Services in EU competition policy

Journal of Service Science (2009) 1:121-146 DOI 10.1007/s12927-009-0007-x

Services in EU Competition Policy Luis Rubalcaba, Gisela Di Meglio Received: 7 December 2009 / Accepted: 23 December 2009 / Published: 25 December 2009 © The Society of Service Science and Springer 2009

ABSTRACT The analysis of competition in services is particularly relevant, given the growing importance of this sector in modern economies and the segmentation still present in many tertiary markets. The objective of this paper is threefold. Firstly, to study the relationship between competition and European Union (EU) competition policy in services by analysing the influence exerted by aspects such as the share of services in the economy or by the market power of enterprises. Secondly, to present a set of sectoral cases under EU competition policy that illustrates the application of competition rules into major services sectors. Lastly, to identify the main challenges that competition policy faces with respect to services. Results show that competition in services markets varies widely by sector. The attention that EU competition policy pays to services should be explained by a wide set of factors (not just market size and market shares); to this end, this paper provides a detailed, sector-by-sector analysis. Several challenges are identified at both sectoral and at overall levels. We conclude that while there is no need for a new specific competition policy for services, more attention should be paid to increasing competition in some particular service markets.

KEYWORDS Services, market structure, competition, competition policy, European Union.

Luis Rubalcaba ( ) Applied Economics Department, University of Alcalá, Spain e-mail: [email protected] Gisela Di Meglio Applied Economics Department, University of Alcalá, Spain e-mail: [email protected]

122 Luis Rubalcaba, Gisela Di Meglio

1. INTRODUCTION In the European Union (EU), the economic integration process might encourage companies to restructure themselves with the purpose of taking advantage of possible scale economies derived from the larger market size. In this context, the EU competition policy establishes methods in order to restrict entrepreneurial dimensions that may reinforce or create dominant positions and the development of anti-competitive practices. Furthermore, this common competition policy is necessary to prevent possible contradictions between national approaches and also to take into consideration any cross-border effects derived from them (Pelkmans 2006). This policy co-exists with and complements competition promotion in some markets traditionally operated by state monopolies. The objective of “ensuring that competition in the internal market is not distorted” is set out in Article 3 (g) of the Treaty. To achieve this, various rules are established in Articles 81 to 89 (ex 85 to 94) regarding agreements between undertakings, abuse by one or more undertakings in a dominant position, state aid, and the liberalization of monopolised industries. Mergers between companies are not specifically addressed in this Treaty, but in special regulations.1 With nearly fifty years of history, the EU’s competition policy faces new business and economics facts: on the one hand, trends towards globalization in previously segmented markets and, on the other, the need for achievements of new scale and scope economies to face stronger global competition. Within this context, competition issues increase in markets traditionally operating in oligopolistic or monopolistic competition conditions. Furthermore, the recent liberalization processes in protected industries (e.g., network services) and the progress in the internal market create a new regulatory global environment for services in which competition policy is required. What are the features that hinder competition in services markets? What is the state of the policy practise? Is there any bias towards manufacturing industries rather than services, as with other policies (e.g., internal market, innovation)? Can the services participation in value added or market power of large enterprises explain competition policy’s attention towards 1

Regulation 139/2004 currently governs merger operations. (EC) Council Regulation no. 139/2004 of 20.01. 2004, on the control of concentrations between undertakings (‘EC Merger Regulation’).

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Services in EU Competition Policy 123

services? How are services affected by competition rules? This paper will address these questions, among others, in order to understand the current situation of the European competition policy in service markets. The paper is organized as follows. The first section studies market structure and competition in different economic sectors. In particular, observations focus on divergences between the liberalized manufacturing sector experiencing external and internal competitive pressures, and services, which are frequently isolated from international competition. The influence of service market structure and of national regulations will also be noted as factors affecting competitive conditions between sectors and countries. Next, the application of competition policy shall be evaluated upon considering anti-trust, mergers and state aid cases handled by the European Commission. This section will explore the relationship between the application of competition policy and services share in EU value added, as well as the market power of large enterprises. Moreover, this exploration will serve as a preliminary identify-cation of the services that may lag behind in the application of competition policies. In the next section, selected cases illustrating the application of competition rules by the European Commission in service activities shall be addressed. Finally, the main challenges competition policy faces in services will be identified. 2. COMPETITION IN THE SERVICE SECTOR Several factors may hinder competition in service industries. First of all, competition pressures arising from international trade face certain restrictions in tertiary activities. The intangibility, heterogeneity, perishability and simultaneity of services make their international provision a complex phenomenon, involving different ways of supply (United Nations Statistical Division 2002). As Kox and Lejour (2006) stated services cross-border trade is more difficult compared to goods-producing sectors. This is why services are internationally supplied mainly through foreign direct investment, networking and other international flows (Rubalcaba and Cuadrado 2002). Trade openness across sectors can be used as a proxy of international competition.2 As shown in Figure 1, EU25 is more open to external commerce 2

Trade openness is defined as exports plus imports over value added. Journal of Service Science (2009) 1:121-146

124 Luis Rubalcaba, Gisela Di Meglio

of goods. This kind of trade represented 24.5 per cent of European value added in 2007, while services trade accounted for only a third of that figure. Within service activities, other business services and transport are the most open to international commerce. At country level, it can be noted that small economies such as Ireland, Belgium and Luxembourg are the most open in terms of tertiary activities. In contrast, France, Italy, Finland and Germany are less open. Nevertheless, we must take into account that certain specific characteristics of countries-unrelated to competition-can influence services trade openness.

24,5%

Goods 8,5%

Services 2,4%

Other business services

2,0%

Transportation

1,6%

Travel Financial services

0,7%

Royalties and license fees

0,6%

Computer and information services

0,3%

Communications services 0,2% Personal, cultural and recreational services 0,1% 0%

2%

4%

6%

8%

10% 24%

26%

Note: Extra EU25 trade is considered. Source: Based on Eurostat.

Figure 1. Services and goods trade openness in EU25, 2007 Market structure is another factor that may affect competitive conditions between sectors and countries. In certain services categories, competitive behaviours may be potentially restricted by companies with high market power. In order to analyze this, a market share index (MSI) has been constructed for large, medium and small firms across service sectors. This indicator attempts to establish the percentage a company of a certain employment size © The Society of Service Science and Springer

Services in EU Competition Policy 125

class (large, medium or small) and category take from the total turnover generated.3 In this sense, this index can be considered as a proxy variable of a firm’s average market power in a particular sector. However, the relative interpretation of the index across sectors is more accurate than its absolute meaning, given the relatively high number of large enterprises under the “large” category, which clearly underestimate the real market share of top firms. Certain tertiary activities are normally characterized by oligopolistic market structures due to high infrastructure costs incurred in the provision which could result in the existence of natural monopolies. This is mainly the case of transport and communication markets. As Figure 2 demonstrates, each large company of the railway transport takes, on average, approximately 1 per cent of the total turnover generated in 2003. In the case of large enterprises of the air transport, postal services, water transport and telecommunications, this share is between 0.65 per cent and 0.3 per cent. In these sectors, competition policy must accompany regulatory reform in order to avoid companies taking unfair advantage of their dominant positions in the market. In contrast, the MSI of large firms is less than 0.1 per cent in other service activities, such as machinery and equipment rental, computer services, hotels and catering, distributives trades or professional services. These are services of monopolistic competition and fragmented market structures may reveal barriers to entry for certain organizational modes, such as large outlets in retail trade (ECB 2006). Regulatory reformsparticularly those regarding entry barriers-are the main tools to guarantee competition; policies can thus be used to inhibit anticompetitive behaviours (Hoj et al. 1995). It is interesting to note that the participation of large enterprises in total turnover of the different sectors has decreased in the majority of services between 2000 and 2007. This is a consequence of stronger competition present in activities that were progressively liberalized in latter years. In particular, it can be noted that the MSI of large enterprises in postal services, air transport and railway transport have fallen 15 per cent, 5 per cent and 4 per cent, respectively, between 2000~2007. These negative growth rates correspond to the positive rates of the MSI of medium enterprises. In the case of railway transport and postal services, 3

The MSI has been constructed by dividing the share of a size class in the total turnover generated by the sector by the number of enterprises corresponding to that size class. Large includes enterprises with more than 250 employees; medium between 20 and 249 and small, firms with fewer than 20 employees. Journal of Service Science (2009) 1:121-146

126 Luis Rubalcaba, Gisela Di Meglio

for example, the participation of a medium enterprise in the total turnover has increased 29 and 9 per cent, respectively, during the period under analysis. In air transport, this annual growth rate has been 5 per cent. It is worth highlighting that in the case of professional services, the MSI of medium and small enterprises have decreased throughout that period, 1,6%

2000

2007

Postal services

Research and development

1,4% 1,2% 1,0% 0,8% 0,6% 0,4% 0,2% 0,0% Transport via railways

Air transport

Water transport

0,20%

2000

2007

0,16%

0,12%

0,08%

0,04%

0,00% Renting

Computer services

Inland transport

Real estate activities

Hotels and restaurants

Professional services

Note: For each category the available data for EU25 has been considered. Source: Eurostat (SBS).

Figure 2. Market share index in EU25, large enterprises © The Society of Service Science and Springer

Services in EU Competition Policy 127

especially in the latter category. This situation is reflected in Figure 2, with the expansion of the market power of large enterprises in this sector. Limits to competition are explained not only on the basis of the inherent nature of services, which favours the market division at a local and international scale, but also according to government interventions undertaken within this sector. Market failures such as externalities derived from certain tertiary activities, as well as information asymmetries, have justified state interventions. These actions have had different degrees of effect on the sector and thus adopted various forms: absolute public control of the delivery of certain services (i.e., railway transport and postal services); control of incorporation into professions by means of requirements such as membership to professional associations; control of certain activities through the granting of concessions to private companies (road passenger transport), establishing quotas, etc. According to the OECD (2002), these national measures are the main restrictive factors to competition in tertiary activities. Moreover, imperfect state interventions intended to rectify market failures may arise. Measures adopted to safeguard competition can turn against it, creating barriers and inflexibilities that hinder the efficiency and productivity of the services involved. In summary, several factors prevent the services sector from experiencing external and internal competitive pressures: limited trade openness, fragmented market structure and state interventions. The next section seeks to evaluate the situation of policy practice. In particular, the application of competition policy will be analyzed in order to determine the presence of any bias against tertiary activities, as it was the case with many other policies (i.e., internal market policy or innovation and R&D policies). Moreover, the analysis may also determine if there is a relationship between competition policy, the sectoral share in value added and market power of large firms. 3. COMPETITION POLICY IN SERVICES Considering the cases handled by the European Commission related to cartel and monopoly control during the period 2000~2005, it can be observed that the application of competition policy in services activities has surpassed that of goods. In this sense, competition policy application follows the trend of structural changes experienced by modern Journal of Service Science (2009) 1:121-146

128 Luis Rubalcaba, Gisela Di Meglio

economies. However, the share of services in competition policy cases does not entirely correspond to their participation in terms of value added generated by countries. As presented in Table 1, services represent, on average, 59 per cent of the cases analyzed by the Commission in accordance with Articles 81 and 82 of the Treaty, while they account for 71 per cent of total value added.4 In contrast, goods register around one-third of value added and represent 41 per cent of the issues related to competition policy. It can also be noted that the situation is not homogeneous within services categories. In energy, financial services, audiovisual services, transport and communications, competition related cases effectively exceed the relative economic participation of these sectors. Quite the opposite occurs in distributive trades, IT and professional services, since a deficit in the policy application can be observed in comparison with the economic relevance of these services and the large amount of regulations and obstacles within them. Between 2000 and 2005, the Commission was constantly involved in telecommunications and audiovisual activities. On average, they represented 12 per cent and 10 per cent, respectively, of the total cases analyzed due to possible agreements between undertakings and abuses of dominant positions, as shown in Table 1. In other services, intervention has fluctuated more. For example, those cases regarding financial services represented 10 per cent of the total only in 2001 and 2004, while their participation in the rest of the period has been lower. Air transport sector has registered a gradual increase in the analyses implemented by the Commission since the year 2000, with the peak reached in 2002 with 15 per cent of total cases. Their importance, however, has decreased moderately over time. A similar situation occurred in distributive trades, where Commission interventions reached their maximum in 2003. In the case of energy, competition cases have increased in latter years. In the field of merger operations within the European Union, an upward trend until the year 2000 can be observed, followed by a fall which was overturned in 2004. Out of the 3022 cases notified to the Commission from 1990 (the year in which the first EC Merger Regula-

4

The cases considered are those published in the DG Competition website between 2000 and 2005. Regarding the value added, the average considered has been that corresponding to the EU15 during the period 2000 to 2005, according to the data available EUKLEMS Database.

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Services in EU Competition Policy 129

tion took effect5) until January 2006, the vast majority (85 per cent) was considered to be compatible with the common market in their first stage; conditions were imposed only for the approval of 5 per cent of the cases. Only 19 operations out of those analyzed in the second stage were prohibited; that is to say, 0.6 per cent of total cases notified. According to Pelkmans (2006), revisions of merger plans after informal interactions with the Merger Task Force and formal negotiations in the second stage of the process can explain this low rate of refusals. In sectoral terms, it can be observed that during the 1990s, mergers and acquisitions carried out in the services sector exceeded those in manufacturing. This is due to the impact of measures aimed at achieving a single market which were launched in the mid-1990s in services, while they were completed earlier in the case of manufacturing. Table 1. Application of articles 81 and 82 by sectors. Share in total cases handled by the Commission, in % 2000

2001

2002

2003

2004

2005

Goods

59

45

31

28

33

54

Services

41

55

69

72

67

46

Audiovisuals

6.8

10.7

14.1

15.4

12.8

11.5

Telecommunications

6.8

8.3

10.9

17.9

5.1

11.5

Energy

2.3

7.1

7.8

5.1

7.7

15.4

Distributive Trade

4.5

1.2

3.1

12.8

10.3

3.8

Air transport

2.3

7.1

15.6

2.6

5.1

3.8

Financial Services

4.5

9.5

4.7

2.6

10.3

0.0

Postal Services

4.5

8.3

1.6

2.6

5.1

0.0

Land, water and railway transport

6.8

1.2

3.1

7.7

7.7

0.0

Business services

2.3

1.2

7.8

5.1

2.6

0.0

Note: For each NACE code, the cases treated under articles 81 and 82 of the Treaty and published in the European Commission website have been added. These were classified by years. Goods include manufacturing and primary sector. Business services include professional and computer services. Source: based on the DG Competition website.

5

Regulation 4064/1989 enabled the a priori regulation of mergers establishing the requirement of previous authorization by the European Commission of EU operations. Journal of Service Science (2009) 1:121-146

130 Luis Rubalcaba, Gisela Di Meglio

Regarding EU merger control, the trend is similar to that present in anti-trust control previously analysed. Between 1990 and 2006, the number of cases notified to the Commission regarding services has been slightly higher than that of goods. However, again in this case, the participation of services in mergers notifications is lower in comparison with their share in value added generated in economy. While this share is, on average, 69 per cent, only 50.6 per cent of the mergers notified between 1990 and 2006 correspond to services, as shown in Figure 3.6 On the other hand, 49 per cent of the mergers notified are related to goods, while they represent one-third of value added. In disaggregated terms, it can be noted that the participation of some service activities in merger notifications is, to a certain extent, in accordance with their dimension in the economy. Such is the case of hotels and restaurants and distributive trades, where 1 per cent and 9 per cent of the mergers have been notified, while their participation in value added is of 2 per cent and 10 per cent, respectively. Moreover, in transport, communications and financial services, the proportions observed are not maintained, since the participation in mergers notifications exceeds that of the economy. Again, intra-sectoral heterogeneities arise in relation to merger control. Audiovisuals

Other services

Real estate, renting, busin ess services Financial services

Transport & communications Goods Hotels & restaurants

Distributive trade

Energy

Note: For each NACE code, the cases published in the European Commission website were added. Goods include the primary sector, manufacturing and construction. Other services include NACE codes L, M, N, O.90, P and Q. Source: based on the DG Competition website.

Figure 3. Mergers notified to the Commission by categories, 1990~2006 6

The cases considered are those published in the DG Competition website between 1990 and 2006. Regarding the value added, the average considered has been that corresponding to the EU15 during the period 1990 to 2005, according to the data available in EUKLEMS Database.

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Services in EU Competition Policy 131

In order to analyze if the participation of services in EU value added is associated with the anti-trust cases handled by the European Commission (cases treated under articles 81 and 82 of the EC Treaty) and mergers notifications, the correlation (r) between these variables is presented in Table 2. In the other two columns, the p-value or marginal significance level is shown as well as the r2 - the fraction of the variance of the application of competition policy explained by the share in value added. The results are not conclusive. When including the manufacturing sector in the analysis, the relationships are positive and statistically significant, indicating that the larger the participation of a sector in EU value added, the more antitrust cases the Commission handles and the more mergers are notified. Nevertheless, when excluding manufacturing, the associations between shares in value added and mergers and with anti-trust cases are not significant. Neither does the market power of large enterprises, measured by the MSI previously described, correlate to the application of competition policy. As it can be seen in Table 2, the relationship between the MSI and antitrust cases and mergers notifications is negative, including or excluding manufacturing, but results are not significant. Thus competition policy is not necessarily weaker or stronger in those sectors where larger enterprises are more powerful in terms of average market share. These results suggest that competition policy in services may depend on a complex set of variables, deserving a case-by-case, sector-by-sector analysis. Table 2. Application of competition policy explained by sectoral share in EU value added and market share index of large enterprises Market Share Index (large enterprises)

Value added Including manufacturing Articles 81 and 82

a

Mergersb Excluding manufacturing Articles 81 and 82 Mergers

r

p

r2

r

r2

p

0,8634

0,013

0,7455

-2879

0,4157

0,0829

0,9081

0,000

0,8247

-0,273

0,3062

0,0746

r

p

2

r

r

p

r2

-0,0174

0,9646

0,0003

-0,2002

0,5551

0,0401

0,4663

0,0798

0,2174

-0,3517

0,1986

0,1237

Notes: a) 10 sectors were considered in the case of value added and 12 sectors in the case of MSI. Value added data is an average for the period 2000~2003. MSI data corresponds to the year 2003. b) 16 sectors were considered in the case of value added and in the case of MSI. Value added data is an average for the period 1990~2003. MSI data corresponds to the year 2003. Journal of Service Science (2009) 1:121-146

132 Luis Rubalcaba, Gisela Di Meglio

With regard to state aid, the European Commission compiles a scoreboard in order to provide information about their situation and nature. Although a significant reduction in the level of global state aid was observed in the late 1990s, recent scoreboards show that this trend is stagnating. Total state aid granted by the EU15 during the period 1994~2004 fell approximately 27 per cent. However, between 1994 and 1999, a remarkable drop of approximately 30 per cent was registered, while between 2000 and 2004, the aids were reduced only 0.03 per cent.7 In 2004, the annual amount of state aid granted by the EU25 reached 62 billion euros, which represents 0.60 per cent of the EU GDP. Germany, France and Italy have conferred the highest amount of aid. It can be noticed that Member States devote their aid mainly to horizontal objectives such as environment, regional economic development, research and development and small and medium sized enterprises.8 It can be noted that distortive state aid does not prevail in the service sector. In sectoral terms, 7 per cent of total state aid granted by the EU25 was aimed at tertiary activities; out of this percentage, 2 per cent corresponded to financial services and another 2 per cent to transport, excluding railways. Portugal granted the highest amount of aid to the financial sector, while the Netherlands was the leader regarding transport. The bulk of state aid (59 per cent) was granted to manufacturing, although the overestimation of data may be expected due to specific measurement difficulties.9 Approximately half of the aid granted to these sectors was in the form of subsidies, and, to a lesser extent, tax exemptions (32.4 per cent) and the granting of guarantees (10.3 per cent). It is worth highlighting that the sectoral distribution of aid was not homogeneous across countries: Italy, Sweden, Malta and Slovakia allocated 75 per cent of state aid to manufacturing and services, while 60 per cent were allocated to the agricultural and fishing sector in Austria, Estonia, Finland, Latvia and Lithuania. In Spain, Germany and Poland, aid granted to the coal industry is also worth mentioning.

7 8 9

Total state aid in the sense described in article 87.1 of the Treaty, including manufacturing, services, coal, agriculture, fishing and transport (except for railways). COM(2005) 624 final ‘State Aid Scoreboard, autumn 2005 update’. Employment received 4% of state aid, 3% was aimed at training, and the remaining 3% corresponded to other horizontal objectives. In the manufacturing sector, state aid includes those for general economic development and horizontal objectives such as research and development, small and medium enterprises, environment, energy, employment and training, for which the specific sector is not always known. Consequently, the data corresponding to this sector could be overestimated.

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4. CASES ON SERVICES UNDER THE EUROPEAN COMPETITION POLICY The previous section concluded that there are no simple cross-sectoral relationship between size and competition in services market and cases managed by EU competition policy. A sector-by-sector analysis is therefore required. To do so, this section adopts a functional viewpoint that does not deepen into the specific competition rules and regulations in force in the main tertiary activities. Instead, different cases handled by the European Commission will be presented in order to illustrate, with examples, the application of the different areas of competition policy within the service sector. 4.1 Antitrust A number of official judgments arose from potential restrictive agreements between services companies and abuses of dominant positions (both of which are prohibited according to Articles 81 and 82 of the Treaty). The Commission’s main instrument to prevent this kind of anticompetitive behaviours is the imposition of fines, as no criminal penalties are applied to sanction infringements of competition law. This fining system contrasts with the mechanisms used in other countries, such as the United States.10 In the case of financial services, the Commission’s decisions range from financial and monetary intermediation to market administration and insurances and pensions. For example, in 2002, a bank cartel-which fixed deposit, lending and other rates in Austria-was fined 124.26 million euros. In 2004, the Commission condemned Clearstream Banking AG and its parent company, Clearstream International SA, for double abuse of their dominant position in these markets. (These were German institutions that provided securities liquidation, compensation and custody services.) In the field of payment systems, the Commission’s first report, issued in 2001, was related to Visa International. With regard to inter-bank commissions applied to cross-border transactions with payment cards, Visa adopted transparent criteria and objectives, and the Commission subsequently granted an exception in 2002. The intervention of the Commission in postal services is important in order to prevent anticompetitive practices by state and private suppliers involved in the delivery of the services. 10

Damien Geradin and David Henry, ‘The EC Fining Policy for Violations of competition law: an empirical review of the Commission Decisional Practice and the Community Courts’ Judgements’, 2 (1) European Competition Journal (2005). Journal of Service Science (2009) 1:121-146

134 Luis Rubalcaba, Gisela Di Meglio

The decisions reached mainly condemn the abuse of a dominant position of some operators within the sector. The first verdict of this type was adopted in 2001 against the German postal operator Deutsche Post AG (DPAG) for using its revenue from the letters monopoly to finance services in the competitive commercial package market. However, no fine was imposed for this infringement because the economic cost concepts used to identify predation were not sufficiently developed at the time the abuse occurred. Furthermore, in 2001, the German operator was fined for intercepting, surcharging and delaying incoming cross-border letter mailings.11 In that same year, the Commission fined the Belgian postal service operator De Post/La Poste 2.5 million euros for financing a new business-to-business mail service with the monetary resources of the letter mail monopoly. With regard to telecommunications, the Commission has carried out several enquiries, related primarily to the abuse of a dominant position by traditional operators. In 2003, Wanadoo Interactive (subsidiary of France Telecom) was fined 10.35 million euros for practising predatory pricing to exclude competitors in the ADSL-based Internet access market. In the same year, Deutsche Telecom was penalized 12.6 million. As Geradin and O’Donoghue (2005) stated, this was the first case in which the Commission employed competition law guidelines to a margin squeeze in this sector.12 In the distributive trade sector, Nintendo and seven of its European distributors were fined 168 million euros in 2002 due to their association, which hampered the commercialization of video games from low-cost countries to high-cost countries. In 2005, Peugeot was penalized 49.5 million euros for hindering the export of new cars from the Netherlands to consumers in other Member States. In the case of the French beer market, Danone and Heineken were fined 2.5 million euros for the arrangement of prices in the integrated distribution network in the hotels and restaurants sector. So far, several official decisions have been made regarding the provision of professional services. For example, the Commission has sanctioned the fixed prices set by Italian customs agents and the prices recommended by Dutch professional associations. In 2004, the scale of 11 12

DPAG was only fined 1,000 euros, due to the existing legal uncertainty at the moment the infringement occurred. Damien Geradin and Robert O’ Donoghue, ‘The concurrent application of competition law and regulation: the case of margin squeeze abuses in the telecommunications sector’, 1(2) JOCLEC 355 (2005).

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Services in EU Competition Policy 135

recommended minimum fees adopted by the Belgian Architects Association’s was condemned.13 However, certain professional regulations have also been admitted under specific circumstances. In the so-called Arduino case, for instance, the Commission permitted Italian lawyers to fix a fees scale, provided that this is justified by a public interest and that there is no delegation of responsibility or control by the state to private operators. Another judgement refers to the prohibition of multidisciplinary practices in the Netherlands in order to prevent conflicts of interests and guarantee the proper functioning of the profession. 14 One consequence was the establishment of a legal precedent, by which the professional ethics and legal rules of those organizations that guarantee the proper exercise of the profession are excluded from the application of Article 81 (1) of the Treaty. In the air transport sector, the Commission considers that, in general, alliances between airlines can be beneficial for passengers in that they expand networks, increase the frequency of flights, and improve the efficiency of the service.15 This is the case of the cooperation agreements signed between British Airways and SN Brussels Airlines, which were approved in 2003, or, authorized subject to conditions in 2004, the alliance between Air France and Alitalia. 4.2 Concentrations between undertakings As stated in the introduction of this paper, mergers operations are controlled in a special regulation.16 Within the financial sector, the proportion of cross-border intra-EU acqui-

13

14 15

16

The Commission fined this association 100,000 euros. The amount reflects the fact that, upon warning, the Commission reconsidered and abolished this system in 2003, leading to a gradual approach in fining anticompetitive practices in the professions. It is worth mentioning that in its first decision concerning tariffs of professional bodies, the Commission did not impose a fine. In the second case, it imposed a symbolic fine of 1,000 euros. Known as the Wouters case. The exemption of the EU competition regulation conferred on the IATA Conference (International Air Transport Association), regarding certain categories of agreements and concerned practices, has been recently renovated for a limited time (EC Regulation Nº 1459/2006 on the application of article 81(3) to certain categories of agreements and concerted practices concerning consultations on passenger tariffs on scheduled air services and slot allocation at airports). Depending on the type of agreement, the date on which the block exemption expires differs. Once the exemptions conclude, the airline industry must evaluate if its practices are in accordance with EU competition rules. (EC) Council Regulation no. 139/2004 of 20.01.2004, on the control of concentrations between undertakings (‘EC Merger Regulation’). Journal of Service Science (2009) 1:121-146

136 Luis Rubalcaba, Gisela Di Meglio

sitions carried out is low compared to other sectors. Between 1999 and 2004, only 20 per cent of the total value of financial operations corresponded to this type of transaction; in other sectors, however, this value amounted to 45 per cent.17 Those involved in this activity-in response to a Commission call-identified the legal and tax control schemes as well as the heterogeneous consumer-protection rules between Member States as the main restrictions limiting these types of operation. With regard to this situation, the Commission has maintained a favourable position towards cross-border banking acquisitions. In 2005, it authorised without objections the takeover of the Banca Nazionale del Lavoro by the Spanish group Banco Bilbao Vizcaya Argentaria, and the Banca Antoniana Popolare Veneta by the Amro Bank, a Dutch banking association. In other cases, companies have to comply with certain requirements in order to achieve the Commission’s authorization. For example, Allianz insurance group and Dresdner Bank legally compromised to reduce their joint holdings in Münchener Rück/Ergo, their main competitor in the bancassurance market. In this way, they avoided straightening their position within it after the merger. The European Commission has also adopted decisions regarding concentrations within the postal sector, such that these neither create nor strengthen dominant positions in the companies involved. For example, the Commission approved (under certain conditions) a joint venture between public postal operators from the United Kingdom (TPO), the Netherlands (TPG) and Singapore (SPPL). On the other hand, the takeover of DHL International Ltd in 2002 by Deutsche Post AG was authorized without conditions. An increased regulatory certainty has boosted the pace of cross-border mergers and acquisitions in the telecommunication sector, whose main objective is not only to take advantage of scale economies, but also to outline potential European and international strategies. Large national operators are already present in other markets, and investment has also been directed towards new Member States. For example, the Commission has authorized the Spanish company Telefónica to acquire Czech Český Telecom. Meanwhile, the acquisition of O2 has been subject to certain conditions. Other mergers have been referred to the national competition authority. For instance, in 2004, the Commission transferred the case 17

Cross-border consolidation in the EU financial sector. Commission Staff Working Document. SEC (2005) 1398.

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of Kabel Deutschland´s acquisition of a local broadband cable network to the German Federal Cartel Office (FCO). Competitive difficulties associated with concentrations carried out within the audiovisual industry are principally related to the access to contents and the supply to final consumers. In this sector, Member States have the capacity to control business concentrations in order to guarantee the diversity of the media.18 However, the European Commission also controls concentration transactions, bearing in mind that certain aspects of the audiovisual sector could result in higher degrees of concentration compared to other industries. As an example, specific conditions have recently been imposed on the acquisition of the Italian pay-television company Telepiú by the Australian media group Newscorp. Concentration transactions within the distributive sector have been significant, representing on average 9 per cent of the total cases notified to the Commission since 1990, and 18 per cent within the services sector. In 2005, a joint venture was approved between Sephora (a retail store of cosmetic products) and the department store chain El Corte Inglés. In the same year, the Commission referred the proposal of acquisition by UK company Tesco of Carrefour retailing business in Slovakia to the national competition authorities, the Antimonopoly Office of the Slovak Republic. This is the first time a merger had been referred to a New Member State authority for its evaluation. Concerning concentrations between air companies, the European Commission has shown a favourable position toward consolidating the European air sector. In 2003, the merger between KLM and Air France was authorized, subject to conditions. Likewise, the increase in the participation of SAS in Spanair has been approved without objections, so the former has taken over the latter. Regarding inland transport, the joint venture between Maersk and P&O Nedlloyd was approved in 2002, with the purpose of facilitating the movement of their containers between the seaports of Rotterdam, Bremerhaven and Hamburg, and the inland terminals located in Germany, Italy, Poland and Hungary

18

Article 21 (3) of the EC Merger Regulation. Journal of Service Science (2009) 1:121-146

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4.3 State aid Several cases of state actions leading to competitive market distortions have been detected in the financial sector. The German state was recently urged to recover 3000 million euros from the WestLB group and another six public banks. France, in turn, granted a guarantee to Caisse des Dépôts et Consignations (CDC), which was transferred to one of its commercial subsidiaries, the investment bank CDC IXIS. This state aid will gradually be withdrawn in order to enable the company to adapt to the new situation during the transition period. With regard to the postal sector, the Commission approved in 2002 the financial support that the Italian government provided to Poste Italiane during the 1990s. This approval was based on the fact that this aid did not exceed the costs of the task of supplying a public postal service. On the same basis, the Commission also authorized the state aid granted by the British government to Post Office Limited (retail subsidiary of Royal Mail Group). Several telecommunications companies have received state aid in different ways. The European Commission has approved (with conditions) a guarantee granted by Germany that consists of a loan of 112 million euros to the mobile operator MobilCom for company restructuring. In 2004, the Commission demonstrated that French authorities had provided illegal aid to France Telecom, including special tax schemes and an advance awarded on condition of its status as a new shareholder, thus enabling the enterprise to gain access to better financial conditions in the market. State aid that is granted to the audiovisual industry, and which does not threaten community exchanges and whose purpose is to promote cultural development, is compatible with the EU regulations in force, provided that certain criteria are met. 19 Within this framework, the Commission has approved certain aid schemes to support cinematographic activities, such as those granted by the German and Belgian governments. Moreover, public broadcasting services have also benefited from state aid. Compared to the mid-1990s, state aid granted to air transport companies has decreased considerably. However, this form of aid continues to be authorized, and recent years have 19

Communication from the Commission on certain legal aspects relating to cinematographic and other audiovisual works. COM(2001) 534 final. For example, subsidies granted to audiovisual works (cinematographic or television) are limited to 50 per cent of their budgets. Moreover, audiovisual organizations should be free to spend part of their budgets in other Member States-not just in the aid-granting state.

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even observed an increase within EU15. In 1994 and 1995, this aid exceeded 2500 million euros, while in the period from 2002 to 2004 the state aid granted were on average of 330 million euros, representing 20 per cent of the overall amount conferred on the transport sector. In contrast, state aid between 2001 and 2003 represented 18 per cent, and between 1999 and 2001, 12 per cent. Among the authorizations given in recent years, the RyanairCharleroi case is worth mentioning: the Commission considered the aid granted by the Belgian region of Valona and the public airport Charleroi to Ryanair to be compatible with the common market, since it enabled the use of a secondary terminal that was underused, reduced air congestion, and boosted the creation of new routes. State aid assigned by the Member States to road and inland water transport represented 13 per cent and 0.4 per cent respectively of the total amount allocated to transports (excluding railways) between 2002 and 2004 (65 per cent for maritime transport and 21 per cent for air transport). The Commission has recently accepted several aid schemes to compensate for additional costs of inter-modal transport. In 2002, for example, the Commission approved rescue aid to the Belgian company ABX, which provides logistical services for road transport, among others. 5. SELECTED SECTORAL CHALLENGES From the analysis of the European Commission’s aforementioned cases, several challenges can be identified for different service activities. The aim of this section is to focus on each of them and to evaluate the state of competition and of the application of competition policy. In this sense, the strengths and weaknesses of the sectors previously studied and the possible improvements that can be made will be highlighted. Undoubtedly, competition has become more intense in the field of European financial services in recent years, particularly regarding wholesale markets. However, some markets are still fragmented, and an improvement is recommended. Such is the case of retail financial services and insurance services, where elements restricting competition persist: entry restrictions, price differences between Member States, market power and vertical agreements. In these fields, final consumers and small and medium enterprises could benefit from lower prices and a wider variety of goods and services. Journal of Service Science (2009) 1:121-146

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Competition is not yet deeply rooted in the postal sector. As in other services categories, significant differences between Member States and market areas can be observed regarding the advances of the liberalization process. The persistence of the reserved area, which acts as a legal barrier to the entry of new operators, limits competitive pressure. In practice, a group of large companies still dominates the sector, and traditional operators enjoy protection, for example, concerning payable taxes. This can also hinder the entry of new agents into the market and limit the competitive process. In spite of the fact that the liberalization process has not been completed in all Member States or in all important market areas, the opening of telecommunications to competition has so far benefited the consumers with lower prices, better services and a wider range of choices.20 Nowadays, operators offer packages of low-cost telecommunication services including voice, broadband access and audiovisual content. However, further progress is needed regarding international roaming options in order to increase competitive pressure. The telecommunication sector is extremely dynamic, which can translate to difficulties in seeing the difference between the effects generated by the technological changes and those arising from the gradual liberalization and introduction of competition. In practice, a reduced number of large enterprises still dominate the sector, as explained in the previous section. In fact, ex ante regulation and control elements present in this opening could eventually restrict the strengthening of competition. Regulations detrimental to competition still exist in distributive trades. For instance, entry restrictions (such as limited permissions granted to department stores), predatory pricing, collusion provision, abuses of a dominant position, and considerable influence of political interests. A more ambitious competition policy would be more advantageous to consumers (the access of department stores to markets and fair competition practices would be easier) and to small stores and suppliers (in order to avoid the abuse of power by large department stores and to promote modernization of retailers). The area of liberal professions is still a sector closed to competition, although significant differences can be observed between Member States. This situation is mainly a result of the 20

COM(2006) 68 dated 20.02.2006. European electronic communications regulation and markets 2005 (11th report).

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lack of national political determination to eliminate professional restrictions that affect the competitive process, on the one hand, and, on the other, the reluctance to change that characterizes this sector. Rents derived from anticompetitive actions can be large, and sectoral interests are highly concentrated (OECD 2001). Consequently, liberal professions still constitute one of the economic sectors most distant from the competitive opening process and market integration. In the case of Latin notaries, Van den Bergh and Montangie (2006) have noted an anti-regulation bias in the Commission’s policy proposals, since the empirical work on rent seeking is overstressed and market imperfections are not entirely taken into account. Air transport liberalization has had positive effects on consumers, who can now choose from a larger number of airlines, routes and timetables. Although promotional fees have increased, no downward trend can be observed in prices of tickets that allow date and time changes. This implies that competition could be intensified even more in air transport sector. In fact, as previously mentioned, business alliances still have certain immunity regarding competition policy, and state aid has not yet disappeared entirely. The emergence of low-cost airlines that use secondary airports not controlled by large enterprises has been one of the most important incentives increasing competitive pressure in this sector. In fact, between 1998 and 2004, the market share of low-cost airlines has grown 16.8 per cent. The liberalization of airports, particularly concerning slots, could also increase effective competition. 6. CONCLUDING REMARKS EU policy is intended to protect competition from certain business and state practices, which could be detrimental to it, and to enhance the opening of some sectors closed to competitive pressure. Therefore, EU policy attempts to promote the positive effects that competition generates on the economic system in general and on consumers in particular. In the first case, pro-competitive policies improve productivity, innovation and technological diffusion that boost economic growth (Nicoletti and Scarpetta 2003; Aghion et al. 2001; Gust and Marquez 2002). In the second, competition allows consumers to choose within a wider range of higher-quality goods at lower prices. Given that the service sector accounts for more than 70 per cent of employment and value added generated in advanced economies, the fact that many of them are still isolated from competitive pressures is an important concern. This is Journal of Service Science (2009) 1:121-146

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due to the specific features of services, to the presence of market power in certain categories of the sector, as well as to the maintenance of inefficient, and now unjustifiable, regulations. The application of competition policy is not entirely in line with the importance of tertiary activities in terms of value added generated in the economy. Services have represented, on average, 59 per cent of the cases analyzed by the European Commission in accordance with articles 81 and 82 of the Treaty during 2000 and 2005, and 50.6 per cent of the mergers notified between 1999 and 2006. The situation, however, is not homogeneous within tertiary activities or countries. Empirical results in this paper indicate a lack of simple relationship between the share of services in economies and relative proxy average market shares of large companies with respect to the number of EU competition policy cases related to services. The results suggest that the relationship between competition policy and services may depend on a complex set of variables, which deserve a sector-by-sector analysis. On some occasions, competition policy is deemed to be unambitious (professional services, distributive trades); in other sectors (such as postal services or communications) traditional operators are still protected, thus hindering the entry of new operators and, therefore, competition. Generally speaking, competition policy appears to be quite flexible, with many exceptions and exemptions, some of which are legitimate according to public interest, and others that can no longer be justified by this argument. There is limited authority regarding the heterogeneity of criteria and policies of Member States. Regulatory differences between them and discrepancies in the adoption of the Commission rules result in asymmetries in the markets, thus hampering the attainment of a single market. The level of competition achieved is uneven between Member States and sectors of a same market. Moreover, potential tensions are feasible between national traditions and the Commission’s approach. No real updating has occurred regarding increasing market integration and globalization. Borders are gradually less important in Europe, and this is a major challenge for competition policy. In this sense, competition policy needs to prioritize higher economic content over legal content. In 2004, the Commission made a change in this direction with the appointment of the first DG Competition’s Chief Economist and the modernizations of the application of Articles 81 and 82 and the Merger Regulation, which have introduced economic criteria to the Commission’s analysis. © The Society of Service Science and Springer

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EU and national economic and political interests can have an influence on the direction of regulation on competition, as well as on the exemptions granted. The promotion of objecttivity and transparency is necessary at both levels. The Commission has been criticized in recent years, as its decisions were not always based on strict and consistent analytical studies. However, its approach has currently become more economic, although some of its fields could provide companies with more legal clarity and security. Member States’ governments are, in turn, likely to suffer internal pressures regarding the application of competition policy. This explains the slowness in achieving certain political objectives, such as the withdrawal of some state aids or, as in the field of professional services, the maintenance of detrimental regulations. It is worth highlighting the low participation of European consumers and the organizations representing them in the struggle against anti-competitive behaviour. In contrast, private actions in the US legislature represent 90 per cent of the application of competition policy. Consumers need to raise their voices and hold more frequent discussions with the Commission. In this regard, the position of the liaison officer has been established within the DG Competition in order to approach competition and consumer protection policies. But this new policy-making still needs to deliver its performance. For many services, consumers are not only individuals but firms which require producer services in order to become more competitive. Moreover, the services economy is based on a permanent co-production and interaction between suppliers and clients. This fact calls for more attention to the demand side in charge of co-producing the services and that may be affected by effects of uncompetitive practices. Despite the specific features that characterize services (e.g., co-production, highly different market structures, on-going liberalization process, etc.), the research carried out in this paper does not suggest the need for a new and specific competition policy for services. This is to say that existing instruments are useful for all economic sectors, including services. Nevertheless, there is need for more attention to services activities and for a revision of current instruments or criteria. These include the concept of significant power in services markets, due to the changing market structure, current liberalization trends and automatic exclusion of certain sectors that are far from the competition problems due to the dominance of small and Journal of Service Science (2009) 1:121-146

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medium enterprises in most services activities. Other competition policy challenges come from the need for economic assessment of service markets, the role of demand (final consumer or business clients) or the very different national regulations for services in a context of increasing competition and integration among EU countries. One final implication can be identified concerning the role of synergies and complementtarities between different policies, following what was proposed in previous work (Rubalcaba 2007). The objectives of competition and competition policies are more likely to be achieved if coordination and reinforcement are produced with other complementary policies. For instance, in the EU internal market policy, many barriers to trade are also barriers against competition, which could be addressed by competition law. Other policies such as regional, innovation or R&D&I may also complement or be complemented by competition policy. In summary, EU competition policy faces many challenges in the services arena. There are specific challenges for specific sectors; more general challenges regarding the way in which competition policy is designed and pay attention to the needs of services markets; challenges derived from increasing globalization trends and potential conflicts with the still-highly heterogeneous regulation and national uneven competition policies; and finally, challenges regarding interactions with other policies. The intelligent management of policies for facing these challenges should lead to better competition and market integration in European services. REFERENCES Aghion P., Harris C., Howitt P. & Vickers J. (2001) Competition, Imitation and Growth with Step-by-Step Innovation, Review of Economic Studies, 68(3):467–492. European Central Bank (2006) Competition, Productivity and Prices in the Euro Area Services Sector, Occasional Paper Series Nº 44 April, 1-141. Gust C, Marquez J (2002) International Comparisons of Productivity Growth: the Role of Information Technology and Regulatory Practices, International Finance Discussion Papers Nº 727, Board of Governors of the Federal Reserve System (US).

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Geradin D, O’Donoghue R (2005) The concurrent application of competition law and regulation: the case of margin squeeze abuses in the telecommunications sector. Journal of Competition Law and Economics, 1(2). Hoj J, Toshiyasu K & Pilat D (1995) Deregulation and Privatization in the Service Sector. OECD Economic Studies Nº 25. Kox H, Lejour A (2006) Dynamic effects of European services liberalization: more to be gained. In: Globalisation Challenges for the EU and Finland, Helsinki, Prime Minister's Office-Economic Council of Finland. Nicoletti G, Scarpetta S (2003) Regulation, productivity and growth. World Bank Policy Research Working Paper 2944. OECD (2000) The Service Economy. STI, Business and Industry Policy Forum Series, Paris OECD (2001) Competition in Professional Services. OECD Journal of Competition Law and Policy 3(4). Pelkmans J (2006) European Integration, Methods and Economic Analysis, Pearson Education Limited, England United Nation Statistical Division (2002) Manual on Statistics of International Trade in Services. ST/ESA/STAT/SER.M/86, Geneva, Luxembourg, New York, Paris, Washington, D.C. Van den Bergh R., Montangie Y (2006) Competition in Professional Services Markets: Are Latin Notaries Different?. Journal of Competition Law and Economics, 2(2):189-214. Rubalcaba L, Cuadrado JR (2002) A comparative approach to the internationalisation of service industries. In: Cuadrado-Roura JR, Rubalcaba, L & Bryson J (eds) Trading Services in the Global Economy, Edward Elgar, Cheltenham 78-108. Rubalcaba L, (2007) The New Services Economy: Challenges and Policy Implications for Europe, Edward Elgar, Cheltenham.

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AUTHOR BIOGRAPHIES Luis Rubalcaba is Professor of Economics at the University of Alcalá, Madrid, Spain. Former President (2004~2008) of the European Association for Services Research (RESER), he has written several books and articles on the service economy. He has worked as expert and scientific advisor for the European Commission (DG Enterprise and Eurostat among other Commission services). He currently coordinates the EU 7th Framework Programme project ServPPIN: The Contribution of Public and Private Services to European Growth and Welfare, and the Role of PublicPrivate Innovation Networks.

Gisela Di Meglio is a researcher in the Applied Economics Department, at the University of Alcalá, Madrid, Spain. She works on national and European research projects on services related topics. Her main research fields are public and private services, competitiveness and European policies in services. She has previously worked as a teacher and researcher in Universidad Nacional del Sur (Argentina).

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