Article 102 Competition Law LLM

2

Table of Contents

3

LLM Competition Law Lecture Notes

Introduction to Article 102 Scope Article 102 TFEU (Formerly Art 82 and Art 86) is all about unilateral conduct. It prohibits (i) any abuse - we are looking at conduct, but this is a really ambiguous definition (ii) by one or more undertakings (iii) of a dominant position - we are looking at a subset of firms that have market power (iv) within the common market or a substantial part of it (v) insofar as the abuse may affect trade between Member States. 1 Abuse Article 102 includes examples of abuses, but this is not an exhaustive list, much like in Art 101. However, offences like tying and discrimination are clearly included, and the Commission and the CJEU often reasons by analogy from these examples. There is no express provision for exemption but: (a) the concept of abuse includes the possibility of objective justification (British Airways (ECJ), para 69). (b) the notion of "Art 102(3)", under which the criteria for objective justification replicate the provisions of Art 101(3), appears to have gained acceptance (Post Danmark, para 42). The structure of Article 102 therefore differs significantly from that of Article 101. Whilst the latter makes explicit provision for exemption, through a 2-step process (implemented through important exemption regulations), Article 102 has no such provision for exemptions, and it is implied, not explicit. Whilst it is clear that prima facie abuses may be justified, the scope and application of that defence leaves much to be desired. Abuses are classed as being either exclusionary or exploitative. Exclusionary abuses seek to drive competitors out of the market, and/or exclude them from entering the market, thus indirectly harming competitors through a lack of competition. Exploitative abuses directly harm consumers through a dominant firm's exploitation of its market power e.g. direct pricing or through inefficiencies. It should be noted that in practice, the Commission's enforcement action has focussed on exclusionary abuses to the virtual exclusion of exploitative abuses (like excessive pricing, or pure discrimination) outside the internal market area. If it does look at exploitative, it does so in the context of exclusionary abuses. Moreover, there are also internal market objectives to the Commission's enforcement. 2 By One or More Undertakings Article 102 is, therefore, essentially concerned with the control of unilateral behaviour by a single firm. Note, however, that Article 102 also reaches: (i) agreements concluded by a dominant firm; and (ii) abuses committed by firms that collectively hold a dominant position. Therefore, there may be contractual co-ordination that can be challenged under Article 101 and Article 102. 3 Dominance (i) Article 102 only applies to undertakings that, singly or collectively, hold a dominant position. (ii) Dominance essentially comprises the ability to act independently of competitors and customers. Its existence is established on the basis of market shares supplemented by other market factors. A firm may hold a very high market share, and yet not be dominant, because the market is contestable, or a firm may hold not a very high market share, but still be held to be dominant. A high market share is neither necessary, nor sufficient.

4

Enforcement In principle, the full range of remedies is available against abusive conduct. Decisions may be adopted under either Article 7 (infringement) or Article 9 (commitments) of Regulation 1/2003. In practice, the majority (over 75%) of decisions since 2005 have been commitment decisions. Article 102 is also directly enforceable in the courts of the Member States. Note that national competition authorities are responsible for over 90% of decisions taken to enforce Article 102. The practical application of the treaty happens mostly at national level. At a national level, there is the possibility of exemplary damages, particularly in the UK.

Theoretical Framework 4 Objectives There are a number of competing claims to the purpose of Article 102. It is important to note that each of these purposes apply in each case, and while they will often lead to the same conclusion, there may also be tensions between them. Overall, we can contrast the EU's objectives with America's. European policy, in contrast to America, has evinced (i) greater scepticism about the robustness of markets; and (ii) greater faith in the abilities of regulators to intervene to correct market failures. In that framework, there is less concern about the risk of false positives and greater concern about the risk of false negatives. 5

Welfare

There is a consensus that: (a) competition law should seek to maximise welfare; (b) monopoly typically has an adverse impact on welfare by reducing output (the "deadweight loss" of monopoly, so called because it refers to demand that is unsatisfied without any supply benefit); (c) competition law should, therefore, control monopolistic abuse. However, monopoly also results in a transfer of wealth from the consumer to the producer by raising the price that is paid for the monopolist's output. There is disagreement as to the proper treatment of that transfer. Should the law care about the additional revenue through raising price? Some (Chicago theorists) argue that the law should be neutral to distributional issues. Thus, the producer surplus from monopoly is unobjectionable. However, conventional thinking (especially in Europe) regards the transfer of surplus from consumers to producers as a legitimate subject for intervention. We must also note that there is a risk to over-deterring monopoly - monopoly profits are arguably required as an incentive to innovate. 6 Socio-Political Objectives This has been a particularly strong and continuing theme in European thinking, under the cumulative influence of the desire to: (a) eliminate private power centres (note the impact of the Ordo-Liberal or Freiburg School in post WWII Germany); and (b) protect small and medium sized enterprises. 7 Single market integration The role of competition policy as an engine for the creation of a unified market has been a particular feature of EC law. In the context of Article 102, this has manifested itself in a number of rulings (especially concerning public sector bodies) against practices that favour domestic firms.

5

LLM Competition Law Lecture Notes

European Competition Policy - Key Issues 8 Market power thresholds At what level of market power should the law bite? The threshold in the EU is much lower than in the USA. We will look at this more in the context of dominance but note now the disparity between US intervention thresholds (typically at least 60%) and those in the EU (40% and possibly lower). 9 Foreclosure Economic modelling shows us that single firm behaviour may simultaneously enhance efficiency and strengthen dominance. How is that ambiguity to be dealt with? In particular, how do we deal with (the admittedly rare) cases in which an efficiency gain cannot be achieved without eliminating competition? Where there are irreconcilable conflicts, how do resolve the risk/reward balance in relation to common forms of conduct such as pricing below total costs, conditional rebates and tying?
To what extent does such conduct have beneficial or harmful effects? Two specific issues that arise in this context concern: firstly, the extent to which competition law is used to protect competitors rather than competition. However, the development of the "as efficient competitor" test points to the resolution of the issue. Secondly, the extent to which a dominant firm is entitled to defend its commercial interests. 10 Exploitation To what extent should excessive pricing be controlled by competition law?
11 Discrimination Discriminatory behaviour is troubling for competition policy in a number of ways. Firstly, discriminatory prices may be output-expanding relative to the monopoly price: should it nonetheless be prohibited? Secondly, discriminatory pricing behaviour may be the most efficient way in which to recover substantial fixed costs: should it nonetheless be prohibited? Finally, discrimination that adversely affects intermediate customers (eg small retailers relative to large retailers) may result in lower prices to ultimate consumers: should it nonetheless be prohibited?

6

Dominance There is a threshold for the application of Article 102. It only applies to undertakings that hold a dominant position within the common market, or a substantial part of it. This has three layers of analysis. Firstly, Market definition - you can argue that you don't actually need this, that you can identify market power independently of market definition, and this has some traction, but as a matter of practice and law in Art 102 cases, you must define a relevant market. Secondly, what do we mean by 'Dominance'? Thirdly, the territorial scope of the dominance. These are primarily a case of jurisdictional allocation - all countries (except Luxembourg) have their own version of Art 102.

Market Definition This tends to be very narrow: Microsoft Market was defined as servers less than $25k, as the operating system would work on all systems, and the Commission had gerrymandered a market so that Microsoft was dominant. Held that this was arbitrary but supported. United Brands Were Bananas in their own market, or were they in the same market as other fruit?
Court used the SSNIP test - cross-price elasticity factored in. In United Brands, it was omitted to argue that even though there were people who needed bananas (babies, the eldery - sans teeth), they couldn't discriminate on the basis of price, there are some consumers who could switch (marginal conusmers), and so you need to look at the margins. Hugin/Lipton Was the spare part market a separate market to the purchase of the original machines for ATMs?
The spare part market is a separate market. IMS Health Court accepted that the upstream dominant market could be a hypothetical market, in order to show control over IP rights. British Leyland Very narrow market definition was used in support of the single market objective. Market definition is a tool to assist the fact-finder in determining whether one or more undertakings have market power. Put simply, market power comprises the ability to raise price above the competitive level. Note that 'price' is a proxy for any competitively significant variable (commonly referred to in the acronym P[rice] Q[uality] R[ange] S[ervice]). Market definition has two dimensions: the product market, and the geographical market. 12 SSNIP test "SSNIP" stands for Small but Significant Non-transitory Increase in Price. This is the standard theoretical test for market definition. Although it is important to understand the concepts that it reflects, its direct applicability in Article 102 cases is limited for two reasons: (i) In many markets, there are insufficient data to enable it to be applied directly. (ii) In all Article 102 cases, the data has to be adjusted to take account of the "Cellophane fallacy" under which the supplier's (assumed) dominance makes it dangerous to extrapolate from the prices actually charged by the supplier. If the defendant is indeed a monopolist, it is likely that

7

LLM Competition Law Lecture Notes

prices have already been raised above the competitive level to a point on the elastic portion of the demand curve. That means that it is likely that a further increase in price would lead to such a loss of sales as to be unprofitable. If that effect is taken at face value, it leads to an over-broad definition of the market. The SSNIP test requires the fact-finder to conduct the following thought experiment: (i) Identify the narrowest plausible scope of the market (in terms of product and territory) and assume that that market is served by a single supplier; (ii) Ask the question whether it would be profitable for that supplier to impose a Small but Significant Non-transitory Increase in Price (the level of increase is usually said to be between 5 and 10%); (iii) If it would, that set of products in that territory constitutes a relevant market; (iv) If it would not, repeat the thought experiment by broadening the hypothetical market as many times as is necessary until an affirmative answer is obtained to the question. 13 Framework for Market Definition The conceptual tools for market definition (whether within the framework of a SSNIP test or not) are: 14 Demand-side substitution The relevant market includes those products that customers could be expected to purchase instead of the dominant firm's products because they are sufficiently close substitutes (in terms of price, characteristics and use) for the dominant firm's products. 15 Supply-side substitution In theory, the relevant market should also include those suppliers who would enter the market with sufficient immediacy if prices charged by existing suppliers were to rise by a small amount. 16 Quantitative techniques Tools used by economists for market definition include: 17 Price correlation analysis Under which price movements of the set of candidate products are measured against each other. There is, however, a significant risk of false positive correlations where price movements are aligned by reason of commonality of costs rather than demand interactions. Price correlation is, therefore, more useful where an absence of correlation points to the conclusion that products are not in the same market. 18 Shock analysis Under which products' price responses to an exogenous or endogenous system shock (such as a sudden change in cost or demand functions) are observed. 19 Qualitative techniques In practice, market definition is commonly determined (or, at least, significantly, influenced) by qualitative factors - such as the nature of the products in question. It is important, especially when using qualitative tools, to remember that market power depends upon the supplier's ability to raise price above the competitive level. Bare in mind two things: firstly, it is sufficient that enough customers (the so-called "marginal customers") may be expected to switch suppliers to render the price increase unprofitable. It is not necessary that all customers should be willing and able to switch suppliers in the event of a price increase. Secondly, it is important to consider whether the supplier is able to discriminate between different customers. A market may comprise products or territories that do not directly overlap where a "chain of substitution" exists. For example, the UK Competition Commission concluded that almost all types

Buy the full version of these notes or essay plans and more in our Competition Law Notes.