Record fines have been imposed by the European Commission for the operation of a cartel. Truck makers, Volvo/Renault, Daimler, Iveco and DAF have been fined a total of €2.93bn. The fines were considerably higher than the previous record fine of €1.7bn on banks for rigging the LIBOR rate.
Along with MAN, they were found to have colluded for 14 years over pricing. They also colluded in passing on to customers the costs of compliance with stricter emissions rules. Together these five manufacturers account for some 90% of medium and heavy lorries produced in Europe.
The companies have admitted their involvement in the cartel. If they had not, the fines might have been higher. MAN escaped a fine of €1.2bn as it had revealed the existence of the cartel to the Commission.
A sixth company, Scania, is still in dispute with the Commission over its involvement. Thus the final total of fines could be higher when Scania’s case is settled.
In addition, any person or firm adversely affected by the cartel can seek damages from any of the companies in the national courts of member states. They do not have to prove that there was a cartel.
The Commission hopes that the size of the fine will act as a disincentive for other firms to form a cartel. ‘We have, today, put down a marker by imposing record fines for a serious infringement,’ said Margrethe Vestager, the EU’s competition commissioner.
Also, by being able to exempt a cartel member (MAN in this case) from a fine if it ‘blows the whistle’ to the authorities, it will help to break existing cartels.
There are some other major possible cartels and cases of abuse of market power currently being considered by the Commission. These include Google and whether unfair tax breaks were given to Apple and Amazon by Ireland and Luxembourg respectively.
Articles
Price-Fixing Truck Makers Get Record E.U. Fine: $3.2 Billion New York Times, James Kanter (19/7/16)
Truckmakers Get Record $3.23 Billion EU Fine for Cartel Bloomberg, Aoife White (19/6/16)
EU fines truckmakers a record €2.93bn for running 14-year cartel Financial Times, Peter Campbell, Duncan Robinson and Alex Barker (19/7/16)
Truckmakers fined by Brussels for price collusion The Guardian, Sean Farrell (19/7/16)
Europa Press Release
Antitrust: Commission fines truck producers € 2.93 billion for participating in a cartel European Commission (19/7/16)
Information
Competition DG European Commission
Questions
- How have the various stakeholders in the truck manufacturing industry been affected by the operation of the cartel?
- What incentive effects are there, (a) for existing cartel members and (b) for firms thinking of forming a cartel, in the fining system used by the European Commission?
- Unlike the USA, the EU cannot jail managers for oligopolistic collusion. Compare the relative effectiveness of large fines and jail sentences in deterring cartels.
- What determines the profit-maximising price(s) for a cartel?
- Apart from the threat of action by the competition authorities, what determines the likely success of a cartel in being able to fix prices?
- Choose two other cases of possible cartels or the abuse of market power being examined by the European Commission. What is the nature of the suspected abuse?
Concerns have been expressed about the UK’s relatively poor record of upgrading broadband services so that households can receive ultrafast connectivity. Some commenters have argued that future economic growth prospects will be harmed if the UK continues to lag behind its leading rivals.
Much of the fixed line system that allows people to connect to broadband was originally installed many years ago for the land-line telephone network. The so called ‘final mile’ consists of copper-based wiring that is carried from street cabinets to the premises of the end-user. This wiring is transported via a huge network of telegraph poles and cable ducts (small underground tunnels).
In order for people to gain connectivity to ultrafast broadband this copper based wiring needs to be replaced by fibre optic cables. This is commonly referred to as Fibre to the Premises (FTTP). Unfortunately, the UK has a relatively poor record of installing FTTP. Japan and Korea were forecast to have 70% and 63% coverage by the end of 2015 as opposed to just 2% in the UK.
Why is the UK’s record so poor? Many observers blame it on the structure of the industry. In other network industries, such as those for gas pipeline and electricity grids, the business responsible for managing the infrastructure, National Grid, is a regulated monopoly. This company does not directly supply services to consumers using the network it is responsible for maintaining. Instead, customers are supplied by the retail sector of the industry, where firms compete for their business. This sector includes the so-called ‘big six’ (British Gas; npower; SSE; Scottish Power; EDF; E.On) and a number of smaller suppliers such as Ovo Energy and Ebico.
The structure of the fixed line telecommunications sector is very different. The company that manages the ‘final mile’, Openreach, is a subsidiary of BT. BT also competes with other Internet Service Providers (ISPs), such as TalkTalk and Sky, to supply broadband to customers using this network. Its market share of 32 per cent makes it the largest player in the broadband market. Sky and TalkTalk have market shares of 22 per cent and 14 per cent respectively. Virgin Media also supplies 20 per cent of this market using its own network of ducts and cables.
Given that in most cases ISPs such as Sky and TalkTalk are stuck with the network Openreach provides, BT may have limited incentives to invest. It can still earn a good return from its infrastructure of copper-based wiring and avoid installing expensive FTTP. Dido Harding, the chief executive of TalkTalk, argued that:
“We need to separate Openreach from the rest of BT to create a more competitive, pro-investment market”
Ofcom, in its recent review of the market, has taken a different approach. Rather than creating an entirely separate monopoly business to manage the network (i.e. splitting Openreach from BT), the regulator instead opted for a policy of encouraging competition between different suppliers that deploy fibre optic cables. It states in the report that:
“We believe competition between different networks is the best way to drive investment in high-quality, innovative services for customers.”
This competition could come from ISPs such as TalkTalk and Sky or other smaller network providers such as CityFibre and Gigaclear.
One major problem with this approach is that potential new entrants might be deterred from entering the market because of the very high initial costs involved in building a new network in order to deploy FTTP. In particular, the costs of digging up the roads and laying the ducts are considerable. Matt Yardley, author of a study on the industry, said:
“It is widely accepted that civil works such as digging trenches account for up to 80% of broadband deployment costs.”
One way of reducing these costs and encouraging more competition is to allow rival firms access to the existing ducts and poles that are currently managed by Openreach. Once access has been obtained, these firms could effectively rent space inside the ducts and lay fibre optic cables alongside the existing copper-based wiring. Vodafone reported that a similar policy in Spain had reduced its capital expenditure of building FTTP by 40 per cent compared with constructing its own network of ducts and poles.
Ofcom first introduced this type of policy in 2010 when it launched its Physical Infrastructure Access (PIA) initiative. Unfortunately it has proved to be relatively unsuccessful with very little demand for PIA from rival firms. The success of this type of policy will depend on a number of factors including (1) the prices charged by Openreach to access and rent space inside the ducts; (2) the simplicity of any relevant administration; and (3) the availability and reliability of information about the ducts. With this last point, key issues include:
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Where they are located . |
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How much space is available: i.e. is there enough space for firms to lay fibre optic cables alongside the existing wiring? |
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What condition they are in: i.e. are they flooded or clogged up with sand and mud, which will involve expensive work to make them usable again?
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Firms did complain about the pricing structures and bureaucratic nature of the administration process under the PIA scheme. However, their most significant concerns were about the uncertainty that was created by the lack of information about the ducts and poles. For example, analysts from the consultancy firm, Reburn, argued that if a firm contacted Openreach to try to obtain access to the network it was informed that:
“We don’t know what condition the ducts and poles are in. Please pay £10 000 for a survey. Also unfortunately we are rather busy and we can only start in six weeks.”
Matthew Hare, the chief executive of Gigaclear, argued that it was like going to a shop where the assistant says:
“Give me some money, and I’ll tell you whether you can have it or not.”
In response to these criticisms Ofcom has introduced a number of changes to PIA, which has been re-named Duct and Pole Access (DPA). In particular, it has imposed a new requirement on Openreach to create a database that provides information on the location, condition and capacity of its ducts and poles. The database must be made available to rival ISPs and network providers. DPA must also be provided on the same timescales, terms and conditions to all businesses including other parts of BT – this is referred to as ‘equivalence of inputs’.
The first big test of this policy is in Southend where City Fibre is hoping to deploy 50km of fibre optic cables using DPA. However, reports in the media have suggested that the initial surveys have found very limited capacity in some of the ducts, which would make DPA impossible.
It will be interesting to see how the trial in Southend progresses. If it is successful, then DPA may be viable for about 40 per cent of premises in the UK. If it fails, then Ofcom might ultimately have to force Openreach to be completely separated from BT.
Articles
How the gothic city of York became a broadband battleground The Telegraph, Kate Palmer (22/5/16)
City Fibre first to mount BT challenge after Openreach is told to share network The Telegraph, Kate Palmer (1/3/16)
Challenges as CityFibre Moot Using BT Cable Ducts in Southend-on-Sea ISPreview, Mark Jackson (2/5/16)
CityFibre to build pure fibre infrastructure for Southend Networking (5/4/16)
Ofcom tells BT to open up infrastructure to rivals The Guardian, Rob Davies (26/2/16)
Questions
- Draw an average total cost curve to illustrate the economics of building a network of ducts and poles. Label the minimum efficient scale.
- To what extent does DPA create a contestable market?
- For DPA to deliver productive efficiency, what must be true about the economies of scale of laying fibre optic cables?
- In the run-up to Ofcom’s review of the telecoms industry, many commentators described Openreach as being a natural monopoly. To what extent do you agree with this argument?
- What are the advantages of marginal cost pricing? What issues might a regulator face if it tried to impose marginal cost pricing on a natural monopoly?
- Using a diagram, explain how the network of ducts and poles might be a natural monopoly in rural areas but not in densely populated urban areas.
- Discuss how Ofcom has tried to increase the level of separation between Openreach and BT.
In April 2015 the European Commission (EC) opened a formal investigation into the behaviour of Google in the market for smartphones and tablets. On the 20th April Google was sent a preliminary judgment (referred to formally as a Statement of Objections) in which it was accused of abusing its dominant market position. The European Commissioner argued that the case was similar to the famous and protracted investigation into the conduct of Microsoft.
In the early 2000s Microsoft had a dominant position in the market for desktop operating systems. It has been estimated that 97% of all computing devices at the time used Microsoft Windows. This market power attracted the attention of the EC who accused the company of using its dominance in the operating systems market to restrict competition in complementary markets for software such internet browsers and media players. This led to a complex legal battle between the two parties.
Windows is proprietory software and computer manufacturers have to pay Microsoft a licence fee to install it on their machines. Before the rulings by the EC, Microsoft could make a licence for Windows conditional on other Microsoft software such as Internet Explorer and Media Player being pre-installed. This is known as bundling and in this case the EC came to the conclusion that it restricted competition. The European Commissioner, Margrethe Vestager recently stated that
“If Microsoft’s media player was already there when you bought a PC, it would be hard to persuade people to even try an alternative, so innovators would be at a big disadvantage”
Microsoft lost most of its competition battles with the EC and had to pay a total of €2.2 billion in various fines. It was also forced to change its conduct. For example, the EC instructed Microsoft to provide its users with a choice of internet browsers.
The marketplace for operating systems has gone through some significant changes since the early 2000s. By 2016 Microsoft’s market share had fallen to 26 per cent. One of the major reasons for this decline has been the increasing popularity of smartphones and tablets.
Google’s Android operating system dominates the mobile market with a market share of over 80 per cent. However, the economics of the Android operating system are very different from those of Windows. Unlike Windows, Android is an example of ‘open-source software’. This means that, rather than having to obtain a licence fee, mobile handset or tablet manufacturers can freely install Android on their devices and are not obliged to pre-install other Google software – both Amazon and Nokia have done this. ,
Another major difference is that it is relatively straightforward for rival firms to develop software that can run on Android. Microsoft was accused of making it very difficult for rival software companies to develop products that would run smoothly on the Windows operating system.
It would appear far easier for rival firms to compete with Google than it ever was with Microsoft when it had a dominant market position. It might therefore seem surprising that the EC has accused Google of abusing its dominant market position.
Rather than any restrictions surrounding the licencing conditions for the operating system the EC’s objections to Google’s behaviour focus on its licencing conditions for other proprietary software products it provides. In particular, the EC has focused on the Google Play Store.
The pre-installation of the Google Play Store is seen as vital to the commercial success of any Android phone. Google Play Store was launched in 2012 and brought three previously separate services together – Android Market, Google Music and Google eBookstore. It is the official app store for all users of a device with an Android operating system. It has been argued that a mobile phone store would not stock an Android phone unless it had Google Play Store pre-installed because it is so highly valued by customers.
Therefore it is vital for Android smartphone and tablet manufacturers to obtain a licence for the Play Store. The conditions for obtaining a licence are outlined in the Mobile Application Distribution Agreement. This specifies that a number of other Google apps must also be pre-installed on the device in order for a licence to be granted for the Play Store. These apps include Gmail, Google Chrome, Google Drive, Google Hangouts, Google Maps, Google Search and YouTube. The manufacturer is free to install any other non-google apps.
The EC has specifically objected to the condition that Google Search has to be installed and set as the default search engine. It is concerned that this that will make it very difficult for other search services to compete with Google because (1) manufacturers will have limited incentives to pre-install any competing search engines and (2) consumers will have less incentive to download competing search engines.
The EC has also expressed concerns that the pre-installation of Google Chrome as the mobile browser will also have a negative impact on competition and innovation in this market.
Companies are given 12 weeks to respond after they have received a preliminary judgment. If they do not accept the objections, then the EC will take several months to come to a final ruling and suggest some appropriate remedies. In this case, the most likely remedy is the removal of the licence conditions for the Google Play Store. If Google appeals the ECs decision to the General Court of the EU, it could take years until a final judgment is made.
Murad Ahmed, the European Technology Correspondent at the Financial Times commented that
“One lesson Google might want to learn from Microsoft’s example is while it fights the EU watchdog it is not overtaken by a less distracted competitor.”
Articles
Europe v Google: how Android became a battleground The Guardian (20/4/16)
EU accuses Google of using Android to skew market against rivals The Guardian (20/4/16)
Google faces EU charge over Android ‘abuse of dominance’ BBC News (20/4/16)
Google hit with EU competition charges for ‘abusing’ dominant position with Android Independent (20/4/16)
Everything you need to know about Google and its EU battle The Telegraph (20/4/16)
Questions
- Draw a diagram to compare and contrast the price and quantity in a competitive market with a situation where a firm has market dominance. Clearly state any assumptions you have made in the analysis.
- What factors does the EC consider when judging if a firm has a dominant position in the market?
- This blog has focused on one aspect of Google’s behaviour/conduct that has raised concerns with the EC. What other elements of Google’s conduct has the European Commission objected to?
- Explain the difference between pure and mixed bundling.
- What impact does bundling have on consumer welfare?
On 13th October 2015 the management team of SABMiller (the second largest brewing business in the world) agreed in principle to a $108 billion takeover offer from AB-InBev (the largest brewing business in the world). When the announcement was made it was clear that the global nature of the businesses involved meant that the deal would have to be cleared by numerous competition authorities from all over the world. This blog focuses on the latest developments in the European Union.
The relevant legislation in Europe that addresses Mergers and Acquisitions (M&As) is the Merger Regulation that came into force on the 1st May 2004. This legislation gives the European Commission (EC) the power to investigate M&As that are said to have an ‘EU dimension’ as they exceed certain turnover thresholds.
Businesses involved in an M&A that meet the ‘EU dimension’ are obliged to pre-notify the EC and obtain clearance before going ahead with the deal. AB-InBev formally notified the European Authorities of its intention to acquire SABMiller on 30th March 2016.
Once official notification has been received, the EC launches a Phase 1 investigation which usually has to be completed in 25 working days. The investigation focuses on whether the M&A would:
“significantly impede effective competition, in the internal market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant market position” (Article 2(2) and (3))
This is often referred to as the ‘SIEC’ test. In addition to worries that an M&A may create or strengthen ‘single-firm dominance’, the ‘SIEC’ test is also used to test for ‘collective dominance’. Collective dominance is the possibility that the M&A might make either formal or tacit collusion more likely.
The European Competition has expressed concerns that the acquisition of SABMiller by AB-InBev might significantly impede effective competition in the premium lager market. Unconditional clearance of the deal would result in the same business owning many of the best-selling premium lager brands in Europe, including Stella Artois, Beck’s, Budweiser, Corona, Peroni and Grolsh.
As part of the Phase 1 investigation, the management of the businesses involved with the M&A can have ‘State of Play meetings’ with officials from the EC. At these meetings EC staff can raise any competition concerns they have with the deal and the businesses can respond by offering to take specific actions that they hope will address any issues. The most common action is a commitment to sell of some of the assets of the newly merged business.
Any commitments must be made no later than 20 days following the formal notification of the merger and they result in the time frame for the Phase 1 investigation being extended from 25 to 35 working days.
On the 8th April, AB-InBev made a commitment to the EC to sell the SABMiller brands Peroni, Grolsch and Meantime as a potential remedy for their competition concerns. A price of €2.55 billion for the deal was agreed with Asahi – the largest Japanese brewery. The sale of the brands is subject to the acquisition of SABMiller by AB-InBev being completed. Following this commitment, the EC extended the deadline for the Phase 1 investigation to May 24th.
It appears that at subsequent State of Play meetings EC officials expressed concerns that this commitment was not enough to address fully their worries over the impact of the acquisition on competition.
On April 27th (just inside the 20-working-day deadline) AB-InBev made an extended package of commitments to the European Union authorities to try to remedy their continued concerns. The commitments now include the sale of the SABMiller breweries in Eastern Europe (Poland, Hungary, Romania, the Czech Republic and Slovakia). Part of this sale would also include the Pilsner Urquell brand – a best-selling beer in the Czech Republic – and the Drecher brand – a best-selling beer in Hungary.
If the EC decides that the deal still raises concerns and could significantly impede effective competition in the single market, then the acquisition will be referred for a Phase 2 investigation. Phase 2 investigations are far more detailed than at Phase 1 and place far greater burdens on the parties involved. They also take much longer. The initial deadline for completion is 90 working days, but this can be extended to 125 working days in certain circumstances. Taking holidays into account they could last for 6 to 7 months before coming to a final decision.
This may help to explain why AB-InBev is willing to sell off nearly all of SABMiller’s European assets in the hope of obtaining clearance for a deal at the end of the Phase 1 investigation. The company aims to finalise the takeover in autumn of this year and is therefore very keen to avoid any regulatory delay created by a more detailed Phase 2 investigation.
Its willingness to sell off the European assets also confirms AB InBev’s main motive for its acquisition of SABMiller – to gain access to new and growing markets in Africa and Latin America.
It will be interesting to see the outcome of the Phase 1 investigation on May 24th.
Articles
AB InBev accepts Asahi offer for Peroni and Grolsch Independent (19/4/16)
Asahi laps up Peroni and Grolsch to smoothe AB InBev’s SABMiller deal The Telegraph (19/4/16)
Peroni and Grolsch sold as AB Inbev and SABMiller deal nears The Guardian (19/4/16)
AB InBev offers more SAB Europe assets to win EU deal approval Reuters (29/4/16)
Peroni and Grolsch brands sold by AB InBev to Asahi BBC News (19/4/16)
Questions
- What threshold criteria have to be met in order for a merger to be classed as having a European dimension?
- Discuss the different types of decision that can be made by the European Commission at the end of a Phase 1 investigation.
- Compare the notification system used by the European Commission with the one used by the UK competition authorities.
- Discuss some of the market conditions that would make either formal or tacit collusion more likely.
- Discuss some factors that might make it in the interests of society for an M&A to go ahead?
- To what extent does the evidence suggest that M&As have delivered the benefits predicted by the managers of the businesses involved?
When people think about healthcare in the UK they tend to associate it with the NHS. However, there is a £5 billion private healthcare market. Concerns have been expressed about the lack of effective competition in this sector and it has been investigated by the competition authorities over a 5-year period.
Approximately 4 million people in the UK have a private medical insurance policy. The majority of these are paid for by employers, although some people pay directly. Four companies dominate the health insurance market (AXA PPP, Bupa, Pru Health and Aviva) with a combined market share of over 90%.
Health insurance companies purchase healthcare services for their policy holders from private hospitals. The majority of private hospitals in the UK are owned by the following businesses – BMI, HCA, Nuffield, Ramsey and Spire. Some concerns have been expressed about the lack of competition between private hospitals in some areas of the country.
After its initial analysis into the sector, the Office of Fair Trading (OFT) referred the case to the Competition Commission (CC) in April 2012 to carry out a full market investigation. This process was then taken over by the Competition and Markets Authority (CMA) when it replaced the OFT and CC. The final report was published on April 2nd 2014.
One specific region that was identified in this report as having a lack of effective competition was central London for patients with health insurance. In particular it was concluded that:
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The market in central London was heavily concentrated and HCA had a dominant market position – its aggregated share of admissions across 16 specialities (e.g. Oncology, Cardiology, Neurology, Dermatology etc.) was 45% to 55%. |
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There were significant barriers to entry including substantial sunk costs. A particular issue for a new entrant or existing business was the problem of securing suitable sites in central London to build new hospitals and in obtaining planning permission. It was pointed out in the report that the market structure in central London had changed very little in the previous 10 years despite a rapidly growing demand for private healthcare. |
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HCA was charging insured patients higher prices for similar treatments than its leading rival – The London Clinic. HCA was also found to be making returns that were in excess of the cost of capital. |
One of the key recommendations of the report was that HCA should be forced to sell–off one or two of the hospitals that it owned in central London to increase the level of competition.
Unsurprisingly HCA was very unhappy with the decision and applied to the Competition Appeal Tribunal (CAT) for a review of the case. During this review, economists working for HCA found errors with the analysis carried out by the CMA into the pricing of health services for insured customers.
In January 2015 the CAT concluded that the findings and recommendations of the report on insured patients in central London should be overturned and the CMA should reconsider the case. In November 2015 the CMA announced that having reviewed the case it had come to a similar set of conclusions: i.e. there was a lack of effective competition and HCA should be forced to sell off two of its hospitals in London.
HCA still claimed that the pricing analysis was incorrect because it did not fully take into account that HCA treated patients with more complex conditions than TLC and that was why their prices were higher.
On March 22nd 2016 the CMA announced that it had reversed its ruling and HCA would no longer be expected to sell off any of its hospitals. The reason given for this change in recommendation was the appearance of new entrants into the market. For example, Cleveland Clinic a US-based private healthcare provider has purchased a long-term lease on a property in Belgravia, central London. It plans to convert the office space into a private hospital with 2015 beds.
A spokesperson for Bupa commented that:
“The CMA has confirmed again that there isn’t enough competition in central London, with HCA dominating the private hospital market and charging higher prices. We ask the CMA to act now to address this gap.”
It will be interesting to see the impact these new entrants have on the market in the future.
Articles
London develops as a global healthcare hub Financial Times Gill Plimmer (31/01/16)
Competition watchdog reverses ruling on private hospitals Financial Times Gill Plimmer, (22/03/16)
CMA’s private healthcare provisional decision on remedies CMA 22/03/16
Competition problems provisionally found in private healthcare CMA 10/11/15
CMA welcomes Court of Appeal verdict in private healthcare case CMA 21/05/15
Questions
- Define sunk costs using some real-world examples.
- Why might the existence of sunk costs create a barrier to entry?
- Draw a diagram to illustrate why a profit-maximising business with significant market power might charge higher prices than one in a very competitive environment.
- What is the cost of capital? Explain why returns that are greater than the cost of capital might be evidence that a firm is making excessive profits.
- Draw a diagram to illustrate the impact of new entrants in a market.
Record fines have been imposed by the European Commission for the operation of a cartel. Truck makers, Volvo/Renault, Daimler, Iveco and DAF have been fined a total of €2.93bn. The fines were considerably higher than the previous record fine of €1.7bn on banks for rigging the LIBOR rate.
