Comparative Competition

Question: Discuss about the Comparative Competition. Answer: 1. Under Article 101(1) of the Treaty on the Functioning of the European Union(TFEU) a different approach has been provided within the Sherman Act in its proscriptions against anticompetitive behavior. Part 1 of Article 101 is considered to be quite similar to the Sherman Act in the sole context that it aims at prohibiting agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition. The subsections (a-e) which have been included under this article have expressly mentioned examples of five different behaviourial traits which explicitly fall within Art. 101(1)[1] These include - market allocation, output controls, price fixing, applying dissimilar conditions to similar transactions and tying. Competition encourages the business establishments to provide their products and services at the price point which i s most favorable for the customers. This helps in reducing the final market price of the products and services and thus promotes efficiency and productivity within an organisation. In order to operate effectively under a competitive business environment, it is imperative for an organisation to act independently of one another by absorbing the competitive pressures which is being exerted by the other market rivals Article 101 of the Treaty on the Functioning of the European Union comprises a very important feature of the European Antitrust policy. It helps in preventing an illegal business arrangement between two market competitors which restricts competition in the market. The provisions made under Article 101 of TFEU include both the horizontal agreements (which have taken place between actual business competitors who are operating their business at the same level of the supply chain) and vertical agreements (where the business establishments operate at different levels such as the business deal between a manufacturer and the raw material suppliers).[2] This plays a very essential role in preventing price fixing or market sharing between two independent business establishments which is one of the most widely evident examples of illegal business conduct which infringes Article 101 Amid the crisis in Ukraine, the relations between the US and Europe seems to be strengthening whereas the relations between Russia and US seems to be at the lowest point since the cold war. Russia being one of the largest producers and exporters of oil in the world has completely stopped exporting oil to the US. This has had a very dramatic effective in the prices of crude oil which is witnessing a steady increase. This increase in the crude oil prices has had a negative impact on the business operations of the global aviation companies which has been forced to buy the crude at increased prices and thus they are struggling with increasing cost of business operations[3] Under this circumstance, a meeting of the International Airline Association (IAA) took place which consisted of all the major airline companies of the world such as British Airways, Emirates, United Airlines, Qantas, Air France, Lufthansa, etc. In the meeting, the representatives of the airline companies were discussin g the issue of the recent increase in the prices of crude oil and its impact on their global operations The representatives tried to address this problem by finding out an effective solution to the problem which would have enabled them to operate their business in a profitable manner by reducing the burden of increased oil prices on the respective aviation companies. The representatives of Qantas and British Airways refrained from participating in the discussion and thus they have violated Article 101 of TFEU. All the representatives from the different aviation companies clearly discussed their future roadmap or the path which will be taken by them in order to absorb the increasing prices of crude oil around the globe [4] Both Qantas and British Airways remained discreet till the end of the meeting and they have not divulged any details regarding the business strategy which they would be undertaking in order to tackle the rising operational cost of their business. The representative from the other airline companies have undertaken a transparent approach to the matter and discussed the strategies which would be implemented by them in order to tackle the rising crude oil prices which showcases their ethical business policies.[5] The behaviour shown by the British Airways and Qantas infringes upon Article 101 of TFEU and thus it is tantamount to an illegal business conduct which can significantly impact the business of the other airline companies which have participated in the meeting. By withholding information regarding their business strategies to tackle the increasing oil prices, both Qantas and British Airways have violated Article 101 TFEU as both these companies could have been involved in a marke t sharing or price fixing agreement (horizontal agreement) which could threaten the business operations of the other airline companies which have participated in the meeting 2. Looking at the scenario presented before me, I can clearly see that Tropicana (which is owned by Pepsico Group) is presently enjoying the lions share of the market at 42% and it is being closely followed by Minute Maid (owned by the Coca-Cola group) which has a market share of 29%. The other players in the market are much smaller in size as compared to both Tropicana and Minute Maid and they are nowhere near to the market shared which is being enjoyed by these two brands. This is the main reason why the fruit juice market is highly segmented as there are no major players apart from Tropicana and Minute Maid.[6] The fruit juice industry is a capital intensive industry which requires huge investment during the initial phase. Apart from the cost of setting up the manufacturing facility for fruit juices, a lot of capital has to be spent on the marketing and promotional campaigns in each and every targeted country and this is the main reason why the commercial fruit juice industry does not have too many market competitors However, with the entry of Nestl in the commercial fruit juice market, the overall picture is slated to undergo a sea change as the dimensions of the industry will not be the same any more. Nestl has the capacity and the financial might to give a tough competition to both Tropicana and Minute Maid as the company is a major global conglomerate in the food products industry and it has the financial might to pose a threat to the business of Tropicana and Minute Maid which till now on has been focused on the premium segment of the market. Nestl intends to bring a cheaper variant of their fruit juice in the market which they intend to market bas an entry level product. This will help the company to target the regular budget segment of the market and this will help Nestl to generate more sales which will eventually help Nestl to generate more profits and revenues from the market [7] Tropicana is presently selling their brand of fruit juice at 3 per liter to the consumers and whereas Nestl intends to sell their fruit juice at 1.3 per liter to their consumers in the market. This will really provide a competitive advantage to Nestl and they will be able to considerably eat up the revenues and profits which are being generated by Tropicana at present. Thus, there is an urgent need for Tropicana to undertake an effective commercial plan which will enable the company to address the growing threat of Nestl.[8] In order to tackle the increasing competition from Nestl Tropicana has decided to commercialize some of their products under a new brand name which will be sold to the customers at entry level prices. The sales team at Tropicana has considered two possible strategies in order to tackle the competition from Nestl. The sales team intends to keep the same pricing that is being offered by Nestl (at 1.3 per liter) or they can even sweeten the deal for their customers by lowering the price further (at 1.1 per liter) than what has been offered by Nestl Being the general counsel for Tropicana, it is my personal opinion that Tropicana should incorporate the predatory pricing approach which will enable it to eat up the market of Nestl. Tropicana should strive to provide their products at a lower price point (at 1.1 per liter) that is being present provided by Nestl. Tropicana can utilise economies of scale which will enable them to increase their daily production levels and at the same time help in bringing down the per item manufacturing cost of their products.[9] Thus, Tropicana will be able to ensure sufficient profits from their business operations even after reducing the market price of their products. This will help Tropicana to attract the regular budget segment customers from the market and they will be able to further increase their consumer base in the market The predatory pricing strategy is as business strategy which is often utilised by the business establishments in order to drive out their competitors from the market. In this strategy, an organisation keep the pricing of their goods and services at such low levels that they hardly make any profit in the market.[10] The other business firms are unable to provide their products and services to their customers at such lower price point and as a result they are forced to shut down their business and leave the market. The predatory pricing strategy will provide a competitive advantage to Tropicana over Nestl and they will be able to retain their overall market share in the commercial fruit juice industry My analysis will still remain the same if the management of Tropicana tells me that they have no intention of maintaining such low entry level prices for their products. If the management is just waiting for the time when Nestl will be forced to shut down their business operations in the market, then also I would recommend that Tropicana utilise the same predatory pricing approach. If Tropicana is successful in their efforts to drive out Nestl from the market then they can increase the prices of their entry level products in the market and the customers will be compelled to buy that product at the offered price as there will be no other available substitute products in the market.[11] Thus, the customer will be unable to switch their preference to another brand. This will help Tropicana to monopolise the entry level budget segment of the commercial fruit juice market and thus Tropicana will be able to maximize their profits and revenues from their business operations in the market 3. The EU Competition Law plays a vital role in promoting healthy competition between the business establishments which are operating within the European Union. It regulates and monitors the unfair trading practices and anti-competitive conduct of the business establishments which helps to ensure that cartels and monopolies are not created by the business establishments that would threaten and compromise the overall interests of the society. The EU competition law has its history which dates back to the prohibitions on therestraint of trade and it is inspired by the Sherman Act of 1890 and Clayton Act of 1914 which are in use in the US. The EU [12] Competition law has been primarily derived from articles 101 to 109 of theTreaty on the Functioning of the European Union (which regulates the activities of the business establishments that are operating within the European Union) apart from other directives and regulations There are essentially four main policy areas which the EU Competition Law seeks to address and they are given below: Preventing market dominance and ensuring that business establishments which are enjoying dominant position in the market do not abuse their power under article 102 of Treaty on the Functioning of the European Union(TFEU). Preventing the rise of business cartels and other anti-competitive practices under article 101 of TFEU[13] Ensuring a proper control on the proposed mergers and acquisitions which occurs between the business establishments which are generating a significant amount of business turnover within the EU as per Merger Regulation. Controlling the amount of aid (both direct as well as indirect) given by the members nations of EU to the business enterprises under article 107 of TFEU In the scenario presented before us, we can clearly see both Gaz de Belgique (GB) and Gazolux (GL) are operating their business within their respective countries which are Belgium and Luxembourg. Both GB and GL provide natural gas to both consumers as well as private business establishments. After the Gas market in Belgium has be opened up to competition, the market share of GB in Belgium has slightly reduced due to the emergence of France Gas (FG) and Gas of UK (GUK).On the other hand, GL is operating under a monopolized market structure in Luxembourg and thus it enjoys a 100% market share in that country. However, the scenario is going to change in 2020 when the gas market in Luxembourg will be opened up to competition as per the recent EU directive and thus GL is going to lose their legal monopoly in the gar market of Luxembourg Presently, both GB and GL import the gas they sell in their respective markets as there are no gas fields in both Belgium and Luxembourg. In order to sust ain the increasing demands for Gas both GB and GL have started negotiating with Gas Norway (GN) which is a Norwegian gas producer and both the companies have entered into agreement with GN.[14] Transporting gas from Norway essentially requires the construction of a huge gas pipeline which will require huge funding from both the countries. In order to reduce the overall cost of building the pipeline both GB and GL have decided to take advantage of the proximity of their respective markets and collaborate in the construction of the pipeline by sharing the costs The draft contract for the agreement between GL and GB includes the clauses that GB will route the gas which it purchases from GN to Belgium and resale it in the Belgium market; whereas GB will route the gas it purchases from GN to Luxembourg and the gas will be resold in Luxembourg. After analyzing the draft that has been formulated for the proposed agreement, I can say that there are certain aspects which have been overlooked in the final draft and this could have severe consequences for both the nations in the near future. First of all, the agreement has missed the most important criteria that both GL and GB must never try to disrupt the gas flow through the pipeline under any circumstances. The amount of gas that is to be bought from GN has not been mentioned in the final draft agreement which is going to be finalized between the two countries. [15]The gas bought from GN should be shared according the proportion agreed by both GB and GL. Both GB and GL should give a written assurance that they should never interfere with each others business interests in the market Moreover, both GB and GL should never incorporate unfair trade practices in order to influence the gas prices in both the markets. All these vital clauses need to be included in the final draft con tract which is going to be finalized and signed in by both GB and GL and this will help in protecting the business interests of both the companies. This will help in creating a formal agreement which will be legally binding on both the parties and this will help in resolving any kind of future disputes that might arise between GB and GL. Under the EU Competition Law it is mandatory for both GB and GL to ensure an independent auditing of the cost incurred in the construction of the pipeline. Both the companies (GB and GL) must maintain a level of transparency in their business and this will enable them to succeed in their long term business endeavors [16] 4. Looking at the scenario presented before me, it is clearly evident that ABC is the leading producer of landline phone in Europe with a market share of about 40%. ABC used to enjoy a monopoly in the market in their heydays but this has considerably reduced now. In order to maintain their share in the market, ABC has been forced to diversify their business apart from manufacturing the office communication devices like phones, scanning and copying machines. There are quite a few operators which have entered the market but none is able to replicate the success and popularity which is enjoyed by ABC. The nearest rival of ABC enjoys a market share of 25%. In case of printing and scanning machines ABC enjoys a market share of 50%. According to me, ABC is in a good position to implement their first sales policy wherein the company will offer a discount of 10% on each and every telephone or scanning or copying machines which are being bought from them by their customers in the market[17] T his would not in any way affect their compliance with the EU Competition Laws as providing discounts to the customers is considered to be legal and business establishments operating in Europe are allowed to offer discounts to their customers. I strongly feel that ABC is in a good position to capitalise on their existing market share and allowing an additional 10% discount on their products and services would enable the company to attract more customers from the market. The fact that they are way ahead of their business rivals in terms of the market share, the organisation could reduce the market prices of their products in order to popularise and promote their products among a larger customer segment in the market.[18] This will enable the organisation to further increase their customer base in the market and thus they will be able to generate more revenues and profits from their business operations in the market. Thus, by offering 10% discounts on their products and services, ABC w ill be able to further strengthen their market share by gaining a competitive advantage over their business rivals In case of the second sales strategy where ABC intends to sell their products at below production cost, I would say that it is quite a risky proposition for the organisation. There is a lot of confusion among ABC regarding how long they will be able to continue selling their products below the production cost. If ABC intends to sell their products at the same price level which is being offered by DEF, then they are allowed to do so under the EU competition laws.[19] Under the EU Competition Laws, business establishments are not allowed to incorporate unfair trading practices that might interfere or threaten the business interests of their rivals. By selling their products at below production cost, the company is compromising their own business in order to avoid losing customers to DEF. However, if ABC goes ahead with their plans to sell their products at below productio n cost, then the company needs to first calculate how long they will be able to sustain the losses in the market.[20] This policy could not be continued indefinitely as it will force the company towards bankruptcy. The company needs to fix a specific time period for which this strategy will be implemented and they should try to attract maximum customers from the market within that time period. This is the only way ahead for the company, if they decide to implement the second sales strategy In case of the third sales policy of ABC where the company wants to set a high amount of royalty rate on their patent which will force their competitors to opt out of a license agreement, I would say it is a well thought out strategy which will help in ensuring competitive advantage to ABC. The fact that ABC owns the patents on their technology which are being utilised in their scanning and copying machines, they have the right to set any amount of royalty which they find appropriate. By setting a high royalty rate for the licensing of their technology will not in any way affect or compromise their compliance with the EU Competition Laws as the technology is developed and owned by them. 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