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Evidence, Inference and Enforcement of Competition

Laws

Dr. Andrew SimpsonAssistant Professor (Law)

Faculty of BusinessHong Kong Polytechnic University

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Outline:Necessity of Market DefinitionGuidance from agencies is necessarily

general Kinds of evidence used by agencies and

courts overseas Direct evidence is surprisingly rareInference and Opinion play a large partLook for corroboration between different

kinds of evidence

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The “market” is fundamental:

PROHIBITED CONDUCT

MARKET CONCEPT

Agreements not to compete

• Is the agreement among undertakings that should compete with each other?

Abuse of dominance• Is the defendant “dominant” in a market?• Can defendant act without constraint by competitors?

Mergers that reduce competition

• Is the merger between undertakings that compete with each other?• Will the merger result in less competition in the market?

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For example, the AML:

PROHIBITED CONDUCT

MARKET CONCEPT

Agreements not to compete

Art. 13 - prohibits “monopoly agreements among competing undertakings”

Abuse of dominanceArt. 19 - a dominant market position is (rebuttably) presumed from certain market shares

Mergers that reduce competition

Art. 27 - market share and “concentration in the relevant market” must be considered when reviewing concentrations.

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What should you aim to prove:

“[T]he greatest prospects for success lie in proposing a market that is widely recognised by the industry itself and is reflected in industry attitudes and practices that may be established through the evidence”

(Beaton-Wells, 2003)

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How to define “the market”? Market “dimensions”

Product Geographical +Functional +Temporal

For example: the passenger cars market in China; the automotive entertainment and communications

market in China the market for carbonated soft-drinks in China

Refer to Guidelines… But how much help do Guidelines really

provide?

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MofCOM Guidelines Demand and supply substitution analyses “Evidence showing consumers shift …to purchasing

other products due to a change of the products’ price or change of other competitive factors” (Art. 8(1))

Price variance – substitutable products share the same trend in price changes over time (Art. 8(3))

Evidence of purchasers buying in new geographical areas (Art. 9(1))

Products’ transportation costs, transportability (Art. 9(2)) Trade barriers (Art. 9(4)) “Hypothetical monopolist test” (Art. 10, 11) Evidence of actual conduct of suppliers and

consumers is highly relevant…

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Two problems:Guidelines are necessarily quite general

In practice, what real-world evidence is helpful to agencies and courts?

How helpful/reliable is such evidence? A large measure of inference is needed Correct inference to draw from “facts” is a

matter of opinion Need to find different kinds of evidence

that reinforce the same conclusion

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EC Market Definition Notice1. Buyer substitution

2. Econometric and statistical approaches

3. Views of customers & competitors

4. Consumer surveys

5. Switching costs

6. Price discrimination

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EC Market Definition Notice1. Buyer substitution Supply or demand

substitution in past

2. Econometric and statistical approaches

Of price movements, changes in demand

3. Views of customers & competitors

Their views on market boundaries

4. Consumer surveys

How would they react if prices went up?

5. Switching costs How difficult for firms/ customers to change?

6. Price discrimination

Firms able to segment customers?

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EC Market Definition Notice1. Buyer substitution Supply or demand

substitution in past Revealed preferences2. Econometric and

statistical approaches

Of price movements, changes in demand

3. Views of customers & competitors

Their views on market boundaries

Expressed preferences4. Consumer

surveys How would they react if prices went up?

5. Switching costs How difficult for firms/ customers to change?

Past/present fact

6. Price discrimination

Firms able to segment customers?

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Direct evidence is relatively rare…

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Common forms of evidence:Monitoring by firm

Pricing by firm

Product marketing/promotion

Firm organisational structure

Purchasing behaviour

Business records

Customer surveys

Executives’ testimony

Econometric analyses

Expert opinion

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Common forms of evidence:Monitoring by firm What rivals does firm monitor?

Pricing by firm Is pricing constrained by rivals?

Product marketing/promotion

Timing, area and group of products?

Firm organisational structure

Location of outlets, transportation?

Purchasing behaviour What switching by customers?

Business records Regard to firm documents?

Customer surveys Indicative of customers’ preferences?

Executives’ testimony Opinions as to competitors?

Econometric analyses Statistical analysis of price changes?

Expert opinion What weight should be given?

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Common forms of evidence:Monitoring by firm What rivals does firm monitor?

Pricing by firm Is pricing constrained by rivals?

Product marketing/promotion

Timing, area and group of products?

Firm organisational structure

Location of outlets, transportation?

Purchasing behaviour What switching by customers?

Business records Regard to firm documents?

Customer surveys Indicative of customers’ preferences?

Executives’ testimony Opinions as to competitors?

Econometric analyses Statistical analysis of price changes?

Expert opinion What weight should be given?

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Industry behaviour – price settingDoes Firm A set its prices/discounts

having regard to Firms B, C, D…? E.g. TPC v Nicholas Enterprises (1979)

But: Firms always monitor industry pricing to some extent – it’s not conclusive

Is there evidence that Firm B’s pricing significantly constrains Firm A’s pricing?

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Industry behaviour – marketingIf different products are advertised

together, that might be evidence that they compete in the same market. Advertising to city / province Advertising alcoholic beverages / wines

Advertisements offering to price-matchComparative advertisingCampaign timing – response to a rival?

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Customers’ purchasing behaviourWhat decision criteria and process do

downstream customers go through?What range of suppliers do customers

consider in practise? Advertisers negotiate rates with newspapers in

own city? Province? Nationally? Advertisers negotiate rates with newspapers?

Other print media? Broadcasters? Sports venues?

What suppliers participate in tenders, quotes?Confidentiality issue…

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Executives’ testimony Facts in issue; opinions on marketExec. might testify that a price increase

would cause the firm to lose a lot of sales.However:

Can the exec point to actual past experience confirming that?

Was that experience caused by supply-side change? (or exogenous shock)

Is this testimony corroborated by business records?

E.g. Aut 6 case

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Business records (1/3)

Reflect actual business operation (not created for the present proceeding)

Obtainable by search, subpoena, discovery – or voluntarily exhibited.

E.g: correspondence/emails, marketing plans, business plans

Often given more weight than statements made in the witness-box.

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Business records contd. (2/3)

Authorship line staff – okay for proving

behaviour management – to prove firm’s views Boral case

Language ‘market’, ‘dominant’ etc. are used in

business sense, not legal sense Baidu case

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Business records contd. (3/3)

Status ‘Draft’ or ‘Final’ form? (Superleague

case) Discussing facts/behaviour? Or merely plans/policies?

Context - for what purpose what the document prepared? To brief the Board? To attract sponsors? (Superleague case)

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Expert OpinionAgencies employ skilled competition

economistsCourts sometimes are assisted by

economists as expert witnessesUSA v Oracle (2004) – Govt. alleged

Oracle’s acquisition of PeopleSoft would infringe Clayton Act s 7. A “battle of the experts” Court preferred Oracle’s experts over Govt’s Court examined empirical bases for experts’

opinions

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Econometric analysesSimplest form is “price correlation

analysis” Examines whether prices of two products

move in parallel over time, to statistically significant degree

If prices of two products track each other, consumers may regard them as substitutes (e.g. Nestle/Perrier case, 1992)

Causality problem – do prices track each other because of competition – or does each correlate to some third factor?

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References: Veljanovski, C. “Quantitative Economic Techniques in EC

Merger Control” Competition Law Year Book (2004) Baker, J.B. and Bresnahan, T.F. “Economic Evidence in

Antitrust: Defining Markets and Measuring Market Power” Stanford Law School Working Paper No. 328 (2006).

Beaton-Wells, C. “Proof of a market for the purposes of the Trade Practices Act 1974 (Cth)” (2003) 31 ABLR 113, 171.

Beaton-Wells, C. “ Customer Testimony and Other Evidence in Australian Antitrust Assessments – Searching for the Oracle” (2005) 33 ABLR 448.

Thank you for your attention.

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