Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Some thoughts on Alfonso’s theory of Article 102 TFEU

with 3 comments

Hole

There is so much about which I want to write that I should not indulge in commenting on Alfonso’s last post. And I really did not want to. But it is happening. It is not often the case that I choose the topics of my posts. They start writing themselves in my head and before I realise I find myself typing, as I am now. So blame the topic, not me. And blame my co-blogger for starting it all with his initial question 😉 . Rest assured that a couple of posts on information exchanges and geo-blocking will start writing themselves in my head soon (primarily because I have much to say about the two).

The fact that I disagree with Alfonso’s last post does not mean that it is not an entirely reasonable one. He says that he does not regard the case law on exclusive dealing and loyalty rebates as the ‘epitome of absurdity’. I do not think it is. It is actually very far from being so. The argument (at least mine) has never been that it is absurd (because it is not), but that it is difficult to reconcile with other aspects of the case law and as such a permanent challenge for the coherence of the competition law system as a whole. Why do we disagree, then? Let us take a look at some of his arguments.

Experience and economic analysis (the Cartes Bancaires test)

The lessons of experience: Alfonso is right to say that the case law assumes that exclusive dealing and loyalty rebates always have restrictive effects on competition. He refers to the Cartes Bancaires test but he does not discuss the lessons of experience, which are valuable ones. Experience shows that that rebate schemes rewarding loyalty do not necessarily prevent the rivals of a dominant firm from thriving or even increasing their market share. This is the fundamental lesson to draw from British Airways and Michelin II. If, as in these cases, there is cogent evidence showing that competition has not been restricted as a consequence of these practices, then it is safe to claim that negative effects cannot simply be assumed to be the necessary consequence of exclusive dealing and loyalty rebates. Unless, of course, one refers to a particular type of negative effects that cannot be seen or proved but is nevertheless there in some form, like a supernatural entity.

The lessons of economic analysis: In relation to the lessons to draw from economic analysis, Alfonso says that he does not know enough about it to conclude whether it suggests that the assumptions underlying the case law need to be refined. What can we conclude from (both theoretical and empirical) economic research? These lessons are elegantly summarised in the Commission Guidance and the EAGCP Report of 2005. I always recommend Massimo Motta’s careful dissection of Michelin II because it is a lucid and accessible piece addressing the question. Against this background, it seems safe to claim that it would be inappropriate to presume that dominant firms implement exclusive dealing and loyalty rebates with the aim of excluding competition. Economic research also shows that negative effects on competition cannot simply be assumed to result from these practices. This is, therefore, one of these areas where the experience of the case law and economic analysis go hand in hand.

I have written elsewhere that EU courts have consistently displayed remarkable intuition about the motives behind business practices. Delimitis is one of the rulings that is very much in line with formal economic analysis. In this remarkable judgment (discussed by Alexander Italianer in the speech he gave back in December), the ECJ concluded that exclusive dealing cannot be considered to be anticompetitive by its very nature (in other words, anticompetitive motivations cannot be presumed) and that its restrictive effects cannot simply be assumed to be the consequence of the fact that access to some outlets is foreclosed. The cumulative effects of similar arrangements may lead to such effects in a particular context, but this is something to be established on a case by case basis. I fail to see why the finding that exclusive analysis is not restrictive by its very nature would not be relevant in the context of Article 102 TFEU. This insight, which relates to the rationale behind the practice, seems to apply irrespective of the degree of market power enjoyed by a particular company.

The lessons of economic analysis have been embraced by EU courts. To name a few, they played a fundamental role in Cartes Bancaires (two-sided markets), in Airtours (in relation to collective dominance), in Tetra Laval (in relation to conglomerate mergers), or in Woodpulp II (concerning the notion of concerted practice). With these precedents in mind, the question arises of why the insights of professional economists would be ignored in relation to a given set of practices if they have informed the case law in other areas.

The ‘making life more difficult’ standard

Alfonso suggests that it is appropriate to prohibit prima facie under Article 102 TFEU any practices that are assumed to make competitors’ life more difficult. Again, this is a defensible position, and one that is very far from being the ‘epitome of absurdity’. That is not the issue. The issue is that practices that in theory always make competitors’ life more difficult are not always prohibited prima facie in the case law. Below-cost pricing by a dominant firm always makes rivals’ life more difficult, but it is not always prohibited as abusive under Article 102 TFEU (just take a look at AKZO and Post Danmark I). Similarly, the ECJ made it clear in Deutsche Telekom and TeliaSonera that it cannot simply be assumed that a margin squeeze always makes competitors’ life more difficult. It would be necessary to establish the likely effects of the practice on rivals’ ability to trade in the retail market in the context of a particular case. In this regard, the ECJ did not follow the Commission decision in Deutsche Telekom.

As can be seen, the real issue here is that Article 102 TFEU case law does not follow a uniform approach, not that the approach followed in relation to exclusive dealing and loyalty rebates is the ‘epitome of absurdity’. The fundamental claim I made in my paper is that the case law, as it stands, does not treat practices that are comparable in their nature and likely effects in the same way. It is, in other words, a matter of legal coherence. In my view, the most sensible way to address the observed tension in the case law is to embrace the lessons of experience and economic analysis across the board.

Administrability vs ‘hordes of public officials, and countless hours of lawyers and economic consultants’

The case law on exclusive dealing and rebates is defended because it is easier to administer than the alternative, which would require ‘hordes of public officials, and countless hours of lawyers and economic consultants’. The administrability of legal tests is an important factor for any lawyer and for any economist who is aware of the demands of legal practice. If I disagree with this point is because, first, he seems to assume that standards to establish, on a case-by-case basis, the likely impact of a practice are very difficult to administer and impossibly demanding in terms of resources. This is clearly not the case.

My second objection to his argument about administrability relates to the coherence of the competition law system as a whole. If Alfonso’s argument applied in the context of merger control, then all conglomerate mergers involving a dominant firm with the ability to foreclose competition (as in, say, Microsoft/Skype) would be prima facie prohibited irrespective of their likely effects on competition. The fact is that the likely effects of conglomerate (and horizontal, and vertical) mergers are routinely examined in concreto. Nobody seems to object to it as an impracticable model or one imposing an unjustified drain on the resources of the Commission. Why, then, would it be a problem for the Commission to establish the likely effects of potentially abusive practices in accordance with the principles that the authority has committed to follow in the Guidance?

Alternatives to exclusive dealing

Finally, Alfonso takes the view that the prima facie prohibition of exclusive dealing and loyalty rebates is not an issue insofar as the same objectives of these practices can be ‘achieved through other, perfectly legitimate and less risky, means’. Is that really the case? What are these other perfectly legitimate means? Tying? Clearly not, as it is also prohibited prima facie. Are quantity rebates perfectly legitimate? Maybe, or maybe not. Possibly, maybe sometimes. As I argued earlier this month, it is far from clear when and why quantity rebates are acceptable under the case law. The pending ruling in Post Danmark II shows that, indeed, it is difficult to say that this route is really less risky for dominant firms.

On my response

As far as I am concerned, this will be the last post on this most interesting (at least for me) exchange. I know, however, that some people did not like the answer I gave. The only way forward of which I can think is to create a new section in the blog, called ‘Choose your favourite Article 102 TFEU decision’. Readers are all invited to send via email the name of a Commission decision of which they are particularly fond (whatever that means). And I hereby commit to discuss its legal, policy and economic aspects 😉 .

Written by Pablo Ibanez Colomo

30 March 2015 at 3:36 pm

Posted in Uncategorized

3 Responses

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  1. I’m on holidays after 3 weeks travelling for work, it’s 28 degrees, I’m playing with my son on the pool and have already had a significant number of work-related vacation breaks, so given the circumstances I think it is objectivelt justificad that I waive my right to reply to Pablo’s timely rebuttal 😉

    Had I replied, I would have commented on experience on the basis of this: http://oregonstate.edu/instruct/phl302/texts/montaigne/montaigne-essays-8.html, and on economics on the basis of this: http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.29.1.89 (those are two reads that, although at very different levels, I very strongly recommend, and that make points I would have never been able to make so lucidly). [Btw, Pablo’s attempt to relate experience to theoretical economics may be a bit far fetched 🙂 ]

    Let me nonetheless clarify that I do not have a theory of 102, but simply responded to a question on my personal view regarding exclusivity arrangements (which is also an issue which has never really interested me as much as it interests many other commentators). As I said in my post, I have enough with trying to understand the case-law; it would be pretentious –and stupid- for me to purport to have an all-encompassing theory.

    I also think that the apparent inconsistency with Delimitis was addressed in my post, as was the fact that, in my experience, dominant companies very often resort to these arrangements not with the aim of excluding, but to rationally pursue their business strategy. All of these were part of my reasoning, as was, much more importantly, the possibility that any exclusivity arrangement be objectively justified. Pablo’s post addresses many of my ancillary arguments, but not this central one, so I still fail to see how this possibility is not satisfactory for those agreements that do indeed have redeeming pro-competitive effects.

    I see in any event that the elephant in the room is, as always when it comes to 102, that we do not have a uniform and uncontroverted notion of “foreclosure”, just as we don`t have one for “restriction of competition”. That says a lot about, among others, the room for legal certainty in our field.

    P.S. This is more of a reply than what I initially intended, but I took advantage of Edu’s siesta. However, given the way in which my wife is looking at me right now after I promised it would only be a second, I’m afraid these may be my last words on this blog… !

    Alfonso Lamadrid

    31 March 2015 at 12:20 pm

  2. Those are great points, Alfonso, thanks a lot!

    On the ‘elephant in the room’: I fully agree with you that it is difficult to infer from the case law a uniform notion of foreclosure (or ‘exclusionary effects’). I do not see how this point (which is a very pertinent one) has impact on my comments above. It may still be worth pointing out the following:

    – Even if the scope and meaning of foreclosure/exclusionary effects remains unclear, I believe ‘poltergeist effects’ (i.e. those which cannot be seen or disproved) should not be part of the analysis. Claims that cannot be disproved (and which may even contradict the observable evidence) seem to have no place in the EU legal system.

    – It would make entire sense to interpret the notion of ‘effects’ in the same way under Article 101 and Article 102 TFEU. Restrictive effects are definitely more likely to arise when a firm is dominant (nobody would dispute that fact), but there is every reason to give the same meaning to the notion under the two provisions. This means, for instance, that limiting the commercial freedom of one firm is not sufficient to establish a restriction of competition (there is abundant and unambiguous Article 101 TFEU case law clarifying this point).

    On objective justifications: This makes me think of the distinction between law and outcomes I made in my original response. You seem to be saying that, so long as there is an objective justification, the prima facie prohibition of exclusive dealing might not be a problem. You seem to be saying, in other words, that so long as the defence is available, the said prohibition might not make a practical difference. My point instead is a legal one: Intel and Delimitis are based on mutually incompatible premises. The first is based on the idea that exclusive dealing has an anticompetitive object and the second is based on the opposite idea. Does it make a difference in practice? Well, suffice it to take a look at Van den Bergh Foods to realise that the situation is the source of some tension in the case law. It remains a challenge for the coherence of the competition law system. The same can be said of the status of tying under Article 102 TFEU vs the legal status of conglomerate mergers. And all of this goes without discussing the actual scope for advancing an objective justification in exclusive dealing and rebate cases!

    On economics: nice read (published, by the way, in a leading mainstream economic journal!). The point has never been that economics is a perfect discipline. The point has always been that formal economic analysis provides more robust conclusions than intuition and common sense.

    On your theory: I am the academic in the duo, I know it when I see a theory 😉 . Enjoy the family and the sun!

    Pablo Ibanez Colomo

    31 March 2015 at 6:44 pm

    • Readers (in case there are any left after our written dialogues) probably won’t believe this, but Pablo and I talked over the phone twice today and did not talk about any of these.. I might reply in a few days, but most likely not 😉

      Alfonso Lamadrid

      31 March 2015 at 7:20 pm


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