RBB Economics
OXFORD, FEBRUARY 2006
RBB ECONOMICS
ARTICLE 82 REFORM:
AN ECONOMIC PERSPECTIVE(?)
IESTYN WILLIAMS
[These thoughts are preliminary. Comments welcome.]
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OVERVIEW
IESTYN WILLIAMS
OXFORD, FEBRUARY 2006
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• General perspective on approach:
─
Does it provide an appropriately economic
perspective?
• Market definition and market power: useful filters?
• Differentiating ‘right’ from ‘wrong’ and the “special
responsibility”
• Consistency across forms
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EFFECTS- NOT FORM-BASED APPROACH
IESTYN WILLIAMS
OXFORD, FEBRUARY 2006
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• Growing recognition (?) that an explicitly economicsbased approach is needed
• Common ground among (most) economists that
form-based rules are not generally appropriate
– Pro- and anti-competitive motivations for most
relevant forms of behaviour
– Overlaps such that form-based bright lines not
desirable
– Danger of inconsistent treatment of conduct with
equivalent effects
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FOCUS: HARM TO COMPETITION
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OXFORD, FEBRUARY 2006
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• Focus on exclusion
• Consensus that (consumer) welfare effect is ultimate
economic measure
─
But how practical/appropriate is this as a guide in
specific Article 82 cases?
• Develop a coherent fact-based story of harm to
competition
– When does foreclosure of particular competitors harm
the competitive process and consumers?
– [How should ‘collateral’ damage be treated?]
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CLEAR BUT ARBITRARY RULES DON’T HELP
IESTYN WILLIAMS
OXFORD, FEBRUARY 2006
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• Example: Treatment of common costs in DG COMP
DP
• DP provides rule on how common costs will
generally be allocated in multi-product settings
─
Allocated in proportion to turnover achieved on
individual products
• Allows calculation of Average Total Costs associated
with a product
• Does not imply, however, that analysis based on this
ATC rule makes economic sense
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INTERVENTION IS COSTLY
IESTYN WILLIAMS
OXFORD, FEBRUARY 2006
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• Competition authorities need to balance costs of false
positives and false negatives
─
In dynamic market settings, impact of mistaken
interventions (and precedents created) may easily
outweigh effects of non-intervention
• Recognise too that freedom to intervene also creates
uncertainty which damages healthy competition
─
Chilling effect on the competitive process
─
Value in non-intervention commitments even if some
harmful conduct escapes
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FILTERS HAVE A VALUABLE ROLE
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OXFORD, FEBRUARY 2006
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• Filters and safe harbours can play a valuable role in
narrowing focus
• For example, in testing a foreclosure story:
– Does the target for investigation possess market
power?
– Does the conduct in question actually affect the
buyer’s incentives to deal with the competitor?
– Are alternative routes to market available?
• Insufficient emphasis in DG COMP DP?
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IS A MARKET POWER FILTER USEFUL?
• Current Article 82 process involves three distinct
stages:
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OXFORD, FEBRUARY 2006
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•
─
Market definition
─
Competitive (dominance) assessment
─
Analysis of conduct
EAGCP suggested that “an effects-based approach
needs to put less weight on a separate verification of
dominance”
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MARKET POWER I
OXFORD, FEBRUARY 2006
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• Common ground that only firms with substantial
market power can cause harm to competition
• Logic  if prove harm, dominance is automatically
satisfied
DOMINANCE
HARMFUL CONDUCT
IESTYN WILLIAMS
X
• Only need to focus on conduct?
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MARKET POWER II
OXFORD, FEBRUARY 2006
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• In practice risk that abandoning dominance ‘prequalification’ will lead to excessive intervention
– Backward implementation (“We know abuse when we
see it”)
– Testing for harm not that straightforward
DOMINANCE
IESTYN WILLIAMS
HARMFUL CONDUCT
CONDUCT
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IS DOMINANCE FILTER TOO RESTRICTIVE?
•
Concern sometimes expressed that dominance
(market share) precedents prevent action against
abuse in some settings
•
Example: Electricity generation and OFGEM’s
Market Abuse Licence Condition
•
2 responses:
IESTYN WILLIAMS
OXFORD, FEBRUARY 2006
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─
From an economic perspective, definition of
dominance is not a limitation
─
Value in commitment to non-intervention, even if
prevents justified action in some cases
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MARKET DEFINITION: SSNIP TEST
• Hypothetical monopolist or SSNIP test provides wellestablished basis for market definition in competition cases
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OXFORD, FEBRUARY 2006
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• Dominance assessment requires markets to be defined
•
─
Could a hypothetical monopolist controlling products in
hypothesised market raise prices permanently and
profitably by 5% - 10%
─
If YES, set of products represent a well-defined market; if
NO, broaden
Provides a framework for assessing strength of demand- and
supply-side substitution
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MARKET DEFINITION: PRACTICALITIES
• In practice, the market definition exercise typically
involves a rounded assessment,
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─
Draws on multiple pieces of evidence
─
An overall picture of competition is assembled
IESTYN WILLIAMS
• Relatively rare for test to be applied formally
• Nevertheless, conceptual/organising value of SSNIP
framework remains important
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MARKET DEFINITION: CELLOPHANE FALLACY
• A firm with market power might be expected to have raised
prices already to point where no further price increases
possible
14
IESTYN WILLIAMS
OXFORD, FEBRUARY 2006
─
ie to point where demand is elastic
• Conducting SSNIP test at prevailing prices would lead to
overly broad market definition in this case
─
But not a SSNIP-specific problem
• [Where low pricing concerns, reverse distortion may arise]
• Fundamental problem: What is competitive price
(benchmark)?
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CELLOPHANE FALLACY: IMPLICATIONS
• Significant damage to application of market definition test
in conduct settings
─
•
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OXFORD, FEBRUARY 2006
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•
cf. merger settings where prevailing price is relevant
benchmark
Is there any value in undertaking market definition
exercise?
─
SSNIP still provides important conceptual framework
for analysis
─
Not all evidence is contaminated
However, emphasises need for careful analysis of effects
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TREATMENT OF CONDUCT: PREDATION EXAMPLE
Summary of DG COMP DP Approach:
Predation finding possible, where “non-replicable”
advantages in play
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ATC
Focus on intent, broadly defined.
Documentary evidence may lead to presumption
IESTYN WILLIAMS
Broad range of indicators, eg selective price cutting,
actual exclusion.
AAC
Predation presumed
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HOW FAR SHOULD “SPECIAL RESPONSIBILITY” EXTEND?
• Should a dominant firm be obliged to forego actions
whose (incremental) profitability does not depend on
excluding rivals?
IESTYN WILLIAMS
OXFORD, FEBRUARY 2006
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─
•
Classic example: Selective price cutting on
“marginal” sales
Must a dominant firm price to allow less efficient
firms to survive?
─
DG COMP DP says yes … sometimes
─
Is this a reasonable obligation?
─
Is it desirable?
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INTENT
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• Helpful recognition in DG COMP DP that “general
talk” is not evidence of intent
• Nevertheless, direct evidence claimed to allow
presumption of predation
─
IESTYN WILLIAMS
•
Avoids need to test coherent theory of harm
Broad range of factors identified as contributing to
“indirect evidence”
─
Example: Above avoidable cost selective pricing
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INDISPENSABILITY AND “SACRIFICE” TESTS
• Meeting the competition: Could losses be
avoided/efficiencies achieved in a less distorting
way?
IESTYN WILLIAMS
OXFORD, FEBRUARY 2006
19
• Generally imposes to high a burden on firms
– Impact of genuine mistakes etc
– How much sophistication reasonable?
• Useful as a guide to exploring business motivations
BUT not a definitive test
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CONSISTENT TREATMENT OF COMMON THEMES
• Example: Selective price cuts and rebates (& predation)
– Common concern is abusive low pricing
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– Consistent analytical framework
• Focus on possible foreclosure of equally efficient
competitors
IESTYN WILLIAMS
–
•
Avoidable cost tests appropriate
Identify and focus on sales range that is open to
competition
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CONSISTENT TREATMENT II
• Consistent treatment of low pricing effects required
• Example: Rollback rebate of 20% on 80% sales target
IESTYN WILLIAMS
OXFORD, FEBRUARY 2006
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20
Assured base
of sales
‘Open’ to
competition
Cost threshold
60%
80%
% of needs
• DG COMP DP appears to endorse ATC as floor for low
pricing in rebates context
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FORM AND EFFECT REVISITED
• Example: Roll-back rebates
• Form: -ve pricing for some ranges
IESTYN WILLIAMS
OXFORD, FEBRUARY 2006
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• Form-based predation tests need thoughtful application
• Effect: Are these ranges competitively relevant?
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END NOTE: EMPHASIS ON FORMAL MODELS
• EAGCP emphasised role of formal models
• Formal modelling offers transparency and rigour
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OXFORD, FEBRUARY 2006
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– An important weapon in the armoury
• However, can gain a momentum of its own
– Spurious confidence in predictions
– Risk ignoring important factors because less easily
modelled
• Relying on implications of a particular theoretical model
generally over-optimistic and potentially harmful
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• Focus for investigation must be a coherent fact-based theory
of harm
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• Consistent effects-based analysis required
IESTYN WILLIAMS
OXFORD, FEBRUARY 2006
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CONCLUSIONS
• Can’t escape serious implications of cellophane fallacy
• Recognise benefits of not intervening
• Demands made of dominant firms in abuse context must be:
─
Base on standards (eg cost benchmarks) that the firm can
reasonably be expected to know
─
Motivated by serious concerns of harm to the competitive
process