ECONOMICS AND THE COMPETITION RULES John Vickers Oxford University British Institute of International and Comparative Law 12 September 2007

2 Economics-oriented reform of EC competition law ► Mergers  2004 reform of EC Merger Regulation  Horizontal merger guidelines; draft non-horiz guidelines ► Anti-competitive agreements (Article 81)  Vertical: block exemption regulation amended in 1999  Horizontal: much tougher anti-cartel policy ► Abuse of dominance (Article 82) ??  Major policy review now under way  Microsoft judgment next week

3 How much trans-Atlantic convergence? ► Mergers  Broad convergence between agencies (and courts?)  Also between law and economics ► Anti-competitive agreements  Horizontal: converged anti-cartel toughness (+ leniency)  Vertical: convergence (until Leegin) ► Abuse of dominance  Ocean still looks wide

4 Competition law and economics  US eras ► : Emphasis on market structure and per se prohibitions ► : The ascent of the Chicago School (Bork, Easterbrook, Posner, …) ► Since 1992: Towards a post-Chicago synthesis [?] From Kovacic and Shapiro, ‘Antitrust policy: a century of economic and legal thinking’, Journal of Economic Perspectives 2000 ► Like Goldilocks, many economists would view these approaches, respectively, as too hot, too cold and just right

5 US antitrust − the double helix ► “Harvard has had as much to do as Chicago with creating many of the widely-observed presumptions and precautions that disfavor intervention by U.S. courts and enforcement agencies” Kovacic, ‘The intellectual DNA of modern U.S. competition law for dominant firm conduct: the Chicago/Harvard double helix’, Columbia Business Law Review 2007, page 78 ► ‘Harvard’ meaning Areeda, Turner and … ► “no [Court of Appeals] judge voted more consistently for defendants or authored opinions narrowing the zone of antitrust liability than Stephen Breyer” ( Kovacic, page 8)

6 ‘Administrability’ as a limiting principle: examples ► Predatory pricing  From Utah Pie (1967) via Areeda-Turner (1975) to Brooke Group (1993) and Weyerhaeuser (2007) ► Regulated network access terms  Boston Edison (1990): price squeeze in a fully regulated industry not normally exclusionary under antitrust law  Trinko (2004): no antitrust claim from alleged breach of regulatory duty to share network. [Related issues in Credit Suisse (2007), where securities laws were held to preclude antitrust.] ► Limits to private actions (NB treble damages)  Brunswick (1977): damages only if antitrust injury  Twombly (2007): evidence to bring collusion case

7 Administrability and the scope of competition law ► The examples above illustrate the US tendency for administrability considerations to limit antitrust intervention ► Leegin (2007) is a rare (section 1) counter-example:  ‘Chicago’ (and post-Chicago?) considerations supported overturning the per se ban on RPM  Administrability (and stare decisis) considerations pointed the other way ► In European debates on Article 82, administrability arguments have been advanced by some in support of formalist intervention and against a ‘more economic approach’ ► That view is superficially like the minority view in Leegin but in stark contrast to the thrust of US section 2 jurisprudence

8 Economics-based rules of law “ To say that the law on abuse of dominance should develop a stronger economic foundation is not to say that rules of law should be replaced by discretionary decision making based on whatever is thought to be desirable in economic terms case by case. There must be rules of law in this area of competition policy, not least for reasons of predictability and accountability. So the issue is not rules versus discretion, but how well the rules are grounded in economics.” ‘Abuse of market power’, Economic Journal 2005

9 Pricing abuse − sorting sheep and goats The task “is to set rules and precedents that can segregate the economically harmful price-cutting goats from the more ordinary price-cutting sheep, in a manner precise enough to avoid discouraging desirable price-cutting activity” − Judge Breyer in Barry Wright (1983) ► Economics and administrability both argue against condemning above-[avoidable/incremental?]-cost price cuts ► Both downplay (‘slice away’?) ‘intent’ ► Both argue for a serious market power screen in unilateral conduct cases −  examine abuse questions only when necessary ► Neither favours form-based rules for such cases − beware goats in sheeps’ clothing, and vice versa

10 Concluding comment on Article 82 reform ► Administrability − the need for rules and precedents − is fully consistent with a more economic approach to Article 82 ► The need is for economics-based rules and precedents ► Those are what the Commission (and NCAs) should develop, for the courts to test and endorse