Chillin'Competition

On Monday, the European Commission announced its decision to fine Lithuanian Railways more than 27 million for abusing its dominant position. The practice itself is remarkable: the company dismantled 19 km of railway connecting Lithuania and Latvia to prevent a major customer from using the services of a competitor.

I welcomed the decision for two reasons.

It adds to the topicality of the seminar on network industries that I give in Bruges (and which, coincidence, I presented last Friday). I cannot wait to start.

More importantly, the information available on the case suggests that Lithuanian Railways may very well be part of a rare breed of practices: those that serve no purpose other than the elimination of competition. It would be great if a body of decisions concerning such practices developed.

Article 102 TFEU enforcement is controversial because the vast majority of potentially abusive practices have ambivalent effects on competition: they are capable of having both pro- and anticompetitive effects. Sometimes it is even trickier: the very effect that is potentially problematic is what makes the practice pro-competitive (think of combining two features in a single product).

But there are practices out there that are not capable of having pro-competitive effects or, more generally, that cannot be plausibly explained as a means to enhance competition.

For these practices, the ‘by object’ label is entirely justified. When a practice serves no purpose other than the elimination of competition, there is no reason to require evidence of anticompetitive effects on a case-by-case basis. This is a point that the Commission made in the Guidance, and I agree.

Examples of conduct of this kind? Pricing below average variable costs. Doing so is in principle irrational for a firm. Thus, the only plausible explanation for the conduct is that it is part of a plan to drive a rival out of the market.

I struggled to think of other examples of practices of this kind (besides that of a company blowing up a rival’s plant, which is a classic). Now Lithuanian Railways potentially provides a wonderful one (I have to say nothing similar ever crossed my mind).

It is not obvious for me to see, prima facie, how dismantling a railway connection can be plausibly explained on efficiency grounds. It is an Aspen Skiing sort of situation. And I look forward to the details of the decision (i.e. how the absence of a pro-competitive rationale for the behaviour has been established).

In this respect, the case appears to be different from others involving the leveraging of a dominant position. For example, while vertical integration (via organic growth or via a merger) can foreclose upstream and/or downstream rivals, we know that it can also have pro-competitive effects. What are exactly the pro-competitive effects of dismantling capacity in the circumstances of this case?

Similarly, I believe there is a clear difference between Lithuanian Railways and the famous ‘strategic underinvestment’ decisions in the energy sector. I fail to see why it would be an abuse for a dominant firm not to invest in capacity to accommodate (read: subsidise) rivals. But I certainly see how removing existing capacity to hinder competition can be in breach of Article 102 TFEU.

I look forward to your comments on the above (in particular, this time around, those of economists!).