Lectures on EU
Competition Law
Dr. Petri Kuoppamäki
Professor of Competition Law
University of Helsinki, February 2013
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Table of Contents
1.  Introduction
2.  Goals and Tools of Competition law
3.  Enforcement of the Competition Rules
4.  Article 101
5.  Exemptions
6.  Article 102
7.  The Concepts of Market Power and Efficiency
8.  IPR issues, digital platforms
9.  Merger Control Rules
10. Future scenarios
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Introduction – Goals of
competition law
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Why competition law?
•  Competition law exists to protect the process of competition in
a free market economy
•  A system where the allocation of resources is determined
mainly by supply and demand in free markets
•  Competition wanted because of the market result it produces
•  Efficiency
•  Low prices
•  Innovations
•  Freedom of action
•  Competition rules limit the freedom of the market players in
order to protect the process of competition; yet at the same
time it preserves freedom of others (e.g. by enabling market
entry or preserving choice for customers and ultimate
consumers)
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Triangle of Competition Law
Merger
control
Abuse of
dominant
position
Prohibition of cartels
1.10.2002 Petri Kuoppamäki © Castrén & Snellman
5
EU competition rules – an
overview
•  Article 101
•  Article 101(1) prohibits agreements or concerted practices
restrictive of competition is
•  According to Article 101(3) Article 101(1) “may … be declared
inapplicable”
•  Article 102
•  Forbids dominant undertakings to abuse their market power
•  Merger Regulation
•  Prohibits concentrations significantly impeding effective
competition
•  State aid rules
•  Prohibits aids from EU member states to companies that
distort competition in the common market
•  Public undertakings and exclusive rights
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Sources of EU Competition law
•  The Treaty Articles
•  Regulations
•  Merger regulation
•  Block exemptions
•  Judgments
•  EU Court
•  EU General Court (former Court of First Instance)
•  Commission notices and guidelines
•  Commission decisions
•  Annual reports from the Commission
•  Decisions of national competition authorities and
courts
•  Other sources
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Enforcement of EC competition law
– an overview
•  Enforcement by the Commission
•  DG Competition in Brussels
•  The legal basis
‒  Article 101, 102 etc.
‒  Regulation 1/2003
•  Enforcement by national competition authorities (NCA’s)
•  Regulation 1/2003
•
•
•
•
Fines (up to 10 % of turnover)
Prohibition decisions
Commitment decisions
Enforcement powers
•  Dawn raids
•  Letters
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Enforcement and remedies
•  Enforcement by national courts
•  Article 101(1) and 102 have direct effect
‒  Case 127/73, BRT v SABAM
•  After Regulation 1/2003: Also Article 101(3)
•  Remedies in national courts
‒  Nullity, unenforceability of agreements
‒  Actions by third parties
‒  Damages(e.g. “Courage)
‒  Does Community law require a national Court to ensure that a
remedy is available?
•  Public and private enforcement
•  In Europe public enforcement ”dominates”
•  In the Us private enforcement ”dominates”
•  Differences in legal culture, in the US wide ranging
discovery, treble damages, and parties pay their own
costs
•  Plans of DG Competition for a directive that would
enhance private damage claims in Europe, single
damages
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Competition policy and
competition law
•  Competition policy
•  Describes the way in which governments take
measures to promote competitive market structures and
behaviour
•  Formulation of goals
‒  Competition policy and competition theory (Industrial
organization/New industrial economics)
•  Competition law
•  The legal rules implementing the competition policy
•  Law and economics
•  Developing competition policy through case law
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Economic efficiency
•  Main objective of competition policy
•  Competition gives the best utilisation of scarce resources
•  Perfect competition vs. monopoly
•  Perfect competition
•  Pareto optimal use of resources
‒  None could be made better of without someone being made worse
of
‒  Consumer welfare maximized
•  Productive efficiency
‒  Constant pressure on costs
‒  Cost reductions is the only means whereby firms can stay in
business and increase profits
•  Static efficiency
•  Dynamic efficiency
•  Productive efficiency
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Monopoly
•  Leads to an inefficient allocation of resources
•  Quantity supplied less the quantity which would be supplied in
a competitive market
•  Allocative efficíency: best allocation of rewsources
•  Dynamic efficiency: new innovation (products and services,
processes)
•  Deadweight loss
•  Loss of consumer surplus which is not turned into profit for the
producer
•  X-efficiency
•  Perfect competition, monopoly and competition in the real
world
•  Workable competition
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Other goals of competition
policy
•  Preservation of liberty (freedom to compete)
•  Fair competition
•  Promoting small and medium sized undertakings ?
•  Balancing with socio-political issues
•  Social policies
•  Employment
•  Industrial policy
•  Environment
•  It is worthwile to protect competition as a process and institution
because:
•  Competition is one of the key pillars of a market economy
•  Improves efficiency and balances economic power (likewise as
constitution balances political and bureucratic power)
•  That being said, in a society other things are needed as well…
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Competing schools of thought – a
helicopter view
•  Ordoliberalism in Germany in 1930’s to 1960’s
•  e.g. Eucken, Böhm
•  Setting up an institutional framework for competition law
•  Competition law is needed to preserve market freedom and ultimately
democracy (cartels as a tool of Nazi ecocomic policy)
•  Competition law
•  Harvard school from 1960’s to 1980’s
•  Workable competition (Clark)
•  E,g. Turner, Areeda, Mason, Scherer
•  SCP (structure conduct paradigm)
•  Concentrated markets lead to inefficiency
•  New Austrian school (e.g. Hayek)
•  E,g. Hayek
•  Competitiion is and open ended iterative process the result of which
cannot be known in advance
•  Markeyt power is not a real problem and if it was, enforcers do not
know how to resolve issues
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Competing Schools of thought…
•  Chicago school from 1970’s to 1990’s
•  e.g. Sigler, Demsetz, Bork, Posner
•  The only goal of the antitrust should be efficiency
•  SCP paradigm not proven
•  Concentare on fighting cartels and scale down other areas
•  Post-Chicago from mid 1980’s
•  e.g. Farrel, Shapiro
•  Market imperfections matter
•  Companies act strategically (game theory)
•  There are no simple rules but every case must be proven on
its own merits
•  EU normally ”current main stream”, functionaire driven
enforcement
•  In US normally a pendulum between active enforcement
(democrats) and more laissez faire (republicans)
•  Demarcation line between theory and values…
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Goals of EU competition law
•  EU court: Systematic-teleological interpretation
•  Rules must be interpreted against their goals and in the wider context
of the EU Treaty
•  Article 2 EU Treaty:
•  The Community shall have as its task, by establishing a common
market and an economic and monetary union and by implementing
the common policies or activities referred to in Articles 3 and 3a, to
promote throughout the Community a harmonious and balanced
development of economic activities, a high level of employment and of
social protection, equality between men and women, sustainable and
non-inflanatory growth, a high degree of competitiveness and
convergence of economic performance, a high level of protection and
improvement of the quality of life, and economic and social cohesion
and solidarity among Member States.
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Common market and Internal
market
•
•
The common market is not an end in itself but a means of achieving the promotion
of matters listed in Article 2
•
An area where direct and indirect barriers to trade between Member States are
removed (internal aspect) and
•
a common import and export policy adopted toward the outside world as far as
commercial transactions are concerned (external aspect)
Internal market
•
the internal aspect of the common market
•
Defined in Article 14:
‒  The internal market shall comprise an area without internal frontiers in which
the free movement of goods, persons, services and capital is ensured in
accordance with the provisions of this Treaty.
•
Articles 3 sets out the ”activities” of the Community, including a system ensuring
that competition in the internal market is not distorted
•
If there were no competition rules companies could re-erect the trade barriers
by private agreements
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EU competition policy and single
market
•  The role of competition policy as an instrument of single market
integration absolutely crucial to understanding EU competition law
•  Regulates conduct of undertakings threatening the establishment of
an internal market
•  Rules on ”free movement” directed towards Member States
•  EU competition law aims to protect and enhance
•  Competition
•  Single market integration
•  Thus: efficiency and allocation of resources a central concern, but not
the sole goal
•  Other objectives?
•  The objectives in Article 2
•  Interface with other policies
•  Balancing between competing goals
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CJEU’s ”definition” of
competition?
•
EU court (CJEU) has not relied upon any particular competition ”ideology”
•  But economic arguments/theories/models decisive for the application of
the competition rules in individual cases
•
Definition in Metro (case 26/76)
•  The requirements contained in Articles 3 and [101] of the EU Treaty that
competition shall not be distorted implies the existence on the market of
workable competition, that is to say the degree of competition necessary to
ensure the observance of the basic requirements and the attainment of the
objectives of the Treaty, in particular the creation of a single market achieving
conditions similar to those of the domestic market. In accordance with this
requirement the nature and the intensiveness of competition may vary to an
extent dictated by the products or services in question and the economic
structure of the relevant market sectors.
•  EU court´s concept of ”workable competition” related to what competition is
inteded to achieve in the Community context
•  Not one of the concepts of ”workable competition” found in economic theory
(but influenced by the theory)
•  Concept of competition in the Merger Regulation compared:
•  Prohibits concentrations creating or strengthening a dominant position ”as a
result of which effective competition would be significantly impeded in the
common market”
‒  Article 2(2) and (3)
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How to pursue the goals?
•  Prevent agreements restrictive of competition
•  Horizontal agreements (among competitors)
•  Vertical agreements (between parties at different levels
of the production or distribution chain)
•  Control market power and its abuse
•  Control oligopolistic markets
•  Prevent mergers which lead to a too concentrated
market structure and hence too high concentration in
market power
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Ex ante and ex post control
•  Ex ante – Preventive Control
•  Rationale is, to hard to remedy ex post facto (Merger control and
State aid)
•  Challenge is (i) imperfect information and, in turn (ii) speculation
on plausibility of anticompetitive harm
•  Ex post – Corrective Control
•  Rationale is hidden behavior that firms would never disclose (or
firms that underestimate the anticompetitive nature of their
practices). Primarily cartels, agreements and abuses of
dominance
•  Challenge is (i) detection through investigative measures; (ii)
determination through proper analytical theories of harm; and (iii)
devising appropriate sanctions (fines, personal sanctions, etc.)
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It is no longer only about EU and
US…
•  Increase of similarities between competition law of EU and competition
laws of its member states
•  Nowadays all 27 member states have their own national legislation
that is based on similar principles that EU rules
•  In many cases blue prints of EU rules (e.g. Sweden, Finland, UK) is
very close
•  National rules are applied to cases where there is no effect on trade
between EU member states
•  International convergence development, EU-USA, OECD, striving for
emergence of international competition law
•  Nowadays competition law in about 130 jurisdictions worldwide
•  New laws e.g. in China, India, Russia, Brazil (BRICK countries)
•  In most cases EU rules have served as a model but national cultures
still differ
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Competition from institutional
point of view
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Relationship Between EU and
National Competition Law
•  EU competition law applies if the practice does,
actually or potentially, directly or indirectly affect the
trade between EU member states
•  Decentralisation and centralisation
•  Decentralisation: passing individual cases from
Brussels to competition authorities of member states
•  Centralisation: increase in appliance of the EU law in
cases affecting mainly on national level, increase of
the EU Commission’s power towards national
authorities, displacement of national law when ‘effect
on trade’ –criteria is present
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Increase of Economic
Argumentation
•  Although sometimes otherwise stated, argumentation based on
economics is not new
•
Rather one could argue that it has changed intermittingly
•
Economics is a tool to competition lawyer, it is not capable of
producing solutions on its own and it cannot replace judicial
considerations
‒  Using microeconomics as a tool, for instance, in defining the
relevant markets, measuring market power and estimating its
effects.
‒  Competition analysis is becoming more complicated; the
challenges of dynamic network economy; old tools for analysis
may not be adequate anymore
‒  On the background are normative questions to which economics is
incapable of answering
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Enforcement of the EU
Treaty’s Competition Rules
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Main powers of the EU
Commission
•  Prohibition decisions
•  Fines for infringements: up to 10 % of the gobal worldwide turnover
•  Conditional fines (procedure)
•  Wide investigaqtion powers
•  Requests for information
•  Dawn raids
•  Sectoral enquiries
•  Hearings (hearing officer)
•  Appeal to EU main court (CFI)
•  Legislative powers: block exemptions (based on Counsel mandate); right
of initiative
•  Guidelines and interpretative statements
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Modernization of the rules in
2004
•  Questionable efficacy of the old system
•  A better allocation of resources is needed in order to fight
serious infringements and to cope with the enlargement process.
•  Case law is pretty much “settled” as far as the general
requirements of the application of Art. 101 EU are concerned.
•  Legal exemptions, new “economics based” block exemptions
•  General business review letters issued in new situations but
basically companies will have to evaluate their situation on their
own
•  The situation will increased importance of expertise
•  Borderline cases?
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Enforcement of Art. 101 and 102
EU
•  Regulation 1/2003
•  Elimination of notification system
•  Decentralization of enforcement of EC competition rules
‒  National Competition Authorities and Courts
‒  European Competition Network, ECN
•  New investigation and enforcement powers for the Commission
•  Modernization package
•  Notice on the cooperation between the Commission and national
courts
•  Notice on cooperation between the network and competition
authorities
•  Notice on informal guidance by the Commission in individual cases
through guidance letters
•  Notice providing guidelines on application of Art. 101(3) EU
•  Notice on handling of complaints under Art 101 and 102 EU
•  Notice on the concept of effect on trade between member states
•  Regulation on the Commission proceedings
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Regulation 1/2003
•  Elimination of the notification system
•  Possibility to receive only “Guidance letters”, which are
non-binding and issued only in limited circumstances
•  Decentralization of the enforcement of EU
Competition rules
•  Direct applicability in national competition authorities
and courts
•  European Competition Authority (ECN)
•  The Commission’s new investigative and
enforcement powers
•  “Dawn Raids” in private residences
•  Ability to take oral statements
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Infringements and sanctions
Most serious infringements:
1.
Price fixing, market sharing and capacity cartels
2.
Sharing of confidential information between competitors
(information cartels)
3.
Vertical restrictions leading to portioning of the markets (import
and export bans), allocation of customers or minimum resale
price maintenance
4.
Abuse of dominant position
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Overview of Sanctions
•  Prohibition of the illegal action (to mput an infringement to an end
•
Fine of up to 10% of the offender's turnover; very high fines for
serious infringements
•
Restrictive agreements are automatically void under Art. 101(2) EU.
•
Damages
•
In some member states (e.g. UK and Ireland) criminal sanctions
•
“Informal” sanctions (bad press)
•
Fines are gettting higher, biggest fine in EU over a 1 billion euro
(Intel)
•
Conditional decisions
•
Commitment decisions (settlements)
•
Leniency in cartel cases
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Enforcement of Art. 101 and 102
1.
From ex ante control to ex post control: Firms are more and more
responsible on the evaluation of their competitive status
2.
More severe sanctions
3.
No longer notifications outside the realm of mergers– Less
byrocracy and more flexibility
4.
Uniform application of the competition rules in the member states
and in the EU level strived at
5.
An administrative organisation, in which the Commission is the
central body and the NCAs national offices?
6.
Companies will assess fulfilment of the criteria of Art. 101 (3) on
their own; business review letters in new situation
7.
Fines have become very high for cartels. Generally more lenient
application of the rules.
8.
Leniency programs for cartels to create a prisoner’s dilemma for
law breakers.
9.
The Commission is striving to put more emphasis on private
enforcement.
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Article 101 TFEU
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The scheme of Article 101
•  The prohibition in Article 101(1)
•  Nullity, Article 101(2)
•  Exemption, Article 101(3)
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Article 101
The following shall be prohibited as incompatible and automatically void:
•  agreements between undertakings,
•  decisions by associations of undertakings, and
•  concerted practices
which may affect trade between Member States and which have as their
object or effect the prevention, restriction or distortion of competition
within the common market,
•  and in particular those which (examples only):
a)  directly or indirectly fix purchase or selling prices or other trading
conditions;
b)  limit or control production, markets, technical development, or
investment;
c)  share markets or sources of supply;
d)  apply dissimilar conditions to equivalent transactions with other
trading parties, thereby placing them at a competitive disadvantage;
e)  make the conclusion of contracts subject to acceptance by the other
parties of supplementary obligations which, have no connection with
the subject of such contracts.
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Article 101 continues
•  The provisions of paragraph 1 may be declared inapplicable in the case
of any agreement, decision or concerted practice, which contributes to
•
improving the production or distribution of goods or
•
to promoting technical or economic progress,
•
while allowing consumers a fair share of the resulting benefit, and
which does not:
•  impose on the undertakings concerned restrictions which are not
indispensable to the attainment of these objectives;
•  afford such undertakings the possibility of eliminating competition in
respect of a substantial part of the products in question.
•
… These abstract competition law principles are then interpreted
by e.g. COMMISSION NOTICE Guidelines on the applicability of Article
101 of the EC Treaty to horizontal cooperation agreements (2001/C 3/02)
and the Courts and the lawyers and the scholars…
•  Thus or therefore, seldom quick & easy answers (except for hardcore restrictions… )
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Most serious violations under
Article 101
•  Most serious forms of restrictive agreements which cannot be exempted
even if they contain pro-competitive effects:
‒  Price fixing
‒  Market sharing
‒  Quota cartels and other forms of capacity collusion
‒  Bid rigging
‒  Boycotts and concerted refusals to deal
‒  Information cartels
‒  Allocating markets or customers
•  Note that what is considered hard core restrictions is dependant on
the entire effect of the concerted practice or agreement.
‒  Price-fixing is much more than just fixing prices.
‒  What constitutes a “concerted action” or a “conspiracy”?
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Elements of Article 101
•  The meaning of “undertaking”
•  Forms of co-operation caught
•  The meaning of agreement
•  Decisions by associations of undertakings
•  Concerted practices
•  “Object or effect the prevention, restriction or
distortion of competition”
•  Effect on trade between member states
•  De minimis
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Prevention, Restriction or
Distortion of Competition
•  Only such co-operation comes within the ambit of Art. 101 (1),
however, which is harmful to competition in the Common Market
(i.e. the geographical area defined).
1. Relevant Market: product market, geographic market.
•  Under both Art. 101 and 102 EU, before an agreement can be
assessed, it must be established which "competition" is
affected. The framework for the analysis is defined by the two
aspects of the product and the geographic area which are
"relevant" for the purposes of enquiry.
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Prevention, Restriction…
2.
Distortion of competition
•  Competition must not only be affected, which any type of conduct on
the market does. Rather, it must be distorted, i.e. made to develop in
a way which is detrimental to the attainment of the aims of Community
competition law. Cartels are by their very nature apt to distort
competition in the sense of Art. 101 (1) EC and are, therefore,
referred to as "naked restrictions".
3. Object or effect
•  An agreement has the object of distorting competition if, on an
analysis of its terms in their given commercial context, such a
distortion is likely to result from it. The notion is such a broad one that
the "effects" of an agreement will only have to be considered in the
case of agreements to be implemented in non-member states, or
where the distortion of competition results, in the case of vertical
agreements, from the frequency with which they occur on a given
market, rather than from each individual agreement taken in isolation.
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“May affect trade between EU
Member States”
•  The condition that only such agreements are prohibited by Art.
1011 (1) which "may affect trade between Member States"
serves to define the sphere of application of Community
competition law as opposed to the competition law of the
Member States (or third countries).
•  Community law, however, takes precedence in cases of conflicts
between the outcome of the two sets of procedures.
•  Community competition law can even reach beyond the frontiers
of the Community, so-called "extraterritoriality."
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Appreciable Effect
•  The detrimental effects of an agreement on competition or on the
integration of markets between Member States must be of a sufficient
magnitude to merit the attention of the Commission. Otherwise, they fall
under the maxim de minimis non curat praetor or short, they are
considered to be "de minimis." Whether this is the case depends
primarily on the market shares of those involved, both on the relevant
and in other markets. The Commission has attached precise figures to
this, while the Court been more reserved in this respect.
•  De minimis Guidelines:
-  Horizontal agreements: 10 % market share
- Vertical agreements: 15 % market share
- Price fixing and market sharing cartels, import and export bans and
similar naked restrictions are always prohibited irrespective of the
market share
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Adressees and Prohibited Forms
of Conduct
Adressees:
1. Undertakings
2. Associations of undertakings
3. Member States – Article 10 in conjunction with Article 101
Prohibited forms of conduct:
1. Multilateral versus unilateral conduct
2. Decisions by associations of undertakings
3. Concerted practices
4. Vertical and horizontal agreements are both caught
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The concept of an ”Undertaking”
•  Article 101 (and 102) applies only to “undertakings”
•  Undertaking not defined in the EU Treaty
•  EU Court’s definition of an undertaking:
•  “the concept of an undertaking encompasses every entity engaged in
an economic activity regardless of the legal status of the entity and
the way in which it is financed”
‒  Case 41/90, Höfner and Elsner v Macrotron, para 21
•  “Every entity”
•  The legal form of the entity irrelevant
‒  All kind of companies
‒  Persons
‒  Self employed
‒  Not employees (Opinion of GA Jacobs, case C-67/96, Albany)
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The concept of an ”Undertaking”
Associations
‒  “Associations of undertakings” directly caught
‒  But can also be found to act as “undertakings”
‒  Example: Co-operatives, P&I clubs
‒  Exception: trade unions representing their members
•  The entity’s engagement in “economic activity” decisive
“Economic activity”
•  Any activity consisting in offering goods and services on a given
market (wide definition)
•  Höffner and Elsner
•  Employment agency in Germany
•  Functional defenition of the concept of undertaking
•  Head hunting was an economic activity to which Art. 102 applied
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State bodies
•  Exercising official authority
•  ECJ: Article 101 does not apply to agreements concluded by bodies
“acting in their capacity as public authorities and undertakings
entrusted with the provision of a public service” (case 30/87, Bodson)
•  Includes tasks which are typical those of a public authority
•  Such tasks are not of an economic nature
•  Can to a certain extent be financed through fees of economic
contributions
•  Engaging in economic activity
•  Will be regarded as an “undertaking”
•  How the public body is organised is not decisive
•  Bodies both exercising official authority and engaged in economic activity
•  Undertakings engaged in “services of general economic interest”, article
106(2)
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Decisions of Undertakings
•  Collusion can take place through the medium of an
association: Directly covered by art 101(1)
•  Makes it possible to hold associations directly liable
•  Decision
•  a statement made with the object or effect of influencing
the commercial behaviour of the association’s
members
•  Does not have to be binding (e g recommendations)
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Parent and daughter - Single
economic unit
•
•
•
•
•
Agreements between two undertakings within a single economic unit not regarded
as an agreement “between” undertakings
•  Escapes the prohibition in article 101(1)
The rationale:
•  No freedom to take decisions regarding the market conduct
‒  Regarded as unilateral conduct
‒  May be caught by article 102 if the undertaking has a dominant market
position
•  Internal allocation of functions
The other side of the coin:
•  If a subsidiary engages in anti competitive agreements the mother company will
also be regarded as part of the agreement
The test of control
•  If a parent company owns more than 50% of the shares in a subsidiary
interdependency is presumed
•  Minority share holdings may also give control if combined with specific rights
attached to them
•  One large shareholder and many small
•  Joint control (50/50)
Two or more separate legal undertakings can be treated as on undertaking
•  if the undertakings “form an economic unit within which the subsidiary has no
real freedom to determine its course of action on the market, and if the
agreements or practices are concerned merely with the internal allocation of
tasks as between the undertakings” (e.g. case 30/87, Corinne Bodson)
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The concept of an ”agreement”
•
”Agreement” is widely widely construed under the EU rules
•  It is sufficient if the undertakings in question should have expressed their joint
intention to conduct themselves on the market in a specific way
‒  Alignment of the competititive parameters available to them
•  “joint intention” : a legally binding agreement not necessary
•  The form of no importance (oral, signed, unsigned)
•  “gentlemen’s agreements”
•  agreement does not have to be exhaustive
‒  It is enough just to set the broad framework for the undertakings market
conduct
•  The engagement of the parties in the agreement
•  It is enough to be partly engaged in the collaboration
‒  Breach of contract regarding parts of the agreement
•  Passive “members”
•  An excuse if an undertaking has been “forced” into a cartel? No, but possible a
mitigation circumstance?
•  ”Cheating” is a common feature in cartels but does not make the activity any
more legal.
•  The situation when the agreement is terminated
•  ECJ: It is sufficient if such agreements continue to produce their effects after
they have formally ceased to be in force
‒  Case 51/75, EMI Records Limited v CBS United Kingdom Limited
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Economics of collusion
•
Collusion is a real concern in competition policy
•
•
•
•
dangers of collusion rise as the number of firms falls.
Collusion diagram – equilibrium combination of mark up and number of firms
•
BE (break even; increasing )
•
COMP (competition; declining)
One extreme is “no collusion”
•
COMP curve for ‘normal’, non-collusive competition
•
Firms do not coordinate prices or sales.
Another extreme is ‘perfect collusion’.
•
Firms coordinate prices and sales perfectly.
•
Max profit from market is monopoly price & sales.
•
Perfect collusion is where firms charge monopoly price and split the sales
among themselves.
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Cartels (economics)
euros
•  Suppose price without cartel would be P.
•  Cartel raises price to P’.
• Consumer surplus is reduced for a+b
• Cartel’s profit rise by the area a-c
•  Two problems with cartels
P’
• “Rip-off effect”; the fact that cartels allow firms to
profit at expense of customers
a
P
• “Inefficiency effect”; the gain to firms in a cartel is less
than the loss to customers
b
c
AC
Demand
curve
C’
C
Quantity
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Cartels (the vitamin case)
•  In 2001, Commission fined 8 companies for vitamins cartels
•  vitamins A, E, B1, B2, B5, B6, C, D3, Biotin, Folic acid, Beta Carotene and carotinoids
•  The European vitamins market is worth almost a billion euros a year.
•  The firms fixed prices, allocated sales quotas, agreed on and implemented price increases and
issued price announcements in according to agreed procedures.
•  They set up a mechanism to monitor and enforce their agreements and participated in regular
meetings to implement their plans.
•  Formal structure with senior managers to ensure the functioning of the cartels: the exchange of
sales values, volumes of sales and pricing information on a quarterly or monthly basis at regular
meetings, and the preparation, agreement and implementation and monitoring of an annual
"budget" followed by the adjustment of actual sales achieved so as to comply with the quotas
allocated.
•  Hoffman-La Roche of Switzerland (cartel ringleader) received the largest fine (462m EUR); BASF
and Merck (Germany), Aventis SA (France), Solvay Pharmaceuticals (the Netherlands), Daiichi
Pharmaceutical, Esai and Takeda Chemical Industries (Japan).
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Distinction between agreement and
concerted practice
•  Overlapping concepts
•  No precise distinction
•  And no use for a precise distinction
•  “Concerted practice” important mainly where the
Commission or the Courts is forced to rely upon
circumstantial evidence alone
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Concerted practices
•  A form of co-ordination where undertakings, without concluding any sort
of agreement or establishing a plan of action, knowingly substitute
practical co-operation between them for the risks of competition
•  This criteria avoids that situations where companies collaborate
without any kind of agreement but only on the basis of a common
understand falls outside article 101(1)
•  It is contrary to the rules on competition for a producer to co-operate
with his competitors, in any way whatsoever, in order to determine a cooperated way of action or to ensure its success by prior elimination of all
uncertainty as to each others conduct regarding the essential elements
of that action
•  ECJ, case 48/69, ICI v Commission, “Dyestuffs”
•  Problem 1: if companies can fix prices ”informally” without getting caught
this would render cartel enforcement ineffective
•  Problem 2: if the level of proof is put too low rights of defense are at risk
•  Question: how much indirect economic evidence can substititute direct
proof (written documents, meeting minutes etc.)
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Proving concerted practices
•  Direct or indirect contact
•  Meeting of minds or some kind of consensus
•  Exchange of information
•  Unilateral disclosure
•  Public announcements
•  Subsequent behavior in the market
•  Causality
•  Can a concerted practice be inferred from circumstantial evidence
alone?
•  A question of the use of economic evidence in competition cases
•  Parallel market behavior alone in itself not a concerted practice; in
practice a “smoking gun” is needed in cartel cases
•  BUT: It may however amount to strong evidence of such a practice if it
leads to conditions of competition which do not correspond to the
normal conditions of the market having regard to the nature of the
products, the size and numbers of undertakings, and the volume of the
said market power
•  ECJ, case 48/69, ICI v Commission (joint price raises)
•  Oligopoly markets and economic evidence
•  Compare joint dominance
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EU Courts decision concerted
practice" and standard of proof
•  The opinion is the result of an Article 234 reference from the
Netherlands, relating to a case whereby the Dutch Competition Authority
(NMa) fined a number of mobile operators for coordinated practices in
breach of Article 81 and/or the national Dutch law equivalent.
•  Whether and to what extent assessment of the specific market
circumstances, the market conduct of the undertakings concerned and
the effects of that conduct on competition, is required for presumption of
an anti-competitive object. In addition, clarification was requested on the
Community law requirements governing the standard of proof necessary
to establish an infringement of Article 101 EC in proceedings before a
national court.
•  Background: Is one single meeting enough for a concerted practice? A
Decision of the Dutch NCA to fine operators.
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Court’s opinion continued
•
In particular, national courts may not ignore the typical characteristics of evidence
adduced in determining infringements of the competition rules and must permit
reference to be made to common experience when evaluating typical events. (c)
Subject to proof to the contrary, which it is for the undertakings concerned to
adduce, there must be a presumption before national courts, too, that undertakings
participating in concerted actions and remaining active on the market take account
of the information exchanged with their competitors when determining their conduct
on that market.
•
(3) Even if only an isolated event of concerted action took place between
competitors which remain active on the market, the rebuttable presumption may be
made that such concertation had an impact on their market conduct. In particular,
such a presumption applies where concertation took place merely on a selective
basis in relation to a one-off alteration in the market conduct of the participants with
reference simply to one parameter of competition.
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Court’s decision
•
1) (a) A concerted practice pursues an anti-competitive object for the purposes of
Article 101(1) EU where, according to its content and objectives and having regard
to its legal and economic context, it is capable in an individual case of resulting in
the prevention, restriction or distortion of competition within the common market. In
that regard, neither the realization of such prevention, restriction or distortion of
competition nor a direct link between the concerted practice and retail prices is
decisive. (b) An exchange of confidential information between competitors is tainted
with an anti-competitive object if the exchange is capable of removing existing
uncertainties concerning the intended market conduct of the participating
undertakings and thus undermining the rules of free competition.
•
(2) (a) For the purposes of proving an infringement of Article 101 EU in proceedings
before national courts it is for national law to determine the standard of proof
required, subject to the proviso that the principles of equivalence and effectiveness
and general principles of Community law must be observed. (b) According to the
principle of effectiveness, criteria for proof of an infringement of Article 101 EU may
not be imposed if they are so onerous as to render such proof impossible in
practice or excessively difficult.
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What about Useful Agreements?
1. Ancillary restraints
•  Even a restriction which, taken on its own, might be in breach of Art.
101 (1), will not bring about a distortion of competition if it is ancillary
to such clauses in an agreement that do not restrict competition but
are beneficial to consumers and competition.
2. No rule of reason?
•  Despite the notion of ancillary restraints, and unlike in US-Antitrust
law, Art. 101(1) does not call for a comprehensive weighing of the proand anticompetitive effects of an agreement; this is reserved for Art.
101 par. 3 (group exemptions). In practice more “rule of reason” also
under Article 101(1).
3. Block exemptions and Guidelines
•  Some agreements are considered to be pro-competitive, when fitted
into the scope of the exemptions and guidelines.
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Exemptions
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Exemptions under Art. 101 (3) EC
•  Where the agreement "contributes to improving the production or
distribution of goods or to promoting technical or economic progress,
while allowing consumers a fair share of the resulting benefit, and which
does not:
(a) impose on the undertakings concerned restrictions which are not
indispensable to the attainment of these objectives;
(b) afford such undertakings the possibility of eliminating competition in
respect of a substantial part of the products in question."
•  Examples:
-
restrictions necessary to encourage the spread of innovative
technology
-
restrictions based on objective technical criteria
-
restriction necessary to protect confidential information
•  Block exemptions and Guidelines:
- Block exemptions on horizontal and vertical agreements, technology
transfer agreements and insurance sector and the relevant guidelines
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Function of block exemptions
•  to exempt automatically agreements from Article 101(1) which
fall within block exemptions, without any need for notification to
the Commission
•  to provide legal certainty
•  historically have been drafted in a restrictive way that has limited
their application in practice
•  new type of block exemptions include more economic analysis,
safe heavens, black lists, flexibility versus legal certainty.
•  shift from Regulations (law) to administrative Guidelines
•  agreements falling outside of a block exemption may benefit
from individual exemption or another block exemption
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List of current block exemptions
•  Vertical restraints 330/2010
•  Automotive vehicle distribution 461/2010
•  Technology transfer agreements 772/2004
•  Specialisation/production agreements
•  Research and development
•  Insurance
•  Road, rail and inland waterway
•  Liner conferences
•  Airline market
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Vertical agreements
•  Vertical block exemption 330/2010 and guidelines
•  Covers all types of basic vertical agreemens, e.g. exclusive and nonexclusive distribution agreements, selective distribution agreements,
franchising…
•  In exclusive distribution agreements distinction between active and and
passive sales
•  Safe harbours if the market share of both seller and buyer 30 % is no
more than 30 %; above that threshold vertical guidelines apply
•  Hard core violations: restriction of parallel trade, vertical price fixing
( minimum prices); restrictions on cross deliveries in selective systems
etc.
•  Efficiency goal vs. integration goal?
•  New: no discrimination of online sales; the seller can, however require
that the online seller has a ”brick and mortar shop” as well
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Exclusive territories (economics)
•  More common anti-competitive practice is
‘exclusive territories’.
euros
•  Nintendo example; high prices in Germany
vs UK.
DGermany
MRGermany
• Germany’s inelastic demand meant
Nintendo wanted to charge a higher price than
in UK.
PGermany
• Normally Single Market limits this sort of
price discrimination (arbitrage by firms).
•  Nintendo implemented a system that
prevented arbitrage within the EU (illegal).
• European Commission fined Nintendo and
the 7 distributors 168 million euros.
PUK
MC
MRUK
DUK
Quantity
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IP and Competition law
•  IP laws
•  Provide exclusive rights for IP holder – exclude others from
certain acts
•  Competition law
•  Preserve competition as driving force in efficient markets
by prohibiting certain conducts
•  Limits i.e. the exercise of market power under certain
circumstances where necessary to preserve competition
•  Common purposes
•  To promote innovation
•  Consumer welfare
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Technology Transfer Agreement
Block Exemption Regulation
•  TTBER applies to all licenses and assignments for production purposes,
excluding IP pooling and R&D arrangements.
•  Guidelines supplement TTBER by clarifying the application of TTBER
and also the application of Art 81 EC to agreements that fall outside the
scope of the regulation.
•  The Commission wanted to “implement a similar general economic
approach to all agreements under Article 81, underpinning the
importance that economic arguments and considerations should have in
a competition assessment and in line with the general competition policy
approach of our main trading partners.” (Mario Monti, January 16th,
2004)
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Structure of Regulation 772/2004
•  Is the agreement a technology transfer agreement as defined by the TTBE
(Article 2)?
•  What is the relevant product or technology market (Article 3)?
•  Are the parties competitors on the relevant product or technology market(s)
(Articles 3-5)?
•  What are the market shares of the parties? Will the market shares increase
during the lifetime of the license agreement (Article 3)?
•  Does the license contain reciprocal or non-reciprocal licenses (Article 4)?
•  Does the agreement contain any hardcore restrictions (Article 4)?
•  Does the agreement contain any excluded restrictions? Are the clauses
containing excluded restrictions severable from the rest of the agreement
(Article 5)?
•  Could the benefit of the TTBER be withdrawn by the Commission or by the
national authorities (Article 6) or could it be disapplied (Article 7)?
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TTBER
•  Covers also Software copyright licenses in addition to patent and
know-how licenses, designs, semiconductor mask works,
supplementary protection and plant breeders certificates.
•  Market share ceilings:
•  Agreements between competitors: combined market share
20%
•  Agreements between non-competitors: combined market
share 30%
•  Broad exemption would not be possible without market share
restrictions?
•  In addition, the guidelines will contain a second safe harbor
based on the number of competing technologies that are
available to potential licensees at a comparable cost. This
will provide extra guidance especially for dynamic sectors.
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TTBER
•  Acknowledgement of vertical and horizontal agreements in certain
restrictions
•  Black-listed restrictions between non-competitors:
‒  Minimum resale price maintenance
‒  Certain passive sale restrictions
‒  Restrictions of active and passive sales to end users by a licensee
which is a member of a selective distribution system and which
operates at the retail level
•  Black-listed restrictions between competitors:
‒  Maximum and minimum resale price maintenance
‒  Reciprocal output limitations
‒  Certain market or customer allocations
‒  Restrictions on licensees’ ability to exploit their own technology or
on the parties’ ability to carry out research and development
•  If a black list provision in an agreement, whole agreement excluded from
TTBE irrespective of market share
•  Competition risks are greater for licensing between competitors and are
www.helsinki.fi/yliopisto licensing.
greater for reciprocal licensing than for non-reciprocal
TTBER
•  Gray-listed restrictions, which do not prevent the
possible block exemption of the remainder of the
agreement.
•  Exclusive grant-back license and assignment
obligations on the licensee with respect to its severable
improvements to the licensed technology
•  IPR validity no-challenge clauses
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A practical approach
1.
2.
3.
4.
5.
6.
7.
8.
Why is the licensing deal done?
Does it increase or decrease output?
Does it have an effect on prices?
What is the overall effect on IP markets and
downstrem product markets?
Does the agreement contain any hardcore or
blacklisted provisions?
Shares in product markets and number of available
technologies?
Specific concerns?
Read and apply the guidelines!
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Article 102 EC
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Article 102
•  "Any abuse by one or more undertakings of a dominant position within
the common market or in a substantial part of it shall be prohibited as
incompatible with the common market in so far as it may affect trade
between Member States."
•  Abuse - Art.102
(a) directly or indirectly imposing unfair purchase or selling prices
or other unfair trading conditions;
(b) limiting production, markets or technical development to the
prejudice of
consumers;
(c) applying dissimilar conditions to equivalent transactions with
other trading
parties, thereby placing them at a competitive
disadvantage;
(d) making the conclusion of contracts subject to acceptance by
the other
parties of supplementary obligations which, by their
nature or according to
commercial usage, have no connection with
the subject of such contracts.
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Market Dominance
•  A dominant position "relates to a position of economic strength enjoyed by an
undertaking which enables it to prevent effective competition being maintained
in the relevant market by giving it the power to behave to an appreciable extent
independently of its competitors, customers and ultimately of its consumers."
•  Market power: possibility to raise prices above competitive level
•  Market dominance: substantial amount of market power
•  Decisive factors:
-  market share of 40-50 %
-  competitive advantages of the market leader (cost advantages, IPR, brand,
customer loyalty etc.)
-  vulnerability of competitors (exclusion and foreclosure)
-  dependency of trading partners
-  Pricing above costs and above competitive level
-  direct measurement of market power
-  indirect measurement of market power
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Market power issues
Market definition is essential but only one way of defining
market power and market dominance.
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Eclectic Model of Market Dominance
(Kuoppamäki 2003)
Structural pillar (SCP)
Power over Price
Market dominance
Strategic conduct
Dependency of
(exclusion)
trading partners
Oikeustieteellinen tiedekunta / Henkilön nimi /
Esityksen nimi
7.3.2013
79
Some basic concepts
•  Market power
•  Market definition
•  Barriers to entry
•  S-C-P paradigm
•  Institutional competition
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The Concept of Market Power
•  Firms possess market power
•  A firm or firms that possess market power can enjoy some of the
benefits available to the true monopolist
•  Market power presents undertakings with the possibility of
limiting output and raising price, which are clearly harmful to
consumer welfare
•  Ways in which market power is manifested
•  Collusion and cooperation between competitors
•  Unilateral conduct; Abuse of dominant position
•  Structural changes; Merger Control
•  Split up off monopolies
•  The legal test of market power; per se or rule of reason?
•  Necessity to use multiple tools to define and catch market power
correctly and avoid type I and type II mistakes.
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The Concept of Market definition
•
•
•
•
•
•
Dominates today the factual framework for the analysis of market power
•  The “relevant” market
•  Economic concept: Economic or economic (econometric) analysis of the facts
•  Direct and indirect means to look at market power
•  Structural and behavioral approaches
An analytical tool, not an end in itself
•  ”a tool for aiding the competitive assessment by identifying those substitute
products or services which provide an effective constraint on the competitive
behaviour of the products or services being offered in the market by the parties
under investigation”
But have normative implications
•  The implications of a broad or limited definition of the relevant market
Farrell/Shapiro (2009): is market definition still the right tool today or should market
power be definied directly by looking at gross margins?
The market definition focus on the market as it is today
•  Identify competitive restraints from actual competitors, does not include
potential competitors
The European Commission’s Notice on the Definition of the Relevant Market
•  Extract of the Commissions practice or experience
•  Without prejudice to the case law of the Court of First Instance and the ECJ
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•  But: In practice an an influential guide
Behind the market definition we
find the SCP paradigm…
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What determines the boundaries?
• Identifying the boundaries of a market
involves identifying the limits of substitution
–
on both the demand and supply sides
• A common test for assessing market
boundaries is known as the Hypothetical
Monopolist Test
• The application of the test results in the
identification of the relevant or separate or
antitrust market
Market definition
•  The “relevant market” the product of three different
market dimensions
•  The relevant product market
•  Interchangeability: to what degree are other products
substitutes to the product in question?
•  The relevant geographic market
•  The area in which the actual product is sold; the
relevant geographic market
•  Temporal market
•  SNIPP test
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Barriers to entry and potential
competition
Barriers to entry hinders short term market entrance and on
longer term the emergence of potential competition which would
otherwise constrain the incumbent undertaking
•  Crucial when determining market power
•  May have high market shares but no market power if there are
no barriers to entry
•  Contestability of the market: if new entrants can profitably enter
the market in case of of a price increase then the incumbent has
no market power
•  Potential competition is an important concept especially in the
context of merger cases
•  If new competition would emerge relatively soon, e.g. in two
years this will be taken into account as a positive
counterfactual in favor of the merging parties
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Analysing barriers to entry and
exit
•
•
•
•
•
•
•
•
Market definition and entry by production substitutes
Market conditions and historical entry
Assessment of absolute cost advantages
Assessment of strategic (first mover) advantages
Vertical foreclosure and exclusion
Predatory behaviour
Assessment of entry impediments
Exit: can companies react by moving the assets to other fields in
case of abuse?
•  Sunk cost, asset specificy, dependency of customers?
•  Not only historical analysis sufficifies but weight should be given
also to current trends and likely future scenarios
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Definition of a relevant product
market
•  "A relevant product market comprises all those products and/or
services which are regarded as interchangeable or substitutable
by the consumer, by reason of the products' characteristics, their
prices and their intended use.”
•  Firms are subject to three main sources of competitive
constraints: demand substitutability, supply substitutability and
potential competition. For the definition of the relevant market,
demand substitution (i.e. substitutability from the consumers’
point of view) is the key issue, and a firm cannot have a
significant impact on the prevailing conditions of sale, such as
prices, if its customers are in a position to switch easily to
available substitute products or to suppliers located elsewhere.
Basically, the exercise of market definition consists in identifying
the effective alternative sources of supply for the customers.
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Product Market Definition in
Antitrust Law & Economics
•  Functional characteristics, end-user view: what can you do with
S?
•  Pricing: SNNIP-test (5-10 % in 1 year)
•  Demand substitability
•  Supply substitability
•  Potential competition
•  Innovation, technology and product markets
•  Consumer markets and industry markets
•  Buying power (proprietary SW as a balancing factor)
•  A market must be “worth of monopolizing”
•  Static versus dynamic view
•  One must not look at numbers but at facts behind the numbers
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SSNIP test
•  Hypothetical monopoly trest: or the SSNIP Test
•  Originates from1982 US Merger Guidelines:
– “A market is defined as a product or group of products and a
geographic area in which it is produced or sold such that a
hypothetical profit-maximizing firm, not subject to price
regulation, that was the only present and future producer or
seller of those products in that area likely would impose at least
a ‘small but significant and non-transitory’ increase in price,
assuming the terms of sale of all other products are held
constant. A relevant market is a group of products and
ageographic area that is no bigger than necessary to satisfy this
test.”
•  See also EU guidelines on definition of the relevant market
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Operationalizing the SSNIP test
•  The SSNIP Test is a thought experiment applied iteratively
•  Start with the narrowest candidate market
•  Is there a market for gin? Is there a market for Beefeater Gin?
•  Look at objective characteristics of product, e.g. high alcohol
content, known as a spirit, often mixed with other products
(complementary good)
•  Similar products vodka, whisky, rum etc.
•  Including similar products
•  Soft drinks with or without sugar
•  Captive users and ability to discriminate: United Brands
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SSNIP test continued
•  Could a hypothetical monopolist profitably increase prices by up
to 10%?
•  – If no, widen market
•  – If yes, stop as boundaries have been identified
•  Why widen the market if no? – If other products on either the
demand or the supply side constrain the hypothetical monopolist,
then these products must lie in the same economic market
•  It is usual to start with price equal to cost, andconsidering the
price increase from this position
•  In merger cases often start with prevailing prices
•  If a higher price is considered, it could lead to what is known as the
cellophane fallacy
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Cellophane fallacy
•  United States v. E.I. Du Pont De Nemours & Co (1956)
•  Between 1923-47 Dupont controlled 75% of cellophane sold in U.S.,
which accounted for 20% of all flexible packaging products
•  Government alleged Dupont had an illegal monopoly
•  Court disagreed with Government on basis of market definition
•  A monopolist ought to set prices such that consumers are close to
switching to other
•  products (near the consumer’s reservation price)
•  Price at the monopoly price will therefore give the impression of many
substitutes
•  But…at the monopoly price a firm has not been constrained by other
products, so they cannot be close substitutes
•  A monopolist ought to set prices such that consumers are close to
switching to other
•  products (near the consumer’s reservation price)
•  Price at the monopoly price will therefore give the impression of many
substitutes
•
But…at the monopoly price a firm has not been constrained by other
products, so they cannot be close substitutes
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Demand and supply side
substitability
Demand side substitutability
•  Price increase results in some (marginal) consumers reducing demand,
as they switch to substitute products
•  – Price of gin increases so some consumers switch to vodka
•  It is possible that demand side substitution alone could make
unprofitable the price increase considered – If so, the market needs to be
widened
Supply side substitutability
•  Price increase results in some firms producing similar products switching
production
•  – A vodka producer may switch to producing gin
•  It is possible that supply side substitution alone could make unprofitable
the price increase considered – If so, the market needs to be widened
•  Supply side substitution is quick entry (occurs in less than a year)
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Definition of Geographic market
•  Geographic area where the competitive conditions are the same
•  Local
•  National
•  EEA wide
•  World markets
•
•
•
•
•
Identification applies same approach as with products
Start with narrow market
Is catering supplied on the University of Helsinki a market?
– Start with Porthania ( etc.) – Add outlets close by (low travel costs)
Given entry barriers, neighbouring suppliers cannot supply consumers in
the territory of the University?
•  Consider both demand and supply substitability
•  Relevant market from who’s point of view? B2C or B2B?
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Goal of market definition
•  Antitrust markets identify boundaries within which a hypothetical
monopolist could enjoy monopoly profits
•  Hence, if a firm enjoys a substantial share of the relevant market – then it
could be in a position where it is able to exercise market power
•  Market power may involve the setting of prices above costs
•  Market definition is used to get a proxy for market power
•  Market definition vs. gross margins vs. dependency of customers vs.
strategic behavior?
•  It is always prudent to test the results with an eclectic method
•  There is not - and most likely there never will be - only ”one correct
method” to analyze market power
•  See e.g. Kuoppamäki (2003)
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Dominant position criteria
Hoffmann-La Roche case, 1979
•  A dominant position relates to a position of economic strength
enabling a company to prevent effective competition being
maintained on the relevant market, by affording it the power to
behave to an appreciable extent independently of its
competitors, its customers and the consumers
•  A dominant position may derive from several factors which,
taken separately, are not necessarily determining :
•
- substantial market shares (> 50%)
•
- large gap with nearest competitor’s market shares
•
- technological advantages and overall financial strength
•  Most important criteria: 1. Market structure, 2. Power over price,
3. Customer dependency, 4. Ability to exclude competitors
www.helsinki.fi/yliopisto
Effect of dominant position
•  A company with a market share higher than 40-45% and having
a large gap to the nearest competitor is held likely to be
considered dominant unless it proves to the contrary. However,
market share is only one indicator. Other factors: market
structure and dynamism, barriers to entry, countervailing buyer
power (e.g., large customers), etc.
•  A company is in a dominant position if it has sufficient market
power to act independently of its competitors and customers.
•  Dealing practices of a dominant company are evaluated more
carefully than those of a non-dominant company, since there is a
possibility that a dominant company would abuse its position.
Especially pricing conduct of a dominant company must be
evaluated carefully.
www.helsinki.fi/yliopisto
What can be held as an abuse?
•  Under EU Competition Law, certain contractual practices may be
challengeable if exercised by a dominant company, but not if exercised by a
non dominant company.
•  Focus of Art. 102 is on anti-competitive unilateral conduct and tacit collusive
behavior of dominant companies.
•  Market dominance is not prohibited as such and competition on the merits
(customer satisfaction) is always allowed.
•  Depending on their scope and effect, fidelity rebates, exclusivity, prices
(excessive or predatory), duration of contracts… may constitute an abuse of a
dominant position when they tend to (ECJ’s Michelin case, 1983):
•  bar competitors from access to the market
•  strengthen the dominant position by distorting competition
•  remove or restrict the buyer’s freedom to chose his sources of supply
•  apply dissimilar conditions to equivalent transactions with other trading
parties
www.helsinki.fi/yliopisto
Classification of abuses
•  Exploitative abuse:
•  A dominant company obtains an advantage at the expense of the
consumer regardless of any effect on the competitive process or
market structure.
•  E.g. excessive pricing to a final customer, refusal to deal,
discrimination
•  Exclusionary abuse:
•  Threatens to prevent, restrict or distort competition by changing the
structure or dynamics of the market.
‒  A dominant company has a special responsibility not to impair
competition.
‒  “competition on the merits” is allowed only?
‒  Covers also potential impact on the markets - likelihood of actual
foreclosure of the competitors?
‒  E.g. price squeeze, predatory pricing, loyalty rebates
•  Often abuse has simultaniously both exclusionary and exploitative
elements
www.helsinki.fi/yliopisto
Exclusionary abused – potential
effects
•  Requirement of actual, concrete effects on the markets cannot
be held as a requirement for the abuse, since
•  Authorities would be able to intervene only when some
detrimental effects have accrued; and
•  The actual effects are hard to asses accurately in any case.
•  But what is the sufficient degree of potential effect that will
constitute an abuse?
•  The potential effect test was applied by the European
Commission and Court of First Instance in the Microsoft case:
•  …”tying of WMP constitutes conduct which by its very nature
is liable to foreclose competition ….. “In the following
sections, it will be explained why tying in the specific case has
the potential to foreclose competition so that the maintenance
of an effective competition structure is put at risk”
•  New formulation of effect on competition?
www.helsinki.fi/yliopisto
Exclusionary abuses – other
evaluation methods
•  Various ways to establish criteria for the exclusionary conduct:
•  Consumer harm test: conduct does raise prices or harms
consumers in some other way.
•  “Sacrifice” test: conduct makes the dominant company
sacrifice profits or incur losses.
•  “But for” test: conduct is not rational but is aimed for
exclusion of the competitors.
•  Efficient competitor test: conduct would exclude efficient
competitor.
•  Balancing test: conduct that can only be balanced against
efficiencies is abusive.
•  The impact of possible efficiencies gained influences the
evaluation – the so called “efficiency defence”
•  Consumer benefit should be taken into account
www.helsinki.fi/yliopisto
Economic argumentation under
Article 102
•  Although sometimes otherwise stated, argumentation based on
economics is not new
•
Rather one could argue that it has changed intermittingly
•  Economics is a tool to competition lawyer, it is not capable of
producing solutions on its own and it cannot replace judicial
considerations
‒  Microeconomics as a tool, for instance, in defining the relevant
markets, measuring market power and estimating its effects
‒  Competition analysis is becoming more complicated; the
challenges of dynamic network economy; old tools for analysis
may not be adequate anymore
‒  On the background are normative questions to which economics is
incapable of answering
•  Article 102 is still the most ”traditional” field where many key precedents
stem from the 1970’s
www.helsinki.fi/yliopisto
What can be abuse?
•  Under EU competition law, certain contractual practices may be
challengeable if exercised by a dominant company, but not if
exercised by a non dominant undertaking; however, market
dominance is not prohibited as such and competition on the
merits (customer satisfaction) is always allowed
•  Depending on their scope and effect, fidelity rebates, exclusivity,
prices (excessive or predatory), duration of contracts… may
constitute an abuse of a dominant position when they tend to
(ECJ’s Michelin case, 1983):
•  bar competitors from access to the market
•  strengthen the dominant position by distorting competition
•  remove or restrict the buyer’s freedom to chose his sources of
supply
•  apply dissimilar conditions to equivalent transactions with other
trading parties
www.helsinki.fi/yliopisto
Case example on refusal to deal
•  Commercial Solvents (1974)
‒  Facts
‒  Commercial Solvents dominant supplier of raw material required for
production of anti-tuberculosis drugs
‒  Commercial Solvents refused to supply manufacturer of anti-tuberculosis
drugs to favour its own drug-producing subsidiary
‒  Key principle
‒  It is an abuse for an undertaking dominant in one market to refuse to supply
goods or services to an undertaking with which it is in competition in a
neighbouring or associated market, with the possibility of eliminating all
competition on the part of that undertaking in the latter market
www.helsinki.fi/yliopisto
Case example - Stopping deliveries
•  United Brands (1978)
‒  Facts
‒  United Brands had dominant position in production of bananas
‒  cut off supplies to ripener/distributor for promoting another
producer’s bananas
‒  Key principle
‒  “An undertaking in a dominant position…cannot stop supplying a
long-standing customer who abides by regular commercial practice,
if the orders placed by that customer are in no way out of the
ordinary”
www.helsinki.fi/yliopisto
Price discrimination
•
Article 102 EC lists as an abuse the fact for one or several firms holding a dominant position
of ”applying dissimilar conditions to equivalent transactions with other trading parties,
thereby placing them at a competitive disadvantage”.
•
The EU Court has extended this notion of abuse to the converse situation of the application
of similar conditions to unequal transactions.
•
Do not discriminate customers. Use similar prices and benefits for similar customers.
•
Use different prices or benefits for customers only when such differences are based on
acceptable and fair criteria, which can be verified later on and which are based on costs and
costs savings.
•
Be consistent and logical when agreeing prices and granting benefits – the same price
should be applied to the purchase of the same quantity of the same products, unless
objective reasons exist for differentiation.
•
Any customer category must be based on differences amongst customers in terms of level of
trade and function, based on services provided and costs associated.
•
Different categories must offer different services.
•
Each discount must be justified separately.
www.helsinki.fi/yliopisto
Loyalty inducing rebates
•
•
Loyalty-inducing pricing, i.e. pricing that encourages the buyer to buy all or almost all of
the products from one company is forbidden for a dominant company.
•
Discounts should not remove or restrict the buyer’s choice as to his source of
supply.
•
Discounts should not block competitors’ access to the market.
Considering the prohibition of loyalty-inducing pricing, incentives based on the obligation
of the customer to reach a predetermined target level (i.e. volume, value of purchases,
market share) are not in practice recommended.
•
Especially if the set target is based on sales that cover significant proportion of
buyers needs.
•
Or the discount is based on purchases exceeding the previous year’s purchases by
some sales growth target.
•
Even though the same targets would be applied to all customers, the scheme is likely
held anticompetitive.
‒  Purpose of such discount scheme is to persuade customers to increase their
purchases.
‒  Viewed as discriminatory, loyalty-inducing and may have the effect of foreclosing
competitors from the market.
www.helsinki.fi/yliopisto
EU case law on fidelity rebates
•  Quasi - per se illegal?
•  Michelin II and BA/Virgin suggests formalistic approach, though it
could be interpreted more generously.
•  Tomra: rule of reason?
•  The suction effect
‒  Leveraging assured sales onto contestable sales.
‒  Effective price for contestable share too low, but how low?
‒  The cost standard debate.
‒  Tomra: do you need to compare with costs?
•  Market level analyses: MES v. size of contestable market.
•  Do we care about actual effects?
•  Efficiency defenses?
www.helsinki.fi/yliopisto
Allowed rebates
•
Compatible with Article 102 EU:
•
Rebates that pass on specific cost savings to customer.
‒  Therefore, all discounts and incentives should be based on some kind of cost
savings accrued by e.g:
‒  large individual order quantity (logistics savings);
‒  cash payment or payment before the payment term ends (financial savings);
‒  the customer’s own marketing efforts (marketing savings);
‒  the customer’s own training efforts (training savings);
‒  transportation or warehousing terms or logistics terms that are better than usual
(transportation or warehousing savings);
‒  use of electronic tools (savings in order handling costs, etc.);
‒  better than usual forecasting (savings in production planning); or
‒  better than usual after market service or warranty terms (after market service or
warranty savings).
‒  Discounts must always be reasonable in relation to the amount of such cost
savings.
•
Rebates remunerating the provision of a service by the buyer will normally not be
abusive.
www.helsinki.fi/yliopisto
Some rules of thumb
•  Incentives should be based on purchases over a
short reference period.
‒  No period longer than three months.
‒  Incentives must be earned, calculated, accrued and paid
separately for each quarter.
‒  Discounts should not be counted by the increase of sales when
compared to the previous period.
•  When the discount is based on volume, it should not be
conditional on exclusive purchasing.
•  If the volume discounts are scaled, they should not
increase proportionately more than the purchased
volumes, i.e. they should not be progressive.
www.helsinki.fi/yliopisto
…Rules of Thumb
•  Retroactive rebates (rebate is paid retroactively for all
previous purchaes when a certain threshold is reached)
lead easier to foreclosure than incremental rebates
(rebate is paid only for additional units above the
threshold)
•  As long as the price remains above the long run
average incremental cost (LRAIC) of the dominant
undertaking, this would normally allow an equally
efficient competitor to compete profitable despite the
rebate
•  Prices below average avoidable cost (AAC) are
normally anticompetitive
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Predatory pricing
•  Practice where a dominant company lowers its price and thereby
deliberately incurs losses or foregoes profits in the short run so as to
enable it to eliminate or discipline one or more rivals or to prevent
entry by one more more potential rivals, thereby hindering the
maintenance or the degree of competition still existing in the market
or the growth of that competition.
•  Commercial conditions for successful predation:
1.  Resources that withstand the losses accrued from low pricing;
and
2.  Ability to recoup the losses after competitor has been disposed.
•  E.g. AKZO Chemie, TetraPak II, Danish Post
•  Prices below AVC or ATC plus other evidence, LRIAC
•  Recoupment is not a mandatory element in the EU
www.helsinki.fi/yliopisto
Predatory pricing
•  Predation is presumed if the dominant firm prices are set below
Average Variable Costs (AVC). Pricing below AVC has no
economic rationale other than the elimination of competitors,
since every unit sold is a net financial loss.
•  If a dominant firm’s prices are set above AVC but below Average
Total Costs (ATC), unlawful predation can only be established on
the basis of additional evidence.
•  Matching pricing with another supplier is no reason for lower
prices and an efficiency defense can in general not be applied
either.
•  Predatory pricing is often sustained through “crosssubsidization”. A situation of this kind arises when a multiservices dominant firm allocates the majority of its costs to its
reserved monopolistic activities.
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English clauses
•  Article 102 EU specificially prevents dominant companies from applying
so-called ”English Clauses”.
•  Under an ”English Clause”, customers have an obligation to disclose to
this company the existence of competing offers and have to inform the
dominant company of the terms and conditions to such offers. The
dominant company has a right to match the competing offer and is thus
able to use the information from its own customers (which it would not
have otherwise) to adapt its market strategy towards the customers and
its competitors.
•  Consequently, the dominant company will only have to lower its price
where there is a risk that a customer switches to another supplier.
•  ”English Clauses” create artificial market transparency which places at
the disposal of the dominant firm information about market conditions
and about the actions of its competitors.
www.helsinki.fi/yliopisto
Defences available to dominant
companies
As of efficient competitor test
•  Vigorous price competition should be allowed. Therefore the
authorities will generally intervene where the conduct concerned is
capable of hampering competition from competitors which are as
efficient as the dominant company.
•  For this test cost data of the dominant company must be analyzed
to see if an as efficient competitor would stay on the market or be
excluded.
•  The aim of this rule is to fight anti-competitive foreclosure that
harms consumers or intermediaries
Efficiency defence
•  May be used if the practice helps consumers more than it harms
rivals provided that it is indispensable, likely efficiences outweigh
likely negative effects to competition and consumer welfare
Objective necessity test
•  E.g. Hilti case
www.helsinki.fi/yliopisto
Mixed bundling (commercial
tying)
•
Mixed bundling is a case of tying where both the bundle and the components are
available on the market, but the bundle is sold at a discount to the sum of the prices of
the components.
•
Mixed bundling is thus an indirect measure to achieve the same result as through
contractual tying by inducing customers to purchase the tied product through granting
bonuses, rebates, discounts or any other commercial advantage.
•
Such discount practices may therefore amount to abuse under Article 102 EU and must
be assessed in accordance with the rules on tying and bundling.
•
A multiproduct bundle may be anti-competitive in the tied or tying market if it so large that
efficient competitors offering only part of the products cannot compete
•
If prices for each of the product remain above LRAIC competition authorities do not
normally intervene
•
If competitors are also selling bundles this is evidence of a bundle against bundle
competition
•
In many industries bundling practices are nowadays a normal and efficiency enhancing
industry practice; hence cases need to be analyzed very carefully
www.helsinki.fi/yliopisto
Digital Platforms and
Article 102
Some recent case law…
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118
Digital platforms
•
The last three decades have witnessed a significant growth in high-tech, often
internet based media and communication "network industries", such as video
games, computers, social networking or e-commerce shopping malls.
•
These industries are often organized around physical or virtual platforms that
enable distinct groups of agents to interact with one another. Digital platforms
function as intermediaries economic actors and users.
•  Online search platforms such as Google or Baidu provide an online search
platform between web users and advertisers;
•  PC operating systems such as Microsoft provide a software platform that allows
transactions between independent software vendors and users;
•
•
•
•
Video game platforms, such as Sony PlayStation or Nintendo, provide software
tools that enable publishers develop games and a device on which consumers
can play those games;
Smartphone platforms such as Android or iPhone provide an interface between
users of the device and content providers such as application developers;
Online shoppers such as Amazon connect customers willing to buy books online
and publishers as well as all suppliers and buyers or all kind of other
commodities. eBay auction site allows us to buy and sell (used) products online.
Social media platforms such as Facebook provide an interface for social
networking and LinkedIn for business related networking. The latter is also a job
board and recruiting tool. Spotify allows us to listen to our favorite music “for
free” or, actually, in exchange for agreeing to listen to some advertisements as
well.
Oikeustieteellinen tiedekunta / Henkilön nimi /
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Digital platforms
•
Digital platforms are normally organized around physical or virtual platforms that
enable distinct groups of agents to interact with one another. Often one side of the
market is subsidized with the income from the other side of the market. Many of the
digital platforms operate by attracting eyeballs with (in case of social networks selfgenerate) content and by selling access to those eyeballs and/or information
gathered to advertisers.
•
The concept of multi-sided markets is not new. Consider, for instance, a medieval
market place connecting customers with producers, e.g. farmers and citizens. Note
also credit card companies operating between banks, merchants and consumers.
•
What constitutes an evolution here is the central place digital media platforms play
in the so called "new economy" markets, in particular in the software,
communication and media industries. An increasing number of modern businesses
belonging to these sectors are two or multisided platforms as a result of
technological changes that have drastically lowered the costs and increased the
benefits of connecting diverse customer groups on a single platform.
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Two (Multi) Sided Markets
•  Direct and indirect network effects
•  Importance of scale or “critical mass” to make the operation
profitable
•  “Winner takes it all” competition vs. level playing field
•  Importance of information as a the key raw material and “kingmaker”
•  “Customer = merchandise as well”
•  Importance of IPR (tangible vs. intangible assets)
•  New challenges for competition policy, e.g.
•  Analysis methods, e.g. market definition, price-cost margins
•  Dynamism of these fast moving markets (fast monopoly vs. no
monopoly)
•  Multiple effects on different sides of the market complicate the
analysis
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Some Article 102 issues relating
to digital platforms
•  Digital markets are fast moving and dynamic; yet due to importance
of scale and installed base they can lead to durable monopolies
•  Endogenous and exogenous growth
•  Interoperability abuses preventing market access of competing
products; refinement of the essential facility concept to deal with high
tech markets
•  Anticompetitive product design (bundling)
•  Protecting istalled base with exclusivity provisions(preventing
competitors from reaching a ”critical mass”)
•  Preventing or manipulating access to information
•  Imposed asymmetry in business operations (e.g. in data crawling)
•  Asymmetric IPR terms that prevent market access
•  FRAND and ex ante
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Some Market Characteristics
•  Scale and access customer data are very important
•  Asymmetric market that is developing rapidly and dynamically
•  Indirect market externalities seem to play an important role with a
clear risk of tipping
•  Competition has to be analyzed on two levels: on the level
“ecosystems” and the level “applications” that both affect each other
•  Difference between open/free and closed/controlled platforms
•  Open/free: parties can freely incorporate their own applications on top
of the platform
•  Closed/controlled: access of third party applications is restricted or
closed (de jure or de facto commercially)
•  Search advertising is moving to mobile which is the growth
market, yet the market structure in mobile search is similar to
“traditional” internet search
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Microsoft case
•
•
•
•
•
•
•
•
•
•
In 2004 Commission decision (and €497m fine) that MS had abused
dominance by
•  refusing to supply interoperability information to rivals on the
market for work group server OS software
•  tying Media Player software with Windows OS
Dec 2004: Court rejects MS request for remedy suspension
Penalty payment decision of July 2006
•  Incomplete and inaccurate Interoperability information
•  Eur 280.5 million
Continuing disputes about compliance with remedies
Sept 2007: Court judgment upholds Commission decision
October 2007: no appeal
Penalty Payment decision of February 2008
•  Reasonable pricing of interoperability information
•  Eur 899 million
Commission press relase of October 9, 2009: settlement, in 2012 a
new statement of objections because of infringement of the
settlement
Special circumstance: bundling by a super-dominant company
holding about 95 % of the gobal market in PC OS markets
Ratio of bundled offering vs. free offring
Commission’s Microsoft
decision
•  The European Commission has concluded in its Decision on March 24,
2004 that Microsoft broke EC competition rules by leveraging its near
monopoly in the market for PC operating systems (OS) onto the markets
for work group server operating systems and for media players. The
Court of First Instance uphed the decision in 2007.
•  Microsoft abused its market power by deliberately restricting
interoperability between Windows PCs and non-Microsoft work group
servers, and by tying its Windows Media Player (WMP), a product where
it faced competition, with its ubiquitous Windows operating system.
•  This illegal conduct has enabled Microsoft to acquire a dominant position
in the market for work group server operating systems, which are at the
heart of corporate IT networks, and risks eliminating competition
altogether in that market. Microsoft’s bundling has significantly
weakened competition on the media player market.
•
For these serious abuses, which have been ongoing for five and a half
years, the EC Commission has imposed a record fine of € 497.2 million.
www.helsinki.fi/yliopisto
Microsoft - Remedies
•  As regards interoperability, Microsoft is required, within 120 days, to
disclose complete and accurate interface documentation which would
allow non-Microsoft work group servers to achieve full interoperability
with Windows PCs and servers. This will enable rival vendors to develop
products that can compete on a level playing field in the work group
server operating system market. The disclosed information will have to
be updated each time Microsoft brings to the market new versions of its
relevant products.
•  To the extent that any of this interface information might be protected by
intellectual property in the European Economic Area, Microsoft would be
entitled to reasonable remuneration. The disclosure order concerns the
interface documentation only, and not the Windows source code, as this
is not necessary to achieve the development of interoperable products.
•  As regards bundling, Microsoft is required, within 90 days, to offer to PC
manufacturers a version of its Windows client PC operating system
without WMP. The unbundling remedy does not mean that consumers
will obtain PCs and operating systems without media players. Most
consumers purchase a PC from a PC manufacturer which has already
put together on their behalf a bundle of an operating system and a media
player. As a result of the Commission’s remedy, the configuration of
such bundles is meant to reflect what consumers want, and not what
Microsoft imposes.
www.helsinki.fi/yliopisto
Commission’s decision on
interoperability
•
Refusal to disclose specifications and allow their use for the
development of compatible products
•
Analyse the entirety of the circumstances, including
•  disruption of a previous level of supply ...
•  of software interoperability information
•  Microsoft’s rapid rise to dominance in server OS software
•  Microsoft can impose de facto standard for work group
computing of which PCs are a key component, so
interoperability essential to compete in server OS
software
Microsoft’s position in CFI
•
Communication protocols contain very valuable IPR
that is protected (patents, copyrights, trade secrets)
•
Intervention reduces Microsoft’s incentives to
innovate
•
Risk of cloning if competitors get free access to
Microsoft’s proprietary information
•
The case is essentially a compulsory license case
•
IMS-Magill criteria are not met in the case
Magill-IMS criteria
•
Leading cases on Article 102 obligation to license IP were
Magill (1995) and IMS Health (April 2004)
•
Cases with very peculiar facts
•  public domain, by-product information
•
Four-part test
•  indispensability of the information that is refused for activity
on an adjacent market
•  elimination of all competition on that market
•  refusal prevents appearance of a new product or service for
which there is potential consumer demand
•  lack of objective justification
Commission’s position in CFI
•
Communication protocols at issue neither innovative nor IP
•
But abuse even on the hypothesis most favorable to Microsoft that
the refusal is regarded as a refusal to supply to third parties a licence
relating to IP rights (CFI, 107)
•
May take account of exceptional circumstances other than those in
Magill and IMS Health; those ‘exceptional circumstances’ are anyway
present
•
Whereas Microsoft relied primarily on the Magill and IMS Health
criteria, the Commission contended that their ‘automatic’ application
would be ‘problematic’ (CFI, 315-7)
CFI on Interoperability
•
•
•
•
Microsoft failed to show that interoperability information is not
indispensable (CFI 436)
No manifest error in finding risk of elimination of effective competition
on work group server OS market (CFI 618)
Not manifestly incorrect to find that Microsoft’s refusal limits technical
development to the prejudice of consumers, so the new product test is
met (CFI 665, which follows the statement that ‘Microsoft impaired
the effective competitive structure on the work group server operating
systems market by acquiring a significant market share on that
market’)
Microsoft did not demonstrate any objective justification, in particular
that the impact on its incentives to innovate outweighed the
exceptional circumstances (CFI 709-11)
Evaluation of the case
•
•
An important precedent on disclosure of interoperability
information
•
•
Market power from standardisation of core system architecture
Compare IBM case in the 1980’s
•
If covered by IPR, refusal to supply can only breach Art 82 in
exceptional circumstances
Licence indispensable to competition in related market
Refusal eliminates all competition in this market
Prevents emergence of new product for which consumer demand
Magill/IMS
•
•
•
•
Microsoft
•
•
•
•
Not all competition needs to be blocked but it is enough to prevent
effective competition
Risk of eliminating effective competition is sufficient
CFI reformulated third limb to “new innovative features”, lowering
the bar
“Exceptional circumstances” found in the case with apparent ease
Microsoft vs. Magill and IMS
•
•
Extraordinary market power of Microsoft
•  Super-dominance (> 90 % market share)
•  Amount of market power affects the likelihood of foreclosure
Particular nature of operating systems
•  Network products by their nature intended for interoperation
•  Refusal to share IO information created an applications barrier to
entry
•
Normal industry practice in ICT is to share interoperability information
•
Not really a ”true” compulsory licensing case because of the relatively
low innovative value of the communication protocols
•
Both in Magill and IMS the scope of IPR had been extended to its boundaries
which led to a) competition law intervention and b) subsequent scaling down of
the IPR (law change in Magill and German appeals court decision in IMS)
In fact, the “conflict between IPR and competition” law is much less severe than
the sheer amount of literature would suggest…J
•
Bundling – requirements for Art
102 infringement
•
Dominance (= significant market power)
‒  In at least one of the affected markets
‒  Market definition
•
Separate products being bundled/tied
‒  Art 82(d) vs Tetra Pak
‒  Difficult issue in IT markets
‒  Added functionality vs distinct product
‒  Rapid evolution – markets merge
‒  IBM – hardware bundling
‒  Consumer demand
‒  Indirect evidence
‒  Windows OS vs WMP
www.helsinki.fi/yliopisto
Bundling –requirements
comtinued
•
“Coercion”
‒  Contractual stipulation
‒  Technical bundling
‒  Microsoft – free and no obligation to use, but deterred from uninstalling
•
“Foreclosure of competition”
‒  Evidence of likely anti-competitive effects
‒  Microsoft
‒  Balance of competition appreciably altered in Microsoft’s favour
‒  Key distribution channel
‒  Network effects
‒  Routes to market outside OEM channel? (Apple)
Oikeustieteellinen tiedekunta / Henkilön nimi /
Esityksen nimi
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Bundling – requirements
continued
•
No objective justification
‒  Burden of proof
‒  Microsoft
‒  Standardisation - not precluded by unbundled version of OS
‒  Consumer benefits of integration - not proven
•
Remedial action
‒  Microsoft
‒  Media Player case 2004 : Standalone version of OS, no effect
‒  Browser case 2009: Screen ballot remedy
‒  US settlement on browser integration - less interventionist and quite
ineffective
‒  IBM
‒  CPUs sold with and without main memory
‒  No US remedy
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Mixed bundling/bundled rebates
•
Widespread use in competitive markets
•
Spectrum of approaches
•
Strictest – per se illegal or illegal absent specific cost savings
‒  Approach evident in past Commission decisions (Coca-Cola, Tetra Pak
II)
‒  Rule of reason – overall effect on competition
‒  GE/Amersham merger decision
‒  Predation test in relation to tied product - long run incremental costs
‒  New Commission approach
‒  UK approach BSkyB / OFT
‒  Predation test in relation to total price of bundle
‒  USA – LePage (rule of reason) vs Cascade (full predation) - recoupment
•
Technical bundles?
‒  Microsoft, standalone version but no real price control
‒  Browser probe – potential remedies don’t appear to include price regulation
•
Super dominance in the Microsoft case (market share of 95 % globally)
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Criteria of Harmfulness
1.  Customers are ”forced” to buy the tied product in
addition to the monopoly product
-
but note tying rebates
-
the bundled product is not offered separately
2. Other companies are foreclosed from the market
3. The freedom of customers is restricted
4. There is no objective justification
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Interoperability Essential,
and Interoperability requires
Standards
•  Incremental additions to IT network require interoperability
within the network and backwards/forward compatibility
•  Companies prefer not to be locked in to one IT supplier
when adding to their network
•  But even if they did: companies do not control what IT
systems are bought by their customers, suppliers,
partners and outsourcing firms
•  Involving customer, supplier, business partner,
outsourcing firms in end-to-end processing requires
integration of their systems through interoperability
•  Without interoperability, no competition, and little
innovation – and without standards, no interoperability
140
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FRAND
Virtues and potential problems of standards essential
patents
141
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Problems with Standards
•  Technical standards help to disseminate new technology and
make nretwork products to interoperate
•  Standards block inter-technology competition
•  This may reduce scope for innovation
•  risk can be limited by using functional specifications rather than
design specifications
•  Chosen standard may depend on proprietary technology
•  This could give patentee a de facto monopoly
‒  Ability to block rivals
‒  Ability to extract monopoly rent
‒  Ability to use monopoly to leverage into other products
•  So, Standard Setting Organizations (SSOs) want to know
whether patent reads on standard
•  But: How do SSOs know whether patents apply to a
standard? (The “Submarine” problem)
•  And: How to prevent patentees from setting “traps”?
142
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Current patent landscape
•  The value of patents has incereased dramatically, as seen by the
very high sums paid in recent patent transactions
•  In digital network industries the problem of ”patent thickets” may
arise
•  While in traditional industries the number of truly important patents
may be limited, products like handsets or computers may potentially
infringe tens of thousands of patents
•  ”Patent wars” (= global patent litigation) are conducted between
important global players, IPR holders and implementors
•  Patents become more valuabe as a result of standardization if they
become essential to a standard (= must be licensed to produce a
standar compliant products)
•  Query: how to resolve patent thickets and sanction abusive or
manipulative conduct yet without fixing what ain’t broken
•  Query: a) ”FRAND is fairness and prevents abuse” and b) ”FRAND
means nothing”. Which statement is true?
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Some recent cases
”Historical cases”
•  Sun vs. ETSI
•  Nokia vs. Qualcomm
•  Broadcom vs. Qualcomm
•  Rambus
”Current cases”
•  Apple vs. Samsung
•  Motorola vs. ROW
•  US Google settlement by the FTC
•  Contract law and antitrust law cases as key ammunition in pending
”patent wars”
•  Commission’s horizontal guidelines from 2010 give a safe heaven for
FRANDly standard setting organizations
Oikeustieteellinen tiedekunta / Henkilön nimi /
Esityksen nimi
www.helsinki.fi/yliopisto
7.3.2013
144
Press relase of December 21,
2012 regarding Samsung
”The European Commission has informed Samsung of its preliminary view that Samsung's seeking of injunctions against
Apple in various Member States on the basis of its mobile phone standard-essential patents ("SEPs") amounts to an
abuse of a dominant position prohibited by EU antitrust rules. While recourse to injunctions is a possible remedy for
patent infringements, such conduct may be abusive where SEPs are concerned and the potential licensee is willing to
negotiate a licence on Fair, Reasonable and Non-Discriminatory (so-called "FRAND") terms.
The sending of a Statement of Objections does not prejudge the final outcome of the investigation.Commission Vice
President in charge of competition policy Joaquín Almunia said: "Intellectual property rights are an important cornerstone
of the single market. However, such rights should not be misused when they are essential to implement industry
standards, which bring huge benefits to businesses and consumers alike. When companies have contributed their patents
to an industry standard and have made a commitment to license the patents in return for fair remuneration, then the use
of injunctions against willing licensees can be anti-competitive."
Standards bodies generally require members to commit to license patents that they have declared essential for a
standard on FRAND terms. This commitment is designed to ensure effective access to a standard for all market players
and to prevent "hold-up" by a single SEP holder, since access to those patents which are standard-essential is a
precondition for any company to sell interoperable products in the market. At the same time, it allows SEP holders to be
fairly remunerated for their intellectual property.The Samsung SEPs in question relate to the European
Telecommunications Standardisation Institute's (ETSI) 3G UMTS standard, a key industry standard for mobile and
wireless communications. When this standard was adopted in Europe, Samsung gave a commitment that it would license
the patents which it had declared essential to the standard on FRAND terms. In 2011, Samsung started to seek injunctive
relief before courts in various Member States against Apple based on claimed infringements of certain of its 3G UMTS
SEPs.
Today's Statement of Objections sets out the Commission's preliminary view that under the specific circumstances of this
case, where a commitment to license SEPs on FRAND terms has been given by Samsung, and where a potential
licensee, in this case Apple, has shown itself to be willing to negotiate a FRAND licence for the SEPs, then recourse to
injunctions harms competition. Since injunctions generally involve a prohibition of the product infringing the patent being
sold, such recourse risks excluding products from the market without justification and may distort licensing negotiations
unduly in the SEP-holder's favour. The preliminary view expressed in today's Statement of Objections does not question
the availability of injunctive relief for SEP holders outside the specific circumstances present in this case, for example in
the case of unwilling licensees.”
Oikeustieteellinen tiedekunta / Henkilön nimi /
Esityksen nimi
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7.3.2013
145
Rambus – Article 102 TFEU
•
•
•
Rambus sued Infineon for patent infringement
Infineon: Rambus committed fraud - set trap
•
Used JEDEC to promote a Synchronous DRAM standard
•
Business plan: Quietly adjust patent claims to cover standard
•
Did not inform JEDEC that it had patent/ applications
•
Breached JEDEC IPR policy which required declaration
•
Left JEDEC to avoid having to disclose patent
•
Used “secret squirrel” (informant) to get further information
•
Document destruction policy and change in testimony
Rambus was found “guilty” of patent ambush and illegal
monopolization by the U.S. district court but was later
found “innocent” by the U.S. court of appeals inter alia
because the obligations derived from the IP policy of the
SSO had remained unclear
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Rambus case, cont’d
•
Reversed on Appeal…:
•
(Much too) strict interpretation of IPR Policy, resulting in conclusion
that Rambus did not breach duty to disclose :
‒
‒
•
Rambus patents (before adjustment) did not read on standard (even
though Rambus believed they did), therefore no breach
IPR Policy was not clear enough – although members believed it required
disclosure
An SSO needs to have a written patent policy with clear guidance
on IPR. Problem: standard so high it discourages participation in
SSO?
•
Rambus still faces an antitrust Complaint filed by FTC alleging
an “anticompetitive scheme”/patent misuse
•
In EU, the Commission sent a statement of objections to
Rambus. However, after the US Court of Appeals the case was
settled. Rambus gave a FRAND promise.
•
Was that a sanction?
147
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Rambus analyzed under 102 EC –
dominance
•  At the time of setting the trap, Rambus was not (yet) dominant
•  No collusion to conceal? Acted alone? Then no liability under 101
TFEU?
•  No dominance so long as standard not adopted, 102 not applicable?.
BUT:
•  Once standard is agreed, IPR owner would be dominant if
•
•
•
•
Patent is essential - All inter-technology competition is excluded
Rambus is an indispensable trading partner (no co-ownership);
Compliance with standard is essential to access market;
The standard is a barrier to new technology entry;
•  Unless there are factors constraining dominance, e.g.:
•  Mutual dependence (in case of blocking patents)
•  Downstream activities constraining freedom to set royalty at will
(GSM example)
148
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Rambus analyzed under Art 102
TFEU– abuse?
•  But: Must abuse and dominance coincide in time?
•  IP enforcement after setting trap could be abuse (limiting
production, markets or technical development to the
prejudice of consumers” (82(b)) – can be linked conduct
•  Competitive impact:
•  Upstream: if standard would have been changed or withdrawn
•  Or if patent would not have “covered” the standard
•  Downstream: if excessive or discriminatory T&Cs and royalties
•  remedy: Compulsory free license/reduced FRAND royalty
•  Microsoft/MicroLeader case suggests “patent misuse”
remedy?
•  If SSO member set trap, then burden should be on member to
prove that standard would not have been changed/withdrawn.
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What is FRAND? -- Royalties
•  Art 102 (a) case law is useful guidance even absent
dominance:
•  Fair – equitable, taking into account all interests involved
(proportionality)
•  Taking into account also interest in development and roll-out
of the standard (avoiding multiple monopoly rents),
implementers, users, innovation, etc.
•  Same criterion as 82(a) EC, so also meaning “not excessive
and not exclusionary or anti-competitive”
•  Reasonable – moderate, bearing some rational relation
to objective criteria other than monopolist’s desire to
maximize profits
•  Non-discriminatory – equal treatment of all customers,
including the IPR-owner’s own downstream business
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No Excessive Pricing – Separating
Value of Innovation from Value of
Network Effects
•  When a company contributes to a standard, it merits revenues
attributable to its invention, but not “strategic value” (revenues
deriving from the benefits of standardization, or the ability to
exclude rivals from neighboring market)
‒  Network effect can be valuable, but allowing patentee to capture that
reduces economic efficiency
•  How to separate value users attribute to innovative contribution
from value they attribute to standardization?
•  Value of innovation: compare with revenues achieved in nonstandardized market (or pre-standardized market) if competitive?
•  Value of standardization: compare with revenues in standardized
market not using patent (or earlier generation of the standard)?
‒  If interoperability could have been achieved in different ways with
similar effect, then the value derives from standardization, not the
innovation
151
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FRAND and ex ante
•
A fair balance needs to be struck between IPR holders and technology users to
ensure that market remain competitive and benefits of the standard are passed on
to consumers
•
In particular in case of important standards implementing companies have often in
practice no alternative than to implement the standardized technology. This “hold
up” situation creates significant market power (dominance) to holders of essential
patents that need to be licensed
•
Giving a FRAND promise to create standard including IP, and then imposing
restrictive terms and conditions in breach of FRAND promise, to impose
monopolistic IPR terms or to restrict competition in downstream product markets
can constitute a breach of Art. 102 EU
FRAND obligations seem substantially similar to the obligations under Article 102
•
•
prohibits unfair, exploitative, licensing terms, such as excessive royalties or the
imposition of royalty-free grant-backs / non assertion provisions
•
prohibits restrictions or foreclosure of competition through exclusionary licensing
practices (e.g. exclusivity provisions, raising rivals’ costs, margin squeeze).
•
the non-discrimination obligation applies in particular where discrimination
would favor the dominant company’s own downstream operations or shield the
licensor from competition in innovation and technology licensing.
Oikeustieteellinen tiedekunta / Henkilön nimi /
Esityksen nimi
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7.3.2013
152
Article 102 reform?
•  Discussion Paper 2005
•  Public consultation 2006
•  Enforcement priorities document in 2008
•  Objective of Article 102 : protect competition with view to
increase consumer welfare (not protection of competitors
as such)
•  Balancing of efficiencies against negative effects
•  More economic effects-based approach
•  Providing predictability through developing coherent
methodology
•  But consider consumer welfare versus “suction effect” in
consultation document
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•  A three prong effects based test as an improvement:
Some developments
•  No Article 102 guidelines but instead a document on
enforcement priorities in 2009
•  Importance of digital platforms
•  Many cases, e.g.
•  Intel
•  Rambus
•  Astra Zeneca
•  Telecom cases, price squeeze issues, fine imposed on e.g.
Telefónica
•  Inquiry into pharmaceutical sector
•  Danish post
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Outlook
•  Tying: Microsoft.
•  Refusals to deal: Microsoft.
•  Google case
•
Rebates: e.g. Intel, Tomra.
•  Margin squeeze: e.g. Telia-Sonera
•  Other vertical foreclosure: electricity and gas cases.
•  Patent ambush: Rambus
•  FRAND licensing: Qualcomm.
•  Lessons from open cases:
•  Focus on pan-European sectors and recently liberalized sectors in
Member States.
•  Focus on sectors which are key for economic growth.
•  Emphasis on exclusionary abuses but also exploitative issues.
•  Case law on rebates still formalistic and www.helsinki.fi/yliopisto
not effects based but
cautious movement towards a more effects based test.
Merger Control
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Short History of EU Merger
Control
•  Originally there was nothing about mergers in the EEC Treaty
•  Article 85 (now 101) regarding restrictive practices
•  Article 86 (now 102) regarding abuse of dominance
•  But no merger control as a difference to the Coal and Steel Treaty
•  A loophole in the rules… several proposals of the Commission in 1070’s
and 1980’s to close the gap
•  Case law as a ”last resort”
•  Continental Can 1973: Article 86 could be applied in a situation where
an already dominant company acquires a still remaining competitor
•  Philipp Morris 1987: Article 85 was applied in a situation where a
minority shareholding (24,9 %) was acquired in a competitor
•  EU Merger Regulation was adopted in 1989…
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Key principles of Merger Control
•  Mandatory notification: Large concentrations meeting certain monetary
thresholds need to be notified to the competition authorities
•  EU: combined worldwide turnover of the merging parties exceeds 5
billion euros and at the turnover of at least two parties exceeds 250
million euros in the EU and less than 2/3 of the turnover is in one
single Member State; or all parties’ worldwide turnover exceed 2,5
billion euros and the aggregate turnover of the parties exceeds 100
million euros in at least 3 EU Member States and each of the parties
has at least a 25 million turnover in these 3 Member States
•  Under national rules turnover figures are significantly lower
•  Implementation ban: the merger may not be put into effect before in
has been cleared by the competition authorities having jurisdiction over
the case: Phase 1: about five weeks from ”effective notification date”;
Phase 2: in case of ”significant doubts ” three additional months
(additional time in case of transfers, remedies etc.)
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Key principles continued…
•  Protection of competition: the merger is prohibited if it leads to a
dominant position or otherwise significantly impedes effective
competition in the relevant market; instead of a prohibition the
transaction can be cleared conditionally (based on remedies proposed
by the merging parties) to remove the competitive concerns
•  One stop shop: if the EU thresholds are met only EU Commission has
jurisdiction over the case within the EU; in certain cases can be
transferred to the EU or to national authorities
•  Notifiable ”Concentrations”
•  Change of control on a lasting basis
•  Mergers and takeovers
•  Setting up a joint venture (sole or joint control, note shifting alliances
and non-full functional entities)
•  Asset transfers
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EU Merger Control Reform in
2004
•  The aim of the reform was to create a system to ensure effective,
efficient, fair and transparent control of concentrations at the
most appropriate level for the enlarged Union.
•  The need for the reform seemed to be more steep and thus the
Commission responded with a package of reforms.
•  Important changes regarding jurisdiction, substance and
procedure of EC merger control.
•  But let’s not focus just on EU because the truth is that…
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The world of merger control
None
None
Voluntary
Voluntary
Mandatory
Mandatory
EU Merger Control Rules
•  Merger Control Package:
•  Regulation 139/2004
•  The Horizontal Merger Guidelines
•  The Vertical Merger Guidelines
•  The Best Practices
•  Implementing Regulation
•  Reorganization of DG Competition:
•  More emphasis on economic analysis (Chief economist)
•  “Scrunity Panels” in critical cases
•  Abolished Merger Task Force
•  Other Notices:
•  Notice on allocation of cases between the Commission and NCAs
•  Notice on ancillary restrains
•  Notice on simplified procedure for concentrations that do not raise any
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competitive concerns
The Merger Regulation
•
Jurisdictional issues:
1.
No modifications on the turnover thresholds in Art 1(2) and 1(3)
‒
2.
3.
Although the threshold was not modified, the enlarged territorial scope of the
Union influences into the number of transactions covered by the Regulation
Possibility to pre-notification referral at the request of the parties – Art. 4
‒
A concentration with Community dimension can, at a request of the parties, be
examined by a member state, in which markets the concentration affects
significantly competition
‒
Parties to a concentration that is not of a community dimension but which is
notifiable in three or more member states can ask that the concentration would be
examined by the Commission
‒
Member states have a possibility to veto the
Amended referral to the competent authorities of the member states – Art. 9
‒
In addition to the request from a member state, the Commission is also able to
invite member state to seek referral
‒
First criterion for referral amended, now “ threatens to affect significantly
competition on a market within member state, which presents all the
characteristics of a distinct market”
‒
Altered time-limits, i.e. removal of the four month deadline for the member states’
to reach the final decision on the reference.
Instead, member states must inform
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the Commission within 45 working days on their preliminary views.
The Merger Regulation
4.
•
Amended referral to the Commission – Art 22
‒
“If the concentration affects trade between member states and
threatens to significantly affect competition within the territory of the
member state making the request”
‒
Other member states can join the request – meanwhile all national
time limits are suspended
The Substantive test
•
The effect of Airtours/First Choice, Tetra Laval/Sidel, Schneider/Legrand
•
Under the new test a concentration will be declared to be compatible with
the common market if it would not significantly impede effective
competition in the common market, or in a substantial part of it, in
particular as a result of the creation or strengthening of a dominant
position.
•
Dominance is now a prime example of an impediment to effective
competition. It is no longer a prerequisite to the finding that a merger is
incompatible with the common market.
•
The assumption is that this test will not lead to different results in practice –
this will be seen in the future.
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The key tests
•
In EU, mergers judged on whether they:
•
“… significantly impede effective competition … in
particular by the creation or strengthening of a dominant
position …”
•
In other jurisdictions, it varies but often either
dominance test or, e.g. in UK, US:
“substantial lessening of competition”
•
However phrased, it’s about market power:
•
unilateral or co-ordinated effects
Merger control (economics)
Williamson diagram
euros
•  Initially P=AC.
•  Merger implies lower AC to AC’, and increased price
to P’.
• Good for the cartel (profit from zero to a+b
P’
• Bad for customers (loss of consumers surplus for
a+b)
• Net welfare to the society is c-b since a is simply
transferred from consumers to firms
•  Laissez-faire (in US and increasingly in EU); if free
entry then eventually P driven down to AC’ (as in AC’
BE-COMP diagram)
Demand
curve
a
b
P=AC
c
C’ C
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Quantity
Herfindahl-Hirschmann Index: Initial
indicator
- EU
Post-merger
Post-merger
Increment(Δ)
<1,000
unconcentrated
-
1,000-2,000
moderate
+250
>2,000
concentrated
+150
- US
Post-merger
Post-merger
<1,000
unconcentrated
1,000-1,800
moderate
>1,800
concentrated
HHI = sum of squares of market share
Increment(Δ)
+100
>50/>100
The Horizontal Guidelines
•  Covers the substantive assessment of horizontal mergers.
•  Aim to
•  provide an economic framework for the assessment and
•  give guidance as to how the Commission assesses the
concentrations where the parties are actual on potential
competitors.
•  Market share and concentration levels
•  Interpreted in the light of likely market conditions, i.e. is the
market highly dynamic in character
•  Market share over 50% may evidence the existence of
dominance
•  Other factors should be taken into consideration when
evaluated the strengthening or creation of a dominant position
with lower market share
•  HHI as an indication of competitive pressure in the market
post merger
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The Horizontal Guidelines
•
Possible anti-competitive effects of horizontal mergers:
•
Non-coordinated effects:
‒  Merger eliminates competitive constrains, which consequently have
increased market power
‒  Creation of or strengthening of the dominant position of a single firm
‒  Factors that may influence are i.e. large market shares of the merging
parties, parties are close competitors, the customers have limited possibility
to switch suppliers…
•
Coordinated effects:
‒  Changes the nature of competition, firms are more likely to coordinate their
behavior and thus harm effective competition
‒  Coordinating may involve i.e. maintaining or raising prices above the
competitive level, limiting production or capacity, dividing markets or sharing
bids.
•
Efficiencies in overall assessment of the merger
•
Efficiencies must be pro-competitive, benefit consumers and verifiable
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Single dominance
•  Single dominance Main criteria:–Market share (both
volume and value sales)< 25% no single dominance>
50% dominance–Evolution of market share–Overall size
of the undertaking–Control of infrastructure not easily
duplicated (essential facility)–economies of scale and
economies of scope–vertical integration
•  Other criteria:–technological advantages or superiority–
absence of or low countervailing buying power–easy or
privileged access to capital markets/financial resources–
product/services diversification–absence of potential
competition (barriers to entry) –a highly developed
distribution and sales network–barriers to expansion
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Collective dominance
Competition authorities analyse:
(a)  whether the characteristics of the market makes it conducive to
tacit coordination; and
(b)  whether such form of coordination is sustainable over time.
•
Main criteria:-mature market-stagnant or moderate growth on
the demand side-low elasticity of demand-homogeneous
product and similar cost structures-similar market sharesvarious kind of informal or other links between the
undertakings concerned-retaliatory mechanisms-lack or
reduced scope for price competition
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Unilateral effects
•  Unilateral effects: the merged group is able profitably to reduce
value for money, choice or innovation through its own acts
without the need for a co-operative response from competitors
•  Also known as non-coordinated effects
•  Was added to EC merger rules in 2004
•  The point here is that the Commission does not need to prove
market dominance
•  Ability to unilaterally raise prices in differentiated oligopoly
situation
•  How big is the gap between single dominance and joint
dominance
•  Compare single/joint dominance and non-coordinated/
coordinated effects
•  Sofar ”unilateral effects” a decisive factor only in a handful EC
cases
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Vertical (and conglomerate)
mergers
•  Analytically identical: does the merged group have the ability and
incentive to leverage market power from one market into a
second?
•  Non-horizontal guidelines: a) ability and b) incentive to exclude
downstream competitors by worsening access to a key asset
•  Control of raw material or another asset that also competitors
need in competing downstream with the merged entity
•  Importance of the controlled asset?
•  Refusal to deal?
•  Price squeeze?
•  Price advantage?
•  Alternative source of supply?
•  Efficiency defence?
•  E.g. Tom Tom/Teleatlas and Nokia/Navteq
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Best Practices
•  Codify the current practice of meetings between the
Commission’s case team and the notifying parties before the
notification and during the investigation.
•  Access to the Commissions file
•  Following statement of objections (SO) either on continuous
basis or at predetermined intervals
•  Possibility to organizing meetings
•  State of play meetings with all parties involved. Organised
three weeks into Phase I, within two weeks of instigating
Phase II, before SO is issued, following reply to the SO and
before Advisory Committee.
•  Involvement of third parties with sufficient interest by Article 11
Requests and by meetings
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