TT. . Takigawa Takigawa 20052005 11

APEC Training Course On Competition APEC Training Course On Competition Policy For APEC Member EconomiesPolicy For APEC Member Economies

•• 22--44 August August 20052005 , , Manila, PhilippinesManila, Philippines ..

•• An ideal Design for Regulation of An ideal Design for Regulation of Monopolization or Abuse of Dominant Monopolization or Abuse of Dominant

PositionPosition

•• Comparative analysis of US, EU, and Comparative analysis of US, EU, and Japanese modelsJapanese models

•• Toshiaki Takigawa Toshiaki Takigawa

–– Professor, Kansai University School of Law , JapanProfessor, Kansai University School of Law , Japan..

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Introduction Monopolization (or abuse of dominant position) concerns exclusionary conducts by dominant enterprises. Effective utilization of monopolization regulation would vitalize economies of developing countries by activating rivalrous competition and encouraging new entries. Developing countries, which do not have well-established competition laws, have freedom to construct an ideal competition law from scratch.

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Contents I. DISTINCTION OF COOPERATIVE CONDUCTS FROM EXCLUSIONARY CONDUCTS

II. DISTINCTION OF UNILATERAL CONDUCTS FROM MULTILATERAL (COOPERATIVE) CONDUCTS

III. STEP-BY-STEP EXAMINATION

IV. NEED FOR MARKET POWER (OR "DOMINANT POSITION")

V. NEED FOR FINDING UNDUE (OR "ABUSIVE") NATURE

VI. ABUSIVE CONDUCTS OTHER THAN EXCLUSION

VII. IMPORTANCE OF REMEDY

VIII. IS PENALTY NECESSARY OR APPROPRIATE?

CONCLUSION

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Cooperative Conducts Vs. Exclusionary Conducts

Cooperative

conducts

Rivalries

U.S. Sherman Act Section 1 Section 2

EU EC

competition

law (EC

Treaty)

Article 81

Article 82

Japan Antimonopoly

Law

Section 3

(Latter-half.

Section 3

(Former-half)

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Proposal for the competition law distinction of unilateral conducts from cooperative conducts

Cooperative

conducts

Unilateral conducts

Law clause Article 1 Article 2

Regulatory approach Generally more

rigorous approach

More cautious approach

Penalty for violation Penalty for

hard-core cartels

• Penalty is limited to clearly

pernicious conducts.

• Remedy should be carefully

designed.

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Step-by-step Examination

Step 1 Step 2 Step 3

Identification of

market power

(including high

probability of its

acquisition)

Identification of

predatory (or undue)

nature of conducts

Designing proper

remedy

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Need For Market Power In EC and U.S. competition laws, regulatory target for unilateral conducts is limited to enterprises holding market power and those having dangerous probability to acquire it. unilateral conducts, in contrast to cooperative conducts, are largely legitimate competitive activities, so that, competition authorities should limit their intervention.

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Reason For The Need Of Market Power

Market power to a seller is the ability profitably to maintain prices above competitive levels for a significant period of time. Competition law’s reach for unilateral conducts should be limited to those with dangerous probability of leading to market power.

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A Regulatory Approach That Does Not Require Market Power (1): US FTC Act

The Section 5 prohibits “unfair methods of competition”, the most important category of which is exclusionary practices. U.S. FTC’s intervention into exclusionary practices is currently limited to dominant enterprises, and is basically in line with Department of Justice (DOJ)’s and courts’ standard for Sherman Act Section 2.

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A Regulatory Approach That Does Not Require Market Power (2): Japan

AML section 19 against “unfair trade practices”.

In contrast to relative decline of importance of U.S. Section 5, Japanese Section 19 has maintained its key role.

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Pro and Con

The appeal of granting them more latitude in regulation of industries. “Unfair trade practices” type regulation tends to lead to unfocused and too-broad intervention into enterprises’ competitive conducts. U.S. and Japanese experience indicates advisability of limiting intervention into exclusionary practices (that is unilateral conducts) to those by dominant enterprises.

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Need For Finding Undue (Or “Abusive”) Nature

Many of exclusionary conducts are legitimate competitive conducts.

E.g. Dominant enterprises’ aggressive price reductions.

A difficult task: distinguishing undue exclusionary conducts from legitimate competitive ones. Courts and scholars have not yet solved this problem.

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Historical Change In U.S. Antitrust (1)

Soon after world war II, dominant companies’ aggressive conducts were viewed suspiciously.

Alcoa case. Alcoa built up production facilities in anticipation of rapid growth in demand of aluminum products.

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Historical Change In U.S. Antitrust (2)

“Aim of antitrust is to protect competition, not competitors”.

This maxim represents the viewpoint that exclusionary practices should not be condemned merely because they harm competitors. Emphasis on consumer welfare has also rendered judgment result less predictable and more controversial.

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Historical Change In U.S. Antitrust (3)

in the Microsoft III case, the US regional court (D.D.C. 2000) found Microsoft’s bundling of its browser (IE) with Windows illegal, since the bundling harms Netscape, and at the same time does not realize redeeming consumer benefit. However, the appellate court (D.C. Cir. 2001), reversed the decision (for its tie-in part) as it considered that Microsoft’s defense on the ground of consumer benefit deserves more thorough examination

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Situation In EU (1)—Comparison With U.S.

EU, in comparison with U.S., Has prioritized economic integration over general economic efficiency.

European commission and courts have viewed dominant enterprises’ conducts harming competitors more seriously than the U.S. Counterparts.

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Situation In EU (2) ongoing Microsoft case, European Commission, in its year 2004 decision found Microsoft’s bundling of its media-player (Windows Media Player) with Windows illegal under Article 82, since the bundling seriously harms competitors’ viability. The Commission did examine Microsoft’s efficiency defense, but concluded that the consumer benefits (transaction efficiency etc.) do not compensate its exclusionary effect

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Situation In Japan (1) Since 1996, JFTC has rendered 5 cases of monopolization under AML section 3. JFTC still makes more frequent use of “unfair trade practices” clause to cope with exclusionary conducts even by dominant enterprises.

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Situation In Japan (2) The five cases all concern exclusionary conducts of clearly undue or abusive nature by dominant enterprises.

Japan hospital foods concerned abusive use of government-related certification system.

M.D.S. Nordion concerned exclusive-purchase contract forced by a globally dominant company (a Canadian company).

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Dominant enterprisesabusive conducts other than exclusion

EC and Japanese competition laws in their monopolization (or abuse of dominant position) clauses condemn dominant enterprises’ conducts that do not fit into exclusionary practices. U.S. antitrust’s monopolization clause (Sherman Act Section 2) has been applied only to exclusionary conducts.

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EC competition law’s Article 82.

“Abuse of dominant position”. “Abuse” may include diverse conducts other than exclusion. European commission in the 1970s ordered dominant companies to reduce their prices. In recent years, European commission has refrained from using the abuse concept for price control.

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Japanese AMA’s Monopolization Clause

“Control”, that is “business activities, by which any entrepreneur controls the business activities of other entrepreneurs” (Section 2 (5)). This concept of “control” may be targeted at dominant enterprises’ diverse conducts that cannot be deemed exclusionary.

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Japan Hospital Foods Case

JFTC made use of the “control” part of monopolization clause, and condemned the dominant enterprise’s price-leadership conduct. The dominant company led other companies to increase the price of hospital foods.

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Pro and Con

This gives competition authorities more power and more latitude in their application of competition laws.

Most developing countries equipped with competition laws seem to have adopted “abuse of dominant position” clause rather than monopolization clause.

However, flexible law clauses lead to excessive intervention into business activities.

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Proposal to Developing countries

In case developing countries adopt or retain abuse clauses, they are advised to define in their competition laws meaning of abuse, and avoid using abuse clauses for administrative purposes other than control of anticompetitive conducts. Administrators may feel need to use abuse clauses for protecting consumers’ general interests, or for protecting small enterprises. For these purposes, they are advised to establish laws, separate from competition laws, specifically targeted for protecting consumers or small enterprises.

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Importance of Remedy Remedy is a measure that a competition authority or a court orders the violating enterprise to take in order to get rid of the violation and avoid future violations. The straightforward remedy is to order the violating enterprise to stop the exclusionary practice.

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Need for proper design of remedies

For big monopolization cases involving persistent monopolies, mere order to stop the exclusionary practice is often insufficient. Refusal-to-deal cases, or bundling (tie-in) cases.

Competition authorities or courts should order the violating enterprises not only to cease the violation but also to hold new contracts with rival enterprises or to produce new separate products.

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How broad and “forward-looking” should remedy be?

Remedy should be broad enough and “forward-looking” enough to prevent future violations. On the other hand, too broad and too interventionist remedy constrains the business strategy of the dominant enterprise so much that business efficiency will be lost.

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Microsoft Case: US-EU Difference (1)

In the U.S. And EU Microsoft cases, the U.S. DOJ and European commission both found Microsoft in violation of monopolization (or abuse of dominant position). Their remedies are considerably different: European remedy is much more severe and far-reaching than the U.S. Counterpart.

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Microsoft Case: US-EU Difference (2)

European Commission ordered Microsoft to provide PC manufactures (OEMs) Windows without codes for media player. U.S.DOJ in its consent decree only ordered Microsoft to allow OEMs to hide the icon of MS’s media player (Windows Media Player).

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Is structural remedy necessary or appropriate?

When a persistent monopolist will devise diverse exclusionary practices in order to preserve its monopoly.

Competition authority should contemplate structural remedy. Industry structure rather than the monopolist’s behavior is the cause of monopolization.

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Structural Remedies

Structural remedies are not restricted to breaking-up companies, but include diverse measures such as getting rid of braches of companies. a structural remedy is only a variation or an extension of broad and “forward-looking” remedies. Special legislation for breaking up monopolies is not called for.

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Pro and con for structural remedies (1)

U.S. DOJ and FTC pursued this policy in 1970s. Corporations and industries included were AT&T, IBM, oil, and cereal industries. Only the DOJ’s case against AT&T resulted in divestiture of AT&T, which transformed itself into regional bell companies and long-distance AT&T.

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Pro and con for structural remedies (2)

Most Americans consider AT&T’s divestiture as great success. Breaking-up major corporations is a radical measure that may risk robbing business executives of incentives for growth. For rapidly changing high technology industries, divestitures suit takes too long time.

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Is penalty necessary for unilateral conducts?

Penalty seems to be neither necessary nor appropriate for monopolization violation.

On the condition that monopolization (or abuse of dominant position) regulation is restricted to unilateral conducts.

Unilateral exclusionary conducts, in contrast to hard-core cartels, are not to be regarded as clearly pernicious.

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Conclusion--Key lessons (1) Monopolization (or abuse of dominant position) regulation should be construed as regulation of unilateral conducts. Cooperative exclusionary conducts should be regulated by competition law clause targeted on cooperative conducts. Competition authorities should examine monopolization cases step-by-step: First stage is identification of market power (or its dangerous probability); Second stage is finding of undue, abusive, or predatory nature of conducts; Third stage is designing a proper remedy. Target for regulation of unitary exclusionary conducts should be limited to dominant enterprises.

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Key lessons (2) Developing countries are advised to limit the objective of monopolization regulation to regulation of exclusionary conducts. Remedy for monopolization violations should be carefully designed in order to take proper balance between the needs for violation prevention and for business freedom. Penalty for monopolization violation is neither necessary nor appropriate, on the condition that monopolization regulation is construed as regulation of unilateral conducts.