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Archive for September 28th, 2018

The Challenge of Digital Markets: First, Let Us Not Forget the Lessons Learnt Over the Years (a JECLAP editorial with Gianni De Stefano)

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[An advance version of a piece jointly written with the better general editor of JECLAP, Gianni De Stefano, has recently become available online (see here). It is on online markets, and it gives you a flavour of how I will be responding to the Commission’s consultation. In short: my main fear, shared by Gianni, is that, when it comes to digital markets, we develop amnesia and we forget the very sensible principles that are enshrined in the case law and that are as valid today as they were when they were introduced. We hope you enjoy it. And please let us know your thoughts!]

Pleas for the reinvention of EU competition law in the digital age have become popular – so much so that they feature in the generalist press (and the pages of this journal). It is regularly claimed that efficiency and/or consumer welfare are poor guides to address the emerging challenges for the discipline. A whole new approach to competition law (labelled ‘New Brandeis’) defines its identity around this key tenet.

Such claims are also made in relation to specific practices or markets. The rise in the use of algorithms, some commentators argue, is a new threat that requires the refinement of existing doctrines. Similar arguments have been advanced in relation to the prominence of online platforms, which are deemed too mighty to leave legal principles untouched.

There is no reason to exclude digital markets from the reach of EU competition law. What is more, some of the economic dynamics of online markets may, in some circumstances, justify vigorous intervention. This said, it is far from clear whether there is something truly unique about the digital world that warrants a fundamental
rethink of the law as it stands.

This editorial suggests that the main risk for EU competition law, at this juncture, is not so much its alleged failure to adapt to new circumstances, but its tendency to forget the lessons learnt over the years.

A blank-slate approach to enforcement that ignores precedents and falls into the trap of well-known fallacies inevitably leads to enforcement errors – both type I and type II.

An overview of recent cases gives an idea of the sort of lessons that cannot be emphasised enough when applying EU competition law in digital markets.

One of these lessons is that price is not the only parameter that matters in EU competition law. More and more, firms compete on other parameters – such as quality and innovation. Some of the most successful technology giants have been able to achieve a strong position while keeping prices significantly above those of rivals.

What are the practical consequences of the above? It means, essentially, that conduct may have a significant impact on prices and still be lawful – even prima facie compatible with Article 101 TFEU and/or 102 TFEU.

This conclusion became apparent in the context of last year’s judgment in Coty. The argument against online marketplace bans is superficially persuasive. By limiting the ability of distributors to appear on major platforms like Amazon or eBay, such bans limit the intensity of intra-brand competition, thereby bringing up prices.

In its Metro I judgment of 1977, the Court pointed out that selective distribution, by its very nature, leads to less intense intra-brand rivalry on prices. In spite of this fact, it held that, under certain circumstances, this distribution method falls outside the scope of Article 101(1) TFEU altogether.

The Court acknowledged – in this and subsequent judgments – that, while restricting the intensity of price rivalry, selective distribution promotes competition in other ways, for instance by allowing a specialist trade capable of providing specific services, or, more generally, rapid market entry and expansion by manufacturers.

A second key lesson learned after years of enforcement is that restrictions of competition cannot be examined from an ex post perspective alone. As far back as 1966 – in Société Technique Minière – the Court clarified that competition must be understood as such competition that would have existed in the absence of the practice.

This is an aspect that is also central in selective distribution cases – including Coty – and cases relating to other vertical restraints – such as franchising.

One of the fundamental questions in Coty was whether the protection of the luxury image of a product justified the creation of a selective distribution system. The Court of Justice answered in the affirmative, even though it leads to ex post restrictions – such as an online marketplace ban.

The logic underlying the Coty ruling seems clear. Had a manufacturer been unable to protect its brand image, it would not have resorted to a selective distribution system in the first place. In other words, the transaction would not have taken place in the absence of clauses seeking to achieve that objective. In relation to franchising, the Court understood that, if effective contractual mechanisms to protect the franchisor’s know-how and reputation were not available, such a method of distribution would simply not exist.

This is an issue that has featured prominently in cases relating to credit card arrangements – including MasterCard and the damages litigation that followed.

Courts understand, on both sides of the Channel, that it is not sufficient to point to the allegedly high prices that, seen ex post, a practice produces. Coming back to the expression used in the European Night Services judgment of 1998, it is necessary to consider whether there would have been ‘real, concrete possibilities’ for the parties to the agreement to achieve the same objective in its absence.

The third lesson is that legal tests should be shaped in a way that incorporate the above insights. Conduct, in EU competition law, falls somewhere in a spectrum that ranges from the prima facie unlawful to the prima facie lawful, with practices requiring a case-by-case assessment falling in between.

Prima facie unlawful practices are presumed to have net negative effects on competition. Prima facie lawful practices, on the other hand, can be safely presumed to be pro-competitive without it being necessary to engage in the case-by-case assessment that is required for other conduct.

Many enforcement errors would be avoided if courts and authorities, when evaluating the lawfulness of a new practice, considered where, and why, it falls in the abovementioned spectrum. Understanding the rationale behind the legal treatment of comparable practices is likely to achieve much in terms of consistency.

To conclude, the real threat of digital markets is that they may lead to the incorrect conclusion that innovation is also required in relation to legal analysis. The opposite is true. The legal edifice built incrementally over the years, broad and rich in insights, remains not only a useful guide to sound and consistent enforcement, but a valuable safeguard against enforcement errors.

Written by Pablo Ibanez Colomo

28 September 2018 at 11:12 am

Posted in Uncategorized