Wanadoo Case

1. Wanadoo Case Wild Thoughts on Predatory Abuses in Highly Dynamic Innovative Industries With Network Externalities and Product Complementarities Giancarlo Spagnolo Università di Roma ‘Tor Vergata’ SITE – Stockholm School of Economics CEPR, www.gianca.org

2. Some general background thoughts • Innovation in short supply in society because of public good features • Important positive externalities of innovation in society • States invest large amounts of money to foster innovation • Competition is not an objective per se, it is a mean that often helps to improve welfare, and sometimes instead reduce it (e.g. when lack of contractility on crucial dimensions, see e.g. Manelli and Vincent (1996), Calzolari and Spagnolo (2007)) • Competition may sometimes be bad for innovation • Unsettled debate on general effect, Schumpeter/Patents vs. Competition as a stimulus • Inverted U legacy does not solve the problem unless we know where we are on the inverted U in the specific industry • Recent empirical evidence suggests patent system does not overeward innovation (Denicoló 2007)

3. Some more specific background thoughts • Innovative markets: highly dynamic, large uncertainties • Uncertanty: hard to know how markets and market structure will be in a few years, many investments today just to get an option for tomorrow • Dynamics: large investments today for very risky but possibly very large returns in the future, often very far in the future (think at pharmaceuticals’ R&D-product life-cycle, or Internet platforms, how long did it take for them to become profitable...) • I think highly innovative industries should be treated with special attention in competition policy, as competition policy may contrast and disrupt what other costly policies are doing (innovation technology policies), with double waste of taxpayer’s money • Example: prosecuting exploitative abuses when IPR awarded • Competition experts are often not that expert on innovation (we might think at special units for innvoative industries)

4. Some questions on the Wanadoo case (in random order) Question 1 (Other Social Benefits from Penetration Prices): • European countries like Italy are highly concerned about the low diffusion of ICT, including broadband access to Internet • Wanadoo pricing appears to have achived a rather fast and important penetration of broadband use in a very short time, compared to other European countries, one of the objectives of costly innovation policies around Europe because of the positive externalities this may have from the point of ICT/internet usage Shouldn’t we care?

5. Some questions on the Wanadoo case Question 2 (Mistakes and Recoupment): • We show in our report for the OFT on Art. 82 (Buccirossi, Spagnolo, Vitale 2006, available from www.gianca.org) that mistakes in the prosecution of abuses tend to be particularly costly in innovative industries (although less costly for price abuses than for structural ones) • The Commission appears to have conducted an analysis of likely recoupment, but then wrote it is not needed; requiring such analysis would certainly reduce the likelyhood of mistakes, reduce discretion and increase legal certainty... Why not doing the recoupment analysis all the time?

6. Some questions on the Wanadoo case Question 3 (Consumer Learning, Contestability and Recoupment): • One of the CoCombine reports funded by the EC (Buccirossi et al. 2005, http://www.learlab.it/e_researchpapers.htm), suggests that broadband connection was close to an experience good during the “predatory pricing” phase, and that thanks to the penetration price consumers became knowledgeable of the product and able to compare different offers; the good became then a search good, so that potential entrants and competitors could compete ad benefit from the penetration phase • The “predatiory phase” therefore changed the structure of the market facilitating entry and competition, making recoupment less likely; moreover, access regulation would tend to keep the market contestable, limiting recoupment... Shouldn’t contestability effects and recoupment be at the core of the Wanadoo case? More generally, shouldn’t recoupment be always proven when markets are changing rapidly and a finding of dominance during the alledged predatory phase may not imply dominance at the recoupment stage?

7. Some questions on the Wanadoo case Question 4 (Firm Learning): • In its defence Wanadoo argued that learning effects, economies of scale and network externalities were behind their pricing; • The Court ruled that these considerations are not relevant for the finding of abuse; Why shouldn’t they be relevant?

8. Some questions on the Wanadoo case Question 5 (Optimal Time Frame): • In its defence Wanadoo suggested that cost and revenue calculations should cover a longer period as the market was new and rapidly expanding; • The Court instead ruled that costs and revenues after October 2002 could not be considered... Why? What is the right time frame to consider? Shouldn’t it be much longer in highly growing, innovative markets? Why should society value shortsighted management?

9. Some questions on the Wanadoo case Question 6 (Complementarities): • Internet access is clearly complementary to other, probably more valuable products/markets, in particular broadband content applications • This is likely to have been the main driver of high-speed Internet access penetration • This may have pro-competitive consequences in these related markets (media) Can we hope to understand the broadband internet access market without enlarging the scope of analysis to complementary growing markets?

10. Concluding remarks • Several other problematic issues discussed in Buccirossi et al. 2005 http://www.learlab.it/Publications/Far-Close.pdf - a ‘must read’ (FerrariBravo-Siciliani JCLE2007 is a summary not as valuable as the original, and does not quote original nor EC/Cocombine that funded the study...) • In innovative dynamic markets there may be strong uncertainty and option value to price below cost and attract consumers • In innovative dynamic markets conditions may change in such unexpected way that it may be very hard to plan recoupment given who knows how the market will look like in some years • How long should a firm be dominant in a market to be so defined - the firm that launch a new product first opening/creating a new market to be immediately defined dominant (at the beghinning it wil of course have 100% market share...) • Market definition may need to be modyfied in this kind of industries