Using Competition Law Cases to Teach Economics

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USING COMPETITION LAW CASES TO TEACH ECONOMICS
Sir John Vickers Chairman, OFT DEBE
Conference Cambridge, 1 September 2005
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Competition law and economics

• competition law is fundamental to operation of
  market economy
• cases can bring economics to life and show it at
  work
• cases motivate research and policy debate as well
  as teaching
• competition policy addresses market failure while
  guarding against regulatory failure

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Competition is hot topic

• competition has moved from fringes of law to
  centre of economic agenda
• new law ? Competition Act 1998, Enterprise Act
  2002, EC developments
• independent, transparent and accountable bodies ?
  OFT, CC, CAT
• numerous high-profile cases

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Whats so great about competition?

• efficient resource allocation
• efficiency displaces inefficiency
• incentives for productivity and innovation
• good for consumer choice and value for money
• think of the alternatives!

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What does competition law deal with?

• anti-competitive mergers
• anti-competitive agreements
• abuse of dominant market positions

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Merger review overview

• UK system OFT ? CC (appeals)
• SLC test
• main kinds of anti-competitive effect
• ? non-coordinated e.g. worse Bertrand
  equilibrium
• ? coordinated more likely tacit collusion
• ? foreclosure to guard/extend(?) market
  power

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Merger review analytical steps (1)

• market definition demand and supply
  substitutability product, geography
• market shares concentration measures, e.g. HHI,
  (mean what?)
• non-coordinated effects incentive shift?
• coordinated effects easier monitoring of
  collusion, deterrence of cheating, and safety
  from disruptive rivals?

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Merger review analytical steps (2)

• conditions for entry and expansion by rivals
• vertical issues
• conglomerate issues?
• efficiency defences (consumer or total welfare
  standard?)
• failing firm issues
• if necessary remedies

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The ITV merger case

• Carlton/Granada agreed merger of 2003
• background of change in TV sector
• commercial case for consolidated ITV
• but potential competition concern about
  advertising airtime
• OFT advised SoS to refer to CC

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Analysis of airtime competition

• relevant market? TV advertising in the UK
• Carlton Granada share c50, declining
• substitutes or (regional/temporal) complements?
• overlap in London ? Carlton and Granadas LWT ?
  and beyond?
• did airtime capacity regulation remove SLC
  concern?

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CC conclusion on ITV merger

• SLC in airtime likely, to detriment of
  advertisers and public interest
• minority favoured structural remedy divest ad
  airtime sales houses
• majority decided on behavioural remedy contract
  rights renewal
• none favoured prohibition

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Anti-competitive agreements overview

• horizontal / vertical, price / non-price
• price-fixing e.g. vitamins, auction houses,
  toys, replica football kit, roofing
• economics of leniency
• vertical agreements ? more economic approach to
  non-price agreements now than in past
• influence of economics of contracts

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Abuse of dominance overview

• EC Article 82, US Sherman Act s.2
• law applies only to firms with dominance / market
  power how to assess that?
• exclusionary and exploitative? abuse
• examples predatory pricing, margin squeeze,
  tying and bundling, exclusive dealing,
  rebate/discount policies, refusal to supply

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What is competition on the merits?

• how to distinguish anti-competitive from
  pro-competitive conduct?
• should some forms of conduct by a firm with
  market power be per se illegal?
• possible guiding principles
• ? profit sacrifice / no business sense
• ? exclusion of as-efficient rivals
• ? consumer harm

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United States v Microsoft overview

• 1998 US brings case that MS had monopolized
  markets for operating systems and browsers
• by engaging in exclusionary practices including
  bundling Internet Explorer with Windows OS
• 2000 District Court judgment structural
  separation behavioural remedies
• 2001 Court of Appeals judgment (see below)
• 2002 US and MS settle behavioural remedies
• Based on Motta, Competition Policy, 2004, pp
  511-523. And see JEP Spring 2001.

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Microsoft case issues

• Does MS, through Windows, have market power?
• How does the market power arise?
• Does bundling IE maintain MSs market power over
  OSs unlawfully?
• Does it extend it to browsers?
• Are consumers harmed?

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Microsofts market power

• parallels with past IBM cases
• network effects, compatibility needs of users,
  switching costs
• relevant market Intel-compatible PC OS worldwide
• Windows share 95
• applications barrier to entry
• Windows dominant

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Maintenance of Microsoft monopoly

• middleware threat from Netscape browser (
  Java) to applications barrier and hence to
  Windows dominance
• thwarted by MS integration of IE with Windows,
  exclusionary contract terms with PC-makers and
  internet access providers?
• Court of Appeals reviewed anti-competitive
  allegations and efficiency defences
• upheld some but not all monopolization charges

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Microsoft remedies

• District Court remedies included structural split
  between MSs OS and applications businesses
• pros and cons of structural remedies may solve
  incentive problems but may lose scope economies
  proportionality?
• Appeals Court quashed break-up
• US and MS then settle a package of behavioural
  remedies

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Competition cases can teach economics

• competition policy now more central
• competition law now more economics-oriented
• interesting cases and analysis now available
• can enliven and spur industrial economics
• anyway I plan to do it

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USING COMPETITION LAW CASES TO TEACH ECONOMICS
Sir John Vickers, Chairman, OFT www.oft.gov.uk