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Can This Be the New Normal? 10 Questions on the Proposed New Competition Tool

with 9 comments

Last week the European Commission launched a public consultation in relation to a proposed “new competition tool”. The impact of this “tool” on competition law and policy would be impossible to overstate. It would be likely to change competition law as we know it, and as developed over decades of thinking, debate, precedent and experience.

The goal of the tool is to identify “structural risks” that cannot be addressed under Articles 101 and 102, and under the merger rules. These include markets that risk tipping, unilateral practices by non-dominant firms or oligopolistic market structures. In the face of those risks, and even absent any infringement, the Commission could then impose behavioural or structural remedies (e.g. divestments, break-ups and other line of business restrictions). The Commission explains that the scope of this tool would not necessarily be limited to digital markets. 

This new initiative would have been unthinkable only a few months ago. But then again, we live in a strange new world. Let me give you just one additional example: in a report also published last week, the Austrian competition authority proposed to “reverse the burden of proof” in cases where “official investigations rapidly come up against natural or technical limits” (!).  As explained here, and by more authoritative people than myself, this was, and should still be, something “hard to conceive, at least in free democratic societies”. I have trouble accepting that these ideas might be the new normal.

The proposal of a new competition tool also raises too many important questions; here are just a few as an appetizer. We will have time for more in the future. [Disclosure: Just like virtually every competition lawyer/economist, I have a large number of clients that would be potentially affected by this proposal, and they might have different views about it; these are just my own].  Please feel free to engage with these questions, particularly if you have different views.

  1. Would there be an overlap between the new tool and Articles 101 and 102? The justification for the tool is that there may be concerns that “the EU competition rules cannot tackle or cannot address in the most effective manner”. Is the idea to cover alleged “gap” cases only, or also concerns that could be addressed under competition law but that it would be harder to prove under an infringement procedure (e.g. because there are clear evidentiary standards)? Overlaps could be problematic (see the next question below). And if the Commission wants to avoid potential overlap, then it should make clear the type of “concerns” that fall outside the scope of the competition rules (e.g. self-preferencing absent indispensability?) I doubt one may want to do that.
  2. The key question, and the limitations of the legal basis: Would the tool have the object or the effect of bypassing the intervention standards set by the EU Courts in relation to Articles 101 and 102? This is, in my mind, the real question. To the extent that there may be a material overlap, this would become inevitable. As explained here and here, I think it would be unwise to ignore the lessons learnt over the years (I don’t buy, and will actively combat, the new argument that “judges don’t get it”). But my point today is a different one: there is no legal basis for the Commission to bypass the content of Articles 101 and 102 as interpreted by the EU Courts. The Commission has explained that the competition legal basis for the proposal would be Article 103 TFEU. This provision only enables the adoption of legislation to “give effect to the principles set out in Articles 101 and 102”, “ensure compliance with the prohibitions” or “define the scope of the provisions”.  Any new tool based on Art. 103 TFEU would need to be consistent with the provisions of the Treaty as interpreted by the Courts (regarding, for example, the burden of proof, the notions of restriction of competition, dominance, anticompetitive effects…). The Treaty provisions deal with restrictions of competition, but can arguably not be the legal basis for measures that seek to create new competition. 
  3. Do we want to bring the definition of the substantive scope of the competition rules to the realm of politics? Competition law has historically been judge-made law, in the belief that this would ensure its flexibility, adaptability, and its isolation from small politics. Until now, only the Commission and the Courts have played a role in defining the material scope of the competition rules. Legislative initiatives under Art. 103 TFEU were limited to merger rules and procedural matters. Again, the times they are-a changin’. This may (for better or for worse) cross what until now was a red line, potentially changing the discipline. It may seem the Commission is obtaining new powers, but it may be at the risk of losing its preeminent role in defining the rules.
  4. Is there really a blind spot in competition law? We dealt with that in a recent post. There are few, if any, areas of the law as flexible and malleable as competition law. Are there really gaps? I, for one, trust in the ability of the Commission to bring, and win, cases where a real problem exists. Have DG Comp’s existing sectoral powers let us down? Remarkably, not so long ago the sentiment was that competition law was unduly harsh to dominant firms (I didn’t buy that then, and I don’t buy the opposite now). That competition law may not reach where some people would like it to doesn’t mean there is a gap. Having to analyze practices on a case by case basis is not a flaw, but the only way to get it right.
  5. Can the pace of competition enforcement give rise to irreversible consequences? Two questions here: is there any case where we know that earlier intervention would have made a change? If you think about it, even the tech cases that have taken a number of years (e.g. Google Shopping) were ultimately precautionary in nature (i.e. concerned about likely potential effects). If the decision had really come too late, it should have been easy to make a case about actual effects. Also, can we all agree that  competition authorities need more resources and that this would also help speeding up cases? 
  6. Are remedies the problem? You may have lately heard on the conference circuit that cases are good but remedies are horrible. It’s clear why one would say that, but it can be a legitimate view. The way we see it, though, remedies, and their outcome, often tell you a lot about how solid a case really is. Imagine a fictional case where there would be no causality between the conduct found as abusive and its alleged effects (for example, because the domco’s market share was due to superior quality). If you impose a remedy targeting that conduct, the remedy will of course not have any impact. Arguably, the remedy’s failure would simply expose that the conduct wasn’t a problem  in the first place. If one believes that the theories of harm underlying  a decision are sound, and we believe that a compliant remedy is insufficient, why don’t we simply draft decisions differently? 
  7. How to ensure the proportionality of intervention? Under current EU competition law (and except in Art. 9 commitment scenarios) remedies need to be proportionate to undoing the consequences of an alleged infringement. Some people believe that the advantage of the new tool is that it would enable the Commission to impose more far-reaching remedies because, as there would be no infringement, there would be no need to ensure proportionality to it. This is a curious logic: since a company did nothing wrong, it can be treated worse. Where would then lie the proportionality limits? The Inception Impact Assessment explains that “these remedies would increase costs for the companies concerned. The proportionality of the costs incurred would be ensured by the fact that such remedies have to be limited to ensuring the proper functioning of the market under scrutiny”. You can judge for yourselves whether that dispels concerns.
  8. What impact on international convergence? The EU competition law system of objective, expert-based and fair enforcement has been a model to other jurisdictions and has inspired many important legislative initiatives around the world. The creation of new standards, the imposition of remedies absent an infringement and the wide margin to identify the situations in need of intervention could also be replicated in other jurisdictions with arguably less guarantess. Be careful what you wish for. The CMA experience is cited as the basis for this new tool, but not all jurisdictions have the UK’s checks and balances. There are in any case lessons from the experience there. The UK has chosen not to use that tool for tech issues when it could have, believing that other tools would be preferable. Why? Where has the CMA done a better job in a market than DG Comp? Was it because the CMA could act faster or because of something else?
  9. Would the new tool be of a “non punitive” nature? The Inception Impact Assessment insists that the options considered would entail no finding of infringement, no fines, no damages claims. Why that emphasis? There may be an assumption that a new regulatory tool would be able to do away with some burdens, including the burden of proof. The “advantage” of the new tool is that one could impose even stricter remedies, without having to establish any wrongdoing. That seems like a win-win for some. But think about it again: companies may face stricter remedies than under quasi criminal competition law, with less procedural rights, and even if they haven’t done anything wrong. This doesn’t mean there is no punishment; it means there would be punishment without the crime and without limiting principles. Would a new tool compliant with the standards that the ECHR sets for liberal democracies? How would we be able to challenge other countries if they start adopting adopting harsh remedies (against companies or individuals) absent wrongdoing but in response to perceived threats?
  10. Do we really want this to be the new normal? The “new tool” would not be a mere technical refirenement; it goes much beyond that. We can no doubt make improvements, but we should be extremely careful not to cross red lines. In competition law (and perhaps even more in competition economics) we have become accustomed to the absence of bright lines and we dislike restrictions, but the law does by nature set some limits to what we all can do (and this goes both for companies and public authorities). Legal rules are but the wise restraints that make us free. It may be frustrating, but we know from experience that it is much better than discretion. This doesn’t mean we should necessarily be satisfied with the “status quo” (without some friction there may not be progress), but we shouldn’t compromise basic principles in the search for solutions. The European Union leads with values, and the balance of justice that makes us proud depends on our taking an evidence led approach to competition law subject to clear standards and thorough judicial review.

Written by Alfonso Lamadrid

11 June 2020 at 11:34 am

Posted in Uncategorized

9 Responses

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  1. Good points. My 2c after a brief analysis were the following:
    – How do you define a ‘tipping’ market? Who identifies it? Does the Commission do it alone or is it a process involving companies active on the market?
    – How do you identify a market which does not produce the optimum competition results? How far off must it be for intervention to be justified?
    – How do you identify what amounts to a competitive outcome? Is it competitive now? in 2 years? In 5 years? Do we keep on meddling? Microsoft sold less than 2000 units of the WMP-free Windows, so…
    – How do you account for the chilling effect of interference with the market? Who will invest in a new market when the prize is not the market itself, but potential regulation taking all the reward away?
    – Will this affect merger control, from SIEC to ‘potentially cause structural competition concerns’?
    – How to you reconvene the Commission’s powers with those of sector regulators?
    – Do we even care about the AEC test? Do we support competitors now, not just efficient ones?
    – Do we think all network effects are bad?
    – The theory used to be that, absent bad regulation and infringements, markets will regulate themselves. It seems that’s no longer the case, and Adam Smith is discarded for good.

    Adrian

    11 June 2020 at 2:04 pm

  2. This seems to me a little hysterical. The market investigation tool appears as you say designed to reflect the CMA’s powers which have for more than 15 years been exercised sensibly and often to good effect (though certainly a great deal has been learnt in making remedies more effective over that period). In that sense this has been normal for a long time, its an old normal and this is simply a sensible step to catch-up.
    In that context, what checks and balances does the CAT provide on the CMA that would not, or could not, be applied to the Commission? Of course the CMA has not yet decided whether or not to use that tool in tech, but if it does not, as indeed is suggested in the interim report, then that certainly does not suggest any doubts about the value of the tool, but rather recognition that the Furman review and government response to that has already set us on a path towards legislation for an ex-ante regulation. In other cases the market investigation tool will fulfill the role of the Furman review and identify to government the need for remedies (which might involve regulatory intervention). Furthermore the set-up of an ex-ante regulator is in any case unlikely to prevent the use of the market investigation tool in future to examine specific digital markets (see those market investigations into other regulated markets such as electricity, airports, banking and so on). Hence the two tools can certainly be effective complements.

    Stepping back a little, an economic basis for competition law is rightly highly valued by many of us, and so i’m surprised that this effort to plug the economic gaps in the commission’s toolkit are not welcomed. for example, as in the US monopolisation rules, unilateral conduct by non-dominant firms can certainly have anti-competitive effects (if the effect of the conduct is expected to lead to ex-post dominance then lack of ex-ante dominance doesn’t matter), and so there’s no economic basis for overlooking those. In addition, where there are demand-side or hold-up problems in markets these can create market power for firms to exploit and these economic problems are surely much better addressed through a holistic diagnosis of the features of a market that adversely effect competition, rather than by relying on excessive pricing/exploitative abuse doctrine which in theory makes firms liable for carrying out what often remains (rightly or wrongly) a duty to their shareholders (and hence are rarely applied). Finally excessive concentration, whether it be through organic growth, rent-seeking, a series of smaller acquisitions, or exits of rivals clearly can create market power for firms to exploit. The US obviously take the line that such exploitation is fine since it offers a reward for innovation. However in the UK we worry about those other sources of market power and their effects and we use market investigations as a tool to address them, moreover the EU is already obviously not fine with the exploitative abuse of market power that has been built without exclusionary conduct. Hence this market investigation tool is not a radical step, it is simply trying to plug gaps in the tool set that we use to make markets work effectively.

    Anyway, it is great to get a concise articulation of people’s worries here since its been a genuine mystery for those of us who have never understood the EU’s lack of such a tool – it always seemed like trying to swim with one-hand tied behind you back. so many thanks for that.

    chris pike

    12 June 2020 at 12:23 pm

    • Many thanks for the comments, Chris. We all highly value the economic basis for competition law, and that’s why economic lessons and trade-off need to be incorporated in predictable and flexible-but-stable legal rules. Legal rules structure the discussion, reflect those trade-offs, manage uncertainty and mitigate discretion. I think we can all agree on that.

      This post concerned mainly legal issues, but let’s pretend we can leave those aside and focus only on the economics. The proposal seems to be premised on a great degree of confidence that one can, for example, (i) predict what markets might tip; (ii) determine whether that tipping is due to competitive problems or other reasons; (iii) devise some sort of public intervention that will prevent/correct tipping; (iv) do this in a proportionate way that does not compromise welfare enhancing elements or incentives. I get that people see shortcomings in legal rules, but is this confidence in our economic knowledge justified with the evidence available?

      Competition law has never been a tool for the optimization/fine-tuning of market outcomes in light of more or less idealized benchmarks (one would need a lot of confidence to do that). That’s why, in my view, this would change the nature of the discipline.

      The UK did not use this tool in a context as polarized and politicized as the current one in the EU regarding digital and with so many interests at stake (note also that the institutional set up of the CMA as an enforcers is, for better or worse, different from that of the European Commission). Can you imagine the public and private pressures that would be exerted on the Commission to make use of this tool in particular cases to advance private interests?

      Thanks also for articulation of a reasonable opposing point of view. In other occasions I’ve at times felt like the best argument against these reforms is a 5 minute conversation with some of its most fervent supporters.

      Alfonso Lamadrid

      12 June 2020 at 1:26 pm

  3. When it comes to tackling the negative effects of tacit collusion, a new tool would fill a gap. Tacit collusion may cause the same effects as a cartel. Whereas the cartel is prohibited; tacit collusion is legal.

    Designing remedies to stop tacit collusion would of course be challenging.

    Arvid Fredenberg

    12 June 2020 at 1:09 pm

  4. Arvid is absolutely right to highlight another economic problem that can potentially be tackled through a market investigation. Given this and the other common market failures that I mention above I would argue the economic case for a market investigation tool is overwhelming – whether or not there are any markets that tip. After all the tool was developed well before any digital platform was even envisaged. So there certainly is a blind spot/gap (question 4). Of course Alfonso you are right that we need appropriate legal frameworks for the tools that we apply to address these economic problems. Hopefully the consultation succeeds in identifying that framework.
    I would also point out that the market investigation tool has been used to address the most politicised topics in the UK – again think banks, electricity, audit, supermarkets and so on. In each case it brought evidence and rigourous analysis to these highly polarised and politicised market issues which drew the sting out of passionate arguments over those markets. The CMA stood up to those pressures you describe and the legal framework in which it applied the tool was key to being able to do so. Therefore as I say, I hope that constructive submissions to the consultation will help build a framework that works in a European context. Challenging the economic rationale for the tool on the other hand is a different matter. On that it seems odd to me to argue that DG competition has no business seeking to address ineffective competition in european markets (I’m afraid that describing that as ‘fine-tuning’ or attempting to reach an ‘idealised benchmark’ simply bears no relation to the reality, do read some of the CMAs remedy analysis to get a more realistic take on the modest improvements that it seeks when operating within its market investigation framework). In any case the tool would change the ambition of EU competition policy. On that I think we can agree. Whether that is a valuable and necessary change given the gaps in our toolset and the performance of the markets we rely on for our shared prosperity is the key question. I look forward to following the debate on that.

    Chris Pike

    12 June 2020 at 11:53 pm

  5. Why am I missing the description of the new “competition rule”?

    Jaime Taronji Jr

    26 June 2020 at 3:54 pm

    • The first hyperlink in the post will take you to the Commission ‘s description of the options under study. Thanks!

      Alfonso Lamadrid

      26 June 2020 at 3:57 pm

  6. […] the bounds of those initiatives have already been totally dissected (e.g. here, here, here), a basic query appears to have eluded discussions: What are authorities attempting to realize […]


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