Wednesday, December 30, 2009

Rhetoric or Reform: Does the Law of Tying and Bundling Reflect the Economic Theory?

Posted by D. Daniel Sokol

Pranvera Këllezi, European Broadcasting Union asks Rhetoric or Reform: Does the Law of Tying and Bundling Reflect the Economic Theory?

ABSTRACT: This paper analyses the recent developments in European competition law with regard to tying and bundling, and assesses them in the light of economic theory. It considers the role of economic theory, whether the case law or the new Commission Guidance is consistent with economic thinking, and whether it is flexible enough to allow for economic learning to be taken into account.

Tying and bundling may have anticompetitive effects by transferring market power from one market to another and raising barriers to entry in one or more markets where the dominant undertaking is operating, thereby protecting its position in these markets. An economic analysis offers an explanation of mechanisms that lead to anticompetitive foreclosure, and identifies a number of factors that increase the likelihood of anticompetitive effects. The effects-based approach improves the methodology for finding anticompetitive effects, and the possibility to consider efficiencies acts as a supplementary screening device to avoid over-intervention. The Microsoft case and the Commission Guidance integrate economic analysis to differing degrees. By definition, the Guidance gives general directions on criteria for harmful tying and bundling. In the Microsoft case, the Commission carried out a detailed analysis on a specific set of facts, guided by economic thinking. This demonstrates what economic analysis can offer to competition law: general guidance which should be adapted to the specific facts of the case. In both instances, the Commission shows that it is carrying out a real reform in terms of approaching tying and bundling cases, and is consolidating the general approach as well as the principles governing tying and bundling.

The risk of competitors’ foreclosure is linked to their reduced capacity to realise economies of scale or scope, or to create and maintain a sufficient base of consumers for profitability, to continue to compete in a market, and to introduce new products or bring innovation to the market. In Microsoft, such economies of scale and network effects were present and fully analysed by the Commission. In contrast, the Guidance fails to clarify that anticompetitive foreclosure may arise only if the tied market structure is not competitive. The general framework for finding anticompetitive exclusionary conduct is however much improved, and the flexibility of the CFI judgment in the Microsoft case allows the Commission to analyse market conditions and a company’s conduct on a case-by-case basis and fully to consider economic theory.

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