1. Unilateral Exclusionary Conduct – An Analytical Framework Jorge Fagundes 3rd Coloquio - ForoCompetencia Buenos Aires, Argentina – November 2, 2007 Fagundes Consultoria Econômica - Brazil

2. Agenda I – Introduction II – Brazil: Abuse of Dominant Position and Relevant Market Domination III – Economic Approach: Principles and Example IV – Conclusions Fagundes Consultoria Econômica - Brazil

3. I - Introduction Anticompetitive behavior are defined by national legislation. Each jurisdiction has its legal and institutional determinants (e.g., antitrust legislation goal: ensure an effective competitive process; promotion of consumer welfare; rule of reason or per se legal framework; etc.) However, there are similarities based in the internationalization of USA antitrust legislation after II world war, increased by..... Vagueness of legal concept and globalization  tendency towards institutional convergence, mainly through diffusion of common principles of analysis (economic analysis and theory) Fagundes Consultoria Econômica - Brazil

4.  Alleged solution for convergence and to minimize over or under deterrence risk: rigorous use of economic theory and analysis of conduct effects in the relevant market (measured by variation in consumer and/or total surplus) – effect based approach  But do we have an unique economic theory for (each type of) unilateral exclusionary conduct? Is there a unique analytical framework for unilateral exclusionary conducts? (i) Theoretical problems; and (ii) Measurement problems Fagundes Consultoria Econômica - Brazil I - Introduction

5. II – Brazilian Approach Law Brazil vs. USA and EU Fagundes Consultoria Econômica - Brazil

6. Art. 20 of Law 8.884/94 “Article 20. Notwithstanding malicious intent, any act in any way intended or otherwise able to produce the effects listed below, even if any such effects are not achieved, shall be deemed a violation of the economic order: I - to limit, restrain or in any way injure open competition or free enterprise; II - to dominate a relevant market of a certain product or service; III - to increase profits on a discretionary basis; and IV - to abuse a dominant position II – Brazilian Approach: Law Fagundes Consultoria Econômica - Brazil

7. Art. 20 of Law 8.884/94 “Paragraph 1. Achievement of market control as a result of competitive efficiency does not entail an occurrence of the illicit act …. Paragraph 2. Dominant position occurs when a company or group of companies controls a substantial share of a relevant market …. Paragraph 3. The dominant position ……is presumed when a company or group of companies controls twenty percent (20%) of the relevant market……. II – Brazilian Approach: Law Fagundes Consultoria Econômica - Brazil

8. USA: monopolization and attempt to monopolize EU: abuse of dominant position Brazil  hybrids elements: (i) monopolization and attempt to monopolize: item II of article 20 (ii) abuse of dominant position: item IV of article 20 II – Brazil vs. USA and EU Fagundes Consultoria Econômica - Brazil

9. Items II and IV of article 20 are not analyzed with distinct formal legal treatment: (i) Resolution 20/99 CADE  Market power (measured basically by market share and barriers to entry in the relevant market) as necessary but not sufficient condition; (ii) Jurisprudence  there is no difference in standards of proofs or analytical framework II – Brazil vs. USA and EU Fagundes Consultoria Econômica - Brazil

10. Economic analysis well established. Guidelines: Resolution 20/99 – CADE  Effect based approach Efficiency defense accepted, mainly transaction costs in vertical restrains (Achievement of market control as a result of competitive efficiency does not entail an occurrence of the illicit act)  rule of reason approach Goal of competition policy for unilateral exclusionary conduct: consumer surplus II – Brazil: Jurispudence Fagundes Consultoria Econômica - Brazil

11. III – Economic Analysis of Unilateral Exclusionary Conduct Principles Example: exclusive dealing Fagundes Consultoria Econômica - Brazil

12. Effect based approach  rigorous examination of competitive dynamic in the relevant market with the goal of identify the effects of a certain conduct over the competitive process and consumer welfare Use of economic theory and empirical data to analyze and measure the economic impacts of exclusionary conducts: anticompetitive effects – maintenance or increased market power – and efficiencies (basically, some form of cost reduction) Burden of Proofs: a uthorities or plaintiffs should demonstrate anticompetitive effects. Defendants should prove efficiencies Fagundes Consultoria Econômica - Brazil III – Economic Analysis of Unilateral Exclusionary Conduct: Principles

13. Supposed benefits: (i) Consistency: two different conducts producing the same effects will received the same treatment; and (ii) Enforcement efficiency: minimize risks of over or under deterrence But: there are several cases where conducts produce private efficiencies (increase profits) - which could be social or not – AND negative effects for rivals competitiveness and the competitive process. Efficiencies should be benefit consumers in order to be social and, therefore, be considered in an antitrust perspective Fagundes Consultoria Econômica - Brazil III – Economic Analysis of Unilateral Exclusionary Conduct: Principles

14. Some problems: (i) more than one economic theory for the same conduct (ii) strong difficulties in measuring impacts over market power, efficiencies magnitudes and net effect over static consumer surplus (iii) even more complicated to assess dynamic results of a certain unilateral conduct. Use of economic analysis do not solve all problems Fagundes Consultoria Econômica - Brazil III – Economic Analysis of Unilateral Exclusionary Conduct: Principles

15. Exclusive dealing  distinct economic approach: (i) foreclosure, raising rival’s costs, device to facilitate collusion (ii) private efficiency enhancing: reduce risks; minimize transaction costs; internalize horizontal externalities in the vertical chain (iii) But both effects could be present: it is often difficult not only to identify each effect, but also to measure them. Fagundes Consultoria Econômica - Brazil III – Economic Analysis of Unilateral Exclusionary Conduct: Example

16. In general, all antitrust laws use terms ands concepts not well defined  jurisprudence and guidelines are fundamental to consolidate meaning of concepts and procedures of analysis Lack of information, information asymmetries and deficiencies in economic theory implies some degree of subjective evaluation by authorities (errors of diagnosis and measurement) Economic analysis is not enough to solver all problems: safe harbors and rebuttable presumptions with guidelines and strong jurisprudence for each main type of exclusionary conduct are necessary to enhance legal security and reduce social costs of antitrust intervention (too much complexity  low legal security and high social costs of intervention) Fagundes Consultoria Econômica - Brazil IV - Conclusions

17. Strategic social role of structural control by competition policies: avoid the creation of dominant firms by means of M&A Attention to exclusionary conducts that increase strategically barriers to entry (bundling; exclusivity; fight brands)  reinforce of dynamic aspect of competition through entry For discussion: unilateral exclusionary conducts are only those ones that reduce static consumer surplus? Dynamic dimension of competition  preserve the competitive process  competition supposes competitors..... Fagundes Consultoria Econômica - Brazil IV - Conclusions

18. Questions and Answers fagundes@fagundesconsultoria.com.br www.fagundesconsultoria.com.br Jorge Fagundes Tel: 55 21 25522207 Fagundes Consultoria Econômica - Brazil