Alfonso’s post on the counterfactual (the best we have published so far this year) made me think of a crucial question that, I believe, it is still very much misunderstood. Often, I hear people say that the counterfactual analysis ‘does not apply’ to restrictions by object, or that it is not relevant in that context. The question is important, as it is crucial to make sense of some major pending issues. I am in fact looking forward to presenting a paper on the counterfactual at the Oxford Antitrust Symposium later this year.
This (relatively widespread) view is, I believe, based on a fundamental misunderstanding about the notion of restriction by object, and about how to go about it in practice. Those who support this view seem to argue, in essence, that the conclusion of the analysis (ie the legal qualification of the agreement under Article 101(1) TFEU) comes before the analysis itself, and not vice versa. To put it graphically (and this is what explains the picture you see above), it is a bit like putting the cart before the horse.
More importantly, this view is contradicted by the case law of the Court of Justice, which makes it abundantly clear that the counterfactual should be considered irrespective of whether the analysis would lead to the conclusion that the agreement is restrictive by object or effect. In other words, what leads to the conclusion that the agreement is restrictive of competition is the evaluation of the counterfactual, and not the other way around.
It makes sense to illustrate the idea by reference to some concrete examples that show that the counterfactual analysis is a step that comes before the legal qualification of the agreement as restrictive by object or effect. Here they are:
- Export prohibitions and Erauw-Jacquery: Typically, an agreement that provides for an export prohibition is restrictive by object. This is not always the case, however. Where the analysis of the counterfactual suggests that the agreement would not have been concluded in the absence of the export prohibition, it is not restrictive of competition, let alone by object. Erauw-Jacquery, which builds on Nungesser, is crystal clear in this regard.
- Joint tendering and objective necessity: Cyril Ritter, an academically-minded Commission official, has recently uploaded a very interesting paper on joint tendering (which he – rightly in my view – sees as a form of joint selling). It is wholly uncontroversial to say that joint tendering can in certain circumstances be restrictive by object (more debatable is whether such agreements are typically by object infringements).
What matters for the purposes of this post, in any event, is an important point that Cyril makes in the paper. Where the agreement is objectively necessary for the parties to take part in the tender, it does not restrict competition, whether by object or effect. As he puts it, ‘there is no competition to restrict’ in the first place, as the parties would not have taken part in the tender absent co-operation between them.
- Price-fixing and collecting societies: The activities of collecting societies provide a wonderful example – if often forgotten – that a horizontal price-fixing agreement is not necessarily restrictive by object. Think about it: we are talking about an agreement whereby all the authors license their works jointly through a common platform. Is it a cartel? Certainly not. Price-fixing and all, this agreement falls outside the scope of Article 101(1) TFEU – and is thus not restrictive by object – where it is necessary for the collecting society to perform its function.
Competition under Article 101(1) TFEU means ‘competition that would otherwise have existed’
The Court clarified in Societe Technique Miniere that the word ‘competition’ in the context of Article 101(1) TFEU ‘must be understood within the actual context in which it would occur in the absence of the agreement in dispute’. In other words, ‘restriction of competition’ under Article 101(1) TFEU means ‘restriction of competition that would have existed in the absence of the agreement’ – as opposed to ‘restriction of competition that could exist in the abstract’.
There is nothing in Societe Technique Miniere, or in subsequent case law, that suggests that a difference must be made in this sense between restrictions by object and by effect. Such a distinction would in any event be artificial. The letter of the Treaty makes it clear that the notion of restriction of competition is a single one. And the Court has repeatedly held (AC Treuhand being a very good recent example) that no differences should be made where the Treaty itself makes no difference.
The object of an agreement cannot be understood without the counterfactual
If the analysis of the economic and legal context suggests that the agreement does not restrict competition that would have existed in its absence, it is very likely that its object is not anticompetitive. The rationale for the agreement (which is after all what the notion of ‘object’ is all about) is most probably a different one.
Allow me to come back to Cyril’s example: if the analysis of the counterfactual reveals that the parties would not have been able to submit tenders individually, the aim of the joint tender cannot be the restriction of competition. Most probably, such an agreement has a pro-competitive purpose, and it is certainly capable of making way for more effective competition (to come back to the expression used by the Court in Gottrup-Klim).
What explains the perpetuation of some myths and misconceptions?
Even though the case law is clear, the view that the analysis of the counterfactual does not apply to restrictions by object is still popular. Why? Because, I think, many people believe that the notion of restriction by object is something that it is not.
For many people, a restriction by object can be established in the abstract, that is, without examining the objective purpose behind the agreement and without considering the economic and legal context. According to this perspective, a price-fixing or market sharing agreement would always be by object infringements. This view is also misguided, and this is something that the Court has repeatedly held. It is true that, as pointed out in Toshiba, the analysis of the abovementioned factors may not be equally detailed in all cases, but this does not mean that the analysis can ever be established in the abstract.
Merger control is making the headlines like it’s 2002. Yesterday, the General Court annulled the Commission decision in UPS/TNT Express. If you have not seen it yet, the reason behind the annulment is interesting: in essence, the GC held that the rights of defence of the merging parties had been breached insofar as the Commission failed to communicate the final version of the econometric model on which its conclusions were based.
The role of economics as a tool to define the boundaries of administrative action (and thus to meaningfully constrain the discretion of the authority) is a topic that keeps me busy, and the judgment gave me good ideas and confirmed some intuitions.
This said, yesterday’s news is not the only big ongoing issue in merger control. On the substantive side, there has been quite a lot of writing lately about the role of innovation in the field (see here from Gavin Bushell, whose name you will find reading yesterday’s judgment; and, from our co-blogger emeritus, here). These writings seem to reflect a concern about what they perceive to be an emerging trend in the administrative practice of the Commission.
As I understand Gavin’s and Nico’s pieces, they – together with a few others – appear to express misgivings about the fact that the analysis of innovation effects does not (or not any more) necessarily relate to a particular product market but to research and development activities and/or capabilities as such.
I have the advantage and the disadvantage that I myself wrote a paper on the topic already some time ago. This means that I have thought about it for a while and have pretty clear views. To a significant extent, I fail to see anything exceptional, novel or parameter-specific in the analysis of a transactions on firms’ ability and incentive to engage in research and development activities. By and large, there is nothing really new under the sun. It is true that I have some concerns, but these are narrower and more modest than those than those voiced by most commentators.
Does it make sense to assess the impact of a transaction on firms’ ability and incentive to engage in research and development activities?
Firms compete with each other – and thus constrain their behaviour – in a variety of ways. For instance, the two only competitors on a particular product market may constrain each other by bringing their costs and prices down. But they may also do so by working on the development of new products and the improvement of existing ones. Depending on the nature of the industry, one manifestation of competition will weigh more than the other.
In either case, a merger between the two only major industry players would have the effect of eliminating a significant competitive constraint. If that is the case, I struggle to see why one of the two manifestations of competition – price-based rivalry – should fall within the scope of the EU Merger Regulation and the other – innovation-based – outside of it. It comes across as somewhat inconsistent to scrutinise some manifestations of competition but not others.
It is true that, in one case, it may not be possible to identify a precise product market. I do not believe it is a decisive factor, in particular because the substantive test in merger control does not refer to a particular manifestation of competition and because the definition of the relevant product market has never been an end in itself, but rather an instrument to identify competition concerns (as well as an occasional trigger of involuntary humour, as Alfonso’s post below shows).
Is the trend towards the analysis of innovation markets a new one?
A second important question is whether this analysis of innovation markets is new. As I understand ongoing discussions, I do not believe it is. In EU competition law, some of the ideas that are being currently explored have been around at least since the adoption of the first version of the Guidelines on horizontal co-operation agreements back in 2000. In that instrument, the Commission toyed with the idea of innovation markets and expressed its concerns with agreements bringing together some of the main drivers of research and development activities in a given industry.
More importantly, the Commission acknowledged at the time the limits of its framework. In particular, it conceded that this analysis can only be properly conducted in industries where the different ‘poles’ of research and development are well structured and can be readily identified. This is the case, for instance, of the pharmaceutical industry. My understanding of ongoing cases is that they follow a similar approach.
Is there something special about innovation?
One could argue that there is something special about merger analysis where innovation is what drives rivalry between firms. After all, the argument goes, there are many things we ignore about innovation. According to an oft-repeated mantra, there is no clear link between market structures and innovation.
While I agree about the extent of our ignorance on these matters, my impression is that this is not a decisive issue. In fact, it would not even matter that there is no clear link between market structures and innovation.
Why not? First, because I do not believe the case law supports the idea that intervention in EU merger control requires direct evidence that a parameter of competition will be harmed. This is true not only of innovation, but also of prices or quality.
Leading judgments like Ryanair/Aer Lingus and Deutsche Borse suggest that a significant impediment to effective competition can be established by proxy. Thus, indirect or qualitative factors, such as those resulting from an analysis of the features of the relevant market, are sufficient to take action.
I do not think yesterday’s judgment changes anything in this regard. The GC did not seem to disagree with the idea that qualitative evidence, alone, is sufficient to establish a significant impediment to effective competition – which is what the Commission, rightly in my view, argued. What the GC held instead is that this fact cannot justify a breach of a firm’s rights of defence, and that the Commission must accept the consequences of relying upon econometric evidence (it is hard to see how the Commission can avoid relying upon such evidence in practice, as it will be put forward by the parties anyway).
There is a second reason why I believe that our ignorance on innovation matters is not decisive. The whole point of EU merger control is to preserve the competitive constraints that firms place on each other at any given point in time (that is, from a static perspective).
Those who claim that there is something different about innovation, appear to claim that such static constraints should not be protected when innovation is at stake. In this sense, they appear to argue that the usual logic of EU merger control should not be followed.
It seems to me that those who claim in a given case that dynamic considerations should take precedence over the static nature of EU merger control bear the burden of proving that the elimination of a competitive constraint would be outweighed by an increase in innovation – good luck with that, by the way, even if it is formally possible to make the argument.
Some concerns are justified: they relate to non-horizontal mergers (and leveraging in general)
In spite of the above, I believe some concerns in relation to the introduction of innovation considerations in EU competition law are justified. These relate to the assessment of the effects of non-horizontal mergers and, more generally, to the assessment of leveraging issues (which can also be observed, in particular, in the context of Article 102 TFEU).
Unlike horizontal mergers, vertical and conglomerate transactions do not in themselves result in the elimination of a competitive constraint. It is therefore necessary to establish, on a case-by-case basis, that the concentration will lead to anticompetitive foreclosure. And it may well be the case that anticompetitive foreclosure is an unlikely outcome in a given market.
Suppose that the available evidence suggests that anticompetitive foreclosure is indeed improbable. In such circumstances, a competition authority may seek to argue that innovation would be harmed even in the absence of foreclosure. In other words, instead of inferring harm to innovation from the elimination of a competitive constraint, the authority would infer the elimination of a competitive constraint from the alleged harm to innovation.
This reversal is what I call in my paper ‘innovation considerations in lieu of foreclosure analysis’. My impression is that it is a trend that can be traced in the practice of the Commission but that has not been scrutinised as much as it should, even though it clearly entails a departure from traditional competition law analysis.
An example of ‘innovation in lieu of foreclosure’? Think of the scraping aspect of the Google saga, which I used in my paper (and about which Alfonso wrote four years ago – time flies). As far as I can tell, it has never been argued that the alleged scraping would drive successful firms like Yelp or Tripadvisor out of the market. The claim, instead, is that the practice in question would reduce these players’ incentives to compete, even if they continue to place a constraint on Google. As I explain elsewhere, this claim is not only at odds with traditional competition law, but problematic for substantive and due process reasons.
Some of our most successful recent posts have had to do with competition competitions and legal awards. Given
that it’s particularly busy and we don’t have time to write something more substantive this interest, we have decided to give awards to the smallest, most absurd or for-whatever-reason funny market definitions used or attempted in competition cases (all jurisdictions count).
In order to get the ball rolling, here are my examples:
–The relevant market for “Bar Mitzvah tours of Israel” discussed in this 1995 7th Circuit Opinion that starts this way: Bar mitzvah tours of Israel. That is the market defined for the antitrust claim in this case. It is an absurd market definition”.
-The relevant market of “Asterix at the Olympic Games” upheld by Austria’s Supreme Court, which noted that any film could constitute a market of its own (see here)
-The one that we discussed in the post “We owe you an apology” (adult-content warning) (the bold is to make sure you
–Licenseable ope…sorry, no ongoing cases.
-In this case the funny thing is not so much the market but the alleged dominant entity: the Cistersian congregation of the Immaculate Conception was found to be dominant in the maritime route linking the continent and the isle of Saint Honorat. The congregation had apparently refused to authorize third parties to provide additional transport services. The French competition authority dismissed allegations of unlawful abuse. It found that the limitation of tourists was objectively justified by the necessity to preserve the quietness of the monks. No kidding. See here.
Your contributions will be much appreciated!
P.S. The Bed of Procrustes (tailored to fit its occupant) is pictured above
Last week Oxford University Press released the book EU Regulation and Competition Law in the Transport Sector edited by our friend/colleague/many other things Luis Ortiz Blanco and by Ben van Houtte.
The book is a certainly a must for anyone interested in the transport sector and is the most-comprehensive work to date on this subject. The book covers both the regulatory and the competition (antitrust, merger and State aid) aspects of public intervention in inland, maritime and air transport as well as everything related to transport infrastructures.
The book has been written by a number of experts in the field currently working either for the European Commission (including DG Comp, DG Move and the Legal Service) and in private practice (among them, the book features key contributions from our very good friends Elvira Aliende and Mark English, pictured below with Luis, smiling very naturally at my phone’s camera at a seminar last week ). The full list of authors is available here.
P.S. I was trying to think of some sort of transport-related joke to accompany the post, but I guess I hit a roadblock….
The upcoming issue of the Journal of European Competition Law and Practice (JECLAP) features an editorial I have written on the use of the term “fairness” in competition law these days. I was particularly happy to contribute to this journal, which and which also boasts the nicest team of editors possible (well, and Gianni too).
JECLAP has very kindly authorized me to publish the editorial here on a free-access basis (any comments will be very welcome!); it is available here: https://academic.oup.com/jeclap/article/doi/10.1093/jeclap/lpx003/2996766/Competition-Law-as-Fairness
Some accompanying explanations are in order:
The term “fairness” seems to have made inroads into public portrayals of competition law (most prominently in salient speeches by Commissioner Vestager and AAG Renata Hesse). Some have reacted strongly into the use of this notion, seemingly due to fear that it may contaminate a realm of the law with even more subjectivity. Whereas I do share the sentiment that references to “fairness” cannot expand the reach of the competition rules, I also believe that a more fair society is a consequence of the right application of the competition rules and there is no reason to shy off from saying it explicitly. Competition law should not -and does not need to- be diverted to pursue fairness because it is already about fairness. Cast in this light references to fairness are not a way to divorce the discipline from economics, but to reconcile it with the public.
The editorial also contains, somehow in passing, the idea that efficiency is more useful as a guiding benchmark than as the ultimate goal of competition law. This idea is relatively common among progressive economists like Amartya Sen (my personal favorite) or Stiglitz, but it is relatively uncommon to hear it from experts in competition law due, I suppose, to the fear of being misinterpreted (which is what I try to avoid with the 8th paragraph of my editorial). Admittedly, general economists tend to see competition law as one more economic policy tool, perhaps failing to entirely realize that competition law may also lead to the imposition of “cuasi-criminal” fines and that one cannot severely punish a firm simply because it is more efficient than rivals (much less for doing things better, which may or may not coincide with being more efficient).
That is why, as I explain in the piece, short term efficiency considerations have a valid and important role to play in our field. But at the same time having efficiency as a sole beacon may chart an unduly narrow path. There are other values, like freedom to compete, choice or equality of opportunity, that may be equally worthy. The challenge in this regard is how to turn these into an operational framework capable of providing the necessary legal certainty.
In this regard I am happy to be in the company of now Judge Paul Nihoul, also General Editor of JECLAP (see here), of some of my favorite specialized economists (see here) and of whom is perhaps the greatest antitrust academic so far, Philip Areeda. In Areeda’s words (quoted from the 6th edition of his Antitrust Analysis textbook and which I did not have space to quote in the editorial):
– “The efficiency concept is at once powerful and weak: powerful because it is arguably the minimum necessary condition of any ideal economic system´s equilibrium, weak because it is not the only value considered important by our society”;
– “The economic model of competition also provides antitrust with a major value: efficiency. Other values impinge, however, to strengthen or retard the force of the unqualified competitive criteria. The task of antitrust, accordingly, is much more complex than simply moving the economy toward more nearly perfect competition”;
– “A free market may be seem as emphasizing competition as an aspect of human liberty. To favor competition for this reason relates to its assumed economic benefits but duffers because it emphasizes the social rather than economic merits of competition and is broader because it emphasizes opportunity and choice for producers and consumers even where fewer opportunities and choices might produce equally or more ‘efficient’ economic results”.
The German government intends to exempt cartels in the press sector: bad news for competition law, bad news for free speech
Rupprecht Podszun, Professor of Competition Law at the University of Dusseldorf, has recently published two posts outlining the reforms to the German competition law system proposed by the government. You really should take a look at them here and here.
As has been widely reported, part of the changes introduced in Germany are intended to capture concentrations in online markets. In any event, the single most significant (and no less than shocking) aspect of the reform is an almost blanket exemption from the application to the press sector of the national equivalent of Article 101 TFEU.
In case you were not aware, you read well. If this proposal goes through, German competition law would no longer apply to, inter alia, plain vanilla cartels among press publishers in the country.
This is a worrying development, for many reasons. First and foremost, it shows that the consensus in favour of the protection of the competitive process is fragile, even in the country with the oldest and most developed system in Europe. Unfortunately, many stakeholders see competition law as a tolerable annoyance during normal times. These same stakeholders are always ready to claim that there are exceptional circumstances that justify setting up cartels and legal monopolies. Even worse, many (perhaps most) politicians appear happy to give in if they believe it is in their (short-term) interest.
Will this development change something?
One could argue that the exemption of the press sector from German competition law will change little after all. Article 101 TFEU would continue to apply to publishers insofar as the agreements they conclude are capable of affecting trade between Member States. And the most problematic agreements, such as cartels (a precondition of which is substantial market power), will almost certainly meet this condition.
Suppose German publishers form a cartel to extract rents from online platforms (which, I suspect, is part of the overall plan). For this cartel to work properly, nearly all (if not all) publishers need to play the game (the Spanish ‘Google tax’ was an embarrassment, but the legislator at least understood this point). And such an agreement would certainly have an effect on trade between Member States.
The Bundeskartellamt does not have the power to exempt agreements caught by Article 101 TFEU (the limited scope of Article 5 is a clever feature of Regulation 1/2003). As a result, any industry-wide agreement would be vulnerable to challenge before a court, or before the European Commission. And if the agreement in question is a blatant cartel, I guess neither a court nor the Commission would have much choice. It might not be easy and there might be considerable external pressure, but the credibility of the whole system (which is a remarkable achievement of the European Union) would be at stake.
Bad news for free speech and pluralism
Some readers may argue that the above is irrelevant, as media pluralism and free speech are far more important than competition law. I agree. In fact, media regulation will always be one of my main areas of interest. But even from that perspective, I struggle to see how allowing cartels in the press sector can be good.
Fiercely independent newspapers that proudly defend their editorial line are essential in a democracy. Can the press fulfil its fundamental mission if it cosies up with politicians and exchanges favours with them? An unholy coalition between newspapers and politicians is certainly not better than an instance in which the independent press is criticised by those in power – which is undesirable, but criticism is at least an indicator that journalists are doing their job.
We competition lawyers know that, in an age of rapid technological change, the cartelisation of the press is unlikely to achieve anything meaningful. At best, it can only delay the inevitable transformation of the industry. The press is important for reasons that go beyond purely economic ones, but this does not mean that the sector is not subject to basic principles of economics.
Last Thursday I participated in the announcement of the first “30 in their 30s list” made by W@Competition, of which I was also happy to be a juror. Seen from the inside, this really was a neutral, independent exercise, and the women who made it onto the lists (available here) all very much deserved it (as also did many of those who did not), so congratulations!
Interestingly, however, this is an exception in many ways. Anyone familiar with awards, prizes and recognitions in our field realises that they are not always given on the merits; sometimes they are priced prizes, other times they are sponsored-for and in other cases they are simply a bit random. Pablo and I have typically been quite well treated by some of the organizers of some of these things so we think we are in a position to say these things.
Although, again, there certainly are a number of serious, well researched rankings and awards, others that don’t necessarily meet this criteria are mushrooming. People within the industry can distinguish the serious from the non serious, but other people can’t.
One example, a couple of weeks ago, we saw this LinkedIn post by Damien Geradin explaining that he had been offered an “Internet Law Firm of the year” award which only required a payment of 2795 pounds. Apparently Damien responded that for that price he’d like to be named “Master of the Universe”.
So that gave us an idea. With a view to lowering barriers to entry in the awards market, and in order to serve the competition community, we have decided to create our very own awards, the Chillin’Competition “True Best of the Best, Really” awards.
The idea behind it is that anyone interested in a prize will get one; you simply need to tell us what prize you would like to receive (the only restriction is that Pablo will keep the “True Best of the Best Academic Star of the Century” award, and that I will compete with Damien for the “Best of the Best Master of the Universe Award” (which I will win -because I created it- and will include in my cv and on business cards) 😉
Alternatively, you can also tell us something about yourself and then we will craft an award that suits you. For example, if you wrote part of a 1 page newsletter piece on, let’s say, the truck cartel, then we can give you an award for the “True Best of the Best Contribution to a Professional Publication in the Automobile Sector”.
We could then give ourselves the award at a dinner ceremony (i.e. a pretext to have some laughts at a tax deductible dinner). We are only partially kidding; if we have enough applications we will do a dinner, trust us.