Saturday, July 21, 2007

Is There a Role for Market Definition and Dominance in an Effects-Based Approach?

Posted by D. Daniel Sokol

Emanuela Arezzo, a Research Fellow at Luiss University - School of Law in Italy takes a contrarian view to the importance of increased economic analysis/effects based approach in EU competition policy in her working paper Is There a Role for Market Definition and Dominance in an Effects-Based Approach?

ABSTRACT: As the old millennium was coming to an end, European Competition law began a massive  reform project aimed at modernizing each and every of its constituent parts. As well known, this ambitious project started with the introduction of Regulation n. 2790/1999 on vertical restraints, and its accompanying Guidelines, it followed with the Guidelines on horizontal cooperation agreements, and made all its way up till the review of the Merger Regulation.

The underlying leitmotif of these reforms has been to introduce a more economics-oriented approach to the assessment of competition cases. In practice, these reforms have resulted in a progressive erosion of per se rules in favour of the more flexible rule of reason which leaves the floor open to case by case considerations and seems better suited to take into account the appropriate circumstances (especially of economic nature) of the controversy at issue.

The turn has come now for abuses of a dominant position to go under review to determine the extent it should conform to the new mainstream trend which calls for a more substantive recourse to economics insights into the assessment of unilateral practices.

As we are about to see, European Commission's (and European competition authorities' in general) treatment of abuse cases has attracted a good deal of criticism for being rather formalistic and rigid and hence inapt to sufficiently take into consideration the economic circumstances of the cases, in particular to weigh the anticompetitive effects apparently caused by the conduct against the likely positive pro-competitive (or, more precisely, pro-consumer) efficiencies which, in the end, could tilt the balance and reverse an initial finding of abuse.

In order to do justice to these points of criticism, the European Commission has drafted a Discussion Paper on the application of Article 82 to exclusionary abuses and has called for open discussion on it. Unfortunately, the document, mainly because of its guideline style, is rather confusing and obscure. A coherent suggestion for a new approach, however, can be more easily inferred by reference to the report presented by the Economic Advisory Group for Competition Policy (hereinafter EAGCP) which the Commission has surely considered in the course of preparing its Discussion Paper.

The effects-based approach (so called to differentiate itself from the current formalistic one) apparently carries a strong economic imprint and seems aimed at correcting the early methodology adopted by European agencies and courts by introducing two substantive changes. On the one hand, the competition authorities would be asked to prove, with strong economics-based analysis and studies, the anticompetitive harm produced by the presumably abusive conduct. This with specific regard to the ultimate effect that the practice will assert on consumer welfare. On the other hand, because it is extremely complex to discern the pro- from the anti-competitive aspects within the same conduct and, as economists strongly assert, pro-competitive effects can also arise from a unilateral conduct adopted by a dominant firm, the new approach would grant defendants the faculty to plead an efficiency defense against a finding of abuse.

This change would appear, at least at a first glance, in line with the assessment of agreements in restraint of competition under Article 81 and would make the overall assessment of competition law cases uniform. Nonetheless, as I will try to demonstrate, such alignment with current assessment of (horizontal or vertical) agreements between firms is nor welcome or desirable.

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