USING COMPETITION LAW CASES TO TEACH ECONOMICS

1. USING COMPETITION LAW CASES TO TEACH ECONOMICS Sir John Vickers Chairman, OFT DEBE Conference Cambridge, 1 September 2005

2. Competition law and economics • competition law is fundamental to operation of market economy • cases can bring economics to life and show it at work • cases motivate research and policy debate as well as teaching • competition policy addresses market failure while guarding against regulatory failure

3. Competition is hot topic • competition has moved from fringes of law to centre of economic agenda • new law  Competition Act 1998, Enterprise Act 2002, EC developments • independent, transparent and accountable bodies  OFT, CC, CAT • numerous high-profile cases

4. What’s so great about competition? • efficient resource allocation • efficiency displaces inefficiency • incentives for productivity and innovation • good for consumer choice and value for money • think of the alternatives!

5. What does competition law deal with? • anti-competitive mergers • anti-competitive agreements • abuse of dominant market positions

6. Merger review: overview • UK system: OFT  CC (+appeals) • SLC test • main kinds of anti-competitive effect:  non-coordinated: e.g. worse Bertrand equilibrium  coordinated: more likely tacit collusion  foreclosure: to guard/extend(?) market power

7. Merger review: analytical steps (1) • market definition: demand and supply substitutability; product, geography • market shares: concentration measures, e.g. HHI, (mean what?) • non-coordinated effects: incentive shift? • coordinated effects: easier monitoring of collusion, deterrence of cheating, and safety from disruptive rivals?

8. Merger review: analytical steps (2) • conditions for entry and expansion by rivals • vertical issues • [conglomerate issues?] • efficiency defences (consumer or ‘total welfare’ standard?) • failing firm issues • if necessary … remedies

9. The ITV merger case • Carlton/Granada agreed merger of 2003 • background of change in TV sector • commercial case for consolidated ITV • but potential competition concern about advertising airtime • OFT [advised SoS to] refer to CC

10. Analysis of airtime competition • relevant market? TV advertising in the UK • Carlton + Granada share c50%, declining • substitutes or (regional/temporal) complements? • overlap in London  Carlton and Granada’s LWT  and beyond? • did airtime capacity regulation remove SLC concern?

11. CC conclusion on ITV merger • SLC in airtime likely, to detriment of advertisers and public interest • minority favoured structural remedy: divest ad airtime sales houses • majority decided on behavioural remedy: contract rights renewal • none favoured prohibition

12. Anti-competitive agreements: overview • horizontal / vertical, price / non-price • price-fixing: e.g. vitamins, auction houses, toys, replica football kit, roofing • economics of leniency • vertical agreements  more economic approach to non-price agreements now than in past • influence of economics of contracts

13. Abuse of dominance: overview • EC Article 82, US Sherman Act s.2 • law applies only to firms with dominance / market power: how to assess that? • exclusionary [and exploitative?] abuse • examples: predatory pricing, margin squeeze, tying and bundling, exclusive dealing, rebate/discount policies, refusal to supply

14. What is competition on the merits? • how to distinguish anti-competitive from pro-competitive conduct? • should some forms of conduct by a firm with market power be ‘per se’ illegal? • possible guiding principles:  profit sacrifice / no business sense  exclusion of as-efficient rivals  consumer harm

15. United States v Microsoft: overview* • 1998 US brings case that MS had monopolized markets for operating systems and browsers … • by engaging in exclusionary practices including bundling Internet Explorer with Windows OS • 2000 District Court judgment: structural separation + behavioural remedies • 2001 Court of Appeals judgment (see below) • 2002 US and MS settle behavioural remedies * Based on Motta, Competition Policy, 2004, pp 511-523. And see JEP Spring 2001.

16. Microsoft case: issues • Does MS, through Windows, have market power? • How does the market power arise? • Does bundling IE maintain MS’s market power over OSs unlawfully? • Does it extend it to browsers? • Are consumers harmed?

17. Microsoft’s market power • parallels with past IBM cases • network effects, compatibility needs of users, switching costs • relevant market: Intel-compatible PC OS worldwide • Windows share 95+% • ‘applications barrier to entry’ • Windows dominant

18. Maintenance of Microsoft monopoly • ‘middleware’ threat from Netscape browser (+ Java) to applications barrier and hence to Windows dominance • thwarted by MS integration of IE with Windows, exclusionary contract terms with PC-makers and internet access providers? • Court of Appeals reviewed anti-competitive allegations and efficiency defences • upheld some but not all monopolization charges

19. Microsoft remedies • District Court remedies included structural split between MS’s OS and applications businesses • pros and cons of structural remedies: may solve incentive problems but may lose scope economies; proportionality? • Appeals Court quashed break-up • US and MS then settle a package of behavioural remedies

20. Competition cases can teach economics • competition policy now more central • competition law now more economics-oriented • interesting cases and analysis now available • can enliven and spur industrial economics • … anyway I plan to do it

21. USING COMPETITION LAW CASES TO TEACH ECONOMICS Sir John Vickers, Chairman, OFT www.oft.gov.uk