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Faculty of Law

Efficiency and Subsidiarity

The Principle of Subsidiarity in the European Competition Law

Edoardo ALBERTI

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Efficiency and Subsidiarity

The Principle of Subsidiarity in the European competition Law

Abstract

Promoting competition has always been one of the main concern for states. In order to reach the highest

degree of efficiency within the economy, states promote and preserve competition. Market Efficiency can

be enacted through laws by regulating anti-competitive behaviour of companies. This process is far from

being intuitive and requires a synergetic combination of public and private enforcement. The purpose of

this research is to analyse the origins of competition law and understand how does the European Union

ensure market efficiency through legal decentralized enforcements.

The origins of Competition law can be traced back to the Roman Empire, when “the Lex Frumentaria” was

established in 123 BC1. The purpose of this legislation was to protect the grain supply and fining merchants

that voluntarily reduce the supply for manipulating prices. In addition, Confiscation of goods and death

penalty were introduced in order to avoid monopolies and infringement of tariff systems. Other principles

of competition appears in middle Age , when Henry III decided to directly regulate the market by fixing a

fair price for basic necessity goods, such as grain and bread2. Following the discovery of America, world

Competition law experienced large improvements that can be summarized with the introduction of the first

system of industrial monopoly licenses in Europe. In 1776 British economist Adam Smith , was the first to

formalize the concept of market economy and give a scientific interpretation of competition. Following the

dawn of Economics Sciences, many experts have demonstrated that perfect competition is the most

efficient type of market structure. In fact, a perfect competitive market is where numerous buyer and

sellers meet, all resources are allocated efficiently and consumers are able to maximize their satisfaction.

“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be

attended to, only so far as it may be necessary for promoting that of the consumer.”3

[Adam Smith]

The Sherman Antitrust Act of 1889 can be considered the emblematic example of modern competition law.

Emanated by the USA congress, it authorizes the federal government to initiate proceedings against

companies that have attempts to destroy competition4. The American antitrust laws had a great influence

1 Guarino, Storia del diritto romano, Napoli, 1981, p. 164-165

2 Pollock and Maitland, History of English Law Vol. II, p. 453

3 Adam Smith,The Wealth Of Nations, Book IV Chapter VIII, p. 660, para. 49

4 “The purpose of the [Sherman] Act is not to protect businesses from the working of the market; it is to protect the

public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so,

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on foreign legislations and After World War II similar regulations appeared in the major industrialized

European countries. The first principles of EU competition laws were firstly formalized in the in 1957 in the

Treaty of Rome and more recently in the treaty of Lisbon of 2007. Nowadays, European Competition policy

is considered a vital part of the internal Market, aiming to ensure that all companies are competing equally

and fairly. It is appropriate to Specify that Competition is not considered a goal in itself, but a mean to

ensure customer protection.

The Law of European union is governed by principles and the main focus of the essay is addressed to the

principle of Subsidiarity and the ideal of efficiency. The purpose is to explain how Subsidiarity and

Competition, even if apparently separated, are strictly correlated. Subsidiarity establishes a degree of

independence for lower authority in relation to the higher levels of hierarchy. It is formalized in Article 3b

of The Treaty of Lisbon providing the balance between member states and union. Since 2006 Subsidiarity

have become the European manifesto of shared power, building the fundamentals for a federal

organisation.

“Under the principle of subsidiarity, in areas which do not fall within its exclusive competence, the Union

shall act only if and insofar as the objectives of the proposed action cannot be sufficiently achieved by the

Member States, either at central level or at regional and local level, but can rather, by reason of the scale or

effects of the proposed action, be better achieved at Union level.”

Treaty of Lisbon , 13 December 2007, Art.3 sec3

The first Chapter of our research is devoted to an economic analysis of law. We will break down the

different types of market structure that have inspired the concept of the European democracy based on

efficiency. Chapter two will focus on the sources of EU Competition law. In Particular Article 102 and 104

TFEU will help us understand how the union can ensure market efficiency adopting a decentralized

structure. Our research will ends on the analysis of the relationship between subsidiarity and competition

highlighting the complexities in balance of powers of the European Union.

but against conduct which unfairly tends to destroy competition itself.” Spectrum Sports, Inc. v. McQuillan', 506 U.S. 447, 458 Supreme Court [1993].

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❶ The role of Economics in competition law

"A lawyer who has not studied economics - is very apt to become a public enemy."5

The recourse of economics evidence in EU competition law with last 20 years has been one of the main

characteristic of EU transformation. The number of economists active in competition law are considerably

risen illustrating the importance of a mathematical approach in disciplines of law. Legal professionals are

now collaborating with economists in the preparation and assessment of a competition law cases.6

Collecting economic evidences has become an essential ingredient for successfully implement competition

law, either at level of authorities and courts. In Europe this tasks has been mainly carried on by the main

competition authorities, discussing best practices for the submission and assessment of economics in

administrative and judicial proceeding.

Since the EU was born as an organisation with economic purposes, it is fundamental to clarify what are the

links between the industrial structure and the performance of markets. Microeconomics theories point out

that Industry structure determines market conduct and consequently influences market performance. The

Industry structure can be categorized in perfect competition and imperfect competition. Market conduct

embodies the various pricing and marketing and pricing tactics that can determine the performance of a

market in terms of productive efficiency and allocative efficiency.7

In a perfect competitive market, firms may freely enter an industry for collecting profit and just as easily

exit the industry in the presence of losses. This assumption will hold only if no barriers exist for entry: such

as large capital requirements or exclusive patents. This concept of free entry and exit of firms on the

market, leads to a price equilibrium on the long run, and consequently insure efficiency. Consumers will

maximize their satisfaction and firms will earn zero economic profit8.

5 Justice Brandeis, Illinois Law Review, “The Living Law”, 1916, Law and Economics, preface

6 Gunnar Niels, Helen Jenkins, and James Kavanagh,” Economics for Competition Lawyers” (Oxford University Press,

2011) 7 Leonard W. Weiss, “The Structure – Conduct – Performance paradigm and Antitrust”, 1979, Vol.27:1104

8 Peter Navarro, “The Power of Microeconomics: Economic principles in the Real World”, University of California

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Allocative efficiency is achieved when Firm set Prices equal to their marginal cost or the extra cost of

producing an extra unit of output. In this particular scenario supply and demand curve are intersected so

social benefits are equal to social cost. 9

The proposed graph clearly indicate the concept of “Pareto Optimality”10, when “no possible reorganization

of production can make anyone better off without making someone else worse off”11. The Economic pillar

of equalize price to marginal cost shows us that perfect competition is the only way to maximize customer

utility.

“We will say that the members of a collectivity enjoy maximum ophelimity in a certain position when it is

impossible to find a way of moving from that position very slightly in such a manner that the ophelimity

enjoyed by each of the individuals of that collectivity increases or decreases.”12

9 < https://courses.byui.edu/econ_150/econ_150_old_site/lesson_08.html >

10 S. Papa, “Equilibrio economico generale e pareto ottimalità”, Università di Roma La Sapienza

11 Sampat Mukherjee, “Modern Economic Theory”,New age international pubblishers 2002, p. 337

12 Vilfredo Pareto English translation (Pareto, 1971, p. 261)

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Contrarily, a Monopoly is an example of imperfect competition. This type of market failure is source of

inefficiency in the market transferring income from the many to the few. In a monopolistic economy prices

are set high and the amount of output is lower, decreasing consumer surplus and producer surplus.

Economists use the term “deadweight loss”13 to indicate the inefficient allocation of resources caused by

the presence of a monopoly in the market.14

Oligopoly is another example of market failure characterized by small number of large firms which

dominate the industry. In this market conduct, prices are fixed above marginal cost, indicating a

deadweight loss of allocative and productive efficiency. From antitrust perspective, a small amount of

firms in the market, create a fertile ground for cooperative behaviour and collusion. For this reason,

Existing companies in the market can easily build trust and drive out emerging firms by enacting predatory

pricing techniques.

The Structure-Conduct-Performance model that we have described, had a great influence not only on

American law makers but firmly revolutionize antitrust thinking in the world. As a matter of fact, during the

early development of European Competition Law allocative efficiency was affirmed as the sole goal.

Inspired by the American antitrust tradition, the father founders of the European Community were driven

by the idea for which a proven economic and social democracy have to be based on a perfectly

competitive system.15

13

Consumer Surplus and Dead Weight Loss, Duke University 2009 ,Chapter 10 14

< https://courses.byui.edu/econ_150/econ_150_old_site/lesson_08.htm > 15

Marcel Boyer, Manifesto for a Competitive Social Democracy, © 2009

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❷ The intuition behind an efficient decentralization

The articles from 101 to 109 of the Treaty on the Functioning of the European Union (TFEU) represent the

sources of EU competition law and have directly impact on companies and individuals. Article 102 TFEU

plays a key role in regulating monopolies, aiming to prevent dominant companies in the internal market

from abusing of their privileged position.

“Any abuse by one or more undertakings of a dominant position within the internal market or in a

substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect

trade between Member States."

Consolidated version of the Treaty on the Functioning of the European Union, 09/05/2008, Article 102 (ex-Article 82 TEC)

The first step in the application of the article is to assess whether the company involved is “dominant”. The

general parameters for defining the market share are: analysing the product or services of the firm, as well

as geographic area of activity. According to EU law, if the firm has over 40 % of the market share it can be

considered as a dominant actor.16 Consequently, the dominant firm has the "special responsibility not to

allow its conduct to impair competition on the common market"17. The Second step for the authorities is to

assess the type of abuse according to the definition provided by Article 102 TFEU.

Defining a market abuse is considered one of most important tasks in EU competition law, and at the same

time the most intricate. Lawyers do not have the necessary mathematical instruments for analysing a

market and will always need to be supported by economists. Moreover, it must be assumed that is

unrealistic for the bureaucratic European ensemble to fulfil its pro-competitive obligations without the

support of national courts. A successful enforcement of competition policies requires a continuous

cooperation between the union and member states. In fact, Studying a geographical activity of company is

a specific task and should be carried at a regional and local level in order to be successful.

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European Commission's Tenth Report on Competition, Published in conjunction with the Fourteenth General Report on the Activities of the European Communities in 1980, p. 103, paragraph 150 : “A dominant position can generally be said to exist once a market share to the order of 40% to 45% is reached” 17

[Judgment of the Court (Fifth Chamber) of 16 March 2000. - Compagnie maritime belge transports SA (C-395/96 P), Compagnie maritime belge SA (C-395/96 P) and Dafra-Lines A/S (C-396/96 P) v Commission of the European Communities. Article 37]

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A large chronology of legal cases empowers our thesis proving that a centralized structure is not enough

reactive for handling competition issues. This Problematic has emerged in the early 1973 when The

European Court of Justice noted:

“Whilst the principle of legal certainty requires that, in applying the prohibition of article 85, that sometimes

considerable delays by the commission in exercising its powers should be taken into account” 18

In addition, the excessive workload of cases assigned to the European Commission Have highlighted that

European Authorities do not have enough resources for applying competition law by themselves.19 For this

reason the Union has constantly made necessary a higher degree of participation by the member states in

order to shrink its responsibilities.

If we observe the evolution of the EU structure we can notice that competition law and subsidiarity are

converging. Following this fundamental management concept, what can be achieved at the lower level do

not have to be managed by the higher body of the hierarchy. In this way, the European institutions have

the responsibility to intervene only if national authorities cannot successfully enforce European

competition law.

The case Automec v. Commission of 1992 is an example of successful application of 82 TEC (actual article

102 TFEU) by a national court.

The motor vehicle distribution company Automec srl was collaborating with BMW Italia for distributing

BMW vehicles in the Italian market. In 1988, After announcing the refusal to renewing the business

agreement, BMW was sued by his counterparty. During the delay for be appealed in the Italian National

Court, Automec decided to send an additional application to the European commission with the hope to

obtain a renewal of contract with BMW. The commission refused to take the responsibility of the issue

because of its lower degree of importance among the Community's priorities. The community court

concluded the case with the following statement:

“the Treaty presupposes that national law gives the national courts the power to safeguard the rights of

undertakings which have been subjected to anti-competitive practices. In this case, the applicant has not

produced any evidence from which it might be inferred that Italian law provides no legal remedy enabling

the Italian courts to safeguard the applicant' s rights in a satisfactory manner.”20

This statement has high relevance in our analysis since it proves how national courts can provide efficient

solutions when charged of competition law cases with a low degree of complexity. We recognize the

importance of Automec judgement since it was one of the first time where Commission has decided to

assign the responsibility of competition law enforcement to a member state. Paraphrasing the statement of

the Ex European commissioner Leon Brittan21, Automec v Commission is still considered a model for

decentralized enforcement in competition law infringement.

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Case 48-72, SA Brasserie de Haecht v Wilkin-Janssen, Reference for a preliminary ruling: Tribunal de commerce de

Liège, [Judgment of the Court of 6 February 1973] Belgium, Para 11 19

Edited by Vivien Rose, David Bailey, “Bellamy and Child: European Union Law of Competition (7th Edition)”, 2013 on 87/123/EEC: Commission Decision of 15 December 1986 in proceedings under Article 85 of the EEC Treaty (IV/31.302 - Boussois/Interpane) 20

Automec Srl v Commission of the European Communities. Case T-24/90 [Judgment of the Court of First Instance of 18 September 1992], Paras 93,94 21

Sir Leon Brittan, The Future of EC Competition Policy, Speech Brussels [1992]

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The article 104 TFEU formalize the relationship between competition and subsidiarity. This help us

understand how the national courts are considered core players for the survival of competition in the

internal market.

“Until the entry into force of the provisions adopted in pursuance of Article 103, the authorities in Member

States shall rule on the admissibility of agreements, decisions and concerted practices and on abuse of a

dominant position in the internal market in accordance with the law of their country and with the provisions

of Article 101, in particular paragraph 3, and of Article 102.”

Consolidated version of the Treaty on the Functioning of the European Union, 09/05/2008, Article 104 (ex-Article 84 TEC)

Given this aspect of complementarity between the two concept, we cannot fully understand efficiency

without before considering subsidiarity.

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❸ The Harmfulness of an excessive decentralization

After have discussed the importance of an increasing participation of the member state for preserving fair

competition between companies, it is appropriate to underline that controversies still exist around this

topic. In fact, while a decentralization can efficiently fight market abuses, an excessive member state

participation can have a negative impact on fiscal competition. 22 With this latter, we refer to the practice

of member state of attracting business and capital by offering ad hoc fiscal environment for economic

activities.23 The following graph provide us an overview on the heterogeneous fiscal spectrum of the EU24.

Despite the improvements achieved so far in matter of competitiveness in the EU, recent issues have

highlighted that progress are still required in terms of tax competition. This lack of common European

fiscal policy has produced the rise of inequality, the retreat of social justice and an asymmetrical

distribution of goods. This recurrent phenomena of fiscal dumping has raised the need for greater

centralization when it comes to taxation.25

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Ernest Maragall, “Fiscal competition or harmonisation? “, (11 May 2015) < http://www.euractiv.com/sections/euro-finance/fiscal-competition-or-harmonisation-314500> 23

Algirdas Šemeta EU Commissioner for Taxation and Customs Union, Audit and Anti-Fraud Porto, Speech of 27 October 2011 24

Blog True Economics: Europe's Corporate Tax Rates 2011 < http://trueeconomics.blogspot.ru/2011/06/20062011-europes-corporate-tax-rates.html> 25

Ernest Maragall, “Fiscal competition or harmonisation? “, (11 May 2015)

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The so called Lux leaks scandal fits perfectly in the view of our conjecture: In 2014, Secret agreements for

tax evasion have been discovered between the authorities of Luxembourg and three hundred worldwide

companies26. This Scheme of Financial “Escamotages” organized by PriceWaterHouseCooper had a massive

impact on public opinion and severely affected the European Commissioner Jean-Claude Juncker.

Filtering the multitude of causes for the existent unfair competition, one of the major reason has to be

found in the Commission’s perspective about taxation. The statement expressed in 2006 regarding “The

coordination of Member States direct tax systems in the Internal Market” is the following:

“As Community law currently stands, Member States remain largely free to design their direct tax systems

so as to meet their domestic policy objectives and requirements(…)any proposal for EU action in the tax field

needs to take account of the principles of subsidiarity and proportionality” 27

In this view we perceive that a misapplication of subsidiarity can represent an obstacle to the fair

competition in the internal market, stimulating sordid fiscal practices between member states. Contrasting

the efficiency of the principle of subsidiarity, several opinion have been carried on against decentralization.

Relevant for our research is the Fiscal Federalism approach:

“Tax competition is an especially delicate matter for the EU: A key argument for centralised taxation is to

limit unfair tax competition that not only creates immediate distortions but also risks cutting public

expenditure below optimal levels because governments dare not levy taxes.”28

Even if the events have revealed the necessity of centralization for restoring fairness, the debate seems far

to be solved. Finally, Europe should accept the fact that there is no future for competition without a fiscal

harmonisation.

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IlFattoQuotidiano.it / Economia & Lobby / Lobby LuxLeaks fa tremare Juncker. “Elusione fiscale in Lussemburgo per 300 aziende” 27

Communication from the Commission to the Council, The Parliament and the European Economic and Social Committee co-coordinating Member States’ direct tax systems in the Internal Market 28

Fiscal Federalism, Subsidiarity and the EU Budget Review 2009 Iain Begg

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Outlook

Throughout our research subsidiarity is defined as an economic principle before being a legal foundation.

Stated in the Treaty of Lisbon and Empowered by Protocol 2, Subsidiarity is respected as mere a

constitutional pillar delineating the proper equilibrium of shared powers. It appears as a dynamic principle,

which allows the European commission to efficiently allocate its resources. In the name of Subsidiarity EU

can expands its competences where appropriate and restrict them when not needed.

Individuals should not treat Subsidiarity as an academic theory, or an instrument of political propaganda to

magnify national sovereignty. Instead as powerful tool that must be used with moderation in order to

ensure efficiency in the internal market. The proposed cases and court decisions have highlighted the

controversial relationship between Subsidiarity and Efficiency. In fact, a proper decentralization enables

member states “to discover the regulation best suited to their needs in both formal and substantial

terms”29. Contrarily, An Excessive use of decentralization encourage member states to follow their

economic interest before the community interest. Reminding the legacy of John Nash it must be assumed

that the best possible outcome for the Union is achieved when member states do what is better for

themselves and the Union.30

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Wallace E. Oates, An Essay on Fiscal Federalism, (1999), 37 J Econ Lit 1120, 1131-33 30

Arun Kumar & N Meenaksh, Organisational Behaviour, Vikas Pubblishing House(2009), p. 399