WORLD TRADE

ORGANIZATION

RESTRICTED

WT/WGTCP/W/1277 June 1999

(99-2281)

Working Group on the Interactionbetween Trade and Competition Policy

THE FUNDAMENTAL PRINCIPLES OF COMPETITION POLICY

Background Note by the Secretariat

1. This note has been prepared in response to a request made by the Group at the meeting which took place on 19 and 20 April 1999,1 to provide a note setting out factual background on the fundamental principles of competition policy. It is intended to assist in the Group's consideration of the relevance of the fundamental WTO principles of national treatment, transparency, and most-favoured-nation treatment to competition policy and vice versa (the first specific element incorporated in the General Council's decision regarding the work of the Group in 1999 2). Following the approach used in the earlier background note prepared by the Secretariat on the Fundamental WTO Principles of National Treatment, Most-Favoured-Nation Treatment and Transparency,3 the present note does not attempt to analyse the relevance of the principles discussed in it for trade policy. Rather, it is understood that this is a task for Members in the Working Group.

2. Following the approach that has been used in past discussions in the Group on related matters, the term "competition policy" is considered, for the purposes of this note, to comprise the full range of measures that may be used to promote competitive market structures and behaviour, including but not limited to a comprehensive competition law dealing with anti-competitive practices of enterprises.4

3. At the outset, it might be noted that, whereas the fundamental WTO principles that were the subject of the earlier paper prepared for this item of the work programme of the Working Group were identified in that work programme and had been codified in multilateral law and jurisprudence (namely that of the WTO), the same cannot be said for the fundamental principles of competition policy. There is one multilateral instrument which addresses principles relating to the control of restrictive business practices, mainly from the perspective of ensuring that such practices do not impede or negate the realization of the benefits of trade liberalization, particularly for the trade and development of developing countries. This is the United Nations Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices ("the Set") which was adopted by the General Assembly of the United Nations on 5 December 1980 (Resolution 35/63). The Set is of obvious interest for the Working Group and is summarized in Section II of this paper and referred to elsewhere as appropriate. For the rest, in selecting the principles on which to focus, the Secretariat has had to seek guidance from such diverse sources as observations made by Members in meetings of the Working Group, guidelines, policy statements and analyses prepared by other international organizations, national laws and guidelines, and academic analyses.

4. As mentioned above, in contrast to the situation regarding fundamental WTO principles, there is no unified body of jurisprudence relating to the application of the fundamental principles of

1 WT/WGTCP/M/8 (to be issued).2 WT/GC/M/32, p. 52.3 WT/WGTCP/W/114.4 WT/WGTCP/2, para 20; see also WT/WGTCP/M/3, para. 12.

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competition law and policy at the multilateral level. Rather, the jurisprudence that exists is developed with reference to diverse national laws and policies. Furthermore, it tends to be concerned with the application of specific statutory elements or jurisprudential doctrines which embody, in varying degrees, the relevant principles, rather than with the application of the principles themselves. Therefore, rather than attempting to trace systematically the application of the fundamental principles of competition law and policy in the national jurisprudence of Members, the note, for the most part, seeks to identify the relevant principles and to illustrate their application by reference to elements of national laws and policies which embody the principles.

5. A word may be in order as to what is meant by a "fundamental principle" of competition policy. The term is not regarded as being synonymous with the elements of competition or antitrust law.5 Rather, what has been identified in preparing this paper are principles of policy design and application, including but not limited to objectives set out in national competition laws, whose impact transcends specific statutory provisions and sectors, and is common to a broad range of jurisdictions having competition policies.6

6. From this perspective, three general categories of principles have been identified in this note. The first category concerns principles in the sense of the overriding goals or objectives of competition policy (e.g., the promotion of economic efficiency and development, the promotion of consumer welfare, or, possibly, other objectives). These objectives serve as important guideposts for officials in applying diverse aspects of related laws and policies. The second category consists of more operational principles of policy design and application. Examples of principles in this category would include, for example, the promotion of market-opening measures and the identification of situations in which market power is likely to be exercised. Another such principle would be the distinction that is made in virtually all competition law systems between arrangements that are primarily horizontal in nature (i.e., they involve restrictions on competition between firms that would otherwise be in direct competition with each other) and arrangements which are primarily vertical in nature (i.e., they limit competition within an individual product production and distribution chain). A third major category of principles relates to the institutions and processes through which competition policy is applied.7

An important example of a fundamental principle in this category would be adherence to due process in the application of competition law and policy.

7. It should be noted that, while the principles discussed in this paper would appear to be common to a large number of jurisdictions having competition policies, it is not necessarily the case that the principles are present in all jurisdictions having such policies, at least in all respects. Rather, in some cases they are better understood as ideals which legislators and officials charged with implementation strive to meet over time, taking into account other relevant goals, public policy priorities and constraints. This is similar, to an extent, to the situation prevailing in regard to the fundamental WTO principles of national treatment, most-favoured-nation treatment and transparency, which are also subject to an element of progressivity in their application, in important respects.8

5 In most jurisdictions having such laws, the basic elements of competition law would include a strict prohibition of (horizontal) cartel agreements, a provision to address monopolization or abuses of a dominant position, normally on a case-by-case basis, and (possibly but not necessarily) other provisions dealing with anti-competitive vertical agreements, mergers and authorization for competition advocacy activities, in addition to provisions relating to enforcement powers. See World Bank and OECD (1999) and UNCTAD (1995).

6 Consistent with the approach that has been taken in the Group to date, in this note, the term "competition policy" is considered to include, but not necessarily be limited to, competition law in the sense of a comprehensive statute addressing anti-competitive practices by enterprises. WT/WGTCP/M/3, para. 12.

7 Recent work on "core principles" of competition policy (as distinct from "common standards and approaches") at the OECD has focused on principles of this nature. See OECD (1999).

8 For example, under the GATS, the principle of national treatment is not a principle of general application; rather, it has to be applied only to the extent that a specific commitment has been made and recorded in national schedules that form part of the Agreement. As is made clear in Article XIX of the GATS,

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8. The structure of the paper is as follows. Part I notes some observations that have been made by Members relevant to the fundamental principles of competition law and policy in meetings of the Working Group. Part II outlines the contents of the United Nations Set. Parts III, IV and V deal, respectively, with the three categories of fundamental principles of competition law and policy which are set out above, namely fundamental principles in the sense of the objectives of competition law and policy; operational principles of policy design and implementation; and institutional and procedural principles that are considered important to the effective application of competition law and policy.

I. RELEVANT OBSERVATIONS BY MEMBERS

9. In the course of the various meetings of the Working Group, Members have made a number of observations relevant to the fundamental principles of competition policy. In addition to observations made with regard to Item I of the Checklist of Issues Suggested for Study, which calls for study of "the relationship of the objectives, principles, concepts, scope and instruments of trade and competition policy to development and economic growth",9 relevant comments have been made with regard to the description of national competition regimes and other elements of the Group's work programme. In many cases, the comments made with regard to Item I of the Checklist were concerned with the general relationship between the trade and competition policy, rather than the principles of competition policy per se. Comments relevant to the principles that are discussed in Parts III, IV and V of this paper are noted in those sections. In addition, this section briefly notes some main themes of Members' more general comments relevant to the fundamental principles of competition policy. These are broadly suggestive of the overall approach and categorization of fundamental principles of competition policy which is developed below.

10. With regard to the objectives of competition policy, a number of Members have made the point that these are essentially the same as those of trade liberalization – i.e., they relate to the promotion of economic efficiency and consumer welfare.10 A related point that has been made is that both competition policy and trade policy can contribute directly to ensuring the effective equality of competitive opportunities for Members in world markets – a consideration which is a fundamental goal of the multilateral trading system as a whole.11 It has been noted, as well, that a number of other goals are reflected in the design and application of national competition policies, to varying degrees. These include, for example, the promotion of opportunities for small- and medium-sized businesses, market integration and (in some cases) industrial policy goals relating to local employment and other matters.

11. With regard to the design and application of national competition policies, the point has been made that competition policy is fundamentally concerned with identifying situations where market power can be exercised, to the detriment of consumers.12 The relationship of this concern to the analytical techniques of competition policy, including market definition, has been noted.13 The distinction between horizontal and vertical relationships has also been stressed,14 as has the importance of striking a balance between competition law enforcement and advocacy activities, and the mutually-reinforcing nature of these activities.15 Another important point of emphasis has been on

the scope of the schedules is to be progressively enlarged through successive rounds of trade negotiations with a view to progressively higher levels of liberalization – in the same way that trade in goods has been progressively liberalized through successive tariff negotiations.

9 Checklist of Issues Suggested for Study, WT/WGTCP/2, Annex 1, Item I.10 WT/WGTCP/M/2, para. 7; WT/WGTCP/M/3, para. 4.11 WT/WGTCP/M/3, para. 4.12 WT/WGTCP/M/3, para. 6.13 WT/WGTCP/M/2, para. 22.14 WT/WGTCP/M/3, para. 54.15 WT/WGTCP/M/4, paras. 68-74.

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the potential pro-and anti-competitive effects of economic regulation,16 and the need for coherence between the roles of competition policy and regulation.17

12. With regard to questions of institutional design and process, the importance of adherence to due process and the rule of law has been stressed on various occasions.18 In addition, the point has been made that, at least in the case of some jurisdictions, competition law and policy already reflect, and appear to be generally consistent with, the core WTO principles of national treatment, most-favoured-nation treatment and transparency.19 The point has also been made that, in any formalization of the link between competition policy and WTO principles, it may be necessary to adapt the principles to the specific subject-matter and procedures of competition policy.20 The important role that international cooperation can play in the effective application of competition law and policy has also been stressed on a number of occasions.21

13. In the most recent meeting of the Working Group (on 19-20 April 1999), in addition to the relevance of fundamental WTO principles to competition policy, observations were made by some Members regarding principles of competition policy that might have relevance for trade policy. In this regard, in its contribution (WT/WGTCP/W/118), Hong Kong, China referred to three "broad principles" of competition policy, namely the promotion of open markets, non-discriminatory conditions of competition and consumer welfare.22 The European Community and its member States, in their submission (WT/WGTCP/W/115), referred to three elements for consideration in future work on the development of core principles of competition policy, namely: adoption of a comprehensive competition law, administration and enforcement of the law and the rights of private parties, in addition to a number of related elements and sub-elements. This approach seeks to focus on those aspects of competition law and policy which are considered to be more relevant for the multilateral trading system, while fully recognizing the development dimension and differences in domestic legal and institutional frameworks.23 A submission by Japan (WT/WGTCP/W/119) referred to a "competition-oriented principle" which is considered to constitute a fundamental concept of competition law. The submission indicates that this principle "is based on the idea of not obstructing the market mechanism. It implies prohibiting those anti-competitive practices that distort the market mechanism (e.g. cartels, boycotts) and systems that relate to competition law and that restrict the sectors or areas where the market mechanism is allowed to work (e.g. exemption systems)".

I. THE UNITED NATIONS SET OF MULTILATERALLY AGREED EQUITABLE PRINCIPLES AND RULES FOR THE CONTROL OF RESTRICTIVE BUSINESS PRACTICES

14. The United Nations Set of 1980 contains principles and rules for the control of restrictive business practices, which take the form of recommendations to States. Its particular focus is on practices that impede or negate the realization of benefits from international trade and thereby economic and social development, particularly of developing countries. It calls for appropriate action to be taken at the national, regional and international levels to eliminate, or effectively deal with, restrictive business practices having such effects. It calls on States to take into account in such action the development, financial and trade needs of developing countries. It contains principles and rules calling on enterprises, including transnational corporations, to desist from horizontal restraints of various types and the abuse or acquisition and abuse of a dominant position of market power. It

16 WT/WGTCP/M/5, paras. 17-29.17 WT/WGTCP/M/5, paras. 20 and 24.18 See, e.g., WT/WGTCP/M/6, para. 63.19 WT/WGTCP/M/3, para. 14.20 WT/WGTCP/M/5, para. 78 and WT/WGTCP/M/8 (to be issued).21 WT/WGTCP/M/4, para. 39 and WT/WGTCP/M/8 (to be issued).22 WT/WGTCP/W/118, para. 7.23 WT/WGTCP/W/115, pp. 12-13.

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further contains principles and rules directed at States, notably that States should, at the national level or through regional groupings, adopt, improve and effectively enforce appropriate legislation and implement judicial and administrative procedures for the control of restrictive business practices. The Set further seeks to encourage various forms of collaboration aimed at eliminating or effectively dealing with restrictive business practices.24

II. THE GOALS OF COMPETITION POLICY

15. It is widely stated that the most basic goal of competition policy is to promote and maintain healthy inter-firm rivalry in markets, wherever this is viable.25 This is achieved in two principal ways: first, anti-competitive market structures and enterprise practices that impede competition can be addressed through the application of a competition law and/or the use of pro-competitive regulation, in appropriate cases; second, government measures that pose unnecessary obstacles to trade and competition can be reduced or eliminated.

16. In addition to the broad objective of promoting healthy rivalry in the marketplace, competition policy is often considered with reference to more specific economic goals, which guide and may be referred to specifically in policy implementation. Two such goals that would appear to constitute fundamental principles of competition policy in many jurisdictions, in that they serve as guideposts for officials in the application of diverse aspects of their respective laws and policies, are: (i) economic efficiency; and (ii) consumer welfare.26 By advancing these objectives, competition policy can also contribute to the overall process of economic development.27 In addition, a number of other goals are embodied in national laws and policies, and can affect the application of such laws and policies in various circumstances.

A. THE PROMOTION OF ECONOMIC EFFICIENCY

17. The goal of promoting economic efficiency is an explicit objective of competition policy in many if not most jurisdictions with such policies.28 In fact, the concept of efficiency as it is applied in competition law typically embraces three discrete aspects. First, "allocative efficiency" is achieved when society's scarce resources are allocated to produce the goods and services that are most desired by consumers. This requires that price be equal to the marginal costs of production and distribution from the social point of view. "Productive efficiency" is achieved when goods are produced using the most cost-effective combination of productive resources available under existing technology. "Dynamic efficiency" is achieved through an optimal rate of invention, development, and diffusion of new products and production processes.29

24 Further information on the Set, including its objectives, scope and means of application and core provisions, can be found in a communication from UNCTAD to the Working Group (WT/WGTCP/W/17).

25 OECD and World Bank (1999) and UNCTAD (1995). Policy makers recognize that competition may not be viable in situations of "natural monopoly" (i.e., markets that are most efficiently supplied by a single firm). In such markets, there may be a need for direct economic regulation of monopoly suppliers. This matter is discussed further in section IV, below.

26 The goals of efficiency and consumer welfare have been repeatedly emphasized in discussions in the Working Group. WT/WGTCP/M/2, para. 7; WT/WGTCP/M/3, para. 4. See also World Bank and OECD, supra, note 1 and UNCTAD (1995). The goals of efficiency and consumer welfare are also emphasized in the UNCTAD SET, Part A (Objectives).

27 See Part III(C), below.28 WT/WGTCP/2, para. 22. See also World Bank and OECD (1999); UNCTAD (1995); Graham and

Richardson, eds. (1996).29 Carlton and Perloff (1995).

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B. PROMOTING THE WELFARE OF CONSUMERS

18. A goal that is widely viewed as a central purpose of competition policy and is used as the leading overall guidepost for the application of competition law in a number of major jurisdictions is that of consumer welfare.30 Under this approach, a fundamental criterion for the application of such policy to particular business arrangements is whether the arrangements in question have a detrimental impact on the prices charged to and/or the array of choices available to consumers. 31 Even in jurisdictions where competition policy is also intended to serve other economic and social goals, the promotion of consumer welfare is generally acknowledged to be an important or even a central goal of such policy. Where consumer welfare is treated as the pre-eminent goal of competition policy, this approach would differ from a "pure" efficiency-based approach in that efficiencies would be given weight to the extent that there is a reasonable expectation that their benefits would ultimately flow through to consumers, and not be retained by producers.32

C. PROMOTING ECONOMIC DEVELOPMENT

19. As has been discussed extensively in the Working Group33, competition policy should also contribute to the process of economic development. It can do this through various channels, including by:34 (i) promoting an efficient allocation of resources; (ii) protecting the welfare of consumers; (iii) preventing/addressing excessive concentration levels and resulting structural rigidities; (iv) addressing anti-competitive practices of enterprises (including by multinational enterprises) that have a trade dimension, and that may impact particularly on developing countries; (v) increasing an economy's ability to attract foreign investment and to maximize the benefits of such investment; (vi) reinforcing the benefits of privatization and regulatory reform/deregulation initiatives; and (vii) establishing an institutional focal point for the advocacy of pro-competitive policy reforms and a competition culture. The goal of promoting economic development is also emphasized in the United Nations Set, a fundamental objective of which is "To ensure that restrictive business practices do not impede or negate the realization of benefits that should arise from the liberalization of tariff and non-tariff barriers affecting world trade, particularly those affecting the trade and development of developing countries".35

D. OTHER GOALS OF COMPETITION POLICY

20. A number of other goals and objectives (explicit and implicit) figure in the application of competition laws and policies of Members. While it is questionable whether they are common to a sufficiently wide range of jurisdictions or guide policy in a sufficiently systematic way to constitute "fundamental principles" of competition policy, these goals can clearly be significant from the standpoint of national laws, policies and enforcement authorities, and can have particular importance depending on the economic and historical circumstances of individual jurisdictions. Some of these goals are as follows:36 (i) the promotion of equity and fairness; (ii) the promotion of opportunities for small and medium-sized businesses; (iii) market integration; (iv) the promotion of technological development, local production and employment; and (v) the protection of economic and political pluralism.

30 World Bank and OECD (1999); Graham and Richardson, eds. (1996).31 U.S., Department of Justice and Federal Trade Commission (1992; revised 1997).32 Crampton (1995).33 WT/WGTCP/W/80, "Synthesis paper on the relationship of trade and competition policy to

development and economic growth", and Minutes of the various Working Group meetings which are cited therein.

34 Id.35 United Nations (1980), Part A, "Objectives", para. 1.36 See the United Nations Set (1980); UNCTAD (1995); Graham and Richardson (1998) and World

Bank and OECD (1999).

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III. PRINCIPLES OF POLICY DESIGN AND APPLICATION

21. The second category of fundamental principles of competition policy that has been identified in preparing this paper consists of more operational principles of policy design and application. Again, such principles are selected on the basis that their impact transcends specific statutory provisions and affects the design or application of competition law and policy in a systematic way, in a broad range of jurisdictions.

A. PRESUMPTION IN FAVOUR OF COMPETITIVE MARKETS

22. A fundamental principle or premise that permeates the application of competition policy is the belief that, in most circumstances, the free operation of competitive markets, undistorted by government intervention, will generate economically and socially efficient outcomes.37 While markets may not need to be perfectly competitive to achieve these results, they need to be "workably competitive". Some of the characteristics of workably competitive markets to which the Group's attention has been drawn are as follows:38 (i) a minimum level of economic development and a culture of quality and competition; (ii) regulatory mechanisms that are constantly improved in the light of widespread usage and practice; (iii) freedom of prices and price formation through the free play of competition (competitive mechanism of supply and demand). This implies the presence of multiple economic actors; (iv) surveillance of market structures and anti-competitive practices, including cartels, collusion, exclusive arrangements and abuse of dominant position; (v) transparency and fairness of transactions to ensure a certain degree of fluidity; (vi) freedom to enter and leave markets; and (vii) neutrality of the State in its dealings with economic agents.

23. The efficient operation of competitive markets can be affected by various kinds of market failures which may necessitate some form of government intervention.39 These include, inter alia: (i) the problem of monopolies and other market structures and behaviour that enable "market power" to be exercised40; (ii) "externalities" such as environmental pollution; and (iii) situations where economic actors have asymetric information regarding product characteristics or other aspects of particular transactions. Each of these may have implications for competition policy.41

24. The presumption in favour of open and competitive markets has a number of aspects that give rise to additional implications for competition policy. First, as has been discussed extensively in the Working Group, it highlights the relevance of trade and investment liberalization, privatization and deregulation to competition policy objectives.42 Second, attention has been drawn to the complementary relationship between competition law and pro-competitive regulation – while the importance of competition advocacy activities in relation to aspects of regulation that go beyond what is necessary to respond to specific market failures has also been emphasized. 43 Third, the importance of various tools for the evaluation of possibilities for the exercise of market power is highlighted. Lastly, the presumption in favour of competition provides the basis for the principle or maxim that "competition policy protects competition, not competitors" – a principle that guides the application of competition policy in a number of areas. Each of these aspects is discussed further, below.

37 World Bank and OECD (1999); Carlton and Perloff (1994) and Brander (1992).38 Contribution of Morocco (WT/WGTCP/W/43).39 Brander (1992), chapter 3.40 As elaborated in Part IV(D), "market power" is a technical concept which refers to the ability of a

firm (or a group of firms acting jointly) to profitably maintain prices above competitive levels for a significant period of time.

41 See Part IV(C), below.42 WT/WGTCP/2, paras. 19-31, 72-80, and 97-111.43 See Part IV(C), below.

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B. PROMOTION OF EXTERNAL AND INTERNAL MARKET-OPENING MEASURES

25. As noted, the presumption in favour of competitive markets highlights the direct relationship of external and other market opening measures for competition policy objectives. The points have been made in the Working Group that trade liberalization can impact positively on competition in two principal ways: (i) it can remove government-imposed barriers that affect directly the state of competition in markets for goods and services; and (ii) in doing so, it can make it more difficult for private actors to implement arrangements that facilitate the exercise of market power, by expanding the scope of the relevant geographic market and enhancing the role of foreign competition. 44 The point has also been made that investment liberalization can have similar effects. Privatization and regulatory reform can also be instrumental in creating the structural conditions that are necessary for healthy competition. The relationship between competition policy and regulation is multi-faceted and is the subject of the next subsection.

C. PROMOTION OF COMPETITION THROUGH PRO-COMPETITIVE REGULATION AND REGULATORY REFORM

26. The discussion in the Working Group has drawn attention to three broad areas of interaction between competition policy and economic regulation. First, it has been pointed out that regulation can play a pro-competitive role in addressing situations of market failure due to the existence of a natural monopoly.45 In the view of some observers, regulation may be a more effective instrument than competition law for addressing such situations, to the extent that they involve a requirement for ongoing price monitoring and setting.46 Second, it has been suggested that sectoral regulation may sometimes entail restrictions on entry and/or pricing in particular economic sectors that are not justified by considerations of market failure. Third, it has been pointed out in the Group that certain forms of regulation that, to a degree, might be considered necessary to respond to particular market failures (e.g., health-related or other product standards and regulatory requirements) may, in some cases, go beyond what is necessary to respond to such failures, and may, therefore, pose unnecessary obstacles to trade and competition. Identifying instances of such "excessive" technical requirements and regulations can, it has been suggested in the Group,47 make an important contribution to promoting trade and competition. The second and third areas of interaction between competition policy and regulation are, it has been suggested in the Group, an appropriate focus for competition policy, for example through advocacy activities, designed to promote the free and efficient operation of market forces.48

27. Recent work on regulatory reform at the OECD has led to the adoption of a number of Recommendations relevant to the above concerns.49 A number of these reflect competition policy principles. The seven principal Recommendations call for OECD member governments to: (i) adopt at the political level broad programmes of regulatory reform that establish clear objectives and frameworks for implementation; (ii) review regulations systematically to ensure that they continue to meet their intended objectives efficiently and effectively; (iii) ensure that regulations and regulatory processes are transparent, non-discriminatory and efficiently applied; (iv) review and strengthen where necessary the scope, effectiveness and enforcement of competition policy, by eliminating sectoral gaps in coverage of competition law, unless evidence suggests that compelling public interests cannot be served in better ways, by ensuring vigorous enforcement of competition law where collusive behaviour, abuse of dominant position, or anti-competitive mergers risk frustrating reform,

44 WT/WGTCP/W/2, para. 22.45 WT/WGTCP/M/5, paragraphs 18, 22 and 23. Natural monopolies are industries which are most

efficiently served by a single supplier.46 Carlton and Perloff (1994).47 WT/WGTCP/M/5, paras. 20 and 24.48 WT/WGTCP/2, para. 109 and paras in Minutes cited therein.49 OECD (1997).

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and by providing competition authorities with the authority and capacity to advocate reform; (v) reform economic regulations in all sectors to stimulate competition, and eliminate them except where clear evidence demonstrates that they are the best way to serve broad public interests, including by placing a high priority on reviewing aspects of economic regulation that restrict entry, exit, pricing, output, and normal commercial practices and forms of business organization; (vi) eliminate unnecessary regulatory barriers to trade and investment by enhancing implementation of international agreements and strengthening international principles, including rules and principles to liberalize trade and investment (such as transparency, non-discrimination, avoidance of unnecessary trade restrictiveness, and attention to competition principles); and (vii) identify important linkages with other policy objectives and develop policies to achieve those objectives in ways that support reform.50

The complete text of the Recommendations is reprinted in Appendix I.

28. The OECD Recommendations parallel, in key respects, points that have been made by Members in the Working Group. In this regard, the important role that competition advocacy can play in respect of regulatory policies and their impact on competition and trade has been widely commented on in the Group.51 The Group was informed that such advocacy had acted as a catalyst for pro-competitive reforms of regulatory regimes. In addition, various suggestions have been made for further work that might be undertaken on this matter.52

D. EVALUATION OF POSSIBILITIES FOR MARKET POWER TO BE EXERCISED

29. A core analytical principle of competition policy that is relevant both to regulatory framework issues53 and the application of competition law54 is the evaluation of possibilities for market power to be exercised. The term "market power" is a technical concept which refers to the ability of a firm (or a group of firms acting jointly) to profitably maintain prices above competitive levels for a significant period of time. Concern over the ability of firms to exercise market power follows directly from: (i) the effort to identify specific market failures; and (ii) competition policy objectives relating to the promotion of efficiency and consumer welfare (discussed in Part III above). An explicit focus on the scope for market power to be exercised is central to the analysis of mergers and strategic alliances in most jurisdictions where such arrangements fall under competition policy.55 Typically, it also figures prominently in the analysis of alleged instances of anti-competitive vertical restraints, abuses of a dominant position or monopolization, and other practices. Factors that are associated with an ability to exercise market power include a high degree of market concentration, the existence of barriers to entry and a lack of substitutes for a product supplied by firms whose conduct is under examination. In addition to higher than competitive prices, the exercise of market power can be manifested through reduced quality of service or a lack of innovation in the relevant market(s).56

50 OECD (1997).51 WT/WGTCP/M/5, paragraphs 19, 23, 25, 26 and 27.52 One suggestion was that there was an urgent need for empirical research on the consequences for

trade and competition of unnecessary, poorly designed and discriminatory regulations. Another was that the Group should give further consideration to the ways in which WTO disciplines attempted to address the trade and competition effects of regulatory policies. It has also been suggested that the Group should give consideration to developing a WTO guideline to provide for regular and systematic review of national regulatory policies in the light of competition policy principles. The view was expressed that this would help to enhance the transparency and effectiveness of reform efforts and be a useful tool in promoting freer access to markets. WT/WGTCP/M/5, paragraphs 20-24.53 ? The above-noted OECD Recommendations indicate specifically that governments should "Promote efficiency and the transition to effective competition where economic regulations continue to be needed because of potential for abuse of market power".

54 World Bank and OECD (1999); Carlton and Perloff (1995); Brander (1992).55 World Bank and OECD (1999).56 U.S., Department of Justice and Federal Trade Commission (1992; revised 1997) and Canada (1993).

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30. As has been pointed out in the Working Group, an important step in evaluating the scope for the exercise of market power in many, if not most, competition law cases is the careful delineation of the relevant product and geographic markets.57 In general, this involves identifying the range of close substitutes for a product and the range of geographic space within which consumers can easily turn to alternative suppliers of the product. Relevant geographic markets in competition law cases can be local, national, international or even global depending on the particular product under examination, the nature of rivalry in the supply of the product, and the presence or absence of factors (e.g. transport costs, tariffs or other measures) that prevent imports from counteracting the exercise of market power domestically.58 In addition to careful delineation of the relevant market, the evaluation of possibilities for the exercise of market power will typically involve consideration of matters such as barriers to entry by alternative suppliers, the nature of any cooperative arrangements among suppliers, and other factors that may limit consumer choice.59

E. DISTINGUISHING BETWEEN HORIZONTAL AND VERTICAL RELATIONSHIPS

31. A basic principle of competition policy which is helpful in delineating possibilities for market power to be exercised and which is used in diverse aspects of competition policy analysis is the distinction between horizontal and vertical business arrangements. Horizontal agreements or arrangements refer to explicit or implicit arrangements between firms that would normally be in competition with each other in the supply of similar products in a relevant market. Vertical arrangements refer to agreements between firms at different stages of the production and marketing chain for an individual product or products. This distinction is relevant to the assessment of both inter-firm agreements and "structural" arrangements such as mergers and joint ventures.

32. The significance of this distinction is as follows. Horizontal agreements, by their very nature, are more likely than vertical arrangements to have a direct, negative impact on competition (and, potentially, trade), and, therefore, to give rise to the exercise of market power. This is particularly the case in regard to "naked" horizontal agreements (i.e., cartels that fix prices or allocate markets among firms that would otherwise be in direct competition with each other). These arrangements serve no purpose other than to enrich producers at the expense of consumers, and entail significant "deadweight losses" in economic surplus.60 Accordingly, in some jurisdictions, these arrangements are treated as illegal "per se" (i.e., without the need for a detailed inquiry into their impact in the relevant market(s)). There is a growing degree of international agreement that naked or hard-core cartels should be subject to strict prohibition under antitrust legislation.61 Reflecting this, in 1998, the OECD adopted a recommendation calling for strict prohibition of such arrangements.62 The importance of a clear prohibition of horizontal cartel arrangements is also noted in the United Nations Set.63 Certain other types of horizontal arrangements (e.g., strategic alliances and joint ventures) may or may not be harmful to competition depending on the specific nature of the individual arrangement and the surrounding market circumstances.

33. On the other hand, it is widely recognized that vertical market restraints (or vertical mergers) frequently serve legitimate, pro-competitive purposes and pose a threat to competition only in a minority of circumstances. Consequently, it is important that such arrangements be judged on a case-by-case or "rule of reason" basis, that takes account of both their potential benefits and their costs.64

57 World Bank and OECD (1999); Carlton and Perloff (1999).58 World Bank and OECD (1999); see also WT/WGTCP/M/3.59 World Bank and OECD (1999).60 World Bank and OECD (1999).61 World Bank and OECD (1999); see also OECD (1997).62 OECD (1998).63 United Nations Set (1980), Part D, paragraph 3.64 OECD and World Bank (1999); UNCTAD (1995).

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F. PROTECTION OF COMPETITION AS A PROCESS RATHER THAN INDIVIDUAL COMPETITORS

34. A basic principle of competition policy that has been referred to on various occasions in the Working Group is that "competition policy protects competition, not competitors".65 The principle indicates that competition law normally will not concern itself with whether individual firms are excluded from or driven out of a market, so long as the process of competition in the market is not significantly impaired. The treatment of vertical market restraints provides a useful illustration of this principle. In this regard, the point has been made in the Working Group that, depending on the particular fact situation and national law, it is possible that the use of vertical market restraints by firms would be considered acceptable from the standpoint of competition policy, even where this has the effect of excluding some individual (foreign or domestic) competitors, provided that the process of rivalry within the market is not substantially constrained.66

IV. PRINCIPLES OF INSTITUTIONAL DESIGN AND PROCESS

35. As noted, a third major category of principles for the application of competition law and policy relates to principles of institutional design and process. Such principles have been emphasized in, among other contexts, recent work on "core principles" of competition policy at the OECD, 67 in addition to meetings of the Working Group. Some of the relevant principles are as follows:

A. ADHERENCE TO PRINCIPLES OF DUE PROCESS/NATURAL JUSTICE

36. The United Nations Set affirms that "States, in their control of restrictive business practices, should ensure treatment of enterprises which is fair, equitable, on the same basis to all enterprises, and in accordance with established procedures of law."68 In a similar vein, recent work in the OECD emphasizes the importance for the effective application of competition policy of adherence to the principles of due process or "natural justice", as it is referred to in some jurisdictions.69 While there are different formulations of this concept, it generally refers to the following of fair and equitable procedures in administrative and judicial proceedings, including the right to be heard, the right to petition competition authorities and seek explanations for inaction on specific matters, the availability of judicial review for administrative decisions, rights of appeal to superior courts, and related matters.70 In addition, some observers consider that the right of firms to petition the courts directly in cases of alleged competition law violations ("private actions") is an important aspect of due process. As pointed out in the United Nations Set, ensuring careful treatment and due protection for confidential information which may be provided to authorities in the context of investigations is another important element of due process.71

37. According to some formulations, the principles of due process may also require the administration of competition law by independent enforcement authorities. The degree of "independence" that is deemed appropriate may, however, be achieved by different countries in different ways. For example, some jurisdictions favour structurally separate and distinct administrative agencies; in others, emphasis may be placed on guarantees of non-interference by Ministers in individual enforcement proceedings.72 Finally, even more fundamental, in the view of

65 WT/WGTCP/2, para. 26.66 WT/WGTCP/M/3, para. 7.67 OECD (1999).68 The Set, Part E, paragraph 3.69 World Bank and OECD (1999). As noted, this has been emphasized in various contributions in the

Working Group. See WT/WGTCP/M/6, para. 63.70 World Bank and OECD (1999).71 The Set, Part E, paragraph 5.72 World Trade Organization (1997).

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some Members, may be the question of adherence to the "rule of law" – i.e., the primacy of rules over subjective decision-making processes in policy implementation.73

B. OPTIMIZING THE SCOPE AND COVERAGE OF COMPETITION POLICY AND ENSURING COHERENCE BETWEEN THE ROLES OF SUCH POLICY AND DIRECT ECONOMIC REGULATION

38. A principle of institutional design in the field of competition policy that has been referred to on various occasions in the Working Group is that of maximizing the scope and coverage of such policy across jurisdictions.74 This reflects a view that there are gains in policy coherence and effectiveness that accrue from employing a consistent approach, to the full extent possible, across national economies. The benefits of a comprehensive approach to competition policy are also noted in the United Nations Set,75 and figure importantly in recent work on the interface of trade and competition policy at the OECD.76 The suggestion has been made in the Working Group that optimizing the scope of competition policy may necessitate review of existing exceptions and exemptions from the application of such policy. Beyond this, it has been suggested that, in some case, there may be benefits from efforts to achieve more explicit coordination between the roles of competition law and sector-specific regulatory policies.77 In this regard, it has also been pointed out that the desired degree of coherence between competition policy and regulation may be achieved by different jurisdictions in different ways. An ongoing dialogue between competition officials and sectoral regulators may be an important consideration in this regard.78

C. ADHERENCE TO NON-DISCRIMINATION AND TRANSPARENCY PRINCIPLES

39. An additional set of principles of institutional design whose importance has been emphasized by Members in various meetings of the Working Group79 are the fundamental WTO principles of national treatment, most-favoured-nation treatment and transparency.80 In meetings of the Working Group, it has been suggested that, in many cases, the competition laws and policies of Members already embody these principles, to a considerable degree.81 In the case of the national treatment and most-favoured-nation treatment principles, this would appear to reflect the focus of competition policy on protecting competition as a process, rather than particular competitors of any nationality. In the case of the principle of transparency, it reflects a recognition that publication of judicial and administrative rulings and guidelines and other efforts to promote transparency and public understanding contribute directly to the effectiveness of competition law and policy.82

Notwithstanding the inherent relevance of these principles, it has been suggested that there may be a need to formalize and adapt the application of the principles to the field of competition law and policy, as was done for the fields of services and intellectual property in the Uruguay Round.83

73 WT/WGTCP/M/6, paragraph 63.74 See OECD (1997) and OECD (1999).75 United Nations (1980), preambular paragraphs.76 OECD (1999).77 Australia and New Zealand.78 WT/WGTCP/M/6, para. 73.79 WT/WGTCP/M/5, paragraph 78 and WT/WGTCP/M/8 (to be issued).80 For an overview of these principles, see The Fundamental WTO Principles of National Treatment,

Most-Favoured-Nation Treatment and Transparency (WT/WGTCP/W/114).81 WT/WGTCP/M/3, para. 14.82 Comments of various representatives, reported in WT/WGTCP/M/8 (to be issued).83 Comments of various Members, reported in WT/WGTCP/M/8 (to be issued).

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D. INTERNATIONAL COOPERATION

40. An additional principle that has been emphasized in the discussions in the Working Group, and is affirmed in the UNCTAD Set,84 in relevant OECD Recommendations85 and in various WTO instruments86 is that of international cooperation in competition law enforcement. As has been pointed out in the Working Group,87 such cooperation may take many forms, including case-specific assistance in the enforcement of competition laws, informal contacts to share publicly available information on enforcement techniques, technical cooperation and training, and peer review and information exchange processes to facilitate institution-building and enhance transparency. A growing body of experience involving countries with experience in this area tends to confirm the benefits of such diverse approaches to cooperation in facilitating effective application of competition laws and policies.88 The matter of approaches to promoting cooperation and communication among Members, including in the field of technical cooperation, is a specific element of the Working Group's work programme to receive consideration in 1999.89

84 UNCTAD SET, Part E, paragraphs (7), (8) and (9) and Part F, paragraph (4). See also Part C, paragraph 7, concerning the matter of preferential or differential treatment for developing countries.

85 OECD (1995).86 Procedures for consultations and cooperation on anti-competitive practices are provided for under

each of the main agreements that make up the WTO Agreement, namely the GATT, the GATS and the TRIPS Agreements. These procedures, and their limitations, are discussed in World Trade Organization (1997).

87 WT/WGTCP/M/8 (to be issued).88 See WT/WGTCP/M/8 (to be issued) and UNCTAD (1999), which provides a useful survey of

experience in this area.89 WT/GC/M/32, page 52.

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APPENDIX I

OECD Policy Recommendations on Regulatory Reform*

1. Adopt at the political level broad programmes of regulatory reform that establish clear objectives and frameworks for implementation.

Establish principles of "good regulation" to guide reform, drawing on the 1995 OECD Recommendation on improving the Quality of Government Regulation. Good regulation should: (i) be needed to serve clearly identified policy goals, and effective in achieving those goals; (ii) have a sound legal basis; (iii) produce benefits that justify costs, considering the distribution of effects across society; (iv) minimise costs and market distortions; (v) promote innovation through market incentives and goal based approaches; (vi) be clear, simple, and practical for users; (vii) be consistent with other regulations and policies; and (viii) be compatible as far as possible with competition, trade and investment facilitating principles at domestic and international levels.

Create effective and credible mechanisms inside the government for managing and co-ordinating regulation and its reform; avoid overlapping or duplicative responsibilities among regulatory authorities and levels of government.

Encourage reform at all levels of government and in private bodies such as standards setting organisations.

2. Review regulations systematically to ensure that they continue to meet their intended objectives efficiently and effectively.

Review regulations (economic, social, and administrative) against the principles of good regulation and from the point of view of the user rather than of the regulator. l Target reviews at regulations where change will yield the highest and most visible benefits, particularly regulations restricting competition and trade, and affecting enterprises, including SMEs.

Review proposals for new regulations, as well as existing regulations. Integrate regulatory impact analysis into the development, review, and reform of regulations. Update regulations through automatic review methods, such as sunsetting.

3. Ensure that regulations and regulatory processes are transparent, non-discriminatory and efficiently applied.

Ensure that reform goals and strategies are articulated clearly to the public. Consult with affected parties, whether domestic or foreign, while developing or reviewing

regulations, ensuring that the consultation itself is transparent. Create and update on a continuing basis public registries of regulations and business

formalities, or use other means of ensuring that domestic and foreign businesses can easily identify all requirements applicable to them.

Ensure that procedures for applying regulations are transparent, non-discriminatory, contain an appeals process, and do not unduly delay business decisions.

* Excepted from OECD, Summary Report on Reglatory Reform (1997).

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4. Review and strengthen where necessary the scope, effectiveness and enforcement of competition policy.

Eliminate sectoral gaps in coverage of competition law, unless evidence suggests that compelling public interests cannot be served in better ways.

Enforce competition law vigorously where collusive behaviour, abuse of dominant position, or anticompetitive mergers risk frustrating reform.

Provide competition authorities with the authority and capacity to advocate reform.

5. Reform economic regulations in all sectors to stimulate competition, and eliminate them except where clear evidence demonstrates that they are the best way to serve broad public interests.

Review as a high priority those aspects of economic regulations that restrict entry, exit, pricing, output, normal commercial practices and forms of business organisation.

Promote efficiency and the transition to effective competition where economic regulations continue to be needed because of potential for abuse of market power. In particular: (i) separate potentially competitive activities from regulated utility networks, and otherwise restructure as needed to reduce the market power of incumbents; (ii) guarantee access to essential network facilities to all market entrants on a transparent and non-discriminatory basis; (iii) use price caps and other mechanisms to encourage efficiency gains when price controls are needed during the transition to competition.

6. Eliminate unnecessary regulatory barriers to trade and investment by enhancing implementation of international agreements and strengthening international principles.

Implement, and work with other countries to strengthen, international rules and principles to liberalize trade and investment (such as transparency, non-discrimination, avoidance of unnecessary trade restrictiveness, and attention to competition principles), as contained in WTO agreements, OECD recommendations and policy guidelines, and other agreements.

Reduce as a priority matter those regulatory barriers to trade and investment arising from divergent and duplicative requirements by countries.

Develop and use whenever possible internationally harmonised standards as a basis for domestic regulations, while collaborating with other countries to review and improve international standards to assure they continue to achieve the intended policy goals efficiently and effectively.

Expand recognition of other countries' conformity assessment procedures and results through, for example, mutual recognition agreements (MRAs) or other means.

7. Identify important linkages with other policy objectives and develop policies to achieve those objectives in ways that support reform.

Adapt as necessary prudential and other public policies in areas such as safety, health, consumer protection, and energy security so that they remain effective, and as efficient as possible within competitive market environments.

Review non-regulatory policies, including subsidies, taxes, procurement policies, trade instruments such as tariffs, and other support policies, and reform them where they unnecessarily distort competition.

Ensure that programmes designed to ease the potential costs of regulatory reform are focused, transitional, and facilitate, rather than delay, reform.

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Implement the full range of recommendations of the OECD Jobs Study to improve the capacity of workers and enterprises to adjust and take advantage of new job and business opportunities.

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REFERENCES*

1. Brander, James A. (1992). Government Policy Toward Business (Toronto: Butterworths).

2. Carlton, Dennis W. and Jeffrey M. Perloff (1994) Modern Industrial Organization (Harper Collins, second edition).

3. Crampton, Paul (1994). "Alternative Approaches to Competition Law: Consumers' Surplus, Total Welfare and Non-Efficiency Goals", World Competition, vol. 17, no. 3, March, pp. 55-86.

4. Graham, Edward M. and J. David Richardson (1997). Global Competition Policy (Washington, D.C.: Institute for International Economics).

5. OECD (1995). Revised Recommendation of the OECD Council Concerning Cooperation between Member Countries on Anti-competitive Practices Affecting International Trade (C(95)130/Final).

6. OECD (1997). Summary Report on Regulatory Reform, July.

7. OECD (1998). Recommendation Concerning Effective Action Against "Hard Core" Cartels [C(98)35/Final].

8. OECD (1999). Joint Group on Trade and Competition, Outline of (A) Core Principles and Minimum Standards and (B) Bilateral and Multilateral Approaches (COM/TD/DAFFE/CLP/(98)97/REV1).

9. United Nations (1980). The Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices (United Nations, Resolution 35/63, 5 December 1980).

10. UNCTAD (1995). The basic objectives and main provisions of competition laws and polices (UNCTAD/ITD/15).

11. UNCTAD (1999). Experiences Gained So Far on International Cooperation in Competition Policy Issues and the Mechanisms Used (TD/B/COM.2/CLP/11).

12. United States, Department of Justice and Federal Trade Commission (1992; revised 1997). Horizontal Merger Guidelines.

13. World Bank and OECD (1999). A Framework for the Design and Implementation of Competition Law and Policy (Washington, D.C.).

14. World Trade Organization (1997). "Special Study on Trade and Competition Policy", in Annual Report for 1997, chapter IV.

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* This list does not include the numerous documents of the WTO Working Group on the Interaction between Trade and Competition Policy which are fully cited in the text.