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Recent developments in EU competition policy: An economic perspective
Tommaso Valletti
London, 19th March 2018
Disclaimer: The views expressed in this article are personal, and do not necessarily represent those of DG Competition or of the European Commission.
Brief history of CET
2
• Post of Chief Economist created in 2003, to reinforce economic capabilities of DG Competition and provide independent economic perspective (Monti)
• Fixed 3-year mandate
• Remit of the CE
• Scrutiny (“check-and-balance”, independent advice to the Competition Commissioner)
• Support (economic analysis in individual cases)
• Balance between two functions
• Relative shift towards “support” function as size of the CET has increased over time (from < 8 to 30)
CET work allocation across instruments
0%
10%
20%
30%
40%
50%
60%
70%
Sept. 2012-Dec.
2013 (16
months)
2014 2015 2016 2017
Mergers
Antitrust
State Aid
Patent analysis in a recent mergercase (Dow/Du Pont)
• Patent analysis carried out to assess the innovative strength of firms
• Sample: all patents for the period 2000-2015
• Methodology:
• Patent citations as indicator of the importance/quality of R&D:
Significant heterogeneity in citations
Important to calculate weighted patent shares
• Patents as indicator of closeness of innovation competition:
Look at the importance of cross-citations
Look at characteristics of research projects corresponding to the best quality patents (review of internal documents)
4
Theory question:Investments and mergers
• You typically hear:
• Inverted U
• Arrow vs Schumpeter
• But…
• It’s not about mergers!
• Two effects (absent efficiencies):
• -Innovation diversion (-)
• -Product market competition (-/+)
• Federico, Langus and Valletti (2017, 2018)
Deutsche Börse/LSE (1)
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• Proposed transaction would have brought together two ofthe main clearing houses for derivatives in Europe
• Customers require vertical stack/bundle of "trading", "clearing" and "settlement" of derivative transactions
• Deutsche Börse supplied these services only as an integratedstack/bundle ("captive sales" of clearing services only)
• LSE supplied clearing services to third parties in the "merchant market" (via LCH SA and LCH Ltd).
• Should the transaction be assessed as a vertical merger or as a horizontal merger?
Deutsche Börse/LSE (2)
7
Main effect arises from horizontal combination of U1 with U2. Assessed as horizontal competition in a "bundle-to-bundle"market in DB/LSE
U2U1
D2D1
U2U1
D2D1
U2U1
D2D1
U2U1
D2D1
1) Vertical demerger [p↑↓?]
2) Horizontal merger p[↑↑!]
3) Vertical (re)merger[p↑↓?]
Vertical or horizontal?
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Query
Specializedsearch results
Links to standalonespecialised search services
AdWords ("paid search")
Genericsearch results
Google's specialised product search
Froogle2004-2007
Specialised search engine
Product Universal
2007-2013
Special product query channel on main page
Google Shopping
From 2013
CSS with special product display
channel
On top of organic search product results and paid product ads
Search filter, also ranks CSS lower
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10
Shoppin
g
on t
he t
op
Com
petito
rs n
ot
vis
ible
Evidence 1: Traffic data
Generic search traffic from Google to CSSs
Panda introduction
11
Evidence 2: Google's experiment
Does the display of the Shopping Unit reduce CSS traffic?
• Outcome variable: clicks on CSS
• Treatment: Shopping Unit displayed or not
12
The conduct: favouringThe Decision does not object to Google applying certain relevance standards but to the fact that Google's CSS is not subject to same standards as rivals
What:Google Shopping is favoured compared to competitors in terms of:
➢ Positioning (prominent placement in Google's general search results, rivals demoted)
➢ Display (graphical appearance)
How:
As regards positioning:
➢ Generic search algorithms prone to demote CSS
➢ Google Shopping not subject to the generic search algorithm
➢ Instead Google Shopping is placed always at the top
As regards display:
➢ Rich graphical features only applicable to Google Shopping
➢ Rich format display increases click-through rates13
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Qualcomm
• Baseband chipsets (BCs)
process all cellular
communications functions in
smartphones and tablets
• Both voice and data
transmission
• BCs incorporate different
technologies, e.g. 4G (LTE),
3G (UMTS), 2G (GSM)
15
Qualcomm's dominance
■ Qualcomm held a dominant position in the market for
LTE baseband chipsets at least in the time period 2011-
2016 based on particular on:
➢ very high worldwide market shares (typically > 90%)
➢ barriers to entry and expansion, including:
R&D expenditure required
Qualcomm's network of pass-through rights to third parties' IP
Qualcomm's brand and established business relationships
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The conduct
■ In 2011, Qualcomm and Apple signed an agreement
according to which Qualcomm committed to grant
significant payments to Apple
■ These payments were conditional on Apple exclusively
sourcing baseband chipsets for its "iPhone" and "iPad"
devices from Qualcomm
■ In 2013, the agreement was amended and extended to
the end of 2016
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Abuse
■ Qualcomm's payment are exclusivity payments
■ Presumption of anti-competitive effects
■ During the administrative proceedings, Qualcomm
submitted, on the basis of supporting evidence, that its
conduct was not capable of restricting competition and,
in particular, of producing the alleged foreclosure effects
■ Decision
➢ Analyses potential anti-competitive effects
➢ Rebuts Qualcomm's arguments (both on price-cost AEC test
and alleged efficiencies)
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Potential effects
■ Amounts paid on condition of exclusivity were significant
■ Exclusivity condition: Qualcomm's payments reduced
Apple's incentives to switch to rivals
➢ confirmed by a broad range of contemporaneous evidence
➢ Apple gave serious consideration to switch in part to Intel
■ Apple is a key customer for baseband chipset suppliers
➢ accounts for a significant share of LTE chipset demand
➢ leading smartphone manufacturer which can influence other customers' and
manufacturers' procurement and design choices
➢ by foreclosing Apple's demand, Qualcomm's conduct had an effect on the
LTE baseband chipset market as a whole ("Divide et impera")
Hipster antitrust?
US Council of Economic Advisers (2016)
"Benefits of Competition and Indicators of Market Power"
- Concentration increase in key industries (~services, 1997-2012)
- Increase in return on invested capital, especially from 2005 for the 90th percentile of firms
- Decreasing entry, stagnating entry rates (1977-2013)
- Decreasing labour market dynamism
- Increasing M&A activity
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