Articles 85 and 86 of the Treaty of Rome set out the basic principles for creating a competitive economic environment within the EU. But the Commission’s Annual Reports on Competition Policy display a broad, even bewildering, set of objectives, and its priorities have shifted considerably over the 40 years since then. A new CEPR study examines how far modern economic analysis can clarify the aims of public intervention in the process of competition among firms and explores the various means of achieving those aims.

In Trawling for Minnows: European Competition Policy and Agreements Between Firms, Damien Neven, Pénélope Papandropoulos and Paul Seabright provide a comprehensive review of EU policy towards agreements between firms. They use three distinct approaches: first, they consider what the literature in industrial economics has to say about the effects of such agreements on competition - and about the consequent rationale for public intervention.

Second, they examine the legal framework and the decisions of the Commission and the European Court over the past decade, asking to what extent these are consistent with the recommendations that emerge from the economics literature. Third, they look at the procedures of the Commission and the way it undertakes investigations and reaches decisions, in order to see to what extent these procedures represent an appropriate means of implementing a defensible policy.

• The Commission’s definition of what constitutes a restriction of competition is much too narrow. There are many instances where agreements have been declared unlawful even though they have had negligible effects on third parties.
• The Commission’s policy on cartels is broadly correct, but the rules on evidence needed to convict firms should be relaxed.
• Joint venture agreements often create efficiency benefits. But the exemptions for such agreements granted in the case law follow a rigid legal structure and frequently fail to consider efficiency benefits in any depth.
• Overall, the Commission’s procedures are slow and cumbersome. They also combine high levels of discretion with very little transparency. Recent attempts to speed up these procedures have led to even less transparency and more intensive lobbying. The Commission should consider many fewer cases, but using explicit, published criteria.
• Reforms are urgently needed: the proposals in the recent Green Paper are far too timid and the Commission must go much further.

Throughout the study, the authors emphasize the importance of clear and predictable policy that does not give unnecessary discretion to public officials. For example, they propose a new streamlined procedure for the evaluation of ‘vertical agreements’ - agreements between firms that produce complementary products.

The first step would evaluate whether in the case of full vertical integration, the two firms would together possess substantial market power for their combined final product. This hinges on the extent of inter-brand competition: if it is sufficiently strong, the contrast should be seen as legal unless it can be shown that the firms are likely to exert more market power without vertical integration. If full integration would lead to substantial market power, a further investigation would take place, focusing on the impact on third parties and asking whether consumers, competitors and potential entrants are likely to be damaged by the contract.

Considering explicit or implicit ‘cartel’ agreements that are concealed by the firms involved, the study finds that the Commission’s practice has a great deal to recommend it. In particular, the Commission and the Court seem, rightly, to look with tolerance on implicit agreements between firms that do not involve explicit coordination. Nevertheless, a particular concern arises because of the requirements imposed by the Court on the material evidence needed to convict firms. Such requirements seem excessive in the light of the small cost that wrongful conviction may entail in this area. They also explain the apparent lack of deterrent effect that the current policy has on cartels.

In examining joint venture agreements (which account for a large proportion of ‘horizontal’ cases), the authors suggest that these should first be compared with the benchmark case of full integration of the activities of the parents. If a merger of these activities would be allowed, then a joint venture should also be allowed. Conversely, if a merger would not be allowed, then there should be a presumption that the joint venture also involves serious restrictions of competition.

In those circumstances, the authors argue, the joint venture should be declared illegal unless it can be shown that the parents are unlikely to be able to use it as a coordination mechanism. Two conditions are essential for this assessment: the extent to which the joint venture can appropriate the benefits from the pricing decisions of the parents; and the extent to which the parents will be able to capture the average profit made by the joint venture.

Of course, joint venture agreements can create efficiency benefits, which may entitle them to exemptions under Article 85. But current procedures for evaluating these benefits are unnecessarily narrow and formalistic, and the authors propose alternative criteria for assessing joint ventures, comparing them to equivalent mergers and balancing their risk to competition against their potential benefits.

The study examines the Commission’s procedures on the basis of a survey of firms that have undergone Commission investigation. It finds that in many crucial areas, the Commission enjoys high levels of discretion with very little transparency. What is more, its procedures are often slow and cumbersome, and unfortunately, many of the reforms that have sought to speed them up have done so at the expense of even such little transparency as already exists. This is particularly evident in the increasing proportion of cases settled under purely informal procedures, which in turn creates inducements for lobbying.

In an econometric analysis of the determinants of lobbying behaviour by firms, the authors find that firms are more likely to lobby senior Commission officials in cases that appear ‘difficult’ or involve high technology. Firm characteristics also determine lobbying behaviour, with significant differences between nationalities. And lobbying is significantly more intense in cases in the transport sector.

The study concludes by recommending reforms in the decision-making criteria that would drastically reduce the number of cases needing to be examined by the Commission. This would mean that the Commission could examine the reduced number of remaining cases in a more transparent manner. These changes could be implemented without changing the EU treaty, but would require important changes in secondary legislation and more than marginal changes in the Commission’s approach.

Such a sharp change in policy could be communicated through a set of published guidelines that clearly laid out the principles of the Commission’s intended new practice, and recognised officially a degree of departure from some of the earlier case law. A set of published guidelines would both help firms to predict the likelihood of their agreements being found to infringe competition law, and provide the Commission itself with an incentive for consistency in its application of that law.