Tag: restrictive practices


Boeing and Airbus have called a truce in their 17-year battle over subsidies. During this period, both have accused each other of unfair government subsidies to their respective plane makers.

The long-running trade dispute

In October 2004, the USA requested the establishment of a WTO panel to consider whether Airbus was providing unfair subsidies to develop its new super-jumbo – the A380. This provoked a counter-request by Airbus, claiming unfair subsidies of $27.3 billion for Boeing by the US government since 1992. In July 2005, two panels were set up to deal with the two sets of allegations.

In June 2010, the WTO panel circulated its findings on Boeing’s case against Airbus. It found Airbus guilty of using some illegal subsidies to win contracts through predatory pricing, but dismissed several of Boeing’s claims because many of the subsidies were reimbursable at commercial rates of interest. However, some of the ‘launch aid’ for research and development was given at below market rates and so violated WTO rules. The report evoked appeal and counter-appeal from both sides, but the WTO’s Appellate Body reported in May 2011 upholding the case that ‘certain subsidies’ provided by the EU and member states were incompatible with WTO rules. In June 2011, the EU accepted the findings.

In March 2011, the WTO panel circulated its findings on Airbus’s case against Boeing. The EU claimed that ten specific measures amounted to subsidies to Boeing, which were inconsistent with the WTO’s rules on subsidies (the SCM agreement). It upheld three of ten alleged breaches, including subsidies between 1989 and 2006 of at least $5.3 billion. These subsidies were adjudged to have resulted in adverse effects to the EU’s interests, specifically in lost sales, especially to third-country markets, and in significantly suppressing the price at which Airbus was able to sell its aircraft.

But these rulings were not the end of the matter. Various appeals and counter-appeals were lodged by both sides with varying degrees of success. Also the disputes extended to other wide-bodied jets and to narrow-bodied ones too with claims by both sides of unfair subsidies and tax breaks.

On 9 June 2017 the WTO’s compliance panel rejected several EU claims that the USA had failed to withdraw all illegal subsidies to Boeing. However, it also found that the USA had not complied with an earlier ruling to abolish illegal tax breaks. Both sides claimed victory. Airbus claimed that the ruling had seen the WTO condemn non-compliance and new subsidies. In particular, it focused on the WTO ruling that Washington State subsidies had resulted in a significant loss of sales for Airbus. On the other hand, a Boeing press release spoke of a US win in a major WTO compliance ruling. Boeing claimed that that ruling meant that the United States had complied with ‘virtually all’ of the WTO’s decisions in the counter-case that the EU had filed against the USA in 2006.

On 27 June 2017, as expected, the EU challenged the WTO decision. This meant that the EU’s case would go back to the WTO’s appellate body, which was still considering a separate US case over state aid to Airbus.

On 15 May 2018, the WTO ruled that Airbus did not use unfair subsidies for narrow-bodied jets, such as the A320, which competes with the 737, but did for wide-bodied jets. The EU said that it would comply with the WTO ruling over the support for wide-bodied jets.

In 2019, the WTO ruled that the EU had illegally provided support to Airbus. The USA responded with tariffs of up to $7.5bn on a range of goods imported from the EU. In a parallel case, the WTO ruled that the US benefits to Boeing also violated trade rules, authorising the EU to impose tariffs on US imports worth roughly $4bn. Then in March 2020, the USA imposed a 15% tariff on Airbus aircraft.

The truce

Agreement was reached on 15 June 2021 in trade talks between the USA and the EU in Brussels. Both sides recognised that the dispute had been a negative-sum game, with both sides losing. It was thus agreed to suspend for five years all tariffs on aircraft and on a range of other goods, such as EU cheese and wine and US tobacco and spirits. The agreement did not include ending EU tariffs on US steel, however.

It was also agreed to work on an overarching agreement on subsidies, which would allow fair support by governments on both sides, and to co-operate in finding ways to counter unfair state investment in aircraft by China. US Trade Representative Katherine Tai said that the agreement ‘includes a commitment for concrete joint collaboration to confront the threat from China’s ambitions to build an aircraft sector on non-market practices’. China’s state-sponsored aerospace manufacturer, the Commercial Aircraft Corporation of China, or Comac, sees its C919, now in late stages of development, as a direct rival to the Airbus A320neo and the Boeing 737 Max.

To work out the details of US-EU collaboration, a working group will be set up. It will consider ways of ensuring that finance is provided on market terms, that R&D funding is transparent and that support given to aircraft manufactures will be equivalent by each side and will avoid harming the other side. It will consider just how the two sides can co-operate to address unfair competition from elsewhere.

Two days later, an almost identically worded deal was reached between the USA and the UK to end tariffs on a range of goods and join the EU-USA co-operation on aircraft manufacture.

Articles

Questions

  1. Choose any one particular complaint to the WTO by either Boeing or Airbus and assess the arguments used by the WTO in its ruling.
  2. Are subsidies by aircraft manufacturers in the interests of (a) passengers; (b) society in general?
  3. Is collaboration between Boeing and Airbus in the interests of (a) passengers; (b) society in general?
  4. How is game theory relevant to the long-running disputes between Boeing and Airbus and to their relationships in the coming years?
  5. Would cheaper aircraft from China be in the interests of (a) passengers; (b) society in general?
  6. Explain what is meant by ‘strategic trade theory’. How is it relevant to aircraft manufacture?

In recent years, US tech companies have faced increased scrutiny in Washington over their size and power. Despite the big tech firms in America being economically robust, seemingly more so than any other sector, they are also more politically vulnerable. This potential vulnerability is present regardless of the recent election result.

Both the Democrat and Republican parties are thinking critically about monopoly power and antitrust issues, where ‘antitrust’ refers to the outlawing or control of oligopolistic collusion. Despite the varied reasons across different parts of the political spectrum, the increased scrutiny over big tech companies is bipartisan.

Rising monopoly power

Monopoly power occurs when a firm has a dominant position in the market. A pure monopoly is when one firm has a 100% share of the market. A firm might be considered to have monopoly power with more than a 25% market share.

If there is a rise in market concentration, it tends to hurt blue-collar workers, such as those employed in factories, more than everyone else. Research, from the University of Chicago, studied what happens to particular classes of workers when companies increasingly dominate a market and have more power to raise prices. The study found that those workers that make things tend to be left worse off, while the workers who sell, market or design things gain. When companies have more pricing power, they make fewer products and sell each one for a higher profit margin. In that case, it’s far more valuable to a company to be an employee working in so-called expansionary positions, such as marketing, than in production jobs, such as working on a factory line — because there’s less production to be done and more salesmanship.

Monopoly power under Trump Vs Biden

In February, President Trump and his economic team saw no need to rewrite the federal government’s antitrust rules, drawing a battle line with the Democrats on an issue that has increasingly drawn the attention of economists, legal scholars and other academics. In their annual Economic Report of the President, Mr. Trump and his advisers effectively dismissed research that found large American companies increasingly dominate industries like telecommunications and tech, stifling competition and hurting consumers. At the time the Trump administration contended that studies demonstrating a rise in market concentration were flawed and that the rise of large companies may not be a bad thing for consumers.

On page 201, the report reads:

Concentration may be driven by economies of scale and scope that can lower costs for consumers. Also, successful firms tend to grow, and it is important that antitrust enforcement and competition policy not be used to punish firms for their competitive success.

The Trump administration approved some high-profile corporate mergers, such as the merger of Sprint and T-Mobile, while also trying to block others, such as AT&T’s purchase of Time Warner. Mr. Trump’s advisers stated that agencies already had the tools they needed to evaluate mergers and antitrust cases. It lamented that some Americans have come to hold the mistaken, simplistic view that ‘Big Is Bad.’

However, it is likely that such big firms, including the tech giants, would take a hit under the new presidency. President-Elect Joe Biden has pledged to undo the tax cuts introduced by Trump and has vowed to increase corporation tax from 21% to 28%. As part of these tax changes, he has suggested the introduction of a minimum 15% tax for all companies with a revenue of over $100 million. This has now been given the nickname of the ‘Amazon Tax’ and it is clear how it would impact on the big the firms such as Amazon.

This is the opposite of what was probable if Trump were to have been re-elected. It was expected that the US would continue along the path of deregulation and lower taxes for corporates and high-income households, which would have been welcomed by the stock market. However, analysts suggest that the tax changes under Biden would negatively affect the US tech sector, with some analysts maintaining that the banking sector would also be hit.

Antitrust enforcement is often associated with the political left, but the current situation is not so clear-cut. In the past, Silicon Valley has largely avoided any clashes with Washington, even when European regulators have levied fines against the tech giants. European regulators have fined Google a total of $9bn for anticompetitive practices. In 2018 Donald Trump attacked the EU decisions. “I told you so! The European Union just slapped a Five Billion Dollar fine on one of our great companies, Google,” Trump tweeted. “They truly have taken advantage of the US, but not for long!”

However, since then the mood has changed, with Trump and other conservatives joining liberals, including senators Elizabeth Warren and Bernie Sanders, in attacking the dominance of tech firms, including Amazon, Google, Facebook and others. While Democrats have largely stuck to criticising the scale of big tech’s dominance, Republicans, including Trump, have accused the major tech companies of censoring conservative speech.

An antitrust subcommittee of the Democrat-controlled House Judiciary Committee released a 449-page report excoriating the Big Four tech companies, Amazon, Facebook, Apple and Google-owner, Alphabet, for what it calls systematic and continuing abuses of their monopoly power. Recommendations from the report include ways to limit their power, force them out of certain areas of business and even a break-up of some of them.

Democratic lawmakers working on the probe claim that these firms have too much power, and that power must be reined in. But not all Republicans involved agreed with the recommendations. One Republican congressman, Jim Jordan, dismissed the report as “partisan” and said it advanced “radical proposals that would refashion antitrust law in the vision of the far left.” However, others have said they support many of the report’s conclusions about the firms’ anti-competitive tactics, but that remedies proposed by Democrats go too far.

The US tech giants


Amazon is a leading example of the economic strength held by the tech giants. Amazon has produced 12-month revenues of $321bn to October 2020, which in an increase from 2019 and 2018 revenues of $280bn and $233bn respectively. However, Amazon, along with the other big players Apple, Facebook, Google parent Alphabet, and Microsoft, are facing increased government scrutiny.

The US Department of Justice has filed a lawsuit against Google for entrenching itself as the dominant search engine through anti-competitive practices. Google’s complex algorithms, software, and custom-built servers helped make it into one of the world’s richest and most-powerful corporations. It currently dominates the online search market in the USA, accounting for around 80% of search queries. The lawsuit accuses the tech company of abusing its position to maintain an illegal monopoly over search and search advertising. Facebook also faces an antitrust lawsuit from the Federal Trade Commission. It is arguable that the US tech giants are so powerful that they may accomplish the seemingly impossible and unite the two parties, at least on one policy – breaking them up.

If it is correct that the tech giants’ behaviour ultimately damages innovation and exacerbates inequality, it is arguable that such problems have only grown worse with the coronavirus pandemic. Many smaller businesses have succumbed to the economic damage: many have been closed during lockdowns or suffered a decline in sales; many have gone out of business.

The changing patterns in teleworking and retail have accelerated in ways that have made Americans more reliant on technologies produced by a few firms. Shares in the Big Four, along with Microsoft, Netflix, and Tesla, added $291 billion in market value in just one day last week. It could therefore be claimed that the dangers of Big Tech domination are more profound now than they were even a few months ago.

Google’s lawsuit

On 20 October, the Department of Justice — along with eleven state Attorneys General — filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia to stop Google from unlawfully maintaining monopolies through anticompetitive and exclusionary practices in the search and search advertising markets and to remedy the competitive harms.

This is the most significant legal challenge to a major tech company in decades and comes as US authorities are increasingly critical of the business practices of the major tech companies. The suit alleges that Google is no longer a start-up company with an innovative way to search the emerging internet. Instead Google is being described as a “monopoly gatekeeper for the internet” that has used “pernicious” anticompetitive tactics to maintain and extend its monopolies.

The allegation that Google is unfairly acting as a gatekeeper to the internet is based on the argument that through a series of business agreements, Google has effectively locked out any competition. One of the specific arrangements being challenged is the issue of Google being preloaded on mobile devices. On mobile phones running its Android operating system, Google is preinstalled and cannot be deleted. The company pays billions each year to “secure default status for its general search engine and, in many cases, to specifically prohibit Google’s counterparties from dealing with Google’s competitors,” the suit states. It is argued that this alone forecloses competition for internet search as it denies its rivals to compete effectively and prevent potential innovation.

However, Google has defended its position, calling the lawsuit “deeply flawed”. It has argued that consumers themselves choose to use Google; they do not use it because they are forced to or because they can’t find an alternative search platform. Google also argues that this lawsuit will not be beneficial for consumers. It claims that this will artificially prop up lower-quality search alternatives, increase phone prices, and make it harder for people to get the search services they want to use.

Conclusion

Despite wanting to stop Google from “unlawfully maintaining monopolies in the markets for” search services, advertising, and general search text, the lack of consensus and divergence among the Democrats and Republicans on the antitrust issues remains a major issue to move things forward.

The Democrats want to see the power held by these companies reined in, while the Republicans would rather see targeted antitrust enforcement over onerous and burdensome regulation that kills industry innovation. It is clear that the US government will have to balance its reforms and ideas while making sure not to put the largest companies in the USA at a competitive disadvantage versus their competitors globally.

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Questions

  1. With the aid of a diagram, explain how pricing decisions are made in a monopoly.
  2. What factors influence the degree of monopoly power a company has within an industry?
  3. What are the advantages of a monopoly?
  4. Why would a government want to prevent a monopoly? Discuss the policies a government could implement to do this.

The European Commission has recently carried out a number of investigations into the various sectors of the industry that supplies parts to car manufacturers. Firms have been found guilty of engaging in anti-competitive practices in the supply of bearings, wire harnesses and the foam used in car seats. The latest completed case relates to firms that supply alternators and starters – both important components in a car engine.

On January 27th the European Commission announced that it was imposing fines on some Japanese manufacturing companies. Melco (Mitsubishi Electric), Hitachi and Denso were found guilty of participating in a cartel between September 2004 and February 2010 that restricted competition in the supply alternators and starters to car manufacturers.

The Commission gathered evidence showing that senior managers in the three businesses held discussions about how to implement various anti-competitive practices. These either took place on the phone or at meetings in offices/restaurants. In particular the firms agreed:

to co-ordinate their responses to tenders issued by car manufacturers. This involved them agreeing on the price each firm would bid.
to exchange commercially sensitive information about pricing and marketing strategies.
which of them would supply each car manufacturer with alternators and starters.

These activities are in breach of Article 101 of the Treaty on the Functioning of the European Union (2009). The European Commissioner for Competition, Margrethe Vestager, stated that:

“Today’s decision sanctions three car part producers whose collusion affected component costs for a number of car manufacturers selling cars in Europe, and ultimately European consumers buying them. If European consumers are affected by a cartel, the Commission will investigate it even if the cartel meetings took place outside of Europe”

The fines imposed on the three businesses were as follows:

– Denso €0
– Hitachi €26 860 000
– Melco €110 929 000

How are these fines calculated? When calculating the size of the fine to impose on a firm the Commission takes into account a number of factors. These include:

the size of its annual sales affected by the anti-competitive activities.
its market share.
the geographical area of its sales.
how long it had taken part in the cartel.
whether it had previously been found guilty of engaging in anti-competitive practices.
if it initiated the cartel in the first place i.e. was it the ring leader?

In this particular case the size of the fine imposed on both Hitachi and Melco was increased because they had both previously been found guilty of breaking EU competition rules.

If a member of the cartel comes forward with information that helps the Commission with its investigation, a reduction in the size of the fine can be applied under a provision called a Leniency Notice (2006). Timing as well as the quality of the information provided influences the size of this reduction. For example, only the first firm to come forward with relevant information can receive a reduction of up to 100% i.e. obtain full immunity. This explains how Denso could be found guilty but not have to pay a fine. (This firm’s initial approach to the Commission actually triggered the investigation.) Any subsequent firms that come forward with information receive smaller fine reductions. Hitachi and Melco received reductions of 30% and 28% respectively.

If a firm accepts the Commission’s decision a further reduction of up to 10% can be applied. This is called a Settlement Notice (2008). All three firms were awarded the full 10% discount in this case.

The European Commission is currently investigating the behaviour of firms that supply car thermal systems, seatbelts and exhaust systems.

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Car parts price-fixing fines for Hitachi and Mitsubishi Electric BBC News 27/01/16
EU antitrust regulators to fine Japanese car part makers: sources Tech News 26/01/16
Mitsubishi Electric and Hitachi get $150 EU cartel fine Bloomberg 27/01/16
EU fines Mitsubishi Electric, Hitachi for car part cartel Reuters 27/1/16

Questions

  1. What market conditions would make the formation of a cartel more likely?
  2. Draw a diagram to illustrate the impact of a profit maximising cartel agreement on the price, output and profit in an industry.
  3. Draw a diagram to illustrate the incentive that each firm has to cheat on an agreed cartel price and output.
  4. Why did the European Commission introduce Settlement Notices?

Over 90% of UK households buy their gas and electricity from one of the ‘big six’ energy suppliers – British Gas (Centrica), EDF, E.ON, npower (RWE), Scottish Power (Iberdrola) and SSE. The big six are currently being investigated by the Competition and Markets Authority (CMA) for possible breach of a dominant market position.

An updated ‘issues statement‘ summarises the investigation group’s initial thinking based on the evidence it has received. In paragraph 16 it states:

Comparing all available domestic tariffs – including those offered by the independent suppliers – we calculate that, over the period Quarter 1 2012 to Quarter 2 2014, over 95% of the dual fuel customers of the Six Large Energy Firms could have saved by switching tariff and/or supplier and that the average saving available to these customers was between £158 and £234 a year (depending on the supplier).

Between 40% and 50% of customers have been with a supplier for more than 10 years. The companies are thus accused of exploiting these ‘loyalty’ customers, many of whom are too busy or ill-informed to switch to an alternative supplier. According to the uSwitch article below:

This is a particular issue for the most vulnerable of customers, including the elderly, who view switching as ‘impossible’.

But the elderly were not the only consumers losing out; the CMA found that those customers most likely to be on expensive standard tariffs were less educated, or on lower incomes, or single parents, and did not necessarily have access to the Internet.

And the problem of penalising ‘loyalty’ customers who do not shop around applies in other industries, most notably banking. People who regularly switch savings accounts can get higher interest rates, often for a temporary ‘introductory’ period. Similarly, people who regularly transfer credit card debt from one card to another can take advantage of low interest rate, or even zero interest rate, deals for an introductory period.

Returning to the energy industry. Is the problem one of oligopoly? Do the big six have too much market power and, if so, what can be done about it? Should they be split up? Should regulation be tightened? Should new entrants be encouraged and, if so, what specific measures can be taken? The following articles explore the issues and possible policies.

Articles

British energy customers missed out on savings Reuters, Nina Chestney (18/2/15)
U.K. Energy Customers Could Save by Shopping Around: CMA BloombergBusiness, Aoife White (18/2/15)
Big six energy firms overcharging customers by up to £234 a year The Guardian, Sean Farrell (18/1/15)
Big six energy firms may lose quarter of customers by 2020, analysts warn The Guardian, Terry Macalister (1/10/14)
UK watchdog says big energy groups do not enjoy unfair advantage Financial Times, Michael Kavanagh (18/2/15)
CMA energy market investigation update: millions are punished for being loyal uSwitch, Lauren Vasquez (19/2/15)
Gas and electricity bills – the key questions Channel 4 News (18/2/15)
Energy customers miss big savings, says CMA inquiry BBC News, John Moylan (18/2/15)
Big Six energy companies overcharging loyal customers by up to £234 a year says watchdog Independent, Simon Read (18/2/15)
Consumer groups demand change after ‘Big Six’ accused of penalising customers out of hundreds of pounds Independent, Simon Read (19/2/15)
Energy companies’ loyalty problem lights the way forward The Conversation, Bridget Woodman (19/2/15)

CMA press releases and reports
Energy market investigation – updated issues statement Competition and Markets Authority (18/2/15)
Energy market investigation Competition and Markets Authority (23/2/15)
Energy Market Investigation: Updated Issues Statement Competition and Markets Authority (18/2/15)

Questions

  1. What barriers to entry exist in the electricity and gas supply markets?
  2. Explain how the big six are practising price discrimination. What form does it take and how are the markets separated?
  3. Find out what tariffs are offered by each of the big six. When you have done so, reflect on how easy it was to find out the information and why so few customers switch.
  4. How could more people be encouraged to ‘shop around’ and switch energy suppliers?
  5. Explain the five theories of harm identified by the CMA. Would a rise in market share of the smaller energy suppliers adequately combat each of the five types of harm?
  6. In what ways may UK energy regulation be ‘a barrier to pro-competitive innovation and change’?
  7. What are the arguments for and against breaking up the big six?
  8. What are the arguments for and against electricity and gas price control?

The Competition and Markets Authority (CMA), launched in October 2013, has been operating since April of this year. It is the successor to the Office of Fair Trading (OFT) and the Competition Commission. One of the current cases under investigation by the CMA is that of suspected criminal cartel activity in the supply of galvanised steel tanks.

On 11 July, Clive Geoffrey Dean, a former director of Kondea, and Nicholas Simon Stringer, a former director of Galglass, appeared before Westminster Magistrates Court. They were charged with dishonestly agreeing with others to divide customers, fix prices and rig bids between 2004 and 2012. The deals were with a number of companies. The charges are under section 188 of the Enterprise Act 2002.

This is the second prosecution in this case. On 17 June 2014, Mr Peter Nigel Snee, Managing Director of Franklin Hodge Industries, pleaded guilty to similar charges.

Under the Act, directors found guilty face custodial sentences of up to 5 years and unlimited fines. The CMA and government are keen to send the message that they will not tolerate cartels and that board members had better beware of colluding with other companies. Indeed, the CMA is committed to pursuing cases of suspected criminal cartels more frequently and more rigorously.

The question is whether this will deter criminal collusion or whether it will simply make companies more careful to keep collusion hidden from the authorities.

Two men face charges in ongoing criminal cartel investigation CMA Press Release (11/7/14)
The First Real Test of Sentencing for the UK Cartel Offence Competition Policy Blog: UEA/ESRC/ccp, Andreas Stephan (24/6/14)
An Important Watershed in the CMA’s Prosecution of the Criminal Cartel Offence Eversheds (18/6/14)

Questions

  1. What types of restrictive practices constitute ‘cartel agreements’?
  2. In what ways are cartels against the interests of their customers?
  3. Are there any ways in which consumers might gain from a cartel?
  4. What factors are taken into consideration in deciding whether a director is guilty under section 188 of the 2002 Enterprise Act.
  5. Find out what other cases are being considered by the CMA. Choose one or two and examine how the activities of the firms/people involved might adversely affect consumers or other firms.
  6. Is anti-cartel legislation in the UK similar to that in the EU for cartels operating in more than one EU country?