Relaxing whilst doing Competition Law is not an Oxymoron

Archive for June 16th, 2014

Intel v Commission and the problem with wrong economic assumptions

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(by Pablo Ibañez Colomo)

Voices that relativise the problems with Article 102 TFEU case law are not infrequent. It may be true that the case law is not beyond reproach in all respects, the argument goes, but perfection is not of this world. The fact that rulings are often criticised simply means that Article 102 TFEU is an inherently controversial provision and that the stakes in abuse cases are generally very high, not that there is something fundamentally wrong with the preferences expressed by EU courts. And in any event, the alternative, economics-based, approaches have their problems too. The current case law is just the expression of a legitimate choice.

There is of course some truth in this position. At the same time, I find a bit defensive and as such problematic because it can become an obstacle to an honest and constructive exchange of ideas. I can think of at least a fundamental aspect that is uncontroversially (or objectively, if one prefers) wrong with Article 102 TFEU case law. What makes it even more interesting is that it fails to attract the attention that, in my view, it deserves. We all know that exclusive dealing and loyalty rebates are (absent an objective justification) abusive under Article 102 TFEU. The assumption underlying this rule is discussed far less often and is crucial to understand the case law. In paragraph 77 of Intel, the Court repeats the old formula whereby the abovementioned practices, as opposed to quantity rebates, ‘are not based – save in exceptional circumstances – on an economic transaction which justifies this burden or benefit but are designed to remove or restrict the purchaser’s freedom to choose his sources of supply and to deny other producers access to the market’.

This statement, as a matter of economics, is incorrect. Contrary to what the Court holds, there are perfectly valid pro-competitive justifications for exclusive dealing and loyalty rebates. I am inclined to believe that everyone at DG Comp and the Legal Service agrees by now with this idea, which has long been part of the mainstream. Suffice it to check any textbook on industrial organisation or the economics of competition law. To mention the three I had in my office when preparing this post, take Carlton & Perloff; Bishop & Walker; or Niels, Jenkins & Kavanagh (Hans Zenger’s piece on loyalty rebates is great too). Given its peculiar cost structure, some of these justifications are of obvious relevance in the microprocessor industry.

Article 102 TFEU case law will not evolve until the ECJ acknowledges that a rule-based approach to exclusive dealing and loyalty rebates is grounded on a misguided economic assumption. Interestingly, a shift in this direction would not require a major revolution. The ECJ would just have to accept – finally – that what is true under Article 101 TFEU must by definition be true under Article 102 TFEU. In paras 10-12 of Delimitis the Court holds that there are perfectly valid justifications for exclusive dealing and – by extension – for loyalty rebates. As a result, they are not restrictive by object. Article 102 TFEU case law cannot be based on the opposite assumption (i.e. that these practices are anticompetitive by their very nature because they have no economic explanation other than the exclusion of competition). Paragraphs 89-91 of Intel show the difficulties into which EU courts run whenever the tension between these two lines of case law is raised (Van den Bergh Foods being another excellent example).

I am convinced that an effects-based approach would follow logically from the suggested shift. The additional arguments raised in subsequent cases to justify the current approach are not particularly persuasive. The fact that dominant firms have a ‘special responsibility’ that derives from their status does not mean that an effects-based approach to loyalty rebates and exclusivity is not conceivable. There are recent cases, like Post Danmark and TeliaSonera, where the ‘special responsibility’ of dominant firms is seen as compatible with requiring evidence of an anticompetitive effect.

Paragraph 77 of Intel also made me think of the relationship between law and economics in competition law. It is interesting that the General Court reiterates the Hoffmann-La Roche formula to make it clear that there is a long line of case law supporting its position. ‘Exclusive dealing and loyalty rebates have no pro-competitive justifications because we have always said they do not’, the judges appear to claim. What is an economic argument is dealt with, in other words, as a legal one. From an economic perspective, to be sure, the fact that EU courts have consistently relied on the same assumption does not make the latter any less incorrect.

The Intel judgment also made me think of something I often say. Economic analysis is sometimes presented as an exogenous force that has interfered with EU competition law since the 1990s. What wrong assumptions such as the one discussed in this post show is that this view is not accurate. Economics is hard-wired into competition law – it is an integral part of it. The only debate should be whether to rely on one’s more or less accurate intuitions (à la market definition in United Brands, for instance) or to trust instead the analytical tools developed over several decades by competent individuals devoting their professional lives to a systematic understanding of the economic side of the discipline.


Written by Alfonso Lamadrid

16 June 2014 at 11:43 am