ARTICLE 82 REFORM: AN ECONOMIC PERSPECTIVE(?)

1. RBB ECONOMICS ARTICLE 82 REFORM:AN ECONOMIC PERSPECTIVE(?) IESTYN WILLIAMS [These thoughts are preliminary. Comments welcome.]

2. OVERVIEW RBB ECONOMICS • General perspective on approach: • Does it provide an appropriately economic perspective? • Market definition and market power: useful filters? • Differentiating ‘right’ from ‘wrong’ and the “special responsibility” • Consistency across forms

3. EFFECTS- NOT FORM-BASED APPROACH RBB ECONOMICS • Growing recognition (?) that an explicitly economics-based approach is needed • Common ground among (most) economists that form-based rules are not generally appropriate • Pro- and anti-competitive motivations for most relevant forms of behaviour • Overlaps such that form-based bright lines not desirable • Danger of inconsistent treatment of conduct with equivalent effects

4. FOCUS: HARM TO COMPETITION RBB ECONOMICS • Focus on exclusion • Consensus that (consumer) welfare effect is ultimate economic measure • But how practical/appropriate is this as a guide in specific Article 82 cases? • Develop a coherent fact-based story of harm to competition • When does foreclosure of particular competitors harm the competitive process and consumers? • [How should ‘collateral’ damage be treated?]

5. CLEAR BUT ARBITRARY RULES DON’T HELP RBB ECONOMICS • Example: Treatment of common costs in DG COMP DP • DP provides rule on how common costs will generally be allocated in multi-product settings • Allocated in proportion to turnover achieved on individual products • Allows calculation of Average Total Costs associated with a product • Does not imply, however, that analysis based on this ATC rule makes economic sense

6. INTERVENTION IS COSTLY RBB ECONOMICS • Competition authorities need to balance costs of false positives and false negatives • In dynamic market settings, impact of mistaken interventions (and precedents created) may easily outweigh effects of non-intervention • Recognise too that freedom to intervene also creates uncertainty which damages healthy competition • Chilling effect on the competitive process • Value in non-intervention commitments even if some harmful conduct escapes

7. FILTERS HAVE A VALUABLE ROLE RBB ECONOMICS • Filters and safe harbours can play a valuable role in narrowing focus • For example, in testing a foreclosure story: • Does the target for investigation possess market power? • Does the conduct in question actually affect the buyer’s incentives to deal with the competitor? • Are alternative routes to market available? • Insufficient emphasis in DG COMP DP?

8. IS A MARKET POWER FILTER USEFUL? RBB ECONOMICS • Current Article 82 process involves three distinct stages: • Market definition • Competitive (dominance) assessment • Analysis of conduct • EAGCP suggested that “an effects-based approach needs to put less weight on a separate verification of dominance”

9. DOMINANCE HARMFUL CONDUCT X MARKET POWER I RBB ECONOMICS • Common ground that only firms with substantial market power can cause harm to competition • Logic  if prove harm, dominance is automatically satisfied • Only need to focus on conduct?

10. DOMINANCE CONDUCT HARMFUL CONDUCT MARKET POWER II RBB ECONOMICS • In practice risk that abandoning dominance ‘pre-qualification’ will lead to excessive intervention • Backward implementation (“We know abuse when we see it”) • Testing for harm not that straightforward

11. IS DOMINANCE FILTER TOO RESTRICTIVE? RBB ECONOMICS • Concern sometimes expressed that dominance (market share) precedents prevent action against abuse in some settings • Example: Electricity generation and OFGEM’s Market Abuse Licence Condition • 2 responses: • From an economic perspective, definition of dominance is not a limitation • Value in commitment to non-intervention, even if prevents justified action in some cases

12. MARKET DEFINITION: SSNIP TEST RBB ECONOMICS • Dominance assessment requires markets to be defined • Hypothetical monopolist or SSNIP test provides well-established basis for market definition in competition cases • Could a hypothetical monopolist controlling products in hypothesised market raise prices permanently and profitably by 5% - 10% • If YES, set of products represent a well-defined market; if NO, broaden • Provides a framework for assessing strength of demand- and supply-side substitution

13. MARKET DEFINITION: PRACTICALITIES RBB ECONOMICS • In practice, the market definition exercise typically involves a rounded assessment, • Draws on multiple pieces of evidence • An overall picture of competition is assembled • Relatively rare for test to be applied formally • Nevertheless, conceptual/organising value of SSNIP framework remains important

14. MARKET DEFINITION: CELLOPHANE FALLACY RBB ECONOMICS • A firm with market power might be expected to have raised prices already to point where no further price increases possible • ie to point where demand is elastic • Conducting SSNIP test at prevailing prices would lead to overly broad market definition in this case • But not a SSNIP-specific problem • [Where low pricing concerns, reverse distortion may arise] • Fundamental problem: What is competitive price (benchmark)?

15. CELLOPHANE FALLACY: IMPLICATIONS RBB ECONOMICS • Significant damage to application of market definition test in conduct settings • cf. merger settings where prevailing price is relevant benchmark • Is there any value in undertaking market definition exercise? • SSNIP still provides important conceptual framework for analysis • Not all evidence is contaminated • However, emphasises need for careful analysis of effects

16. TREATMENT OF CONDUCT: PREDATION EXAMPLE RBB ECONOMICS • Summary of DG COMP DP Approach: Predation finding possible, where “non-replicable” advantages in play ATC Focus on intent, broadly defined. Documentary evidence may lead to presumption Broad range of indicators, eg selective price cutting, actual exclusion. AAC Predation presumed

17. HOW FAR SHOULD “SPECIAL RESPONSIBILITY” EXTEND? RBB ECONOMICS • Should a dominant firm be obliged to forego actions whose (incremental) profitability does not depend on excluding rivals? • Classic example: Selective price cutting on “marginal” sales • Must a dominant firm price to allow less efficient firms to survive? • DG COMP DP says yes … sometimes • Is this a reasonable obligation? • Is it desirable?

18. INTENT RBB ECONOMICS • Helpful recognition in DG COMP DP that “general talk” is not evidence of intent • Nevertheless, direct evidence claimed to allow presumption of predation • Avoids need to test coherent theory of harm • Broad range of factors identified as contributing to “indirect evidence” • Example: Above avoidable cost selective pricing

19. INDISPENSABILITY AND “SACRIFICE” TESTS RBB ECONOMICS • Meeting the competition: Could losses be avoided/efficiencies achieved in a less distorting way? • Generally imposes to high a burden on firms • Impact of genuine mistakes etc • How much sophistication reasonable? • Useful as a guide to exploring business motivations BUT not a definitive test

20. CONSISTENT TREATMENT OF COMMON THEMES RBB ECONOMICS • Example: Selective price cuts and rebates (& predation) • Common concern is abusive low pricing • Consistent analytical framework • Focus on possible foreclosure of equally efficient competitors • Avoidable cost tests appropriate • Identify and focus on sales range that is open to competition

21. Assured base of sales ‘Open’ to competition 20 Cost threshold 80% 60% % of needs CONSISTENT TREATMENT II RBB ECONOMICS • Consistent treatment of low pricing effects required • Example: Rollback rebate of 20% on 80% sales target • DG COMP DP appears to endorse ATC as floor for low pricing in rebates context

22. FORM AND EFFECT REVISITED RBB ECONOMICS • Form-based predation tests need thoughtful application • Example: Roll-back rebates • Form: -ve pricing for some ranges • Effect: Are these ranges competitively relevant?

23. END NOTE: EMPHASIS ON FORMAL MODELS RBB ECONOMICS • EAGCP emphasised role of formal models • Formal modelling offers transparency and rigour • An important weapon in the armoury • However, can gain a momentum of its own • Spurious confidence in predictions • Risk ignoring important factors because less easily modelled • Relying on implications of a particular theoretical model generally over-optimistic and potentially harmful

24. CONCLUSIONS RBB ECONOMICS • Focus for investigation must be a coherent fact-based theory of harm • Consistent effects-based analysis required • Can’t escape serious implications of cellophane fallacy • Recognise benefits of not intervening • Demands made of dominant firms in abuse context must be: • Base on standards (eg cost benchmarks) that the firm can reasonably be expected to know • Motivated by serious concerns of harm to the competitive process