Federal Trade Commission
THE CRUCIAL ROLE OF COMPETITION LAW AND POLICY IN THE NEW EUROPE
PREPARED REMARKS OF
JANET D. STEIGER
FEDERAL TRADE COMMISSION
INTERNATIONAL BAR ASSOCIATION
5th EASTERN EUROPEAN REGIONAL CONFERENCE
THE EUROPEAN UNION AND CENTRAL AND EASTERN EUROPE
THE NEW LEGAL ENVIRONMENT
JULY 6, 1995
The views expressed herein are those of Commissioner Janet D. Steiger and do not necessarily reflect the views of the Commission or any other individual Commissioner.
THE CRUCIAL ROLE OF COMPETITION LAW AND POLICY IN THE NEW EUROPE
By Janet D. Steiger, Commissioner
U.S. Federal Trade Commission
Let me begin by offering thanks: first, that the IBA has organized this timely conference, and second, that it has asked me to share my thoughts on the crucial role of competition law and policy in the new Europe. I believe that competition policy is an example of the closeness of the U.S. and Europe -- both the "old" and the "new" -- on which broader and deeper economic relations can be based. As always, I have a caveat: the views expressed in my remarks are my own, and they do not necessarily represent those of the Federal Trade Commission or any other Commissioner.
Five years have passed since the centrally planned economies in Central and Eastern Europe became, to use the now familiar phrase, economies in transition. New governments have enacted new laws intended to facilitate this transition to a free-market-based economy. Competition and consumer protection laws were included in those early enactments as essential elements of economic policy in a successful market economy. Competition authorities were established and have taken root.
I am very proud of the fact that the FTC and the Justice Department were able to help the new competition authorities in Central and Eastern Europe. For the past four years, with the financial support of the Agency for International Development ("AID"), we have been able to devote considerable resources to this "technical assistance" program. The program as we know it is gradually coming to an end, but it looks as if we will be doing the same sort of work in other countries in the future. I would like to take a few minutes to talk about our technical assistance program and then discuss more generally the challenge of promoting and enforcing competition policy in countries with economies in transition.
II. The FTC/DOJ Technical Assistance Program
Our technical assistance program in Central and Eastern Europe is intended to help competition and consumer protection offices as they play their crucial role in facilitating the transition to competitive market economies. Under the program, Commission and Department of Justice advisors work with representatives of the competition agencies of the countries in this region, sharing their respective experience in the areas of antitrust and consumer protection. Our advisors provide technical assistance, comment on draft competition and consumer protection laws, and explain the structure and administration of our agencies. We describe our investigative techniques and the tools of economic analysis of competition issues. And these have not been hit-and-run missions; our lawyers and economists have been sent to work at the new agencies for up to nine-month periods.
The program was scheduled to end last year, but AID requested us to continue it through December 31 of this year. Although the program is "winding down," a number of significant activities remain.
First, even as we speak, a four-day conference is being held in Vienna, entitled "Competition and Consumer Protection Policy: An FTC/DOJ Seminar." We expect approximately thirty entry-level staff members from the competition authorities of eleven countries -- Albania, Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia. The instructors will present three days of instruction in competition law and policy and a one day overview of consumer protection.
Second, we are conducting a series of "Train-the-Trainers" Missions. Over the past several years, as we have worked with the competition authorities in Central Europe, the FTC and the DOJ have noticed many similarities among the issues that exist in each country. We have designed a four-day seminar to address some of these issues.
The seminar focuses primarily on an investigation of a hypothetical situation involving an abuse of dominant position by a firm. It emphasizes the practical skills required to conduct an investigation. In each country, the seminar will be presented jointly by an attorney/economist team from the FTC and DOJ and by managers from the competition office. By involving managers from the competition offices, and by leaving translated training materials at the end of the seminar, we hope to make it easier for the offices to train their own employees after the FTC/DOJ technical assistance program is completed.
The first seminar was conducted in Slovakia in June. We are planning to present it during the fall in the Czech Republic, Hungary, Latvia, Lithuania, Poland, and Romania.
Third, during late October, the FTC and the DOJ plan to invite senior officials from the competition authorities of eleven Central European countries to participate in a conference where each delegation will hopefully address the progress and continuing needs of the competition office. The conference may be considered the last hurrah for our program, at least with regard to most of the participating countries.
But that's not all. In a recent amendment to our funding agreement with AID, we have expanded our technical assistance program to support Albania and Slovenia in their transitions to market economies. We will send an initial, high-level assessment mission to Tirana and Ljubljana this summer to determine how we can assist the Albanian and Slovenian competition and consumer protection authorities. Aid to both countries will consist of short-term missions by FTC and DOJ experts, internships for their personnel in Washington, participation in regional conferences on competition and consumer protection, and the ongoing support of attorneys and economists in Washington.
Our first direct contact with Albanian and Slovenian authorities took place at the consumer protection conference we held in Vienna in March. As I mentioned, they are participating in the competition and consumer protection conference that is going on right now, and they will also be invited to our October conference.
Finally, the FTC has submitted a budget to AID in anticipation of an Inter-Agency Agreement under which we and DOJ will provide technical assistance to the Newly Independent States of the former Soviet Union in the areas of competition and consumer protection. Our program will last two years and will provide limited technical assistance in the form of short-term missions supplementing other donors in the region. The program will focus primarily on Russia, Ukraine, Belarus, Kazakhstan, and Moldova. AID will identify the issues and needs of each country, and FTC/DOJ will respond with specific expertise.
III. International Cooperation Among Antitrust Authorities
Our technical assistance program was designed, of course, to assist newly established competition and consumer protection authorities in enforcing their domestic laws, but it has had another important benefit. It has also laid the groundwork for cooperation in international antitrust and consumer protection enforcement. As you know, there is great interest throughout the world in fostering cooperation among antitrust enforcement agencies. It is one of the "hot topics" on the conference circuit. So, while cooperation in consumer protection is also important, I will focus my remarks on cooperation among competition agencies and convergence of competition laws.
The world-wide interest in cooperation and convergence in the antitrust area is attributable, principally, to the increased number of countries with antitrust laws and the increased percentage of mergers and joint ventures that have effects in more than one country. As I said here in Brussels about a year ago, we can make antitrust enforcement both effective and efficient through cooperation and coordination of our efforts. I still believe that it is premature to seek convergence by imposing a uniform competition policy from the top down, and I would like to see us continue to progress with successful "convergence through cooperation."
Our experience under cooperation through the OECD and under bilateral agreements with Germany, Australia, Canada, and the European Commission ("EC") provides evidence that convergence is occurring through cooperation. Our experience with the EC is particularly instructive. Almost four years ago, the U.S. Government and the European Commission entered into an agreement regarding the application of their competition laws. A major impetus for entering into this agreement was the concern that the differences in our laws and active enforcement on both sides of the Atlantic -- particularly in the wake of the EC's adoption of merger control -- would lead to conflicts.
The fact is that in the past four years we have avoided conflict -- more successfully than many thought possible -- despite having had any number of cases that could have resulted in conflicting enforcement actions. The differences in our laws have not proven so great as to result in conflict, partly because of the amount of "de facto" convergence that has occurred in antitrust's analytical methods, such as the tools we use to define product and geographic markets and to assess competitive effects. Rarely have we disagreed in our respective analyses of the cases we have both reviewed.
I mention this in part because of the general interest in antitrust cooperation, but also because it relates to what we have been doing in our technical assistance programs and to one of the areas where the recipients of that assistance will need to continue to focus some of their attention. The countries of Central and Eastern Europe did not enact copies of the Sherman, Clayton, and FTC Acts. The laws they did enact were more like those of Western Europe, and today they may look even more "European." Now, I am not a pollyanna who wants to "paper over" real differences in these laws, but more important than differences is the fact that all the laws address a core set of economic concerns and rely in large part upon the same analytical tools for their application. When you think about it, this core set of concerns and principles is precisely what we have been addressing in our technical assistance; after all, the Central and Eastern European countries weren't looking for advice about U.S. law, and we weren't experts in their laws.
The need to address these core concerns and principles will continue as part of the convergence process. All countries aspiring to membership in the EC must "harmonize" their laws to those of the EC, but such harmonization does not require that competition laws use all the same words -- after all, there are differences among the laws of the current EC members -- but rather requires agreement on core concerns and principles. So, many of the countries with economies in transition will be discussing these core concerns and principles with the EC. And at the same time, the U.S. and the EC are, through the process of cooperation, engaging in de facto convergence of their approaches to these core concerns and principles. In fact, this process is going on among all countries with competition law. Although we will soon no longer be discussing these core concerns with new agencies as technical advisors, we will be discussing them with those agencies -- as fellow antitrust enforcers -- at OECD meetings, conferences such as this, and in bilateral dealings.
IV. Competition Policy (and Potentially Competing Policies)
Competition law enforcement in the United States has been characterized at times as "over-aggressive" and at other times as "lax." (Of course, I happen to believe that during my tenure we have gotten it about right.) Likewise, the European Commission is criticized by some Member States as being too tough in competition policy enforcement, while -- at the same time -- others feel it is too lax. I have no doubt that the new competition agencies in Central and Eastern Europe face the same criticism. I also know that all of us hear from time to time, in one industry or another or across our economies as a whole, that competition policy should be replaced, or "supplemented" with some sort of industrial policy.
If we as competition law enforcers totally ignore all such criticisms and claims, we risk missing out on a significant new insight about competition policy. On the other hand, if we seek to reinvent the wheel every time some critic says that we have a flat tire, we will never get around to competition enforcement. How can competition law enforcers -- particularly those in economies in transition -- maintain a competition policy that is open-minded without being self-critical to the point of paralysis?
I certainly do not have all the answers, but it does seem to me that we can lay down a few basic points that can provide a flexible, yet firm framework for competition policy.
The first point is to acknowledge up front that competition policy is not carved in stone, but rather is something that evolves with improved understanding of how markets work. During the 100- plus years of Federal enforcement of competition policy in the U.S., our understanding of what makes markets function efficiently over time has grown as certain dynamics in various sectors of our economy have changed. As a result, our views have changed about certain types of agreements, such as vertical distribution arrangements, and also about mergers. That does not mean that we no longer worry about vertical relationships; it means that we have to examine the facts carefully to determine when vertical relationships are more likely to be procompetitive or more likely to be anticompetitive, rather than drawing general conclusions from the existence of vertical relationships. Likewise, as to mergers, we acknowledge through our Enforcement Guidelines that market shares and concentration ratios do not tell the whole story without further pertinent factual analysis. In addition, we believe that our understanding of markets has given us insights into when governments should be more willing to rely upon competition to improve market performance. Where we have the necessary industry expertise, we are ardent advocates on behalf of competition and consumers.
The result of this evolution is a body of knowledge that is not set out in any dispositive treatise. Our learning about competition principles and their application to the market is continuously growing as we have new insights into old issues. That body of knowledge -- the best current thinking about how markets work, both generally and in response to alternative regulatory schemes -- corresponds to the core concerns and principles I mentioned when discussing technical assistance and international cooperation. Indeed, access to the U.S. component of that body of knowledge -- the product of our particular mistakes and successes -- is what we bring to the table, whether we are offering technical assistance or cooperating with foreign antitrust authorities on matters of common concern. Of course, other countries have their own bodies of knowledge about competition policy, and every time we get up from the table, our body of knowledge has grown from what we have learned.
A second basic point is that this ever-increasing body of knowledge that underlies competition policy is applicable to all markets. Ultimately, the knowledge is about how markets -- and people -- work. Now, neither all markets nor all people work the same, so one cannot blindly apply rules made in one situation to all other situations, but the knowledge gained in one situation can and should inform the way one analyzes other situations. In particular, since how markets work is in significant part a function of both market structure and the knowledge and attitudes of market participants, one can and should expect that in economies in transition, one may often need transitional rules. The point is not that competition policy doesn't work in these situations, it is that competition policy acknowledges differences and provides broad principles to use in formulating differing rules for differing situations.
Let me illustrate the applicability of basic competition principles to differing situations with an example in which the U.S. economy and the economies of Central and Eastern Europe face similar problems. We know from our recent experience with airlines and telecommunications that when you deregulate and demonopolize, monopoly power may be left behind. The question then is whether and to what extent measures are needed to further dampen the residual monopoly power and foster growth of new competitors. When AT&T was broken up and its monopoly over long distance telephone service was ended, it was prohibited from engaging in certain activities and was limited by regulations that did not apply to its new long distance competitors.
Currently in the U.S., the Administration and Congress are considering legislation to restructure our telecommunications network; in so doing, they are seeking to permit competition between the Baby Bells, who were divested by AT&T in the 1980s and who have local telephone service monopolies, and cable television firms, which with few exceptions have local monopolies. One of the areas of debate is what special rules there should be during the transitional process -- during the period after the elimination of monopoly regulation and before real market competition develops.
This consideration of special transitional rules is, upon careful scrutiny, simply a special case of very basic competition principles. In devising a conduct remedy in a competition case, one begins with a prohibition of the illegal conduct. Then, one applies competition policy principles in determining whether what we call "fencing in" relief is appropriate; that is, whether some lawful conduct should also be banned in order to make it more difficult for the illegal conduct to be repeated. And how is this question an application of competition policy? It is because the essence of the inquiry is how the potential procompetitive benefits of a broader order compare to its potential anticompetitive effects. After all, and this is certainly one of those elusive "basic principles," any ban on potentially efficient conduct may be anticompetitive and injure consumers. Transitional rules in telecommunications are a form of "fencing in" in which otherwise lawful and potentially efficient conduct is banned because in the particular market context such conduct is considered likely to prevent the development of competition.
The U.S. faces in the telecommunications area challenges that are very similar to those faced much more broadly by the transforming economies of Central and Eastern Europe. And competition policy is crucial in dealing with those challenges -- first in defining the problem and then in devising a remedy. In particular, insofar as we rely on conduct remedies in the demonopolizing process, we both rely on fencing in relief.
Of course, the monopoly situation in telecommunications is not typical of the U.S. economy, whereas both monopoly and state ownership are pervasive features of the economies in transition. Therefore, the application of basic competition principles means that we have less need for this kind of fencing in relief than do the economies in transition. And because the point is an important one, let me repeat that this difference in the frequency in which fencing in relief is needed is a result of competition policy principles, not an example of the inapplicability of those principles to the situation at hand.
The application of competition principles in different market contexts can lead not only to different competition remedies, but to different enforcement agendas. In the U.S., for example, we have very carefully assessed the pro- and anticompetitive effects of nonprice vertical restraints. In our highly competitive economy, we have concluded that while such restraints can be anticompetitive in some circumstances, they are not, overall, a major problem for the U.S. economy. Applying the same body of knowledge to economies in transition, we have seen that nonprice vertical restraints by former state monopolists can be a major competition problem in many circumstances. Let me again emphasize that these different enforcement agenda aren't evidence of the limits of competition policy, but an illustration of the usefulness of competition principles in analyzing markets of any kind, including markets in transition.
These basic points are generally well understood by competition officials, but they are often misunderstood or ignored by critics, particularly those who claim that competition law and policy is not just too strict or too weak, but simply irrelevant. All of us face those claims. Even in the United States, with its strong tradition of competition enforcement, we constantly hear claims that this or that industry is special, that "normal" competition principles do not apply to this or that situation, or even that competition policy should be replaced -- at least for a while -- with some other sort of "industrial policy." In countries with economies in transition, competition officials are even more likely to hear claims that certain industries do not follow normal competitive models, because the countries' citizens have had less experience with competition, because there is more need for transitional rules, and because the need for political consensus may force real exceptions to competition policy.
What all of this means is that in economies in transition, even more than in the U.S., competition agencies must be prepared to devote considerable attention to competition advocacy -- explaining to legislators, other government agencies, and the public, the ways in which competition policy can benefit consumers and, equally important, the ways in which unwise or unfettered government regulation can injure consumers. I believe that, in general, the best approach to such advocacy is to return to basic principles. If critics do not understand competition policy, your explanations may persuade them or at least make it easier to discuss your differences. If the critics understand competition policy and are making spurious arguments in order to obtain government protection from competition, explanations may not persuade them that they are mistaken but will make it harder for them to use misleading claims.
The recent International Cartel Conference in Berlin addressed the issue of the compatibility of competition and industrial policies, and FTC Chairman Robert Pitofsky noted that competition policy is the U.S.' industrial policy. From time to time the U.S. Government has utilized financial means that are commonly considered examples of industrial policy, not typical competition policy, to assist distressed companies, as we did for Lockheed and Chrysler, or to try to encourage innovation through research and development. But those are exceptions, so much so that they have been recognized as responses to market failure. Competition policy remains the centerpiece of our economic policy.
Although competition policy principles are fully applicable to economies in transition, I hope it is clear from what I have already said that the application of those principles to such economies may justify transitional rules. For example, Chairman Pitofsky expressed his belief that economies in transformation may need to cushion their transition to a free market. In some circumstances it might be appropriate to continue some price controls until new entry occurs. Consistent with competition policy, some short-term state intervention in the economy may indeed be appropriate, so long as it is aimed at achieving the long term goal of an efficient market-based economy.
Still, I want to remind you that we have found that short-term intervention into the economy can easily become long-term, because the people and firms that benefit from the intervention will not want it to end. I also want to tell you that from where I sit in Washington, D.C., competition policy has produced some remarkable successes during the transition process, and those successes add to my natural skepticism about industrial policy exceptions to competition policy. I can understand the calls for measures to encourage domestic industry and to protect jobs in distressed industries. The shock of high-double-digit unemployment has been severe. But while some short-term intervention may be appropriate, industrial policy attempts by a country to protect domestic industries which must restructure to remain competitive are in general likely to be harmful to the transition and to the country's citizens.
So competition authorities in countries with economies in transition must be open-minded but vigilant. Properly understood, competition policy is applicable to economies in transition. By stressing basic principles in an active competition advocacy program, competition authorities can attempt to prevent both unjustified exemptions from competition laws and unjustified "command and control" regulatory schemes that may injure the consumers they intend to protect. This kind of advocacy is an important supplement to competition law enforcement throughout the world, but nowhere is it more important than in countries with economies in transition.
Despite the success of competition policy in many areas and the collapse of an economic system that was the antithesis of a competitive economy, many people may not understand the important goals that a competition agency tries to foster. Competition authorities everywhere face a constant need to be active in advocating and defending competition policy, as well as in enforcing competition laws. People and firms everywhere may seek unwarranted government action that distorts markets and harms consumers. A government that acts on the basis of a group's desire for special treatment or out of a failure to understand that rules intended to protect consumers can end up hurting them may impede the transition to a market-based economy. Competition advocacy is crucial to check those efforts and to maintain a market economy that produces the products and prices that consumers demand and deserve.