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1 EuropeanEconomic&Ma rketin gConsultants
EuropeanEconomic&Ma rketin gConsultants - EE&MC E - Mail: DHildebrand@ee - mc.com * Homepage: http://www.ee - mc.com 1 CompetitionCompetenceReport1/2005 CompetitionCompetenceReport MOREECONOMICSBASED APPROACHINARTICLE 10 2 TEFU :NEWTES T PROCEDURES The “more - economics - based - approach ” inEuropean c ompetition p olicy has nowbe en implemented also in theassessmentof abusiveexclusio n- aryconduct bydominantcompanies . On December 19 th 2005 , theEur o- peanCommission issued a comprehensive discussionpaper 1 whichr e- jected the former legalistic straight - jackedapproach infavourofa n effects - based ap proach. After alongpublicconsultation,the “Guidanceon theCommission'senforcementprior i tiesinapplyingArticle82(now102) oftheECTreatytoabusiveexclusionaryconductbydominantunderta k- ings” wasadoptedinFebruary2009. 2 Theguidancepape rfirstdescribestheeconomicandeffect - baseda p- proachthatwillguide theCommissioninthe assessmentofexclusio n ary practices andthen presents an analyticalframeworkfortheasses s mentof themostcommonexamplesofexclusionaryconduct,namelyexc lusive dealing,conditionalrebates,tyingandbundling,pred a torypricing,refusal tosupplyandmarginsqueeze. The new effects - based approach meansthat thekey intheassessmentof anexclusionaryconduct are the measurable effect s onthemarket ofs uch conduct . Inotherwords, byapplying t heeffects - basedapproachthe Co m mission intendsto carefullydiscerncompetitiononthemerits,which hasbeneficialeffectsforconsumersandshouldthereforebepr o moted, fromcompetitionthatisliabletolead toanticompetitiveforecl o sure,i.e. foreclosurethatislikelytoharmconsumers. This new a p proach requires convincingevidence and s oundeconomicanalysis. 1 “ DGcompetitiondiscussionpaperontheappl i cationofArticle82oftheTreatyto exclusionary abuses“ ,availableat: http://ec.europa.eu/competition/antitrust/art82/index.html 2 OJC45,24.2.2009 EuropeanEconomic&Ma rketin gConsultants - EE&MC E - Mail: DHildebrand@ee - mc.com * Homepage: http://www.ee - mc.com 2 The guidance paper also provide s instruction s to national competition authorities onhowto asse ss an abuseofadominantposition . Most importantly , thepaper givesguidance to dominant companies onhowto defendthemselves against allegation s ofabuse an

2 dtocompet i tors onhow to pleadtheircase
dtocompet i tors onhow to pleadtheircaseinfrontofthecompetitionauthorities. Objective ofArt icle 10 2 EC Treaty Twoformsofabuse by adominant company canbedistinguished: excl u- sionaryabuses( behaviours byadominantfirm whichare likelytohavea for e closureeffect on themarket)andexploitativeabuses(behaviours where adom i nantcom pany take s advantageof its marketpower,e.g.by chargingexcessiveprices).The guidance paper covers excl u sionary abuses only . 3 Thefocusoftheanalysisisonthe potential harm toco n sumers: Theaim oftheCommission'senforcementactivityisto “ ens urethatdominant undertakingsdonotimpaireffectivecompetitionbyfor e closing their competitorsinananti - competitiveway,thus havinganadverseimpacton consumerwelfare ” . C ompet i tionandconsumersbenefitif companies are ableto expand ,to enter new marketsandcompeteonthemeritswithout competitionconditions being di s tortedorimpairedby a dominantfirm .On theotherhand, exclusionaryconductmightproducesubstantial efficie n- cies which arepassed - onand outweigh the anti - competitiveeffect son co n sumers . Aneconomics - based approachrequiresacarefulexam i nationofhow compe tition functions ineachparticularmarket . Keytotheeconomic approach istheanalysisoftheeconomiceffectsofcertain bus i ness conduct . Restrictionstocompetitio nneedtobeprovenonacase - by - case basis.Inaddition, asalreadystated, theanalysishastoinclude an evalu a tion on whether efficiencygains outweigh negativeeffects .The identification of the harm tocompetitionandofthe likely harmtoco n- sumers mustbe basedonsoundeconomic theories andsupportedby e m piricalevidence.Similarly , efficienciesshouldbeproperly assessed on thebasisofec o nomicanalysisandgroundedon the factsofeachcase. Inordertoassessthecompet i tiveharmarisingfrom specificbusiness practices,the EuropeanCommission adopted the “ a s - efficient - competitor - test”. Thistestisa price - costtestwhichislesseffects - basedthan co m- paredtoother possible tests . 4 Furthermore ,theEuropeanCommission 3 AccordingtotheEuropeanCommissionthisisbecause“itisbettertoprevent thantocure.” 4 Afullyeffects - basedapproachwould derivetheasse ssmentwhetheragiven practiceisdetrimentaltocompetitionornotsolelyfromtheeffectsofthepra c- EuropeanEconomic&Ma rketin gC

3 onsultants - EE&MC E - Mail: DHildebrand
onsultants - EE&MC E - Mail: DHildebrand@ee - mc.com * Homepage: http://www.ee - mc.com 3 pr e sented the criteria that needtobemetinordertoapply an efficiency defence . Bothconceptsareillustratedint hefollowing sections . As - efficient - competitor - test Article 102 prohibitsexclusionaryconductwhichproducesactualorlikely anticompetitiveeffectsinthe marketan dwhichcanharmconsu m ersina directorindirectway. Harmtointermediatebuyersisgenerallypr e sumed toharmfinalconsumers aswell . Therefore , thecentralconcernof t he Commission istoinhibitbusinesspracticesthatfor e closecompetitors and createharmtofinalconsumersintermsof higher pricesor reduced quality. Thereby notonlyshorttermharm,butalsomediumandlong termharmarisingfromforeclosure is takenintoaccount. F oreclosure means thatactualorpotentialcompetitorsar ecompletelyorpartially deniedprofi t ableaccesstoamarket. Thep ossible effectsofanabusiveconduct are: 1)rivalsare disadva n- taged; 2) rivals competeless aggre s sively; 3) rivalsleavethe marketor 4) rivalsdonotenterthemarketinthefirst place . T he dominantcompany can reduce demandfor ther i val s ’ productsordirectlyraiserivals` costs. Inthe first case , foreclosure occurs because a dominantcompany can strengthen itsmarketpositionbyusingexcl u sionarypracticessuchas predatorypr icingor loyalty rebatesy s tems.Inthelattercase , a dominant company which isverticallyintegrated or disposesofastrongposition both on the downstream market (relevantmarket) and on theu p stream - market (inputmarket),can raisepricesof inputfac torsandthereby increasecostsforthe its rivalsonthe relevant market. The key issue istodifferentiatebetweenbusinessconductsthatarepart of ahealthycompetitionin the marketandthose co n ducts thatarepartof anabusivestrategy ofthe domin antcompany. The guidance p apersu g- gest s to use theas - efficient - competitor - test asabenchmark test : The Commissionwillinvestigate whether a theconductiscapableofexclu d ing a competitor whichisaseffi cientasthedom i nantcompany . The “ as - efficien t - competitor ” isahyp o theticalcompetitorhavingthesamecostsas thedominantcompany. Therefore,f oreclosureofan as - efficient - competitor meansthat thedominantco m pany ispricing belowitsown costs. Since the as - efficient - competitor -

4 test isacost - benchmark - test , thech
test isacost - benchmark - test , thechoice oftheappropriatecostbenchmark iscrucial fortheanalysis . TheCommi s- sionch oseasabenchmarktheaverageavoidablecost(AAV)andthe long - runincrementalcost(LRAIC). AccordingtotheCommission,f ailure ticeontheconsumer.Amulti - stageapproachcoulde.g.includeaSacrifice - Profit - Test,an Exclusion - TestandaRecoupment - Test. EuropeanEconomic&Ma rketin gConsultants - EE&MC E - Mail: DHildebrand@ee - mc.com * Homepage: http://www.ee - mc.com 4 tocoverAACindi cates thatthedom i nantundertakingissacrificingprofits inthe shorttermandthatanequallyefficientcompetitorcannot servethe targetedcustomerswithoutincurringaloss. FailuretocoverLRAICind i- cates thatthedominantundertakingisnotrecove ringall the(attribu t- able)fixedcostsofproducingthegoodor serviceinquestionandthatan equallyefficientcompetitor couldbeforeclosedfromthemarket . Other effectsneedtobeconsideredaswell includingtheexi s tenceofeconomies ofscaleand scope , learningcurveeffects orfirstmoveradva n tages which mayfavourdecliningcosts. Theexact appl i cation ofthe as - efficient - competitor - test aswellasthechosencostbenc h marksvaryonacase - by - casebasis. Inthefollowing , theanalysisof are batesystem isillustrated asan example . Example: As - efficient - competitor - test forrebate schemes Issue : Whatisthe economiceffect of afidelityrebate scheme ? Do cu s- tomers buy additional output from thedominantcompany applying suchscheme bydiverting purchas esfrom othersuppliers tothe dominantcompany ? Theanalysis ofa rebate scheme hasto assessthelikelihoodand economic incentive sto switching :Whatisthethres h old level thatwouldconvince customerstoswitch ?Whatistheeconomiceffectoncetheth reshold level is reached orpassed ? Isitpossiblethat ahypoth e tic a l as - efficient unde r- taking meet s thepric elevel ofthedominant co m pany andsetitsown pricesatthe same level ?Whichotherfactorshaveanimpactonthe threshold? Withintheanalysis ,the following concerns havetobe a d- dressed : “ Retroactive ”effect: oncethethresholdismet,therebateappliesnotonly to the purchasesabove the threshold,butalso to allpreviouspu r- chases .Re t roactiverebatescanforeclosethemarketsignificantly as theymaymakeitlessattractivefor customerstoswitchsmall amountsofdemandtoanalternativ

5 e supplier,ifthiswouldleadto lossofthere
e supplier,ifthiswouldleadto lossoftheretroactive rebates .P rice s forthelast units which are bought beforethethreshold isreached aresignifica nt ly lowerand possiblyevennegativebecausethetransactiontriggerstherebate forallthepurchasesbelowthethreshold aswell .The dimension of the retroactive effectdependsontherelative sizeofthethreshold andhas tobeassessedempir i cally. Su pplyofcommerciallyviableamounts: Ascompet i tors may notableto competefor theentiredemand, thequestionis,whethertherebate systemhinders competitors fromsupplyingcommerciallyviable EuropeanEconomic&Ma rketin gConsultants - EE&MC E - Mail: DHildebrand@ee - mc.com * Homepage: http://www.ee - mc.com 5 amounts toindividualcustomers. Toanswerthisissuea mar ketsim u- lation analysis hastobe pe r formed. Priceanalysis: Whatistheeffectivepricelevel forthe purchase with respecttotherebate s offeredbythe dominantco mpany? Costanalysis: Wh atarethe average av oi dable costsofthedominant co m panyor of ahypothetical efficientcompetitor? Price / cost analys e s: Istheeffectiveprice fora comme r ciallyviableshare ofacompetitor belowtheaverage avoidable costofan efficientco m- petitor? Price / cost comparison : Istheeffectiveprice b elowtheaverage avoidable costofanefficientcompetitor,sothati t isimpossibletocompete withthedominantunde r takingforthispartofthedemand? Efficien cyD efence Iftheresul tsofthe as - efficient - competitor - testshowthat thebusiness conduct causes foreclosureeffects ,the dominantcompany can stillclaim thatitsconductis justified . Theburdenofproofforsuchjustifica tionison thedominantcompany: Thedominantcompan yhastodemonstratethat a) itsconductis objectivelynecessary andproportionate ,and b) that its conduct producessubstantialefficiencieswhichoutweighanyanticompet i- tive effectsonconsumers. For theefficiencydefencetobeaccepted , thedomi nantcompanymust demonstratethatthefollowing cumulative cond i tionsarefulfilled: E fficienciesarerealisedor are likelytoberealisedasaresultofthe conduct ; The conductisindispensabletorealisetheseefficie n cies ; The likely efficiencies out weighanylikelynegativeeffectsoncomp e- titionandconsumerwelfare; Theconductdoesnoteliminateeffectivecompetition,byremoving allormostexistingsourcesofactualorpotentialcompetition . Considering againthe exa

6 mple ofa rebate scheme ,the followingque
mple ofa rebate scheme ,the followingque s- tionshavetobeaddressedwhenapplying the efficiencydefence . Example:Efficiency d efence in caseofarebate scheme Whenassessingtheindispensabilityofthe rebate scheme , thefollo w ing questions havetobeaddressed. EuropeanEconomic&Ma rketin gConsultants - EE&MC E - Mail: DHildebrand@ee - mc.com * Homepage: http://www.ee - mc.com 6 Can costadvantag es beobtainedand pas s ed ontothecusto m ers? Isthe rebateschemenecessaryforthedominantfirmtomakece r- tainr e lationship - specificinvestments ? Can otherless - restrictivemeasurescreatethesame incentivesfor the dominant company ? Conclusion Int he guidance paper onthe appl icationof Article 102 toabusiveexcl u- sionaryconduct , theEuropeanCommission pr o vide s adetaileddescription on how toassess cases of alleged abuseofadominantposition . These guid e lines areusefulfor: - C ompanies that h avetodefendthemselvesagainstallegation s of abusiveconduct ,either bya nationalcompetition authority orthe Eur o peanCommission ; or - C ompanies that aredisadvantaged orpreventedfromenteringa market byexclusionary practices from theincumbent do minant company . Ineithercase ,the introductionofthe “more - economics - based - approach” meansthat marketfacts needto be presentedbased onsound economic theories andgroundedonempiricalevidence.Withthisapproach , the EuropeanCommission address es the criticism ofthe EuropeanCourt s whichin severalArticle102 cases judgedinadequate theeconomic anal y- ses carriedoutbytheCommission. Inparticular , withthe “as - efficient - competitortest” , t he European Co m- missiondevelopeda detailed fram e work fortheassessmentof specific case s of exclusionaryabuses. Inaddition,the implementationof the eff i ciencydefencereflects a basic insightfromeconomictheory ,i.e. that manybusinesspracticescanbothharmandpromotecompetition and consumerwelfa re. T hepract i calimplementation ofthis effects - based approachrequiresbroadexperienceandsubstantiatedempiricalanal y ses. EE&MChasasolidknow - howonhowtocollectdata andbroadexperience witheconomicandeconometricanalyses. EE&MC advises cli entsonabuse ofdominancecasesbothatEuropean and atnationallevel inlinewiththe “more - economic - based - approach”developedbytheEuropeanCommi s- sion