London 22 Nov 2005

Modernization of Article 82Modernization of Article 82

Lars-Hendrik RöllerLars-Hendrik Röller**

Chief Competition EconomistChief Competition EconomistEuropean CommissionEuropean Commission

CLA and BIICL Conference on Article 82 London 22 November 2005

*The views expressed are those of the author and do not necessarily reflect those of DG COMP or the European Commission

London 22 Nov 2005

outlineoutline

Why the review?Why the review?

The EAGCP report The EAGCP report effect-based approacheffect-based approach rule-of reason vs. per se approachrule-of reason vs. per se approach role of dominancerole of dominance

Current review – overviewCurrent review – overview

Other issuesOther issues

London 22 Nov 2005

Why the review of Article 82Why the review of Article 82

current approach too restrictivecurrent approach too restrictive In the past: form-based approach and per se rules (loyalty rebates in In the past: form-based approach and per se rules (loyalty rebates in

Michelin II)Michelin II) need to limit false positives that chills pro-competitive conductneed to limit false positives that chills pro-competitive conduct need to limit false negatives that allows conduct that lead to consumer need to limit false negatives that allows conduct that lead to consumer

harmharm effect-based analysiseffect-based analysis

in order to better discriminate between harmful and pro-competitive in order to better discriminate between harmful and pro-competitive conduct (limit false positives/false negatives)conduct (limit false positives/false negatives)

to identify relevant theory of harm & the relevant empirical evidenceto identify relevant theory of harm & the relevant empirical evidence should provide legal certainty and consistencyshould provide legal certainty and consistency may require significant investigation (time and resources)may require significant investigation (time and resources)

clarifies and creates consistencyclarifies and creates consistency approach consistent with Art. 81, merger control, and state aid approach consistent with Art. 81, merger control, and state aid

action planaction plan

London 22 Nov 2005

The EAGCP report

not form-based, but effect-based not form-based, but effect-based categories of conduct (predation, discrimination, rebates, tying, categories of conduct (predation, discrimination, rebates, tying,

refusal to deal) can have the same effectrefusal to deal) can have the same effect effect of foreclosure (same, horizontal, vertical markets) on effect of foreclosure (same, horizontal, vertical markets) on

consumers (as a proxy for competition -multiple, present and consumers (as a proxy for competition -multiple, present and future)future)

““the story” = role of robust theory and factsthe story” = role of robust theory and facts

more rule-of-reason, less per-se rules more rule-of-reason, less per-se rules rule-of-reason better done under an effect-based approachrule-of-reason better done under an effect-based approach

no need for separate dominance under an effect-based no need for separate dominance under an effect-based approachapproach dominance and its abuse => interrelateddominance and its abuse => interrelated case law vs. legal norm of Art. 82 => case law vs. legal norm of Art. 82 => abuses abuses of dominanceof dominance

London 22 Nov 2005

Current review of Article 82 (some key elements)

abuse-specific approach, but effect basedabuse-specific approach, but effect based competition not competitors, consumer welfarecompetition not competitors, consumer welfare all effects (likely & actual, short & long-term)all effects (likely & actual, short & long-term) as efficient competitor testas efficient competitor test on dominanceon dominance

necessary conditionnecessary condition more economics in dominance assessmentmore economics in dominance assessment

=> role of the case law and the ECN=> role of the case law and the ECN

London 22 Nov 2005

rule-of-reason vs. per-se rulesrule-of-reason vs. per-se rules

need presumptions & safe harbors as a screenneed presumptions & safe harbors as a screen green light zones & red light zonesgreen light zones & red light zones ““rule of reason” analysis for some cases (follow rule of reason” analysis for some cases (follow

EAGCP approach)EAGCP approach)

predictability vs. precision: is there a trade-off ?predictability vs. precision: is there a trade-off ? Vickers argumentVickers argument ultimate trade-off between precision and predictability ultimate trade-off between precision and predictability

((and and enforcement costs)enforcement costs) predictability of rulespredictability of rules

London 22 Nov 2005

Is there a trade-off in Article 82?

Predictability

Precision

rules

Rule-of-reason

London 22 Nov 2005

OverallOverall

effect-based approacheffect-based approach

consumer orientation consumer orientation

pre se rules and rule of reasonpre se rules and rule of reason

dominance necessary conditiondominance necessary condition

some other issues……..some other issues……..

London 22 Nov 2005

the role of dominancethe role of dominance

only dominant firms are subject to Article 82only dominant firms are subject to Article 82 advantage: bright lines + legal certainty + enforcement costsadvantage: bright lines + legal certainty + enforcement costs disadvantages: under-enforcementdisadvantages: under-enforcement

abuse of abuse of pre-existing pre-existing dominancedominance But market power may create significant anticompetitive conduct => acquiring But market power may create significant anticompetitive conduct => acquiring

dominance through such conduct might be abuseddominance through such conduct might be abused how much economic analysis under dominance, given that how much economic analysis under dominance, given that

effect-based analysis is to follow?effect-based analysis is to follow? how do we determine that a firm has substantial market power?how do we determine that a firm has substantial market power?

use of market share?use of market share? analysis of barriers to entry?analysis of barriers to entry? price-cost margin?price-cost margin?

integrated approach?integrated approach? what is the correct screen?what is the correct screen?

can a non-leader be a dominant firm?can a non-leader be a dominant firm? should the path to dominance matter in the competitive should the path to dominance matter in the competitive

assessment?assessment?

London 22 Nov 2005

an over-arching test

no reason to believe that one single test gives best answer in all no reason to believe that one single test gives best answer in all casescases

as-efficient competitor testas-efficient competitor test cost datacost data potentially efficientpotentially efficient competitive constraint, even if inefficientcompetitive constraint, even if inefficient non-price competitionnon-price competition product differentiationproduct differentiation

probably better to apply different (structured) rules, including shortcuts, for different practices

but strive for consistent framework to show: capability to foreclose and market distorting effect

London 22 Nov 2005

predationpredation

How much form-based is there in the case law?How much form-based is there in the case law? AKZO rule still basic frameworkAKZO rule still basic framework

Below AVC/AAC rebutable presumption of abuseBelow AVC/AAC rebutable presumption of abuse Between AVC and ATC need to prove strategy of foreclosure Between AVC and ATC need to prove strategy of foreclosure

(“intent”)(“intent”) No separate requirement to prove recoupment beyond dominanceNo separate requirement to prove recoupment beyond dominance

Except perhaps in specific cases (e.g. collective dominance)Except perhaps in specific cases (e.g. collective dominance)

Predation: likely foreclosure, sacrifice, recoupmentPredation: likely foreclosure, sacrifice, recoupment

London 22 Nov 2005

…….... efficiency defenseefficiency defense

abuses have two effectsabuses have two effects burden of proof (burden of production)burden of proof (burden of production) integrated into conduct (pricing efficiencies)integrated into conduct (pricing efficiencies)

market definitionmarket definition defining the relevant product or geographic market is a legal requirementdefining the relevant product or geographic market is a legal requirement by definition the dominant firm does not face any competitive constraint. by definition the dominant firm does not face any competitive constraint.

So does the dominant firm constitute a market on its own?So does the dominant firm constitute a market on its own? applying the SSNIP test would often result in a broader market definitionapplying the SSNIP test would often result in a broader market definition evaluate directly the impact of the exclusionary abuse should help evaluate directly the impact of the exclusionary abuse should help

delineate the boundaries of the relevant marketdelineate the boundaries of the relevant market exploitative vs. exclusionary abuseexploitative vs. exclusionary abuse

is monopoly pricing an abuse of dominant position? is monopoly pricing an abuse of dominant position? in market economy, risk of reducing firms’ incentives to be more in market economy, risk of reducing firms’ incentives to be more

efficient or innovative. Merger control, IP rights and regulation of efficient or innovative. Merger control, IP rights and regulation of natural monopolies can better limit false positives and negativesnatural monopolies can better limit false positives and negatives

should there be guidelines? (how much do we know?)should there be guidelines? (how much do we know?)

London 22 Nov 2005

Convergence with the US?Convergence with the US?

institutional differences with EUinstitutional differences with EU US approach may put more emphasis on green US approach may put more emphasis on green

zoneszones economics is a common language (same questions, economics is a common language (same questions,

same methodology)same methodology) answers to the same case may still be differentanswers to the same case may still be different

London 22 Nov 2005

The role of economicsThe role of economics

DG-Comp – more emphasis on economic effectsDG-Comp – more emphasis on economic effects Judicial Review – recent judgmentsJudicial Review – recent judgments ECN - consistencyECN - consistency

London 22 Nov 2005

conclusionconclusion

pragmatic approachpragmatic approach

important improvementsimportant improvements legal certaintylegal certainty consistencyconsistency competitivenesscompetitiveness