Corporate strategy and compliance

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BRIEFING NOTE

Corporate strategy and antitrust compliance

 

Source:

Ennis, S. (2022) "Business Strategy and Antitrust Compliance", in Perspectives on Antitrust Compliance, Editors: Riley, A., Stephan, A. and Tubbs, A. Concurrences, 2022. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4096094

 

Executive Summary

This paper explores the fundamental tension between corporate strategy, aimed at achieving a near-monopoly position to maximize profits, and competition law, whose objective is to prevent such situations. It highlights the direct relevance of competitive strategy theories to antitrust compliance, arguing that traditional strategies focused on competitive advantage may unintentionally violate the law. The author, Professor Sean F Ennis, emphasizes the need for companies to consider antitrust risks from the design stage of their strategy, particularly in the face of concepts such as abuse of dominance and defensive strategies inspired by influential work such as Michael Porter, some of whose recommendations may need to be reassessed in light of current competition law, particularly in the European Union. Ultimately, the paper advocates integrating antitrust compliance into strategic thinking to avoid potentially serious legal and financial consequences.

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Key words

Business strategy

Antitrust Compliance

Fundamental tension

Unintentional risks

Abuse of dominant position

Corporate Strategy and Antitrust Compliance

 

Introduction

 

Fundamental Tension: The article immediately establishes a tension between the objective of corporate strategy ("to get a company as close as possible to 'monopoly profit'") and that of competition law ("to try to prevent companies from doing this").

 

Relevance of Competitive Strategy to Compliance: Professor Ennis argues that traditional competitive strategies, focused on establishing a sustainable competitive advantage and influencing competitors, can at certain specific times potentially violate antitrust laws. He emphasizes that "theories of competitive strategy have direct relevance to antitrust compliance."

 

Unintended Risks: Well-established and taught business strategies can, without malicious intent, create competition law issues due to the ambiguity of these laws and the lack of specific guidance. This may require "unlearning" certain elements of the classic strategy.

 

Benefits of Compliance: A critical analysis of corporate strategy with regard to competition law can significantly reduce the risk of antitrust investigations and prosecutions, as well as other sanctions such as the loss of licenses or exclusion from public procurement.

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Executive Responsibility: Drawing on the Caremark criteria , the author emphasizes that boards must seriously consider antitrust risks to avoid personal liability. Internal audit should also integrate these risks.

 

Three Areas of Strategic Risk: 

 

Abuse of Dominant Position: The biggest challenge lies in the concept of abuse of dominant position, as many strategies aim to establish and maintain such positions, creating an inherent risk of competition law violations. The constant evolution of competition law exacerbates this risk.

The article identifies three main areas of classic strategy that present compliance risks:

 

* Competitor selection: Strategies to encourage the growth of "good" competitors (less aggressive in terms of pricing) and to discourage "bad" competitors (those who charge low prices and seek to gain market share).

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* Product differentiation: Actions to make products difficult to imitate, potentially including anti-competitive practices.

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* Defensive strategy: Actions to defend strong positions and reduce the likelihood of successful entry by new competitors, risking abuse of a dominant position.

 

Strategy Is Not Inherently Risky: The author points out that most business strategies (cost reduction, new product development, increasing consumer value) are compliant with competition law and even pro-competitive.

 

Focus on Michael Porter: The article focuses on the detailed strategies of Michael Porter, whose work is highly influential. The author notes that some of his recommendations may need to be reassessed in light of recent competition law decisions, particularly in the EU, where the treatment of abuse of dominance differs from that in the United States. "Since the publication of the seminal works Competitive Strategy (1980) and Competitive Advantage (1985), a number of competition law cases have been decided that probably merit a rewrite of the strategy guidance, particularly in the EU."

 

Importance of Jurisdictional Differences: Strategies that are compliant in one country (such as the US) may be illegal in other jurisdictions (such as the EU), highlighting the need for strategy experts working with multinationals to consider global legal developments.

 

Detailed Review of Risk Areas

 

Selection of Competitors:

 

Porter suggests encouraging "good" competitors and attacking "bad" ones. However, competition authorities prefer the growth of low-cost ("bad" competitors).

 

"Good" competitors are described as having limited ambition and goals compatible with established companies.

 

Influencing the competitive environment can pose problems for authorities.

 

Porter notes that "a competitor who emphasizes product quality, durability, and service can help reduce buyer price sensitivity and mitigate price rivalry in the industry."

 

Using excess capacity to control prices is dangerous and associated with cartels.

 

Price differentiation, while often beneficial, can raise concerns about "loyalty penalties."

 

Having competitors can "reduce antitrust risk" by reducing the risk of excessive market share and litigation.

 

Encouraging "good" competitors can deter entry by increasing the likelihood of retaliation.

 

Companies can selectively influence competitors through technology licensing, targeted retaliation, and dependency contracts.

 

Attempts to "transform" "bad" competitors may involve signals about prices and investment plans, which may be considered anticompetitive. "Where an undertaking makes a unilateral announcement that is also truly public, for example through a newspaper, this generally does not constitute a concerted practice within the meaning of Article 101(1). However, depending on the facts of the case, the possibility of finding a concerted practice cannot be excluded, for example in a situation where such an announcement was followed by public announcements by other competitors, in particular due to the competitors' strategic reactions to each other's public announcements."

 

Cross-Subsidies:

 

Cross-subsidization (selling one product at a loss to boost sales of another) is suspect because it alters the conditions of competition.

 

Although historically present in regulated industries, it is increasingly opposed due to efficiency losses.

 

Porter suggests that pricing systems can "exploit the link between" complementary products by selling a low-profit commodity to sell other profitable items (e.g., printers and ink cartridges).

 

Leadership pricing can be problematic if it prevents fair competition, as illustrated by the French fuel pricing law.

 

To be rational, cross-subsidization must increase overall profits in the long run.

 

Conditions favorable to cross-subsidization include price sensitivity of the commodity, price insensitivity of the profitable product, a strong link between the products, and barriers to entry for the profitable product.

 

Barriers to entry can be created legally (patents) or more questionably ("useless" technology, software incompatibilities).

 

The relevance of cross-subsidization increases with network industries and digital products, where products may be free or sold in bundles. Long-term cross-subsidies or those financed by profits from dominant positions are of particular concern.

 

Defensive Strategy:

 

Defensive strategy aims to make an attack less desirable for competitors by reducing the incentives to attack or increasing barriers to entry. "Defensive strategy relies on influencing competitors' decision-making processes to make an attack on a firm's position less desirable from the challenger's perspective. This is achieved by reducing a competitor's incentives to challenge the firm, or by increasing barriers to entry and mobility to make a challenge more difficult."

 

Defending against entry by lowering prices is generally accepted.

 

It is important to act before entrants have developed high exit costs.

 

Strategic actions to prevent entry include increasing structural barriers, increasing expectations of retaliation, and reducing incentives for entry.

 

Increasing structural barriers: * Blocking access to distribution channels through "aggressive volume discounts based on total channel purchases to discourage experimentation with new suppliers" may be an abuse of dominance (see Michelin case). * Increasing switching costs, for example through "ownership of storage facilities or on-site facilities based at the buyer's location," may be problematic (see HB Ice Cream case). * Increasing the cost of trial purchases through excessively long contracts or announcements of future products ("vapourware") may raise concerns. * Locking in suppliers through exclusive contracts or the purchase of key assets. * Increasing competitors' input costs by avoiding suppliers that serve them.

 

Increased expectations of retaliation: * Announcing plans to "build capacity ahead of demand." * Establishing blocking positions in other industries or countries where competitors generate a significant portion of their cash flow (multi-market contact). * Joint ventures, information sharing, and signaling among competitors may be closely scrutinized by competition authorities, even in the absence of evidence of price collusion.

 

Reduced incentives for entry: * Price matching guarantees can quickly identify competitors charging lower prices and, combined with other actions, can restrict competition (see Darty/FNAC case). "Although price matching guarantees are a common business tool, they also allow the price matcher to quickly and effectively identify competitors charging lower prices."

 

Conclusion

The article concludes that a number of strategies encouraged by classical strategic management literature carry significant antitrust risks. Increasing awareness of these risks is essential to enable compliance officers to effectively support management. It is crucial to "unlearn" certain elements of traditional strategy and revise existing strategic models with due regard for competition law requirements. Ignoring these aspects can have serious consequences for management and corporate reputations.

 

Boards must ensure that compliance experts and legal professionals are involved from the very beginning of strategy development. Effective appeal mechanisms must be in place to address disagreements between the compliance team and traditional strategy proponents. While antitrust investigations remain the exception, companies that can reasonably anticipate increased scrutiny should undertake a sustained "deprogramming" effort to ensure their strategy remains clearly within the bounds of the law.

 

Compliance exercises are an important first step in assessing strategic risks. It is also essential to integrate compliance into strategy development. Geographic differences in competition law enforcement suggest that business strategies focused on specific geographies could be a solution to mitigating antitrust risks.

 

 

Paper Summary Initial Draft By NotebookLM