Network Effects And Essential Facilities

1. Network Effects And Essential Facilities The University of Oxford Centre for Competition Law and Policy 20 February 2006 CCLP (S). 03/06 Donald I. Baker Baker & Miller PLLC Washington, DC

2. Why Networks Generate So Many Competitive Issues and Conflicts • Increasing importance in a global economy • Source of potentially increased competition • Source of monopoly power • Traffic interchange as a competitive issue • Strong incentives for vertically integrated enterprises to try to disadvantage unintegrated competitors • Competitive imbalances among users • Joint venture networks

3. Different Types of Networks • Wholesale Interchange Networks (e.g., Visa, London Stock Exchange, Railtrack). This category generates the most antitrust network problems. • End-User Networks (e.g., AOL, Vodafone, local cable and telephone networks) • Captive Networks (e.g., American Express)

4. Sources of Market Power in “Network Interchange” Markets • “Network Effects” • Natural Monopoly Characteristics • Barriers to Alternative Network Entry on an effective scale • Strong Product Differentiation (e.g., MasterCard)

5. Vertical Integration as Key Factor in Generating Antitrust Issues for Wholesale Interchange Networks • Costs and operational effects of network restraints • Vertically integrated competitors’ incentives • Potential conflict issues—rates, technical interconnection standards, eligibility rules, etc. • Independent network operator often will have different incentives (see Stena Sealink)

6. Different Types of Interchange Network Antitrust Issues • Switching fees • Exclusivity, bypass and routing rules • Technical standards • Interchange fees • Network membership eligibility rules • Interconnection rates and terms • Access for User Market participants

7. The Basic Elements in the “Essential Facilities” Doctrine • Concept– tailored application of refusal to deal rules • Essentiality • Technological and economic feasibility • Lack of business justification

8. The “Essential Facilities” Doctrine Raises Some Especially Difficult Policy Issues • A fundamental long-run, short-run conflict • The “essential facilities” doctrine is driven by shorter-run frustration about loss of competition in the User Market • Types of relevant “facilities” include purely physical facilities, data bases, and networks (which are a combination of facilities, interconnections and rules) • Risk of discouraging investment and innovation

9. Possible Factors to Weigh in Making an “Essential Facilities” Determination • Public franchise or subsidy as the source of the “facility” • Investment and risk in establishing the “facility” • Non-investment (i.e., “facility” is a by-product). E.g. Magill • Size of “facility” in relation to the potential size of the dependent user market • Independent operator test • Net balancing

10. Treating Joint Venture Interchange Networks More Stringently than Dominant Single Firm Networks in the U.S. • Joint ventures in the U.S.—source of most U.S. “essential facilities” cases • Monopoly Networks in the U.S. • Dominant Networks in Europe—source of most E.C. “essential facilities” cases • Joint Venture Networks in Europe

11. Different Enforcement Institutions and Philosophies as Influencing Antitrust Outcomes • The administrative antitrust enforcement system in Europe • The judicial-centered antitrust enforcement system in the U.S. • Judicial reluctance about making “regulatory” decisions in the U.S. • Administrative agencies may be substantially more willing to make “regulatory” findings and engage in ongoing supervision

12. Conclusions • Differences in approach and willingness to impose “essential facilities” remedies • Potential importance of private litigation • Potential forum shopping by complainants and plaintiffs