The dangers of the notion of competition on the merits (and how to address them)
The notion of competition on the merits (which I recently discussed in a paper here) would have been aptly described, until recently, as a relic of the early days of Article 102 TFEU. Just take a look at the case law of the past decade.
Landmarks from Deutsche Telekom and TeliaSonera to Intel and Slovak Telekom (not to mention the Post Danmark saga) ignored competition on the merits altogether. At best, the notion featured in the old formulas taken from early judgments. In practice, however, it played no role in the assesment.
There was a good reason why competition on the merits was disregarded in the long decade preceding Servizio Elettrico Nazionale. It had been accepted that most potentially abusive conduct is normal (by which I mean that it has a pro-competitive potential and that it is also routinely implemented by non-dominant firms).
For instance, the fact that a practice is, objectively speaking, a product improvement does not insulate it from scrutiny under Article 102 TFEU.
The main conclusion to draw from this consistent case law is that authorities cannot be required to show that a practice is an abnormal method of competition. Typically, an abuse can be established by showing that the contentious conduct is a source of actual or potential effects in the relevant economic and legal context.
Things have changed. All of a sudden, it looks as if the notion of competition on the merits is central to the interpretation of Article 102 TFEU. Deciding whether or not a practice is a legitimate method of competition now seems to be a key step in an abuse of dominance investigation (at least in some quarters).
As I argue in my paper, this perception is not only difficult to square with the case law, but it is also dangerous. It is dangerous in the sense that it risks taking law and policy back to the stone age. If not handled with care, competition on the merits may pave the way for the comeback of intuitive and informal analysis (which we thought had left us for good).
Consider the example of tying. Is this practice a ‘normal’ method of competition? It certainly is. Decades of experience and formal analysis show that it is potentially pro-competitive (we know that the combination of products and of features can improve the competitive process in several ways).
We also know that tying is pervasive in the economy. Both dominant and non-dominant firms routinely engage in tying, typically for non-sinister reasons. In other words (and to come back to the vocabulary used in Servizio Elettrico Nazionale), non-dominant firms can (and do) ‘replicate’ the conduct.
In fact, tying illustrates (perhaps better than any other practice) the limits of the ‘replicability test’ at which the Court hinted in Servizio and reveals, moreover, that the said test is underinclusive (it would lead to Type II errors).
In spite of the above, tying can be caught by Article 102 TFEU if, absent an objective justification, it is a source of actual or potential anticompetitive effects in the relevant economic and legal context.
The key consideration is not whether this practice can be categorised as falling outside the scope of competition on the merits, but whether, in a particular factual scenario, it causes net harm on the competitive process. An authority (or claimant) cannot and should not be expected to establish, in addition to the effects, that tying is at odds with competition on the merits.
This (well-established and uncontroversial) analytical framework risks being replaced by intuitive, informal analysis that revolves around deciding whether tying is a legitimate method of competition (or an abnormal one instead).
We already have examples of this intuitive interpretation of Article 102 TFEU. Coming back to the example of tying, some commentators have argued that this practice is not competition on the merits insofar as it deprives customers of choice (presumably the possibility of acquiring the tying product without the tied product).
Crucially, these intuitive claims are made without the support of any theoretical and/or empirical evidence. They are an expression of what we might call a ‘vibes-based approach’ to the interpretation of Article 102 TFEU.
My point in this post is that this ‘vibes-based approach’ is not only at odds with the case law (the Court has consistently emphasised the importance of experience and economic analysis when construing competition law provisions), but also risky.
First, intuition and informal analysis would make enforcement less rigorous. Second, they would make it less predictable, since the established body of knowledge may be disregarded altogether in favour of ad hoc, impressionistic evaluations. Third, they would pave the way for the arbitrary and capricious interpretation of the law. ‘Vibes’, by definition, cannot be meaningfully challenged before a court, because they are just that – vibes.
Finally (and more importantly), intuition and informal analysis distract us from the fundamental substantive issues. Rather than focusing on the net impact of a practice on the competitive process, the assessment would turn into pigeon-holing and semantic discussions.
What is the solution? How can the risks associated with the notion of competition on the merits be addressed?
The solution, I argue in my paper, is simple: it is a matter of following the case law. As far as the vast majority of practices are concerned, the question of whether a practice is, in principle, an expression of competition on the merits and that of whether it can cause anticompetitive effects are one and the same. Showing the latter implicitly proves the former.
This is not only the approach that the Court has consistently followed since the early 2010s, but the one that ensures that law and policy remains rigorous and grounded on the best available expertise. Authorities (which would not be wasting precious resources arbitrarily categorising practices) would also gain from this approach (as would the system as a whole).
Chillin'Competition 
I am begining to think it was a mistake to conceive of competition policy enforcement as a legal endeavour. It seems to me that it is a public policy tool masquerading as a body of law, the results of which pinball around without reason from court to court, from time to time and from case to case, with no coherence or indication that it is heading down a a path to improvement.
A property of a desirable system in my view should be that ambiguity is decreasing throughout time as new cases clarify the meaning of the law, but this doesn’t seem to be happening, at all. Advising a client today on what is or isn’t anticompetitive is no clearer than it was 20 years ago.
– Sincerely, a frustrated competition economist.
Tom
14 February 2024 at 5:45 pm
Thanks, Tom, for sharing your thoughts
I can understand the frustration, as the law does not evolve, unfortunately, in a linear fashion. Eppur, si muove
Pablo Ibanez Colomo
16 February 2024 at 8:22 am
Pablo:
I totally agree with your comment. Relying on the notion of competition on the merits is taking competition law and policy back to the stone age.
Unfortunately, I have the impression that decisions by the Commission and NCA, consciously increase the number of times they refer in their decisions to this concept, and to “special responsibility”, the other classical Article 102 empty mantra, to avoid having to prove the anticompetitive effects of a certain practices, that are, otherwise, pervasive in the market.
It is surprising that, after so many years repeating these two key concepts ion the application of Article 102, neither the Commission nor the European Court have been able to properly define the scope of these mantras, thus allowing firms to distinguish when a commercial practice may be deemed contrary to Article 102 and give rise to multi billion fines. The AEC was a step in the right direction, but as we can see, a step that the Commission now regrets to have taken.
Assuming that neither the Commission/NCA, not the ECJ, want to abandon such vague concepts, they should at least remember that a conduct should only be prohibited as not to being competition on the merits if, and only if, it has previously been shown that it can cause anticompetitive effects; and not the other way round.
Rafael Allendesalazar
15 February 2024 at 6:35 pm
Thanks, Rafa, as always, for the insightful comment
As far as I can gather, (some) dominant undertakings have played the competition on the merits game, too (perhaps in the hope that requiring authorities to show that the practice is not an expression competition on the merits would make it harder to prove an abuse).
You mention a crucial point, in my view. My fear (which I understand you share) is that, as soon as a practice is cast as ‘abnormal’, or not in keeping with competition on the merits, everything else will become irrelevant (including the assessment of anticompetitive effects). The concept of competition on the merits, in other words, risks obscuring everything else (everything else being, incidentally, what really matters, as you say)
Pablo Ibanez Colomo
16 February 2024 at 8:30 am
It find it absolutely remarkable that the economic profession and a handful of legal academics are putting so much effort into fighting against a notion (admittedly not always easy to delineate) that has been in the case-law for decades and was prominent also in every single judgment after 2010 (which all refer to less efficient competitors not being protected against “competition on the merits”, including Post Danmark I, see 22, 25, or Intel, 134, 136).
All the cases you mention that allegedly “ignored” the notion actually mention it. One could argue that part of the test in those judgments encapsulated whether or not the pricing practice at issue (all cases you mention are about pricing practices) was competition on the merits (or not).
Meritocracy
18 February 2024 at 12:17 pm
Thanks very much for the comment and for taking part in the discussion. Your perspective is really valuable, even if we do not appear to disagree all that much (if at all).
First, because I fully agree that there is no point in “fighting” the notion of competition on the merits.
If you take a look at my paper (your thoughts would be really welcome), the challenge is to reconcile different strands of the case law and to avert the dangers that come with the notion of competition on the merits, not abandon it.
Second, the case law of the 2010s did refer to the notion of competition on the merits (which I acknowledge), but the notion played no role in the assessment. Take ‘margin squeeze’, for instance. Deutsche Telekom and TeliaSonera go about establishing whether the practice is an abuse without ever ascertaining if it is competition on the merits.
In this sense, I fully agree with your last point. In fact, I develop it in the paper and, indeed, this very post. In some instances, the issue of effects and that of whether a practice is an expression of competition on the merits collapse into one and the same. Establishing the former proves the latter, in other words.
The above said, it is important to acknowledge the risks that come with informal and intuitive analysis. Failing to do so would be a disservice to the competition law community. Where impressionistic, ad hoc evaluations replace the lessons of experience and economic analysis, we all lose. As you say, the notion of competition on the merits is not easy to delineate, which means that the temptation to jump to short cuts or to crude approaches is always there (and that this risk needs to be anticipated and averted).
Thanks very much again!
Pablo Ibanez Colomo
18 February 2024 at 12:32 pm