USING COMPETITION LAW CASES TO TEACH ECONOMICS Sir John Vickers Chairman, OFT DEBE Conference Cambridge, 1 September 2005

Competition law and economics competition law is fundamental to operation of market economy cases can bring economics to life and show it at work cases motivate research and policy debate as well as teaching competition policy addresses market failure while guarding against regulatory failure

Competition is hot topic competition has moved from fringes of law to centre of economic agenda new law Competition Act 1998, Enterprise Act 2002, EC developments independent, transparent and accountable bodies OFT, CC, CAT numerous high-profile cases

Whats so great about competition? efficient resource allocation efficiency displaces inefficiency incentives for productivity and innovation good for consumer choice and value for money think of the alternatives!

What does competition law deal with? anti-competitive mergers anti-competitive agreements abuse of dominant market positions

Merger review: overview UK system: OFT CC (+appeals) SLC test main kinds of anti-competitive effect: non-coordinated: e.g. worse Bertrand equilibrium coordinated: more likely tacit collusion foreclosure: to guard/extend(?) market power

Merger review: analytical steps (1) market definition: demand and supply substitutability; product, geography market shares: concentration measures, e.g. HHI, (mean what?) non-coordinated effects: incentive shift? coordinated effects: easier monitoring of collusion, deterrence of cheating, and safety from disruptive rivals?

Merger review: analytical steps (2) conditions for entry and expansion by rivals vertical issues [conglomerate issues?] efficiency defences (consumer or total welfare standard?) failing firm issues if necessary … remedies

The ITV merger case Carlton/Granada agreed merger of 2003 background of change in TV sector commercial case for consolidated ITV but potential competition concern about advertising airtime OFT [advised SoS to] refer to CC

Analysis of airtime competition relevant market? TV advertising in the UK Carlton + Granada share c50%, declining substitutes or (regional/temporal) complements? overlap in London Carlton and Granadas LWT and beyond? did airtime capacity regulation remove SLC concern?

CC conclusion on ITV merger SLC in airtime likely, to detriment of advertisers and public interest minority favoured structural remedy: divest ad airtime sales houses majority decided on behavioural remedy: contract rights renewal none favoured prohibition

Anti-competitive agreements: overview horizontal / vertical, price / non-price price-fixing: e.g. vitamins, auction houses, toys, replica football kit, roofing economics of leniency vertical agreements more economic approach to non-price agreements now than in past influence of economics of contracts

Abuse of dominance: overview EC Article 82, US Sherman Act s.2 law applies only to firms with dominance / market power: how to assess that? exclusionary [and exploitative?] abuse examples: predatory pricing, margin squeeze, tying and bundling, exclusive dealing, rebate/discount policies, refusal to supply

What is competition on the merits? how to distinguish anti-competitive from pro- competitive conduct? should some forms of conduct by a firm with market power be per se illegal? possible guiding principles: profit sacrifice / no business sense exclusion of as-efficient rivals consumer harm

United States v Microsoft: overview* 1998 US brings case that MS had monopolized markets for operating systems and browsers … by engaging in exclusionary practices including bundling Internet Explorer with Windows OS 2000 District Court judgment: structural separation + behavioural remedies 2001 Court of Appeals judgment (see below) 2002 US and MS settle behavioural remedies * Based on Motta, Competition Policy, 2004, pp And see JEP Spring 2001.

Microsoft case: issues Does MS, through Windows, have market power? How does the market power arise? Does bundling IE maintain MSs market power over OSs unlawfully? Does it extend it to browsers? Are consumers harmed?

Microsofts market power parallels with past IBM cases network effects, compatibility needs of users, switching costs relevant market: Intel-compatible PC OS worldwide Windows share 95+% applications barrier to entry Windows dominant

Maintenance of Microsoft monopoly middleware threat from Netscape browser (+ Java) to applications barrier and hence to Windows dominance thwarted by MS integration of IE with Windows, exclusionary contract terms with PC-makers and internet access providers? Court of Appeals reviewed anti-competitive allegations and efficiency defences upheld some but not all monopolization charges

Microsoft remedies District Court remedies included structural split between MSs OS and applications businesses pros and cons of structural remedies: may solve incentive problems but may lose scope economies; proportionality? Appeals Court quashed break-up US and MS then settle a package of behavioural remedies

Competition cases can teach economics competition policy now more central competition law now more economics-oriented interesting cases and analysis now available can enliven and spur industrial economics … anyway I plan to do it

USING COMPETITION LAW CASES TO TEACH ECONOMICS Sir John Vickers, Chairman, OFT