Chillin'Competition

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On Excessive Pricing: The Common Ground in AG Wahl’s Opinion and Commissioner Vestager’s Chilling’Competition Speech

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On 6 April AG Wahl delivered an Opinion in a case that he sees as “an opportunity to clarify he conditions under which the imposition of high prices by a dominant company” might run afoul of the competition rules. The Opinion is timely. It comes a few months after Commissioner Vestager delivered a speech –precisely at our Chillin’Competition Conference- that focused on excessive pricing. The Commissioner’s speech (a full video of which is available here, including Q&As) spurred quite some commentary, but we had yet to give our views. The Opinion gives us the opportunity to also do that now.

AG Wahl’s Opinion has been reported as somehow contradicting the Commissioner’s speech –and in fact has been portrayed by Trevor Soames –our former “correspondent” at the Intel Hearing; see here– as an “antidote” to that speech. In my view, however, on closer inspection both are pretty much aligned, and both are welcome examples of common sense.

To be sure, there are differences between the two. For one, you can expect more of a detailed legal discussion in an Opinion than you would from a short speech, and AG Wahl’s proposal refers to elements that the speech could not touch upon [By the way, another difference is that the Commissioner’s speech did refer to us by name, AG Wahl is yet to do so, although you know we are trying to fix that; see here 😉 ].

Below I set out the key messages contained in the Opinion and the way in which they tie in with the Commissioner’s speech. A few personal comments will follow:

On prudence. The Opinion starts off saying that “there is simply no need to apply [the prohibition against unfair trading conditions in Art. 102] in a free and competitive market: with no barriers to entry, high prices should normally attract new entrants. The market would self-correct”. AG Wahl notes that this is why the Commission has, “rightly” been “extremely reluctant to make use of that provision”.

Commissioner Vestager also insisted that “most of the time, we get consumers a fairer deal by keeping markets competitive, not by correcting prices or other outcomes in the market”, and emphasized that “we have to be careful in the way we deal with [exceptions to this rule]. The very conclusion of the speech was that “we need to act carefully when we deal with excessive prices. The best defense against exploitation remains the ability to walk away. So we can often protect consumers just by stopping powerful companies from driving their rivals out of the market. But we still have the option of acting directly against excessive prices”.

On the circumstances in which action may be needed. The Opinion nevertheless explains that markets may not be able to self-correct when there are “legal barriers to entry or expansion and, in particular, [when] there is a legal monopoly”. The Opinion relates to a case concerning allegedly excessive rates set by a collecting society. As AG Wahl observes, this is not a first. Actually, my second ever publication in the field of competition law already 12 years ago was precisely about excessive prices and collecting societies (the first was about fiscal state aid, all of which shows that in competition discussions we are cyclically reinventing the wheel…).

The Commissioner’s speech also identified, as an exception, that the Commission is “still bound to come across cases where competition hasn’t been enough to provide a real choice” and after explaining why competition authorities “have to be careful” (see below), she mentioned 3 examples of instances where action could be justified: Gazprom, pharmaceuticals and standard-essential patents, all of which share in common allegedly high legal barriers to entry.

On the methodology to assess allegedly excessive prices. As recalled in the Opinion (16-18), back in United Brands [1978] the CJEU laid down a two-step test to discern whether prices were “unfair”, “disproportionate” or “exorbitant” with regard to the value of the product at issue. First, one is to determine whether there is a significant difference between the price charged by the dominant company and what would have been charged in a competitive environment. Secondly, one needs to assess whether the price at issue is unfair in itself or when compared to competing products. In theory it sounds easy, right?

No method is perfect. When discussing how to approach the first step and determine the benchmark price, AG Wahl –as he often does- looks for the consensus in economic thinking, and in para. 36 states that “at the current stage of legal and economic thinking, there is no single method, test or set of criteria which is generally accepted in economic writings or across jurisdictions” . He –quite logically- observes that each of those methods “reveals some inherent weaknesses” (36), that their suitability depends “on the specific features of each case” (37); that the information required to conduct them may be missing, incomplete or controversial (usefully noting how different accounting methods may provide inaccurate pictures) (38); that mere comparisons across geographic markets are risky as markets are rarely so homogeneous as to allow for immediate and automatic meaningful comparisons (39) [on that point see also  paras. 61 and 65 ]; that comparisons between undertaking may overlook different qualities or value (40), and that comparisons over time may fail to account for rapidly changing business strategies or market conditions (41). The Opinion underlines that “because of those limitations, antitrust authorities and economists generally agree that the exercise consisting of determining the benchmark price (…) carries a high risk of producing both type I (…) and type II (…) errors”.

A combination of methods as the most perfect of imperfect solutions. Given the observed limitations, the main proposal in the Opinion is that in order to minimize risks, “competition authorities should strive to examine a case by combining several methods among those which are accepted by standard economic thinking” (43). Whilst recognizing that the weakness of one method is not remedied by applying other weak methods, the Opinion states that the convergence of results may be taken as an indicator of the possible benchmark price in a given case (45).

Additional indicators when only one method is available. According to AG Wahl, when only one method is available competition authorities should double check its results considering other indicators, including, (i) whether the market is or not protected by high barriers to entry or expansion (48); (ii) whether there is an expert sector regulator whose task is inter alia to control prices (in which case intervention may appear less warranted except, very importantly, in cases “where the sectoral authority should have intervened and erroneously failed to do so” (49); (iii) whether there is market power on the buyers’ side (50); and (iv) other factors relevant depending on the case (51).

[Commissioner Vestager’s speech also noted that “the best answer is often to adjust regulation” (…) even if “there can be times when competition rules need to to their bit to deal with excessive prices”.]

Purchasing Power Parity Index. In the case at issue the Latvian competition authority had “corrected” the rates applied in other 19 Member States in order to account for differences in purchasing power prior to comparing them with those applied in Latvia. AG Wahl notes that any comparison must be among very similar products and also in a broadly similar economic context (84), acknowledges that significant price differences exist for the same goods even in the EU (85) and therefore concludes that the PPP index can be a useful and appropriate instrument (86 and 92), its sufficiency depending on other factors. The bottom-line is that 1 euro in Germany has a different value than 1 euro in, say, Portugal, and that this should be reflected in the comparisons. Makes sense to me.

On when a price difference is excessive. It all often boils down to this. The Opinion states that theoretically any deviation from the competitive price may warrant intervention, but that this approach would “neither be realistic nor advisable” (102) given (i) the complexities inherent to establishing a benchmark and the risk of type I errors (which, citing Easterbrook, he notes involve a much larger cost for society in unilateral conduct cases) (103); (ii) the difficulty for the dominant company to estimate in advance what price would be legal and the legal certainty issue this entails (104); and (iii) the fact that competition authorities are not well-suited to be turned into price regulators.

[Commissioner Vestager’s speech also acknowledged some of these problems, and insisted that “we also need to be careful that we don’t end up with competition authorities taking the place of the market. The last thing we should be doing s to set ourselves up as a regulator, deciding on the right price”]

AG Wahl takes the view that a price can only be deemed excessive under 102 when it is both “significantly and persistently above the benchmark price” (106). Significant is simply described as “appreciably higher” and “persistently” as remaining/being recurrently above the benchmark price for a “substantial period of time” (107 and 108). The Opinion (109) acknowledges the remaining crucial question: how significant and how persistent? In Wahl’s view, neither the case law nor the decisional practice provide precise guidance or clear patterns (110), and this because the question cannot be responded in the abstract, it all depends on the case (111). As a consequence, he proposes that an authority should intervene “only when it feels sure” that “almost no doubt remains” as to the abusive nature of a price. The more significant the difference and the longer the period, the easier it should be to build a case. (112)

Prices unfair in themselves or when compared to competing products. In order to assess the fairness of a given price, the United Brands case law offers two possibilities, deciding on the basis of the price in itself or comparing it to other products. The AG provides some explanations on these alternative conditions. He explains that prices may be considered unfair in themselves when, for instance, the legislation enabled a dominant company to demand payment for services not requested (Merci Convenzionali or Grüne Punkt), as well as when the excessive price is a means to pursue a different anticompetitive aim (such as curbing parallel trade, e.g. General Motors and British Leyland).

The alternative comparison is presented as a “sanity-check” of the assessment made with regard to the benchmark price, particularly to include factors that were overlooked or that were not easily quantifiable in financial terms (including some types of costs, demand, consumers’ perceptions on the value or superior quality of the dominant company’s product) [Commissioner Vestager’s speech also made the point that caution was needed because “sometimes a company is dominant simply because it’s better than its competitors. And when that’s the case it’s only fair that it should get the rewards of its efforts”]

In sum, the Opinion explains that “it is only when no rational economic explanation –other than the mere capacity and willingness to use market power even when abusive- can be found (…) that a price may be qualified as excessive under Article 102”.

My personal comments:

As explained above, the Commissioner’s speech and AG Wahl’s Opinion have much more in common than some have suggested. They both acknowledge that competition law is to be prudent but that there are instances where intervention may be warranted, and both logically coincide in pointing to markets with high barriers to entry and particularly to legal and natural monopolies and, more generally, to market and regulatory failures. If anyone can point to real differences in their content, I’m happy to pay a round of beers.

Cases concerning exclusive rights are in my view clear candidates. For example, I have lately discovered a new phenomenon that consists of privatizing without liberalizing, whereby a legal monopoly is granted to a private party that is allowed or required under the national regulatory system to charge excessive prices. After all, if the concession holder is able to extract high prices it will be willing to pay more in exchange for the privatization. That way, the State gets more money, and so does the concession holder under the umbrella of national law. It’s a win-win for them, and a clear loss to everyone else, starting with consumers/citizens… ]

-I would therefore interpret the speech and the Opinion as supporting intervention in the right cases. But that may be my interested view (as a father of a 2 years old and purchaser of baby stuff I’m now very sensitive to excessive pricing ripping off consumers…).

-Actually, I had a recent conversation with the President of a national competition authority in which he expressed the view that running excessive pricing cases was almost a matter of legitimacy. After all, citizens/consumers have the impression that competition law is there precisely to combat excessive pricing and may not be so perceptive of the attempts to avoid these via the protection of competitive structures. Sometimes, he said, direct intervention would send a right message. This reminds me of the very last phrase in the Commissioners’ speech: “we still have the option of acting directly against excessive prices. Because we have a responsibility to the public. And we should be willing to use every means we have to fulfill that responsibility”. For more on my views on fairness and legitimacy in the Commissioner’s speeches, see here.

As a matter of fact, the widespread view that excessive pricing cases are rare in the EU is a bit misplaced. If one looks closely at national cases you will find that a surprising number of cases on unilateral conduct relate to exploitative abuses. My most frequent co-authors (Luis Ortiz Blanco and your very own Pablo) teamed up some years ago to write this article where they brilliantly make this point looking at Spanish practice.

-In sum AG Wahl’s Opinion is a welcome exercise of common sense and contains interesting points even if it still unavoidably leaves pretty open some the relevant questions. In practice, he advocates for prudency but ultimately relies on authorities’ discretion to pursue cases depending on whether they “feel sure” (see paras. 35 and 112) (and, to be sure, proposing a high burden and very much insisting on safeguarding the presumption of innocence in the face of uncertainty). This is a rare instance when AG Wahl appears to (unavoidably?) rely on the Commission’s enforcement-setting priorities as the main limitation to a wide prohibition (which he has rebelled against in Intel, for example).

Written by Alfonso Lamadrid

3 May 2017 at 4:57 pm

Posted in Uncategorized

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