Competition Law as an Interdisciplinary Hybrid.
Combining Legal and Economic Approaches
Beata Mäihäniemi, M.Sc. (Adm.)
University of Helsinki, Faculty of Law
P.O. Box 4, 00014 University of Helsinki
Phone: +358 44 04 82 877, e-mail: beata.maihaniemi@helsinki.fi
1. Introduction.
2. Economic Analysis of Law. General Remarks.
3. Efficiency.
4. Economics as an Indispensible Part of Competition Policy.
5. Economic Concepts Applied to the Area of Competition Law. Examples from the
Article 102 TFEU.
6. Conclusions.
Abstract
Current EU competition law can be characterized as a hybrid of legal and economic
approaches. On one hand, anti-competitive abuses are subjected to legal sanctions, which are
articulated in forms of legal rules and standards. Abuses are then classified into categories,
e.g. exploitative and exclusionary abuses; unilateral and collusive behaviour, dominant and
non-dominant firms. Such a categorisation of abuses is an essential part of legal thinking and
simplifies the enforcement of the competition law. On the other hand, economic approach is
gaining more importance when providing evidence in antitrust cases. “Efficiency” can now be
a new form of “justice”, while the cases are analysed according to their effects, not category.
However, although, advanced methods of economic analysis, such as econometrics and
statistics, can be used in providing evidence in competition law cases; courts tend to lean
towards a more simplified application of economics. Therefore, general economic concepts
such as “monopoly”, “network effects” or “incentives to innovate” can be used as an
argumentation in the court room. This paper will aim at (1) demonstrating how economics
can be useful in deciding competition law cases and (2) characterising the most popular
economic concepts applied to the antirust area.
1. Introduction
The aim of this paper is to introduce the reader to the concept of economics applied to the
area of competition law. Although many legal scholars consider economics as a distant
discipline, it could actually be considered appropriate in a number of cases. Economics as a
legal tool is now affecting not only the area of intellectual property rights, competition or tax
law, but also family law or even legal theory. In order to apply economics to support his
thesis, a legal scholar or a lawyer does not have to hold a Masters in Economics Degree. This
is because one does not need to include complicated mathematical or statistical methods in
his study to show that a legal rule or doctrine is inefficient. He can support his arguments
with economic theories (e.g. Coase theorem) or concepts (different kinds of costs, monopoly,
etc.). The fear of ‘unknown’ economics is steadily disappearing as learning programs that
include economics for competition law are being offered on a wider scale. A slow but steady
development of the European competition law towards the more economic approach can be
observed. Unlike in the United States, a well-functioning economics-based approach is still in
development.
There are a number of aspects of competition law to which economics can be
applied. Firstly, economics is relevant in deciding whether a particular kind of an anticompetitive conduct should be regulated in a form of a legal rule or a standard. Secondly, it is
applied in an assessment of efficiency/inefficiency of a firm’s conduct. Moreover, economic
arguments can help decide whether competition law should be applied to the area of
intellectual property rights, since such an application could deprive firms from incentives to
invest and innovate. In addition to that, certain fundamental economic concepts are
appropriate in an investigation of an alleged abuse of dominance. This paper focuses on
concepts applied in the analysis of the Article 102 TFEU, such as market and monopoly
powers, leveraging, network effects, since they play a decisive role in a formulation of
research questions in my doctoral thesis.
Competition law can be approached from different angles. Recently, there has been a
shift from the form-based to the economics-based approach in European competition policy.1
The form-based approach emphasizes the nature of the conduct and organizes conducts in
categories such as predatory pricing, discrimination, fidelity rebates and tying. Nevertheless,
in some cases, alternative conducts may serve the same purpose. For example, a firm which is
See Lianos, I., “Categorical Thinking in Competition Law and the Effects-Based Approach in Article 82 EC”,
in Article 82 EC Reflections on Its Recent Evolution, ed. Ezrachi, A. (Oxford and Portland, Oregon: Hart
Publishing, 2009).
1
2
in control of an essential facility may distort competition in a downstream market and this can
be achieved by: (1) refusing to deal with independent downstream firms; (2) engaging in
exclusive dealing arrangements or (3) engaging in explicit or implicit price discrimination. 2
The effects-based approach is concerned with promoting consumer welfare and therefore,
competition law enforcers should assess beforehand how the conduct at issue is likely to harm
consumers. The effects-based approach understands the fact that an anti-competitive conduct
may not only be harmful but also produce some positive effects. In order to defend itself, a
dominant company needs to demonstrate that its conduct is objectively necessary or produces
substantial efficiencies which outweigh any anti-competitive effects on consumers.3
The change towards the full application of the effects-based approach can only
succeed if a classification of conduct categories, which is an essential ingredient of legal
thinking, would be combined with the economic analysis and objectives of the EC
competition law. The Commission understands this need and continues to support the
classification of a conduct, e.g. a distinction between price and non-price discrimination can
be found in the Guidance Paper.4 Other types of categorized conduct include often applied
distinctions between exploitative and exclusionary abuses; unilateral and collusive behaviour,
dominant and non-dominant firms.5
2. Economic Analysis of Law. General Remarks.
A separate scientific discipline of the economic analysis of law combines legal and economic
approaches into one social science. The economic analysis of law is a relatively new idea
which can be divided into two kinds of analyses. The division of analyses is based on the
assessment whether statements formed in the economic analysis of law are focused on de lege
lata (the law as it exists) or de lege ferenda (with a view to the future law) criterion. The
economic analysis of law can then be either positive or normative. The former explains the
law, predicts its effects and indicates which legal rule will be efficient. Results of the positive
analysis can be later used for normative purposes (e.g. as a prescription of an efficient rule)
which represent the normative analysis.
Gual, J. et al., “An Economic Approach to Article 82”, Munich Discussion Paper 26, (University of Munich:
Department of Economics, 2005), 6.
3
European Commission , “Communication from the Commission — Guidance on the Commission's
Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant
Undertakings”, Official Journal of the European Union, C 45/02 (2009): 28.
4
Lianos, I., “Categorical Thinking”, 49.
5
Ibid.
2
3
Additionally, within the paradigm of the economic analysis of law two major
discourses can be separated: explanatory and prescriptive. The former discourse has an aim of
developing models that aim at explaining, in economic terms, how humans interact, both
outside of, and within, social and political institutions. There are several examples of this
discourse, e.g. homo economicus which aims at understanding human nature and considers an
individual as a self-interested actor, who is competitive in nature and thrives to achieve the
rational maximization of a personal utility. Another example of this discourse is the Public
choice analysis which is focused on the political process of governmental institutions. It
characterises itself as a descriptive, rather than normative enterprise. Public choice analysis
applies economic analysis to a political decision-making, including theories of state; voting
rules etc.6 The latter discourse is concerned with a substantive content of the materials of law,
such as legislative enactments and judicial doctrine. The prescriptive discourse seeks to find
the basis for the choice made in legal processes. This discourse is dominated by approaches
that are rooted in individualist or hierarchical values. Examples of this discourse include
Chicago and Yale Schools. The former is based on the assumption that an individual
entitlement to a property should be given maximum protection from the violation from other
individuals and government’s action. It also regards wealth maximization as a highest good.
By contrast, Yale School rejects the concept of natural and inherent rights and claims that
public institutions have a paramount role in directing economic and social arrangements.7
Although the economic analysis of law is represented by several different schools
(e.g. Chicago and Yale) most of legal economists follow a pragmatic, eclectic approach and
they do not faithfully follow the rules of one school. Nevertheless, a plethora of ideas of such
schools on various legal and economic issues may be applied to support an argumentation in
the court room. Moreover, the economic analysis of law can provide a scientific theory to
predict the effects of legal sanctions on behaviour. This prediction is based on the idea that
economists perceive sanctions as prices. Consequently, people respond to heavier legal
sanctions in the same way as to higher prices. Therefore, since the more expensive the good is
the less people consume it, people will not as a result; commit crimes that are followed by a
severe punishment. Such an effect of prices on behaviour can be analysed with a support of
mathematical theories including price and game theory.8 The application of economics to law
See Brion, D.J, “Norms and Values in Law and Economics”, in Encyclopaedia of Law and Economics, ed.
Bouckaert, B. and De Geest, G. (Cheltenham: Edward Edgar, 2009): 1041-1071.
7
Ibid.
8
Cooter, R.D., “The Confluence of Justice and Efficiency in the Economic Analysis of Law", The Origins of
Law and Economics: Essays by the Founding Fathers (The Locke Institute, 2003), 4.
6
4
may be rational and highly relevant in many cases, however it may require a specialist
mathematical theory in order to be applicable.
When a punishment is compared to a price, a question of justice arises. There is a
contrast between a notion of punishment, which is subjective and connected to the moral
consideration, and a price, which is objective and easier to grasp than a punishment.
Therefore scholars of the economic analysis of law comprehend ‘justice’ as a subjective,
while, efficiency as an objective value.9 Indeed, although there are only a couple notions of
efficiency accepted by the established economic paradigm (those of Pareto and KaldorHicks), there are as many notions of justice as judging individuals. Applying efficiency as a
determining criterion reduces to minimum a possible level of a value judgement and aims at
avoiding the waste of resources.10 This kind of approach to justice is only one of the possible
ways of interpretation of law (here, of interpretation of a legal sanction). Although the
application of the economic analysis of law to various legal problems is limited to a certain
extent, some legal scholars cross these limits by postulating e.g. selling babies11, blood,12 as
well as treating law in crude managerial terms.13
Another example of how economics can be generally applicable to the area of law is
the concept of the economics of rules and standards. It helps to decide in which form should
law be regulated. The debate over rules and standards is one of the regulatory problems
analyzed by the economic analysis of norm formulation (to regulate or not to regulate?).
Consequently, lawmakers must perform prior search (ex ante) to decide on the suitable rule to
create. Ex ante assessment of the rule is conducted e.g. in telecommunications and other
specific laws.14 Rules are more costly for legislators to promulgate than standards. Standards
require less specificity, however they are more costly for legal advisors to predict or
adjudicators to apply because they require determinations of the law’s content (ex post). Ex
post assessment of the rule or standard is conducted e.g. in the area of competition law. From
See Feldman, H.L. (1994). “Objectivity in Legal Judgment”, Michigan Law Review 92 (1994): 817.
See Cooter, R. D, “The Best Right Laws: Value Foundations of the Economic Analysis of Law”. Notre Dame
Law Review 64 (1989): 817.
11
Landes, E.M. and Posner, R.A., “The Economics of the Baby Shortage”, Journal of Legal Studies 7 (1978):
323-348.
12
Kessel, R., “Transfused blood, serum hepatitis, and the Coase Theorem”, Journal of Law and Economics 17
(1974): 265-289.
13
Veljanovski, C., “The Economics of Law”, Institute of Economic Affairs Hobart Paper 157 (2006): 58.
14
See Parisi, F., “Rules versus Standards”, in The Encyclopedia of Public Choice Rowley, eds. C.K. and
Schneider, F. (Dordrecht: Kluwer Academic Publishers, 2003): part 2.
9
10
5
an ex ante perspective, rules are typically optimal, and from an ex post one, standards are
typically optimal.15
3. Efficiency
Efficiency is a basis of the economic analysis of law. As mentioned above, law can be
regulated in the form of a rule or standard, and each of them may lead to efficient or
inefficient outcomes. Rules and standards can be analysed from two perspectives: ex post and
ex ante. The ex post perspective assesses whether a solution embodied in a rule or standard
fulfils its aims or not. The ex ante perspective is forward looking and evaluates whether the
rule will change in the future and what effects the change in policy and welfare will have on
it.
The application of efficiency as a judging criterion raises similar concerns as the
treatment of a punishment as a price. Therefore, there is a need to ask a question on the
presence of justice. Could efficiency be a new form of justice? Justice is a moral ideal which
states that law has an aim of protection of rights and punishment of wrongs 16 and it is a more
distant and blurry idea than efficiency. Furthermore, justice is not a synonym with the law,
since law can be also unjust. Although there are many different forms of justice, only two of
them seem to include efficiency considerations. These two forms are a distributive and
corrective justice. Distributive justice assesses whether resources are allocated in a fair
(efficient) way amongst different members of the community. Fair (efficient) allocation
denotes taking into consideration total amount of goods to be distributed, the distributing
procedure and the pattern of distribution. In the application of a distributive justice, efficiency
can be achieved for example by raising tax revenue in such a way which imposes the smallest
possible burden on the economy. The other kind of justice – a corrective one, aims at ‘fixing’
the injustice that the defendant has inflicted on the plaintiff. Consequently, it stresses the
connection between the remedy and the wrong. While seeking corrective justice, efficiency
can be achieved by e.g. a compensation for a harm caused by accidents that requires an
allocation of the entitlement to injurers or victims.
Efficiency considerations are applied to various phases of legal thinking. Firstly, they
can be taken into consideration in the phase of a preparation of legislative drafts. An
15
16
Ibid.
Law, J. and Martin, E.A., Dictionary of Law, (New York: Oxford University Press, 2003): 310.
6
argumentation of these drafts often refers to efficiency and can be translated into economic
jargon. Secondly, efficiency considerations may be applied in the phase of the interpretation
of law.
In such a case they are usually already written into law. Thirdly, efficiency
considerations are relative in a justification of court decisions. However, although only a few
judicial opinions contain explicit references to efficiency concerns, often the true grounds of
legal decision are concealed rather than illuminated by the characteristic rhetoric of opinions.
Furthermore, many legal doctrines (e.g. essential facilities doctrine) rest on the inarticulate
groupings toward efficiency. Efficiency applied to the legal dispute requires that an exchange
of goods will continue until the owner of each good values it at least as much as anyone else.
Whenever the owner of a good values it less than someone else, exchange has not yet
proceeded to the point where the pattern of ownership is efficient, since efficiency requires
the allocation of legal entitlements to the parties who value them the most. Thereafter,
efficiency can be taken into consideration in the phase of a policymaking, since it is always
more efficient to achieve any given policy at lower cost than at higher cost. Despite the fact
that economists often recommend changes that increase efficiency, they usually avoid taking
sides in disputes about distribution. What is more, economists can show how much of one
value e.g. efficiency must be sacrificed to achieve another one and that the means by which
society has attempted to attain a particular goal were inefficient. Finally, economic efficiency
can be appropriate in providing an explanation for a legal change. Here, competition is at play
either among different legal orders, or between different sources of law within a given
system. Within a single legal system, legal formants compete for the solution of each legal
problem, while in the international arena there is a competition between national legal
regimes.
Economic efficiency is defined as obtaining the maximum output for given inputs
and may take three different forms. Firstly, there can be efficiency in consumption, which
denotes that goods are allocated between consumers in such a way that it is not possible by
any reallocation to make some people better off without making anybody else worse off.
Secondly, there is efficiency in production, which assumes that available resources are
allocated between industries in such a way that it would not be possible to produce more of
some goods without producing less of any others. Thirdly, there can be efficiency in the
choice of goods to produce. That requires choosing goods so that it would not be possible to
change the chosen set of goods in order to make some consumers better off without others
becoming worse off.
7
In addition to the previous distinction, economists apply two more criterions of
efficiency: Pareto or Kaldor-Hicks. The situation is Pareto efficient when the welfare of one
individual cannot be improved without reducing the welfare of others. Therefore, all parties
benefit from such a solution or none of the parties is harmed, although a resource, good or
asset is relocated or there is a change in law. The situation is Kaldor-Hicks efficient when
parties which gain in such a relocation of a resource, good or asset or change in the law,
compensate (at least hypothetically) to those that are harmed by such relocation. However,
these who gain are still better off.
4. Economics as an Indispensible Part of Competition Policy
The economic analysis of law is an indispensible part of competition policy and law. As
noted by Wish17 “competition law is about law and economics and economic behaviour, and
it is essential for anyone involved in the subject – whether a lawyers, regulator, civil servant
or in any capacity – to have knowledge of the economic concepts concerned.”18 Similarly,
according to Posner 19 ‘antitrust law is a body of economically rational principles’. 20 In
Europe, the economic approach is a ‘key talking point’21 due to the propaganda started by the
Europe’s judges, who can also take a credit for a change from a form-based to effects-based
approach to competition policy.
The application of economics to the area of the European competition law can be
regarded as a legal transplant from the American antirust regulation. This argument can be
supported by an observation that, for a long time economics had a much greater impact in the
United States than in Europe, since European lawyers were less familiar with economics than
the American ones. Moreover, at the beginning of its existence, the European Commission,
tried not to engage itself in economic thinking.22 Only after the intervention of the European
Court of Justice, in the 1969, all agreements started to become evaluated on the basis of not
only factual and legal, but also economic analysis.23
17
Whish, R., Competition Law, 5th edition, (London: Lexis Nexis, 2003): 1.
Ibid.
19
Posner, R.A., Antirust Law. 2nd edition, (Chicago: University of Chicago Press, 2001): viii.
20
Ibid.
21
See Gual, J. et al. (2005), “An Economic Approach to Article 82”.
22
Van den Bergh, R.J. and Camesasca, P.D, European Competition Law and Economics: A Comparative
Perspective, 2nd edition, (London: Sweet and Maxwell, 2003): 1.
23
Ibid.
18
8
As a result, a clear historical connection between economics and competition can be
established. In addition to that, both economics and competition are concerned with an
effective allocation of resources. Economics is then ‘a social science that studies individual
and group decisions on how to use scarce resources to satisfy their wants and needs’. 24 It
analyses how people and society choose to employ resources to produce different kinds of
commodities. Economics also assesses the costs and benefits of better allocation of goods.
The allocation of resources is important in some of the conceptions of competition. One of
them, which is based on the effects that a firm’s behaviour has on the economic welfare25
denotes that these effects influence preferences of individuals and the way in which they use
scarce resources. Moreover, the conception of competition based on the economic freedom is
strongly related to the definition of economics, since it assumes that the aim of competition
policy is to protect individual economic freedom of action as a value in itself.26
The close bound between economics and competition can be illustrated by three
concepts: the economics of property rights, innovation economics and economics of rules and
standards. The economics of property rights is concerned with economic value and use of
resources and assets in an efficient way. It assumes that value of a particular good depends on
a ‘bundle of rights’ which is attached to physical and non-physical commodities and assets.
As a result, the price of such an intellectual property varies significantly from that one of e.g.
leasehold or tenancy.27 The economics of property rights can be applied, among others, in
cases of a refusal to deal or supply to an IPRSs-formed commodity. There has been a wide
debate on whether such a commodity should be shared at all, since allowing access to it may
deprive firms from incentives to invest and innovate.
The other concept which illustrates the close relationship between economics and
competition law is innovation economics. It assumes that policies which encourage
innovation may be able to ‘distort’ price signals and thereafter lead to some minor loss in the
economy (deadweight loss). This approach places more weight on the impacts of actions in
the marketplace on productivity and innovation, than on short-term price effects even if they
24
Black, J., Hashimzade, N. and Myles, G., A Dictionary of Economics. 3rd edition, (New York: Oxford
University Press, 2009): 131.
25
See Monti, G., EC Competition Law, (New York: Cambridge University Press, 2007): 22.
26
Möschel, W., “Competition Policy from an Ordo Point of View”, in German Neoliberals and the Social
Market Economy, eds. Peacock, A. and Willgerodt, H. (London: Macmillian, 1989).
27
Veljanovski, C. G., Economic Principles of Law, (Cambridge: Cambridge University Press, 2007): 60.
9
distort market allocation.28 Innovation economics is definitely forward-looking and focuses
on the consequences of legal policies in a long-term perspective. Such a perspective seems
rational and effective; nevertheless, there will be a number of firms, who may be discouraged
from entering the market in the fear of short-term loses.
Third example of the application of economics to the area of competition law is the
concept of the economics of rules and standards. In deciding how should a conduct be
regulated, the specifics of rules and standards have to be taken into consideration. Rules have
the ability of maximizing certainty which allows law to be more workable; however they bare
the risk of under- and over-inclusion. Standards promote flexibility and are less fragile to
legal changes. Nevertheless, they can also be unclear and may require more consideration
from judges then rules.
5. Economic Concepts Applied to the Area of Competition Law. Examples from the
Article 102 TFEU.
Economic concepts have first been applied in merger cases and then have spread on a wider
scale into various areas of competition law. One of such areas is the Article 102 TFEU which
implicates that abuses of dominant position within the Common Market are forbidden. This
provision is concerned with a number of anti-competitive practices such as predatory pricing,
tying, refusals to deal, etc. The list of abuses stated in the Article 102 is not exhaustive and
therefore there may be some other, unspecified abuses that also qualify as the ones breaching
the Article. Amongst economic concepts that are useful in the analysis of the Article 102, the
concept of a market power plays a major role in determining whether an undertaking‘s
behaviour is classified as an anti-competitive. This is because only an undertaking which
holds a dominant position (= its market shares are above certain level) possesses a market
power which gives it a possibility to exclude competitors from the output market. For
example, in the case of a refusal to deal market power is exercised by either refusing to deal
with rivals or setting a too high a price for agreeing to deal. Market power is a strength of a
dominant undertaking but it may also cause a number of negative effects, such as an
exclusion of strong rivals from the market. A firm which has market power may exclude its
rivals by e.g. tying two products together or discriminating in terms of price.
Atkinson, R.D. and Audretch D.B., “Economic Doctrines and Approaches to Antitrust”, The Information
Technology
and
Innovation
Foundation
(2003):
6,
electronic
copy
available
at:
http://ssrn.com/abstract=1750259
28
10
Market power can be understood in four different ways. Firstly, market power can be
interpreted as an ability to increase prices at a profitable and competitive level.29 Such a form
of a market power should concern a competition authority only when it is both significant and
durable.30 Secondly, the concept of market power can be based on the notion of commercial
power. This approach is often used in the discussion of certain doctrines in contract law, such
as economic duress.31 Thirdly, market power can be regarded as a power to exclude rivals in
order to be able to increase prices. Consequently, an undertaking which exercises the market
power is involved in strategies which aim at harming rivals and, as an effect, it is able to raise
prices and reduce its output.32 Finally, market power can be interpreted as a jurisdictional
concept. Following this approach, market power is measured by the level of market shares of
an undertaking while, at the same time, cheaper and more effective application of law is
considered more important than the threat of under-enforcement.33
The concept of market power is also related to the one of monopoly power.
Monopoly power is defined as a degree of control that a firm can exercise over a market. This
is usually measured by a degree of the concentration in the industry.34 Concepts of market
and monopoly power are related; however they differ to certain extent. According to Posner35
‘market power’ is the real significance of concentration; it facilitates collusion among the
firms in the market by reducing the costs of collusion and of detecting cheating. 36 By contrast,
‘monopoly power’ is the power of a single firm, which is not acting in cooperation with
competing seller, to maintain a price slightly above the competitive level. 37
Monopoly power can be a result of either planned, aggressive behaviour or a
successful investment of an undertaking. In the case where a monopoly is a result of a
business luck or a successful R&D policy (a case of a ‘no-fault monopoly’), it is still treated
on the same terms as the regular form of monopoly. This situation should change since the
circumstances in which these two types of monopoly come to life are significantly different.38
29
Carlton, D.W. and Perloff, J.M., Modern Industrial Organization, 2nd edition (New York: Harper Collins,
2003): 8.
30
Werden. G., “Demand Elasticities in Antitrust Analysis”, Antitrust Law Journal, 66 (2003): 363, 373-80.
31
Monti,G, EC Competition Law, 125.
32
Krattenmaker, T.G., Lande, R.H. and Salop, S.C., “Monopoly Power and Market Power in Antitrust Law”,
Georgetown Law Journal 76 (1987): 241.
33
Monti, G., EC Competition Law, 126-127.
34
Black, J., Hashimzade, N. and Myles, G, A Dictionary of Economics, 298.
35
Posner, R., Antirust Law, 124.
36
Ibid.
37
Ibid.
38
See Hovenkamp, H., The Antitrust Enterprise: Principle and Execution (Cambridge, MA and London:
Harvard University Press, 2005): 157.
11
Hence, a ‘regular’ monopoly is created by socially harmful acts while a ‘no-fault’ one is
maintained by efficiency.
Moreover, a ‘regular’ monopoly can become so efficient that there will be no more
space for other companies in the market (a situation of a ‘natural monopoly’). The strength of
such a monopoly derives from economies of scale and scope. Economies of scale are these
factors which allow a monopolist to produce goods or services more cheaply than his smaller
competitors. Economies of scope are benefits arising from carrying on related activities. A
natural monopolist is the only producer of goods in the market as there is nobody else who
could compete with him. The examples of natural monopoly include the areas of public
utilities such as telephone industry, electricity and water supplies.
Some monopolists are able to extend their powers to other markets and exclude
competitors from a market which they do not yet dominate. This practice is known as
leveraging and can consist of a number of strategies such as tying two products together or
granting significant rebates to customers.39 In the assessment of whether a particular act of
leveraging is anti-competitive or not antitrust authorities decide whether the monopolist has
incentives to expand his market power to the adjacent market and his conduct (e.g. tying,
refusal to license) would eliminate competitors. Additionally, the authorities determine
whether the elimination of competitors is harmful for consumers.40
In a number of legal cases monopoly power produce phenomena of network effects.
‘Network effect’ can be defined as “the circumstance in which the net value of an action, such
as consuming a good, subscribing to telephone service, is affected by the number of agents
taking equivalent actions”.41 Network effects are a direct or indirect result of the existence of
network that consists of components which are complementary to each other.42 In the case of
direct network effects, the number of interconnections between components rises and
increases network’s utility. Direct effects can occur in a physical, two-way communications
network. For example, a purchase of a fax machine directly benefits existing fax machine
owners, since they now have an additional person with whom they may communicate.43 In
the case of indirect network effects the value of the network is increasing since there are more
39
Tetra Laval [2002] ECR II-4381 para. 156.
Lèvêque, F., “Innovation, Leveraging and Essential Facilities: Interoperability Licensing in the EU Microsoft
Case”, Word Competition (2005): 14-15.
41
Liebowitz, S.J. and Margolis, S.E., “Network Externality: An Uncommon Tragedy”, Journal of Economic
Perspectives 8 (1994): 135.
42
Economides, N., “The Economics of Networks”, International Journal of Industrial Organization 14 (1996):
674.
43
Page, W.H. and Lopatka, J.E., “Network Externalities”, Encyclopedia of Law and Economics, ed. Bouckaert,
B. and De Geest, G. (Cheltenham: Edward Edgar, 2009): 956.
40
12
complements for the product, and consequently, there are more users interested in buying the
product. However, indirect effects can arise only when components are purchased at different
times. For example, software programs are often purchased at various times over the useful
life of a computer.44 Direct and indirect network effects are observed in telecommunications,
computers software or Internet industries.
Networks have the ability of both enhancing and inhibiting competition and
therefore present unique challenges to competition authorities. On one hand, they enhance
competition since consumers are offered an increased number of choices. On the other hand,
networks lead to a problem with interoperability. A monopolist who is in charge of the
network may produce products that are not interoperable with rivals’ technology and drive
competitors out of the market. Moreover, in the context of networks some anticompetitive
behaviour, such as a predatory pricing or tying can be difficult to assess.45
6. Conclusions
An economic approach to competition law will most probably persist and evolve. This is
evident as a role of economists in the Commission is constantly growing (e.g. a position of
Chief Economist). An increasing number of books and articles which conduct the economic
analysis of competition law is being published as well. What is more, evidence in the form of
an economic consideration as well as some econometric techniques are being applied in the
analysis of competition issues.
As it has already been mentioned in the Introduction part, the economic analysis of
law is a basis for the effects-based approach to competition law. This approach applies
economic concepts such as leveraging or network effects in the assessment of positive and
negative effects of a company’s conduct on the market and consumers. The effects-based
analysis is more flexible and certain than the form-based one, though, may be accused of a
lack of legal certainty and lead to certain errors.
Despite its shortcomings, the effects-based approach, along with the application of
general economic principles has brought more consistency to the EU competition policy. 46 An
44
Ibid., 955.
45 Sharpe, N.F. and Arewa, O.B., ”Is Apple Playing Fair? Navigating the iPod FairPlay DRM Controversy”,
Northwestern Journal of Technology and Intellectual Property 5, 2 (2007): 341.
46
Peeperkorn, L. , “Commission Publishes Discussion Paper on Abuse of Dominance”, Competition Policy
Newsletter
1
(2006):
4,
electronic
copy
available
at:
http://ec.europa.eu/competition/publications/cpn/2006_1_4.pdf
13
assessment of the effects of the conduct has served a number of purposes. It has not only
helped in the evaluation of the competition law enforcement but also influenced the choice of
priorities in fighting anti-competitive practices or proved helpful in establishing the size of
damages to be paid in compensation for concrete anti-competitive practices. 47 In order to
assess the extent to which negative effects of the conduct are able to outweigh the positive
ones, a lawyer does need to apply a complex economic or econometric analysis. Actual or
likely negative effects can be proved by an analysis of factual developments of the conduct,
as well as by assessing the ways in which it is likely to affect the market. Nevertheless, the
application of economic and econometric models to support the analysis of competition law
should be applied on a wider scale.48
When applying economics to competition policy, authorities from different Members
States should be able to implement the same definitions of various concepts, so as there
would be a smaller possibility of a misapplication of the economic approach. Economic
concepts should be standardised by the Commission. Preferable way of standardising would
include issuing of specialised Guidelines. However, such a standardisation can also be
conducted by scholars, in the form of publications. An example of a concept that had been
standardized in such a way is ‘economic efficiency’.
Moreover, there is a need to understand different contexts in which economic
concepts are being applied. Economic concepts can then be relevant in both traditional and
IPR-based industries (so-called ‘new economy industries’). Traditional industries include
production and distribution of physical goods, such as steel, automobiles and railroad cars.
They are characterized by multi-plant and multi-form production where average total costs
are rising at relatively modest output levels. In traditional industries the rate of innovation is
modest; rivals enter and exit the market very infrequently and slowly, while economies of
scale at both plant and firm level are limited. New economy industries, such as manufacture
of computer software, Internet service/content providers or biotechnology are characterised
by falling average costs on a product, not a firm basis, and often require a modest capital to
start the business.
In addition, these industries are highly innovative and give rivals a
possibility to enter and exit on a frequent basis. New economy industries exhibit economies
of scale in consumption. The recognition of the new economy industries may require
Don, H., Kemp, R. and Van Sinderen, J., “Measuring the Economic Effects of Competition Law
Enforcement”, De Economist 156, 4 (2008): 344.
48
Neven, D. and de la Mano, M., “Economics at DG Competition 2008-2009”, Review of Industrial
Organization 35, 4, (2009): 337.
47
14
monopoly or inter-firm cooperation in standard setting. 49 It appears that the economics
concepts should be applied much more often in the case of the new economy industries, since,
in their context, it is complicated to assess various kinds of anti-competitive abuses.
Finally, the application of economics to the area of competition law can be
problematic since there are different criteria for the assessment of abuses proposed by legal
scholars and economists. Nevertheless, the fact that these criteria vary does not exclude a
possibility of combining them in order to achieve effective antitrust solutions. Therefore,
economic and legal arguments can support and complement each other. To sum up,
economics may provide arguments which have not been mentioned in the court cases. These
arguments allow lawyers and judges to look at antitrust issues with a fresh perspective.
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17