26 October 2007

Aftermarkets Discussion

Read: Eastman Kodak Co v Image Technical Services Inc 504 US 451 (1992)

Please enter a brief discussion addressing one or more of these points.
1) who defined the market correctly in your view, the majority or the dissent? Should competition law bother with aftermarkets?
2) How would the EC Commission have defined the market applying the 1997 Notice? The OFT with its market definition procedures?

10 October 2007

Book's Out

Apologies for taking a long summer holiday with the blog. Normal service shall resume now that term has started.

The book aorund which this blog rotates is now out, you can buy it from the publisher (Cambridge University Press) and also Amazon (cheaper from Amazon). I am sure there is more intra-brand competition from retailers, if anyone knows where the book can be obtained more cheaply, do write a comment here and tell others - market imperfections can always be cured by savvy consumers.

Each post is usually earmarked with the relevant chapter of the book, I hope that helps. From time to time I will note specific pages which a posting updates too.

As always, comments on how I might improve this blog are welcome.

27 June 2007

The End of Competition Part 2

More on the politics of the Brussels summit. I have found a press conference held by President Sarkozy which is illuminating and I am just translating the juicy sound bites here.

In his speech, speech the President made the following comments:
“we have obtained a major reorientation on the objectives of the Union. Competition is no longer an objective of the Union or an end in itself, but a means to serve the internal market.’

‘the place of public services in Europe has been recognised and consecrated by a protocol that specifies that they play a major role, that the Europeans are attached to them and that their organisation is first and foremost, for the Member States. It is for another place to place this in harmony with competition, as a means and not an end in itself.

In the Q&A this exchange is interesting:

Question: To return to the objectives of the EU, on competition and the protection of citizens: what do these changes mean exactly in the daily life of the French and or the Europeans?

Answer: This perhaps gives a little more humanity to Europe. Because as an ideology, as dogma, what did competition give to Europe? It has give less and less to the people who vote at the European elections, and less and less to the people who believe in Europe. There was perhaps a need to reflect. I believe in competition, I believe in markets, but I believe in competition as a means and not an end in itself. This may also give a different legal direction to the Commission. That of a competition that is there to support the emergence of European champions, to carry out a true industrial policy. ….

It was not a question of making an economic Treaty or a liberal Treaty and explain it to the citizen. It was a question of turning our backs to ideology, dogma ad naivety.

Therefore, of course we can consider this doing politics. But precisely because we are political leaders, and it is perhaps because we have not done enough politics in Europe that we find ourselves in a Europe that people do not recognise themselves in anymore. From this perspective, I put pressed, with my friends, that France and The Netherlands were not late, that what happened to us could happen to others. In fact I find that [our decision] is an extremely important awakening. We are in a country which voted ‘no’ and it was a way of saying to our colleagues and friends in Europe: ‘wake up, you must see things differently.’ We have shown that this was possible even among 27 [member states] without leaving anyone behind…

The Commissioner for competition did not quite see eye to eye with these assertions.

Statement by European Commissioner for Competition Neelie Kroes on results of June 21-22 European Council - Protocol on Internal Market and Competition
An Internal Market without competition rules would be an empty shell - nice words, but no concrete results.
The Protocol on Internal Market and Competition agreed at the European Council clearly repeats that competition policy is fundamental to the Internal Market. It retains the existing competition rules which have served us so well for 50 years. It re-confirms the European Commission's duties as the independent competition enforcement authority for Europe.
Now I would like to get back to the job. The Commission will continue to enforce Europe's competition rules firmly and fairly: to bust cartels and monopolies, to vet mergers, to control state subsidies. That is in the interests of our Internal Market. It is in the interests of European citizens and consumers, it is what Europe's business community quite rightly expects and deserves, and it is a firm foundation for Europe's prosperity, notably by ensuring fair conditions for international investment.

Reform of the EC Treaties

Some more clarity has emerged about the Treaty amendment. The official resource is the Presidency Conclusions of 23 June 2007. Essentially there will be a Reform Treaty that amends both the Treaty of European Union and the EC Treaty. The TEU will remain as named, and the EC Treaty will be called the Treaty for the Functioning of the European Union (TFEU). The Treaty will be ready by the end of 2007 and in force by, I think, 2009. Then the Community will be known as a Union for all its activities.

For competition lawyers the key changes are twofold.

First, the ‘end of competition’
The TEU will have a general article at the beginning about the ambitions of the Union (Article 3). This was supposed to contain some reference to undistorted competition, but it has now gone. However, I understand that in the TFEU there will still be an Article 3 (which lists the tasks of the Union) and this will include Art 3(1)(g) which states that one of the tasks is establishing a system where competition is not distorted.

Article 3(3) TEU is the section where I think the reference to competition was deleted. This is the wording as it stands (and apparently ‘undistorted competition’ should have followed after the ‘internal market’ phrase.

“The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance.”

The reference to competition is relegated to a Protocol on internal market and competition“The High Contracting Parties, considering that the internal market as set out in Article 3 of the Treaty on European Union includes a system ensuring that competition is not distorted
Have agreed that, to this end, the Union shall, if necessary, take action under the provisions of the Treaties, including under Article 308 of the Treaty on the Functioning of the Union."

Is the deletion of competition significant? If you read the current version of Article 2 EC (which lists the Community’s tasks) as it stands, there is no reference to competition there either. From this perspective competition was never a basic ‘task’ (old Art 2 EC) and is now not an ‘objective’ (new Art 3 TEU). So all those press comments that competition was removed after 50 years are wrong. Competition was never a key objective, only ever a job the Community had to do. Accordingly, the deletion from the draft is a political gesture so that President Sarkozy can tell the French public that the Reform Treaty, unlike the Constitution, is not about importing Anglo-Saxon capitalism. (The fact that the Constitution did not have competition in its aims either is conveniently ignored).

An alternative interpretation (as I suggested in the earlier post) is that the ECJ sees this as a way of rethinking its deontological approach and becomes less daring in extending the law in cases of ambiguity, and perhaps even begins to accept more public policy considerations such as those listed in Article 3(3). But then, as I said above, since there is no substantive change from the new and the old Treaty why should the court change its stance?

The protocol is a messy compromise – competition is ‘subsumed’ into the internal market (if you are familiar with the Guidelines on 81(3) you will see that subsuming is something which the Commission likes to do!) but I don’t get the reference to Article 308. Anyone care to explain? (The only reason I can come up with is that legislation under Art 308 can only pass if it is designed to reach the objectives of the EC and so while competition is not an objective, it is possible to invoke Art 308 to inject more competition in the EU). Has this been done in the past?

Second, a protocol on services of general interest
The current wording is below. There is so much verbiage on this topic but does it mean anything in practice? Article 16 so far seems to have had little impact. So, more pretty language of political value but scant legal interest.

Protocol on services of general interestThe High Contracting Parties, Wishing to emphasise the importance of services of general interest
Have agreed upon the following interpretative provisions, which shall be annexed to the Treaty on European Union and to the Treaty on the Functioning of the Union:
Article 1
The shared values of the Union in respect of services of general economic interest within the meaning of Article 16 EC Treaty include in particular:
- the essential role and the wide discretion of national, regional and local authorities in providing, commissioning and organizing services of general economic interest as closely as possible to the needs of the users;
- the diversity between various services of general economic interest and the differences in the needs and preferences of users that may result from different geographical, social or cultural situations;
- a high level of quality, safety and affordability, equal treatment and the promotion of universal access and of user rights;
Article 2
The provisions of the Treaties do not affect in any way the competence of Member States to provide, commission and organise noneconomic services of general interest.

22 June 2007

The End of Competition?

Breaking news, the EU's committment to 'undistorted competition' looks likely to disappear if the revised Treaty is agreed during the German summit. Excellent coverage in the peerless Financial Times suggests that this is President Sarkozy's doing (funny that, he is supposed to be a right-winger elected on a reform ticket) who was still upset by his clashes with the Commission when he tried to bail out French firms.

This could be significant because of the European Court often referring to the basic principles of EC Law found in the foundational articles in order to interpret EC Law, the so called teleological interpretation (purposive interpretation for the common lawyers). Surely the court cannot but be persuaded that if competition was an objective under the old Treaty, its disappearance indicates that the Court should depart from some of its basic principles. The Daily Telegraph reports fears that this chips away at one of the few good things the EC was actually good at.

However, according to the British (who apparently traded this concession for something else) this is just cosmetic, see Spiegel Online. This is also how the issue is seen by the Commission, who suggest that this would not affect the key role competition plays.

We will have to see the text of the Treaty as a whole before being certain of what this all means, but this goes to show how the pendulum can swing quite quickly from the Lisbon agenda and Mario Monti's DG Competition promoting competition and today's increased protectionism.

25 May 2007

Proving conspiracy

In Bell Atlantic et al v Twombly et al handed down on 21 May 2007 the Supreme Court explained what a plaintiff must plead in order to bring a claim under s.1 Sherman Act. The Federal Rule of Civil Procedure 8(a)(2) requires "a short and plain statement of the claim showing that the pleader is entitled to relief." The Court (7-2) considered what sufficed and according to the dissent it made claims more difficult.

The facts are easily stated but we need a little background. The liberalisation of the telecommunications market in the US occurred in two stages. In the first stage the market was divided up and a competitive market created for long distance phone calls, while the market for local calls was left with regional monopolies (colloquially the Baby Bells). The Baby Bells were not allowed access to the long distance market. The then Telecommunications Act 1996 made two changes: (1) it abolished the Baby Bell's monopolies and gave entrants strong access rights to use the Baby Bells' facilities to enter the local market and (2) as a qui pro quo it allowed the Baby Bells (Now called ILECS - Incumbent Local Exchange Carriers) to enter the long distance market.

The defendants here are the ILECS. The plaintiffs are clients of some of the firms that had tried to enter the local markets (Competitive Local Exchange Carriers, CLECS). They alleged a conspiracy by the ILECS that had two strands: first the ILECS agreed to make life difficult for new entrants by making access to their networks expensive (here recall the Trinko case of 2004), second the ILECS agreed not to compete against each other, so that an ILEC in one part of the US agreed not to try and compete against another ILEC. The plaintiffs alleged that without this conspiracy the market would have been more competitive, they would have got cheaper telecommunications services and so suffered antitrust injury as a result of this conspiracy.

All well and good, but did the plaintiffs have any evidence to prove this? They had an interesting statement by the Chief Executive Officer of one of the defendants, who said that competing with another ILEC "might be a good way to turn a quick dollar but that doesn't make it right." Have we got enough here to bring a claim?

The majority said no. In line with the earlier case law, parallel behaviour is not sufficient on its own to prove that there is a conspiracy. From a procedural point of view, the Court said that the plaintiff must bring to the table more than an allegation of conspiracy, but some facts to show that the claim is not speculative, which would then entitle the plaintiff to discovery. But mere allegations based on parallel behaviour will not do.

In reaching this decision the Court was influenced by the size of this lawsuit it was a class action by 90% of the subscribes to local telephone or high speed internet against the largest telecommunications firms, for a 7 year conspiracy. The Court feared that if this case was allowed to proceed that the costs of discovery would be too high to bear and discovery too expensive to manage. So here is a tradeoff between the cost of litigation and the benefit of a successful claim. The Court's judgment has been described as a major win for defendants, especially corporate defendants.

This is probably a most significant judgment and it will be interesting to see how it affects stand-alone private litigation. If, before getting the right to discover evidence of a conspiracy you must already have some evidence, does it not create a Catch-22? (Obviously most corporations are sufficiently savvy to avoid placing in the public domain any confession of an agreement, so where is the plaintiff to get his evidence from?)

One small point which might go plaintiff's way is the reasoning of the Court when it considered the fact that the defendants did not try and compete against each other. The Court said: "In a traditionally unregulated industry with low barriers to entry, sparse competition among large firms dominating separate geographical segments of the market could very well signify illegal agreement, but here we have an obvious alternative explanation. In the decade preceding the 1996 Act and well before that, monopoly was the norm in telecommunications, not the exception. The ILECs were born in that world, doubtless liked the world the way it was, and surely knew the adage about him who lives by the sword. Hence, a natural explanation for the noncompetition alleged is that the former Government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same thing." So does this mean that if we find a scenario where say builiders based in Camden regularly refuse to carry out work in Westminster (these are London boroughs) and vice versa, that we have enough evidence to commence a trial?

The Court was not impressed with the CEO's statement either, and quoted this passage which I think is a helpful reminder that not everything that looks inefficient is anticompetitive: “[f]irms do not expand without limit and none of them enters every market that an outside observer might regard as profitable, or even a small portion of such markets.” Areeda & Hovenkamp ¶307d, at 155 (Supp. 2006). The dissent took a different line:

"What did he mean by that? One possible (indeed plausible) inference is that he meant that while it would be in his company’s economic self-interest to compete with its brethren, he had agreed with his competitors not to do so. According to the complaint, that is how the Illinois Coalition for Competitive Telecom construed Notebaert’s statement, id., ¶44, App. 22 (calling the statement “evidence of potential collusion among regional Bell phone monopolies to not compete against one another and kill off potential competitors in local phone service”), and that is how Members of Congress construed his company’s behavior, id., ¶45, App. 23 (describing a letter to the Justice Department requesting an investigation into the possibility that the ILECs’ “very apparent non-competition policy” was coordinated).
Perhaps Notebaert meant instead that competition would be sensible in the short term but not in the long run. That’s what his lawyers tell us anyway. See Brief for Petitioners 36. But I would think that no one would know better what Notebaert meant than Notebaert himself. Instead of permitting respondents to ask Notebaert, however, the Court looks to other quotes from that and other articles and decides that what he meant was that entering new markets as a CLEC would not be a “ ‘sustainable economic model.’ ”

On this basis, the dissent would at least have wished for a trial to hear what the CEO meant, and the dissent feared that now defendants would try and dismiss claims of conspiracy by hiring economists to 'prove' that it was not efficient to collude.

In a Europe thinking about expanding private action, the repercussions of this judgment are worth following closely.

03 May 2007

Article 82 Guidelines in limbo

According to this news report, the Guidelines on Article 82 will not be published until the Microsoft case is handed down. Given that this case is in the CFI and an appeal to the ECJ is pending, is this an indication that we won't have any guidelines on Article 82 for the next few years? Surely one would not want to risk publishing Guidelines before the case is heard by the higher court? and this could be interesting depending on which Advocate General is picked to hear any appeal.

And on Microsoft, the Commission is talking tough, challenging the way that the company is complying with the 2004 decision, by issuing a statement of objections.

In a fast moving market the wheels of the regulatory system move very slowly.

24 April 2007

Further Reading...

Exam time at LSE, here a couple of fresh publications coinciding with revision. I'll post a 'new articles' review shortly, but now just two reports:

OFT on damages: the OFT launched a discussion paper to stimulate debate on private litigation. It starts off with a set of six general principles to inform the evolution of the law and is well worth looking through for some of the latest thinking.

FTC and DOJ: Report on Antitrust and Intellectual Property. Much scepticism on refusal to licence as an antitrust offence. Compare the European attitude to that in this report.

05 April 2007

American Modernization Commission Report Published

The AMC released its report on 3 April, making several recommendations, a few highlights of relevance are summarised below. The AMC is the latest in a regular review of antitrust laws, one of the more well-kown previos commissions is the 'Neal Report' that had suggested stronger action against oligopoly markets.

The AMC's report finds the state of antitrust law as essentially sound. Importantly the report emphasises that antitrust is not about making markets work better. It is not an industrial policy instrument. As I suggest in my book, EC Competition Law is still seen as forming an important part of the Community's industrial policy.

Highlights of the report include:

1) abolish the Robinson-Patman Act (this is a much disliked statute prohibiting price discrimination).

2) Bundled rebates should be handled differently, suggesting a three stage test: (a) after allocating all discounts and rebates attributable to the entire bundle of products to the competitive product, the defendant sold the competitive product below its incremental cost for the competitive product; (b) the defendant is likely to recoup these short-term losses; and (c) the bundled discount or rebate program has had or is likely to have an adverse effect on competition.
The gist of this is broadly to apply a predatory pricing type test to rebates. This is along similar lines to the EC Commission, although it is a much less aggressive standard than that advocated by the Commission or that applied in British Airways (see earlier post).

3) Facilitate private litigation by allowing law suits by direct and indirect purchasers. The idea is that both types of plaintiffs be able to sue, and that they damages (based on the higher prices charged by the defendant) are divided up between direct and indirect purchasers. This is interesting because there are similar debates in Europe. For example, in Germany the law provides that direct purchasers can sue but indirect purchasers cannot. Is this a matter for Community Law?

03 April 2007

Resale Price Maintenance: the per se rule is going, going...

The US Supreme Court is hearing a case (Leegin Creative Leather Products, Inc. v. PSKS, Inc.) where it is being asked to overrule the rule which makes resale price maintenance agreements per se illegal. Obviously these are also black listed in the EC under the Block Exemption for Vertical Restraints. Some think that the Court will overrule the per se rule established in Dr. Miles, and judging by the transcripts of the oral argument, this seems likely.

I'll debate the minutiae of the rule another time, but I can't help notice that the US government has submitted an amicus brief supporting the overruling of the old cases. This is how antitrust authorities should be getting rid of old doctrines. Not by publishing guidelines in the hope that people will forget the case law. Reform of Article 82 in Europe should follow this track: incremental or radical alterations by the European Court of Justice that erode precedents that are seen as unsuitable.

02 April 2007

Discussion Paper in the Doldrums?

In 2005 the Commission announced a review of the application of Article 82 to exclusionary abuses leading to the publication of a Discussion Paper in December 2005. The gist of this was to move enforcement away from the current overly aggressive policy towards an approach based on 'mainstream economics'. Has the Court's recent judgment in Case C-95/04P British Airways v Commission (15 March 2007) killed the Discussion Paper off?

The case addressed BA's rebate scheme to travel agents. Virgin had complained and the Commission found an abuse even though Virgin's market share increased during the period the abuse was taking place. As I explain in Chapter 6 there are several policy reasons that animated the Commission's decision, not least the wish to liberalise air transport. The judgment of the Court is unremarkable, in that it confirms the more thorough analysis of the Court of First Instance, and in so doing confirms how easy it is to prove that rebates are abusive. The Commission needs merely to show that rebates have a loyalty effect, and a tendency that this will restrict competition, which is established by the first step in that competitors are selling less goods because the rebates make retailers loyal to the dominant firm. The burden of proof is very low. I think the Discussion Paper of 2005 would probably require somewhat more evidence before condemning rebates. So is the discussion paper dead after this judgment?

Advocate General Kokott
Her opinion is a must read. It is a reaffirmation of the 'ordoliberal' understanding of competition law, and agree with her or not, she makes a clear case for the status quo. Listen in particular to her general reflections on competition law:

68. The starting-point here must be the protective purpose of Article 82 EC. The provision forms part of a system designed to protect competition within the internal market from distortions (Article 3(1)(g) EC). Accordingly, Article 82 EC, like the other competition rules of the Treaty, is not designed only or primarily to protect the immediate interests of individual competitors or consumers, but to protect the structure of the market and thus competition as such (as an institution), which has already been weakened by the presence of the dominant undertaking on the market. In this way, consumers are also indirectly protected. Because where competition as such is damaged, disadvantages for consumers are also to be feared.

So antitrust in Europe protects an 'institution', or perhaps a market structure. In this light, BA's existing competitors form part of the institution that allows for competition in the airline market. This is not the language of mainstream economics the Commission wishes to embrace. Now track back and listen to her take on the Discussion Paper:

28. In this context it is immaterial how the Commission intends to define its competition policy with regard to Article 82 EC for the future. Any reorientation in the application of Article 82 EC can be of relevance only for future decisions of the Commission, not for the legal assessment of a decision already taken. Moreover, even if its administrative practice were to change, the Commission would still have to act within the framework prescribed for it by Article 82 EC as interpreted by the Court of Justice.

So basically, in her view there is no chance for the Commission to make any significant departure from the case law, since she is quite content that the current case law protects the 'institution' of competition.

The Court of Justice
There is slightly more hope for bits of the Discussion Paper to survive in the Court's judgment. At para.86 the Court accepts an efficiency defence designed along the lines of Article 81(3), which the Discussion Paper also envisaged. But even the Court at paragraph 106 backs up the Advocate General and decides that there is no need to prove consumer harm to find an abuse because an abuse is found when there is an impact on an 'effective competition structure.' And since loyalty rebates make retailers buy less of competitors' goods, market structure is affected.

One thought: in Oscar Bronner, the Court said that the defendant's alleged 'essential facility' was not essential because it was plausible for all competitiors to get together and design an alternative. Should the Court in rebate cases not take a similar line? BA can give deep discounts because of its financial strengths. But then can Virgin not enter into some sort of agreement with other airlines and offer packages of tickets to travl agents? Given that BA's maket share was 40% and falling, it should not have been too hard for say three airlines to offer some form of collective rebate to lure travel agents to promote their tickets. Instead, the law in this case is that no other company, idividually, has a big enough 'financial base' (para.76) to garnt rebates that compete with BA. This line seems to always favour small firms against big ones. As I argue in my book in chapter 5, dominance is too frequently associated with 'commercial power'. This is another manifestation of that approach.

In the national courts
Assume (as is expected) that the Commission publishes Guidelines on Article 82 this summer. Plaintiff wants to take a case in a national court for alleged abusive rebates. Does the national court apply the Guidelines (which may make life harder for plaintiff) or follow the case law? It seems to me that a national court will more likely follow precedent than a soft law measure. If so, even if the Commission follows its own guidelines and stops taking up the kinds of cases it took in the past, the current law on rebates may well live on in national courts.

It would be remarkable if national courts were to enforce Article 82 in one way and the Commission in another, but this is what you get when you try to reform hard law (cases) through soft law (guidelines). The Commission might have been better off admitting that its approach to Art 82 was wrong and start from scratch. But this was politically impossible because when the Discussion Paper was being worked on there were several significant cases going through the Courts (Michelin 2 and BA on rebates, Wanadoo on predatory pricing, and Microsoft on refusals to deal and tying...) With the case law still in development, should one not perhaps have waited before considering reform? (On this last point, and thinking VERY laterally, perhaps one can draw lessons from Giandomenico Majone's important critque of the European Union in his 2005 book Dilemmas of European Integration.)

28 March 2007

The Chicago School, Pre-Chicago, Post-Chicago

Last year Herbert Hovenkamp published an important book: The Antitrust Enterprise: Principle and Execution. It is a short, accessible overview of US antitrust, ideal both for those wishing to recap US antitrust before an exam, or those new to the subject. There is a good review and some pretty sharp commentary in the University of Chicago Law School Faculty Blog.

However, something about this book left me a little uneasy, and other on line observers have reached similar views: that the book advocates a fairly narrow, conservative vision of antitrust laws. You get this message early on at pp.10-15 where antitrust is described as a residual, reactive regulatory law. To explain why this is worthy of comment we need to track back a little.

In the 1970s two pathbreaking works were published, Richard Posner's Antitrust Law: An Economic Perspective (1976) and Robert Bork's The Antitrust Paradox (1978). The historical significance of these books was that they provided a blueprint (or a manifesto) for what we now call the Chicago School view of antitrust. Both authors were reacting to a 'populist' version of antitrust that seemed to protect the public interest. The effect of those books was to create and capture the intellectual mood of the time and led to the Chicago School approach to antitrust. Before the Chicagoans dominated the courtrooms, the major mainstream economic position was the Harvard School. I discuss key differences between these two schools in Chapter 3 of my book. Essentially, Harvardians believed that concentrated markets were an antitrust problem, while Chicagoans thought that the only problem antitrust laws should be concerned with is collusion, and that the only entry barriers were erected by government. This implied a significantly less aggressive antitrust policy. In 2001, Richard Posner published a second edition of his book, but this time the title was simply Antitrust Law. In the preface he explained that now there was no need for the subtitle, because now the ideological battle had been won: there was no other perspective to embrace.

However, in the 1980s a number of scholars began to speak of a post-Chicago approach to antitrust. In brief, this approach criticised Chicagoans for being too laissez-faire and suggested instead that, with the aid of new economic tools, especially game theory, one could endorse a more aggressive antitrust policy based on economic principles.

With Posner, I think it is best to treat these three schools of antitrust as historical labels representing the dominant economic paradigms rather than ideologies, so with some rough dates indicating the enforcement high-water marks:
  1. Harvard (1960-mid 70s)
  2. Chicago (mid 70s to mid 80s)
  3. Post-Chicago (late 80s onwards)
Hovenkamp, at around page 37 of his book, suggests that the 'new Harvard position' is represented by the multi-volume Antitrust Law treatise, first authored by Harvard Professors Areeda and Turner. Hovenkamp is now one of the co-contributors to this work. So now every major American commentator has broadly the same economic outlook. The 'new Harvard' in this book is no different from the 'post-Chicagoan' (as defined above) take in Posner's book. What is a little disappointing about this state of affairs is that there is no antitrust alternative any longer.

However, I think that there is space for debate, there is room to assert a more aggressive antitrust policy. In fact, a close comparison suggests that Hovenkamp's 'new Harvard' might be a little more aggressive than the more conservative position of the new Chicago, for example Hovenkamp supports the failed attempt by the Department of Justice to challenge the predatory practices by American Airways to oust new entrants, which the courts rejected (I discuss this case in chapter 3, and see Aaron Edlin's on line comments). Perhaps what might have helped Hovenkamp's book is a more emphatic assertion of the key distinguishing features between his 'new Harvard' approach and the more conservative elements of the post-Chicago school. A nice textbook written with a more aggressive antitrust streak is Sullivan and Grimes' The Law of Antitrust: An Integrated Handbook (2nd ed 2006).

One reason many antitrust scholars might be a little wary of espousing aggressive antitrust policy these days is that they risk being criticised for returning antitrust to the pre-economic, populist approach, which perhaps still lingers on in European antitrust circles...

22 February 2007

The Supreme Court and predatory bidding - lessons for the EU

Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. Inc. (20 February 2007)

Defendant and plaintiff were competitors, both operated sawmills and purchased red alder sawlogs for their mills. Some of the logs are purchased through long term contracts, some are obtained from the mill owner’s property, and some are acquired through bidding. Plaintiff alleged that defendant placed bids at very high prices, forcing the price of logs to go up, thereby forcing plaintiff to pay more for his logs too, which forced plaintiff to increase his sales prices. The result was that defendant’s predatory strategy drove plaintiff out of business. In the lower courts plaintiff was successful in an action based on s.2 Sherman Act, in particular the courts did not think that predatory bidding was comparable to predatory pricing, so the strict standards set out by the Supreme Court in Brooke Group (1993) did not apply.

The Supreme Court disagreed, ruled that predatory bidding is judged by the same standards as predatory pricing, and because plaintiff admitted it was unable to prove the elements required by Brooke Group, the claim was unsuccessful. The judgment comes a short time after the CFI ruled on predatory pricing (see earlier entry in this blog) and holds two lessons for the EU: (1) how to use economics to analyse disputes; (2) how to write judgments.

(1) The use of economics

First, the Court explored whether predatory bidding (the exercise of monopsony power; that is, buyer power) is comparable to predatory pricing. The logic is similar: in a first period the predator engages in a measure that raises rivals’ costs (here by bidding high, increasing the price of the inputs and forcing competitors to pay more); in a second period, once competitors have been driven out of business, the predator uses its monopsony power to force sellers of input to lower the prices. As with predatory pricing, the first period represent’s the predator’s ‘investment’ – he suffers losses of profit and his dominance allows him to survive while competitors go out of business. The second period is when he recovers that investment by getting low prices for the inputs, recovering the losses made in the first. Accordingly, the legal standard for predatory bidding should be the same as that for predatory pricing.

Second, the Court held that aggressive commercial tactics are the very essence of competition, and that there were a myriad of reasons why buying inputs at high prices could be innocent, or even pro-competitive: (1) miscalculation of input needs; (2) a response to increased consumer demand; (3) a more efficient firm might bid up input prices to gain market share in the output market; (4) a firm that adopted an input intensive production process might bid to increase the inputs; (5) a firm might buy a lot of inputs today to hedge against future shortages. ‘There is nothing illicit about these bidding decisions. Indeed, this sort of high bidding is essential to competition and innovation.’

Third, the Court noted that like predatory pricing, a failed attempt of predatory bidding is benign. The monopsonist who buys more goods, will be in a position to sell more to consumers, and provided he does not have monopoly power on the selling side, this means that consumers get more goods at competitive prices.

Two things follow from this analysis: (a) predatory bidding is a high risk strategy that has many efficiency justifications; (b) a failed attempt to achieve the rival’s exclusion does not harm consumers. Therefore, a high standard of proof is necessary or there is a ‘risk of chilling pro-competitive behaviour with too law a liability standard.’

The legal test therefore is the same as for predatory pricing: (1) the predatory bidding results in below cost output sales; (2) there is a dangerous probability that the losses in the first period will be recouped through the exercise of monopsony power.

When will European courts think about aggressive commercial behaviour in this way?

Even those who think that a more lenient standard should apply and that Europe is right to be tougher on predators might take an interest in the lower court’s decision. The 9th Circuit held that three things needed proof: anticompetitive conduct through predatory overbidding, intended specifically to eliminate competition, and a dangerous probability of achieving monopoly power .

On intention, the court used evidence which in my mind is more compelling than that in the Wanadoo case. The court used three types of evidence: (1) Defendant’s anticompetitive conduct itself, (2) the testimony of Defendant’s employees, and (3) Defendant’s business projections regarding sawlog prices. Note that (2) is trial based testimony, not internal memoranda. Note also how items (1) and (3) show that Defendant had calculated what it would take to outs plaintiff. This evidence is much more specific than that which the CFI relied upon.

(2) Judicial Style

This decision is 16 pages of a pdf file. The first paragraph is a concise statement of the key points. The facts are examined in a succinct manner. Quotes from previous cases are brief and to the point. Academic literature is mentioned. The case can easily be read, and understood, while commuting on the tube. It is unfortunate that the style of judgment in the European Courts cannot be as clear and as concise.

Interestingly perhaps, the Court eschews mention of wider debates about the nature of S.2 monopolisation claims, a topical issue in light of the current hearings on single firm conduct. Perhaps the Court thinks it best if the law develops incrementally rather than setting out general standards for anticompetitive behaviour like the no economic sense test, or the as efficient competitor test.

12 February 2007

Predatory Pricing - bad intentions and no economic sense

Case T-340/03 France Télécom v Commission (judgment of 30 January 2007)

The Commission’s Wandoo decision fining the firm for predatory pricing in the sale of high-speed internet access, was affirmed by the Court of First Instance. The Commission immediately issued a press release to show its delight. In this press release is an important passage: “Broadband is a strategic sector highly important to the European economy and the Commission's strategy for growth and jobs. The Commission is determined to prevent exclusionary practices by incumbent operators on strategic markets.” This is in line with its 2004 Communication, which sought to align competition law enforcement with the Lisbon Strategy (a bold attempt to make Europe more competitive). This is the ‘Community interest’ that guides competition enforcement post-modernisation. But if the pursuit of this interest leads to decisions like this one, we must wonder whether Europe is not made less competitive by competition law enforcement.

After a hundred or so paragraphs where the CFI rejects procedural points and checks the Commission’s arithmetic, the Court wrestles with several interesting points of principle that Wanadoo raised. Their rejection shows a complete failure to understand predatory pricing.

Meeting competition
There is some doubt as to whether a dominant firm can react aggressively when challenged by competitors. The CFI said that the dominant firm “cannot rely on an absolute right to align its prices on those of its competitors in order to justify its conduct. Even if alignment of prices by a dominant undertaking on those of its competitors is not in itself abusive or objectionable, it might become so where it is aimed not only at protecting its interests but also at strengthening and abusing its dominant position.” (para.187)

This is not novel, but it confirms that there is no meeting competition ‘defence’ in EC competition law. The only defence is for the dominant firm to prove that there was no abuse. But it is too easy for the Commission to prove abuse.

Prices above average variable cost (AVC) and below average total cost (ATC) are abusive only if there is a plan to eliminate competition. More clearly than in earlier cases, the CFI states that this requires proof of ‘intention’.

In this case, the Commission proves intention with a raft of internal documents where the dominant firm’s management explained how it wished to pre-empt the challenge of new entrants by selling goods more cheaply. The firm’s intention to acquire and hold on to market power is evidence of abuse. This is unwise. In previous cases, intent was shown by selective price cuts designed to harm certain rivals, this was a little more probative. In contrast here, intent is proven by evidence that I suspect we can find in any company. What company does not want to beat its competitors? To gain and hold on to a higher market share? Is the intention to compete evidence of abuse? Yes, it seems.

Admittedly Wanadoo was somewhat unwise to write in language that so fits the Commission’s legal standards, look at this note: ‘The high-speed and ADSL market will, for the next few years, continue to be conquest-driven, the strategic objective being to gain a dominant position in terms of market share, the period of profitability only coming later.’ (cited at 215) Nevertheless, can this really be sufficient evidence of anticompetitive intent?

Perhaps as a last throw of the dice, the defendant thought that if the Commission’s burden of proof is so light in showing intention, that the Court would see sense and rectify this by requiring proof that predatory pricing would create a dominant position and that Wanadoo would be able to recoup its losses. No such luck. In Tetra Pak 2 the ECJ said that on the facts of that case recoupment need not be shown. The CFI says that there is never any need to prove recoupment. (227). This removes the caution of the ECJ and is in line with the Advocate General’s view in Tetra Pak 2 that all predatory pricing should be condemned without the need to show the possibility of recouping losses.

Predatory pricing standards and the Lisbon strategy
To be clear, I am not suggesting predatory pricing should not go unpunished, nor that Wanadoo was not trying to harm its competitors. Rather, that the court sets such a low threshold of illegality that dominant firms are deprived of any incentive to compete hard. First, the fact that
recoupment need not be shown, is economically irrational: if a predator cannot recover the loss of profits, it means predation was unsuccessful, and competitors have not been harmed, so the predator is punished by the market for his irrational attempt to exclude rivals. Second, flimsy evidence of intention makes findings too easy, creating further risks of over enforcement. If dominant firms cannot respond aggressively to maintain their position (Wanadoo has to pay a fine of 10.35 million euros), what incentives are there to be successful?

10 February 2007

Information Exchanges and the Consumer Interest

Case C-238/05 Asnef-Equifax v. Ausbanc judgment of 26 November 2006

Spanish banks agreed to set up an electronic register of credit information that would disclose the credit history of potential customers. The effect is that each bank is aware of each potential client’s credit history and takes this into account when negotiating further loans. A horizontal agreement no doubt, but was it contrary to Article 81? The Spanish Court was in doubt and asked two questions of the ECJ.

Does the agreement restrict competition?
Wisely the Court noted that prima facie the agreement made for more competitive markets, since lenders were now better placed to offer loans based on a more informed understanding of each client’s credit risk (so the solvent client would get preferential loans, and the very risky clients no loans at all, thus preventing him from accumulating even more debt). Moreover, clients can now obtain credit more easily from financial institutions other than the ones from which they have borrowed historically, since all banks have their credit histories.

However, an anticompetitive effect might arise, said the Court, and three factors were relevant (this is not a cumulative test):
(1) The degree of market concentration (that is, how many banks are there, a few or many?)
(2) Whether the register discloses information that allows competitors to see the business strategy of other lenders (accordingly it is imperative that the names of lenders be invisible)
(3) Whether all lenders are able to have access to the register

Condition 3: making markets work better?
The ECJ rightly noted that the agreement, if anything, was more likely to benefit consumers than to harm them. Nevertheless, it is troubling that the Court said that the agreement was lawful only because any lender could join the scheme set up by the parties. The condition makes sense for all lenders because the more lenders join, the more information all have about the credit history of clients. But the Court’s analysis is slightly troubling because even if the first two criteria are met (the market is not concentrated and the information does not allow for parties to understand each other’s business strategies) the exchange of information is lawful only if it is open for newcomers, but the first two conditions are sufficient to prove that the agreement does not restrict competition. The third condition is designed to allow the market to grow, providing opportunities for new lenders to enter. But this is regulation, not the application of competition law.

The Consumer interest
Should the national court find (highly unlikely given the above reasoning) that the agreement restricts competition, the Court offered some guidance on how the consumer benefit test in Article 81(3) might be applied. The Court did not refer to the Guidelines on Article 81(3) that roughly have the same as the judgment: Paragraph 87: ‘The decisive factor is the overall impact on consumers of the products within the relevant market and not the impact on individual members of this group of consumers.’

But after stating that one should look at the benefits for consumers generally, the Court muddies the water, saying that two groups of consumers benefit: those who get better loans, and those who do not get loans because of their bad credit scores, and this is a benefit because it avoids over indebtedness. It is a little patronising for the Court to say that, but also one wonders why a private agreement is necessary to avoid over indebtedness, as surely this is a task for the legislature, not competitors. But this wider conception of consumer interest is part of the Commission’s practice – recall how reduced electricity consumption benefited all members of society in CECED.

In sum, this judgment shows the Court in full regulatory mode: it designs markets to ensure they facilitate the entry of new players, and suggests that agreements can be exempted if big spenders are denied loans, competition law as a device to protect improvident consumers. Real antitrust law shoudl be more humble about its capacities and its scope.