The concept of competition on the merits is used for distinguishing
a. unilateral conduct that is harmful to competition
b. unilateral conduct that enhances competition
There is an inherent tension between fostering legal certainty, ease of administration, and
accuracy. Form-based systems may provide more certainty and are relatively easy to administer, but also may generate results inappropriate.
Case-by-case or effects-based approaches yield results that are more appropriate, but having to uncover every detail in every case would be slow, unworkable, and unenforceable.
Either approach, driven to excess, produces unattractive results.
Over the years, scholars searching for more principled ways to sort out pro-competitive conduct from anti-competitive conduct have proposed a number of tests: no single test is suitable for every type of case
a.The profit sacrifice test states that conduct should be considered unlawful when it involves a
profit sacrifice that would be irrational if the conduct did not have a tendency to eliminate or
reduce competition. this test is useful for capturing predatory pricing conduct, but it does not appear to be a good test in other cases
b.The no economic sense test states that conduct should be unlawful if it would make no economic sense without a tendency to eliminate or lessen competition.
The test can be used offensively, i.e., to argue that conduct was exclusionary because it made no economic sense, and defensively, i.e., to demonstrate that conduct should not be condemned because it did make economic sense. It seems, however, this test is also not too good.
c.The equally efficient firm test states that conduct should be unlawful if it would be likely to
exclude a rival that is at least as efficient as the dominant firm is.
The equally efficient firm test (which is also known as the as efficient competitor test) is geared toward distinguishing harm to competition from harm to competitors, and it relies on the fact that without bad conduct by a dominant firm, equally efficient rivals cannot be eliminated. The test allows the elimination of new firms that are
currently less efficient, but that would eventually become equally or more efficient than the
incumbent if they are able to survive long enough.
d. Consumer welfare balancing tests determine whether conduct should be unlawful by requiring to balance the positive and negative effects that the conduct has on consumer
welfare. . Unfortunately, it can be quite challenging, if not impossible, to measure the magnitude of those changes. It is therefore difficult to have confidence that
balancing tests can be applied accurately, objectively, and consistently. Furthermore, it is not
clear what the appropriate time horizon should be when applying this test, but that choice has
very important implications for dynamic strategies such as predatory pricing.
However, the real method that courts and agencies ultimately use to identify abusive conduct is going to be based on the precedents set by reasoned decisions.
In July 1993, Virgin Atlantic Airways filed a complaint with the European Commission that was
directed against rebates for travel agents implemented by its competitor British Airways.
Three months later, Virgin filed a complaint in a federal court in New York, alleging that British Airways had violated the Sherman Act by implementing the same system of rebates. The American case ended when a Court of Appeals upheld a ruling in favour of British Airways, finding that Virgin had failed to show that the rebates had harmed consumers.
About two years later, under Article 82, the European Court of First Instance considered exactly the same rebate system during the same relevant period. It concluded that British Airways had abused a dominant position because its rebates were discriminatory and they
could have an exclusionary effect on competitors in the air transport services market. Why were the outcomes in these two decisions so different? Is the conflict in results attributable solely to differences in the competition statutes in Europe and the United States? Or, did the conflict arise because different courts have different ideas about how to
evaluate the same conduct?
the reason is a different understanding of theconcept, competonthemerits.
can be quite a difficult task for firms to show that they are competing on the merits when there is no accepted definition of what it means to do so.
The key points of this paper are:
• The first step in finding a better approach , to define competinthemerits, is to clarify what the objectives of competition policy toward unilateral conduct are. the purpose of competition policy is to protect competition, not competitors, but there has been less agreement concerning how to go about doing that. The factors that drive competition policy, therefore,
should include consumer welfare and productive efficiency.
• The profit sacrifice test states that conduct should be considered unlawful when it involves a
profit sacrifice that would be irrational if the conduct did not have a tendency to eliminate or
reduce competition. One form of this test is useful for capturing predatory pricing conduct, but it does not appear to be a good test in other types of cases because it is both over-inclusive and under-inclusive. It also is not well-suited to cases in which the conduct at issue can be both beneficial and harmful.
• The no economic sense test states that conduct should be unlawful if it would make no economic sense without a tendency to eliminate or lessen competition. This test avoids under-inclusiveness because it does not require profit sacrifice. It seems, however, that over-inclusiveness and an inability to deal well with conduct that has mixed effects are characteristic of this test, too.
• The equally efficient firm test states that conduct should be unlawful if it would be likely to
exclude a rival that is at least as efficient as the dominant firm is. This test is geared toward
distinguishing harm to competition from harm to competitors, and it relies on the fact that
without ìbadî conduct by a dominant firm, equally efficient rivals cannot be eliminated. The test may be too lenient, though, because it seems to permit the elimination of new firms that would eventually become equally or more efficient than the incumbent if they were allowed to survive long enough as less efficient firms.
when conduct has both positive and negative effects on consumer welfare, a balancing step is
necessary to determine which effect is stronger. It is difficult to have confidence that balancing can be done accurately, objectively, and consistently.
• Professor Einer Elhauge has devised a test for analysing unilateral, dominant firm
conduct: are rivals being excluded because the dominant firm is
improving its own efficiency, or because it is impairing the efficiency of its rivals. If the conduct causes both of those effects, then it is still permissible as long as at least some of the exclusionary effect is caused by the improvement in the dominant firmís efficiency. Elhaugeís test appears not to suffer from many of the drawbacks that affect the other tests, but it is relatively new and untested in both the courts and the literature.
• A sampling of court decisions highlights the need for a more principled approach to abuse of
dominance and monopolisation cases. In many cases, courts are still relying on vague slogans
that do not provide useful guidance to dominant firms who wish to ensure that their conduct will not run afoul of the competition laws. It is an interesting and worthwhile exercise to apply the tests above to these cases to see what outcomes they would point toward and whether they would provide better, more predictable guidance.
Objectives of competition policy toward single-firm conduct:
the tests can be evaluated properly only if it is clear what their objectives should be.
what does it mean to protect competition, and what purposes does it serve? possible answers to both questions are:
• deterring conduct that reduces consumer welfare
• deterring conduct that reduces productive efficiency
• deterring conduct that produces a net decrease in overall welfare when both consumer welfare and productive efficiency are considered
• deterring conduct that interferes with the openness of markets, or distorts the ìcompetitive
processî
• deterring conduct that eliminates smaller, weaker firms
the idea that there could be harms to the cl that are not even capable of harming consumers, is unattractive. Competition must serve the needs of the general public of consumers −not some abstract notion of competition for its own sake. The reason intervention is unattractive in that situation is that the point where a government begins to protect an
ideal of a fair competitive process beyond the extent to which competition and social welfare are harmed, is also where the government begins to protect competitors for their own sake. Who else would benefit?
Competition on the merits in principle
characteristics that the ideal test would have:
• Accuracy ñ the test should be based on widely accepted economic principles and yield minimal false positives as well as minimal false negatives
• Administrability ñ the test should be relatively easy to apply
• Applicability ñ the wider the scope of unilateral conduct the test can cover well, the better
• Consistency ñ the test should yield predictable results
• Objectivity ñ the test should leave no room for subjective input from the decision-maker
• Transparency ñ the test and its objectives should be understandable
The following tests vary in their conformity to these characteristics, each one having its own strengths and weaknesses. While none of them are perfect, some may be less imperfect than others.
The Profit Sacrifice- PS Test
The profit sacrifice (ìPSî) test, sometimes called the ìbut forî test, holds that when a dominant firm engages in conduct requiring it to forego short run profit, the conduct should be deemed unlawful if it would be irrational absent its tendency to eliminate or reduce competition in the longer run. The test has at least superficial appeal because it seems to distinguish deliberately exclusionary conduct from healthy responses to competition.
For a very simple illustration of how the PS test works, suppose that a dominant firm is making a profit of $1000 per week. If it engages in certain conduct that requires a one-time expenditure of $600, though, it can permanently exclude its rivals from the market. Thereafter, it will earn a profit of $1200 per week. It is rational for the firm to spend the $600, but it would not have been rational without the exclusionary effect. The PS test captures this kind of conduct whenever there is no other rational reason for engaging in the conduct that excluded the rivals.
Most jurisdictions currently use a relaxed form of the PS test to assess predatory pricing. The PS test captures predatory pricing because the strategy involves absorbing short-run losses in anticipation of eliminating or disciplining rivals, thereby making it possible to earn higher profits and recoup the shortterm losses. Discounts that leave price above cost, on the other hand, pass the test because they do not rely on eventual profits from greater market power for their profitability. The ability of the PS concept to deal with predatory pricing cases encouraged a move to apply it in all types of unilateral conduct cases… however, the PS test does not seem to be well-suited for evaluating exclusionary conduct that does not involve below-cost pricing.
In fact, one of the primary criticisms of the PS test is that it is under-inclusive. Some conduct may entail no short run profit sacrifice yet still be exclusionary and harmful to competition. ìCheap exclusionî falls into this category, as does raising rivalsí costs.38 Suppose, for example, that a monopolist lies to potential customers about the quality of a new entrantís product. This is essentially costless behaviour (in fact it may even be profitable in the short run if it works quickly enough), yet it still has the potential to be exclusionary if the incumbent manages to manoeuvre the entrant into a position where it must either exit without a fight or make expenditures that it cannot afford to counter the negative publicity. The PS test
would be no better at capturing a scheme to kidnap a rivalís leading scientist, which could pay immediate dividends and thus be profitable, or at least not unprofitable, in the short run. Thus, courts may reach the wrong result in some cases if they use the PS test.
Admittedly, kidnapping is an extreme example, so one might argue that no one would be so foolish as to use the PS test in a case like that. Elhauge, who is critical of this test, responds:
But then one has to ask what precisely are the normative criteria that determine when the profitsacrifice test would apply and when it wouldnít. If we have nothing to go on other than ëwe know it when we see it,í then the resulting test is no better than a conclusory standard[.] If we would use implicit normative criteria for determining what sorts of conduct that exclude[s] rivals is desirable even when it sacrifices profits, then those implicit criteria are what really does the work, and we should focus on defining them explicitly rather than hiding normative judgments in ad hoc decisions about when to apply the profit-sacrifice test.
The problem is that it is good to get some conduct that eliminates or reduces competition
Therefore, in the PS test …. which profits should be counted to find profit sacrifice?
Also, the PS test is overly permissive because defendants will not fail it unless the
sole purpose of their conduct was to exclude competition. iow: multiplepurposedefendants
will fail the test only when none of their motives is profitable (other than
eliminating competition)….A drawback of the PS test, therefore, is that all defendants with a reasonable story to tell about why their conduct was likely to achieve some legitimate, profitable purpose will never fail it. Defendants will thus be able to cover any anticomp goal if they can think of a justifiable purpose.
How, then, should conduct that is likely to produce both beneficial and harmful
results be treated? This is the challenge facing all unilateral conduct tests, but the PS test
sidesteps the issue.
The other major criticism is that the PS test is over-inclusive. It breaks down when it is applied to certain types of behaviour that increase consumer welfare even though they also exclude competitors. For example, suppose a firm invests in research and development to develop a drug that will be profitable only if it is so effective that it excludes competitors and gives the firm market power. Is it sound policy to discourage such investments? If it were, governments would not facilitate the exclusionary effect by awarding patents for some types of innovation. In doing so, governments recognise that innovation improves societyís welfare by creating better or cheaper products. Yet the PS test censures this highly desirable kind of investment. Thus it appears that the PS test is both over-inclusive and under-inclusive….iow, failing it is neither a necessary nor a sufficient condition for conduct that harms competition.
conclusion:
while profit sacrifice is a useful test for predatory pricing, it is not good regarding unlawful exclusionary behaviour.
The No Economic Sense Test
The no economic sense (NES) test holds that conduct should be unlawful if it makes no economic sense absent its tendency to eliminate or lessen competition. This may sound like the PS test, but profit sacrifice is neither a necessary nor a sufficient
condition for failing the NES test. It therefore avoids the two major criticisms directed at the PS test. if there is a profit sacrifice, then the NES test inquires why the
defendant would find it desirable to make that sacrifice.
If there is no sacrifice, there may still be harm to competition and the NES test asks why the conduct is profitable.44 The NES test has won the respect of the U.S.doj, which supported it in several cases brought under section 2 of the Sherman Act over the last few years. the NES test is really only part of the definition of exclusionary conduct. The NES test should signify unlawful behaviour only if there is also a showing that the conduct in question has caused, or has an actual tendency to cause, the elimination or lessening of competition.
This makes perfect sense and is true of the PS test, as well. This additional step shows up in predatory pricing cases, for example, in the form of the recoupment test. Price-cost tests may show that a firmís conduct is irrational, but the recoupment test is still necessary to show that the conduct is likely to harm competition.
The Equally Efficient Firm Test
The equally efficient firm (ìEEFî) test aims to identify dominant firm conduct that harms competition by asking whether the conduct would be likely to exclude rivals that are at least as efficient as the dominant firm is. If the answer is that EEFs would probably be excluded, then the conduct is considered harmful to competition. Otherwise, the conduct is considered lawful. This test has substantial merit, too.
It guards against the danger of protecting competitors rather than competition because, under competitive conditions, a market will be served only by the most efficient firms. Therefore, it is not considered harmful for less efficient firms to be driven out.
Like the PS test, the EEF test also has a bearing on some of the cost benchmarks used in the case law on predatory pricing. The logic behind the average variable cost test, for example, is that it is an approximation of a marginal cost test, and a firm could not exclude an equally efficient competitor by pricing at or above marginal cost.
Most of the criticisms that have been levelled against the EEF test contend that it treats dominant firms too leniently. Critics have pointed out, for example, that even when an entrant is less-efficient than the incumbent firm, it may still improve social welfare by forcing the market price downward (and quantity upward). If the allocative efficiency gain from lower pricing/higher quantity outweighs the reduction in productive efficiency due to the presence of the higher-cost entrant, these critics note, then it is better to use a stricter test to protect that entrant.
Other commentators have replied that it is too difficult to predict which way the scales in such
balancing tests would tilt and whether entrants would eventually become more efficient.48 Furthermore, they reason, it is wiser not to adopt a policy that encourages inefficient entry and guarantees that prices will be higher in the short run than those that would prevail if the incumbent were not forced to allow inferior rivals to survive. Another problem with trying to help less efficient competitors is that doing so may improve social welfare in the short run at the expense of the longer run. Specifically, it ignores the damage that could be done to innovation and competition by taking away dominant firmsí ability to defend
themselves by eliminating rivals through their own superior efficiency. If dominant firms are forced to make room even for inferior competitors, then all firms ñ not just the dominant ones ñ may begin to wonder why they should strive to win a dominant position in the first place. Consequently, the incentives to compete and innovate, which are crucial to the long term performance of the market system, could suffer
Elhauge Efficiency Test
Professor Elhauge has devised a test that is more difficult to understand than the others, but it could prove to be the most useful one to date. His test turns on whether the alleged exclusionary conduct succeeds in furthering monopoly power
(1) only if the monopolist has improved its own efficiency or
(2) by impairing rival efficiency whether or not it enhances monopolist efficiency. Under this standard, which would permit the former conduct and prohibit the latter, a defendant that has increased its own efficiency by investing in its intellectual or physical property should not have a duty to share that property with rivals, but has no privilege to discriminate by offering worse terms to rivals or those who deal with rivals.
There are several ideas packed into that concise statement, so it is best to begin by breaking it down into smaller parts. To apply Elhaugeís test, one must answer the following questions:
1. Does the defendantís conduct discriminate against its rivals in some manner? (This question is asked only in cases involving refusals to deal, exclusive dealing, or conditional dealing.)
2. Does the conduct enhance or maintain the firmís dominance, or is it likely to do so?
3. If so, then does the effect on dominance occur only if there is an improvement in the
defendantís efficiency?
4. If not, then is the effect on dominance caused by the conductís impact on rivalsí efficiency, regardless of whether the conduct also enhances the defendantís efficiency?
For a defendantís conduct to be found unlawful, the answers to these questions must be yes (if
applicable), yes, no, and yes, respectively. Any deviation from that sequence of answers results in a finding in favour of the defendant. Because Elhaugeís test still seems a bit daunting, even in a broken-down format, it may also be helpful to describe it in ordinary text. The test requires, as a threshold matter, that the defendantís conduct somehow discriminate against its rivals if the conduct involves a refusal to deal or dealing only under certain conditions, such as exclusivity. It also requires that the conduct increase or maintain (or be likely to increase or maintain) the defendantís dominance. It then asks whether a dominant position is being
enhanced or maintained because the defendant is improving its own efficiency (lawful), or because the defendant is impairing the rivalís efficiency (unlawful). If both firmsí efficiencies are affected by the defendantís conduct, then the defendant is not liable so long as the effect on its dominance takes place only if the conduct has a positive impact on the defendantís efficiency.
If, on the other hand, the effect on dominance is attributable entirely to the conductís damage to the rivalís efficiency, then the conduct is unlawful even if the defendant can come up with some kind of an efficiency-enhancing story to tell. This latter situation could occur, for example, in cases where the defendant did not use the least restrictive means available to improve its own efficiency. The key factor that distinguishes the sort of exclusionary
conduct that merits condemnation is that it can successfully increase or maintain the monopolistís market power even if the monopolist has not increased its efficiency in any way. It is immediately apparent that Elhaugeís test, though it takes efficiencies into account, does not require any balancing. It therefore avoids a major administrative difficulty. It also permits behaviour such as investing in research and development to make a better or cheaper product, whereas the PS test can capture that behaviour.
Furthermore, the innovating firm is allowed to sell its new or improved product at any above-cost price (absent discrimination against rivals), even if doing so takes market share away from its rivals to such an extent that they become less efficient. The key factor is that permissible conduct reduces rivalsí efficiency only as an unavoidable side effect of the improvement in the defendantís own efficiency.
UNITED KINGDOM
compinthemerits -CM, in assessing unilateral behaviour by dominant firms:
CM IS THE OPPOSITE OF ANTICOMP
how to distinguish competition on the merits (pro-competitive behaviour), which is good for consumers, from anticompetitive behaviour (rivalry-impeding competition) ?
CM EGS: good deals, discounts, rebates, etc.
How to distinguish between anti-competitive and pro-competitive behaviour:
a. The consumer welfare test.
This examines the likely impact of the behaviour on consumer welfare. If the behaviour is found to be unlikely to harm consumer welfare, then it is presumed to be competition on the merits. In practice, the UK authorities typically examine at least whether a reasonable story of consumer harm can be told, recognising that adverse effects on consumers may be indirect. We would not usually intervene against behaviour which had no reasonable likelihood of harming consumers. However, the difficulty with laying a strong emphasis on this consumer welfare standard as a necessary condition for a finding of abuse is that it can be difficult to demonstrate clearly that consumers are likely to be harmed. The ëbut forí or profit sacrifice test. This involves assessing whether a given behaviour would entail profit sacrifice but for any anti-competitive effect. This test again requires a clear analysis of the likely anti-competitive effect of the behaviour in order to be applied effectively, since it otherwise begs the
question of what we mean by ëanti-competitive effectí. The test also raises difficult issues of specification, for example of the benchmark against which profit sacrifice is assessed.
The ëas efficient competitorí test. A final possible approach to allowing competition on the merits while disallowing ëanti-competitive behaviourí is to require that a ëlevel playing fieldí is preserved for competition between the dominant firm and its competitors on which competitors can thrive, and match the offers made by the dominant firm, so long as they are no less efficient than the dominant firm.
So, under the as efficient competitor test, behaviour will is presumed to be competition on the merits (and not anticompetitive behaviour), so long as an equally efficient competitor would not be excluded by it. A criticism sometimes made against using careful economic analysis to distinguish between anticompetitive behaviour and competition on the merits, especially when compared with a simple form-based approach to making this delineation, is that it can lead to paralysis or delay in enforcement, can undermine deterrence, and can erode legal certainty.
In our view, however, carrying out a proper analysis of likely effect, based on economic principles, is crucial for aligning competition law consistently with its economic purpose. Competition, productivity, and consumer welfare will only be enhanced by competition policy interventions so long as such interventions neither (i) deter pro-competitive behaviour nor (ii) leave genuine anti-competitive behaviour unchallenged. Simple form-based rules for intervention run both risks.
Moreover, the economic approach should help improve legal certainty by avoiding both:
• ëcategory shoppingí (which can occur where the treatment of a given behaviour under
competition law will depend on precisely how it is categorised); and
• ëad hoceryí (which can occur under a form-based approach whenever a new ëformí of behaviour needs to be assessed).
In addition, timely enforcement should be facilitated through the use of clear tests (such as those set out above) and also through the development of more structured rules for reaching (rebuttable) presumptions of abuse. The AKZO two-part test for predation1
is a good example of such a rule. It is clear and provides legal certainty, and yet is strongly grounded in economics. Thought is being given to the development of similar rules (mostly variants of the AKZO test) for other types of abuse case. We recognise that there is some way still to go in this area, but remain hopeful that other such rules can be developed relatively quickly.
Laying emphasis on the assessment of anti-competitive effect also focuses due attention on a number of key questions about what sorts of ëeffectí we should properly be addressing with competition policy. There is now a degree of consensus that it is likely (i.e. not actual) effect on competition (i.e. not competitors) that is important. However, some controversy remains about how substantial the likely effect on competition needs to be, whether there are any arguments for protecting inefficient competitors, and how clear any likely harm to consumers needs to be.
Responses to questions raised in the OECD request for submissions:
Question 1:
The Current State of Competition on the Merits. In some countries (e.g., the U.S.), the
phrase ìcompetition on the meritsî is interpreted to include aggressive, tactical behaviour such as discounting, whereas in others (e.g., the EU), competition on the merits has seemed to mean only innovation. Describe what this term means to courts and competition agencies in your jurisdiction, using the context of any relevant guidelines and cases.
The concept of competition on the merits is typically employed as follows: behaviour will be viewed as anti-competitive if it falls outside an area circumscribed by the term ëcompetition on the meritsí. This distinction is consistent with the use of the concept in UK jurisprudence.
For example, the UK Competition Appeals Tribunal (CAT) makes the following statement in its judgement on the OFTís Genzyme decision:
ìIf the elimination of competition in the related market is not the result of competition on the
merits, then an abuse may be found. However, within this, views vary as to what types of behaviour can constitute ëcompetition on the meritsí.
In the UK, we consider that ëcompetition on the meritsí can encompass various forms of competition to offer customers good deals, including behaviour that is sometimes considered aggressive and tactical such as discounts, rebates, etc.
While it is true that such behaviour can be anti-competitive when practised by a dominant firm in some market contexts, it can equally, in other market contexts, not only characterise normal competitive markets but also play a key part in the effective functioning of normal competitive markets. It is also not obvious that there are any forms of behaviour of which it is possible to say that they will tend to be harmful on average (i.e. more often harmful than not) when carried out by dominant firms, without considering the market context in which the behaviour occurs.
This means that looking simply at the form of the behaviour under investigation is not a reliable guide to whether behaviour is or is not competition on the merits. Moreover, while any given form of behaviour can cause substantial consumer harm when it has an anti-competitive effect, there is a very real risk that beneficial competition will be stifled if firms curtail their behaviour unduly as a result of Article 82 worries.
In our view, therefore it would be inappropriate to reach a view on whether behaviour constitutes competition on the merits without examining its likely anti-competitive effect. For this reason, the UK Office of Fair Trading (OFT) typically gives primary emphasis to analysing whether the available evidence supports a finding of anti-competitive effect.
The OFTís emphasis on effects-based analysis has also been supported by the CAT. It is
noteworthy that, in its judgment on the OFTís Genzyme decision, the CAT rejected one element of the OFTís infringement findings ñ relating to bundling ñ on the basis that that, while the OFT had shown that there was a reasonable theoretical case for bundling having an anti-competitive effect, it had not demonstrated that this effect was actually likely to occur in the particular market context involved.
Question 2:
Evaluation of the Current Situation. What tests/principles underpin the decisions and
guidelines that relate to competition on the merits? Does the jurisprudence in your jurisdiction clearly identify what the criteria are for applying the concept of competition on the merits?
Are the decisions clear and consistent enough to make it possible to accurately predict which practices by dominant firms will be ruled legal and which will not?
As set out above, analysis of whether a given behaviour comprises competition on the merits is typically wrapped up, in the UK, with our analysing its likely anti-competitive effect. We would not favour trying to deduce anti-competitive effects from a form-based analysis of whether or not behaviour constitutes competition on the merits. In endeavouring to distinguish between anti-competitive and procompetitive behaviour, we have found it helpful to consider three approaches.
• The consumer welfare test: is the behaviour likely to reduce consumer welfare? If not then it is presumed to be competition on the merits.
• The ëbut forí or profit sacrifice test: would the behaviour entail profit sacrifice but for any anticompetitive effect? If not, then it is presumed to be competition on the merits.
• The ëas efficientí competitor test: would a competitor that is as efficient as the dominant firm be able to compete effectively against the behaviour? If so, then it is presumed to be competition on the merits. Each of these tests has been applied within the UK, and examples are given below.
We consider that the jurisprudence on abuse in the UK is sufficiently consistent to give rise to an acceptable level of legal certainty. However, we would agree that there is a need for the appropriate use of these tests to be further developed, such that they can be applied more comprehensively and consistently across cases.
UK jurisprudence: The consumer welfare test
In assessing abuse, the UK authorities do typically examine whether a reasonable story of consumer harm can be told at least, and would not usually intervene against behaviour which had no reasonable likelihood of harming consumers.
Two recent decisions which explicitly discuss the potential for recoupment are Napp9
and Aberdeen Journals10. In the former, Napp was found to be able to recoup its losses in the hospital segment on a direct ongoing basis through its excessive prices in the community segment. In the latter, Aberdeen Journals argued, in its defence, that it its conduct could not be abusive because it had no realistic possibility of recouping its losses. This argument was rejected on factual grounds. There were found to be a number of routes by which recoupment could be achieved.
UK jurisprudence: The ëbut forí or profit sacrifice test
The OFTís non-infringement decision on BSkyBís mixed bundling of premium TV channels
(BSkyB11) explicitly adopts a ëprofit sacrifice testí in assessing whether the mixed bundling behaviour constitutes ënormal competitioní.
The OFT accepted that mixed bundling was likely to be a profit-maximising form of pricing for this type of product, since it allows the efficient recovery of high fixed costs (of acquiring premium channel content) from a variety of consumers, some of whom valued its channels very highly, and others less so.
The OFT also accepted that some form of mixed bundling would tend to be good for consumers. Absent such a price structure, BSkyB would need to charge more for additional channels, and as a result many customers whose willingness to pay exceeds the incremental cost of providing the channel to them would be inefficiently deterred from taking additional channels.
As such, the OFT took the view that:
ì[G]iven the nature of the industry and its consumers, BSkyB is not required by the Act to offer a wholesale pricing structure that implies a zero level of mixed bundling, nor is it permitted to offer all forms of mixed bundled discounts as it sees fit. To find mixed bundling to infringe the Chapter II prohibition, the Director considers that its extent must exceed that which would occur in conditions of normal competition.î (Paragraph 590)
ì[T]he key principle to adopt in assessing a state of normal competition in this industry is
whether, absent any entry deterrence, the mixed bundling represents a clear deviation from a
profit maximising strategy. In the absence of evidence of intent or consumer preferences
showing such a deviation, the Director would not normally expect a pricing structure
characterised as mixed bundling to be grounds for a finding of infringement of the Chapter II
prohibition.
The profit sacrifice test was also invoked as a defence by Napp, in response to the allegation that it was offering exclusionary discounts for its sustained release morphine product, MST, in the hospital segment of the market (Napp). Napp argued that its low prices in this segment merely reflected normal competition, that the price cuts had been instigated by its competitors, and that Napp had had no commercial alternative but to match these low prices.
In this case, the argument was rejected. Napp was found to have priced several tablet strengths at below average variable costs for many years and to have done so selectively where it faced competition. It was not clear how such loss-making behaviour could be the result of normal competition. Moreover, it was not accepted that Napp had no commercial alternative but to meet these price cuts. There were found to be substantial switching costs and other first mover advantages in the hospital segment, which meant that
competitors would have faced difficulties in building up a significant market share even if Nappís hospital prices had remained substantially higher.
UK jurisprudence: The ëas efficientí competitor test
The ëas efficientí competitor test has been employed by the UK competition authorities on a number of occasions. For example, in the margin squeeze part of the BSkyB non-infringement decision, the OFT decision sets out that, in assessing whether BSkyBís margin squeeze is abusive:
[Ö] the correct test, consistent with these precedents, should determine whether an undertaking as efficient in distributing as BSkyB can earn a normal profit when paying the wholesale prices charged by BSkyB to its distributors, and that this should be tested by reference to BSkyBís own costs of transformation.
ì[I]f the dominant undertakingís competitors are equally or more efficient, they should be able to compete on the same terms. Community competition law should thus not offer less efficient
undertakings a safe haven against vigorous competition even from dominant undertakings.î
(Underlining added) This would seem to provide some legal authority for employing the ëas efficientí competitor test in abuse cases. In its judgment on Aberdeen Journals the CAT appears regard the AKZO test for predation1 applied in that case as a version of the ëas efficientí competitor test, making several explicit references to
whether the pricing behaviour under investigation would drive out an ëequally efficientí competitor.
A version of the ëas efficientí competitor test was also put forward by Napp in defence of its pricing behaviour. Napp argued that its below-cost sales to hospitals were incrementally profitable on what it
described as a ënet revenueí basis. According to Napp, for each unit a supplier sells to a hospital, it can expect to sell ëfollow-oní units in the community sector, and the profits on these community sales are sufficient to recoup the initial losses in the hospital segment. Since similar linkages are equally available to other suppliers, they should be able to compete with Napp by pricing in the same manner, and thus the pricing behaviour should not be viewed as abusive. Although Napp did not state so explicitly, the suggestion here seems to be that if competitors have been unable to break into this market, this must be due to inherent inefficiencies or disadvantages, rather than due to Nappís pricing behaviour.
This argument was not accepted in this particular case, primarily on the basis that the ëfollow-oní linkages available to Napp were not in practice equally available its competitors given Nappís first mover advantages.
Question 3:
Candidate Standards/Tests.
Not all conduct by a dominant firm that somehow harms or inconveniences its competitors is harmful to competition. But what principles or standards ought to drive
the determination of which types of competition are on the merits and which are not? What are the strengths and weaknesses of the various standards and tests that have been used and/or proposed for identifying what competition on the merits is? E.g., equally efficient competitor test, profit sacrifice test, consumer welfare test, etc.
The OFT very much supports the view that ënot all conduct by a dominant firm that somehow harms or inconveniences its competitors is harmful to competitioní. In the past, EC case precedent on Article 82 has sometimes been criticised for laying too much emphasis on effect on competitors, without considering whether there is actually any harm to competition. In this respect, it is worth noting that firm B may be harmed whenever firm A offers a better deal to consumers. But this is precisely how competition on the merits works.
It is competition, not competitors, that improves the prices and quality offered to consumers and drives innovation and competitiveness. The key question for competition authorities is how to distinguish pro-competitive behaviour (pro-consumer competition), which is good for consumers, from anticompetitive behaviour (rivalry-impeding competition) which will ñ at least over the long term ñ be bad for consumers.
Each of the three tests listed above can be used to this end, and the pros and cons of each are
discussed in some detail by John Vickers in his recent paper on ëAbuse of Market Powerí17. Rather than replicating his points in full here, we simply make a few observations on each test.
Consumer welfare test
Many types of anti-competitive behaviour involve giving (certain) consumers a better deal than they would otherwise get, but recouping the associated losses once the anti-competitive effect of the behaviour has been achieved.
The potential for such recoupment is important for analysing abuse because it provides both a
rationale for policy intervention in terms of consumer harm and also an incentive for a firmís alleged anticompetitive behaviour. Absent potential for recoupment, the behaviour likely to be on balance good for consumers. Moreover, absent any anti-competitive incentive, it would seem more appropriate to view the behaviour as competition on the merits.
In practice, however, EC case precedent has been interpreted as meaning that there is no need to examine the potential recoupment in predation cases, at least in cases where there is a risk of elimination of a competitor. In the US, by contrast, there is a requirement to prove ñ or at least demonstrate a ëdangerous probabilityí – that such recoupment will occur.
It is not obvious that either the EC or the US approach is ideal. One frequently-mentioned rationale for the difference between the EC and US approaches to recoupment is that the EC is only able to bring abuse findings against firms with existing dominance, whereas the US regime does not require existing dominance in order to make a finding of monopolization. The argument here would appear to be that recoupment will always be possible in a market where there is existing dominance and elimination of a competitor, and as such there is no need to prove recoupment under the EC regime in such circumstances.
However, it is not clear that this presumption has a strong basis in economics.
The problem with the US approach, meanwhile, is that it can be very hard to prove recoupment. Recoupment can occur in a variety of different ways, which can sometimes be fairly intangible or hard to evaluate. For example, a well-recognised benefit of predation is the gaining of a ëreputation for predatory behaviourí. The benefits of this, in terms of deterring potential future entry, can potentially be recouped across a wide set of markets (i.e. not just the market in which the original predation occurred) and can be exceptionally hard to evaluate. Perhaps due to this requirement to prove recoupment, introduced in 1993, not a single predation case has been successfully brought in the US over the last decade.
In practice, the OFT typically reviews the potential for recoupment in investigating abuse cases, and considers whether a reasonable story of consumer harm can at least be told, recognising that adverse effects on consumers can be indirect. If no such story can be told, then the OFT would not usually wish to make an infringement finding. However, we would not wish to make demonstration of consumer harm a necessary condition for a finding of abuse, given the difficulties involved in demonstrating clearly that consumers are likely to be harmed, since this could lead to a serious risk of under-intervention.
Profit sacrifice test
Application of the profit sacrifice test raises difficult issues of specification, and in particular of the benchmark against which profit sacrifice is assessed. If the relevant benchmark is the firmís profitmaximising strategy, then this can be very difficult to determine, especially if information on the consumer demand and cost structures facing the dominant firm is imperfect. This can make demonstration of profit sacrifice very difficult. It is not the same as examining whether the firm is making actual losses. Evidence of actual losses will tend to be strong (albeit not conclusive) evidence of profit sacrifice, but profit sacrifice can in principle occur without actual losses being incurred.
This point was recognised by the OFT when it applied the profit sacrifice test to the assessment of BSkyBís mixed bundling of its premium TV channels, as discussed in the BSkyB decision. In practice, the OFT was only able to assess the negative; that is, whether there was clear evidence that that BSkyBís behaviour represented a clear deviation from a profit-maximising strategy. This was done by examining whether BSkyB was making incremental losses in supplying any of its channels to additional subscribers. It was not possible for the OFT to prove the converse – that is, that BSkyBís behaviour actually represented a profit-maximising strategy and thus normal competition ñ given the complicated pattern of consumer preferences in this market, and the fact that the optimal profit-maximising strategy was very likely to involve some form of non-linear pricing/mixed bundling.
It is also worth noting that the profit sacrifice test itself is neither necessary nor sufficient as evidence that a given behaviour does not constitute ënormal competitioní. The test is not sufficient for reaching such a conclusion, since firms can sacrifice short-run profits for any number of non-problematic reasons (for example low start-up pricing to develop a new market). In its non-infringement decision case of First Edinburgh/Lothian(an alleged predation case), the OFT found that First Edinburghís price lay below average variable cost, which in turn implied short term losses, but nevertheless concluded as follows:
There is no evidence in this case that First Edinburgh’s conduct was intended to drive
Lothian out of the Greater Edinburgh area, nor that it believed that it was capable of doing
so. Instead, the balance of evidence suggests that First Edinburgh’s conduct was intended to
establish a more secure commercial basis for its Edinburgh operations. As a result, the
presumption of predation which arose as a result of its pricing below average variable cost
can be rebutted. The profit sacrifice test is also not necessary as evidence that a given behaviour does not constitute ënormal competitioní, since it is only relevant to certain types of abuse. Exclusionary abuses can be broadly categorised into two types:
• predation-type abuses: where competition is damaged through the revenues available to
rivals being reduced; and
• raising Rivalsí costs (RRC) abuses: where competition is damaged through the costs of
rivals being increased.
While predation-type abuses typically involve some form of profit sacrifice22, abuse which involves raising rivalsí costs need not involve profit sacrifice at all.
A slight variant of the profit sacrifice test, which is more widely applicable, is the ëbut forí or ëno economic senseí test. This asks whether the behaviour would make economic sense but for its tendency to eliminate or lessen competition. For predation-type abuses, this will effectively equate to the profitsacrifice test, but it can also be employed for assessing other forms of abuse.
Similarly to the consumer welfare test, the OFT typically reviews whether behaviour would make economic sense, but for its anti-competitive effect, when assessing abuse. However we would not wish to make failure of this ëbut forí test a necessary condition for a finding of abuse, due to the demonstrability difficulties outlined above.
As efficientí competitor test
Under this test, a given piece of behaviour will be viewed as acceptable so long as a competitor that is ëas efficientí as the dominant firm would be able to compete effectively against it. Critics of this test argue that it is inherently flawed, at least as a necessary condition for abuse. In practice, it is argued, there may simply not be any ëas efficientí competitors around to compete in the market.
Consider, in particular, a situation where competitors are not currently ëas efficientí as the dominant firm but are expected to become so as they learn about the market and expand in size. This may be especially likely to occur in dynamic or network industries. If the ëas efficientí competitor test is applied too strictly in such a case, there is a risk of dominant firms doing substantial harm both to actual competition and to potentially ëas efficientí competitors without being found abusive. And as is wellknown, one of the key benefits of monopoly is a ëquiet lifeí. A dominant firm that faces no competitive challenge, because there are no ëas efficientí challengers on the horizon, is hardly likely to spearhead efficiency or productivity growth.
Proponents of the test argue that without some form of efficient competitor test, competition policy may end up protecting inefficient competitors. This would dull firmsí incentives to improve their efficiency, and stifle the beneficial competitive process by which more efficient firms displace less efficient firms in the marketplace. In addition they argue that the test is sufficiently flexible to accommodate the scenarios outlined above. For example, in certain circumstances it may be possible and desirable to modify the test to take account of the first mover advantages enjoyed by the dominant undertaking.
It is clear that overly strict adherence to the ëas efficientí competitor test can raise difficulties.
However, we agree with those who argue that if competition policy were to protect inefficient competitors, it would risk compromising the very efficiency and productivity growth that the law should properly be spearheading, Employed flexibly, we believe that this test can help ensure that competition law is not used inappropriately, to the long term benefit of effective competition and of consumers.
Question 4: Economics
. Does economic theory offer pertinent criteria that make it possible to identify
what competition on the merits is?
As discussed above, economic theory tells us a great deal about the ways in which different sorts of behaviour can be anti-competitive and also about the ways in which they can be pro-competitive and have efficiency benefits. Economics can therefore provide a clear and well-structured framework for distinguishing between anti-competitive behaviour and competition on the merits. Within the OFT, economic analysis plays a key role in all abuse cases.
A criticism sometimes levelled against using careful economic analysis in abuse cases is that it can lead to paralysis or delay in enforcement, can undermine deterrence, and can erode legal certainty.
In our view, however, carrying out a proper analysis of likely anti-competitive effect, based on
economic principles, is crucial for aligning competition law consistently with its economic purpose. Competition, productivity, and consumer welfare will only be enhanced by competition policy interventions so long as such interventions neither (i) deter pro-competitive behaviour nor (ii) leave genuine anti-competitive behaviour unchallenged. Any form-based rules for intervention run both risks. Moreover, the UK approach arguably helps improve legal certainty by avoiding both:
• ëcategory shoppingí (which can occur where the treatment of a given behaviour under
competition law will depend on precisely how it is categorised); and
• ëad hoceryí (which can occur under a form-based approach whenever a new ëformí of
behaviour needs to be assessed).
In addition, concerns about paralysis or delays in enforcement are increasingly being alleviated by the development by economists of more structured rules for reaching (rebuttable) presumptions of abuse. The AKZO two-part test for predation is a good example of such a rule.25 It is clear and provides legal certainty, and yet is strongly grounded in economics. This test (or a variant of it, based on avoidable or incremental costs) is applied by the OFT in all predation cases, including Napp, Aberdeen Journals and First Edinburgh/Lothian.
Some progress is being made in the development of similar rules (mostly variants of the AKZO test) for other types of abuse case. For example, a variant of the first element of the AKZO test was utilised by the OFT in analysing BSkyBís mixed bundling in the BSkyB case. Specifically, the OFT examined whether BSkyBís incremental avoidable cost per additional subscriber of supplying particular premium channels exceeded the implied incremental price (given the mixed bundling) of such channels. We recognise that there is some way still to go in this area, but remain hopeful that such rules can be developed relatively quickly.
Question 5: Agency Experience.
What role, if any, has your agency played in helping to define the term ìcompetition on the meritsî in your jurisdiction? Please report on any arguments you have made in court papers, or in helping to draft legislation, relevant to this concept.
See responses to other questions.
Question 6: Intent.
What role, if any, should exclusionary intent play in determining whether conduct is within the bounds of competition on the merits?
The role of exclusionary intent in abuse cases is not entirely clear. On the one hand, it is clear from EC case precedent that the concept of abuse is intended to be an objective one, meaning that behaviour can be abusive even where the dominant undertaking had no intention of infringing Article 82.26 On the other hand, it is clear that evidence of intent can be relevant to a finding of abuse, and indeed it plays a key role under the second leg of the AKZO two-part test for predation.
It is noteworthy that in all three CAT judgments on exclusionary pricing cases so far27, the CAT has looked explicitly at the issue of intent. Indeed, it has done this even for the predation cases where prices lay below average variable costs.
It is the OFTís view that intent is neither necessary nor sufficient for an abuse finding, but that it can provide useful evidence towards such a finding, since anti-competitive intent will often be likely to give rise to anti-competitive effect. However, in assessing intent, it is useful to distinguish two types of possible evidence of intent: subjective and objective.
ëSubjectiveí evidence of intent comprises documentary evidence on the thinking and motivation of the dominant firm in adopting its behaviour. Documentary evidence that a firm was attempting to squeeze its competitors out of the market has frequently been employed by competition authorities, in particular in predation cases (where the role of intent is well-specified). Such evidence can be useful, especially if the anti-competitive strategy is laid out explicitly. However, the difficulty with this sort of evidence, especially where it is less specific, is that it can also be consistent with aggressive (but non-predatory) competition
Objectiveí evidence, by contrast, involves assessing intent through examination of the behaviour itself. This sort of evidence can be ñ and often is – employed badly. For example, it is dangerous to infer intent from the mere form of a particular pricing behaviour, as has sometimes been done in EC cases. For example, price cutting that is selectively targeted at those market segments where a dominant firm faces competition can be consistent with both exclusionary behaviour and normal competitive reaction. It can be erroneous to treat such pricing behaviour ñ in itself ñ as blatant evidence of intent. On the other hand, if employed rigorously, such objective evidence on intent (or the lack of it) can be extremely powerful. Particularly useful in this regard is the ëprofit sacrificeí test. If a firmís behaviour would entail profit sacrifice but for its anti-competitive effect, this is strong evidence that the firm (objectively) intends to behave anti-competitively. As such, when the profit-sacrifice test is employed to assess whether a firmís behaviour comprises competition on the merits, this inherently also involves examining whether the behaviour is motivated by anti-competitive intent.
Question 7: Exceptions
Should a dominant firm be held liable for having competed ìoff the meritsî even if it loses market share during the period of the allegedly unlawful conduct? If so, under what circumstances, and why?
What other exceptions should be recognisable under the law?
As set out above, we believe that competition authorities should not intervene against unilateral behaviour, even by a dominant firm, unless this behaviour has a (likely) anti-competitive effect. Given this, competition authorities might typically want to be cautious in finding abuse if a dominant firm is losing share, since this might often be evidence against a finding of anti-competitive effect.
However, there may nevertheless be situations in which intervention may be appropriate, even though the dominant firm loses share. The relevant question in assessing anti-competitive effect is how soon the firm would have lost market share absent the abusive behaviour. If share would have been lost more quickly absent the behaviour then an abuse finding may be appropriate. Moreover, in a growing market, a decreasing market share can nevertheless be consistent with the dominant firm gaining sales, in absolute terms, at the expense of its competitors. In practice, the OFT has not so far made abuse findings against any firms that were losing market share, but we do not consider ourselves prevented from doing so in the future, so long the evidence loss in market share is considered to be consistent with a finding of (likely) anticompetitive effect.
In a number of UK cases, parties have proposed an alternative exception. In each of the Napp,
Aberdeen Journals and Genzyme cases, the dominant firm under investigation argued that it should not be found abusive given that the firm that was allegedly being foreclosed had in practice remained in the market.
It is perhaps possible that, under some market circumstances, the absence of actual foreclosure could constitute evidence against likely anti-competitive effects from the behaviour, and thus against an abuse finding. However, in practice this argument was in fact rejected in every one of the above cases. In each case, it was found either that there were good grounds for the foreclosure not yet having occurred (and thus that it remained reasonable to expect, on the basis of the available evidence, that foreclosure was likely) and/or that the behaviour was anti-competitive in that it prevented or hindered the growth of competition.
For example, in Genzyme, the CAT found that:
ìGenzyme is in a position potentially to exclude Healthcare at Home and other homecare
services providers [Ö], and would have already done so but for these proceedings. In those
circumstances it does not seem to us that the OFT has to wait until Healthcare at Home has
actually been eliminated from the market before the Chapter II prohibition is applicable.î
Question 8:
Dominant firmsí special responsibility.
Does a dominant firm have a ìspecial responsibilityî not to harm competition, such that conduct which constitutes competition on the merits when undertaken by a non-dominant firm becomes just the opposite when the firm crosses the dominance threshold?
Is there a sound basis for that special responsibility? If so, what is it, and how should that
responsibility be defined? Is it limited to markets in which the firm is dominant, or does it include complementary product markets?
It is clear that there is strong legal precedent in EU law for dominant firms having a ëspecial
responsibilityí not to harm competition. This can include complementary product markets, although the
OFT would not typically bring such a case unless:
• either the markets are sufficiently close, or linked, to enable the dominant firm to leverage its
market power into a neighbouring market;
• or the likely effect of the behaviour on the non-dominant market will be to protect or enhance the firmís position on the market which it dominates.
However it is less clear from existing case precedent what the precise meaning of this ëspecial
responsibilityí concept is. Most controversial is the question of whether the concept covers situations in which a dominant firm is shown to be damaging competition unintentionally, simply by acting in its own short-run non-strategic interest and essentially engaging in ëcompetition on the merits
The benefit of intervening in such situations is clear; it prevents competition from being damaged. The problem with adopting a policy of intervening in such situations, however, is that it risks forcing firms to engage in inefficient pricing behaviour that is in fact bad for consumers and does not in fact constitute competition on the merits.
This issue can be particularly problematic if the concept is applied to complementary product markets, in which the firm is not dominant, since it will typically need to be allowed to ëcompete on the meritsí in such markets if it is to be an effective competitor.
Until the precise legal scope of the special responsibility concept is established, it will be difficult to reconcile these views. In many ways however this debate may merely be a restatement of the main issue addressed above; that is, how to distinguish benign conduct from abusive behaviour.
Merger Guidelines
Also under the Guidelines on the assessment of horizontal mergers it is clear that a ëbalancedí
approach is taken with respect to the assessment of the positive and negative effects of a merger. They state that mergers may be in line with the requirements of dynamic competition and are capable of increasing the competitiveness of industry, thereby improving the conditions of growth and raising the standard of living in the Community. According to the Guidelines it is possible that efficiencies brought about by a merger counteract the effects on competition and in particular the potential harm to consumers that it might
otherwise have. In order to assess whether a merger would significantly impede effective competition the Commission performs an overall competitive appraisal of the merger. It may decide that, as a consequence of the efficiencies that the merger brings about there are no grounds for declaring the merger incompatible with the common market
In making this assessment, the Commission takes due account of the effects of the efficiencies to consumers: The greater the possible negative effects on competition, the more the Commission has to be sure that the claimed efficiencies are substantial, likely to be realised and likely to be passed on, to a sufficient degree, to the consumer. It is highly unlikely that a merger leading to a market position approaching that of a monopoly or leading to a similar level of market power, can be declared compatible with the common market on the ground that efficiency gains would be sufficient to counteract its potential anti-competitive effects
Conclusion
It is clear that also under Article 82 behaviour that on a strict interpretation of the concept of ëabuseí may fall under the prohibition may also be explained as genuine competition and may even generate positive effects for competition. One of the challenging questions of the Article 82 review is whether and, if yes, to what extent, this provision leaves room for balancing of positive and negative effects.
Although efficiency considerations have not played an important role in the case law under Article 82, the pursuance of common objectives by the Article 81 and 82 requires an alignment of the approaches towards such concerns under the two provisions. The ECJ and CFI have already demonstrated readiness to examine efficiency justifications for practices which have been found to have foreclosure effect. In the literature many tests have been developed in order to distinguish ëgenuine competitioní or ëcompetition on the meritsí from behaviour, the ëactual purpose of which is to strengthen the dominant position and abuse ití52. However, given the mixture of economic and legal aspects to investigations under Article 82 EC it would not seem that one particular test can be identified as the only appropriate one. In
view of the aim to protect competition and not competitors, a first goal will have to be to protect efficient competitors against exclusionary conduct of dominant undertakings. Conduct that is likely to exclude efficient competitors is unlikely to be qualified as competition on the merits.
Comments by Experts:
The Chairman then turned to Professor Rey for comments. Professor Rey began by stating that there is economics in form-based approaches, so he disagreed with the notion that adopting a form-based approach means no economics. The question is to focus on the facts and the effects instead of relying on presumptions or beliefs.
Second, one may worry about preserving the competitive process because we worry about competition and consumers in the future, so why not compose a story of why consumers may be hurt in the future? For instance, it would be interesting to know if in Japanís Intel K.K. case, the possibility of the rivalsí future ability to compete was considered.
Third, moderate use of economics is good but excessive use of it can be fatal. If the definitions aretoo precise then you encourage a firm to engage in bypass techniques, category shopping, and so on.
Finally, in looking at whether an equally efficient firm could enter a market and survive, we may also want to consider whether that firm would be able to exert competitive pressure. The mere fact that it can survive is
not necessarily adequate.
The Chairman then gave the floor to Professor Hawk. Professor Hawk emphasised that
the first step in determining what competition on the merits means is to decide what oneís policy objectives are. If it is decided that one wants to promote some type of consumer welfare, which everyone does, then is it going to be consumer welfare as many economists think of it, or will it be based on competitive rivalry or market structure? Germany, for example, tends very much toward competitive rivalry and process. If one decides
to promote competitive rivalry, there will be tougher rules on refusals to license and on product innovation, since the focus will be on protecting access to the market.
Professor Hawk also expressed his surprise and pleasure that no one had mentioned fairness as a goal of competition policy during the roundtable. One simplifies the law if goals such as fairness and market integration are eliminated and one focuses instead on consumer welfare or competitive rivalry.
Professor Hawk stated that if a competition authority is going to condemn certain conduct, it is of the utmost importance for the authority also to structure a way for firms to continue to be able to innovate and be competitive in the marketplace, rather than just condemning.
In addition, he noted the importance of developing legal rules for recurring claims like predatory pricing. It would also be useful to have specific rules for refusals to deal, for example. He closed by saying that simpler tests for anticompetitive conduct are preferable to complicated ones.
General Discussion
A delegate from Italy began by noting that economic approaches are mainly effects-based. The problem, he said, is that the effects that are considered are not always based on sound economic analysis. A rebate is not necessarily unlawful, for example. The analysis in the Michelin decision is based on effects, but the effect considered was really not very relevant and was based on incorrect assumptions.
Secondly, the equally efficient competitor test is appropriate to use for price abuses like predation, and it is a short cut for a consumer welfare test. It is really the same test. The only difference, the delegate maintained, is that we presume that exclusion of efficient competitors would worsen consumer welfare.
However, the equally efficient competitor test is not appropriate for other types of abuses. If there is bundling with irreversible technology where two products cannot be immediately taken apart, that is something that may or may not be an abuse. It depends on the circumstances, like radios in cars. These things are technologically reversible. It’s not abuse. The delegate disagreed with the U.S. position on not interfering in the case of a new product. There are instances in which bundling can be an abuse because it could be the same as a predation case.
A delegate from Austria then stated that although Austria did not have a long history with the term ìcompetition on the merits,î there seemed to be an inconsistency in the economics-based approach. Economics should be used only in moderate quantities. If we were forced to prove things economically either by law or by guidelines, that would not increase the efficiency of competition but decrease the efficiency of the national competition authority, especially with respect to small competition authorities.
The other question is that what is meant by a firmís efficiency. Is it really satisfactory to measure
efficiency primarily by turnover, production cost, or economy of scale in investment? If economy of scale
does not have the same importance in all economic sectors, it might be difficult to measure efficiency in
business activities comprising, say, handcrafts, knowledge, or R&D, for example.
DAF/COMP(2005)27
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A delegate from the EC stated that the no economic sense test itself makes no economic sense because
behaviour can have both foreclosure effects and efficiency effects. Why would one refrain from balancing
the negative and positive effects? Authorities do that kind of balancing when they apply the rule of reason
in Section 1 cases, Article 81 cases, and when they analyse mergers. Why not perform that balancing
process in the context of conduct by dominant firms, as well?
The delegate further stated that he agreed with the U.S. delegate that it is absolutely necessary to have
in mind not only that we can prohibit something, but what the remedy should be. The remedy should not
define the test, though.
Next, a delegate from BIAC reiterated that it was competition, not competitors, that competition laws
seek to protect, and one must be very wary of establishing presumptions, which are simply another way of
switching the burden of proof to the defendant rather than to the plaintiff. Particular caution is called for in
condemning discount pricing, including bundled pricing or loyalty discounts providing benefits to
consumers, without knowing more about the operation of the market. Intensive analysis is needed.
Condemning those kinds of practices can cause more consumer harm than consumer benefit.
The delegate added that a secondary thing that calls for caution is a requirement to assist competitors.
In the U.S., there is no obligation for a firm to assist its competitors, and it is the predominant legal view
that one does not have to share intellectual property with a competitor. Furthermore, per se rules should be
avoided in areas where there has not been as much experience as there has been in certain another areas,
such as predatory pricing.
The delegate agreed that the no economic sense test makes no economic sense on an objective basis.
On the other hand, he said, the equally efficient competitor test could be very difficult to apply. What is an
equally efficient competitor? This ends up being a kind of cost-based analysis. Do we look at the
dominant firmís efficiency or at the efficiency of some hypothetical firm that may or may not exist in the
market?
A delegate from Brazil concurred with the US that the no economic sense test is more applicable than
other ones for many reasons. It has one problem, though, which is how can one differentiate antitrust
infringement from unfair competition? In other words, how can competition authorities weed out unfair
competition cases and keep only the antitrust infringement cases? After all, unfair competition does not
make economic sense, either, but for its exclusionary effects.
A delegate from Chinese Taipei said that the first question should be how to formulate better
economic criteria in monopoly cases on the basis of efficiency. In Chinese Taipei, sanctions have been
imposed on two monopolies, but the question remains how not to colour the reasoning with a superficial
analysis that is not rigorously economic. Finally, there is also the question of how to fashion good
remedies.
A delegate from Germany expressed relief that the difference between form-based and effect-based
approaches is less and less stressed. If any forms are used, one must define them by looking at the effects
they have on market behaviour and the competitorís behaviour. For example, rebates are often considered
to be unlawful, and the form of illegal rebates is defined by their effects of attracting customers and
excluding other competitors. This is a combined way of looking at the issue, so is there really a big
difference between the systems applied?
A delegate from Australia briefly concurred on the importance of sound economic analysis when
bringing cases.
D
A delegate from Japan wished to answer Professor Reyís question on the Intel K.K. case. He
explained what was happening in the CPU market in Japan before the conduct in question occurred. Intel
had lost 5% of its market share in Japan to competitors. But by providing funds or rebates conditioned on
the agreement that PC manufacturers would not use non-Intel CPUs, Intel increased its share to 90%. This
was clearly designed to have the impact of excluding a competitor, which would lead to a situation of no
competition in the Japanese market. Therefore, he stated, such conduct could not be defended regardless
of any possible short-term benefits.
Lastly, a delegate from Switzerland reiterated that the different tests are more or less suitable
depending on the situation one is examining.
The Chairman then made his closing comments, stating that in contrast to other roundtables, there was
wide consensus in this one. The difficulty comes when trying to decide the variables at which to look and
how we should deal with them. There are tests that are very difficult to implement and therefore there is a
lot of hesitation. As Professor Hawk said at the beginning of the roundtable, the transparency of reasoning
in decisions is very important. Exposing the decisions and their reasoning to public criticism may be
useful in the sense that it provokes the kind of debate that is helpful and may be a way to improve the
quality of the tests. While waiting for a better test to emerge, competition authorities are being viewed
negatively because their reasoning is not always clearly spelled out and there is a belief that the authorities
use certain beliefs, other than intellectual reasoning, when coming to their conclusions.