Dear readers,
As previously announced, I am incredibly happy and honored to publish guest articles written by several of the world’s most renowned antitrust scholars every month of the year 2020. The one for July is authored by Frédéric Jenny, Professor of Economics at ESSEC Business School, and Chairman of the OECD Competition Committee. In it, Frédéric discusses how competition agencies have been responding to the challenges brought by the Covid-19. I am confident that you will enjoy reading it as much as I did. Frédéric, thank you very much!
All the best, Thibault Schrepel
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Market adjustments, Competition Law and the Covid-19 Pandemic
The Covid-19 economic crisis was, first, caused by a cataclysmic exogenous shock which has led to brutal spikes in the demand for products needed to limit the expansion of the pandemic. In many countries, general confinement measures were adopted because they were deemed the only possibility to contain the pandemic given the lack of availability of the equipment or products required to block the spread of the disease.
As a result, shortages appeared for essential goods and demand collapsed on a large number of markets both because of the physical impossibility for consumers to access stores and because of the constraints imposed on suppliers by confinement.
The question we want to focus on is how competition authorities have adjusted their antitrust enforcement to these new market conditions and what this crisis has meant for market competition.
Response of competition authorities to exploitative practices
The shortages due either to the spike in demand for some products deemed necessary to protect oneself against the risk of Covid-19 (such as masks, gloves, respirators, medicine, tests, etc.) and or the confinement of the population in many countries have increased the possibilities of price-gouging and monopolistic exploitative practices. Those practices were considered to be particularly shocking by the general public.
The responses of competition authorities to the risk of price-gouging have differed, depending on three factors: whether the competition law of their country had public interest goals or was strictly limited to the protection of consumer surplus, whether or not they believed that intervening on price abuses was a legitimate use of competition law enforcement and, finally, whether or not their institution was a multi-function competition law entrusted with a consumer protection function.
At one extreme, we have the U.S. FTC which has a mandate to enforce competition law and a consumer protection function but firmly believes not only that antitrust laws should not be used intervene against high prices but also that price gouging laws that have the effect of controlling prices likely will do consumers more harm than good. The U.S. FTC will intervene against anticompetitive price agreements (from the antitrust side) and against deceptive practices (from the consumer protection side) but will refrain from acting against price gouging (and so will the Antitrust division of the U.S. Department of Justice).
The position of the U.S. competition authorities is not universally shared by competition authorities as revealed by the ICN Steering Group statement which indicates that “The COVID-19 pandemic has prompted concerns that, while most businesses will act responsibly, some businesses might respond with anti-competitive conduct, e.g., by cartelizing or abusing a dominant position. It is of utmost importance to ensure that products and services remain available at competitive prices, especially those that are essential to urgent public health needs in the current situation, like medical supplies and equipment. Competition agencies intend to remain vigilant against anti-competitive mergers or conduct during this crisis”.
There has been much more willingness to use competition law provisions against exploitative abuses of dominant position in Europe, and there have been some cases of unfair and excessive prices brought against pharmaceutical firms in the recent past. Thus on 21 November 2016, EC commissioner Vestager declared (in reference drug prices) that “(…) as the recent action by the British and Italian competition authorities shows, there can be times when competition rules need to do their bit to deal with excessive prices.”
In some European countries, however, such as the U.K. and Italy, the competition authority is also entrusted with a consumer protection function and therefore can use its consumer protection tools together with its competition enforcement tools to intervene against price gouging. Thus, Lord Tyrie the Chairman of the CMA on 20 March 2020 stated: “We will do whatever we can to act against rip-offs and misleading claims, using any or all of our tools; and where we can’t act, we’ll advise government on further steps they could take, if necessary.” Besides the willingness to use the flexibility offered by the combination of competition and consumer responsibilities, the CMA position on price gouging also offers a sharp contrast with the U.S. FTC position on possible remedies. Indeed the statement published on its websites also states that: “In addition, the CMA will assess whether it should advise Government to consider taking direct action to regulate prices.”
Finally, in some countries, like South Africa, which have a competition law similar to that of Europe, the definition of an excessive price under both competition law and the consumer protection law (enforced by different regulators) was simplified to facilitate the task of enforcers during the time of the “National Disaster.” A material price increase of a good or service that does not correspond to or is not equivalent to the increase in the cost of providing that good or service indicates prima facie that the price is excessive or unfair.
Response of competition authorities to coordination among competitors
The second major concern of competition authorities in a time of crisis due to the Covid-19 pandemic concerns horizontal agreements among competitors.
Competition authorities were quick to point out that the economic crisis could not be used as a justification for cartel behavior. However, they had to face the possibility that firms may seek to or have to coordinate in order to alleviate the shortages of essential products or services necessary to limit the spread of the virus or to treat it or to discover a vaccine against it.
Even though competition authorities eventually bowed to the pressure of adapting their enforcement practice to the exceptional circumstances of the crisis, the routes they chose to follow were quite different. Indeed, the answer to the challenge faced by the competition authorities depended on three major factors: the extent to which they could avoid the dilemma by strategically using their prioritisation discretion, the extent to which they were willing to admit that some horizontal agreements could in the particular circumstances of the Covid-19 crisis enhance efficiency, the extent to which the competition laws they were enforcing allowed them to take into consideration public interest goals.
On 23 March 2020, the members of the European Competition Network stated that they would not “in the current circumstances” “actively intervene against “necessary and temporary” measures put in place in order to avoid a shortage of supply.” However, the justification given by the members of the ECN not to intervene is that “such measures are unlikely to be problematic, since they would either not amount to a restriction of competition under Article 101 TFEU/53 EEA or generate efficiencies that would most likely outweigh any such restriction.”
In contrast, the EC Commission, in its Communication of 8 April 2020 on the establishment of a temporary framework for assessing antitrust issues related to the Covid-19 outbreak, acknowledged that the measures to be taken to adapt production, stock management and distribution in the industry in the Covid-19 crisis may require exchanges of commercially sensitive information and a certain coordination of which site produces which medicines. Such exchanges and coordination between undertakings are in normal circumstances problematic under E.U. competition rules. The Commission, however, stated that such measures – in view of the emergency situation and their temporary nature – would not give rise to an enforcement priority for the Commission as long as (1) they would be designed and objectively necessary to actually increase output in the most efficient way to address or avoid a shortage of supply of essential products or services, such as those that are used to treat Covid-19 patients, (2) they would be temporary in nature (i.e. to be applied only as long there is a risk of shortage or in any event during the Covid-19 outbreak), and (3) they would not exceed what is strictly necessary to achieve the objective of addressing or avoiding the shortage of supply.
By using its prosecutorial discretion, the Commission will avoid having to make a formal decision on the anticompetitive nature of these agreements and to weigh their efficiency benefits. The Commission will thus avoid the risk of being overturned by the Courts. More importantly, it will avoid the creation of precedents applying article 101(3). Indeed, the EC Commission has never applied article 101(3) since the modernization of EC law in 2004.
The Federal Trade Commission and the U.S. Department of Justice Antitrust Division issued a joint statement on 24 March 2020 in which they stated that “The agencies will also account for exigent circumstances in evaluating efforts to address the spread of COVID-19 and its aftermath. For example, health care facilities may need to work together in providing resources and services to communities without immediate access to personal protective equipment, medical supplies, or health care. Other businesses may need to temporarily combine production, distribution, or service networks to facilitate production and distribution of COVID-19-related supplies they may not have traditionally manufactured or distributed. These sorts of joint efforts, limited in duration and necessary to assist patients, consumers, and communities affected by COVID-19 and its aftermath, may be a necessary response to exigent circumstances that provide Americans with products or services that might not be available otherwise.” Thus, like the European Commission, they acknowledge that they may decide, using their prosecutorial discretion, not to go after some anticompetitive cooperations which respond to the “exigent circumstances” of the moment.
The United Kingdom CMA, on 25 March 2020, published its approach to business cooperation in response to the crisis.1Guidance CMA approach to business cooperation in response to COVID-19, 25 March 2020 First, the CMA explains that it will prioritize during the Covid-19 outbreak the cases, which protect consumers, and in particular, those in vulnerable circumstances and deliver consumer benefits where it is most needed. Therefore it will refrain from taking enforcement actions if the coordination measures (a) are appropriate and necessary in order to avoid a shortage, or ensure security of supply, (b) are clearly in the public interest, (c) contribute to the benefit or wellbeing of consumers, (d) deal with critical issues that arise as a result of the Covid-19 pandemic and (e) last no longer than is necessary to deal with these critical issues. Second, the CMA states that should it have to assess cooperation agreement to mitigate a shortage it will be likely to consider that agreements to avoid or mitigate shortages fulfill the conditions set for an exemption under section 9 of the Competition Act 1998 if they are temporary and strictly limited to what is necessary, because in most cases they are indispensable given the lack of alternatives in the short-run and alleviates shortages which give consumers a fair share of the benefits.
Thus, the CMA differs from the E.U. and the U.S. both because it bases its prioritization more openly on public interest considerations (the protection of vulnerable consumers) and because it is willing to apply in a particularly favorable way the exemption criteria of Article 9 of the Competition Act 1998 to agreements to mitigate shortages during the Covid-19 crisis.
Finally, in some countries, the Covid-19 crisis has elicited different reactions than a simple adjustment of competition authority practices. For example, in South Africa, the government suspended the application of the competition law in key sectors to facilitate the coordinated response of the private sector and to support the actions taken by the South African government in dealing with the pandemic. Thus, unlike in previously mentioned countries, there is a clear concern in South Africa that competition law is inadequate or insufficiently flexible or adaptable to deal with collusion in a period of acute crisis.2This approach has been followed in other European Union countries as well.
Conclusion
Two lessons can be learned from this examination of the impact of the pandemic on competition law enforcement.
First, the unwillingness or the inability of competition authorities to deal with the price consequences of market disruptions is incomprehensible for non-specialists and led to questioning the credibility of competition authorities’ claims to promote or protect consumer welfare. If it is clear that competition law enforcement is not the best instrument to deal with price gouging or excessive prices, it may be wise to entrust competition authorities with a complementary consumer protection function to enlarge their ability to intervene against such abusive practices.
Second, over and beyond the differences in their approaches, competition authorities have reacted in similar ways by refusing to prosecute, or allowing, or exempting individually or collectively (for economic or public interest reasons) horizontal cooperation agreements aiming at alleviating shortages in the context of the Covid-19 crisis.
In normal times, competition authorities consider that the long-run collective benefits of competitive markets are such that no short-term disruption or even threat of disruption of the competitive process is justified. However, in the case of a pandemic like the Covid-19, the short-run cost to consumers of letting the market adjust is quite different from what it is in normal times. First, we are talking about markets where supply disappeared entirely (due to confinement in some countries) or where supply was nonexistent (such as the supply of a vaccine against Covid-19). Second, and more importantly, if consumers are not able to protect themselves against the virus or to be tested in order to be isolated or to be treated, they will unwillingly facilitate the transmission of the virus by exposing others to the risk of becoming infected. In other words, there is a negative externality associated with letting the competitive market adjust spontaneously but slowly.
When the short-term cost of the negative externality of the competitive adjustment of the markets involved is factored into the analysis, an agreement among suppliers, which speeds up the process of adjustment of supply and demand by increasing supply faster than the competitive process would have, is seen in a different light. The long-term social cost of weakening competition has to be traded off against the short-term benefit of reducing the spread of the pandemic. The net balance of the agreement, which under normal circumstances would be considered detrimental to society, can become positive.
Thus, competition authorities refrained from acting against short-term cooperating agreements to increase supply or to innovate, even when such agreements could reduce competition compared to what would have resulted from the process of individual adjustment of each supplier and consumer because such agreements delivered faster results. Competition authorities accepted (within limits) the granting of state aid, thus preventing some firms from existing markets, which is something they would have been unwilling to do in normal circumstances when the economy is not on the verge of total collapse because of the measures taken to fight the pandemic.
To assess the conditions of efficiency defenses, competition authorities took into consideration the fact that whenever there was a massive disequilibrium between demand and supply, speeding up the process of adjustment through an increase in the volume or the distribution of supply was welfare increasing. They took into consideration, whenever justified, the fact that successful firms could, in a very short time, see their business model becoming inadapted to the macroeconomic environment resulting from the health crisis and become failing firms. They have made it known that they will not soften the exacting criteria they apply to exempt crisis cartels from competition law. This pronouncement does not mean that they will not recognize that those exacting criteria apply in a larger number of cases than previously, given the fact that a number of sectors are likely to be permanently affected by a depressed demand.
Competition authorities are right to insist that these adjustments do not reflect in any way a compromise of their standards or a decrease in their determination to eliminate anticompetitive practices that are detrimental to consumer welfare.
These adjustments constitute an adaptation of competition law enforcement practices justified by the goal of maximizing consumer welfare in an unconventional situation where the spontaneous but slow adjustment of some competitive markets entails, in the short-run, a large negative externality on society.
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Citation: Frédéric Jenny, Market adjustments, Competition Law and the Covid-19 Pandemic, CONCURRENTIALISTE (July 6, 2020)
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