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Consumer Welfare in Article 82EC

Work in ProgressDr. Pinar Akman

The Norwich Law School and ESRC Centre for Competition Policy

p.akman@uea.ac.uk

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This research questions whether the ‘consumer welfare’ standard is really about the welfare of the ‘consumer’ and if not, what the implications

are.

EC DG Competition: Objective of Article 82EC is the ‘protection of competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources’.

- Whose welfare is ‘consumer welfare’ really about?- Who is the ‘consumer’ in ‘consumer welfare’?- What are the implications?

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In contrast to consumer law and economics, ‘consumer’ in EC competition law is not limited to ‘final-users’.

• Neither Article 81EC nor Article 82EC refers to the ‘consumer’ in the sense of ‘final-user’ although both use the term ‘consumer’.

• In EC competition law ‘consumer’ = ‘customer’.Proof: French, Italian & Dutch versions of the EC Treaty; travaux préparatoires; Guidelines on Article 81(3)EC and so on.

• Guidelines on Article 81(3)EC [84]: ‘The concept of “consumers” encompasses all direct or indirect users of products covered by the agreement, including producers that use the products as an input, wholesalers, retailers and final consumers, i.e. natural persons who are acting for purposes outside their trade or profession. …’

• Consumer law, everyday usage and economics refer to the ‘final-user’ by the term ‘consumer’: any person acting for purposes outside his trade/business/profession.

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Different usage in EC competition law has implications.

• Confusion – consumer law and competition law refer to different concepts by the same term.

• Illusion – the ‘consumer’ is the (supposed) beneficiary of both areas of law!

• ‘Chicago trap’ – advocating ‘consumer welfare’ as the ultimate goal of competition law is deceptive as it may support the interests of businesses rather than benefiting final consumers. How the interests of final consumers are served should be decisive when examining whether ‘consumer welfare’ is merely a catchword (Cseres, 2005).

• EC DG Competition: ‘Harm to intermediate buyers is generally presumed to create harm to final consumers.’ (Article 82EC Discussion Paper [55])

Will effects on ‘customers’ always coincide with effects on ‘consumers’?

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Effects of a practice on ‘customers’ will not always coincide with effects on ‘consumers’.

Example: A merger scenarioMergers are relevant examples for Article 82EC as the main concern for competition policy in both is the control of market power. Similar Article 82EC scenario – a dominant undertaking strengthening its position by increasing price/reducing output as a result of exclusion.

• Most mergers involve inputs, not final products. Effects on the immediate ‘consumers’ (ie customers) can be different from the effects on the final-users (Heyer, 2006):

To the extent that some producers rely less heavily on a particular input than others in producing competing products, impact on the former may be positive even if a merger can raise costs for those firms and rivals. (Consumers shift to those firms with relatively lower price increases).

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Effects of a practice on ‘customers’ will not always coincide with effects on ‘consumers’.

Where final demand is inelastic and pass-through nearly complete, intermediate customers will not be harmed even with substantial price increase, although consumers will be harmed.

Intermediate customers with stocks of the input may even benefit from the cost increase all other firms, although consumers will be harmed.

In some circumstances, pass-through of a cost increase will be more than 100% and depending on final demand conditions, increase in marginal costs may actually increase the profits of intermediate customers.

It is possible to increase ‘customer welfare’ while harming ‘consumer welfare’.

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Effects of a practice on ‘customers’ will not always coincide with effects on ‘consumers’.

Example: Another merger scenarioO’Brien and Shaffer (2005) – a merger that harms the retailer may increase welfare.Non-linear supply contract, bargaining, bundling (interdependent price schedules).Horizontal merger, at least two upstream manufacturers selling through a single retailer.

M1 M2 R

C

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Effects of a practice on ‘customers’ will not always coincide with effects on ‘consumers’.

- If m1 & m2 can be bundled, merger between M1&M2 need not have any effect on input/output choices, wholesale/final prices – even without cost efficiencies. Overall joint profit maximised.

M1&M2 would have an incentive to merge even without cost savings as M1M2 would be able to extract more surplus from R. Harm to R does not coincide with harm to consumer welfare.

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Effects of a practice on ‘customers’ will not always coincide with effects on ‘consumers’.

- If m1&m2 cannot be bundled (or bundling is prohibited), effect on prices and welfare depends on the bargaining powers of M1M2 and R. M1M2 sufficiently low bargaining power – outcome same

as previous.

M1M2 sufficiently high bargaining power – extract more surplus from R, possibly lower total and consumer welfare. [R can threaten to drop one of the products if M1M2 attempts to extract more than the incremental surplus generated by m1 and m2. To reduce R’s profit if R carries out the threat, M1M2 negotiates higher than efficient transfer prices with R]. Cost savings may offset the increase in prices.

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Effects of a practice on ‘customers’ will not always coincide with effects on ‘consumers’.

Absent cost efficiencies, with bundling, merger increases M1&M2’s profits and decreases R’s profit.Pure rent transfer – no effect on consumer or total welfare.

With cost efficiencies, with bundling, if cost savings small, R’s share of them will be less than the rent transfer and thus R’s profit decreases. Welfare increases.

It is possible to increase ‘consumer welfare’ while harming ‘customer welfare’.

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Effects of a practice on ‘customers’ will not always coincide with effects on ‘consumers’.

Example: Slotting AllowancesSlotting allowances – fees paid by manufacturers to retailers for obtaining patronage, ie shelf space.Shaffer (2005)

DM FM R1 R2

CDM – Product aFM – Product bR1 and R2 can sell either a or b. a and b are imperfect substitutes.p = w + F w = wholesale price F = fixed feeF < 0 (M pays Rs) – slotting allowanceF > 0 (Rs pay M)

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Effects of a practice on ‘customers’ will not always coincide with effects on ‘consumers’.

- To exclude FM, DM sets high w and pays F. Trade-off between cost of F and monopoly profit.

- To accommodate FM, DM sets low w and does not pay F. Trade-off between no F and loss in profit due to entry.

DM is more likely to exclude than accommodate the more substitutable a and b are.

Slotting allowance is the means of exclusion. Welfare is higher without exclusion. Lowering w would decrease overall profit of DM and R.

Slotting allowance avoids this as lump-sum. Slotting allowance increases welfare of R. Slotting allowance decreases consumer welfare – higher price,

less choice.It is possible to increase ‘customer welfare’ while

harming ‘consumer welfare’.

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Effects of a practice on ‘customers’ will not always coincide with effects on ‘consumers’.

Example: Vertical RestrainsVertical restraints allow undertakings at various stages of the vertical chain to control for externalities.Double marginalisation (both M and R add separate mark-ups) can be avoided by non-linear pricing, ie two-part tariffs.

q*

p*

w*

MR D

w = F + wqw* = cm

Πm* = F+ w*q* – cmq*

Πm* = F

F

ΠR

CSCS

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Effects of a practice on ‘customers’ will not always coincide with effects on ‘consumers’.

Relation between ΠR and F depends on the bargaining power of M and R.

If M has more bargaining power than R, R’s surplus can be decreased – pure rent transfer.

Elimination of double marginalisation by non-linear pricing would increase consumer welfare compared to linear pricing.

In general, the decrease in profits of R by the transfer to M does not necessarily indicate anything about consumer welfare.

It is possible to increase ‘consumer welfare’ while harming ‘customer welfare’.

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Conclusions and further questions

• How often would the welfare of ‘customer’ coincide with that of the ‘consumer’? Sensible presumption?

• Accepting ‘consumer welfare’ rather than ‘total welfare’ as the standard already has problems – eg ignoring producer welfare.

• There are obviously instances where the welfare of the customer clashes or does not coincide with the welfare of the consumer.

• It does not make sense in these cases to prefer the welfare of the buying firms over selling firms – consumer welfare as a standard loses its legitimacy.

• If the standard is to be ‘consumer welfare’ then it must at least refer to the welfare of final-users.