ARTICLE 82 REFORM: AN ECONOMIC PERSPECTIVE(?)

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ARTICLE 82 REFORMAN ECONOMIC PERSPECTIVE(?)

• IESTYN WILLIAMS

These thoughts are preliminary. Comments
welcome.
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OVERVIEW

• General perspective on approach
• Does it provide an appropriately economic
  perspective?
• Market definition and market power useful
  filters?
• Differentiating right from wrong and the
  special responsibility
• Consistency across forms

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EFFECTS- NOT FORM-BASED APPROACH

• Growing recognition (?) that an explicitly
  economics-based approach is needed
• Common ground among (most) economists that
  form-based rules are not generally appropriate
• Pro- and anti-competitive motivations for most
  relevant forms of behaviour
• Overlaps such that form-based bright lines not
  desirable
• Danger of inconsistent treatment of conduct with
  equivalent effects

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FOCUS HARM TO COMPETITION

• Focus on exclusion
• Consensus that (consumer) welfare effect is
  ultimate economic measure
• But how practical/appropriate is this as a guide
  in specific Article 82 cases?
• Develop a coherent fact-based story of harm to
  competition
• When does foreclosure of particular competitors
  harm the competitive process and consumers?
• How should collateral damage be treated?

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CLEAR BUT ARBITRARY RULES DONT HELP

• Example Treatment of common costs in DG COMP DP
• DP provides rule on how common costs will
  generally be allocated in multi-product settings
• Allocated in proportion to turnover achieved on
  individual products
• Allows calculation of Average Total Costs
  associated with a product
• Does not imply, however, that analysis based on
  this ATC rule makes economic sense

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INTERVENTION IS COSTLY

• Competition authorities need to balance costs of
  false positives and false negatives
• In dynamic market settings, impact of mistaken
  interventions (and precedents created) may easily
  outweigh effects of non-intervention
• Recognise too that freedom to intervene also
  creates uncertainty which damages healthy
  competition
• Chilling effect on the competitive process
• Value in non-intervention commitments even if
  some harmful conduct escapes

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FILTERS HAVE A VALUABLE ROLE

• Filters and safe harbours can play a valuable
  role in narrowing focus
• For example, in testing a foreclosure story
• Does the target for investigation possess market
  power?
• Does the conduct in question actually affect the
  buyers incentives to deal with the competitor?
• Are alternative routes to market available?
• Insufficient emphasis in DG COMP DP?

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IS A MARKET POWER FILTER USEFUL?

• Current Article 82 process involves three
  distinct stages
• Market definition
• Competitive (dominance) assessment
• Analysis of conduct
• EAGCP suggested that an effects-based approach
  needs to put less weight on a separate
  verification of dominance

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MARKET POWER I

• Common ground that only firms with substantial
  market power can cause harm to competition
• Logic ? if prove harm, dominance is automatically
  satisfied
• Only need to focus on conduct?

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MARKET POWER II

• In practice risk that abandoning dominance
  pre-qualification will lead to excessive
  intervention
• Backward implementation (We know abuse when we
  see it)
• Testing for harm not that straightforward

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IS DOMINANCE FILTER TOO RESTRICTIVE?

• Concern sometimes expressed that dominance
  (market share) precedents prevent action against
  abuse in some settings
• Example Electricity generation and OFGEMs
  Market Abuse Licence Condition
• 2 responses
• From an economic perspective, definition of
  dominance is not a limitation
• Value in commitment to non-intervention, even if
  prevents justified action in some cases

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MARKET DEFINITION SSNIP TEST

• Dominance assessment requires markets to be
  defined
• Hypothetical monopolist or SSNIP test provides
  well-established basis for market definition in
  competition cases
• Could a hypothetical monopolist controlling
  products in hypothesised market raise prices
  permanently and profitably by 5 - 10
• If YES, set of products represent a well-defined
  market if NO, broaden
• Provides a framework for assessing strength of
  demand- and supply-side substitution

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MARKET DEFINITION PRACTICALITIES

• In practice, the market definition exercise
  typically involves a rounded assessment,
• Draws on multiple pieces of evidence
• An overall picture of competition is assembled
• Relatively rare for test to be applied formally
• Nevertheless, conceptual/organising value of
  SSNIP framework remains important

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MARKET DEFINITION CELLOPHANE FALLACY

• A firm with market power might be expected to
  have raised prices already to point where no
  further price increases possible
• ie to point where demand is elastic
• Conducting SSNIP test at prevailing prices would
  lead to overly broad market definition in this
  case
• But not a SSNIP-specific problem
• Where low pricing concerns, reverse distortion
  may arise
• Fundamental problem What is competitive price
  (benchmark)?

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CELLOPHANE FALLACY IMPLICATIONS

• Significant damage to application of market
  definition test in conduct settings
• cf. merger settings where prevailing price is
  relevant benchmark
• Is there any value in undertaking market
  definition exercise?
• SSNIP still provides important conceptual
  framework for analysis
• Not all evidence is contaminated
• However, emphasises need for careful analysis of
  effects

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TREATMENT OF CONDUCT PREDATION EXAMPLE

• Summary of DG COMP DP Approach

Predation finding possible, where
non-replicable advantages in play
ATC
Focus on intent, broadly defined. Documentary
evidence may lead to presumption Broad range of
indicators, eg selective price cutting, actual
exclusion.
AAC
Predation presumed
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HOW FAR SHOULD SPECIAL RESPONSIBILITY EXTEND?

• Should a dominant firm be obliged to forego
  actions whose (incremental) profitability does
  not depend on excluding rivals?
• Classic example Selective price cutting on
  marginal sales
• Must a dominant firm price to allow less
  efficient firms to survive?
• DG COMP DP says yes sometimes
• Is this a reasonable obligation?
• Is it desirable?

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INTENT

• Helpful recognition in DG COMP DP that general
  talk is not evidence of intent
• Nevertheless, direct evidence claimed to allow
  presumption of predation
• Avoids need to test coherent theory of harm
• Broad range of factors identified as contributing
  to indirect evidence
• Example Above avoidable cost selective pricing

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INDISPENSABILITY AND SACRIFICE TESTS

• Meeting the competition Could losses be
  avoided/efficiencies achieved in a less
  distorting way?
• Generally imposes to high a burden on firms
• Impact of genuine mistakes etc
• How much sophistication reasonable?
• Useful as a guide to exploring business
  motivations BUT not a definitive test

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CONSISTENT TREATMENT OF COMMON THEMES

• Example Selective price cuts and rebates (
  predation)
• Common concern is abusive low pricing
• Consistent analytical framework
• Focus on possible foreclosure of equally
  efficient competitors
• Avoidable cost tests appropriate
• Identify and focus on sales range that is open to
  competition

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CONSISTENT TREATMENT II

• Consistent treatment of low pricing effects
  required
• Example Rollback rebate of 20 on 80 sales
  target
• DG COMP DP appears to endorse ATC as floor for
  low pricing in rebates context

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FORM AND EFFECT REVISITED

• Form-based predation tests need thoughtful
  application
• Example Roll-back rebates
• Form -ve pricing for some ranges
• Effect Are these ranges competitively relevant?

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END NOTE EMPHASIS ON FORMAL MODELS

• EAGCP emphasised role of formal models
• Formal modelling offers transparency and rigour
• An important weapon in the armoury
• However, can gain a momentum of its own
• Spurious confidence in predictions
• Risk ignoring important factors because less
  easily modelled
• Relying on implications of a particular
  theoretical model generally over-optimistic and
  potentially harmful

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CONCLUSIONS

• Focus for investigation must be a coherent
  fact-based theory of harm
• Consistent effects-based analysis required
• Cant escape serious implications of cellophane
  fallacy
• Recognise benefits of not intervening
• Demands made of dominant firms in abuse context
  must be
• Base on standards (eg cost benchmarks) that the
  firm can reasonably be expected to know
• Motivated by serious concerns of harm to the
  competitive process