Anti-trust Policy

Endogenous Market Structures and Antitrust Policy by F. Etro (2010, International Review of Economics).

The recent literature on the endogeneity of market structures has revisited a number of descriptive results of industrial organization for markets with strategic interactions and endogenous entry of firms, and a number of normative results on industrial policy, trade policy and macroeconomic policy.

This article will apply this theoretical apparatus to discuss antitrust policy issues. In particular, it will advance a critical view of the post-Chicago approach to antitrust policy, emphasizing that this approach has often disregarded the consequences of the endogeneity of the market structure. This takes into account both strategic interactions and the endogeneity of the number of strategic players in the market: the hypothesis of endogenous entry should not be interpeted as pure free entry in perfectly competitive markets, but as a condition determining endogenously the size of the market power of the active firms. Taking this into account, standard results of the post-Chicago literature can be radically modified. The main implications concern the behavior of market leaders and, consequently, the antitrust approach to abuse of dominance (or monopolization) issues, but I will also derive implications for the antitrust approach to mergers and collusion.

The theory of endogenous entry and market leadership has shown that whether entry in a market is exogenous or endogenous makes a lot of difference for the way leaders behave (Etro, 2006a, 2008). In markets where entry is independent from the profitability conditions, market leaders can adopt accommodating strategies to increase prices or aggressive ones to exclude rivals, and their strategies can harm consumers. When entry is endogenously dependent on the profitability conditions in the market, the leaders always adopt aggressive strategies which typically do not harm consumers. For instance, a firm competing with a single rival could engage in accommodating pricing to increase mark ups, or could engage in predatory pricing to induce the exit of the rival, but a firm facing endogenous entry of competitors will ordinarily engage in aggressive pricing strategies without exclusionary purposes. As a second example, consider a monopolist in a primary market competing also in a secondary market: when the latter is characterized by a single rival, the monopolist may bundle its goods to monopolize also the secondary market, but when the secondary market is characterized by endogenous entry the only purpose of bundling can be the strengthening of price competition. Finally, a firm facing a single rival could adopt vertical restraints on its retailers or price discrimination strategies to soften price competition, but when the same firm faces endogenous entry of rivals these anti-competitive practices will not be in its interest. Of course, notice that efficiency reasons can still motivate the adoption of bundling, vertical restraints, price discrimination or other strategies. Therefore, the overall flavor of the endogenous market structures approach is reminiscent of the Chicago school, but the analysis is based on game theoretic foundations in line with the post-Chicago tradition.

The endogenous market structures approach delivers a related and strong result on horizontal mergers. As well known, even in the absence of cost efficiencies, these mergers are often profitable when entry is exogenous because they allow the merged entity to increase prices or restrict production so as to enhance profitability. These effects are counterproductive when entry is endogenous because any accommodating strategy attracts entry. Therefore, the only rationale for mergers in markets with endogenous entry must be a cost efficiency large enough to (more than) compensate the strategic disadvantages associated with the merger. In these cases, mergers are welfare improving. Similar results apply to cartels, that are ineffective whenever entry in the market is endogenous, unless the cartels act as leaders (in this last case, the cartels coordinate aggressive strategies aimed at increasing the market shares of their members through low prices, and their implementation is always sustainable and it does not even harm consumers).

It is clear that the relevance of these results depends on the relevance of the hypothesis that entry is endogenous in a specific market. One may argue that entry can be usually regarded as endogenous in the medium and long run, but not in the short run. If this is the case, and if antitrust policy is aimed at correcting distortions in the medium and long run (as opposed to short run distortions), then these results are potentially relevant.

from COMPETITION LAW AND THE ENFORCEMENT OF ART. 102, Federico Etro and Ioannis Kokkoris Eds. (2010, Oxford University Press):

Does the Guidance Paper on Article 102 Matter? – Damien Geradin (Howrey LLP and Tilburg University)

Some outstanding issues from the European Commission’s Guidance on Article 82: Not-so-faint echoes of Ordoliberalism – Philip Marsden (British Institute of International and Comparative Law)

Optimal Enforcement and Decision Structures for Competition Policy: Economic Considerations – Yannis Katsoulacos (Athens University of Economics & Business) and David Ulph (University of St. Andrew’s)

IP Rights in the EU-Microsoft Saga – Assimakis Komninos (Greek Competition Authority) and Katarzyna Czapracka (White & Case LLP)

The assessment of efficiencies under Article 102 EC and the Commission’s Guidance Paper – Denis Waelbroeck (Ashurst, Free University, ULB)

Will Efficiencies Play an Increasingly Important Role in the Assessment of Conduct Under Article 102? – Jean-François Bellis (Van Bael and Bellis and University of Brussels) and Tim Kasten (University of Brussels)

Is There a Gap in the Enforcement of Article 102? – Ioannis Kokkoris (Reading University and IMEDIPA)

Is the availability of “appropriate” remedies a limit to competition law liability under Article 102? The mishiefs of “discretionary remedialism” in competition law effective remedies as a limit to Article 102 - Annex – Ioannis Lianos (University College, London)

Damages for exclusionary practices: a primer – Chiara Fumagalli, Jorge Padilla and Michele Polo (Bocconi University, LECG and Bocconi University)

The “Effects-Based” Approach of the Commission to the Application of Article 82 to Exclusionary Abuses: Is the New Approach Really Economics Friendly? by S. Tavsanoglu (2009).

The purpose of this thesis is to criticize the approach of the Commission to the application of Article 82 regarding the exclusionary conducts of the dominant firm. The European Approach to dominant firms has significant implications on the consumer welfare, total efficiency in the EU, innovation and economic development of EU. For that aim, the Commission has published a Discussion Paper which aims to bring an effects-based approach which is compatible with the new economic theories and to update the analysis of exclusionary conducts of the dominant firm. This thesis aims to investigate whether the new approach of the Commission is really economics-based and whether the Commission is successful in increasing consumer welfare and efficiency in European market and in promoting innovation and economic development with the new approach to Article 82.

In order to analyze the old and new approach of the Commission to Article 82, the author has relied on EC Treaty provisions, case law of the Community Courts, the Commission’s documents mainly the Discussion Paper published in 2005 regarding the Article 82 and literature about the competition theories and the European Approach to competition law and Article 82. the author firstly provides the theoretical framework and compare the main competition theories with the European Approach to competition law, then provides an explanatory part regarding the old attitude of the Community Courts and the Commission towards the application of Article 82 to the exclusionary abuses based on the case law and EU legislation. In the third chapter, the new approach of the Commission towards the application of Article 82 to the exclusionary abuses is criticized. To illustrate the issues in which the Commission failed to bring a real effects-based approach, the analysis proposed by the Discussion Paper is examined and criticized based on the reports and commentaries published. Moreover, the Guidance Paper is briefly analyzed to show that the Commission is insistent on its formalistic approach regarding the exclusionary abuses of the dominant firms. In the last part, the author provides some suggestions for the Commission to revise the application of Article 82 to exclusionary abuses. In this part, mainly the Etro’s theory of market leaders is used.

The sources of monopoly power before Bain (1956) by M. Mosca (2009).

The purpose of this article is to show that there is a gap in the literature on the sources of monopoly power. It looks at the literature on the history of different topics (Industrial Organization, Models of profit maximization in non-competitive markets, Antitrust, Competition) to find out which kind of limitation to entry economists before Bain took into account, the role they attributed to the number of firms present in the market, and their ideas on potential competition. It finds that there are good reasons to investigate the sources of market power in the Italian marginalist thought. The paper demonstrate that: 1. new filiations of ideas can be traced; 2. entry is not considered before 1950s only in analytical models, while in non formalized theory there is a lot on this notion; 3. economists were perfectly aware of the situation between perfect competition and monopoly before 1930s; 4. Italian marginalists used a kind of theory of strategic competition, which was an adaptation of the classical theory of competition; 5. competition policies were requested in 19th century not only in the U.S.

The Microsoft Judgment and its Implications for Competition Policy Towards Dominant Firms in Europe by C. Ahlborn and D. Evans (2009, Antitrust Law Journal)

The European Court of First Instance (CFI) rejected Microsoft's grounds for annulling the Commission's Decision that the software maker had abused its dominant position in computer operating systems by refusing to supply certain protocols for interoperating with rivals' computers and by tying Windows Media Player to its Windows operating system. This article argues that the Court's judgment continues the form-based approach it has followed for four decades to abuse of dominance cases and is inconsistent with the Court's emphasis on coherent economic reasoning in merger clearance reviews, thereby reinforcing a divide between these two critical parts of European competition policy. The CFI's approach also continues its historical adherence to focusing on market structure and putting aside direct evidence of adverse effects on consumer welfare. In particular, the CFI did not embrace parts of the Commission's Decision against Microsoft that advocated an effects-based approach. At the same time the CFI's judgment expands the possibilities for finding an abuse of dominance by weakening key prongs of the Bronner/Magill/IMS exceptional circumstances test for refusal to supply and adopts a separate products test for tying that has illogical implications for many standard cases.

Endogenous Market Structures and Antitrust Policy by F. Etro (2009).

The recent literature on the endogeneity of market structures has revisited a number of descriptive results of industrial organization for markets with strategic interactions and endogenous entry of firms, and a number of normative results on industrial policy, trade policy and macroeconomic policy.

This article will apply this theoretical apparatus to discuss antitrust policy issues. In particular, it will advance a critical view of the post-Chicago approach to antitrust policy, emphasizing that this approach has often disregarded the consequences of the endogeneity of the market structure. This takes into account both strategic interactions and the endogeneity of the number of strategic players in the market: the hypothesis of endogenous entry should not be interpeted as pure free entry in perfectly competitive markets, but as a condition determining endogenously the size of the market power of the active firms. Taking this into account, standard results of the post-Chicago literature can be radically modified. The main implications concern the behavior of market leaders and, consequently, the antitrust approach to abuse of dominance (or monopolization) issues, but I will also derive implications for the antitrust approach to mergers and collusion.

The theory of endogenous entry and market leadership has shown that whether entry in a market is exogenous or endogenous makes a lot of difference for the way leaders behave (Etro, 2006a, 2008). In markets where entry is independent from the profitability conditions, market leaders can adopt accommodating strategies to increase prices or aggressive ones to exclude rivals, and their strategies can harm consumers. When entry is endogenously dependent on the profitability conditions in the market, the leaders always adopt aggressive strategies which typically do not harm consumers. For instance, a firm competing with a single rival could engage in accommodating pricing to increase mark ups, or could engage in predatory pricing to induce the exit of the rival, but a firm facing endogenous entry of competitors will ordinarily engage in aggressive pricing strategies without exclusionary purposes. As a second example, consider a monopolist in a primary market competing also in a secondary market: when the latter is characterized by a single rival, the monopolist may bundle its goods to monopolize also the secondary market, but when the secondary market is characterized by endogenous entry the only purpose of bundling can be the strengthening of price competition. Finally, a firm facing a single rival could adopt vertical restraints on its retailers or price discrimination strategies to soften price competition, but when the same firm faces endogenous entry of rivals these anti-competitive practices will not be in its interest. Of course, notice that efficiency reasons can still motivate the adoption of bundling, vertical restraints, price discrimination or other strategies. Therefore, the overall flavor of the endogenous market structures approach is reminiscent of the Chicago school, but the analysis is based on game theoretic foundations in line with the post-Chicago tradition.

The endogenous market structures approach delivers a related and strong result on horizontal mergers. As well known, even in the absence of cost efficiencies, these mergers are often profitable when entry is exogenous because they allow the merged entity to increase prices or restrict production so as to enhance profitability. These effects are counterproductive when entry is endogenous because any accommodating strategy attracts entry. Therefore, the only rationale for mergers in markets with endogenous entry must be a cost efficiency large enough to (more than) compensate the strategic disadvantages associated with the merger. In these cases, mergers are welfare improving. Similar results apply to cartels, that are ineffective whenever entry in the market is endogenous, unless the cartels act as leaders (in this last case, the cartels coordinate aggressive strategies aimed at increasing the market shares of their members through low prices, and their implementation is always sustainable and it does not even harm consumers).

It is clear that the relevance of these results depends on the relevance of the hypothesis that entry is endogenous in a specific market. One may argue that entry can be usually regarded as endogenous in the medium and long run, but not in the short run. If this is the case, and if antitrust policy is aimed at correcting distortions in the medium and long run (as opposed to short run distortions), then these results are potentially relevant.

Market Leaders, Antitrust Policy and the Software Market by F. Etro (2008, Icfai Journal of Industrial Economics).

A recent growing literature has analyzed from a theorical and empirical point of view the role of market leaders in sectors with barriers to entry and with endogenous entry. In particular Etro (2007) has developed a full fledged theory of market leaders and based a new approach to antitrust policy on this. This article starts from those results and studies an important example of market leadership and technological leadership, that of Microsoft in the software market, which is also associated with well known antitrust cases. The choice of Microsoft as a symbol of market leadership is somewhat natural: Microsoft is one of the most visible and relevant companies in the New Economy, one of the most innovative firms in one of the most dynamic industries. The antitrust cases in which this company has been involved in both the US and the EU attracted primary attention of media, policymakers and observers. Many important economists were involved in these antitrust cases in both the US and the EU, and many others were inspired by them while developing theoretical and empirical analysis on the structure of the software market, on the role of Microsoft in this market and on the role of antitrust policy for the New Economy. In a recent important book, Evans et al. (2006) have emphasized the crucial role that software platforms are playing in shaping our economies, in enhancing the development of many traditional sectors, and ultimately in affecting our way of living. These “invisible engines”, as they call the software platforms, power not only the PC industry but also other industries like those associated with mobile phones and other handheld devices, video games, digital music, and (with strong externalities for the rest of the economy) on-line auctions, online searches and web-based advertising. Their claim is that software platforms and microprocessors are at the basis of a new industrial revolution, exactly as the steam engine had been at the basis of the first industrial revolution (1760-1830) and electric power at the basis of the second industrial revolution (1850-1930). The third industrial revolution began with the introduction of commercial PCs in the early 80s and had a second phase starting in the mid 90s with the diffusion of the Internet. Observers have talked about “Intel economics”, “Microsoft economics” or the “Internet economics” to refer to this period of innovations in general purpose technologies, and to describe the ultimate engine of growth in the New Economy. This article surveys the wide academic debate on these issues. The aim is not to provide a comprehensive analysis of the software market or of the role of Microsoft, but to point out relations between the theory of endogenous market structure and the structure of this market, and use this theoretical background to evaluate antitrust issues involving Microsoft.

Refusals to License IP: Are we Closer to an Optimal Legal Standard after Microsoft vs. Commission? by Y. Katsoulacos (2008).

Economic theory suggests that refusals to license IP rights are on average benign, and thus presumptively legal, taking into account both long-run and short-run considerations. If, as the US authorities indicated in Xerox, the presumption of legality is quite strong, we show that a Per Se Legality standard should be adopted, as it is then superior in welfare terms to any discriminating standard including EU’s ‘exceptional circumstances’ one (even though Per Se Legality maximizes false acquittals). The scope for reduced costs of decision errors by discriminating standards is not sufficiently large to compensate for negative indirect effects. If, on the other hand, the presumption of legality is not very strong - the Commission’s point of view regarding interoperability information in Microsoft, endorsed recently by the CFI - then a discriminating rule is expected to be superior to Per Se Legality. We show that the ‘exceptional circumstances’ standard is likely to be optimal under these circumstances. However, this will be the case not because, as the existing literature suggests, it minimizes the costs of decision errors relative to other standards, such as the one adopted in Microsoft, but because it minimizes negative deterrence effects, not taken into account in the existing literature.

TWO-SIDED PLATFORMS AND ANALYSIS OF SINGLEFIRM CONDUCT by D. S. Evans (2006).

Recent work in economics has shown that many significant industries are based on “two-sided platforms” that enable distinct groups of customers to interact with each other and obtain the benefits of externalities between them (see "Invisible Engines: How Software Platforms Drive Innovation and Transform Industries", by David S. Evans, Andrei Hagiu and Richard Schmalensee, 2006, The MIT Press). These include old-economy industries such as advertising-supported media and new-economy industries such as those based on software platforms and web portals.

Pricing and other business strategies are strongly affected by the interdependencies between the two sides of the platform. As a matter of theory, for example, the profit maximizing prices may entail below-cost pricing to one set of customers over the long run and, as a matter of fact, many two-sided platforms charge one side prices that are below marginal cost and are in some cases negative.

Antitrust analysis of single-firm conduct—and, of course, all antitrust analysis— should be cognizant of the economics of two-sided platforms. This paper provides a brief introduction to this topic.

Reevaluating Merger Guidelines for the New Economy by K. Rhee (2006).

The inherent dynamic competitiveness of the new economy brings about novel challenges to antitrust enforcements. This article evaluates the appropriateness of the 1992 Horizontal Merger Guidelines for United States in light of this new environment. It shows that the Guidelines relies too heavily on market concentration measures that are bound to be overstated for new-economy industries. To properly address the dynamic competitiveness of the market, we suggest that the Guidelines should (i) explicitly consider innovation markets in the market-defining process, (ii) pay attention to entry conditions as the most important standard for assessing competitiveness, (iii) examine demand-side volatilities when assessing likeliness of entries, and (iv) use less strict standards for substantiating efficiency gains.

Competition Policy for the New Economy by F. Etro (2007).

The EU Approach to Abuse of Dominance by F. Etro (2006).

The main provisions of European Competition Law (what in US terminology would be Antitrust Law) concerning abuse of dominance are contained in the Article 82 of the Treaty of the European Communities which states:

“Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading  parties, thereby placing them at competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”

This article (as Article 81 on horizontal and vertical agreements) is part of the law of each member state and is enforced by the European Commission (in particular the Directorate General for Competition) and by all the National Competition Authorities. The application of EU competition law on abuse of dominance involves the finding of a dominance position and of an abusive behaviour of the dominant firm, usually associated with excessive pricing or with exclusionary practices as predatory pricing, rebates, tying or bundling, exclusive dealing or refusal to supply. However, the analysis of both dominance and abusive behaviours entail complex economic considerations and has been subject to a recent revision. The European Commission published, in December 2005, a Discussion Paper on exclusionary abuses under Article 82 (hence on, the Discussion Paper) which is the subject of an open debate and gives an important indication as to how the Commission may approach exclusionary abuses in the future. The Discussion Paper states that the purpose of Article 82 is “the protection of competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources” (# 4). This implies that antitrust should protect competition and not competitors and be based on an economic approach aiming at the maximization of consumer welfare and allocative efficiency rather than based on a legalistic approach.

In the current proposal of the guidelines for EU antitrust there are some positive aspects, mainly in the central concern to enhance consumer welfare and to protect competition and not competitors, but such a welfare-based approach is not enough supported in the overall design of these guidelines. This paper reviews the EU approach to competition law regarding abuse of dominance in the general terms concerning the definition of dominance and the objectives of antitrust, and with references to the main cases of abusive conduct, and I will provide an evaluation of the Discussion Paper.

ICC Comments on the European Commission discussion paper on the application of Article 82 of the Treaty to exclusionary abuses (2006).

EXECUTIVE SUMMARY: The Commission’s International Chamber of Commerce welcomes the opportunity to comment on the European Commission’s Discussion Paper. We hope that our comments will be helpful. We welcome the opportunity to expand upon our comments, if necessary. In the currently contemplated guidelines there are positive aspects, mainly in the central concern to enhance consumer welfare and to protect competition and not competitors. We recommend that such a welfare-based approach be more supported in the overall design of these guidelines. Consumer welfare does not necessarily equate to the public interest more generally and short term consumer welfare and the wider public interest may differ. The interrelationship between the purposes of antitrust and the wider public interest should be made more explicit. Consistent with a welfare-based approach would be a clearer acknowledgement that as specific business conduct may simultaneously give rise to (short term) efficiency gains and (longer term) negative effects, the reviewing agency necessarily must take account of both effects in its (initial) finding of abusive behavior. Moreover, as the contemplated guidelines are likely to be relied upon by a large number of decision makers, including national courts, it would be helpful if the guidelines would make clear that in ex ante assessments of conduct under Article 82, the finding of an abuse of a dominant position is subject to a rigorous standard of proof as the successive future chain of events ultimately giving rise to the negative effects on consumers required under Article 82. In ex post reviews a key element in the evaluation is the causal connection between the alleged abuse and those negative effects. We invite the Commission in particular to further consider the risk of market definitions that are artificially narrow, in particular with regards to new technologies which relevant markets are, more than any other, likely to be excessively segmented.

Dominance. The stress on market shares in the evaluation of dominance (paragraphs 29-33) appears in clear contrast with the conclusions of the modern theory of market leadership: market leaders have larger market shares exactly when they are constrained by effective and potential competition since in this case they adopt more aggressive (pricing and investment) strategies which expand their market shares. In other words there is not necessarily a positive correlation between the presence of larger market shares and a dominant position and, especially in highly dynamic markets, there is not unambiguous theoretical support for a statement saying that “[m]arket share is only a proxy for market power” (paragraph 32). As a recent DG Competition’s study on Article 82 has correctly pointed out, “the case law tradition of having separate assessments of dominance and of abusiveness of behavior simplifies procedures, but this simplification involves a loss of precision in the implementation of the legal norm. The structural indicators which traditionally serve as proxies for ‘dominance’ provide an appropriate measure of power in some markets, but not in others”, as indeed in high-tech and New Economy industries (e.g., computer hardware and software, online businesses, mobile telephony and biotechnology).

Framework for analysis of exclusionary abuses. In particular, we would encourage the Commission more fully to ensure that the interests of consumers are always paramount of those of competitors, to move even further away from form-based rules and presumptions towards a more economics- and fact-based approach, and to expand the avenues through which account may be taken of the efficiency-enhancing effects of challenged conduct.

Predatory pricing. The Discussion Paper substitutes the standard Areeda-Turner test based on AVC with the AAC, a sort of average marginal (or incremental) cost of the extra output to serve the predatory sales. Unfortunately, the AAC can be quite higher than the right theoretical concept whenever it accounts for fixed costs. Moreover, the AAC can be much more difficult to measure than the AVC since it is almost always impossible to precisely define which costs are sustained for a given output and isolate the extra output (supposedly the predatory output) from total output. Finally, there are well known conditions, as in presence of network externalities, under which pricing below marginal cost is a normal competitive strategy for a market leader. Hence it would be better to substitute the concept of AAC with that of average variable cost (AVC), in line with the traditional economic interpretations of the Areeda-Turner test.

Single branding and rebates. Overall, the Discussion Paper contemplates a more flexible approach than in the past.  It appears to depart from a per se prohibition and make assessment of rebates conditional on the existence/likelihood of foreclosure effects.  In principle, the Commission intends to conduct an analysis of the market conditions in order to show that foreclosure effects are at least likely.  The ICC also welcomes the introduction of an efficiency defense that dominant companies can use in order to justify their rebate systems. However, several passages in the Discussion Paper seem to cast doubts on a genuine change of approach.

Tying and bundling. While the Discussion Paper purports to adopt a more balanced approach that takes into account that tying and bundling can be pro-competitive, we are concerned that this approach is not carried through into the details of the analysis. A close reading suggests that certain older presumptions against tying remain embedded in the analysis, which, taken together, risk perpetuating the current situation in which tying and bundling are viewed as suspect unless proven otherwise.  In our view, this would be a mistake, and we urge the Commission instead to adopt an approach that would better reflect that basic principle that tying is generally pro-competitive. In addition to our overarching concern that the proposed analysis fails to take account of the quite common benefits of tying, our specific concerns include: (i) the proposed “distinct products” analysis; (ii) the discussion of the “market foreclosure effect”; and (iii) the treatment of the efficiency defense.

Refusal to supply. The Section of the Discussion Paper on Refusal to Supply seems to start from the existing case-law, but still raises many controversial policy issues that, the ICC submits, warrant further consideration by the European Commission, such as necessary or sufficient conditions, different thresholds, indispensable input and foreclosure effect.. The thresholds to argue efficiencies and objective justifications seem to be too high to be realistically successful in practice. Furthermore, the Discussion Paper fails to acknowledge that an input may become indispensable simply as a result of a company’s superior business performance. The ICC submits that a duty to deal/supply should not be imposed simply because consumers prefer the dominant company’s products.

In setting out the exceptional circumstances where refusal to licence an IPR may constitute an abuse, the Discussion Paper starts from the principles and approach well established in the case-law of the Court of Justice (notably and most recently, IMS Health). However, it then fails to give guidance on some key issues still left open by IMS Health and, in some instances, expands the scope of potential compulsory licensing to cover cases beyond the requirements of exceptional circumstances set out in IMS Health, thus potentially having a chilling effect on incentives to invest and innovate.

Aftermarkets. We recall the comments made in our submission dated 12 December regarding aftermarkets. In particular, we suggest that the Commission examine the competitive links between products and systems at the stage of market definition. The Commission would thus recognise, in line with economic analysis, that main products  and their spare parts or consumables should, in appropriate cases, be considered as systems which, together with other systems against which they are in competition, constitute a single relevant product market. We believe that the complex, multi-step analysis of aftermarkets set forth in the Discussion Paper would be both unnecessary and counterproductive.  The Discussion Paper appears to acknowledge that harm to customers through actions by a supplier of aftermarket products and services is a limited concern.  The only example provided is one in which a supplier adopts a “policy change” with respect to aftermarket products or services. We submit that it is preferable to address this limited concern regarding “installed based opportunism” through private contracts rather than by attempting to apply Article 82 to single-brand aftermarkets and treating a “policy change” as a potential abuse of dominance.

For the point of view of a leading international law firm, see the Ashurst Comments on DG Competition Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses (2006)

Competition Policy: Toward a New Approach by F. Etro (2006, European Competition Journal).

The new theory of market leadership tries to integrate the Chicago approach of the 60’-70’s, which has emphasized the importance of competition in constraining market leaders and the post-Chicago approach of the 80’-90’s, which has emphasized the strategic interaction between market leaders and competitors. While the former approach has ignored strategic interactions and the asymmetric role of market leaders, the latter has ignored the role of endogenous entry, focusing only on the relation between an incumbent and a competitor: the theory of market leaders tries to fill this gap. The results, however, are conflicting: under price competition, while the post-Chicago approach associates any aggressive pricing with predatory purpose, the new theory of market leaders shows that aggressive pricing can have a pro-competitive and welfare enhancing role without exclusionary purposes. The theory is applied to EU antitrust issues, especially with reference to the current reform of the application of Article 82, and to the Microsoft case.

See also Market Dominance: An Economic Perspective on Art. 82 EU by F. Etro (2006, European Enterprise Institute).

Exploitative Practices in Article 82 by Y. Katsoulacos (2006).

One of the most controversial aspects of article 82 relates to the prohibition of socalled Exploitative Practices or, more specifically, to the prohibition of excessive prices. In addition to condemning Exclusionary (or Foreclosure) Practices, Competition Authorities in Europe can, under article 82, also condemn “excessive pricing”. This is an area where EU Competition Law differs from US Law which does not provide the competition agencies with the power to intervene in cases of “too high” prices. The Commission’s recent proposals for the revision of article 82 do not at present contain proposals for a potential revision for dealing with exploitative practices. However, it is anticipated that such proposals will be made in due course.

The purpose of this article is to assess how the application of a more economics-based approach, which is behind the current reform proposals of the application of article 82 to exclusionary practices, might affect the treatment of exploitative practices. It is interesting that while for exclusionary practices an economics-based approach leads naturally to a rule of reason attitude towards assessing potential offenses, in the case of exploitative practices an economics-based approach suggests that a per se legality norm may be the most appropriate norm to apply. Such a norm has been proposed recently by Evans and Padilla (20045). To reach such a conclusion, however, the author believes that certain modifications, specifically in relation to the “as-efficient” competitor test, have to be made in the proposed reforms to the application of article 82 to exclusionary practices.

An Economic Analysis of Article 82 by J. Gual, M. Hellwig, A. Perrot, M. Polo, P. Rey, K. Schmidt and R. Stenbacka (2005, Report by the Economic Advisory Group for Competition Policy).

This excellent Report by a group of outstanding economists of the Economic Advisory Group for Competition Policy argues in favour of an economics-based approach to Article 82 of the EC Treaty, which prohibits the abuse of a dominant positions. In particular, the Report supports an effect-based approach to competition policy rather than a form-based one. Such an approach focuses on the presence of anti-competitive effects that harm consumers, and is based on the examination of each specific case, based on sound economics and grounded on facts. The Report emphasizes that many market strategies as aggressive pricing, price discimination, rebates, tying and bundling, refusals to deal or exclusive dealing can have both anti-competitive and pro-competitive effects and these should be judged according to the consequences for consumer welfare (rather than to the impact on competitors, which is what a form-based approach often ends up doing). Notice also that what matters is not only welfare of current consumers but also that of future ones. As an example, the Report considers “the problem of monopoly pricing. One response to the problem might be for the competition authority to intervene, citing excessive pricing by a monopolist as an infraction of the abuse-of-dominance prohibition in Article 82 of the Treaty. Another response might be to leave the matter alone, hoping that the profits that the monopolist earns will spur innovation or imitation and entry into the market, so that, eventually, the problem will be solved by competition.” We believe that four main elements of the proposal are quite important:

1) The fundamental role of economic theory. The application of an effects-based approach to anti-trust analysis and policy requires proper procedures: first, according to the Report, “the authority must analyse the practice in question to see whether there is a consistent and verifiable economic account of significant competitive harm. The account should be both based on sound economic analysis and grounded on facts. In particular, since many practices can have pro- as well as anti-competitive effects, merely alluding to the possibility of a story is not sufficient. The required ingredients of the story must therefore be properly spelled out and shown to be present. At the same time, the authority must check to see whether the practice in question cannot also be justified as a legitimate mode of competitive behaviour. If several interpretations are possible, the authority must investigate whether the data permit a distinction as to which of the different interpretations apply…Formal models are designed to verify the consistency of arguments about one particular effect and to gain an idea about the empirical data one needs in order to assess the relevance this effect in a given case…for each particular effect that is considered, the arguments that are made should be grounded in formal analysis. At this level the analysis should rely on models as tools to assess the validity of the argument - in its relation to the facts, as well as internal consistency, and consistency with the other arguments that are given. Where empirical information points to effects that have not yet been studied in the literature, it may be necessary to develop a model from scratch, relying on standard methods”. Moreover, the Report suggests that “a natural process would consist of asking the competition authority to first identify a consistent story of competitive harm, identifying the economic theory or theories on which the story is based, as well as the facts which support the theory as opposed to competing theories. Next, the firm should have the opportunity to present its defense, presumably to provide a counter-story indicating that the practice in question is not anticompetitive, but is in fact a legitimate, perhaps even pro-competitive business practice. In the end, it will be up to the court to determine which story it considers to be the most plausible…the general rule should be that the antitrust authority bears the burden of proof for identifying and establishing anticompetitive effects…in the absence of additional evidence to the contrary, an argument based on established economic theory and supported by facts that according to the theory, are material to the assessment of the practice in question should be deemed more credible than a counterargument that does not have such a basis… Taking existing economic theory as a standard of reference removes some arbitrariness from such an interpretation” (italic added).

2) The irrelevance of structural indicators to verify a dominant position. While a form-based aproach needs to verify dominance of a firm and the existence of a certain abusive behaviour, the effect-based approach just needs to verify the existence of harm to consumers which implies by itself abuse of dominant position. In this sense the use of an index of market concentration and of data on market shares used to infer the dominance of a firm are useless, a recent economic research in industrial organization has shown, while the focus should be on the consequences of the market strategies on consumers. This is in line with the well known principle for which dominance is not illegal while its abuse is illegal: “The case law tradition of having separate assessments of dominance and of abusiveness of behaviour simplifies procedures, but this simplification involves a loss of precision in the implementation of the legal norm. The structural indicators which traditionally serve as proxies for ‘dominance’ provide an appropriate measure of power in some markets, but not in others. In a market where these indicators do not properly measure the firm’s ability to impose abusive behaviour on others, the competition authority’s intervention under traditional modes of procedure is likely to be inappropriate” (italic added) .

3) The focus on promoting free entry. The focus of the antitrust analysis should be on existence of free entry conditions in the market, which guarntee a competitive outcome which should be beneficial to consumers. Lack of free entry is associated with harm to consumers, while effective free entry in the market is associated with the absence of abuses of dominant positions. According to the same Report, “In an effects-based, non-dirigiste approach the analysis of competitive harms naturally focuses on keeping the competitive process open and avoiding the exclusion of actual or potential rivals from the market. In addition, by focussing on the impact of competition policy towards barriers to entry, such an approach guarantees an easier access to markets for new entrants” (italic added). This point is in line with recent economic theories on market structure, which show that the priorità of anti-trust authorities sould be in fighting against barriers to entry rather than market leaders and that, under certain circumstances, the presence of a market leader in a dominant position can be welfare improving for the consumers as long as entry in the market is free and effective or potential entry creates a competitive pressare on the actions of the same leader.

4) Aggressive strategies can be pro-competitive and increase consumer welfare. The typical interest of anti-trust authorities is in exclusionary strategies by dominant firms which are usually aggressive strategies in the short run, with the aim to induce exit of the competitors. For instance, the market leader may reduce the price (predatory pricing) or it may simply overinvest in capacity to expand production and lower prices to induce exit of the followers; it may choose a very high level of quality, offer additional varieties (product proliferation) or augment its advertising efforts reducing the competitors’ demand or expected profits; it may adopt bundling or tying strategies; and finally it may engage in aggressive forms of price discrimination or offer targeted rebates in order to reduce the rivals’ demand and induce losses. However, under certain cirumstanes, these same strategies may be pro-competitive. For instance, an aggressive pricing strategy by market leaders may be a pro-competitive strategy with positive effects for the consumers in the long run in presence of introductory pricing, economies of scale and scope, learning-by-doing or network effects; higher quality, more varieties and more informative advertising by the dominant firm can be positive for the consumers while hurting competitors who would be forced to increase their investments in quality, differentiation and advertising; bundling may have an efficiency rationale and may induce stronger competition on bundles rather than on separate goods, especially in case of mixed bundling; and finally price discrimination or quantity discounts by the dominant firm may make better off some consumers and not others but they may also enhance competition with rivals on a customer per customer basis, with positive effects on final prices. The only way to judge these strategies and their consquences for the consumers is to have a solid theoretical framework to understand each particolur market structure, which is at the basis of the effect-based approach proposed by the Report. The adoption of this approach would represent a major step in the achievement of the goals of the EU in terms of promoting competition, innovation and growth in the European countries.

To see the European Commission Competition discussion paper on the application of Article 82 related with the above paper, click here.

Competition policy and sector-specific regulation for network industries by M. Hellwig (2004).

Network Industries such as telecommunications, electricity, gas, railways, postal systems have traditionally been organized as vertically integrated monopolies in state ownership and/or subject to sector-specific regulation.  Regulation has come to be seen as a promoter of competition, competition in downstream markets through access regulation, and competition among networks themselves where feasible and economically sensible. Given that, under the new paradigm, network industries are no longer treated as monoliths, the role of competition policy and the relation between competition policy and sector-specific regulation in these industries become an issue. If the promotion of competition in downstream markets is successful, why shouldn’t these markets be subject to general competition rules rather than sector-specific regulation? If competition between networks is workable, why should there be a need for sector-specific regulation at all? The paper addresses these questions, largely on the basis of the German experience with telecommunications and electricity industries.

For more on this subject see the June 2005 Stockholm Network Monthly Bulletin.