roberto pardolesi luiss g. carli, rome - italy antitrust law & economics

Roberto PardolesiLUISS G. Carli, Rome - Italy

Antitrust Law & Economics

A Glance to the Existing Laws

Antitrust Around the World

DDIM RP Luiss Rome

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Why Bother About Antitrust?

Competition within the economy is assumed to be good for business and good for consumers. Strong competition regimes encourage open, dynamic markets, and drive productivity, innovation and value for consumers.

Competitive and open markets are deemed to raise economic growth and standards of living and benefit consumers by ensuring lower prices and a greater variety of goods and services.

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A Caveat: Antitrust Evils? Idleness? The (almost) prevailing wisdom is that the Great Merger

Wave of the beginning of the 20th century, which prompted the Second Industrial Revolution, was caused by the enactment and first applications of the Sherman Act.

Macroeconomic empirical analysis finds no evidence of any long-run benefits following the initially disruptive (negative) effects of antitrust activities on productivity. ”Innovations in antitrust law enforcement apparently do not constrain market power in the economy, but do hamper productivity growth, at least temporarily. Perhaps antitrust achieves its stated objectives in the small. Even if so, it does not seem to do so in the large”.

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A Transnational Trend Despite scattered doubts and criticisms, the prevailing view holds

thatcompetition policy plays a fundamental role in boosting the competitiveness of national economies, as well as in fostering a country’s openness to foreign trade, to the full advantage of final consumers.

By pursuing the overarching goal of efficient resource allocation, competition rules have thus become a cornerstone of advanced economies.

Several developed and developing countries have followed suit, and antitrust policy has rapidly become a pillar of economic policy in more than a hundred countries world-wide.

The United States was once the only major country actively enforcing a comprehensive set of antitrust laws; nowadays, according to the UNCTAD, there are no less than 105 competition legislations all over the world.

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Algeria (1995)

Benin

Botswana*

Burkina Faso*

Cameroon*

Central African

Republic

Côte d’Ivoire (1978)

Egypt*

Gabon (1998)

Ghana*

Kenya (1988) (DraftRevision 2002/2003)

Lesotho*

Malawi (1998)

Mali (1998)

Mauritius*

Namibia (2003)

Morocco (1999)

Senegal (1994)

South Africa (1955,amended 1979, 1998, 2000)

Togo*

Tunisia (1991)

United Republic of

Tanzania (1994, ***

rev. 2002)

Zambia (1994)

Zimbabwe (1996,

rev.2001)

UEMOA (1994, 2002)

COMESA*

Africa

* Competition law in preparation.

*** Fair Trade Practices Bureau established January 1999.

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Fiji (1993)

Indonesia (1999)

India (1969, 2002)

Jordan*

Malaysia*

Pakistan (1970) (Draft Revision

2002)

Philippines*

Sri Lanka (1987)

Taiwan Province ofChina (1992)

Republic of Moldova**

Mali (1998)

Thailand (1979, 1999)

Viet Nam*

Asia and Pacific


** Most CIS countries have established an antimonopoly committee within the Ministry of Economy or Finance.

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Armenia (2000)

Azerbaijan **

Belarus **

Bulgaria (1991)

Croatia (1995)

Georgia**

Kazakhstan**

Kyrgyzstan**

Lithuania (1992)

Mongolia (1993)

Republic of Moldova**

Romania (1996)

Russian Federation (1991)

Slovakia (1991)

Slovenia (1991)

Tajikistan**

Turkmenistan**

Ukraine (2001)

Uzbekistan


** Most CIT countries have established an antimonopoly committee within the Ministry of Economy or Finance.

Countries in Transition

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Argentina (1980)

Bolivia*

Brazil (rev. 1994, rev. 2002)

Chile (1973, rev. 1980, rev.

2002)

Colombia (1992)

Costa Rica (1992)

Dominican Republic*

El Salvador*

Guatemala*

Honduras*

Jamaica (1993)

Nicaragua*

Panama (1996)

Paraguay*

Peru (1990)

Trinidad and Tobago*

Venezuela (1991)

Caricom*

Latin America and Caribbean

* Competition law in preparation

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Australia (1974)Austria (1988)Belgium (1991)Canada (1889)Czech Republic (1991, rev. 2001)Denmark (1997, rev. 2002)European Union (1957)Finland (1992, rev. 2001)France (1977, rev. 1986 et 2001)Germany (1957, 7° rev. 2005)Greece (1977, rev. 1995)Hungary (1996, rev 2000)Ireland (1991, rev. 1996, 2002)Italy (1990, 3° rev. 2006)Japan (1947, rev. 1998)

Luxemburg (1970, rev. 1993)Mexico (1992)Netherlands (1997)New Zealand (1986)Norway (1993)Poland (1990)Portugal (1993)Republic of Korea (1980, rev. 1999)Spain (1989, rev. 1996)Sweden (1993)Switzerland (1985, rev. 1995)Turkey (1994)United Kingdom (1890, rev.1973, 1980, 1998 & 2002)United States (1890, rev. 1976)

OECD Countries

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People’s Republic of China and Antitrust

China currently has many laws dealing with various aspects of antitrust issues.

Some practices, including price fixing, bid rigging, and tie-ins, were already outlawed by the Anti-Unfair Competition Law of 1993. Others, such as predatory pricing and price discrimination, were proscribed in 1997.

A draft competition law was submitted to the National People’s Congress Standing Committee for review in June 2006.

Eventually, the Anti-Monopoly Law of China was enacted on August 30, 2007. It will come into effect on August 1, 2008 (antitrust and Olympic Games featuring as the great events of the year to come).

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Convergence Notwithstanding this large number of

antitrust regimes worldwide, the multinational level of antitrust variance is limited.

Significant convergence has occurred and is continuing to occur on the core substance of competition law.

Yet, even within a generally coherent framework, some level of inconsistency, with particular regard to enforcement, persists.

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Effectiveness of Antitrust Enforcement

Investigating a data set containing the key features of the 105 competition laws, Hylton and Deng (2006) have compared the breadth of the laws overall and that of various subparts.

They have constructed scope indexes which provide quantitative measures of the size of the overall “competition law net” in a country, or the various smaller nets designed to cover specific subject matters.

The quantitative measures could be treated as measures of “antitrust risk” within each country examined.

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Main Scores The Restrictive Trade Practice Score measures the size

of the net designed specifically to catch firms that engage in collusive anticompetitive conduct or enter into contracts that restrain trade.

The Dominance Score is an attempt to measure the number of types of conduct specified in a country’s competition law as unlawful abuse of a dominant position.

The Merger Score attempts to measure the size of the competition law net applied to concentrations of undertakings.

The Remedy Score is an index measuring the range of punishments available to competition law enforcement authorities. Three types of punishment are considered:

fines, prison sentences, and divestiture orders.

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Some Hints from ‘Numerical Comparative Law’

The regional comparisons suggest that for large enterprises “antitrust risk” – the risk of being found in violation of some competition law provision – is substantially higher in the European Union than anywhere else.

Ordinary least squares regressions of the impact of the law’s scope suggest, with some caution, that it has a positive impact on perceived competitive intensity.

But many basic questions -for example, does the scope of competition law have a positive impact on a nation’s wealth?– still lack empirical validation.

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Costs of Divergence Divergence can create problems of at least three

types: companies may be subject to conflicting and

inconsistent laws, creating uncertainty as to the legal standards applicable to their business arrangements;

companies must comply with the procedural requirements of multiple jurisdictions, potentially increasing their costs significantly, particularly with respect to notification requirements for mergers;

different countries may ultimately impose different, and inconsistent, remedies with respect to the same transaction.

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Monopolies without Borders

On the other hand, globalization has opened markets to anticompetitive spillovers by foreign actors (or paved the way to export of anticompetitive practices to other countries).

Cartels in one nation may affect supply in others. A typical merger between, say, large US

corporations must get approval not just in the United States but also by the European Community (EC), for their activities often affect both markets.

The internationalization of antitrust enforcement is a response to this globalization of anticompetitive conduct.

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Extraterritoriality [1] The first answer to the problems of

transnational anticompetitive conduct was extraterritorial application of internal antitrust laws.

Starting in 1945 with the United States v. Aluminium Company of America case, the United States took a unilateral approach to international cartels through the application of its antitrust laws extraterritorially.

Extraterritorial applications of domestic antitrust laws provide a “self-help” approach to international spill-over concerns.

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Extraterritoriality [2] Extraterritoriality meant that, to a certain

extent, the United States became the antitrust enforcer of the world.

At the time of early US extraterritorial enforcement, many countries did not view cartels as a particularly serious problem relative to their perceived benefits of helping to strengthen domestic economies at the expense of foreign consumers.

It often occurred in the 1970s that extraterritorial enforcement of the US antitrust laws was resisted through blocking statutes and the like.

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Cooperation and Comity Cooperation between and among different

nations’ antitrust enforcers has contributed, over time, to limit conflict.

Regular application of principles of comity is another critical component that calls for one enforcer to defer to another’s decisions, and not take parallel, potentially inconsistent decisions.

But, despite a substantial degree of convergence, improved by cooperation and coordination, further steps are appropriate.

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International Dialogue International organisations have devoted significant resources in

promoting international dialogue on the development and enforcement of competition rules at national level, especially in developing countries.

These institutions include: the World Trade Organization (WTO); regional and bilateral trade agreements; the United Nations Conference on Trade and Development

(UNCTAD); the International Competition Network (ICN); domestic courts and agencies; and the market as institution. There are flaws in each of the existing competition institutions,

which address the issues of trans-border antitrust. But it is obvious that effective regulation requires no less than some degree of ‘deep’ cooperation with respect to substantive laws.

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From Now On Our focus will be on the competition law of both US

and EU. This for several reasons:

I. as a practical matter, the lion’s share of global antitrust enforcement is done by the US and EU;

II. as a conceptual matter, nations outside those jurisdictions by and large borrow the basic statutory frameworks of either the US and EU and employ similar methods of antitrust analysis;

III. knowing how the US and EU jurisdictions have grappled with the standard set of antitrust problems goes a long way toward understanding how antitrust analysis is done in the rest of the world too.

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A Roadmap Basic Economic Principles

The Origins of Competition Theory

Perfect Competition

Monopoly vs. Perfect Competition

The Welfare Effects of a Monopoly

From Freiburg to Chicago, and beyond

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Market EquilibriumPrice

Equilibriumprice

0 QuantityEquilibriumquantity

A

Supply

C

BDemand

D

Producersurplus

Consumersurplus

E

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Consumer Surplus

Consumer surplus is the amount a buyer is willing to pay for a product minus the amount the buyer actually pays.

Consumer surplus is the area below the demand curve and above the market price.

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Producer Surplus

Producer surplus is the amount a seller is paid for a product minus the total variable cost of production.

Producer surplus is equivalent to economic profit in the long run.

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Economic Welfare Consumer surplus measures economic

welfare from the buyer/consumer perspective.

Producer surplus measures economic welfare from the seller/producer perspective.

Economic welfare can be quantified as the sum of consumer surplus and producer surplus, i.e. equal weights assumed.

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Market Power In economics, market power is the ability of a firm to alter

the market price of a good or service. A firm with market power can raise price without losing all customers to competitors.

When a firm has market power, it faces a downward-sloping demand curve (price increases lead to a lower quantity demanded).

In perfectly competitive markets, market participants have no market power.

If the demand curve is downward sloping, then the decrease in supply as a result of the exercise of market power creates an economic deadweight loss in comparison with a situation of perfect competition.

This is often viewed as socially undesirable, and as a result, many countries have antitrust legislation with the aim of limiting the ability of firms to accrue market power

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Perfect Competition


The Welfare Effects of a Monopoly From Freiburg to Chicago, and Beyond

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Competition: An Introduction Competition theory, competition policy

and competition law are inextricably linked.

Ever since competition law came into existence, the economic theory of competition has exercised its influence upon it.

The rules alter as and when the underlying economic theory changes.

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The Origins The roots of the classical concept of competition go

back at least to Adam Smith’s The Wealth of Nations. Competition… ... was a behavioral concept; … was seen as power which forced prices to a level just

covering costs; … was seen as a process of rivalry between competing

firms possessing reasonable knowledge of the market opportunities;

… was a dynamic concept; … was viewed as a price-determining force and not as a

market structure. Freedom of trade was stressed as a necessary condition

for competition to work.

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The Neo-Classical Concept of Competition

The mathematical economists Cournot, Jevon, Edgeworth, Marshall changed the concept of competition.

A structural and static model of competition was developed: the abstraction of perfect competition.

Competition is no longer seen as a dynamic process: price theory focuses on the properties of market equilibrium.

If the conditions of the model are satisfied, no competitor can gain a lead on any of the others and this result in a slowing-down of the competitive process.

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Perfect Competition



From Freiburg to Chicago, and Beyond

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Perfect Competition

The model of perfect competition describes a hypothetical market form in which no producer or consumer has the market power to influence prices. According to the standard economical definition of efficiency (Pareto efficiency), perfect competition would lead to a completely efficient outcome.

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Pareto Efficiency Given a set of alternative allocations

and a set of individuals, a movement from one allocation to another that can make at least one individual better off, without making any other individual worse off, is called a Pareto improvement. An allocation of resources is Pareto optimal when no further Pareto improvements can be made

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RequirementsPerfect competition requires that the following parameters be fulfilled. Atomicity There is a large number of small producers on a given market, each so

small that its actions have no significant impact on others. Firms are price takers, meaning that the market sets the price they can get.

Homogeneity Goods and services are perfect substitutes; that is, there is no product

differentiation.

Perfect and complete information All firms and consumers know the prices set by all firms.

No transaction costs All firms have access to production technologies, and resources are

perfectly mobile.

No barriers There is perfect freedom of entry and exit from the industry. Firms face no

sunk costs that might impede movement in and out of the market.

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Short run vs. Long run In the short-run, it is possible for a firm to make abnormal

profit. New firms will enter into the industry.

The addition of new suppliers causes an outward shift in the market supply curve.

The horizontal demand curve of each individual firm shifts downward, bringing down at the same time the price, the average revenue and marginal revenue curve. The final outcome is that, in the long run, the firm will make only normal profit (zero economic profit). Its horizontal demand curve will touch its average total cost curve at its lowest point.

There is no further incentive for movement of firms in and out the industry and a long-run equilibrium has been established.

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The Long Run Adjustment

The entry of new firms shifts the market supply curve to MS2 and drives down the market price to P2. At the profit-maximizing output level Q2, only normal profits are being made. There is no incentive for firms to enter or leave the industry. Thus, a long-run equilibrium is established

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The Long Run Equilibrium

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Efficiencies In a perfectly competitive market, there will be both

allocative efficiency and productive efficiency.

Allocative efficiency occurs when price (P) is equal to marginal cost (MC), at which point the good is available to the consumer at the lowest possible price.

Productive efficiency occurs when the firm produces at the lowest point on the average cost curve (AC), implying it cannot produce the goods any more cheaply. This would be achieved in perfect competition, since, if a firm does not behave this way, another firm would be able to undercut it by selling products at a lower price.

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A Roadmap Basic Economic Principles The Origins of Competition Theory Perfect Competition Monopoly vs. Perfect Competition

The Welfare Effects of a Monopoly From Freiburg to Chicago, and Beyond

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Monopoly v. Perfect Competition

Monopoly is a market structure in which a single firm makes up the entire market.

Monopoly and perfect competition can be compared/contrasted by using consumer surplus and producer surplus (i.e. by using economic welfare/societal welfare measures).

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The Price a Monopolist Will Charge

How much should the monopolistic firm choose to produce if it wants to maximize profit?

Equilibrium output for the monopolist (as for the competitor) is determined by the MC = MR condition.

The monopolist will charge the maximum price consumers are willing to pay for that quantity.

That price is found on the demand curve.

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Q

P

MC

Demand

Ppc

Qpc

For Perfect Competition MR=AR=Demand

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Q

P

MC

MR Demand

For monopoly:-MR Demand-Output is set where MC = MR

Qm

PmThe monopoly output is less than the perfectly competitive

output

Ppc

Qpc

The monopoly price is higher than the perfectly competitive price

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The Key Difference Between a Monopolist and a Perfect Competitor

Since the monopolist’s marginal revenue is below its price, price and quantity will not be the same.

The monopolist’s equilibrium output is less, and its price is higher, than for a firm in a competitive market.

If a monopolist made the perfect price discrimination, he would be able to achieve the same results of perfect competition.

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First Degree Price Discrimination The monopolist charges each consumer

according to his willingness to pay. Quantity sold by the discriminator is

equal to the competitive level. There is no consumer surplus, only

producer surplus. Implies efficiency! Sell until reservation

of last unit = marginal cost. First-degree price discrimination is

Pareto-efficient.

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First-Degree Price Discrimination

p(q)

q

$/output unit

MC(q)

q’ q” qc

p(qc

)

p(q”)

p(q’)

Sell the q’ unit for $p(q’)

Sell the q” unit for $p(q”)

Sell the qc unit for marginal cost $p(qc)

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First-Degree Price Discrimination

$ $

QC QC

PC

output output

consumer surplus

firm’s revenuefirm’s revenue

Consumer surplus with fixed prices

First degree price discrimination

S S

D D

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The Origins of Competition

Perfect Competition




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The Welfare Consequences of Monopoly

A part of the consumer surplus is redistributed to the monopolist as producer surplus. This is the so called price effect: consumers pay too much.

There is a dead-weight loss which lowers the welfare of the concerned economy. This is the so called allocation effect: consumers purchase less.

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PM

MC

MR D

QM

PC

QC0

Price

Quantity

The Welfare Loss from Monopoly

The welfare loss is represented by the area of the triangle RST.

R

ST

O

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The Welfare Loss from Monopoly Under the most competitive equilibrium, welfare is

given by the triangle OPCS, which also correspond to the consumer surplus (firms do not have any surplus, since profits are equal to zero).

Under monopoly, welfare is given by the area described by the points OPCTR: producer surplus PMPCTR + consumer surplus OPMR.

The net efficiency loss caused by monopoly is given by the area of the triangle RTS.

Relative to monopoly, competition increases net welfare but does not bring about a Pareto improvement (not everybody is better off), since the producer surplus shrinks with respect to the monopoly case.

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Is the model of perfect competition relevant as a yardstick for competition, policy and law?

Perfect Competition, as monopoly’s antithesis, allows for clear-cut predictions about firms’ behavior and its consequences on economic welfare…

… but most real-world markets cannot be characterized by either perfect competition or monopoly…

… so more refined oligopoly models developed.

Different schools of thought emerged, each projecting and stressing its own axioms.

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The Origins of Competition

Perfect Competition




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The Freiburg School (1930): Key Concepts Individual freedom as a primary social goal which can

be guaranteed only if economic freedom and private property are protected.

Economic freedom as the corollary of political freedom and competition as the main instrument to realize a free society.

A legal framework necessary to protect individual economic freedom against both governmental interference and private economic power. Any limitation of business freedom represents a virtual limitation of competition.

Vollständiger Wettbewerb (complete competition) as the goal to be achieved.

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The Freiburg School: the Ordoliberalism of Walter Eucken e Franz Böhm

In a market of vollständiger Wettbewerb no firm as the power to forcibly influence the conduct of other firms.

The ideal market form is polyopoly. The emphasis is put on the need to transfer

responsibility for achieving competition from laissez faire to a strong state.

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The Freiburg School: Actions A strict and general prohibition of horizontal

cartels and a preventive merger control should prevent the creation of monopolies in markets where the condition of complete competition are still satisfied.

In other markets, state intervention should realize or simulate the outcomes under complete competition.

Firms possessing economic power should be forced to behave als ob (“as if”) vollständiger Wettbewerb existed, in particular with respect to their pricing decisions.

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The Monopolistic Competition Model

Edward Chamberlain developed a model of imperfect competition: the monopolistic competition.

In this model a market structure is characterized by both competitive and monopoly elements.

Proceeding upon the reasonable assumption that firms are profit maximizers, Chamberlain showed that, under monopolistic competition, long-run equilibrium would be achieved where price was equal to average cost.

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The Concept of Workable Competition

The concept of workable competition was first enunciated by economist John M. Clark in 1940.

He argued that the goal of policy should be to make competition "workable," not necessarily perfect.

He proposed wide ranging criteria for judging whether competition was workable, e.g. the number of firms should be at least large as economies of scale permit, promotional expenses should not be excessive and advertising should be informative.

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Dynamic Innovation and Austrian Economics Joseph Schumpeter: competition as a dynamic process

of “creative destruction”. Monopolies are no longer seen as evil, but as decisive factors in promoting competition and engines of innovation (no real investment in R&D in a perfect competition scenario; monopoly profits are “the baits that lure capital on untried trails”).

The dynamic vision of competition was advanced in its most extreme form by the disciples of the Austrian School (Mises, Hayeck, Kirzner). The competitive process, with its teaching strenght and the pivoltal role of potential competition, should be protected from exogenous interference, like antitrust interventions.

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The Harvard School Approach (dominant until the 1970s)

Main axioms:

The perfect competition and monopoly models must be supplemented with the more realistic and useful models of imperfect competition (monopolistic competition and oligopoly).

The objective at which antitrust law should aim is not perfect competition but workable competition.

Structural determinism: the structure-conduct-performance paradigm is developed emphasizing the direction of causality from structure to conduct to performance.

Government policy, through antitrust laws, regulation and taxes, may affect the structure of an industry, the conduct of the economic players, and the ultimate performance of an industry.

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Limits of the Harvardian Approach The Harvard "structural" school “rested on a fairly rigid

theory of Cournot oligopoly, exaggerated notions about barriers and impediments to entry, and a belief that certain types of anticompetitive conduct were more-or-less inevitable given a particular market structure. As a result, the best course for antitrust was to go after the structure and the conduct would take care of itself” (Hovenkamp).

Later on, the Harvard School would evolve in a “chastised” version, that emerged in the late 1970s in the writings of Phillip E. Areeda and a converted Donald F. Turner and was much less ambitious about the goals of antitrust, much more concerned with conduct as such, and significantly more skeptical about the benefits of aggressive judicial intervention.

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The Chicago School Approach

Main axioms:

The structure-conduct-performance paradigm is rejected: the positive correlation between structure and performance is not a loss of welfare caused by market power, but simply the consequence of higher efficiency.

Failing proof to the contrary, conduct based on the maximization of profits can be considered as competitive conduct.

Markets are capable of correcting eventual imperfections by themselves.

Markets can be competitive even if they contain relatively few firms.

Monopolies will not last forever.

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Chicago Impact The Chicago School has reneged many of the

previously received criteria of antitrust law enforcement, denouncing an underlying bias in terms of “inhospitality and suspect” for entrepreneurial initiatives not fully understood.

Thanks in part to Chicago School efforts today antitrust policy is more rigorously economic, less concerned with protecting non-economic values that are impossible to identify and weigh, and more confident that markets will correct themselves without government intervention.

The Chicago School advocates a “minimal antitrust enforcement”.

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Post-Chicago Developments [1]

Beginning in the early 80’s, and building on an extensive use of game theory, modern industrial organization has greatly added to our understanding of how actual, imperfectly competitive, markets work.

The New Industrial Organization analysis resulted in a number of possibility theorems, according to which most practices, that had been re-assessed as pro-competitive by the Chicago school, ambiguously give rise to either anti-competitive (welfare-reducing) or pro-competitive (welfare-enhancing) effects, depending upon the particular circumstances.

The typical concern that arises from Post-Chicago developments is the need to avoid both type I (to challenge innocent behavior, thus implying over-deterrence) and type II (to ignore pernicious behavior, thus implying under-deterrence) errors in antitrust decisions.

To face such dilemma, economists tend to advocate, in the vast majority of cases, a full-scale rule of reason inquiry on the economic effects of the challenged behavior.

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Post-Chicago Developments [2]

Is there any coherent approach which can be labeled as Post-Chicagoan?

The powerful (though admittedly reductionist) synthesis, which was characteristic of the Chicago School, has been replaced by more refined economic (often game-theoretical) analysis. The complexifiers took over: but the basic economic framework is still there, albeit in a less conservative vein. Moreover, more attention is devoted to the dynamics of the market scenario.

More sophistication promises interpretive miracles, but risks obscuring the overall sight and precluding court-manageable recipes for applicative outcomes.

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A Roadmap Measurements of Market Power

Some Technical Problems

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Market Power Market power is defined as the ability of a firm

to raise prices above its marginal cost.

A firm has “technical market power” if it faces a downward sloping demand curve. Whereas a firm in a perfectly competitive market faces a perfectly elastic (horizontal) demand curve and is said to possess no market power.

In real-world industries, where fixed costs are ever-present and products are unlikely to be perceived as perfect substitutes by all consumers, we should expect every firm to have some degree of market power.

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The Lerner Index The standard theoretical economic approach

assesses the degree of technical market power as an increase in the Lerner index:

L = (P - MC)/P

Lerner ratios range from 0 to 1. For a perfectly competitive firm (where P=MC),

L=0. It has no market power. As the ratio increases from 0 to 1, it is more

likely that the firm possesses significant market

power.

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The Lerner Index: Shadows At first blush, the Lerner Index seems to offer a

quick and easy insight into a firm's market power. Complex product and geographic market definitions are unnecessary.

However, there are some difficulties in using the Lerner Index to measure market power.

The most significant practical obstacle to broader application of the Lerner Index is determining the firm's marginal cost of

production at any given point in time.

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The Elasticity of Demand Due to the traditionally limited applicability of the

marginal cost concept, antitrust economics has focused mainly on the elasticities of demand to determine market power.

The firm’s elasticity of demand is the response of the firm’s output to a change in price, i.e. the relationship between the percentage in quantity of a good demanded and the percentage change of the price:

ε = δQ/Q ÷ δP/P or alternatively δQ/δP · P/Q Whenever ε is greater than 1, the demand is said to be

elastic, meaning that a price increase of X% will yield a decrease in quantity demanded of greater than X%.

At ε smaller than 1, the demand is inelastic, implying that a price increase of X% yields a decrease in quantity of less than X%.

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ε Components

As Landes and Posner explain, the Lerner Index is the reciprocal of the demand elasticity facing the firm at its own profit-maximizing level of output:

(P – MC)/P = 1/ε

ε has two components: 1. the (direct) own-price elasticity of demand for the

product produced by the firm;2. the (indirect) sum of the cross-price elasticities with

respect to competing products as a result of changes in the prices set by other firms.

At the firm profit maximizing price:the higher ε, the closer P will be to Pc

if ε = ∞, the Lerner index = 0

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Firm’s Market Share The "own-demand" elasticities may sometimes

be difficult to measure directly.

The standard approach assesses market power in an indirect way. The focus is on the firm's market share on a relevant market.

High market share is equated with a high degree of market power.

However, market share is only one of the variables that determine market power: other variables are the relative position of competitors, the existence of potential entrants and the countervailing power of buyers.

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The Relevant Market The relevant market is the set of products and

geographical areas that exercise some competitive constraints on each other.

A test used to guide the analysis of market definition in both the product and the geographic dimension is the so-called SSNIP test, introduced in the US Department of Justice 1982 Merger Guidelines.

The test seeks to identify the smallest market within which a hypothetical monopolist or cartel could impose a small but significant non-transitory increase in price and defines this as the relevant market.

.

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The SSNIP Test in Action It asks whether a monopolist or cartel could sustain a price

increase of 5% for at least one year on a ceteris paribus assumption that the terms of sale of all other products are held constant.

1. If sufficient numbers of consumers are likely to switch to alternative products as to make the price increase unprofitable, then the firm or cartel lacks the power to raise price.

2. The relevant market therefore needs to be expanded.

3. The next closest substitute is added and the process is repeated until the point is reached where a hypothetical cartel or monopolist could profitably impose a 5% price increase.

The range of products or the geographic area so defined constitutes the relevant market.

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An Alternative: Critical Loss Analysis[by Dan Rubinfeld]

Critical Loss (CL): for a given price increase by a hypothetical monopolist, what is the smallest loss of sales (in percentage terms) that would make the increase unprofitable? If the Actual Loss (AL) is greater than the CL, the price increase would not be profitable and the proposed market is not a relevant antitrust market.

Let P = current price of the hypothetical monopolistΔP/P = proposed percentage price increase (e.g., 5%) MC = marginal (incremental) cost of production m = percentage profit margin of the hypothetical monopolist = (P-MC)/P Q = sales volume of the hypothetical monopolist ΔQ = lost sales volume (diversion)Increased profit (from higher margins on the initial volume sold): Q(ΔP)Lost profit associated with lost sales: ΔQ (P + ΔP – MC).CL is the percentage volume diverted, ΔQ/Q, which equates QΔP to ΔQ (P + ΔP– MC).Solving, CL = (ΔP/P)/(ΔP/P + m)Suppose that the hypothetical price increase (ΔP/P) = 5% and the margin, m, is 50%. Then, CL = .05/(.05+.50) = .091 = 9.1%. (If m = 100%, CL = 4.8%)

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A Roadmap

Measurements of Market Power

Some Technical Problems

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The Cellophane Fallacy Trap The essential point of identifying the relevant market in

cases of alleged dominance is to assess whether a firm or group of firms have market power.

By considering the degree of product substitution at prevailing prices, one might effectively focus on the position after the firm or firms have already raised price to the maximum extent possible, i.e. after they have exercised that market power.

The US Supreme Court was seen to have made this mistake in the Cellophane case in what has come to be known as the ‘cellophane trap’.

Thus, in order to define the market in abuse of dominance cases, the SSNIP test would have to be estimated on the basis of competitive prices rather than at the prevailing price level. Of course it may be impossible to calculate the competitive price level.

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Further Technical Problems What is “small but significant” is left somehow

undefined: but the choice of a different measure (5, 10 or more) may have huge consequences on consumers’ perception.

The time dimension is left somehow undefined as well; but a different time span may imply different reactions by both consumers and new-entrant producers.

Market power can express itself in a different dimension (limiting variety, diminishing quality, delaying innovation). In such cases, the SSNIP test is unhelpful. (European alternative: expedient definition of the market of technology)

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From the Supply Side [1] Some products, even if non-substitutes, can be

considered as belonging to the same market because of their similar production conditions.

In the case Brown Shoe (1962), Brown urged that, “in order to find autonomous relevant markets not only were the age (shoes for babies, for children and for adults) and sex of the intended customers to be considered, but even the differences in grade of material, quality of workmanship, price, and customer use of shoes”.

The Court rejected these “refinements” as “unrealistic and impractical”. “There is one group of classifications which is understood and recognized by the entire industry and the public: the classification into `men's, women's' and children's' shoes considered separately and independently.”

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From the Supply Side To decide if the producers of non-substitutes products can be

considered as belonging to the same market, the attention has to be focused on:

the characteristics of production; the different technology used; the firms’ specialization. (cases Continental Can, Michelin, Atlantic Container Line) It is necessary that a producer can realize a conversion (to

penetrate into the market of another producer) in a relatively short period without additional investments: it has to be a “simple adjustment” (Continental Can). [The ‘hit-and-run’ competition, which implies no sunk cost, is the basis for the theory of contestable markets].

Finally, it is hard to imagine substitutability on the supply side in the presence of essential facilities.

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A RoadmapCompetition Policy Goals:

• Efficiency

• Consumer Welfare

• Protection of Small Firms

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Competition Policy Goals:[a] Efficiency

Why can allocative efficiency be considered the major policy goal for competition law?

1. Perfectly competitive markets are Pareto efficient.

2. Allocative efficiency implies that firms produce what buyers want and are willing to pay for.

But allocative efficiency may conflict with other efficiency goals: productive efficiency and dynamic efficiency.

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Productive and Dynamic Efficiency

Productive or technical efficiency

1. Output is maximized by using the most effective combination of inputs: internal slack (also called X-inefficiency) is absent.

2. Is a static concept (as allocative efficiency).

3. The achievement of productive efficiency is not a Pareto improvement: the less efficient firms are made worse off.

Dynamic efficiency

1. Is achieved trough the invention, development and diffusion of new products and production processes that increase social welfare.

2. It refers to the rate of technological progress.

3. There will be losers in the dynamic competition struggle: Pareto improvements cannot be reached.

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Kaldor-Hicks Efficiency [1] Given that the different efficiency goals are

not consistent with each other, welfare economics offers the alternative criterion of Kaldor-Hicks efficiency.

Using Kaldor-Hicks efficiency, an outcome is more efficient if those that are made better off could in theory compensate those that are made worse off and still have a surplus left for themselves: total welfare is maximized.

It is irrelevant that producers, rather than consumers, capture the surplus produced by achieving efficiencies.

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Kaldor-Hicks Efficiency [2] The promotion of aggregate economic welfare

has clearly been voiced by the Chicago School.

The Kaldor-Hicks criterion accepts restraints of competition if they lead to an increase in the welfare of producers greater than the ensuing loss suffered by consumers.

The total welfare model of antitrust rejects the view that enforcement agencies should require firms to pass on efficiency benefits to consumers: redistribution is considered neutral.

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Competition Policy Goals:[b] Consumer Welfare

In policy statements of competition authorities, the goal to improve allocative efficiency is quoted alongside the objective of furthering consumer welfare, defined as the maximization of consumer surplus.

The goal of consumer welfare implies that competition law has to prevent increases in consumer prices due to the exercise of market power by dominant firms.

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Allocative Efficiency vs. Consumer Welfare

Interventions leading to reduced prices (or preventing price increases) are invariably at the expense of the profits of the firms concerned: Pareto improvements are excluded.

The maximization of consumer surplus requires that consumers are made better off without accepting gains that accrue to producers only, even if these gains are sufficiently large to potentially compensate the losses to consumers: Kaldor-Hicks improvements are also excluded.

Allocative efficiency and consumer welfare may be conflicting; policy makers cannot escape from trade-offs if these goals are to be pursued simultaneously.

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A Dynamic Approach In some cases increasing producer surplus may

be in the interest of consumers. If profits are the necessary return on previous

innovation or provide the funding for future innovation, consumers will be harmed if antitrust intervention focuses on low prices only.

To guarantee innovation (dynamic efficiency), the size of producer surplus should matter inasmuch as it generates future increases of consumer surplus.

The scope for conflicts between efficiency goals and consumer welfare seems to be smaller if dynamic efficiencies are realized.

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Competition Policy Goals:[c] The Protection of Small Firms

The defense of small firms has often been one of the main reasons behind the adoption of competition laws.

The favorable treatment of small firms is not necessarily in contrast with the objective of economic welfare if it is limited to protecting such firms from the abuse of larger enterprises.

However, artificially helping small firms to survive when they are not operating at an efficient scale of production is in contrast with economic welfare objectives.

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A Roadmap

A Comparative (quick) Look

Main Antitrust Acts in the US (and some additional features)

European Basic Discipline

Italian Law

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Antitrust in the US The origins of modern competition policy can be

traced back to the end of the 19th century, mainly as a reaction to the formation of trusts in the US.

In 1890 the Sherman Act was adopted in the US.

This is not the earliest example of anti-trust law in the world: Canada, for instance, adopted a similar law in 1889, but its enforcement was to be much weaker.

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A Note about the Nickname Why antitrust, given that the trust is a

prestigious legacy of the English equity system, which the civil law countries are currently trying to absorb?

At the time of the enactment of the Sherman Act, a corporation was not allowed to participate another corporation. The most consistent alternative in order to effectuate a combination tighter than a pool or cartel was, then, for its members to confer their stock to a board of trustees: each participating corporation would retain its individual state charter, but all participants would be subject to the control of the entity holding their stock.

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Sherman Act: Sections 1 and 2 Section 1 prohibits contracts, combinations and

conspiracies which restrain trade, and prescribes imprisonment and fines for violations.

Section 2 prohibits monopolization, attempts to monopolize and conspiracies to monopolize “any part of the trade of commerce among the several states, or with foreign nations”.

These norms are vague, in the sense that they have only general content. They do not specify what practices are in fact conducive to co-ordination of market strategies, or what practices imply market monopolization.

Specific content (i.e., the identification of the illegal practices) only springs from court decisions. This makes the case law of particular relevance in antitrust.

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Clayton Act Merger Law was introduced after first attempts to assess

mergers as monopolization practices: they were legal unless formed with the intention to monopolize the market using unfair methods of competition.

In 1914 the Clayton Act was passed.

The Act prohibits mergers if their effect “may be to substantially lessen competition, or tend to create a monopoly”.

The Act also explicitly forbids other practices, such as price discrimination, which lessens competition; a less obvious prohibition is introduced also for exclusive dealing and tying.

The Act empowers private parties injured by violations of the Act to sue for treble damages.

In the same year, the FTC Act assigned the merger assessment to a newly created Agency, namely the Federal Trade Commission.

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Some Amendments

The Robinson-Patman Act of 1936 amended provisions on price discrimination of the Clayton Act .

The Hart-Scott-Rodino Act of 1976 amended the merger provisions of the Clayton Act by giving the DoJ and the FTC the power to review all mergers of firms above a certain size threshold.

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The Protection of Small Firms:The US Side

In past decades, examples of a “small is beautiful” approach could also be found on the other side of the Atlantic.

In contrast with current US antitrust law, the early Robinson-Patman Act, as well as older American case law under the Sherman Act, expressed a wish to restrict the power of big firms in favor of smaller firms.

In current US antitrust law promotion of small business has been discredited as a policy goal, given its noticeable inefficiencies.

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Per Se Rules v. Rule of Reason

In antitrust law, it is customary to distinguish between per se rules and rules of reason.

When a practice is considered to be a per se violation, a defendant is left with the only possibility to prove that he has not performed the challenged conduct.

Practices tested under the rule of reason are condemned only if found to interfere with competition unreasonably.

Reasonableness is a typical criterion in the common

law tradition, implying that the assessment of a given conduct requires a balancing of its overall consequences along different, alternative, perspectives.

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US Antitrust Enforcement:the Origins

The history of US Antitrust in the period that preceded the heyday of structuralism - namely, from its beginning to the second world war - shows that antitrust decisions usually took explicitly into account a multiplicity of goals from which to assess the effects of a given conduct.

The economic effects, in terms of competition and market efficiency, were systematically balanced with other, often contrasting, effects (such as political defence of small firms, or the smoothing of social tension).

The courts performed the balancing by resorting to rules of reason.

In particular, during the interwar period, the application of the rule of reason allowed the balancing to be significantly bent in favour of different, non-economic, goals.

The most cited decision of the US Supreme Court during the interwar period was, in this respect, Appalachian Coals (1933), that excepted to the per se prohibition of horizontal price-fixing.

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The Design of Antitrust Structuralism

Antitrust structuralism translated the neoclassical, abstract notion of perfect competition as price-taking behaviour from economic analysis to the realm of law.

Under antitrust structuralism, the assessment was firmly grounded on the primacy of the economic goal of preserving competition – also because, under the structure-conduct-performance paradigm, the latter consistently absorbed the political goal of small firms’ defence.

This resulted in the emphasis on per se rules that characterised antitrust structuralism.

Most significantly, since Alcoa (1945), the widespread resort to the per se rules went also along with the courts’ view that, by following antitrust structuralism, anti-competitive behaviour is to be construed as an objective notion, and therefore to be assessed independently of the firms’ anti-competitive intent.

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The Chicago Critique

The first challenge to antitrust structuralism came from the Chicago school. Its critique focussed on a number of practices (both unilateral practices and vertical agreements) that, in the taxonomy of antitrust structuralism, were classified as implying, often per se, anticompetitive, illegal, behaviour.

Building on scrupulous economic analysis, the Chicago scholars proved that most practices can be given an efficiency rationale, that contrasts with their pretended anticompetitive effects.

The normative suggestion of the Chicago critique was that vertical agreements and many unilateral practices should be legal per se, unless it can be proven that they are a tool for the implementation of a horizontal agreement

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A Roadmap

A Comparative (quick) Look



Italian Law

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Treaty of the European Communities

In the European Union, antitrust principles exhibit constitutional nature, as they are directly embedded in its Treaty (from article 81 to 89) and bind not only private economic agents, but also national legislators and Governments.

Articles 81, 82 and 86 are the three pillars: they are obviously enforced by the European Commission.

These articles are characterized by “direct applicability”: they are part of the law of each Member State and are directly enforceable by national courts.

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Article 81(1) of the EC Treaty (Article 85 in the Treaty of Rome)

Article 81(1) prohibits “all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:

a directly or indirectly fix purchase or selling prices or any other trading conditions;

b limit or control production, markets, technical development, or investment;

c share markets or sources of supply; d apply dissimilar conditions to equivalent transactions with

other trading parties, thereby placing them at a competitive disadvantage;

e make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts”.

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Article 81(2) and (3) of the EC Treaty

Accordihg to Article 82(2), “any agreements or decisions prohibited pursuant to this article shall be automatically void”.

Paragraph (3) , however, states that “the provisions of paragraph 1 may, however, be declared inapplicable in the case of: - any agreement or category of agreements between undertakings, - any decision or category of decisions by associations of undertakings, - any concerted practice or category of concerted practices, which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question”.

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Article 81: Some Preliminary Remarks

Article 81 deals with both horizontal and vertical agreements. Economics show that these agreements have quite different

competitive effects. Horizontal agreements (among competitors) usually restrict

competition. Vertical agreements (between firms operating at different

stages of production processes) are often efficiency enhancing and pose problems to competition, only if they are undertaken by firms which enjoy considerable market power.

To treat them with the same legal paradigm is therefore unlikely to be efficient.

As will be seen, however, only recently the EU perceived this problem and adopted an approach to vertical restraints which is more in line with economic thinking: Regulation 2790/1999.

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Regulation 17/62 Regulation 17/62 introduced two main distinctive aspects in

the European competition system:1. The notification procedure, according to which all

agreements potentially falling within Article 81 (1) EC had to be notified to the Commission for assessment if they were to benefit from a negative clearance or an exemption according to Article 81 (3) EC.

2. The centralized power of the Commission, which enjoyed a monopoly for the application of Article 81 (3) EC, in contrast to Articles 81(1) and (2), and 82 EC, that could be enforced via private actions in national courts and also applied by national competition authorities (NCAs).

The concentration of the power of exemption in the hands of the European Commission entailed either rejecting in toto the rule of reason approach or reducing its breath to the four conditions listed in Article 81(3) EC.

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Block Exemptions The previously mainstream construction of Article 81(1) had been

inspired by the Freiburg School ‘credo’, according to which any limitation of business freedom should be held as a virtual restriction of competition, and thus subject to prohibition unless exempted.

This determined a massive resort to prior notifications of agreements.

The numbers, unsustainable, called for the introduction of block exemptions: quasi-regulatory initiatives aimed at avoiding that the bureaux at the DG 4 were literally submerged by paperwork.

Such regulatory initiatives struck a balance, at once restating the formal prohibition and specifying, on a prejudicial basis, the exemption where applicable.

The end of the story was overt hypocrisy: everything was prohibited ex ante, but almost everything was also permitted ex ante.

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The Reform introduced with the Regulation 1/2003

The Regulation 1/2003 has not only replaced the 40-year-old Regulation 17/62, but also constitutes a radical reform of EC competition law enforcement.

Notifications to the Commission under Article 81 EC have been abolished. A system of legal exception has been introduced: Article 81 (3) EC will apply automatically, exempting from Article 81 (1) EC prohibition all agreements falling within its scope, without the need for an official decision to be adopted by the Commission or any other authority.

The enforcement system created by Regulation 17/62 has been decentralized. Some of the Commission’s current enforcement responsibilities have been extended/devolved to NCAs (and national courts for private litigation) by allowing them to apply Article 81 EC in its entirety. Undertakings and their legal advisers, on the other hand, have to self-assess their behavior.

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Towards a “Rule of Reason”? Since both stages of the analysis are now left in

the hands of the same authority, the practical importance of the dichotomy (between the intransigent, full-fledged prohibition and the compromises of exemption) fades away.

The contested conduct will then be challenged as anticompetitive whenever it appears, from the enforcer’s viewpoint, as lacking the redeeming virtues needed to pass the overall scrutiny.

Not yet a rule of reason, but an important step in that direction.

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European Competition Policy and theGoal of Market Integration

At least at its beginning, the crucial purpose of antitrust in Europe was to enhance the common market: competition law was considered an instrument to break down the national boundaries between the Member States of the Community.

Neither Member States nor private enterprises could engage in practices conflicting with or undermining the unification of the common market.

The Commission has, without exception, condemned firms which have tried to segment markets across national borders, and practices, such as forbidding parallel imports, have been given the status of per se illegality within the EU.

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Is Competition Law an appropriate instrument to further market integration?

Market integration is largely impeded by factors, such as fiscal disparities and different regulatory interventions by the Member States, which are external to concerns of competition policy.

Prohibiting companies active in the European Union to adapt their sales policies to heterogeneous local conditions is nothing else but combating effects without reaching the causes of the existing disparities.

Using competition law to bring about price convergence by means of the arbitrage of parallel trade comes down to imposing the costs of non-Europe on companies.

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Distribution Agreements Since Consten/Grundig (1966), distribution agreements

were accused of compartmentalizing national markets and played the unfortunate role of “villains”.

However, not all distribution agreements were subject to blame:

exclusivity in resale and supply was conceded a block exemption through Reg. 67/67, and later Reg. 1983 and 1984/83;

motor vehicle distribution followed the Regulation 1475/95;

franchising agreements, notoriously the “queen’s favorite”, were governed by an ex ante, ad hoc, permissive regulation: Regulation 4087/88.

Black, grey and white lists were used.

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The Strait Jacket Effect [1] The predecessors of Regulation 2790/99 (which, as

will be seen in awhile, produced a revolutionary switch in the European approach) used to contain additional ‘white list’ provisions.

Such provisions comprised a list of clauses, possibly restrictive of competition but, nonetheless, explicitly permitted to be included in block-exempted agreements.

However, since block exemption regulations ought to be strictly interpreted in accordance with the European judiciary, a particular agreement was not able to benefit from block exemption under the old regulations unless it complied exactly with the precise terms of the relevant legislation.

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The Strait Jacket Effect [2] Consequently, block exemption was inapplicable

whenever the agreement incorporated a single clause (restricting the conduct of any party) which was not contained within a relevant ‘white list’, even if it did not appear in the relevant ‘black list’.

Hence, vertical agreements were often formulated by taking the relevant block exemption regulation as a model agreement: these ‘white list’ provisions produced a strait jacket effect, which indicates that they caused severe constraints imposed on the economic entities during the drafting process of vertical agreements.

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Regulation 2790/1999 The Regulation 2790/1999 concerns vertical agreements

falling within Article 81(1) but pertaining to a category which can normally be regarded as satisfying the conditions laid down in Article 81(3).

Practically, a block exemption from Article 81(1) has been introduced on vertical restraints, subject to:

(i) a market share criterion (below 30%, safe harbor); and(ii) a black list of clauses which are not exempted. Thus, the

Regulation does not exempt (but not even condemns ex ante) vertical agreements containing certain types of severely anti-competitive restraints such as resale price maintenance, as well as certain types of territorial protection, irrespective of the market share of the undertakings concerned.

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European Competition Policy and the Protection of Small Firms European competition law has been, and is still partly

influenced by considerations of fairness (preservation of equal opportunities) not consistent with an efficiency oriented competition policy.

At the outset, the raging economic crisis launched a concern for small and medium-sized firms to become part of Community law.

The European Court of Justice, in the United Brands case (1978), referred to the “independence of small and medium sized firms” in order to counter the alleged ability of large firms to extract unfair prices and conditions from smaller enterprises.

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European Competition Policy and the Protection of Individual Economic Freedom

European competition law, inspired as it was to the views of the Freiburg School, is still permeated by rules aiming at the protection of freedom of action, rather than the achievement of allocative efficiency.

For example, in the Regulation on distribution of cars there are several requirements to protect the commercial freedom of the “weak” car dealer against supposedly abusive behavior by the “strong” car manufacturer”.

But using rules of competition law to protect freedom of business decisions will cause inconsistencies and may create welfare losses.

Rules of contract law may be more appropriate to achieve the latter goal.

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The Main Goal of European Competition Policy

As of now, the main objectives of competition policy as enforced by the EC can be inferred from Guidelines on the application of Article 81(3) of the Treaty [2004]:

“The objective of Article 81 is to protect competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources. Competition and market integration serve these ends since the creation and preservation of an open single market promotes an efficient allocation of resources throughout the Community for the benefit of the consumer”.

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Article 82 of the EC Treaty (Article 86 in the Treaty of Rome)

The Article states that “any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States”.

Such abuse may, in particular, consist in:(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;(b) limiting production, markets or technical development to the prejudice of consumers;(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

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Article 82 in a Nutshell In general, Article 82 is related to

exploitative behavior (excessive pricing) and such exclusionary practices as predatory pricing, exclusive dealing, refusal to supply, and tying.

For an abuse of dominant position to exist, it must be previously established that a dominant position obtains, then that the hegemonic firm has undertaken an abusive behavior.

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Article 86 of the EC Treaty (Article 90 in the Treaty of Rome)

Article 86 of the EC Treaty makes provisions for the application of the competition rules to public undertakings and undertakings to which Member States grant special or exclusive rights.

Article 86(1) applies to States, and ensures the effectiveness of the free-trade, non-discrimination and competition rules set out elsewhere in the Treaty:

“ In the case of public undertakings and undertakings to which Member States grant special or exclusive rights, Member States shall neither enact nor maintain in force any measure contrary to the rules contained in this Treaty, in particular to those rules provided for in Article 12 and Articles 81 to 89”.

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Article 86(2) Article 86(2) applies to public undertakings and to

undertakings that have been granted special or exclusive rights by a State:

“Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules contained in this Treaty, in particular to the rules on competition, insofar as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Community”.

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Article 86(3)

Article 86(3) entrusts the European Commission with enforcement of its provisions:

“The Commission shall ensure the application of the provisions of this Article and shall, where necessary, address appropriate directives or decisions to Member States”.

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Merger Regulation In Europe Merger Law was introduced after antitrust enforcers

had started to fill the preexistent lacuna by assessing mergers as abuses (Continental Can, 1982).

Merger Regulation was first introduced in 1989, when more than thirty years had elapsed since the Treaty of Rome had been signed. It has undergone significant modification in 2004.

Merger Regulation No. 139/2004 states the incompatibility with the Common Market of “a concentration which would significantly impede competition … as a result of the creation or strengthening of a dominant position”.

The Regulation consists of an authorization procedure with strict time deadlines.

There are three possible outcomes: the mergers might be allowed, prohibited, or allowed subject to certain conditions, or remedies.

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A Roadmap A Comparative (quick) Look



Italian Law

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Italian Law (just a glance) Law No. 287/90 of October 10, 1990, as subsequently

modified with several interventions (the last being represented by the Law No. 248/06 of August 4, 2006).

Article 1.1 states the law is direct expression of Article 41 of the Italian Constitution (but the same provision was effective when the economic scene was dominated by the Public Hand through State-owned enterprises).

Article 1.4 mandates that the interpretation of the statute should comply with antitrust principles of the European Community, whose overall thesaurus is consequently adopted automatically and without any reservation.

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European Soul for the Italian Antitrust Law? The Italian statutory discipline is substantially shaped

after the European model (and aims to replicate it); the enforcement by the Agcm has always been tuned up with the European statutory and judicial developments.

Formally, however, Law No. 287/90 has not been modified in order to conform to Reg. 1/2003, so that the Italian discipline still contemplates the possibility of notification of the agreements to be stipulated by the firms, in order to get a preliminary assessment, which has been dropped in Europe and replaced by the system of legal exception. At any rate, the praxis has been folded according to the new European rules.

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A Roadmap

Collusive Agreements

Price Parallelism

Plus factors and Facilitating Practices

Restriction of Competition

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[from the press]

Italian Bakers: Suspicion of Rosetta Cartel

Yesterday, a group of Italian Guardia di finanza and competition authority officials raided Rome' most influential bread producers suspected of fixing prices of "rosettas", the most popular roman bread.

Experts already queuing for a hearing, to be held in baker mills, with perfumes of hot bread and fountains of olive oil. Economic experts already questioning cross elasticity between "rosetta", "sfilatino" and "ciabatta". Damages claims appear to have been filed in "Frascati" Tribunal from "Porchetta" producers, claiming anticompetitive overcharges. Contingency fees might be paid by means of monthly rosettas supply.

(from Financial Times of October 16, 2007, p. 1).

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Collusive Agreements: Introduction

Collusive agreements can take different forms: firms might agree on sales prices, allocate quotas among themselves, divide markets so that some firms decide not to be present in certain markets in exchange for being the sole seller in others, or coordinate their behavior along some other dimensions.

Collusive practices allow firms to exert market power they would not otherwise detain, and artificially restrict competition and increase prices, thereby reducing welfare.

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Potentially Anti-Competitive Collusion

Potentially anti-competitive collusion can take three forms:

1. Firms may agree to fix prices, restrict output, freeze market shares, or divide markets. Such agreements allow cartel members to maximize their profits directly.

2. A second category of collusion consists of agreements to take action to harm rivals who are not party of the collusion. Firms can reduce their rivals’ revenue through boycotts or raise rivals’ costs by forcing the latter to increase prices (allowing the cartel members to sell under the rivals’ price umbrella).

3. Finally, firms can collude to change their behaviors in a manner that will lessen forms of rivalry other than price competition. This category includes agreements to limit advertising or raising consumers’ search costs in another way (for example, restricting opening hours of shops).

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Welfare Effects of Collusion (1) Collusion of the first type directly raises price

and causes a wealth transfer from consumers to the cartel as well as a deadweight loss (allocative inefficiency).

From society perspective, the costs of forming and enforcing the cartel (rent seeking) are also welfare reducing.

In addition, the prospect of profits that are easy to make may reduce incentives to keep production costs low (productive inefficiency) or to innovate (dynamic inefficiencies).

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Welfare Effects of Collusion (2)

Since cartels of the second category lead to supra-competitive pricing, they can also cause the same detrimental effects of the cartels of the first type.

In addition, collusion to disadvantage rivals causes wasteful defensive measures by the victims and wasteful expenditure of resources by the cartel members to accomplish the cartel’s objective.

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Welfare Effects of Collusion (3)

The welfare effects of cartel agreements of the third type are more numerous and complex.

Since consumer prices will be higher, because of the restrictions on advertising (or other sales methods), losses in terms of allocative efficiency and rent seeking will again ensue.

In addition, the latter cartels will cause increased consumer search costs and lower the quality or variety of products offered in the market.

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Evils of Collusion

Quantifying the direct harm from cartels is difficult. Data collected through an OECD survey induce to believe that the harm from cartels, with an average overcharge between 15 and 20%, is even larger than has been previously thought, and conservatively exceeds the equivalent of billions of U.S. dollars per year. More recent studies (by Connor & a.) on a sample of 674 cartels indicate average overcharges of 25% (20% for domestic cartels and 34% for international ones).

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International Cartel Duration

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Cartel Duration in Europe(Combe, Monnier – 2007)

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Detection Rates

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Estimate of Impact of Cartels in Europe Lower bound estimate: the yearly impact of

cartels in Europe would amount to €16.8 bn, of which €11.2 bn would represent the net transfer from buyers to sellers, and €5,6 bn the deadweight loss. This would in turn mean an impact of 0.12% of the EU GDP.

Upper bound estimate: the yearly impact of cartels in Europe would amount €261,228 bn, of which €174.14 bn would represent the net transfer from buyers to sellers, and €87.07 bn the deadweight loss. This would in turn mean an impact of 1.80% of the EU GDP.

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Some Economics of Cartelization

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Explaining Economics of Cartelization

In order to maximize its profits, the cartel will derive its demand curve, Dd, which corresponds to the difference between D and the supply curve of the fringe firms, Sf. On this basis, it is possible to trace the marginal revenue curve. The output produced by the cartel will be Qd, the total quantity Qt=Qd+Qf.

A well organized cartel will behave like a dominant firm; but it faces collective action problems.

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The Main “Ingredients” of Collusion

It is not easy for firms to achieve a collusive outcome. It may be difficult to find a cartel price which satisfies all the cartelists; in order to avoid an enlarged version of the prisoner’s dilemma, they should be able to freely exchange information.

Moreover, every firm would be tempted to unilaterally deviate from a collusive action, as by doing so it would increase its profit.

The acknowledgement that any collusive situation naturally prompts the temptation to deviate from it leads to the identification of the two elements which must exist for collusion to obtain:

1. its participants must be able to detect deviations from the common understanding;

2. there must also be a credible punishment, which might take the form of rivals producing much higher quantities (or selling at much lower prices) in the periods after the deviation, thus depressing the profit of the deviator.

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Market Characteristics which Facilitate/Complicate Collusion [1]

Concentration. Collusion is the more likely the smaller the number of firms in the industry (and the larger the number of customers).

Symmetry and product homogeneity. The more firms are symmetric (in capacities, market shares, costs or product range), the more likely collusion will be.

Entry. The easier entry into an industry (the lower entry barriers), the more difficult to sustain collusive prices. When prices and profits are high, new firms will be attracted into the industry, and this tends to disrupt the collusive outcome.

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Market Characteristics which Facilitate/Complicate Collusion [2]

Demand Elasticity. The more inelastic the demand curve facing a cartel, the higher the price the cartel can set (but it is not clear why elasticity should affect the likelihood of collusion: if demand is very elastic, then a given price cut will determine a large increase in the quantity demanded, but this is true both for the price cut in a deviation and for the price cut in the punishment period).

Competitive fringe with elastic supply. The existence of large and sophisticated

buyers. Large buyers may succeed in obtaining secret discounts causing the cartel to unravel.

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The ‘Tragedy’ of the Cartel Left to itself, without the possibility to

invoke judicial enforcement of the agreed-for terms, the cartel is -according to the Chicago School- doomed to fail. Question is, then: why bother on it?

The natural collapse of the cartel –let alone the danger of its successful organization- would take time; meanwhile, social costs would accrue.

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A Roadmap

Collusive Agreements

Price Parallelism



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Price Parallelism Courts and antitrust authorities have sometimes

been tempted to infer the existence of collusive behavior from the fact that sellers charge similar prices over time: so-called “price parallelism”.

But common exogenous shocks such as the increase in input prices of all the suppliers, or an increase in inflation, would probably lead all the sellers to increase prices proportionally, without implying that they are colluding.

Moreover, a parallel behavior might ‘naturally’ stem from an oligopoly framework.

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Oligopoly and Mutual Interdependence In an industry collectively dominated by a few large

firms, each recognizes that whatever competitive action it takes will significantly impinge upon the other large firms, and will elicit a corresponding response on their part, potentially rendering all of them worse off financially.

The oligopolistic firms come to recognize that unilateral, independent competition jeopardizes the peaceful coexistence of them all.

They need not conspire explicitly to curb competition among themselves, although they may; instead, they develop an understanding--a modus operandi or "code of conduct"--delineating which kinds of rivalry are, and are not, acceptable to the group.

Parallelism is thus the produce of autonomous, rational decisions of each firm.

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A Roadmap Collusive Agreements

Price Parallelism



The Two-Tier Test

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Parallelism Plus However, in some cases price parallelism can be credibly

explained only by coordination among firms, even if there is no proof of the latter.

The “parallelism plus” rule consists of finding illegal behavior whenever price parallelism is accompanied by a facilitating factor (such as exchange of information, resale price maintenance, or best price clauses).

The rule, already entrenched in the U.S., has been explicitly endorsed by the where, for instance, markets have geographic differentiation, they can coordinate on a policy of not invading the geographic areas of other firms.Supreme Court in Twombly (2007). Moreover, Twombly recognizes that oligopolistic coordination need not involve coordination on price, but can involve coordination on a strategy of not moving into the areas where rivals compete: where, for instance, markets have geographic differentiation, they can coordinate on a policy of not invading the geographic areas of other firms.

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Plus Factors Minutes of meetings, e-mail messages, memos and other

written (or recorded) evidence concerning agreements on prices and quantities are the most likely proof of collusion.

However, firms may also sustain collusion without openly discussing prices or quantities, but coordinating as to establish the environment that facilitates collusion. They might decide to:

exchange detailed prices and quantity information (via their trade association, or an outside agent);

set up a forum where they can announce future prices to each other;

agree on a resale price maintenance scheme or to other practices that make their prices more uniform or transparent.

In all such cases, if there is evidence that firms have not acted unilaterally, firms should be found guilty of collusion.

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Exchange of Information on Past or Current Prices and Quantities

Exchange of information on past prices and quantities (or of verifiable information on prices and quantities set in the current period) of each individual firm facilitates collusion, as it allows to identify deviators and better target market punishments, which then become more effective and less costly for the punishing firms.

In the absence of disaggregate information on past prices and quantities, availability of more precise estimates of aggregate (market) demand would also help, as it allows firms to see whether a decrease in individual demand is due to cheating of rivals or to a negative shock in market demand.

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Exchange of Information on Future Prices and Quantities

Announcements of future prices (or production plans) might help collusion, in that it might allow firms to better coordinate on a particular equilibrium among all the possible ones.

Announcements about future actions can be:

private announcements directed only to competitors;

public announcements with commitment value to consumers.

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Private Announcements Private announcements are directed only to

competitors (an example can be a a firm sending a fax to rivals where it is stated that from next month it intends to set a certain price).

It is hard to imagine any efficiency reason behind them.

Most likely, they just help rivals to coordinate on a particular collusive price, and therefore help them collude by avoiding costly periods of price wars and price instability.

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Public Announcements Public announcements are seen by rival firms as well as

consumers (an example is a firm advertising the prices of its products in newspapers).

On the one hand, it might be argued that transparency of prices still helps collusion.

On the other hand, market transparency is good for consumers, as it allows them to “shop around” for the best offer.

Both theoretical argument and empirical evidence suggest that price advertising in this sense is generally beneficial and brings prices down.

Therefore, when prices are “transparent” for both consumers and firms, this should not be considered as an anti-competitive practice.

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Resale Price Maintenance Resale price maintenance is a vertical agreement whereby a

manufacturer imposes upon its retailer(s) the price at which the good should be sold in the final market.As will be better illustrated later on, RPM might facilitate collusion among manufacturers.

With a competitive retail market and stable retail cost conditions, manufacturers could assume agreed-upon retail prices by fixing their wholesale prices appropriately. But variation over time in the costs of retailing would lead to fluctuating retail prices. If wholesale prices are not easily observed by each cartel member, cartel stability would suffer because members would find it difficult to distinguish changes in retail prices that were caused by cost changes from cheating on the cartel. RPM can enhance cartel stability by eliminating the retail price variation.

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A Roadmap Collusive Agreements

Price Parallelism



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Hard and Soft Cartels? Although economic analysis does not provide support for

a clear distinction between hard and soft cartels, European competition law differentiates between agreements having as their object the restriction of competition (hard-core cartels) and agreements or concerted practices which, also implicitly, may have anti-competitive effects.

Agreements having as their object the restriction of competition are price fixing, market sharing, quotas and rigging bids. Such agreements are deemed to command the per se application of Article 81(1) EC, as they are presumed to have negative market effects.

The European Commission considers this to be the case even if such agreements fall under its de minimis Notice’s less-than-10% market share threshold.

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Restriction of Competition:

the Object of Cooperation Such an approach is not perfectly aligned with economic

analysis, which stresses the need to examine the real-life consequences of collusion. In fact, even when restriction of competition is proven object of cooperation, market evidence may show that prices are not substantially above competitive levels, which makes antitrust intervention less compelling or even unnecessary.

As a matter of fact, European Commission and Courts are quite reluctant to allow agreements which are (assumed to carry few efficiencies, if any, while being) generally deemed fiercely restrictive of competition.

However, at least formally, the strict illegality of hard core cartels does not imply that they disqualify in toto for an exemption through Article 81(3) EC.

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Efficiency Savings from Horizontal Cooperation

Most inter-firm cooperation does not have as its object a restriction of competition.

Cooperation between firms may be motivated by goals which are beneficial to social welfare.

Different types of cooperation can lead to a range of efficiencies, such as:

economies of scale and scope;

better planning of production;

advantages in marketing, distribution, research and development.

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Article 81(3) EC: A Reminder

As already pointed out, practices prohibited under Article 81(1) can be exempted if four cumulative conditions are satisfied:

1. the agreement must contribute to improving the production or distribution of goods or to promoting technical or economic progress;

2. a fair share of the resulting benefit has to be reserved to consumers;

3. the restrictions must be indispensable to the attainment of these objectives;

4. the agreement must not give to the undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

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Article 81(3) in Action Historically, Article 81(1) EC has been

interpreted widely. This meant that substantive analysis was largely confined to the Article 81(3) EC question, which in turn led to an excessive burden on the European Commission.

Nowadays, both the European Commission and Courts incline to recognize that this formalistic approach has no place in a modern effects-based competition regime. For gauging the applicability of Article 81(1) EC to cooperative agreements which do not have a restriction of competition as their object, an analysis of the agreement’s effects is required.

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As a consequence, the assessment under Article 81 EC consists of two parts.

I. The first step is to assess whether an agreement between undertakings (capable of affecting trade between Member States, which is excluded under the thresholds of combined shares of 5%) ) has an anti-competitive object, or actual or potential anti-competitive effects.

II. The second step, which becomes relevant only when an agreement is found to be restrictive of competition within the meaning of Article 81(1), is to determine the pro-competitive benefits produced by that agreement and to assess whether these pro-competitive effects outweigh the anti-competitive effects.

The balancing of anti-competitive and pro-competitive effects is conducted exclusively within the framework laid down by Article 81(3).

Restriction of Competition:

the Effect of Cooperation

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The Two-Tier Test With particular regard to the first step, the European

Commission’s Horizontal Guidelines (like their US counterpart under the “rule of reason” assessment) states that the analysis has to be focused on the economic contest of the agreement, taking into account both the nature of the agreement and the parties combined market power, as this (together with other structural factors) determines the ability of the cooperation to affect overall competition.

This approach fosters an “economic analysis” hinging on a two-tier test:

1. What the characteristics of the parties’ cooperation?2. Which is the amount of market shares the parties hold

in their competitive surroundings?

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The Nature of the Agreement Indicative of the likelihood that coordination

will lead to competitive concerns is the parties’ commonality in total costs, which in turn depends on two conditions:

area of cooperation, aiming to exclude from further scrutiny arrangements among firms that could not carry out the envisioned project by themselves or are far removed from the commercial marketing level;

extent of cooperation, implying ability of firms to observe each other’s behavior.

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Market Power and Market Shares If the nature of the agreement points toward a potential

competitive concern, the second component of the test will assess the market power of the parties involved.

The European Commission’s practice translated into issuing the de minimis Notice, which introduced relatively safe harbors based on low market shares (aggregate < 10% in horizontal settings, 15% in vertical ones, with the exception of hard-core prohibitions).

The relevant block exemptions -Reg. No. 2658/2000, concerning specialization agreements; Reg. No. 2659/2000, on cooperative agreements in research and development- and the Horizontal Guidelines extend this approach and create a range of relatively safe harbors, depending in scope on the nature of the agreement.

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Safe Harbors If the parties together hold…

… less than 25% of the market for agreements on R&D (Reg. No. 2659/2000);

… less than 20% for production and specialization agreements (Reg. No. 2658/2000); or

… less than 15% for purchasing agreements and commercialization agreements (Horizontal Guidelines, §§ 130 and 149),

then a restrictive effect of the cooperation is considered unlikely.

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…and a Caveat According to Reg. 2658 and 2659/2000, even when

aggregate shares are below the thresholds of the safe harbor, the Commission keeps the power to withdraw the exemption on an individual basis.

Beyond the upper thresholds, the agreements are not prohibited; but the four conditions for an exemption ex Article 81.3 must be substantiated on an individual basis.

The block exemption is precluded to cooperation agreements containing hard-core restrictions (no severability).

Agreements featuring forms of cooperation different from specialization and R&D are excluded from the block exemption and must undergo individual scrutiny under Article 81.3.

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More on the Horizontal Guidelines The actual version has been published in 2001 (the

previous one dated 1968). It has been completed, after the enactment of Reg. 1/2003, by an additional Communication in 2004.

They apply both to agreements that would be covered by the block exemption, but exceed the upper thresholds, and to cooperative agreements of different nature, but capable of promoting efficiency: standardization agreements, joint purchasing and commercialization, and agreements concerning environmental protection.

Complex agreements are evaluated according to the prevailing feature (whether horizontal, or vertical), unless the particular forms of cooperation appear so inter-related as to request a comprehensive, holistic scrutiny.

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An Exemplary Bundle of Technicalities: R&D Agreements [1]

The exemption is extended to the joint exploitation of the results of cooperation, the former being considered a “natural complement” of the latter.

No need for exemption when the inputs provided for the research activity are complementary (so that, without cooperation, no research would have been possible). The same holds for outsourcing of R&D to universities, research institutions, and the like.

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An Exemplary Bundle of Technicalities: R&D Agreements [2]

No coverage (Article 5) for agreements that, inter alia: restrict the freedom of participating undertakings to carry out

independent research in other sectors; prohibit passive sales in areas reserved to other parties; prohibit actives sales in areas reserved to other parties after

the end of the seven years period after the contract products have been first put on the European market;

limit output; fix prices; restrict customers beyond the seven years period;

prohibit challenge to the validity of IPRs stemming form the joint research;

prohibit grant of licenses to third parties when the exploitation by at least one of the parties is not provided for.

Setting of production target is allowed when cooperation extends to joint production; setting of sale targets and direct prices is allowed as well, when cooperation extends to joint distribution.

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An Exemplary Bundle of Technicalities: R&D Agreements[3]

Further conditions (Article 3): access to the results free to all the parties; free exploitation for each party, if not

otherwise provided for; IPRs deriving from joint R&D programs must

contribute to technical or economic process, and be “decisive”, i.e. essential, for exploitation.

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An Exemplary Bundle of Technicalities: R&D Agreements[4]

The Horizontal Guidelines distinguish two relevant markets:

market of incremental innovations of existing products and processes; in particular, the latter is the so called market of technology, where the results are commercialized as such, through licenses, and the market share is assessed dividing the amount of license fees, collected by the parties, by the total amount of fees collected by the remaining holders of substitute technologies (special attention to potential competition).

market for innovation, non-extant: the market share is assessed considering the remaining R&D poles, and their capability of undertaking competitive research.

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Conclusive Remarks on Horizontal Cooperation

The US Guidelines follow a similar structure.

A general safety zone is created for competitor cooperation where the parties together account for less then 20 per cent of the relevant market. Innovation markets benefit from a wider safe harbor based on the existence of substitute efforts by rivals.

Overall, both the European and the US antitrust authorities thus purport a flexible analysis that varies in focus and detail depending on the nature of the agreement and market circumstances.

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A Roadmap

Vertical Restraints

Economic Theories

US Antitrust Law

European Competition Law

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Vertical Restraints: Introduction In most markets, producers do not sell their

goods directly, but reach final customers through intermediaries, wholesalers and retailers.

Further, the final good is often produced in several stages.

Very often, firms at different stages of the vertical process do not simply rely on spot market transactions, but sign contracts of various types in order to reduce transaction costs, guarantee stability of supplies, and better co-ordinate actions.

These agreements and contractual provisions between vertically related firms are called vertical restraints.

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Vertical Relationships between Manufacturers and Retailers The classical example is the vertical

relationship between a manufacturer and a retailer which distributes its products.

In general, both of them decide on different actions, and what is an optimal action for one is not necessarily optimal for the other.

As a result, a party can try to use contracts and clauses so as to restrain the choice of the other and induce an outcome which is more favorable to itself.

For the purposes of legal and economic analysis, vertical restraints are often divided into price and non-price restraints.

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Price Restraints Price restraints can take different forms.

Manufacturers may require distributors to charge a fixed price or limit their freedom to determine prices by setting a minimum or maximum retail price.

The former practice is variously termed: resale price maintenance (RPM), vertical price fixing or, in the US, fair trade.

An important variant of resale price maintenance is the communication by the manufacturer of non-binding recommended prices or advertised prices.

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Non-Price Restraints Non-price restraints include requirements that

distributors : do not locate near each other, so that each dealer

enjoys some degree of territorial protection (exclusive distribution);

do not sell competing products (exclusive purchasing or dealing);

sell a fixed quantity or a minimum number of units (quantity fixing);

satisfy a number of quality requirements (selective distribution);

operate within a standardized and highly detailed promotional framework (franchising).

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Intra- vs. Inter-Brand Competition

Vertical restraints may limit both intra- and inter-brand competition.

Intra-brand competition refers to competition between retailers offering the product of a given manufacturer within a given vertical structure. It is typically limited by RPM: retailers selling the same brand will not compete on price.

In-store inter-brand competition involves the interaction between vertical structures. It will be weakened if retailers are tied to manufacturers by means of exclusive purchasing agreements.

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A Roadmap

Vertical Restraints

Economic Theories

US Antitrust Law


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Economic Theories Economic theories on verticality can be broadly divided into

two categories: theories stressing the danger of anti-competitive effects; efficiency theories explaining vertical restraints as remedies

to principal-agent problems and opportunistic behavior. In the early days of antitrust, vertical restraints (in particular

price restrictions) were seen as detrimental to competition… … whilst the benign view found its first official formulation in

the US Guidelines of 1985 issued by the DoJ. Nowadays policy recommendations reject simple rules such

as per se (il)legality of (certain types of) vertical restraints. A legal rules must take into account that vertical restraints

have ambiguous effects on economic welfare, depending on the context in which they are used (effect-based approach).

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The RPM Puzzle: Collusion Theories As already pointed out, vertical minimum price fixing

has often been deemed to function primarily as an aid to collusion by suppliers or dealers.

Collusion theories refer to the possibility that vertical minimum price fixing may be used to sustain a dealers’ cartel or facilitate upstream collusion by reducing the manufactures’ incentives to lower wholesale prices.

There are two main effects of minimum/fixed retail prices on competition:

1. the dealers can no longer compete on price and this leads to a total elimination of intra-brand price competition;

2. there is increased transparency on price and responsibility for price changes: horizontal collusion is facilitated, at least in concentrated markets.

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The Manufacturer-Collusion Theory

In the manufacturer-collusion theory, vertical price fixing is used to set retail prices reflecting the collusive wholesale price.

Vertical price fixing is said to prevent cheating since retail price cuts are easier to detect.

It also makes wholesale price cuts less desirable, since such a price cut at the upstream level cannot be passed on to the downstream level.

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The Distributor-Collusion Theory In the distributor-collusion theory, dealers acting as a group

induce the supplier to enforce a collusive price through vertical price fixing either to discipline price cutting among the distributors or to prevent the evolution of more efficient forms of distribution.

This form of conspiracy apparently was not uncommon in the USat the end of the 19° century (e.g., druggists’ rebate plan).

But it seems unlikely that dealers’ collusion is a major explanation for vertical price fixing:

the collusive prices desired by dealers conflicts with the manufacturer’s interest of making maximum sales, given the wholesale price;

since entry is relatively easy in many retail markets, abnormally high profits resulting from vertical price fixing are likely to attract new entrants.

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Further Collusion Theories A third line of conspiracy theories warns that

dominant retailers may demand RPM to forestall innovation in distribution channels. For example, a brick-and-mortar retailer may demand RPM to prevent efficient online retailers from price competition: Toys “R” Us, Inc. v. FTC, 221 F.3d 928 [7th Cir. 2000]).

A fourth line of conspiracy theories suggests that manufacturers use RPM as a means to exclude competitors from the market. Under this theory, the RPM high mark-up is a “payment” for the retailers’ willingness not to deal with competing manufacturers (Yamey).

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The Free-Riding Problem In 1960 Lester J. Telser published an article on vertical

restraints in which the free-rider problem played a central role in explaining minimum RPM.

Free riding: one firm benefits from the actions of another without paying for it.

Consumers could go to a store providing sales promotion (pre-sale services, which cannot be billed for) and, having obtained the information and weighed the various options, switch to a discount store which provides no service but offers the desired product at a cheaper price.

Which is the consequence? No store will make anymore sales promotion!

Vertical minimum price fixing imposed by the manufacturer encourages retailers to offer an optimum level of sales services.

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Free-ride Variations: The Quality Assurance Theory Klein and Murphy have advanced a quality assurance

theory, which sees vertical minimum price fixing as a contract enforcement mechanism.

For some products, the distributor can influence the final quality of the good received by the consumer: where a bundle is being sold (e.g., cars), post-sale services are important.

The distributor may have the incentive to provide a lower quality level than the manufacturer would like, thus creating a vertical externality.

Minimum retail prices, together with a control over the number of dealers and the right to terminate dealers, is used to create incentives for distributors to provide the quality of post-sale services that manufacturer wants.

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The Demand Risk Theory Rey and Tirole have formalized the demand

risk theory, which sees vertical minimum price fixing as a means of reducing the risk faced by differentiated distributors when consumer demand is uncertain.

Exclusive distribution contracts have the effect of transferring all demand risks to distributors.

If distributors are more risk averse than the manufacturer, it may be optimal to share some of the risk between the parties: vertical minimum price fixing can be used to limit the extent of discounting if demand turns out to be low.

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Free-ride Variations:Fighting Loss Leaders

Some variants of free-riding theories suggest that sometimes consumers learn about high-quality products from the reputation of retailers that carry such products. Discounters may free ride on the reputation of such retailers, attracting to heir stores consumers by selling high-quality products as loss leaders or just at bargain prices. Alternatively, low-quality sellers may carry high-quality branded products to allure shoppers to their stores and the convince them to buy low quality unbranded products. RPM is the antidote for such free-riding problems.Allure of status goods?

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Demand Risk Practice Manufacturers regularly face a real challenge to

convince retailers to carry inventories of a new product for which the demand is uncertain. A failure of a new product on the market results in losses for the retailer, unless the manufacturer is willing to buy back unsellable inventories. These losses are particularly deep when competing retailers try to get rid of the inventories through aggressive discounts.

This analysis holds also for successful products for which the demand cannot be estimated accurately and thus the ordering of large stocks is risky for retailers.

The demand-uncertainty theory simply states that RPM encourages retailers to order large stocks.

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Demand Risk Theory: A Glorious Precedent

In 1887, Alfred Marshall approached Macmillan & Co., proposing the publisher to publish his Principles of Economics, which is still regarded as one of the most important texts in economics. Macmillan convinced Marshall to agree to fix the retail price of his masterpiece with the argument that price competition among booksellers often bring them to the point that “there is not enough profit in the business to enable booksellers to carry good stocks or to give their attention to bookselling”.Bookselling RPM has become widespread: arg. ex the German Buchpreisbindung-Gesetz, mandatory RPM replacing the previous voluntary system (former § 15 GWB).

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The Double Marginalization Problem The successive monopoly mark-up problem offers an

efficiency explanation for the fixing of maximum retail price.

If the manufacturer and the distributor are both monopolists, each adds a monopoly mark-up so that consumers face two mark-ups instead of one.

As a consequence of this “double marginalization”, output is lower and price is higher than in the case of a vertically integrated producer.

Both consumers and manufacturers are worse off with successive monopolies: in particular, consumers (facing the double mark-up) buy less output.

Manufacturer may contractually impose a maximum retail price and thus prevent the distributor from raising his price much above the wholesale price.

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Theories on Vertical Non-Price Restraints

As with price restraints, both theories arguing anti-competitive effects and efficiency theories are advanced to explain why manufacturers may wish to impose vertical non-price restraints upon their distributors.

The first group of theories stresses that vertical restraints may be used to erect entry barriers or dampen competition at the upstream level.

Conversely, principal-agent theories regard non-price restraints as methods to cope with problems of successive monopolies or to prevent free riding.

In addition, the transaction costs theory explains vertical restraints as remedies for the danger of opportunistic behavior in cases where manufacturers and distributors are dependent upon each other because of the specific investments made to carry out the transactions (asset-specificity).

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Exclusive Dealing: Anti-Competitive Effects The general criticism is that exclusive dealing leads to

market foreclosure.

If distributors agree to handle the products of only one supplier, their outlets are foreclosed to other manufacturers: long term exclusive dealing contracts foreclose markets, thus raising rivals’ costs.

However, exclusive purchase agreements raise barriers to entry only if…

…they last for longer than the normal contractual period, otherwise competing manufacturers have equal opportunities to win distributors at contract renewal time;

…the manufacturer attempting to enforce exclusive dealing has a relevant market power;

…entry into distribution is difficult.

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Exclusive Distribution: Anti-Competitive Effects Also exclusive distribution may limit inter-brand

competition. In the short run, exclusive territories can be used to

dampen competition among rivals. In the long run, such restraints may be used by

incumbent firms to deter entry. In both cases, these anti-competitive effects rely on a

strategic use of the delegation of price decisions to distributors (consequently RPM, which rules out any freedom in the distributor’s choices of price, cannot be used to dampen inter-brand competition). In markets where inter-brand competition is initially imperfect, vertical restraints can exacerbate existing imperfections and reduce further the degree of inter-brand competition.

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Some More Effects Incumbent firms may use both exclusive purchasing and

exclusive distribution agreements to commit themselves to a tough attitude in the event of entry by modifying the partners’ attitude towards competitors .

Exclusive purchasing agreements, entered into for long periods, induce the dealers to engage in fierce competition if competing products appear.

Similarly, exclusive territories may be allocated to induce a tougher response on the part of the distributor in the event of geographically limited entry. In the absence of exclusive distribution agreements, manufacturers may be reluctant to engage in price wars that could also affect neighboring areas. In contrast, an exclusive distributor would be likely to engage in tougher competition with the local entrant.

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Principal-Agent TheoriesDouble Monopoly Mark-Up Theory

Where successive monopolies in manufacturing and distribution are at work, the double monopoly mark-up theory may also explain vertical restraints (both sales quotas and franchising) other than RPM.

Sales quotas induce distributors to expand their output by lowering their prices, so that the magnitude of the second monopoly mark-up is reduced.

Also franchising may serve as a device to cope with the double monopoly mark-up problem. A manufacturer may charge the distributor one price for the product and a second price for the right to sell the product. While charging the marginal costs for his product, the manufacturer may make positive profits from the payment of a franchise fee. At the end, the profits will be equal to the revenues earned by an integrated manufacturer-distributor.

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Principal-Agent TheoriesThe Free Rider Theory [1]

From the manufacturer’s point of view, the advantage of an exclusive territory arrangement is that the offer of a wider margin to the distributors will encourage them to maintain a high quality of service.

If the territorial restraints is coupled with exclusive dealing, the manufacturer can also expect the maximum effort on the part of the distributor to sell the product.

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Principal-Agent TheoriesThe Free Rider Theory [2]

Protection against free riding may also explain inter-brand restraints, such as exclusive dealing.

Exclusive territory provisions address the free riding of one dealer on the efforts on another, whereas exclusive dealing addresses the free riding of one manufacturer on the efforts of another.

Exclusive purchasing agreements can be considered as means of protecting the manufacturer’s property rights in cases in which he possesses informational advantage and is therefore better placed to organize the distribution of his own products.

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Principal-Agent TheoriesThe Transaction Costs Approach

Vertical restraints reduce transaction costs. Manufacturer may place vertical restraints on

distributors to approximate the outcome that would occur if the firms were vertically integrated.

Franchising is an example of regularly repeated transactions for which relationship-specific investments are needed. The investments lose much or all of their value if the franchise agreement is ended. A franchisee would be reluctant to make specific investments if nothing prevents the franchisor from locating another franchisee next to him once the investment has been sunk. Territorial protection thus serves the efficiency goal by reducing the risk of opportunistic behavior.

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A Roadmap Vertical Restraints

Economic Theories

US Antitrust Law


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US Antitrust Law Under Section 1, the Sherman Act prohibits

contracts, combinations and conspiracies which restrain trade.

In practice, this very broad prohibition is substantially relaxed, since only few types of conduct are deemed per se illegal and most antitrust claims are analyzed under a rule of reason.

A chronological review of the case law of the Supreme Court equally shows a changing attitude towards the desirability of rules per se with regard to vertical restraints.

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Case Law on Price Restraints [I]

With Dr. Miles in 1911, the Supreme Court recognized the illegality of agreements under which suppliers set the minimum resale price to be charged by their distributors.

The Court found that an agreement between a manufacturer and a retailer was equivalent to a horizontal agreement among the retailers themselves, and "can fare no better“.

Only eight years later, in Colgate, the Supreme Court, distinguishing between coincidence of action and agreement, held that “a manufacturer could legally establish a price that it wanted retailers to charge and announce that it would refuse to sell to any retailers that deviated from it -- so long as it was wholly unilateral and the retailers did not verbally agree to the policy”.

The rationale was that a seller should be free to choose its own customers, and that --absent any agreement-- there could be no violation of Section 1 of the Sherman Act.

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Case Law on Price Restraints [II]

Through the 1930s various states passed minimum RPM laws, called fair trade laws: minimum RPM was seen as a way of impeding the growth of large, low-cost retail chains.

In 1937, Congress passed the Miller-Tydings Resale Price Maintenance Act, which made RPM legal under the federal Sherman Act where it was legal under state law.

The effect of the Miller-Tydings Act was strengthened by the 1952 McGuire Act, which reversed case law of the Supreme Court and made it possible to enforce minimum RPM even against dealers who had not signed the RPM agreement (legality of “non-signer clauses”).

The acts allowing “fair” prices, that is minimum prices set by the manufacturer, were repealed in 1975 by the Consumer Goods Act: at this point the original per se prohibition resumed its full force.

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Case Law on Price Restraints [III]

In recent years the Supreme Court has kept the per se prohibition of minimum RPM intact: in 1984 it did not profit from the opportunity offered in the Monsanto case to reverse the Dr Miles rule.

Meanwhile, in 1968, with Albrecht, the Supreme Court had decided that the imposition of a maximum price by a supplier upon his distributors was per se prohibited as well.

Albrecht was overruled in 1997 in the case State Oil v. Khan where the Court held that agreements between a manufacturer and a retailer on maximum resale prices were subject to the rule of reason.

More or less in the same period, the case law on non-price restraint underwent a dramatic change.

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Case Law on Non-Price Restraints In fact, the case law on non-price restraints has evolved from

per se prohibitions to treatment under the “rule of reason”. In a nutshell:

In 1963 the Supreme Court addressed the issue of territorial restrictions in White Motor Co., but decided the issue was not ripe for a in-depth assessment.

Four years later, the Supreme Court enunciated in Schwinn that the rule of reason applied to the merchandise handled by consignees or sales agents, whereas restrictions concerning merchandise to be re-sold were held illegal per se.

In 1977 Schwinn was overruled by the Sylvania case: after having acknowledged that exclusive territories reduce intra-brand competition, the Supreme Court advocated a rule of reason approach because of the possible benefits conferred by these restrictions to inter-brand competition.

Under current US antitrust law, territorial restrictions and customer restrictions are no longer invalid per se.

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Case Law on Price Restraints [IV] On June 28, 2007, with an opinion (in the Leegin case)

written by Justice Kennedy, the Court overruled Dr. Miles, subjecting future RPM cases to the Rule of Reason. Justice Breyer wrote a spirited dissent signed by three other justices.

Notwithstanding the sharply divided result, the Court was actually in unanimous agreement that the relevant antitrust economics indicated that vertical minimum price-fixing could have both anticompetitive effects and procompetitive efficiencies.

The dissent took the position that, given the mixed economic theory, the case should be resolved, not by the traditional test for deciding whether to apply per se scrutiny, but rather by the empirical evidence or by the doctrine of stare decisis.

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A Comment With Leegin, the case law on vertical restraints

has been reconciled and reduced to a unitary mold.

But there is still vibrant resistance (why replace Dr. Miles bright rule with uncertainty and confusion? why forget that, without Dr. Miles, no Wall-Mart would have been possible? why ignore that, under fair trade laws, consumer prices have been prover higher? ).

The new development creates, as will be seen, a Transatlantic clash.

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A Roadmap Vertical Restraints

Economic Theories

US Antitrust Law


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European Competition Law [I]

Ever since the landmark Grundig case, it has been clear that the prohibition of restrictive agreements contained in Article 81(1) EC covers both horizontal and vertical agreements.

The consequence of the Court’s decision was that conferring absolute territorial protection upon a distributor became one of the “mortal sins”, for which there is no chance of an exemption under EC competition rules.

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European Competition Law [II] In addition, the requirement that inter-state trade

must be affected has been interpreted very broadly.

Also agreements between undertakings located in the same Member State may thus come within the scope of the prohibition.

Consequently, exemptions became necessary to clear vertical restraints which are not de minimis.

The European Commission used the block exemption expedient in order to avoid the need for individual appraisal of a multitude of agreements.

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Group Exemption Regulations

Until May 31, 2000, different group exemption regulations covered..

…exclusive distribution agreements (Regulation 1983/83);

…exclusive purchasing agreements (Regulation 1984/83);

…motor vehicle distribution and servicing agreements (Regulation1475/95);

…franchising agreements (Regulation 4087/88).

These group exemptions were all drafted in formal legalistic terms and were often based on distinctions for which there is no economic reason.

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Lists of Clauses The old regulations contained: a “white list” of clauses, which could be inserted

into contractual agreements without losing the benefit of the block exemption;

a “black list” of clauses that, when inserted, have the effect of bringing the agreement within the scope of the cartel prohibition.

The white list had the “strait-jacketing” effect: to avoid problems of compatibility with the European competition rules, firms were given an incentive not to include “grey” clauses which were not explicitly exempted.

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One Broad Umbrella Block

Exemption Regulation In an exercise of rationalization and modernization of its

policy concerning vertical restraints, the European Commission adopted a new general block exemption, Reg. No. 2790/1999, replacing three of the previous block exemptions (the new regulation would not cover the distribution of motor vehicles).

This is a block exemption regulation that covers all vertical restraints in distribution agreements, excluding only the sale of motor cars.

The two main parameters of the Regulation are:

1. the nature of the restraints; and

2. the level of market power involved.

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The Safe Harbor Mechanism [I]

The new regulation introduces a presumption of legality (safe harbor) to the benefit of manufacturers with a market share not exceeding 30 per cent, provided they do not include a number of blacklisted clauses in their distribution agreements.

The black list includes restraints such as minimum RPM and market partitioning by territory.

These restrictions do not profit from the benefit of the group exemption; and it is unlikely that they will be permitted by way of individual exemptions.

If market share is higher than 30% distribution, agreements may nonetheless be granted an individual exemption; a prohibition of the vertical restraints will follow if the conditions of Article 81(3) EC are not fulfilled.

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Is market share below

30%?

Does agreement contain hardcore

or other anti-competitive restrictions?

Does agreements

contain hardcore

restrictions?

No problem

In practice, abandon or

modify agreement

Article 81 full analysis, possible

application of 81(3)

Yes

No

Yes

No

No

Yes

Block Exemption Vertical Restraints

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Inter-brand Competition Analysis Producers with significant market power can

limiti access to distribution channels: foreclosure effect.

Structural market features –concentration on the supply side, limited availability of POS, barriers to entry- are to be considered.

Particular attention is reserved to cumulative effects stemming from the widespread adoption of a vertical restraint (Delimitis): e.g., according to the Guidelines, exclusive dealing covering at least 50% of the market; each operator’s contribution must exceed the 5% share threshold.

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Intra-brand Competition Analysis Restraints involving intra-brand competition are usually

deemed less obnoxious, especially when there exist several operating suppliers.

Yet, the Commission attitude has always been quite severe. An important part of the story, though, has been represented by the fight against agreements aiming to restrict parallel trade, defying the communitarian integration principle. Export prohibitions imposed by producers to their distributors have been traditionally condemned per se.

The inclination to employ the antitrust discipline as a tool supporting parallel trade is diminishing (see Bayer-Adalat and Glaxo cases).

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Some Criticisms…

Some of the criticisms directed towards the old regulations will remain valid after the legal reform. In particular…

…under current European competition law, technical legal distinctions continue to play an excessively important role: the economic consequences of vertical restraints (and not their legal form) should be decisive in judging their conformity with the competition rules.

…different types of vertical restraints can be substitutes for each other, so that there is no economic reason for distinct rules: economic analysis does not provide a justification for the different treatment of price and non-price restraints.

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…and a Tail After a first attempt in 1984, the European Commission

passed in 1995 a new regulation of car distribution, making price floors and quantity ceilings illegal, on the grounds that these provisions, by restricting intrabrand competition, obstructed the free cicrculation of cars throughout the EU. This still left some scope for manufacturers to limit intrabrand competition by assigning dealers to exclusive territories.

In 2002, the Commission passed a stricter regulation (Reg. No. 1400/02), which resembles the general one (threshold system, black-listed provisions), but presents distinctive features:

enhanced contractual protection for automobile dealers (e.g., the relationship cannot last less than 3 years, cf. the US Automobile Dealers’Day in Court Act of 1956); favor for multi-brand sale;

strenghtened attention to intra-brand competition, with the exclusion of the possibility to deploy, within the same market, exclusive and selective distribution.

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A Roadmap IPRs and Antitrust Law: Convergence v.

Conflict US Guidelines TTBER: Framework and Main Features

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IPRS and Antitrust Law: Convergence v. Conflict [1] Two opposite views:

1. Since IPRs confer monopolies, and antitrust is supposed to prevent monopoly, the two disciplines are doomed to conflict with one another. Query: how solve the conflict? Which discipline should prevail?

1. The two disciplines are complementary efforts aiming to promote an efficient market and long-run dynamic competition through innovation. Same goal, but different means, which may occasionally turn out to be in tension.

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IPRS and Antitrust Law: Convergence v. Conflict [2]

The mainstrean view in the US: The market power (if any), conferred by an IPR, is represented

by the prerogative of refusing to deal (ius excludendi), which is the core of the right itself. Accordingly, when refusing access to the product or fixing its price at a supra-competitive level, the IPR-holder is acting well within the established boundaries of the protection.

When the two disciplines happen to come into contact, IPRs should prevail in so far they are exercised within their established boundaries, thus relegating competition law to police abuses, which surface when the IPR-holder tries to transfer the monopoly power conferred by the patent to a different market.

The EU approach, as will be seen later in more detail, points out that, under exceptional circumstances, the IPR-holder can be forced to share the protected resource.

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IPRS and Antitrust Law: Convergence and Conflict [3]

With particular regard to the cooperative profiles, it should be noted that the proliferation of IPRs triggers the risk of a Heller-like tragedy of the anti-commons: under-use due to blocking patents, patent thickets, and the like. Technological cooperation is a way of skipping these problems:

technology license agreements incentivize innovation, allowing licensors to collect revenues capable to cover their R&D costs, and licensees to abate their production costs or manufacture new and better products; they may also promote the development of the technology.

technology license agreements may also favor collusion, foreclose markets, dampen competition among the parties. As such, they would risk infringing Article 81(1) of the EC Treaty.

on balance, however, the advantages realized by these agreements may outweigh the anti-competitive drawbacks.

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A Roadmap

IPRs and Antitrust Law: Convergence v. Conflict

US Guidelines TTBER: Framework and Main

Features

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US Guidelines: Principles The DoJ and the FTC jointly released Antitrust Guidelines for the

Licensing of Intellectual Property in 1995 (the previous version dated back to 1988).

Three core principles, which provide foundation for the policy statements in the Guidelines:

1. Licensing often has significant efficiency benefits, so that antitrust concerns arising in licensing arrangements normally will be evaluated under the rule of reason.

2. Absence of a presumption that intellectual property necessarily creates market power, so that an antitrust evaluation of licensing restraints normally will require investigation of market circumstances to establish anticompetitive effects.

3. Same general antitrust approach to intellectual property as well as to any other form of tangible property. Though intellectual property features important differences, the antitrust laws are sufficiently flexible to take these differences into account and should not impose greater or lesser scrutiny for intellectual property than for other forms of property.

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US Guidelines: Key Features [1] Safe harbor for licensing transactions: combined market

share up to 20%, unless the restraint is facially anticompetitive.

Building on and refining the 1988 version, the Guidelines include a section on analysis of competitive effects in research and development and on the use of innovation markets (which was dealt with supra) to address such effects. The basic intuition is that an innovation market can be useful to identify competitive effects that cannot be adequately analyzed in markets for goods and services when the arrangement may affect the quantities, availabilities or prices of products that do not presently exist, as in a research and development joint venture. Innovation markets also may be useful when an arrangement has competitive effects from research and development in geographic markets where product market competition is limited or non-existent.

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US Guidelines: Key Features [2] According to the Guidelines, "antitrust concerns may

arise when a licensing arrangement harms competition among entities that would have been actual or likely potential competitors in a relevant market in the absence of the license."

This principle should not be interpreted as a "baseline" against which to measure the economic effects of a licensing arrangement. If entities affected by a licensing arrangement would not have been actual or likely potential competitors in a relevant market in the absence of the license, the arrangement generally cannot result in harm to the economy and therefore should not be considered to have an adverse effect on competition. This is so even if an alternative licensing arrangement could have created more competition.

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A Roadmap IPRs and Antitrust Law: Convergence v.

Conflict US Guidelines TTBER: Framework and Main Features

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TTBER: Framework… Reg. No. 240/1996 has been the first European attempt to create a

comprehensive disciplinary framework. But its formalistic approach led the EU to reshape the discipline.

The new Reg. No. 772/2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements (TTBER) , came into force on the same date of Reg. No. 1/2003, laying down new rules for the licensing of patents, know-how and software copyright, thereby replacing the old regulation of 1996.

Alongside the new TTBER, a set of accompanying Technology Transfer Guidelines came into effect. They explain the application of the TTBER and provide a framework for analyzing technology license agreements that fall outside the scope of the TTBER.

License agreements which fulfill the conditions laid down in the TTBER benefit from a safe harbor; those which fall outside the scope of the TTBER are not, however, presumed to be illegal and could still qualify for individual exemption on the basis of Article 81(3) of the EC Treaty. Such agreements must therefore be analyzed on the basis of the TT Guidelines.

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…and Main Features [1] The TTBER applies to technology license agreements between

two undertakings for the manufacture or provision of goods or services incorporating the licensed technology (“contract products”). The TTBER also applies to agreements whereby the licensee must carry out development work before obtaining a product or process that is ready for commercial exploitation, provided that a contract product has been identified.

The new TTBER applies to patent (including design rights), know-how and software copyright licensing or mixed patent, know-how or software copyright licensing). Trademarks and copyright licensing are covered only if they are licensed as ancillary to patent, know-how or software copyright license agreements.

Agreements whereby a company licenses technology to a licensee to manufacture products and supply them only to the licensor in a subcontracting arrangement also fall under the scope of the TTBER.

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…and Main Features [2] The exemption contained in the new TTBER covers

agreements between: competitors, provided that their combined market share does

not exceed 20% on the affected relevant technology and product market;

non-competitors, provided that neither party’s individual market share exceeds 30% on the affected relevant technology and product market.

Market share on the relevant technology market is to be calculated on the basis of sales of products incorporating the licensed technology on downstream product markets. A licensor’s market share on the relevant technology market(s) shall be calculated on the basis of all sales by the licensor, the licensee and other licensees of products incorporating the licensor’s technology. Where the parties are competitors on the technology market, sales of products incorporating the licensee’s own technology must be added to the sales of the products incorporating the licensed technology.

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…and Main Features [3] Hardcore restrictions will impede the benefits of the

block exemption. There is a separate hardcore list for agreements

between competitors and agreements between non-competitors.

License agreements between competitors: Restrictions on the parties’ ability to freely set prices

when selling products to third parties; Reciprocal output limitations on the parties; Restrictions on the licensee’s ability to exploit his

own technology or restrictions on the parties’ ability to carry out R&D.

Allocation of markets or customers (with several exceptions, particularly with regard to non-reciprocal agreements).

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…and Main Features [4] Licence agreements between non-competitors:

Restrictions on price-setting); Restrictions on the territory in which, or of the

customers to whom, the licensee may passively sell, with several exceptions;

Restrictions of active or passive sales to end users by a licensee who is a member of a selective distribution system and who operates at the retail level.

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…and Main Features [5] The TTBER also lists a number of restrictions not automatically

exempted, and requiring individual assessment, which does not, however, prevent the application of the block exemption to the rest of the agreement, provided that the market share thresholds are met and the agreement contains no hardcore restrictions.

The restrictions concerned are the following: Exclusive grant-back obligations (either through a licence or

assignment) in respect of a licensee’s own ‘severable’ improvements to (or his own new applications of) the licensed technology (a severable improvement means ‘an improvement that can be exploited without infringing the licensed technology’);

No-challenge clauses in respect of the validity of the intellectual property rights held by the licensor, without prejudice to the possibility of providing for termination of the licence agreement in the event of a challenge;

In case of non-competitors: restrictions on the licensee’s ability to exploit his own technology or on the parties’ ability to carry out R&D.

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…and Main Features [6] The TTBER does not cover technology pools, i.e. arrangements where two or

more parties assemble a package of technology that is not only licensed to members of the pool but also to third parties. Such arrangements have to be assessed on the basis of the TT Guidelines.

Technology pools may restrict competition. However, the TT Guidelines acknowledge that patent pools may also have pro-competitive effects (e.g. one-stop licensing and reduction of transaction costs), particularly if:• the patents concerned are essential, complementary and not substitutable;• the license-in and license-out arrangements are non-exclusive;• access to the technology is non-discriminatory;• the technology is licensed on terms that are fair and reasonable.

The anti-competitive risks and the efficiency-enhancing potential of technology pools depend to a large extent on the relationship between the pooled technologies and their relationship with technologies outside the pool. In this respect it is important to distinguish between technological complements and substitutes, and between essential and non-essential technologies.

As a general rule, the inclusion of substitute technologies in a pool will be considered to restrict competition to an extent that would not allow for an exemption.

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…and Main Features [7] When a pool is composed only of technologies that are

essential and therefore by necessity also complementary, the creation of the pool as such generally falls outside the scope of Article 81(1). However, the conditions on which licences are granted may fall under the scope of Article 81(1) EC.

Where non-essential but complementary patents are included in the pool, there is a risk of foreclosure of third party technologies, in particular where the pool has significant market power.

In the event of non-essential technologies, parties will have to assess whether there are pro-competitive reasons for including the non-essential technologies in the pool, to what extent licensors remain free to license their respective technologies independently and whether licensees may exclude certain parts of the package from the licence and receive a corresponding reduction of royalties.

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Good Intentions, but Missed Opportunities?

The 2004 version of the TTBER is filled with appreciable intentions, but is far enough from translating them into a coherent set of practical solutions.

The regulation fails to implement the principle that was expected to inspire the new learning: i.e., that tranfers of technology promote the availability of a resource whose use would be otherwise confined to its exclusive holder (precisely the same effect which is sought through the often forced recourse to the essential facility doctrine and the connected remedy of compulsory licensing).

The emphasis on the intra-competition technology and the requirement that no less restrictive alternative be available marks a sharp divide with respect to the US approach, where the agencies deem proper a “reasonably necessary” agreement, though not teoretically essential to achieve the efficiency-enhancing outcome.

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A Roadmap Monopolization (US) vs. Dominant Position (EU) Exclusionary Practices in General

Predatory Pricing

Refusal to Deal

Price Discrimination

Tying and Bundling

Abuse of Collective Dominance

A Couple of Risks

Buying Power

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Unilateral Behavior

Both monopolization (and attempt to monopolize) in the US and abuse of dominant position in Europe deal with the problematic evaluation of unilateral behaviors.

Lack of a consolidated theory.

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Difficult ObservationMonopolistic conduct is exceedingly difficult to observe

and define, for a number of reasons. While most agreements among multiple firms are

readily observed, the inner workings of most decisions by dominant firms are not.

Much of the activity that firms engage in through multilateral agreements seems suspicious, but not so for the dominant firm. For example, multi-firm price setting is highly suspicious, but the monopolist acting unilaterally cannot do business without setting a price.

Many of the things that are suspicious when done by two or more firms acting in concert are essential parts of routine business for the dominant firm.

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Exclusionary (and Exploitative) Behavior:US vs. European Approach [1]

Exclusionary practices are carried out by an incumbent with the aim of deterring entry or forcing the exit of rivals.

By and large, such practices correspond to the legal concepts of monopolization in the US and abuse of dominance in the EU.

The Sherman Act, Section 2, prohibits all strategies that entail monopolization, or attempts to monopolize the market.

Article 82 of the Treaty of the European Union restrains firms, with a dominant position in the market, from abusing it (notice that the abuse can consist also of unfair prices or trading conditions). No separate “attempt” offence is recognized.

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Exclusionary (and Exploitative) Behavior:US vs. European Approach [2]

In the praxis of European law, aggressive practices are permitted to competitors, but not to a dominant firm, which is exposed to a “special responsibility”.

Section 2 of the Sherman Act assumes the existence of a causal link between the contested conduct (improper means) and some form of monopoly power.

EC rule ignores the process that led to the achievement of that power, and merely bans its abuse by the firm that achieved it. For an abuse of dominant position to exist, first it must be established that a dominant position exists, then that the dominant firm has engaged into an abusive behavior.

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Monopolization The offense of monopolization requires a finding of

monopoly power, willfully achieved or preserved by means of behaviors which have nothing to do either with competition on the merits, or with expansion “as a consequence of superior product, business acumen, or historic accident”.

Trinko (2005) states:

“The opportunity to charge monopoly prices, at least for a short period, is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct”.

In the US, setting a monopoly price is not prohibited.

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Mirroring Experiences? Or…

With the remarkable exception of exploitation, the two experiences, to a certain extent, mirror one another:

monopoly status by itself is not unlawful; a dominant position by itself is not unlawful; only improper means and abuses will trigger antitrust

enforcement;

whereas profound differences remain as regards the activation threshold of the two disciplines.

In Europe, absent formal indications, concerns start to arise as the market share approaches 40%.

The offense of monopolization requires a much higher market share, around 70% (under this level, the plaintiff is left with the much more stringent burden of proof required for a finding of attempt to monopolize).

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… Or Different Rationales? [1] Section 2 of the Sherman Act protects consumers

from price increases resulting from anticompetitive conduct that enhances market power.

Article 82 EC is primarily applied with the aim of preserving open market structures.

Preserving an open market structure may, or may not, maximize consumer welfare. This contrasts starkly with the U.S. Supreme Court's approach in Trinko:

"The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system."

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…Or Different Rationales? [2] The differences between Europe and U.S. include such things as: Which of a dominant firm's practices should be unlawful because

of the impact that those practices have in the primary market, which is the market in which the dominant firm has its monopoly power?

What are the circumstances under which we can and should condemn the conduct of a firm that is not yet a "monopolist," or dominant firm, but which creates a realistic threat of leading to single-firm dominance?

Which of a dominant firm's practices should be unlawful because of the impact that those practices have in a secondary market, which is a market in which the dominant firm lacks a dominant position at the time the practices occur?

In the U.S. the strong trend in decisions is to hold that there is no offense of monopoly "leveraging"; in contrast, the "abuse of dominance" conception admits a notion of leveraging when the conduct in the secondary market is regarded as sufficiently abusive.

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…or Different Rationales? [3]

Recent decisions and commentary on monopolization have recommended that some sort of alternative test of exclusionary conduct should be used in place of the consumer welfare test:

the sacrifice test, implying that anticompetitive exclusion consists in a willingness to sacrifice short run revenues for the future benefits of high prices in a market from which rivals have been excluded;

the “no economic sense” test, similar to the sacrifice test in some respects, would refuse to condemn exclusionary single firm conduct "unless it would make no economic sense for the defendant but for its tendency to eliminate or lessen competition."

RRC; conduct capable of excluding equally efficient rivals (implicitly endorsed, according to some commentators, by the S. Ct. decision in Weyerhaeuser, 2007).

On the whole, the proposed tests present narrow ground for condemning conduct as monopolistic (the “exclusion of equally efficient rivals” ranking as the most under-deterrent).

Article 82 EC praxis reflects a more interventionist attitude.

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Predatory Pricing

Refusal to Deal


Tying and Bundling


A couple of Risks

Buying Power

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Market Dominance [1]

In one of the first Article 82 cases, Hoffman-La Roche (1979), the European Court of Justice gave a definition of market dominance which is still used nowadays:

“The dominant position…relates to a position of economic strength enjoyed by an undertaking, which enables it to prevent effective competition being maintained on the relevant market by affording the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers..”.

From United Brands (1978) comes the threshold of 40%. It is still considered as a relevant threshold for the purpose of determination of dominance (the offense of monopolization requires a much higher market share, around 70%).

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Market Dominance [2] However, the market share of a firm is neither

a necessary nor a sufficient condition to prove its dominance.

In practical terms, the analysis of dominance by the Commission and the courts coincides with the economic analysis of market power.

A firm will be judged dominant when it has a high degree of market power, and the process of finding dominance involves the study of those factors that are relevant for the determination of market power.

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Abuse of Dominance In Hoffman-La Roche, the abuse of dominant position has been

defined as: “...a behavior which, through recourse to methods different from

those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition”.

An important point to emphasize, once again, is that European law does not punish the creation of a dominant position, just its abuse.

In other words, if a firm builds market power, however strong, through innovation, investment, marketing activities, this is perfectly legal.

This makes sense from the point of view of economic efficiency: firms haven’t to be punished just because they are better, more successful, or even luckier, than others, as this would reduce incentives for them.

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Article 82 EC: A Reminder As was already seen, Article 82 prohibits abuses consisting

in:a. directly or indirectly imposing unfair purchase or selling

prices or other unfair trading conditions; b. limiting production, markets or technical development to

the prejudice of consumers; c. applying dissimilar conditions to equivalent transactions

with other trading parties, thereby placing them at a competitive disadvantage;

d. making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts”.

Most of Article 82 enforcement has been devoted to exclusionary behavior as (I) predatory pricing, (II) refusals to deal, (III) price discrimination, (IV) tying and bundling.

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Predatory Pricing

Refusal to Deal


Tying and Bundling


A couple of Risks

Buying Power

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(I) Predatory Pricing

There are circumstances where a dominant firm might set low prices with an anti-competitive goal: forcing a rival out of the industry or pre-empting a potential entrant.

Predatory pricing constitutes a type of behavior where prices are so low that the competitive process itself is damaged.

The basic idea is that a dominant firm, called the predator, incurs short term losses in a particular market in order to induce the exit or deter the entry of a rival firm, called the prey, so that super-normal profits can be earned in the future, either in the same market or in other markets.

But is predatory pricing a rational strategy?

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The Chicago Argument: Predatory Pricing is Irrational [I-II] Chicago economists have argued that predation is

unlikely to occur because it is a very costly strategy for the predator to undertake.

There are four reasons why dominant firms will not engage in predatory pricing.

I. Due to its market share, a large firm will usually have to suffer greater losses than a small firm: other things being equal, the same unit loss will be multiplied by a larger number of units.

II. Predation makes sense only if the large firm will increase prices when the prey leaves. But the assets and plants of the small firm will not disappear, and, as soon as prices rise, the small firm can re-enter, or its assets might be bought and used by somebody else, reducing the profits the predator expects to make.

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The Chicago Argument: Predatory Pricing is Irrational [III]

The main explanation for predation is the deep pocket theory (first told by Telser in 1966). This theory contrasts a dominant firm (the predator), having easy access to capital or able to cross-subsidize from other markets where it meets relatively little competition (deep pocket), and a rival facing tighter financial constraints. The predator could decrease prices below the level of the latter’s variable costs and thus exhaust the financial resources of the prey.

III. But why should the small firm not be able to get further financing from banks or other lending institutions?

Robert Bork (1972) argued that victims of predatory pricing will be able to find the financial resources needed to face the price war.

Easterbrook (1981) opined that also customers, who are the ultimate victims of the predator’s future monopoly prices, will come to the aid of target firms. The prey may offer long term contracts at a price which would be less than the price the predator would charge if it obtained a monopoly.

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The Chicago Argument: Predatory Pricing is Irrational [IV]

IV. For predation to be rational, it must be not only feasible, but also more profitable than alternative instruments.

In a seminal paper, McGee (1958) suggested that the predator would find it more profitable to merge with the prey. Merging with the rival would be a more profitable strategy, as it would allow the preservation of high profits in the industry.

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Modern Economic Literature on Predation

If the Chicago School’s arguments are accepted, the antitrust offence of predatory pricing should be simply be forgotten.

However, there are situations in which predatory pricing can be entirely rational, and the threat of it credible.

Modern economic literature on predation has relaxed some of Chicago assumptions and, in the early 1980s, developed new theories showing under what conditions predatory pricing may be a profitable strategy.

The crucial assumption that has been relaxed is that of perfect information.

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Predation in Imperfect Capital Markets

In particular, modern corporate finance theory, focusing on the imperfections existing in capital markets, leads to a deep-pocket theory of predation where the prey’s limited access to funding is endogenous, since predation affects the perceived risk of lending money, thereby reducing financial sources available to the prey.

The key point is the existence of imperfect information on the side of the lenders (be they banks, equity holders, or financial institutions).

Lenders do not have their hands on the industry and cannot have precise knowledge about it (or cannot observe some of the actions taken by firms).

Under these conditions, target firms will not receive funds or, at least, will face higher interest rates because the risk of bankruptcy is greater.

Incumbents facing potential entrants may exacerbate existing capital market imperfections.

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A Reputation Model The predator develops a reputation for fighting

entry. Such a reputation acts as an entry barrier, since it

induces potential entrants to believe that entry would be forcefully resisted.

Though apparently irrational, this strategy might be rewarding if entry, concerning a number of markets, is prevented in some of them (suppose 10 mkt, each with a monopoly profit of 20.000 for the incumbent, who reacts immediately to the threat of entry; in 3 mkt the incumbent loses 10.000, in the remaining 7 he deters entry and keeps being monopolist, with a profit of 20.000x7: resulting profit higher that the one he would get by accommodating the rival).

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Signaling Models [1]

These models start from the assumption that the predator has an informational advantage over the prey and is, therefore, able to influence the target firm’s expectations about future profits.

It is possible that an entrant does not have complete information about the production costs of the predator or is unable to predict whether demand for his product will be either high of low.

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Signaling Models [2] Fudenberg and Tirole (1986) suggest that the

incumbent might engage in “signal-jamming predation”, which inhibits the entrant from improving its information.

A better informed incumbent firm has an incentive to charge low prices to signal that competing with him will not be profitable, perhaps conveying false information that market demand is falling or that he has lower costs than the prey.

Even if the prey knows the predator’s strategy, however, it could not have information about what the demand would be in normal competitive circumstances. In the absence of information, it may prefer to exit.

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How to Decide? A particular difficulty for competition authorities and

courts is that claims denouncing predatory pricing are made in the first stage of the predation process, when prices have supposedly been lowered to drive rivals out of the market.

The problem is that prices may fall for many reasons and that most of them reflect increased competition rather than predation.

Different rules have been suggested to allow competition authorities to decide whether the price reduction is the result of competitive forces or simply the first stage of a predatory scheme.

The (operational) rule with the greatest impact on competition authorities and judges is the Areeda-Turner test (1975).

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Three Main Rules The Areeda-Turner test is based on average variable costs:

prices below average variable costs are seen as illegal. Average variable costs are a surrogate for short run marginal costs which are difficult to determine.

The underlying rationale for this test is that pricing below marginal costs is inconsistent with short term profit maximization and must therefore be predatory, since the losses can only be justified by recoupment via higher prices at a later time.

Other policy proposals include the “no post-entry output increase” rule and the “no post-exit price increase” rule:

Williamson (1977) proposed forbidding a dominant firm increasing output in response to entry for a period ranging from 12 to 18 months.

Baumol (1979) suggested allowing a firm to cut price in response to entry, but forbidding any raise in price at some later date if the entrant decides to exit.

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US Antitrust Law

Predatory pricing cases were infrequent (Standard Oil being a noticeable exception) until after the passage of the Robinson-Patman Act.

Under this Act, discriminatory price cutting by large interstate sellers, injuring small local businesses, was virtually per se unlawful.

The enforcement climate changed radically with the introduction of the Areeda-Turner test in 1975: in the following five years, no plaintiff prevailed.

Most courts held that a price below average variable costs was presumptively unlawful, while a price above average total costs was conclusively lawful. A price falling between both benchmarks was presumptively lawful, but the presumption could be rebutted by evidence of intent and market structure.

In the 1980s Chicago analysts gained a noticeable influence upon US case law on the subject of predatory pricing.

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The Brooke Case The Brooke case (1993) is the Supreme Court’s most

important predatory pricing decision in modern times. The Court rejected the possibility of predatory pricing. The Supreme Court required pricing below costs and a

sufficiently high probability of recoupment. The Court did not clearly specify how costs are to be

measured: in its terminology, a price cannot be predatory unless it is below “some measure of cost” or even “some measure of incremental cost”.

Proof of recoupment requires that the predator will be able to raise price above the competitive level sufficient to compensate the predator for its predatory investment.

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European Competition LawAKZO

The fact that the economic doctrine of the Chicago School has not had the same influence on European competition law is clearly apparent from the decisions in AKZO (1991) and Tetra Pak II (1994).

In AKZO the Court of Justice accepted a price-costs comparison as the yardstick by which to establish the permissibility of price undercutting:

Abuse of dominant position must be deemed to be present once prices fall below the level of average variable costs.

In order to be deemed predatory, prices which are higher than average variable costs but lower than average total costs must be part of a strategy of excluding competitors: such prices can exclude from the market firms that are just as efficient as the dominant firm but do not possess sufficient financial resources to enter such a price war.

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European Competition Law Tetra Pak II In 1994 the European Court of First instance had an

opportunity to reconsider the legality of predatory pricing in Tetra Pak II.

Tetra Pak argued that, even if it had priced its products under costs, it could not have been indulging in predatory pricing because it had no reasonable hope of recouping its losses in the long term.

The Court, however, stated that where a producer charged AKZO-type loss-making prices, a breach of Article 82 EC was established ipso facto without any need to consider specifically whether the involved company had any reasonable prospect of recouping the losses which it had incurred.

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Current European Competition Law and the Economic Insights on Predation

A cost test, as suggested by the European Court of Justice, is easy to use, but should be applied only when predatory pricing is a feasible strategy.

When analyzing a complaint of predatory pricing, the extent of monopoly power, the conditions for market entry, and the effects that a dynamic competitive process has on costs should be carefully examined in order to determine whether a sufficient degree of monopoly power could be acquired in the long run.

Only if this is the case will predatory pricing be a realistic, and welfare damaging, strategy.

If the evaluation of the above-mentioned market characteristics indicates that monopoly power is probable in the long run, a cost-based rule can be applied in the second phase of the decision-making process.

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European Competition Law Wanadoo

Even though current European competition law is not in line with the above economic insights on predation, there are some signs that the tide may be turning.

In Wanadoo (2006), the European Commission stressed that neither the case law of the European Court of Justice, nor its own decision-making practice, require proof of recoupment of losses as a condition for a finding of abuse through predatory pricing.

Nevertheless, in the following paragraphs the European Commission examines the entry barriers and entry costs, which characterize the relevant market and render plausible the recoupment of the losses of the dominant firm in the long run. After this examination, the Commission concludes that “the recoupment by Wanadoo of its initial losses is therefore a likely scenario; its predatory strategy appears pertinent in this context”.

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Predatory Pricing

Refusal to Deal


Tying and Bundling


A couple of Risks

Buying Power

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(II) Refusal to Deal and Essential Facilities Firms enjoying a dominant position have a duty to supply on a

non-discriminatory basis.

In Commercial Solvents (1974), the Court of Justice held that refusing to supply a downstream competitor in order to restrict competition in the market for the final product must be considered an abuse within the meaning of Article 82.

From this case, the notion of essential facilities has been developed.

Essential facilities cases involve refusals to deal of a special type: the firm holding the facility refuses to provide other firms with access to something that is vitally important to competitive viability in a particular market.

A competition problem can then arise if a vertically integrated firm owns an input (the facility) indispensable to compete in the final market and denies request for access to that input by other firms.

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Economic Analysis of Refusal to Deal [1]

When a dominant firm is vertically integrated and refuses to deal with a competitor in a downstream market, various factors, dependent on the characteristics of the industry involved, affect the welfare analysis.

Economic theory teaches that vertical integration by a monopolist has no effect on welfare in a world of complete information and no uncertainty, where the upstream monopolist is uncontested and sells to identical downstream buyers using the inputs in fixed proportions and employing a constant return- to-scale production technology.

Whether the monopolist charges prices at the stage of production or decides to integrate downstream, he will be able to appropriate all monopoly profits in either scenario.

This insight is in accordance with the Chicago view that there is only one monopoly profit to be gained

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Economic Analysis of Refusal to Deal [2]

The argument does no longer hold true when the monopolist can discriminate through secret contracts. Then, according to Hart and Tirole (1990), the upstream monopolist may use vertical restraints to foreclose a market so as to reduce intra-brand competition downstream, even when the downstream market is competitive.

What type of effects this entails for social welfare, can only be determined through a case-by-case assessment. But a fair guess is that situations where the huge quantity of anticompetitive effects requires firms to open their facilities to competitors should be rare.

Areeda (1989) concluded on essential facilities that they are “less a doctrine than an epithet indicating some exceptions to the right to keep one’s creation to oneself, but not telling us what those exceptions are”.

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Refusal to DealCompetition Policy and Law Two observations:

1. Competition law protects competition, not competitors. A generous application of the essential facilities doctrine will lead to unsatisfactory results when aiding only competitors in catching up on their more efficient counterparts, since it will discourage them from investing in the development of competing facilities themselves and so truly benefit consumers.

2. It has been argued that granting access through essential facilities should be limited to natural monopolies. In other industries, which are not characterized by natural monopoly, the application of the essential facilities doctrine will undermine the incentives for dynamic efficiency. Innovation activities by the dominant firm may be discouraged since giving its competitors access to bottleneck is an expropriation of the return on the firm’s efforts.

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The Bronner Test The endorsement of a broad scope for the essential facilities

doctrine by the European Commission scored a setback with the Tiercé Ladbroke case (1997) and, above all, the Bronner case (1999).

The Bronner test for a facility to be essential, so that denial of access constitutes an Article 82 infringement, can be so summarized:

1. the facility is controlled by a monopolist;

2. the facility is considered essential because it is indispensable in order to compete on the market with the controller of the facility;

3. access is denied, or granted on unreasonable terms;

4. no legitimate business reason is given for objectively justifying the denied access (as to the feasibility of providing the facility);

5. a competitor is unable (practically or reasonably) to duplicate the essential facility.

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Refusal to Deal: Right or Wrong? Trinko vs. IMS [1]

While Justice Scalia for the Supreme Court of the United States completed the opinion of the Trinko case, rejecting in toto, or nearly, the idea of the subsistence of a duty to share of the monopolist with the entering contender, the European Court of Justice, in the IMS case (2004), set out the exceptional circumstances where refusal to grant an IPr license by a company which has a dominant position might be construed as an abuse.

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Refusal to Deal: Right or Wrong? Trinko vs. IMS [2]

Justice Scalia simply observed that the hope of gaining a competitive advantage -thence, more profitable prices- stimulates innovation, which would be no news.

But Scalia intended something else: “The opportunity to charge monopoly prices, at least for a short period, is what attracts business acumen in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct”.

In other words, not only monopoly is no evil; it is, rather, a fat prize waiting for a winner.

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IMS: the Case In IMS, at issue was the right of NDC Health to demand a

licence to the marketing database of its larger rival, IMS Health. Both are US companies providing information systems to the pharmaceutical industry, although the dispute concerned data gathered in Germany.

NDC wished to use IMS’s copyrighted geographic software format for collecting data on sales of individual pharmaceutical products, and it planned to sell the data it collected to the pharmaceutical companies in competition with IMS.

Replying to a question by a German court, the European Court of Justice declared that the exercise on an exclusive right is not normally an abuse of dominance, but may constitute an abuse of dominance in exceptional circumstances.

The Court held that such exceptional circumstances were present in the case giving rise to the judgment in Magill, in which the the Court of Justice required the three TV broadcasters in Ireland to license their TV schedules to Magill, who wished to publish a consolidated TV guide where none existed, and there was a consumer demand for this new product.

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IMS What Constitutes a Violation? [1]

First, to constitute a violation, access to the product, service or intellectual property must be indispensable to enable the undertaking to carry on business in a market. To find indispensability:

“it must be determined whether there are products or services which constitute alternative solutions, even if they are less advantageous, and whether there are technical, legal or economic obstacles capable of making it impossible or at least unreasonably difficult for any undertaking seeking to operate in the market to create, possibly in cooperation with other operators, the alternative products or services”.

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IMS What Constitutes a Violation? [2] If access is indispensable, three additional factors are

sufficient to trigger a violation based on refusal to license:

1. that the refusal is preventing the emergence of a new product for which there is a potential consumers demand;

2. that it is unjustified; and

3. that it is such as to exclude any competition on a secondary market.

The secondary product or service need not to be marketed separately from the product/service to which access is sought.

“It is sufficient that a potential market or even hypothetical market can be identified”.

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MicrosoftKill Bill 2? The Court of First Instance has recently confirmed the

Commission’s condemnation of Microsoft’s refusal to deal with its rivals.

Assuming, as the Court concedes, that the refusal hinges upon IPRs on communication protocols, two main issues surface:

indispensability of access, in the context of software interoperability, means that, beyond communicating and sharing files, a non-Microsoft server must be capable of operating as fast and safe as Microsoft ones, in order to make sure that rivals can remain viably in the market of work group server OS;

the new product/market requirement boils down to limitation of technical developments, causing prejudice to consumers.

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Predatory Pricing

Refusal to Deal


Tying and Bundling


A couple of Risks

Buying Power

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(III) Price Discrimination Price discrimination occurs when identical products are

sold at different prices under identical costs conditions or when non-identical but similar goods are sold at prices which are in different ratios to their marginal costs.

Three necessary conditions must be satisfied to enable a firm to engage in price discrimination and make it a profitable strategy:

1. the firm must possess some market power;

2. the firm must have information about the maximum prices (different groups of) consumers are willing to pay (information about the reservation price);

3. arbitrage must be prevented. Following the work of Pigou (1920), three types of price

discrimination can be distinguished: first, second and third degree price discrimination.

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First Degree Price DiscriminationWelfare Effects First degree (perfect) price discrimination: each single unit of

output is sold at the highest possible price. It leads to an outcome which is allocatively efficient: the firm

is able to sell its entire output at prices covering marginal costs and each unit of output is sold at its maximum demand price (given that different consumers have different “reservation prices”).

The deadweight loss associated with single-price monopoly is eliminated: if the goal of competition policy is the minimization of deadweight loss, perfect price discrimination is a good thing.

The sum of producer and consumer surplus is maximized. However, consumer surplus is entirely captured and

transferred to the monopolist: there are problems in terms of distributional effects and of social costs resulting from “rent seeking”.

However, for firms it is difficult, or better impossible, to use this form of discrimination.

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Second Degree Price Discrimination Welfare Effects Second degree price discrimination: a firm sells different

units of output for different prices, even though every individual buying the same amount of the goods pays the same price.

Prices differ across the units of the goods but not across people, so that some buyers enjoy a consumer surplus.

Two forms of second degree price discrimination are block pricing (charging a decreasing average price with increasing use), often practiced by public utilities, and quantity discounts.

If average and marginal costs decrease by expanding output, block pricing may be encouraged.

Consumer welfare can thus be increased, even though allowing for greater profit to the company.

The reason is that prices are reduced overall, while the savings from the lower costs per unit allow a reasonable profit.

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Third Degree Price DiscriminationWelfare Effects Third degree price discrimination occurs when a firm

segregates consumers into distinctive groups characterized by different elasticities of demand which are explained by exogenous criteria such as location, age, sex or occupation. Different (groups of) buyers pay different prices, but every unit of output sold to a given buyer (or a given group) is sold at the same price.

In a classic article, Schmalensee shows that the impact on welfare is indeterminate:

welfare may be increased if price discrimination succeeds in increasing the output level, for example by allowing the firm to enter a new market segment;

in general, however, unless a prohibition of price discrimination results in a substantial reduction in output, price uniformity will be superior to price discrimination.

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Economic Analysis: A General Framework

The ambiguity of the economic analysis makes the results of the removal of price discrimination ambiguous.

First, price discrimination is not a phenomenon confined to firms with dominant market power and is, as such, not anti-competitive. From an efficiency perspective, intervention by competition authorities to guarantee price uniformity may be defended only if the firm engaged in price discrimination possesses substantial market power.

Second, in fixed costs recovery industries firms must be able to charge prices in excess of marginal costs, in order to keep incentives to invest intact.

Third, if a result of the introduction of uniform pricing is that a large group of low price consumers no longer receives supplies, price discrimination is preferable from a welfare point of view.

In addition, uniform prices may have adverse distributional effects if lower income groups are forced to pay higher prices.

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Article 82(c) For the Article 82(c) EC to apply, three conditions must

be satisfied.I. Equivalent transactions: the products or services

provided must be substitutable, taking into account all relevant market factors (case HOV-SVZ , 1994).

If substantial differences arise in terms of costs, quality and type of service provided, the services are not equivalent (case United Brands, 1978).

Also the trading parties must be equivalent (comparable) (case AKZO, 1991).

II. Whether or not conditions are dissimilar, can be assessed by reviewing: the nature of the transaction; the differences in the nature of the products (or services) sold; the cost of supply (case Irish Sugar, 1997).

III. There may be objective justifications for the different treatment but these must be demonstrated by the dominant company (case CBEM, 1985).

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Rebates Granted by Dominant Firms: A Transatlantic Divide

Faced with a form of price competition that may be exclusionary, but whose effects are extremely difficult to ascertain, the EU and US authorities have adopted opposite approaches.

In the United States, the fear to lessen price competition, together with the idea that “rewarding customer loyalty promotes competition on the merits” has led to a very strong presumption of legality of discounts and rebates, provided that they are not predator or bundled.

In the EU, the tendency to induce loyalty is deemed sufficient to justify the prohibition of the practice, on the ground that the special responsibility of dominant undertakings requires them not to make it more difficult for rivals to access the market.

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Rebates Granted by Dominant Firms:European Court of Justice Findings

The European Court of Justice had to judge the validity of rebate schemes granted by a dominant company in the leading Michelin I case (1983).

From the Court’s findings in this and subsequent cases, some essential principles can be drawn:

When assessing a rebate scheme, all relevant circumstances need to be taken into account (see also Irish Sugar case, 1999).

Rebates granted by a dominant company must be justified by showing that they are based on an economic benefit for the dominant firm.

The rebate must not distort competition by…a. … excluding competitors from the market, and/orb. … effectively tying customers to the dominant supplier,

and/orc. … discriminating between customers.

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Rebates Granted by Dominant FirmsThe European Commission Approach [1]

In developing the European Court of Justice’s precedent, the European Commission has strictly limited the type of rebate schemes that can be operated by a dominant firm.

In the decisions Virgin/BA (2000) and Michelin II (2002), the commission came down heavily on rebate schemes.

In Virgin/BA, the Commission stated that the earlier Michelin I and Hoffman-La Roche cases establish a general principle that “a dominant supplier can give discounts that relate to efficiencies. But it cannot give discounts or incentives to encourage loyalty, that is for avoiding purchases from a competitor of the dominant supplier”.

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Rebates Granted by Dominant Firms The European Commission Approach [2]

The European Commission has emphasized (in the cases Hoffmann-La Roche, Virgin, Michelin II) several factors as distorting competition, and hence subject to a per se prohibition:

a. a rebate system which is equivalent to an exclusivity requirement, implying that the discount should not be conditional on the customer’s obtaining all or most of its supplies from the dominant supplier, thus functioning as a loyalty and/or fidelity rebate;

b. a rebate system which is discriminatory among customers of the dominant supplier in applying dissimilar conditions to equivalent transactions; a rebate system can be found discriminatory if discounts are granted on the basis of subjective criteria;

c. a rebate system which is discriminatory among customers of the dominant supplier in making discounts dependent upon orders placed in a certain period, thus functioning as a target rebate.

Other types of rebates and discounts have been found to infringe European competition law, depending upon their discriminatory character and the degree to which they bind buyers to the dominant supplier.

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Rebates Granted by Dominant Firms The European Commission Approach [3]

The reference period on the basis of which the discount is calculated should not be too long.

While the European Commission in British Gypsum Super Stockist Scheme (1992) still accepted a one-year reference period...

…six months is seen as the maximum in the case Virgin/BA;

…three months was accepted in the 1989 Coca-Cola case; and

…three months was deemed a reasonable period in Michelin II.

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Economic Assessment of Rebates The principles derived from the European case law are

not in harmony with basic insights from economic analysis.

To start with, the general rule requiring that rebates must be based on cost differences is ill-conceived.

Rebates are offered not only to reflect cost savings, but also to gain more customers.

The latter goal says nothing about the pro- or anti-competitive impact of the discount scheme.

Only a case-by-case approach is able to distinguish competitive and anti-competitive uses of discount schemes.

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Pro-Competitive Effects of Rebates

Discount schemes may enliven competition and benefit consumers.

The overall effect on consumer welfare is a priori ambiguous, since consumers with a high elasticity of demand benefit from price differentiation, whereas consumers with a low elasticity may suffer from it.

However, if output increases (more consumers are served), pro-competitive effects of discount schemes will dominate over anti-competitive ones.

Efficiency gains can also be achieved when discount schemes are used as an incentive mechanism to induce efficient behavior by retailers (solving adverse selection and moral hazard problems).

Moreover, discount schemes may also enable the dominant firm to achieve economies of scale and enable transaction costs savings for the buyers.

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Anti-Competitive Effects of Rebates

Rebates may exclude rival suppliers and lead to market foreclosure.

Discount schemes may generate three types of exclusionary effects:

a. selective rebates offered to consumers considering switching to a new entrant may lead to exclusion within one market;

b. rebates offered if the products on an adjacent market are bought together with products on the main market may lead to exclusion in a horizontally related market;

c. rebates offered to retailers in order to discourage them from selling competitors' products may lead to exclusion in a vertically related market.

A necessary condition for a finding of exclusionary pricing behavior is that rival firms have been forced to leave the market or that their market share is in such decline that their continued existence as effective rivals is in doubt (British Airways case, 2000).

Under these conditions, competitive harm and a lowering of consumer welfare will result.

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Other Limits in the European Commission’s Approach to Rebates Second, the European Commission chooses a form-

based rather than an effects-based approach. Third, European Commission’s praxis neglects the

insight that price discrimination may be objectively justified in industries where there are large fixed costs and low marginal costs (such as airlines).

Not only distribution costs, but also production costs matter.

From a viewpoint of economic efficiency, large price rebates are cost justified if they are intended to increase sales with the purpose of recouping large fixed costs as long as they exceed the marginal cost of supply.

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In particular: Loyalty Discounts

Loyalty discounts represent a classical form of nonlinear pricing. When applied retroactively to the entire amount of purchases realized by a customer during a certain reference period, loyalty discounts may determine a kind of lock-in effect, in that they generate switching costs for buyers. If customers decided to differentiate their supply sources and failed to achieve the thresholds set by the dominant firm, they would lose discounts or rebates calculated retroactively on the products they have already purchased during the reference period, as well as on additional units they would buy in any case from the supplier.

Loyalty discount schemes produce a so-called suction effect. When customers are close to the threshold, a small increase in purchases would trigger the discount or rebate for all the units purchased from the dominant firm in the reference period. The incremental price of the units necessary to achieve the threshold may be substantially lower than the list price. The incremental price p(x*) is expressed by the following formula: p(x*) = p (x* – αxT)/x*where p is the list price, x* is the amount of purchases necessary to achieve the threshold xT and α is the discount rate.

The higher the discount rate, the threshold and the purchases already made during the reference period, the lower the incremental price. Due to the retroactive character of the system, the incremental price of the units necessary to achieve the threshold may be below cost or even negative, although the final price is not predatory.

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Exclusion from Loyalty Discounts

The fact that the incremental price of units necessary to achieve the threshold is lower than cost does not necessarily imply that equally efficient firms cannot compete. For a discount system to have serious exclusionary effects, it is necessary that the dominant undertaking holds a substantial market power over a significant part of the customer’s demand (the so called assured base of sales), so that rivals cannot compete for the entire requirements of individual buyers.

A useful indicator of the practice’s foreclosure effect is the incremental price of the contestable portion of the customer’s demand. This price may be expressed by the following formula:

p(xC) = p [xC – α (xM + xC)]/xC where p is the list price, α is the discount rate, xM is the assured base of sales and xC is the contestable portion of the customer’s demand.

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Pro-competitive Effects of Loyalty Discounts

Loyalty discounts determine a reduction in the price level, which may break collusive equilibriums and benefit consumers.

In markets with very high fixed costs, loyalty discounts contribute to reducing per er unit costs by increasing total sales, and allow the implementation of forms of Ramsey pricing, which may lead to a more efficient allocation of resources.[

The practice can be used to implement a form of second-degree price discrimination, which may increase sales and generate efficiencies.

Loyalty discounts may stimulate dealers’ sale efforts and promotional services (by increasing the level of profits earned by distributors on marginal sales).

The use of loyalty discounts might be a response to the buying power of purchasers.

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Toward an Economic Overall Assessment of Loyalty Discounts?

The recent judgment of the ECJ in the British Airways case (2007) seemed to reinforce the traditional EC enforcement policy.

Assessing the exclusionary effect of a loyalty discount scheme is extremely complex. However, the difficulty of ascertaining the competitive impact of the practice does not justify an almost per se ban. As a typical form of price competition, the grant of discounts should benefit from a presumption of legality, which should be rebutted only when the practice may exclude equally efficient competitors.

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Predatory Pricing

Refusal to Deal


Tying and Bundling


A couple of Risks

Buying Power

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(IV) Tying and Bundling Practices of dominant firms may generate anti-competitive

effects in related or adjacent markets. A dominant firm may establish a link between its home market

and a horizontally related market: in many situations, a product is offered by a seller under the condition that another product is also bought, a phenomenon which is called tie-in sales.

Three different cases have to be considered:I. Pure or mixed bundling (or package tie-in) and requirement

tying. In the case of pure bundling, two or more products are sold together for a single price and are offered only in fixed proportions.

II. Mixed bundling occurs when consumers have the choice of buying the products separately or as a bundle, which is sold at a discount.

III. A seller can also requires the buyer to purchase not only a certain good, but also all the units that the latter wishes to buy of another good: here the two goods are sold together in variable proportions.

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Some Examples Some examples of…… pure bundling: your favorite newspaper might come with a supplement on

Sundays, and you will be forced to pay a higher price for your newspaper that day even though you might not be interested in the supplement;

a travel agent might sell a plane ticket only together with the purchase of a hotel accommodation;

a car manufacturer sells a car as a whole; computers might include both OS and application software;…

… requirements tying: a mobile phone company might want to sell you the mobile

phone set only under the condition that you make all the phone calls from the same company and not from those of other operators;

a photocopier company might sell a copy machine only if one agrees to buy toner only from it.

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The US Antitrust Approach [1] In Jefferson Parish (1984), the majority decided to keep

the per se prohibition intact, but required that the tying allegation has to pass several screens before being considered illegal on its appearance.

This test (modified per se illegality) consists of four steps:a. the tying and tied goods are separated;b. the defendant has market power in the tying product

market;c. the defendant forces consumers to purchase the tied

product;d. the tying arrangement forecloses a substantial volume of

commerce.

Modern US antitrust shows the impact of the Chicago School and its rejection of the leverage argument.

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Tying and Bundling: Effects

Tying and bundling will be anti-competitive if these practices exclude competitors and hurt consumers; conversely, will be benign if they increase efficiency.

Tying and bundling may generate different types of efficiencies (costs savings, quality assurance) and be used as a price discrimination device.

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The Leverage Theory The overwhelmingly negative attitude

towards tying in competition law has its origin in the “leverage theory”, which was popular in the early days of antitrust.

According to this theory, a monopolist in the market for product A (home market) may use tying in order to reduce competition for a complementary product B (adjacent market) and thus achieve two monopoly profits.

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The Chicago Critique In the 1970s, Chicago economists

criticized the traditional leverage argument arguing that it is not possible for a firm to leverage monopoly power from one activity into another.

Even if the firm is a monopolist in the market for the tying product, it cannot achieve a second monopoly profit in the market for the tied product (single monopoly profit theorem).

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The Chicago Critique: An Example

Assume two complementary products: the first product is sold at the profit-maximizing monopoly price ($200) and the second product is competitively priced ($30).

To achieve a double monopoly profit, the sale of the first product must be made contingent upon the purchase of the second product and the price for the latter product must be increased (to, let’s say, $50).

However, if the price of the tied product is higher than the competitive price, consumers will perceive the package price as being too high and will buy less of the tying product.

Since consumers are not willing to pay $250 for the first product sold in combination with the second product, which they value at $30, the firm will have to reduce its package price to maximize its profits (in this example $230).

Hence, achieving a double monopoly profit is not possible.

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Kodak Case Recent research in industrial organization has made it clear

that the Chicago approach is only valid on its own assumptions.

The Chicago critique only applies if the tied market is perfectly competitive.

Obviously a crucial assumption is that consumers are perfectly informed: if they are not able to calculate the full package price, the risk that they may be exploited cannot be excluded.

This is the reason why the American Supreme Court decided in the Kodak case (1992) that buyers of photocopying machines, who are required to purchase maintenance services from the same manufacturer, may be exploited if they cannot calculate the lifetime costs of using the machine.

In Kodak, the Supreme Court accepted the plaintiff’s economic theory of an aftermarket hold-up of imperfectly informed consumers.

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Hugin Case The Kodak case bears close resemblance to the older

European Hugin case (1969).

A manufacturer of cash registers refused to supply spare parts for the machines to clients unwilling to purchase also maintenance and repair services. Even though Hugin’s market share in the market for cash registers was low (not exceeding 13 per cent), the refusal to supply independent service organizations was qualified as an abuse.

In the European Commission’s view, the refusal to supply had the result of removing a major competitor (Liptons) in the matter of service, maintenance, repair and supply of reconditioned machines.

In the early days of European competition law, the relevant competition problems of aftermarket were not touched upon.

The Court of Justice annulled the decision primarily for the absence of impact on interstate trade.

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Scenarios of Anti-Competitive Effects

In recent theoretical economic literature, some scenarios have been presented in which, contrary to the Chicago learning, dominant firms may strategically leverage market power in adjacent markets.

These models show under which conditions tying and bundling may cause anti-competitive effects, but their practical value is limited because the available data are rarely adequate to determine whether the practice will actually reduce welfare.

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A First Scenario A first scenario, presented by Whinston in 1990, involves

independent products. By credibly committing itself to sell the products only as

a bundle (for example, technological bundling), the dominant firm signals to competitors in the market of the bundled good that pricing will be aggressive.

Fierce competition in the bundled good market may decrease the rivals’ profits and force them to exit.

However, if the dominant firm is unable to commit itself to the bundling strategy (if it cannot credibly threaten to refuse supplies to customers who do not want to purchase the bundle), re-entry may be expected if the price of the bundled good is increased.

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A Second Scenario A second scenario involves complementary products. Tying can be profitable in markets where firms compete

through upfront R&D investments and entry is, therefore, risky.

By tying the two products, the prospects of recouping an investment (by new entrants) are made less certain.

The reason is that innovations by newcomers must be simultaneously successful in both markets, because the tying and tied good are complements.

Since successful entry requires that newcomers enter two markets instead of one, the entrants’ incentives for investment and innovation will be reduced.

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Efficiency Explanations of Bundling and Tying [1] The foreclosure explanation is challenged by efficiency

theories. Bundling and tying may reflect consumers’ preferences,

achieve costs savings and/or be used for reasons of quality assurance.

There is no reason for antitrust intervention when consumers desire assembled products such as laced shoes, radios and cars.

Beside reflecting consumer preferences, bundling and tying may generate costs efficiencies.

Costs savings resulting from economies of scope arise if consumers purchase complementary goods from the same producer.

Also the suppliers’ costs of producing and distributing those products are reduced through bundling or tying.

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Efficiency Explanations of Bundling and Tying [2] Another reason to engage in tying is quality assurance

and the related protection from opportunistic behavior (Bork, 1972).

Generally a firm may assure quality by forcing customers to buy another of its products or services and not to use substitutes.

A manufacturer of durable goods may decide to operate through a network of exclusive dealerships forcing customers to purchase servicing from the network.

The refusal to supply independent service organizations may be motivated by the concern that the low quality of the servicing provided by the latter may harm the reputation of the network.

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Efficiency Explanations of Bundling and Tying [3]

A prominent explanation for bundling and tying is that it permits profitable price discrimination (Stigler, 1963).

Once an intermediate durable good is sold, control of its rate of utilization passes to the downstream purchaser.

Manufacturers of such durable goods may tie the purchase of relatively low-valued commodities to the sale of the primary goods.

Hence, tying arrangements may be motivated by the goal of gaining control over the rate of utilization of durable goods (Bowman, 1957).

Tied sales of machines and complementary products may enable manufacturers to charge higher prices to high intensity users.

The same is true for tied sales of machines and maintenance services.

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The Us Antitrust Approach [2] In the old days of antitrust, judges regarded

tying as inherently anticompetitive. In Standard Oil (1949), Justice Frankfurter

wrote that tying agreements “serve hardly any purpose beyond the suppression of competition”.

In the Northern Pacific case (1958), the Supreme Court held that tying denies competitors free access to the market for the tied product not because the party imposing the tying requirements has a better product or a lower price, but because of his “power leverage in another market”.

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The Us Antitrust Approach [3] The US Microsoft Case

The DC Circuit Court of Appeals’ opinion in the US Microsoft case does not hinge on the leverage theory.

Rather, the Court caused a Copernican revolution in the antitrust treatment of tying by endorsing a “rule of reason” approach to “technological tying”.

Under a rule of reason standard, it must be shown that tying harms the competitive process and thereby harms consumers; in addition, there is scope for the monopolist to argue a pro-competitive justification (for example greater efficiency or enhanced consumer appeal).

This approach allows the assessment of whether the integrated product is more valuable to end users than the sum of its parts, so that technological bundling can be accepted if it leads to an increase of consumer welfare.

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The Us Antitrust Approach [4]Independent Ink In the case Independent Ink (2005), the Federal

Circuit Court, evaluating a tie-in of printer cartridges and ink, concluded that it was obliged by precedents to presume the very existence of a patent grants market power on the tying product.

Later on (2006), however, the Supreme Court, through Justice Stevens, made it clear that mere existence of a patent does not support any presumption of market power on the patented product, and that tying arrangements involving patented goods may be deemed unlawful only upon proof of substantial market power.

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The European Antitrust Approach [1] The American Supreme Court’s view that tying

agreements serve hardly any purpose beyond the suppression of competition has inspired European competition law and has laid the basis for a skeptical treatment of tying which comes to a per se prohibition.

The formulation of Article 82(d) EC tends to remain a major obstacle to an analysis focusing on allocative efficiency and consumer welfare.

The idea of a superficial link between products is more hospitable to protection of competitors from (unsubstantiated) leveraging of market power than to a careful analysis of competitive harm damaging consumers.

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The European Antitrust Approach [2] In European competition law, the leverage argument is

prominently present in the leading Tetra Pak case (1994), which identifies five leveraging categories that may be abusive, two of which are particularly relevant:

a. the abuse takes place on the dominated market but its effects are felt on another market on which the company does not hold a dominant position;

b. the abuse takes place on a market separate from, but related to and connected with, the market dominated by the company.

Consequently, tying is likely to infringe Article 82 EC if the supplier is dominant in the market of the tying product.

The only way to avoid the prohibition is by showing that tying can be objectively justified.

There is no scope for an efficiency defense: an objective justification requires that the dominant firm pursues a legitimate objective and that tying is a reasonable and proportionate means to achieve that objective.

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The European Antitrust Approach [3] Tying is often used as a means of entering a relatively

fast-moving “new” market, into which a dominant player wishes to establish itself by drawing from its existing market position.

The European Commission’s Microsoft decision confirms that Article 82 EC fully applies to practices exercised on such markets if dominance can be established either on such a new market or a related market.

The fact that a dominant company merely reacts to competitive pressure does not ward off a potential infringement aiming at a restriction of competition (case Michelin II).

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The European Antitrust Approach [4]The Microsoft Case In Microsoft, the European Commission outlined four

conditions under which tying is incompatible with Article 82 EC:

a. the tying and tied goods are two separate products;b. the company concerned is dominant in the tying

product market;c. the company concerned does not give customers a

choice to obtain the tying product without the tied one;d. tying forecloses competition.

If these conditions are satisfied, tying will be illegal unless it can be objectively justified.

One might argue these requirements boil down to a modified per se illegality test, which was rejected in the US Microsoft case by the DC Circuit Court of Appeals. But the CFI opinion’s emphasis on finding anticompetitive effects rings of rule of reason.

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The European Antitrust Approach [5] The European case law also offers some indications as to

the permissibility of mixed bundling, where the different products are still available to the customer separately.

Article 82 EC may apply when a dominant undertaking offers a bonus or discounts if the customers acquire different products (case Michelin, 1983).

This conduct can be viewed as abusive, in particular when the large size of the discounts provides powerful incentives to buy the bundle of goods (case Michelin II).

In a merger case, it was held that mixed bundling is usually compatible with European competition law, except in cases where the financial reserves are used to subsidize the sale of product A or B in the mixed bundle (case GE/Honeywell 2004).

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Tying and Bundling: an Overview

Looking at the case law and taking into account the different economic explanations for bundling and tying, current European competition law seems too simplistic.

A more careful analysis of anticompetitive effects and a full consideration of efficiency gains benefiting consumers are needed to bring the current European competition law on tying in line with sound economic principles.

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Predatory Pricing

Refusals to Deal


Tying and Bundling


A couple of Risks

Buying Power

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Abuse of Collective Dominance The Cewal Case The appellant companies were members of Cewal, a conference

made up of shipping companies operating a regular liner service between the ports of two African countries and those of the North Sea, with the exception of the United Kingdom. ‘Liner conferences’ are usually granted antitrust immunity by special sectoral regulations, subject to certain conditions.

The appellants’ principal competitor held that the conference and its members had infringed art 81(1) EC by entering into non-competition agreements according to which each member of Cewal refrained from operating as an independent shipping company (outsider) in the area of activity of two other shipping conferences in order to share out the liner market between northern Europe and western Africa on a geographical basis.

The Commission, finding that Cewal had a share of over 90% of the market in question and only one competitor, concluded that the members had, in order to eliminate the principal competition, abused their collective dominant position contrary to art 82 EC.

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Cewal: The Decision The Court of First Instance of the European Communities found,

inter alia:1. …that the Commission was entitled to base a finding of abuse of a

dominant position under Article 82 solely on circumstances or facts which would have constituted an agreement, decision or concerted practice under art 81(1), and could therefore be automatically void unless exempted under art 81(3); and

2. …that the ‘fighting ships’ practice constituted an abuse in the instant case.

The Court of Justice of the European Communities went on to find that, by its very nature and in the light of its objectives, a liner conference could be characterized as a collective entity which presented itself as such an entity on the market vis-à-vis both users and competitors; and further that the Cewal agreement enabled the conduct of the members to be assessed collectively for the purpose of determining abuse.

Apart from this result, some points from the European Court of Justice’s decision can be considered in order to explain, in general, the collective dominance problem.

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Collective Dominance and Abuse [1]

In terms of Article 82 of the Treaty, a dominant position may be held by several undertakings.

The expression “one or more undertakings” in Article 82 of the Treaty implies that a dominant position may be held by two or more economic entities legally independent of each other, provided that, from an economic point of view, they present themselves or act together on a particular market as a collective entity.

A finding that two or more undertakings hold a collective dominant position is not in itself a ground of criticism, but simply means that, irrespective of the reasons for which they have such a dominant position, the undertakings concerned have a special responsibility not to allow their conduct to impair genuine, undistorted competition on the common market.

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Collective Dominance and Abuse [2] Thus, for the purposes of analysis under Article 82, it

is necessary to consider whether the undertakings concerned together constitute a collective entity vis-à-vis their competitors, their trading partners and consumers on a particular market.

It is only where that question is answered in the affirmative that it is appropriate to consider whether that collective entity actually holds a dominant position and whether its conduct constitutes an abuse.

In order to establish the existence of a collective entity, it is necessary to examine the economic links or factors which give rise to a connection between the undertakings concerned.

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Collective Dominance and Abuse [3]

The mere fact that two or more undertakings are linked by an agreement, a decision of associations of undertakings or a concerted practice within the meaning of Article 81(1) of the Treaty does not, of itself, constitute a sufficient basis for such a finding.

Nevertheless, the existence of an agreement or of other links in law is not indispensable to a finding of a collective dominant position; such a finding may be based on other connecting factors and would depend on an economic assessment and, in particular, on an assessment of the structure of the market in question (oligopoly?).

To summarize, three elements have to be examine

separately:1. the collective position;2. the dominant position;3. the abuse of such a position.

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Predatory Pricing

Refusals to Deal


Tying and Bundling


A Couple of Risks Buying Power

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General Conclusions on Dominance: A Couple of Risks

Current European competition law is not in harmony with the above economic insights.

The burden of proof under Article 82 EC does not require evidence of likely competitive harm (exclusion of rivals) and reduction of consumer welfare.

Non-costs related discounts and tying are subject to what comes down to almost a per se prohibition; the case law on predatory pricing is overtly restrictive since it contains no requirement that recoupment of the losses suffered during the price war is possible.

As compared to the European approach, US antitrust law is steadily moving towards a more economically sound approach.

A similar evolution may be expected in Europe if the Commission will opt for an effect-based approach.

However, such a reform does not easily fit with the current text and case law of Article 82 EC, which are clearly inspired by ordoliberal thinking (protection of individual economic freedom of action) and goals of fairness.

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A Couple of Risks The conclusion is that the European approach

brings with its two main problems:I. prohibiting excessive prices (exploitation) may

penalize dominant firms that have reached that position through efficient means, thus reducing the incentives to compete and hurting dynamic efficiency;

II. moreover, in practice it is very difficult to determine the borderline between a reasonable and an abusive practice.

The nature of the risk? Type II errors! (Remember that a type II error, “false positive”, denotes an erroneous prohibition of pro-competitive behavior).

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Roadmap Monopolization (US) vs. Dominant Position (EU)

Exclusionary Practices in General

Predatory Pricing Refusals to Deal Price Discrimination Tying and Bundling Abuse of Collective Dominance A Couple of Risks Buying Power

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Buying Power: A Special Case? In economic terms, buyer power allows buyers to

force sellers to reduce the price below the price that would result in a competitive equilibrium.

The term "buyer power" is often used to describe two distinct phenomena.

1. It can refer to what economists have traditionally called "monopsony" power.

2. It can also refer to the concept of bargaining in markets with a small number of retailers.

These two scenarios require different economic understandings. But the policy question for both scenarios is the same: whether buyer power exhibits special properties that justify different treatment from traditional seller monopoly power for the purposes of antitrust analysis.

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Monopsony The economics of monopsony are analytically

identical to the economics of monopoly. Where the monopolist directly withholds

supply for the purpose of raising (price, which of course reduces social welfare) profits, a monopsonist achieves the same ultimate effect indirectly simply by refusing to buy more inputs.

If a firm is simultaneously a monopsonist (towards input suppliers) and a monopolist (towards final customers), there would result a double retraction in final supply.

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The Dual Monopoly Problem This is a problem of double marginalization, which occurs

in industries characterized by an upstream monopolist supplier and a downstream monopolist retailer.

The problem can be solved by vertical merger or contract alignment, that usually involves the supplier delegating distribution and promotion tasks to a retailer.

In fact, the agent's incentives to promote and distribute the principal's product are not the same as the principal's incentives: this requires some means of ensuring that the agent performs the delegated tasks as though they were his own. In the business world, countless new and ingenious methods can be found by which contractual parties in principal/agent commercial contexts seek to align incentives through self-enforcing mechanisms.

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US and UE Discipline of Buyer Power

The mainstream view is that, at the end of the day, there is nothing really special about market power on the buyer side of markets (but it should be kept in mind that, if a firm, that successfully engages in exclusionary conduct, obtains a monopsony and yet does not have any potential to injure the end users of its products, consumer welfare would not be imperiled).

Recently, however, much focus has been placed on the alleged growth of market power of supermarkets and other big-box retailers.

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The Economics of Supermarkets Supermarkets offer a number of advantages to suppliers

and consumers: Economies of scale and scope enable them to obtain

inputs for less expensive prices and thus sell final goods more cheaply to end-customers.

Supermarkets and large retailers generally are able to reduce consumer search costs.

Supermarkets resolve the coordination problem for shoppers and distributors (complementarity) by placing substitutable goods next to each other. That is, supermarkets are sites of simultaneous substitutability and complementarity.

Retailers have the ability to influence consumer demand, and have discretion regarding what products to stock and how those products will be allocated on their shelves.

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Practices Evidencing Buyer Power

Practices in the supermarket industry which have come under suspicion include:

Slotting allowances. Allegedly, a mechanism by which suppliers with market power can "overbuy" shelf space in order to exclude rivals.

Category management. A business technique by which retailers share with a particular manufacturer (category captain) decisions concerning shelf space allocation, promotion, and inventory by product category.

Private-label products. By increasing the retailer's negotiating leverage against suppliers, they reduce the retailers' dependence on any individual branded product, give the retailer greater flexibility to reduce branded products' shelf space or to stock a more limited range and increases the credibility of the retailer's threats to de-list branded products.

The antitrust relevance of the above practices is highly controversial.

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Roadmap

A Local Anomaly: Abuse of Economic Dependence

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A Local Anomaly? Abuse of Economic Dependence [1]

Since the original enactment (1957), the German GWB, now in its seventh version (2005), introduced a variation to the general model of the abuse of dominance.

§ 20.2 recites:“1Absatz 1 [Diskriminierungsverbot] gilt auch für Unternehmen und Vereinigungen von Unternehmen, soweit von ihnen kleine oder mittlere Unternehmen als Anbieter oder Nachfrager einer bestimmten Art von Waren oder gewerblichen Leistungen in der Weise abhängig sind, dass ausreichende und zumutbare Möglichkeiten, auf andere Unternehmen auszuweichen, nicht bestehen. 2Es wird vermutet, dass ein Anbieter einer bestimmten Art von Waren oder gewerblichen Leistungen von einem Nachfrager abhängig im Sinne des Satzes 1 ist, wenn dieser Nachfrager bei ihm zusätzlich zu den verkehrsüblichen Preisnachlässen oder sonstigen Leistungsentgelten regelmäßig besondere Vergünstigungen erlangt, die gleichartigen Nachfragern nicht gewährt werden“.

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Analogue discipline is found in France (Ordonnance No. 1243/1986), Greece (Law No. 703/1972, as amended in1995), Portugal (Law No. 422/1983, as amended in 1993), Spain (Law No. 16/1989, as amended in 1999), and Italy (Law No. 192/1998).

The Italian discipline was originally conceived of as an amendment to the antitrust law, but actually enacted as a general private law provision. In 2001, however, an amendment to Law No. 192/1998 conferred the NCA the power to apply the prohibition of abuse of economic dependence, provided that it is “relevant to the protection of competition and the free market”. So far, this power was never resorted to.

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The various provisions in national laws on abuse of economic dependence focus on the idea that a party infringes competition law if it abuses a situation of economic dependence. However, these provisions are often regarded as aiming to combat abuse of buying power, and have been hardly used since they were introduced. In large part this has been due to a likely reluctance on the part of suppliers to complain (for fear of reprisals). But a case, even if taken up, may well fail because of the requirements of showing (i) dependence, (ii) abuse and (iii) an effect on the market (which is notoriously difficult to show). Note that the last requirement is no longer relevant if the provision is framed as a private law/unfair competition one.

It is still to be seen whether the abuse of economic power is a local anomaly or, at least so far, a missed opportunity for a more sensitive antitrust enforcement.

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A Roadmap The Assessment of Mergers Means for the Acquisition of Control The Concept of Full-Functionality Market Shares Concentration Levels in US The 1992 Horizontal Merger Guidelines Concentration Levels in European

Competition Law

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The Assessment of Mergers

In addition to the two general legal norms (the first concerning “agreements” and the second prohibiting “monopolization” or “abusive” behavior by a dominant firm), antitrust law has a third ingredient, that is the assessment of mergers.

In the US, the Clayton Act prohibits mergers if their effect “may be to substantially lessen competition, or tend to create a monopoly”.

In Europe, Regulation no. 4064/1989 established the principle that a concentration with a Community dimension which creates or strengthens a dominant position as a result of which effective competition … would be significantly impeded should be declared incompatible with the Common Market.

Pursuant to the new Merger Regulation (Regulation no. 139/2004) concentrations are incompatible with the Common Market when they “would significantly impede effective competition, … in particular as a result of the creation or strengthening of a dominant position”.

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Merger Law: US vs. Europe

Both in the U.S. and in Europe, a merger control system was added to competition law only at a later stage.

It is interesting to notice that, in both jurisdictions, merger law was introduced after antitrust agencies had started to assess mergers as monopolization practices (in the U.S.) or as abuses (in Europe).

In the U.S., the Clayton Act was passed in 1914 and, in the same year, the FTC Act assigned the merger assessment to a newly created agency, namely the Federal Trade Commission.

In Europe, Merger Regulation was first introduced in 1989 (then significantly modified in 2004), when more than thirty years had elapsed since the Treaty of Rome was signed.

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The Different Nature of Merger Assessment

Merger assessment is very different from the assessment of agreements and abuses.

The latter implies illegal behavior: something that is, or should be, ex-ante known to firms, which therefore have a duty to abstain from it.

Merging firms are not called to evaluate whether their choice is legal or illegal, they only have a duty to file a notification of their decision to merge, and wait for the authorization of a public agency to implement it.

The antitrust agency has to perform a perspective, structural analysis, as concentrations determine structural changes of the market.

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Two Main Types of Concentrations

Article 3(1) of the European Merger Regulation defines two categories of concentrations:

those arising from a merger between previously independent undertakings or parts of undertakings (point (a));

those arising from an acquisition of control of the whole or parts of one or more other undertakings (point (b)).

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Article 3(1)(a) of the Merger Regulation

A merger within the meaning of Article 3(1)(a) of the Merger Regulation occurs when:

two or more independent undertakings amalgamate into a new undertaking and cease to exist as separate legal entities;

when an undertaking is absorbed by another, the latter retaining its legal identity while the former ceases to exist as a legal entity;

in the absence of a legal merger, the combining of the activities of previously independent undertakings results in the creation of a single economic unit.

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Article 3(1)(b) of the Merger Regulation

Article 3(1)(b) provides that a concentration occurs in the case of acquisition of control.

Such control may be acquired by one undertaking acting alone or by several undertakings acting jointly.

Control may also be acquired by a person already controlling (whether solely or jointly) at least one other undertaking or, alternatively, by a combination of persons (which control another undertaking) and undertakings.

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Article 3(2) of the Merger Regulation

Control is defined by Article 3(2) of the Merger Regulation as the possibility of exercising decisive influence on an undertaking.

It is not necessary to show that the decisive influence is or will be actually exercised; however, the possibility of exercising that influence must be effective.

The possibility of exercising decisive influence on an undertaking can exist on the basis of rights, contracts or any other means, either separately or in combination, and having regard to the considerations of fact and law involved.

A concentration may therefore occur on a legal or a de facto basis.

Control may be positive or negative, sole or joint and may extend to the whole or parts of one or more undertakings.

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An Italian View

The antitrust notion of control, as spelled out by Article 7 of Law No. 287/1990, is more comprehensive than the ‘civil’ one, shaped by Article 2359 of the Civil Code (see the Generali/Toro case, 2007). As will be seen, in antitrust sale or rent of a part of an on-going business, not independently incorporated, may suffice; shareholding is not requested in order to detect a de facto control.

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Competition Law

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Means for the Acquisition of Control [1]

1. The most common means for the acquisition of control is the acquisition of shares, possibly combined with a shareholders’ agreement in cases of joint control, or the acquisition of assets. Notice that the acquisition of minority shareholding may constitute an agreement, rather than a concentration, depending on the long-lasting control on the management and the resources of the concerned undertaking (influencing strategic decisions).

2. Control can also be acquired on a contractual basis. Only long-term contracts can result in a structural change in

the market. Article 3(2)(a) specifies that control may also be constituted

by a right to use the assets of an undertaking. Such contracts may also lead to a situation of joint control if

both the owner of the assets and the undertaking controlling the management enjoy veto rights over strategic business decisions.

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3. Control can also be established by any other means. Purely economic relationships may play a decisive role for

the acquisition of control. In exceptional circumstances, a situation of economic

dependence may lead to control on a de facto basis where, for instance, very important long-term supply agreements or credits provided by suppliers or customers, coupled with structural links, confer decisive influence.

There may be an acquisition of control even if it is not the declared intention of the parties or if the acquirer is only passive and the acquisition of control is triggered by action of third parties (for instance, where the change of control results from the inheritance of a shareholder or the exit of a shareholder triggers a change of control, in particular a change from joint to sole control).

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4. Specific issues may arise in the case of acquisitions of control by investment funds.

If there is a multitude of investors in the fund, the investors normally do not exercise control, either individually or collectively, but control is typically exercised by the fund itself or the investment company which has set up the fund.

The investment company usually exercises its influence (control) by controlling the general partner of funds organized as limited partnerships, or by contractual arrangements.

These considerations also apply if an investment company sets up several investment funds which intend to invest in different portfolio undertakings.

The different funds are normally linked together by their relations with the investment company.

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Object of Control [1]

Article 3(1)(b) of the Merger Regulation provides that the object of control can be one or more (or also parts of) undertakings which constitute legal entities, or the assets of such entities, or only some of these assets.

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Object of Control [2]

The acquisition of control over assets can only be considered a concentration if those assets constitute the whole or a part of an undertaking.

The transfer of the client base of a business can be deemed a concentration.

A transaction confined to intangible assets such as brands, patents or copyrights may also be considered to be a concentration if they are the basis for an existing economic activity and the assignment of these intellectual property rights seems sufficient for also transferring the turnover-generating activity.

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Competition Law

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Joint Ventures: the Concept of Full-Functionality [1]

Pursuant to Article 3(4), also the creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity (so called full-function joint venture) shall constitute a concentration within the meaning of the Merger Regulation.

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Joint Ventures: The Concept of Full-Functionality [2]

The fact that a joint venture may be a full-function undertaking and therefore economically autonomous from an operational viewpoint does not mean that it enjoys autonomy as regards the adoption of its strategic decisions. Otherwise, a jointly controlled undertaking could never be considered a full-function joint venture and therefore the condition laid down in Article 3(4) would never be complied with.

For the criterion of full-functionality to be satisfied, it is therefore sufficient that the joint venture is autonomous in operational respect.

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Joint Ventures A JV with operational autonomy is

deemed to be a concentration, and is treated as such. If, in addition to that, it presents also cooperative side effects, it will be considered also under the Article 81 perspective, including para. 3 exemption.

If a JV has no operational autonomy, it will undergo only Article 81 standard scrutiny.

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Competition Law

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A Two-Steps Process [1] The European Commission, substantially

following the U.S. approach, assesses the anti-competitive consequences of a concentration through a two-steps process.

1. First, the market structure is analyzed.

2. If market structure is such that it seems to require an in-depth analysis, the Commission will move to the second step of the assessment and analyze the anti-competitive effects of the concentration.

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A Two-Steps Process [2]

The structural changes caused by horizontal concentrations raise two potential competitive concerns:

I. by eliminating the competition which exists between the parties prior to the concentration, the merger may weaken to a significant degree the strength of the overall competitive constraint acting on one or more of the parties;

I. firms that were previously not coordinating their behavior could be, post-concentration, more likely to coordinate, or firms which were already coordinating could find this easier and more stable.

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Market Shares and Concentration Levels

Horizontal concentrations have two effects on market structure:

1. they reduce the number of competing firms;

2. they increase market concentration, as the market share of the entity resulting from the concentration is larger than either of the parties’ share prior to the concentration.

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Market Shares in US Antitrust Law [1]

Section 7 of the Clayton Act stipulates that “no person … shall acquire the whole or any part of the assets of another person … where … the effect of such acquisition may be to substantially lessen competition”.

In du Pont (1957), the Supreme Court decided that “Section 7 is designed to arrest in its incipiency … the substantial lessening of competition”.

To determine whether there is reasonable probability of a substantial lessening of competition, the courts have subsequently focused on whether such mergers will cause the merged entity to have enough market power so that it could profitably increase prices.

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In the 1960s, the US Supreme Court formally condemned mergers between horizontal competitors with only minimal market shares (United States v. Philadelphia National Bank, 1963), referring to market shares data as “one of the most important factors to be considered when determining the probable effects of the combination on effective competition in the relevant market” (Brown Shoe Co., Inc, 1962).

Also, the idea was advanced that incipient market power should be blocked, even if the transaction was efficient (United States v. Von’s Grocery, 1966).

The Supreme Court retreated from its extreme structuralist approach in 1974 when it held, in the General Dynamics decision, that non-market share issues had to be examined as well.

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The decision to investigate and challenge a merger often lies with the federal agencies. The stated antitrust concern of the US regulators’ 1992 Horizontal Merger Guidelines is market power, with market concentration being rated as a “useful indicator” of the likely competitive effects of a merger.

Therefore, careful attention is paid to the initial level of concentration and the predicted change in concentration due to the merger.

This reflects a view that anti-competitive harm is an increasing function of concentration.

In principle, however, concentration has not served as a presumption of “guilt”, but to determine which cases should be investigated, concentration being a necessary, though on its own an insufficient, condition for a merger challenge.

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Market Shares in European Competition Law [1] The EC Merger Regulation itself does not establish a

methodology for assessing whether a merger actually results in a significant impediment to effective competition.

It merely states that, when performing the appraisal of whether a concentration is compatible with the Common Market, the European Commission takes into account:

“the need to maintain and develop effective competition within the Common Market” in view of, among other things, the structure of the markets concerned and actual or potential competition (Article 2(1)(a) Merger Regulation); and

other factors, such as “the market position of the undertakings concerned and their economic and financial power, the alternative available to suppliers and users, … barriers to entry, supply and demand trends … the development of technical and economic progress, provided that it is to consumers’ advantage and does not form an obstacle to competition” (Article 2(1)(b) of the Merger Regulation).

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Market Shares in European Competition Law [2]

All early European Commission merger decisions, in which the proposed concentration generated high market shares, led the Commission, as later confirmed by the Court of First Instance (see, e.g., Gencor, 1999), to define what may be understood as a dominant position in the merger context:

“the ability to act, to an appreciable extent, independently of its competitors, customers, and consumers”.

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The definition given by the court is not materially different from the definition of dominance as applied under Article 82 EC.

In Boeing (1997), the European Commission refers quite explicitly to Article 82 EC, as:

“The market power of Boeing, allowing it to behave to an appreciable extent independently of its competitors, is an illustration of dominance as defined by the Court of Justice of the European Communities in its judgment in Michelin”.

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The connection between the substantive test contained in the Merger Regulation and economic analysis was already made in Renault/Volvo (1990), where the European Commission indicated its belief that there exists a very close link between the ability to act independently and the ability to increase prices without losing market shares.

The assessment of market shares has moved from an almost mechanical measurement towards taking into account the context of market’s characteristics and the nature of competition in it.

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In Tetra Pak (1991), the Commission said that a “market share of 90% is a very strong indicator of the existence of a dominant position. However, in certain rare circumstances even such a high market share may not necessarily result in dominance”.

In Gencor, the Court of First Instance supported a case-by-case approach stating that “… the view may legitimately be taken that very large market shares are in and of themselves evidence of the existence of a dominant position, save in exceptional circumstances”.

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According to the EC Horizontal Merger Guidelines, “very large market shares” (50 per cent or more) may in themselves be evidence of the existence of a dominant market position (case Gencor).

The EC Horizontal Merger Guidelines also confirm that: the presumption of dominance based on such “very large

market shares” may be rebutted (if, for instance, smaller competitors have the ability to act as a sufficient constraint through their incentives to increase production);

lower market shares may still raise competitive concerns in view of other factors (for instance, the strength and number of competitors, the presence of capacity constraints,…);

where market shares remain below 25 per cent, however, it is presumed that the concentration will not bring about any anti-competitive effects.

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Competition Law

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Concentration Levels in US Antitrust Law [1] Initially, the US Supreme Court found that high levels of

concentration established a rebuttable presumption of illegality (United States v. Philadelphia National Bank, 1963).

This strict policy approach was formalized under the US DoJ’s 1968 Merger Guidelines, which applied the so-called CR4 analysis (concentration ratio for the top four firms) in order to determine the degree of concentration in a market.

The CR4 approach does not take into account: the relative sizes of the leading companies; and the total number of firms in the market or the market

shares of the companies below the four largest. Since the 1982 revision of its Merger Guidelines, the DoJ

tried to quantify some of the criteria that should be considered in assessing the impact of a merger on the market.

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Concentration Levels in US Antitrust Law [2]

The DoJ stated that “mergers should not be permitted to create or enhance market power or to facilitate its exercise”.

The degree of concentration, however, remained relevant because it was found much easier to raise prices above a competitive level and keep them there in a highly concentrated market.

For the first time, the HHI was used as the way of measuring market concentration.

With the 1992 Horizontal Merger Guidelines, the discussion of the potential adverse competitive effects of concern (the means by which market power may be exercised and the circumstances in which such conduct is likely to be successful) have been substantially revised.

Market concentration, while still a significant component of the analysis, is less determinative of the enforcement agencies’ action than under previous Guidelines.

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A Roadmap The Assessment of Mergers Means for the Acquisition of Control The Concept of Full-Functionality A Two-Steps Process Market Shares The 1992 Horizontal Merger

Guidelines Concentration Levels in European

Competition Law

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The 1992 Horizontal Merger Guidelines

The 1992 Horizontal Merger Guidelines provide an analytical framework for evaluating concentration evidence in determining whether a merger is likely to have adverse competitive effects, consisting of five steps:

1) market definition, measurement and concentration;2) competitive effects;3) entry analysis;4) efficiencies; and5) failure or exiting assets.

The HHI is used as the primary concentration guide.

Stigler (1950) suggested that the HHI is an appropriate measure of concentration “if we wish concentration to measure the likelihood of effective collusion”.

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CR4 vs. HHI

CR4 = ∑qi HHI = ∑qi2

HHI embodies two aspects of the distribution of market shares in an industry: (a) the dispersion in shares, indicating whether they are spread out or relatively equal; (b) and the number of firms in the industry.

As compared to the CR4, all firms are now included in the measurement with the shares of larger firms given greater weight than those of smaller companies, in order to offer a more complete picture of the whole market.

i=1

i=1

4 n

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A Three-Tier Test

According to the 1992 Horizontal Merger Guidelines , the following thresholds are relevant in deciding whether mergers will be challenged:

any merger in a market with a post-merger HHI below 1,000 is unlikely to be challenged;

a merger in a market with a post-merger HHI above 1,800 is likely to be challenged if the merger causes the HHI to increase by more than 100, unless other mitigating factors exist such as easy of entry;

mergers in the “in-between” markets with moderate post-merger concentration levels between 1,000 and 1,800 require further analysis before a decision is made whether or not to challenge.

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The HHI Application In the USA the application of the set HHI levels has not

been overtly mechanical. First, the courts have “hardly validated the Guidelines’

wording of challenge in all but extraordinary circumstances”.

Overall, if there are no entry barriers, courts do not worry about the danger that collusion is immanent, and even merger to near monopoly may be allowed if sufficient evidence exists to support the inference of lack of anticompetitive effects.

In fact, the HHI levels as identified in the 1992 Guidelines are well below actual enforcement trends.

Statistics show that in 2000-01 successful merger challenges were brought by the DoJ in cases where the average post-merger HHI level was 5,215, with an average HHI increase equal to 1,729.

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A Largely Pragmatic Application

Second, evidence reveals that the HHI is not sufficient to determine the effects of concentration on non-competitive behavior.

The link between concentration and the exercise of market power is recognized to be weak; the only thing that can be stated with any confidence is that concentration is a necessary condition for the effective exercise of market power.

In sum, the US Horizontal Merger Guidelines have been applied in a largely pragmatic manner.

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Concentration Levels in European Competition Law

Also under European competition law, market shares are not to be detached from the effect the merger has on concentration.

Prior to the issuance of the EC Horizontal Merger Guidelines, only general inferences could be drawn from case law.

The Guidelines now offer a standardized approach similar to that of the US.

The European Commission clearly points out that “market shares and concentration levels provide useful first indications of the market structure”.

Although the Commission normally uses current market shares in its competitive assessment, past or future market shares may be useful in dynamic industries.

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HHI’s relevant levels [1]

In terms of HHI, the relevant levels are the following:

concentrations in markets with a post-merger HHI below 1,000 are unlikely to be challenged;

concentrations in markets with a post-merger HHI between 1,000 and 2,000 are unlikely to be challenged, if the increase in the HHI is below 250 (except in “special circumstances”);

concentrations in markets with a post-merger HHI above 2,000 are unlikely to be challenged, if the increase in the HHI is below 150 (except in “special circumstances”).

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HHI’s relevant levels [2]

“Special circumstances” may arise, for instance, when the concentration involves new entrants, important innovators or maverick firms, there are cross-shareholdings among competitors, there is evidence of past or ongoing coordination or facilitating practices, or one party’s pre-merger market share exceeds 50 per cent.

These HHI levels are, again, only an initial indicator of competition concerns.

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A Roadmap Oligopolistic Behaviors

Unilateral Effects

Coordinated effects

Countervailing Factors

Efficiency Considerations

Failing Firm Defense

Non-Horizontal Mergers

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Two Types of Oligopolistic Behavior

As an alternative to being conducive to a single dominant firm, a merger may threaten competition in two ways (J.B. Baker 1999).

These two ways are conceptually distinct, even if sometimes hard to distinguish in practice.

The first threat to competition comes from so-called non-coordinated, unilateral effects (non-competitive outcomes resulting from the individual profit-maximizing responses of firms to market conditions: i.e., eliminating important competitive constraints on one or more firms, which consequently would have increased market power, without resorting to coordinated behavior).

The second threat to competition comes from so-called tacit collusion or coordinated effects (by changing the nature of competition in such a way that firms, which previously were not coordinating their behaviour, are now significantly more likely to coordinate and raise prices or otherwise harm effective competition. A merger may also make coordination easier, more stable or more effective for firms which were coordinating prior to the merger).

Both unilateral and coordinated effects are instances of oligopolistic behavior; they differ in the way the firms involved take into account their competitors’ behavior.

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Unilateral Effects

Coordinated effects





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Unilateral Effects [1]

The most direct effect of the merger will be the loss of competition between the merging firms.

Prior to the merger, it is conceivable that, had one of the involved firms raised its price, it would have lost some sales to the other merging firm.

The merger removes this particular constraint.

Non-merging firms in the same market can also benefit from the reduction of competitive pressure that results from the merger, since the merging firms' price increase may switch some demand to rival firms, which, in turn, may find it profitable to increase their prices.

The reduction in competitive constraints could lead to significant price increases in the relevant market.

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Unilateral Effects:An Example

In a given town there are few independent grocery stores. Competition constrains the market power of each store: if

one of them tries to increase prices in a significant way, many among its current consumers would start to shop at one of the other stores.

Anticipating this, the store considering the price increase will refrain from doing so. Its market power, i.e. its ability to charge consumers a high price, is therefore limited by the presence of the rival stores.

Such market power, however, will increase if two or more stores merge to give rise to a chain of grocery stores.

A contemporaneous increase by the merged stores in the price of each product sold might now be profitable, because the number of rival stores is reduced and lost sales will be lower.

Consumers might have to travel greater distances to find a store with lower prices, and many of them will shop at their usual store despite high prices.

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Unilateral Effects [2] Generally, a merger giving rise to such non-coordinated

effects would significantly impede effective competition by creating or strengthening the dominant position of a single firm, one which, typically, would have an appreciably larger market share than the next competitor post-merger.

Furthermore, mergers in oligopolistic markets involving the elimination of important competitive constraints that the merging parties previously exerted upon each other, together with a reduction of competitive pressure on the remaining competitors, may result in a significant impediment to competition, even where there is no individual dominant position and little likelihood of coordination between the members of the oligopoly.

The Merger Regulation clarifies that all mergers giving rise to such non-coordinated effects shall be declared incompatible with the common market.

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Unilateral Market Power

A number of factors, which taken separately are not necessarily decisive, may influence whether significant non-coordinated effects are likely to result from a merger.

Not all of these factors need to be present for such effects to be likely.

Nor should this be considered an exhaustive list.

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Variables which Affect Unilateral Market Power [1]Concentration Other things being equal, the larger the number of

independent firms operating after the merger, the less likely it is to be detrimental to consumers.

Market Shares The larger the market share, the more likely a firm is to

possess market power. The larger the addition of market share, the more likely

it is that a merger will lead to a significant increase in market power.

The larger the increase in the sales base on which to enjoy higher margins after a price increase, the more likely it is that the merging firms will find such a price increase profitable despite the accompanying reduction in output.

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Variables which Affect Unilateral Market Power [2]

Merging firms are close competitors [I] The higher the degree of substitutability between the

merging firms' products, the more likely it is that the merging firms will be able to raise prices significantly.

The merging firms' incentive to raise prices is more likely to be constrained when rival firms produce close substitutes to the products of the merging firms than when they offer less close substitutes.

It is therefore less likely that a merger will significantly impede effective competition, in particular through the creation or strengthening of a dominant position, when there is a high degree of substitutability between the products of the merging firms and those supplied by rival producers.

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Merging firms are close competitors [II] When data are available, the degree of

substitutability may be evaluated through customer preference surveys, analysis of purchasing patterns, estimation of the cross-price elasticities of the products involved, or diversion ratios.

In bidding markets it may be possible to measure whether historically the submitted bids by one of the merging parties have been constrained by the presence of the other merging party.

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Entry [I]

The firms’ ability to raise prices after a merger is limited by the existence of potential entrants.

Firms which would find it unprofitable to enter the industry at pre-merger prices might decide to enter if the merger brings about higher prices or lower quantities.

By anticipating this effect, post-merger prices might not rise at all; or, if they do, the price increase would be transitory.

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Entry [II] The extent to which potential entrants restrain

the market power of actual industry participants crucially depends on fixed sunk costs: the larger and the more sunk the costs that an entrant has to incur, the higher the scope for a price increase.

The evaluation of the likelihood of entry involves some difficulties: antitrust authorities have to judge whether there are firms which consider entry, how likely they are to enter, what are the possible barriers they face and how long it might take for entry to be accomplished.

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Variables which Affect Unilateral Market Power [6]Productive capacities The ability to raise prices by any given firms is limited

by the existence of rivals to which consumers can switch; but these rivals have to be able to satisfy the possible additional demand addressed to them

Other things being equal, the larger the unused capacity of rivals, the less likely it is that the merging firms will exercise much market power.

Demand variables In industries characterized by very high switching costs,

consumers would not easily change their providers, who will then enjoy market power.

More generally, the lower the elasticity of market demand, the higher the scope for raising prices.

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Unilateral Effects

Coordinated effects





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Coordinated Effects [1] Coordination, as was seen, may take various

forms.

In some markets, the most likely coordination may involve keeping prices above the competitive level.

In other markets, coordination may aim at limiting production or the amount of new capacity brought to the market.

Firms may also coordinate by dividing the market, for instance by geographic area or other customer characteristics, or by allocating contracts in bidding markets.

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Coordinated Effects [2] Tacit collusion is more likely to emerge

in markets where it is relatively simple to reach a common understanding on the terms of coordination.

Generally, the less complex and the more stable the economic environment, the easier it is for the firms to reach a common understanding on the terms of coordination.

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Coordinated Effects [3]

According to economic analysis, European case law (Airtours, 2002) and the EU Horizontal Merger Guidelines, three conditions are necessary for coordination to be sustainable:

1. the coordinating firms must be able to monitor to a sufficient degree whether the terms of coordination are being adhered to (market transparency);

2. there must be some form of credible deterrent mechanism that can be activated if deviation is detected;

3. the reactions of outsiders, such as current and future competitors not participating in the coordination, as well as customers, should not be able to jeopardize the results expected from the coordination.

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Coordinated Effects [4]

In assessing the likelihood of coordinated effects, the Commission takes into account all available relevant information on the characteristics of the markets concerned, including both structural features and the past behaviour of firms.

Evidence of past coordination is important if the relevant market characteristics have not changed appreciably or are not likely to do so in the near future.

Likewise, evidence of coordination in similar markets may provide useful information.

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Unilateral Effects

Coordinated effects





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In the competitive assessment of a concentration, the Commission has to carefully assess the influence of factors which may counter the increase in merging firms’ market power, such as, in particular:

buyer power;

entry of new competitors; and

efficiencies.

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Buyer Power

It has already been stressed that one possible meaning of buyer power may be defined as the bargaining strength that the buyer has vis-à-vis the seller in commercial negotiations due to its size, its commercial significance to the seller and its ability to switch to alternative suppliers.

The threat to resort to alternative sources of supply, should the supplier decide to increase prices or to otherwise deteriorate commercial conditions, may derive from the ability of the buyer to:

immediately switch to other suppliers;

credibly threaten to vertically integrate into the upstream market; or

sponsor upstream expansion or entry.

The EU Guidelines point out it is not sufficient that only a particular segment of customers is shielded from significantly higher prices or deteriorated conditions after the merger.

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Entry

According to the EU Horizontal Merger Guidelines, for entry to be considered a sufficient competitive constraint on the merging parties, three conditions must be shown:

likelihood of entry (analysis of entry barriers and profitability);

timeliness (normally, it is necessary that entry would occur within two years);

sufficient scope and magnitude to deter or defeat the anti-competitive effects of the merger.

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Unilateral Effects

Coordinated effects





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Efficiency Considerations [1]

Efficiency considerations pose a number of awkward questions to any competition authority that wishes to engage in a coherent review of concentrations.

Such considerations boil down to a balancing between anti-competitive effects (determined using a prospective analysis of the concentration) and possibly pro-competitive effects (projecting potential future costs savings to a transaction not yet consummated).

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Efficiency Considerations [2]

There have been no clear-cut cases under European competition law that contain a worked-up discussion of efficiencies.

There have been two relatively recent cases in the USA and Canada.

In the US case Heinz/Beech-Nut (2000), efficiencies were fielded without changing the ultimately negative outcome; in the Canadian precedent, Superior Propane/ICG (2000), the efficiency defense was successful.

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Private Profitability vs. Social Welfare [1]

Concentrations often have the potential to be privately profitable, as they offer the opportunity to internalize (at least in part) the consequences of a price increase. Since a price increase affects aggregate industry output levels, firms could choose to collude to lower output and raise profits; but they can also merge and internalize this externality.

One way or another, aggregate industry profits would increase. However, social welfare is not well served if output is lowered as a result of concentration.

How does it relate?

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Salant, Switzer and Reynolds (1983) show that some exogenous concentrations would induce losses for the firms involved, even when the concentration creates such large efficiency gains through scale economies that it would be socially advantageous.

Confirming Stigler’s earlier finding (1950), their model shows that the parties to a concentration do not capture all the profits resulting from the transaction; rather, because of this externality, concentrations which increase total industry profits need not be privately profitable.

Following on from these authors, it may be noted that the welfare consequences of concentrations are not always well defined. In particular, combining the assets of the concentrated firms increases the output that the newly created entity can produce at given average costs (as it faces a different maximization problem because of its altered costs function and new strategic considerations). To keep it simple: the amalgamated firm is larger.

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Subsequently, Davinson and Deneckere (1984), as well as Perry and Porter (1985), identified the principal behavioral as well as structural characteristics that give rise to the necessary incentives to merge.

Farrell and Shapiro (1990) then provided a model broad enough to explain the adjustments of prices and quantities in response to a concentration in an oligopolistic Cournot-type industry. Assuming a concentration to be privately profitable, they show that concentrations raise prices if they do not generate synergies between the merging firms, with high market share firms needing to achieve “impressive synergies” if their merger is to reduce price.

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The crucial conceptual improvement of the Farrell and Shapiro analysis emerges from emphasizing the external welfare effects of the concentration on consumers and non-participant firms (instead of trying to distinguish some hard-to-prove effects of the concentration that are internal to the firms involved). Positive external effects thus could imply an increase in social welfare.

If non-participant firms reduce their output, the concentration lowers welfare even though it is profitable, and this will be more likely if collusion is facilitated, oligopolists compete in price among differentiated products, or if the combined market share of the firms involved is large, relatively to the shares of the firms outside the concentration.

On the contrary, if the outsiders expand their output considerably in response to the concentration, a significant welfare gain can be provided.

Few real-life industries, however, would be compatible with the Farrell and Shapiro assumptions (P.D. Camesasca, 2000).

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To summarize: From the efficiency perspective, a large increase in HHI

levels should be viewed with suspicion; but there is no reason to be more concerned about whether concentration levels as such are high or low (R.D. Willig, 1991).

Focusing on the external welfare effects of a concentration presupposes that the regulator dealing with this concentration is not making any evaluation of its desiderability, bringing the theoretical inclusion of the efficiency defense in line with the European Community’s goal of establishing an open market economy.

Accordingly, approving a concentration, on the basis that it has no adverse external effects on the interests of third parties, would leave private agents free to pursue their own advantage without regulatory intervention (P. Seabright, 1994).

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Efficiency Requirements under a Consumer Welfare Standard

While Williamson’s partial merger to monopoly model required “relatively large price increases for the net allocative effects to be negative”, contemporary developments have evolved now to demanding “impressive” synergies in order to allow efficiencies to make a positive impact on the assessment of concentrations.

Even more far reaching conclusions can be drawn when efficiencies are quantified by confining them to those leading to immediate consumer benefits through lower prices; they would plainly require enormous costs savings to count as benefits at all (Froeb and Werden, 1998).

The inclusion of the redistribution effect, involving all or part of the wealth transfer, will greatly reduce, or even eliminate, the possibility of successfully conducting an efficiency defense.

It is thus important to have clear guidance on how much weight should be given to the requirement that efficiency gains should be passed on and under which timescale.

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Efficiencies in the EC Horizontal Merger Guidelines [1]

The solution opted for in the EC Horizontal Merger Guidelines, similarly as under Section 4 of the US Horizontal Merger Guidelines, is to acknowledge efficiencies as a potential counterbalance as part of an “overall competitive appraisal” within the meaning of Article 2(2) and (3) Merger Regulation.

This will be the case if it is possible to conclude, “on the basis of sufficient evidence”, that the efficiencies generated by the concentration are “likely to enhance the ability and incentive of the newly created entity to act pro-competitively for the benefit of consumers, thereby counteracting the adverse effects on competition” which the transaction might otherwise have.

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Thereto, the efficiencies have to:

a. benefit consumers;

b. be specific to the concentration;

c. be verifiable.

For efficiencies to benefit consumers, they should be substantial and timely, and should, in principle, benefit consumers in those relevant markets where it is otherwise likely that competition concerns would occur.

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Efficiencies in the EC Horizontal Merger Guidelines [3] The Guidelines list some examples:

cost savings in production, leading to a reduction in variable or marginal costs; reductions in fixed costs are considered less likely to result in lower prices for consumers, while cost reductions resulting from anti-competitive reductions in output are excluded;

R&D and innovation efficiency gains leading to new or improved products;

in the context of coordinate effects, costs savings leading to increased production and reduced prices, thereby reducing the newly created entity’s incentive to coordinate with competitors.

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Timeliness and the incentive on the part of the newly created entity to pass efficiency gains on to consumers is often related to the existence of competitive pressure.

The EC Horizontal Merger Guidelines apply a sliding scale approach: the greater the possible anti-competitive effects, “the more the European Commission has to be sure that the claimed efficiencies are substantial, likely to be realized, and to be passed on, to a sufficient degree, to the consumer”.

It is, as such, “highly unlikely” that mergers to monopoly would be waved through on the basis of efficiency claims.

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For efficiencies to be specific to the concentration, they need to be a “direct consequence” of the concentration, and impossible to achieve to a similar extent by less anti-competitive alternatives.

The firms involved have the onus to demonstrate that there are no less anti-competitive, realistic, and attainable alternatives (as cooperative joint venture).

For efficiencies to be verifiable, the European Commission must be “reasonably certain” that the efficiencies are likely to materialize and are substantial enough to counteract a concentration’s potential harm to consumers.

If quantification is impracticable, “it must be possible to foresee a clearly identifiable positive impact on consumers”, whereto “the longer the start of the efficiencies is projected into the future, the less probability is assigned to them”.

However, the EC Horizontal Mergers Guidelines provide a relatively vague guidance and they have not yet been tested on the point of efficiencies.

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Unilateral Effects

Coordinated effects





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In order to decide on the desiderability of a concentration, it is important to understand what is likely to happen after it takes place, but it is also relevant to assess what would happen were the concentration not to take place.

It is the case of a concentration that involves a failing firm, i.e. a firm that would, in the absence of a merger, not have been able to survive in the industry.

The ex post concentration situation should be compared not with the ex ante one, but with the situation occurring after the failing firm would have exited the industry.

The failing firm defense has been rarely used both in the US and in the EU, where the EC adopted it in the Kali und Salz decision.

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Failing Firm Defense: US Merger Guidelines [1]

The failing firm defense is clearly stated in the US Merger Guidelines, Section 5.1, where an otherwise anti-competitive concentration is accepted if:

1. the failing firm would be unable to meet its financial obligations in the near future;

2. it would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act;

3. there are no suitable alternative buyers that would keep the failing firm’s tangible and intangible assets in the relevant market while having lower anti-competitive effects than the proposed merger; and

4. in the absence of the merger, the failing firm’s assets would have exited the relevant market.

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Failing Firm Defense: US Merger Guidelines [2]

The first two conditions require that the failing firm must not only have short-run problems, but be unlikely to be viable in the medium-long term.

The other conditions require that the proposed merger is the only (or the best) way to keep the assets of the firms in productive use.

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The Failing Firm Defense in Europe

Neither Article 2 of the Merger Regulation nor any other provision of the Community merger legislation contain an express reference to the "failing firm defense" as a ground for authorizing a merger that would create or strengthen a dominant position in the EU.

Despite the lack of statutory definition, the Commission has developed in its case-law the concept of a "rescue merger", which can be regarded as a version of the "failing firm defense".

In several cases the concept of the "rescue merger" was invoked by the parties as a ground for authorizing the notified transaction.

However, Kali und Salz/MdK/Treuhand is the only case to-date where this concept is discussed at length in the Commission’s decision.

It is also the only case where the Commission authorized the acquisition of a failing firm.

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Failing Firm Defense: The EU Merger Guidelines [1]

A merger or acquisition which would normally lead to the creation or strengthening of dominance, cannot be regarded as causing this result, if:

1. in the absence of the merger or acquisition, the merging or acquired company would disappear from the market in the near future ("failing firm");

2. merger with or acquisition by another company which would result in less damage to the competitive structure of the market can be practically ruled out;

3. there is evidence that, if the merging or acquired company were to disappear from the market, virtually all of its market share would go to its merger partner or acquirer.

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Failing Firm Defense: The EU Merger Guidelines [2]

According to the Commission, there is a presumption that the creation or strengthening of dominance following a merger is caused by that merger.

Consequently, the burden of proving the existence of the requirements of a "rescue merger" lies with the merging firms.

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Unilateral Effects

Coordinated effects





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Non-Horizontal Mergers [1]

Concentrations where the undertakings concerned are active on distinct relevant markets are called “non-horizontal mergers”.

Two broad types of non-horizontal mergers can be distinguished: vertical mergers and conglomerate mergers.

Vertical mergers involve companies operating at different levels of the supply chain. (For example, when a manufacturer of a certain product, the “upstream firm”, merges with one of its distributors, the “downstream firm”, this is called a vertical merger).

Conglomerate mergers are mergers between firms that are in a relationship, which is neither purely horizontal (as competitors in the same relevant market) nor vertical (as suppliers or customers). In practice mergers between companies that are active in closely related markets (e.g. mergers involving suppliers of complementary products or products that belong to the same product range).

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Non-Horizontal Mergers [2]

In practice, mergers may entail both horizontal and non-horizontal effects.

Non-horizontal mergers are generally less likely to create competition concerns than horizontal mergers.

1. Unlike horizontal mergers, vertical or conglomerate mergers do not entail the loss of direct competition between the merging firms in the same relevant market. As a result, the main source of anti-competitive effects in horizontal mergers is absent in the case of vertical and conglomerate mergers.

2. Furthermore, vertical and conglomerate mergers provide substantial scope for efficiencies.

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Non-Horizontal Mergers Pro-Competitive Effects [1]

A characteristic of vertical mergers and certain conglomerate mergers is that the activities and/or the products of the companies involved are complementary to each other. The integration of complementary activities or products within a single firm may produce significant efficiencies and be pro-competitive.

For instance, in vertical mergers, efforts to increase sales at one level will benefit sales at the other level (by lowering price, or by stepping up innovation). Depending on market conditions, integration may increase the incentive to carry out such efforts.

In particular, after the vertical integration, lowering the mark-up downstream may lead to increased sales not only downstream but also upstream and vice versa (“internalization of double mark-ups”).

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Non-Horizontal Mergers Pro-Competitive Effects [2]

Integration may also decrease transaction costs and allow for a better co-ordination in terms of product design, the organization of the production process, and the way in which the products are sold.

Similarly, mergers which involve products belonging to a range of products that are generally sold to the same set of customers (be they complementary products or not) may give rise to customer benefits such as one-stop shopping.

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Non-Horizontal Mergers Anti-Competitive Effects

There are two main ways in which non-horizontal mergers may significantly impede effective competition: non-coordinated effects and coordinated effects.

Non-coordinated effects arise when: non-horizontal mergers give rise to foreclosure; the merged entity, by vertically integrating, gains access to

commercially sensitive information regarding the upstream or downstream activities of rivals;

the merged entity puts competitors at a competitive disadvantage, thereby dissuading them to enter or expand in the market.

Coordinated effects arise where the merger changes the nature of competition in such a way that firms, which previously were not coordinating their behavior, are now significantly more likely to coordinate and raise prices or otherwise harm effective competition. A merger may also make coordination easier, more stable or more effective for firms, which were coordinating prior to the merger.

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Vertical Mergers Foreclosure Foreclosure may discourage entry or expansion of rivals or

encourage their exit.

Foreclosure thus can be found even if the foreclosed rivals are not forced to exit the market: it is sufficient that the rivals are disadvantaged and consequently led to compete less effectively. As a result of such foreclosure, the merging companies and, possibly, some of its competitors, may be able to profitably increase the price charged to consumers.

Two forms of foreclosure can be distinguished.

First, the merger may be likely to raise the costs of downstream rivals by restricting their access to an important input (input foreclosure).

Secondly, the merger may be likely to foreclose upstream rivals by restricting their access to a sufficient customer base (customer foreclosure).

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Conglomerate Mergers Foreclosure

Conglomerate mergers might theoretically raise two competitive concerns.

The financial power of the new entity (deep pocket) might facilitate the implementation of abusive conducts, such as predatory pricing, or otherwise put competitors at a competitive disadvantage. Big is bad?

The combination of products in related markets may confer on the merged entity the ability and incentive to leverage a strong market position from one market to another by means of tying or bundling or other exclusionary practices.

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Conglomerate Mergers Tying and Bundling [1]

Tying, as was illustrated, occurs when customers that purchase one good (the tying good) are required also to purchase another good from the producer (the tied good).

In certain circumstances, tying (and bundling, and rebating when made dependent on the purchase of other goods) may lead to a reduction in actual or potential rivals’ ability or incentive to compete. This may dampen the competitive pressure on the merged entity, allowing it to increase prices.

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Conglomerate MergersTying and Bundling [2]

In assessing the likelihood of such a scenario, the Commission has to examine:

whether the merged firm would have the ability to foreclose its rivals;

whether it would have the economic incentive to do so; and

whether a foreclosure strategy would have a significant detrimental effect on competition, thus causing harm to consumers.

In practice, these factors are often examined together as they are closely intertwined.

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Tetra Laval/Sidel: The Commission’s decision

Tetra Laval is the leading producer of liquid food carton packaging.

Sidel is the leading producer of stretch blow molding (“SBM”) machines used in the production of PET plastic bottles.

Following a public bid, Tetra Laval acquired in excess of 95% of the shares and voting rights in Sidel.

The Commission subsequently prohibited the merger in October 2001 and ordered the separation of the companies, primarily on grounds that the merger would have lead to conglomerate anti-competitive effects (although it also had concerns over certain “horizontal” and “vertical” effects of the merger).

The Commission concluded in particular that the merged company would be in a position to leverage Tetra Pak’s dominant position in the carton packaging market to create a dominant position in the PET packaging equipment market.

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Tetra Laval/Sidel :The CFI’s decision

The Court of First Instance (“CFI”) overturned the Commission’s decision to block the proposed merger between Tetra Laval and Sidel.

The CFI held that the Commission did not have sufficiently strong evidence that the merger would be anti-competitive and had failed to take due account of certain behavioral commitments offered by Tetra Laval to alleviate the Commission’s concerns.

In particular, the CFI noted that exclusionary practices (such as fidelity discounts) are prohibited under EC competition law. The perspective of antitrust fines would have significantly discouraged the leveraging of market power.

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Tetra Laval/Sidel:The ECJ’s decision [1]

On February 15th, the European Court of Justice (“ECJ”) dismissed the European Commission’s appeal and largely affirmed the decision by the Court of First Instance.

The ECJ affirmed that: a prospective analysis of the kind necessary in merger control, in

general, and in relation to conglomerate effects, in particular, should be carried out with great care;

the concern in a conglomerate merger is that the merged firm may leverage dominance from one market to another. Although all merger analysis requires some degree of speculation regarding likely future effects, in a horizontal merger the structural effects are immediate, while in a conglomerate merger such effects may occur, if ever, only far in the future;

the chains of cause and effect are dimly discernible, uncertain and difficult to establish in conglomerate-type mergers, and hence the quality of the evidence produced by the Commission is particularly important where the Commission intends to prohibit such a merger.

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Tetra Laval/Sidel:The ECJ’s decision [2]

The ECJ held that the CFI correctly required the Commission to comprehensively evaluate whether the merged firm was likely to engage in such conduct in order to establish the required convincing evidence of likely harm from the merger.

In doing so, the ECJ admonished the Commission to take into account both the incentives to adopt such conduct and the factors liable to reduce, or even eliminate, those incentives (including antitrust sanctions).

However, the ECJ specified that “it would run counter to the Regulation’s purpose of prevention to require the Commission … to examine, for each proposed merger, the extent to which the incentives to adopt anti-competitive conduct would be reduced, or even eliminated, as a result of the unlawfulness of the conduct in question, the likelihood of its detection, the action taken by the competent authorities, both at Community and national level, and the financial penalties which could ensue”.

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General Electric/Honeywell

In February 2001, the European Commission was notified of a project according to which General Electric (GE) would have taken over Honeywell.

This merger had vertical, horizontal and conglomerate aspects.

The US DoJ approved the deal, but in July 2001, the European Commission prohibited the merger.

On 14 December 2005 the European Court of First Instance upheld the Commission decision. The CFI concluded that the proposed merger would have created or strengthened dominant positions as a result of which effective competition would have been significantly impeded on three markets.

According to the CFI, the horizontal effects of the proposed merger were sufficient to establish that the Commission merger prohibition was well-founded. However, the CFI further stated that the Commission made manifest errors of assessment with regard to the effects of the merger on particular markets, especially in its analysis of conglomerate effects resulting from the concentration.

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General Electric/Honeywellthe Three Aspects of the Merger

The several distinct aspects of the merger.

I. It had a horizontal nature as far as the market for large regional jet engines is concerned, where GE and Honeywell are competing.

II. It had a conglomerate nature because in several product markets only one of the merging partners is present.

III. It had a vertical nature, because Honeywell and GE have an upstream-downstream relationship in that the former produces engine starters used by the latter in the production of engines, but also because GE is an important buyer of planes through its leasing company GECAS, and in this sense it (indirectly) purchases Honeywell products.

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General Electric/HoneywellErrors of Assessment [1]

The CFI held that the Commission failed to take into account the deterrent effect of Article 82 EC, despite its relevance, and that the Commission’s analysis was, as a result, vitiated by a manifest error of assessment.

In light of ECJ’s Tetra Laval judgment, the CFI held that the Commission does not have to carry out “an exhaustive and detailed examination of the rules of the various legal orders which might be applicable and of the enforcement policy practiced within them, given that an assessment intended to establish whether an infringement is likely and to ascertain that it will be penalized in several legal orders would be too speculative”.

However, “where the Commission, without undertaking a specific and detailed investigation into the matter, can identify the unlawful nature of the conduct in question, in the light of Article 82 EC or of other provisions of Community law which it is competent to enforce, it is its responsibility to make a finding to that effect and take account of it in its assessment of the likelihood that the merged entity will engage in such conduct”.

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General Electric/HoneywellErrors of Assessment [2]

According to the CFI, the Commission did not establish to a sufficient degree of probability that the merged entity would have used GE's financial and commercial strength to extend to Honeywell’s markets (avionics and non-avionics products) thereby creating dominant positions on the various avionics and non- avionics markets concerned.

The Commission also failed to establish to a sufficient degree of probability that the merged entity would have bundled sales of GE’s engines with Honeywell’s avionics and non-avionics products thereby failing to demonstrate that dominant positions would have been created or strengthened.

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General Electric/Honeywell The importance of the Judgment

The CFI did not concentrate on procedural errors made by the Commission, but rather analyzed the Commission's substantive arguments (from this standpoint, it did not continue the practice established in the Tetra Laval/Sidel case).

The CFI judgment provided some very important insights on certain substantive issues, such as the economic theory of "conglomerate effects". This theory had already been used in the Tetra Laval/Sidel case, where the CFI overturned the Commission's decision to prohibit the proposed merger on the basis that the Commission failed to prove that a merged entity would not only have the ability to harm competition, but that it would actually act anti-competitively.

In GE/Honeywell, once again, the theory of "conglomerate effects" formed the basis of the Commission's decision. However, in this case it was not necessary to prove the existence of conglomerate effects, since the merger's horizontal effects were sufficient to establish that the concentration was incompatible with the common market.

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An Efficiency Offense Doctrine?

After the EC decision in GE/Honeywell, the economists supporting GE have argued that the EC developed an efficiency offense doctrine: “a concern that the merger could make the merged entity too efficient and consequently threaten the future of competitors”.

Furthermore, the US enforcement authorities, who had earlier granted clearance to the GE/Honeywell proposed acquisition, severely criticized this approach, stating that the EC interprets competition policy as a tool to protect competitors instead of competition, whereas the US authorities protect aggressive competition that benefits consumers, even if it leads to the reduction of the sales and market share of the merged entity’s competitors.

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A Roadmap

State Intervention

Undertaking: (Private and) Public

Fighting Anticompetitive Effects of State Intervention: Main Principles

The Primacy of Community Law

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The Search for Antitrust Immunities

State intervention may encroach, alter and even turn on its head the standard application of antitrust discipline.

Anticompetitive state imposed restraints are widespread.

One obvious set of public restraints is immunities or exemptions from antitrust law, often stemming from private interests pressure.

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Two Reasons for Antitrust Immunities

The industry might want to avoid inefficiencies created by antitrust laws (e.g., type-II prohibition of beneficial collaborative activity).

Firms might want to cartelize an industry in order to reap profits.

As a mechanism to establish an efficient competition policy, the use of immunities may be socially desirable in those instances where some collective action is needed for efficiency. Otherwise, they confer market power on the exempted industries to the detriment of society.

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Exemptions from Antitrust Laws: US

Agriculture and Fishing

(Clayton Act, § 6; Capper-Volstead Act of 1922).

R&D Joint Ventures (National Cooperative research Act of 1984).

Sport Leagues (Sport Broadcasting Act of 1961).

Ocean Shipping (46 U.S.C. 1706).

Export Cartels (Webb-Pomerene of 1918).

Colleges (P. Law 102-235 of 1992).

Labor (Clayton Act, and Norris-La Guardia Act of 1932).

The U.S. Antitrust Modernization Commission (Report and Recommendations, April 2007) has identified no less than 31 antitrust immunities and exemptions (among which air transportation, defense production, newspaper preservation, railroad transportation) that it considers for possible elimination or time-limitation.

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Exemptions from Antitrust Laws: US A Note on the Robinson-Patman Act [1]

A special derogation to antitrust laws was introduced by the Robinson-Patman Act, as a Congressional response to the concern of small businesses, who complained that they could not obtain from suppliers the same price discounts that larger businesses demanded and received.

The Robinson-Patman Act prohibits sellers from offering different prices to different purchasers of “commodities of like grade and quality” where the difference injures competition.

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Different discount levels, or lower prices, can be offered only where:

1) the same discount is practically available to all purchasers;

2) a lower price is justified by a lower per-unit cost of selling to the “favored” buyer;

3) a lower price is offered in good faith to meet (but not beat) the price of a competitor; or

4) a lower price is justified by changing conditions affecting the market or marketability of the goods, such as where goods are perishable or seasonal or the business is closing or in bankruptcy.

Other provisions of the Robinson-Patman Act ensure the goal of equal pricing by restricting the use of commissions and promotional expenses, for example.

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The Act generally appears to have failed in achieving its main objective (and has been progressively dropped by the enforcement agencies). According to the prevailing view, an act that restricts price and other forms of competition is fundamentally inconsistent with the antitrust laws, which protect price and other types of competition that benefit consumers.

The U.S. Antitrust Modernization Commission (Report and Recommendations, April 2007) has recommended that Congress should repeal the Robinson-Patman Act in its entirety.

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EU Exemptions from Antitrust Laws

Activities in the European Union that are wholly or partially immune from the competition rules include:

nuclear energy, military equipment, national agricultural market organizations, farmers associations;

general economic services assigned by a Member State and rules of the liberal professions (for example, lawyers, architects, auditors, and doctors).

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Exemptions as Forms of Regulation Exemptions are forms of regulation.

Regulation, as an ad hoc, sectoral discipline, assumes some sort of market failure (natural monopoly, externalities, imperfect information, cutthroat competition) that cannot be cured through episodic antitrust redress, or the political endorsement of social goals.

Public property of an undertaking is an extreme form of regulation (usually resorted to in order to handle the natural monopoly problem).

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A Note on Natural Monopoly [1]

Subadditivity of the Cost Function

A natural monopoly exists when there is great scope for economies of scale to be exploited over a very large range of output. Indeed the scale of production that achieves productive efficiency may be a high percentage of the total market demand for the product in the industry.

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A Note on Natural Monopoly [2] Subadditivity of the cost functions simply means that

the production of output is accomplished at least cost by a single firm.

Natural monopolies tend to be associated with industries where there is a high ratio of fixed to variable costs.

For example, the fixed costs of establishing a national distribution network for a product might be enormous, but the marginal (variable) cost of supplying extra units of output may be very small. In this case, the average total cost will continue to decline as the scale of production increase, because fixed (or overhead) costs are being spread over higher and higher levels of output.

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A Note on Natural Monopoly [3]

The single firm which eventually wins the market could set a monopoly price, neglect productive efficiency (particularly cost minimization), waste resources because of rent seeking, and delay innovation.

This is why natural monopoly is a problem, which should be dealt with through some sort of regulation (historically, in Europe, the traditional -though now declining- solution has been public ownership).

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Decline of Regulation? During the twentieth century, a belief that certain

industries were either “natural” monopolies or were at risk for “excessive competition” was predominant and led to regulation of prices, costs, and entry in those industries. The industries tended to involve core services, such as electricity, natural gas, telecommunications, and transportation.

Beginning in the 1960s and 1970s, however, attitudes changed. In some industries, such as electricity generation, technological progress made competition possible. More generally, significant criticisms of the costs and market distortions that accompanied regulation prompted serious review of regulatory regimes.

The trend is toward deregulation in almost all regulated markets.

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A Roadmap

State Intervention




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Article 86 of the EC Treaty

1. In the case of public undertakings and undertakings to which Member States grant special or exclusive rights, Member States shall neither enact nor maintain in force any measure contrary to the rules contained in this Treaty, in particular to those rules provided for in Article 12 and Articles 81 to 89.

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A Neutral Concept of Undertaking

The European Court of Justice has held (Case C-41/90 Höfner and Elser [1991] ECR I-1979, and Case C-218/00 Cisal [2002] ECR I-69) that, in the context of competition law, the concept of undertaking, within the meaning of Articles 81 and 82 of the Treaty, encompasses every entity engaged in an economic activity, regardless of the legal status of the entity and the way in which it is financed.

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Public Undertaking According to Article 2 of the Commission Directive 80/723/EEC

(transparency in financial relationships),1. Public undertaking means: “any undertaking over which the

public authorities may exercise directly or indirectly a dominant influence by virtue of their ownership of it, their financial participation therein, or the rules which govern it”.

2. A dominant influence on the part of the public authorities shall be presumed when these authorities, directly or indirectly in relation to an undertaking:

a) hold the major part of the undertaking's subscribed capital ; or b) control the majority of the votes attaching to shares issued by

the undertakings ; or c) can appoint more than half of the members of the

undertaking's administrative, managerial or supervisory body.

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Public/Private Undertaking:Impartial Antitrust Treatment

The basic principle is that private and public undertakings are to be considered on an equal footing, as far as competition law is concerned, unless special or exclusive rights are granted in order to pursue general economic interests.

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Public Agencies Acting as Undertakings?

Often National Authorities and Courts resolve the cases of application of competition law to the public sector denying the qualification of undertaking to public agencies:

“The concept of an undertaking does not include organizations involved in the management of the public social security system, which fulfill an exclusively social function and perform an activity based on the principle of national solidarity which is entirely non-profit-making” (case C-160/91, Poucet).

“The fact that the amount of benefits and of contributions is, in the last resort, fixed by the State, leads to the conclusion that a body entrusted by law with a scheme providing insurance against accidents at work and occupational diseases, such as the Italian National Institute for Insurance against Accidents at Work, is not an undertaking for the purpose of the Treaty competition rules” (case C-218/00,Cisal).

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A Roadmap

State Intervention




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Article 86 of the EC Treaty2. Undertakings entrusted with the operation of

services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules contained in this Treaty, in particular to the rules on competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Community.

3. The Commission shall ensure the application of the provisions of this Article and shall, where necessary, address appropriate directives or decisions to Member States.

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The General Interest Exception

In some economic sectors, the operation of the free market might fail to satisfy relevant social interests.

Services deemed to be essential to the welfare of the society should be provided even if not profitable, which may justify public intervention.

But the application of the antitrust discipline to the public sector has been, and keeps being, fraught with problems.

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The Active Behavior/Omission of Undertakings [1]

“Article 81 of the Treaty itself concerns only the conduct of undertakings and not legislation or regulations adopted by Member States” (case C-67/96, Albany International).

“Article 81 requires the Member States not to introduce or maintain in force measures, even of a legislative or regulatory nature, which may render ineffective the competition rules applicable to undertakings. Such is the case where a Member State requires or favors the adoption of agreements, decisions or concerted practices contrary to Article 81 or reinforces their effects or deprives its own legislation of its official character by delegating to private traders responsibility for taking economic decisions affecting the economic sphere” (case 267/86 Van Eycke v. ASPA).

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The Active Behavior/Omission of Undertakings [2]

“It must first be observed that the Netherlands rules on insurance agencies…

…neither require nor favor the conclusion of any unlawful agreement, decision or concerted practice by insurance intermediaries, since the prohibition which they lay down is self-sufficient.

…have not the effect of reinforcing an anti-competitive agreement given that they were not preceded by any agreement in the sectors to which they relate.

…only prohibit the grant of financial advantages to policyholders and beneficiaries of policies and do not delegate to private traders responsibility for taking decisions affecting the economic sphere”.

“It follows that these and similar rules do not fall within the categories of State rules which, according to the case-law of the Court of Justice, undermine the effectiveness of Article 3, 10, and 81 EC”.

“Article 3, 10, and 81 EC do not, in the absence of any link with conduct on the part of undertakings of the kind referred to in Article 81 of the Treaty, preclude State rules which prohibit insurance companies, whether or not they operate” (case C-245/91, Ohra).

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A Couple of DoubtsI. Isn’t it a contradiction that: the States are considered responsible when

they either favor or impose the violation of the competition rules; and

the conducts of the States are lawful when they directly reach the goal that the rule aims to avoid, by reproducing the illicit conduct’s effect?

II. Wouldn’t it be possible, in most cases, to infer an undertaking’s omission (i.e., suggesting that the insurance agency, in Ohra, refrained from discounting)?

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Traceability [1] Sometimes the application of competition rules

is denied since the contested behavior is not traceable either to an undertaking or to associations of undertakings.

This is particularly remarkable with regard to measures arranged by organizations that have the power to take part in the economic activity, e.g. fixing rates, regulating the admission and the exercise of certain economic activities, imposing production quotas, adopting rules.

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Traceability [2]

“As regards the role of economic agents, the fact that the public authority appoints as members of a body responsible for fixing prices persons proposed by trade organizations which are directly concerned does not exclude the existence of an agreement, decision or concerted practice within the meaning of Article 81 EC if those persons have negotiated and concluded an agreement on prices as representatives of the organizations which proposed them”.

“The adoption of a measure by a public authority making an agreement binding on all the traders concerned, even if they were not parties to the agreement, cannot remove the agreement from the scope of article 81” (case C-123/83 BNIC/Clair).

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Public Authorities’ Anti-Competitive Provisions The Noerr-Pennington Doctrine

In the United States antitrust law there is an exemption to the application of the competition rules called Noerr-Pennington doctrine (it cannot be a violation of the federal antitrust laws for competitors to lobby the government to change the law in a way that would reduce competition).

In Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., (1961), the Supreme Court held that “no violation of the [Sherman] Act can be predicated upon mere attempts to influence the passage or enforcement of laws”.

Similarly, the Court wrote, in United Mine Workers v. Pennington, (1965), that “joint efforts to influence public officials do not violate the antitrust laws even though intended to eliminate competition”.

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Public Authorities’ Anti-Competitive Provisions Cewal

“There is a difference between a request to a public authority to comply with a specific contractual obligation and mere incitement or inducement of the authority to take action. In the latter case, there is a simple attempt to influence the authority concerned in the exercise of its discretion. The purpose of a request to comply with a specific contractual obligation, by contrast, is to enforce legal rights which the authority concerned is, by definition, bound to observe”.

“It follows that the appellants' insistence that the terms of the Ogefrem Agreement be complied with cannot be treated in the same way as mere incitement of the Zairian authorities to take government action”.

“Cewal sought to rely on the contractual exclusivity provided for in the Ogefrem Agreement in order to remove its only competitor from the market. Such conduct was in no way required by that agreement, since, under the second paragraph of Article 1 thereof, express provision is made for possible derogations, so that the requirements of Article 82 EC could be met” (case

C-395 Cewal).

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Anti-Competitive Undertakings’ ConductAutonomous vs. Bound Conduct

“Articles 81 and 82 EC apply only to anti-competitive conduct engaged in by undertakings on their own initiative.

If anti-competitive conduct is required of undertakings by national legislation or if the latter creates a legal framework which itself eliminates any possibility of competitive activity on their part, Articles 81 and 82 do not apply. In such a situation, the restriction of competition is not attributable, as those provisions implicitly require, to the autonomous conduct of the undertakings” (joined cases C-359/95 P and C-379/95 P Commission and French Republic v. Ladbroke Racing Ltd).

When the undertakings’ conduct is bound, the public power can be considered responsible because defaulting to the duties imposed by Articles 3, 10 and 86 of the Treaty. In such case the rules for the violation of the norms of the Treaty by the States are applied.

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Anti-Competitive Undertakings’ ConductCase C-198/01 CIF [1]

“[…] the answer to be given to the first question referred for a preliminary ruling is that, where undertakings engage in conduct contrary to Article 81(1) EC and where that conduct is required or facilitated by national legislation which legitimizes or reinforces the effects of the conduct, specifically with regard to price-fixing or market-sharing arrangements, a national competition authority, one of whose responsibilities is to ensure that Article 81 EC is observed:

has a duty to preclude the application of the national legislation;

may not impose penalties in respect of past conduct on the undertakings concerned when the conduct was required by the national legislation;

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Anti-Competitive Undertakings’ ConductCase C-198/01 CIF [2]

may impose penalties on the undertakings concerned in respect of conduct subsequent to the decision to preclude the application of the national legislation, once the decision has become definitive in their regard;

may impose penalties on the undertakings concerned in respect of past conduct where the conduct was merely facilitated or encouraged by the national legislation, whilst taking due account of the specific features of the legislative framework in which the undertakings acted”.

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The Effet Utile Doctrine

“[…] according to settled case-law of the Court of Justice, Article 81 of the Treaty, read in conjunction with Article 10, requires the Member States not to introduce or maintain in force measures, whether legislative or regulatory, which may render ineffective the competition rules applicable to undertakings. Such is the case, according to the same case-law, where a Member State requires or favors the adoption of agreements, decisions or concerted practices contrary to Article 81 of the Treaty or reinforces their effects or deprives its own legislation of its official character by delegating to private traders responsibility for taking decisions affecting the economic sphere” (case C-67/96 Albany).

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Professional Associations [1]

“The activity of customs agents has an economic character. They offer, for payment, services consisting in the carrying out of customs formalities, relating in particular to the importation, exportation and transit of goods, as well as other complementary services such as services in monetary, commercial and fiscal areas. Furthermore, they assume the financial risks involved in the exercise of that activity. If there is an imbalance between expenditure and receipts, the customs agent is required to bear the deficit himself”.

“In those circumstances, the fact that the activity of customs agent is intellectual, requires authorization and can be pursued in the absence of a combination of material, non-material and human resources, is not such as to exclude it from the scope of Articles 81 and 82 of the EC Treaty” (case C-35/96 Commission of the European Communities v Italian Republic).

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Professional Associations [2]

“[…] not every agreement between undertakings or every decision of an association of undertakings which restricts the freedom of action of the parties or of one of them necessarily falls within the prohibition laid down in Article 81 of the Treaty. In fact […] account must first of all be taken of the overall context in which the decision of the association of undertakings was taken or produces its effects. More particularly, account must be taken of its objectives, which are here connected with the need to make rules relating to organization, qualifications, professional ethics, supervision and liability, in order to ensure that the ultimate consumers of legal services and the sound administration of justice are provided with the necessary guarantees in relation to integrity and experience. It has then to be considered whether the consequential effects restrictive of competition are inherent in the pursuit of those objectives” (Case C-309/99 J.C.J. Wouters).

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Professional Associations [3] “[…] national regulation such as the

1993 Regulation adopted by a body such as the Bar of the Netherlands does not infringe Article 81 EC, since that body could reasonably have considered that that regulation, despite the effects restrictive of competition that are inherent in it, is necessary for the proper practice of the legal profession, as organized in the Member State concerned” (Case C-309/99 J.C.J. Wouters).

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A Roadmap

State Intervention




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The Primacy of Community LawCase C-198/01 CIF [1]

“In accordance with settled case-law the primacy of Community law requires any provision of national law which contravenes a Community rule to be disapplied, regardless of whether it was adopted before or after that rule”.

“The duty to preclude the application of national legislation which contravenes Community law applies not only to national courts but also to all organs of the State, including administrative authorities which entails, if the circumstances so require, the obligation to take all appropriate measures to enable Community law to be fully applied”.

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The Primacy of Community Law Case C-98/01 CIF [2]

“Since a national competition authority such as the Authority is responsible for ensuring, inter alia, that Article 81 EC is observed and that provision, in conjunction with Article 10 EC, imposes a duty on Member States to refrain from introducing measures contrary to the Community competition rules, those rules would be rendered less effective if, in the course of an investigation under Article 81 EC into the conduct of undertakings, the authority were not able to declare a national measure contrary to the combined provisions of Articles 10 EC and 81 EC and if, consequently, it failed to disapply it”.

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The Primacy of Community LawCase C-98/01 CIF [3]

“In that regard, it is of little significance that, where undertakings are required by national legislation to engage in anti-competitive conduct, they cannot also be held accountable for infringement of Articles 81 EC and 82 EC. Member States' obligations under Articles 3(1)(g) EC, 10 EC, 81 EC and 82 EC, which are distinct from those to which undertakings are subject under Articles 81 EC and 82 EC, none the less continue to exist and therefore the national competition authority remains duty-bound to disapply the national measure at issue”.

“As regards, by contrast, the penalties which may be imposed on the undertakings concerned, it is appropriate to draw a two-fold distinction by reference to whether or not the national legislation precludes undertakings from engaging in autonomous conduct which might prevent, restrict or distort competition and, if it does, by reference to whether the facts at issue pre-dated or post-dated the national competition authority's decision to disapply the relevant national legislation”.

RP Luiss Rome

A Roadmap

Private / Public Enforcement

Enforcement in the US

Enforcement in Europe

The Green Paper

EU Antitrust Fines

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Enforcement Strategies There are two basic approaches to deterring socially

harmful behavior: with enforcement by public agencies and the threat of litigation by private parties.

Both approaches are used in most countries, but in varying degrees.

Private litigation is common in the US and (to a lesser extent) the United Kingdom and other “common law” jurisdictions.

In contrast, the “civil law” countries, such as those of continental Europe, have far less private litigation, and rely more on enforcement by public agencies.

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Institutional Design The lines between public and private

enforcement may blur once the problem is analyzed with the view of designing optimal enforcement institutions, which may have a combination of “public”and “private” features.

The crucial question becomes that of fine-tuning various parameters of the system.

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Private/Public Enforcement [1]

Private enforcers have greater incentive to take enforcement action than public enforcers, which may benefit society through additional deterrence.

Their costs of detecting possible violations and gathering initial evidence are lower.

Public enforcers regulate a vast array of industries, and therefore cannot detect anti-competitive practices as easily as private enforcers who experience these practices on a regular basis.

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Private/Public Enforcement [2] In general, private enforcers are better informed

about their particular industry. As Shavell (1984) argues, “private parties should

generally enjoy an inherent advantage in knowledge over public regulators. For a regulator to obtain comparable information would often require virtually continuous observation of parties’ behavior, and thus would be a practical impossibility”.

Also, as Brodley (1996) points out, “competitors and takeover targets are ideal litigants in terms of litigation capability because they are likely to have the skill, knowledge of the industry, and motivation to mount a powerful case with speed and precision”.

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Private/Public Enforcement [3]

However, in antitrust cases there may be more arguments for public enforcement than in other areas (Van den Bergh/Camesasca, 2006).

On the one hand, there are good reasons to assume that private enforcement will work poorly in antitrust cases:

If victims of antitrust law infringements are private consumers, harm and causation are typically not obvious to the victims; the detection of infringements requires investigation by experts, and public authorities are often better informed than the victims.

Because the total harm caused by infringements of competition law is often spread across many victims, even well-informed victims have little incentive to bring damages claims.

Facilitating access to civil courts in antitrust cases increases the risk that private damages actions will be abused by competitors.

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Strategic Behaviors In the antitrust field the plaintiffs are often competitors

or takeover targets of defendants: they may have an incentive to employ private enforcement strategically, that is, to sue even if they know that their competitors did not violate the antitrust laws.

Firms may use the antitrust laws to prevent large potential competitors from entering their market, as in the classic case of Utah Pie Co. v. Continental Baking (1967, U.S. Court of Appeals, 1978).

Firms can also use the antitrust laws to prevent their rivals from competing vigorously, extort funds from successful rivals, improve contractual conditions, enforce tacit collusive agreements, respond to existing suits, and prevent hostile takeovers (McAfee and Mialon, 2006).

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Punitive Damages The extent to which firms strategically abuse the

antitrust laws under private enforcement also depends crucially on the structure of damage awards in private antitrust cases (Elzinga, 1985; Easterbrook, 1985).

Punitive damages reduce firms’ incentives to violate antitrust laws, but also increase their incentives to use antitrust laws strategically against their rivals.

For example, firms can use the powerful threat of treble damages to extort funds from successful rivals. The actions that are taken to extort money are often resolved through the payment of a “tax on success” for the firms whose positions are sought after by competitors. But taxes on success discourage investment and innovation, which harms consumers (Gentry and Hubbard, 2000).

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A Roadmap




The Green Paper

EU Antitrust Fines

RP Luiss Rome

Enforcement in the US [1] In the US, antitrust laws are supported by criminal

fines (up to $ 100 million for corporations) and convictions (up to a 10 years jail term: Antitrust Criminal Penalty Enhancement and Reform Act of 2004).

The criminal enforcement system includes a crown witness system whereby the suspected company representative may get amnesty if sufficient information and cooperation is provided, not only about own involvement in the alleged cartel but also about the other cartel members (Leniency Program).

The evidence provided by the cartel members themselves facilitates the investigation.

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Enforcement in the US [2] Section 7 of the Sherman Act and Section 4

of the Clayton Act entitle any firm to bring a lawsuit against a competitor for three times the damages suffered from any violation of the antitrust laws.

Private enforcement of the antitrust laws is thus explicitly permitted and indeed encouraged, and supplements public enforcement by the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission.

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Enforcement in the US [3] There are three main ways in which the federal antitrust laws are

enforced:

criminal and civil enforcement actions brought by the Antitrust Division of the Department of Justice (since May 1999, more than 100 individuals, with at least 20 of them foreign nationals, have been sent to jail; since fiscal 1997, more than $3 billion in criminal fines have been imposed);

civil enforcement actions brought by the Federal Trade Commission, involving administrative adjudication;

state enforcement: State attorneys general can file actions either under state antitrust laws or under federal law, including (since 1976) as parens patriae to seek treble damages on behalf of state residents;

lawsuits brought by private parties asserting damage claims (their ratio to public antitrust suits is estimated at between 10 to 1 and 20 to 1).

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Damage Claims by Private Parties

Damage claims by private parties against companies involved in competition law infringements are extremely common in the US (in 2004, 95,7% of all antitrust cases filed were private cases).

This is, inter alia, due to procedural tools such as class actions, contingency fees and treble damages.

Treble damages have been the focus of a reform of the US leniency program initiated by the US Department of Justice.

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Preserving Leniency More and more US companies had found themselves in

the dilemma that they successfully obtained a reduction in fine through a leniency application but later had to face millions of dollars of treble damage award payments for the same infringement.

This situation seriously put into question a company's incentive to apply for leniency.

The new law adopted in the United States provides that a company which was the first to file a leniency application may no longer be subject to treble damages payments in any follow-on litigation, but only to the payment of simple damages. However, in order to benefit from this exception, the company has to fully cooperate during the trial.

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Total DoJ Investigations, by Primary Type of Conduct

1999

2000

2001

2002

2003

2004

2005

2006

Sherman §1 - Restraint of

Trade

73 85 84 94 133 79 118 103

Sherman §2 -Monopoly

6 10 10 13 10 7 8 3

Clayton §7 - Mergers

288 221 179 129 129 106 137 116

Others 6 11 9 7 11 19 10 23

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Total Criminal Cases

1999

2000

2001

2002

2003

2004

2005

2006

Filed 57 63 44 33 41 42 32 33

Won 48 52 38 37 32 35 55 53

Lost 2 - 2 1 1 1 2 -

Pending 24 35 39 34 42 48 43 44

Appeal Decisions

- - 5 1 2 7 4 5

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Restraint of Trade – Criminal (Sherman §1)

1999

2000

2001

2002

2003

2004

2005

2006

Filed 53 52 37 23 23 28 23 21

Won 45 44 29 28 19 17 41 31

Lost 2 - 1 1 1 1 2 -

Pending 22 30 37 31 34 44 24 14

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Fines Imposed1999 2000 2001 2002 2003 2004 2005 2006

Total Individual Fines ($000)

12,273 5,180 2,019 8,685 470 644 4,483 3,650

Number of Individual Fined

50 43 20 19 16 15 22 17

Total Corporate Fines ($000)

959,866

303,241

270,778

93,826 63,752

140,586

595,996

469,805

Number of Corporations Fined

25 26 14 17 17 13 18 18

Total Fines Imposed ($000)

972,138

308,421

272,797

102,511

64,222

141,230

600,449

473,455

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A Roadmap




The Green Paper

EU Antitrust Fines

RP Luiss Rome

Enforcement in Europea. Europe's tradition of administrative

enforcement Certain Member States have introduced

criminal sanctions for certain antitrust behaviour (F, IE, I, A, UK, G).

However, insufficient support for criminal sanctions in many European Member States.

Tradition of administrative enforcement.

b. Introduction of criminal sanctions top down by Community remains controversial

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Cartels: Fines imposed (not corrected for court judgments)

Year Amount in €

2002 944.871.000

2003 404.781.000

2004 390.209.100

2005 683.029.000

2006 1.846.385.500

++2007++ 1.743.024.700

total 6.012.300.300

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Cartels: Fines imposed (corrected for court judgments)

Year Amount in €

2002 904.777.970

2003 400.791.000

2004 390.209.100

2005 683.029.000

2006 1.846.385.500

++2007++ 1.743.024.700

total 5.968.217.270

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Year Case name Amount in €++2007++ elevator and

escalators992.312.300

2001 vitamins 790.505.000

2007 gas insulated switchgear

750.712.500

2006 synthetic rubber (BR/ESBR)

519.050.000

2002 plasterboard 487.320.000

2006 hydrogen peroxide and

perborate

388.128.000

2006 methacrylates 344.562.500

2006 fittings 314.760.000

2001 carbonless paper 313.690.000

2005 industrial bags 290.710.000

Cartels: ten highest cartel fines per case (since 1969)

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Year Undertaking Case Amount in €

2007 ThyssenKrupp elevators and escalators

479.699.850

2001 F. Hoffman-La Roche AG

vitamins 462.000.000

2007 Siemens AG gas insulated switchgear

396.562.500

2006 Eni SPA synthetic rubber

272.250.000

2002 Lafarge SA plasterboard 249.600.000

2001 BASF AG vitamins 236.845.000

2006 Arkema SA methacrylates 219.131.250

2001 Arjo Wiggins Appleton Plc

carbonless paper

184.270.000

2006 Solvay SA / NV hydrogen peroxide

167.062.000

2006 Shell synthetic rubber

160.875.000

Cartels: ten highest cartel fines per undertaking (since 1969)

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Cartel cases decided by the European Commission since 2002

Year Number

2002 9

2003 5

2004 7

2005 5

2006 7

++2007++ 2

total 35

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European Merger Control:Notifications

2002

2003

2004

2005

2006

Mar200

7

Total

Number of notified cases

277 211 247 313 356 102 1506

Cases withdrawn – Phase 1

3 0 3 6 7 1 20

Cases withdrawn – Phase 2

1 0 2 3 2 0 8

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European Merger Control:First Phase Decisions

2002

2003

2004

2005

2006

Mar200

7

Total

Art 6.1(a) out of scope Merger Regulation

1 0 0 0 0 0 1

Art 6.1(b) compatible

238 203 220 276 323 78 1348

Art 6.1(b) compatible, under simplified procedure

103 110 137 167 207 48 772

Art 6.1(b) in conjunction with Art. 6.2

10 11 12 15 13 3 64

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European Merger Control:Second Phase Proceedings Initiated

2002

2003

2004

2005

2006

Mar 200

7

Total

Art 6.1(c) 7 9 8 10 13 2 49

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European Merger Control:Second Phase Decisions

2002

2003

2004

2005

2006

Mar 200

7

Total

Art 8.1 compatible (8.2 under Reg.4064/89)

2 2 2 2 4 0 12

Art 8.2 compatible with commitments

5 6 4 3 6 0 24

Art 8.3 prohibition 0 0 1 0 0 0 1

Art 8.4 restore effective competition

2 0 0 0 0 0 2

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Private Enforcement in Europe

For many years it has even been unclear whether individuals harmed by a breach of EC competition rules have any right to claim damages.

Though the Treaty establishing the European Community is silent on this point, private enforcement should have played a role in the European Union since the 1957 Treaty of Rome, as all parts of Articles 81 and 82 of the Treaty are directly applicable in member states.

The European Court of Justice’s 2001 decision in Courage v. Crehan finally erased any doubt.

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Courage v. Crehan The ECJ decision from 2001 C-453/99 Courage v. Crehan

confirmed that actions for damages for breach of EC competition law is an established right in Community law:

“The full effectiveness of Article [81] of the Treaty and, in particular, the practical effect of the prohibition laid down in Article [81](1) would be put at risk if it were not open to any individual to claim damages for loss caused to him by a contract or by conduct liable to restrict or distort competition.

Indeed, the existence of such a right strengthens the working of the Community competition rules and discourages agreements or practices, which are frequently covert, which are liable to restrict or distort competition. From that point of view, actions for damages before the national courts can make a significant contribution to the maintenance of effective competition in the Community.”

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Regulation 1/2003 Regulation 1/2003 EC introduced a change of paradigm in the

enforcement of European competition rules permitting the substitution of decentralized and private enforcement for centralized and public enforcement of Articles 81 and 82 EC.

The Regulation envisaged enforcement not only by national competition authorities, but also through litigation between private parties before the national courts.

However, the determination of appropriate remedies and procedures for claiming damages still lies within the competence of each Member State.

Therefore only the requirements of equivalence (the rules are to be not less favorable than those governing similar domestic actions) and effectiveness (the rules should not render practically impossible or excessively difficult the exercise of rights conferred by Community law) restrict Member States’ discretion.

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Compared to the US, where about 90% of all antitrust cases are private actions (Wils 2003; Salop/White 1986), private enforcement of European antitrust law by damages claims for infringement is still underdeveloped in all the Member States.

A problem for private antitrust enforcement is created by the limits of the pan-European court system.

The European Union’s courts, based in Luxembourg, are only entitled to hear cases arising out of decisions or actions of EU institutions or member states.

Civil actions remain the preserve of the national jurisdictions, each with its own laws and procedures.

For plaintiffs that have suffered harm on a pan-European level, bringing individual claims in all these jurisdictions is a daunting prospect.

Private Enforcement: Limits [1]

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Private Enforcement: Limits [2] Damages actions are limited also since victims of

antitrust infringement often have limited knowledge of actual harm.

Furthermore, antitrust violations often produce scattered damages for numerous victims, where the damage suffered by each individual victim is often of little entity. As a result, individual victims have scant incentives to sue, although the overall damage imposed on society as a result of the anticompetitive conduct is significant.

Moreover, as a single anticompetitive conduct may affect a large group of undertakings or consumers, every victim may have an incentive to wait for others to bring legal action for obtaining compensation, and then take a free ride on a previous judgment.

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Private Enforcement: Recent Developments With a view to improving the conditions for

antitrust damages actions, the Commission has undertaken a study to identify and analyze the obstacles in the Member States to successful damages action against infringements of EC competition rules.

As a next step, the Commission has recently published (2005) a Green Paper on “damages actions for breach of the EC antitrust rules” in order to “identify the main obstacles to a more efficient system of damages claims and to set out different options for further reflections and possible action to improve damages actions”.

RP Luiss Rome

A Roadmap




The Green Paper

EU Antitrust Fines

RP Luiss Rome

The Green Paper:Two Pillars

Private Pillar

Injunctive Relief

Actions for

Damages

Nullity .

European Commission, DG CompetitionPolicy and Strategic Support

The Green Paper assumes that the traditional pillar, the public enforcement, should be complemented by a second pillar, the private enforcement, which so far appears to be in a situation of total underdevelopment.

Private Pillar

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The Green Paper In the Green Paper the European Commission presents

several options to facilitate damages actions for the infringement of antitrust law in the European Member States.

Removing the obstacles to these kinds of damages actions should serve a double purpose, “namely to compensate those who suffered a loss as a consequence of anti-competitive behavior and to ensure the full effectiveness of the antitrust rules of the Treaty by discouraging anticompetitive behavior, thus contributing significantly to the maintenance of effective competition in the Community […] (deterrence).

By being able effectively to bring a damages claim, individual firms or consumers in Europe are brought closer to competition rules and will be more actively involved in enforcement of the rules”.

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Green Paper:Main Issues Thereafter, the Green Paper identifies the main

obstacles to private enforcement by damages claims and presents several options for improving the conditions for antitrust damages claims.

In this context, some issues deserving discussion are:

damages; the passing-on defense; representative / collective actions; coordination of public and private enforcement.

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Green Paper:Damages

How to define damages?

Compensatory Damages

Recovery of Illegal Gain

Double Damages (only for horizontal cartels)

Prejudgment Interest

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Green Paper:Passing on Defense [1]

Passing-on defense: should a defendant be allowed to argue that the plaintiff lacks any injury because it ‘passed-on’ the alleged overcharge to its own customers?

The question presented by the Green Paper has critical significance as to which set of plaintiffs (e.g., dealers, consumers, etc) will have the economic incentive to pursue private litigation.

If such a defense is excluded, those who purchased directly from the defendant will have increased incentives, but the defendant might be exposed to duplicate recovery where both direct and indirect purchases successfully collect for the same overcharge.

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Green Paper:Passing on Defense [2] The Green Paper provides four options about

passing on defense (it may be allowed or excluded).

1. Defense permitted – direct + indirect can sue

2. No defense – only direct can sue

3. No defense – direct + indirect can sue

4. A two step procedure: (a) infringer is sued for total overcharge, and

(b) damages allocated among all parties.

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Green Paper:Representative / Collective actions Representative / collective actions can serve,

as the US experience suggests, to consolidate a large number of smaller claims into one action (time and costs saving).

Distribution of damages: damages to the association itself / to its

members Quantification of damages: association = illegal gain members = individual damage suffered Option for collective actions by groups of

purchasers other than final consumers.

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Green Paper:Coordination of Public and Private Enforcement

An increase in private actions (and damages claims) potentially has the adverse effect of discouraging companies from exercising the leniency programs which give incentive to cartel participants to blow the whistle.

If such applicants are likely to face additional private damages actions, their incentives for coming forward are reduced.

The green paper identifies this tension and lists a number of options thus limiting the applicant’s exposure to damages in whole or for its pro rata share corresponding to its share of the affected market.

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A Roadmap




The Green Paper

EU Antitrust Fines

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Fines [1] Article 83(1) of the EC Treaty instructs the Council to lay

down “the appropriate regulations and directives to give effect to the principles set out in Articles 81 and 82”.

Article 83(2)(a) adds that these regulations or directives shall be designed in particular “to ensure compliance with the prohibitions laid down in Article 81(1) and in Article 82 by making provision for fines”.

The Council has done so through Regulation 1/2003, Article 23(2) of which empowers the Commission to impose fines on undertakings that, either intentionally or negligently, infringe Article 81 or Article 82 of the EC Treaty.

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Fines [2] The Court of Justice has held that such fines

“have as their objective to suppress illegal conduct as well as to prevent it being repeated”.

Similarly, the Commission has stated that “the purpose of the fines is twofold: to impose a pecuniary sanction on the undertaking for the infringement and prevent a repetition of the offence, and to make the prohibition in the Treaty more effective”.

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Developments [1] For three decades, from the imposition of the

first fines in 1969 (Commission Decision Quinine [1969]), to the publication of the 1998 Guidelines, the Commission imposed fines without having published any guidance.

In its decisions imposing fines, the Commission always listed a number of factors which it had taken into account in fixing the amount of the fine, but never explained how these factors had

brought it to reach the precise figure of the fine.

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Developments [2] The Court of First Instance nevertheless

observed in 1995, in three judgments concerning the Welded steel mesh, cartel that it would be 'desirable' for the Commission to make more transparent its method for setting fines.

Those judgments led to the publication by the Commission of its 1998 Guidelines.

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The Purpose of Guidelines According to the first paragraph of the

1998 Guidelines, to which the 2006 Guidelines also refer, the principles outlined in these guidelines “should ensure the transparency and impartiality of the Commission's decisions, in the eyes of the undertakings and of the Court of Justice alike, while upholding the discretion which the Commission is granted under the relevant legislation to set fines within the limit of 10% of overall turnover”.

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The European Commission's2006 Guidelines on Antitrust Fines

On September 1, 2006, the European Commission published new Guidelines on the method it will use when setting fines for undertakings for violations of the prohibitions on restrictive agreements and abuse of a dominant position laid down in Articles 81 and 82 of the EC Treaty and Articles 53 and 54 of the EEA Agreement.

The Guidelines set out a two-step methodology for the setting of fine.

First, the Commission will determine a basic amount for each undertaking.

Second, it may adjust that basic amount upwards or downwards.

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The Basic Amount [1] Basic amount: a percentage of the value (before tax) of the

undertaking's sales of goods or services to which the infringement directly or indirectly relates in the relevant geographic area within the EEA.

The percentage depends on the gravity of the infringement.

The assessment of gravity will be made on a case-by-case basis.

As a general rule, the percentage applied on account of gravity will be up to 30 %.

For hard-core cartels the percentage will generally be set at the higher end of the scale.

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The Basic Amount [2] To take into account the duration of the

infringement, the amount thus determined will be multiplied by the number of years of participation in the infringement.

In addition, irrespective of the duration of the undertaking's participation in the infringement, the Commission will, for hard-core cartels, include in the basic amount a sum of between 15 % and 25 % of the value of sales.

The Commission may also apply such an additional amount in the case of other infringements.

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Adjustments [1] Once the basic amount of the fine determined, the

Commission may make adjustments upwards or downwards for a number of reasons.

I. The basic amount may be increased or decreased on account of aggravating or attenuating circumstances.

The Guidelines contain a non-exhaustive list of aggravating circumstances (recidivism, obstruction of investigations, and role of leader or instigator of the infringement) and of attenuating circumstances (including negligence, and authorisation or encouragement by public authorities or by legislation).

If the increase or decrease on account of other aggravating or mitigating circumstances is not specified, the increase on account of recidivism will be by up to 100% of the basic amount for each earlier finding of the same or a similar infringement.

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Adjustments [2]

II. The Commission may apply a specific increase for deterrence in the case of undertakings which have a particularly large turnover beyond the sales of goods or services to which the infringement relates and/or to ensure that the fine exceeds the amount of gains improperly made as a result of the infringement where it is possible to estimate that amount.

III. Whenever the amount thus set exceeds the statutory maximum of 10% of the total turnover in the preceding business year of the undertaking concerned, as laid down in Article 23(2) of Regulation No 1/2003, it will be capped at that ceiling.

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Adjustments [3]IV. The Commission will apply its Leniency Notice, under which

immunity from fines or reduction of fines is granted in cartel cases, to undertakings that have cooperated with the Commission by voluntarily providing intelligence and/or evidence of the infringement, in accordance with the criteria set out in that notice.

V. In exceptional cases, the Commission may reduce the fine on account of the undertaking's inability to pay in a specific social and economic context, on the basis of objective evidence that imposition of the normal fine would irretrievably jeopardize the economic viability of the undertaking concerned and cause its assets to lose all their value.

VI. The particularities of a given case or the need to achieve deterrence in a particular case may justify departing from the methodology set out in the Guidelines.

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The Anti-Monopoly Law

of the

People’s Republic of China

The Making of an Antitrust Law

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Something about China’s Economy

China's economy presents three principal features raising competition concerns:

the so-called local blockage or regional monopolies;

sectoral monopolies by Chinese firms, including state-owned enterprises ("SOEs"); and

a perception of alleged abuses of dominant positions by some foreign multinationals.

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Antitrust Law in China China has already enacted many laws dealing with

various aspects of antitrust issues. China’s previous laws and regulations dealing with

antitrust-related issues are fragmented. Oftentimes, provisions of those laws and regulations

are vague and repetitive, and the effectiveness of antitrust enforcement is greatly reduced by the existence of multiple enforcement agencies authorized by different laws.

China’s previous competition policy was to be found in a number of specific laws and administrative rules which generally do not have a clear and credible enforcement mechanism; their implementation has been largely ineffective.

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China’s Current and Proposed Antitrust Laws [1]

The most comprehensive of these rules is the Anti-Unfair Competition Law, promulgated in 1993.

The Anti-Unfair Competition Law contains some provisions that are usually found in antitrust law, such as prohibition of tie-in sales and prohibition of price fixing and bid rigging.

But the Anti-Unfair Competition Law also addresses many other issues, including bribery, deceptive advertising, coercive sales, and appropriation of business secrets.

To a large extent, the Anti-Unfair Competition Law is more like a consumer protection law than an antitrust law.

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Other relevant provisions are also scattered in more specialized laws.

For example, the Commercial Banking Law, passed in 1995, includes an article that prohibits banks from engaging in “improper competition”.

In 1997 the Price Law was passed containing provisions against “improper pricing behaviors”, among which price fixing, predatory pricing and price discrimination.

The Procurement and Bidding Law, passed in 1999, prohibits bid rigging.

In 1993, the State Administration of Industry and Commerce (“SAIC”) issued Rules on Prohibiting Public Utility Companies from Restricting Competition, which was meant to reign in widespread abuse of monopoly positions by public utility companies.

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In April 2001, the State Council, China’s cabinet, issued the Rules on Prohibiting Regional Blockades in Market Economic Activities.

Another regulation is contained by the Provisional Rules on Prevention of Monopoly Pricing, issued by the State Development and Reform Commission in 2003.

The Rules prohibit the abuse of “market dominance” and infer dominance through “market share in the relevant market, substitutability of relevant goods, and ease of new entry.”

The Rules also prohibit price coordination, supply restriction, bid rigging, vertical price restraint, below-cost-pricing and price discrimination as abuses of dominance.

Finally, the Rules prohibit government agencies from “illegally intervening” in market price determinations.

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China’s Current and Proposed Antitrust Laws [4] To address rising concerns about foreign acquisitions of

Chinese companies, six government agencies jointly issued the Rules on Acquisitions of Domestic Enterprises by Foreign Investors (“M&A Rules”) in 2006.

These M&A Rules lay out the conditions under which pre-merger notification to China’s Ministry of Commerce (“MOFCOM”) and the SAIC is required.

The conditions include… …thresholds that relate to annual sales; …the number of enterprises the foreign party has

previously acquired in related industries; and …the merging parties’ market shares.

To aid the implementation of the M&A Rules, in March, 2007, MOFCOM posted on its web site the Antitrust Filing Guidelines.

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Toward China’s Anti-Monopoly Law China in 1994 began its efforts to enact a

comprehensive antitrust law, or the so-called Anti-Monopoly Law (“AML”).

In recent years, numerous drafts of the AML have been circulated and commented on.

In March 2004, a draft was submitted to the State Council Legislative Affairs Office for review.

After several more revisions, a draft was submitted to the National People’s Congress (“NPC”) Standing Committee for review in June 2006.

The long-lasting legislative process came to its final step on August 30, 2007.

The Anti-Monopoly Law will become effective on August 1, 2008.

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An Overview of the Anti-Monopoly Law: Eight Chapters [1]

1. Chapter One describes the general principles of the AML, including objectives, applicability and coverage.

2. Chapter Two describes which monopoly agreements are prohibited and which exempted.

3. Chapter Three prohibits the abuse of market dominant position. It provides methods to infer dominance and describes abusive behaviors.

4. Chapter Four provides for agency review of proposed mergers, acquisitions, and joint ventures, specifying the exemptions, required documents, and review procedures.

5. Chapter Five is devoted to prohibitions of anticompetitive activity by government agencies. This chapter incorporates some of the prior administrative rules and focuses in particular on various forms of local protectionism.

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An Overview of the Anti-Monopoly Law: Eight Chapters [2]

6. Chapter Six contains the discipline of the investigation of suspected anticompetitive behavior in the marketplace by the Antimonopoly Enforcement Authority (the other authority created by the law is the Anti-monopoly Committee under the State Council, which performs the functions of making competition policies; organizing the investigation and assessment of the market competition status; making the anti-monopoly guidelines; coordinating the anti-monopoly administrative enforcement work).

7. Chapter Seven describes liability and penalties for violating the AML. This chapter also provides reduced penalties for voluntarily assisting the enforcement authority’s investigation in monopolistic agreement cases.

8. The last Chapter (Supplementary Provisions) states, inter alia, that trade associations are subject to the AML, agricultural activities are generally exempted, and an intellectual property right is not to be regarded as a per se unlawful monopoly; but the abuse of such rights to restrict competition is subject to the AML.

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The Objectives of the Law

Article 1 of the AML provides: “this law is enacted for the purposes

of guarding against and curbing monopolistic conduct, safeguarding and promoting fair market competition, enhancing economic efficiency, protecting the legitimate rights and interests of consumers, protecting the public interests, and ensuring the healthy development of the socialist market economy.”

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Scope of the Law The AML applies to conduct with restrictive effects on

competition within China. This includes both activities within China and conduct outside China which has a restrictive impact in China, without any further qualification (substantial, foreseeable, etc.) (Article 2).

In terms of sectors, the scope of the AML is quite broad. The application of the AML is only explicitly (but partially) excluded in the agricultural sector (Article 56).

Pending the adoption of implementing regulations and guidelines, Article 7 seems to partially exclude the application of the AML to SOEs in three different categories of industries: (1) industries vital to the national economy, (2) industries vital to national security and (3) industries subject to exclusive operations and sales according to the law.

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Monopolistic ConductArticle 3 A monopolistic behavior can manifest itself

in three forms: actions among undertakings to come to

agreements, decisions, or other consensus that eliminate or restrict competition (hereinafter “Monopoly Agreements”);

abuse of dominant market positions by undertakings;

concentration of undertakings that are likely to have the effects of eliminating or restricting competition.

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Monopoly AgreementsArticle 13 Monopoly agreements between competing

undertakings are prohibited. The provision provides a non-exhaustive list of

horizontal anti-competitive agreements:

1. agreements which have as their object the fixing, maintenance or alteration of product prices;

2. restrictions on the production or sales volume of a particular product;

3. segmentations of the sale markets or the raw materials purchasing markets;

4. limitations on the acquisition of new technology or equipment;

5. boycott agreements.

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(Vertical) Monopoly AgreementsArticle 14

Undertakings are prohibited from entering into the following monopoly agreements with their trading parties in the transaction:

Fixing the price for resale to a third party; Restricting the minimum price for resale to a third

party; or Other monopoly agreements confirmed by the Anti-

monopoly Enforcement Authority under the State Council.

The range of relevant vertical agreements is apparently reduced to the subset of price restraints, with the caveat that other practices might be considered and disciplined by the Anti-monopoly Law Enforcement Agency under the State Council. This is a delicate interpretive knot.

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ExceptionsArticle 15 Both horizontal and vertical agreements are exempted from the

prohibitions of Article 7 and Article 8 if they… a…lead to technological progress and the development of new

products; …improve product quality, lower costs, increase efficiency or

simplify norms and product specifications; … enhance operational efficiency and reinforce the

competitiveness of small and medium-sized business operators; ... mitigate the severe decrease of sales volume or obviously

excessive production during economic recessions; …are conducive to energy conservation, environmental

protection, emergency aid or other public interests; …are conducive to the promotion of exports.

Exemptions may be provided in other cases as well.

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Abuse of Dominance [1](Articles 17-19)

Article 6 of the AML prohibits dominant entities from abusing their market position "to eliminate or restrict competition“.

Article 17 defines a dominant market position as referring to "a controlling market position held by one undertaking or several undertakings as a whole which is capable of controlling the price or quantity of products or other trading conditions in the relevant market or restricting or affecting other undertakings in entering into the relevant market."

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Article 18 of the AML sets forth a non-exhaustive list of factors to be resorted to in determining dominant market position:

i. market share of the undertaking and the other undertakings which have a competitive relationship with the undertaking in the relevant market;

ii. ability of the undertaking to control purchase market or sales market;

iii. association condition of the undertaking with other undertakings;

iv. the difficulty of entering the relevant market by other undertakings;

v. the dependent relationship on the undertaking of other undertakings and the extent of it.

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Article 19 of the AML contains three parameters which, if present, lead to a presumption (which can be overcome by opposite evidence) of the existence of a dominant position.

The presumptions are based entirely on market share thresholds.

Undertakings are directly considered to be holding a dominant market position if:

i. the market share of one undertaking in a relevant market accounts for 1/2;

ii. the joint market share of two undertakings as a whole in a relevant market accounts for more than 2/3;

iii. the joint market share of three undertakings as a whole in a relevant market accounts for more than 3/4.

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Abuse of Dominance [4](Arts.17-19)

Article 17 of the AML includes a non-exhaustive list of forms of abusive behaviour which are forbidden to dominant undertakings:

i. monopoly price, i.e. selling products at unfairly high or buying products at unfairly low prices;

ii. predatory price without valid reasons, selling products at prices below cost;

iii. refusing trade without valid reasons, refusing to trade with trading partners;

iv. mandatory trade, exclusive trade compelling trading partners to trade with undertakings or, without valid reasons, restricting trading partners to only trade with the undertaking or the undertakings designated by the undertaking;

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[Article 16]

v. tying and imposing other unreasonable trading conditions contrary to the will of the trading partners, tying products or imposing other unreasonable trading conditions;

vi. differentiated treatment without valid reasons, applying differentiated treatment in regards to transaction conditions such as trading prices to equivalent trading partners, so as to put some trading partners at a competitive disadvantage.

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Abuse of Dominance [6](Articles 17-19) Another provision related to abusive conduct is contained in

Chapter VIII, entitled “supplementary provisions.” Article 55 states that, in principle, the AML does not apply to undertakings exercising their lawful intellectual property rights (“IPRs”). However, where undertakings abuse their IPRs to eliminate or restrict competition, the AML applies.

This provision seems to delimit the boundaries of IPRs and competition law. Article 55 should be interpreted in the sense that the conduct of an IPR holder in the relevant market to which the IPR belongs does not fall under the AML, provided that the conduct conforms to the IPR laws and regulations: a patent holder has the right to exclude others from making or using the invented product or process, and is, in principle, free to set the sales conditions for the patented product; whereas Article 17 might apply if the conduct of the IPR holder has an impact in a relevant market other than the market pertaining to the IPR.

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Merger Control [1](Articles 20-31)

Concentrations of Undertakings are defined in Article 20 of the AML as:

i. a merger of undertakings;

ii. an undertaking's acquisition of voting shares or assets of one or more other undertakings to an adequate extent;

iii. an acquisition of control of other undertakings by contract, technology or other means, or the capability of imposing material effects on competition.

The new discipline will apply to Chinese as well as foreign acquiring parties.

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The "size of transaction" and "size of parties" prerequisites for a required filing

(which, in the previous version, were fixed as follows: the aggregate worldwide turnover in the preceding year of all undertakings participating in the concentrations, more than RBM 12 billion; one party to the transaction with a turnover in China of more than RBM 800 million)

are replaced by a “threshold of declaration, left to the stipulation of the State Council (Article 21).

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Article 22 of the AML contains two exceptions to the notification obligation, which affect the following cases:

an undertaking participating in the concentration already holding more than half of the voting rights or the assets of all other undertakings participating in the concentration; and

an undertaking not participating in the concentration holding more than half of the voting rights or assets of all other undertakings participating in the concentration.

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Legal Liabilities No criminal punishment. The undertaking of a monopoly agreement may face

confiscation of the illegal gains and imposition of fines of 1 up to 10% of the total sales volume in the relevant market from the previous year (Article 46). If the monopolistic agreements have not been implemented, a fine of less than 500.000 RMB may be imposed.

Abuse of dominant position is exposed to analogue sanctions (Article 47).

Article 45 establishes a procedure where undertakings under investigation offer commitments and, apparently, get no fine.

Undertakings which violate the AML and cause damages to others shall bear civil liability.

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Leniency Program

Article 46 of the AML contains also a sketchy leniency program.

The prohibition of horizontal agreements in Article 13 of the AML is accompanied by this leniency program, according to which fines, that should otherwise be imposed, can be reduced or waived in return for cooperation with the competition authorities.

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Leniency Program: Europe vs. China According to the European Commission’s Leniency

Notice, leniency is only granted when an undertaking provides the relevant competition authority with sufficient information for it to open an investigation into a breach of competition law which was previously unknown.

The Chinese leniency regulation is not tied to such a receipt information: even if the competition authority already initiated an investigation into an alleged cartel, its members are still fully eligible for leniency.

There seems to be no incentive for cartel members to “blow the whistle” and to contact the competition authority before it initiates a proceeding.

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Treatment of Administrative Monopolies Chapter Five [1]

Chapter Five of the of the AML sets forth the general principles dealing with governmental actions that have the intent or effect of creating monopolistic conditions.

It specifically lists several categories of governmental actions that are prohibited under the draft law:

i. designation of deals;

ii. regional blockades;

iii. restrictions on bidding;

iv. restrictions on market entry; and

restrictions on competition (in fact, the most “explosive” provision is Article 37, which prohibits authorities from abusing their administrative powers by issuing rules with content that eliminates or restricts competition).

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Treatment of Administrative Monopolies Chapter Five [2]

The AML suggests that “administrative monopolies” are monopolies created by administrative agencies but does not give a definition of them.

Specifically, in the Chinese context, such monopolies result from the following three kinds of governmental actions:

I. administrative monopolies stemming from governmental measures that are intended to restrict competition in a particular industry, or from governmental measures that compel certain anticompetitive conduct.

II. administrative monopolies prompted by governmental measures that mandate the use of products or services by certain producers, which usually are “affiliate companies” of the government agencies.

III. administrative monopolies caused by governmental actions that restrict market entry.

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Treatment of Administrative MonopoliesChapter Five [3]

The practical implications of the AML’s provisions concerning administrative monopolies may be limited for undertakings. The text of the AML does not indicate that undertakings can directly rely on those provisions before the authorities or courts.

The Anti-monopoly Law Enforcement Agency can only make “recommendations” to the superior authority. The sanctions system thus relies exclusively on self-correcting supervision mechanisms within an administrative institution.

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Anti-monopoly Examination and National Security Examination

In Article 31, the AML states that:“Where a foreign investor participates in the concentration of business operators by merging or acquiring a domestic enterprise or by any other means, and national security is involved, besides the examination on the concentration of business operators in accordance with this Law, the examination on national security shall also be conducted according to the relevant provisions of the State”.

It is the first time that the national statute clearly requires the foreign investment shall pass both anti-monopoly examination and national security examination.

roberto pardolesi luiss g. carli, rome - italy antitrust law & economics

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