The use of economics in competition law

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The use of economics in competition law

• A presentation to the Second Asian Competition
  Law Policy Conference
• Hong Kong Polytechnic University, 11 12
  December 2006

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INTRODUCTION AND OVERVIEW OF PRESENTATION

• The development of the use of economics in
  European competition law
• The discussion on the abuse of dominance in
  Europe
• Important economic notions for the application of
  competition law

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OVERVIEW

• The development of the use of economics in
  European competition law
• The discussion on abuse of dominance in Europe
• Important economic notions for the application of
  competition law

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Economics and European competition law

• Start of application of European competition law
  in 1960s
• Introduction of European merger control in 1989
• Publication of notice on the definition of
  relevant markets in 1997

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Economics and European competition law

• Review of policy on vertical restraints and
  introduction of safe harbour market share
  thresholds in 1999, Guidelines in 2000
• Guidelines on assessment of horizontal agreements
  and de minimis notice published in 2001
• Guidelines on technology transfer agreements and
  Guidelines on 81(3) published in 2004

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Economics and European competition law

• Horizontal merger guidelines published in 2004
• Vertical and conglomerate merger guidelines to be
  published in 2006

These documents reflect growing importance of
economics in the application of European
competition law
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Economics and European competition law

• Market shares and HHIs used as screening
  device/safe harbour threshold behaviour or
  merger of firms that are (combined) below certain
  market share thresholds not considered
  problematic
• From form based to effects based regime
  increased emphasis on (measuring) effects of
  behaviour and mergers on the market

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Economics and European competition law

• Examples
• Assessment of vertical agreements focus on
  ability of vertical agreements to foreclose the
  market for rivals
• Mergers change of merger test - from creation or
  strengthening of dominance to Significant
  Impediment to Effective Competition (SIEC or SLC
  in US)

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Economics and European competition law

• What does this mean in practice
• More economics based reasoning and empirical
  testing of effects on competition and consumer
  detriment
• Important role for economists at competition
  authorities (incl. Chief Economists and Economic
  Bureaus) and in representing private parties
• Increased burden of proof? Less cases?

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OVERVIEW

• The development of the use of economics in
  European competition law
• The discussion on abuse of dominance in Europe
• Important economic notions for the application of
  competition law

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The Discussion Paper of the Commission Objectives

• Introducing a more effects-based approach for
  exclusionary abuses
• Install consumer welfare and economic efficiency
  as the guiding principles
• With regard to exclusionary abuses the objective
  of Article 82 is the protection of competition on
  the market as a means of enhancing consumer
  welfare and of ensuring an efficient allocation
  of resources. In applying Article 82, the
  Commission will adopt an approach which is based
  on the likely effects on the market

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Why an Effects-Based Approach?

• The same conduct can be anti-competitive in
  certain cases and pro-competitive in others
• Effects-based approach provides better results
  for consumer welfare than form-based approach
• Exclusionary practices are likely to have
  efficiency-enhancing properties
• Harm to Consumers vs. Harm to Competitors
• Reduce number of false positives (such as
  Michelin II) and, to a lesser extent, false
  negatives

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Threshold for Abuse

• Firms can exit the market because of
• Intense competition on the merits, OR
• Anti-competitive behaviour of a dominant firm
• An effects-based policy would seek to distinguish
  these two cases
• Dominant firms should be allowed to compete
• Discussion still on-going, Commission likely to
  publish guidelines and work on similar discussion
  paper on exploitative abuses

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OVERVIEW

• The development of the use of economics in
  European competition law
• The discussion on abuse of dominance in Europe
• Important economic notions for the application of
  competition law

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MARKET DEFINITION NOT AN END IN ITSELF

• Provides appropriate frame of reference for
  competition analysis (market shares, potential
  entry)
• First step in the assessment of market power
• Usually important when assessing whether
  competition law infringed
• Helpful in screening cases where market power
  unlikely to be present

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THE SSNIP-TEST

• Test is a useful CONCEPT to gather and assess
  evidence on market definition
• What is the smallest set of products that it is
  worth monopolising?
• Formally, a market is defined as
• the smallest set of products that a
• hypothetical monopolist needs to control in order
  to
• profitably sustain a significant price increase

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TRADEOFF HIGHER PRICES VS. SMALLER VOLUMES
price
5-10 price increase
increased profit
lost profit
lost sales
volume
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DEMAND-SIDE AND SUPPLY-SIDE SUBSTITUTION

• A monopoly supplier of X might fail the SSNIP
  Test for two reasons
• DEMAND SIDE Consumers buy Y if X becomes more
  expensive
• SUPPLY SIDE Suppliers of Y start to produce X if
  it is more profitable to do so

X
Y
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COMMON ERRORS AND MISCONCEPTIONS
Different price levels mean different
markets Market definitions are
unique Products must be completely
interchangeable Test is impossible without
full econometric analysis
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ISSUES CELLOPHANE FALLACY

• SSNIP test originated in merger control Will
  merger make things worse compared to status quo?
• Dominance Cases Is the current price level too
  high already?

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ISSUES DIFFERENTIATED PRODUCTS

? Closeness of competition matters
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ISSUES BIDDING MARKETS

• Markets characterized by bidding for contracts
  (example construction sector)
• Market shares not necessarily good indicator of
  competitive constraints posed by market players
  (i.e. 50 market share often not equal to 50
  chance of winning next tender)
• Market shares tend to overstate importance of big
  players and understate importance of competitive
  constraint posed by (unsuccessful) smaller
  players
• In merger assessment attention to closeness of
  competition on basis of bidding data and
  potential for dynamic supply and demand side
  responses to merger

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• Thank you!
• Matthijs.Visser_at_rbbecon.com
• www.rbbecon.com