1

THE ‘MORE ECONOMIC APPROACH’ IN EUROPEAN COMPETITION LAW:

IS ‘MORE’ ALSO ‘ENOUGH’?

Prof. Dr Roger Van den Bergh

Erasmus University Rotterdam

2

OVERVIEW

• The move towards a ‘more economic approach’: has the economic approach penetrated all areas of competition law, where economic insights are relevant?

• Does the legal framework provide (sufficient) scope for economic approaches?

• What kind of economics is most relevant?• How to use economics in deciding real-life

cases?• Conclusions and topics for further research

3

THE MOVE TOWARDS A MORE ECONOMIC APPROACH (1)

• EC competition law was dominated by technical legal distinctions but this has gradually changed.

• Notice on market definition (1997)- Traditional legal market definition geared to the

economic definition of a relevant market (SSNIP test)- But remaining inconsistencies: e.g., legal definition of

dominance (focusing on independent behaviour) different from economic definition; market definition on basis of product characteristics may lead to outcomes different from the SSNIP test; no solution for the Cellophane fallacy

- Also incomplete guidance concerning quantitative methods: e.g., informative value of figures on elasticities, no reference to critical loss analysis

4

TOWARDS A MORE ECONOMIC APPROACH (2)

• New Regulation (2790/99) on vertical restraints in distribution contracts:

- More effects-based than previous block exemptions (e.g. Reg. 1983/83 and 1984/83): straight-jacketing effect of black lists and white lists

- But also here inconsistencies with a full economic approach: legal distinction agent/distributor, still black clauses, in particular prohibition of vertical minimum price fixing, no balancing of anti-competitive effects and efficiency gains below the market share threshold of 30 percent, different treatment of vertical integration

- Separate rules for car distribution agreements (Regulation 1400/2002)

5

TOWARDS A MORE ECONOMIC APPROACH (3)

• Revision of the Merger Regulation (after ECJ judgments in Airtours,Schneider/Legrand, Tetra Laval/Sidel)

- Change of substantive test: from ‘creating or strengthening a dominant position’ to ‘ significantly impeding effective competition’ (compare US substantially lessening competition’ test): allows relevant economic distinctions, such as coordinated effects and non-coordinated effects (unilateral price increases

- Guidelines articulate relevant criteria to assess non-coordinated effects (e.g. market shares as ‘first indicators’ of dominance, closeness of competitors, limited possibilities of switching suppliers) and coordinated effects (reaching terms of coordination, monitoring deviations, deterrent mechanisms)

6

TOWARDS A MORE ECONOMIC APPROACH (4)

• Discussion paper on exclusionary abuses by dominant firms (Article 82)

- Last bulwark of legal formalism?- Focus on exploitative abuses in Art. 82 EC Treaty - Old-fashioned case law on discount schemes (British

Airways) and predatory pricing (AKZO/ France Telecom)• Current discussion on private enforcement- In a first phase, economic expertise only used to quantify

damages (Ashurst study)- Need for a broader efficiency analysis to inform policy

decisions

7

THREE QUESTIONS

• Is there (sufficient) scope for economic analysis in applying rules of EC competition law? Is EC competition law effects-based or form-based?

• If there is scope for economic analysis, what kind of economics?

There exist different economic approaches to different problems of competition law.

• How should economic analysis be used in decision making?

Economics as an instrument of quality control and quality control of economic analysis.

8

SCOPE FOR ECONOMIC ANALYSIS

• Large parts of EC competition law are effects based:- Already in the 1960ies the ECJ demanded an extensive

analysis of agreements in their economic context (market effects);

- This requirement contrasted with the formalistic ‘old style’ block exemptions of the EC Commission, which have now been replaced by a ‘more economic approach’ (in practice : compromise between economics based approach and legal certainty);

- In merger control cases the CFI has set a standard of burden of proof that requires a full-blown analysis of the relevant data on the basis of economic theory.

9

LIMITS TO ECONOMIC ANALYSIS (1)

• De lege lata the scope for economic analysis in Art. 82 cases seems more limited:

- The formulation of the rule is not effects based (contrast: Sec 2 Sherman Act); no efficiency defence.

- Is the notion of ‘abuse’ wide enough to embrace efficiency considerations?

• Some proposals in the EAGCP Report (no separate verification of dominance, no intervention against monopoly pricing) can be considered only de lege ferenda.

10

LIMTS TO ECONOMIC ANALYSIS (2) ART.82 EC: THE LAST LEGALISTIC BULWARK

• Don’t blame the Ordoliberals- An abuse prohibition is not compatible with Eucken’s

view on monopoly: divestitures or regulation of conduct. Ordoliberalism is closer to the prohibition of monopolization of the Sherman Act than is usually thought.

- Examples of exploitative abuses do not fit the ordoliberal concern for protection of individual economic freedom

• Blame the ECJ- No requirement of recoupment in predatory pricing cases

(Akzo, Tetra Pak, France Telecom)- Formalistic approach towards legality of rebate schemes/

no proof of consumer harm required (British Airways)

11

LIMITS TO ECONOMIC ANALYSIS (3)

• Integration clauses in the EC Treaty demand that non-competition objectives are taken into account.

Example: social policy.

Cartel prohibition does not apply to collective labour agreements

• ECJ may create exceptions outside Article 82 (3) EC Treaty

Example: liberal professions (Wouters case)

Self-regulatory rules of the legal profession escape the cartel prohibition if they are necessary for the ‘proper practice of the profession’

12

WHAT KIND OF ECONOMICS (1)?

• The problem of inconsistent goals- Allocative efficiency versus productive efficiency and

dynamic efficiency- Allocative efficiency versus consumer welfare• This is only half of the story:- Is market integration still a goal ?- Is protection of business freedom a goal?- What about considerations about environmental policy,

social policy…

13

WHAT KIND OF ECONOMICS (2) ?

• Evolution of economic theory on competition: classical economics, neo-classical theory, SCP paradigm, Chicago School, post Chicago

• The ‘more economic approach’ is dominated by mainstream industrial organisation theory (static equilibria, game theoretic approaches)

• There is a lot of economics missing in the ‘more economic approach’:

- Dynamic theories on competition (Austrian School, Hoppmann);- Transaction cost economics;- Constitutional Law and Economics;- Law and Economics of enforcement;- Public Choice analysis.

14

POLICY CONCLUSIONS FROMDYNAMIC THEORIES (1)

• The focus on static price competition (normal economic profits/ allocative efficiency) and market structure (competition in the market) may be misguided

• Markets are in a constant state of disequilibria• High mark-ups may be necessary to recoup the

expenditures of risky innovation projects • Market concentration emerges endogenously out of the

discovery process of imitation and adaptation• The concept of monopoly must be redefined as immunity

from competitive threats by other entrepreneurs. Firms compete through radical innovation, thus attaining ‘fragile’ monopoly positions. Competitive constraints emerge mostly from outside the market (potential competition/ competition for the market).

15

POLICY CONCLUSIONS FROM DYNAMIC THEORIES (2)

• The process based assessment (‘process monopoly’) necessitates a shift away from the focus on market delineation

• Analyses of market definition and market shares are meaningless as all products compete with the remaining ones. Specific problems of the SSNIP test

• Static views are inadequate if products are not homogeneous and technology evolves rapidly

• Evolutionary theories emphasize diversity and heterogeneity – a selection process among multiple and impartial sources of innovation

• Dynamic welfare optimization is not confined to allocative efficiency

16

POLICY CONCLUSIONS FROMDYNAMIC THEORIES (2)

• If adverse competitive effects are ambiguous, regulators should refrain from intervention due to a knowledge problem

• If a conduct is clearly anti-competitive, legal prohibitions should be formulated as per se rules

• Caveats: i) no unequivocal support for the thesis that large firms innovate more, ii) no solution for the trade-off between static and dynamic efficiency

• However, dynamic views may be closer to lawyers’ views on competition policy, in particular the need for legal certainty

17

WHAT KIND OF ECONOMICS (3)?

• The EC Commission seems more worried about differences with US antitrust law (dominated by modern IO) than by the need to align EC competition law with the Member States’ tradition in the field of competition policy and law.

• The potential tension between economic analysis and legal certainty may be lower in alternative economic approaches.

• The concept of ‘competition’ is nowhere clearly defined. Hence the ECJ enjoys large discretionary powers to choose the ‘right’ economic approach. Ideally, the choice made should be adapted to the competition problems at hand.

18

ECONOMICS AS AN INSTRUMENT OFQUALITY CONTROL

• Application of legal rules may require economic analysis.

Examples:- Definition of the relevant market- Assessment of efficiencies ( Art.83 (3) EC)- Are prices evidence of predation or competition?

(Art. 82 EC)? - Does a merger significantly impede effective

competition?

19

QUALITY CONTROL OF ECONOMIC ANALYSIS (1)

• Competition authorities and judges must distinguish ‘good’ from ‘bad’ economics and enhance the use of economic analysis which may improve the quality of the decision-making.

• Economic analysis may be ill-suited to decide real-life cases:

- Price correlation analysis to define relevant product markets;

- Marketing studies to define relevant geographic markets;- Risk that intuitive and simple but outdated theories

dominate decision-making by judges. Example: predatory pricing

20

QUALITY CONTROL OF ECONOMIC ANALYSIS (2)

• Economic analysis may fail the required ‘burden of proof’:

- EC Commission fails to show anti-competitive effects;- Parties fail to prove efficiency savings.

• Problem: Every economic model must reduce the complexity of reality. Inadequate standards of proof (certainty, preponderance of evidence) may unnecessarily limit use of econometric evidence. Possible solution: adjust the standard of proof to the nature of the economic evidence.

21

TOPICS FOR FURTHER RESEARCH (1)

• Analysis of substantive rules (horizontal cartels, vertical restraints, abuses) from a different perspective:

- dynamic approach versus static approach/differentiation across industries

- other economic approaches• Enforcement- What is the optimal mix of public and private

enforcement?- Welfare analysis of specific measures: multiple

damages, passing-on defence, collective actions, access to evidence

22

TOPICS FOR FURTHER RESEARCH(2)

• Enforcement (cont’d)- Assessment of benefits: i) deterrence, ii) corrective

justice, iii) market integration- Assessment of costs:i) enforcement costs (legal

proceedings/principal-agent problems), ii) error costs, iii) administrative burdens, iv) costs of harmonisation

- Identification of ‘optimal’ bundles• Public Choice perspective- May current substantive rules be explained by private

interest theories? - May modernization (Regulation 1/2003) be explained by

theories on bureaucracies?

23

CONCLUSIONS

• There is much more economics that is relevant for European competition law than what is currently part of the ‘more economic approach’.

• More important than the question ‘how much economics?’ is the question ‘what kind of economics?’

24

THANK YOU

Any questions?

Comments?