These are happy days for cycling fans. We are a week into the Tour de France, and the best is yet to come. The race will resume tomorrow with the mountain stages in the Pyrenees, including one featuring the mighty Col du Tourmalet on Wednesday. I follow the event with genuine interest every year. The nerd in me, alas, cannot avoid seeing the (valuable) economic lessons that can be drawn from it.
The Tour de France was not set up by public authorities. It was not an initiative of cycling fans, either. It is instead a creature of competition and vertical integration. More precisely, it was part of a strategy put in place to increase the sales of a newspaper, L’Auto. Its fiercest and more successful competitor, Le Vélo, already organised some cycling events at the time (early 20th century), but the editor of the struggling L’Auto decided to go ahead with the idea of setting up the greatest ever race of the kind. L’Auto disappeared long ago, but the Tour de France has now reached its 102nd edition and remains the most important and spectacular cycling event in the world.
This story, I think, provides a good illustration of the relationship between vertical integration (and vertical restraints) and efficiency, which is sometimes seen with suspicion. Efficiency sounds like very abstract concept – almost like an excuse – when relied upon to explain the rationale for some arrangements between firms. It is only by using concrete examples that one can understand why and how new or improved products that may never have appeared can be offered when different activities are coordinated. What these examples reveal, moreover, is that such efficiency gains are difficult to anticipate or to quantify in advance. They may never materialise, or they may exceed everybody’s expectations (and I am sure the editor of L’Auto did not anticipate that the Tour de France would be such an enormous success).
The story is also a valuable warning against the inclination on the part of competition and regulatory authorities to impose neutrality rules across the board. Alfonso and I have discussed many examples showing that access and non-discrimination obligations have become the flavour of the day. The idea underlying this trend is that strict neutrality principles will preserve competition and firms’ incentives to innovate. Supply obligations are being imposed on vertically-integrated firms even (and this is the most worrying part of the trend) absent convincing evidence of indispensability.
As the example of L’Auto and the Tour de France shows, competition is first and foremost about distinguishing oneself from rivals, not about subsidising them. L’Auto intended to sell more than its rivals and be the most interesting sports newspaper in France, not to make all sports newspapers equally interesting (even though that was an inevitable side-effect). And there was nothing wrong with that. On the contrary.
[The picture captures the defining moment of the 1991 Tour de France. Greg LeMond, who had won the previous two editions, is unable to keep pace with les hommes forts on the way up to the Col du Tourmalet. Dominance is not forever! Claudio Chiappucci would win the stage on that day and Miguel Indurain would wear the first of his many yellow jerseys.]
Some of you may remember that I wrote a few months ago about the regulation of pay TV markets by Ofcom. Back in 2010, the regulator required Sky to supply its premium sports channels to its rivals even though there was (is) no evidence that they were (are) indispensable for downstream competition (there is in fact strong evidence suggesting the opposite), and even though intervention could have the paradoxical effect of strengthening the position of the incumbent telecommunications operator (thereby contradicting the very logic and purpose of the EU Regulatory Framework for electronic communications).
The battle between BT and Sky has made the headlines again, unfortunately for the wrong reasons. BT instigated Ofcom to start the pay TV investigation that resulted in the imposition of wholesale supply obligations on Sky. It now appears that the latter wants an inquiry into the BT’s Openreach, the division that runs the network of the incumbent operator. The ultimate aim of Sky and other major broadband providers like TalkTalk is to achieve the structural separation of Openreach, which they would like to become an independent company. This question is particularly topical against the background of the (ongoing) merger between BT and EE (the leading mobile operator in the UK).
BT and Sky cannot be blamed for using regulation as a means to obtain competitive advantages (or as a means to compensate for a competitive disadvantage). If Ofcom has created the impression that lobbying to obtain regulatory favours pays off, it is natural that Sky follows that route in an attempt to achieve a level playing field in the operation of broadband Internet services. Those of us interested in competition law (and competition tout court), however, see this trend with concern. Where companies devote their resources to achieve regulatory advantages, and not to improve their services, consumers are typically made worse off.
These developments also suggest that bad regulation (and bad intervention under competition law, may I add) is more harmful than commonly assumed. Imposing an obligation on Sky to supply its premium sports channels is problematic not only because it is entirely unjustified, but also because it distorts firms’ incentives and encourages them to compete before the regulator, not in the marketplace. Not to mention that overregulation tends to create the need for ever more regulation to remedy the distortions created by the piling up of successive interventions.
It was sad and shocking to see some French taxi drivers resorting to violence in their demonstrations against Uber. These events, and the response of the French government, are the expected consequence of bad regulatory design. Regulation in the sector, as originally conceived and still enforced in many European cities, is simply not justified anymore. Applications like Uber address very effectively the market failures that used to provide a rationale for it. As an enthusiastic and regular user of the service in both London and Brussels, my impression is that Uber is in fact more effective, more responsive and more protective of the consumer than any local rules I have seen (and I have lived and used taxis in a few European cities).
The problem at the heart of the current troubles relates not so much to whether legacy regimes are justified (which they are not), but to the way in which they could be reformed to accommodate disruptive technologies. Some taxi drivers use violence because the legislator had created the expectation that existing regulation would apply forever. This expectation is reflected in the hefty prices paid for taxi licences in many cities. A government (local or national) has to be very courageous to change such a system. It is infinitely easier to prohibit a new service – no matter how good for the public at large – than to confront technological reality.
Why do I discuss all of this, which is well known by all readers of the blog? Well, if there is a lesson that the Uber debate provides is that regulation should be carefully crafted so that it can adapt seamlessly and effectively to technological change. Unless flexibility and adaptability are enshrined in the regime itself, change is unlikely to occur (or unlikely to occur at the pace required by the underlying economic and technological reality).
The European Commission had this lesson in mind when the Regulatory Framework for electronic communications was proposed in 1999. The telecommunications sector was rapidly changing, and it was already clear that technology alone would progressively address many of the concerns that were deemed to justify intervention at the time.
Thus, the Regulatory Framework was not conceived as a collection of rules imposing precise requirements on operators but as a set of broad principles that national authorities would follow when considering the need for intervention in a particular market. Because administrative action is subject to regular review, remedies are only imposed insofar as, and for as long as, they are necessary to advance the objectives of the regime.
The Regulatory Framework was an impressive legislative achievement that, alas, has been progressively undermined. Maybe it is true that good things never last. The most recent nail in the coffin has come from the recent political agreement to introduce net neutrality rules at the EU level (and which apply at least to what the press release calls the ‘open Internet’). As far as I can gather, the new rules will provide for an unconditional ban on some practices. Such prohibitions would be directly enshrined in the Framework. This is the very regulatory technique that the Commission considered to be inappropriate back in 1999.
I have never seen anything close to a theory providing a convincing case for net neutrality. But this is not really the issue here. What I find worrying is that, because of the regulatory device chosen by the European legislator, net neutrality is here to stay, and is likely to stay even if it becomes clear that it does more harm than good. The Regulatory Framework was conceived as a ‘future-proof’ instrument. It is ironic that, over time, it has evolved to become more rigid and less evidence-based.
Given that my most recent posts have been substantive and lengthy, I think I’ve earned myself a
lazy short self-serving post today:
Two events have just been announced concerning some of the trendiest topics in competition law these days, so save the dates:
– On Monday 13 July the Spanish Association for the Digital Economy (Adigital) will be holding a talk about Competition law and e-commerce featuring Thomas Kramler (head of the DG Comp task force in charge of the sector inquiry and one of the greatest experts in competition digital markets) and myself (not head of anything). All info is available here.
– After the summer, on 24 September the European Data Protection Supervisor and the Academy of European Law (ERA) will be hosting a most interesting conference titled “Competition Law rebooted: Enforcement and personal data in digital markets“. I will be sharing a panel with Jorge Padilla and Orla Lynskey. For more info click here.
In the coming days I will also be participating in other fascinating events, including 8 hours of lectures with consecutive translation into Mandarin in Bruges, 4 cartel hearings in Luxembourg, a peculiar race in Brussels that you should join if you’re around, and swimming baby lessons, but I’m guessing I will not be attracting much public to any of these…
As I wrote almost 4 years ago (On the EU and the sovereign debt crisis- Because life isn’t just competition law), discussing about EU competition law considering everything that’s going on these days feels a bit weird; it’s as if in the midst of the Titanic’s sinking we –competition lawyers- were only discussing about the colors of the paper wall of one of its most luxurious ball rooms…
Some years ago, as part of PhD courses, I wrote a pretty lengthy research paper on the value of precedent in EU Law for Professor Gil Carlos Rodríguez Iglesias, the former President of the ECJ. The topic was most interesting. For some time I entertained the idea of turning it into a proper article on the subject and then doing a spin-off for competition cases alone. I now acknowledge I most likely won’t have the time to do that (although I encourage any of you looking for thesis topics to give it a try), but the interest remains.
This is to explain why something the US Supreme Court said in its recent Opinion in a patent case, Kimble v Marvel, caught my attention (the case, concerning a licensed Spiderman product that lets children “and young-at-heart adults” to shoot “webs” from a device held in the palm of the hand; [sounds pretty cool, no?]) reaffirms a precedent –Brulotte– pursuant to which a patentee cannot collect royalties on sales made after expiration of the patent). Actually, many of the things I read there caught my attention, and for different reasons:
As serious antitrust experts, you would mainly be interested in the SCOTUS’ acknowledgment that stare decisis is nuanced in antitrust cases (no news, but it’s always interesting to read it so explicitly). The Opinion -written by Justice Kagan- contains a very interesting discussion about the value of stare decisis (“stand by things decided”) even when it may lead to “sticking to some wrong decisions”. Remarkably, at one point it says the following:
“If Brulotte were an antitrust rather than a patent case, we might [address the issues] as Kimble would like. This Court has viewed stare decisis as having less-than-usual force in cases involving the Sherman Act. See, e.g., Khan, 522 U. S., at 20–21. Congress, we have explained, intended that law’s reference to “restraint of trade” to have “changing content,” and authorized courts to oversee the term’s “dynamic potential.” Business Electronics Corp. v. Sharp Electronics Corp., 485 U. S. 717, 731–732 (1988). We have therefore felt relatively free to revise our legal analysis as economic understanding evolves and (just as Kimble notes) to reverse antitrust precedents that misperceived a practice’s competitive consequences. See Leegin, 551 U. S., at 899–900. Moreover, because the question in those cases was whether the challenged activity restrained trade, the Court’s rulings necessarily turned on its understanding of economics. See Business Electronics Corp., 485 U. S., at 731. Accordingly, to overturn the decisions in light of sounder economic reasoning was to take them “on [their] own terms.” Halliburton, 573 U. S., at ___ (slip op., at 9)”.
This paragraph confirms, once again, that antitrust is an odd legal animal and that general legal principles often apply to it with a twist. It also confirms that antitrust is a discipline in permanent evolution, which is why many of us enjoy it (and even write blogs about it).
But perhaps more importantly, the reflection that this paragraph triggers is that the “changing content” of antitrust as opposed to other disciplines means that it is a product of common sense distilled from decades of experience on individual cases and of established economic thinking rather than a product of political preferences embodied in a statute. Changes in competition law are (most often) dictated by logic applied by technical bodies and judges, not by political agendas. I made already many of those points here.
It is important not to forget this at a time when some, at least in the EU, are talking about changing/adapting the content of the competition rules (i.e. to replace those decades of distilled thinking by a more hands-on approach on the part of legislators, which would imply the adoption of rules guided by the political concerns of the day and not by the evolution of technical knowledge).
As not-so-serious readers of this blog, you’ll probably also be interested by the language used both in the Opinion and in the dissents. Justice Kagan describes the product at issue as “a toy that allows children (and young-at-heart adults) to role-play as “a spider person”, when describing IP protection explains that “Patents endow their holders with certain superpowers, but only for a limited time”, and after referring to a “web of precedents” reasons that “as against this superpowered form of stare decisis, we would need a superspecial justification to warrant reversing Brulotte.” In sum, the Opinion concludes that “what we can decide, we can undecide. But stare decisis teaches that we should exercise that authority sparingly. Cf. S. Lee and S. Ditko, Amazing Fantasy No. 15: “Spider Man”, p. 13 (1962) (“[I]n this world, with great power there must also come—great responsibility”)”. And these are only some examples (our great intern, Pablo, found many others J)
P.S. And speaking of the US Supreme Court, this past week it featured in the news for reasons other than antitrust and superpowers. As you know, in an Opinion authored by Justice Kennedy (of which many have highlighted the last paragraph), the SCOTUS declared bans on gay marriage unconstitutional. This Opinion and the dissents (particularly the controversial ones by Scalia and Thomas) have once again revealed how fascinating those characters are (admittedly, in Europe we have recently learnt that it is not only there that Courts fight internally…).If you have a few minutes, I would very much recommend reading this on Scalia’s dissent, this on Thomas dissent, and, above all, Richard Posner’s brilliant take on the whole thing. [By the way, if you’re interested in knowing what insult Scalia would have for you, click here] I was fortunate enough to take US Constitutional Law with Michael Klarman (who that year won the prize for the best rated professor at Harvard Law School) and possibly the best thing about the lectures were the myriad anecdotes he told about the Justices. Anyone interested in these should read this extraordinary book. Anecdotes aside, and whereas there are a bunch things I don’t like about the Supreme Court, there are a couple that I wouldn’t mind importing to the EU; one is the drafting style and the other is the fact that submissions, transcripts and recordings of hearings are publicly available (
I could not make it to Wouter Wils’s visit to London last week, but fortunately he has shared his views online. The paper – short and to the point – is a refreshing read that dispels some commonly held views about commitment decisions. It is, to begin with, a great reminder that one should be very careful when analysing, and making inferences from, data (this is definitely an area where lawyers have much to learn from economists!).
But more important is Wouter Wils’s attempt to put commitment decisions in perspective. In line with the points made in the paper, I keep telling to anybody who is willing to listen that it is wrong to perceive commitment decisions as having significantly changed the enforcement landscape. Informal settlements existed under Regulation 17, and exemptions worked in many ways like today’s Article 9 decisions (just think of the seamless transition exemplified by UEFA Champions League, an exemption, and Bundesliga, the first ever – if I remember correctly – commitment decision).
In the same vein, it is usually pointed out that commitment decisions are rarely ever challenged before EU courts and that, as a result, they leave substantive questions unaddressed. But I would be interested to see whether the old exemptions were really challenged much more often that commitment decisions and thus whether there is a marked difference in this sense with the previous regime. In case you are curious too: my wonderful research assistant and I are gathering the data and should be able to share some findings soon!
The underlying theme in the paper is probably that commitment decisions are just that – an instrument through which policy is expressed. And I agree. We have reached a point where some substantive trends in EU competition law and policy – for instance, the perceived ‘regulatory’ turn in the field – are explained by the recourse to commitment decisions. From the perspective of some commentators, the medium would determine the policy, which does not seem correct. As the experience of the old regime shows, it is the policy that determines the instruments, whether these are formal ones or created in an informal way to address some enforcement needs (which cannot always be predicted or anticipated in legislation).
Wouter Wils is not the only one who has been productive lately. @CompetitionProf, aka our co-blogger emeritus, sticks to his prolific pace. He has recently written and presented (at the OECD, no less) on oligopolies and on competitive neutrality. And we received earlier this week a good summary (forthcoming in JECLAP) of the main issues raised by the on-going e-commerce sector inquiry and prepared by Lars Kjølbye, Alessio Aresu and Sophia Stephanou. By the way, Alfonso will be speaking on this topic together with Thomas Kramler in Madrid in a couple of weeks.
The European Commission is a great Institution. When I was an EU law student I used to revere it, and now, after knowing much more about its inner workings, my views are much more nuanced, but still overall very positive, particularly in comparison with what goes on at the national level. Still, it is the EU Institution that should be giving impulse to the EU project, a mission that it has not always accomplished in recent times. And in our field, it is the Commission that calls the shots.
Some readers of this blog have remarked that I tend to be “too” Commission friendly. Some friends at the Commission see it otherwise. I see those opposing views as a good thing (for my views on the importance/difficulty of not taking the same side on every issue, see here).
Frequent readers of the blog may also remember me saying multiple times that the human factor is very often what determines whether institutional arrangements work or nor. An organization or Institution without the right people is very unlikely to function as it should. Today I want to insist on that point.
[Those interested in reading more can click here]