Chillin'Competition

In the last weeks, France lost its triple A, but gained a fourth operator in the mobile telephony sector.

The chronology of events that led to the entry of Free Mobile brings a good illustration of what may constitute retaliation tactics amongst semi-collusive oligopolists. A reminder of what happened:

1. Since last year, rumour has it that a new operator contemplates entering the French mobile telephony triopoly;
2. In the summer 2011, the 3 incumbent oligopolists introduce  low cost subscriptions in a bid to possibly dissuade the new entrant;
3. As the threat of entry grows in the first days of 2012, the incumbents make statements in the press that they are ready to throw heavy artillery at Free mobile;
4. On 10 January, Free Mobile launches its mobile telephony service, cutting the incumbent’s mobile offers by several €s, and outcompeting them on voice, sms and the Internet;
5. In the following days, all three incumbent players align their offers on Free, with Bouygues Telecom even applying similar prices as Free ;
6. Yesterday, one incumbent send bailiffs to witness that Free’s network is dysfunctional, in violation of a number of contractual obligations.

Looks to me as if 2, 3, 5 and 6 are clear examples of ex ante and ex post retaliation tactics.  Thanks to Free Mobile for offering an opportunity to put pictures on theory. Will likely use this as a case-study with my students.

Now, the theoretical question is: can Free Mobile rely on the competition rules to block incumbents’ retaliation tactics?  As a matter of theory, retaliation practices of collectively dominant oligopolists could fall within the scope of Article 102 TFEU’s under-used abuse of collective dominance doctrine (O’Donoghue and Padilla, 2009, p.158).

That said, traditionnally, the economics of oligopolistic retaliation are still seen as too equivocal to be imported into a legal standard.  Economists for instance disagree on the magnitude of retaliation measures.  Whilst some believe that only measures akin to predatory pricing constitute an effective retaliatory mechanism, others view a mere temporary breakdown of collusion as a sufficient deterrent mechanism.  Moreover, economists still disagree on whether retaliation must be specifically targeted at the cheating firm or whether general retaliation through market-wide price reductions is a sufficient disciplining factor.

Now, what is interesting in the Free Mobile case, is that retaliation is not just confined to prices. Incumbents seems to be engaged in a broadening pattern of retaliation tactics, the purpose of which is to force Free Mobile off the market.  Those include the sending of anticompetitive signals through the press, agressive price competition, and possibly judicial/contractual harassment.

If things go on this way, and new retaliation measures are taken by incumbent oligopolists, Free Mobile may well solicit the protection of competition authorities under Article 102 TFEU. The fact that there are additional retaliation measures in addition to aggressive price competition  could indeed make a strong case of  abuse, under a  Karate-competition law approach. Moreover, the incumbents might have coordinated their response to Free Mobile’s entry, as they did back in the day when they organized a Yalta on mobile telephony.

A last reason to believe: at the press conference announcing the launching of  Free Mobile’s offer, X. Niel, the CEO of Free Mobile  praised Bruno Lasserre, the head of the French CA, for his support in the last few years. And in reading Bruno Lasserre’s own words about free, it seems the French CA is quite enthusiastic with the entry of a fourth player in the market.

During a recent conversation with a Judge, he mentioned that he felt envious of competition agencies (we were talking about the European Commission) because they could easily behave in a “schizophrenic” way, taking one stance in one case and a completely different one in another. He argued that courts are much more concerned about respecting their own precedents (as I pointed out, there are also some nuances to this view) than competition authorities are. In my view, there is a lot of truth to this statement; competition enforcers do not feel bound by their decisional practice because the Court has endorsed the view that each case must be dealt with in light of its specific circumstances. Moreover, progressive interpretations of the law (notably with regard to unilateral behavior) show that some national competition authorities as well as the European Commission do not necessarily feel obliged to follow the case-law neither. To a certain extent, much of this could be understood, but only provided that adequate reasoning is offered to justify that the circumstances merit a change of approach. Sadly, this is not always the case (although, to be fair, the Courts are not a paradigm of transparency when they overrule their previous case-law neither). I´m sure you can think of quite a few examples of radical unexplained shifts.

This conversation made an idea spring to mind: we should ask you who or what (within the antitrust world; yeah, we know, that´s pretty limited, but..) do you wish you were?

Here are a couple of ideas to get the ball rolling:

- I wish I was one of those economists who can say “this is an economic model that we developed for this particular case“. I´m waiting for the day when I can say “this is a legal principle that we developed for this particular case“!.

- I wish I was NOT the lawyer (or rather the former lawyer, I suppose) of the Austrian company that has requested a preliminary ruling from the ECJ on whether having obtained wrong legal advice can exempt a company from responsibility…

Anyone else?

We will be closing the shop for a few days, but there are a few things that we would like to tell you first:

- Our personal Christmas wishlists appear in a special issue from Competition Policy International.  They´ve done a great job with editing our pictures (“thanks” to all those of you who have written to say that I need to change the one I use for these things),  and we´re grateful for having been placed in such good company. I´m also grateful for the opportunity to do some free advertising of my family´s bakery: thanks to this they will now start seeing some usefulness to my job!  Nicolas also profited from this occassion to make it (more) evident that he´s a competition law freak geek.

- Nicolas and I had some pre-holiday drinks last night together with some good friends. Not only all of us were competition lawyers, but the place we went to was also packed with competition lawyers from a well-known firm. We´ll keep the name of the firm confidential, but we can give you a hint: what do you see in the second row of the image below?  ;)

- Many other lawyers in Brussels and elsewhere are also getting some last-minute Christmas gifts. Our thoughts will be with all those who, like our friend David Henry, will have to be stuck at the office with a merger filing…

- The Spanish CNC also received a Christmas gift the day before yesterday, when the names of the members of the new Spanish government were made public. The new minister for the economy is Luis de Guindos, who was the Secretary General for Competition between 1996 and 2002. The CNC is certainly poised to play an important role in the coming years as Spain makes an effor to boost competitiveness. (By the way, the CNC has joined the list of national competition authorities resorting to animated cartoons to explain their job and the benefits of competition. Check it out here).

- A reminder of some events coming up right after the holidays: Nicolas will be opening the new edition of the IEB´s Competition Law Course in Madrid on 13 January (we´ll profit from our visit to Madrid to plot a couple of interesting projects on which we´ll report right after the holidays). The BSC will also be holding a very interesting conference on “Costs in Competition Law” on 25 January.

- A light piece of Christmas reading: Freedom to Trade and the Competitive Process by A. Edlin and J. Farrell. This short article is perhaps the most insightful paper I´ve read in a long time. It´s cool to see two top-notch U.S. economists saying sensible stuff that in Europe would be received with the worst of all insults: Ordoliberal!

- Finally, we want to thank whoever had the idea of improving the search tool in the webpage of the European Court of Justice.  You made our lives easier.

- To be frank, there were more issues on which I was planning to comment, but I need to run to the airport…Merry Christmas to all and our best wishes for 2012!!

P.S. We leave you with the image of the European Union´s Christmas tree:

Last week the European Commission announced the opening of formal proceedings to investigate whether international publishers may have engaged in anti-competitive agency agreements regarding the sale of ebooks (see Press Release). Dawn-raids in connection with this case were carried out last March.

Today´s edition of the Financial Times (edited by Pearson -a publisher affected by the investigation-) features a most interesting piece on a very related topic under the title Don´t make Amazon a monopoly.

Its author -John Gapper- argues that competition authorities in the US and the EU should not challenge the arrangements under which publishers set minimum prices for ebooks and preclude companies such as Amazon, Apple or Barnes&Noble from offering discounted prices. It explains that this is a textbook example of the situation that the US Supreme Court had in mind when it overturned Dr. Miles in its Opinion in Leegin, and submits that it would be paradoxical for competition rules to enable free riding-based discounting on the part of Amazon, thus enhancing its alleged “monopoly”.

This situation and the legal controvery surrounding it raises very interesting questions that go beyond the situation at issue and which have the potential to affect online distribution in general.

Does anyone have any strong views on this?

This morning, as I was doing  a some last-minute airport shopping for a “Secret Santa” gift for my firm´s Christmas dinner in Brussels tonight, I received an email announcing that Frontier Economics has released a paper on the economics of Christmas. It wasn´t so useful for me because I had severe budget constraints, but it has the sort of fun approach that we like, and we thought you might find it useful or at least entertaining.  As they explain on their web page:

It’s easier to think of economists as the prophets of trading doom than as Santa’s little helpers – too busy telling everybody what’s happening to productivity, energy demand and like-for-like sales to provide any insights into the annual exchange of goodwill and good-or-ill gifts to family and friends. So Frontier Economics has been scouring the academic literature of behavioural economics for tips to make that last struggle with your present list a little easier…

If interested in economic advice for Christmas shopping, click here: Present values- The economics of Christmas.

And if you´re one of those who likes to “shop around” for the best deals, you can also check out Waldfogel´s seminal paper on this matter (which Nicolas already recommended last year) and The New York Times´ collection of stories about the economics of Christmas.

By the way, this week is a nervous time for competition lawyers all over Brussels waiting to see if their Christmas break will be wiped out by unexpected Christmas gifts from the Commission!

P.S. This morning we crossed the 200.000 visits threshold. Once again, thank you for taking the time to read us!

Last week was a very weird one. I spent almost as much time at competition law conferences than at the office.  Here is a brief account of how the week went and of the thoughts that this conference overdose triggered:

 As I have already mentioned on this blog, on Tuesday I participated at a workshop entitled “What is happening to Article 101 TFEU?” organized by Giorgio Monti at the European University Institute in Fiesole (as you know, Prof. Monti´s  idea to hold this workshop was “inspired” by some discussions on this blog). The presentations by Giorgio Monti, Saskia King, Eric Gippini and Luis Ortiz and the discussion we had were all extremely interesting. I was overwhelmed by how smart (an genuinely nice and funny) the group was both during the workshop and outside of it. We tried to make sense out of the object/effect dichotomy and talked at length about what really is a restriction of competition as well as about the “deaths” of restrictions by effect and of Article 101(3). It´s a pity that only a small group could attend.  On the plane back to Brussels, Eric, Luis and I mentioned that perhaps we could try to write a brief piece with our “non-mainstream” ideas some time soon. I´ll make sure that they don´t forget about it.

On Wednesday Charles River Associates (CRA) held its annual conference in Brussels. I attended most of the morning sessions and I have to say that the event was a great success. As excellent economists, these guys are conscious of the power of “FREE”. They deserve recognition for holding a free very high quality conference in Brussels.

Then on Thursday there was a lunch talk at the GCLC on the Menarini Judgment. I couldn´t attend, but all I hear is that the speakers were truly brilliant.

The reason I couldn´t attend the GCLC event is that at the same time I was speaking at yet another conference: the International Symposium on Competition Policy organized by the Centre for Parliamentary Studies. I was invited to this event following a recommendation from Nicolas (I really owe you one here, mate -please note the irony-). I was supposed to deliver the final keynote speech on “The future of EU Competition Policy“. I had prepared what I thought to be a fairly original and humorous prediction of what I think will certainly happen in the short term, of what should happen in the medium tem, and of what will inevitably happen in the long term. I´m not very sure that my messages will have the impact I´d hoped for: the audience was composed by two people from the Namibian competition authority, two members of the Malaysian competition Commission, a member of the Danish Ministry of Economic Affairs, a Scot from the Water Industry Commission, and my colleague Napoleón Ruiz who threatened me with taking pictures.   Jokes aside, it was fun.

So many hours of sitting at these and other recent events made one thoughts spring to mind: I wouldn´t need the expertise of my friends at CRA to come up with an ad hoc algorithm or formula with which to predict how interesting a competition law conference is supposed to be. The general rule (subject, of course, to exceptions) is easy: the likelihood of getting to listen to new and interesting stuff is inversely proportional to the combination of three cumulative variables: the price of the event, the number of attendees, and the number and lenght of slide decks. It´s generally not a good sign if an event is pricy and crowded. The ones with a greater chance of not being interesting at all are those for which you have to pay in order to be a spayeaker (yes, there are plenty of those!). (Not that so many people care anyway, since some of these events are mainly about networking, a.k.a “free” drinks and nibbles + some gossiping).

That´s why the 1st Chillin´Competition Conference should also be free. We only have to figure out minor details, such us how to pay for it..  Here are some options: Voluntary contributions? Sponsoring? A lottery for a date with Nicolas?

 Ideas welcome…

My “learned” co-blogger (and NY-Times interviewee of the week) initiated a very interesting debate yesterday with regard to the Microsoft/Skype clearance decision. I must confess that I read the decision last evening on the plane back fromFlorence (more on that tomorrow) and, to be frank, I was astonished. Let me briefly, and not exhaustively, explain to you why:

As our usual readers know, I’ve a particular interest in looking at how competition authorities appraise network effects in competition cases (it was the topic of my LL.M dissertation and it’s also supposed to be the topic of a pending PhD project). Since the Microsoft/Skype merger involves two entities benefitting from huge network effects I regarded this decision as a must read.

Well, I was wrong; the decision is a must RE-READ: I had to read certain paragraphs several times in order to make sure that it wasn’t just that I was tired and couldn’t make sense out of it. After several re-reads, I reached the conclusion that, actually, the decision doesn’t make any sense.

Nicolas said yesterday that “the decision clearly shows that a merger involving a large monopoly can get Phase I clearance”. I was not involved in this case and therefore I may be missing something but, if you ask me, the decision reads as if the Commission already knew that it wanted to clear the decision in Phase I and then tried to construct an assessment that would fit its pre-determined conclusion. Arguing in a convincing manner that the creation of a “large monopoly” such as the one at issue does not raise competitive concerns and is suitable for Phase I clearance is practically impossible. Nonetheless, that is what the decision has tried to do. And, inevitably, that leads to serious logical problems.

Even from the perspective of an outsider is easy to detect many defects, but for the sake of brevity (notably because I have only allocated one hour of today’s afternoon to write down my notes about this) let’s focus just on one of the Commission’s errors. I have chosen to present you with an error concerning the market for consumer communications because it involves network effects (which is what initially got me interested) and horizontal effects, and because all of us as consumers are able to understand it better. The decision is equally, perhaps even more, questionable with respect to the assessment of vertical and conglomerate effects in the market for enterprise communications, but that part is harder to explain in a brief post; I might develop my views on this in a later post.

In what follows I´ll explain what the decision says in this regards and I will provide you with my very personal views on the Commission´s reasoning. I might be right, but I certainly may as well be wrong. If interested in taking a look at the substantive stuff in other to arrive to your own conclusions, click here:

Read the rest of this entry »

The European Commission has just released a brochure entitled Compliance matters: What companies can do better to respect EU competition rules.

The foreword says that companies should “[l]ook at this brochure as a road safety brochure ahead of the holiday period“. Many of the companies reading this will be certainly comforted by the  irony  positive thinking underlying the reference to the holiday period ahead.

In essence, the Commission´s document contains the following messages: (i) breaching competition law isn´t cool and naughty companies can be punished; and (ii) companies should have tailor-made compliance programs.

When I received the brochure this morning I was curious to read the Commission´s advice on how firms could stay out of trouble. After a quick skim, I see that the closest to constructive advice on substantive matters is this profound passage:

 ”DON´T fix purchase or selling prices or other trading conditions; DON´T limit poduction, markets, technical development or investment; DON´T share markets or sources of supply; DON´T exchange individualised information on intended future prices or quantities or other strategic information.”

I have the feeling that most of the readers of the brochure already had some kind of intuition that they couldn´t do such things. Moreover, some of that advise is rather hard to put in practice (e.g. “limiting investment” : could bank’s refusal to grant credit be considered a breach of competition law?;  “limiting production”: shall a company make some more of this product that isn’t selling too well?; “limiting a market”: how does one limit a market? ).

In any case, and  leaving easy jokes aside, the Commission must be applauded for its attempt to foster a compliance culture. Other competition authorities such as the OFT and the Autorité de la Concurrence should also be commended for their efforts on this area. Moreover, the Commission has provided much general guidance elsewhere and it cannot be expected to do so on a brochure like this.

In fact, the message about the need for companies to have an effective and tailor made compliance program is welcome and important. The brochure basically sets out the fundamentals of compliance program design, and whereas it does not say anything groundbreaking it does a good job in explaining the basic stuff.

The Commission doesn´t seem to contemplate further incentives such as fine reductions for companies with established and appropriate compliance programs. The French competition authority has proposed fine reductions, but on an ex post basis and only in the framework of settlement proceedings. But why not take a bolder step?  I tend to understand those who argue that it doesn´t make much sense to reward firms that have breached the law ignoring such programs, but what about those cases where the company has a clear  policy and intention of complying with the law, but one or a few ”rogue” executives act on their own? (we all know many instances where this has been the case). It all would come down to assessing what standard the firm had set and whether it complied, as a firm, with that standard. This point was also made by D. Geradin (with the support of J.Wileur and D. Malamataris ) on an interesting recent paper. Companies should not be rewarded for breaching the law, but it would be fair to limit the damage when it can be shown that a given company has done everything it could.

At the end of the day, the content of the Commission´s document is ok given what can be expected from a  non-specialist brochure from the Commission. What is more worrysome is that I have seen (more than once) very similar “brochures” which had been sold to companies prêt à porter (not tailor made; i.e copy/paste jobs) and at ridiculous prices.  I´m currently working on a couple of compliance programs, and, to be frank, general and vague programs aren´t useful for the companies nor for lawyers (unless billing is considered to be the sole parameter).  On the contrary, ad hoc programs adapted to particular firms and markets are extremely useful for firms as well as extremely interesting for lawyers, since we get to be in touch with a wide array of strategies and practices in many different markets.  A subversive thought springs to mind, shouldn´t clients also draft some compliance programs on professional service standards for some law firms?

In the antitrust field, Prof. Barry Nalebuff will remain to posterity  for being the one guy who challenged the caricatural Chicago view that there can be no exclusionary bundling (the “single monopoly profit” theorem).

But beyond this, he may also remain to posterity as being one of the founders of Honest Tea.

Turning business theory to practice, Barry Nalebuff co-founded a company that “creates and promotes delicious, truly healthy, organic beverages” (sic!).

Apparently, the idea came out of “a class discussion that involved a Coke vs. Pepsi case study“. And since then, they have achieved a truly impressive penetration on a market usually depicted as a fortress, given high barriers to entry.

With this background, Alfonso and I are currently contemplating a potential move on a  less healthy, but equally delicious market segment of the drinks industry.

Very many thanks to my LLM student Stéphanie de Smedt for the pointer.

The Commission’s Draft Proposal for a New Regulation on Credit Rating Agencies (“CRAs”) is just out.

It enshrines a whole host of competition-related remedies (see text at the end of this post). Amongst the  proposals on the table:

• A limitation of the duration of CRA-issuers business relationships to a maximum of 3 years (article 6b);
• Injunctions on outgoing CRAs to exchange information with incoming CRA (article 6b);
• A 10 years general ban on merger and acquisitions, that applies to CRAs holding a market share > 20% (article 6c);
• Remedies including fines, which bear intriguing resemblance to penalties for competition infringements.

The proposal however abandons the option of creating a publicly funded European rating agency, given “concerns relating to conflicts of interest and its credibility, especially if such CRA would rate sovereign debt”.

In light of  this, a question springs to mind: if (i) the problems that plague the rating industry are competition related; and (ii) similar remedies can be ordered on the basis of the competition rules, why follow a  cumbersome legislative approach, rather than using the good old, flexible Articles 101 and 102 TFEU?

The answer is relatively straightforward: the competition rules only kick in in the presence of a competition infringement in the form of an unlawful agreement or an abuse. To date, no such conduct has been reported in the ratings industry (that said, I have argued elsewhere that cooking an Article 101 or 102 TFEU case might not be that difficult).

Because all competition problems cannot be solved with the competition rules, there is thus a “gap” in the competition toolbox of the TFEU.

In some Member States, like the UK,  this gap is filled with the possibility to launch “market investigations” and possibly order intrusive remedies where “any feature, or combination of features, of each relevant market prevents,  restricts or distorts competition“.

It is certainly about time for the EU to enjoy similar powers. The sector inquiries found at Article 17 of Regulation 1/2003 only provide an imperfect substitute.

Otherwise, the EU might have no other choice but to follow the “hard way“ with competition issues subject to political maneuvers of all sorts and endless,  protracted negotiations (but true though, in Airbourne’s lyrics “there’s no way but the hard way“).

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