|
Single-Firm Conduct As Related to Competition Prepared by the Commission on Competition Submission to the US Federal Trade Commission and Department of Justice Hearings on Section 2 (project no P062106) of the Sherman Act ICC, the International Chamber of Commerce, and the USCIB, United States Council for International Business, welcome the opportunity to submit comments to Federal Trade Commission and Department of Justice Hearings on Section 2 of the Sherman Act regarding certain antitrust issues that have been identified for potential study. As world business organizations with members from all sectors in over 130 countries, ICC and USCIB are able to draw on a rich range of perspectives from different sectors on these issues. With their long history of interest in the issues below, it is hoped that the following comments may assist the hearings to identify priority areas for further work. The issues identified and questions presented in the Federal Register notice have been previously addressed in recent comments submitted by ICC and the USCIB, specifically in the International Chamber of Commerce, Comments on the Reform of the Application of Article 82 of the EC Treaty1; the ICC Comments on the European Commission Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses2; the International Chamber of Commerce, Comments on Selected Issues for Study by the U.S. Antitrust Modernization Commission;3 and the United States Council for International Business, Submission to the Directorate-General for Competition on the Application of Article 82 of the Treaty to Exclusionary Abuses.4 Rather than repeat this material in its entirety, ICC and USCIB direct the staff to them generally, and here include only highlights addressing particular issues and questions presented in the Federal Register notice.
There is no basis for the premise that all rebate systems established by a dominant undertaking are abusive unless they are cost-justified. International Chamber of Commerce, Comments on the Reform of the Application of Article 82 of the EC Treaty, Document No. 225/623 (12 December 2005) at 15. ICC has problems understanding why it would be abusive for dominant undertakings to try to 'maintain or strengthen' market shares through the adoption of rebates... Competition is generally about increasing market shares to the detriment of competitors... [D]ominant undertakings should be allowed to compete aggressively on rebates since this may lead to long-term aggressive price competition. Rebates would become abusive in limited defined circumstances when competitive strategies are not 'on the merits' or involve predatory or other anticompetitive behaviour resulting in likely foreclosure effects, for example, "full line forcing". International Chamber of Commerce, ICC Comments on the European Commission Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses, Document No. 225/627 (7 April 2006) at 14-15.
Any kind of fidelity rebate can have a pro-competitive role in the sense that it creates further dimension of competition (the non-linear price schedule) and it can represent a more aggressive pricing strategy: hence an additional minimal condition for rebates to be abusive should be that competitors are not able to propose similar rebates or different ones (with different thresholds),... International Chamber of Commerce, ICC Comments on the European Commission Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses, Document No. 225/627 (7 April 2006) at 16.
[R]ebates increase allocative efficiency and consumer welfare by increasing output and reducing prices. They are often preferred by customers to alternative arrangements and are often the result of hard bargaining by customers to get the best price from undertakings that, because they are dominant, would otherwise charge higher prices. International Chamber of Commerce, Comments on the Reform of the Application of Article 82 of the EC Treaty, Document No. 225/623 (12 December 2005) at 13. Loyalty rebates are particularly important to a pure-play innovation company and ultimately for end-consumers. Consumers may benefit, for example, from a manufacturer having a low marginal input cost, when that low cost is passed on to the consumers. This in turn will provide the manufacturer with an incentive to expand sales by competing on price. Additionally, loyalty rebates may facilitate efficient recovery of fixed costs. In general, consumers will face higher prices where an innovator needs to charge higher prices - resulting in lower volume - in order to recover fixed research and development costs. A loyalty rebate scheme allows the innovator to charge a relatively high price for the non-contestable share of the market, where demand is relatively inelastic, while charging a lower price (after loyalty rebates) for the contestable part of the market, where demand elasticity is higher. The company can simultaneously profit from a higher margin on the infra-marginal units without losing volume at the margins. International Chamber of Commerce, ICC Comments on the European Commission Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses, Document No. 225/627 (7 April 2006) at 18.
First, 'distorting' effect on competitors docs not necessarily mean 'abusive'. Findings of abuse should be based on a longer-term market assessment that should take into account competitors' likely response to the rebate system, customers' ability to switch and long term benefits for end-users. International Chamber of Commerce, ICC Comments on the European Commission Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses, Document No. 225/627 {7 April 2006) at 14.
Increases in allocative efficiency and consumer welfare ought to be regarded as objective justifications for rebates and should negate the assumption that such rebates are exclusionary by their very nature. International Chamber of Commerce, Comments on the Reform of the Application of Article 82 of the EC Treaty, Document No. 225/623 (12 December 2005) at 14. It is critical that the regulation of these practices focus on their effects on the welfare of customers in the market. The ability of rivals to match a dominant firm's discounts is at best ambiguous evidence on the desirability of the practice. Inadequate attention to demonstrable competitive effects could create law that preserves inefficient competitors while sacrificing competition. Remedial relief is not warranted when smaller competitors have difficulty competing against a dominant player that is more efficient. Efficiencies should always be relevant in unilateral conduct cases -- whether preferred in defense of the practice or implicated in the proposed remedy. Challengers of aggressive discounting should bear a heavy burden to show that intervention in the marketplace would produce remedies that benefit consumers without imposing costs that consumers will bear. International Chamber of Commerce, Comments on Selected Issues for Study by the U.S. Antitrust Modernization Commission, Document No. 225/621 (1 September 2005) at 17.
Consideration of the effects of a practice should focus on the maintenance or enrichment of market power, not structural dominance. When enforcement agencies or tribunals protect competition through the regulation of single-firm conduct, they must engage in the task of distinguishing between firms that achieve or maintain a dominant position through legitimate means and those that have done so through means that hinder the competitive process. Dominant firms often employ behavior that combines valuable innovation with aggressive marketing. International Chamber of Commerce, Comments on Selected issues far Study by the U.S. Antitrust Modernization Commission, Document No. 225/621 (1 September 2005) at V7.
Market-leading companies should be able to continue producing innovative combinations of products benefiting consumers without running afoul of the prohibitions on tying unless the competition authority can rebut the innovating firm's prima facie case of efficiency gains. When companies combine formerly separate products, consumer welfare is usually increased as firms realize the efficiencies involved. These efficiencies may be the result of greater product functionality or the elimination of double marginalization, or simple convenience. Such tying or bundling may also lead to system-based competition, which may create an even more innovative and competitive market than component-based systems, as the markets for computer systems, home theaters, and cell phones aptly demonstrate. United States Council for International Business, Submission to the Directorate-General for Competition on the Application of Article 82 of the Treaty to Exclusionary Abuses (30 March 2006) at 23.
[B]undling is a valuable strategy to gain broader distribution of the products or service that is subject to network effects. And the broader the distribution, the greater the value produced for all consumers. This is particularly true when the product or service in question has a low (or no) marginal costs, because the supplier can costlessly include the product or service in bundles with other products... Similarly, we believe that it should be acknowledged that bundling can generate efficiencies in multi-sided markets, i.e. markets where products or service must be matched with other products or service to have value... The complex business models resulting from multi-sided markets often require bundling practices because the consumption on one side of the market is being "sold" on the other side of the market, and piece-meal consumption on one side of the market breaks down the interdependent ecosystem. International Chamber of Commerce, ICC Comments on the European Commission Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses, Document No. 225/627 (7 April 2006) at 24.
Because the harm over-enforcement can cause to consumer welfare is significant in this area, the ideal test is one that greatly reduces the risk of enforcement by being administrable by competition authorities while being easily and predictably applied by businesses. It would create a safe harbour for which a business can qualify using its own readily available data, thus not diminishing the effects of efficient conduct as a result of compliance costs. United States Council for International Business, Submission to the Directorate-General for Competition on the Application of Article 82 of the Treaty to Exclusionary Abuses (30 March 2006) at 24-25.
It is critical that the regulation of these practices focus on their effects on the welfare of customers in the market. The ability of rivals to match a dominant firm's discounts is at best ambiguous evidence on the desirability of the practice. International Chamber of Commerce, Comments on Selected Issues for Study by the U.S. Antitrust Modernization Commission, Document No. 225/621 (1 September 2005) at 17. [T]he fact that other undertakings in the market also offer bundles is a presumption that bundling generates efficiencies and meets consumer demand - if not, bundling by the dominant undertaking would provide competitors with a great opportunity to differentiate their offerings and make them more attractive to consumers. Additionally, the dominant undertaking ought to be able to compete with bundles offered by its competitors. International Chamber of Commerce, ICC Comments on the European Commission Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses, Document No. 225/627 (7 April 2006) at 22. If there were sufficient customer demand to make the supply of the unbundled product profitable, competitors of the dominant undertaking would most likely avail themselves of this business opportunity. Id.
[A] safe harbour based upon analysis of whether "the incremental price that customers pay for each of the dominant company's products in the bundle [covers] the long-run incremental costs of the dominant company of including th[e] product in the bundle." Assuming that this safe harbour is sufficient, then for mixed-bundle discounts or rebates that fall outside the safe harbour, the Commission should then continue the analysis by demonstrating (1) a likelihood of recoupment and (2) a likelihood of the creation of substantial market power in the relevant market for the "bundled" product in order to show that discounting through mixed bundling constitutes an abuse of dominance. Absent such a showing, mere exclusion of a competitor should not be found sufficient to establish a finding of anticompetitive bundling. United States Council for International Business, Submission to the Directorate-General for Competition on the Application of Article 82 of the Treaty to Exclusionary Abuses (30 March 2006) at 23. The fundamental inquiry when analyzing a tying arrangement should be whether competition is threatened by the practice in question. ICC members believe that this assessment is best accomplished by analyzing tying arrangements under the rule of reason. International Chamber of Commerce, Comments on Selected Issues for Study by the U.S. Antitrust Modernization Commission, Document No. 225/621 (1 September 2005) at 15. It can be difficult to distinguish between anticompetitive acts and vigorous competition. This is particularly true when the alleged anticompetitive act is the offering of lower prices to customers - practices such as aggressive discounting, attractive rebates, and various loyalty programs. The law should continue to demand that companies challenging such practices demonstrate anticompetitive consequences, because these types of cases may discourage practices that provide significant net benefits. International Chamber of Commerce, Comments on Selected Issues for Study by the U.S. Antitrust Modernization Commission, Document No. 225/621 (1 September 2005) at 16. Inadequate attention to demonstrable competitive effects could create law that preserves inefficient competitors while sacrificing competition. Remedial relief is not warranted when smaller competitors have difficulty competing against a dominant player that is more efficient. Efficiencies should always be relevant in unilateral conduct cases - whether proferred in defense of the practice or implicated in the proposed remedy. Challengers of aggressive discounting should bear a heavy burden to show that intervention in the marketplace would produce remedies that benefit consumers without imposing costs that consumers will bear. International Chamber of Commerce, Comments on Selected Issues for Study by the U.S. Antitrust Modernization Commission, Document No. 225/621 (1 September 2005) at 17. [T]he distinct products test itself may not be helpful for understanding market dynamics because, by definition, this test is backward-looking... A better approach in these cases would be simply to ask whether the undertaking integrating the previously distinct products can make a plausible showing of efficiency gains. Since technical tying is normally efficient, market-leading undertakings would be able to continue producing innovative products benefiting consumers without running afoul of the prohibitions on tying. Id. We believe that the long-run incremental costs standard is inconsistent with business reality because it requires companies to price bundles to cover sunk fixed costs that are unrecoverable. This approach ignores the economic reality that, when businesses decide how to price a product, they do not consider costs that are "sunk" or "unrecoverable," even if not a single product is sold... We believe that a more appropriate cost standard in this case would be marginal costs ("MC") or at least Average Avoidable Costs ("AAC"). When business people decide whether or not to make a marginal sale at a particular price, they generally consider the marginal cost of making that sale. Id. at 23.
Dominance itself should not be sufficient to establish the likelihood of recoupment, particularly in technology markets. For example, looking forward one or two years in the dominance inquiry is not sufficient to undertake a proper assessment of recoupment where significant uncertainty abounds regarding not only cost and demand but the existence of potential entrants. It is entirely possible that a firm may be dominant in the sale and/or distribution of a given product, yet be constrained by entrants with highly disruptive technologies which require greater than one or two years to mature and be successfully commercialized. International Chamber of Commerce, ICC Comments on the European Commission Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses, Document No. 225/627 (7 April 2006) at 13. First, pricing at or above average total cost (ATC) should not provide a basis for a claim of predatory pricing. United States Council for International Business, Submission to the Directorate-General for Competition on the Application of Article 82 of the Treaty to Exclusionary Abuses (30 March 2006) at 21. Pricing above ATC ["average total cost"] is in general not considered predatory, but according to the virtually unanimous economic literature, it would be better to state explicitly that pricing above ATC is never predatory since it cannot lead to foreclosure of 'as efficient' competitors. International Chamber of Commerce, ICC Comments on the European Commission Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses, Document No. 225/627 (7 April 2006) at 12. [T]here are not economic justifications for a change of standard from AVC ["average variable cost] to LAIC ["long-run average incremental cost"]. Moreover, we believe that the LAIC standard is inconsistent with business reality because it requires companies to price to cover average sunk fixed costs that are unrecoverable: this approach ignores the economic reality that, when businesses decide how to price a product, they do not consider costs that are "sunk" or "unrecoverable," even if not a single product is sold. Id. at 13. Recoupment should be a critical element of any predatory pricing claim, since consumers will benefit overall from lower prices unless the firm engaging in below cost pricing is able to recoup all of its losses on a net present value basis. It is therefore not sufficient to presume a "likelihood of recoupment" from the fact that a firm holds a dominant position and, consequently, that there are likely to be barriers to entry into the relevant market. The existence of barriers to entry is necessary for the dominant firm to recoup its losses but is not sufficient to establish that recoupment would occur. The recoupment assessment should take into account the magnitude of the likely losses, the level of increased prices following foreclosure and the period of time during which those prices would need to be charged, the time value of money, and the prospects for innovation affecting the ability to recoup as well as the prospects for entry prior to recoupment of the losses on a NPV basis. United States Council for International Business, Submission to the Directorate-General for Competition on the Application of Article 82 of the Treaty to Exclusionary Abuses (30 March 2006) at 21-22.
In a market system of free competition, even a dominant company must, at least in principle, be allowed to freely decide upon its sales strategy and distribution system. If it decides to change its distribution policy, e.g., to terminate existing distribution contracts and to establish a direct sales organization, it is its own choice for which it bears responsibility. Competition law is not meant to guarantee an existing distributor relationship once and for all. As long as the supplier does not act in order to discipline a specific distributor and as long as the necessary termination periods are observed (depending on the given set of facts, the length may vary), there is no reason to intervene... Therefore, it should not "fall upon the dominant company to show that consumers are better off with the supply relationship terminated"... If there be a presumption at all, it should be in favour of the company's freedom to decide upon its distribution strategy. Only in the case where the terminated dealer can show that he was disciplined or discriminated, the supplier might be required to justify the termination. International Chamber of Commerce, ICC Comments on the European Commission Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses, Document No. 225/627 (7 April 2006) at 26. It is also widely recognized that forcing dominant firms to grant access to their inputs can deter innovation, both by discouraging dominant firms from investing in innovation in the first instance, and by encouraging smaller rivals not to innovate but instead to "free ride" on the innovations of others.5 The United States Supreme Court, echoing these principles, recently observed that compelling firms who have established an advantage "to share the source of their advantage is in some tension with the underlying purpose of competition law, since it may lessen the incentive for the monopolist, the rival, or both to invest" in ways that promote consumer surplus.6 United States Council for International Business, Submission to the Directorate-General for Competition on the Application of Article 82 of the Treaty to Exclusionary Abuses (30 March 2006) at 25. It is a well established principle that the rights of intellectual property holders are to be respected in all but most exceptional circumstances. In fact, there is no economic reason why cases involving intellectual property rights should be treated any differently than any other case involving a refusal to deal.7 The purpose of intellectual property law in the first instance is to provide businesses an incentive to invest in research and development activities aimed at generating new products and services. Thus, intellectual property rights are of vital importance to promoting consumer welfare. The adoption of rules and standards that create uncertainty as to when a company may be required to license its intellectual property will have a chilling effect on investment in research and development, to everyone's detriment. This is particularly true in markets that are already subject to governmental regulation. Such regulation tends to significantly reduce the likelihood of major antitrust harm. The additional benefit to competition of adding another layer of legal process will tend to be small, whereas the risk of false positives is high.8 United States Council for International Business, Submission to the Directorate-General for Competition on the Application of Article 82 of the Treaty to Exclusionary Abuses (30 March 2006) at 27.
As in bundling and tying cases, reducing the occurrence of over-enforcement in cases involving refusals to deal while being efficient and administrable requires the consistent application of sound economics. In order not to suppress conduct that would be beneficial to consumers, appropriate standards must be adopted that condemn only conduct that is not "competition on the merits," while allowing firms to reap the fruits of their skill, foresight and industry by being able to predict the likely consequences of their actions. Meaningful guidance must be provided to firms to enable them to know how to avoid liability using data that is readily available to them at the planning stage, and that the conduct, if challenged, will be evaluated under the same efficient standard that applied at the time the company decided to engage in the conduct. United States Council for International Business, Submission to the Directorate-General for Competition on the Application of Article 82 of the Treaty to Exclusionary Abuses (30 March 2006) at 26. The recent decision in Verizon Communications v. Law Offices of Curtis Trinko, LLP,9 deals explicitly with the challenge facing courts in their endeavors to avoid deterring beneficial conduct or imposing remedies that they are ill-equipped to administer. For these reasons the Court declined to use Section 2 to impose upon the defendant a duty to deal with a competitor, even if the refusal allowed the defendant to reap the benefits of its position in the market... In essence, the Court reiterated reasons why Section 2 should be applied cautiously to refusals to deal, and resisted the temptation to recognize new theories of liability or to declare the practice immune from attack. ICC members can understand why the Court (and the U.S. competition authorities, which filed briefs in the case) did not regard the situation before it as one of the rare exceptions to the right of parties to choose their customers. Accordingly, we would not characterize the decision as going too far. International Chamber of Commerce, Comments on Selected Issues for Study by the U.S. Antitrust Modernization Commission, Document No. 225/621 (1 September 2005) at 14-15. A firm's dealings with third parties and its prior dealings with rivals provide a baseline for evaluating its challenged conduct. Where a firm is willing to deal with its retail customers on certain terms (such as a certain price), claiming that its refusal to deal with a rival on those terms constitutes anticompetitive conduct makes no economic sense. However, absent discriminatory dealing or departures from prior profitable courses of dealing, decisions by either courts or regulatory agencies to enforce sharing distorts the incentives to innovate and should therefore be avoided. United States Council for International Business, Submission to the Directorate-General for Competition on the Application of Article 82 of the Treaty to Exclusionary Abuses (30 March 2006) at 26. ICC believes that patented and non-patented technical technology should be treated on the same footing and that the requirement that the refusal to license prevents the appearance of new goods or services be clearly set out. International Chamber of Commerce, Comments on the Reform, of the Application of Article 82 of the EC Treaty, Document No, 225/623 (12 December 2005) at 19. Similarly, there is no justification in law or economics for the proposition that trade secrets should be entitled to less protection under Article 82 than other forms of intellectual property. If trade secrets are provided less protection than other forms of intellectual property, the net effect will be less innovation and competition in the market, not more. This is simply because the protection of trade secrets enables firms to recover the investments they make in the research and development that are necessary for the firm to be able to meet the competitive pressures of its rivals, who are themselves investing in research and development for the same reason. Thus, as is the case with other forms of intellectual property, uncertainty as to the ability to recover the costs of the research and development necessary to create innovative trade secrets acts as a disincentive, to the detriment of consumer welfare. From the other perspective, there is little incentive for risking the loss of your own investment in research and development that may fail to yield the desired results when you have the option of free-riding off of the efforts of a rival. For these reasons, sound economics requires that trade secrets be protected the same as any other form of intellectual property, and that the rules and regulations impacting intellectual property rights not create ambiguity with regards to the extent of their protection. United States Council for International Business, Submission to the Directorate-General for Competition on the Application of Article 82 of the Treaty to Exclusionary Abuses (30 March 2006) at 28-29. * * * * * We hope that our comments will be helpful. We welcome the opportunity to expand upon our comments, if necessary. Document No. 225/637
APPENDICES
FOOTNOTES 1. Document No. 225/623 (12 December 2005),available at http://www.iccwbo.org/uploadedFiles/ICC/policy/competition/Statements/Comments%20on%20the%20R eform%20of%20the%20Application%20of%20Articie%2082%20of%20the%20EC%20Treaty.pdf 2. Document No. 225/627 (7 April 2006), available at http://www.iccwho.org/uploadedFiles/ICC/policy/competition/Statements/ICC_Comments%20EC%20Art icle%2082.pdf 3. Document No. 225/621 (1 September 2005), available at http://www.iccwho.org/uploadedFiles/Submission_%20to_%20the_%20AMC.pdf 4. (30 March 2006), available at http://www.uscib.org/docs/Final_USCIB_Article82.pdf 5. Brief for the United States, et al, as Amici Curiae Supporting Petitioner, Verizon Communications Inc, v. Law Offices of Curtis V, Trinko, LLP, 540 U.S, 398 (2004) (No 02-682), 2003 WL 21269559 at *13-20, 6. Verizon Communs., Inc.,540 U.S. at 407. 7. Illinois Tool Works, 126 S.Ct. at 1293. 8. Verizon Communs., Inc., 540 U.S. at 407-408, 411-15.
Comments on the Reform of the Application of Article 82 of the EC Treaty Prepared by the Commission on Competition This paper is submitted to the European Commission by the International Chamber of Commerce (ICC). It has been prepared by its Commission on Competition. This is the first ICC paper on reform of the application of Aricle 82 EC. It deals with a number of general points. We will in a subsequent paper address some specific forms of abuse of dominant position. We also intend to comment on the draft Guidelines when available. We begin by reviewing the purpose of Article 82 and its implications for the benchmarks to be used. We then comment on what we recommend as a modernized approach to dominance, relevant market and abuse. We end by stating briefly how a modernized application of Article 82 would contribute to the pursuit of the objectives of the Lisbon Agenda. 1. Some general remarks The EC Treaty makes clear that its competition rules are designed to establish "a system ensuring that competition in the internal market is not distorted" (Art. 3(1)(g)). In applying Article 82, this means preventing practices of dominant firms that distort the normal functioning of the market. "Normal functioning" of the market in the presence of dominant firms can have different meanings. It could mean a market that is efficient in the sense that it leads to optimal allocation of resources, provides to economic agents appropriate incentives to pursue innovation, efficiency and quality, and maximizes consumer welfare.l Under this interpretation, the rules on abuse of a dominant position are enforced against conduct of dominant undertakings where it is established that the conduct does not enhance efficiency and harms consumers. "Normal functioning" of the market could also mean a market in which economic agents have access to the market and operate on the market without obstacles created by dominant undertakings. Under this interpretation the presence of a number of competitors on the market is of paramount importance and is considered, in and of itself, as necessary in order for the market to function so as to achieve the ultimate purpose of competition rules. Under this interpretation, the rules against abuse of dominant position are seen primarily as protecting competitors in order to protect competition. The drawback of this interpretation is that, by focusing on the presence of competitors, it may end up protecting less efficient competitors and prohibiting conduct of dominant undertakings that furthers Article 82's ultimate purpose of promoting an efficient market. In addition, protecting rivals against competition from the dominant undertaking may reduce their incentive to engage in robust and creative competition that can further efficiency and benefit consumers. We consequently recommend that, when applying Article 82, the Commission move beyond findings relating to the effects on competitors and assess whether the conduct of a dominant undertaking is likely to have effects that promote or impede efficiency and benefit or harm consumers. As Commissioner Kroes has noted, "it is competition, and not competitors, that is to be protected"2. We elaborate this recommendation in the following sections. The ultimate test The Commission decisional practice and the case law of the EC court have not provided clear guidance as to which interpretation is correct. Various concepts have been used as benchmarks for assessing whether the conduct of a dominant undertaking is abuse, including "normal competition"3, "competition on the merits"4; "genuine undistorted competition"5. These vague concepts need to be clarified and elaborated so as to reflect the purpose of the rules against abuse of dominance. In its Guidelines on the Application of Article 81 (3), the Commission has done so with respect to the concept of "restriction of competition" and has put forward consumer welfare as the ultimate test. We are of the view that harm to consumers, which is expressly referred to in Article 82 (b), is the ultimate test of abuse of dominance6, just as it is for Article 81. In Continental Can7 the ECJ made clear that the purpose of Article 81 and 82 should be consistent. If harm to consumers is the ultimate test for "restriction of competition" under Article 81, it should be so as well under Article 82. It is our understanding that the Commission may wish to maintain the distinction made by the EC court between practices directly damaging consumers ("exploitative abuse") and practices that do so less directly by restricting competition by efficient undertakings ("exclusionary abuse")8. In that event, Article 82 should be cautiously applied to conduct coming within the first category and only be applied to condemn a practice where it is established that the practice is likely to have a direct material adverse effect on consumer welfare in the form of higher prices or less output, so as to not stifle innovation and investment. As to conduct coming within the second category, there is clearly a need for principles that distinguish legitimate competition by a dominant undertaking from exclusionary abuse. In making this important distinction, the Commission should not adopt a single test - such as the "profit sacrifice" test, and, for pricing behaviour, the "equally-efficient competitor" test or the "limiting production" test - for all forms of potentially exclusionary conduct because there is no consensus that any such test is applicable in all circumstances. The Commission should instead elaborate principles, such as commitment to promote efficiency and consumer welfare, and apply those principles to individual cases on the basis of a careful assessment of the particular facts9. These principles should be set out in guidelines, so that they can be taken into account ex-ante by undertakings when they decide on a given course of conduct. Legal Certainty As is clear from the above, we advocate that the Commission should move away from a legalistic "form-based" approach to a more economics-based approach in the application of Article 82. Such a move would be in conformity with recent developments in the other areas of EC competition law. A more economics-based application of Article 82 would focus on increase in consumer welfare. It should not lead at the same time to reducing legal certainty as long as undertakings are in a position to assess whether their conduct has a legitimate efficiency-enhancing business justification. Much of the current uncertainty about the boundaries between permissible and prohibited business practices results from a form-based approach to certain pricing practices and the difficulty inherent in such an approach in determining whether new kinds of economic activity should be regarded as being of one type of form or another. Form-based approaches lack consistent and rigorous analysis of the concrete effects of a given practice and often have the effect of condemning profit-maximizing conduct that benefits consumers. The uncertainty that results from the condemnation of conduct that may not have any significant impact on competition or that may benefit consumers creates added risks for business, which itself reduces efficiency, and deters undertakings from applying business practices (e.g. certain pricing schemes) which in fact increase competition and are beneficial for consumers. The deterrence of desirable conduct is enhanced because of the lack of an official procedure for undertakings to make sure that a certain business practice is in conformity with the competition rules, the lack of coherent and clear case law and the level of fines inflicted for abuses of a dominant position. We suggest that the Commission issue economics-based guidelines, which would guarantee an adequate level of legal certainty by making it clear that single undertaking conduct that enhances efficiency and benefits consumers is not an abuse, whatever its form and the degree of market power of the undertaking concerned. Such guidelines are all the more necessary to avoid inconsistencies, now that increased enforcement by NCAs and national court is to be expected. Such guidelines would also be to the benefit of competition authorities and court by lowering enforcement costs. 2. Dominance The current review of Article 82 is focused on the various types of abuse and the need to give clarity and guidelines in relation to conduct by dominant undertakings and the test to assess whether business practices may or may not be held to be abusive. So far the Commission has not published any notice that gives guidance on the assessment of dominance or market power. There are documents where the Commission has given some indication on its thinking on dominance in other contexts:
While the above documents, together with Commission decisions and the EC courts' case-law on dominance.13 provide some insight into the Commission's thinking, the lack of a comprehensive framework for assessing dominance undermines legal predictability and business certainty. Therefore, specific guidance by the Commission on the assessment of dominance under Article 82 would also be welcomed in the context of the current review, since a finding of dominance is a basic element of the scrutiny of any business conduct under Article 82. By contrast, the OFT in the UK has published Guidelines on the Assessment of Market Power which explain how the OFT will assess whether undertakings have market power when investigating cases both under Articles 81 and 82 and under the respective UK law provisions (Chapter 1 and Chapter 2 of the Competition Act 1998). In particular, the OFT explains that a company is not dominant unless it has substantial market power and acknowledges that market power is not an absolute term but a matter of degree, and that the degree of market power will depend on the circumstances of each case, including whether and to what extent the company concerned faces competitive constraints from existing or potential competitors, and other factors (such as strong buyer power). This is consistent with the position of Commissioner Kroes, who has noted that "market shares are not - on their own - sufficient to conclude a dominant position exists" and that to show dominance, "a full economic analysis of the overall situation is necessary". We believe that this approach is the correct and appropriate starting point for the assessment of dominance and we encourage the Commission to put in place a framework providing predictability as to the tools that will be used in assessing, in the specific circumstances of each case, whether an undertaking may be in a dominant position under Article 82. In this context, the Commission should distinguish between the following scenarios:
Cases where an undertaking is below the dominance threshold The objective of Article 82 to promote efficiency will be furthered if undertakings have a clear understanding of when they will not be regarded as dominant. The Commission should thus develop some screening mechanisms to determine "safe harbors", e.g. undertakings with a low market share may presumptively be able to engage in certain unilateral conduct. Similarly there may be situations where an undertaking has large market shares for only a brief period of time, before the emergence of a new product or new competition, and therefore cannot be held to have any market power. Such mechanisms will reduce uncertainty and allow undertakings in "safe harbors" to engage in robust and creative competition for the benefit of consumers. In formulating its "safe harbors", the Commission should give special attention to the pronouncement of the ECJ in Hoffman-Larochel4 that the fact that an undertaking is compelled by competitive pressure to lower its own prices is inconsistent with the independence vis-à-vis consumers and competitors that is the hallmark of dominance. Cases where an undertaking may be held to be dominant It is now widely acknowledged that: (a) market shares are only the starting point that give a first indication of the market structure and of the competitive position of an undertaking; (b) market shares alone are not conclusive in determining whether an undertaking has market power; and (c) there is no specific market share threshold that reliably establishes that an undertaking has market power. In fact, what is of particular significance in assessing dominance is the exercise of market power over time, i.e. the ability to profitably raise prices above competitive levels. The Commission is increasingly relying on economic analysis and empirical work in its investigations. That trend is taking place in the assessment of mergers and vertical agreements and Commissioner Kroes has indicated in recent statements that the Commission intends to use similar economic analysis in investigating potential abuses of dominant position under Article 82. We support this commitment and recommend that the Commission give clear guidance about the economic framework, tools and evidence that it will use to assess the competitive constraints on undertakings (such as the structure of the market, existing and potential competitors, entry analysis and countervailing buyer power). Complex areas in fast-moving markets There has been some debate recently about the need to enforce competition law with caution and flexibility in fast-moving markets where the key features of certain industries (particularly high-tech and "new economy" industries, such as computer software and hardware, internet, mobile telephony and biotechnology) make it challenging to apply traditional competition law concepts and tools to analyse competitive issuesl5. Such industries are often characterised by huge investments in R&D and IPRs, network effects, high fixed sunk costs and low marginal costs. Competition in these markets is dynamic in the Schumpeterian sense that competition often takes place for the market in a "winner takes all" race. Undertakings may have high market shares, but are constantly subject to threat from innovative competitors and potential entrants. Some scholars and economists argue that the mechanical application of static models does not give true reflection of market power when applied to high-tech/new economy industries. Therefore, the Commission should also give guidance on how it intends to assess dominance/market power in such fast-changing and complex markets. Collective dominance The Commission has taken the view that Article 82 also applies where two or more undertakings together hold a dominant position. The EC courts have endorsed this view and have set out conditions to be fulfilled in the cases that were brought before them. In the interest of legal certainty, some guidelines should be issued summarizing the case law. They should clarify that collective dominance does not apply to uncoordinated single undertaking conduct and that such conduct must be assessed based on the market power (or absence thereof) of the individual undertaking. 3. Relevant Market Definition The purpose of market definition In order to establish whether an undertaking already possesses market power (or is likely to achieve such a position in the future), it is necessary to define the relevant market in which the undertaking is alleged to have such power. If the definition of market power is the ability of an undertaking "to behave independently of its competitors and customers': it is clearly necessary to identify the competitors. The purpose of the Commission's Market Definition Noticel6 was to create a common framework for identifying and defining the boundaries of competition between undertakings (the hypothetical monopolist test) that could be applied to all competition analyses: mergers, Article 81 situations, Article 82 investigations and state aid enquiriesl7 Differences between mergers, agreements and abuse of dominance Important differences exist, however, in respect of the role that market definition plays in the different analytic frameworks:
Avoid artificially narrow markets It is now well understood that the inability to raise prices without facing significant substitution does not necessarily demonstrate wider markets (or significant competition) but could mean that the current price is already set at a supra-competitive level (the cellophane fallacy).19 The danger of the cellophane fallacy is that the relevant market in an Article 82 case may be narrower than in a merger situation, but only in very limited circumstances and not in all Article 82 cases. A more economics-based approach to Article 82 therefore not only means avoiding the cellophane fallacy, but also, importantly, avoiding artificially narrow market definitions. There are a number of cases in which the Commission adopted a very narrow market definition, unconnected with the cellophane fallacy and contrary to the principles set out in the Market Definition Notice. The reason seems to lie mainly in the Commission's focus on demand-side considerations to the near exclusion of supply-side factors. These examples can be grouped into two categories: (i) a too narrow focus on a particular customer segment and product characteristics; and (ii) a too rigid view of markets involving consumables (after-markets): In United Brands/Chiquita20 an important contributing factor in the Commission's market analysis was that bananas were a very important part of the diet of only one customer segment (i.e. the "young, sick and the very old")21 and this seems to have been accepted by the Court: "The banana has certain characteristics, appearance, taste, softness, seedlessness, easy handling, a constant level of production which enable it to satisfy the constant needs of an important section of the population consisting of the very young, the old and the sick"22 This conclusion seems to have been reached without sufficiently robust empirical evidence. Moreover, neither the Commission nor the Court considered whether the remaining customers (for whom switching to other fruit was viable and who could not be charged different prices) constituted a sufficiently large group constraining any price rises. Similarly, in Hilt23 the Commission decided that powder-actuated fastening systems (nail guns) form a distinct market from other fastening systems (such as welding, self tap screws or rivets, bolts and nuts). This was based purely on the fact that product characteristics differed and that there may not be full demand-side substitution.24 The Commission did not consider whether the pricing of one product constrains the pricing of the other products. On appeal, the Court of First Instance similarly failed to consider whether the number of marginal customers who could switch and who could not be charged different prices was sufficiently large to act as a constraint.25
If the approach in Article 82 cases evolves away from per se prohibitions towards a more economics based approach, the relevance of market share and hence market definition may well decline, as the Commission focuses directly on the competitive harm. However, doing so without a robustly defined market removes a significant methodological safeguard against findings of dominance by instinct. In the context of complementary products, concentrating on demand-side substitutability will lead to the definition of separate markets for the main product and for the spare pars or consumables for that product, since the main product and its spare parts or consumables will not be interchangeable, be it at the level of supply or demand. The main product and the spare parts or consumables have been held to form separate relevant markets in cases like Hugin26, Hilti27 and TetraPak28. In these cases the Commission, upheld by the Court, defined the market for consumables or spare part by reference to the primary product (e.g. "Hilti-compatible"). In such cases, the manufacturer was found to hold a dominant position on the market for these spare pars or consumables29, although it may not have been dominant in the market for the main product. In the context of complementary products, substitutability should be explored through the analysis of the effects of an increase in price of either the main product or the spare part or consumables. An explicit analysis of the impact of a hypothetical price increase has not always been carried out, particularly in the cases mentioned above (albeit that an econometric study was presented in the Hilti case). This type of analysis could show, for example, that in the case of a price increase of the main product A, consumers switch to competing products B and C and to their consumables or spare parts, since the purchase of a competing main product without its spare part or consumables would be of no value to the customer. Similarly, in the case of an increase in the price of the consumables or spare part, consumers switch again from product A to product B and C and their consumables or spare pars. In such a hypothesis, the conclusion to be drawn is that both the main products B and C and the consumables or spare parts, ie the whole system, lie in the same relevant market as the main product A and its consumables or spare part. More recent Commission decisions: no change in market definition There has been an evolution in the Commission's analysis in recent decisions. In 1995, it announced that several factors had to be taken into account in order to assess dominance with respect to spare parts or consumables: price, life-time of the main product, transparency of prices of spare parts or consumables, prices of spare parts or consumables as a proportion of the main product value and information costs. Although it examined two separate markets, taking these elements into consideration led the Commission in the Pelican/Kyocera case30 to conclude that there was no dominance on the market for consumables. Particular features of both the market for consumables and the market for the primary product, such as the price of the consumables as a high proportion of the main product value, which was taken into account by customers from the outset, meant that consumers would switch to another main product if the price of consumables for the first main product increased. The Commission concluded that there was no evidence of possibilities for price discrimination between "old" or captive customers and new customers. A similar more economics-driven analysis was carried out in the Info-Lab/Ricoh case in 199931, where the Commission held that the market for the main product and the market for consumables were interrelated in such a way that competition in the main product market also constituted an effective competitive constraint in the consumables market. Ricoh was not dominant on the main product market and was not held to be dominant on the separate market for consumables. The Commission therefore appears to have reconciled (i) the definition of two separate markets for the main product and the consumables with (ii) the conclusion that the manufacturer of a main non-dominant product may not be dominant on the market for consumables for the main product, by analysing the links in terms of competitive constraints between these markets. Suggested improvements This approach remains debatable in that the Commission still typically considers the main product and the spare part or consumables to constitute two separate markets. The analysis of the competitive links between both markets, in particular with regard to switching costs, should, however, in appropriate cases, lead the Commission to conclude that the main product and its consumables or spare parts constitute a system which is in competition with other similar systems, where consumers would switch to another main product and its consumables or spare parts, if the price of the consumables or spare parts of the first main product were to increase by a small but significant amount. Although its more recent analysis has led the Commission to conclude that the manufacturer may not be dominant on the market for consumables or spare parts, it could also reach (as it has done in the past) the opposite conclusion, even if the manufacturer is not dominant on the market for the main product. In such cases, manufacturers would have to apply different commercial policies to two complementary products, causing genuine difficulties from a business point of view. It is therefore recommended that the Commission examine the competitive links between products and systems at the stage of market definition. The Commission would thus recognise, in line with economic analysis, that main products and their spare parts or consumables should, in appropriate cases, be considered as systems which, together with the other systems against which they are in competition, constitute a single relevant product market. 4. Abuse On "abuse" we have three general comments that we hope the Commission will take into account in preparing its forthcoming guidelines. These are (1) forms of conduct not listed in Article 82, (2) the "legalistic" approach and (3) the treatment of "efficiencies". Forms of conduct not listed in Article 82 It is established that the catalogue of the forms of abuse listed in Article 82 is an open one. However, in order to qualify conduct other than the forms listed in Article 82 as abuse, courts and regulators cannot limit themselves to finding that such conduct is capable of having or likely to have the effect of restricting competition. Even if one should deduce from the fact that by expressly listing certain forms of conduct as abuse the Treaty has introduced a presumption of abuse, courts and regulators can only treat forms of conduct other than those listed in Article 82 as abuse where, on the basis of a precise examination and convincing evidence, they find that the conduct has effects that run counter to the purpose of Article 82. In identifying the constituent elements of the abuse, the Commission should make it clear that, while harm to competitors is necessary for conduct to be an abuse, it is not sufficient. After all, inventing better products or more efficient methods of distribution, reducing price or offering better terms of trade for the benefit of consumers, and more quickly adapting to changes in the market can disadvantage rivals and maybe even cause them to abandon business. Yet these forms of conduct enhance efficiency and consumer welfare, and should thus not be prohibited by Article 82. The Commission should articulate standards that make clear that conduct by a dominant firm would be deemed to be an abuse only if it does not promote efficiency or consumer welfare. The Commission might be tempted to argue that even conduct that increases efficiency can be an abuse if it excludes competitors on the ground that, in the long run, the loss of competitors will reduce competition and, ultimately, consumer welfare. However, such an approach would require the Commission to establish that the long run harm from the reduction in competition exceeds the short run increases in consumer welfare and the long run improvement in efficiency attributable to the dominant undertaking's conduct. The Commission should be very reluctant to treat conduct as an abuse on the basis of such a tradeoff. Projecting and estimating the magnitude of long run harm to competition is almost always very difficult and uncertain. More importantly, were the Commission to attempt to meet that burden, it should explain how it addresses the risk of overstating long run competitive harm in the particular circumstances of the case under consideration. Indeed, dynamic, Schumpeterian competition inherently brings forth new innovations and new entry that were not anticipated and could not have been predicted. Efforts to assess long run harm to efficiency and to consumers as a result of exclusion of competitors clearly risks grossly overstating the harm if they fail to take account of these likely developments. Therefore, in cases where the conduct at issue generates short term efficiency and the Commission nevertheless considers prohibiting such conduct, it is the duty of the Commission - as the institution entrusted with the enforcement of competition rules aimed at promoting consumer welfare - to demonstrate that the balancing test between short- and long-term effects avoids the risk of overstatement of long term consumer harm. "Legalistic" approach Our second comment relates to the "legalistic" (form-based) approach mainly used so far when dealing with Article 82 cases. As the EAGCP Report points out "[t]he standard for assessing whether a given practice is detrimental to 'competition' or whether it is a legitimate tool of 'competition' should be derived from the effects of the practice on consumers" (at p. 8). A form-based approach is inadequate as a standard for such assessment. To illustrate this, we briefly analyse the treatment of rebate and discount structures. The issue In evaluating whether a discount or rebate ("rebate" for short) scheme constitutes an abuse under Article 82 EC, the European court determine whether the rebate scheme is objectively justified32. If it is not, there is an evident danger from certain CFI rulings that a rebate by a dominant undertaking will be treated asperse having restrictive and/or discriminatory effects. As a result of developments in the case law, there has been a narrowing of the types of rebate considered legitimate when implemented by a dominant undertaking. This narrowing has reached a point where all rebates, including those calculated on a quantitative basis, are deemed to be abusive when established by a dominant undertaking, unless they are the result of economies of scale that are passed on to the customer33. For example, although the judgement is ambiguous, in Michelin II, the CFI appears to have taken the view that under Article 82 it may not always be necessary to show an actual effect on competition: rather, the conduct may be abusive if it "tends to restrict competition or, in other words, that the conduct is capable of having that effect" (para 239). Thus, the CFI appears to consider volume rebates as presumptively abusive, a presumption that can be rebutted if there is an objective justification of the rebate scheme. However, Michelin II suggests that only transaction-specific cost justifications will suffice: i.e. the grant of a specific rebate must be linked to economies of scope gained through sales to that particular customer, in that particular transaction34. Furthermore, the European courts have shown an increasing willingness to find behaviour to be abusive where there is no anti-competitive effect, or even any strong likelihood of anticompetitive effect, but merely the potential for harm. These developments have created a legal doctrine which has serious consequences for dominant undertakings and which seriously restricts the pricing structures and arrangements that they are permitted to establish. Indeed, as things now stand, the rules relating to discounting are considerably stricter than those applicable to single dealing and refusals to deal. In the case of single dealing, the courts have considered the actual exclusionary effects35, while in the case of refusals to deal, the court have developed a rule of reason approach36. The stricter treatment of rebate schemes appears difficult to justify: discounting reduces the cost to consumers and is not on its face exclusionary. In examining how this position has been reached, it becomes clear that the legal and economic foundations for the doctrine are shallow and insufficient to support the edifice now constructed on them. In particular, these cases overlook the fact that rebates increase allocative efficiency and consumer welfare by increasing output and reducing prices. They are often preferred by customers to alternative arrangements and are often the result of hard bargaining by customers to get the best price from undertakings that, because they are dominant, would otherwise charge higher prices. Conduct of this nature should be subject to Article 82 only if there is a compelling economic basis for doing so. Increases in allocative efficiency and consumer welfare ought to be regarded as objective justifications for rebates and should negate the assumption that such rebates are exclusionary by their very nature. Summary of Existing Case Law
The lack of legal or economic basis for the legal doctrine There is no basis for the premise that all rebate systems established by a dominant undertaking are abusive unless they are cost-justified. In the early case law, there is no adequate legal or economic analysis to distinguish quantitative rebates based purely on volumes purchased from "fidelity-type" rebates. Furthermore, the need to demonstrate that a quantitative rebate depends on cost savings in order not to be deemed restrictive is new in Michelin II and is largely unexplained. That requirement ignores all sorts of other efficiencies that are often realized by rebates (allocative efficiencies, economics of scope in the case of multi-product undertakings and distribution efficiencies). The current case law is, in effect, a form-based rule: a rebate system which is transaction-specific, quantity-based and structured to reflect benefits of scale is legitimate if applied by a dominant company: all other rebates applied by a dominant company are, by default, unlawful, irrespective of effect or market analysis. Form-Based -v- Effects In Michelin II, the Court considered that the rebates were loyalty-inducing44 and that this practice was capable of restricting competition45. Paragraph 60 of that judgment identifies two areas for economic and factual inquiry: (i) whether there is an economic justification for the rebate; and (ii) if not, whether the rebate has anticompetitive effects46. While there has been a tendency on the part of the Court to curtail the second analysis once it determines that there is no economic justification for the rebate under the first test, there is no legal requirement for it to do so. Thus, the failure to conduct such an analysis is inconsistent with both the legal test set. forth in Michelin II and the Court's case law, which gives foreclosure effects a serious examination47. In particular, there should be no presumption that a particular type of discount and rebate will have an anti-competitive effect based on its form, especially as discounts and rebates produce immediate benefits in the form of lower prices in every instance whereas they may produce harm only on a limited set of circumstances. And, whether or not any inference of anti-competitive effects is based on evidence of actual market performance, it should be rebuttable with evidence of actual market performance. Given the possible pro-competitive benefits of some rebates which are not quantity-based and structured to reflect benefits of scale, a blanket prohibition of all such schemes by dominant undertakings under Article 82 could discourage potentially efficient behaviour. The need to move away from form-based rules From an economic perspective, it is difficult to find any form of unilateral behaviour that will always be harmful to competition, without considering the market context in which the behaviour occurs. It is therefore difficult to find an economic rationale for a regime in which certain types of behaviour are perse unlawful once an undertaking passes over the threshold into dominance, especially when they are per se lawful below this threshold. An effects-based framework of analysis under Article 82 would also be in line with the approach under the Article 81 (3) Notice, in particular if the Article 82 Guidelines mandate the same requirements in terms of quantification and balancing the pro- and anticompetitive effects of unilateral behaviour. ice believes that the draft Guidelines should fully acknowledge the analytical approach under Article 81(3) Notice. A rebate scheme may create an incentive for a customer to purchase all his requirements from the dominant undertaking but it needs to be established that the scheme has a negative impact on consumers. If the rebate can be easily matched by rivals, only applies to some but not to others or is of short duration, it may well have no negative effects. A detailed market analysis of the actual effects is, therefore, indispensable. On "efficiencies" A third comment relates to efficiencies. Efficiencies occur when mergers, agreements or unilateral conduct give rise to reduced prices, improved quality or other positive effects that benefit consumers. Efficiencies may be either of a quantitative (cost) nature or of a qualitative (dynamic) nature. When unilateral conduct enables an undertaking to realize economies of scope or scale or to utilize more efficient production or distribution methods, it can reduce costs. Unilateral conduct can also increase output when, for example, it better aligns incentives of distributors and other producers of complements with the dominant undertaking. Unilateral conduct by undertakings can also promote dynamic efficiency, where it leads to increased research and innovation, or the development of new and improved methods of production and distribution. Unilateral conduct by dominant undertakings also increases allocative efficiencies whenever it reduces prices or increases output. There is widespread consensus among economists that efficiencies are to be measured in terms of consumer surplus. This methodology explicitly underlies the Guidelines on the application of Article 81(3) and, less explicitly, the Guidelines on the assessment of horizontal mergers. As a consequence, it is nowadays well established under EC competition law that static and dynamic efficiency gains are to be taken into account when assessing both horizontal and non-horizontal mergers and agreements. Similarly, under US law, under both Section 1 and 2 Sherman Act, efficiencies are factored into the analysis of courts and antitrust agencies of the net effect of the transaction at issue. In contrast, the scope for taking account of efficiencies under Article 82 seems at best very limited in a number of cases, non-existent in other cases and, on the whole, unclear. First, while case law under Article 82 (e.g. Michelin II, Telemarketing) postulates that an objective justification prevents a finding of an abuse of a dominant position, that notion appears to be interpreted in an extremely limited manner (see e.g. Hoffmann-La Roche; see also the Commission decision in Microsoft). Second, in addition to the (few) cases where the proffered objective justifications were considered - but rejected -, a number of practices, in particular in the field of rebates, are subject to a per se analysis. As a result, the treatment of efficiencies under Article 82 is cumbersome, at best. We recommend that in its guidelines, the Commission expressly take account of all types of efficiencies for the following reasons:
Furthermore, we believe that efficiencies in Article 82 cases should be assessed pursuant to the following principles:
On refusal to license intellectual property rights It is a well established principle under EC competition law that inroads on the rights of intellectual property holders are only allowed under exceptional circumstances. The underlying reason for this approach is the need to preserve companies' incentives to engage in research and development and other ventures aimed at generating innovative products and services. ICC believes that the future Guidelines on Article 82 should clearly signal that the Commission intends to adhere to the criteria developed by the Community court. In this respect, ICC believes that patented and non-patented technical technology should be treated on the same footing and that the requirement that the refusal to license prevents the appearance of new goods or services be clearly set out. 5. The Lisbon Agenda One of the Lisbon Agenda objectives is sustainable economic growth. It refers to stimulation of competitiveness and innovation as one of the policy tools. An economics-based approach to the application of Article 82, particularly as it takes efficiencies into consideration, is likely to promote competitiveness and growth. Moreover, by focusing on the effects on consumer welfare rather than on forms of conduct, such approach will, provided appropriate guidelines are issued, improve the regulatory environment in which undertakings operate, contribute to reduce their regulatory burden and thus allow them to become more competitive and innovative, while safeguarding consumer welfare. Document n° 225/623
FOOTNOTES
1. M. Monti, "European Competition Policy for the 21st Century, in B. Hawk (ed) 2000 Fordham Corporate Law Institute ch. 15 at 257. 2. N. Kroes, Preliminary Thoughts on Policy Review of Article 82, Speech at Fordham Corporate Law Institute (23 September 20). 3. E.g. Hoffman-Laroche, [1979] ECR461, para 91. 4. E.g. AKZO, OJL1985, L 375/1 para 81. 5. E.g. Atlantic Container Lines, judgment of the CFI of 30 September 2003 n.y.r., para. 1460 6. See also Jacobs AG in Bronner. "...the primary purpose of Are (821 is to prevent distortion of competition - and in particular to safeguard the interests of consumers."[1998] ECR1-7791 at. 7811 7. Continental Can, [1973] ECR215, para. 25 9. See e.g., Report by the Economic Advisory Group on Competition Policy ("EAGCP") (July 2005) (advocating on "economic-bed approach" to Article 82 "based on the assessment of anti-competitive effects of business behaviour"). 13. The ECJ has defined dominance as "a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately consumers". (United Brands v European Commission, [1978] ECR 207, para. 65) 14. Hoffman-Laroche, supra n. 3. 15. See for example, Robert C. Lind and Paul Muysert "Innovation and Competition Policy Challenges tor the New Millennium", (20031 ECLR 87; Christian Ahlborn, David Evand and Jorge Padilla, .. Competition Policy in the New Economy: Is European Competition Law up to the challenge?" in LECG Global Competition Policy, Economic Issues and Impact 2004. 16. Commission Notice on the definition of relevant market for the purposes of Community competition law (OJ 1997 C372/5). 17. Paras 1 and 2 of the Market Definition Notice. 18. As was recalled by the CFI in European Night Services (199) ECR II-3141 at paras 135 and 136, the assessment of whether an agreement has restrictive effects requires that account be taken of the actual conditions in which the agreement functions, in particular the economic context in which the undertakings operate, the products or services covered by the agreement and the actual structure of the market concerned. 19. The name is derived from the US Supreme Court case United States v. DuPont 351 US 377, (1956). There the court held that cellophane was part of a wider market including other flexible wrapping materials without realising that the price of cellophane was already at such a level that consumer were prepare to switch to other products which wold not have ben regarded as substitutes had the price ben at competitive levels. Fora detailed discussion of the cellophane fallacy see Bishop and Walker, The Economics of Competition Law (2 nd . ed) para 4.34 - 4.46 and the OFT's Discussion Paper 2, The roe of market definition in monopoly and dominance enquires (July 2001), para 2.25 et seq. 20. Case 1V/26.699-Chiquita OJ 1976, L95/1 22. United Brands v. Commission [1978] ECR 207 at para 31. 23. Cases IV/30.787 and 31.488 -Eurofix-Bauco v. Hilfi, OJ 1988 L 065/19 24. Ibid. para 61: examples are different technical possibilities of the various systems; the fact that certain characteristics differ radically and the fact that local building regulations prohibit the use of nailguns for certain applications. 25. Hilti v. Commission, [1991] ECR II 1439 at para 73. 26. Hugin Kassaregister AB and Hugin Cash Registers Ltd. v. Commission, [1979] ECR 995, paras 5 to 7: the Court examine the "category of clients who require (spa) part" and concluded that since there was a specific demand for Hugin's spare parts, those parts were not interchangeable with spare parts for cash registers of other makes. 27. Ibid, par. 69 and Hilti AG v. Commission, [1994] ECR I-667, para. 13. The courts first narrowly defined the market for the main product, in which Hilti was found to be dominant The market for consumables (ie nails compatible with Hilti equipment) was defined as a separate market from the market for the equipment for which they were intended, in which Hill was also found to be dominant, although there were other players in the market 28. Tetra Pak International SA v. Commission, [1994] ECR II-755, para. 79 to 85 where the Court dismissed the argument based on a commercial link between the machines for packaging liquid foods and the packaging itself. 29. This wold also be the case where the spare part or consumables are protected by patents or other intellectual property rights, for example in the case of the Hilti cartridge strips (compatible with the Hilti tools) for which Hilti held patents. 30. XXVth Report on Competition Policy, pa. 86 and 87, p. 41 and 42. This decision concerned the manufacturer of computer printers and toner cartridges for those printers. 31. XXIXth Competition Report p.169-170. This decision concerned toner cartridges and photocopiers. The complainant alleged that there was a market for empty toner cartridges compatible with Ricoh photocopiers, an argument that was dismiss by the Commission since powder and cartridge had to be considered as a single product 32. Hoffman La Roche v Commission, [1979] ECR 461 at para. 90; Michelin v Commission (Michelin I), [1983] ECR 3461 at para. 73; Irish Sugar v Commission, (1991) ECR 1-2969, pa. 114 and 188; Michelin v Commission (Michelin II) n.y.r. at para. 98; British Airways v Commission, (n.y.r.) at para. 247 and 271. 33. Michelin II and British Airways supra n. 33. 34. Michelin II. supra n. 33, para 98-110. 35. CFI judgment of 23 October 2003 in Van den Bergh Foods (nyr). 36. Bronner, [1998] ECR 1-7791. 37. Hoffman La Roche supra n.33 44. Ibid. at para. 95: "a quantity rebate system in which there is a significant variation in the discount rates between the lower and higher steps, which has a reference period of one year and in which the discount is fixed on the basis of total turnover achieved during the refer period, has the characteristics of a loyalty-inducing discount system". 45. It should also be noted, as was pointed out ibid. at 96, that the aim of any competition on price and any discount system is to encourage the customer to purchase more from the same supplier. 46. Ibid, at para 60, "In determining whether a quantity rebate system is abuse, it will therefore be necessary to... investigate whether, in providing an advantage not base on any economic service justing it the rebates tend to remove or restrict the buyer's from to choose his sources of supply, to bar competitors from access to the market, to apply dissimilar conditions to equivalent transactions with other trading parties or to trengthen the dominant position by distorting competition". 47. See Van den Bergh. supra n. 36.
ICC Comments on the European Commission discussion paper on the application of Article 82 of the Treaty to exclusionary abuses Executive Summary General Comments The International Chamber of Commerce (ICC) welcomes the opportunity to comment on the European Commission's ("the Commission") Discussion Paper. We hope that our comments will be helpful. We welcome the opportunity to expand upon our comments, if necessary. In the currently contemplated guidelines there are positive aspects, mainly in the central concern to enhance consumer welfare and to protect competition and not competitors. We recommend that such a welfare-based approach be more supported in the overall design of these guidelines. Consumer welfare does not necessarily equate to the public interest more generally, and short term consumer welfare and the wider public interest may differ. The interrelationship between the purposes of antitrust and the wider public interest should be made more explicit. Consistent with a welfare-based approach would be a clearer acknowledgement that as specific business conduct may simultaneously give rise to (short term) efficiency gains and (longer term) negative effects, the reviewing agency necessarily must take account of both effects in its (initial) finding of abusive behavior. Moreover, as the contemplated guidelines are likely to be relied upon by a large number of decision makers, including national court, it would be helpful if the guidelines would make clear that - in ex ante assessments of conduct under Article 82 - the finding of an abuse of a dominant position is subject to a rigorous standard of proof, relating to the successive future chain of events ultimately giving rise to the negative effects on consumers required under Article 82. In ex post reviews, a key element in the evaluation is the causal connection between the alleged abuse and those negative effects. Section 3: Market definition in Article 82 cases We invite the Commission in particular to further consider the risk of market definitions that are artificially narrow, in particular with regards to new technologies which relevant markets are, more than any other, likely to be excessively segmented. Section 4: Dominance The stress on market shares in the evaluation of dominance (paragraphs 29-33) appears in clear contrast with the conclusions of the modern theory of market leadership: market leaders have larger market shares exactly when they are constrained by effective and potential competition since, in this case, they adopt more aggressive (pricing and investment) strategies which expand their market shares. In other words, there is not necessarily a positive correlation between the presence of larger market shares and a dominant position and, especially in highly dynamic markets, there is not unambiguous theoretical support for a statement saying that "(m)arket share is only a proxy for market power' (paragraph 32). As a recent DG Competition's study on Article 821 has correctly pointed out, "the case law tradition of having separate assessments of dominance and of abusiveness of behavior simplifies procedures, but this simplification involves a loss of precision in the implementation of the legal norm. The structural indicators which traditionally serve as proxies for 'dominance' provide an appropriate measure of power in some markets, but not in others", as indeed in high-tech and New Economy industries (e.g., computer hardware and software, online businesses, mobile telephony and biotechnology). Section 5: Framework for analysis of exclusionary abuses In particular, we would encourage the Commission more fully to ensure that the interests of consumers are always paramount of those of competitors, to move even further away from form-based rules and presumptions towards a more economics- and fact-based approach, and to expand the avenues through which account may be taken of the efficiency-enhancing effects of challenged conduct. Section 6: Predatory pricing The Discussion Paper substitutes the standard Areeda-Turner test based on average variable cost ("AVC") with the average avoidable costs ("AAC"), a sort of average marginal (or incremental) cost of the extra output to serve the predatory sales. Unfortunately, the AAC can be higher than the right theoretical concept whenever it accounts for fixed costs. Moreover, the AAC can be much more difficult to measure than the AVC since it is almost always impossible to precisely define which costs are sustained for a given output and isolate the extra output (supposedly the predatory output) from total output. Finally, there are well-known conditions, as in the presence of network externalities, under which pricing below marginal cost is a normal competitive strategy for a market leader. Hence it would be better to substitute the concept of AAC with that of average variable cost, in line with the traditional economic interpretations of the Areeda-Turner test. Section 7: Single branding and rebates Overall, the Discussion Paper contemplates a more flexible approach than in the past. It appears to depart from a per se prohibition and make the assessment of rebates conditional on the existence/likelihood of foreclosure effects. In principle, the Commission intends to conduct an analysis of the market conditions in order to show that foreclosure effects are at least likely. ICC also welcomes the introduction of an efficiency defence that dominant companies can use in order to justify their rebate systems. However, several passages in the Discussion Paper seem to cast doubts on a genuine change of approach. Section 8: Tying and bundling While the Discussion Paper purports to adopt a more balanced approach that takes into account that tying and bundling can be pro-competitive, we are concerned that this approach is not carried through into the details of the analysis. A close reading suggests that certain older presumptions against tying remain embedded in the analysis, which, taken together, risk perpetuating the current situation in which tying and bundling are viewed as suspect unless proven otherwise. In our view, this would be a mistake, and we urge the Commission instead to adopt an approach that would better reflect that basic principle that tying is generally pro-competitive. In addition to our overarching concern that the proposed analysis fails to take account of the quite common benefits of tying, our specific concerns include: (i) the proposed "distinct products" analysis; (ii) the discussion of the "market foreclosure effect"; and (iii) the treatment of the efficiency defence. Section 9: Refusal to supply
The Section of the Discussion Paper on Refusal to Supply seems to start from the existing case-law, but still raises many controversial policy issues that, ICC submits, warrant further consideration by the European Commission, such as necessary or sufficient conditions, different thresholds, indispensable input and foreclosure effect. The thresholds to argue efficiencies and objective justifications seem to be too high to be realistically successful in practice. Furthermore, the Discussion Paper fails to acknowledge that an input may become indispensable simply as a result of a company's superior business performance. ICC submits that a duty to deal/supply should not be imposed simply because consumers prefer the dominant company's products.
In setting out the exceptional circumstances where refusal to licence an IPR may constitute an abuse, the Discussion Paper starts from the principles and approach well-established in the case-law of the Court of Justice (notably and most recently, IMS Health). However, it then fails to give guidance on some key issues still left open by IMS Health and, in some instances, expands the scope of potential compulsory licensing to cover cases beyond the requirements of exceptional circumstances set out in IMS Health, thus potentially having a chilling effect on incentives to invest and innovate. Section 10: Aftermarkets We recall the comments made in our submission dated 12 December regarding aftermarkets2. In particular, we suggest that the Commission examine the competitive links between products and systems at the stage of market definition. The Commission would thus recognize, in line with economic analysis, that main products and their spare part or consumables should, in appropriate cases, be considered as systems which, together with other systems against which they are in competition, constitute a single relevant product market. We believe that the complex, multi-step analysis of aftermarkets set forth in the Discussion Paper would be both unnecessary and counterproductive. The Discussion Paper appears to acknowledge that harm to customers through actions by a supplier of aftermarket products and services is a limited concern. The only example provided is one in which a supplier adopts a "policy change" with respect to aftermarket products or services. (paragraphs 261-262). We submit that it is preferable to address this limited concern regarding "installed based opportunism" through private contracts rather than by attempting to apply Article 82 to single-brand aftermarkets and treating a "policy change" as a potential abuse of dominance. We hope that our comments on DG Competition's Discussion Paper will be helpful. We welcome the opportunity to expand upon our comments, if necessary. Document n° 225/627 ICC Comments on the European Commission discussion paper on the application of Article 82 of the Treaty to exclusionary abuses Prepared by the Commission on Competition General Comments The International Chamber of Commerce (ICC) welcomes the opportunity to comment on the European Commission's ("the Commission") Discussion Paper. We hope that our comments will be helpful. We welcome the opportunity to expand upon our comments, if necessary. In the currently contemplated guidelines there are many positive aspects, mainly in the central concern to enhance consumer welfare and to protect competition and not competitors. We recommend that such a welfare-based approach be more supported in the overall design of these guidelines. Consumer welfare does not necessarily equate to the public interest more generally, and short term consumer welfare and the wider public interest may differ. The interrelationship |
