Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

The OPEC cartel’s blues: lessons for competition law

with 3 comments

OPEC

I guess many of you are following with interest what is going on in the oil sector. It looks like the OPEC cartel does not manage to scare people anymore. And it is not for lack of trying. Due to several economic and technological developments, the OPEC’s ability to dictate oil prices is not what it used to be. Their market power, while definitely significant, has appreciably decreased. There are reasons to believe that (relatively) low oil prices are here to stay.

As a good geek, it did not take long before this piece of news got me thinking about its competition law angle. I can think of the following:

Market power should be in any definition of cartel conduct

There have been attempts to give a meaningful definition of what a cartel is, and how it is different from other horizontal agreements. It has always been clear to me that definitions that focus on the external manifestation of cartel conduct (price-fixing, market sharing and so on) are not accurate, because (1) cartel conduct may take many other forms; and (2) not all agreements that provide for price-fixing, market sharing or output restrictions are necessarily cartels.

It has also been clear to me – and the OPEC cartel’s current travails confirm this view – that cartel conduct worthy of the name only exists where the parties enjoy significant market power. There may be conduct that, on the face of it, looks like a cartel. If the market power of the parties is insignificant, however, the practice is most probably not one. In all likelihood, it is something else (Herb Hovenkamp explains all of this brilliantly in his Antitrust Enterprise, by the way).

Just in case you were wondering: the good old days of the OPEC cartel may now be gone, but it still a cartel, the object of which is certainly restrict competition. Whether, and how long, the cartel will last is a different question.

How to distinguish between by object and by effect restrictions

The degree of market power enjoyed by the parties is a useful filter not only to identify cartel conduct but to distinguish, more generally, between by object and by effect agreements. Where the market power enjoyed by the parties is not significant, the object of the practice is, in all likelihood, not the restriction of competition.

Let me take a couple of examples from prior discussions in the blog.

Buyers’ cartel vs pro-competitive joint purchasing agreement

The Commission has taken action in the past few years against cartels involving buyers of a product. And rightly so. A buyers’ cartel can be as damaging, and every bit as restrictive by object, as a cartel involving sellers. There is no reason to distinguish between the two.

The twist is that not all agreements involving buyers are restrictive by object. A joint purchasing agreement like the one at stake in Gottrup-Klim is not as such contrary to Article 101(1) TFEU. As the Court explained in that case, it may be that such arrangements ‘make way for more effective competition’, and thus fall outside Article 101(1) TFEU altogether. The Commission takes the same view in its Guidelines on horizontal co-operation agreements, where it distinguishes between buyers’ cartels and joint purchasing agreements.

How is it possible to distinguish between the two in practice? The form of the agreement does not help that much. Both a buyers’ cartel and a joint purchasing agreement take the form of price fixing (yet another example that a price-fixing agreement between competitors is not necessarily a cartel!)

The degree of market power, on the other hand, gives an idea of the object of the agreement. The lower the degree of market power enjoyed by the parties, the more credible the claim that the object is not to restrict competition, but to ‘make way for more effective competition’ instead. And vice versa: if the agreement involves all buyers of a product it is very likely that the parties seek to restrict competition.

If, for instance, the joint market share of the parties is below 15%, the parties are unlikely to have the ability to influence prices. They would be shooting themselves in the foot if they tried to raise prices. Thus, the rationale for the agreement cannot be to raise prices in a coordinated manner, but a different, pro-competitive one.

Joint bidding

I discussed joint tendering before my book-related break. A joint tender is, on its form, difficult to distinguish from a (bid-rigging) cartel. As much as a cartel, submitting a joint tender involves price-fixing between competitors. Does it make it a ‘by object’ infringement? Not always. What the Court held in Gottrup-Klim should be equally applicable in this context (I do not see any reason why it should not, anyway).

It may well be the case that a joint tender ‘makes way for more effective competition’ within the meaning of Gottrup-Klim. If the firms submitting the joint tender are relatively small, their chances of competing against larger rivals may be substantially improved if they join forces. The object of such an agreement does not seem to be (and cannot be) the restriction of competition, but the opposite. Again, market power can provide a reliable filter to identify pro-competitive and ‘by object’ infringements.

Evidence issues

The above suggests that a market power defence should be available to the parties to an agreement, in particular in cases where an authority or a claimant argues that their practice amounts to a ‘by object’ infringement. The parties can show, in other words, that there are factors pertaining to the economic and legal context that lead to the conclusion that the agreement is not caught by Article 101(1) TFEU by its very nature. That this sort of defence is available in the context of Article 101(1) TFEU was confirmed by the Court in Murphy.

Written by Pablo Ibanez Colomo

26 May 2017 at 1:54 pm

Posted in Uncategorized

3 Responses

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  1. Interesting as always, though the buyers’ cartel – joint purchasing dichotomy is arguably about more than the degree of market power (see eg Carstensen’s article from 2010 Willam & Mary Bus L Rev). In joint bidding, the ability to submit a credible bid in the specific case is the key element. The “plausible source of efficiency gains” test, put forward by certain prestigious academics, seems to me as a more appropriate distinguishing factor in these cases.

    Madrid lawyer

    1 June 2017 at 6:31 pm

    • I think we fully agree, Madrid lawyer

      In particular with the ‘plausible source of efficiency gains’ test. These ‘prestigious academics’ know their stuff, whomsoever they may be 😉 In fact, my post is another way of expressing the same idea.

      Pablo Ibanez Colomo

      2 June 2017 at 9:03 am

  2. […] Zu diesem Thema hat Pablo Ibanez Colomo eben einen bemerkenswerten Beitrag in Chilling Competition geschrieben. […]


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