Article 82 Discussion Paper Luc Peeperkorn Rita Wezenbeek DG Competition, European Commission Rotterdam, 17 March 2006

2 Discussion paper Published on 19th December 2005 Published on 19th December 2005 Public consultation until end of March Public consultation until end of March We hope for serious and wide debate on paper We hope for serious and wide debate on paper Paper concerns exclusionary abuses only; exploitative abuses and discrimination follow at later stage Paper concerns exclusionary abuses only; exploitative abuses and discrimination follow at later stage Depending on results Guidelines may follow. Depending on results Guidelines may follow.

3 Review of Article 82 Effects based approach using economic principles and concepts, leading to a more systematic and consistent policy in different areas of anti-trust Effects based approach using economic principles and concepts, leading to a more systematic and consistent policy in different areas of anti-trust Continuation of work done in other areas Continuation of work done in other areas Vertical restraints BER + Guidelines Vertical restraints BER + Guidelines Horizontal BERs + Guidelines; Horizontal BERs + Guidelines; Article 81 (3) Guidelines; Article 81 (3) Guidelines; Technology transfer BER+ Guidelines; Technology transfer BER+ Guidelines; Horizontal Merger Guidelines Horizontal Merger Guidelines

4 ‘Form’ vs ‘ effects ’ based approach Form based approach: may provide certainty and timely enforcement but at too high a cost of false positives and false negatives Form based approach: may provide certainty and timely enforcement but at too high a cost of false positives and false negatives Pure effects case by case approach: may provide correct outcome in each case but risk of uncertainty and too (s)low enforcement Pure effects case by case approach: may provide correct outcome in each case but risk of uncertainty and too (s)low enforcement Conclusion: Need a combination of elements of form and effect and a fair division of the burden of proof to ensure operational rules Need a combination of elements of form and effect and a fair division of the burden of proof to ensure operational rules Rules anchored in economic principles to help consistency and predictability Rules anchored in economic principles to help consistency and predictability

5 Framework exclusionary abuses Essential objective of 82 is to protect competition as a means to protect consumer welfare Essential objective of 82 is to protect competition as a means to protect consumer welfare Central concern is foreclosure that hinders competition and thereby harms consumers Central concern is foreclosure that hinders competition and thereby harms consumers Protection of competition, not protection of competitors against competition Protection of competition, not protection of competitors against competition Equal right of dominant firms and of residual competitors to compete on the merits Equal right of dominant firms and of residual competitors to compete on the merits

6 General test Does conduct have capability to foreclose? Does conduct have capability to foreclose? Investigate form and natureInvestigate form and nature Does it have a likely or actual market distorting foreclosure effect? Does it have a likely or actual market distorting foreclosure effect? Actual or potential competitors are completely or partially denied profitable access to the market, entry or expansion of rivals is discouraged, maintenance or growth of competition is hindered;Actual or potential competitors are completely or partially denied profitable access to the market, entry or expansion of rivals is discouraged, maintenance or growth of competition is hindered; Incidence;Incidence; Importance of customers or competitors in case of selective foreclosure;Importance of customers or competitors in case of selective foreclosure; Other market characteristics such as network effects;Other market characteristics such as network effects; Degree of dominanceDegree of dominance ‘Sliding scale approach’ ‘Sliding scale approach’ Exception for conduct which creates no efficiencies and only raises obstacles to residual competition. Exception for conduct which creates no efficiencies and only raises obstacles to residual competition.

7 Application to price based abuses Predation, loyalty rebates, mixed bundling How to distinguish between abusive pricing which is capable to foreclose and thereby harm competition and pro-competitive pricing? How to distinguish between abusive pricing which is capable to foreclose and thereby harm competition and pro-competitive pricing? As efficient competitor test as practical proxy for consumer harm test As efficient competitor test as practical proxy for consumer harm test In general, conduct that would not exclude “as efficient competitors” but would only exclude “not as efficient competitors” is unlikely to harm competition In general, conduct that would not exclude “as efficient competitors” but would only exclude “not as efficient competitors” is unlikely to harm competition Such conduct also more easily identified with competition on the merits Such conduct also more easily identified with competition on the merits

8 As efficient competitor test Price-cost test Price-cost test Normally costs of dominant company benchmark for competition on the merits Normally costs of dominant company benchmark for competition on the merits

9 Defences Objective necessity Objective necessity constraint that applies to all undertakings in the marketconstraint that applies to all undertakings in the market is the prima facie abusive conduct actually necessary on the basis of objective factors external to the dominant company?is the prima facie abusive conduct actually necessary on the basis of objective factors external to the dominant company? ‘Meeting competition’ ‘Meeting competition’ dominant company may defend its own commercial and economic interests in the face of action taken by competitorsdominant company may defend its own commercial and economic interests in the face of action taken by competitors conduct that may seem abuse is actually a loss minimising reaction to competition from othersconduct that may seem abuse is actually a loss minimising reaction to competition from others suitable, indispensable and proportionatesuitable, indispensable and proportionate ‘Efficiencies’ ‘Efficiencies’

10 Efficiency defence Efficiency defense needed since same conduct can be both efficiency-enhancing and restrictive Efficiency defense needed since same conduct can be both efficiency-enhancing and restrictive No exemption possible: Successful efficiency defense must lead to conclusion that conduct is not abusive No exemption possible: Successful efficiency defense must lead to conclusion that conduct is not abusive Consistency required with analytical framework of Art. 81(3) and merger control Consistency required with analytical framework of Art. 81(3) and merger control Case law (Syfait, Piau) indicates such a defence Case law (Syfait, Piau) indicates such a defence

11 Conditions for efficiency defence Efficiencies realised or likely to be realised by conduct Efficiencies realised or likely to be realised by conduct Conduct indispensable to realise efficiencies Conduct indispensable to realise efficiencies ‘Consumer pass on’ ‘Consumer pass on’ Competition not eliminated in respect of a substantial part of the products concerned Competition not eliminated in respect of a substantial part of the products concerned Level of dominance above which protecting the competitive process will normally outweigh possible efficiencies: market share above 75% and no meaningful competitive pressure left from either residual or potential competitors Level of dominance above which protecting the competitive process will normally outweigh possible efficiencies: market share above 75% and no meaningful competitive pressure left from either residual or potential competitors

12 Conditional rebates on all purchases Overall test of capability and effect Overall test of capability and effect Is the dominant firm an unavoidable trading partner? Is the dominant firm an unavoidable trading partner? If yes, no effective ex ante competition for whole demandIf yes, no effective ex ante competition for whole demand Rebate may create suction effectRebate may create suction effect If no, the rebate scheme does not foreclose, unless overall predatoryIf no, the rebate scheme does not foreclose, unless overall predatory

13 Capability: the threshold Authority to show that threshold is not set so low as to allow switching of customers Authority to show that threshold is not set so low as to allow switching of customers Share of individual customer’s requirements or individualised quantity target Share of individual customer’s requirements or individualised quantity target It is assumed that the thresholds are well-targeted absent evidence that actual purchases far exceed the thresholdIt is assumed that the thresholds are well-targeted absent evidence that actual purchases far exceed the threshold Single target or generalised grid with a certain number of steps Single target or generalised grid with a certain number of steps Targeting of steps needs to be analysed more carefully in order to assess capability to have effectTargeting of steps needs to be analysed more carefully in order to assess capability to have effect

14 Capability: how to apply the as- efficient-competitor test Close to the threshold effective price is often negative but competition not just for marginal units Close to the threshold effective price is often negative but competition not just for marginal units The relevant range: What is the CVS on which P effective is calculated? The relevant range: What is the CVS on which P effective is calculated? Capability to exclude if Price < ATC Capability to exclude if Price < ATC

15 Effect on the market the dominant company applies the rebate system to a good part of its buyers and this system therefore affects, if not most, at least a substantial part of market demand, or the dominant company applies the rebate system to a good part of its buyers and this system therefore affects, if not most, at least a substantial part of market demand, or it applies selectively but these selected buyers are of particular importance for (potential) competitors, and it applies selectively but these selected buyers are of particular importance for (potential) competitors, and there are no clear indications of a lack of foreclosure effect such as aggressive and significant entry and/or expansion by competitors and/or switching of customers there are no clear indications of a lack of foreclosure effect such as aggressive and significant entry and/or expansion by competitors and/or switching of customers

16 Rebuttal and efficiencies Rebuttal on capability Rebuttal on capability Rebuttal on effect Rebuttal on effect Efficiency defence Efficiency defence Conclusion: full effects based analysis, no easy presumptions helping the authority to shift the burden of proof

17 Example 1 ThresholdRebate Average Price Turnover Incremental Turnover Step Size Step Price 50002,597, , , ,2596, , ,596, , ,6596, , ,7596, , ,8296, ,76

18 Example 2: CVS = 10% ThresholdRebate Average Price CVA Effective Price 50002,597, , ,2596, , ,596, , ,6596, ,7596, , ,8296, ,55

19 Example 3: CVS = 5 % ThresholdRebate Average Price CVA Effective Price 50002,597, , ,2596, ,596, , ,6596, , ,7596, , ,8296, ,85

20 Example 4 ThresholdRebate Average Price CVA Effective Price 50002,597, , ,2596, , ,596, , ,6596, , ,

21 Example 5: CVS = 10% ThresholdRebate Average Price CVA Effective Price 50002,597, , ,2596, , ,596, , ,6596, ,

22 Example 6: CVS = 5 % ThresholdRebate Average Price CVA Effective Price 50002,597, , ,2596, ,596, , ,6596, , ,