The investigation of anti-competitive conduct in the UK An analysisof costsand benefitsarising out of the application of the Fair Trading Act 1973 and the Competition Act 1980 in relation to the control of monopolies, complexmonopolies and single-finnanti-competitive conduct Mark Furse BA (Economicsand Law), LLM (InternationalBusiness Legal Studies) Submitted for the degreeof PhD, University of Newcastle upon Tyne This work was carried out under the auspicesof the Faculty of Law, University of Newcastle upon Tyne October 1999 NEWCASTLE UNIVERSITY LIBRARY ---------------------------- 099 07212 0 ---------------------------- ABSTRACT This PhD is an examination into some of the costs and benefits arising from the application of the Fair Trading Act 1973 and the Competition Act 1980 to single firm anti-competitive conduct and complex monopoly conduct in the United Kingdom. The theoretical arguments advanced for the application of competition policy generally, along with the costs identified as likely to flow from this policy, are examined in an attempt to devisea criteria by which the application of competition policy in specific casesmay be assessed.Enforcement activity of the Office of Fair Trading (OFT) and Monopolies and Mergers Commission (MMC) is examinedto consider the extent to which previousactions have resulted in outcomesthat may be identified or measured. Three specific investigations conducted between 1993 and 1997 are examined in somedetail in ChaptersS, 6 and 7. Thesearc related in Chapter 8 to more general experiencesof thoseinvolved repeatedlywith the operation of the regimein the United Kingdom. The experiencesand evidence drawn together in these four chapters have not, to the author's knowledge, previously been so considered or set out. It is shown that the mechanism by which the policy is put into effect is heavily criticised, and that there are aspectsof the procedurethat impose burdens beyond those necessaryto achieve the given result. In this context the experienceof the American regime is usedas a comparative example.The work concludeswith a synthesisof the problems identified, and offers somepossible solutions to the difficulties raised by the regime at the time of writing. Someconsideration is taken into account of the future shapeof the regime following the entry into force of the Competition Act 1998, although much of the work presentedhere remainsvalid to the operation of the new regime. List of contents Chapter one- Introduction I Chapter two - Methodo1gy 8 INTRODUCnON 8 CASESTUDIES AND THE COLLECTION OF DATA 9 Interviewsand questionnaires 10 Limitations on data -The OFT and MMC 11 Partiesto the inquiries 12 PREVIOUSMODELS 13 CHAPTER-SPECIFICAPPROACHES14 Chapter5 (UnitedAutomobile Services) 14 Chapter6 (ClassifiedDirectory AdvertisingServices) 15 Chapter7 (Foreignpackage holidays) 15 Chapter8 (Repeatusers) 16 Chapter three -The Economic and Regulatory Framework: Benefits and Costs of Competition Policy Generally 18 INTRODUCTION 18 BENEFITSFLOWING FROM COMPETITION POLICY 19 Theeconomic framework 19 Neo-classicaleconomics 19 Principlesof industrialeconomics, and monopoly markets 20 THE POLICY 'SCHOOLs' 24 Legislativegoals 26 THE UNITED KINGDOM 26 AMERICA 28 THE EUROPEANcommuNiTy 29 Conclusion31 COSTSOF COMPETITIONPOLICY 32 Introduction 32 Fundingthe regulation 32 TheUK 32 MiEDGrrANDT1iEoFr 33 THEmmc 33 THE Bi-PARTrrE sPuT 34 Investigations/Reports 35 Coststo industry of competitionpolicy 36 Compliancecosts 36 Misapplicationofpolicy 36 Reducedcompetition? 37 MEASUREMENT OF COSTSAND BENEFITS 38 CONCLUSION 38 Chapter four - OFT and MMC Reports:past activities and outcomes 41 INTRODUMON 41 THE REPORTS 42 CompetitiveStrategies 43 Introduction 43 Predation 44 Raisingor creatingbarriers to entryother than by predation 46 VERTICAL REsTRAam 46 CONTROL OVER AN ESSENTIJ1kLFACILITY, PROPERTYRICHTS AND INTELLECTUAL PRoPERTY 48 PRICE-DISCRIMINATION 49 PREDATORYSUPPLY INCREASES 50 Exploitative practices SO Excessivepricing and super-normal profits 50 Full-lineforcing, tie-in sales, and line discounts 53 Distributionsystems and refusal to supply 55 Miscellaneous57 Collusivepractices and agreementsfailing short of merger 57 Reportsas precedent 58 UNDERTAKINGSAND ORDERS-THE FORMAL'OUTCOME' S8 CONCLUSION 60 Chapter five- United Automobile Services 62 INTRODUCTION 62 THEINQUIRY 63 THE REPORT 64 Theinput and views of theprimary parties 65 YourBus 65 TheOFT 67 UnitedAutomobile Services ('United') 68 Theprivate parties 70 Precedentvalue (tbe 'reacb-across'effect) 71 CONCLUSION 73 Chapter six- Classified Directory Advertising Services 7S INTRODUCITON 75 THENMCREPORT 76 YellowPages 78 Thirdparty involvement 80 Significantthird parties 82 KINGSTON COMMUNICKnONS (HULL) PLc 83 6ANOTHER PUBLISHEROF CLASSIFIEDDIRECTORIES' 83 THE UNDERTAKINGAND ITSEFFECTS 8S Chapter seven- Foreign Package Holidays 87 INTRODUMON -THE INDUSTRYAND THE OFT 87 THEMMCINVESTIGATION 91 Thestudy 92 Airtours 92 ThomasCook 95 AssociationofIndependent Tour Operators 96 CONCLUSION99 Endnote 100 Chapter eight - The RepeatExperiences of ProfessionalAdvisers and ConsumerGroups 104 INTRODUCTION 104 PROFESSIONALINVOLVEMENT IN COMPETITIONINQUIRIES 105 Lawyers 105 Beforethe OFr 106 Beforethe MMC 107 THE QuEsiiommm 107 THEvisrr 109 MiEHEARING 109 The quality of analysis,and the outcomeof the procedure 110 PREVIOUSREPORTSASINDICATORSOFFUTUREHNDINGS Ill The attitude of clients to the process,and other proceduralissues 111 PROCEDURALISSUES 111 CIJENTS'VIEWS Ill The position of complainants 112 Lobbying 114 Economists 115 THE RESPONSEOF THE OFr AND MMC TO ECONOMIC EVIDENCE,AND THE DIFFERINGAPPROACHES 117 COMPETITIONT17111LAWYERS FOR FEES? 118 Professional fees and costs 118 CONSUMER GROUPS 119 CONCLUSION 120 Chapter nine - Regulated Settlement vs Trial, The United Statesof America and the Consent Decree 122 INTRODUCTION 122 THE CONSENTDECREE PROCEDURE 125 TheTunney Act andthe Meaning of Tublic Interest' 126 COSTSAND BENEFITSOF CONSENTDECREES 128 Introduction 128 Theburden of investigation 129 Litigation 130 Therisk of litigation 130 Thecosts of litigation 130 Thestrengtbs of consentdecrees 131 TheGovernment's position 131 Compliance132 Tbirdparty interests 133 CONCLUSION 134 Chapterten- Condusion 137 INTRODUCTION137 PROCEDUREIN THE PRESENT REGIME 138 Thirdparty involvement 142 THE BENEFITSOF APPLICAnON OF THE LAW IN INDIVIDUAL CASES 143 THE'NEW'REGIME 144 Annex -The Competition Regime 147 INTRODUCrION 147 THE ORIGINSOF THE LAW 147 THE MODERNREGIME 149 TheFair TradingAct 1973 152 FTA,Part I (ss1-12) 152 FTA,Part IV (ss44-56G) 154 FTA,Part VII (ss81-83) 156 FM PartVIII (ss84-93B) 157 TheCompetition Act 1990 1S9 Criticismsof theActs 161 REFORM,AND THE cOMPETUIONACT 1998 163 Bibliography 166 Chapter one - Introduction Competition law in the United Kingdom is, at the time of writing in mid-1998, in a transitional phase.The post-war emphasison a systemof regulation through investigation, with condemnation the exception rather than the rule, is being replaced by a prohibition system modelled very closely in most significant respectson the superior law of the EuropeanCommunity. ' This change is in responseto consistentpressure from industry that has bemoanedthe application of two very different legal structuresto the sameconduct and situations. Government ministers continually emphasisedduring the passageof the Bill that its 'purpose is to ensure as far as possible a burdens for business' Section 60 Act consistency with EC approach and thereby ease .2 of the imposesa strong duty on the courts and regulators to ensureconsistency with Community law in the application of the Act. Criticism has in particular been levelled at the Restrictive Trade PracticesActs 1976 and 1977 for their overly technical and arcane approach to the control of restrictive agreements,and to Fair Trading Act 1973 In the systemof inquiry into monopoly practicesthat operatesunder the .3 relation to the latter the oft-voiced criticism has been that the regime as a whole lacks focus, that the 'public interest' test set out in the Act is vague and ill-defined, and that the burdens consequentlyimposed on businesseswhose conduct is referred to the Monopolies and Mergers Commission (MMC) by the Office of Fair Trading (OFT) are greater than they should be, with is inefficient Further has been the result that the regime as a whole .4 criticism made of the multiplicity of institutions involved in this process.It has beennoted in the standard student text that '[o]ne of the extraordinary features of UK competition law is the superfluity of institutions involved' (Whish and Sufrin, 1993,20). A consequenceof this is that a company whose conduct is under examination may have to deal first with the OFT, then with the MMC, and then may find itself lobbying the Secretaryof State for Trade and Industry and the Department of Trade and Industry, and then having to deal again with the OFT, which may not itself agree with the stance taken by either the MMC or the Minister. The processcan take several years from beginning to end, and affected third parties, whoserights are severelyrestricted under domesticlaw, may find little solacein the proceedings. Thesefactors consideredduring the debatein the Lords on the Competition Act 1998: 'The" Fair Trading Act balancescarefully the respective roles of the Office of Fair Trading, MMC Secretary State. The Act the and the of ... enableswide ranging I The Competition Act 1998 received Royal Assent on 9 November 1998. The most fundamental changesmade by that Act will take effect from 1