Competition Policy on
Exclusionary Conduct:
Toward an Effects Based
Analysis?
Gregory J. Werden
Senior Economic Counsel
Antitrust Division
U.S. Department of Justice
British Institute of International and
Comparative Law
February 24, 2006
The views expressed herein are not purported
to reflect those of the U.S. Department of Justice
The Problem of False
Positives
• The application of competition policy “can
be difficult because the means of illicit
exclusion, like the means of legitimate
competition, are myriad.”
• The inevitable “false positives” harm
consumers by chilling any legitimate
conduct that is sometimes mistakenly
found to be exclusionary.
• A competition agency should allow for
the possibility of error in assessing
potentially exclusionary conduct.
The Supreme Irony
• Against any gains from efforts to promote
competition, one “must weigh a realistic
assessment of its costs.”
• Zealous efforts to promote consumer
welfare can have the opposite effect;
denying successful competitors the fruits
of their efforts discourages the innovation
and risk taking from which consumers
derive enormous benefits.
• A competition agency should account for
the impact of its actions on incentives to
take risks and innovate.
Best Serving Consumers
• Consumers are best served by a policy
that avoids chilling legitimate competition
and discouraging innovation.
• The best policy features elements that are
form based as well as elements that are
effects based.
• Desirable form based elements include a
rigorous dominance screen and safe
harbors for certain conduct.
• Desirable effects based elements include
the “no economic sense” test.
Common Ground
“To say that the law on abuse of dominance
should develop a stronger economic
foundation is not to say that rules of law
should be replaced by discretionary decision
making based on whatever is thought to be
desirable in economic terms case by case.
There must be rules of law in this area of
competition policy, not the least for reasons
of predictability and accountability.”
Sir John Vickers, Abuse of Market Power, 115
Economic Journal F244, F260 (2005).
The Chilling Effect
• An open ended analysis of the effects of
potentially exclusionary conduct is not
just problematic; it most likely is
counterproductive.
• “Overreaching the limits of adjudication
will increase the rate of error.”
• “Subjecting a single firm’s every action
to judicial scrutiny for reasonableness
would threaten to discourage the
competitive enthusiasm that the
antitrust laws seek to promote.”
The Short Sightedness
Problem
• A purely effects based policy could be
fatally short sighted.
• “The successful competitor, having been
urged to compete, must not be turned upon
when he wins.”
• “The opportunity to charge monopoly
prices—at least for a short period—is what .
. . induces risk taking that produces
innovation and economic growth.”
A Rigorous Dominance
Screen
• Statutory provisions regulating the conduct
of single competitors generally make
dominance (at least threatened dominance)
a jurisdictional prerequisite.
• There is also a strong policy case for
employing a rigorous dominance screen,
because the actions of a truly dominant
competitor should be “examined through a
special lens.”
The Monopoly Power
Test
• An element of the Sherman Act offense
most like abuse of dominance is “the
possession of monopoly power.”
• Many courts in the United States have
indicated that a share below 50% precludes
finding monopoly power and a share of
over 70% is required to infer monopoly
power.
• “Monopoly power must be shown to be
persistent . . . .“
• “In evaluating monopoly power, it is not
market share that counts but the ability to
maintain market share.”
The Monopoly Power
Screen
• The monopoly power requirement avoids
difficult issues in the evaluation of conduct
that might possibly be exclusionary, but it
most probably is not.
• This screening process reduces
administrative cost and provides
cherished certainty to competitors
confident they would not be found to
possess monopoly power.
• A rigorous monopoly power screen avoids
false positive findings of exclusionary
conduct.
Integrating the
Dominance Test?
• A separate dominance test is required
because the appropriate effects test
depends on whether a competitor was
dominant before implementing the subject
conduct.
• It can be exceptionally difficult to
determine whether single competitor
conduct has the sort of long term adverse
effects that would merit its condemnation.
• Easily observed effects on competitors
may imply market power but generally
not the substantial and persistent market
control required for monopoly power.
Category Based Safe
Harbors
• “A monopolist, no less than any other
competitor, is permitted and indeed
encouraged to compete aggressively on
the merits.”
• Conduct that can be categorically labeled
“competition on the merits” should be
placed in a prudential safe harbor and not
subjected to any enquiry into actual
effects.
• “[I]mproved product quality, energetic
market penetration, successful research
and development, cost reducing
innovations, and the like” cannot violate
the law.
A Cost Cutting Safe
Harbor
• Cost reducing innovations illustrate the
need for a safe harbor and the critical
difference between protecting competition
and protecting competitors.
• Reducing cost can exclude inefficient
competitors, which may harm consumers,
but reducing cost nevertheless is
competition on the merits, which should
be encouraged.
A Price Cutting Safe
Harbor
• The U.S. Supreme Court held that a price
cutting is unlawful only if “the prices
complained of are below an appropriate
measure of [the price cutter’s] costs.”
• “As a general rule, the exclusionary effect
of prices above a relevant measure of cost
either reflects the lower cost structure of
the alleged predator, and so represents
competition on the merits, or is beyond the
practical ability of a judicial tribunal to
control without courting intolerable risks
of chilling legitimate price cutting.”
Other Conduct Safe
Harbors
• The U.S. Supreme Court also created a
safe harbor for any litigation that is not
“objectively baseless.”
• Lower U.S. courts have explicitly rejected
the possibility of condemning a dominant
competitor merely for introducing a new
product or for declining to do so.
Limiting Effects Based
Analysis
• Competition agencies and courts should
not have “carte blanche to insist that a
monopolist alter its way of doing business
whenever some other approach might
yield greater competition.”
• Rather, the conduct of a single competitor
should be evaluated under objective
standards assuring that only truly
exclusionary conduct is condemned.
The “No Economic
Sense” Test
• The Solicitor General of the United States
has argued that conduct should not be
deemed exclusionary “unless it would
make no economic sense for the defendant
but for the tendency to eliminate or lessen
competition.”
• The U.S. Department of Justice has
consistently advocated this “no economic
sense” test in its recent monopoly cases:
American Airlines, Dentsply, and Microsoft.
Application of the Test
• The test is easy to apply to conduct that
can benefit the dominant competitor
only by eliminating competition.
• The test can be difficult to apply to
conduct that benefits the dominant
competitor only partly by eliminating
competition, but it should be difficult to
find such conduct exclusionary.
• The test is not always useful; predatory
pricing cases instead should compare
prices with cost and examine prospects
for recoupment.
Conduct Costing Little or
Nothing
• One objection to the “no economic
sense” test is that exclusionary conduct
may cost little or nothing.
• It normally is impossible to exclude
without incurring some cost, and the “no
economic sense” test asks whether the
cost sensibly would have been incurred
absent the tendency to eliminate
competition.
• Costless exclusion could be dealt with:
The test deems conduct exclusionary if
it can confer an economic benefit only
by eliminating competition.
Conduct Making Little
Sense
• Another objection to the “no economic
sense” test is that highly anticompetitive
conduct nevertheless may make some
economic sense.
• No real world illustration of such
conduct has been cited, nor is there
reason to believe that such a scenario
could be identified accurately if it did
arise.
• The bar should be set high for any
conduct producing significant,
immediate consumer benefits.