What makes unilateral conduct abusive? An economic perspective

Transcription

1 What makes unilateral conduct abusive? An economic perspective 11 th Annual Conference of the GCLC, Brussels, 26 and 27 November 2015 Andrea Lofaro 23 November, 2015

2 Overview Effects based vs form based approach The as efficient competitor test Appropriate cost measures Assessing effects of exclusionary practices in practice Retroactive rebates and the Intel case Tying practices and the Browser case 2

3 Effects based vs form based approach Guidance paper suggests consumer welfare and economic efficiency are the guiding principles in the application of EC competition law Para. 5: In applying Article 82,... the Commission will focus on those types of conduct that are most harmful to consumers Para. 6: what really matters is to protect an effective competitive process and not simply protecting competitors. This may well mean that competitors who deliver less to consumers in terms of price, choice, quality and innovation will leave the market These are sound statements. A form-based approach generally fails to protect consumer interests as it can discourage pro-competitive practices 3

4 Effect based approach and the as efficient competitor test (I) As efficient competitor test is a key tool to implement an effects-based approach Acknowledged in the Guidance Paper: Para 22: the Commission will normally intervene where the conduct concerned is capable of hampering competition from competitors which are considered to be as efficient as the dominant undertaking Good benchmark to distinguish between harm to competitors that arises from competition on the merits and anti-competitive foreclosure Reduces uncertainty for dominant firms (since test is based on own costs and prices) 4

5 Effect based approach and the as efficient competitor test (II) Consider a market where a dominant firms produces at a cost of 5 and sells at a price of 10 A new entrant produces a similar product for a cost of 7 and undercuts the monopolist by charging 8 Incumbent s possible response is to undercut its new rival by charging 7 (or less). The incumbent can charge this price and still make a profit However, the less efficient entrant will be forced to exit the market, at which point the monopolist can revert to a price of 10 Has the dominant firm committed an abuse that requires intervention? 5

6 Effect based approach and the as efficient competitor test (III) From a static perspective, there is a clear case for intervention Consumers are better off in a market where the dominant firm is constrained by an inefficient rival This is the stance that has been taken by the Commission in a number of places throughout the GP However, no reason to assume that the correct counterfactual is no competition Potential entrant could strive to enter the market through innovation that lowers its cost base or by offering a differentiated product In the long-term, intervention would reduce the incentive to increase efficiency for both the dominant firm and the new entrants No practical policy rule under which a dominant firm can determine a lawful course of action To prevent foreclosure, the relevant test would need to be based on rival s costs rather than on dominant firm s cost 6

7 Appropriate cost measures (I) Most used cost measures to establish whether the conduct under investigation has the capacity to foreclose: Average avoidable costs (AAC) o o Average cost per unit that could have been avoided if the company had not produced a discrete amount of (extra) output AAC will often be the same as or similar to the average variable cost (AVC) Long-run average incremental costs (LRAIC) o o Average of all the (variable and fixed) costs that a company incurs to produce a particular product LRAIC and average total cost (ATC) are the same in the case of single product undertakings but not in multi-product settings 7

8 Appropriate cost measures (II) AAC suitable cost benchmark P < AAC may potentially exclude as efficient competitors Reasonable to require a justification when P < AAC However, to avoid risk of prosecution, dominant firms appear to be required to price above LRAIC Conditional rebates: the GP suggests that P > LRAIC provide a safe harbour, and that P < AAC are likely to be problematic Predation: the discussion focuses on whether an act of profit sacrifice has taken place, and this is associated with P < AAC. The GP does not explicitly discuss situations where AAC < P < LRAIC, but the implication is that P < LRAIC could be problematic Margin squeeze: the GP indicates that a dominant firm must leave a gap between its retail and wholesale prices that at least matches the firm s LRAIC, in order to allow an as efficient rival to compete Suggested tests ultimately provide little guidance as to what conduct may be regarded as lawful 8

9 Domco s dilemma (I) Domco is a dominant firm in the UK with a market share of 95% Domco s business comprises a large factory built 10 years ago Repayments on loan for the whole life of the factory amount to 100,000 per annum Factory will last for another 20 years and has no other use Domco s variable cost is 5 Price is 12 Revenue = units * 12 = 240,000 Costs = 100,000 + (20,000 units * 5) = 200,000 Profit = 40,000 9

10 Domco s dilemma (II) Newco, based in Northern France, starts offering equivalent product to customers located in the south of the UK at 10 Domco plans to reduce its price to 9 to customers in the South and maintain it at 12 in the North Impact of strategy on Domco s profits: Revenue = 10,000 units * ,000 units * 12 = 210,000 Costs = 100,000 + (20,000 units * 5) = 200,000 Profit = 10,000 10

11 Domco s dilemma (III) Domco s management does not like the idea of reducing its profits but the other alternatives are even worse Options Volume Revenue Costs Profits 1. Do nothing (price = 12) 10, , ,000-30, Cut price to 9 20, , ,000-20, Cut price in South only 20, , , ,000 Option 3, involving selective price reductions to customers located in the South, is the only strategy that is consistent with Domco making a profit 11

12 Domco s dilemma (IV) Domco s pricing in the South cannot be characterised as predation Price is higher than AAC ( 5) but below LRAIC ( 10). In a sense these sales are loss-making But Guidance s profit sacrifice condition is not met However, Para 20: The dominant undertaking may apply the practice only to selected customers or input suppliers who may be of particular importance for the entry or expansion of competitors. They may, for example,. be situated in a geographic area well suited to new entry It is clear that Domco is guilty of limiting low prices to customers in the South But how can this be anti-competitive if the two other strategies represent a commercial suicide? However, Commission s practice and GP do not rule out that Domco s legitimate pricing policy will be deemed anti-competitive 12

13 Intel case - Background Theory of harm involved Intel s use of rebates in the market for CPUs, in which it was deemed to be dominant The use of these rebates was alleged to be part of a strategy to foreclose AMD, Intel s only rival for the sale of CPUs Rebates were awarded to customers only once they had reached a specific target volume and were then applied retroactively to purchases made before reaching the target volume 13

14 Intel case Example of retroactive rebate (I) Consider a customer that pays 10 per unit for the first 99 units and then qualifies for a 10% discount on all purchases as soon as the 100th unit is bought As the customer increases purchases from 99 to 100 units, its total expenditure falls from 99 to 90 Supplier s profits are higher if 84 < Quantity < 100 than if Quantity =

15 Intel case Example of retroactive rebate (II) Retroactive rebates make it less attractive for customers to switch small amounts of demand to an alternative supplier The discount a competitor would need to offer to compensate the customer may require below-cost pricing even for an AEC Assessing whether a retroactive rebate is capable of foreclosing an AEC requires an estimate of the contestable share Rebate will be more likely to affect rivals ability to compete if most customers are unable to switch large volumes away from the dominant firm 15

16 Intel case Commission s findings Commission found that an AEC would need to price below AAC on the contestable range of demand in order to win customers Commission ruled that Intel had been abusive in its actions, fining it 1bn In its appeal, Intel highlighted AMD s growth in sales and R&D to argue that the market had not been foreclosed General Court s decision disappointingly side-lined the effects-based analysis, ruling that the Commission need only find that a practice is capable of reducing competition to determine abuse 16

17 Microsoft Browser Art. 102 case - Background Since 1995, Microsoft included Internet Explorer in every copy of Windows sold Internet Explorer cannot be removed by OEMs or users Commission argued that tying IE with Windows: makes IE available on 90% of the world's PCs distorts competition on the merits between web browsers reduces the pace of product innovation and the quality of products which consumers ultimately obtain 17

18 Microsoft s defence Consumers can download and use any competing browser with Windows IE s share of the browser market had been falling steadily in recent years (from 95% in to 65% in 2009) A number of rivals, such as Firefox and Chrome, gained significant shares No anti-competitive foreclosure as a result of tying 18

19 Assessing the Effects the claim against MS (I) Growth in rivals share is not sufficient to rule out anti-competitive effects Relevant question is whether Microsoft s behaviour has weakened the competitive constraints it faces E.g. following Netscape s exit, most enterprise applications were written to work only on IE As a result, enterprises faced large obstacles to switching to rival browsers (indeed IE6 still used by large proportion of enterprises at the time of the investigation) By weakening the constraints exerted by rivals, Microsoft could afford to offer a lower quality browser while retaining a high share Microsoft did not innovate for more than five years after Netscape was marginalised IE was widely considered to be inferior to rivals due, for instance, to lower speed 19

20 Internet Explorer market share and new versions over time 1. Between 2001 and 2006, Microsoft did not introduce any new version of IE 100% innovation gap 80% 60% 40% 20% 0% New IE versions? IE1/2 IE3 IE4 IE5 IE6 IE7 IE8 IE9 Sources: Dataquest ( ); Adknowledge (1998); WebSideStory (1999); TheCounter.com ( ); Net Applications ( ). 20

21 IE was widely considered to be inferior due to lower speed Results of Javascript speed test on different browsers Source: 21

22 Assessing the effects the claim against MS (II) Lower quality of IE hampers the development of sophisticated online applications Due to IE s continued high market share, applications at the very least need to work on IE Speed very important for creating online applications with the same feel as desktop applications Hampering online applications deemed in Microsoft s interest Online office packages represent a potential threat to its Office products Applications run into browsers could reduce the reliance of users on the Windows operating system As a result, Microsoft s strategy considered to harm consumers Slower development of online applications Continued Microsoft dominance in operating systems/office packages 22