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Archive for April 5th, 2019

The report on ‘Competition policy for the digital era’ is out: why change the law if there is no evidence? And how?

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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.

Written by Pablo Ibanez Colomo

5 April 2019 at 9:47 am

Posted in Uncategorized