José María Marín Quemada Chairman of the CNMC (Spain)

presidencia@cnmc.es

Latin American and Caribbean Competition Forum, 4 - 5 April 2017 • Managua, Nicaragua

Competition fines, harm and illicit gains

Problems with the judicial review of competition fines in Spain

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• One of the most serious problems faced by the CNMC has been the divergent interpretation on fines that appeared in the judgments of the National Court since March 2013.

• Disagreements on articles 63 and 64 of the Competition Act (Act 15/2007):

• Supreme Court’s judgment (29 January 2015):

In agreement with the National Court: the maximum of 10% should be interpreted as an upper limit, not a cap.

In agreement with the CNMC: “total turnover” should be understood as… total turnover.

Discard de Fining guidelines (2009)

CNMC (Fining guidelines, 2009) National Court

Cap or levelling threshold to the fines: 10% of total turnover of the company in the year previos to the fine Fines set according to different criteria, among which the size of the market turnover affected by the infringement was especially relevant

10% is the upper limit of a range of fines (reserved for the worst possible infringements) Applicable to the turnover of the market affected by the infringement on the year previous to the fine

A new fining methodology for the Spanish Competition Authority

• Consequences of the Supreme Court’s judgment:

Significant reduction in uncertainty. Sufficient leeway to impose fines that are both proportional and

deterrent. The new fining methodology diverges from the one applied by the

European Commission and most of the National Competition Authorities (except the BKartA)

• A new CNMC’s fining methodology in three steps:

1) The fining criteria about the infringement in general are considered to set an initial fining rate (% of total turnover).

2) The fining criteria about the individual firms’ behavior are added next: total fining rate (% of total turnover) and fine (in €).

3) A proportionality cap is applied to avoid over deterrence:

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Proportionality cap = Potential illicit gains x Proportionality factor

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Fines, harm and illicit gains

• Main criteria considered by the CNMC in steps 1 and 2 when setting fines (article 64.1 of the Competition Act):

Dimension and characteristics of the affected market

Market share of the responsible undertaking(s)

Scope and duration of the infringement

Illicit profits obtained from the infringement

Effects of the infringement on the rights and legitimate interests of consumers or on other economic operators

• So harm is not the only nor the most important criterion considered by the CNMC

• On the contrary, illicit profits are considered in steps 1-2 but also -and crucially- in step 3 to estimate the proportionality cap

Reference to the harm produced by the anticompetitive conduct, but usually only considered in a very general and qualitative way (difficult to estimate)

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The estimation of illicit profits (I)

∆𝜋𝜋 = 𝑓𝑓 𝑆𝑆;𝑚𝑚, 𝑘𝑘, 𝜀𝜀 = 𝑘𝑘1 + 𝑚𝑚 1 − 𝜀𝜀𝑘𝑘 − 𝜀𝜀𝑚𝑚

(1 + 𝑚𝑚)(1 + 𝑘𝑘)(1 − 𝜀𝜀𝑘𝑘) 𝑆𝑆

Where:

- 𝑆𝑆 is the total turnover in the affected market (in €) Known

- m is the competitive mark-up (% over marginal costs)

- 𝑘𝑘 is the cartel overcharge (%)

- 𝜀𝜀 is the price elasticity of demand in absolute value

• Methodology based mainly on the work by Buccirossi and Spagnolo (2007)* regarding optimal deterrent fines (frequently used)

• The illicit profits (∆π) are the difference between the profit obtained by the cartel members (πM) and the profit they would have obtained in a competitive environment (π)

Requires estimating

* Buccirossi, P. and Spagnolo, G. (2007), “Optimal Fines in the Era of Whistleblowers: Should Price Fixers still go to Prison?”, in The Political Economy of Antitrust (V. Goshal and J. Stennek eds., Elsevier 2007).

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Competitive mark-up (m) Cartel overcharge (k) Price elasticity of

demand (ε)

General information

- Negative correlation with illegal profits - Data usually not available - Proxies: operating margin of the firm or the industry of a period before the formation of the cartel (Bank of Spain)

- Positive correlation with illegal profits - In infringements by object or per se, data frequently not available - 10% (below Boyer and Kotchoni’s estimate of 13.7% *)

- Negative correlation with illegal profits - Difficult to estimate, usually not available - In theory between 0 and infinite. - From 0 to 2

Reference values in the literature

5 to 20% 5% to 30% 0 to 2

The estimation of illicit profits (II)

* Boyer, M., and Kotchoni, R. (2015), “How much do cartels overcharge?”, Review of Industrial Organization, Vol. 47(2).