Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Comments on Android (II): follow-up questions on market definition (+ thanks for the comments!)

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follow-up_questions

I received wonderfully interesting comments to my first post on market definition in Android . That was really the blog at its best. I am really grateful

I felt I would not do full justice to the involvement of these readers if I just added a comment of mine to the pile. The insights are so powerful that it makes sense to give them more exposure (and hopefully lead to yet more comments).

Would a merger between Apple’s and Android’s app stores be unproblematic?

Chris was the commentator to break the ice. The inevitable consequence of the definition of a separate market for Android’s app stores emerged from our exchange. Taken to its logical consequences, Chris explained, the Commission’s approach implies that a merger between Apple’s and Android’s app stores would be unproblematic.

This is a counterintuitive outcome. The fact that it is counterintuitive, however, does not mean anything. Rigorous economic analysis often surprises us with outcomes that contradict our instincts. However, this conclusion could also mean that there is something funny going on.

Any thoughts in this regard would be most welcome. If there is indeed something funny going on, what is it? One possibility is that the assessment of competitive constraints cannot focus on switching alone. A second possibility is that there is scope for refining the assessment of switching (which is what Nicolas was suggesting in his comment). I will focus on the first point.

Competitive constraints: is it all about switching?

The idea that Apple’s app store does not exercise a sufficient constraint on Android’s app store (paras 652-673) relies, by and large, on switching (switching from the end-users’ perspective and the app developers’ perspective).

My immediate question here is: is there something beyond switching opportunities that we may need to consider when assessing competitive constraints? Another commentator, Andrew, gave an excellent example on supermarkets that comes across as a wonderful starting point for this discussion.

Suppose there are two supermarkets that do not compete at the retail level: each one operates in a different geographic area. However, they compete on the upstream market where they buy inputs from providers. Suppose, further, that they are the only buyers on the upstream markets, so suppliers have nowhere else to go, and cannot give up either.

Would a merger-to-monopsony between the two supermarkets of the example be unproblematic? My instinct tells me that, in all likelihood, such a merger would be blocked absent appropriate remedies (and Gianni, in his comment, makes it clear that of course it would be blocked). As a telecoms nerd, the Liberty Global/Ziggo merger, the underlying facts of which are not fundamentally different from those sketched by Andrew, came to mind.

Liberty Global/Ziggo appears to confirm that it is not all about switching (it does not seem to be framed in terms of switching anyway). The Commission identified a series of potential negative effects that would arise even when the suppliers lack the ability to switch from one to the other (or have no choice but to deal with the two buyers). The question was whether the transaction would increase the buyers’ bargaining power.

If a merger-to-monopsony could be problematic even absent switching opportunities for suppliers, perhaps competitive constraints faced by powerful buyers are indeed manifested in other ways (that is, it is not all about switching).

If this is the case, my question is: what are these other ways? Is it, for instance, buyers’ ability to refuse to carry certain products from certain providers? Why would a merger-to-monopsony reduce competitive constraints if suppliers lacked switching opportunities prior to the transaction?

Thanks a lot in advance for sharing your thoughts.

And please feel free to comment on Nicolas’ points. I understand his comments as suggesting that it may be tricky to define markets involving goods such as smartphones, which are not acquired everyday.

It could be interesting to compare the analysis in Android with the analysis of retail markets in the network industries (after all, end-users do not change providers every day, and may be faithful to some providers, in particular incumbent ones).

If you have found an embarrassing number of typos, at least you should know why by now.

Written by Pablo Ibanez Colomo

21 October 2019 at 6:02 pm

Posted in Uncategorized

Major dates not to miss: ASCOLA 2020 (Porto), Mardis and more!

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Dates not to miss

Now that we are firmly in Autumn time, dates for major events start to pile up. We thought it would be a good idea to remind you of some of the major ones ahead of us. Time to plan, as they say.

Under the leadership of the wonderful Michal Gal, ASCOLA goes from strength to strength. All competition law scholars are grateful to her. The 2020 edition of the ASCOLA conference will take place in beautiful Porto. Academics: you have until late January to submit your papers or extended abstracts. More info can be found here.

Denis Waelbroeck and Jean-Francois Bellis run the venerable Mardis de la concurrence. I am proud to have presented on selective distribution last year. This year’s programme of events is truly outsdanding (see here). It features, inter alia, Carles Esteva, Pierre Regibeau, Marc van der Woude, Fernando Castillo, as well as a lawyer that goes by the name of Alfonso Lamadrid. Not to be missed if in Brussels!

A more recent venture, undertaken by UCL and White & Case, promises to become another classic in the Brussels scene. This year it is organised by Deni Mantzari and Makis Komninos and will take place on 21 November. You can find the programme here.

And last, but not least (albeit perhaps more urgent): the College of Europe alumni in competition law organises tomorrow an event on digital competition (see here). The event will be moderated by Aleksandra Boutin and will have Thomas Graf, Silke Heinz and Thomas Kramler as its speakers. You can still make it!

Written by Pablo Ibanez Colomo

15 October 2019 at 5:10 pm

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Banerjee, Duflo and Kremer: Winners of the Nobel Prize in Economics 2019

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Nobel Prize 2019

I do not believe it is news to anybody reading the blog that Abhijit Banerjee, Esther Duflo and Michael Kremer have been awarded this year’s Nobel Prize in Economics. In their case, the only question was when they would get the award, not whether they would.

I thought I would write a short post to offer an appreciation of their work. As an academic, I have always regarded them as inspiring figures. In particular, Esther Duflo (just like Jean Tirole) is the sort of academic all scholars should aspire to be. If you want to be inspired too, just take a look at her superb (passionate, thoughtful, articulate) TED talk on the matters that keep her busy.

It has become fashionable in some competition law circles to be dismissive of economics: too ideological, too theoretical, impractical, not real world at all. Typically, these cliches come from people with only the most superficial understanding of the discipline.

Perhaps worse, criticism of this kind is unfair to people like Esther Duflo, who devote their professional lives to the understanding of complex problems and, by doing so, to improving the lives of millions.

I have often told my friends that, if they want to make an effort and go beyond the surface to get an idea of what economics is really about (how it addresses problems, how it improves incrementally and how it is relevant for the real world), they should take a look at Poor Economics, the book for non-specialist audiences she wrote with Abhijit Banerjee.

I guess this eventful day is as good as any other to recommend it to everyone following the blog!

 

 

Written by Pablo Ibanez Colomo

14 October 2019 at 6:23 pm

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23rd edition of the EU and Spanish Competition Law Course (Madrid, January-March 2020)

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The Competition Law course founded by Luis Ortiz Blanco (and which I have helped co-direct for a few years now) is turning 23.  The course takes place in between January and March at the IEB (around the corner of the buildings above) in Madrid, generally from 16 pm onwards.

We’re very satisfied of what this course has achieved so far, gathering top competition lawyers (judges, officials, practicioners, academics) and economists from all over Europe, and attracting students from competition authorities, companies, law firms and universities, also from Latin America.

The course has always remained affordable for students. This is to a great extent due to Luis’ efforts and to the great contribution from the sponsoring firms and economic consultancies, which include Garrigues, Uria Menéndez, Cuatrecasas, Gómez Acebo y Pombo, MLAB, Latham&Watkins, Clifford Chance, Araoz&Rueda, NERA, Compass Lexecon and KPMG.

While we work on the beautified flyer, the general program is the following:

Introductory session (17 January 2010), by Pablo Ibañez Colomo (LSE, College of Europe)

Module I: Cartels and procedure (20-22 January)

Module II: Other agreements and restrictive practices; horizontal and vertical agreements (27-29 January)

Practical Workshop: Inspections (31 January 2020)

Seminar 1: Recent Developments in EU Competition law (31 January 2020)

Module III: Abuse of Dominance (10-12 February 2020)

Module IV: Merger Control (24-26 February 2020)

Practical Workshop 2: Merger control in practice (6 March 2020)

Seminar 2: Competition Law in Hi-Tech Markets (6 March 2020)

Module V: Sector Regulation and Competition Law (16-18 March 2020)

Module VI: Public Competition Rules and State aid (23-25 March 2020)

Practical Workshop 3: Vertical Distribution Contracts (27 March 2020)

Seminar 3: Private Application of the Competition Rules: Procedural Aspects (27 March 2020)

***

For any practical question and information about registrations, please send an email to competencia@ieb.es or drop me a line.

Written by Alfonso Lamadrid

9 October 2019 at 11:24 am

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Comments on Android (I): some questions for economists on market definition

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I have a question

Like many others, I guess, I jumped on the Android decision as soon as it became available (see here). If you have not done so, you should definitely read it. It provides abundant food for thought. It is not an exaggeration to say that a whole competition law course could be taught around it. Pretty much all the (unresolved) issues are there, in a fascinating factual setting with plenty of intriguing ingredients.

It would be great if the decision were widely discussed. The general interest is not served when only those with an interest in a case talk and write about it. When there is so much at stake, the atmosphere tends to get ugly and aggressive (footballised, if you want). The youngest among you should not feel discouraged: you can change the tone of debates by asking questions and/or sharing your views.

I thought I would kick off (no pun intended) with the issue of market definition and dominance, which has attracted a great deal of interest. One of the most intriguing aspects of the original press release was the suggestion that the Apple and Android ecosystems do not constrain each other. The detailed rationale behind this conclusion is now there for all to see.

Since the definition of the market and the assessment of dominance are essentially economic exercises, the right way to go about it is to raise some questions to specialists. It would be wonderful if you could share your thoughts on the comments section.

I will not discuss all aspects of these two questions, just the two that I find to be particularly interesting. Some people may react by saying that these two questions are not even decisive. To which I reply: perhaps, but I am not, and have never been, interested in the outcome of individual cases. Plus, there are more posts for discussion coming up.

One of them relates to the app store. According to the decision, there is a separate market for Android app stores. The most salient implication is that Apple’s app store would be on a separate market. In the same vein, the constraint placed by Apple’s app store would not be sufficient to rule out a finding of dominance.

The second concerns the market for operating systems. The Commission concludes in the decision that there is a separate market for the licensing of smart mobile OS. Again, non-licensable smart mobile OS (read: Apple iOS) are found not to be on the same market. What is more, the constraint coming from Apple iOS is not deemed strong enough to exclude a finding of dominance.

App stores as two-sided markets? What are the implications?

The first set of questions is for economists in general and for Lapo Filistrucchi in particular. As most of you know, Lapo – together with his co-authors – has written influential work on two-sided markets. In part, his research seeks to tame people’s enthusiastic tendencies to see two-sided markets everywhere. So whenever I notice a setting that might be a two-sided market, I ask myself what he would say.

My (cautious) impression is that the app store is a two-sided market. Would that be correct? Using Lapo’s helpful categorisation, I am inclined to conclude that it is a transaction market (in an app store, there is a transaction between the two sides of the market). Hopefully full points so far.

If I understand the scholarship on two-sided platforms correctly, it would follow that there is a single market encompassing both sides. Even more interesting is the analysis of the competitive constraints. My question here I guess is: how are the constraints evaluated in practice?

In this regard, the decision provides a fascinating case study. If you read the decision (paras 652-673), you will see that the Commission focuses, by and large, on Android end-users’ inability and/or unwillingness to switch OS (and thus phones). I guess my question here is: is this factor decisive?

According to the Horizontal Merger Guidelines, the absence of switching opportunities does not rule out a horizontal overlap (that is, a competitive constraint). I would say that, in a two-sided market, the fact that one side of the market cannot (or would not) switch is even less decisive. I would welcome thoughts and clarifications in this sense.

How about the other side of the market? Less importance is given to app developers in paras 652-673. But it is worth reading para 668, where the Commission states (uncontroversially, I would say) that app developers would not switch away from Android because they could not afford to do so.

My question here is: does it follow from that – uncontroversial – finding that Android’s and Apple’s app store do not constrain each other? As I read para 668, I thought of an Australian-like country with two very large supermarket chains (I visited Australia in 2013 and what I paid for groceries still haunts me). Many suppliers would not be able to give up either supermarket chain in such a scenario. Would it follow that the two chains do not constrain each other?

Android as a franchise and the analysis of indirect constraints

When I first wrote about Android, I suggested that the underlying business model is best understood as a form of franchising. I am still of this opinion after reading the decision. Just like McDonald’s, Google licenses its formula so that third-party OEMs can sell their products alongside vertically-integrated manufacturers (euphemism for Apple).

Seen from this perspective, the Android decision claims that the licensing of the formula by the franchisor is a separate product market. Even more interesting is the finding that the franchisor is not constrained by Apple. As I see it, it would be tantamount to suggesting that McDonald’s would not be constrained by vertically-integrated fast-food hamburger restaurants.

It may be a counterintuitive claim, but it is extensively supported by two sets of arguments. First (paras 483-496), I understand the decision as suggesting that the OS is one of many features found in a smartphone, which would allow McDonald’s (I mean, Google) to decrease the quality of its operating system without suffering the consequences. In other words, the Commission conducted an SSNDQ analysis. I find it great that we will be get some guidance about the robustness of this exercise (question: has the GC ever reviewed an SSNDQ assessment?).

Second (paras 497-559), the same arguments discussed above (including the fact that app developers would not be able to afford abandoning Android and Android users’ inability and/or unwillingness to switch OS and devices) are also advanced to rule out that vertically-integrated systems constrain non-integrated ones. So the same questions I raised above would be relevant here too.

In addition, the Commission emphasises the price differences between Apple and Android phones. Again, here my main question for economists would be: how decisive are these price differences? Similarly, I would also ask about the implications. How about high-end Android devices? Would it follow that further segmentation of the market is warranted?

As said above, I very much look forward to your reactions.

In case you were wondering (which I would understand): Alfonso and I generally comment on each other’s posts prior to publication. Not this time. I have not shared or discussed this post with him (nor will I share or discuss any of the subsequent posts in this series). So now you know the answer to the question ‘why are there even more typos than usual in Pablo’s post?’.

Written by Pablo Ibanez Colomo

3 October 2019 at 11:11 am

Posted in Uncategorized

Chillin’Competition Conference 2019- SAVE THE DATE

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Chillin’Competition will very soon turn 10, and it recently reached 2 million visits. This calls for an even more special annual conference.

The Conference will take place on Monday 9 December 2019.

Commissioner Vestager has confirmed that she will be there for the 4th time in a row. Will you? 😉

We have been working on our ideal program and will start contacting speakers tomorrow.

We will be posting some updated info on the blog, but will also keep some surprises.

Registrations will open on 5 November at 10am (Brussels time) via a link that we will publish here. Be warned that in past years they were all gone within 2-5 minutes.

Should you need to travel long distance and plan more in advance, please drop us a line (we might not reply immediately, but we’ll try to do it asap).

As always, the conference will be free of charge. If you would like to contribute by sponsoring the event, please contact us.

Written by Alfonso Lamadrid

25 September 2019 at 8:32 pm

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The Fiat and Starbucks Judgments

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Yesterday the General Court handed down the first and much awaited Judgments regarding the assessment of individual tax rulings under State aid. The Court roasted the Starbucks decision, but the Commission managed to drive home the Fiat one.

These Judgments raise complex issues and fit within a complex line of case law. Those interested in a full overview of these should attend a forthcoming presentation at the ULB’s Mardis de la Concurrence (more information here; incidentally, I’ll be the speaker).

But here is an appetizer. My colleague (and main specialist on the issue) José Luis Buendía, Pablo and myself all immediately devoured the Judgments yesterday and spoke to several media outlets about them. The text below contains a collage of our views:

General comments

The Judgments are carefully crafted in their content, outcome and intended message. Not much of a sexy headline, but the takeaway is that tax rulings may, or may not, amount to State aid: the Commission needs to do a thorough job, and the Court has demonstrated its willingness to exercise a strict control. In Pablo’s words “proceed – but with caution, because the court is watching.”

As I told Politico yesterday, “the Court has not challenged the Commission’s policy as a matter of principle, but has sent a clear message that the devil lies in the details of each specific ruling”. This complicates predictions (also as to the outcome of the Apple case, which moreover raises different issues) and arguably legal certainty.

The Judgments are nuanced on the law, avoiding some of the thorniest legal issues (notably the questions related to selectivity, which are effectively bypassed by focusing virtually all of the debate on the requirement of “advantage”). The Judgments are also fact-heavy, which might minimize the chances of success of possible appeals on either side.

Politically, the credibility of the Court and of the EU system may be reinforced by the fact that – fortuitously –  it was only the US company (and the Netherlands) getting out of the hook, not the European one (and Luxembourg).

In our view, the key to understand the opposite outcomes of the Judgments is the Court’s insistence in taking the Commission’s burden of proof seriously. The Commission needs to establish the existence of an advantage, without shortcuts, however tempting.

Advantage 

The GC confirms that the Commission was entitled to rely on the arm’s length principle (“ALP”) as a tool for screening whether a given tax measure is in line with market conditions. The Court seems cautious (just like the Commission itself) not to extract a general ALP principle directly from EU Law, but it accepts that it may be relied upon as a tool. The Judgments seem to be premised on the “nationalization” of the ALP; i.e., on the understanding that both the Dutch and Luxemburguese legal systems had – even if implicitly – incorporated this principle.

Given their recognition at the national level, the Commission was entitled to rely on this principle tool to check whether the specific tax rulings had accepted transfer pricing arrangements departing from normal market conditions (in the sense of Art. 107) and, therefore, departing from what had been the normal taxation of these situations without the tax rulings. Our view is that the Court did not endorse the far-reaching Commission theory that the ALP originates directly from EU law and would apply regardless of its recognition at the Member State level. One could argue that the “nationalization” of the ALP may have required an interpretation of the decision and of national laws that goes beyond the obvious.

Even if the Commission was entitled to apply the ALP in both cases, the judgement underlines that the ALP admits different methodologies, as the OECD guidelines show. Member States thus have a certain choice between them, and the Commission’s assessment ALP must therefore recognize the existence of a certain margin of possible inaccuracies. Crucially, the GC notes that the choice of a particular methodology, in and of itself, is beyond reproach. Thus, the mere fact that the Member State has relied on a method different from the one preferred by the EC does not automatically create a presumption of advantage.

Very much on the contrary, both judgements underline that it is the Commission that has the burden of proving the presence of an “advantage”, that this exercise may be demanding (as exemplified in Starbucks), but nevertheless feasible (as shown in Fiat). It is therefore not for the Member State or the beneficiaries to prove the absence of an advantage, but up to the Commission to prove its existence.

In fact, a too proactive defense by the Member State might even backfire in some cases, by providing the Commission with an analysis that was originally absent. In Fiat the Court validated the reasons offered by the Commission to question the methodology used by Dutch authorities. In Starbucks, it has ruled that non-compliance with methodological requirements cannot be used as a shortcut to find an advantage. Paradoxically, this may require the Commission to do a greater job when Member States do worse. In other words, the Commission cannot simply assume that because the Member State acted in a seemingly arbitrary manner the outcome was wrong.  As Vice President van der Woude noted at the Apple hearing last week, one cannot fully exclude that there may have been a happy coincidence. The message, again, is that nothing is evident and that the Commission cannot take things for granted.

Selectivity

The General Court clearly avoided discussing “selectivity” to the extent possible. The Starbucks Judgment did not need to go there due to the finding that there was no advantage. The Fiat Judgment did require a selectivity assessment, but there the Court found its own shortcut.

Indeed, the Fiat Judgment endorses a  “presumption” of selectivity for cases concerning individual aid (not in cases related to aid schemes). The tax rulings at stake look very much as individual aid. The GC considers that they are not the product of an “scheme” with a predetermined content but rather that they are tailor made by the administration applying discretionary powers. Therefore, if the Commission can prove that the individual tax ruling is advantageous (like in Fiat), it does not need to prove in addition that it is also selective.  This is automatically presumed. The existence of such presumption in EU Law is, in our view, not totally clear. This could therefore be a point of law that the applicants could raise in a possible appeal.

Perhaps because the existence of the said “presumption” of selectivity is far from obvious, the General Court also applied – just in case – the “3 steps test” in order to confirm the selective character of the Fiat tax ruling. The Judgment claims that  ruling would constitute a “derogation”, irrespective of how one were to define the reference system (only the treatment of companies belonging to a group vs those and also stand-alone companies). However, our impression is that the judgement does not entirely justify that claim. Instead, it equals the already established finding of an “advantage” with the finding of a “derogation” for selectivity purposes. This equivalence may be legally questionable and may also offer fertile ground for debate, perhaps on appeal.

Analysis

At the end of the day, the General Court has confirmed that the Commission may indeed use State aid rules against certain tax rulings, but it has also carefully framed its power to do so. It can rely on the ALP (except in the unlikely, and arguably purely theoretical, case that the national legislation explicitly excludes it), but has to recognize a certain margin of “error” to the Member States. Above all, the Commission must prove clearly that the tax ruling confers a real advantage.

The impact on these judgements on the pending tax rulings cases is hard to predict. It would largely depend upon the investigative evidence provided by the Commission in the different decisions. The impact on these judgements on other fiscal cases, dealing with general schemes, might be none.

The Commission may not even file an appeal against the Starbucks Judgment, since the judgement is eminently based on a factual assessment and avoids a taking position on important legal principles. Fiat and Luxembourg may have more incentives to try an appeal, perhaps arguing that the GC has denaturalized national law and raising points of law concerning selectivity. In any case, the chances of success may not be very high.

These judgements will allow the Commission to claim a partial victory and to vindicate its crusade against tax rulings. At the same time, however, they also underscore the need for detailed and thorough investigations. The Commission will no doubt be particularly careful in picking its cases from now on.

Written by Alfonso Lamadrid

25 September 2019 at 6:31 pm

Posted in Uncategorized