EU – U.S. dominant firm conduct

Hogan and Hartson SeminarGET AHEAD OF THE COMPETITION…

Developing Successful Global Antitrust Strategies

Hotel Le Meridien Brussels, Wednesday, 28 November 2007

Frederic JennyProfessor of Economics, ESSEC

Chairman, OECD Competition Committee

With the title :

“Recent developments on abuse of market power in the EU and the USA”

this presentation, was delivered at The Eighteenth Annual Workshop of The Competition Law and Policy Institute of New Zealand, Wellington August 3rd 2007

Issues to be addressed1) Transatlantic differences (examples: excessive pricing, fidelity rebates, monopoly leveraging, essential facilities, refusal to deal)

2) Transatlantic conflict : the British Airways/Virgin case

3) Advocating a move from a form-based to an effects-based approach: the EAGCP Report

4) How to assess the effects ?

5) Mixed reactions from DG Comp: the discussion paper

6) Limitations of an effects-based approach?

7) Sructured rule of reason

8) Conclusions

A US/ EU Comparison

« US enforcement policy on single-firm conduct is driven in large part by the danger of « false positive » that chills hard competition. But the decisions of the US courts in private litigation do not embrace this concern as clearly as US officials might hope. Private cases reveal that - notwithstanding the efforts of enforcers, court, practitioners and scholars to develop objective, transparent, economically based standards for single-firm conduct - much progress remains to be made in the US before this goal is realized.

Internationally, the lack of coherent policy is even more stark. The EuropeanCommission pursues a more interventionist approach to single-firm conduct. Although working relationships among US and European enforcers are good, fundamental differences in single-firm competition policy persist. »

1)R. Hewitt Pate « International trend of competition policy: enforcement trends regarding cartels, single dominance, single firm conduct and intellectual property rights »,Taiwan 2006 International Conference on Competition Laws/Policies: The Role of Competition Law/Policy in the Socio-Economic Development, Taipei June 20-21, 2006.

Excessive pricingExcessive pricing can be a practice prohibited under article 81

There is no analogue in US antitrust law to this EU prohibition against excessive pricing.  «The general view in the US is that the courts are not well suited to evaluating which prices are excessive, what rates are reasonable, what capital should be allocated to which activity and what the risk characteristics are of various activities » (US oral contribution to the OECD Roundtable on Abuse of Dominance)

In Société civile agricole du Centre d’Insémination de la Crespelle v Cooperative d’élevage et d’insémination artificielle du Département de la Mayenne, the ECJ held that a firm in an administratively established dominant position had abused its dominant position through charging fees that were disproportionate to the value of the services.

In General Motors Continental (1976), the ECJ found no abuse but held that a firm could abuse its dominant position by charging a price «which is excessive in relation to the economic value of the service provided and which has the effect of curbing parallel imports by neutralizing the possibly more favorable level of prices applying in other sales areas in the Community. »

Fidelity rebates: the Michelin case

« The Commission has established that Michelin operated a complex system of quantitative rebates, bonuses and commercial agreements, which constitute a loyalty-inducing and unfair system vis-à-vis its dealers. (…)Michelin’s commercial policy for both the retread and the new replacement tyre market had the effect of keeping dealers in close dependence and preventing them from choosing their suppliers freely between 1990 and 1998. This policy which artificially barred competitors’ access to the market was suspended by Michelin in January 1999. (…). The EC Court of Justice has ruled in the first Michelin decision and consistently in more recent cases, that quantity rebates with exclusionary effects are illegal when granted by a company in a dominant position for more than three months ».

EC Press release: « Commission fines Michelin for abusive commercial behavior », Brussels 20 June 2001

Fidelity Rebates

“In Europe, the Commission and the European court of Justice have come close to establishing a per se rule against fidelity rebates granted by a dominant firm, the only exceptions being short term discounts programs and volume discounts that are cost-justified and open to all on equal terms.

In the United states by contrast we tend to view any reduction in price by a leading firm as moving prices toward the competitive ideal so long as the resulting prices are not below cost. We have generally refrained, therefore, from challenging discount programs like these under our antitrust laws.”

“North Atlantic Competition policy: converging toward what ?”,William Kolasky, BIICL Second annual International and Comparative Law Conference, London, England May 2002

Monopoly Leveraging“Most US Courts have held that it is not unlawful for a firm with a monopoly in one market to use its monopoly power in that market to gain a competitive advantage in neighbouring markets, unless by so doing it serves either to maintain its existing monopoly or to create a dangerous probability of gaining a monopoly in the adjacent market as well. My understanding is that under EU law, by contrast, it is an abuse of dominance for a firm that is dominant in one market to use that position to gain a competitive advantage in a neighbouring market in which it is not dominant even if the conduct is not shown to be likely to create a dominant position in the second market unless the dominant firm can show legitimate business justification for its conduct ( Tetra Pack Rausing SA v Comm C-333, 1996, ECR I-5951 (1996). Our view by contrast is that “ so long as we allow a firm to compete in several markets, we must expect it to seek the competitive advantages of its broad based activity—more efficient production, greater ability to develop complementary product, reduced transaction costs, and so forth” (Berkey Photo vf Eastman Kodak Co, 603 F.2d 263 (2d Cir 1979) and that allowing it to do so ultimately benefits consumers.”

1. William Kolasky, BIICL Second annual International and Comparative Law Conference, London, May 2002

Abuse of Dominance and the essential facility doctrine 1

“The fourth area where we see a potentially significant difference between US and EU law relates to the use of the so-called “essential facilities” doctrine to compel access to a dominant firm’s facilities. While the essential facilities doctrine originated in the US, we have construed the doctrine very narrowly, limiting it largely to regulated utilities and joint ventures, out of fear that its overbroad application would both chill incentives to invest and innovate and require antitrust agencies to undertake the uncomfortable task of having to regulate the terms of access.For this reason, there are no cases in the United States applying the essential facilities doctrine to require the compulsory licensing of intellectual property, our courts have generally applied what we call the “Colgate doctrine” to hold that refusals to deal are lawful in the absence of any purpose to maintain a monopoly (US v Colgate & Co, 250 US 300 ( 1919)” 1.William Kolasky, BIICL Second annual International and Comparative Law Conference, London, England May 2002

Abuse of Dominance and the essential facility doctrine 2

 “A (...) debate is ongoing in Europe as a result of two cases, Magill and IMS, applying or attempting to apply the essential facility doctrine to intellectual property.(…) Supporters of the application of the essential facility doctrine in these cases have argued that they both involved “ extraordinary circumstance” in that the copyrights in question did not involve the kind of creativity copyright law is designed to encourage and that the decisions therefore should not undercut the incentive to invest and innovate. This raises the prospect of basing competition policy on whether we think the intellectual property rights at issue are worth protecting; this kind of ex post judgment cannot help but create uncertainty and reduce the incentive to innovate (!!)”

1.William Kolasky, BIICL Second annual International and Comparative Law Conference, London, England May 2002

Refusal to supply, refusal to deal 1

In United Brands the ECJ held that : a dominant firm cannot « stop supplying a long-standing customer who abides by regular commercial practices, if the orders placed by that customer are in no way out of the ordinary »

In Commercial Solvents, the ECJ held that it was an abuse to refuse to supply an existing customer that would by that refusal be eliminated from the market (because a firm with a dominant position in raw materials cannot eliminate the competition of its customer « just because it decides to start manufacturing » the end product in competition with its customers).

A central concern of these cases is the protection of the trading partners of the dominant firm and the European law goes much farther than comparable doctrines in the US.

Refusal to supply, refusal to deal 2“Refusal to deal is closely related to the essential facility doctrine. It is harder to bring a refusal to deal case in the United States than in Europe. A major exception to this trend emerged in United States v Otter Tail Power Co, 410 US 366 (1973) and Aspen Skiing Co v Aspen Highlands Skiing Corp, 472 US 585 (1985) where the Supreme Court ruled that dominant firms may have a broad duty to deal with rivals, particularly where they own assets with natural monopoly characteristics. While the Aspen Ski case is complex, there are two important factors: there had been a change of policy (after dealing with the competitor for a number of years, there was a cut-off, so investments were stranded and the argument that dealing would be difficult or impossible was undermined) and the business justification was very weak. This remains an unclear area in the law”. (US oral contribution, Roundtable on Abuse of Dominance and Monopolisation, OECD,

Paris 1996)

US DoJ Reaction to EU Microsoft Decision

"The US filed a complaint against Microsoft in 1998 (…). The US Final Judgment provides clear and effective protection for competition and consumers by preventing affirmative misconduct by Microsoft that would inhibit competition in 'middleware' programs, such as the web browser that was the subject of the United States' lawsuit and the media player that is the subject of the EC's action today(…). Imposing antitrust liability on the basis of product enhancements and imposing 'code removal' remedies may produce unintended consequences. Sound antitrust policy must avoid chilling innovation and competition even by 'dominant' companies. A contrary approach risks protecting competitors, not competition, in ways that may ultimately harm innovation and the consumers that benefit from it. It is significant that the U.S. district court considered and rejected a similar remedy in the U.S. Litigation ».

In search of legal certainty in Europe

From « competition on the merits »

To a « form based » approach

And a transatlantic conflict

British Airways (U.S.):

We must note first that even with monopoly power, a business entity is not guilty of predatory conduct through excluding its competitors from the market when it is simply exploiting competitive advantages legitimately available to it. Advanced Health-Care Servs., Inc. v. Radford Cmty. Hosp., 910 F.2d 139, 147 n.14 (4th Cir. 1990). Moreover, the Supreme Court has expressed deep skepticism regarding the viability of proving a predatory pricing scheme. See Matsushita, 475 U.S. at 589 ("[P]redatory pricing schemes are rarely tried, and even more rarely successful."); accord Brooke Group, 509 U.S. at 226. Success under such a scheme is rare because a predatory competitor must not only sustain short-term losses to drive out competition, but also maintain monopoly power long enough to recoup those losses and derive additional gain. Matsushita, 475 U.S. at 588-89

British Airways (U.S.):

Finally, nothing in the record suggests British Airways stopped using or restructured its incentive agreements following Virgin's entry or expansion. Since Virgin now represents a competitive threat in the five markets, a factfinder would be left to conclude the agreements are rational for British Airways independent of any alleged improper motive. See IIIA Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 807f (1996) (stating that business practices presumptively should not be viewed as an attempt to monopolize when "the practices have been ongoing for several years and rivals have managed to profit, new entry has occurred, and their aggregate market shares are stable”).

British Airways (U.S.):

With the evidence suggesting only that British Airways added profitable flights to its schedule simply to accommodate a general increase in traffic, a factfinder would necessarily conclude that the decision to offer incentives was nothing more than an attempt to generate increased business on the whole by limiting profitability on selected sales. We must be mindful that low prices are a positive aspect of a competitive marketplace and are encouraged by the antitrust laws. See Eastman Kodak, 504 U.S. at 478 ("Because cutting prices to increase business is 'the very essence of competition,' . . . mistaken inferences would be 'especially costly' and would 'chill the very conduct the antitrust laws are designed to protect.'") (quoting Matsushita, 475 U.S. at 594); accord BrookGroup 509 U.S. at 226. As long as low prices remain above predatory levels, they neither threaten competition nor give rise to an antitrust injury. Atl. Richfield Co., 495 U.S. at 340. Virgin has not shown otherwise with respect to British Airways' flights on the transatlantic routes in question.

The British Airways Case: Court of First Instance

270) In order to determine whether BA abused its dominant position by applying its performance reward schemes to travel agents established in the United Kingdom, it is necessary to consider the criteria and rules governing the granting of those rewards, and to investigate whether, in providing an advantage not based on any economic service justifying it, they tended to remove or restrict the agents' freedom to sell their services to the airlines of their choice and thereby hinder the access of BA's competitor airlines to the United Kingdom market for air travel agency services (see, to that effect, Hoffmann-La Roche, paragraph 90; Michelin, paragraph 89, and Irish Sugar, paragraphs 114 and 197).

1) Case T-219/99. British Airways plc v Commission of the European CommunitiesJudgment of the Court of First Instance (First Chamber) of 17 December 2003.

Advocating a move from a firm-based to an effects-based approach - The EAGCP Report

The EAGCP reportThe EAGCP has submitted an opinion on an economic approach to Article 82.

The report argues in favor of an economics-based approach to Article 82, in a way similar to the reform of Article 81 and merger control. It supports an effects-based rather than a form-based approach to competition policy.

Such an approach focuses on the presence of anti-competitive effects that harm consumers, and is based on the examination of each specific case, based on sound economics and grounded on facts.

After highlighting an economic approach to different types of competitive harm, the report discusses how such an approach can be put to work in Article 82 cases. As several alternative practices e.g., refusal to deal, exclusive dealing, prohibitively high access prices for downstream rivals, can often serve the same anticompetitive purpose, it is argued that a competition authority’s investigation should be led by the question: What is the nature of the competitive harm involved in that case? The report finally analyzes individual issues as price discrimination, rebates, tying and bundling, refusal to deal, exclusive dealing and predation.

From a per se approach to an effect based approach

Goals of competition policy

An economic approach to Article 82 focuses on improved consumer welfare. In so doing, it avoids confusing the protection of competition with the protection of competitors and it stresses that the ultimate yardstick of competition policy is in the satisfaction of consumer needs.

Competition is a process that forces firms to be responsive to consumers’ needs with respect to price, quality, variety, etc.; over time it also acts as a selection mechanism, with more efficient firms replacing less efficient ones. Competition is therefore a key element in the promotion of a faster growing, consumer-oriented and more competitive European economy.

In an effects-based, non-dirigiste approach, the analysis of competitive harms naturally focuses on keeping the competitive process open and avoiding the exclusion of actual or potential rivals from the market. In addition, by focussing on the impact of competition policy towards barriers to entry, such an approach guarantees an easier access to markets for new entrants; it therefore contributes to fostering the birth of new activities and firms, in line with the « Lisbon agenda ».

The economics-based approachAn economics-based approach implies that competition authorities will need to identify a competitive harm, and assess the extent to which such a negative effect on consumers is potentially outweighed by efficiency gains. Theidentification of competitive harm requires spelling out a consistent business behavior based on sound economics and supported by facts and empirical evidence. Similarly, efficiencies, and how they are passed on to consumers, should be properly justified on the basis of economic analysis and grounded on the facts of each case.

An economics-based approach will naturally lend itself to a « rule of reason » approach to competition policy, since careful consideration of the specifics of each case is needed, and this is likely to be especially difficult under « per se » rules. At the same time, we should not fall into the trap of active intervention and fine-tuning; whenever possible, competition is to be preferred to detailed regulation (...); this calls for a «non-dirigiste» approach to competition policy that focuses in most cases on entry barriers; in the context of Article 82, it is then natural to focus on competitive harm that arises from exclusionary strategies. Possible exceptions concern some natural monopoly industries which may require ongoing supervision of access prices and conditions by regulatory agencies.

Exclusionary Practices in Art 82 (I)1) Exclusion within the same market It follows a common pattern: a short-run sacrifice in profits and a long-run recoupment of losses; this pattern appears, for example, in the predationscenarios described above, namely, reputation, signal jamming and financialpredation. In each case, exclusion can be achieved through a wide set of strategic tools andpractices, which, however, can also be part of normal competition. Hence, inorder to distinguish abusive from competitive behavior we have to carefullyidentify a precise history of competitive harm and the restrictions on the factsthat need to be established in order to substantiate it.2) Exclusion in adjacent markets In sum, the modern economic analysis of strategic leveraging of a dominantposition in adjacent markets has shown that, beyond the Chicago school critique,there may well be sound profit-maximizing reasons why dominant firms attemptto extend their market power beyond their home market. Most importantly,economic analysis provides policy-makers with a fairly detailed roadmap of thespecific circumstances that need to be present (such as the relationship betweenthe products, the costs of entry, or the irreversibility of bundling) for theseleveraging practices to be judged as detrimental to the competitive process.

Exclusionary Practices in Art 82 (II)

3) Exclusion in vertically related markets

Modern economic analysis has gone beyond the Chicago school critique andidentified several reasons why a firm may use its dominant position in one market to distort competition in vertically related markets. Furthermore, several alternative types of practices can be used to that purpose . e.g., refusal to deal, exclusive dealing, prohibitively high access prices for downstream rivals, etc.

Therefore, when vertical foreclosure is the concern, one should treat these alternative practices in a consistent manner. The economic approach alsoemphasizes the relation between ex post intervention and ex ante investment incentives. It can thus help competition authorities to identify the specific circumstances calling for intervention.

Procedural implicationsMoving from a form-based to an effects-based approach has important implications for procedure. Whereas under a form-based approach, it is enough to verify (i) that a firm is dominant and (ii) that a certain form of behavior is practiced, an effects-based approach requires the verification of competitive harm.In the first place, in deciding to bring a case, the competition authority should therefore focus on identifying the competitive harm of concern. To do so, the authority must analyze the practice in question to see whether there is a consistent and verifiable economic account of significant competitive harm. The account should be both based on sound economic analysis and grounded on facts. In particular, since many practices can have pro, as well as anticompetitive effects, merely alluding to the possibility of a story is not sufficient. Therequired ingredients of the story must therefore be properly spelled out and shown to be present. At the same time, the authority must check to see whether the practice in question cannot also be justified as a legitimate mode of competitive behavior. If several interpretations are possible, the authority must investigate whether the data permit a distinction as to which of the different interpretations apply.

Effects-based approach to abuse of dominance and court proceedings

Moving from a form-based to an effects-based approach will pose a challenge for court proceedings.

It will be up to the court to determine which story it considers to be the most plausible. The outcome of such proceedings can be very sensitive to how the burden of proof is allocated between the two parties. (… The general rule should be that the antitrust authority bears the burden of proof for identifying and establishing anticompetitive effects.

Two additional principles seem advisable: First, in the absence of additional evidence to the contrary, an argument based on established economic theory and supported by facts that, according to the theory, are material to the assessment of the practice in question should be deemed more credible than a counterargument that does not have such a basis.

Second, if the story of competitive harm that is brought forth by the competition authority fulfills the criteria listed above and the validity of the counter-story brought by the firm hinges on data in the domain of the firm, then it should be incumbent upon the firm to provide these data.

How to assess effects ?

Relevant Tests for Abuses of Dominance:The Profit Sacrifice (« But For ») Test

The profit sacrifice test states that conduct should be considered unlawful when it involves a profit sacrifice that would be irrational if the conduct did not have a tendency to eliminate or reduce competition.

Illustration :

Assume that a dominant firm is making a profit of $1,000 per week.

If it engages in certain conduct that requires a one-time expenditure of $600, it can permanently exclude its rivals from the market.

Thereafter, it will earn a profit of $1,200 per week.

It is rational for the firm to spend the $600, but it would not have been rational without the exclusionary effect. The PS test captures this kind of conduct whenever there is no other rational reason for engaging in the conduct that excluded the rivals.

The profit sacrifice test

Use of the Profit Sacrifice Test

Most jurisdictions currently use a loose form of the profit sacrifice test to assess predatory pricing.

The profit sacrifice test captures predatory pricing because the strategy involves absorbing short-run losses in anticipation of eliminating or disciplining rivals, thereby making it possible to earn higher profits and recoup the short-term losses.

The profit sacrifice test could condemn not only below-cost prices, but also limit-pricing.

Discounts that leave price above cost, on the other hand, pass the test because they do not rely on eventual profits from greater market power for their profitability.

Limitations of the Profit Sacrifice Test1) The benchmark is not a cost but the (unknown) price that the dominant firm wouldhave charged in a hypothetical, “but-for” world where it engaged in the allegedlyunlawful conduct, but that conduct did not have the effect of excluding or discipliningrivals. Thus the profit-sacrifice test does not provide guidance for making the decision asto how to choose the correct benchmark. Hence, the determination will be “extremelysubjective” and thus “prone to error.”

2) The profit-sacrifice test is over-inclusive. It breaks down when it is applied to certaintypes of behavior that increase consumer welfare even though they also excludecompetitors. For example, the test would catch a firm which invests in research anddevelopment to develop a drug that will be profitable only if it is so effective that itexcludes competitors and gives the firm market power. Is it sound policy todiscourage such investments? Is it not contradictory with IP laws?

3) The profit-sacrifice test is under-inclusive. Some conduct may entail no short runprofit sacrifice yet still be exclusionary and harmful to competition. “Cheap exclusion”falls into this category, as does raising rivals’ costs. If, for example, a monopolist lies topotential customers about the quality of a new entrant’s product. This is essentiallycostless behavior, yet it still has the potential to be exclusionary if the incumbentmanages to manoeuvre the entrant into a position where it must either exit without a fight or make expenditures that it cannot afford to counter the negative publicity.

Relevant Tests for Abuses of Dominance:the No Economic Sense Test

The no economic sense test states that conduct should be unlawful if it would make no economic sense without a tendency to eliminate or lessen competition.

This test avoids under-inclusiveness because it does not require profit sacrifice. It seems, however, that over-inclusiveness and an inability to deal well with conduct that has mixed effects are characteristic of this test, too.

Limits of the No Economic Sense Test

The no economic sense test prohibits conduct that has an actual tendency to eliminate competition when that conduct provides an economic benefit to the defendant onlybecause of that tendency, regardless of whether the conduct is costless.

Thus the no economic sense test is not under-inclusive like the profit sacrifice test, because it can capture cheap exclusion cases.

But the test may be over-inclusive in that, like the profit sacrifice test, it would prohibita firm from investing in research and development to develop a drug that will be profitable only if it is so effective that it excludes competitors and gives the firm market power.Also, like the profit sacrifice test, the no economic sense test prohibits conducts which reduce competition and increase efficiency.

The No Economic Sense Test in Practice

« The US Supreme Court recently addressed the standard for determining whensingle-firm conduct is exclusionary in the Trinko case(1).

In that case the DoJ and the FTC advocated a standard under which a refusal to assist rivals cannot be exclusionary unless the conduct makes no economic sense but for its tendency to reduce or eliminate competition (the no economic sense test).

Although the US Supreme court did not explicitly adopt this standard, the Court’s analysis was consistent with agencies’ approach and provides important guidance on the fundamental principles of US monopolization law »(2).

1)Verizon Communications Inc v. Law offices of Curtis V. Trinko, LLP, 540 US.398 (2004)

2)R. Hewitt Pate « International trend of competition policy: enforcement trends regarding cartels, singledominance, single firm conduct and intellectual property rights », Taiwan 2006 International Conference on Competition Laws/Policies: The Role of Competition Law/Policy in the Socio-Economic Development,

TaipeiJune 20-21, 2006.

Relevant Tests for Abuses of Dominance:the Equally Efficient Firm Test

The equally efficient firm (“EEF”) test aims to identify dominant firm conduct that harms competition by asking whether the conduct would be likely to exclude rivals that are at least as efficient as the dominant firm.

If the answer is that EEFs would probably be excluded, then the conduct is considered harmful to competition. Otherwise, the conduct is considered lawful.

This test guards against the danger of protecting competitors rather than competition because, under competitive conditions, a market will be served only by the most efficient firms. Therefore, it is not considered harmful for less efficient firms to be driven out.

The Equally Efficient Firm Test

Limits of the Equally Efficient Firm TestThe equally efficient firm test may treat dominant firms too leniently.

Some argue that even when an entrant is less-efficient than the incumbent firm, it may still improve social welfare by forcing the market price downward (and quantity upward). If the allocative efficiency gain from lower pricing/higher quantity outweighs the reduction in productive efficiency due to the presence of the higher-cost entrant, these critics note, then it is better to use a stricter test to protect that entrant. However this view is disputed.

A difficult question to be answered regards the scale of operation at which one should assess the hypothetical equally efficient firm’s efficiency. New entrants tend to enter at a relatively small scale and therefore have not yet worked their way down the marginal cost curve. Consequently, they may be less efficient than the dominant firm in the short run; but if they were able to survive long enough they might become equally or even more efficient.

This tendency of the test to give false negatives appears to be a serious drawback.

LePage’s v. 3M and the Equally Efficient Firm Test

3M’s rebates were calculated based on the customer’s level of purchases from six of 3M’s product lines, ranging from health care products to retail automobile products. Customers were given targeted growth rates in each line, and the more targets the customer met, the larger were its rebates across all of the product lines. 3M conceded that it had a monopoly in the transparent tape market, with a market share of90 percent.

LePage’s claimed that it was foreclosed from selling tape because it could not cover itscosts and still compensate customers for the rebates lost on other products in 3M’s discount program when customers bought LePage’s tape instead of 3M’s.

3M argued that its pricing was above its costs regardless of how its costs arecalculated, and that LePage’s did not contest that assertion. 3M therefore reasoned that the bundled discounts could not be anti-competitive.

LePage’s v. 3M and the Equally Efficient Firm Test

The court did not expressly use any particular test to determine whether 3M’s conduct was unlawful.

Without specifically endorsing the EEF test, the court did allude to it in its description of the potential harm of bundled rebates. That harm, the court explained, occurs when a customer buys the defendant’s product B rather than plaintiff’s B, not because defendant’s B is better or cheaper, but because doing so will enable the customer to receive a larger discount on A, which the plaintiff does not produce. Thus theplaintiff can compete in the market for B only by lowering its price enough to compensate for the customer’s forfeited discount on A. Depending on how many other products like A the defendant wraps into the bundled discounts, and on how much the customer buys, “even an equally efficient rival may find it impossible to compensate for lost discounts on products that it does not produce.”

However, there was no examination of whether 3M’s rebates would have forced an equally efficient firm to price below cost. As the dissenting opinion stated, the court simply presumed that the defendant had acted unlawfully because LePage’s had suffered. In other words, the dissent accused the majority of protecting a competitor and not necessarily protecting competition.

Using the EEF test in bundled rebate cases is problematic because multiple product markets are involved and it is therefore unclear how one should conceptualise an EEF.

Relevant Tests for Abuses of Dominance:Consumer Welfare Tests

There are several kinds of consumer welfare tests. They all have a certain amount of appeal because they attempt to use consumer welfare effects themselves, rather than indirect factors such as profit sacrifice, as the gauge of dominant firm conduct. Unfortunately, it is one thing to be able to tell whether conduct enhances or reduces consumer welfare, and quite another to try to measure the magnitude of those changes. The latter can be extremely difficult, if not impossible. Yet when conduct has both positive and negative effects on consumer welfare, a balancing step is necessary to determine which effect is stronger. It is difficult to have confidence that balancing can be done accurately, objectively, and consistently.

Consumer Welfare Test and EfficiencyWhen the firm’s conduct has the potential both to reduce consumer welfare and to enhance the defendant’s efficiency, there seem to be four possibilities:

1. always condemn conduct if it is likely to have any negative effect on consumer welfare, regardless of any efficiencies;2. always allow conduct if it is likely to have any positive effect on efficiency, regardless of harm to consumer welfare;3. balance the two effects against each other to determine which one is likely to be stronger, and prohibit the conduct if likely harm to consumer welfare outweighs likely improvements in performance; or4. balance the two effects and consider conduct unlawful only if it is likely to produce harm to consumer welfare that is disproportionate to the improvement in efficiency.

Consumer Welfare Test

Elhauge Test

Professor Einer Elhauge has devised a test for analyzing unilateral, dominant firm conduct.

Essentially, his test asks whether rivals are being excluded because the dominant firm is improving its own efficiency, or because it is impairing the efficiency of its rivals.

If the conduct causes both of those effects, then it is still permissible as long as at least some of the exclusionary effect is caused by the improvement in the dominant firm’s efficiency.

Elhauge’s test appears not to suffer from many of the drawbacks that affect the other tests, but it is relatively new and untested in both the courts and the literature.

The Elhauge Test

Does the dominant firm’s conduct involve exclusive dealing,

conditional dealing or a refusal to deal?

Does the conduct enhance or maintain the firm’s dominance,

or is it likely to do so?

Does the enhancement or maintenance of dominance

occur only if there is an improvement in the dominant

firm’s efficiency?

Is the enhancement or maintenance of dominance

caused by the conduct’s impact on rival’s efficiency, regardless of any effect on the dominant

firm’s efficiency?

NoLiability

Does the dominant firm’s conduct discriminate

against rivals?

Liability

No

Yes

Yes

Yes

Yes

Yes

No

No

No

No

Inapplicable

Applicable

Test

Refusal to deal

Exclusive dealing

Conditional selling

Elhauge

Elhauge

Refusal to deal

Bundling and Tying

Discrimination

Abusively high prices

Bundling and Tying (Le Page)

Fidelity rebates (British Airways)

Cheap Exclusion

Refusal to deal (Trinko?)

Predation

Limit

pricing

Mixed Bundling (difficult or impossible ?)

Consumer surplus

Equally efficient

Posner

No Econ sense

Profit sacrifice

Willig Ordover

Possible use of various tests

Mixed reaction from DG Comp: the discussion paper

The DG Competition discussion paper on rebates

where it is established that:(a) the dominant company applies a conditional rebate system where therebates are granted on all purchases in a particular period once a certainthreshold is exceeded, and(b) there is no indication that this threshold is set so low that for a good part ofthe dominant company’s buyers it cannot hinder them to switch to andpurchase substantial additional amounts from other suppliers without losingthe rebate, and(c) the required share exceeds the commercially viable amount per customer,and(d) the dominant company applies the rebate system to a good part of its buyersand this system therefore affects, if not most, at least a substantial part ofmarket demand, and(e) there are no clear indications of a lack of foreclosure effect such asaggressive and significant entry and/or expansion by competitors and/orswitching of customers,the Commission is likely to conclude that the rebate system creates a marketdistorting foreclosure effect and thus constitutes an abuse of the dominant position.

The DG Competition discussion paper on tying and bundling

189. In the case of tying and pure bundling, (….) Competitors are foreclosed if the discount is so large that efficient competitors offering only some, but not all of the components, cannot compete against the discounted bundle.

190. The incremental price that customers pay for each of the dominant company’s products in the bundle should therefore cover the long run incremental costs of the dominant company of including this product in the bundle. This would allow an equally efficient competitor with only one product to compete profitably against the bundle. Long run incremental cost is used as the cost concept, since this captures the extra costs of the dominant company’s activities in the market(s) in which it is not dominant. If a price charged by the dominant company covers its incremental costs, such a price cannot normally be considered exclusionary. The same must hold for the incremental prices described in this section. However, it may exceptionally be concluded that although the price exceeds the long run incremental costs the mixed bundling nonetheless is considered exclusionary (see paragraphs 67 and 129).

The DG Competition discussion paper on predation

127. Price cuts where the resulting price remains above average total costs are in general not considered to be predatory because such pricing can usually only exclude less efficient competitors. Companies that are equally or more efficient will, if challenged by the dominant company, be able to follow such price cuts and the ensuing price competition would normally be characterised as competition on the merits. Where it thus can be established that the price, also after the price cuts,remains above average total cost the pricing will not be assessed as predatory, unless exceptional circumstances indicate that such price cuts have led or will lead to substantial harm to consumers.128 An example (….) is where companies in a collective dominant situation (…) selectively undercut (…) the competitor and thereby put (….) pressure on its margins, while collectively sharing the loss of revenues.129. Another example (…) is where a single dominant company operates in a market where it has certain non-replicable advantages or where economies of scale are very important and entrants necessarily will have to operate for an initial period at a significant cost disadvantage because entry can practically only take place below the minimum efficient scale.

Limitations of an effects-basedapproach ?

The difficulties of the rule of reason approach

« The rule of reason approach is quite difficult to implement. Competition authorities therefore have the difficult choice between an approach that is conceptually sound but subject to considerable practical difficulties and an approach which is conceptually second but easier to implement ».

J Padilla: the antitrust economics of tying: a farewell to per se illegality

The difficulties of the rule of reason approach

Economic models postulating circumstances where mixed bundlingschemes could exclude competitors without offsetting social or consumer welfarejustifications abound. An important question with respect to any such model iswhether its hypothesized conditions match the actual circumstances of mixedbundling cases involving alleged anticompetitive exclusion. Even if they do,there remains the further challenge of applying complex and condition-sensitiveeconomic models to the U.S. civil litigation system where lay juries decide theultimate issues and judges who are often unfamiliar with complex industrialorganization theory serve as gatekeepers. Well-intentioned liability rulesgoverning complex industrial behavior often produce unintended consequencescontrary to the intended result and efficiency criteria that seem theoretically easyto spot have proven difficult to demonstrate in litigated cases.

1) Jacob Burns Working Paper No. 137 Benjamin N. Cardozo School of LawInstitute for Advanced Legal Studies, 2005.

Bundeskartellamt’s call for cautionabout the value of an economic approach

to article 82

1) Dr. Ulf Böge President of the Bundeskartellamt: “The Role of Economics in the Enforcement of Antitrust– a German and European Approach –”,10 March 2005 IBA/DG Comp – Conference, Brussels.

Gravitating toward structured rules of reason

The choice of a legal standard:economic and legal considerations

Per se illegal : practice is deemed to be harmful and courts cannot accurately separate anticompetitive tying from others

Modified per se illegal illegal unless there is strong evidence that significant pro-efficiency effects outweigh anti-competitive effects

Rule of reason or structured rule of reason Existence of screens instructured rule of reason

Modified per se legal legal unless there is strong evidence that significant anticompetitive effects outweigh pro-competitive effects (technological tying?)

Per se legal practice is harmless and courts cannot accurately separate efficient tying from others

The structured rule of reason approach for tying (Padilla)

Test 1 Is an anticompetitive effect possible ?

1) Market power for the tying firm

2) Status of competition in the tied market (imperfect competition)

3) Commitment to tie (except if consumers have heterogenous tastes)

4) Competitors inability to match the tie

5) Likelihood of competitors’ exit (degree of product differentiation)

6) Entry barriers (necessary for long term effect)

7) Absence of buyer power

Examination of factual circumstances

of the markets

The structured rule of reason approach for tying (Padilla)

Test 2 Is it plausible that the tie will be anticompetitive ?

How will the tying lead to anticompetive effects (exclusion of competitors and/or reduction in consumer surplus) and does that apply to the facts of the case?(Most difficult part to start from a theory which may be applicable only if certain parameters have a certain value to reality. Yet necessary because no general theory of harm by tying).

Test 3 Are there offsetting efficiency benefits

Includes dynamics (discounting future gain/losses) and uncertainty considerations

Conclusions

Conclusions1) Revising the ways in which antitrust rules on abuse of dominance areimplemented in Europe is a necessity to bring about more consistency betweenthe US and Europe and more economic relevance to antitrust enforcement.

2) The adoption of an effects based approach to abuse of dominance enforcement requires the definition of appropriate tests to assess the practicesof firms with market power.

3) Because the rule of reason approach is complicated and resource intensive, astructured rule of reason approach and the definition of safe harbors wouldbe useful in Europe.

1) The publication of guidelines by the DG Competition on abuse ofdominance would bring about a higher degree of legal predictability,transparency and consistency of enforcement.

5) The publication of a systematic ex-post assessment of remedies is also necessary.

frederic.jenny@club-internet.fr