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The role of Economics in European Competition Enforcement and Policy

Damien Neven, Chief Economist*

DG COMP, European Commission

5th International Competition workshopSeoul, September 3, 2008

*The views expressed are those of the author and do not necessarily reflect those of DG COMP or the European Commission

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Introduction

Still 15 years ago, explicit economic analysis in enforcement decisions was quite rudimentary

Since then, there has been a significant shift towards economic analysis

By now, the annual turnover of economic consultancies makes up 15% of the fees earned in antitrust cases

Objective of enforcement has become more focused

What are the effects on consumers ?

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Outline1. Risk of being captured by an accountable bunch of

pseudo-scientists ?2. Economics helps in evaluating effects and designing

structured rules – law and economics of enforcement3. Economics help in understanding market dynamics

and building evidence 4. Ideology is more of a concern for the former5. The question with the latter is not how much

economics but how to make the best us of it in actual cases

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Law and economics

Per se vs structured rules of reasons Business experience and empirical evidence

identify empirical regularities which support presumptions and help designing structured rules of reasons

For instance, systematic evidence on resale price maintenance support the Supreme Court’s reversal of per se illegality

Non horizontal merger guidelines

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"The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method, rather than a doctrine. An apparatus of the mind, a technique of thinking, which helps its possessors to draw correct conclusions." Sir John (not Vickers - Keynes)

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Investigating effects

1. Spell out a logically consistent theory of consumer harm

2. Validate that theory empirically– Check the realism of the underlying

assumptions(ex-ante validation)

– Check whether observed market outcomes are consistent with the predictions of the theory (ex-post validation)

3. Identify alternative pro-competitive motivations for the practice (validate ex-ante and ex-post)

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Investigating effects (ii)

Use of established theory, extensions, ad hoc developments

Develop testable hypothesis Evidence should be (i) scientifically valid,

(ii) open to scrutiny (iii) directly relevant (tied to the facts)

Daubert test of scientific evidence : can the theory be tested, peer review, rate of error, wide acceptance

No perfect test – reference to simplifying assumptions and data limitations should not be sufficient to dismiss evidence

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Investigating effects (iii)

What if several pieces of evidence meet all criteria and provide conflicting conclusions ? – Not appropriate to ignore results as cancelling each

other – Evidence is consistent with several hypothesis – Valuable insights despite apparent contradictions

Above all, need for a convincing explanation Effects based analysis does not have to be

overly dense in technical economic reasoning Consistent set of facts and different pieces of

evidence

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Conclusion The EU is in a better position to take

advantage of economic analysis than the US And abuse of it… Institutional response

– Role of the CET– Interaction with economic consultants

More R&D – identify regularities Guidelines