USING COMPETITION LAW CASES TO TEACH ECONOMICS

Sir John Vickers

Chairman, OFT

DEBE Conference

Cambridge, 1 September 2005

Competition law and economics

competition law is fundamental to operation of market economy

cases can bring economics to life and show it at work

cases motivate research and policy debate as well as teaching

competition policy addresses market failure while guarding against regulatory failure

Competition is hot topic

competition has moved from fringes of law to centre of economic agenda

new law Competition Act 1998, Enterprise Act 2002, EC developments

independent, transparent and accountable bodies OFT, CC, CAT

numerous high-profile cases

What’s so great about competition?

efficient resource allocation

efficiency displaces inefficiency

incentives for productivity and innovation

good for consumer choice and value for money

think of the alternatives!

What does competition law deal with? anti-competitive mergers

anti-competitive agreements

abuse of dominant market positions

Merger review: overview

UK system: OFT CC (+appeals)

SLC test

main kinds of anti-competitive effect:

non-coordinated: e.g. worse Bertrand equilibrium

coordinated: more likely tacit collusion

foreclosure: to guard/extend(?) market power

Merger review: analytical steps (1)

market definition: demand and supply substitutability; product, geography

market shares: concentration measures, e.g. HHI, (mean what?)

non-coordinated effects: incentive shift?

coordinated effects: easier monitoring of collusion, deterrence of cheating, and safety from disruptive rivals?

Merger review: analytical steps (2)

conditions for entry and expansion by rivals

vertical issues

[conglomerate issues?]

efficiency defences (consumer or ‘total welfare’ standard?)

failing firm issues

if necessary … remedies

The ITV merger case

Carlton/Granada agreed merger of 2003

background of change in TV sector

commercial case for consolidated ITV

but potential competition concern about advertising airtime

OFT [advised SoS to] refer to CC

Analysis of airtime competition

relevant market? TV advertising in the UK

Carlton + Granada share c50%, declining

substitutes or (regional/temporal) complements?

overlap in London Carlton and Granada’s LWT and beyond?

did airtime capacity regulation remove SLC concern?

CC conclusion on ITV merger

SLC in airtime likely, to detriment of advertisers and public interest

minority favoured structural remedy: divest ad airtime sales houses

majority decided on behavioural remedy: contract rights renewal

none favoured prohibition

Anti-competitive agreements: overview horizontal / vertical, price / non-price

price-fixing: e.g. vitamins, auction houses, toys, replica football kit, roofing

economics of leniency

vertical agreements more economic approach to non-price agreements now than in past

influence of economics of contracts

Abuse of dominance: overview

EC Article 82, US Sherman Act s.2

law applies only to firms with dominance / market power: how to assess that?

exclusionary [and exploitative?] abuse

examples: predatory pricing, margin squeeze, tying and bundling, exclusive dealing, rebate/discount policies, refusal to supply

What is competition on the merits?

how to distinguish anti-competitive from pro-competitive conduct?

should some forms of conduct by a firm with market power be ‘per se’ illegal?

possible guiding principles:

profit sacrifice / no business sense

exclusion of as-efficient rivals

consumer harm

United States v Microsoft: overview* 1998 US brings case that MS had

monopolized markets for operating systems and browsers …

by engaging in exclusionary practices including bundling Internet Explorer with Windows OS

2000 District Court judgment: structural separation + behavioural remedies

2001 Court of Appeals judgment (see below)

2002 US and MS settle behavioural remedies* Based on Motta, Competition Policy, 2004, pp 511-523. And see JEP Spring

2001.

Microsoft case: issues

Does MS, through Windows, have market power?

How does the market power arise?

Does bundling IE maintain MS’s market power over OSs unlawfully?

Does it extend it to browsers?

Are consumers harmed?

Microsoft’s market power

parallels with past IBM cases

network effects, compatibility needs of users, switching costs

relevant market: Intel-compatible PC OS worldwide

Windows share 95+%

‘applications barrier to entry’

Windows dominant

Maintenance of Microsoft monopoly

‘middleware’ threat from Netscape browser (+ Java) to applications barrier and hence to Windows dominance

thwarted by MS integration of IE with Windows, exclusionary contract terms with PC-makers and internet access providers?

Court of Appeals reviewed anti-competitive allegations and efficiency defences

upheld some but not all monopolization charges

Microsoft remedies

District Court remedies included structural split between MS’s OS and applications businesses

pros and cons of structural remedies: may solve incentive problems but may lose scope economies; proportionality?

Appeals Court quashed break-up

US and MS then settle a package of behavioural remedies

Competition cases can teach economics competition policy now more central

competition law now more economics-oriented

interesting cases and analysis now available

can enliven and spur industrial economics

… anyway I plan to do it

USING COMPETITION LAW CASES TO TEACH ECONOMICS

Sir John Vickers, Chairman, OFT

www.oft.gov.uk