Chillin'Competition

Supermarkets are often presented as serial competition law offenders. Some commentators simply assume that it is a highly concentrated industry that makes supra-competitive profits. From this perspective, they would be the epitome of the tight (and evil) oligopoly. According to other accounts, however, high prices are not the problem, but excessively low ones. Some see with genuine concern that supermarket chains compete vigorously across some product categories. The exercise of unilateral market power vis-à-vis suppliers has emerged as a third popular topic in recent years. The idea that there is something wrong about retailers favouring their labels and/or with them competing vigorously with manufacturers at the downstream level has become a popular one.

It is hard to believe that these claims can all be true at the same time. The reality of the industry must be far more complex than commonly assumed. I thought of all of this when reading about Tesco’s recent troubles. The consensus among analysts is that a significant part of the company’s problems – currently the leading supermarket chain in the UK with a market share of around 29% – is the consequence of strong competition from hard discounters such as Aldi or Lidl. Incumbents have a hard time meeting the prices of the two German chains, which are relatively recent entrants in the British market.

Why do I say all this? Well, because sometimes there may be a gulf between popular belief and the reality of markets. The problems in the supermarket industry are assumed to be so rampant and fundamental that the European Parliament became involved and – in line with the growing tradition – sector-specific regulation addressing the perceived problems was discussed and contemplated. In such situations, the best competition authorities can do is assess rigorously whether such claims are really justified, even if it means not taking any measures in the end. In fact, I wrote a while ago that a major task of competition authorities is to lead by inaction, which means that sometimes their remit is to explain clearly to the wider public why concerns are not justified, why the market is working in the interest of consumers or why sector-specific regulation could have the perverse effect of stifling competition. This is how I interpret what the Commission did recently in relation to supermarkets.

The groceries sector is also interesting in that it shows that there are necessarily winners and losers when markets evolve. The fact that some companies are driven out of the market does not always mean that it is the consequence of anticompetitive conduct. The exclusion or marginalisation of some players may simply mean that the conditions of competition are changing. In this sense, indicators that rivalry among supermarket chains in the UK is fierce may be interpreted as suggesting that vertical integration is merely a logical reaction to the new conditions of competition, and not an unlawful strategy limiting – enter the buzzwords – choice and innovation.

As I was thinking about the above, I received an email from Caron Beaton-Wells (Professor of Law at the University of Melbourne) informing about the launch of a research project about the industry (Supermarket Project). I wish her and her team the best of luck and I look forward to the findings!

In other news, and to indulge in some self-preferencing: I am delighted to report that my co-blogger has (once again) been the sole non-partner listed in the 2015 edition of Chambers Europe. Congratulations on the richly deserved achievement! Knowing how Spanish law firms work, he should be able to repeat the feat a good number of years… 😉

We have just learnt that Ian Forrester -our first Friday Slot interviewee and actually the person who named the Friday Slot– will be a Judge at the General Court replacing Judge Forwood. The addition of a distinguished competition law expert to the Court is always good news; congrats to him. For his interview with us, click here.

The ECJ is again news due to the controversy surrounding the planned duplication of Judgments Judges at the General Court. The tension seems to have mounted and some internal documents have become public. For the Financial Times‘ piece on this topic, click here: “The 1st rule of ECF Fight Club is about to be broken“. And speaking of the FT, I was quoted in it today in a piece on the Apple State aid case (see here).

I hear very often that the outcome of Google depends on whether you call it a refusal to deal or a tying case. If one sees it as a refusal to deal case, then it would be necessary to establish, at the very least, that non-discriminatory access to the search engine is indispensable. If not, the threshold would be much lower (although the Commission committed to establish anticompetitive foreclosure in tying cases in the Guidance). This approach cannot be right. The legal test that applies to a practice should not depend on what one ‘sees’, or on picking the words that one prefers (and which, no surprise, tend to coincide with the legal test that one also prefers).

What should matter when thinking about the applicable legal test to a given practice is the underlying issue, and in particular whether it is closer in nature to those underlying refusal to deal cases or tying cases instead. How could one draw the line between one and the other? This is a topic that I discuss very often in class with my students. The easiest way to go about the question is to think backwards about the case. In other words, it makes sense to think first about the remedy and then about the legal test.

In technology markets, it is not always easy to distinguish between tie-ins and refusals to deal, in the same way that it is difficult to distinguish between vertical and conglomerate mergers. What is clear, on the other hand, is that remedies in tying and refusal to deal cases are very different in nature. This explains, in turn, why the legal test under Article 102 TFEU is also very different.

The typical remedy in a tying case is an example of the good old, unsophisticated competition law. The likely or potential anticompetitive effects of tying can be easily addressed by breaking the tie-in, that is, by preventing the dominant firm from conditioning the acquisition of one product to the acquisition of another. Once tying is prohibited, concerns about the ability of the dominant firm to extend (or strengthen) its position on the market for the tied product disappear.

The remedy in refusal to deal cases takes competition law out of its comfort zone. Remedial action is no longer about a one-off, proscriptive form of intervention but about positive obligations that require monitoring. If a refusal to deal is found to be abusive, it is inevitable that the remedy will regulate the conditions of access to an input or a platform owned by an integrated firm. Remedies will, as a result, greatly interfere with the way in which a company does business. These are some of the reasons why competition law has traditionally limited to exceptional circumstances the instances in which regulated access obligations are imposed on a dominant firm.

The fact that concerns are addressed by means of access obligations on regulated terms and conditions tells you something else about the underlying issues in a case. If the dispute relates to the conditions of access to a platform or input, it also means that it does not really involve two separate products, as is in principle required in tying cases (just take a look at the Guidance). The dispute, in other words, relates to a complex product that integrates different components and not to a tie-in of distinct products. What about the Internet Explorer case? Was it not about access and tying at the same time? Indeed, but bear in mind it also was a commitments decision, which did not address substantive issues. In fact, I fully agree with the view, taken by some authors, that it was a refusal to deal case in disguise.

Where does the above leave us in relation to Google? I have written several times in the blog that I suspect that the underlying issues in the case are closer to those at stake in refusal to deal cases (hence why I mentioned last week that I am not convinced that anticompetitive foreclosure would or should suffice). It seems now clear to me that the Commission does not challenge the integration of Google’s services into the search engine, which suggests that talking about distinct products would be entirely artificial. This issue became very clear when the different rounds of commitments were discussed. The Commission has now explicitly mentioned that the remedy should be non-discriminatory access to the platform.

One could wonder whether it has become meaningless to distinguish between refusal to deal and tying cases. If drawing the line between the two is so difficult in practice, would it not make more sense to require anticompetitive foreclosure across the board, and get rid of the indispensability/new product conditions? I think it would be a terrible idea. The reasons why the legal test in refusal to deal cases is so strict are in fact as compelling as ever given the shift of the discipline towards IP-intensive and technology-intensive markets.

A separate question is of course whether the indispensability and new product conditions will be watered down in EU competition law to the point that they are no longer reliable indicators of administrative action in the field. In one way or the other, and irrespective of what courts and authorities formally say, we may end up in a situation in which, for all practical purposes, the test applying to refusals to deal and to tying cases is the same. I am more inclined to agree with this question, which is not one of principle. This is a phenomenon in which I am interested and which I follow closely. Who knows, maybe I will teach my students in a few years’ time that the Microsoft saga was the first nail in the coffin of the refusal to deal doctrine and that Google was the definitive one.

The Google case has kept us distracted from other interesting issues. Of the recent developments that keep piling up (including this one), Commissioner Vestager’s proposal to launch a sector inquiry into e-commerce is arguably the most relevant. The expression e-commerce is used in a relatively expansive way in the Commissioner’s anouncement, as it encompasses a variety of activities that do not necessarily belong together (other than, I suspect, involving the use an electronic device like a smartphone or a computer).

The context behind the proposal is well-known, but is precisely what makes it particularly interesting. The new Commission has given priority to the so-called Digital Single Market. The (explicit) purpose of the sector inquiry is in fact to explore the contributions that competition law can make to the policy agenda of the institution. The use of competition law as a tool to explore the feasibility of initiatives that are, more often than not, eventually addressed via ad hoc legislation has become something of a tradition (and, as far as I am concerned, a research topic). Just think of roaming or energy. In this sense, it is remarkable that the announcement itself openly presents the sector inquiry as a contribution not only to EU competition law but to other policy initiatives.

I look forward to some of the findings. According to the announcement, the Commission will examine whether there are barriers to e-commerce that limit access to websites from other Member States, based on their location or the credit card details. One would have assumed that, following the adoption of the Guidelines on vertical restraints (in particular following the ruling of the ECJ in Pierre Fabre), these issues were clear for stakeholders. It will therefore be interesting to see whether soft law instruments are truly effective in changing business conduct. And, why not say it: there is so much going on in relation to vertical restraints that some enforcement action in the area would be exciting.

The issue of geo-blocking is trickier. The statements made by several Commissioners in recent months suggest that European consumers should be able to access the content of their choice from the website of their choice. From this perspective, subscriptions to pay TV services should be accessible from anywhere in Europe. The announcement insists on the idea that geo-blocking of websites or of content is plain unacceptable.

It is not that I would be opposed to such an outcome, it is simply that it is not obvious to say that the phenomenon of geo-blocking is the consequence of an infringement of competition law provisions (as opposed to an undesirable phenomenon from a policy-making perspective). In fact, it was accepted for a long time that granting exclusive territorial licences (which then may give rise to geo-blocking) does not amount to an infringement of Article 101(1) TFEU. The issue is far less clear now. What is more, removing geo-blocking across the board may itself raise major challenges. I have dozens on questions on this aspect of the inquiry, but I guess it is better to wait for the details!

Today, just a few hours after the Commission sent a statement of objections to Google, I have received a book I ordered a couple of weeks ago, called Do Great Cases Make Bad Law? What a wonderful coincidence. The author addresses the question, profound and fascinating, in light of 22 landmark US Supreme Court rulings. This is definitely a research exercise one could replicate by examining Article 102 TFEU case law and administrative practice.

The statement of objections in Google has just been sent, but the case has already secured its place in the hall of fame. After more than four years speculating about the legal aspects of the case, the documents issued yesterday by the Commission (see here and here) finally give a more accurate idea of the reasons why the authority has taken the preliminary view that Google has breached EU competition law. The memo is remarkable in many respects. As Alfonso explained earlier this week, it makes little sense to take a guess at this stage, but, from what I can read, the case could transform the way we think about Article 102 TFEU. The underlying issues are so fundamental, and some of the tentative theories of harm so unprecedented, that its consequences are, at least potentially, far-reaching.

What is particularly interesting is that the underlying issue is a basic one. It is in fact strange that it has not been addressed many times already. The case seems to revolve around whether, and if so, under what circumstances, a dominant firm is entitled to discriminate in favour of its own services. The Commission memo seems to take the view that, indeed, such behaviour may violate Article 102 TFEU, but it is not very clear about the conditions under which this may be the case (which is not surprising; after all, it is just a memo). In any event, one can think of three possible legal approaches to the question:

Discrimination is prima facie prohibited absent an objective justification: At times, the memo suggests that favouring one’s services is abusive by its very nature. This would make Google a by-object case. Absent an objective justification, discriminating in favour of an affiliate would be prohibited under Article 102 TFEU. According to the Commission, the prominence and growth of Google’s service since 2008 do not reflect its relative quality or its relative relevance for end-users. The document suggests, in other words, that it is not the outcome of competition on the merits.

I have explained elsewhere that it is controversial to state that dominant firms are under a general duty not to discriminate against rivals. Discrimination of the kind outlined in the memo is ubiquitous (supermarkets may give more prominence to their brands, media groups favour their own outlets and electronic equipment is often designed in a way that it only works with affiliated products). More importantly, such discrimination is more often than not pro-competitive. Trying to thrive in the marketplace by exploiting one’s advantages is what competition is all about. Similarly, it is a banality to state that markets sometimes work better when different activities are integrated. I do not know whether the Commission intends to follow a by-object line of reasoning, but it is easy to think of the far-reaching consequences for the future of Article 102 TFEU if it does. The scope of the provision would expand very significantly. Just think of the many practices that could be labelled (or re-labelled) as exclusionary discrimination.

Discrimination is abusive if it leads to anticompetitive foreclosure: The Non-Horizontal Merger Guidelines are based on an idea that contradicts the above approach. Following a vertical merger, the new entity may have an incentive to favour its own services. This is not problematic in and of itself, even when one of the merging parties holds a dominant position (and Alfonso knows a thing or two about this). Favouring an affiliate by restricting access to inputs or outlets is only an issue if it leads to ‘anticompetitive foreclosure’. This is an approach that could also be followed in Google. It would not be entirely uncontroversial – I spare you the details of why I am not entirely convinced – but it would have the advantage of consistency. Like issues would be treated alike across competition law provisions. Arguably, it would also be the logical approach for the Commission to endorse. After all, the Guidance is a pre-commitment device intended to confine administrative action to instances where anticompetitive foreclosure is likely. In this sense, it is remarkable that the word ‘foreclosure’ is not used in the memo. Not even once. The rhetoric of foreclosure is equally difficult to find in the document. This conspicuous absence raises a number of questions. Does the Commission believe that the Guidance is not relevant in Google? Is the Guidance no longer a reliable indicator of the Commission’s approach to the enforcement of Article 102 TFEU?

Discrimination is abusive if it harms consumers and innovation: The memo suggests that foreclosure is not the only source of anticompetitive effects that can trigger the application of Article 102 TFEU. The Commission seems to imply that, even in the absence of anticompetitive foreclosure, administrative action could be justified if it can be shown that discrimination harms consumers and competitors’ incentives to innovate. If the Commission chooses to follow this third approach, it would be venturing into unchartered territory. Instead of inferring harm to consumers and innovation (these effects are typically assumed to result from the exclusion of rivals), harm would be established in a direct way. I can think of several reasons why, in theory, it would make sense to do so. The questions I have in this regard are more practical than theoretical, however. For instance, I wonder whether it would be possible for the Commission to provide cogent and convincing evidence of harm to innovation (as opposed to discussing the plausible mechanisms through which innovation could be negatively affected). Similarly, I am not sure whether a dominant company would be able to challenge or disprove claims that a practice is harmful to innovation.

As usual, we very much welcome your views on the above.

It has been reported today (see here) that Commissioner Vestager may announce tomorrow that the Commission will be addressing Google a Statement of Objections.

This move, that many (including ourselves) would not have anticipated only a few months ago, has been the subject of rumors for some weeks. We have been asked about our opinion a myriad times these past days, and, frankly, we cannot say much more than what we have said in our many posts on the subject (too many to be linked to now), all written in the light of the very scarce publicly available information.

The good news of this whole story is that the law may now take center stage. I wrote recently that this was a perfect case study to discuss the limits of Article 102 (see the end of this post for my own recent case study on the subject for the Brussels School of Competition), but it is also a perfect case study on the huge importance of non-legal factors in competition cases in which the law is unclear (as it’s arguably always the case, save in -some- cartel cases) (for our previous reflections on this, see here or here).

The decision to pursue the case, at least for now, is likely to bring to the fore some fascinating legal questions. The arguments of both parties are by know well known, but it will be interesting to see how the Commission will frame its theory of harm. The stakes couldn’t be higher for Google, for the complainants resorting to competition law as a major competitive tool, and for the Commission, which was left in an uncomfortable position by the last minute decision to halt the commitment negotiations, which generally has the winning hand in these cases and which has, until know, always succeeded in all its 102 cases, including all previous high-stakes tech ones.

Whereas the parties’ submissions will, in principle, not be made public, their arguments have recently been publicly championed by commentators who give us a good taste of what is to come. The latest round of comments has been made by two reputed experts who have held some of the highest possible roles in the competition community, namely President of the General Court (Bo Vesterdorf) and Emeritus editor of Chillin’Competition (Nicolas Petit).

Mr. Vesterdorf’s piece (based on research done for Google but expressing his own views) has very recently received a reply from Nicolas (his research has been financed by iComp, a complainant in the case, but he also expresses his own views). We suggest that you read both.

Pablo and myself -who, believe or not, for better or worse, and despite the hours invested, must certainly be among the few who haven’t made any money out of this case in over 4 years…- are most curious about the many conceivable scenarios that now open up, but we won’t give our take on what is to happen. Why? Because as the recent evolution of the case shows, in proceedings with so many non-legal ancillary factors, predictions are doomed to fail; anything is possible.

We are back. This time, with a post that is not voluntarily humorous (nevermind the picture above). A good opportunity to prove ourselves, dear readers, that there is (some) room for (at least some) serious discussions in Chillin’ Competition. I have been meaning to write about the ECJ ruling in Bananas (hence the picture above). I am now out of excuses to avoid doing so given that I cannot (and really should not) keep myself busy forever discussing Alfonso’s posts.

The appeal judgment in Bananas is interesting in that it addresses the status of exchanges of information under Article 101(1) TFEU. Because the nature and the context of such exchanges may vary widely from one case to another, it is probably the practice that exemplifies better than any other the approach taken by the ECJ when drawing the line between restrictions by object and by effect. You know from previous posts that I find the relevant case law to be very sensible. More importantly, it is clear to me the Court has been consistent over time in its approach to the question.

The key arguments raised by Dole in its appeal are familiar ones. An exchange of information may not have an actual impact on future prices. For instance, as argued by Dole in the case, the employees discussing prices may lack the power to set them. It may also be the case that the nature of the exchange does not completely eliminate uncertainty about the behaviour of competitors. The Court clearly dismissed these arguments and held that the exchange at stake in the case amounted to a restriction of competition by object. What lessons can one draw from this case? A couple of them. Nothing, I am afraid, that you have not seen in one way or the other in the blog.

Formal categories are not particularly useful

Are exchanges of information restrictive of competition by object? Well, it depends. Sometimes they are, as in Bananas. Sometimes they fall outside the scope of Article 101(1) TFEU altogether, as in Asnef-Equifax. It all depends on the nature and purpose of the exchange in the context in which it is implemented. The formal category is as such not particularly useful. This has always been the problem with the so-called ‘object box’ and with similar attempts to capture the essence of the case law. Labels (‘exchange of information’, ‘price fixing’, ‘market sharing’) mean virtually nothing in themselves and can even be misleading.

Sometimes, an exchange of information is an ingredient in a cartel-like arrangement. In such a case, the exchange lacks pro-competitive virtues and is therefore deemed restrictive by its very nature. Sometimes, it can improve the functioning of markets and as such potentially beneficial for consumers and the economy. It is clear from the case law that the analysis of the nature and purpose of the agreement needs to be carried out on a case-by-case basis. This sort analysis is not about actual or likely effects (more on this below) but about the rationale behind the agreement.

Bananas provides an interesting example of the above. I welcome your views on the ruling, but it seems clear to me that the Court essentially considers whether the relevant exchange pursued a ‘legitimate objective’ (to take the expression found in Cartes Bancaires, which, unsurprisingly, is abundantly cited in the judgment). In this case, it was found that the purpose of the exchange was simply to remove uncertainty about the behaviour of rivals.

The ‘by object’ category is not a presumption of anticompetitive effects

It has become popular to present the ‘by object’ category as a presumption of anticompetitive effects. The likelihood of such effects is so high in the case of some restraints, the argument goes, that it makes sense to prohibit them irrespective of their actual impact on competition. This view is not unreasonable. The problem is that it is contradicted by the case law.

Bananas shows, again, that an agreement can be deemed to restrict competition by object even if it is not clear that it would have resulted in higher prices. In paragraph 123, the Court holds that ‘a concerted practice may have an anticompetitive object even though there is no direct connection between that practice and consumer prices’. Along the same lines, it is stated in paragraph 125 that ‘there does not need to be a direct link between [a concerted practice] and consumer prices’.

In light of the above, it seems clear to me that determining whether an agreement is restrictive by object has little to do with setting a presumption about its likely impact on competition. As explained above, this assessment is about something else. This also means that there is no real overlap between establishing the anticompetitive nature of the agreement (i.e. understanding its object) and showing its restrictive effects. The first test is about determining whether the agreement is plausibly pro-competitive; the second is about showing, in concreto, its negative effects. This is another major source of misunderstandings. I hope the clear statements of the Court in Bananas will prove helpful in this regard.

More on State aid and investments.

Remember my post on State aid and investment arbitration? The Commission has ordered Romania to recover the compensation to the investors following the award of an arbitration tribunal. More to follow, I am sure!

Yes, our last post –“Breaking News: Joaquín Almunia to be EU Judge”, was a spoof, a hoax, a “poisson d’Avril” as they say in Belgium, our contribution to April Fools’ day 2015. We improvised it after reading a couple of weird news stories that morning and realizing the date in which we were. Some people, and even some news agencies, took it seriously, and after a few hours Mr. Lucky Namoodia  Joaquín Almunia himself commented about it on Twitter (@AlmuniaJoaquin), confirming that it was a hoax and stating that “It’s a pity indeed”.

If anyone felt disappointed by our misinformation, we are sorry, and we apologize, like we have done before when needed (see here for an example of deficient coverage on our part).

In any event, this has helped us realize that people who read this blog care less about substantive issues (there are indeed very good reasons why no one should give a damn of what Pablo or I think about exclusivity arrangements), than about us posting nonsense (we are better at that, and competition law is a fertile ground to find nonsensical stuff). Point taken. In that spirit, we thought of offering you this post April’s Fools Day Special, with some of the best hoaxes and law or antitrust-related jokes of recent times:

• One of our all-time favourites is one that we already covered in Chillin’Competition. A hoax published in a Belgian newspaper concerning Charleroi Airport actually fooled the European Commission, leading DG Comp to send a request for information on the basis of the pretty absurd piece (see here).
• Now that rumour has it that an SO is in the pipeline this very funny piece is particularly timely “EU Google Probe to be Based Entirely on Google Searches“.
• In the U.S. there was a tradition of very good April Fools jokes from the American Antitrust Institute here, my favorite ones being Antitrust Controlled by Jerks, Says New Evolutionary Biology Report, As US Attorney General Gonzales Confidentially Reports, There’s Nothing Funny About Antitrust, and President Bush’s proposal to merge antitrust agencies with the Department for Homeland Security.
• A more recent one was reported these days by Abovethelaw, and has to do with the April Fools’ Day email sent to all workers of a BigLaw firm concerning life-work balance that was apparently not well received by many (see here).
• Also at Chillin’Competition we have done this before. We did it, although not on the right day, when we announced that we were facing a legal challenge following the Google Spain Judgment (see here) or when we announced on-side beach inspections by DG Comp (see here) ; Nico did it when he announced we were closing this blog (see here). Then there were others which did not pretend to be serious in spite of their accuracy, such as this post on Microsoft’s Contribution to the EU Budget. Another joke worth mentioning if only for the number of absurd comments it elicited was Nicolas’ Chuck Norris Antitrust Facts.
• Then of course you never know, because some stories that seem a hoax end up being true (see here).

Very trustworthy sources in Spain confirmed to us last night that rumours were true, and that former competition Commissioner Joaquín Almunia is poised to be a judge at the EU General Court. The news has now also been confirmed by at least M-Lex and Bloomberg.

The appointment would take place within the timely addition to the Court of 12 more judges, just when the existing ones had managed to clear the backlog.

Chillin’Competition has been able to talk to Mr. Almunia via a former intern at his cabinet. Mr. Almunia has acknowledged that he will indeed take up this new role, which he considers as a new challenge that comes at the right moment of his life, given that his stint at DG Comp has provided him with a unique viewpoint that is different from that of his colleagues to be. The former Commissioner and Judge-to be also noted that his background in economics might contribute to shifting the case-law towards a more economics based approach.

An economist and lawyer by training, Mr. Almunia will be able to join the General Court pursuant to a controverted provision included in the new Spanish Law regulating the selection procedures for candidates to EU judgeships (see here). This provision states that politicians having held office in EU institutions for more than 8 years, as well as former national ministers who do not find a suitable occupation within 12 months of leaving office, could now be considered for a post at the Constitutional Court. Whereas some claim this may be a legal subterfuge conceived only to enable them to be appointed to EU Courts (indeed the EU rule is that candidates are suitable when they can be appointed for the highest judicial role in their Member State), the Spanish Government has replied that in reality this provision only codifies, and even narrows down, previous practice, adding that customs and precedents are also sources of law. A government spokesperson is quoted today by Lewis Crofts in M-Lex stating as well as in the Spanish newspaper El Mundo Today stating that “Chancellor Merkel supports us on this one, so we are not concerned”.

In his new job Mr. Almunia is very likely to encounter some of the cases that he dealt with as Competition Commissioner. Asked about the risk of any possible conflicts of interest,  Mr. Almunia responded that, “as rightly noted by Professor Nicolas Petit, fortunately there are no public rules on how conflicts of interests are dealt with at the Court, so I cannot speak about that yet. However, I see no possible conflict of interest. If you are referring to the Google case, people are wrong to believe I was closely associated to the investigation. I had nothing to do with it; that said, I would have solved it all had I had a few months more in office”  (N.B. the translation from Spanish is ours).

Mr. Almunia also wondered whether we had any question for him concerning Greece and the monetary union, but we did not.

Mr. Almunia’s predecessor as Competition Commissioner, Neelie Kroes, has complained to Aoife White, from Bloomberg, that the merits-based system for EU Court appointments used in The Netherlands (and that led to the appointments of Sacha Prechal and Marc van der Woude) does not offer equal chances to valuable and experienced politicians and should hence be replaced. “If we are going to have a more political Commission, I don´t see why we cannot have a more political Court”, she added.

There is so much about which I want to write that I should not indulge in commenting on Alfonso’s last post. And I really did not want to. But it is happening. It is not often the case that I choose the topics of my posts. They start writing themselves in my head and before I realise I find myself typing, as I am now. So blame the topic, not me. And blame my co-blogger for starting it all with his initial question 😉 . Rest assured that a couple of posts on information exchanges and geo-blocking will start writing themselves in my head soon (primarily because I have much to say about the two).

The fact that I disagree with Alfonso’s last post does not mean that it is not an entirely reasonable one. He says that he does not regard the case law on exclusive dealing and loyalty rebates as the ‘epitome of absurdity’. I do not think it is. It is actually very far from being so. The argument (at least mine) has never been that it is absurd (because it is not), but that it is difficult to reconcile with other aspects of the case law and as such a permanent challenge for the coherence of the competition law system as a whole. Why do we disagree, then? Let us take a look at some of his arguments.

Experience and economic analysis (the Cartes Bancaires test)

The lessons of experience: Alfonso is right to say that the case law assumes that exclusive dealing and loyalty rebates always have restrictive effects on competition. He refers to the Cartes Bancaires test but he does not discuss the lessons of experience, which are valuable ones. Experience shows that that rebate schemes rewarding loyalty do not necessarily prevent the rivals of a dominant firm from thriving or even increasing their market share. This is the fundamental lesson to draw from British Airways and Michelin II. If, as in these cases, there is cogent evidence showing that competition has not been restricted as a consequence of these practices, then it is safe to claim that negative effects cannot simply be assumed to be the necessary consequence of exclusive dealing and loyalty rebates. Unless, of course, one refers to a particular type of negative effects that cannot be seen or proved but is nevertheless there in some form, like a supernatural entity.

The lessons of economic analysis: In relation to the lessons to draw from economic analysis, Alfonso says that he does not know enough about it to conclude whether it suggests that the assumptions underlying the case law need to be refined. What can we conclude from (both theoretical and empirical) economic research? These lessons are elegantly summarised in the Commission Guidance and the EAGCP Report of 2005. I always recommend Massimo Motta’s careful dissection of Michelin II because it is a lucid and accessible piece addressing the question. Against this background, it seems safe to claim that it would be inappropriate to presume that dominant firms implement exclusive dealing and loyalty rebates with the aim of excluding competition. Economic research also shows that negative effects on competition cannot simply be assumed to result from these practices. This is, therefore, one of these areas where the experience of the case law and economic analysis go hand in hand.

I have written elsewhere that EU courts have consistently displayed remarkable intuition about the motives behind business practices. Delimitis is one of the rulings that is very much in line with formal economic analysis. In this remarkable judgment (discussed by Alexander Italianer in the speech he gave back in December), the ECJ concluded that exclusive dealing cannot be considered to be anticompetitive by its very nature (in other words, anticompetitive motivations cannot be presumed) and that its restrictive effects cannot simply be assumed to be the consequence of the fact that access to some outlets is foreclosed. The cumulative effects of similar arrangements may lead to such effects in a particular context, but this is something to be established on a case by case basis. I fail to see why the finding that exclusive analysis is not restrictive by its very nature would not be relevant in the context of Article 102 TFEU. This insight, which relates to the rationale behind the practice, seems to apply irrespective of the degree of market power enjoyed by a particular company.

The lessons of economic analysis have been embraced by EU courts. To name a few, they played a fundamental role in Cartes Bancaires (two-sided markets), in Airtours (in relation to collective dominance), in Tetra Laval (in relation to conglomerate mergers), or in Woodpulp II (concerning the notion of concerted practice). With these precedents in mind, the question arises of why the insights of professional economists would be ignored in relation to a given set of practices if they have informed the case law in other areas.

The ‘making life more difficult’ standard

Alfonso suggests that it is appropriate to prohibit prima facie under Article 102 TFEU any practices that are assumed to make competitors’ life more difficult. Again, this is a defensible position, and one that is very far from being the ‘epitome of absurdity’. That is not the issue. The issue is that practices that in theory always make competitors’ life more difficult are not always prohibited prima facie in the case law. Below-cost pricing by a dominant firm always makes rivals’ life more difficult, but it is not always prohibited as abusive under Article 102 TFEU (just take a look at AKZO and Post Danmark I). Similarly, the ECJ made it clear in Deutsche Telekom and TeliaSonera that it cannot simply be assumed that a margin squeeze always makes competitors’ life more difficult. It would be necessary to establish the likely effects of the practice on rivals’ ability to trade in the retail market in the context of a particular case. In this regard, the ECJ did not follow the Commission decision in Deutsche Telekom.

As can be seen, the real issue here is that Article 102 TFEU case law does not follow a uniform approach, not that the approach followed in relation to exclusive dealing and loyalty rebates is the ‘epitome of absurdity’. The fundamental claim I made in my paper is that the case law, as it stands, does not treat practices that are comparable in their nature and likely effects in the same way. It is, in other words, a matter of legal coherence. In my view, the most sensible way to address the observed tension in the case law is to embrace the lessons of experience and economic analysis across the board.

Administrability vs ‘hordes of public officials, and countless hours of lawyers and economic consultants’

The case law on exclusive dealing and rebates is defended because it is easier to administer than the alternative, which would require ‘hordes of public officials, and countless hours of lawyers and economic consultants’. The administrability of legal tests is an important factor for any lawyer and for any economist who is aware of the demands of legal practice. If I disagree with this point is because, first, he seems to assume that standards to establish, on a case-by-case basis, the likely impact of a practice are very difficult to administer and impossibly demanding in terms of resources. This is clearly not the case.

My second objection to his argument about administrability relates to the coherence of the competition law system as a whole. If Alfonso’s argument applied in the context of merger control, then all conglomerate mergers involving a dominant firm with the ability to foreclose competition (as in, say, Microsoft/Skype) would be prima facie prohibited irrespective of their likely effects on competition. The fact is that the likely effects of conglomerate (and horizontal, and vertical) mergers are routinely examined in concreto. Nobody seems to object to it as an impracticable model or one imposing an unjustified drain on the resources of the Commission. Why, then, would it be a problem for the Commission to establish the likely effects of potentially abusive practices in accordance with the principles that the authority has committed to follow in the Guidance?

Alternatives to exclusive dealing

Finally, Alfonso takes the view that the prima facie prohibition of exclusive dealing and loyalty rebates is not an issue insofar as the same objectives of these practices can be ‘achieved through other, perfectly legitimate and less risky, means’. Is that really the case? What are these other perfectly legitimate means? Tying? Clearly not, as it is also prohibited prima facie. Are quantity rebates perfectly legitimate? Maybe, or maybe not. Possibly, maybe sometimes. As I argued earlier this month, it is far from clear when and why quantity rebates are acceptable under the case law. The pending ruling in Post Danmark II shows that, indeed, it is difficult to say that this route is really less risky for dominant firms.

On my response

As far as I am concerned, this will be the last post on this most interesting (at least for me) exchange. I know, however, that some people did not like the answer I gave. The only way forward of which I can think is to create a new section in the blog, called ‘Choose your favourite Article 102 TFEU decision’. Readers are all invited to send via email the name of a Commission decision of which they are particularly fond (whatever that means). And I hereby commit to discuss its legal, policy and economic aspects 😉 .