Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Economics in competition law

with 2 comments

Nicolas’ post from yesterday was somewhat of a declaration of lawove to economics. However, as the post noted, in my personal case this love is not at all unconditional.

Nico’s post stated that the “reptilian reflex of dismissing economics as a source of legal uncertainty is misguided“, but acknowledged that “on this point Alfonso has more nuanced views that he will develop here“.

So, here they are.

Those “more nuanced views” have been recently developed in a couple of pieces co-written by Luis Ortiz Blanco and by myself (one was presented at Fordham’s Annual Conference and the other at a GCLC Annual Conference, and both are about to be published as part of the proceedings of these two events). In these papers we argue that the growing influence of economics in competition law enforcement has brought about many positive consequences, but that we should be mindful of letting the about pendulum swing too far. We submit that there is a limit to the concessions that a legal regime can make without renouncing its nature, and that effects-based legality tests might approach decision-making to economic divination to the prejudice of legal certainty.

I’m conscious that these thoughts may not appear be shared by the mainstream (I don’t expect them to make me the most popular guy if I go to Place Lux for a drink tonight). Nevertheless, I do tend to think that there is a silent large minority/majority that supports these ideas. In fact, a very prominent European Commission official read outloud the following paragraphs from one of our papers at a conference held two or three months ago (by the way: he said he liked them, not that he endorsed them), and invited the attendants to reflect on them:

(If interested, click here to continue reading)

“The quest for a “more economic approach” in all areas of competition law and enforcement has unquestionably been the driving force of the seemingly never-ending evolution undergone by EU competition law in recent years. Commentators have underlined that “the philosophy and expert base of competition administration is shifting from law to economics”; at the EC level, some have referred to this phenomenon as the “economic reconstruction of DG COMP”. Indeed, under the legitimate aim of avoiding excessive formalism in the formulation and application of legal principles, economists have conquered competition law. The rising influence of economics in competition law enforcement is beyond question. Its consequences, however, are more uncertain.

In many ways, the rising profile of economics is excellent news; after all economics provides the intellectual foundations that ultimately justify and legitimize the existence of this legal order and, accordingly, it must inspire and inform legal rules. Economists –and we know astonishingly good economists working for competition enforcers- have brought a lot of sense to many debates. At the same time, they may have brought a bit of non-sense too…

Whereas excessive formalism shall be banished from EU competition law, we should avoid swinging the pendulum too far in the opposite direction, as so often happens in antitrust and in life. And, in our view, a visible phenomenon of “marginalization” of legal principles with regard to the enforcement of legal rules has been on the rise for several years, its most visible manifestation being the embracing of “effects-based” legality tests at the expense of legal certainty. Such phenomenon has been made possible by the idea that law is unscientific and unreliable coupled with an illusory view of economics as more objective and closer to scientific certainties. But, in our view, resorting to economic analysis to assess the effects of a given conduct often proves inconclusive, and yields results which are as debatable or contestable as pure legal reasoning.[1] 

The general applicability of the law entails obvious risks of inaccuracies in specific cases, but this is acceptable for the sake of certainty and objectivity. Just as voting ages are not established in light of the specific circumstances of a given person, and just as speed limits don’t depend on the features of each car, the application of the competition rules cannot solely depend on the effects of each specific given practice. In our view, the inherent indefinition of these rules already  leaves sufficient leeway to take into account the specific circumstances of the practices and markets at issue.

Another cause, or perhaps rather a consequence, of the adoption of such tests is that the prestige of competition law within the legal community, and of law within competition law, is not at its highest. In fact, saying what we are saying is not “cool”: we risk being labeled as quintessential “stone-age” formalistic lawyers or, even worse, ordoliberals! Many will surely be surprised (if not outraged) by hearing us say what would seem to be obvious: that law is law, that legal certainty also has an economic value, and that the enforcement of legal rules –the matter of their design and of their evaluation being a different issue-[2] cannot disregard basic general principles of law.

But don’t get us wrong. We do believe that the greatest effort must certainly be made to reconcile legal principles and economic thinking for the enforcement of competition law to make any sense.

What we put forward is that there must be a limit to the concessions in terms of legal certainty that a legal regime can make without renouncing its nature; and that the coexistence between law and economics, however convenient, cannot be deemed amongst equal disciplines. In our view, failing to acknowledge the asymmetry of this relationship is not only detrimental to the interests of those subject to competition law, but also to the ability of the discipline to effectively accomplish its mission”.

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[1] See P. Areeda, L. Kaplow and A. Edlin, Antitrust Analysis, Problems, Text and Cases, Aspen Publishers, 6th Edition, 2004, p. 105: “Although economic theory is indispensable to our task, clear-cut answers are often impossible. The complexities of economic life may outrun theoretical tools and empirical knowledge. We often will remain uncertain about the economic results of the particular practice or market structure under examination. Nor can we always predict the consequences of prohibiting some particular behavior. Thus, we shall time and again meet this question: How far must we search for economic truth in a particular case when the economic facts may be obscure at best, when the relevant economic understanding may be controversial or indefinite, and when the statute does not give us a clear-cut value choice?”

[2] In our view, the greatest contribution that economics can make to competition law lies in aiding to the formulation of legal rules which are economically sound and, at the same time, administrable. It is therefore at the level of the formulation of rules where we can –and must- ensure that economic theory and substantive law go hand in hand.

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Written by Alfonso Lamadrid

1 March 2012 at 2:18 pm

2 Responses

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  1. Me dear Alfonso, if the “mainstream” means a majority of lawyers, officials and judges, the mainstream certainly shares more thoughts with you than with me…

    Nicolas Petit

    1 March 2012 at 3:31 pm

  2. i completely agree with this post and i guess many of my fellow lawyers and clients would agree. i think that if the competition rules were approved following a referendum, many would choose legal certainty over the ability of doing something that they cannot be thinking at now.
    i come from a “marginal jurisdiction” in the EU and i can tell you that here the companies have time, people and budget constraints that almost never allow them to take a full art. 101 (1) and (3) or art. 102 exercise before deciding a certain conduct (whether this is a distribution structure, pricing and special offers or many other day-to-day activities). while people can understand clear rules on cartels, real life rarely falls into a vertical or horizontal block exemption. and despite the fact that “verticals” are declared to be the least sensitive infringements, the rules are not at all straight forward so the companies get “legal advice” that is subject to economic assessment. then come the enforcement agencies and conduct painfully lengthy investigations, with most people having worked their entire life for the state and unable to understand why a non-dominant company may need some sort of sales reporting from distributors (which the lawyers said it’s legitimate, unless the scope of the reporting is proven illegal). or, 3 years after the advise, the EU case law changes on fundamental matters that were a daily business for the company (e.g., discounts)…all this in an area of law prescribing the heaviest sanctions (after the criminal law or, in many cases, ahead of criminal law); while the fundamental human rights principle is that a person (or yes, a company) should not be heavily sanctioned unless it infringed a clear rule established by law.
    yes, things like that may have their charm for the lawyers (prevent them to become too bored…), but my feeling is that all this uncertainty does not encourage companies to get more legal advice (which is still subject to uncertainty) or economic advice (after all, economists cannot say for sure if we get out of this crisis by spending more or by spending less!)
    i think that indeed we should strike a line between were it is safe to have economic principles prevail (and i am thinking here of exceptional events for a company, such as mergers or cartels or even other horizontal dealings) and were the economic principles should be embedded into legislation to bring fair rules, at the same time with legal certainty (and this should be the daily application of the competition rules in vertical matters).
    so, Alfonso, you may not be mainstream (yet), but you are not alone.

    another anonymous

    6 March 2012 at 10:24 am


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