NEW PAPER | Competition on the merits
What is competition on the merits? This is the question I seek to answer in my most recent paper, available here.
The notion of competition on the merits seemed irrelevant not so long ago (that is, before Servizio Elettrico Nazionale exposed a friction in the case law). Landmarks of the 2010s such as Post Danmark I, TeliaSonera or Intel went about applying Article 102 TFEU without paying much attention (if any) to this notion.
Competition on the merits is now back in all discussions (and, for some, central to determine whether or not a given practice amounts to an abuse). Against this background, the paper seeks to answer two interrelated questions. What is competition on the merits? Does Article 102 TFEU apply to normal conduct or is an abuse an inherently ‘abnormal’ or ‘wrongful’ act?
It makes sense to start with the second. An overview of the case law suggests that normal conduct can be subject to Article 102 TFEU. ‘Normal’, in this context, means that the strategy is potentially pro-competitive (that is, firms can have recourse to it for non-exclusionary reasons) and that can be implemented by both dominant and non-dominant firms (that is, it is not the exclusive province of the former).
Exclusive dealing, tying and rebates (not to mention a refusal to deal with a third party) are all normal in this sense. However, we know well that they may amount to an abuse of a dominant position where certain conditions are met.
How about competition on the merits? The paper explains that this notion has become an irritant in the case law, in the sense that it is a source of confusion and frictions.
Tensions can be explained in part by the fact that the notion of competition on the merits was introduced at a time when the prevailing ideas about abusive conduct were very different from today’s.
In the 1960s and 1970s, it was assumed that abusive practices could be identified ex ante and in the abstract. The underlying premise was that it was possible to draw a clear dividing line between unlawful conduct and legitimate expressions of competition on the merits.
The case law that followed (as well as the evolution of legal and economic thinking) moved away from these ideas. Whether or not most practices amount to an abuse is a context-specific exercise, not an abstract one detached from ‘all the circumstances’ surrounding their implementation.
If most practices are neither inherently good nor bad and the application of Article 102 TFEU is very much context-dependent, what is the contemporary role of competition on the merits?
My argument is that the notion of competition on the merits has role to play in the contemporary case law if it is interpreted in light of the ‘as efficient competitor’ principle (which has been a consistent feature in the judgments delivered over the past decade, including in yesterday’s ruling in Superleague).
Against this background, the argument provides a positive and a negative definition of the notion.
From a positive perspective, a dominant firm can be said to compete on the merits where it gets ahead in the marketplace with, inter alia, better, cheaper and/or more innovative goods or services.
The corollary to this positive definition is that, where the exclusion of a rival is attributable to the fact that the latter is less attractive along one or more parameters of competition, the practice is not abusive. Any exclusion would be the manifestation of competition on the merits.
From a negative perspective, a dominant firm does not compete on the merits in three instances.
First, where the practice has an anticompetitive object (that is, it makes no economic sense other than as a means to restrict competition). Pricing below average variable costs is the classic example in this regard.
Second, where the strategy involves the use of assets not developed on the merits (that is, assets that have been developed with State support, either in the form of State aid or the award of exclusive rights). In this instance, which was at stake in Post Danmark II, the ‘as efficient competitor’ principle would not be the benchmark against which the lawfulness of the practice is assessed.
Third, where the practice, while potentially pro-competitive, causes the exclusion of equally efficient rivals. In the latter, instance, the question of whether the behaviour is an expression of competition on the merits and that of whether it is exclusionary collapse into one and the same issue.
Based on the above, one can classify the case law in the manner you see on the Table below:
I would very much welcome your comments on the paper. As usual, I have nothing to disclose.
Chillin'Competition 
Hola Pablo,
the term “competition on the merits” is, indeed, kind of a weasel word. In German competition law it is know as “Leistungswettbewerb”. Some time ago, the Higher Regional Court of Düsseldorf (OLG Düsseldorf, Urteil vom 21. Februar 2001 – U Kart 33/00, Rn. 52 bei juris) has given a quite accurate description: “The applicant challenges the defendant’s tying arrangement – in relation to the telecommunications market which it does not dominate – as abusive and therefore in breach of competition law, primarily because it is a “merits unrelated” (leistungswettbewerbsfremdes) or “non-competitive” (wettbewerbsinkonformes) behaviour which departs from the competition on the merits, i.e. the promotion of sales activities through its own performance. This line of argumentation certainly has its role models. It may also be that the concept of so-called merits unrelated practices (which can be difficult to distinguish from competition on the merits in individual cases) already provides an “approach” for an abuse control review. However, it would be wrong to conclude that a market behaviour which is not in line with competition on the merits (and which does not yet constitute unfair and therefore prohibited behaviour within the meaning of Section 1 UWG) per se constitutes an abuse of a dominant market position pursuant to Section 19 (1) and/or (4) No. 1 ARC. This is because the argument of being alien to competition on the merits – which is vague anyway – does not provide enough clarification for the actual point of reference of Section 19 ARC, the protection of freedom of competition and the combating of barriers to market entry, and cannot replace the balancing of interests necessary in individual cases.” (German version: “Die Antragstellerin greift das Kopplungsangebot der Antragsgegnerin — bezogen auf den von dieser nicht beherrschten Telekommunikationsmarkt — als mißbräuchlich und damit kartellrechtswidrig vor allem deshalb an, weil es sich um eine “leistungswettbewerbsfremde” bzw. “wettbewerbsinkonforme” Verhaltensweise handele, die den eigenen Leistungswettbewerb — Förderung der Absatztätigkeit durch eigene tüchtige Leistung — verlasse. Diese Argumentationsweise hat durchaus ihre Vorbilder (vgl. KG WuW/E OLG 1767, 1772; 2403, 2407). Es mag auch sein, daß sogenannte leistungswettbewerbsfremde Praktiken (deren Abgrenzung zu wettbewerbskonformem Verhalten im Einzelfall schwierig sein kann) schon einen “Ansatz” (KG WuW/E OLG 1767) für eine Mißbrauchsaufsichtsprüfung geben. Verfehlt wäre es aber, aus der Feststellung einer sogenannten Leistungswettbewerbsfremdheit eines Marktverhaltens (das noch kein unlauteres und schon deshalb verbotenes Verhalten im Sinne des § 1 UWG darstellt) per se auf einen gemäß § 19 Abs. 1 und/oder Abs. 4 Nr. 1 GWB relevanten Mißbrauch der marktbeherrschenden Stellung zu schließen. Denn das — ohnehin unscharfe — Argument der Leistungswettbewerbsfremdheit bringt zu wenig an Klärung für den eigentlichen Bezugspunkt des § 19 GWB, den Schutz der Wettbewerbsfreiheit und die Bekämpfung von Marktzutrittssperren, und kann auch nicht die im Einzelfall notwendige Interessenabwägung ersetzen (vgl. Möschel in Immenga/Mestmäcker, GWB 2. Aufl., § 22 Rdnr. 101 bis 104, m.w.N.; vgl. auch Schultz a.a.O., § 19 Rdnr. 131 f.).”)
Best,
Simón
Simón Maturana
22 December 2023 at 11:16 am
When dealing with high fixed costs low variable cost and high network externality tech and telecoms businesses, pricing to the incumbent’s average variable costs would always be exclusionary and limit or prevent entry. Telia Sonera and other cases recognise this. Your table doesn’t adequately present the point – it’s a table so no doubt there has to be something of a summary about it. Maybe you could make the above point as a clarification?
Tim Cowen
22 December 2023 at 11:30 am