1. The Modernization of Article 82 : an Economic Perspective Dr Valérie RABASSA* Chief Economist Office DG COMPETITION EUROPEAN COMMISSION *The views expressed are those of the author and do not necessarily reflect those of DG COMP or the European Commission ASOCIACIÓN ESPAÑOLA PARA LA DEFENSA DE LA COMPETENCIA Madrid 16 February 2006

2. Outline  Article 82 : current review and  Discussion paper : general framework  Predation, loyalty rebates and bundling/tying under the draft Article 82 guidance paper  An example

3. Article 82 : current review  Case law under Article 82 may be fragmented  Lack of general and systematic approach  Guidelines could address this shortage by providing a framework for analysis  Time schedule  DG Competition invites all interested parties to make comments on the discussion paper  public consultation starting 19 December 2005, ending 31 March 2006  expected final guidance paper: End 2006  Internal working group, ECN, EAGCP

4. Discussion paper : general framework  Emphasis on effect-based analysis (rather than form-based)  Approach to market definition / dominance  Exclusionary practices  predation  predation  single branding and rebates  single branding and rebates  tying & bundling  tying & bundling  refusal to deal  refusal to deal  after markets  after markets  Efficiencies

5.  Market definition : SSNIP test  “Cellophane fallacy”  Dominance as significant market power General framework for the analysis of market definition and dominance

6. General framework for analysis of exclusionary practices (1) Effect-based analysis  By exclusionary abuses are meant behaviours by dominant firms which are likely to have a foreclosure effect on the market, i.e. which are likely to completely or partially deny profitable expansion in or access to a market to actual or potential competitors and which ultimately harm consumers

7. General framework for analysis of exclusionary practices (2)  An over-arching test  Case by case check of consumer harm  the “as-efficient competitor” test or price-costs test

8. Predatory pricing analysis under the discussion paper  AKZO rule still basic framework  Below AVC/AAC rebuttable presumption of abuse  Between AVC and ATC need to prove strategy of foreclosure (“intent”)  No separate requirement to prove recoupment beyond dominance  except perhaps in specific cases (e.g. collective dominance)

9. Loyalty rebates analysis under the discussion paper   Retroactive   loyalty enhancing effect : increase with the target and the rebate percentage   suction effect close to the threshold : the higher the threshold and the rebate percentage   Benchmark   abusive likely if discounted price < ATC   no profit sacrifice test   Market distorting foreclose effect likely high if :   substantial coverage (tied market share) or selectivity (if affected buyers are particular important for rivals)   uncertainty (to minimise the risk of not obtaining the rebate)   Efficiencies objective justification

10. Bundling/tying analysis under the discussion paper   Dominance   Market distorting foreclose effect Step I Among others, analysis of the :   number of customers that buy both products   economies of scale, network externalities, learning effects in the tied market   product differentiation   rivals replication of the bundle Step II   does incremental revenue cover long run incremental costs of including each product in the bundle ?   Efficiencies objective justification

11. An example(1) : a An example(1) : a pure bundling analysis  Market A and Market B : A = computer A = computer B = monitor B = monitor  Market A is monopolized by firm 1  Market B is potentially served by firm 1 and Firm 2; Firm 1Firm 2 AB1B2

12. Pure bundling  Dominance in the tying market ?  Two step analysis - does tying have an exclusionary effect in the tied market ? - effect of foreclosure on the final consumer – price-cost test ?  Efficiencies objective justification ? An example(2)

13. Pure bundling  Dominance in the tying market √  Does tying have an exclusionary effect in the tied market ? Among others, analysis of :  demand-link between the tying good and the tied good √  if independence in consumption between the tying and the tied good  necessary pre-commitment  similar consumer tastes regarding the tying good √  high entry barriers √, scale economies √, network effects in the tied market  low level of product differentiation in the tied market √  no credible counter-strategies of the rival firms √  lack of buyer power √ An example(3)

14. An example(4)  Reservation value for good A : θ A = 5  Unit costs for good A : C A = 2  B1 is produced by firm 1 at price P B1 = 4  B2 is produced by firm 2 at price P B2 = 3

15. Bundling test  Consumer harms ?  p A + p B1 > p A+B1 5 4 6 = ( p A + p B1 - ( θ A – C A )) 5 4 6 = ( p A + p B1 - ( θ A – C A ))  test under a bundling assessment  incremental price < long run incremental costs 1 = (6 – 5) 4 1 = (6 – 5) 4  Efficiencies : no  Consumer harms more likely An exemple(5)