Economy, Legislation and Competition An interdisciplinary approach - - PowerPoint PPT Presentation

Economy, Legislation and Competition – An interdisciplinary approach Bucharest, 22 April 2013

Prologue: imagine that...

 A plaintiff (bakery) sues milling companies for a cartel increasing the

price of flour

 The defenders claim that the price increase is due to the increase in

the price of cereals

 The evidence brought in Court looks like the following slides The example is freely inspired by the European Commission’s Draft Guidance Paper

• n quantifying harm in actions for damages:

(http://ec.europa.eu/competition/consultations/2011_actions_damages/draft_guidance_paper_en.pdf)

The example is freely inspired by the European Commission’s Draft Guidance Paper

• n quantifying harm in actions for damages:

(http://ec.europa.eu/competition/consultations/2011_actions_damages/draft_guidance_paper_en.pdf)

• 1. The plaintiff

 The price of flour has increased due to the cartel, according to the

following “interpolation” analysis Prologue

• 2. The defendant

 The price of flour has increased due to increase in the price of cereals,

according to the following statistical correlation Prologue

• 3. The expert

 The price of flour has increased both due to the cartel and to the increase

in the price of cereals, according to the following “simple regression” analysis Prologue

SSNIP

% market share %

Dominant position horizontal vs. vertical effects Prologue

Law Facts Evidence Legal qualification Decision Prologue

Summary

Introduction

Competition law and the judge: friends or foes?

What the law says

EU Competition Law: in particular, cartels and abuse of dominant position Private enforcement of cartels and abuses: key issues

How competition law is applied: law vs. economics

Law vs. economics: what a judge does in a competition law case

Economics in a Law Court: legal vs. economic analysis

Economic facts and tools in legal analysis Example: quantitative analysis and legal decisions

Conclusion

Is competition law anything “new”?

What the law says EU competition law

In particular: cartels and abuse of a dominant position

EU Competition Law

Antitrust

 Article 101 TFEU: anti-competitive agreements, including cartels  Article 102 TFEU: abuse of dominant position  Procedural regulation 1/2003

Concentrations

 Merger Regulation 139/2004

State aid

 Article 107 TFEU  Article 108 TFEU and procedural regulation 659/99

Special and exclusive rights and services of general economic interest

 Article 106 TFEU

• Art. 101(1) TFUE: anti-competitive agreements (cartels)

The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

EU Competition Law

• Art. 101(2) TFEU: consequences

Any agreements or decisions prohibited pursuant to this Article shall be automatically void

• Art. 101(3) TFEU: derogations

The provisions of paragraph 1 may, however, be declared inapplicable in the case of:

• any agreement or category of agreements between undertakings,
• any decision or category of decisions by associations of undertakings,
• any concerted practice or category of concerted practices,
• which contributes to improving the production or distribution of goods or to promoting

technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

EU Competition Law

Article 102 TFEU (abuse of a dominant position)

Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

EU Competition Law

How the law is applied Law vs. economics

What competition law is about

 Two basic categories of anticompetitive behaviour

 Multi-lateral practices (cartels)  Unilateral practices (abuse of dominant position)

Antitrust is all about “combating two of the most innate proclivities in human nature – bullying and ganging up – when such conduct harms competition” [R. M. Steuer, University of Pennsylvania Journal of Business Law 2/2012]

 Two main types of anticompetitive practices

 Exploitation: e.g. raising prices  Exclusion: e.g. foreclosing markets to competitors

Competition Law in practice

What a (competition law) judge does

• 1. Establishes (the existence of) a possible infringement
• 2. Evaluates the available evidence
• 3. Establishes the consequences of an infringement
• 4. Quantifies damages

Competition Law in practice

• 1. Establishing a possible infringement

 Underpinning notions

 Undertaking and economic activity  Market definition and market power  Agreement (cartel) and dominant position  Distortion of (workable/effective) competition and effect on trade

between Member States

 Anticompetitive practices (typical instances)

 Fixing market conditions (purchase or selling prices, quantities or other

trading conditions)

 Restricting markets and market sharing  Discrimination and tying/bundling

Competition Law in practice

• 2. Evaluating available evidence

 Normal rules apply, but  Infringements by object vs. infringements by effect:

 Article 101(1) TFEU: “[...] shall be prohibited [...] all agreements [...]

which have as their object or effect the prevention, restriction or distortion of competition within the internal market [...]”

 Infringement by object:

 Facts (evidence) + legal qualification + decision  Sufficient that the behaviour has a potential anticompetitive impact

 Infringement by effect:

 Facts (evidence) + (economic) effect-based analysis + legal qualification

+ decision

 Need for in-depth economic analysis

Competition Law in practice

• 3. Establishing the consequences of an infringement

 Fines and remedies: administrative authority and courts  Damages: civil courts

• 4. Quantifying antitrust damages

 “Traditional” civil law analysis

 Violation of law + damage + causal relationship + quantum (measure)  Irrelevance of the “object vs. effect” distinction: need for an in-depth

analysis of the effects of any anticompetitive practice Competition Law in practice

Focus on the “counterfactual scenario”

 What is likely to have happened without the infringement?

 E.g. how prices would have evolved without a cartel? What would the

fair price of a wholesale input from a vertical-integrated (dominant)

• perator be ?

 Complex evaluation, based on:

 Economic data (“variables”: market share, cost, profits, prices, etc.) and  Assumptions (based on different methods and techniques)

Competition Law in practice

Economics in a Law Court Legal vs. economic analysis:

is competition law anything different?

Differentiating facts from arguments Economic data (facts) Evidence

 E.g. prices, costs, etc. (direct evidence)  Evidence-based analysis: are these facts true or false? Likely or unlikely?

Economic arguments (legal) analysis

 E.g. likely effects of the behaviour (cartel) on prices (circumstantial

evidence)

 Arguments-based analysis: are these arguments well-founded (evaluation

• f the assumptions) and conclusive (is there an alternative explanation of

these facts?) Economics in a Law Court

Areas of economic analysis (examples)

 Market definition

 What is the relevant market? Product vs. geographical market: the SSNIP test

 Market power

 Is there any market power/dominance? How is the market power measured?  Are the undertakings concerned exercising such market power?

 Anticompetitive effects

 What are the effects of a cartel?  What are the effects of a margin squeeze?

Economics in a Law Court

 Anticompetitive damages

 How can damages be measured? Different analysis, according to the context, examples:  Cartels

 Damages to undertakings (purchasers): increased prices, discounted of “passed-on” price increase  Damages to consumers: increased prices

 Predatory pricing (abuse of dominance by way of below-cost pricing)

 Damages to competitors: quantifying costs and loss of profits  Damages to consumers: initial benefits; damage

• nly

where “recoupment” takes place

Economics in a Law Court

Tools/methods for economic analysis

 Example: quantitative tools (such as econometrics)

 Application of mathematics, statistical methods and computer science to

economic data to give empirical content to economic relations

 In simpler terms: establishing causal relationship between economic factors

 Main purpose

 What is likely to have happened without the infringement (counterfactual

scenario)

 Object

 Identify anticompetitive behaviour (e.g., investigation of market power)  Screen markets for violations of competition law (e.g., behavioural screens

for cartel detection, structural monitoring for competition problems)

 Investigate causality (e.g., price-concentration studies) and effects (e.g.,

simulation of competitive effects of mergers)

 Establish appropriate remedies (e.g., simulations of remedies based on

structural models)



Economics in a Law Court

Practical example

Use and evaluation of quantitative analysis by the (competition law) judge

• 1. What to find out (“theory of harm”)
• 2. How to find it out (economic analysis)

 Example: economic analysis’ outputs

• 3. What can the judge do (legal evaluation of economic analysis)

 Explanatory table: economic analysis in the (legal) decision-making

process

 “Judging” quantitative analysis’ results

Example below (flour cartel) freely inspired by the European Commission’s Draft Guidance Paper on quantifying harm in actions for damages:

(http://ec.europa.eu/competition/consultations/2011_actions_damages/draft_guidance_paper_en.pdf)

Economics in a Law Court

• 1. What to find out (“theory of harm”)

 Causal relationship between (economic) factors  What would a product’s price (flour) be without a cartel (between

milling companies)?

• 2. How to find it out (economic analysis)

 Comparing prices before/after the cartel  Taking account of

 The “variable of interest”: price of the product (wheat)  Influencing variables: prices of raw material (cereals)

Economics in a Law Court

Examples (from the Commission’s Draft Guidance Paper)

Economics in a Law Court

• 1. Simple interpolation based on analysis of pre- and

post-infringement flour prices

• 2. Statistical relationship between the price of the main

product (flour) and of the raw material (cereal)

• 3. (1+2) Correction based on a simple regression analysis

including 1 additional variable: raw material (cereal) prices – additional variables can be added

• 3. What can the judge do (legal evaluation of economic analysis)

 Determine standard and burden of proof under applicable law  Verify economic hypotheses and assumptions

 Where necessary with the help of an expert  Based on industry knowledge, experience, common sense (in Latin:

“iudex peritus peritorum” – the judge is the expert of the experts)

 Interpret results

 Possible “adjustments” based on equity

Economics in a Law Court

Economic analysis in the (legal) decision-making process

[simplified indicative example]

Economics in a Law Court

Step Example Analysis (Legal) qualification Cartel (i.e. agreement between competitors aimed at sharing markets/customers) Legal “Theory of harm” Reducing competition in order to raise prices (exploitative behaviour) Economic Evidence search/verification Data: quantities, prices, costs, etc. Facts: meeting/communication, etc. Legal Quantitative analysis

• Hypothesis
• Measurement
• Analysis of results

Positive correlation between reduction of the

• utput and prices

Negative correlation between other factors and prices Economic Decision Fine/damages Legal

• 4. “Judging” quantitative analysis’ results

 Quantitative analysis (e.g. an econometric model) is based on

 A set of data (direct evidence) and  A model, based on a set of hypotheses and assumptions

(circumstantial evidence)

 Judges are constantly confronted with complex evidence and

arguments

 The use of economic tools in competition cases make no

exception

 It requires evaluation of verifiable facts, data and assumptions  It tells what is the likely effect of an (anti)competitive practice

 In Latin words: “id quot plerumque accidit” (“that which generally

happens”), i.e. the most probable outcome from an act, fact, event or cause

Economics in a Law Court

Conclusion

Conclusion

Competition law at the crossroad between law and economics

Competition law and its application implies the use of economic facts and arguments Yet, economics and the judge can be “friends”

Economics in the law

Interpreting Articles 101 and 102 TFUE (and implementing measures) requires basic economic notions

Economics in the (legal) analysis

Economic data (facts) > analysis of evidence Economic arguments/tools > careful consideration of theory and assumptions

Economics in antitrust (private enforcement) decisions

Anything new? In the end, decision-making falls under the traditional civil law standard: “id quod plerumque accidit”