Chillin'Competition

The Global Competition Law Centre will be holding its annual conference at the College of Europe in Bruges (as well as online) on 25-26 March 2022. For many years, and leaving Chillin’Competition conferences aside, this has been arguably the most substantive event on EU competition law. This is a conference with no agenda other than contributing to the understanding and the refinement of our discipline. Every year it brings together a balanced mix of competition law experts from public institutions, academia and private practice genuinely interested in discussing substance.

This year’s program is available here.

I will be taking part in panel 6 on the role of the EU Courts, together with General Court President Marc van der Woude, Judge Ingeborg Simonsson and Damien Gerard as Chair. My presentation will be titled “The role of the EU Courts: a view from the Bar“.

You can CLICK HERE for further information and registration. Whoever registers via this link (and lets me know) will get a post-conference beer at my favorite bar in Bruges (here is a view from that, the, Bar).

The 2022 edition of the annual IEB seminar on “Competition Law in Hi-Tech markets” will take place next Friday 25 February at 16 .00 CET. This will be a hybrid seminar, with most speakers participating in-person at the Instituto de Estudios Bursátiles in Madrid and others joining via Teams. Should you be interested in joining, either in-person or remotely, please contact competencia@ieb.es

The program is the following:

Panel I- Recent competition law developments in hi-tech markets  (16.00-17.30 CET)

-Moderator: Lewis Crofts (MLex) 

-Nicholas Banasevic (Gibson Dunn)

-Milan Kristof (Court of Justice of the European Union)

-Alfonso Lamadrid (Garrigues)

Panel II- From antitrust to ex ante regulation (17.45-19.15 CET) 

-Moderator: Lewis Crofts (MLex)

-Pedro Hinojo (CNMC)

-Kay Jebelli (Computer and Communications Industry Association)

-Natalia Moreno (European University Institute)

-Anne Witt (EDHEC Business School)

Oxford University Press has just published the 4th edition of the procedural bible in EU competition law. EU Competition Procedure (edited by Luis Ortiz Blanco) is, as you know, an essential facility for anyone active in our field.

My very first task as an intern, in my first contact with competition law some 17 years ago, was to do research for the 2nd edition of this book. Since then I have been fortunate to join a distinguished team of authors that, in this edition, includes Corneliu Hödlmayr (European Commission), Johannes Holzwarth (European Commission), Konstantin Jörgens (Garrigues), Manuel Kellerbauer (European Commission), Luis Ortiz Blanco (Garrigues), Ralf Sauer (European Commission), Ailsa Sinclair (European Commission), Maria Luisa Tierno Centella (CNMC), Marcos Araujo Boyd, Nicolas von Lingen (European Commission), José Luis Buendía (Garrigues), Jean-Paul Keppenne (European Commission), Carlos Urraca Caviedes (European Commission), Kieron Beal, (Blackstone Chambers) and Gordon Blanke (Blanke Arbitration).

Readers of Chillin’Competition interested in buying the book will receive a 30% discount, courtesy of OUP. The discount will apply automatically if you click on this link.

Two weeks ago the CMA ordered Meta to sell Giphy. Our readers (who have always been very keen on exploring the blurred boundaries between competition law and silliness) were quick to point out that we could not let the opportunity pass to gif you a primer on the CMA’s order using Giphy’s GIFs.

Since Pablo and I have become serious people, we have invited a new contributor to blog at Chillin’Competition. From now on Areeader will be in charge of our editorial line regarding anything that may be fun, amusing, or remotely interesting. Pablo and I will take care of the rest.

Here are Areeader’s comments on a case that arguably sets a high-water mark for merger enforcement in dynamic, and animated, markets.

The background. The CMA seems to be reacting to the views of some commentators that merger control has been too lax in recent years. It has become commonplace to argue that deals such as Facebook/Whatsapp (2014) and Facebook/Instagram (2012) should have been prohibited. While there may arguably be some hindsight and selection bias at play, it is probably fair to say that some enforcers regret those decisions. And as fans of behavioral economics know, regret is a powerful factor when it comes to decision-making.

A lot has changed. Along came Facebook/Giphy, which the CMA must have seen as an ideal case to flex its muscles.

Some of you may very much doubt that this case would have raised issues in the past but, as we also know….

The CMA’s competition concerns. The CMA has explained that its extraordinary order for Meta to unwind the Giphy acquisition is based on three serious competition concerns:

-The first concern is that Meta could deny or limit other platform’s access to Giphy GIFs. I repeat, this is a serious concern. The CMA identifies a risk that other tech companies would not be able to effectively compete with Facebook and Instagram absent access to those GIFs. It’s easy to see how running out GIFs would be a problem for anyone. The treatment of GIFs as an essential input, however, raises important legal questions that will attract our community’s attention for months to come, like: are GIFs substitutable with memes?

-The second serious concern relates to the risk that Meta could change the terms of access (to GIFs) by, “for example, requiring TikTok, Twitter and Snapchat to provide more user data in order to access Giphy GIFs“). This substantive concern would appear to overlap with the first one, but it arguably helps bring out the user data argument and show that, of course:

-The third concern is that the deal could affect the display advertising market by eliminating “an important source of potential competition” (yes, Giphy). The CMA’s press release explains that before the merger Giphy had launched innovative advertising services, and observes that “Giphy’s services allowed companies – such as Dunkin’ Donuts and Pepsi – to promote their brands through visual images and GIFs“.

Regardless of your opinion on this case, we can probably all agree that the CMA could not have chosen better examples to illustrate the importance of ensuring a healthy market for display advertising:

The remedies. This is the first time that the CMA reverses a completed acquisition by a large digital platform and, inevitably, the remedy has attracted lots of attention. Facebook had offered behavioural remedies consisting in (i) open access to Giphy for new and existing partners, and (ii) creating a sale and licensing arrangement for Giphy’s content and algorithm. The CMA, however, considered that its concerns could only be addressed by Facebook divesting Giphy.

The CMA’s position might again seem surprising. It appears, however, that the CMA would rather avoid engaging in post-transaction compliance monitoring. Why? Because GIF-related competition issues are not time-limited but likely to come up again, and again, and again…

What now? Meta is reportedly considering an appeal. Given the UK’s standard of review for merger cases, battling the CMA may not be easy. We’ll be watching. (Yes, I inserted this last bit and the reference to “battling” only to justify posting a GIF of Mark Zuckerberg fencing in the metaverse).

THE END

2022 will mark the 25th edition (!) of the EU and Spanish competition law course founded by Luis Ortiz Blanco. This is a course that is particularly dear to us: I took it as a student back in 2005, and have co-directed it for the past few years; Pablo is also actively involved as lecturer and module coordinator.

The course (taught partly in Spanish and partly in English) will run from January to March 2022 in a hybrid format (attendees can participate either in person or online). Lectures take place in the afternoon (16h to 20h CET) to help make it compatible with other professional or academic activities.

As always, it will feature a great line-up of international lecturers (70 in the past edition) that include Judges from EU and national courts, officials from the European Commission, the Spanish CNMC and other national competition authorities, as well as top-notch academics, in-house lawyers and practitioners. Students are tipically officials from competition authorities, in-house lawyers as well as lawyers/economists in private practice. The course is designed to cater to all levels.

All relevant information (program, coordinators, cost, sponsors, and list of lecturers in the past edition of the course) is available here:

IEB COMPETITION LAW COURSE 2022

In addition to registering for the full course, it is also possible to register for the 1-day seminars that will be fully taught in English. The seminars in this 25th edition will be the following:

Seminar 1- Recent Developments in EU Competition Law (4 February 2022). Coordinators: Fernando Castillo de la Torre and Eric Gippini-Fournier

Seminar 2 – Competition Law in Hi-Tech Markets (25 February 2022). Coordinators: Nicholas Banasevic and Alfonso Lamadrid

Seminar 3 – Sport and Competition Law (18 March 2022). Coordinator: Marcos Araujo

Seminar 4 – Private enforcement of the competition rules (25 March 2022). Coordinator: Mercedes Pedraz

Special Seminar – Celebrating 25 years of the Course (1 April 2022).

If you want to know more, please drop us a line at competencia@ieb.es

(Guest post by Marcos Araujo Boyd)

On 6 October 2021, the Grand Chamber of the CJEU issued its much-awaited decision in respect of the legal entities against which follow-on claims may be made (link here)

This decision that will be remembered for reasons way beyond the liability of subsidiaries in a follow-on cartel claim. As suggested by the appointment of a Grand Chamber, the Court soon realised that it would have to reconsider a particularly convoluted area of EU competition law:  the theory of the undertaking or economic unit and its relationship with legal persons and groups of companies. The answer provided may be ranked alongside Hydrotherm, Viho, Dansk Rørindustri , Confederación Española de Estaciones de Servicio , Akzo Nobel or Skanska in its importance on the construction of the undertaking as a legal concept in EU competition law.

The discussion follows the order of the arguments in the judgment starting from its paragraph 31, after having dealt with procedural and admissibility issues. For a fuller discussion on the context of the judgment, the reader is invited to check my previous guest post on AG Pitruzzella’s Opinion.

The opening statements: On Giant’s Shoulders (paras 32 to 37)

After rephrasing the three initial questions as whether a victim may indifferently sue a parent company sanctioned by the Commission or an affiliate provided both entities constitute an economic unit, paragraphs 32 to 37 of the judgment recall the jurisprudence of the Court on private enforcement. The arguments feature Skanska prominently, stressing that the determination of the liable entity is a matter of EU law only, and abundantly noting the link between public and private enforcement.

While there is little new in this section, these references usefully reveal the reluctance of the Court to heed to the temptation of facilitating private claims under the principle of effectiveness or, as suggested in para 52 of AG Pitruzzella’s Opinion, by admitting that national courts affirm it without that being required by EU law. Rather, the Court builds its arguments on private enforcement over the strong shoulders of public enforcement, dismissing by implication potential divergences between the two tools. That perspective enables it to rely on its rich public enforcement case-law in the sections that follow.

The Centrality of the Notion of Undertaking (paras 38 to 44)

Following the discussion on public and private enforcement, the Court moves on to a second constitutional stepping stone, constituted by the notion of undertaking. Quoting earlier jurisprudence, the Court depicts it as ‘an autonomous concept of EU law’ that designates ‘the perpetrator of an infringement (…), who is liable to be punished’ and ‘the entity on which the Commission may impose a fine’, contrasting it with other concepts such as companies or legal persons, and observes that this notion is employed both in primary and secondary legislation, especially the Damages Directive 2014/104. It then recalls the jurisprudence on the notion of undertaking by recalling Imperial Chemical Industries, Confederación Española de Estaciones de Servicio, the 2009 and 2017 Akzo Nobel judgments and Knauf Gips before moving on to the application of the principle of personal responsibility to the undertaking and not to legal entities, an apparent oxymoron that has, not without some reaction from various AGs, featured prominently in EU competition law since ETI. That recollection ends with a surprising, yet reiterated, principle of EU competition law used in public enforcement since at least Siemens Österreich whereby the joint and several liability amongst the entities of a single economic unit applies ipso iure or automatically, no decision to that effect being actually needed, an argument that resonates differently in the context of private enforcement than when discussing a case where the separate entities have been identified in a decision following a procedure. That is, in any event, inevitable given the logic of parallelism between public and private enforcement already noted.

The consequence of the above is clear: upward and downward liability are placed on equal footing, both resulting from the very nature of the undertaking as defined in EU law, and not as a result of control or agency theory. But thar is not the end. Keep reading.

Undertakings within Groups of Companies? (paras 45-50)

After reaching the above conclusion, the Court moves on to a correction required by the problem identified already by AG Pitruzzella: the link that should exist between the legal entity against which the claim is made and the undertaking that is initially liable. It will be recalled that the AG had proposed to require an involvement by the subsidiary on the specific economic activity under consideration, for example, by selling the goods object of the cartel (see para 57 of the Opinion).

Quoting the AG’s Opinion, the Court follows its logic with a significant twist. Taking conglomerate groups as an example, the Court argues that groups of companies may contain various ‘economic units’ (or undertakings, although the judgment avoids that term in this context). This would be the case where the groups are active in ‘several economic fields having no connection between them’. It even notes that, in those conglomerate groups, ‘the same parent company may be part of several economic units made up (…) of itself and of different combinations of subsidiaries all belonging to the same group of companies’, thereby affirming that a group of companies, all linked by control, may actually contain several separate ‘economic units’.

This logic is used to solve the absurdity that a subsidiary ‘could be held liable for infringements committed in the context of activities entirely unconnected to its own activity and in which they were in no way involved, even indirectly’ (para 47). However, its impact is far reaching beyond the matter at hand, changing the notion of undertaking as hitherto regarded by supplementing the presence of ‘control’ with ‘sharing an economic field’. Wow.

It is difficult to overestimate the relevance of this logic. From now on, groups of companies may, at least where their activities substantially differ, be understood to integrate various economic units or undertakings. Worldwide turnovers used in the calculation of sanctions may need to be determined separately for each economic entity. One can not help but to note the divergence this represents with the notion of undertaking as used in the EUMR, where conglomerate groups would remain to be a single ‘undertaking’. It might even be wondered if Article 101 could apply to agreements between separate ‘economic units’ of a conglomerate group, a door that might have appeared to have been closed in Ecoservice not that long ago.

Other questions to be clarified in future cases will look at what standards may be used to tell an activity from another. Sumal has been cautious in presenting this in the context of conglomerate groups where the legal entities act in ‘several economic fields having no connection between them’, That said, it will be interesting to follow what intensity of ‘connection’ is relevant for these purposes.

That said, the answer given by the Court adequately resolves the problem of inverse or downward liability in a consistent way which is firmly anchored on the notion of undertaking. It also provides a hook to resolve the inconsistency resulting from Recital 22 of the Merger Regulation, which appeared to recognise the existence of separate undertakings within public conglomerates, an option arguably unavailable for private ones.

What About Rights of Defence? (paras 51 to 67)

Read the rest of this entry »

[Maurits Dolmans delivered one of the talks at our last Chillin’Competition conference, back in December 2019 (video available here). Maurits talked then about Sustainable Competition Policy. This subject has only continued to gain prominence, and today it is one of the hottest topics in contemporary competition policy. The guest post below could not be more timely]

This summer, the Commission adopted “Fit for 55” proposals to deliver the Green Deal, and the Council and Parliament adopted a Climate Law.  There have been calls for a reassessment of competition policy too.  Indeed, DG Comp is considering whether to adopt a more permissive approach to sustainability agreements, in the context of the review of the Guidelines on Horizontal Agreements.  Commissioner Vestager is about to decide.

When speaking early this year on this topic at the OECD Open Day on Sustainable Competition Policy, EC Chief Economist Pierre Regibeau put his finger on a sore spot.  He asked, I hope rhetorically: “Can we allow sustainability deals if that means taxing the people who buy, to benefit those who do not buy?”  

That question is of course exactly the wrong way around.  Producers and consumers impose costs on society – including climate change, large scale pollution, and loss of biodiversity – that are not included in the monetary price consumers pay.  This leads to overconsumption and a “tragedy of the commons”, the degrading of our environment, due to overuse.  These supply- and demand-side market failures are hard to resolve – why should a supplier produce cleanly if that means higher costs and rivals taking market share; why should a consumer buy green at a higher price if the neighbours keep buying polluting goods?  Eminent economist Sir Nicholas Stern said in 2007 that “climate change is a result of the greatest market failure the world has seen”. We all suffer from this collective action problem, including the consumers themselves. 

The Chief Economist should have asked “Why should we allow producers and consumers to impose costs on those who do not consume?”  Or “why should we prohibit agreements that could help reduce the social costs of climate change and pollution, if they may make the polluters pay for the damage they cause?” 

Article 191(2) TFEU leaves the Commission no choice in how to answer that question:  EU policy, including competition policy, “shall be based on the … principles … that environmental damage should as a priority be rectified at source and that the polluter should pay.”  See also here.  Article 11 TFEU demands that “environmental protection requirements must be integrated into the definition and implementation of the Union’s policies and activities, in particular with a view to promoting sustainable development.”  And for the avoidance of doubt, Article 7 TFEU requires the Commission to “ensure consistency between its policies and activities”. 

I could go on citing additional Treaty provisions saying the same (like Articles 3(3) and 3(5) TEU), but the message is clear enough: we should allow agreements that efficiently prevent or reduce greenhouse gas emissions or pollution at source, or that make producers pay for removing past emissions and repair of the environment. 

Some argue that carbon taxation and an adequate emissions trading price are a better answer (although interesting critiques appeared here and here), or prefer regulation.  But regulation is slow, and often ineffective, and carbon taxes especially are deeply unpopular. Carbon trading rights in the EU have gone up from € 25 to more than € 60 recently, but even that level is not enough to compensate for the real (and ever-increasing) social cost of climate change.  More important, carbon trading rights don’t cover all greenhouse gases, including several that are much more potent than CO₂, and cover only a fraction of the world’s economy. The revenues are not dedicated to solving the climate crisis, either.  It is counterproductive to prohibit sustainability agreements on the ground that, in theory, taxation or regulation is a better tool, when that regulation is too little, too late.  We have to use all available tools to reduce emissions, remove excess greenhouse gases, and repair the environment.

Is the threat of private liability part of the solution?  The Dutch “climate tort” judgment recently required Shell to reduce emissions by 45% by 2030 compared to 2019.  But Shell is appealing, arguing it should not be held to a standard that does not apply to its competitors.  A perfect illustration of the collective action problem.  Do we let burglars off the hook because many of their colleagues are not caught and convicted?  If everyone reasoned that way, we would never get anywhere. Would it not be better to solve the problem by allowing oil and gas companies to agree that they will all comply with at least the same standard as Shell?  A “compliance with law” agreement – of course with the right do better than the minimum required by the Paris Agreement?  (Yes, I know that may be wishful thinking, but wouldn’t it be enlightened and set a great example if they did…)  But in the meantime, resolving the Shell litigation and pursuing others will take years.

The Commission is tempted to focus on competition as the solution:  more competition means more innovation, and innovation is the answer to everything.  But as Stiglitz explains, innovation has been suboptimal, and we can’t be sure that some innovator will emerge as deus ex machina to save the world.  And competition is exactly the force that drives firms to use up natural resources and emit greenhouse gases as if there is no tomorrow.  The costs will be borne by our children and our grandchildren.

Competition is the answer only in markets where firms know that enough consumers are willing to pay to eliminate all greenhouse gas emissions (and even then, we still have to repair the damage already done).  In those markets, firms have an incentive to compete not just to be the cheapest and best, but also the cleanest and greenest supplier.  Unfortunately, in many markets, consumers do not have the willingness or the ability to pay.  That’s when cooperation should be allowed, as a complementary tool, to spread the costs, reduce the risks, and speed up reduction of greenhouse gas emissions.

A few economists, such as Prof Maarten Pieter Schinkel, argue that if we give competitors a finger, they will take the whole arm, and try to avoid having to pay for emissions reduction.  They back this up with elegant economic models.  But if competition practitioners know anything about economic models, it is that you have to check the assumptions.   They may not apply universally in the real world.  For instance (and see also here):

• Consumers are assumed to be willing to pay as much as is needed to avoid climate damage, and it is always profitable for firms to meet that demand – whereas in reality, the ICPP warns of tipping points with dramatic effect, as well as extreme weather events, meaning climate damage increases in a non-linear way. Cutting half the emissions does not cut half the climate risk, and many people do not realize the dramatic impact of climate change until it happens to them.  Because of this information asymmetry and other demand-side market failures, many consumers are not willing to pay (or pay enough) for greenhouse-gas-neutral products, and firms may lose more than they gain if they go green individually;

• Regulation is assumed to offer a fully effective solution – which flies in the face of our experience of “regulatory failure” or “political failure” of the last decades;

• Firms are assumed to benefit only from (and to seek only) short-term profit maximization, and always collude to minimise green investment or greenwash if they can get away with it, without regard to the long-term impact on them; and

• It is assumed that consumers must be fully compensated for any price increase.  Out-of-market benefits or improved access to non-market goods (say, clean air or a safe environment) supposedly do not count as compensation. 

Let’s have a closer look at the last two assumptions:

Read the rest of this entry »

[Chillin’Competition is publishing a series of posts featuring the views of various experts and stakeholders in relation to the European Commission’s proposal for a Digital Markets Act. We have received several contributions and will also be inviting some experts to ensure a plurality of informed views from a variety of perspectives. For our previous posts on the DMA see here (by Pablo), here (by me), here (by Cani Fernández, originally published in JECLAP), here (by Tim Lamb, Facebook) and here by Agustín Reyna (BEUC). Today we are happy to publish the thoughts of our friend Makis Komninos (White & Case).

I am grateful to my friends Alfonso and Pablo for giving me the space to address a topic that has not received much attention in the discussion around the Digital Markets Act (DMA) Proposal. Is there space for private enforcement? And if yes, is this a good or a bad thing? And what would be the optimal solution that safeguards the consistency and effectiveness of the DMA enforcement system? I have just finished a paper on these questions, which will appear in the Liber Amicorum of one of my long-time friends and mentors, Professor Eleanor Fox, to be published by Concurrences.  

In my view there is no doubt that the DMA will give rise to private enforcement. The fact that it says nothing about private enforcement and the role of national courts is not material. It will take the form of a Regulation and Regulations are directly applicable. Of course, its provisions must be sufficiently precise and unconditionalto create rights for individuals (and thus have horizontal direct effect). The provisions of Articles 5 and 6 will satisfy that test. As I explain in my paper, there is no difference between Article 5 and Article 6. The “specification” process for Article 6 does not affect the nature of its rules but only relates to effective compliance measures that are necessary. In other words, the rules of Article 6 are complete and apply, irrespective of a possible “regulatory dialogue” between the Commission and the gatekeeper and a possible “specification” decision.

So, as the DMA Proposal currently stands, private enforcement will be a reality. Apart from adjudicating on claims for damages or other types of relief, national courts would also be competent to grant permanent or interim injunctions and order the gatekeepers to take specific measures of a negative or positive nature. The problem is, however, that such national decisions will inevitably result in a considerable degree of fragmentation within the Union. There will be full decentralisation to the level of countless national courts of a generalist nature, which will be deciding on countless cases, leading to countless “mini-regulations” (with inter partes effects) within the EU. I am not sure people have actually realised that. Such disintegration and fragmentation within the internal market will be distractive and will entail increased compliance costs, since, instead of interacting with 1 centralised enforcer (or even with 1 + 27 enforcers, if national authorities were to be given certain competencies), gatekeepers will need to defend their business practices before an infinite number of courts. The DMA Proposal and its Impact Assessment Report spent pages to highlight the risks that a fully decentralised (to the NCAs) system of enforcement would bring and defended the choice of centralisation at the EU level. Yet, if a risk of fragmentation exists with 27 specialist administrative authorities, surely the risk is much higher with potentially thousands of generalist courts having full decisional powers on Articles 5 and 6.

For these reasons, I believe that the EU legislator should introduce certain proportionate limitations on private enforcement of the DMA rules or a “rule of precedence” for public enforcement. Private enforcement should only be allowed in its “follow-on” form. But public enforcement should have precedence and private enforcement should not be allowed in its “stand-alone” form, i.e. before the Commission has had the chance to declare the infringement of a DMA rule by a gatekeeper and has also possibly ordered specific remedies. Such a rule could be re-examined by the legislator at an appropriate time, e.g. in 10 years’ time, after the Commission and the EU Courts have had a chance to build up a body of precedent. In fact, EU competition law can offer some guidance: although direct effect was recognised in 1974, it took 40 years of case law (1962-2004) for the EU legislator to opt for a full decentralisation of the application of the rules (of Article 101(3) TFEU), with the introduction of Regulation 1/2003. It also took 10 more years for the EU legislator to introduce specific measures aimed at enhancing private antitrust enforcement in Europe, with the Damages Directive. If that was the case with EU competition law, a fortiori a degree of prudence is called for in the case of the novel regime of the DMA.

Can such a limitation would be possible and defendable from an EU law point of view? Yes. Τhe DMA is not primary law. Since it is the product of secondary EU legislation (a Regulation), it is open to EU legislation to introduce limitations on competence and on the direct effect of the legal rules it contains. I explain this further in my paper.

For the avoidance of doubt, I have always been a strong proponent of private enforcement and my 2008 monograph is proof of that. I was also the first commentator who argued 20 years ago that the Courage v Crehan ruling of the Court of Justice was something new – not many EU lawyers back then were ready to acknowledge the EU law basis of the right to damages. So my proposal is not due to any dislike of private enforcement. All I am saying is: let’s make sure that public enforcement of the DMA takes precedence for as long as the DMA is in its infancy and that private enforcement is possible only after the Commission has had the chance to take a decision. From the point of view of EU law, such a solution would be fully appropriate and proportionate. It would ensure the effective and consistent enforcement of the DMA in the Union, while avoiding fragmentation, and would also further the undertakings’ legal certainty.

Jammin’Digital is a new podcast aimed af fostering debate on all things digital in Brussels and beyond. As an exception to a series of excellent interviews conducted by Evelina Kurgonaite, its latest episode features my views about the DMA and competition law enforcement in the digital world. Nothing new to readers of this blog, but in a different format and without typos. It is available here.

There is also a great new entrant in the podcast field: Monopoly Attack (by Kay Jebelli and Friso Bostoen). It focuses specifically on tech antitrust policy. In only its first week, Monopoly Attack has already released 5 episodes, offering an overview of the enforcement landscape in the digital field and discussing the DMA proposal in detail. If you are interested in these topics, make sure to subscribe.

by Stephen Lewis

What determines the quality of a national football team?  Other things being equal, we would expect countries with a large population to produce stronger teams than those with a smaller population.  They have more people to select from. It is therefore quite intuitive that football team quality must, to at least some extent, be positively impacted by population size.

This intuition seems to be borne out if we consider pairs of countries that have markedly different population sizes but are similar along other relevant dimensions.  For example, take Italy and San Marino. Italy has a population of 60 million, while San Marino has a population of less than 50,000.   The countries are otherwise (broadly) similar with respect to other factors that might determine football team quality, such as length of football tradition, the cultural significance of football, the relative popularity of alternative sports, climate, etc.  Italy last played San Marino in 2017 and won 8-0 (having won all previous encounters on record).  Results like this certainly cast doubt on any claim that there is no link between population and football team quality.  There may even be a “minimum efficient scale” below which a national football team cannot credibly compete with leading football nations (and perhaps San Marino is below that scale).

But the question is how strong is the link between population size and football team quality and how small is any minimum efficient scale?  Answer: surprisingly weak and surprisingly small.  This is obvious from a cursory review of the international football landscape.  The two most populous countries on the planet, China and India, have qualified for one world cup between them (China in 2002).  Meanwhile, Croatia has achieved an all time FIFA ranking high of 3^rd (in 1999) and reached the World Cup final in 2018.   Croatia’s population is 4 million – smaller than the United Arab Emirates (10 million), which recently beat India 6-0.

Even ignoring the high leverage outliers of India and China and considering clusters of countries in relatively close geographic proximity where football has a similar level of cultural significance, the effect of population on performance seems remarkably weak above a certain size.  Uruguay (population: 3.5 million, FIFA ranking 9), is a match for much larger Argentina (population 45 million, FIFA ranking 8), which in turn is a match for much larger Brazil (population 220 million, FIFA ranking 3).  Similarly, Belgium (population 12 million, FIFA ranking 1) is evenly matched with France (population 65 million, FIFA ranking 2).  Indeed, today’s top 10 ranked teams include four countries with populations under 12 million (Belgium, Portugal, Uruguay and Denmark), while Germany (population 84 million) for the time being languishes in position 12.

And even amongst those countries with a very low population there are some standout national football teams, suggesting that if there is a minimum efficient scale, it may be very small indeed.  With a population of around 300,000, Iceland knocked England (population 55 million) out of Euro 2016, and reached an impressive FIFA ranking of 18 in 2018.

Quantitative studies support the view that population has weak explanatory power for football team quality.

A 2010 PWC study performed a statistical analysis in which total World Cup points were regressed against population, average income levels and a count variable based on the number of times a country has hosted the competition (with values 0, 1 or 2).  This included only 52 countries that have played at least 5 World Cup finals matches (so excluded China and India).  Even among this football-playing-country sample, population is insignificant once these other variables are included. 

Gelade (2007) finds that the relationship between FIFA ratings and (linear) total population is “vanishingly small”, finding in a sample of 204 countries that only 1% of variation in FIFA Ratings is explained by total population, and notes that this counterintuitive finding has also been reported by other studies.

The discussion above has focused on the Men’s game but considering the relative performance of teams in Women’s football reinforces the idea that factors other than population size are important for explaining football team quality.  For example, the US is ranked 1st in the Women’s FIFA ranking and 20th in the Men’s, whereas the comparative advantage arising from having a large total population to select from is equivalent for both the Men’s and Women’s teams.

Now imagine a strange parallel universe where the only two countries are Brazil and Australia.  Brazil is 10 times bigger than Australia and consistently wins when they play football.  In this parallel universe, researchers are tempted to conclude that the relationship between population and football team quality is very strong.  Not only are there sound a priori grounds for believing a larger population should translate into better football team quality, but this seems to be borne out by the only two observations available.  But this inference is not valid.  Brazil and Australia differ along various dimensions that are critical determinants of football team quality, such as footballing tradition and competition for athletic talent from other sports (football is the national sport of Brazil but football in Australia has to compete with other ball sports such cricket, Aussie rules, rugby league and rugby union).  Of course, this would be obvious in a world with hundreds of observations available; far less so in our parallel universe with two.

What has this got to do with online search engines?  

I should start by making clear that I make no claim that the apparent weakness of population scale effects in national football has any bearing at all on the strength or otherwise of any scale effects affecting search engine quality.  The lesson from the football analogy is that researchers could be fooled into thinking that they can see a strong scale effect if they compare a small number of subjects that differ in scale and quality and do not take account of other factors that also affect quality.  

My claim is that when it comes to analysing the effect of scale on search quality, competition authorities have not got far beyond the following reasoning:

Query data is used to produce search results (people are used to produce football teams).  More query data is better than less query data (more people to select from is better than fewer people to select from).  Google has many times more queries than Bing (Brazil has many times more people than Australia).  Google has much higher search quality than Bing (Brazil has a much better football team than Australia).  Therefore, query scale is a crucial determinant of search quality (population is a crucial determinant of national football team quality).

Some competition authorities have gone deeper than others, for example, by examining query level datasets to gain a better understanding of differences in the range and volumes of the distinct queries each search engine sees.    But a query level comparison of Google and Bing just confirms the obvious – Google has a scale advantage over Bing.  This, entirely unsurprisingly, implies that for any given distinct query, Google is likely to receive higher query volumes than Bing.  It follows that queries that are rare for Bing are not rare for Google, while the converse tends not to be true.  But this just supports the existence of a scale advantage.  It does not shed light on how this translates to quality and the relative importance of scale compared to other factors.  This would be like a researcher going to some lengths to establishing that not only does England have a higher population than Iceland, but also that for every left-footed person who can run fast (and who would therefore on paper make a good left wing back) in Iceland, there are 100 such individuals in England, and that for every tall agile person (who would on paper make a good goalkeeper) in Iceland, there are 100 in England.  This deeper assessment of the nature of the scale advantage should not be confused with an assessment of the explanatory power of scale for performance.

Yet the reasoning in italics above is clearly faulty. 

Companies, much like countries, differ in their histories, cultures and priorities.  Just as national football team quality may be better explained by length of football tradition, cultural factors and presence of competing sports than by population size, the quality of a company’s search engine may be better explained by length of time trying to make incremental improvements to search algorithms, the importance of experimentation and measurable improvement in a company’s culture, and the general strategic centrality of search to the company as a whole, which impacts among other things investment and hiring priorities.

These factors clearly cannot be assumed to be similar across Google and Microsoft.  This means that the extent to which scale advantages drive quality requires some unpicking.  But no competition authority to date has made a serious attempt to do this unpicking. 

So why is Google better than Bing in a given national market for search, say, Belgium?  Of course, data-scale could in principle be a factor that explains the difference in quality, and it could be an important factor.  But there’s another plausible story: it is about how many engineering hours the company has poured into improving its search engine. 

Google entered Belgium in March 2002, launching a localised version of its search engine with French and Dutch language capabilities.  Bing entered Belgium in October 2013, over 11 years later.  If search engine quality in Belgium is a function of how many Wednesday-morning-meetings search engineers have had to discuss improving search quality in Belgium, then Google might be better than Bing simply because its engineers have had about 600 more Wednesday-morning-meetings than Bing.  

So there are competing theories as to why Google is better than Bing in Belgium – is it data or is it the number of Wednesday-morning-meetings?  Both are consistent with a scale gap (under one theory the scale gap drives a quality difference and under the other it is caused by a quality difference).  Analysis of the extent of the scale advantage, even when based on granular query level data, cannot distinguish between these two competing theories.

Indeed, trying to unpick which theory is more plausible (or how much weight to place on each) is an area where competition authorities have yet to really scratch the surface.  They are still trying to make inferences on the importance of population for football team quality by comparing Brazil and Australia.