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

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• 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)

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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)

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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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Google

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

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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

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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)

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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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