Agencias de Viajes de Buenos Aires—AVIABUE v. United Airlines Inc., American Airlines Inc. y British Airways Plc .... Asociacion de Clinicas y Sanatorios de la Provincia Entre Rios............ Association of Alcohol Producers ............................................................. Association of Fire Extinguisher Manufacturers ...................................... Authorizations required by the Local Government of Sinaloa................. Autogas S.A.I.C./YPF S.A.—YPF Gas S.A. ............................................... Automobile Insurance................................................................................. Avantel, S.A. v. Teléfonos de Mexico, SA de CV (Telmex) ...................... Aventis Pharma, S.A., and Rhone Poulenc Rorer de Venezuela, S.A...... 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 620 List of Cases (Alphabetical Order) Axle and others........................................................................................... Ayuntamiento de Angostura, Sinaloa (Ayuntamiento de Angostura) y de la Unión de Vendedores Ambulantes del Municipio de Angostura, Sinaloa (Unión de Vendedores) (Street Sellers’ Union)....................... Ball Memorial Hospital, Inc. v. Mutual Hospital Insurance, Inc., 784 F.2d 1325, 1335 (1986).......................................................................... Bompreço Bahia S.A. and Petipreço Supermercados Ltda. ..................... Cable TV ..................................................................................................... CADE v. Estaleiros Ilha S.A. and Marı́tima Petróleo e Engenharia Ltda ..................................................................................... Cámara Argentina de la Construcción, Delegación Entre Rı́os v. Cooperativa Entrerriana de Productores Mineros Ltda. (Arenera case) ........................................................................................ Cámara Costarricense de Corredores de Bienes Raı́ces (CCCBR) ........ CANTV Servicios ........................................................................................ Cantv-Digitel merger review ..................................................................... CFC v. RPF, Rhone-Poulenc Animal Nutrition, SA de CV, (Aventis) Animal Nutrition, SA de CV (RPANM), Basf AG, Basf Mexicana, SA de CV (Basf M), HLR, Productos Roche, SA de CV (Roche), and Syntex, SA de CV (Syntex).............................................................. Chamber of Construction ........................................................................... Chicles Canel’s, S.A. de C.V. v. Chicles Adams, S.A. de C.V. ................ CLC (ex officio) v. Asociación Peruana de Seguros, El Pacı́fico Peruano Suiza Compañı́a de Seguros y Reaseguros, Generali Perú Compañı́a de Seguros y Reaseguros S.A., y otros (Insurance companies) ........... CLICAC v. Gold Mills de Panamá S.A. and others ................................. CNDC v. Aerolineas Argentinas and Aerolineas Austral......................... CNDC v. Duperial S.A. and Compania Quimica S.A............................... CNDC v. Loma Negra and others ............................................................. CNDC v. Juntas vecinales de Bariloche/Expendedores, distribuidores y/o vendedores de GLP envasado.......................................................... Coca-Cola Femsa ....................................................................................... Coca-Cola v. Pepsi Cola ........................................................................... Coca-Cola/Cadbury.................................................................................... Colombian Association of digestive endoscopy ........................................ Colombian neurosurgery association ........................................................ Colombian Radiology Association............................................................. Columbia Tristar ........................................................................................ Comercializadora el Mar S.A. v. Jogaymex S.A....................................... Comité de Molinos de Trigo de la Sociedad Nacional de Industrias and others.............................................................................. Commissioner of Competition v. Superior Propane Inc........................... Compañı́a Colombiana Automotriz, S.A.................................................... Compañı́as Cervecerı́as Unidas and Savory (Nestlé)............................... 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 List of Cases (Alphabetical Order) Comunicación Celular S.A. (Comcel) and Celular Movil de Colombia (Celumovil) ............................................................................................. Continental Can.......................................................................................... Corporación Televen C.A., v. R.C.T.V, C.A., and Corporación Venezolana de Television, C.A. (Venevision) (Televen) ....................... Correo Argentino S.A. y Sociedad Anónima Organización Coordinadora Argentina ................................................................................................ Council of Trujillo...................................................................................... D&S and Falabella .................................................................................... D&S v. Rosen ............................................................................................. Darcy v. Allein (77 Eng. Rep. 1260, King’s Bench, 1603) ..................... Davenant v. Hurdis (72 Eng. Rep. 769, King’s Bench 1599) ................. Depósito Santa Beatriz S.R.L., Eleodoro Quiroga Ramos S.R.L. y Comercial Quiroga S.R.L. v. DINO S.R.L. [Construction Materials]........................................................................ Distribuidora Del Sur ................................................................................ Dupont......................................................................................................... Empresa Colombiana de Vı́as Férreas and Drummond Ltda (Ferrovı́as) .............................................................................................. Farmex ........................................................................................................ Fecliba v. Roux Ocefa, Rivero and Fidex................................................. FERJISA S.A. v. Abonos Agro S.A. ........................................................... FNE v. Air Liquide Chile S.A. and others ................................................ FNE v. Empresa Electrica de Magallanes, S.A. ....................................... FNE v. Isapre ING S.A. ............................................................................. FNE v. LAN Airlines S.A. and LAN Cargo S.A. ....................................... FNE v. Abbott Laboratories de Chile Ltda. et al ..................................... FNE v. D&S S.A. and Cencosud S.A ........................................................ Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 503 (1969)...................................................................................................... FTC v. California Dental Association....................................................... FTC v. Indiana Federation of Dentists ..................................................... Gas Supremo, SA de CV (Gas Supremo) v. Gas de Cuernavaca, SA de CV; Gas de Cuautla, SA de CV; Gas Modelo, SA de CV; Compañı́a Hidro Gas de Cuernavaca, SA de CV; Gas del Sol, SA de CV y Compañı́a de Gas Morelos, SA de CV (Liquefied Petroleum Gas Distributors)............................................................................................ Gases Industriales ...................................................................................... Gasocaña Ltda., Norgas S.A. and another................................................ General Motors Colmotores S.A. (GMC) and its dealerships.................. Grupo Aeroportuario del Centro Norte .................................................... Grupo Bimbo/Fargo ................................................................................... Hyundai Colombia Automotriz S.A. and its dealerships .......................... Indoor Tanning ........................................................................................... 621 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 622 List of Cases (Alphabetical Order) INSACA v. Federación Farmacéutica de Venezuela and Colegio de Farmacéuticos del Distrito Federal ...................................................... Johnson & Johnson’s trademark Favor by Unilever N.V ........................ Julio Dittborn et alia filed a complaint against Metro S.A...................... K Exteriores Publicidad v. C.A. Metro de Caracas ................................. Kibon........................................................................................................... La Casa del Grafito v. Rich Klinger y Bruno Cape................................. Labbé, Haupt y Cı́a. Limitada contra Shell Chile .................................... Laboratorio Knop Ltda. v. Farmacias Ahumanda S.A. et al. .................. Loma Negra and others ............................................................................. Low-alcoholic content beverages............................................................... McDonald’s................................................................................................. Mexico City International Airport ............................................................. Microsoft ..................................................................................................... Miller Brewing............................................................................................ Ministério Público do Estado de Santa Catarina v. Sindicato do Comércio Varejista de Combustı́veis Minerais de Florianópolis e outros ...................................................................................................... Ministério Público do Estado de Santa Catarina v. SINDIPETRO and others....................................................................................................... Miraflores taxation..................................................................................... Municipalidad de Lambayeque .................................................................. Nabisco ....................................................................................................... National Association of Rice Processors, et al......................................... Neptunia, S.A. v. Enapu, S.A. .................................................................... Nestle/Garoto.............................................................................................. Nestle/Perrier.............................................................................................. New Holland N.V. and Case Corporation ................................................ Newspaper cartel ........................................................................................ Northern Pacific Railway v. United States ............................................... Opinion on the legality of the Regulations for Opening Operating Nixtamal Mills, Tortillerı́as and Similar Activities............................... OralB/Laboratorios Substantia acquisition ............................................... P&G—Colgate Palmolive pre-merger filing case..................................... Paiva Piovesan Engenharia & Informática Ltda., v. Microsoft Informática Ltda (Microsoft II case) ..................................................... Pasteurized milk ......................................................................................... Pemex Refinación ....................................................................................... Penonomé carnival board .......................................................................... Pepsi v. Coca Cola (Soft drinks) ............................................................... Peralta Comercial e Importadora Ltda..................................................... Petroperu .................................................................................................... Pharmaceutical Association of Buenos Aires ........................................... Phillip Morris v. Chilena de Tabacos S.A. (Chiletabacos) ...................... Phillip Morris/Nabisco............................................................................... 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 List of Cases (Alphabetical Order) Polar/Golden acquisition............................................................................ Postobón/Quaker ........................................................................................ Power-Tech/Mattel ..................................................................................... Praxair Argentina et al. ............................................................................. Premezclados de Concreto......................................................................... Pro-Competencia (Ex Officio) v. Banco Venezolano de Crédito SACA and Promotora Buenaventura, C.A. (Buenaventura Mall) ................... Pro-Competencia (ex officio) v. Panamco de Venezuela S.A. (Panamco); Sociedad Productora de Refrescos y Sabores, S.A. (Sopresa) and Presamir, Presaragua y Presandes (Sopresa-Panamco) ...................... Pro-Competencia (ex officio) v. Toyota de Venezuela C.A...................... Pro-Competencia (ex officio) v. Venepal, Surfit Cartón de Venezuela, Venezolana de Cartones Corrugados, Cartonerı́a del Caribe, Servicios de Corrugados Maracay y Corrugadora Suramericana (Pro-Carton) ........................................................................................... Pro-Competencia v. Cemex and others ..................................................... Pro-Competencia v. Suramericana de Espectáculos (Cinex) y Cines Unidos C.A. (Movie cinemas case)........................................................ Procter & Gamble and Colgate ................................................................ Procter & Gamble-Gillette ........................................................................ Proquim v. Venezolana de Terminales C.A. (Venterminales) .................. PVC Gerfor S.A., Ralco S.A. Tuvinil De Colombia, S.A and Fábrica Nacional De Muñecos—Jorge H. Bernal y Cı́a Ltda ........................... RCTV C.A. y C.A. Venezolana de Televisión v. AGB Panamericana de Venezuela de Medición S.A (AGB)........................................................ Ricardo Raúl Barisio/Cı́rculo Odontológico Regional de Venado Tuerto ........................................................................................ Ripasa/Suzano/VCP .................................................................................... Ruling No. 0004/1993 ................................................................................ Ruling No. 1/2004 ...................................................................................... Ruling No. 22/2007 .................................................................................... Ruling No. 488/1997.................................................................................. Ruling No. 531/1998.................................................................................. SabMiller/Bavaria acquisition ................................................................... SADIT and others v. Massalin Particulares and others........................... SDE ‘‘ex officio’’ v. Indústria e Comércio de Extração de Areia Khouri Ltda and others (Sindipedras) ............................................................... SDE v. CSN, Usiminas and Cosipa ........................................................... Sharp ........................................................................................................... Sindicato Brasiliense de Hospitais ............................................................ Sindiposto.................................................................................................... Sociedad Anónima Organización Coordinadora Argentina (OCA)/ Correo Argentino S.A. acquisition............................................ SOFASA S.A. and its dealerships .............................................................. Steel cartel .................................................................................................. 623 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 624 List of Cases (Alphabetical Order) Supercanal .................................................................................................. Superintendencia de Competencia (es officio) v. Lafise Agrobolsa De El Salvador, S. A.; Interproductos, S. A.; Sbs, S. A. Y Granos Continentales, S. A. ................................................................................ Suramericana de Aleaciones C.A. (Sural) v. C.V.G. Venalum................. Tele 2000 v. Telefónica del Perú Telecoms Operator Applying Automatic National Roaming................................................................................... Televisa and Acir........................................................................................ Televisa and Acir merger........................................................................... Televisa/Editora Cinco............................................................................... Temixco....................................................................................................... Tortillas....................................................................................................... TV Cable Orión C.A., Parabólicas Serviceás C.A., Cable Corp TV C.A. and ACC Comunicaciones, Supercable and the Cámara Venezolana de Televisión por Suscripción (Cavetesu) v. Enelven, Enelco, Enelbar, Eleval, Cadafe and her subsidiaries: Elecentro, Eleoriente, Eleoccidente, Semda y Cadela............................................................... U.S .v. Addyston Pipe................................................................................. Union of Tortilla Processing Maquiladores.............................................. United Brands............................................................................................. United States v. Topco Associates, Inc., 405 U.S. 596, 610 (1972) ........ Valer............................................................................................................ VCC S.A., Multicanal S.A., Cablevisión T.C.I C.I. and others s/Ley 22.262...................................................................................................... Vesuvius ...................................................................................................... VFG -Vitrofibras de Venezuela C.A. v. VFG-Sudamtex C.A. .................. VFG -Vitrofibras de Venezuela C.A. v. VFG-Sudamtex C.A. (Vitrofibras) ............................................................................................ Voissnet S.A. and FNE v. CTC.................................................................. Wheat Flour cartel ..................................................................................... Xerox ........................................................................................................... Yacimientos Petroliferos Fiscales (YPF)................................................... 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 List of Cases (per Jurisdiction) Argentina AU: Provide ruling number for File 064-002388/97. AU: Provide ruling number for Secretario de Defensa. . . . – Ruling No. 226/01—Secretario de Defensa de la Competencia, Ministerio de Economı́a (File 064-010116/2000). Acquisition of Correo Argentino S.A. by Sociedad Anónima Organización Coordinadora Argentina (OCA) – Ruling No. 413—CNDC (File 064-002388/97). Representantes de Compañı́as Aéreas (JURCA) y empresas de transporte aéreo de pasajeros – Ruling No. 417/03—CNDC (File 064-011 479/99). Cámara Argentina de la Construcción, Delegación Entre Rı́os. v. Cooperativa Entrerriana de Productores Mineros Ltda – Ruling No. 448—CNDC (File 064-000591/98). Ricardo Raúl Barisio/ Cı́rculo Odontológico Regional de Venado Tuerto – Ruling No. 352/99—CNDC (File 020-002134/94. Cámara de Asistencia de Empresas Farmacéuticas (CEAF)/Colegio de Farmacéuticos de la Provincia de Buenos Aire. (Pharmaceutical Association of Buenos Aires) – Ruling No.—CNDC (File 064-002388/97). CNDC v. Aerolineas Argentinas and Aerolineas Austral – Ruling No. 942/97—CNDC (File 064-000960/97). SADIT and Others v. Massalin Particulares and Others (1997) – Ruling No.—Secretario de Defensa de la Competencia, Ministerio de Economı́a (File 064-014125/2000). Phillip Morris-Nabisco merger case – Ruling No. 506/05—CNDC (File 064-012896/99). CNDC v. Loma Negra C.I.A.S.A., Cementos Avellaneda S.A., Cemento San Martı́n S.A., Juan Minetti S.A., Petroquı́mica Comodoro Rivadavia S.A. y la Asociacion de Fabricantes de Cemento Portland (AFCP) – Ruling No. 461/03—CNDC (File 064-003996/98). Juntas Vecinales de Bariloche/Expendedores, distribuidores y/o vendedores de GLP envasado 626 List of Cases (per Jurisdiction) – Ruling No. 446/00—CNDC (File 064-000359/98). Autogas S.A.I.C./YPF S.A.—YPF Gas S.A – Ruling No. 314/99—CNDC (File 064-002687/97). CNDC v. Yacimientos Petroliferos Fiscales, S.A. – Ruling No. 440/02—CNDC (File 064-003046/97). Asociacion de Clinicas and Sanatorios de la Provincia Entre Rios – Ruling No. 145/00—Secretario de Defensa de la Competencia, Ministerio de Economia (File 064-006582/2000). Acquisition of Liberty Media International Inc., and Cablevisión S.A. – Ruling No. 94.601/01—Medida Cautelar Cámara Nacional Comercial Sala D. Supercanal v. Telered Imagen and others – Ruling No. 110/89—CNDC. La Casa del Grafito v. Rich Klinger y Bruno Cape – Ruling No. 284/98—CNDC. Fecliba v. Roux Ocefa, Rivero and Fidex – Ruling No. 449—CNDC (File 064-000630/98). Impsat S.A. v. Telefónica de Argentina S.A, Telecom Argentina Stet France Telecom S.A, Startel S.A., Advance Comunicaciones S.A. y Telecom Soluciones S.A. – File V. 1050. XXXIX Injunction. Ruling of August 31, 2005—VCC S.A., Multicanal S.A., Cablevisión T.C.I C.I. y otros s/Ley 22.262 – Ruling No.—CNDC v. Duperial S.A. and Compania Quimica S.A. – Ruling No. 209/1995—Alberto Dupuy v. VCC and Cablevision – Ruling No. 376—Secretario de Defensa de la Competencia, Ministerio de Economia (File S01:8000099/02). Merger between Cervecerı́a y Malterı́a Quilmes SA (Quilmes) and Brazilian brewing company Cia de Bebidas das Americas SA (Ambev) (erger between Quinsa and Ambev) – Ruling No. 395/04—Secretario de Defensa de la Competencia, Ministerio de Economia (File S01:8000099/02). Grupo Bimbo Sociedad Anonima de Capital Variable S.A.—Compañı́a de Alimentos Fargo S.A. – File No. 064-000962/97—Argentinean Chamber of Stationery and Bookshops v. Supermercados Mayoristas Makro S.A. – American Express—Visa 6/5/97, American Express c/ Visa y otros Exclusión Desestimación, Report on the Development and Enforcement of Competition Laws and Policies in the Western Hemisphere (Preliminary Report), OAS Trade Unit, 1997 – Axle and Others, OAS Trade Unit, October 14, 1999 Brazil – Ruling No. 23/1991(PA)—Repro Materiais e Equipamentos de Xerografia et al. v. Xerox do Brasil S.A. (Xerox case) – Ruling No. 01/1991(PA)—Interchemical Ind. e Com. International Ltda. v. Sharp Ind. E Com. Ltda. (Sharp case) – Ruling No. 54/1992 (PA)—SDE (ex officio) v. Sindicato dos Hospitais, Clı́nicas, Casas de Saúde e Laboratórios de Pesquisas e Análises—PE (Sindicato de Hospitais) AU: Provide ruling number for CNDC v. . List of Cases (per Jurisdiction) 627 – Ruling No. 148/1992 (PA)—Sindicato da Indústria de Panificação e Confeitaria de São Paulo v. KIBON—Kraft Suchard Brasil S.A. (Kibon case) – Ruling No. 32/1992—SDE (Ex officio) v. Valer Alimentacao e Servicos Ltda. (Valer) – Ruling No. 145/1993 (PA)—Sindicato Brasiliense de Hospitais case – Ruling No. 08000.024581/1994-77 (PA)—DPDE ‘‘Ex offı́cio’’, v. Rede Gasol (Grupo Cascão), Rede Igrejinha, SINPETRO/DF-Sind. Com. Var. Derivados Combust. e Lubrificantes/DF – Ruling No. 08000.015337/1994 (PA)—Steel cartel – Administrative cases 58/1995 (AC) (economic concentration)—Miller Brewing Company and Companhia Cervejaria Brahma (Miller Brewing) – Ruling No. 08012.0027/1995 (AC) (economic concentration)—K e S Aquisições Ltda. And Kolynos do Brasil S.A. (Colgate Palmolive/Kolynos acquisition) – Ruling No. 0083/1996(AC) (economic concentration)—Companhia Antarctica Paulista Indústria Brasileira de Bebidas and Anheuser Busch International Inc. (Anheuser-Busch/Antartica) – Ruling No. PA 08000.007464/1997-18—SDE ‘‘Ex-officio’’ v. Sindicato Brasiliense de Hospitais de Brasilia – Ruling No. 08000.022579/1997-05—S.A White Martins and Ultrafértil – Ruling No. 08000.015337/1997-48—SDE v. CSN, Usiminas and Cosipa (1999) – Ruling No. 080012.007758/1997-66—Rio Grande Ltda. v. Columbia Tristar, Buena Vista Filmes do Brasil Ltda. et al. (Columbia Tristar case) – Ruling No. 08012.009991/1998-82—Participações Morro Vermelho Ltda., v. Condomı́nio Shopping Center Iguatemi e Shoping Centers Reunidos do Brasil Ltda . (Iguatemi) – Ruling No. 08012.008024/1998-49(PA)—TBA Informática Ltda and SDE ‘‘Ex Offı́cio’’ v. Microsoft Infomática Ltda Processo Administrativo—Lei 8884/1994 (Microsoft I) – Ruling No. 08012.009118/1998-26—CADE v. Estaleiros Ilha S.A. and Marı́tima Petróleo e Engenharia Ltda – Ruling No. 08012.007674/1998-59 (AC) (economic concentration) of May 12, 1999, Vesuvius Refratarios Ltda. & Re-Plate Equipamentos Metalurgicos (Vesuvius case) – Ruling No. 08012.003208/1999-85 (PA)—Department of Justice of the State of Pernambuco v. Union of Retail Stores of Petroleum-derivative products and Convenience Stores of the State of Pernambuco— Sindicombustı́veis/PE and its controllers Romildo Ferreira Leite and Joseval Alves Augusto (Sindicombustiveis) – Ruling No. 6762/2000-09 (PA)—Banco Finasa de Investimento S/A and Zurich Participações e Representações – Ruling No. 08012.004117/1999-67 (AC) (economic concentration)—Bolsa Brasileira de Àlcool Ltda, COCAL—Comércio, Indústria Canaã Açúcar e Àlcool Ltda (Association of Alcohol Producers) 628 List of Cases (per Jurisdiction) – Ruling No. 08012.002097/1999-81 (PA)—SEAE/MF ‘‘ex officio’’ v. Sindicato das Empresas Proprietárias de Jornais e Revistas do Municı́pio do RJ, Editora O Dia S/A, Infoglobo Comunicações Ltda. e Jornal do Brasil S/A (Newspaper cartel case) – Ruling No. 08012.000293/2003-59 (PA)—Brasil Álcool S.A., Copersucar Armazéns Gerais S.A. and others (Alcool cartel case) – Ruling No. 08012.002127/2002-14 (PA)—SDE ‘‘ex officio’’ v. Indústria e Comércio de Extração de Areia Khouri Ltda and others (Sindipedras) – Ruling No. 08012.004901/1999-93 (AC) (economic concentration)— New Holland N.V. and Case Corporation – Ruling No. 08012.001182/1998-31 (PA)—Paiva Piovesan Engenharia & Informática Ltda. v. Microsoft Informática Ltda (Microsoft II case) – Ruling No. 08012.000787/1999-78 (AC) (economic concentration)—Companhia Brasileira de Distribuição and Peralta Comercial e Importadora Ltda, Peralta Comercial e Importadora Ltda case – Ruling No. 08012.000677/1999-70 (PA), Varig/TAM/Transbrasil/VASP (Airlines cartel case) – Ruling No. 08012.000677/1999-70, SDE ‘‘Ex Offı́cio’’ and SEAE—MF v. Varig S.A. and others (Rio de Janeiro/Sao Paulo Airline cartel) – Ruling No. 08012.001337/2000-15 (PA)—Bompreço Ahold—Petipreço case, Bompreço Bahia S/A and Petipreço Supermercados Ltda – Ruling No. PA 08012.002299/2000-18—Ministério Público do Estado de Santa Catarina v. Sindicato do Comércio Varejista de Combustı́veis Minerais de Florianópolis e outros (Florianópolis) – Ruling No. 08012.002299/2000-18 (PA)—Ministério Público do Estado de Santa Catarina v. Sindicato do Comércio Varejista de Combustı́veis Minerais de Florianópolis e outros (Florianópolis) – Ruling No. 08012.004712/2000-89 (PA)—SDE ‘‘Ex Offı́cio’’ v. José Batista Neto and Sindicato do Comércio Varejista de Derivados de Petróleo do Estado de Goı́as—SINDIPOSTO/GO (Sindiposto) – Ruling No. 08012.004036/2001-24 (PA)—Ministério Público do Estado de Santa Catarina v. SINDIPETRO and others (Sindipetro/SC) – Ruling No. 08012.002841/2001-13—Condomı́nio Shopping D v. Center Norte S/A—Construção, Empreendimento, Administração e Particapação – Ruling No. 08012.001697/2002-89 (AC) (economic concentration)— Chocolates Garoto S/A and Nestlé Brasil Ltda (Nestle/Garoto case) – Ruling No. 08012.010192/2004-77 (AC) (economic concentration)— Ripasa S/A Celulose e Papel and Votorantim Celulose e Papel S.A. – Matec case (2004) – No. 08012.003005/2002-37 (PA) (2002)—Comissão de Assuntos Econômicos do Senado Federal—CAE v. McDonalds International Spanisch Holdings S.L (McDonald’s) – Ruling No. 61/1993—Associacao Medica Brasileira (1996) – Aluminum cartel case (1994) List of Cases (per Jurisdiction) 629 Chile – Ruling No. 88/1980—CR – Ruling No. 325/1889—CR, Compañı́as Cervecerı́as Unidas and Savory (Nestlé) – Ruling No. 1016/1997—CR, D&S v. Rosen case – Ruling No. 488/1997—CR, Enersis S.A. – Ruling No. 494/1997—CR, Enersis’ acquisition of Agua Potable Lo Castillo – Ruling No. 531/1998 – Asociación Chilena de Seguridad y del Instituto de Seguridad del Trabajo, against Ruling No. 1.288—Antitrust Commission (2004), Ruling No. 1/2004—TDLC, October 25, 2004 – UIP Chile Ltda. y Andes Films S.A., against Ruling No. 1.277—Antitrust Commission (2005) Ruling No. 16/2005—TDLC, May 20, 2005 – Laboratorio Knop Ltda. v. Farmacias Ahumanda S.A. et al. (2005), Ruling No. 24/2005—TDLC, July 28, 2005 – Ruling No. 26/2005—TDLC, Phillip Morris v. Chilena de Tabacos S.A. (Chiletabacos) – Ruling No. 33/2005, November 8, 2005—FNE v. Abbott Laboratories de Chile Ltda. y otros – Ruling No. 60/2005—TDLC, Voissnet S.A. and FNE v. Telefónica CTC-Chile – Ruling No. 12/2006—June 13, 2006 – Ruling No. 15/2006—TDLC, August 3, 2006 – Ruling No. 22/2007—TDLC, October 19, 2007 – Ruling No. 43/2006—TDLC, FNE v. Air Liquide Chile S.A. and others, TDLC – Ruling No. 45/2006—TDLC, October 26, 2006, Voissnet S.A. and FNE v. CTC – Labbé, Haupt y Cı́a. Limitada v. Shell Chile (2007) Ruling No. 53/2007— TDLC, June 6, 2007 – Ruling No. 55/2007—TDLC, FNE v. LAN Airlines S.A. and LAN Cargo S.A. – Ruling No. 57/2007—TDLC, FNE v. Isapre ING S.A. – Ruling No. 24/2008—TDLC, January 31, 2008 – Ruling No. 65/2008—TDLC, May 8, 2008, FNE v. D&S S.A. and Cencosud S.A. – Ruling No. 73/2008—TDLC, FNE v. Empresa Electrica de Magallanes, S.A. Colombia – SabMiller/Bavaria acquisition case – Ruling No. 1382/1994—SIC, Compañı́a Colombiana Automotriz, S.A. 630 List of Cases (per Jurisdiction) – Ruling No. 28037/2004—SIC (merger), GWP C.V. (Philip Morris) and Compañı́a Colombiana de Tabaco (Coltabaco) (Phillip Morris /Coltabaco acquisition) – Ruling No. s/n/2004—SIC, PVC Gerfor S.A., Ralco S.A. Tuvinil De Colombia, S.A and Fábrica Nacional De Muñecos—Jorge H. Bernal y Cı́a Ltda – Ruling No. s/n/2004—SIC v. Colombian neurosurgery association case – Ruling No. S/N—SIC v. Colombian Association of digestive endoscopy case – Ruling No. 28,037/2004—SIC, P&G and Colgate Palmolive pre-merger filing case – General Motors Colmotores S.A. (GMC) and its dealerships (Ruling 367 of March 18, 1997) – Hyundai Colombia Automotriz S.A. and its dealerships – Ruling No. 1187/1997—SIC, SOFASA S.A. and its dealerships – Ruling No. 2324/1994—SIC, Empresa Colombiana de Vı́as Férreas (Ferrovı́as) v. Drummond Ltda – Ruling No. 1736/1995—SIC, Comunicación Celular S.A. (Comcel) and Celular Movil de Colombia (Celumovil) – Ruling No. 27920/2004-SIC, Postobón/Quaker merger case Costa Rica – Ruling No. 025-1997—COPROCOM, Compañı́a FARMEX S.A. v. CEFA Central Farmacéutica S.A., Farmacias ESO, S.A. (Farmex) – Ruling No. 10/1997—COPROCOM, FERJISA S.A. v. Abonos Agro S.A. – Ruling No. 007/2001—COPROCOM, Coca-Cola v. Pepsi Cola – Ruling No. 38/98—COPROCOM, Tax payments on vehicle imports are subject to discriminatory conditions affecting individual rights – Ruling No. 28/00—COPROCOM, Cámara Costarricense de Corredores de Bienes Raı́ces case El Salvador – Ruling No. SC-008-O/PA/R-2006—Cable TV – Ruling No. SC-003-D/PA/R-2006—ASDPP v. Chevron Caribbean Inc., Esso Standard Oil, S.A. Limited, Shell El Salvador, S.A. – Ruling No. SC-001-O/PA/R-2007—Lafise Agrobolsa De El Salvador, S. A.; Interproductos, S. A.; Sbs, S. A. Y Granos Continentales, S. A. – Ruling No. SC-008-O/PA/R-2007—Distribuidora Del Sur (2006) Distribuidora de Electricidad Del Sur S. A. DE C. V. (DELSUR) – Ruling SC-005-O/PA/NR-2008, 01/04/2008—Superintendencia v. Molinos de El Salvador, S. A. de C. V. (MOLSA)—HARISA, S. A. de C. V. (HARISA) (Wheat Flour cartel case) List of Cases (per Jurisdiction) 631 Mexico – Ruling No. IO.16-96—Chicles Canel’s, S.A. de C.V. v. Chicles Adams, S.A. de C.V. – Ruling No. RA. 111-2002—Avantel, S.A. v. Teléfonos de Mexico, SA de CV (Telmex) – Ruling No. DE-65-2000—Gas Supremo, SA de CV (Gas Supremo) v. Gas de Cuernavaca, SA de CV; Gas de Cuautla, SA de CV; Gas Modelo, SA de CV; Compañı́a Hidro Gas de Cuernavaca, SA de CV; Gas del Sol, SA de CV y Compañı́a de Gas Morelos, SA de CV (Liquefied Petroleum Gas Distributors) – Ruling No. DE-04-2003—Ayuntamiento de Angostura, Sinaloa (Ayuntamiento de Angostura) y de la Unión de Vendedores Ambulantes del Municipio de Angostura, Sinaloa (Unión de Vendedores) (Street Sellers’ Union) – Ruling No. IO-25-2000—Pateurizadora El Nayar, SA de CV (Nayar); Ganaderos Unidos de Aguascalientes y Zacatecas, SA de CV (GUAZ); Monica’s Food, SA de CV (Monica’s); Leche Queen, SA de CV (Queen); Pasteurizadora y Enfriadora de Lerdo, SA de CV (Lerdo); Comercializadora Latinlac, SA de CV (Latinlac); y Ganaderos Productores de Leche Pura, SA de CV (Alpura) (Pasteurized milk) – Ruling No. DE-02-2000—Authorizations required by the Local Government of Sinaloa – Rulings Nos. DE-06-2000, RA-30-2005 y RA-45-2005—Pepsi-Cola Mexicana, SA de CV (PCM) and others v. The Coca-Cola Company and others – Ruling No. IP-09-2004—Opinion on the legality of the Regulations for Opening Operating Nixtamal Mills, Tortillerı́as and Similar Activities – Ruling No. IO-62-97—CFC v. Pemex Refinacion I, ratified by RA-37-200 – Ruling No. IO-14-99—CFC v. Pemex Refinacion II, ratified by RA-082001 – Ruling No. 036-96—Comercializadora el Mar S.A. v. Jogaymex S.A. – Ruling No. IO-12-2003—CFC v. Temixco – Ruling No. IO-09-99—CFC v. RPF, Rhone-Poulenc Animal Nutrition, SA de CV, (Aventis) Animal Nutrition, SA de CV (RPANM), Basf AG, Basf Mexicana, SA de CV (Basf M), HLR, Productos Roche, SA de CV (Roche), and Syntex, SA de CV (Syntex) (Vitamins cartel case) – Ruling No. RA-176-2001—Mexico City International Airport case (1999) – Ruling No. CNT-LI-23-99—Grupo Aeroportuario Centro Norte, SA de CV (GACN) – Notice 2000-12-04—Grupo Televisa, SA (Televisa), propietaria del Sistema Radiópolis, SA (Radiópolis), con Grupo Acir Comunicaciones, SA de CV (Acir) (pre-merger) – Low-alcoholic content beverages case (2004) – Ruling No. CNT-166-98—acquisition of Cadbury Schweppes by The Coca Cola Corporation (Coca-Cola/Cadbury) 632 List of Cases (per Jurisdiction) – Notice 07-2007 on the acquisition of Jugos Del Valle by The Coca Cola Export Corporation y Coca Cola Femsa Panama – Ruling No. 1168/2000—Juzgado Noveno de Circuito, Ramo Civil, del Primer Circuito Judicial, Panamanian Airline Code Sharing – Ruling No. 64/2003 – Juzgado Octavo de Circuito, Ramo Civil, del Primer Circuito Judicial CLICAC v. Gold Mills de Panamá S.A. and others – Ruling No. 59/2004—Juzgado Noveno de Circuito, Ramo Civil, del Primer Circuito Judicial, CLICAC v. Oxigás against Distribuidora de Gases Industriales, S.A. y Acetioxı́geno, S.A. (2004) (Liquid Oxygen case) Peru – Ruling No. 041/1995—CLC, PETRAMÁS S.A.C. v. Empresas de Servicio Municipal de Limpieza de Lima (ESMLL) – Ruling No. 047/1995—CLC, Comité de Molinos de Trigo de la Sociedad Nacional de Industrias and others – Ruling No. 057/1995—CLC, International Airport Jorge Chavez’s Parking Lot case – Ruling No. 012/1997—CLC, Municipalidad de Lambayeque case – Ruling No. 020/1997—CLC, Proquinsa y Silicators S.A. (Proquinsa case) – Ruling No. 276/1997—TDC. CLC (ex officio) v. empresas avı́colas (Poultry) – Ruling No. 004/1997—CLC, Petroperu S.A against Rheem Peruana S.A and Envases Metalicos S.A., (Petroperu) – Ruling No. 182/1997—TDC, Council of Trujillo decision – Ruling No. 188/1997—TDC, Miraflores taxation case (1997) – Ruling No. 005-1997—CLC Neptunia, S.A. and others v. Enapu, S.A. – Ruling No. 870/2002—TDC, Aero Continente S.A. v. Banco de Crédito del Perú – Ruling No. 025/2002—CLC, CLC (ex officio) v. Asociación Peruana de Seguros, El Pacı́fico Peruano Suiza Compañı́a de Seguros y Reaseguros, Generali Perú Compañı́a de Seguros y Reaseguros S.A., y otros; (Insurance companies) – Ruling No. 006/2003—CLC, Depósito Santa Beatriz S.R.L., Eleodoro Quiroga Ramos S.R.L. y Comercial Quiroga S.R.L. contra Distribuidora Norte Pacasmayo S.R.L. v. DINO S.R.L. (Construction Materials) – Ruling No. 429/2004—CLC, Pension Fund Market case – Ruling No. 1326/2005—TDC Unión de Cervecerı́as Backus y Johnston S.A.A v. Compañı́a Cervecera Ambev Perú S.A.C. European Union – Continental Can, Case 6/72 Europemballage Corporation and Continental Can Company Inc. v. Commission [1973] ECR 215 List of Cases (per Jurisdiction) 633 – United Brands, Case 27/76 United Brands Company and United Brands Continental BV v. Commission, [1978] ECR 207, [1978] 1 CMLR 429 – Pronuptia de Paris GmbH (Frankfurt am Main) and Pronuptia de Paris Irmgard Schillgalis (Hamburg), Case 161/84 of January 28, 1986 – Nestle/Perrier case, Case T-12/93 Comité Central d’Enterprise de la Société Anonyme Vittel and Comité d’Etablissement de Pierval and Fédération Générale Agroalimentaire v. Commission [1995] II-ECR 1247 – Dalgety plc/The Quaker Oats Company, Case IV/M.554, March 13, 1995 United States – United States v. Addyston pipe & steel company et al. (6th Cir. 1898), 85 Fed, 271 – Dupont case, U.S. v. E.I. Du Pont de Nemours & Co., 351 U.S. 377, 391-392 [1956] – Northern Pacific Railway v. United States, 356 U.S. 1,5 (1958) – Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977) – Arizona v. Maricopa County Medical Society, 457 U.S. 332, 344 (1982) – FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986) – State Oil Co. v. Khan, 522 U.S. 3 (1997) – California Dental Ass’n v. FTC, 526 U.S. 756 (1999) – Commissioner of Competition v. Superior Propane Inc. (2001), 11 C.P.R. (4th) 289 (April 4, 2001) Venezuela – Ruling No. 0004/1992—SPPLC, Pro-Competencia (Ex officio) v. Federacion Farmaceutica de Venezuela case (FEFARVEN I) – Ruling No. 0002/1993—SPPLC, Pro-Competencia (Ex Officio) v. Premezclados y Prefabricados de Concreto S.A (Premex), Premezclados Tucón C.A., Mezcladora Mixto Listo C.A., Premezclados Avila C.A., y Venmar C.A. (Venmarca) (Premezclados de Concreto) – Ruling No. 00028/1993—SPPLC, Pro-Competencia (Ex officio) v. C.A. Gases Industriales de Venezuela y AGA Venezolana C.A., Appeal ruling of the First Administrative Court 97-734 of June 5, 1997 (Gases) – Ruling No. 0027/1993—SPPLC, Farmatodo v. Federacion Farmaceutica de Venezuela case (FEFARVEN II) – Ruling No. 0013/1994—SPPLC, Polar/Golden acquisition case – Ruling No. 0001/1994—SPPLC, Olimpia Tour & Travel C.A. v. Asociación Venezolana de Agencias de Viajes y Turismo (Avavit) – Opinion on the restrictive effects of Distribuidora Venezolana de Azúcares, C.A. (DVA) (1994) – Ruling No. 0042/1995—SPPLC, OralB/Laboratorios Substantia acquisition – Ruling No. 033/1996—SPPLC, Pro-Competencia (ex officio) v. Federación Farmaceútica de Venezuela y Colegios Farmaceuticos (FEFARVEN III) 634 List of Cases (per Jurisdiction) – Ruling No. 00034/1996—SPPLC, Pepsi v. Coca Cola (Soft drinks) – Ruling No. 0016/1996, Nabisco case – Ruling No. 0017/1996—C.A. El Mundo, C.A. Ultimas Noticias, Editorial Santiago de León C.A. (2001), Meridiano C.A., El Universal C.A. y C.A. Editora El Nacional – Ruling No. 0008/1996—SPPLC, Johnson & Johnson’s trademark Favor by Unilever N.V. – Ruling No. 001/1998, Pro-Competencia (Ex Officio) v. Banco Venezolano de Crédito SACA and Promotora Buenaventura, C.A. (Buenaventura) – Ruling No. 0048/1998—SPPLC, Proquim v. Venezolana de Terminales C.A. (Venterminales) – Ruling No. 0053/1999—SPPLC, Pro-Competencia (ex officio) v. Aeropuerto de Maiquetı́a – Ruling No. 0018/1999—SPPLC, Proquim v. Ávila Quı́mica C.A. y American Natural Soda Ash Corporation (Ansac) – Ruling No. 0015/1998—SPPLC, Pro-Competencia (ex officio) v. Toyota de Venezuela C.A. – Ruling No. 004/1999—SPPLC, RCTV C.A. y C.A. Venezolana de Televisión v. AGB Panamericana de Venezuela de Medición S.A (AGB) – Ruling No. 0012/1999—SPPLC, SCAT v. Consorcio Guaritico-Guaritico III (Puerto El Guamache) – Ruling No. 0009/2000—SPPLC, Pro-Competencia (ex officio) v. Panamco de Venezuela S.A. (Panamco); Sociedad Productora de Refrescos y Sabores, S.A. (Sopresa) and Presamir, Presaragua y Presandes (Sopresa-Panamco) – Ruling No. 0001/2000—SPPLC, Alpes C.A. v. Royal C.A. (Alpes) – Ruling No. 0030/1999—SPPLC, TV Cable Orión C.A., Parabólicas Serviceás C.A., Cable Corp TV C.A. and ACC Comunicaciones, Supercable and the Cámara Venezolana de Televisión por Suscripción (Cavetesu) v. Enelven, Enelco, Enelbar, Eleval, Cadafe and her subsidiaries: Elecentro, Eleoriente, Eleoccidente, Semda y Cadela (TV Cable) – Ruling No. 0041/2000—SPPLC, INSACA v. Federación Farmacéutica de Venezuela and Colegio de Farmacéuticos del Distrito Federal – Ruling No. 0035/2000—SPPLC, Cines Unidos, Difox y Blancica Camara Venezolana de la Industria del Cine y del Video (Association of Movie Theaters) – Ruling No. 029 -2000—SPPLC, Compañı́a Anónima Nacional Teléfonos de Venezuela (CANTV) and CANTV Servicios – Ruling No. 0005/2001—K Exteriores Publicidad v. C.A. Metro de Caracas (Caracas Metro) – Ruling No. 0021/2002—SPPLC, Suramericana de Aleaciones C.A. (Sural) v. C.V.G. Venalum – Ruling No. 0027/2002—SPPLC, VFG—Vitrofibras de Venezuela C.A. v. VFG-Sudamtex C.A. (Vitrofibras) List of Cases (per Jurisdiction) 635 – Ruling No. 0041/2003, Pro-Competencia (ex officio) v. Venepal, Surfit Cartón de Venezuela, Venezolana de Cartones Corrugados, Cartonerı́a del Caribe, Servicios de Corrugados Maracay y Corrugadora Suramericana (Pro-Carton) – Ruling No. 0007/2003—SPPLC (Johnson & Johnson/Bayer merger transaction) – Ruling No. 003/2004—SPPLC, Pro-Competencia v. Suramericana de Espectáculos (Cinex) y Cines Unidos C.A. (Movie cinemas case) – Ruling No. 007/2005—SPPLC, Corporación Televen C.A., v. R.C.T.V, C.A., and Corporación Venezolana de Television, C.A. (Venevision) – Ruling No. 0007/2005—SPPLC, Televen v. Venevision and Radio Caracas Television – Ruling No. 0029-2007—SPPLC, Cantv-Digitel merger case – Opinion in the merger Compañı́a Anónima Nacional Teléfonos De Venezuela (CANTV) and Corporación Digitel, C.A. List of Statutes I. Andean Community – Decision No. 608/2005 of the Andean Commission (amending Decision No. 285/1991 of the Andean Commission, March 21, 1991) II. Argentina – Articles 42 and 43 of the 1984 Constitution – Decree No. 284/1991—Deregulation of Domestic Commerce in Goods and Services – Law No. 25156/1999 for the Defense of Competition—Competition Act (amending Law No. 22262/80) – Decree No. 89/2001—Regulations of Law No. 25156/1999 – Decree No. 1019/1999 (amending Law No. 25156/1999) – Decree No. 396/2001 (amending Law No. 25156) – Ruling No. 40/2001—Guidelines for the notification of Economic Concentrations – Ruling No. 164/2001—Guidelines for the Control of Economic Concentrations – Ruling No. 26/2006—Rules of Procedure to make consultations before the CNDC – Ruling No. 100/2004—Understanding of Cooperation between MERCOSUR countries for the enforcement of their Competition Laws – MERCOSUR/CMC/DEC. No. 15/2005—Understanding of Cooperation between MERCOSUR countries for the Control of Regional Economic Concentrations 638 List of Statutes Bolivia – Political Constitution, Article 7 (‘‘Trade Freedom’’), Article 141 (‘‘Public Order regulation’’); Article 134 (‘‘Control of Economic Power’’); Article 142 (‘‘Export Monopolies’’) – Decision No. 608/2005—Andean Regional Competition Rules – Supreme Decree No. 21060/85 establishing the New Economic Policy – Law No. 1,600/1994—Rules of the Sector Regulatory System (SIRESE) – Supreme Decree No. 24,504/1997—Regulations of the SIRESE System Brazil – Articles 170, 173 and 174 of the 1988 National Constitution – Law No. 8884/1994 for the Prevention and Repression of Infringements against Economic Order (as amended by Law No. 9069/1995 and Law No. 10149/2000)—Competition Act. (Enacted originally in 1962; amended in 1990 and revised in 1994.) Transforms the CADE into an autonomous government agency and provides for prevention and prosecution of infractions against the economic order – Law No. 8137/1990—Defines crimes against the tax and economic order, and against consumption – Law No. 9021/1995—Provides for implementation of the autonomy of CADE, established by Law No. 8884/1994 – Law No. 10149/2000—Vests CADE with institutional autonomy and introduces a leniency program – Resolution No. 15/1998 CADE—Regulates CADE procedures and formalities applicable to concentration acts – Resolution No. 18/1998—Regulates the procedure of consultations before CADE, on issues under its jurisdiction – Resolution No. 36/2004—Provides for the amount of the pecuniary fine imposed for untimely submission of Concentration Acts, as set forth in article 54, paragraph 5 of Law No. 8884/1994 – Law No. 7.347/1985—Regulates the civil action for liability for damages caused to free competition or any other diffuse or collective interest (amended by the single paragraph of article 88 of Law No. 8.884 of June 11, 1994) – Resolution No. 20 of CADE of June 20, 1999 (published in the Official Gazette of the Federal Executive, Section I, on June 30, 1999)—Provides, on a supplementary basis, for administrative proceedings pursuant to Article 51 of Law 8884/1994 – Joint Directive SEAE/SDE 50/2001—Horizontal Merger Guidelines Chile – Article 19 (21) and (22) of the National Constitution – Law No. 19,911/2003—Competition Act. (Enacted originally by DecreeLaw No. 211/73, successively amended Laws No. 18,118/82; 19,336/1994; 19,610/1999; 19,806/2002; 19,336/1994; 19,610/1999; 19,806/2002.) List of Statutes 639 – Law No. 19.733—Freedom of Speech and Information Act – Guide for the Analysis of Horizontal Concentration Operations – Ruling No. 389/1993—Guidelines for the Operations of Telecommunications Service Suppliers Colombia – – – – Articles 333 and 334 of the Constitution of 1991 Decision No. 608/2005—Andean Regional Competition Rules Law on Restrictive Business Practices No. 155/1959 Decree No. 2153/1992—restructuring the Superintendence of Industry and Commerce (Competition Act) – Law No. 195/2007—on the regulations in economic concentration and restrictive trade practices (pending approval) – Executive Order No. 663/1993—which updates the Organic Statute of the Financial System Television: Law No. 182/1995 – Law No. 142/1993—which establishes the system of public services to residences and other provisions Costa Rica – Article 46 of the Political Constitution of the Republic, 1949 – Law No. 7472/1994—Law of Promotion of Competition and Effective Protection of Consumers—Competition Act – Decree No. 25234/1996—Regulations of the Competition Act Dominican Republic – Law No. 42/2008—Law on the Defense of Competition—Competition Act El Salvador – Article 102 of the Political Constitution – Legislative Decree No. 528/2004—Competition Act (amended by Legislative Decree No. 436/2007) – Presidential Decree No. 126/2006—Regulations of Legislative Decree No. 528/2004 European Union – Commission Notice—Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, DG COMP, January 28, 2004. European OJ C 31, February 5, 2004 (‘‘Merger Guidelines’’) – Commission Notice of October 13, 2000—Guidelines on vertical restraints [COM(2000/C 291/2001)—OJ C 291 of October 13, 2000]. 640 List of Statutes – Notice on the definition of the relevant market for the purposes of Community competition law (1997) – Explanations of the Competition Council on the definition of the relevant market, Ruling 17 of February 24, 2000 of the Competition Council, Official Gazette, 2000, 19-487 Honduras – Legislative Decree No. 357/2005—Official Register No. 30,920 of February 4, 2006—Competition Act – Competition Commission Agreement No. 001/2007—Regulations of the Competition Act Mercosur – Decision No. 20/1994, December 17, 1996—about Public Politics that impair competition, as of June 30, 1995 – MERCOSUR Protocol for the Defence of Competition, Decision No. 18/ 1996, as of December 30, 1996 – Decision No. 21/1994—Defence of Competition. General Norms of Harmonisation Mexico – Article 28 of the Political Constitution of the United States of Mexico, 1917 – Federal Law of Economic Competition of 2006—Competition Act (amending the 1992 Competition Act) – Regulations of the Competition Act, March 4, 1998 – Internal Regulations of the Federal Commission on Competition, August 28, 1998 Nicaragua – Law No. 601/2006—Law for the Promotion of Competition— Competition Act – Decree No. 79/2006—Regulations of the Competition Act Panama – Law No. 45/2007—Law that establishes rules on the protection of Competition and Defense of Competition—Competition Act (amending Ley No. 29/1996 on the Protection of Competition and Other Measures; and Decree Law No. 09/2006) – Executive Decree No. 31 (September 3, 1998)—Regulation for the Title I (monopoly) and other provisions of Law No. 29 List of Statutes 641 – Guidelines on the Control of Economic Concentrations of September 12, 2001 – Ruling No. PC-503-03—Guidelines for the Analysis of Vertical Restraints Peru – Articles 58, 59, 60, 61 and 63 of the Peruvian Constitution of 1993 – Decision No. 608/2005—Andean Regional Competition Rules – Legislative-Decree No. 701/1991—Against Monopolistic Practices, Controls and Restraints on Free Competition—Competition Act (amended by Decree-Law No. 25,868/1992 and Legislative-Decree No. 807/ 1996) – Decree-Law No. 25,868—Organization of INDECOPI – Legislative Decree No. 757—Principles and rules for the expansion of private investment – Supreme Decree No. 27-95 ITINCI, October 19, 1995—Regulating Concessions – Law No. 26876—Power Sector Antitrust Law – Supreme Decree 017-98-ITINCI—Regulating the Power Sector – Ruling No. 206/1997—Precedents of Mandatory Compliance for the Interpretation of Horizontal Restraints Uruguay – Law 17.243/2000 United States – 1992 U.S. Department of Justice Horizontal Merger Guidelines (49 Fed. Reg. 26, 823 [1984]) – U.S. FTC/DOJ Guidelines for Collaboration among Competitors Venezuela – Constitution of the Republic of Venezuela (1999), Articles 112 and 113 – Law for the Promotion and Protection of the Exercise of Free Competition (1992)—Competition Act – Regulation No. 1/1993—Rule of Reason and class exemptions of the Competition Act – Ruling 0004/1993—Exemption to small farmers and farmers associations willing to negotiate prices jointly with the agro-industry – Regulation No. 2/1996—Economic Concentrations – Ruling No. 038/1999—Guidelines for the Assessment of Franchising Contracts – Ruling No. 00039/1999—Guidelines for Economic Concentrations – Ruling No. 036-95—Exclusive Distribution Agreements and Exclusive Supply Agreements Subject Index Alcool Cartel case, Antitrust analysis Collective dominance assessment, general, Antitrust goals balancing weight standard, consumer surplus, examples of economic efficiencies, optimally differentiated rules, sacrifice test, the ancillary restrictions doctrine, total surplus, Antitrust legislation classification, functional nature, Antitrust market definition, Introduction, Antitrust Policy definition, Epistemological problems, medieval origins in Castille, Antitrust Policy effects on the rule of law enhancing government discretion, erosion of property rights, general, insufficiency of quantitative data, Antitrust Policy objectives and discretional decision making, diverse goals, futility of the debate, predictability as policy goal, Argentinean Liquid Oxygen, Barriers to entry assessment, classification, definition, CNDC v. Loma Negra and others, Coca-Cola/Cadbury, Collection of information confidential information, general, investigation powers, leniency programs, Competition definitions, Competition advocacy definition, scope, Competition advocacy and government anticompetitive measures, Local Councils, Technical standards, 644 Competition advocacy and government driven cartels, Basic Industries, Foodstuff producers, The energy Sector, Competition advocacy and liberal professions, Pharmacists and drugstore retailing, Public Notaries, The Health Sector, Competition advocacy in Latin America capital markets, scope, Tourist agencies, trade associations, Competitive equilibrium and the perfect justice, policy implications, Competitive equilibrium limits of the workable competition model, Conditions to invoke efficiency clause, De Roover, Economic efficiency the short run vs. the long run, Entry barriers analytical problems, entry in dynamic markets, illustrative cases, legal uncertainty, Federal District case, Historical background, Horizontal restraints and the Imperfect Competition Theory, Class exemptions. See policy assessment, pro-competitive agreements, trade associations, truncated rule of reason, Horizontal restraints assessment exploitative effects, monopoly power, pro-competitive effects, Horizontal restraints policy countries including a per se prohibition, legal problems with the per se treatment, Subject Index Imperfect Competition model and Robinson’s static interpretation of competition, and the change of economic thinking in the 1930s, incompatibility with the long run competitive equilibrium, its influence on the development of conventional Industrial Organization, Joan Robinson’s recognition of her own mistake, import substitution industrialization background, policies, resilience of monopolies, theory of Dependencia, Institutional flaws funding, general, general, imprecise enforcement provisions, independent legal charter, marginal role of courts, multiple overlapping agencies, organizational problems, scope of activity, stability in office, International antitrust standards and globalization, International standards and the OECD, Mercosur, the Andean Group, the FTAA and the WTO, the ICN, the role of UNCTAD, Latin American economic institutions Colonial monopolies, Mercantilism, Spanish origins, Legal standards rule of reason, the per se prohibition, Legal standards per se prohibition scope, Liquid Oxygen case, 645 Subject Index Market concentration indexes Ci, dominance test, HHI, Market dynamics elements, general, Market information and the long run competitive equilibrium, Market size measurement problems, and the improvements in data collection, the Cellophane Fallacy, Meaning of economic efficiency in Latin American antitrust statutes, Merger remedies Behavioral remedies, General, Structural remedies, Merger review and monopoly power, elements of the analysis, evaluation of their exclusionary effects, Failing firm defense, mandatory vs. voluntary merger review, policy assessment, popularity as a policy tool, pro-competitive efficiencies, Mergers and acquisitions and the Imperfect Competition Theory, Monopoly model allocative losses, assumptions of the model, basic tenets, Monopoly power and Latin American domestic law, Definition, European concept of dominance, the US concept of market power, Monopoly power assessment problems and product substitution, naked price fixing definition, Neoliberal reforms Emphasis on macroeconomic policies, Washington Consensus, Nestle/Garoto case, Newspaper Cartel, No merger review Bolivia, Peru and Uruguay, oligopoly theory and collusion, and game theory models, and the barriers to entry, and the control of vertical restraints, and the rationale for merger control, and the SCP paradigm, tenets, Perfect competition and the equilibrium view of markets, assumptions of the model, Personal jurisdiction of antitrust laws economic control, notion of enterprise, Philip Morris/Coltabaco acquisition, Policy enforcement anticipated settlements, civil remedies, preventive measures and compliance orders, punitive remedies, Potential competition alternative notions in Latin America, and the theory of market contestability, importance in antitrust analysis, Poultry case, Powers to investigate Supplying misleading information, Pre-merger review Mandatory jurisdictions Argentina, brazil, Colombia, el Salvador, General, Honduras, Mexico, Nicaragua, voluntary jurisdictions chile, Costa Rica, general, Panama, Venezuela, 646 Pro-Competencia v. Cemex and others, Productive efficiencies and Joan Robinson’s ‘‘wrong turn’’, the antitrust view, the case of price fixing, Proquinsa case, Rent seeking in Latin America, institutional and regulatory reform, institutional forms, the economic theory of, Scope of antitrust laws copyrights and patents, Exceptions, Government immunity, rationale of exempted sectors, rent seeking and antitrust exemptions, special interest groups, strategic industries, territorial scope and the effects doctrine, Sector regulation and institutional coordination with competition agencies, as instrument for competition promotion, general, Sector regulation and pro-competitive arrangements franchise bidding, open infrastructure, pooling capacity, time-tabling, Sector regulation arrangements price regulation, Sector regulatory policy Electricity sector, Financial Services, Gas and Oil, Ports and Airports, railways, Solid Waste, Telecommunications, Sector regulatory policy general, Social Justice Origins, policies, resilience of monopolies, Subject Index Social Positivism evolution in Latin America, Origins, policies, Spanish Scholastics economic fairness, growth of royal prerrogatives, origins of the School, SSNIP, SSNIP test market measurement and quantitative tests, tacit collusion and gentlemen’s agreements, plus factors doctrine, Unilateral restraints and the Essential facilities doctrine, Classification, Monopoly power, Policy Excessive Pricing, Exclusive dealings, Increasing Switching costs, Predatory Pricing, Price discounts, Price discrimination, Price Squeeze, Raising Rivals’ costs, refusal to Deal, Tie-in, pro-competitive efficiencies Development of complementary production, general, Minimization of commercial risks, Utopia definition, Utopianism and antitrust policy, and Latin American history, and the impact on the rule of law, origins, vertical restraints assessment double marginalization problem, Vertical restraints assessment exclusionary effects, 647 Subject Index pro-competitive efficiencies, Vertical restraints assessment monopoly power, Vertical restraints policy exclusive distribution, exclusive supply, Franchising, resale price maintenance, selective distribution, suggested prices, Vertical restraints theory inter brand vs. intra brand exclusions, the Imperfect Competition Theory, INTERNATIONAL COMPETITION LAW SERIES 1. Ignacio De León, Latin American Competition Law and Policy: A Policy in Search of Identity (2001) (ISBN 90-411-1542-0) 2. Wim Dejonghe and Wouter Van de Voorde (Eds), M & A in Belgium (2001) (ISBN 90-411-1594-3) 3. Yang-Ching Chao, Gee San, Changfa Lo and Jiming Ho (Eds), International and Comparative Competition Law and Policies (2001) (ISBN 90-411-1643-5) 4. Martin Mendelsohn and Stephen Rose, Guide to the EC Block Exemption for Vertical Agreements (2002) (ISBN 90-411-9813-X) 5. Clifford A. Jones and Mitsuo Matsushita (Eds), Competition Policy in the Global Trading System: Perspectives from the EU, Japan and the USA (2002) (ISBN 90-411-1758-X) 6. Christian Koenig, Andreas Bartosch, Jens-Daniel Braun and Marion Romes (Eds), EC Competition and Telecommunications Law. Second Edition (2009) (ISBN 978-90-411-2564-4) 7. Jürgen Basedow (Ed.), Limits and Control of Competition with a View to International Harmonization (2002) (ISBN 90-411-1967-1) 8. Maureen Brunt, Economic Essays on Australian and New Zealand Competition Law (2003) (ISBN 90-411-1991-4) 9. Ky P. Ewing, Jr., Competition Rules for the 21st Century: Principles from America’s Experience, Second Edition (2006) (ISBN 90-411-2477-2) 10. Joseph Wilson, Globalization and the Limits of National Merger Control Laws (2003) (ISBN 90-411-1996-5) 11. Peter Verloop and Valérie Landes (Eds), Merger Control in Europe: EU, Member States and Accession States, Fourth Edition (2003) (ISBN 90-4112056-4) 12. Themistoklis K. Giannakopoulos, Safeguarding Companies’ Rights in Competition and Anti-dumping/Anti-subsidies Proceedings (2004) (ISBN 90-4112254-0) 13. Marjorie Holmes and Lesley Davey (Eds), A Practical Guide to National Competition Rules across Europe, Second Edition (2007) (ISBN 978-90411-2607-8) 14. Sigrid Stroux, US and EU Oligopoly Control (2004) (ISBN 90-411-2296-6) 15. Tzong-Leh Hwang and Chiyuan Chen (Eds), The Future Development of Competition Framework (2004) (ISBN 90-411-2305-9) 16. Phedon Nicolaides, Mihalis Kekelekis and Maria Kleis, State Aid Policy in the European Community: Principles and Practice, Second Edition (2008) (ISBN 978-90-411-2754-9) 17. Doris Hildebrand, Economic Analyses of Vertical Agreements: A SelfAssessment (2005) (ISBN 90-411-2328-8) 18. Frauke Henning-Bodewig, Unfair Competition Law: European Union and Member States (2005) (ISBN 90-411-2329-6) 19. Duarte Brito and Margarida Catalão-Lopes, Mergers and Acquisitions: The Industrial Organization Perspective (2006) (ISBN 90-411-2451-9) 20. Nikos Th. Nikolinakos, EU Competition Law and Regulation in the Converging Telecommunications, Media and IT Sectors (2006) (ISBN 90-411-2469-1) 21. Mihalis Kekelekis, The EC Merger Control Regulation: Rights of Defence. A Critical Analysis of DG COMP Practice and Community Courts’ Jurisprudence (2006) (ISBN 90-411-2553-1) 22. Mark R. Joelson, An International Antitrust Primer: A Guide to the Operation of United States, European Union and Other Key Competition Laws in the Global Economy, Third edition (2006) (ISBN 90-411-2468-3) 23. Themistoklis K. Giannakopoulos, A Concise Guide to the EU Anti-dumping/ Anti-subsidies Procedures (2006) (ISBN 90-411-2464-0) 24. George Cumming, Brad Spitz and Ruth Janal, Civil Procedure Used for Enforcement of EC Competition Law by the English, French and German Civil Courts (2007) (ISBN 978-90-411-2471-5) 25. Jürgen Basedow (Ed.), Private Enforcement of EC Competition Law (2007) (ISBN 978-90-411-2613-9) 26. Jung Wook Cho, Innovation and Competition in the Digital Network Economy: A Legal and Economic Assessment on Multi-tying Practices and Network Effects (2007) (ISBN 978-90-411-2574-3) 27. Akira Inoue, Japanese Antitrust Law Manual: Law, Cases and Interpretation of the Japanese Antimonopoly Act (2007) (ISBN 978-90-411-2627-6) 28. René Barents, Directory of EC Case Law on Competition (2007) (ISBN 97890-411-2656-6) 29. Paul F. Nemitz (Ed.), The Effective Application of EU State Aid Procedures: The Role of National Law and Practice (2007) (ISBN 978-90-411-2657-3) 30. Jurian Langer, Tying and Bundling as a Leveraging Concern under EC Competition Law (2007) (ISBN 978-90-411-2575-0) 31. Abel M. Mateus and Teresa Moreira (Eds), Competition Law and Economics— Advances in Competition Policy and Antitrust Enforcement (2007) (ISBN 97890-411-2632-0) 32. Alberto Santa Maria, Competition and State Aid: An Analysis of the EC Practice (2007) (ISBN 978-90-411-2617-7) 33. Barry J. Rodger (Ed.), Article 234 and Competition Law: An Analysis (2007) (ISBN 978-90-411-2605-4) 34. Alla Pozdnakova, Liner Shipping and EU Competition Law (2008) (ISBN 978-90-411-2717-4) 35. Milena Stoyanova, Competition Problems in Liberalized Telecommunications: Regulatory Solutions to Promote Effective Competition (2008) (ISBN 978-90-411-2736-5) 36. EC State Aid Law/Le Droit des Aides d’Etat dans la CE. Liber Amicorum Francisco Santaolalla Gadea (2008) (ISBN 978-90-411-2774-7) 37. René Barents, Directory of EC Case Law on State Aids (2008) (ISBN 978-90411-2732-7) 38. Ignacio De León, An Institutional Assessment of Antitrust Policy: The Latin American Experience (2009) (ISBN 978-90-411-2478-4)