The economics of Article 82 reform Dr Helen Jenkins, Managing Director February 8th 2008

2 Outline (I) -what is market power? -from form- to effects-based tests for abuse -critique of the guidelines on loyalty rebates -practical issues in applying the methodology -Microsoft

February 8th What is market power? The ability to exclude competitors The ability to maintain price above the competitive level no entry by competitors no switching by customers must be able to maintain price > marginal cost (P > MC) over time significant impact on market price and conditions ability to foreclose requires barriers to entry

February 8th Market power is a matter of degree Differentiated product power Appreciable effect (Chapter I) Dominance (Chapter II, mergers) Super-dominance Monopoly

February 8th The current ‘form-based’ approach Is the company dominant? No No case to answer Yes Special responsibility Thou shalt not -price below variable cost -offer loyalty rebates -tie products -‘The successful competitor, having been urged to compete, should not be turned upon when he wins’ -US Judge Learned Hand in Alcoa (1945)

February 8th Guidelines open the way for effects-based tests -dominance is not a binary state, and the degree of dominance matters for assessing abuses -a significant proportion of the market or of customers need to be affected by the alleged abusive behaviour -to assess exclusionary behaviour, the stated benchmark is the exclusion of an ‘as efficient’ competitor

February 8th The ‘as efficient competitor’ -the AEC is a central concept in the guidelines -setting benchmark for when it is OK for a competitor to be excluded -in liberalising markets there can be justifications for weakening this benchmark (eg, adjusting for scale) -notably, the AEC concept does not enter the assessment of loyalty rebates -comparison there is between the MES of competitor and the ATC of Domco  regardless of the level of cost at the entrant’s MES

February 8th Potential situations Scenario 1:Ci > P > Ce -where the entrant is more efficient than the incumbent -can pricing below cost exclude this more efficient rival? Scenario 2: Ce > P  Ci -the ‘traditional’ situation, where scale effects reduce the incumbent’s cost -abuse in this situation ruled out by the guidelines (mostly)

February 8th Two-sided markets and consumer welfare What is normal competition? What enhances welfare? Downloading is a barrier OEMs do not want to load multiple media players Content providers do not want to multi-format Single media player is more efficient? OEMs often happy to pre-load more and/or downloading is easy Costs more to multi-format, but critical mass of users is small Can sustain multiple media players, even if WMP is ubiquitous Commission’s viewAlternative view How should it be chosen? Relevant to consider if there is a foreclosing effect

February 8th Market shares of media players (unique users) (%) Source: European Commission decision of relating to a proceeding under Article 82 of the EC Treaty. (Case COMP/C-3/ Microsoft), data for years 1998–2002; WebSiteOptimization (2007), ‘Apple's iTunes Player Climbs Streaming Media Charts’, March, data for years 2003–07; and Oxera analysis.

February 8th Use of multiple media players -according to Microsoft Fact Sheet (2006), significant increase in the number of media players pre-installed (in addition to WMP) -EU increased from 1.4 per user in 2004 to 3.2 in USA increased from 3.2 per user in 2004 to 3.7 in average number of media players per user increased from 2.1 in 2004 to 2.6 in 2006

February 8th Streaming media player time per person (minutes) Source: WebSiteOptimization (2007), ‘Apple's iTunes Player Climbs Streaming Media Charts’, March, and Oxera analysis.

Contact: Dr Helen Jenkins +44 (0)