SIMPLE SCREENS TO DETECT COMPLEX CARTELS WORKSHOP ON DETECTING CARTELS Tirana, March 2014 Renato Ferrandi

SUMMARY Three complementary tools Complaints Leniency Economic analysis The issue of substantiation Case study: EC e-book case Conclusions

Three complementary tools LENIENCY ECONOMIC ANALYSIS COMPLAIN TS

Complaints First-hand information from the market Different viewpoints: consumers, companies, PAs BUT They might miss some serious infringement They might focus on non-competition issues “Silent majority” Neutrality?

Leniency Effectiveness depends on Amount of fines (EU) Criminal incrimination (US) Reputation and cartel detection Reliability and transparency of leniency program BUT Risk of being overwhelmed and driven by leniency applications vs. setting priorities Blatant but marginal infringements might remain unpunished

Economic analysis Sets priorities based on economic relevance (without sending the message that other companies can «sleep peacefully») Monitors market structure and developments Examines complaints BUT It might lack “on the field” validation

Monitoring Priority setting Complaints assessment Market analysis

The issue of substantiation Infringements must be proven High likelihood with little evidence is not enough Trade off: competition culture vs. factual evidence (dawn raid effectiveness) Once upon a time: candid undertakings, «what’s wrong with it?» Nowadays: dawn raids simulations

E-books case E-books appear on the market Amazon believed in e-books before the smartphone and tablet era Reseller (wholesale model) Original pricing strategy: $ 9.99 Traditional pricing: hardcover (new releases) and paperbacks (backlist)

Publishers’ worries Risk of cannibalization for print books From a pulverized distribution to a super-dominant player Publishers try to react Increasing wholesale prices to Amazon (and other resellers) «Windowing» some digital titles It does not work Amazon retaliates (decreasing prices, delisting titles) Other resellers complain

Apple enters the ebook market Launch of i-Pad including i-Book section (january 2010) Agency agreements with all top publishers (30% fee on retail price) Similar price grids in all agency agreements, linked to the print book pricesprice grids MFC clause in all agency agreements

A different business model…

… which made no economic sense

But it worked! Amazon signed agency agreements with all top publishers Prices rose to $12.99 or $14.99 Apple and Amazon signed equivalent agency agreements in Europe

DOJ started an investigation EC opened formal proceedings Dawn raids and RFIs Straightforward detection… Joint shift to agency model Price increase Oligopolistic market structure Nascent market … but proving it is another story!

Evidence Publishers and Apple shared common incentives Publishers exchanged comments on the need to react to Amazon’s pricing Apple signed similar agency agreements in the same days with all top publishers On the verge of the deal, Apple systematically reassured publishers that all other top publishers are signing BUT Limited proof of horizontal coordination

Theory of harm Infringement of Article 101 TFUE Joint switch to the agency contracts was coordinated between the publishers and Apple, as part of a common strategy aimed at raising retail prices for e-books MFC clause acted as a commitment device

The end of the story Coordinated push from DOJ and EC Fear for private enforcement Commitments to restore a «quasi-wholesale model»

Conclusions An effective cartel detection strategy should also envisage points of strength and weakness in carrying out the investigation and proving the infringement Dawn raids and thorough collection of evidence are key FIT Economic analysis and game theory as part of the assessment? Cooperation with judges

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