Antitrust Goes Global: What Future for Transatlantic Cooperation?

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Overview

How will the rapid growth of trade, cross-border mergers and acquisitions, and international joint ventures alter antitrust enforcement? Can national antitrust enforcement guard against restrictive corporate practices in a globalizing world? Or will international friction increase as nations disagree over antitrust cases, like the Boeing-McDonnell Douglas merger? Recognizing the sheer volume of transatlantic commerce, the EU and U.S. have long cooperated on antitrust matters, but what has that cooperation achieved? And how far should such cooperation go in the future? This volume addresses these questions in the context of antitrust policies towards cartels, mergers and acquisitions, and vertical restraints. Leading experts elucidate the changing nature of antitrust enforcement on both sides of the Atlantic, with a keen eye to future multilateral, as well as bilateral, developments.

Contributors include Merit E. Janow (Columbia University), James Venit (Skadden, Arps, Slate, Meagher, and Flom) and William Kolasky (Wilmer, Cutler and Pickering); Edward M. Graham (Institute for International Economics), Philip Marsden (Linklaters & Alliance), and Spencer Weber Waller (Loyola University Chicago School of Law).

About the Authors:
Simon J. Evenett is an economist in the Development Economics Research Group at the World Bank, moderator of the Brookings Roundtable on Trade and Investment Policy at the Brookings Institution, and research affiliate at the Centre for Economic Policy Research.

Alexander Lehmann is an economist at the International Monetary Fund.

Benn Steil is a senior fellow in U.S. Foreign Economic Policy and Linda J. Wachner Chair in Foreign Economic Policy at the Council on Foreign Relations.

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Product Details

  • ISBN-13: 9780815725015
  • Publisher: Brookings Institution Press and Chatham House
  • Publication date: 11/1/2000
  • Edition description: New Edition
  • Pages: 224
  • Product dimensions: 5.78 (w) x 8.76 (h) x 0.46 (d)

Meet the Author

Simon Evenett is a professor of international trade and economic development and director of the Swiss Institute for International Economics and Applied Economic Research at the University of St. Gallen, Switzerland. Alexander Lehmann is an economist at the International Monetary Fund. Benn Steil is senior fellow and director of international economics at the Council on Foreign Relations. He is also the founding editor of International Finance, a top scholarly economics journal, as well as a cofounder and managing member of Efficient Frontiers LLC, a capital markets consultancy.

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Read an Excerpt


Chapter One


Antitrust Policy in an
Evolving Global Marketplace

SIMON J. EVENETT
ALEXANDER LEHMANN AND
BENN STEIL


That competition policy has acquired a prominent place in discussions on international economic policy is in large part due to the growing interdependence among national economies during the closing decades of the twentieth century. This interdependence blurs the long-standing distinctions between "domestic" and "international" policies, in which competition policy has been the purview solely of the former. A nation's antitrust policies are no longer concerned exclusively with corporate practices within its borders, nor are these policies any longer seen as the sole preserve of national government. The "globalization" of antitrust therefore raises questions about the erosion of national sovereignty, about the potential for intergovernmental disagreements to lead to trade wars, and about the effects of antitrust actions that "spill over" borders.

    The merits and practicalities of reconciling national antitrust law and enforcement with an increasingly global marketplace have been discussed in several arenas: regional forums, the World Trade Organization (WTO), the Organization for Economic Cooperation and Development (OECD), and with increasing frequency over the last ten years, in meetings between the United States and the European Union. The chapters in the book analyze the considerable progress made by the United States and the European Union in cooperating, while enforcing their respective antitrust and competition laws. Our analysis focuses on two areas: the economic and legal questions that will arise if the United States and the European Union decide to move beyond the status quo; and the merits of the various outstanding proposals for reform.

    Our focus on the intensification of cooperation on antitrust matters by the United States and the European Union in no way denies the importance of the changes in law and enforcement practices that have occurred for other reasons. Nor should our focus on antitrust policy give the impression that EU and U.S. cooperation on economic matters is confined to this important policy area. Indeed the mid-1990s saw considerable momentum grow behind proposals to establish a transatlantic marketplace, including the launching of formal negotiations between the European Union and United States. The failure of this wide-ranging initiative does not appear to have prevented sustained cooperation in a large number of policy arenas, including antitrust, but it does appear to have taken efforts to harmonize laws or to adopt common standards off the negotiating agenda.

    The rest of this introductory chapter is organized into seven sections. The next two sections draw the implications for antitrust enforcement of the changes in business strategies that have occurred during the latest phase of international market integration. The third section outlines the issues facing policymakers as they craft an effective strategy of transatlantic cooperation on antitrust policy. The fourth section briefly describes the last decade's cooperation between the European Union and the United States. The fifth section assesses potential future transatlantic initiatives on antitrust policy. The sixth section discusses whether such initiatives could evolve into a blue print for a global competition policy agreement. The final section provides an overview of the volume.


Antitrust Enforcement and the
Evolving Transatlantic Marketplace


Falling trade barriers, a revolution in communications technology, declining restrictions on foreign investment, ongoing deregulation, and the embrace of market-friendly policies by many governments have wrought significant changes in business strategies on both sides of the Atlantic. The following corporate developments have taken center stage in this new environment:

    —A cross-border merger wave of unprecedented scale

    —A reevaluation of the benefits of vertical integration, resulting in increased outsourcing and the fragmentation of stages of production across national borders

    —The spread of network-based industries.

    These developments are in turn altering the context in which antitrust policy is enforced. We describe each of these responses with an eye to the questions raised for antitrust policy, questions that are elaborated upon and taken up in the sections and chapters that follow.


The Current Global Merger Wave


One of the principal differences between the current merger wave and its predecessors is the scale of cross-border mergers and acquisitions (see table 1-1). In just five years the value of completed mergers and acquisitions rose from a worldwide total of $200 billion in 1995 to more than $500 billion by the end of 1999. Measured by their value, American and European firms were parties to more than 80 percent of these transactions. And unlike the merger wave of the late 1980s, which was dominated by British and American firms, during the recent wave numerous French, German, Dutch, and Spanish firms also made substantial cross-border acquisitions (see table 1-1).

    One might have anticipated that falling tariff barriers, constraints on the use of nontariff barriers, and improvements in transportation technologies would have shifted firms' strategies for entering foreign markets toward exporting and away from acquiring local partners. However, in those sectors in which it is costly to establish distribution networks or reputations for supplying high-quality products, firms still find that acquiring or merging with a local partner is often the most profitable mode of entry into overseas markets. The attractiveness of this mode of entry has been further strengthened by the ongoing liberalization of foreign investment regimes and, in some nations, a more relaxed attitude toward foreign takeovers of domestic firms.


—>
Table 1-1. Cross-Border Mergers and Acquisitions, Valued by Sales of Parties, 1995-99
        1998

January-
September
1999


  1995 1996 1997 Sales  Share
(percent)
Sales  Share
(percent)

World
United States
European Union
    Belgium
    Denmark
    France
    Germany
    Ireland
    Italy
    Netherlands
    Spain
    Sweden
    United Kingdom
    Other EU
Australia
Canada
Japan
Switzerland
Rest of world
199,116
61,796

4,644
160
10,200
18,548
1,157
4,895
7,456
1,089
5,531
32,045
1,019
6,368
12,812
4,190
10,420
16,786
242,965
64,604

3,500
730
15,866
19,875
2,245
1,668
13,268
3,506
2,342
37,713
2,946
11,123
9,066
6,256
9,731
38,526
334,435
89,467

2,137
1,565
22,363
13,539
1,875
4,547
19,085
9,360
8,093
62,746
6,027
13,657
18,929
3,578
11,423
46,044
586,773
145,861

2,707
1,259
38,705
69,998
3,335
14,155
25,543
17,474
16,685
108,648
18,453
8,144
36,031
3,403
41,808
34,564
100.0
24.9

0.5
0.2
6.6
11.9
0.6
2.4
4.4
3.0
2.8
18.5
3.1
1.4
6.1
0.6
7.1
5.9
498,203
93,068

7,206
2,880
52,241
45,457
1,984
7,000
34,029
25,681
4,160
139,930
6,491
4,448
14,236
9,905
10,665
38,822
100.0
18.7

1.4
0.6
10.5
9.1
0.4
1.4
6.8
5.2
0.8
28.1
1.3
0.9
2.9
2.0
2.1
7.8

    Source: Thomson Financial Securities Data. Data refers to completed deals only.
—>


    Deregulation and privatization, especially in Europe, have played a significant role in stimulating cross-border mergers and acquisitions. As governments have opened public utilities (the electricity, water, gas, and telecommunications sectors, for example) to competition, cross-border transactions have surged, putting these industries among the top ten in terms of total mergers and acquisitions during 1995-99 (measured by the value of sales). Furthermore, the liberalization of the highly regulated financial services industry has resulted in considerable consolidation within this traditionally sensitive sector. Typically, deregulation does not mean the end of regulation, and industry regulators, in addition to antitrust authorities, increasingly review cross-border acquisitions. Gary Doernhoefer (this volume), in his case study on the American Airlines and British Airways alliance, argues forcefully that satisfying multiple regulatory authorities adds substantially to the costs and uncertainty involved in cross-border transactions. This problem extends well beyond the airline industry.

    Antitrust enforcement, if not antitrust law, has responded to this surge in cross-border mergers and acquisitions. An increasing number of transactions are reviewed in multiple jurisdictions, and officials regularly discuss their concerns and possible remedies. Most of those concerns appear to be international analogues to the concerns raised by domestic transactions. For example, in the Federal-Mogul and T&N merger, U.S., British, French, Italian, and German antitrust officials were concerned that the merged firm would have an 80 percent market share in the worldwide market for thin wall bearings used in car, truck, and heavy equipment engines. To allay fears about the current anticompetitive effects of this horizontal aspect of their merger, the parties were forced to divest T&N's thin wall business, including the intellectual property needed for the divested firm to compete effectively in the future.

    The possibility that an international merger or acquisition could result in a reduction in future competition, possibly by retarding the development of new products, is another concern of antitrust officials. Mergers and acquisitions of firms that are about to launch competing products, or that are assisting other firms in developing potential substitute products, were mentioned in authorities' reviews of ABB's acquisition of Elsag Bailey Process Automation, the Zeneca and Astra merger, and the acquisition of COBE Cardiovascular by Sorin Biomedica.

    Increased cross-border transactions give additional prominence to two other antitrust issues. The first is the extent to which import competition can discipline the market power of the entities that result from such transactions. Economists have traditionally argued that vigorous competition from firms, no matter their location, can constrain the exercise of market power by large domestic firms. A number of recent empirical studies have shed further light on the extent of this constraint (the implications of these studies for antitrust enforcement are outlined in the next section).

    The second issue concerns the proper antitrust response to a proposed merger, acquisition, or joint venture that creates cross-border efficiencies—that is, that lowers the cost of supplying foreign markets but not the domestic market. Unlike Canadian Merger Guidelines, which can take into account the effect on export performance, U.S. case history and the public statements of senior officials suggest that a merger that claims to balance anticompetitive effects in the United States with procompetitive effects abroad would be poorly received. The chairman of the U.S. Federal Trade Commission, Robert Pitofsky, could not be more explicit on this point:


If that argument were advanced, we would consider it but our approach would be skeptical. This is not a strictly chauvinistic interpretation of American merger law. First, it is consistent with the basic premise ... that domestic firms are best able to succeed in international markets if required to compete vigorously at home.... Second, balancing anti-competitive effects in a domestic market against efficiencies in a foreign market is unusually difficult. Finally, it is an unattractive prospect to "tax" United States consumers (as a result of the domestic anti-competitive effect) in order to confer benefits on U.S. exporters and non-U.S. consumers.


This remark raises a fundamental issue that recurs throughout this book and more generally in discussions of international antitrust enforcement. How efficient can national antitrust enforcement be, focusing almost exclusively on effects within a nation's borders, in a world in which more and more corporate transactions and practices have effects that are not confined to one nation's jurisdiction?


The International Fragmentation of Production
and Vertical Disintegration


The last fifteen years have seen far-reaching changes in the internal organization of businesses and in business-to-business contracting and relationships. Two distinct and not mutually exclusive changes have been at the fore: the fragmentation of multistep production processes across national borders and the sale of corporate subsidiaries peripheral to the firm's principal activities (often replacing intrafirm transactions with transactions between firms). One significant consequence of these changes is that production components often cross many international borders before reaching the purchaser of the finished product. The total value of imported components embodied in exports accounts for approximately 30 percent of current world trade; during 1970-95 the growth of this type of trade accounted for one-third of the growth of world trade.

    Liberalization of foreign investment regimes, reductions in tariffs on intermediate products, and improvements in communications have spurred firms to relocate (typically labor-intensive) stages of production abroad. It is no longer uncommon to have a product designed in one country, materials purchased (and even refined) in another country, and assembly undertaken in third countries. This multiple crossing of borders implies that even small reductions in international transportation costs and tariffs can have significant effects on trade volumes. Furthermore, multinational sourcing decisions respond vigorously to exchange rate changes.

    The effects of international market integration on the vertical structure of firms is more subtle. When suppliers produce specialized inputs, they can be "held up" by buyers who may try to renegotiate the terms of their contract after the inputs have been produced. Such ex post renegotiation is more likely to occur when the seller cannot find other potential buyers for its product, either because there are none or because the inputs are so specialized that there are only a small number of potential buyers. To cover the losses associated with reduced payments on some of their sales, this hold-up problem causes suppliers of inputs to raise prices, which in turn raises the costs of production of input buyers. These higher input prices lie at the heart of the incentive to vertically integrate: by owning the producers of inputs, the downstream buyer of inputs pays only the marginal cost of producing the inputs and so avoids the premium charged by independent input suppliers to cover expected losses created by the hold-up problem. It should be noted that the incentive to vertically integrate is reduced if there are larger governance costs associated with running a vertically integrated firm. Finally, once vertical integration begins in an industry it creates a dynamic that reinforces the incentive for further vertical integration: as more and more input suppliers and buyers vertically integrate, the set of available input buyers whom the remaining independent input suppliers can sell to shrinks, exacerbating the hold-up problem and reinforcing the incentive to vertically integrate.

    Falling impediments to international commerce reduce the incentive to vertically integrate by increasing the number of potential overseas buyers for an input, diminishing the severity of the hold-up problem. Furthermore, as suppliers of inputs are less susceptible to the hold-up problem they charge a lower premium over marginal costs, which in turn reduces the cost savings from vertical integration. Indeed some integrated firms may now find the cost savings (which induced them to vertically integrate in the first place) no longer compensate for the higher governance costs of running both the input producer and its downstream purchaser and so may sell off one of these two activities. Such vertical disintegration further increases the number of potential buyers for any one input seller's output, further ameliorating the hold-up problem and reinforcing the incentive for other firms to vertically disintegrate. It is through this mechanism that falling impediments to international trade are reshaping the vertical structure of firms.

    Vertical disintegration has several implications for antitrust enforcement. First, to the extent that arm's-length agreements between firms have been subject to more antitrust investigations than supply management within firms, vertical disintegration can be expected to increase the enforcement activity of antitrust officials. Second, antitrust officials should examine the availability of overseas inputs when assessing claims that a firm is being deliberately denied inputs by a domestic rival. Such claims should be treated with considerable suspicion if the relevant firms are in an industry that is experiencing considerable vertical disintegration. Finally, although falling trade impediments may mitigate the hold-up problem and reduce the incentive to vertically integrate, other rationales for vertical integration remain—some of which distort market outcomes—and so globalization does not imply that antitrust enforcement in the area of vertical restraints should be abandoned.


The Spread of Network-Based Industries


Although it is fashionable to argue that recent developments in information technology are creating a "new economy," in fact many of the characteristics of today's network industries have historical precedents, such as the spread of the Bell telephone system in the United States during the late nineteenth century. Whether a network is physical (for example, railroads) or "virtual" (for example, compatible software), it has the same principal characteristic: the value any one consumer derives from connecting to a network depends in large part upon the number of consumers already using the network. The antitrust issues raised by the tremendous recent growth of network industries probably merits a chapter of its own, but we focus briefly on a few central issues below.

    First, in common with some "old economy" industries, network industries tend to have high fixed costs—reflecting research and development costs and the costs of building a network infrastructure—and very low marginal costs. Firms in these industries thus have an incentive to price-discriminate across consumers, charging higher prices to consumers with price-inelastic demand. Here the critical question is whether this market power is transitory. The fast pace of innovation in these industries suggests that antitrust enforcers should examine not only whether corporate practices and interfirm agreements inhibit the entry of new products but also the effects of these practices and agreements on the rate of innovation and the ability to sustain market power. Another concern, at the center of the recent U.S. federal case against Microsoft, is whether monopoly power in one product market can be used to leverage market power in another product market.

    The second characteristic of these industries is the presence of positive network externalities, which complicate antitrust analysis. The source of these externalities is the following: one of the factors that determine how much a consumer values a product is the number of other consumers who are currently purchasing or have purchased the product. Firms that sell such products often have an incentive to set prices below marginal cost, expanding sales and so further increasing the demand for their products through network externalities. The likely consequence of this pricing strategy is increasing industry concentration.

    In the presence of network externalities, therefore, it is as if consumers value concentration, which implies that the traditional techniques for quantifying the effects of horizontal mergers and alleged abuses of dominance need to be modified to take into account the benefits that consumers derive from firms having a large clientele. Furthermore, the magnitude of this benefit to any one consumer may well depend on the worldwide total number of purchasers of the same good. Thus even a national antitrust authority concerned solely with the effects of a firm's actions within its borders ought to consider the effects of company practices on worldwide sales. Network externalities can create international spillovers distinct from those discussed in our earlier section on mergers and acquisitions.

    Extensive cooperation on standard setting, product compatibility, and licensing is the third distinctive characteristic of network industries. Whereas any alleged consumer benefits from cooperation between the producers of substitute goods should rightly be viewed with skepticism by antitrust authorities, such skepticism is less warranted for the producers of complements, of which computer software is a leading example. Consumers value compatibility across software programs: being able to convert documents or data supplied by one program into a form manipulable by another program. Cooperation to improve product compatibility, which often involves setting common standards in software design, benefits consumers and ought not to be discouraged by antitrust authorities. This argument extends to patent pooling, in which two or more companies own patents that could block the introduction of each other's products.

    An essential precondition for maximizing consumer gains from standard setting is that the adherence to these standards be open to new competitors, irrespective of their nationality. This requires that standards be well publicized and that compatibility with an existing standard can be readily demonstrated. This encourages research and the development of new varieties of products—such as video games, compact discs, and computer applications—that benefit consumers.

    Looking forward, there is the potential for intergovernmental disagreement over standard setting by private entities. A critical test will be whether industrial policy considerations trump concerns of allocative and productive efficiency when a national antitrust authority examines foreign complaints of discriminatory standard setting by domestic firms. The merits of this application of industrial policy were examined at length in the 1980s and the early 1990s, and it is worth recalling Paul Krugman's conclusion that, although there are some theoretical circumstances under which government intervention of this sort can raise the national welfare, the preconditions for successful intervention—in particular the information requirements—are so stringent that resisting the temptation to intervene is the best rule of thumb.


Does International Competition Tame
Domestic Market Power?


Since antitrust investigations often turn on how much market power a firm (or group of firms) possesses, the extent to which international competition diminishes that power is of considerable interest. In recent years our understanding of exporter behavior and its effects on the pricing behavior of domestic competitors has been enhanced by empirical studies whose methodologies can readily be applied by the antitrust community.

    The first research program examines the sensitivity of domestic firms' pricing decisions (specifically the markup of price over marginal cost) to lower trade barriers. Although these studies examine firm behavior in developing countries, the techniques can be applied to firms in industrial countries, such as the United States and the members of the European Union. The principal finding of this research is that, holding other factors constant, the larger the reduction in an industry's protection from imports, the greater the contraction in markups of prices over marginal costs. Furthermore, in response to trade reform domestic firms have increased their productivity levels, reducing costs, which then have in part been passed on to consumers in the form of lower prices. This evidence supports the view that integration into the market economy attenuates domestic market power. However the evidence does not imply that integration eliminates domestic market power, suggesting that a liberal trade policy is not a perfect substitute for national competition policy

    Even though imports from existing overseas suppliers tend to rise in response to a rise in the prices of domestic firms, other empirical studies show that such price rises are unlikely to induce new foreign firms to start supplying the domestic market. Entering new markets requires considerable startup costs (establishing distribution networks, tailoring products to the new market, and marketing), and so the assertion of greater market power by domestic firms is unlikely to induce new foreign entrants unless the domestic price increases are so large as to enable those potential entrants to recover these costs over a plausible time horizon. This implies that the short-term constraint on domestic market power is actual, rather than potential, foreign competition.

    However, the same studies show that once a foreign firm enters the domestic market (perhaps owing to a favorable exchange rate movement or to falling impediments to trade), then it takes especially unfavorable domestic market conditions for the foreign firm to exit the market. The unwillingness of foreign firms to leave the market in anything other than severe downturns is related to firms' desires to avoid having to reestablish their presence in the market once favorable conditions return. This finding implies that, as global integration unfolds, the extent of foreign competition faced by domestic firms ratchets up over time, posing an ever more serious threat to domestic market power. Finally, one hypothesis that receives little support in recent studies is that foreign exporters learn how to reduce costs by exporting, enabling them to lower prices and so to grind away continuously at what remains of domestic firms' market power.

    Taken together these findings imply that, while it is existing foreign rivals that provide the bulk of the restraint on domestic market power, there is a pronounced tendency for the number of these foreign rivals to increase over time. Should these patterns continue into the future—and there is little evidence to suggest that they will not—further development and application of techniques that better account for the discipline that foreign competition exerts on domestic market power is called for.


Multijurisdictional Antitrust: The Principal Issues


Four important areas require investigation:

    —Defining the proper boundaries of "markets"

    —The relationship between trade and antitrust intervention

    —The "new economy" features of cross-border markets

    —The interaction between antitrust and other forms of regulatory intervention.


Defining Markets in an Integrating Global Economy


As markets integrate across national borders, the logic of purely national antitrust policy breaks down. The most immediate problem—and frequently the most critical aspect of antitrust cases, particularly those dealing with monopolization and mergers—is how to define the relevant "market." The market share of the merged parties is scrutinized by competition authorities to gauge potential market power and harm to consumers. The sensitivity of case outcomes to definition of the relevant market is compellingly illustrated in the 1997 case brought by the U.S. Federal Trade Commission against the proposed merger of Staples and Office Depot, two office supply retailers. The combined entity would have accounted for a small percentage of the aggregate sales of office supply products, but the FTC successfully argued for restricting the definition of the product market to "the sale of competitive office supplies through office superstores" (italics added). Having been persuaded of the appropriateness of this definition, the judge then granted the FTC's request for a preliminary injunction on the grounds that the combined company would have a dominant 45-100 percent market share in many parts of the country.

    The proper geographic scope of a market must include all sellers to whom buyers can turn in order to counteract the effect of a significant and nontransitory price increase by local incumbents. Where imports can play that price disciplining role, then the market should be defined so as to include foreign producers. Thus the proper market definition is itself determined not only by the level of imports but also by trade policy itself, as a measure of the potential for new imports to discipline domestic market incumbents.

(Continues...)

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Table of Contents

1 Antitrust Policy in an Evolving Global Marketplace 1
2 Transatlantic Cooperation on Competition Policy 29
3 Economic Considerations in Merger Review 57
4 Substantive Convergence and Procedural Dissonance in Merger Review 79
5 Anticartel Cooperation 98
6 The Divide on Verticals 117
Case Studies 139
The Boeing-McDonnell Douglas Merger 139
The American Airlines and British Airways Alliance 145
PricewaterhouseCoopers 153
The Treatment of Transatlantic Linear Shipping under EU and U.S. Law 166
The First Microsoft Case 174
Two Joint Ventures in International Telecommunications 177
The WorldCom-MCI Case 188
The A. C. Nielsen Case 192
The Amadeus Global Travel Distribution Case 195
Index 199
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