ROLE OF ECONOMIC ANALYSIS IN COMPETITON LAW AND ENFORCEMENT: COUNTRY EXPERIENCE - TURKEY

Transcription

1 FIFTH UNITED NATIONS CONFERENCE TO REVIEW ALL ASPECTS OF THE SET OF MULTILATERALLY AGREED EQUITABLE PRINCIPLES AND RULES FOR THE CONTROL OF RESTRICTIVE BUSINESS PRACTICES Antalya, Turkey, November 2005 ROLE OF ECONOMIC ANALYSIS IN COMPETITON LAW AND ENFORCEMENT: COUNTRY EXPERIENCE - TURKEY Submission by TURKEY AYT

2 COMPETITION AUTHORITY Fifth United Nations Conference to Review All Aspects of the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices Belek, Antalya (Turkey), November 2005 Communication submitted by: TURKEY ROLE OF ECONOMIC ANALYSIS IN COMPETITON LAW AND ENFORCEMENT: COUNTRY EXPERIENCE - TURKEY

3 ROLE OF ECONOMIC ANALYSIS IN COMPETITON LAW AND ENFORCEMENT: COUNTRY EXPERIENCE- TURKEY * A. INTRODUCTION The importance of economic analysis in the application of competition rules, especially in mergers, has been increasing. Quantitative techniques may help competition agencies to assess competition cases quickly and guide them towards better decision making when faced with the increasing complexity of markets. Agencies employ a lot of techniques, from very basic to sophisticated ones 1. When the qualitative data are abundant, say in a cartel case, call for economic analysis may be limited in some cases. Today it is widely accepted that the use of economics has improved the decisions of competition authorities when it is appropriate. The United States passed the debate whether economics should guide competition policy or not, long ago. Now, they seek to improve economic foundations of antitrust 2. In Europe the limited use of economic analysis in Commission cases has been changing. In 1997, European Commission issued a notice on the definition of relevant market, where use of quantitative techniques stated explicitly 3. Recent creation of the position of Chief Competition Economist in the Competition Directorate of the European Commission has elevated the role of economic analysis in competition proceedings in Europe 4. * Ali İhsan ÇAĞLAYAN and Aydın ÇELEN, Competition Experts at the Turkish Competition Authority. This paper does not necessarily reflect the official view of the Turkish Competition Authority. 1 An excellent source on the quantitative techniques used in European Commission is Bishop and Walker (2002). See also LECG Ltd (1999), Lexecon Ltd. (2005), Houston (2005) and for a discussion of various empirical methods used in antitrust litigation see Baker and Rubinfeld (1999). 2 For an elaborate discussion see, Muris (2003). 3 Commission Notice on the definition of relevant market for the purposes of Community competition law, Official Journal C 372, 09/12/1997 p In section III Evidence Relied Upon To Define Relevant Markets, it is quoted as There are a number of quantitative tests that have specifically been designed for the purpose of delineating markets. These tests consist of various econometric and statistical approaches: estimates of elasticities and cross-price elasticities (5) for the demand of a product, tests based on similarity of price movements over time, the analysis of causality between price series and similarity of price levels and/or their convergence. The Commission takes into account the available quantitative evidence capable of withstanding rigorous scrutiny for the purposes of establishing patterns of substitution in the past. ( 4 Prof. Lars-Hendrik Röller was appointed in September 2003 for a period of three years to be the first Chief Competition Economist in Directorate General Competition- European Commission ( For an overview of the role of Chief Competition Economist Office at European Commission, see Röller and Buigues (2005). 2

4 According to chief economist Prof. Röller (2005,11), the assessment of decision making, in light of modern economic principles that are robust and empirically tested, as well as the reliance on a number of empirical methodologies that help identify a theory of harm 5 lies at the core of this trend. This paper aims to highlight some observations on the role of economic analysis in the decisions of newly established Turkish Competition Authority (TCA) 6 and offer suggestions for competition agencies derived from TCA experiences. B. ECONOMIC ANALYSIS AT TCA Substantive Provisions of the Competition Law 7 Turkish Competition Act has three main articles regarding firms. Article 4 cites the non-exclusive lists of anticompetitive practices for both horizontal and vertical practices. While horizontal practices include price fixing, market division, concerted control of outputs or inputs, boycotts, and entry deterrence, vertical practices includes resale price maintenance, discrimination between similarly situated parties, tying, and actions intended to impede competitors or potential entrants. Article 6 bars abuse of a dominant position, whether performed by a single firm or by several firms acting jointly. Dominance is defined in Article 3 as the power to act independently of competitors and customers in determining economic parameters such as price and output. There is no particular market share test for presuming or identifying dominance. The non-exclusive list of abusive practices in the article include, discrimination between similarly situated parties, tying, exclusion of competitors, exploitation of market power to distort competition in a different market, and resale price maintenance and restriction of production or technical development to the detriment of consumers. Article 7 and the associated merger communiqué deals mergers and acquisitions. Joint ventures are covered if the emerging entity is an autonomous economic actor. According to the article any merger or acquisition that creates or strengthens the dominant position of one or more enterprises, as a result of which competition is significantly impeded in a relevant market is prohibited. Analytical Approach Followed at TCA Anticompetitive behaviors and mergers have been analyzed mainly in four steps by TCA. In the first step, the evaluation of firms about their economic activities 5 Theory of harm expression is used to identify a theory, to find out how and who is harmed in the competition cases. 6 Although the Act on the Protection of Competition (Law no 4054) was accepted at National Parliament in 7 December 1994, effective from 13 December 1994, The Competition Board ( The Board ), decisive body of TCA, was appointed in 27 February 1997 and TCA announced the conclusion of the organization of the authority by 5 November For a recent evaluation of Turkish competition law and practices, please see OECD (2005). 7 Turkish Competition Law and secondary legislation in English can be found at: 3

5 and legal standings are assessed. Preliminary analysis of their activities helps a lot to see the scope of the case. On the other hand, detailed information on the legal standings of the firms might give the authority a shortcut to reach a final decision on the matter. For example, most of the decisions of TCA regarding mergers and acquisitions, have concluded as the inquiry is not within the scope of competition law, because parties are within the same group of firms, leading economic integrity. This issue is also important in cartel cases especially for dawn raids. More often than not, the sales and marketing activities and production are carried out by different firms. They might be located in different regions of the country and one has to know beforehand which qualitative evidence can be found in which location. Additional problems may arise in fining the firms if the legal standing of the firms is not clear. The TCA has the power to impose administrative fines on the firms up to 10% of their annual gross revenues. Whether it is a merger case or a cartel case, it is very important at the outset to identify the investigated company s products/services which are subject of the review by the Authority: What are the substitutes for the products? Does the company produce any raw materials? Who are the customers of the firm: Final consumers or intermediate firms? Answers of those and other questions help to find a good starting point regarding relevant product and geographic markets. Thus the second step involves defining relevant markets. The effect of the anticompetitive conduct in a cartel case or the effect of a merger/joint venture to the relevant market is another important element of economic analysis at TCA. Does the proposed merger/joint venture lead any dominant position or coordinated effects? Are there any firms who left the market solely because of alleged refusal to deal or predatory pricing? Would the price levels have been any different but for the alleged cartel agreement? At the third step similar adverse effects of the alleged conduct or merger are assessed. Lastly, any efficiency justification for the conduct or relevant public interest justification that might be involved in the case, is assessed before final decision. In order to have an accurate economic analysis during these steps, a reliable data source is needed. That s why data collection plays an important role in economic analyses. In a recent study 8, the issue of developing reliable evidence is addressed. As it is outlined in the study, following steps written below may help to get the data needed to carry out economic analyses on time and correctly: Identify at the earliest stage possible what data are required for the analyses. 8 ICN (International Competition Network) (2005). Although this study covers the techniques for merger review, for the purposes of data collection, most of the guidelines and tips given in the study can be easily applied for other competition matters. See especially third chapter on Developing Reliable Evidence and fourth chapter on The Role of Economics and Economic Evidence in Merger Analysis. 4

6 Find out what types of data are available. (Preliminary meetings or telephone conversations with those responsible for data collection or analysis in the firms can be quite useful.) Ask for the minimum amount of data required to carry out the desired analyses. Note that in some cases asking for more data can be less costly to the parties than asking for less. At TCA, regarding data collection, availability and standardization of data are sometimes turned out to be common problems. Sometimes the data in request are not readily produced by related state institutions or firms. On the other hand, having a standardized data set for all firms can be difficult due to different calendars for accounting purposes or different understanding of cost items. For example a cost item can be assumed fixed in one firm and variable in another firm. Hence, one should be very cautious in collecting data. Selected Decisions 9 of The Board Abuse Cases In Havas 10 case, it was alleged that the natural monopoly in the mass transportation services between the Ankara city centre and Esenboga airport, Havas Ground Handling Services Company, was accused of charging excessive prices for some time, and thus breaching the competition Act by abusing its dominant position. According to preliminary inquiry results, the estimation of price-cost margins did not support any excessive pricing conduct and then the case was dismissed by the Board. In Afyon Ekmek 11 case, it was alleged that the dominant bread production factory in Afyon city was charging % higher for bread compared to nearby cities. Cost and price analysis showed that price of bread was increasing due to increase in costs. Moreover the accused firm was found to be not dominant in Afyon. The Board rejected the complaint on these grounds. In a complaint by Ankara Chamber of Industry, it was alleged that the electricity distributor TEDAŞ was charging excessive prices. In the TEDAŞ 12 case, pricecost margin was estimated by a linear regression model and the results did not support any excessive pricing. Although the Board rejected complaint, it drew 9 In the footnotes regarding cases, decision date and number of the Board are shown for each corresponding case. Decisions of the Board can be found in Turkish at TCA s web site; Summaries of selected major decisions in English are available in the annual reports of TCA at March 1999, 99-12/ August 2000, 00-29/ April 2002, 02-26/

7 attention on the cost inefficiency of TEDAŞ and the control of costs could be examined the Energy Market Regulatory Authority. Elzinga-Hogarty Test 13 was used to determine the relevant geographic market in Arçelik 14 parts case. Arçelik is a well-known white goods producer in Turkey and it purchases some of the parts that are used to produce white goods by contract manufacturing. It was alleged that Arçelik abused its dominant position in the purchase of plastic injection parts and excluded one of the contract manufacturer since the manufacturer had also a contact with a competitor of Arçelik. The Board dismissed the case since Arçelik was not found to be dominant in the relevant market and lack of evidence relating to allegations. In Coca-Cola 15 case it was alleged that Coca-Cola, enjoying its dominant position in cola market, was charging predatory prices in the soft drink market. At the outset Granger Causality Test 16 was used to determine the relevant market and according to the test soft drinks were found to be in the same relevant market as cola drinks. Then a detailed analysis of costs was carried out to check whether the prices alleged to be predatory were indeed so. The Board concluded that Coca-Cola was dominant in the cola market but since there was not any documentary evidence showing an intent of predatory pricing, the complaint was rejected. Cartel Cases The Board rejected the economic analysis of purchase of raw milk prices in Setbir 17 case. The homogenized milk producers were alleged to set the purchase price of raw milk. They were also accused of sharing the regions. Contrary to experts view, the Board found the same bid-prices in different regions not to be 13 Elzinga-Hogarty Test is often used as the first step in defining a relevant geographic market. It is a shipment test based on trade flows. The test basically asks whether imports into the region are small relative to total sales in that region (LIFO) and whether exports from the region are small relative to total production (LOFI). If both values are high the test states that the geographic area in question should be regarded as a separate geographic market. See Bishop and Walker (2002), chapter 12 on Shipment and Transport Cost Tests, pp October 2000, 00-39/ January 2004, 04-07/ According to this test, X causes Y if the past values of X can be used to forecast Y more precisely than simply using the past values of Y. In other words, if past values of X statistically improve the prediction of Y, then we can conclude that X "Granger-causes" Y. Notice that Granger causality is a specific econometric concept and it does not necessarily mean daily usage of causality. Bishop and Walker (2002, 445) demonstrates use of the concept in competition law inquiries with reference to market definition: If two products, X and Y form part of the same market, then one would expect the price of X to affect of the price of Y and vice versa. This suggests that the predictions of the price of Y obtained using only information on the price of Y. The same would be true for predictions of the price of X March 2000, 00-11/

8 evidence of coordination and collusion due to the features of the market and on the grounds of lacking documentary evidence. In the Maya 18 case, bread yeast producers were alleged to set cartel prices and share the customers. Although there was no qualitative data inducing cartel, the cost-price analysis compared to inflation with a period of three years, proved to be at least concerted practice between the producers. Similar movements of prices and costs are used to prove coordination. The Board accepted the experts analysis and imposed administrative fines on the producers. In the Newspapers 19 decision, it was alleged that prices of major political and sports newspapers were set in collusion. Increases in the prices of newspapers were examined and the correlation ratios between prices of the rival papers were found rather high, changing between 0.90 and The Board did not accept the arguments that the parallel prices were due to common costs and transparency of the newspaper market. The Board took into consideration of serious documentary evidences and concluded that parallel increases in prices were concerted practices of the players, and imposed administrative fines on them 20. In the Saray 21 case, Ulker was alleged to exclude a rival company, Saray. This time correlation test was used in defining relevant product market. Test results indicated that prices of 13 different biscuit, cake, cracker and cream chocolate products were highly correlated. The Board decided that although Ülker had market power in the relevant market, the case lacked evidence on excluding rival out of the market. The Frito-Lay 22 decision is one of the most important decisions which discuss the techniques aimed to define relevant product market. In this case, the leading firm in the crisps market, Frito-Lay, was accused of excluding rival company, Kar Gıda. Frito-Lay utilized correlation analysis and stationary test to persuade the Board that the relevant product market included not only crisps but also biscuits, nuts, confectionaries, candies and chocolates. The Board stated that the tests applied by Frito-Lay had important drawbacks such as ignorance of the common costs and diversity in the prices of the goods. Relying on the qualitative findings, the Board decided that the relevant market contained only crisp June 2000, 00-24/ July 2000, 00-26/ This decision shows how misuse of data and economic techniques may result in incorrect decisions. It was criticized (Senyucel, 2003; 44-46) that the data set were not adjusted to inflation and correlation analysis was used to prove collusion instead of relevant market analysis. Thus one should be cautious in using data and economic techniques June.2003, May 2004,

9 Merger Cases In Cisco systems/ibm 23 case, Cisco systems acquired some of the international property rights of IBM. Although CR4 increased to about 90 %, 70% of which was owned by Cisco systems after said acquisition, the economic analysis of entry barriers to the network market and of potential competition, showed that competition in the relevant market was not restricted and was shaped by global players actually. The Board permitted the acquisition. In IGSAŞ 24 privatization case, concerning nitrogenous fertilizers market and composite fertilizers market, the Board mentioned that cost of a new production facility at a level of USD million and drew the attention to the necessity of a wide distribution network. IGSAŞ had the capacity around 25% and the only candidate to purchase was Toros Gübre, another player in the market. The economic analysis of entry barriers and post merger HHI analysis showed substantial lessening of competition in the market. The Board blocked the privatization 25 and that caused a tension between TCA and the government. Three years later, in the second attempt of privatization 26, this time after TCA s review, Yılyak, which was not a player in the market, acquired İGSAŞ by almost doubling the price. In the acquisition of Blomberg by Arçelik 27, the relevant geographic market was estimated by Elzinga-Hogarty test. The results showed that the geographic market for the washing machines was European countries and Turkey. The Board accepted the analysis and did not oppose the acquisition. C.CONCLUSION The use of economic analyses has become more common in the competition law and enforcement. Generally improvement in computer technology and availability of data made application of empirical techniques used in economic analyses feasible and economical. On the other hand, reliable economic analyses may be useful for competition agencies and judiciary organs in their decisions. While economic analysis can play many useful roles in antitrust it is important to have correct data and correct techniques at hand. As some of the selected TCA decisions show, lack or misuse of economic analysis may lead to decisions that are inconsistent with the correct scientific interpretation of available qualitative 23 2 May 2000, 00-16/ November 2000, 00-43/ Likely economic effects of the transaction were evaluated at Dalkır and Kalkan (2004) where they found economically significant price effects even in the absence of coordinated effects, supporting TCA s decision. This article is a rare example of quantification of TCA s decisions January 2004, 04-04/ May 2002, 02-32/

10 evidence. In this case, there might be serious problems with the data or the techniques applied to it. On the other hand apparent facts do not always neatly fit into economic analysis and this points to the need for checking one s facts which might be wrong. Of course whether the alleged anticompetitive behaviors were put into practice is also a relevant factor. Our review of TCA decisions indicates that Elzinga-Hogarty test was used in the definition of the relevant markets in some cases and HHI/CR4 techniques became established almost in every concentration case. However a large majority of decisions lack comprehensive economic analyses. There has been a tendency to favor documentary evidence over economic analyses. Sophistication of the economic analyses were varied from decision to decision which was also criticized in the OECD Report (2005, 38). According to the Report, this is due to the fact that TCA is still a relatively new agency and partly the fact that TCA does not have a staff of industrial organization economists. Another factor might be the documentary evidences that were found in the on-spot investigations. However, generally the decisions are not claimed to be incorrect on economic grounds but they are criticized that they should be more comprehensive and insightful. Regarding role of economic analysis in competition law and enforcement, following suggestions might help any newly established competition agency in enforcing competition law: Focus on competition advocacy. Almost eight years of experience of Turkey in the competition law and enforcement revealed that without competition advocacy, effective competition policy can not be implemented. Any competition authority should devote some of its resources to the creation of a competition culture both in public and in government practices 28. In fact, a professional public relations company should assist a competition authority in explaining to public why competition benefits to all. Quantify benefits of competition law enforcement 29. Providing solid economic data to the public is more effective than just talking about the benefits of law enforcement. Thus an agency should publicize quantified benefits in its decisions, annual reports or through other appropriate channels. For example estimation of economic harms caused by anticompetitive conducts, decrease in prices, increase in quality and choice alternatives, and contribution to economic targets of the 28 For example, competition advocacy efforts brought competition to air transportation sector in Turkey. Before the liberalization private carriers could only be assigned to the routes that dominant publicly owned carrier Turkish Airlines did not have flights. This restriction was abolished in 20 October 2003 and Ministry of Finance agreed in deducting taxes on air transportation by 1 January After these developments, as of October 2005 there are 15 private carriers owning two thirds of total capacity of 37,914 seats while ticket prices dropped at least by 50%. 29 For a recent study on ex-post evaluation of antitrust policies from an effectiveness and efficacy perspective, please see Dalkır (2005). 9

11 government such as increase in economic growth or decrease in inflation, can be mentioned in suitable ways. Hence competition advocacy from the government and non-governmental organizations can be provided. Take notice of communication with non-economists. Appellate bodies, government agencies may not be aware of the economic rationale behind the purely legalistic competition rules. The importance of the role of economic analysis in competition law and enforcement can only be realized as long as the addressees are able to understand. Increase in-house economic capacity 30. Economic expertise at an agency should be enough to apply various empirical techniques so that contribution from economics in the decision-making process can fully be assessed. Moreover firms may abuse use of economic techniques and arguments in defending themselves. Although special workshops, seminars may help to increase capacity, an independent economics department consisting only economists who focus on economic reasoning of the cases, can be more effective and beneficial. Increase external economic capacity. When a need arises, outsourcing some of the economic analyses to academicians or private consultants may help to see different perspectives related to the cases. Besides an expert report may make up for the lack of in-house capacity relating to sophisticated economic analyses while attention of academicians to competition law enforcement may be attracted effectively. Benefit from the experiences of economists at Federal Trade Commission and Department of Justice of United Sates and at Competition Directorate General of European Commission on a consistent basis. Since these agencies have a lot of experiences in different cases, there are always opportunities in benefiting from them. Moreover such consistent contacts may help to overcome possible problems in international cooperation of competition law and enforcement. 30 Röller (2005:11) points out that although use of economics in antitrust has been increasing; market share of economists has not been increasing. However positive correlation between the economic analyses and number of economists can still be argued. As of October 2005, TCA employs 89 competition experts coming from different undergraduate backgrounds such as; economics, law, public administration, business administration, international relations, industrial engineering. %25 of them holds undergraduate degree in economics and none of them holds PhD degree in economics. 10

12 REFERENCES Baker, J. and Rubinfeld, D. (1999), "Empirical Methods in Antitrust: Review and Critique" American Law and Economics Review, Fall, pp Bishop, S. and M. Walker (2002), The Economics of EC Competition Law: Concepts, Application and Measurement, London: Sweet & Maxwell. Dalkır, S. (2005), A Quantitative Evaluation of Antitrust Policies Within A Cross- Country Framework: Effectiveness And Efficacy, unpublished mimeo (requests for a copy should be ed to sd@micradc.com). Dalkır, S. and Kalkan, E. (2004), Predicting potential welfare effects of actual and hypothetical merger proposals in the Turkish privatization program, METU Studies in Development, Vol.31, No.2 pp ( Houston, G. (2005), The Role of Quantitative Analysis In Competition Assessments, NERA Economic Consulting. ( ICN (2005), Investigative Techniques Handbook for Merger Review, June. ( LECG Ltd (1999), Quantitative Techniques in Competition Analysis, Office of Fair Trading Research Papers, Lexecon Ltd. (2005), An Introduction to Quantitative Techniques in Competition Analysis. ( Muris, T. (2003), Improving the Economic Foundations of Competition Policy, George Mason Law Review, Vol. 12:1, pp ( OECD (2005), Competition Law and Policy in Turkey. Peer Review Report. ( Röller, L. H. (2005), Economic Analysis and Competition Policy Enforcement in Europe, European Policy Perspectives. ( Röller, L. H. and Buigues, P.A. (2005), The Office of the Chief Competition Economist at the European Commission. ( SENYÜCEL, O. (2003), "Rekabet İktisadında Ampirik Uygulamalar" (Empirical Applications in Competition Economics, in Turkish), Rekabet Kurumu Uzmanlık Tezleri Serisi No:23. 11