Article 82 Discussion Paper

Luc PeeperkornRita Wezenbeek

DG Competition, European CommissionDG Competition, European CommissionRotterdam, 17 March 2006Rotterdam, 17 March 2006

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DiscussionDiscussion paper paper

Published on Published on 19th December 200519th December 2005

Public consultationPublic consultation until end of March until end of March

We hope for We hope for serious and wide debateserious and wide debate on paper on paper

Paper concerns Paper concerns exclusionaryexclusionary abuses only; abuses only; exploitative abusesexploitative abuses and and discriminatiodiscrimination follow at n follow at later stagelater stage

Depending on results Depending on results GuidelinesGuidelines may follow. may follow.

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Review of Article 82Review of Article 82

Effects based approach using economic principles Effects based approach using economic principles and concepts, leading to a more systematic and and concepts, leading to a more systematic and consistent policy in different areas of anti-trustconsistent policy in different areas of anti-trust

Continuation of work done in other areasContinuation of work done in other areas Vertical restraints BER + GuidelinesVertical restraints BER + Guidelines Horizontal BERs + Guidelines;Horizontal BERs + Guidelines; Article 81 (3) Guidelines;Article 81 (3) Guidelines; Technology transfer BER+ Guidelines;Technology transfer BER+ Guidelines; Horizontal Merger GuidelinesHorizontal Merger Guidelines

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‘‘Form’Form’ vsvs ‘ ‘effectseffects’ based approach’ based approach

Form based approachForm based approach: may provide certainty and timely : may provide certainty and timely enforcement but at too high a cost of false positives and enforcement but at too high a cost of false positives and false negativesfalse negatives

Pure effects case by case approachPure effects case by case approach: may provide correct : may provide correct outcome in each case but risk of uncertainty and too (s)low outcome in each case but risk of uncertainty and too (s)low enforcementenforcement

ConclusionConclusion: : Need a combination of Need a combination of elements of form and effectelements of form and effect and a and a

fair division of the fair division of the burden of proofburden of proof to ensure to ensure operational operational rulesrules

Rules anchored in Rules anchored in economic principleseconomic principles to help consistency to help consistency and predictabilityand predictability

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Framework exclusionary abusesFramework exclusionary abuses

Essential objectiveEssential objective of 82 is to of 82 is to protect competition protect competition as a means toas a means to protect consumer welfare protect consumer welfare

Central concern Central concern is is foreclosure foreclosure that hinders that hinders competition and thereby harms consumerscompetition and thereby harms consumers

Protection of Protection of competitioncompetition, not protection of , not protection of competitors against competitioncompetitors against competition

Equal right of dominant firms and of residual Equal right of dominant firms and of residual competitors to competitors to compete on the meritscompete on the merits

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General testGeneral test Does conduct have Does conduct have capabilitycapability to foreclose? to foreclose?

• Investigate Investigate formform and and nature nature

Does it have a Does it have a likely or actual likely or actual market distorting market distorting foreclosure effect?foreclosure effect?

• Actual or potential competitors are Actual or potential competitors are completely or partially completely or partially denied profitable accessdenied profitable access to the market, to the market, entryentry or or expansionexpansion of rivals is of rivals is discourageddiscouraged, maintenance or growth of , maintenance or growth of competition is hindered;competition is hindered;

• Incidence;Incidence;• Importance of customers or competitors in case ofImportance of customers or competitors in case of selective selective

foreclosure;foreclosure;• Other market characteristics Other market characteristics such as network effects;such as network effects;• Degree of dominanceDegree of dominance

‘‘Sliding scale approach’Sliding scale approach’

Exception for conduct which Exception for conduct which creates no efficienciescreates no efficiencies and and only raises obstacles to residual competitiononly raises obstacles to residual competition..

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Application to price based abusesApplication to price based abuses

Predation, loyalty rebates, mixed bundlingPredation, loyalty rebates, mixed bundling

How to distinguish between abusive pricing which is How to distinguish between abusive pricing which is capable to foreclose and thereby harm competition and capable to foreclose and thereby harm competition and pro-competitive pricing?pro-competitive pricing?

As efficient competitor test as practical proxy for consumer As efficient competitor test as practical proxy for consumer harm testharm test

In general, conduct that would not exclude “as efficient In general, conduct that would not exclude “as efficient competitors” but would only exclude “not as efficient competitors” but would only exclude “not as efficient competitors” is unlikely to harm competitioncompetitors” is unlikely to harm competition

Such conduct also more easily identified with competition Such conduct also more easily identified with competition on the meritson the merits

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As efficient competitor testAs efficient competitor test

Price-cost testPrice-cost test

Normally Normally costs of dominant company costs of dominant company benchmarkbenchmark for competition on the for competition on the meritsmerits

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DefencesDefences

Objective necessityObjective necessity• constraint that applies to all undertakings in the market constraint that applies to all undertakings in the market • is the is the prima facieprima facie abusive conduct actually necessary on abusive conduct actually necessary on

the basis of objective factors external to the dominant the basis of objective factors external to the dominant company? company?

‘‘Meeting competition’Meeting competition’• dominant company may defend its own commercial and dominant company may defend its own commercial and

economic interests in the face of action taken by economic interests in the face of action taken by competitors competitors

• conduct that may seem abuse is actually a loss conduct that may seem abuse is actually a loss minimising reaction to competition from others minimising reaction to competition from others

• suitable, indispensable and proportionate suitable, indispensable and proportionate ‘‘Efficiencies’Efficiencies’

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Efficiency defenceEfficiency defence

Efficiency defense needed since same conduct Efficiency defense needed since same conduct can be both efficiency-enhancing and restrictive can be both efficiency-enhancing and restrictive

No exemption possible: Successful efficiency No exemption possible: Successful efficiency defense must lead to conclusion that conduct is defense must lead to conclusion that conduct is not abusivenot abusive

Consistency required with analytical framework of Consistency required with analytical framework of Art. 81(3) and merger controlArt. 81(3) and merger control

Case law (Syfait, Piau) indicates such a defenceCase law (Syfait, Piau) indicates such a defence

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Conditions for efficiency defenceConditions for efficiency defence

Efficiencies realised or likely to be realised by conductEfficiencies realised or likely to be realised by conduct Conduct Conduct indispensableindispensable to realise efficiencies to realise efficiencies ‘‘ConsumerConsumer pass on’ pass on’ Competition Competition not eliminatednot eliminated in respect of a in respect of a substantial partsubstantial part

of the products concernedof the products concerned

Level of dominance above which protecting the Level of dominance above which protecting the competitive process will normally outweigh possible competitive process will normally outweigh possible efficiencies: market share above 75% and no meaningful efficiencies: market share above 75% and no meaningful competitive pressure left from either residual or potential competitive pressure left from either residual or potential competitorscompetitors

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Conditional rebates on all purchasesConditional rebates on all purchases

Overall test of capability and effectOverall test of capability and effect Is the dominant firm an unavoidable Is the dominant firm an unavoidable

trading partner?trading partner?• If yes, no effective If yes, no effective ex anteex ante competition competition

for whole demandfor whole demand• Rebate may create suction effectRebate may create suction effect• If no, the rebate scheme does not If no, the rebate scheme does not

foreclose, unless overall predatory foreclose, unless overall predatory

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Capability: the thresholdCapability: the threshold

Authority to show that threshold is not set so low Authority to show that threshold is not set so low as to allow switching of customersas to allow switching of customers

Share of individual customer’s requirements or Share of individual customer’s requirements or individualised quantity targetindividualised quantity target• It is assumed that the thresholds are well-targeted It is assumed that the thresholds are well-targeted

absent evidence that actual purchases far exceed the absent evidence that actual purchases far exceed the thresholdthreshold

Single target or generalised grid with a certain Single target or generalised grid with a certain number of stepsnumber of steps• Targeting of steps needs to be analysed more carefully Targeting of steps needs to be analysed more carefully

in order to assess capability to have effectin order to assess capability to have effect

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Capability: how to apply the as-Capability: how to apply the as-efficient-competitor testefficient-competitor test

Close to the threshold effective price Close to the threshold effective price is often negative but competition not is often negative but competition not just for marginal unitsjust for marginal units

The relevant range: What is the CVS The relevant range: What is the CVS on which P effective is calculated?on which P effective is calculated?

Capability to exclude if Price < ATCCapability to exclude if Price < ATC

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Effect on the marketEffect on the market

the dominant company applies the rebate the dominant company applies the rebate system to a good part of its buyers and system to a good part of its buyers and this system therefore affects, if not most, this system therefore affects, if not most, at least a substantial part of market at least a substantial part of market demand, ordemand, or

it applies selectively but these selected it applies selectively but these selected buyers are of particular importance for buyers are of particular importance for (potential) competitors, and (potential) competitors, and

there are no clear indications of a lack of there are no clear indications of a lack of foreclosure effect such as aggressive and foreclosure effect such as aggressive and significant entry and/or expansion by significant entry and/or expansion by competitors and/or switching of customerscompetitors and/or switching of customers

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Rebuttal and efficienciesRebuttal and efficiencies

Rebuttal on capabilityRebuttal on capability Rebuttal on effectRebuttal on effect Efficiency defenceEfficiency defence

Conclusion: full effects based analysis, Conclusion: full effects based analysis, no easy presumptions helping the no easy presumptions helping the authority to shift the burden of proofauthority to shift the burden of proof

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ExampleExample 1 1

ThresholdRebateAveragePrice

TurnoverIncrementalTurnover

StepSize

StepPrice

5000 2,5 97,5 487500 97,5

10000 3 97 970000 482500 5000 96,5

15000 3,25 96,75 1451250 481250 5000 96,25

20000 3,5 96,5 1930000 478750 5000 95,75

25000 3,65 96,35 2408750 478750 5000 95,75

30000 3,75 96,25 2887500 478750 5000 95,75

35000 3,82 96,18 3366300 478800 5000 95,76

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Example Example 2: CVS = 10%2: CVS = 10%

Threshold RebateAveragePrice

CVAEffectivePrice

5000 2,5 97,5 500 75

10000 3 97 1000 92,5

15000 3,25 96,75 1500 94,5

20000 3,5 96,5 2000 94,25

25000 3,65 96,35 2500 95

30000 3,75 96,25 3000 95,35

35000 3,82 96,18 3500 95,55

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ExampleExample 3: CVS = 5 % 3: CVS = 5 %

Threshold RebateAveragePrice

CVAEffectivePrice

5000 2,5 97,5 250 50

10000 3 97 500 87,5

15000 3,25 96,75 750 92

20000 3,5 96,5 1000 91,75

25000 3,65 96,35 1250 93,5

30000 3,75 96,25 1500 94,35

35000 3,82 96,18 1750 94,85

2020

Example Example 44

Threshold RebateAveragePrice

CVAEffectivePrice

5000 2,5 97,5 97,5

10000 3 97 5000 96,5

15000 3,25 96,75 5000 96,25

20000 3,5 96,5 5000 95,75

25000 3,65 96,35 5000 95,75

30000 7 93 5000 76,25

35000 10 90 5000 72

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Example 5: Example 5: CVS = 10% CVS = 10%

Threshold RebateAveragePrice

CVAEffectivePrice

5000 2,5 97,5 500 75

10000 3 97 1000 92,5

15000 3,25 96,75 1500 94,5

20000 3,5 96,5 2000 94,25

25000 3,65 96,35 2500 95

30000 7 93 3000 62,85

35000 10 90 3500 63

2222

ExampleExample 6: CVS = 5 % 6: CVS = 5 %

Threshold RebateAveragePrice

CVAEffectivePrice

5000 2,5 97,5 250 50

10000 3 97 500 87,5

15000 3,25 96,75 750 92

20000 3,5 96,5 1000 91,75

25000 3,65 96,35 1250 93,5

30000 7 93 1500 29,35

35000 10 90 1750 33