Speech Martijn Snoep: ‘Plugging gaps’ in Antitrust Enforcement
Prepared remarks on “Plugging Gaps” in Antitrust Enforcement for Conference Antitrust, Regulation & the Political Economy, Brussels, 2 March 2023
Martijn Snoep (Netherlands Authority for Consumers & Markets (ACM))
As times change and markets evolve, so must competition policy and enforcement. Sometimes setting new enforcement priorities is sufficient. At other times, existing tools need to be sharpened, or old tools need to be dusted off to be applied in a new context. When there is no other option left, laws may need to be changed to align with the changing times but we all should be mindful of the time it takes for the legislature to change laws and also of the unpredictable outcome of that process.
In these changing times and evolving markets, I see four gaps in antitrust enforcement that either need to be plugged or that are already in the process of being plugged but may need further support. These are 1) creeping control by dominant companies, 2) tacit collusion, 3) exploitative abuse, and 4) necessary cooperation to mitigate climate change and the loss of biodiversity.
Creeping control by dominant companies
Killer acquisitions were all the rage a while ago. Whether it is a new phenomenon or not, it made enforcers around the world sit up and take notice. Today, a new rage is making waves: creeping control. Predominantly (but not exclusively) private equity firms are rolling out consolidation strategies in markets with low concentration levels, at least at the national level. For example, specialized health-care clinics, veterinary practices, and child-care centers. As a result of such strategies, local or regional dominant positions may be created or strengthened. Even at a national level, the consolidated company can become an unavoidable trading partner that, for example, insurers cannot ignore.
There are two issues surrounding these types of mergers: detection and review. Detection may be difficult as merger thresholds are usually set at a level that is too high for these types of transactions. Ideally, authorities should have the ability to review them, either by substantially lowering or changing the thresholds or by creating the opportunity to reel them in should they see potential issues. At the EU level, Article 22 (the “Dutch clause”) of the Merger Regulation offers such an opportunity if there is a cross-border effect, for example.
Although ACM wholeheartedly supports the Commission’s recalibrated policy (a good example of dusting off old tools), the instrument is not designed to deal with the proverbial merger-to-monopoly in a provincial town far away from national borders. That means that the creeping-control gap needs to be plugged at the national level through changing thresholds or a reeling-in option, but that will require legislative changes. An alternative way to plug this gap could be the application of the Continental Can-doctrine by national authorities, if national law allows for this, and if this doctrine will survive the Court of Justice’s Towercast judgment, which we can probably expect before the end of the year.
The other issue is reviews. Mergers are prohibited if they have a significant effect on competition. But what is significant? In a recent case, ACM prohibited the acquisition of a much smaller competitor by an already dominant, private-equity-owned group of health-care clinics. The case is before the courts now, and one of the arguments of the group is that the increment in market share is too small to have a significant effect on competition. The judgment in this case is very important as it will hopefully not create a stealth route for dominant companies to string numerous smaller competitors together until no competition is left. Depending on the market structure and the entry barriers, such a strategy is not purely a theoretical one. For example, in regulated professions suffering from undercapacity due to admission restrictions to the required educational programs, this could be a plausible route. In any event, to protect the remaining competition and to keep hope that, one day, the dominant company will lose its position to its competitors, a company that is already dominant should clear a high bar if it wishes to acquire an actual and potential competitor, however small it is, unless the dominant company can put up a credible efficiency defense of which it carries the burden of proof.
Due to the focus on dominance by Big Tech, Big Pharma and the like, the practice of tacit collusion in concentrated markets has moved to the background for many competition authorities. However, this phenomenon does require our attention as the negative effects on prices (including wages), quality, and innovation can be as significant. Yet, most competition authorities can only confront tacit collusion in downstream or upstream markets on for example prices with their hands tied behind their backs. It’s not a cartel, particularly if there is no price signaling involved. Only if there is horizontal tacit collusion combined with vertical non-hardcore restrictions, the Block Exemption Regulation may not apply or can be revoked, which makes enforcement possible. The threshold for an abuse of a collective dominant position is high, and is pretty much uncharted territory. By the way, the latter can be good (few difficult cases to take into account) or bad (lack of clarity on the evidence required). It depends.
So that leaves most competition authorities with only one other option to address tacit collusion: a market study and the hope that the legislature will remedy this through regulation. Few authorities have the ability to remedy tacit collusion themselves through non-punitive rulemaking. Such rules may aim to deconcentrate the market or destabilize the tacit collusion, either by lowering barriers to entry, for example through the introduction of interoperability or data-portability obligations, or through the break-up of companies as a nuclear option if everything else fails. In several member states, the idea to create a national “New Competition Tool” to address tacit collusion and other non-illegal competitive evils by imposing rules has gained traction or is already being proposed. Ideally, this tool should also be put on the EU legislative agenda again, because tacit collusion is a market failure that requires the authorities’ full attention. The current gap needs to be plugged.
The third gap that needs to be plugged is exploitative abuse. Since the implementation of the “more economic approach”, exclusionary abuse has been the favorite tool of European competition enforcers. Exploitative abuse, outside excessive pricing in pharma, was a near forgotten family member with underenforcement as a result. The applicable fairness standard was not economic enough to receive the proper attention of the economists in power and the lawyers who tend to look up to them. Fairness can’t be counted so how can we apply it then? But as most people know, not everything that counts can be counted, and not everything that can be counted counts. Fairness is a fundamental moral and legal value that has been applied for centuries, and that begins with the Golden Rule: don’t do to others what you don’t want them to do to you. I dare to say that fairness is perhaps even more important than efficiency, but, in a room full of economists, that may not go down very well. Based on long-standing case-law, companies with dominant positions have a special responsibility. They can’t do things other companies can do, such as applying unfair trading terms. In exploitative abuse cases, context is always crucial for determining what is and what is not fair. What is fair in one case is not necessarily so in another. That doesn’t make it a very attractive instrument for imposing high fines, but it is nevertheless a very powerful tool to stop the exploitation of customers or suppliers by dominant companies.
Fortunately we’re seeing a renaissance of exploitative abuse cases across Europe in particular in the digital sector. The ACM’s Apple Appstore (online dating) case is based on exploitative abuse and so is the Commission’s (music streaming), we learned this week. There is the German Facebook case and the French Google case and probably more to come. Unfair trading conditions are also uncharted territory before the courts except from a few cases, and again this can be good or bad news. But what we do know is that it will not before long that the Court of Justice will give more guidance.
Necessary cooperation to mitigate climate change and the loss of biodiversity
While there may be underenforcement in exploitative abuse, there is overenforcement (or overdeterrence, if you will) in applying the legal exception for anti-competitive behavior in the context of cooperation between competitors to mitigate climate change and the loss of biodiversity. And that’s the last of the four gaps that need to be plugged.
But let’s be clear, competition policy is not going to solve the climate crisis, but it shouldn’t stand in the way of genuine cooperation between competitors to reduce the risks either. This is not a theoretical issue but something that is happening in front of our very eyes, and that requires the attention of competition authorities around the world. Like with the other gaps in antitrust enforcement, it is again time to dust off old tools, revisit dogmas, and to get rid of orthodoxy. A return to the original meaning of the law may shine on a way forward.
Climate change and the loss of biodiversity are fundamental threats to our future. These threats have pulled together an overwhelming majority of countries around the world in the treaties of Paris and Rio de Janeiro. These goals have to be fully implemented in accordance with agreed upon milestones, often through a complete overhaul of complex international supply chains that have been built over decades. Think about the supply chains in the energy and chemical sectors, and about those in food and agriculture. It is very hard to change these systems, but we need to reach the treaties’ goals and milestones that our democratically elected representatives have committed to.
To demonstrate how hard this is going to be, let’s take the Netherlands’ highly efficient agricultural sector as an example. In this densely-populated country, the sector and the connected industrial complex uses almost 55% of the available land, employs 8% of the total workforce, and adds 6% to the country’s GDP. Roughly 18 million people live in a country that is not even the size of a province of many other countries, together with 100 million chicken, 11 million pigs, and 4 million cows. They are mostly fed soy and corn imported from North and South America. The overwhelming majority of the livestock will be exported in pieces to other EU countries and beyond. By far the biggest destination of domestically raised pigs is China. The fact that Dutch pig farmers are able to compete with Chinese farmers is a remarkable feat in itself. In fact, approximately 75% of the total value of the agricultural sector is exported, which makes the Netherlands the second largest agricultural exporter in the world by value, after the US. The Netherlands is even the world’s second largest tomato exporter after Mexico, and that is not because of its sunny weather. Natural gas and electricity do the trick.
You don’t have to be an economic wizard to understand that the relative impact of the sector on the national CO2 and nitrogen emissions, loss of biodiversity, and animal welfare is significant. At the same time, the agricultural sector is part of the Netherlands’ national identity in which wooden shoes, cheese, and tulips play an important role. Even after recent (and repeated) farmer protests had brought highway transportation to a practical halt, and tractors had blocked off the central government’s quarter in The Hague, support for the sector has remained very high. A newly formed political party with a pro-farmer agenda may well become one of the largest parties in the country after this month’s regional elections, more popular than the social democrats, the greens and the center-right Christian democrats. If the polls become reality, it will be very hard to ignore this party in the Netherlands, where we traditionally have coalition governments consisting of three to four parties.
This would make, for example, top-down regulation to significantly reduce emissions unlikely to survive a vote in Dutch parliament. As the sector has been built around low costs and efficient production, all its participants are caught in a prisoners’ dilemma. The first mover to reduce emissions will lose its business due to a higher cost price. That leaves collective bottom-up cooperation as the only alternative to change the sector over time. This change will require an increase in high-value production for the domestic market, alternative business models, and attractive revenue prospects, as most farmers want to continue farming on the land they own. New crops, new farming methods, new products, new suppliers, and new customers need to be found within a relative short period of time. Farmers cannot do this alone, and the government cannot and should not try to micromanage this. The business acumen and ingenuity of today’s Dutch farmers as well as the ecosystem around them need to be leveraged to make the change possible. And for that to work, market organizations, trade organizations, suppliers, retailers, and banks must be able to cooperate and to jointly offer farmers a way out of the status quo. And this is exactly what is happening right now with the help of the government and under the guidance of ACM.
Fortunately, the EU competition rules allow for more flexibility in the agricultural sector. EU competition law and the competition laws of individual EU member states generally ban agreements between companies that restrict competition, such as agreements between competitors leading to higher prices or lower quantities. However, the European Parliament and Council of the EU recently adopted an exception allowing anti-competitive restrictions in agreements in agriculture if they are indispensable in achieving sustainability standards higher than current EU or national mandatory standards. This exception is laid down in a regulation forming part of the EU common agricultural policy. To qualify for an exemption, the agreements should pursue certain environmental objectives, such as the reduction of CO2 or nitrogen emissions, the use of pesticides, and the protection of animal welfare. The parties to the agreements should be farmers, possibly acting together with other actors in the supply chain, such as traders, food processors, banks, and retailers.
But this exception does not apply to other sectors of the economy. They fall under the full scrutiny of the competition laws that are currently applied through the lens of a rather narrow definition of consumer welfare and with an exaggerated focus on short-term price effects for consumers compared with the harmful long-terms effects on our societies. That needs to change. The draft guidance of the Commission is a step in the right direction but doesn’t go far enough. The draft guidance of the CMA goes even a step further but needs to be further studied to determine whether there is room for improvement. The key here is whether the fair share of the benefits standard requires that today’s consumers will be fully compensated for the price increase that the agreed reduction of the risk of climate change and loss of biodiversity will entail. The answer is no. Again, what is and what is not fair is always context-specific. In light of the ‘polluter pays’ principle (and the Golden Rule), it can be entirely fair that consumers ultimately pay for a short-term price increase for products that reduce the long-term risk that our planet becomes inhospitable for future generations.
Applying the legal exemption to anti-competitive agreements is not an easy task, and has elements in it of “dancing with the devil”. But the rigor of the four exemption criteria, the burden of proof that lies with the parties to the agreement, and an open and transparent process that also allows consumer organizations and environmental groups to raise their objections will prevent judgment errors. It is not only a moral obligation for competition authorities not to stand in the way of genuine sustainability cooperation between competitors, it would also mean an infringement of our democratically constructed mandate not to distinguish between good and bad cartels or to make it virtually impossible to qualify for exemptions. We have to dust off and look with a fresh pair of eyes to the original meaning of the legal exemption to the cartel prohibition, and apply it to the present and future needs of the societies we serve. And, for now, that would plug the last gap in competition enforcement.