1. Antitrust enforcement against unilateral practices in high tech industries Michele Polo (Bocconi University and Igier) LEAR Conference – Rome, June 25-6, 2009

2. Outline Antitrust enforcement in high tech industries: – Preventing abuses without chilling competition on the merits: Laissez-faire, law enforcement or ex-ante regulation? Antitrust Enforcement: – A package of three tools: Fines Remedies Damages

3. Enforcement and deterrence: the traditional approach The traditional Law and Economics approach: – Harmful practices a should be deterred – Affect the choices among harmful conducts: marginal deterrence: Design the fine schedule F(a) conditional on the action a chosen, in order to induce the less damaging action a, i.e. General result: more enforcement (higher p and/or higher maximum F) improves marginal deterrence, i.e. implements less damaging actions a

4. Enforcement and deterrence: the traditional approach Policy implications: – It is always optimal to prosecute unilateral practices (interventionism) – The only argument against extensive enforcement is the cost of enforcement itself (limited resources)

5. Enforcement and deterrence: High tech industries The policy goal: Preventing abuses without chilling competition on the merits New practices a can be adopted after a (successful) research activity New practices ex-ante are expected to be socially harmful with a given probability β (authoritys prior!) : The firm invests in costly research activity, increasing the probability I of success in discovering the new actions, according to the expected profits from research, that depend on: – Private benefits of the innovative actions Π(a) – Probability β that the new actions will be considered socially harmful – Expected fines pF(a) that will be applied ex-post if the new actions will be socially harmful Hence, the firm now takes two decisions, how much to invest in research (I) and which new action (a) to take if research is successful

6. Enforcement and deterrence: High tech industries Deterrence now works through two channels: – The traditional marginal deterrence effect: a higher p and/or a higher maximum fine F allow to implement a less damaging practice a (if ex-post the innovative activity leads to socially harmful new actions) >> preventing abuses – A new effect, average deterrence: a higher expected fine ex- post reduces the ex-ante expected profits from investing in innovation, reducing the probability I that any new action a (welfare enhancing or socially harmful) will be discovered >> without chilling competition on the merits – When the new actions are expected to improve welfare, a conflict between marginal deterrence (more enforcement is welcome) and average deterrence (less enforcement is desirable) arises

7. Enforcement and deterrence: High tech industries Results (Immordino, Pagano and Polo, 2008, 2009) : – The optimal policy depends on the expected welfare effects of the new practices (the prior β of the authority): – Low β: laissez-faire (never optimal in the traditional setting!) – Higher and higher β: (ex-post) law enforcement with increasing expected fines (ex-ante) regulation (notification and approval)

8. Enforcement and deterrence: High tech industries Christine Varney (new AAG at the Antitrust Division), on May 11 withdraw the Report Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act prepared under the previous Administration, on the arguments that:.. The report went too far in evaluating the importance of preserving possible efficiencies and understated the importance of redressing exclusionary and predatory acts.. >>> the previous Administration had a too low β.. Counseled in favor of a significant limitation of Section 2 enforcement.. >>> and therefore advised for laissez-faire

9. Enforcement at work We now move from the general policy (how much to intervene) to enforcement in pratice Unilateral practices are prosecuted under Section 2 of the Sherman act and Article 82 of the Treaty Different tools: – US: remedies + private damages – EU: fines, remedies and (limited) private damages How to manage this package of instruments?

10. Enforcement at work Unilateral practices: distinguish – ongoing temporary effects (the market structure and the competitors profits are not permanently affected), e.g. exploitative practices, exclusionary practices in their initial phase – permanent effects, e.g. exclusionary practices Policy goals and instruments: – Restoring the competitive conditions: remedies – Deterrence: fines – Compensation of harmed agents: damages

11. Enforcement at work Remedies: we can distinguish – Structural: intervene on the assets fo the incumbent Divestitures: hard to design and manage in unilateral practices, lower administrative duties Access: usual trade-off of competition and investment – Behavioral: positive or negative commitments to practices: Prohibitory injunctions (including fencing-in) Affirmative obligations: reduce rivals costs

12. Enforcement at work Practices with ongoing temporary effects: – Remedies: prohibitory injunctions with fencing-in – Fines: to counterbalance the interim gains; take into account the average deterrence issue if fines are not feasible (US), rely on private damages but avoid overshooting remedies – Damages: not to be used with deterrence intents if fines are feasible Practices with permanent effects: – Remedies: interrupt the practice >> prohibitory Counterbalance the structural advantage of the incumbent>> affirmative/access/divestitures – Fines – Damages