A Revolution in Thinking about Verticals

A Revolution in Thinking about Verticals

Verticals:
Do national differences warrant different regulatory
approaches?
Kai-Uwe KÜHN
Chief Economist
DG Competition, European
Commission
A Revolution in Thinking about Verticals
•  “Form based” vs. “Effects based” approaches
•  The Chicago School Critique
•  Arguments for anticompetitive effects not logically
consistent
•  Efficiency explanations are ignored
•  The Chicago School Problem: Models too simple to explain
either efficiency or anticompetitive explanations of market
behavior
2
•  The role of modern contract theory (Asymmetric
information, incomplete contracts): Explains many
institutional structures as efficient solutions to
contracting problems.
•  Empirical studies support the importance of efficiency
explanations (Lafontaine und Slade, Handbook of
Antitrust Economics, 2005)
The One Monopoly Profit Argument
•  Vertically related markets implies selling of
complementary products
•  For complements there is only one monopoly profit
•  Inefficiencies in pricing of complements
•  "Double Marginalization"
•  Solution: Two part tariffs
•  But: Asymmetric information
w>c
•  Constraining downstream pricing is
good
A Monopolist wants downstream competition!!
p>w
Efficiency Explanations for Vertical
Restraints
•  Eliminating Intrabrand competition
is likely to be efficiency enhancing:
•  Competition is good for U:
Downstream prices down for given
w enhances profits!
U
w
w
•  Efficiency Mechanisms:
•  Asymmetric Information:
D
Interference of incentive
mechanisms for multiple retailers
p1
•  Exclusivity (Territorial or otherwise,
Selective Distribution) can align incentives
D
p2
5
Anticompetitive Mechanisms
•  The evidence for efficient vertical restraints does
not mean that there is never a problem, but:
•  The foreclosure theory of the case has to address
the one monopoly profit critique:
•  Restauration of monopoly rents through exclusion
–  Restoring ability to price discriminate (see Genakos,
Kühn, Van Reenen 2012)
–  Overcoming opportunism with unobservable constracts
(Hart and Tirole 1992 and others)
•  Dynamic Foreclosure: Complements become the
launchpad for Substitutes
•  Naked exclusion through scale effects
•  All about elimination of Interbrand competition!
Economic Analysis Gives Discipline To
Effects Based Analysis
•  Theory of the Case
•  Is there a coherent economic theory that implies
anticompetitive effects?
•  What alternative motives could explain the observed
behavior?
•  The basic assumptions of the theory of the case have to fit
the relevant market
•  The theory of the case guides what relevant evidence is
•  There is a defense because it becomes clear what kind
of information would support or contradict the theory of
the case
•  The use of multiple types of evidence
•  Economic data on prices, quantities, etc.
•  Internal strategy and planning documents
•  Market surveys
7
•  The coherence of the theory and the different data sources
together lead to a solid case
What is Different about Small Markets?
•  Higher Concentration Downstream
•  Should the analytical approach be different?
•  In foreclosure problems it is still about the horizontal
effects of the vertical practices!
•  You need strong dominance to have likely effects
under any economically relevant theory of harm
•  A Form Based approach (based only on market share
thresholds) will generate a greater proportion of
economically inappropriate cases
•  Ability of Agencies to appropriately apply an effects
based approach
Exploitative Abuses: Price Discrimination
•  The disconnect between discrimination rules and
economic analysis:
•  Geographic price discrimination generally has
ambiguous effects on consumer welfare
•  Often price discrimination leads to more equal
outcomes in consumption
•  Price Discrimination based on intensity of
competition:
•  Detecting and preventing excessive pricing in a small
market due to dominance (implications selective
distribution)
•  Cost without dominance: Losing efficient price signals
How not to argue price discrimination
•  Complaint about disadvantaging D2
•  Evidence:
•  Prevailing view (prior) is that
downstream competition
is underdeveloped
owner
U
•  Internal Documents
reveal that owner thinks
w2
w1
maintaining w1 < w2
D2
D1
important for competitive
position with respect to D2
•  Theory: Transfer price should not matter, only w2
matters. Hence, only margin squeeze is a relevant
test
Conclusions
•  The principles for the analysis of vertical restraints
should be the same in any jurisdiction (as long as it
is based on economically valid principles)
•  Solid foreclosure cases are infrequent even in
concentrated markets making form based
approaches even more problematic in smaller
markets
•  There is some legitimacy in using exploitative
abuses of a dominant position to control excessive
domestic prices
•  Primacy of market opening measures and
enforcement against horizontal constraints
Die Anreizeffekte von Bussgeldern in
Marktbeherrschungsfällen
• 
• 
• 
Im Gegensatz zu Kartellen kann das Verhalten in
Marktbeherrschungsfällen gut oder schlecht sein
Es kommt auf die Umstände an
Traditionelles Denken: Minimierung von “Type I and Type II
errors”
l  Führt zu einer Fall bei Fall Analyse
l 
l 
Aber: Wetbbewerbspolitik sollte ex-ante Anreize geben
Firmen sollten Praktiken vermeiden dann und nur dann,
wenn sie wettbewerbschädigende Effekte haben
Die Anreizeffekte von Bussgeldern in
Marktbeherrschungsfällen
• Ein (recht abstraktes) Beispiel:
•  Nehmen wir an:
•  wir wissen, Informationsaustausch ist schlecht in 50% der Fälle und gut
in den anderen 50%
•  Ex-Post können wir genau feststellen in welcher Kategorie wir sind
•  Ex-Ante: Wir wissen nicht, welche Information uns erlaubt zwischen
guten und schlechtem Informationsaustausch ex-post zu ungerscheiden.
•  Was für Anreizeffekte hat eine Wettbewerbspolitik, die Informationsautausch
verbietet genau dann wenn eine ex-post Untersuchung zeigt, dass wir einen
schlechten Fall haben?
•  Wissen Firmen wann das Verhalten “schlecht” ist?
Safe Harbors und Anreizeffekte
• 
• 
Können Unternehmen Antitrustrisiken vermeiden?
▫  Wenn nicht, gibt es geringe Anreize problematische
Praktiken zu vermeiden
▫  Safe Harbors geben die Möglichkeit auf Verhalten
auszuweichen das Rechtssicherheit liefert
▫  Safe Harbors erhöhen damit die Anreizeffkte der
Wettbewerbspolitik
▫  Es wird leichter Ex-post zwischen problematischen
und unproblematischen Fällen zu unterscheiden.
Beispiel:
▫  Disaggregierter Informationsaustausch
▫  Der UK Tractors Fall
The Antitrust Enforcer's Nightmare:
How Do I Prove (Likely) Effects?
•  Theory of the Case
•  Evidence that supports the applicability of the theory
•  Possibly internal documents about the desired effects or
statements that support the theory of the case
•  But is this enough? Don't we want to be sure about the
causal effects of the anticompetitive conduct and the
remedies?
•  How do we prove (likely) market outcomes in the
counterfactual?
•  How do we show what changes through the remedies in
the Microsoft case?