TILEC s COMMENTS ON: DG COM s DISCUSSION PAPER ON EXCLUSIONARY ABUSES. Jan Boone Eric van Damme Pierre Larouche Wieland Müller TILEC.

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1 TILEC s COMMENTS ON: DG COM s DISCUSSION PAPER ON EXCLUSIONARY ABUSES Jan Boone Eric van Damme Pierre Larouche Wieland Müller TILEC March 2006 Jan Boone, Eric van Damme and Wieland Müller are Professors of Economics at CentER and the Department of Economics of Tilburg University. Pierre Larouche is Professor of Competition Law at the Department of European and International Public Law at Tilburg University. All four authors are affiliated with the Tilburg Law and Economics Center (TILEC), which groups researchers from the Faculty of Law and from the Faculty of Economics and Business Administration of the University; see The ideas in this paper have been discussed in several meetings with TILEC members and visitors, and are representative of the view of TILEC members, although not every member necessarily agrees with every point made in the paper. For comments, please write to TILEC@uvt.nl, or contact one of the authors at j.boone@uvt.nl, Eric.vanDamme@uvt.nl, Pierre.Larouche@uvt.nl, w.mueller@uvt.nl 1

2 1. GENERAL TILEC welcomes the discussion paper of DG Competition on the application of Article 82 EC to exclusionary abuses and the intention of the Commission to adopt an approach that is based on investigating the likely effects of such behaviour on the market. At the same time, we are somewhat disappointed that this is not really a discussion paper, but rather largely a summary of existing law. A true discussion paper would have offered the possibility to deviate somewhat more from existing practice and case-law and would provide room to also discuss some alternative approaches, each with its pros and cons. The present paper does not do this: it does not contrast alternative approaches, either those that are provided in the literature, or that are used by other competition agencies, or novel ones such as those proposed by the EAGCP. As shown by the references in the footnotes, the paper of DG Competition does not look outside of the area of existing European Competition policy, and indeed in several sections, rather that starting a discussion, it just codifies existing policy. We regret that the Discussion Paper is not somewhat more detached from existing case law. Let us illustrate with one specific example. In Section 5, the discussion paper proposes the as efficient competitor test in order to separate competition on the merits from abusive behaviour. This is just one possible test; alternatives are the sacrifice test and the consumer harm test; see Vickers (2005). The value of the discussion paper would have been enhanced if there had been a more extensive discussion about these alternative tests, a better motivation for why the as efficient competitor test was chosen, references to the literature in which these tests are discussed and compared, and references to experiences of competition authorities that are using these test. In particular, we believe that a comparison with the US and the UK would have been useful. The discussion paper only discusses exclusionary abuses; it does not deal with exploitation of a dominant position, nor with price discrimination. We believe that it is a wise choice to start with foreclosure. Indeed economic literature shows that price discrimination frequently has pro-competitive properties and can enhance consumer 2

3 surplus. Consequently, price discrimination should not be forbidden per se. Once DG Competition embarks on the preparation of a separate discussion paper on price discrimination, it would be well-advised to take this into account. Perhaps such a discussion paper should then also go back to the goals of competition policy. Speeches of the present and past Commissioners have stressed consumer surplus as the goal of competition policy. Market integration may serve consumers, but forcing market variables to be uniform, that is, preventing price discrimination, may hurt consumers, as is well-known. With respect to exploitative abuses, we note that dealing with these can be classified more as regulation than as maintaining competition. One may wonder, and indeed we do, whether competition authorities should be required to deal with exploitative abuses. In cases where the dominant position arises out of structural characteristics of the market, and these cannot be expected to change significantly for a long period of time, one may consider sector-specific regulation instead. In all other cases, competition authorities would probably best limit themselves to dealing with foreclosure, so as to enable the market to take care of possible exploitation itself. 2. THE RELEVANT MARKET We agree that it is useful to start the analysis by identifying the relevant market and that the purpose of market definition is to try to identify in a systematic way the competitive constraints that a firm is facing. In 12 of the discussion paper, the attention, however, is limited to the immediate competitive constraints, thus, presumably, leading to a more narrow relevant market, which does not seem justified to us. Of course, a narrow market definition may lead to a firm being classified as dominant where dominance in fact does not exist. In several places in the discussion paper, we have detected a bias going in this direction. In contrast to what was set out in the 1997 Notice on the definition of the relevant market for the purposes of Community competition law, Section 3 of the Discussion Paper presents the SSNIP test and the product characteristics and intended use test as alternative means of defining the relevant product market. We are well aware that the enthusiastic endorsement of the SSNIP test in the 1997 Notice has not quite been 3

4 translated into decision practice, but nevertheless it is worrisome to see that the discussion paper now seems to open the door to market definition on the basis of characteristics and intended use alone, without regard to economic factors (which the SSNIP test brings into the analysis). Here as well, the discussion paper sets out an approach that in fact will lead to narrow market definitions, with the increased risk of false positives on dominance. 3. DOMINANCE One of the key difficulties with the concept of dominance is that the law requires a yes or no, black or white answer on the issue of market power, which in economic theory rather is a question of degree: firms have more or less market power. In this respect, the definition set out in 21 collapses two different levels of market power into one legal concept. Preventing effective competition on a market (item (b)) requires more market power than behaving somewhat independently on that market (item (c)). On a sophisticated view of product markets where firms are able to compete not only on price but also through a certain amount of product differentiation, it is quite conceivable that a firm would gain enough market power to support supra-competitive prices (i.e. a price premium on its products) and thereby evolve somewhat independently of the market, yet without being able to discipline competitors, much less drive them out of the market. As the discussion paper rightly sets out, the main concern of competition law should be foreclosure, i.e. item (b) in 21. This would imply that dominance requires more market power than item (c) would imply, and it would be advisable to reflect this in the rest of Section 4 of the discussion paper, in particular in the discussion of market share thresholds (which remain low when compared to other jurisdictions). In 32 it is correctly stated that market share is only a proxy for market power and that the latter factor is decisive. If competitors can quickly expand production, then a firm with a large market share is not necessarily dominant. This holds even for a firm that has a (near) monopoly position. On the other hand, if competitors face capacity constraints, then even a firm with small market share may, in certain circumstances (such as demand which is unexpectedly rising), be able to price independently of competitors and, hence, be dominant. As a result of this, there is no necessary relation 4

5 between market share and market power, and the usefulness of market share as an indicator for dominance should not be exaggerated. In our opinion, therefore, the remarks made in 29 and in 31 are not justified; in any case, the remarks made there are in conflict with economic thinking. In Section 4.2.2, the discussion paper has an extensive discussion on entry barriers. The paper rightly notes that, if entry barriers are low, potential competitors can easily enter the market, hence, an incumbent with a very large market share need not have significant market power: pricing above the competitive level would invite entry. It is thus crucial to correctly identify entry barriers. The discussion paper makes the conventional distinction between legal entry barriers, strategic entry barriers and natural entry barriers, which is a useful one. In our opinion, the discussion paper, however, adopts too broad a definition of the latter concept, thus again biasing the analyses in the direction of finding dominance where it does not exist. We are concerned that in 40, the Commission defines barriers to entry and expansion so broadly that the most common competitive advantages of dominant players (economies of scale and scope, cost advantages, developed distribution and sales networks, incumbency, etc.) will be found to constitute barriers to entry. Accordingly, in practice it appears unlikely that a firm, which has been found prima facie dominant on the basis of a cursory look at market shares, would somehow manage to show that there are no barriers to entry on its market(s). In the end, therefore, section might be pointless. Specifically, in 40, the discussion paper argues that economies of scale and scope may constitute entry barriers and that, therefore, it is useful to consider the minimum efficient scale (MES). We disagree and believe that a much more sophisticated analysis is called for; also see De Bijl, Van Damme and Larouche (2006). What is important really is the speed with which an entrant can build market share. If this speed is low, it may take a while before an entrant can reach its MES and the investment to enter may not pay off. On the other hand, when the speed is high, the MES can be reached easily and scale economies cannot be said to constitute an entry barrier. What this shows is that whether scale economies form an entry barrier or not crucially depends on properties of the demand side of the market, the question cannot 5

6 be decided on the basis of information on the supply side alone; see Mc Afee et al. (2004). The discussion in Section fails to take in account these aspects. Section is thus biased somewhat towards finding dominance where no dominance exists. Section 4.3 on collective dominance does not go much beyond existing law. It does put forward the Airtours test under Article 82 EC, which is to be preferred to the traditional connection and collective entity approach set out at The latter approach finds little support in economic theory and seems to confuse the boundaries of Articles 81 and 82 EC. Nevertheless, gearing the concept of collective dominance towards coordination in oligopolistic markets, à la Airtours, does not solve all the basic conceptual problems linked with collective dominance. For instance, in a situation of collective dominance within the Airtours meaning, which type of abuse could arise and how could an abuse be committed by one firm only? Section 5.4 does not provide a satisfactory explanation. More fundamentally, whereas excessive market power leading to single dominance can in most cases be treated as an anomaly, a market characterized by collective dominance within the Airtours meaning is not necessarily malfunctioning. Such a market can have multiple equilibria and it cannot be assumed that it will move to a competitive equilibrium following the intervention of a competition authority. Remedies can therefore be quite thorny and it appears difficult to avoid heavy intervention of a more regulatory sort. 4. THE PROPOSED FRAMEWORK FOR ANALYSIS Section 5.1 opens with a crucial sentence: The essential objective of Article 82 when analysing exclusionary conduct is the protection of competition as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources. The sentence mentions both outcome variables (consumer welfare, efficient allocation) and process variables (competition) as objectives. The question is whether one can have both at the same time and what to do when these two conflict. The discussion paper is not as clear on these issues as would have been desirable. 6

7 There are two questions: (i) how to distinguish normal competition (competition on the merits) from behaviour that is anti-competitive, and (ii) how to separate protection of competition from protection of competitors. The discussion paper circles around these two questions, but it does not provide clear answers. In our view, it would be desirable if a somewhat sharper answer would be provided. 4.1 The test proposed for price-based strategies For price-based strategies of the dominant company, the discussion paper proposes to answer the first question by checking whether the as efficient competitor test is satisfied: is the dominant company itself able to operate profitably in the environment created by its own strategy? Several remarks can be made. First of all, whilst the as efficient competitor test indicates a more sophisticated view of price-based strategies, applying it implies greater enforcement costs, on the part of the Commission, the defendant and other interested parties. It can be expected that the defendant could supply the Commission with information to indicate how it would fare if it was on the receiving end of the alleged abusive practice, but of course that information will not be available to a prospective complainant. In the interest of a fair and efficient distribution of the burden of proof, it should be specified that it be up to the defendant to prove that an efficient competitor would not be hurt by the alleged abusive practice. Secondly, there are circumstances in which the answer to the as efficient competitor test will be no, but in which the behaviour of the dominant firm cannot be classified as abusive. Suppose, for example, that production only involves fixed costs, that the market is a monopoly and that the monopolist charges a price equal to average cost. In this environment, an entrant that is as efficient as the monopolist is sure to make losses, hence, the monopolist fails the test, even though his price is welfare maximizing. (Technically this example demonstrates that the last sentence from 63 of the discussion paper is incorrect.) Thirdly, in a presentation by one of the authors of the discussion paper, we were informed that DG Competition views the as efficient competitor test as a proxy for 7

8 the consumer harm test. The above example already shows that the as efficient competitor test may be violated even though the consumer is not harmed. More generally, we know that the two tests need not produce the same results; hence, it would be desirable to know more about the circumstances under which this is the case. Equally important: why did DG Competition not propose the test that it prefers? Suppose the pricing strategy of a dominant firm violates the as efficient competitor test, but satisfies the no consumer harm test, does the company violate Article 82 EC? It would be desirable if DG Competition would provide more clarity about how good a proxy the as efficient competitor test is for the consumer harm test and what the consequences are if the two tests produce conflicting outcomes. In 67 of the discussion paper, it is mentioned that it may sometimes be necessary in the consumers interest to also protect competitors that are not (yet) as efficient as the dominant company, hence, there is a suggestion that behaviour that passes the as efficient competitor test may be found abusive after all. In several other places in the discussion paper, one finds similar statements. In our view, these types of pronouncements undermine any benefit derived from the more sophisticated approach heralded in Section 5 by leaving open the possibility that the traditional approach could be applied after all. Any progress on legal certainty is cancelled out and we are only left with a more complicated law. We advocate that DG Competition provides clarity on the circumstances in which competition law will in fact apply to protect inefficient competitors. We do not find it sufficient to invoke consumers interest without more, nor should the answer lie in a special responsibility of dominant firms not to harm competitors. We note with satisfaction that the latter notion which is difficult to square in with an economic approach to Article 82 EC does not figure prominently in the discussion paper. In the end, there must be a credible justification in economic theory for the pronouncement made in 67 that consumers would be served by protecting inefficient competitors. We would suggest that, if anything, this justification would have to be sought in a dynamic perspective (which is lacking in section 5.2). It could lie either in a general assumption that initially inefficient newcomers deserve a chance for the sake of keeping the competitive process open over time, or in a more restrictive assumption that in certain specific markets, the fostering of innovation in 8

9 the longer term requires protecting initially efficient but potentially innovative entrants. The former route appears more difficult to take for a competition authority. In any case, we would advocate that DG Competition clearly states how it would judge whether a competitor has the possibility to become efficient in the future and how it intends to show that consumers would be harmed otherwise (the burden of proof should rest on the Commission in such cases). 4.2 Possible defences Section 5.5 of the discussion paper states that the company can defend itself against the allegation of abuses in two ways: it can produce an objective justification for its behaviour, or it can show that the conduct produces efficiencies that outweigh the negative aspects. It is proposed that, in both cases, the burden of proof rests with the dominant company. In our view, allocation of the burden of proof is sensible in the second case, but not necessarily in the first. We propose that DG Competition reviews this aspect. We note that the concept of objective justification seems to be collapsed in the objective necessity and meeting competition defences. Yet in the ECJ case law and Commission decision practice, the objective justification is broader. It implies that the defendant can escape liability by adducing evidence that the alleged abusive conduct can be rationally explained as competition on the merits (e.g. the first mover on a new market characterized by network effects must enter with low prices in order to create the critical mass which triggers the network effects, otherwise the new market might never emerge). The discussion paper mentions this at 60, without developing it fully. Reducing the objective justification to objective necessity and meeting competition, as proposed at 78, appears overly restrictive to us. As already argued above, the discussion paper proposes to use a rather wide net to catch exclusionary behaviour: the concept of dominance is biased in this direction and the definition of foreclosure is broad as well: it includes exclusion and market disciplining so as to induce less aggressive competition. With such a wide definition, there is the risk that normal competition will be classified as abusive. It seems to us that the burden of proof should be put on firms only if one can be reasonably sure that 9

10 the behaviour is indeed abusive, hence, a more narrow definition of foreclosure would be called for. In particular, it seems to us that the proportionality test that is described in Section might be going too far. Businesses are then put in a situation where they have to justify their actions using standards applicable to public authorities. As far as the efficiency defence is concerned, the discussion paper proposes to link up with the criteria from Article 81(3) EC: the behaviour should generate efficiencies, it should be indispensable to generate these efficiencies, it should benefit consumers, and it should not eliminate all competition. Again we see here the multiple goals of competition policy and we wonder why it should not be sufficient to prove that consumers benefit from the behaviour under scrutiny. We can accept what is stated in the in the discussion paper, but we doubt whether it is necessary and desirable to go beyond what is stated there. In particular, we have not been convinced what is stated in the In 91 it is stated: Ultimately the protection of rivalry and the competitive process is given priority over pro-competitive efficiency gains. One may wonder why this should be so: why protect rivalry on a market if this would hurt consumers? As mentioned before, it must be clearly explained in such situations how consumer welfare (ultimately) is served. The paragraph seems to argue that this is necessary since otherwise there will be economic losses in the longer term. This, however, is asserted but not proved. Furthermore, the problem is exacerbated by the fact that the discussion paper proposes a narrow definition of the relevant market. In such a case, even if a dominant company can eliminate competition on this narrowly defined market, this does not necessarily imply that it will be able to eliminate the competitive constraints. This argument seems especially relevant in the context of dynamic competition in innovative industries. In 92 a near monopoly position is identified with a market share of 75% or more and it is proposed in 91 that for such companies it is very unlikely that they will be able to make use of the efficiency defence. We have argued above that market share may be a very poor proxy for market power and already for this reason alone we cannot accept the argument of DG Competition in this case. Furthermore, we strongly believe that statements like these sent the wrong signals to market players: firms that 10

11 achieve market dominance through competition on the merits should be allowed to achieve efficiencies that benefit consumers. Finally, in a more practical perspective, the efficiency defence would come at the end of the Commission assessment, once the Commission has already reached the conclusion that the defendant holds a dominant position and prima facie abused it. In such circumstances, and given the relatively heavy burden put on the defendant invoking an efficiency defence, it seems to us unlikely that such defence will ever succeed. Again this section might be pointless. 5. STRATEGIES THAT MAY BE EXCLUSIONARY We will not provide here a detailed discussion of the Sections 6-10 of the discussion paper: we just comment on a few Sections and make a couple of general observations. First of all, most of these Sections just provide a description ( codification ) of existing case law, and they do not provide for a real discussion. The description is useful, but one might have expected a bit more in a discussion paper. Secondly, there is little discussion about whether the principles discussed in the Sections 6-10 are consistent with the general principle formulated in Section 5, or whether these principles are consistent with each other. We would advocate that in follow up work to the discussion paper, DG Competition clarifies these matters. 5.1 Predatory pricing The definition of predatory pricing that is given in 93 is relatively broad: it focuses on the ability to discipline competitors without addressing the question whether the dominant firm will have the incentive to do so, hence, it does not consider the question whether predation will be a value maximizing strategy for the dominant firm. As a consequence, again the net is cast too wide here. In contrast, 96 correctly views predation as an investment: the predator deliberately incurs short-run losses with the intention to discipline rivals in the hope to recoup these losses afterwards. The assessment of predation should take this dynamic aspect into account: one cannot separate the first phase from the recoupment phase. In

12 it is argued: The Commission does therefore not consider it is necessary to provide further separate proof of recoupment in order to find an abuse since As dominance is already established this normally means that entry barriers are sufficiently high to presume the possibility to recoup. We cannot accept this argument. As argued above, the discussion paper adopts a narrow definition of the relevant market and a broad definition of entry barriers, implying that dominance may be found where no dominance exits. It is then also not possible to conclude that recoupment will be possible or likely. In our view, as part of the test for predatory pricing, the Commission should also show that recoupment is likely. Following the AKZO decision, the discussion paper essentially proposes a cost test for predation where a price below average avoidable cost is presumed to be predatory, as is the case of any price below average total cost that is part of a strategy or plan to predate. In our view, focusing too much on cost analysis is dangerous. First of all, it leads to considerable resources being spend on investigating what should be included in costs and what types of cost are relevant, an arduous task as we all know from regulatory proceedings. In multi-product situations, in particular, assessing costs can be very time-consuming; all available models are arbitrary in one way or the other and have their downsides. Competition authorities should try to avoid these exercises. Secondly, putting the emphasis on costs can be misguided. Instead it may be preferable to look into more detail into the market characteristics to see whether these are such to make predation possible and likely profitable. Bolton, Brodley and Riordan (2001) provide a way of doing so, and the approach proposed in De La Mano and Durand (2005) is similar. It seems to us that the rule of reason approach proposal in this discussion paper of members of the office of the Chief Economist is better founded in economics that the test proposed in the current discussion paper. We would advocate an approach similar to that in De La Mano and Durand (2005), as that explicitly takes into account the two phases of predation. Noteworthy is the fact that nowhere in Section 6 does the term consumers harm appear. If the ultimate aim is to prevent consumer harm then at least it should be investigated whether the alleged predatory behaviour will have that property. Economic literature has indicated that there might be circumstances where predation 12

13 is possible and profitable, but where it also might be in the consumer s interest. Consequently the question cannot be neglected. 5.2 Single branding and rebates It seems fair to say that economic theory is not yet able to provide a comprehensive assessment of the pro- and anticompetitive effects of rebate single branding (henceforth SB) and rebate systems (henceforth RS). Also there is a lack of empirical results. Nevertheless there are quite a number of articles that (a) analyse the effects of SB and RS and (b) provide various tests that could help to distinguish whether or not the use of SB and RS is abusive. As a result of this, both economists and lawyers agree that the use of single branding and rebate systems can have both pro- and anticompetitive effects such that a per se rule forbidding these practices would not be justified. We think it appropriate that this is acknowledged in section 7 of the discussion paper. However, we feel that the discussion in the literature is not sufficiently reflected in the present paper. Thus, we have various points of criticism regarding Section 7. Firstly, the present paper discusses only one test to assess the legality of RS and it is not clear why the test outlined in 155 and 156 would be most appropriate. We think it would be useful to also discuss other tests that have been put forward (see, e.g., Greenlee and Reitman (2005a, b), or Kobayashi (2005)). Secondly, the present paper distinguishes between conditional and unconditional rebates irrespective of the underlying market structure. We think it would be useful to include a discussion of the relationship between market structure and the likely proor anticompetitive harm of rebates (Greenlee and Reitman (2005a, b), Spector (2005)). Thirdly, procedures taken in an antitrust investigation regarding SB and RS could be spelled out more clearly. Padilla and Slater (2005) and Spector (2005) make very reasonable suggestions. 13

14 Fourthly and most importantly, we think it is a serious shortcoming of the discussion in section 7 that there is no suggestion of possible safe harbour provisions regarding the use of SB and RS. This is clearly advisable as one of the purposes of the review of Article 82 EC should be to provide (dominant) firms with greater legal certainty as to which kind of RS would be considered to be legal. RS falling under the safe harbour provisions could be described in terms of the share of a customer s requirements from a specific (dominant) firm, the duration of the RS, and whether or not rebates are applied to all purchases once a critical threshold is reached (see, e.g., Padilla and Slater (2005) and Spector (2005)). 5.3 Tying and bundling The main thrust of Section 8 makes sense, but again the discussion paper could have taken a more daring and clearer point of view. We agree that tying and bundling can have welfare-enhancing effects and should not be abolished in such cases. Examples here are the reduction of transaction costs (buying left and right shoes together), cost savings in production and reputational considerations for the seller (if there are concerns that consumers would mistakenly combine products in such a way that their functioning is impaired). On the other hand, tying and bundling can also have a foreclosure effect. If a firm is active in two markets, one where it is dominant and one where there is substantial competition, bundling the two products gives the firm a commitment to price aggressively. After the goods are bundled, the profit margin on the product where the firm is dominant can only be earned if the bundle is sold. Such a commitment can help to keep entrants out. Second, bundling can reduce rivals value (instead of the standard foreclosure argument of raising rivals costs ). Once a customer has Windows Media Player installed on a new computer, her valuation of a competing media player is only the difference in value (compared to Windows Media Player) instead of her (absolute) valuation of the other media player. Third, in markets with network effects, it is probably the case that fending off entry in one segment helps to keep entrants out of another segment. All these effects are nicely captured in Nalebuff (2004); a paper that stresses that bundling can be used to deter entry without incurring 14

15 (much of) a cost. We believe this paper by Nalebuff would have been a good starting point for the discussion of tying and bundling in the current paper. In the light of the approach taken by Nalebuff, not all of the elements mentioned in 183, however, make sense. There the discussion paper mentions the four elements necessary for tying and bundling to be prohibited under Article 82 EC: (i) the company is dominant in the tying market, (ii) the tying and tied goods are distinct products, (iii) the tying practice is likely to have a foreclosure effect and (iv) the tying effect is not justified objectively or by efficiencies. Of these four elements the second one does not seem so obvious and the way the third is implemented is also not clear to us. The first and fourth elements do make sense. We are not convinced that there should be a requirement that the products are distinct. In 185 distinct is defined by the view of the consumers. Probably quite a number of consumers would view the operating system, the Internet browser and media player as one product bought together with the hardware of a computer. However, there can still be bundling going on with the aim to foreclose rivals. By the end of the day, the practice can only be defended on efficiency grounds (basically point (iv)) not on the grounds that consumers do not view the products as distinct. On the third point, section tries to define a market distorting foreclosure effect. In 190 an as efficient competitor test pops up again. In view of the Nalebuff paper this seems surprising. That approach stresses the point that bundling can lead to foreclosure without cost and thus does not necessarily involve pricing below long-run incremental costs for one (or both) components. At the end of 190 this point is recognized where it says: it may exceptionally be concluded that although the price exceeds the long run incremental costs the mixed bundling nonetheless is considered exclusionary. Also the calculation of an incremental price is quite involved and actually not necessary. The point must be that the tying practice cannot be defended on (consumer) welfare grounds (like lowering of transaction costs or protecting a firm s reputation) while it does make it harder for other firms to enter. 15

16 We do agree with 202, 203 that even if the goal of the tying practice is to make life hard for rivals, the reaction by rivals and customers should be taken into account as well. The practice cannot be viewed as exclusionary if there are strategies available to other players to defend themselves against it. 5.4 Refusal to supply Here we focus mostly on Section 9.2.2, dealing with access to facilities, as we know it from cases such as Magill, Bronner and IMS Health. We confine ourselves to two remarks concerning the refusal to licence intellectual property rights. We all agree that the appropriate starting point is consumer welfare. Accordingly, whether access should be ordered, and most importantly at what price, should be assessed with respect to consumer welfare. Is consumer welfare increased, do consumers benefit from the regulatory intervention in question? Typically, deciding these cases involves finding a balance between short-term and long-term considerations. Generally, ordering access at low prices (close to cost) stimulates competition in the short term by allowing some operators to use the facilities of their competitors to offer to consumers services which they could not offer on their own. Consumers obtain a greater variety of services and/or lower prices. In a more dynamic, longer-term perspective, however, it is feared that generous access regimes undermine the incentives to invest in new facilities and new technologies, because of the inability to achieve a reasonable rate of return on the investment given low mandated access prices. Under these circumstances, it would be preferable not to order access at all or to impose higher prices (including a significant mark-up over costs to give a return on investment). As a starting point, in line with the above remarks, both the short-term and the longterm implications must be examined from a consumer welfare perspective. For instance, the mere fact of having an extra player on the market might not increase consumer welfare all that much; it could be that the market was already quite competitive as regards both variety of services and price. By the same token, the investment incentives of larger players are not determinative for the longer-term 16

17 assessment either. It can be that other players requiring access would also invest in their own facilities over time, with the overall result for consumers (new services and products, innovation, etc.) being similar. In addition to examining consumer welfare, when making access and pricing decisions regard should also be had to the efficiency of the decision in and of itself. In particular, the costs arising from any intervention (both for the firms and for the authorities) should not exceed either (i) the costs which would arise in the absence of intervention (for competitors who would have to find another solution) or (ii) the increase in consumer welfare (otherwise the total welfare effect is negative). The above paragraphs set out a theoretical framework, but of course they have to be operationalized. In practice, movements in consumer welfare are hard to measure, especially in the long-term. The same goes for the costs of intervention or nonintervention. The Magill, Bronner and IMS line of case law (often presented as the essential facilities doctrine ), whose broad lines are taken over in the discussion paper, does not strike us as an adequate operationalization of that theoretical framework. In essence, in order to ensure that the costs arising from intervention (on firms and on the authority) are exceeded by (i) the increase in consumer welfare and (ii) the cost of non-intervention, the case-law requires (i) a novel product (at least for intellectual property cases) and (ii) indispensability or essentiality of the facility. These conditions are poor proxies. They leave a significant risk of Type I but also Type II errors. For instance, the condition of novelty is an undesirable one. First of all, if implemented, it would be required that competition authorities or courts are in charge of deciding whether a product is new, or will develop into something new in the future. In our view, they are badly equipped for this purpose. Secondly, from the point of view of consumers it is largely irrelevant whether a product is new or not; what matters is whether it generates surplus or not; offering a close substitute to an existing product may yield the highest consumer surplus. In other words, the newness criterion does not match very well with the consumer harm test. Thirdly, requiring newness may distort the behaviour of entrants. If a license can be acquired only for 17

18 a new product, then entrants will artificially produce new products, even in situations where consumers would be better off with adjustments to existing products. In other words, insisting on newness may induce consumer harm. In the end, it would be preferable if the legal test did not skirt the issue of the costs arising from the intervention and included conditions relating to the long-term impact on consumer welfare and firm incentives, for which the cost to the authority of imposing access can be a reliable proxy. Indeed a competition authority can assess with some accuracy is the administrative cost involved in intervention. In some cases, NRAs must first of all identify to which facilities access should be ordered (because they were not open at all), under which conditions, and then build up costing models from scratch to try to determine the price at which access should be granted. In such cases, when the authority has to spend considerable amount of resources (personnel, time, money) on reaching a decision, then it probably implies that the decision would have a significant effect on consumer welfare in the longer-term and would impose significant costs upon the industry. References: Bolton, P., J.F. Brodley, and M.H.Riordan (2000): Predatory Pricing: Strategic Theory and Legal Policy, Georgetown Law Review 88, De Bijl, P., E. van Damme and P. Larouche (2006): Regulating access to stimulate competition in postal markets?, in: M.A. Crew and P.R. Kleindorfer (eds.), Progress toward Liberalization of the Postal and Delivery Sector, Boston: Springer Science, De la Mano, M. and B. Durand (2005): A Three-Step Structural Rule of Reason to Assess Predation under Article 82, Discussion Paper, Office of the Chief Economist of DG Competition, December Greenlee, P. and D. Reitman (2005a): Competing with Loyalty Discounts, SSRN Working Paper Greenlee, P. and D. Reitman (2005b): Distinguishing competitive and exclusionary uses of loyalty discounts, Antitrust Bulletin 50 (3), Kobayashi, B.H. (2005): The Economics of Loyalty Discounts and Antitrust Law in the United States, Competition Policy International 1(2),

19 McAfee, P., H. Mialon and M. Williams (2004): What is a barrier to entry? American Economic Review 94(2), Papers and Proceedings, Nalebuff, B.: Bundling as an Entry Barrier, Quarterly Journal of Economics 119, 2004, Padilla, J. and D. Slater (2005): Rebates as an Abuse of Dominance under Article 82 EC, GCLC Research papers on Article 82 EC, Spector, D. (2005): Loyalty Rebates: An Assessment of Competition Concerns and a Proposed Structured Rule of Reason, Competition Policy International 1(2), Vickers, J. (2005): Abuse of Market Power, The Economic Journal 115 (June), F244- F261 19