Conception, reliability and selection. H... · process of assessment and highlights genuine competitive problems. 4 . ... TomTom/Tele Atlas ... cases forces enforcers to find artificial

Hans Zenger 27/10/2011

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Theories of harm Conception, reliability and selection


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Theories of harm Conception, reliability and selection

Theories of harm Hans Zenger 27/10/2011

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Introduction


Introduction

The last ten years have seen an increasing focus from competition authorities on articulating a theory of harm behind competition concerns.

A theory of harm should be a) logically consistent, b) reflect the incentives that various parties face, c) be in line with the available empirical evidence, and d) articulate how consumers have been/will be harmed.

This establishes a rigorous standard of proof, which has substantially improved the quality of enforcement across all areas of competition law.

The requirement to present a theory of harm makes it much harder for internally inconsistent and speculative competition concerns to survive the process of assessment and highlights genuine competitive problems.

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Mergers


Mergers

Arguably, mergers is the field of European competition law where the use of credible theories of harm is best established, with a visible improvement of assessment over the past ten years.

Admittedly, on occasion it may still happen that in state of play meetings parties get exposed to a broth of allegations, some of which half-baked or inconsistent with each other.

But it appears much harder for enforcers nowadays to move ahead on the basis of ill-defined allegations. Most of the noise usually tends to get washed away in the course of the procedure.

Some examples of how things have changed for the better in mergers:

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The past

Guinness/Grand Metropolitan (1997): merger of two alcoholic spirits producers raised “serious doubts” despite negligible overlap.

Two main concerns: a) merged entity would realize economies of scale and scope, which would make it more difficult for others to compete, b) merged entity would increase market power vis-à-vis distributors, as the threat of refusal to supply would be more daunting for retailers.

a) is obviously an efficiency offense. b) is just a diffuse allegation that more efficient forms of organization could be leveraged somehow (although how exactly remains unclear).

Uncontrolled “portfolio power” theories have in the meantime been given up, not least since the GE/Honeywell judgment.

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The past

Airtours/First Choice (1999): merger of two UK holiday firms in a concentrated market.

The Commission applied a “checklist approach” of looking for factors that facilitate collusion and prohibited the merger on these grounds.

Problem: while firms may have had the ability to coordinate on collusive prices, collusion would have run counter to their monetary incentives: Deviations from collusive prices/capacities in this market could only have been observed with substantial time lag, so punishment threat not credible.

The Commission argued that it was not necessary to consider the possibility of punishment, but the Court rightly rejected that view.

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The present

TomTom/Tele Atlas (2008): merger of largest portable navigation device manufacturer with largest producer of navigable maps. 10 years ago this would certainly have been very problematic due to fears of foreclosure.

The Commission applied its new Non-Horizontal Merger Guidelines: a) ability to foreclose, b) incentives to foreclose, c) harm to consumers.

Theory of harm: • Tele Atlas refuses to supply/raises prices to TomTom’s rivals. • This would allow Navteq (TA’s only competitor) to raise prices, too. • Result: reduced pricing pressure for TomTom downstream. • Economically coherent, but ultimately an empirical question

(countervailing: loss of TA sales and reduced double marginalization)

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The present

Investigation showed: • Downstream margins considerably larger than upstream margins (speaks

in favor of the theory of harm, as TA losses would be less important) • But: maps made up only a small part of the costs of PNDs, so even large

upstream price increases have only small competitive effects downstream • And: empirical work showed that cross-elasticity downstream was low • In sum, the benefit of foreclosure downstream was estimated to be small

compared to the cost of lost upstream sales

ABF/GBI (2008): Application of the Airtours criteria focussing on dynamic incentives (ability to reach coordination, ability to monitor and punish, coordination cannot be undermined by third parties). Case lead to significant remedies.

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Remaining concerns

Perhaps the most pressing concern in terms of the application of theories of harm in mergers is the resurfacing danger of efficiency offenses in vertical mergers.

Intel/McAfee (2011): far reaching remedies imposed on Intel calling for equal treatment of third party security software providers, even concerning technological integration.

Fear that hardware-software integration/lack of access might disadvantage McAfee’s rivals.

Unconditional “equal treatment” remedies undermine those benefits of integration that are not contractible. I.e., the remedy package might jeopardize exactly those efficiencies that are merger-specific.

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Article 102


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Article 102

Arguably, the area of most concern regarding the agencies’ willingness to formulate and apply a theory of harm is Article 102.

Here, the old case law is economic wasteland, with decisions regularly confusing restrictions of conduct with restrictions of competition.

Economically, we know that loyalty rebates, tying and exclusive dealing tend to intensify competition and often create substantial efficiencies.

Perhaps even more so than in mergers, negative prima facie presumptions are hard to justify and countervailing efficiencies abound. Foreclosure can lead to competitive harm only in particular circumstances.


The past

This is well-reflected in the Article 102 Guidance Paper: a) Not every restriction of conduct produces foreclosure. b) Foreclosure itself is not a theory of harm. c) A theory of harm identifies anticompetitive foreclosure.

a) and b) have consistently been ignored in a case law that shielded smaller competitors from the inconveniences of the competitive process: • Michelin II (2001): Prohibition to use rebates to compete (no foreclosure) • Hilti (1994): Prohibition of tying without theory of harm (no anticompetitive

foreclosure) • Coca Cola (2005): Prohibition of exclusive dealing that protected

investments (strong efficiency defense vs. minor—if any—harm)

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The present

While the Guidance Paper is very helpful in pointing out how to identify the existence or absence of foreclosure (e.g., through the as-efficient-competitor test), it remains quite abstract on how anticompetitive foreclosure will be identified by the Commission.

The legal standard on unilateral conduct remains in a state of uncertainty.

Intel (2009): Strong focus on the as-efficient-competitor test. This is helpful in trying to avoid one failure of the rebates case law (prohibiting rebates that do not lead to foreclosure)

But arguably the decision is rather terse on the concrete theory of harm that gives rise to anticompetitive effects (the second failure of the case law).

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Which standard for Article 102?

When can foreclosure lead to competitive harm?

Usually, this is when large scale foreclosure harms competitors’ access to the market to such an extent that rivals cannot reach a minimum efficient scale of operation and are hence marginalized or have to exit.

An economically sound and administrable theory of harm should therefore contain the following elements: • Identifying a credible mechanism of exclusion (in particular, predatory

exclusion vs. raising rivals’ costs) • Evaluation of the size of the foreclosure share in the specific market

context (taking into account the importance of economies of scale).

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Which standard for Article 102?

Intel remains somewhat abstract there, in particular as regards the mechanism of exclusion. Did Intel sacrifice profits to predate by bribing OEMs into exclusivity?

The decision suggests the Commission may have believed something else was at play (RRC of AMD without profit sacrifice).

Anticompetitive exclusion through market share contracts can arise if a dominant producer plays competing resellers off against each other: “If you don’t buy 90% from me at a high price, I will grant larger rebates to your competitor so they beat you in the market.” (E.g., Inderst and Shaffer, 2010.)

If that was the theory of harm, it could have been spelled out more explicitly. (It is hard to defend yourself against an abstraction.)

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Article 101


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Article 101

In Article 101 cases, the object/effect distinction plays an important role.

The belief that a theory of harm can be dispensed with in object cases is intuitive, popular, and wrong.

In cartel cases, things are simple: we usually know the theory of harm from the outset (e.g., co-ordinated price increases or market sharing).

Things become much more murky where the cartel analogy is applied to agreements that might arguably serve other purposes.

Some examples:


Non-cartel object practices

• Restrictions of parallel trade to price discriminate (e.g., GSK or, arguably, E.ON/GDF)

• Credit card interchange fees to balance prices in two-sided markets (e.g., MasterCard)

• Vertical agreements to induce promotion (e.g. resale price maintenance)

Such practices are economically very distinct from standard cartel cases, rarely generate pure price increases and often generate strong efficiencies. These efficiencies are to be balanced against the alleged harm of an agreement, even in object cases.

But how to balance a concrete efficiency against an abstract harm that is not even theoretically specified by the authority? Usually authorities artificially resort to searching reasons to negate the existence of any efficiency.

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Conclusion


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Conclusion

The past ten years have seen an encouraging change towards formulating and proving theories of harm in competition cases in all areas. This is particularly true for horizontal mergers, but also for most other areas.

This has substantially improved the quality of enforcement and increased firms’ ability to undertake a self-assessment of their business practices against a logically consistent standard.

Nonetheless, a number of areas remain in flux: • “Equal treatment” remedies in vertical mergers still sometimes confound

merger-specific efficiencies with a theory of harm. • The applicable standard of proof in Article 102 remains uncertain. • The unwillingness to formulate a theory of harm in Article 101 object

cases forces enforcers to find artificial reasons to negate efficiencies.


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Conception, reliability and selection. H... · process of assessment and highlights genuine competitive problems. 4 . ... TomTom/Tele Atlas ... cases forces enforcers to find artificial