Abuse of dominant position
Unilateral behavior
Both monopolization (or attempt to monopolize) in the US and abuse of dominant position is forbidden under any jurisdiction. Lack of clarity has been, and
keeps being a long running problem in this kind of prevention. Part of the problem is a failure to develop a theory capable of application to the case law. This
means that it is difficult to find a microeconomic theory that support the abuses of dominant position. Furthermore, it is very difficult to distinguish between
predatory conducts and extremely competitive actions. We need to look also at the response of the competitors regarding the practice undertaken by the firm
using unilateral abuses. Under article 101 it is easy to identify a practice infringing it because either you have a cartel or you have some sort of exchange of
information, and similar practices.
An example, concerning exactly this point, is the Predatory Pricing practice. It consists in 2 phases: first reducing the prices to throw the competitors out of the
market, second the undertaking increases prices above the competitive level. These higher prices reduce the overall consumer welfare. In most of the cases the
courts try to stop this practice at the beginning, when prices goes down even if the consumers in that period are better of. One of the indicator of predatory
pricing is the prices below the level of costs. This indicate us that courts must be very confident when taking a decision because short-term low prices may hide
great danger in the future, while short term restrictive outcome can increase overall social welfare in the long run. This is the reason why, while looking at
vertical restraints for example, we said that we can foregone some level of competition if it will enhance overall consumer welfare (e.g. providing information or
share development costs).
Basic taxonomy:
The usual doctrine, especially in the Europe, distinguishes between:
1)
Exclusionary abuses, Def: practices of a dominant undertaking seeking to harm the competitive position of its competitors or to exclude them
form the market.
e.g. limiting production or technological progress, applying dissimilar conditions to equivalent transaction, supplementary obligations in
contracts.
Since the first aim of any undertaking is to exclude its competitor form the market and to prevail, these kinds of conducts are not considered
anticompetitive by definition. The throw off of competitors based on efficiency and risk taking is perfectly legal, therefore there is a need to
distinguish between non-abusive and abusive exclusionary practices. The benchmark to understand the difference is, again, the harm of consumer
welfare. For anticompetitive foreclosure to be recognized there must be three conditions holding (shared more or less by both jurisdictions):
foreclosure, anticompetitiveness, and consumer harm.
2)
Exploitative abuses, Def: undertakings, thanks to its market power, exploits consumers directly.
e.g. unfair prices or trade conditions. Exploitation consists in imposing excessive prices or unfair contractual conditions. These kind of practices
represent the most direct and the most common way of expressing market power. Cartels are the expression of this kind of practices between
different undertakings, because they aim at imposing unfair prices that would otherwise could not. But under this point we need to point out a big
umbrella, because high prices are never condemned as such. Both in the US and in Europe there is always a closer look at the situation.
When checking for higher prices there is always a problem of measurement. Fairness of price should be assessed, which is based on the costs, which is
not really known to the public. So at the end of the story it is difficult to measure fairness, but this problem should not be to emphasized.
EU vs USA on Exclusionary and Exploitative
These practices are both recognized in the US and in Europe, this means that they both fall under article 102 TFEU and Section 2 of the Sherman Act. The
TFEU does not directly states “attempt”, which means that the EU only enforce this article when the dominant position has been used to exploit consumers
or competitors. For this reason, we need to distinguish between abusive conduct and NOT abusive conduct, which directly tell the courts that some practices
are forbidden or not. Both the jurisdiction, tho, take the notion of dominance as a mean to reach a conclusion.
Refusal for regulation (EU and US)
There is widespread consensus on the idea that competition law should not intervene where the market can be expected to self-correct exploitative
practices. Both jurisdictions accept that an economic rationale for price regulation exists only where non-transitory barriers (such as government
monopoly) exclude competition in the long term. The alleged difference, then, might lead to different allocation of competences with other
Authorities entitled to exercise the regulatory power within particular markets (energy, gas, telecommunications, railways). In these cases there is
no full competition, but the processes of liberalization are increasing the level in these particular industries.
European Special Responsibility
Aggressive practices are permitted to competitors but not to the dominant firm, which is exposed to a “special responsibility”. The responsibility is to keep the
market open. In the case where one non-dominant undertaking undercut prices, the dominant firm cannot undercut prices too, because it will be considered
an abuse. But this kind of principle has a lot of controversies because it protects competitors and not competition in itself. We can accept this principle only if
the competitor that adopts abusive practices is as efficient as the dominant firm. There are also problems of discrimination, regarding dominant and nondominant firms because the ladder is more free to decide the competitive actions to use, and of less incentives to become bigger, which is essential for
competition.
In the new EU Guidance paper this special responsibility has a lesser importance, the guidance states: the dominant undertaking is entitled to compete on the
merits; and, with regard to price competition, the Commission will intervene only yo rescue “as efficient” competitors. This is the only way to accept such
principle. But still pay attention because in 2009 the ECJ recognized that a dominant undertaking does not have absolute right to align its prices on those of the
competitors, because considered an abuse (still social responsibility).
The American long way to monopolization offense
In the USA, to be found an infringement of section 2 of the Sherman act there must be 2 conditions that apply: finding of monopoly power and position achieved
or maintained with practices not regarding merits.
Monopolistic conducts correspond to acts that:
1)
are reasonably capable of creating, enlarging or prolonging monopoly power by impairing
the opportunities of rivals; and either
2)
do not benefit consumers at all, or
are unnecessary for the particular consumer benefits claimed for them, or produce harms disproportionate to any
resulting benefits.
The similarities
Both the jurisdictions recognize that the monopoly in itself is not unlawful, but the means by which the monopoly has been reached and it is kept need to be
checked. The activation of Antitrust enforcement happens only when there are improper means and a clear harm to consumers. Still some differences But
still they differ on which amount of market power is needed to actually be checked: 40% for the EU and 60% for the US.
In defense of monopoly
The fact of becoming more and more bigger and stronger is simply the main strategy of every undertaking acting in the market. So the main concern, for the US,
is actually how the position of dominance has been achieved, not if there are excessive pricing later on. The case Trinko (US) carries the view that monopolies
can be the cause for innovation and risk taking and it’s the first objective of the undertaking, that makes them engaging in competitive activities. The main
objective is the long-term welfare enhancement.
Still talking about the US legal system, the dominant position is not unlawful and the dominator should be free to behave according to profit
maximization, which in most cases is to increase prices.
Even tho we always talk about US, also in Europe they do not differ to much on this point. High prices are normally not condemned per se illegal.
Market dominance and abuse of dominant position
Def of dominance: “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” (Hoffman-La Roche case 1979). Closer look: this definition is similar to the definition of significant market power. The level of
market power is so high that he can act, to an appreciable extend, independently, without any regards to customers, competitors, etc. . The highest level of
dominance is exactly monopoly, because it can do whatever it wants without any regard to other parties. Form the case United Brands comes the threshold of
40% of market share which is used as a mean of understanding dominance. Remember that market shares are a mere tool to arrive to a conclusion, never an
end in themselves. 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 – conditions of entry and expansion, importance of competitors, positions of customers and input suppliers, and the like - that are relevant for the
determination of that power.
(Look at paragraph 14 of the EU Guidelines on Abuse of dominant position.)
Def of abuse of dominant position:“[…] 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 [effective] competition still
existing in the market or the growth of that competition”(Hoffman-La Roche 1979). After having defined the dominance of the undertaking we need to assess if
there was actually an abuse of it.
[An example,] The fact of responding to the aggressive conduct of non-dominant firm, specified under the principle of special responsibility, will reduce the
growth of competition which is stated in this definition inside the Guidelines. So, it is considered as an infringement. The dominant firm has an important role on
keeping the market open, which is probably the main concern of the European Commission, and the other European institutions.
Article 102 TFEU (reminder)
It prohibits abuses consisting on:
- Directly or indirectly imposing unfair prices or other unfair trade conditions. (Exploitative behaviors above)
- Limiting production, market or technical development to the prejudice of consumers, they are the most used practices.
- Applying dissimilar conditions to equivalent transactions, discriminate among different parties.
- Making the conclusion of contract subject to acceptance by the other parties of supplementary obligations which have no connection with the subject
of such contracts. (Extending the market power from one industry to
another, e.g. a tie-in).
Article 102 is more focused on exclusionary abuses, rather than exploitative one even tho they are not formally excluded. We can summarize the most
common practices in 4 main areas: I) predatory pricing, II) refusal to deal and abuse of property rights, III) price discrimination, IV) tying and bundling.
The EU Guidance Paper states that the prohibited conducts, the ones just specified above, must create competitive foreclosure causing consumer harm. So the
focus is on the consumers. (Paragraph 5) under this paragraph there is also a clear expansion of the notion of consumer welfare, not only based on price
anymore.
Another important reminder: 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 have not to be punished just because they are better, more successful, or even luckier than others,
as this would reduce incentives for them.
Predatory pricing
Sometimes, there are some occasions where an undertaking reduces prices to exclude other competitors form the market. The predatory pricing tactic
constitutes a type of behavior where prices are so low that the competitive process itself is damaged. This sounds kind of a paradox, because the essence of
competitive markets is exactly low prices. The idea consist on a firm, called predator, incur short-term losses, in the present (phase 1), 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 (phase 2). One of the indicators of this practice is
the price equal or lower than marginal cost, which according to microeconomics it is not sustainable.
Is predatory pricing a rational strategy?
The Chicago argument
Chicago economists have argued that predatory pricing is unlikely to occur because it is very costly strategy for the predator to undertake. There are
various reasons for this statement:
1)
A bigger firm will have to suffer enormous losses to act predation.
2)
The assets of the undertakings excluded form the market do not disappear but they can be bought by other potential competitors, or new
entrants, that will make the strategy unsustainable.
3)
Small firms can sustain the price war. They can gather resources form lending facilities (Bork 1972), and be helped by customers which are promised a
long-term advantage (Easterbook 1981).
4)
Predatory pricing must be, not only rational but also, the most profitable strategy. If the firm has two options: predatory pricing or merging, normally
the undertaking prefer to merge with the competitor rather than fighting with him (McGee 1958).
If the Chicago school is accepted than the predatory pricing should never exist. But there are many voices disagreeing with this position.
Modern economic literature
There are situations in which predatory ricing can be entirely rational and the threat of it is credible. Modern economic literature has relaxed some of Chicago
assumption, first of all is the one of perfect information, that makes, as a result, predatory pricing a profitable strategy. If we analyze corporate finance
theory, we can see that the preys have serious difficulties to finance the actions against the predation. Thus they will inevitably suffer losses and leave the
market, or not enter at all.
A reputitional model
This is based on the industry’s history. If the predator is know as to act quickly and against new entrances, this reputation deter the entrances of
the preys, so we can define this reputation as an entry barrier.
Signaling model
This model start from the assumption that the predator has an informational advantage over the prey and is able to influence the target firm’s
expectations about future profits.
How to decide
A particular difficulty for competition authorities and courts is that claims denouncing predatory pricing are made in the first stage, the lower price period. The
problem is that prices can decrease for many reasons; increased competition for example.
Three criteria
The Areeda-Turner test is based on average variable costs (AVC): prices below it are seen illegal. AVC are seen as surrogate as marginal costs, which are more
difficult to determine by a court. The underlying rationale for this test is that pricing below marginal costs is inconsistent with short term profit maximization,
based on classic microeconomic theory, and the losses incurred in the short-term must be recouped with higher prices in a later time. One other very
important measure is the Average Avoidable Cost (AAC). The differences between the AVC and AAC is that the ladder tells you that the undertaking is
sacrificing profit, because it supplies the new units of the product at a price lower that the cost it suffer to produce them. Based on an economic point of
view, anyway, the most important measure that makes the the strategy unreasonable is price<MC.
Another criterion is the aim to excluding competitors.
US development
Most courts held that:
A)
A price below AVC was presumptively unlawful
B)
A price above ATC was conclusively lawful
C)
A price between the 2 is presumptively lawful, but it can be rebutted by evidence of intent and market structure. The Brooke Case (1993) is the
Supreme Court most important predatory pricing decision. The court downplayed the possibility of predatory pricing, according to Chicago school. To condemn
as predatory a pricing strategy the SC required price below costs and high probability of recoupment.
The appropriate measure of cost
According the the DoJ’s report (2008, USA) the appropriate measure should look at avoidable incremental costs, so that above cost pricing should be
considered per se legal. There are different measures that can be taken into account when deciding on the legality of the prices: marginal cost, average variable
cost (AVC), long-run average incremental cost, and average avoidable cost (al costs, fixed and variable, that could have been avoided by not engaging in the
predation strategy). The preference should be given to the last one. (Example in the slides)
(Another kind of practice: predatory bidding
The predator beats the price of an input, the goal is still the same to kick the competitors out of the market thanks to the deep-pocket-theory.)
EU cases
Akzo: the court of justice accepted a price-cost comparison as the yardstick by which to establish the permissibility of price undercutting in conformity to
the following principles:
• There is an abuse when prices fall below the level of average variable costs (according to Arreda-Tuner).
• Prices which are higher than average variable costs but lower than average total costs may be deemed predatory if they are part of a strategy of
eliminating competitors.
Such prices can exclude from the market firms that are just as efficient as the dominant firm but do not have the financial resources to sustain a price war, this
point must be made clear because there is always a need to protect competition and not competitors. The difference with the juries prudence of the US is that
here we don’t look for any probability of recoupment in the future. When prices fall below costs, in Europe, it is considered an infringement of article 102
because it aims at creating foreclosure, without arming consumers/reducing consumer welfare. The problem is that foreclosure can be both good and bad. The
aim of the undertaking can be both of enhancing competition and gain market shares, or the aim can be of excluding the competitors and enjoy monopoly
power in the future.
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 stated that where a producer charges AKZO-type loss-making prices (AVC), a breach of
Article 102 was established ipso facto without any need to consider specifically whether the involved undertaking has any reasonable prospect of recouping
the losses which it has incurred.
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.
Wanadoo: the ECJ stressed that neither the case law of the ECJ, nor its own decision-making practice, require proof of recoupment of losses as a condition
for a finding of abuse through predatory pricing.
Nevertheless, the European Commission (first degree) examined the entry barriers and entry costs, which characterized the relevant market and could render
plausible the recoupment of the losses of the dominant firm in the long run. After this examination, the Commission concluded that “the recoupment by
Wanadoo of its initial losses is therefore a likely scenario; its predatory strategy appears pertinent in this context”.
European refinements
Rationality plays a crucial role to understanding predation. If the undertaking incurs losses in the short-term, it can be thought to be acting a predatory
pricing strategy. When there is a sacrifice in the short-run there is no rational for not thinking about an abusive practice. (Paragraph 64, 67 EU guidance
paper 2009) the second step the EU look for is the foreclosure, or likely foreclosure, of actual or potential as efficient competitors through pricing below
LRAIC.
Limit pricing
With entry threat, despite the existence of some sorts of sunk costs, and the perspective that the entrant will earn positive profit, the incumbent might
set a low pre-entry price, in order to make entrant fear a low post-entry price.
Price squeeze
is the label for a US theory of antitrust liability (Alcoa, 1945), that concerns the pricing practices of a vertically integrated monopolist that sells its upstream
bottleneck input to firms that compete with the monopolist itself in the production of a downstream product sold to end users. At issue is the size of the margin
between the input price (to competing firms) and the price that the monopolist charges in the downstream market for the end product incorporating that
particular input. (Explanation figure in the slides)
Refusal to deal
This practice is relevant in so far it is unilateral and unconditional. Not every refusal to deal can be punished under article 102 TFEU, as we need to look at the
consequences the refusal has. Inside European countries there are never refusals to deal that are unlawful by object, only by effects; of course there are
exceptions but are very rare. (Paragraph 75 of the Guidance) “When setting its enforcement priorities, the Commission starts from the position that, generally
speaking, any undertaking, whether dominant or not, should have the right to choose its trading partners and to dispose freely of its property. The Commission
therefore considers that intervention on competition law grounds requires careful consideration where the application of Article 102 would lead to the
imposition of an obligation to supply on the dominant undertaking (1). The existence of such an obligation - even for a fair remuneration - may undermine
undertakings' incentives to invest and innovate and, thereby, possibly harm consumers. The knowledge that they may have a duty to supply against their will
may lead dominant undertakings - or undertakings who anticipate that they may become dominant - not to invest, or to invest less, in the activity in question.
Also, competitors may be tempted to free ride on investments made by the dominant undertaking instead of investing themselves. Neither of these
consequences would, in the long run, be in the interest of consumers.”
The Commission recognize that the duty to deal can bring both positive and negative effects, the negative one is the discourage of undertakings to invest.
This will ultimately decrease consumer welfare. According to the EU law, firms enjoying a dominant position have a duty to supply on a non-discriminatory
basis. In Commercial Solvents the ECJ held that refusing to supply a downstream competitor in order to restrict competition in the market for final
products must be considered an abuse within the meaning of article 102. E.g. if a upstream monopoly acquires a downstream retailer so they become
vertically-integrated, and decides to stop supplying all the other retailers (Commercial Solvents 1974). This kind of practice can be put inside the Special
Responsibility box, being the upstream firm a dominant firm that must keep the market open. In the case where the upstream undertaking has 60% of
market share, if the firm refuse to deal still can be considered as an abuse. In the case where the upstream undertaking decides to discriminate and sell
the product to its partner company to a lower price than the one charged to the other retailers; there is no clear answer, it must be looked for the reasons
why this kind of practice is undertaken. In the ladder case we need to look even more to the real basis of the case, and always distinguish if the product
supplied by the upstream firm is essential.
Essential facility
The undertaking 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 undertaking owns an input indispensable to compete in the final market and denies
request for access to that input by other undertakings.
As example we take the railways transportation. Most of the countries in Europe have the duty to keep the company that owns the railways separated from
the one that owns the trains, and the former one has also the duty to keep the market open and cannot refuse to deal with other companies that need the
assess to the facility to supply certain markets.
There are 3 observations coming from the USA to point out:
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 form investing in the development of
competing facilities themselves and so truly benefit consumers. When there are vertically integrated firms that has developed a certain level of
infrastructure/facilities they may be obliged to share them with competitors because they are considered as standards (unavoidable inputs for
competing downstream).
2)
Based on the point 1), it has been argued that granting access though essential facilities should be limited to natural monopolies. This is the case of
railways in most of the world, certainly in Europe. 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.
3)
Even when there is a qualifying monopoly, forcing a firm to share it would not help, since:
a.
Consumers are no better off when a monopoly is shared (ordinarily, price and output are the same as they were when one monopolist used
the input alone).
b.
The right to share a monopoly discourages firms from developing their own alternative inputs (reduction of dynamic efficiency); both form the
monopoly side and from the competing side, because the competitors will be just waiting for the intervention of a court that will grant them
the better technology.
In the US in fact the essential facility doctrine has been declared useless and unnecessary. What about Europe?
The EU has been much less skeptical than the US in recognizing an essential facility-like doctrine, under the conduct of abuse of dominant position. It does not
hesitate to apply such a doctrine, even to Intellectual Property Rights (IPRs). The divergence between legal systems may bring complication also to interstate
commerce. IPRs are like ownership rights, you can exclude third parties to use your “thing”, and your are entitle to earn and dispose of the fruits coming from
it.
IPRs and its abuse
They are generally categorized into patents, solutions to technical issues that are new, useful, and non- obvious and whose right for exploitation is granted to
the developer for a limited period of time (which then can be resold, given, lended, etc. to somebody else); and copyrights, grants given on non physical matters
and that express and idea, they last 70 years. There are also trademarks, but we will not treat them here. The reason why the government grants a monopoly
power to somebody is to foster research and development (may look at the economic incentives of patents discussed in Industrial Organization).
One of the first cases, where there was an attempt to balance between the monopoly abuse and the lawful enforcement of IPRs, was Magill (1995), in which 3
tv broadcasters were required to license their TV schedule to Magill, who wished to publish a consolidated TV guide which was not existing, and there was a
consumer demand for this new product. When this 4th undertaking asked for licensing to the 3 broadcasters, they all refused. It was, and still is, very difficult to
distinguish between the concept of abuse of dominant position and the rightful exploitation of an innovation, also because the right to exploit my invention was
given by the state. There is also another view that makes things even more difficult: IPRs and Antitrust promote the same thing which is innovation, so the
should not be any incentive for one to go against the other. The key words here were: the possibility to create a new product belonging to a different relevant to
market (a comprehensive TV guide which was not possible without the information of the other undertakings), and the existence of a demand for it.
The ECJ, after the case, issued the following principle on abuse of IPRs:
A)
The information sought by Magill was indispensable to the publication of a comprehensive guide.
B)
There was a demonstrable potential consumer demand for the would be product.
C)
There were no objective justification for the refusal to supply.
D)
The refusal would eliminate all competition in the secondary market of TV guides. (Difference between the primary market, the one of the
patent in itself, and the secondary market, the exploitative one)
Magill was the first case of harmonization in regard to copyrights inside Europe.
The Bronner case (1999) was solved with a similar essential facility doctrine idea. Bronner was an Austrian publisher of a daily newspaper and wished to have
access to the highly development home-delivery distribution system of its much larger competitor, Mediaprint. Bronner complained that a refusal to allow such
access amounted to an infringement of art. 102. The decision can be summarized with 5 points:
A)
The facility is controlled by a monopolist
B)
The facility is considered essential because it is indispensable in order to compete on the market with the controller of the facility
C)
Access is denied
D)
No legitimate business reason is given for objectively justifying the denied access
E)
A competitor is unable to duplicate the essential facility
So, the request of Bronner was accepted. When you satisfy these 5 conditions in all cases you can apply the essential facility doctrine, under the
European Jurisprudence and for material matters.
The decisions taken in the previous cases were not very satisfactory in the eyes on various undertakings, because if a firm invest to develop a new product
it does not want to give it away for free. Many where against these decisions because they knew that it could create more harm than benefits.
The IMS case set out the exceptional circumstances where refusal to grant an IPR license by a firm which has a dominant position might be construed as an
abuse. 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 pre-judicial question by a German court, the European Court of
Justice declared that the exercise of an IPR is normally no abuse of dominance, but it may constitute such an abuse in exceptional circumstances. 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 were alternative solutions and whether there are technical, legal, or economic obstacles. The key point
was: is indispensable to have access to this kind of data (the blocks)? It is if there is no possibility to find any replacement. After having assessed that the access
is indispensable, then 3 conditions must be met: 1. that the refusal is preventing the emergence of a new product for which there is a potential consumers
demand; 2. That the refusal is unjustified; 3. Try to exclude any competition on a secondary market, thus restricting that market to the IPR owner. The idea is
that a refusal to share your IPR is to foreclose competitors in a secondary market and not to mere exploit the right that the state has granted me.
The IPR can be used by others if it can be found a new market that, in order to be supplied, needs the patented system. (Paragraph 48, 49 of IPRs) and the
undertaking using the IPR cannot duplicate the goods, or services, that the rightful undertaking currently produce. There can also be a potential market, not
already established, and it would be lawful as well.
(This case is very important for the principles)
(Case presented and in the professor slides) Microsoft refused to deal with its rival in the PC operating system market. The refusal was based on the IPR, and
of course there were 2 issues concerning the reaching of the conclusion: first: indispensability of access; second: a new product/ market requirement is
reduced to a limitation of technical development, causing benefits to consumers.
The rational of the case were:
I) The exercise of IPRs is not an objective justification…
II) Use,…
III)
Ordinary…
The other companies, that filed to the Commission, were required to be as efficient as Microsoft by the Court of Justice. Competitors cannot obtain the
possibility to access the IPRs of Microsoft for supplying the same products to the same market. (Copy from slides and case presented)
Price Discrimination
Can price discrimination amount to an infringement of article 102? The part of this article we are referring is letter C.
Price discrimination occurs when:
1)
Identical products are sold at different prices under identical costs conditions
2)
Where non-identical but similar goods are sold at prices which are in different ratios to their marginal costs
We do not need really a dominant undertaking for seeing price discrimination, but it is needed to be condemned as an infringement. There are 3 conditions
that must be satisfied to enable a firm to engage in price discrimination and make it a profitable strategy, and also make it relevant to Antitrust enforcement:
A)
The firm must possess some market power, keep in mind, tho, that the reverse it’s not true: a firm can charge different prices but not having any kind
of market power. In these cases there is actually an increase in consumer welfare because normally output increases.
B)
The firm must have information about the reservation prices of the costumers.
C)
Arbitrage must be prevented.
Historically we have three types of price discrimination: first, second, and third degree. Take the usual notions to study the differences and practices.
Every single unit of product is sold to the highest possible price. There is one peculiar thing about this kind of price discrimination: total welfare is
maximized. Selling different units of outputs for different prices. The concern here is how the undertaking imposes this discrimination. One possibility is
the fact of obtaining the discount at the last unit purchased. I.e. I pay the full price for the N-1 units and I will obtain the full discount at the Nth unit.
This is a lot more dangerous for competition, in respect to the normal way of second-degree price discrimination, because it keeps forcing the
customers to purchase the same product, and not switching to competitors. This is the main concern for Antitrust enforcement.
The firm segregates consumers into distinctive groups with different elasticity of demand. This kind of discrimination can reduce welfare because it decreases
output.
The ambiguity of the economic analysis on this matter produce indefinite results. Price discrimination is not a phenomenon confined to companies that enjoy
market power so it cannot be declared illegal per se. In industries with high fixed sunk costs firms must be able to charge prices in excess to marginal costs to
keep investing and to recoup the previous investments. Lastly, price discrimination is never condemned illegal when the effect is to increase output. Since
article 102 clearly states that the other parties must be placed at a competitive disadvantage, when this does not occur it can be declared that price
discrimination is not illegal.
USA: the Robinson-Patman Act: prohibits manufacturers and suppliers from price discriminating and granting other forms of preferential treatment to
some buyers and not to others, if the effect of such discrimination is to lessen competition or injure individual competitors. But the US does not apply
very often this Act.
EU: article 102 (C). For article 102 to be enforced, 4 conditions must be satisfied:
a.
Dissimilar conditions: (criteria)
i. Nature of the transaction;
ii.
Differences in the nature of the products;
iii.
Cost of supply.
There may be objective justification for the different treatment, but these must be demonstrated by the dominant firm.
b.
Equivalent transactions: the products or services provided must be substitutable, taking into account all relevant market factors.
c.
If substantial differences arise in terms of costs, quality and type of service provided.
d.
Also the treading parties must be equivalent, not exactly the same but comparable and very similar.
Exclusive dealing and selling
It was already scrutinized from the standpoint of restrictive agreements. The relevant analysis holds true also under the headline of dominance. We have to
distinguish between acceptable restriction and non-acceptable restrictions, and to do so we, once again, have to take the difference between active and
passive sales. As always, active sales can be restricted but there cannot be any sort of clause that prevent from accepting passive sales. The problem really
comes when there are either few firms upstream or downstream. Exclusive dealing might be interpreted as either a refusal to deal (with all downstream firms
but one) or a price discrimination (by charging different prices to different retailers).
(Article 4 reg. 330) Base on the market shares, 30% or less market share firms that act an exclusive dealing clause will not be considered unlawful, if of
course there are no black listed clauses (block of passive sales). Above 40% we can apply the special responsibility rule for dominant firm.
These kind of practices can fall both under article 101 and 102. Since it is a unilateral practice, it can be identified as an abuse of dominant position; but
because we need an agreement between undertakings, it can also fall under the meaning of article 101.
Chicago critique
Retailers have the incentive to avoid entering agreements that will ultimately harm them; and the incumbent cannot profitably use exclusive contracts to
deter entry. Chicago scholars states also that exclusive dealing contracts create efficiencies rather than anticompetitive effects. This facts have been
embraced also by more modern economic literature, but the debate about this topic is still open.
The upstream firm must compensate the retailer for creating foreclosure against the other manufacturer, otherwise retailers will not have any incentive to
refuse to deal with other parties.
Looking for foreclosure
The Department of Justice (DoJ) believes that exclusive dealing should be illegal only when it has no pro competitive effects, or when there are benefits but
the harm is greater than them. It does not really look at the market shares. (Article 32, 33, 34, 36 guidelines 102_2009) There can be foreclosure also in the
downstream market if a manufacturer decides to deal only with a certain number of retailers.
Tying and Bundling
Article 102(d) and article 101(1)(e) express the same idea; this because this types of practices, that constitute abuses, are exercised by agreements. We also
saw this possibility under exclusive dealing and selling. Practices of dominant firms may generate anti-competitive effects in horizontally-related or adjacent
market. So our starting scenario is that there is a market where the undertaking is dominant and another where the same undertaking is NOT dominant, but
tries to expend its market power into the ladder one. In order to do so it ties a product, the tied product, to another one, the tying one.
Bundle: simultaneous sale of 2 or more products, one of which is not sold separately.
Requirement tie: buyers of one product must purchase all their requirements of another product form the same seller. E.g. spare parts
Technological tie: achieved through integration of what could be viewed as two distinct products. E.g. the development of a product
Types of bundles:
1)
Pure bundling: two or more products are sold together for a single price and are offered only in fixed proportion. Examples:
a.
A newspaper that on a day of the week always have a supplement, you cannot split them and you have to pay for both;
b.
A plane ticket is sold only if you purchase the hotel accommodation from the same site;
c.
Computers sold with the Operating system and some applications.
2)
Mixed bundling: consumers have the choice of buying the products separately or as a bundle, which is sold at a discount.
3)
Requirement tying, in this case the products are not sold together but still one has to be bought if you have already purchased the other. The
key characteristic is the different proportions of units bought.
Examples:
a.
A mobile phone company sells you the a phone by the constrain that you will make all the phone calls with the same company, and not using
competitors network;
b.
The restrain of purchasing toner from the same company you purchased the printer.
Tying and bundling will be anticompetitive if these practices exclude competitors and hurt consumers in the tied market. On the other hand, tying and bundling
can generate efficiencies, and may also serve as price discrimination device which can ultimately increase output. 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.
They state that the monopoly cannot reach a double monopolistic position. This idea is based on the fact that consumers will reduce the purchase of the tying
product if the tied product’s price increase because they do not value the bundle as much as the manufacturer offers it to them. As a consequence, the firm
must reduce the price of the tied product.
Kodak case laid down the idea that the Chicago critique is sustainable only under its own assumption (perfect information for consumers and
market perfectly competitive), but not true in the real world.
Hugin case laid down the first layer is Europe. One manufacturer decided to refuse to supply the main product if the customers refused to exclusively buy
repairmen parts from the same manufacturer. The Commission found that this behavior was aiming at excluding competitors in the secondary market. (The
CoJ then overruled the decision because there was not interstate affairs but still we see the attempt to control the issue of bundling)
Looking at article 102 there are no foundations of efficiency gains, like paragraph (3) of article 101, because talking about the abuse of dominant position we
always talk about per se illegal rules. Of course, the undertaking, and its practices, must be studied before taking a decision. This points is very important
because it means that the only possibility for an undertaking to not be found liable is of proving that it is not dominant or that there is no foreclosure or no
harm to consumers. Having said that however, we still can see some efficiency gains when certain conducts are carried on. The only clear solution is to study the
situation before taking any final decision.
By credibly committing itself to sell the products only as a bundle, the dominant firm signals to competitors in the market of the bundled good that pricing
will be aggressive. Strong competition in the bundled good market may decrease the rivals’ profits and force them to exit or not even enter in the first place.
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.
Tying can be profitable in markets where firms compete through important 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 goods are complements. Since successful entry requires that newcomers enter two markets instead of one, the
entrants’ incentives for investment and innovation will be reduced.
1)
2)
3)
4)
5)
Bundling and ties can represent consumer preferences achieve costs savings and/or be used for reasons of quality assurance.
No reason for antitrust enforcement when consumer desire assemble products
Generate cost efficiencies
Economies of scale
Production and distribution costs are reduced
Sections 1 and 2 of the Sherman Act.
In Standard Oil (1949) there was a condemnation of tying products for the reason that they do not serve any purpose other than excluding competitors.
In Norther Pacific (1958) the SC declared that tying was impeding competitors the free access to the market.
In Jefferson Parish (1984) the majority decided to keep the per se rule but required that the tying allegation had to pass several screens before being declared
illegal; which are: products are separated, the undertaking has market power, the undertaking forces costumers to purchase the ties product, and that tying for
loses substantial volume of commerce.
In the Microsoft case the court endorsed the rule of reason for technological ties. Under the new 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 in so far it leads to an increase in consumer welfare.
This created a profound divide between the US and the EU because the same case has been strongly condemned in Europe but not at all in America.
The fact that the US switched to a by effect violation brought a revaluation also in Europe, but it has not really changed the idea that an infringement of article
102 is a per se violation, i.e. there is no possibility of showing any improvement of efficiencies and consumer welfare.
Tetra Pak II (1994) identifies 5 leveraging categories that may be abusive, two of which are particularly relevant:
i)
The abuse takes place on the dominated market but its effects are felt on another market on which the undertaking does not hold a
dominant position.
ii)
The abuse takes place on a market separate from the market dominated by the undertaking.
One of the problems of tying and bundling is that the dominant position is in one market but the effects of its abuse, and the practice itself, are in another
market. 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.
In EU Microsoft the European Commission outlined 4 conditions under which tying is incompatible with article 102:
1)
The tying and the tied good are two separate products
2)
The company concerned is dominant in the tying product market
3)
The company concerned does not give customers a choice to obtain the tying product without the tied one
4)
Tying forecloses competition
The main effect wanted by the undertaking, that grant rebates to customers, is the increase in loyalty.
They can create 3 exclusionary effects:
1)
selective rebates offered to consumers considering switching to a new entrant may lead to exclusion within one market (loyalty discounts);
2)
bundled discounts may lead to exclusion in a horizontally related market (ties and bundles);
3)
rebates offered to retailers on a single product in order to discourage them from buying competitors' products may lead to exclusion in a vertically
related market (exclusive dealing).
Each of these 3 cases actually bring short-term consumer welfare, but the medium and long- terms effects can be of eliminating competitors. Thus, the
undertaking can then exploit them to obtain monopoly profits.
In the US the fear to lessen price competition, together with the idea that rewarding consumer loyalty promotes competition on the merits, has led to a
strong presumption of legality of discounts and rebates, provided that they are not predatory. This implies the fact that the department of justice prefers to
include some of these abuses inside the predatory pricing box. Bundle discounts instead receive separate consideration.
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 (keep the market open).
One of the most important case about rebates in the EU is Michelin I (1983), where the Court draw some essential principles: all relevant circumstances need
to be taken into account; 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 excluding competitors from the market, and/or effectively tying customers to the dominant
supplier, and/or discriminating between customers. The Commission comes down heavily on rebates, especially on loyalty discounts.
The Commission has emphasized several factors as distorting competition, and hence subject to a per se prohibition:
1)
A rebate system which is equivalent to an exclusivity requirement, thus practically conditional on the customer’s obtaining all or most of its supplies
from the dominant supplier, and functioning as a loyalty and/or fidelity rebate.
2)
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.
One key factor about rebates is also the reference period, the period in which the customer is entitled to have the discount and the manufacturer can foreclose
other competitors. In the cases where there is no per se violation the reference period, on the basis of which the discount is calculated, should not be too long
(this “too long” is subjective to the industry). One thing that still hold, of course, is that the Court will never protect non-as-efficient competitors.
Loyalty discounts:
Retroactive discounts are a concern for competition because the retailer/costumer will not switch to another competitor. When it reaches a certain threshold
where it hasn’t had the discount yet but he can “see” it, he/she will see the additional units “free”. This happens because retroactive rebates increases the
switching costs. This increase comes from the loss of the full discount. Loyalty discounts produce a so-called suction effect, which is exactly what is just been
written above. Seen in the eyes of the consumers, this discount will make the incremental price a lot less than the sticker/listed price because he/she sees the
discount very close. This will make its willing to switch to a competitor a lot less likely.
Prices can also be set below the AAC or AVC to make the customer even more attached to the company, because it makes the switching cost huge. This signal
the intention of the undertaking to exclude competitors, more than just price competition since there will be losses to sustain. But of course, for being declared
illegal there need not to be a price below cost and also that price below cost does not imply a per se violation.
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, so that rivals cannot compete for the entire amounts of consumers. I.e. if the competitors are not able to increase market
shares. The example done in class was: the dominant undertaking has, say, 60% of market share, with a rebate scheme it increases to 70% and does not leave
room to competitors for increasing their market shares because they cannot compete with the price charged thanks to the discount (this is also due to the fact
that the lost market shares make competitor less efficient by not being able to exploit economies of scale). The necessary conditions 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.
Bundle discounts
Bundled discounts are defined as those granted by a supplier to customers, distributors or agents, with respect to the purchase of one or more products,
provided that their purchases or sales of one or more additional products achieve or exceed certain thresholds during a given reference period.
Bundled discounts combine elements of bundling and tying, on the one hand, and loyalty discounts, on the other hand. In fact, in addition to establishing a link
between two or more products, they generate switching costs for buyers and may give rise to a fidelity-inducing effect, if they are applied retroactively to the
entire amount of purchases realized by a customer during a certain reference period. If an equally efficient rival does not offer a comparable product range, it
may be unable to compensate buyers for the loss of discounts offered by the dominant firm, since it would have to grant very high discounts on a lower number
of sales.
Economic assessment
Rebates may exclude rival suppliers and lead to market foreclosure. Discounts schemes may generate 3 types of exclusionary effects:
A)
Selective rebates, exactly loyalty discounts
B)
Bundle discounts, may lead to exclusion in a horizontally related market
C)
Rebates offered to retailers, on a single product in order to discourage them from buying competitors’ products may lead to exclusion in a vertically
related market.
These kind of practices may bring to short-term gains for consumer but negative medium and long term harm. A rebate by a dominant firm may enable it to use
the “non contestable” portion of the demand of each customer as leverage to decrease the price to be paid for the “contestable portion” of the demand.
Pro-competitive effects
Loyalty discounts determine a reduction in the price level, which may break (quasi/tacit) collusive equilibriums and benefit consumers. The second possible
efficiency gain is the possibility of creating second degree price discrimination and increase total output, thus increasing social welfare. A third possible gain
is the reaching of better economies of scale which reduce unit costs, especially in industries with high fixed investments. The use of bundle discounts may
bring to efficiency gains as well. The decrease of units price of the bundled product and the possibility of economies of scale and economies of scope. The
price of the bundling product can be lowered, which is the monopolistic one.
Criticisms
If the cost of an undertaking is low and the price is low too, a rebate will bring to economic efficiencies, allowing to the most efficient undertaking to gain
market shares and allow to consumers to benefit from it. But we cannot justify the rebates schemes only on the basis of the costs (as said before), but it
should be analyzed case-by-case to see on whether there is actually an objective justification for the rebate scheme. The European Commission chooses a
form-based rather than an effect-based approach for this kind of anticompetitive behaviors.
External lecture
Abuse of dominant position in the Pharmaceutical Sector
The pharmaceutical market has a lot of regulation that should guarantee safety and effectiveness. There are a lot patents to allow the firm to recoup
from the expenses that it had to have for searching a cure. Also the antitrust authority gets involve to regulate prices to not make inaccessible to
citizens drugs. The main objective of competition law is to control the prices charged by firms, that, thanks to patents, enjoy monopoly market power.
The Command and Control approach used to be the old kind of method to attach high prices, but nowadays is exactly Competition Authority that play
the biggest role in the market.
Generic products, the ones created after the patent expired (20 years) by other competitors, are not really a concern for the Antitrust Authorities because since
the dugs are exactly the same the only way to compete is by cutting prices. This drop is on average 25% as soon as the patent expires. The free entry of generic
companies should scare the innovative companies. One thing that a company can to is to ask an SPC. SPC is used for extending the patent (max 5y) because a
drug must be texted before entering the market and it takes about 8-15y to do so. During this time the patent time is passing by and the company cannot
exploit its innovation.
The strategy that a company does is the “stream of innovation”, that is possible in competition by substitution (in contrast with competition by imitation).
Another possibility is to obtain a prolongation of the duration of the patent. But, of course, there are anticompetitive strategies that the firm can try to
undertake to foreclose competition:
- Regulatory gaming
The AstraZeneca case
The AstraZeneca company has been filed for abusing its position. This company owned a patent and had a blockbuster sales (more than 1B$). The alleged
abuses were: AZ illegitimately obtained the SPCs (additional patent protection) on Losec (the drug); and illegitimately withdrew its marketing authorization (the
possibility to enter the market) for Losec-capsules and introduced Losec tablets. The Commission found AZ to be guilty of abusing the position. The
consideration for alleging the fine of 60Meuro were: AZ was dominant in the relevant market of omeprazole; AZ obtained the SPC by not stating correctly the
starting date of the Marketing Authorization to which it was not entitle to; the marketing authorization released by AZ was the one about capsules and not
tablets which made to the Generics the impossibility to exactly copy the the drug to sell it to the market. Even if all these abuses were actually legal on a law
point of view, they created foreclosure in the market which is condemned as an abuse of dominant position. The Court recognized the possibility for a company
to exploit the patent granted by law, but there are some exceptions that have to found practically. These are based on the following questions: 1anticompetitive intent? 2- business irrationality? 3- the limitation of technological development test (Microsoft case, the impossibility for other companies to
develop a better product based on the first one).
The Italian Pfizer case
Pfizer became the owner of a patent for a blockbuster drug, Xalatan. When the company asked for the SPC, it forgot to include Italy, so it had an extension in all
Europe except for Italy. Pfizer-Pharmacia applied for a divisional patent, a special patent on a product slitty different from the one already patented that expire
at the same date, for the reason that it developed a better dosage. It then asked for a SPC to the new patent for filling the gap of Italy. When, in 2009, the
Generic were ready to enter the Italian market, Pfizer stated that it had a SPC that entended the patent. The Italian competition Authority said that Pfizer put
up a scheme to foreclose entrance to the generic companies, so condemned him liable of an abuse of dominant position. The European Court of Appeal
overruled the decision of the Italian AA and said that the divisional patent was legitimate. The ICA appealed by sustaining the facts that it has been found to
fine the firm. In the last appeal, it has been decided that where there is even the possibility for anticompetitive effects, the practice can be sanctioned by the
Anticompetitive Authority. This case divides the law community into 2: the ones who wish to see the Antitrust authority intervene ex-post into the market and
fix bad patents, and the ones who are very skeptical about the antitrust intervention because it will ultimately scare companies to try to invest.
The Aspen case
We are in the field of exploitative abuses, the other 2 were exclusionary abuses. The Commission is the one more in charge to punish excessive prices, while the
competent national authorities are more concerned about the foreclosure of competitors. This case concerns the Cosmos drugs, used to cure cancer therefore
essential drugs. Aspen, a South African generic company, bought the drug that was already out of patent. Aspen wanted to move the move the drugs form a Acategory to a C-category, where the drugs have free price charged by the firm and have no possibility to have reimbursement form the state. The request was
asked to the Italian Medicine Agency (AIFA) which refused. The threat of the undertaking was to stop the supply to the Italian market which created big
shortages in the pharmacies in Italy. AIFA had to accept the request of Aspen but at the same time it filed a complain to the ICA. The antitrust authority fined
Aspen by finding an infringement of article 102 (a) and for not having lawfully negotiate the price with AIFA at the start of the year as the law provide. The
peculiar thing is that even if the drugs were out of patent, there was only one one supplies; this happened because there is no enough demand to let
competitors into the market. To apply article 102(a) it must be assessed whether prices are both excessive and unfair. This implies that this is 2 steps process:
first check excessiveness (with cost-plus-method and gross-margin-method) and then check for unfairness (which cannot be calculated mathematically but
instead with non-costs-related-factors). Form this case come the main principles of unfairness: disproportion from benchmarks, absence of non-cost related
factor, misuse of limited resources, awareness of impossible renegotiation, aggressive pressure, the essentiality of the products and absence of substitutes, old
product, lack of certain costs that allow to charge excessive prices.
- Patent filing, divided into: patent clusters, patent thickets, and divisional patents
-