Competition Policy Between the United States and European Union By Chad Carta, Colin Mead, Eric Luoma, Pablo Vives, Bob Grannatt and Kim Weeden

Legislation and Competition Background Goal of governments has always focused on competition Goal of governments has always focused on competition Europe originally believed in an economic- nationalist approach (mercantilism) Europe originally believed in an economic- nationalist approach (mercantilism) In 19 th century, governments evolved to endorse free trade In 19 th century, governments evolved to endorse free trade

Important Competition Legislation The Sherman Antitrust Act, 1890 The Sherman Antitrust Act, 1890 The Clayton Act, 1914 The Clayton Act, 1914 The Federal Trade Commission Act, 1914 The Federal Trade Commission Act, 1914

Goals of EU Competition Legislation Regulate natural monopolies Regulate natural monopolies Suppress the emergence of new monopolies by regulating mergers and acquisitions Suppress the emergence of new monopolies by regulating mergers and acquisitions Dissuade collusive and anticompetitive behavior Dissuade collusive and anticompetitive behavior Promote integration within the market Promote integration within the market

Vertical and Horizontal Cooperation Vertical Cooperation occurs when anti-competitive agreements are made between manufactures and distributors Horizontal Cooperation prevents economic integration within industries

Merger Control within EU To prevent collective dominance To prevent collective dominance The prevention of state aid which is rampant in the European Union The prevention of state aid which is rampant in the European Union Emerging companies are occasionally subsidized, which is anticompetitive and a significant problem for competition control policies Emerging companies are occasionally subsidized, which is anticompetitive and a significant problem for competition control policies

Microsoft Anti-trust Case

Case Against Microsoft EU has taken action against Microsoft for not allowing adequate competition within the computer industry EU has taken action against Microsoft for not allowing adequate competition within the computer industry Microsoft’s bundling technique has drawn criticism from competitors like Nokia, IBM, Oracle, Real Networks and Red Hat Microsoft’s bundling technique has drawn criticism from competitors like Nokia, IBM, Oracle, Real Networks and Red Hat

Microsoft’s Defense Microsoft claims to be producing a superior product, which is able to incorporate a variety of necessities for the consumer Microsoft claims to be producing a superior product, which is able to incorporate a variety of necessities for the consumer It uses these bundling techniques to minimize costs for consumers It uses these bundling techniques to minimize costs for consumers The variety of Microsoft programs are compatible with other systems and external appliances like digital cameras or Firefox explorer The variety of Microsoft programs are compatible with other systems and external appliances like digital cameras or Firefox explorer

EU Decision The EU found that Microsoft was unfairly influencing competition with the industry The EU found that Microsoft was unfairly influencing competition with the industry First penalty, $600 million in fines to EU and competitors First penalty, $600 million in fines to EU and competitors Second penalty, Microsoft is now required to sell a stripped down version of its Windows operating system that will not contain Windows media player Second penalty, Microsoft is now required to sell a stripped down version of its Windows operating system that will not contain Windows media player

Defense of the EU Decision This decision is a precedent for the EU and will have an impact on monopoly activity in the future This decision is a precedent for the EU and will have an impact on monopoly activity in the future Now competitors will have an equal chance at winning over competitors Now competitors will have an equal chance at winning over competitors Microsoft is still likely to retain its 90% market share, but this will allow customers to have more choice in their products Microsoft is still likely to retain its 90% market share, but this will allow customers to have more choice in their products

BoeingvsAirbus Subsidies International Trade Policy Anti-Trust Law

History… 1916: Company created by William Boeing 1992: Produces 60% of commercial aircrafts in world History… 1966: Created by pooled resources of 4 European countries -Aerospatiale S.A. (France) -Aerospace PLC (Britain) -Messerschmitt, Boelkow, and Bloom (Germany) -Construcciones Aeronauticas S.A. (Spain)

Background of Dispute - Part 1- Early 1990s: American companies switch to Airbus Better technology Lower prices New designs vs. Boeing’s modified old designs

Background Behind Dispute - Part 2- Airbus Subsidies Airbus Subsidies “Loans” from European government “Loans” from European government No repayment timetable No repayment timetable Financial information not published Financial information not published Leads to strategic trade policy Leads to strategic trade policy Targets domestic industry for subsidies Targets domestic industry for subsidies Captures monopoly profits on foreign sales Captures monopoly profits on foreign sales Boeing Subsidies Boeing Subsidies Contracts with US Government for military aircrafts Contracts with US Government for military aircrafts No official government subsidies No official government subsidies Held bidding war for location of new U.S. plant Held bidding war for location of new U.S. plant Local subsidies from Washington State Local subsidies from Washington State Airbus claims this was illegal Airbus claims this was illegal

Market Strategies -European- Frequent subsidies Frequent subsidies R&D, declining industries, new industries, regional development, and export promotion R&D, declining industries, new industries, regional development, and export promotion Equity infusions, non-program-specific operating loans, R&D funding, and production subsidies Equity infusions, non-program-specific operating loans, R&D funding, and production subsidies Focus on alliances and cooperative ventures Focus on alliances and cooperative ventures “Loans” “Loans” Payback period Payback period Interest Interest -American- -American- Free market economy Free market economy Government is mainly regulatory Government is mainly regulatory

The Solutions 1979: Civil Aircraft Code of the General Agreement on Tariffs and Trade (GATT) Eliminates tariffs, prohibits licensing requirements, and bans discrimination Parties ensure a “reasonable expectation of recoupment of all costs”

The Solution - Part : Variable 30-33% cap on government subsidies (“Airbus Accord”) 1992: Variable 30-33% cap on government subsidies (“Airbus Accord”) Also requires financial info to be published Also requires financial info to be published Boeing pulls out in 2004; counteraccusation against Boeing Boeing pulls out in 2004; counteraccusation against Boeing Airbus subsidies are legal under 1992 accord Airbus subsidies are legal under 1992 accord

The Implications Subsidy Regulation Subsidy Regulation Greater competition Greater competition Higher production costs Higher production costs Increased air travel costs Increased air travel costs No Subsidy Regulation No Subsidy Regulation Unfair advantages between companies Unfair advantages between companies Lower market prices for aircrafts Lower market prices for aircrafts Greater chance of a monopoly Greater chance of a monopoly

Oracle and PeopleSoft Merger In June of 2003, Oracle launches a hostile bid for software rival PeopleSoft

Reaction of the European Community The European Commission challenged the merger because of its potential threat to competition The European Commission challenged the merger because of its potential threat to competition The EAS supplier market consists of three major companies; SAP, Oracle, and Peoplesoft. The Commission was concerned that the number of competitors being reduced from 3 to 2 would decrease competition and result in higher prices. The EAS supplier market consists of three major companies; SAP, Oracle, and Peoplesoft. The Commission was concerned that the number of competitors being reduced from 3 to 2 would decrease competition and result in higher prices.

Merger Proceedings -Oracle argued that the merger would not cause a decrease in competition for 2 main reasons: -Oracle argued that the merger would not cause a decrease in competition for 2 main reasons: 1. German company SAP is the largest player in the sector 1. German company SAP is the largest player in the sector 2. Smaller EAS vendors such as Microsoft, Lawson, Intentia, and QAD have won bids for enterprise software projects contributing to competition in the market 2. Smaller EAS vendors such as Microsoft, Lawson, Intentia, and QAD have won bids for enterprise software projects contributing to competition in the market

The EU Decision The European Commission analyzed hundreds of bids launched by smaller vendors and overall conditions in EAS market. The European Commission analyzed hundreds of bids launched by smaller vendors and overall conditions in EAS market. The Commission approved Oracle’s bid for Peoplesoft on the grounds that the merger would not create a dominant position for Oracle, and competition in the common market would not be impeded The Commission approved Oracle’s bid for Peoplesoft on the grounds that the merger would not create a dominant position for Oracle, and competition in the common market would not be impeded

General Electric Honeywell Merger 42 billion dollar deal largest proposed takeover in history 42 billion dollar deal largest proposed takeover in history Both American based firms Both American based firms Reason behind merger both firms are leaders in the aerospace industry Reason behind merger both firms are leaders in the aerospace industry

Governmental Regulation Proposed Merger was approved by U.S. Justice Department Proposed Merger was approved by U.S. Justice Department Needs approval by EU, if not GE/Honeywell would be unable to do business in Europe’s single market Needs approval by EU, if not GE/Honeywell would be unable to do business in Europe’s single market July 3 rd 2001 EU blocks proposed merger between GE and Honeywell July 3 rd 2001 EU blocks proposed merger between GE and Honeywell

What Killed the GE Honeywell Merger Area of contention: The strength of GE’s aerospace component after the merger. Area of contention: The strength of GE’s aerospace component after the merger. Two Main Aerospace market Two Main Aerospace market Jet aircraft engines Jet aircraft engines Avionics and non-avionics Avionics and non-avionics

GE’s Vertical Integration GE’s size and enormous amount of resources provide the firm with benefits its competitors do not have GE’s size and enormous amount of resources provide the firm with benefits its competitors do not have Important components to GE’s dominance in the Aerospace industry Important components to GE’s dominance in the Aerospace industry GE Capital GE Capital GE Capital Aviation Services (GECAS) GE Capital Aviation Services (GECAS)

Future Ramifications Set precedent for future mergers Set precedent for future mergers US and EU merger regulations differ significantly US and EU merger regulations differ significantly EU not afraid to block mergers between to American firms EU not afraid to block mergers between to American firms

Ford/Volvo Merger Ford Motor Co. offers $6.45 billion for Swedish based Volvo Ford Motor Co. offers $6.45 billion for Swedish based Volvo Auto Sales (1997) Auto Sales (1997) Ford- 6.9 million Volvo- 400,000 million

Anticipated Result of Merger Increase competition in luxury market by: Increase competition in luxury market by: 1) Ability to use Ford parts in Volvos 2) Distribution of Volvos through Ford’s networks

EU and Market Share Concerns Merger would increase Ford’s market share Merger would increase Ford’s market share Passenger and large car sectors would go from approx. 15% to 20% Passenger and large car sectors would go from approx. 15% to 20% Ford’s national market share would end up below 25% even after merger Ford’s national market share would end up below 25% even after merger

EU Decision Merger is endorsed by the EU Merger is endorsed by the EU Ford’s market share is marginal after merger Ford’s market share is marginal after merger Dominance and lack of competition is not a factor in this case Dominance and lack of competition is not a factor in this case

The End