Competition laws regarding cartels in times of economic crisis

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The occurrence of an economic downturn disturbs the normal patterns of behaviours of economic players, in both private and public sectors. As was seen during the economic crisis of 2008, central banks and national and European authorities tried to overcome the crisis through various methods intended to help the private sector get out of difficulty. This article tries to analyse, from an historical, legal and economic point of view the use of a lenient policy toward cartels as a step to check a structural economic downturn.

Historical approach: overview of crisis cartel policies

Using cartelization to help tackle an economic downturn was the position adopted by many different countries throughout the 20th century although some were more permissive than others.

In Germany, during the inter-war years, cartelization was considered by German governments as a way to improve economic production with a view to fulfilling the obligations set out in the Treaty of Versailles[1]. As a result, enormous industrial cartels grew up and controlled key sectors of Germany’s economy (such as coal, steel, paper etc.). Even after the hyperinflation period for which cartels share some of the responsibility[2], the Weimar Republic did not adequately tackle seriously the problem. In the 1930s, the new National Socialist regime considered cartelization as part of its “state regulated economy” policy, which was similar to that of other totalitarian regimes in Italy and Japan[3].

In the meantime, in the United-States, Franklin Roosevelt’s first administration started the “New Deal” policies in order to tackle the Great Depression, which had been going on since the Wall Street crash in 1929. As part of this economic reform, the American government favoured the development of cartels under the aegis of federal authorities. In exchange for a label intended for consumers, the government expected to convince the firms within the cartels to respects its regulations. Nevertheless, shortly after the system was set up, consumers’ enthusiasm for the label failed, diminishing its importance for the firms[4]. Eventually, the Supreme Court of the United States ruled the National Industrial Recovery Act, which was implemented the pro-cartelisation policy unconstitutional[5].

 In the European Community, after the recession of the 1970s, the European Commission established some criteria to identify the cartels that could be granted an exemption. As a result, “crisis cartels” were treated with lenience only in situations where these agreements aimed to reduce structural overcapacity[6]. This latter may be considered as proven “where over a prolonged period all the undertakings concerned have been experiencing a significant reduction in their rates of capacity utilization, a drop in output accompanied by substantial operating losses and where the information available does not indicate that any lasting improvement can be expected in this situation in the medium-term”[7].

In Japan, during the second half of the twentieth century, prosecution against cartels was not a main concern for the Public Authorities as only a few cases of companies being sentenced were reported[8]. Furthermore, Japanese antitrust law provided exemption cases for cartels that the National Authorities used during periods of crisis as part of their industrial policy[9].  In the late 1990s however, permissiveness toward cartels diminished as a result of a global trend around the world, which led to more frequent prosecutions by the Japan Fair Trade Commission.

Legal approach: provisions under European law

Under European Union competition law, “all agreements between undertakings (…) which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market” are prohibited[10]. Nonetheless, exception may exist if the following conditions are fulfilled:

– The agreement contributes to improving the production or distribution of goods or to promoting technical or economic progress

  • It allows consumers a fair share of the resulting benefit
  • It does not impose on the undertakings concerned restrictions that are not indispensable to the attainment of these objectives;
  • It does not afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

Thus, there is no specific exception which automatically makes any kind of crisis cartel legal. Even during an economic downturn cartels have to fulfil these conditions in order to avoid sanctions.

 Given this legal framework it is worth highlighting the use of these legal rules by the European Union, especially by the European Commission, the antitrust authority on the European level, and the Court of Justice of the European Union.

 As stated above, the Commission previously adopted a lenient approach toward cartels aimed at reducing structural overcapacity, arguing that in situations of economic crisis, market forces do not ensure a reduction of the least profitable surplus capacity.[11] Nevertheless, since the position adopted by the Commission during the economic downturn in 2008, the topicality of this reasoning is no longer as obvious. In fact, after the occurrence of this crisis, prosecution against cartels statistically increased during this period[12]. More directly, the former European Commissioner for Competition stated about crisis cartels that “There may be many temptation in 2009 to cut corners, but encouraging cartelists and others would we guaranteeing disaster. It would drag down recovery, increase consumer harm and create more cartel and cartel cases into the future. No-one wins- today’s softness is tomorrow’s nightmare.”[13] Thus, an economic downturn in itself does not affect the assessment by the Commission of the exemption conditions laid down in abovementioned article 101 (3) TFEU. Furthermore, the Court of Justice has recently ruled that a cartel agreement having the objective to reduce structural overcapacity during crisis periods constituted an anti-competitive practice by its object prohibited by article 101(1) TFEU. [14]

As a result of this strict approach, an exemption under abovementioned article 101(3) TFEU will be trickier to obtain. Basically, the parties wishing to benefit from this exception will have to demonstrate that, on the one hand, entering into a cartel agreement will in fact resolve the problem of overcapacity and be beneficial to the market and, on the other hand, that this kind of agreement is the only solution to reach these objectives. The first conditions will imply a detailed analysis of the capacities expected to leave the market, ensuring that no any efficient actor will be affected[15]. To fulfil the second condition, the parties will need to prove that other means, such as mergers and acquisitions, specification agreements or market forces alone will not lead to a solution to the overcapacity problem.

 Economic approach: the prisoner’s dilemma

 Nevertheless, it has been argued that in times of economic crisis, cartel agreements in order to reduce structural overcapacity may be justified from an economic point of view so that an excessively rigorous application of competition laws in times of economic downturn may be unsuitable.[16] [17]

The major concern deals with what may be referred to as the “prisoner’s dilemma”. In fact, in situations of structural overcapacity, even if demand falls, rival companies will maintain the same level of production in the expectation that one of them will leave the market. If that happens, the remaining company would be able to use its overcapacity to actually acquire the market share abandoned by the rival. Such a situation leads to investment and the maintenance of capacity, which are not optimal with regard to the overall economic welfare. Moreover, such inefficiency can be avoided if the companies are allowed to agree with each other to reduce overcapacity.

However, it is important to note that in cases where a substantial difference of efficiency exists before the crisis between the different actors, market forces may suffice to tackle the overcapacity issue without the need of any cartel. Indeed, less efficient companies will leave the market allowing the strongest ones to maintain their production levels by recovering market share lost to their rivals without any concern about inefficient investments.

In fact, a cartel may be a solution to reduce structural overcapacity only in situations of symmetric market structures where the competitors have similar means and features. In this kind of situation, a long term conflict may arise between strong companies, which could be harmful for the economy as a whole.[18]

 Conclusion

It follows from the considerations hereabove that crisis cartels may be considered as a solution to an economic downturn only in very limited cases. Broadly speaking, the historical analysis reveals some inefficiency in the practice of state-stimulated crisis cartels, which has led to the phasing-out of such practices in current policy making.  Furthermore, in European competition law, crisis cartels are legally allowed only under restrictive conditions and as a subsidiary solution. Finally, from an economic perspective, cartelisation in times of economic downturn makes sense only in situations of structural overcapacity combined with a symmetric market structure. Hence, if the concept of crisis cartels does not seem to be banned, its use is highly circumscribed.

 Featured image credit: Marty

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