International Think-Tank on Innovation and Competition

American and European approaches to antitrust: the U.S. DoJ Report on Monopolization vs the E.U. Guidance on Exclusionary Strategies

April 2nd, 2009

The main differences between U.S. and E.U. industrial policy emerge in the general approach to market dominance and in the antitrust treatment of monopolization issues, which are extremely important not only for their impact on the effectiveness of competition, but also for their possible interference with innovation policy.

The different approaches can be well represented by the American Report on "Competition and Monopoly", issued by the U.S. Dep't of Justice in September 2008, and by the European "Guidance on the Commission’s Enforcement Priorities in Applying Article 82 EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings", issued by the European Commission in December 2008. These documents contain the general principles that guide the two authorities in deciding which cases to pursue and how to deal with specific types of conducts.

The American approach emerging from the Report is aimed at the defense of the competitive process both in principle and in practice, reflecting "a national committment to the use of free markets to allocate resources efficiently and to spur the innovation that is the principal source of economic growth." The analysis of dominance pays a lot of attention on the limits imposed by endogenous entry, emphasizing the role of entry pressure in disciplining market leaders inspite of their large market shares. The Report provides an enligthening example which is in perfect accordance with the implications of the Endogenous Market Structures approach: "Suppose a large firm competes with a fringe of small rivals, all producing a homogenous product. In this situation, the large firm's market share is only one determinant of its market power over price ... if the fringe firms can readily and substantially increase production at their existing plants in response to a small increase in the large firm's price (that is if the fringe supply is highly elastic), a decision by the large firm to restrict output may have no effect on market prices."

More in general, the American approach recognizes the poor correlation that can exist between market share and market power, especially in high-tech sectors: "in markets characterized by rapid technological change, for example, a high market share of current sales or production may be consistent with the presence of robust competition over time rather than a sign of monopoly power. In those situations, any power a firm may have may be both temporary and essential to the competitive process." As a consequence the Report of the U.S. Dept of Justice adopts a non-intrusive role for antitrust policy in the competition in and for the markets. For instance, predatory pricing can be established only when recoupment is likely, that is only when entry is difficult once the market is monopolized. Moreover, the efficiency role of tying is recognized as a primary role (against a long-lasting hostility), mainly for technological bundling, "an area where enforcement intervention poses a particular risk of harming consumers more than it helps them in the long run. Technological tying often efficiently gives consumers features they want and judicial control of product design risks chilling innovation." Finally, the Report marginalizes also the need for intervention in case of a refusal to supply, because "forcing a competitor with monopoly power to deal with rivals can undermine the incentives of either or both to innovate" and because "judges and enforcement agencies are ill-equipped to set and supervise the terms on which inputs, property rights, or resources are provided". In conclusion, the U.S. approach is based on the belief that competitive entry forces are the main constraints on the exercise of market power and when they are present antitrust intervention should be a marginal or residual necessity.

The European approach is more interventionist. The cited Guidance of the European Commission states the adoption of an "effect-based" approach that is aimed at maximizing consumer welfare and protecting an effective competitive process and not simply competitors, however it provides a limited application of these important principles.

First of all, there is an important new aspect in the Guidance, the emphasis given to the role of entry in determining whether a dominant position exists or not. The key element in the Guidance definition of dominance is the extent to which the firm can behave independently of its competitors, customers and consumers, which relates to the degree of competitive constraints exerted on this firm 1) by the supply of actual competitors, 2) by the threat of expansion of competitors and by the potential entrants and 3) by the bargaining power of customers. Therefore, entry plays a crucial role and dominance is incompatible with the presence of a threat of endogenous entry. In particular, a leader "can be deterred from increasing prices if expansion or entry is likely, timely and sufficient". However, we think it would be also important to recognize that the same expansion or entry can induce the leader to decrease its prices below those of the rivals, or to adopt other aggressive strategies, without any anti-competitive purpose, as the EMSs approach has made clear.

Beyond this, we have a strong concern on the way the positive premises of the Guidance are carried through its details. A first concern is about the defense of consumers, which is strongly emphasized in theory but not in practice. Most of the focus of the Guidance is on the foreclosure of competitors and not on the relation between this and the harm to consumers, which is what should matter.

A second related concern is about the nature of the foreclosure effects under the "effects-based" approach. The Guidance indicates that a key element of abuse is anti-competitive foreclosure, defined as "a situation where effective access of actual or potential competitors to supplies or markets is hampered or eliminated as a result of the conduct of the dominant undertaking" which is likely to profitably increase its prices with harm for the consumers. However, it is not entirely clear which facts are going to prove foreclosure and which not. For instance, consider a situation in which new competitors enter in the market and some competitors increase their market share to a significant extent: one would expect that this proves that the dominant company's practice is not abusive, but not even this can be taken for granted on the basis of the E.U. Guidance.

A third issue is about the standard of undistorted competition. As regards pricing abuses, the European approach introduces the "as efficient competitor" test: "the Commission will normally intervene where the conduct concerned has already been or is capable of hampering competition from competitors which are considered to be as efficient as the dominant undertaking". However, the document introduces several exceptions to this principle (for instance, a dynamic view for which less efficient competitors may become as efficient in the future through network or learning effects), and the test does not apply to non-pricing abuses. This means that companies are left without a clear standard.

As a last issue we welcome the confirmation in the Guidance of an efficiency defense: a dominant firm may justify a conduct leading to foreclosure on the ground that efficiencies are sufficient to guarantee that consumers are not penalized. The burden of proof is on the dominant firm, that has to show that the efficiencies are the result of the conduct, that this is indispensable to produce the same efficiencies, and that these efficiencies more than compensate the negative effects on competition.

Now, while the consideration of efficiencies generated by a conduct is extremely important to re-direct antitrust policy toward the maximization of consumer welfare, in our view the Guidance appears to adopt a too vague approach and to make it hard, if not impossible, for dominant companies actually to avail themselves of the efficiency defense. The main reason is that their verification appears to be postponed after the establishment of an anti-competitive foreclosure that harms consumers, and not during the decision on whether the same foreclosure harms consumers. Moreover, there appears to be a bias against the possibility that efficiencies can occur: for instance, technological tying is not even mentioned as a source of efficiency in tying cases, but it is actually considered a source of greater risk of anticompetitive foreclosure (because more costly to reverse).

Notice that, to assert a successfull efficiency defense under the European framework, dominant firms will be required to show that there are no other less anticompetitive alternatives to achieve the claimed efficiencies. Does the current rule mean that an efficiency defense must be rejected if the conduct creates more efficiency gains than other conducts, but is more restrictive on the competitors? In other words, is it the size of the efficiencies that matters or what matters is the amount of restrictions imposed on competition to obtain those efficiencies? Imagine the dominant company trying to manage these various imponderables: it is much easier just to forego the conduct and, possibly, deprive consumers of an important benefit. Is that what competition policy is supposed to do?

Last, it is not clear why the possibility of an efficiency defense (and with it the possibility to enhance consumer welfare) is to be off-limits for an entire class of companies, as the Guidance makes clear when it states that an "exclusionary conduct which maintains, creates or strengthens a market position approaching that of a monopoly can normally not be justified on the grounds that it also creates efficiency gains". It is positive that the Commission eliminated the reference to firms with a market share above seventyfive per cent which appeared in its 2005 document, but still, in our view, efficiencies should be assessed in the same manner in all cases, regardless of the defendant's market share.

Finally, the new guidelines do not seem to reduce the amount of uncertainty that is associated with the move toward the rule of reason approach. For instance, the potential conflicts between IPRs protection and antitrust policy remain entirely unsolved: while the U.S. have taken a clear position against the possibility of compulsory licensing of IPRs, the E.U. approach still contemplates this possibility under vague conditions. This kind of uncertainty can be a source of inefficiency and distorted behavior, especially when decision rules are imperfect and subject to errors [The lack of legal certainty is particularly regrettable in a context of increasing punitive fines and important efforts by the Commission to increase the scope for private enforcement to complement public enforcement of EU competition law]. More in general, antitrust uncertainty on exclusionary strategies may deter genuinely competitive or innovative strategies to be adopted by leading firms, and therefore it may exert negative consequences on consumer welfare. It has been noticed that "the welfare cost of this lack of clarity and excessive caution must be enormous to the E.U. economy as a whole - something the E.U. can ill-afford given its lack of competitiveness relative to other international blocks and the stated objectives of the Lisbon Agenda in this regard" (O'Donoghue and Padilla, 2006, xi).

In conclusion, the E.U. competition policy remains largely linked to a naive version of the post-Chicago approach which is biased against market leaders and in favor of their competitors in a way that is largely unrelated to the real protection of consumers, in particular in the treatment of abuse of dominance issues. The U.S. approach, closer to the principles of the Chicago school, has proved to be much more useful in promoting competition and business creation, especially in high-tech markets.

Send us your feedback and comments about this article

Links to recent Media Briefings

 

 

 

About Intertic | Credits | Site Map | Privacy Policy |Reserved Access | ECG Statistics | Email: intertic@intertic.org | Copyright © 2004-2013 E.C.G. All rights reserved