Chillin'Competition

On Chillin’Competition we have always been for fair, objective, neutral and consistent rules and enforcement. Rules and cases should not be designed to favor (nor to challenge) only certain companies.

The debate surrounding the Siemens/Alstom deal triggered important debates around these issues at the legal and political levels. Both Pablo (here) and myself (here) contributed to that debate with our own views.

Today the Financial Times has published an open letter signed by 92 competition lawyers and economists (myself included), organised by Vanessa Turner, standing up for our current and time tested system, based only on the law and on the facts.

The letter is available here. For those with no access, here is a PDF version: Open letter on EU competition policy (FT)

‘Self-preferencing’ is the buzzword of the day. This concept was discussed at length in the Special Advisers’ Report and is now being explored in earnest by national competition authorities around the EU. We have heard news about the Dutch Authority exploring Apple’s alleged favouring of its own app. Right before the break, the Italian authority announced the opening of an investigation against Amazon and its practices.

This flurry of enforcement activity, yet another sign of the turning tide, cannot surprise an attentive observer. Self-preferencing is a powerful rhetorical device: it provides authorities with the key to potentially countless investigations and allows them to monitor closely the activity of large firms in the digital arena. More importantly, it is through this device that they can adopt wide-ranging remedies changing, potentially in fundamental ways, some business practices.

The genius of self-preferencing as an epithet is that it turns the most pervasive and the most banal of practices into prima facie violations of Article 102 TFEU. Vertical integration is, indeed, pervasive in the digital (and the analogue) world. And instances in which vertically-integrated firms treat their affiliates more favourably than their rivals are equally pervasive. Just stroll around your local supermarket after reading this post.

Self-preferencing may become the tool to achieve ‘common carrier antitrust’ (that is, a state of affairs in which vertically-integrated firms are expected to comply with perfect neutrality obligations vis-a-vis customers and suppliers). This is an idea I explored previously on the blog.

As I was reflecting on the above, and on the dangers of enforcement-by-slogan, I was reminded of Areeda’s classic piece on essential facilities. In that piece, Areeda warned against an epithet-based approach, emphasising that it tends to lead to the expansion of a doctrine ‘to the limits of its language’, ultimately resulting in outcomes that are intellectually indefensible (Areeda’s choice of words was more colourful and perhaps more effective, but I guess you get the point).

If arguments revolving around self-preferencing are going to play a fundamental role in the coming years, it makes sense to ask some hard questions by reference to first principles. And it is also important to face the consequences of certain choices.

Self-Preferencing has never been seen as a concern, but as an expression of competition on the merits

It may be hard to believe, but there was a time when vertical integration and, by the same token, firms favouring their affiliates were not deemed problematic in themselves. They were not considered suspicious conduct deserving close scrutiny but the natural manifestation of the competitive process.

One of my favourite examples of the traditional approach dates back from the days when people smoked. In Tabacalera v Filtrona, the latter firm challenged a self-preferencing decision by the former (at the time, the tobacco monopoly holder in Spain): Tabacalera had decided to favour its own affiliate for the production of cigarette filters.

The Commission explained in its press release that this form of self-preferencing was not in itself an ‘abnormal act of competition’. In fact, few things are more normal than a firm relying on its affiliate to meet its own needs for a particular product (or favouring it when in doubt).

A second example (another one of my favourites) along the same lines is provided by the Guidelines on non-horizontal mergers. Again, self-preferencing is not presented in the document as something justifying remedial action, in and of itself, after a merger. It is instead presented – and was examined in individual cases – as an expected outcome of  a vertical merger, which may be problematic only where certain circumstances are met.

Key takeaway: I guess the main message here is that self-preferencing cannot be seen, in and of itself, as a departure from competition on the merits. Questioning this practice, in essence, is tantamount to questioning vertical integration and the rationale behind vertical integration – and I do not think anybody is ready to suggest (or at least not yet) that vertical integration is inherently bad, or presumptively bad.

Thus, if self-preferencing is going to dominate enforcement, we need to think carefully about the legal conditions under which it is deemed unlawful (i.e. the legal test) and the rationale behind such conditions. Which takes me to my next point.

Indispensability: the hard question that cannot (and should not) be avoided

I have explained many times on the blog that I am not interested in the outcome of individual cases. What matters, in my view, is the analysis, and how the analysis relates to the applicable case law. And I noted, when I read the Google Shopping decision, that none of the hard questions about the legal status of self-preferencing were addressed.

The Commission never spelled out in the decision the legal test against which the lawfulness of self-preferencing was assessed. It merely explained that Article 102 TFEU can apply to leveraging practices. This is not only correct but wholly uncontroversial. The problem is that (i) it is not a legal test and (ii) fails to address any of the issues.

If you have not done so, take a look at paragraph 334, which, according to the decision, provides the case law underpinning intervention. The Commission refers to several cases in footnotes 350 and 351. A cursory look at these judgments shows that there are virtually as many judgments as there are legal tests:

• CBEM-Telemarketing: in this case (the first to be mentioned by the Commission), the legal test requires evidence of indispensability (the reference to indispensability is explicit in the judgment, a point expressly confirmed in Bronner).
• Tetra Pak and Microsoft (Media Player): as the law stands, tying is prima facie unlawful under Article 102 TFEU – the practice is prohibited in and of itself (bearing in mind that it is always possible for a firm to rely on Murphy/Intel to rebut the underlying presumption that the practice is capable of restricting competition).
• TeliaSonera: a ‘margin squeeze’ is only prohibited where it has, or is likely to have, anticompetitive effects.

As you can see, the outcome in Google Shopping is perhaps correct. The difficulty is that we do not know which of the above three legal tests was the applicable one in the case, as the question was never tackled as such in the decision.

The uncertainty in this sense will have to be addressed, sooner or later, by the EU courts. It cannot be dismissed simply by arguing that leveraging has in the past been found to be abusive. For the same reasons, the question of whether indispensability is a legal condition in some, or all, self-preferencing cases will have to be addressed.

If you ask me: I always say that Google Shopping is just a re-run of Commercial Solvents: a firm, following a decision to vertically integrate, engages in a raising rivals’ costs strategy. But bear in mind Commercial Solvents, like CBEM-Telemarketing, required indispensability (and for good reasons).

Key takeaway: Perhaps it makes sense to depart from Commercial Solvents. Perhaps the reasons behind the introduction of the indispensability requirement in that case (and in CBEM-Telemarketing) are not compelling anymore. Perhaps one should not require indispensability in the specific circumstances of the case (for instance, it makes sense not to not to require indispensability in TeliaSonera/Slovak Telekom scenarios, as I explained here). 

But these questions have to be addressed explicitly. Avoiding the inevitable for a while can only lead to uncertainty and inconsistencies in the case law.

The need for a robust analysis of anticompetitive effects

One could argue that, so long as we can show that self-preferencing is potentially a source of anticompetitive effects, the above discussion is largely irrelevant. This is a very reasonable position to take. There is only one problem: it all depends on how anticompetitive effects are defined, and how they are assessed in practice.

This is a question that keeps me busy – and to which I devoted my talk at the last Chillin’ event. As I explained then, if the threshold of effects is low, pretty much any behaviour would be in principle prohibited, and would be treated, in practice, just like ‘by object’ conduct. The requirement to show anticompetitive effects would be a mere formality.

If we understand anticompetitive effects to mean ‘any competitive disadvantage’, self-preferencing will be, always and in any circumstance, prima facie abusive. Complaints about self-preferencing are, in fact, complaints about the affiliate receiving a competitive advantage.

We would face the same situation if an authority were able to discharge its burden of proof by showing that anticompetitive effects (however defined) are plausible. Such a low threshold would be met in the vast majority of cases. After all, the reason some practices deserve scrutiny is because they are deemed a plausible source of anticompetitive effects.

I believe it is possible to infer from the case law what is meant by effect. However, there seems to be a disparity between the case law and the practice of competition authorities. My work over the years has taught me that authorities have a tendency to equate any competitive disadvantage with anticompetitive effects, and tend to prefer to set the threshold of effects at the level of plausibility.

This disparity will inevitably arise in self-preferencing cases. And, like the indispensability issue, the question of what we mean by an anticompetitive effect will have to be tackled directly and in a clear and meaningful way.

Key takeaway: Saying that self-preferencing is abusive where it is a potential source of anticompetitive effects does not solve any of the problems discussed above. Unless the notion of effects is defined, considerable uncertainty, and considerable scope for opportunism, will remain.

Our blogger emeritus Nicolas Petit has put together a conference to address a core public policy question: What institutions, policies, rules, and regulations will maximize individual benefits and economic surplus in the Fourth Industrial Revolution? The topics discussed wil include Royalty Setting and Patent Policy, Autonomous Vehicles, Digital Platforms: Antitrust and Regulation and Globalization, Industrial Champions and 21st Century Protectionism.

The event is jointly organized by the LCII, Hoover IP² (Stanford University) and the Center for Intellectual Property (University of Gothenburg). It will take place at the Sofitel Hotel Le Louise, in Brussels on 3 May 2019.

Here you can find the conference programme featuring a number of excellent speakers. The registration link is available here.

A Chillin’ event at the Fondation Universitaire (Rue d’Egmont 11, Brussels) will take place on 14 June.

The event will be devoted to State aid. There is a great deal going on in this field (procedurally and substantively, within and outside the EU) and we are convinced it makes sense to have three panels (two in the morning, one in the afternoon) to take stock of these developments.

The event will be possible thanks to the support of my amazing institution, LSE.

We are still finalising some bits of the programme, but we can already confirm the attendance of the following leading experts (to whom we are really grateful for the enthusiastic reaction):

José Luis Buendía Sierra (Partner, Garrigues)
Jacques Derenne (Partner, SheppardMullin)
Juliette Enser (Senior Director, Competition and Markets Authority)
Natura Gracia (Partner, Linklaters)
Christian Jordal (Deputy Director, EFTA Surveillance Authority)
Christina Siaterli (Head of Unit, European Commission)

As we usually do, registrations will open a month or so ahead of the event. Stay tuned! And please come back to us for any questions you may have!

The much-awaited report on ‘Competition policy for the digital era’, jointly authored by Jacques Crémer, Yves-Alexandre de Montjoye and Heike Schweitzer (the latter my PhD supervisor and mentor for a lifetime) is finally out. It is a (most readable) 130-page long piece that, as expected, proposes some major changes to the system.

The title of the report refers to policy, which is a bit of a misnomer as the proposals relate to the law (and as such they do not depend on the Commission alone). The most significant of these changes are the following:

As a general rule, the authors seem to advocate making it easier for the European Commission to discharge its burden of proof, by lowering the requisite threshold of effects. The premise underlying this proposal is that the analysis of effects may be uncertain, and the ‘stickiness’ of market power too great to rely on existing principles and approaches.

There are instances in which the authors propose reversing the burden of proof altogether. Some practices, in certain circumstances (in particular, when they are implemented by a vertically-integrated dominant platform) will be deemed anticompetitive. It will thus be for the firm to show that their conduct is on the whole pro-competitive. This is, in other words, a proposal to enlarge the ‘by object’ category in digital markets – the ‘by object’ category would perhaps also reach merger control.

In this regard, the authors, for instance, refer in several passages to a ‘presumption in favour of a duty to ensure interoperability’. Remember Microsoft, where the Commission had to show indispensability? As I understand the report, there would be a duty to ensure interoperability upon a finding of dominance alone.

There is nothing new, no consensus and no evidence that there is something specific about digital markets. Why then, the changes?

The authors justify their proposals in light of three economic features of digital markets:

• Extreme returns to scale
• Network externalities
• The role of data

It is not immediately obvious to see how these features justify a departure from the law and the existing principles underlying the law. This is a point I already made in my submission to the Commission.

And the report and the conference that preceded it do not change my view in this regard. In fact, the report appears to be based on the premise that there is something unique about digital markets, but this idea is not explained or developed. I went several times over Chapter 2 (which is meant provide the basis) without finding any references to evidence supporting this underlying premise.

For instance, the report claims that there are ‘extreme’ returns to scale in digital markets. But the authors do not explain why these returns to scale are more extreme than those that exist, for instance, in network industries with natural monopoly features like telecoms or energy (see page 20).

And competition law has played a key role in ensuring the success of the liberalisation in the said industries without ever suggesting changing the law (in fact, the Court of Justice moved in the opposite direction in key cases like Deutsche Telekom).

Similarly, the report discusses at length network effects. I remember my days as an LLM student in Bruges (15 years ago, no less), reading with fascination Shapiro’s and Varian’s Information Rules (which the authors cite) and Oz Shy’s The Economics of Network Industries. Again: we have known about this phenomenon for a long time (as evidenced by the peer-reviewed literature cited in the report).

Since I graduated from Bruges, a body of case law addressing the issue of network effects and on two-sided markets has developed. Importantly, we have learnt from this case law that anti-competitive effects are not inevitable even when networks effects are strong (think of Microsoft/Skype), and that two-sidedness in an industry may lead to the conclusion that a practice is not restrictive by object (think of Cartes Bancaires).

If these are well-known phenomena and do not inevitably lead to the conclusion that anticompetitive effects are more likely, why would they justify departing from the relevant case law? I looked carefully in the report for any evidence, but I struggled to find answers. To the credit of the authors, they acknowledge that these phenomena are not yet fully understood (see for instance pp. 52 and 126), and also make it clear that their report is by no means intended to provide the last word.

There is no good reason to change law and policy absent evidence and expert consensus

One could argue, as many commentators have suggested in the past years, that if we wait for consensus to develop some dominant positions will become entrenched and it will be too late. Is it not reasonable, in the name of precaution, to take action before it is too late? Are the stakes not too important?

I am not persuaded by this view. First, we simply do not know (yet) whether ‘this time it’s different’. As someone who has studied competition law for a while, I have heard, over the years, many (unpersuasive) stories of why a particular sector was special and required ad hoc rules. I am no more inclined to believe these stories now, which stakeholders tend to use to justify bending the law to their advantage.

Second, I have seen fascinating stuff happen to the sectors which I have followed closely since my days as an LLM student. I have witnessed the decline of Windows as a major gateway, the development of mobile Internet, the launch of smartphones and the transformation of the audiovisual industry (with the rise of Netflix and the progressive demise of the once mighty pay-TV operators). And all of this in industries with natural monopoly features and/or subject to strong network effects (and arguably less dynamic than online markets).

Third, and perhaps more importantly, if we allow a competition authority to choose what to believe, we enter the realm of arbitrariness. There can be no effective judicial review, and no effective protection of the individual vis-à-vis the administration, if expert consensus becomes optional and policy is not based on the best available evidence.

This is something that the EU courts understand well: these insights are at the heart of the Airtours case, where the General Court reminded the Commission that it cannot make up the expertise underlying legal analysis, and ignore the knowledge incrementally developed over the years.

Finally (and in line with the first point), an authority that feels can disregard the expert consensus is more easily captured by stakeholders, who will always try to present a plausible or semi-plausible case favouring their interests.

Changing the law is not the Commission’s prerogative and the report does not say much on how to proceed

I mentioned above that the reference to policy in the report is misleading, as the authors propose to change the law in several fundamental respects (alter the analysis of effects, re-categorise some practices as ‘by object’ infringements, refine the conditions under which information is licensed).

In addition, they propose an error-cost framework that is not easy to reconcile with the approach followed by the EU courts to distinguish between ‘by object’ and ‘by effect’ infringements. Similarly, the authors discuss the possibility of applying restorative remedies, which appear to be at odds with the logic of remedial action followed, so far, under Articles 101 and 102 TFEU (and enshrined in Regulation 1/2003).

Interestingly, there is little in the report about how to implement the changes proposed. And it may not be obvious to do so. Here and there, one gets the impression that the authors envision the emergence of a parallel, industry-specific, competition law. There are all sorts of problems with this idea – as mentioned above, valuable information, network effects and natural monopolies exist elsewhere in the economy.

In any event (and this is perhaps the crucial point), the changes suggested – whether introduced case-by-case or via new sets of Guidelines – cannot be implemented by the Commission alone, in the sense that they would have to be validated, ultimately, by the Court of Justice. And this is not a foregone outcome. In fact, on issues of proof, evidence and effects (let alone the issue of expert consensus mentioned above), the case law has markedly moved in the very opposite direction. Would the EU courts change course now?

What does the report tell us about the current landscape?

The report comes at a time when competition law debates have become increasingly polarised. There were certainly differences of views ten years ago, but there was a broad agreement among authorities and stakeholders that enforcement had to rely on the best available evidence and could not ignore consensus views among experts.

Things are not so clear now. With increased polarisation, it would seem that some consider that it is enough to please the like-minded crowd. If Team Enforcement (or Team Anti-Enforcement) agrees with one’s views, then the job is done.

Against this background, the report is most refreshing in its humility and open-mindedness. Authors expressly encourage an exchange of views and acknowledge that there are many things that we do not know about these markets.

In these circumstances, the Commissioner (and DG Comp) will have to make a choice. They may choose to test the ideas proposed in the report and determine whether the views advanced by the authors reflect expert consensus and are supported by evidence. Or they may instead move forward with the proposals irrespective of whether there is a consensus.

Recent developments suggest that they may follow the second route, which for an academic is fascinating on many levels (if only because it would mark a break from the approach the Commission has pursued since the mid-1990s). We will wait and see.

And since we talk academia, I am happy to clarify (as I did in my submission) that, in accordance with the ASCOLA declaration of ethics, I have nothing to disclose.

There is much noise and too little law in many of the ongoing debates about multi-sided platforms (digital or not). For quite a while now I have been hoping to have the time to finish an article developing my view of the relevant EU case law, but I’m now coming to terms with the fact that this moment may not come in the short term.

In the meantime, here are a few slides I have used at a couple of recent events, where you will see some ideas sketched: EU Competition Law and Multi-Sided Platforms (Lamadrid)

Proposals to reform the system and create new rules are now common, and they often criticize the case law for offering unsatisfactory solutions. Until recently EU case law was criticized for being to harsh on dominant companies; more recently, it has been criticized for being too lenient. To reach these conclusions, commentators often mischaracterize the Court’s reasoning, resorting to flawed statistics or to isolated dicta.

In my view, EU case law offers a balanced approach and a sensible and prudent analytical framework to deal with the competitive ambiguity of these business models. In some cases the lessons could not be clearer. In other cases one simply has to connect the dots. Whether one wants to follow, ignore or throw away the case law, it would make sense to understand it first.

[Disclaimer and Recommendation: Since one could always legitimately claim I am one-sided, I suggest you go directly to the sources and read the case law cited in the slides, don’t take my word for granted and come to your own view. Any comments that I might (one day…) use for my piece would be most welcome!)