Exclusionary practices: Theory and Practice Massimo Motta ICREAUniv. Pompeu Fabra and BarcelonaGSE

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Exclusionary practicesTheory and Practice
Massimo Motta ICREA-Univ. Pompeu Fabraand
BarcelonaGSE

• Ten Year Celebration Competition Conference
• Pretoria, September 2009

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Exclusionary abuses

• Theory
• Traditionally, economists skeptical about
  exclusion Chicago-school critique
• More recently exclusion of efficient rivals is
  profitable in a number of circumstances
• Practice
• Very high burden of proof on plaintiffs in the US
  
• The opposite in the EU
• (see e.g. British Airways Virgin)

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An exclusionary mechanism

• Often (but not always), a common mechanism behind
  different exclusionary practices (predation,
  rebates, exclusive dealing, tying)
• In industries where (demand- or supply-side)
  scale economies matter, if an incumbent firm
  deprives the more efficient rival of key buyers
  (or markets) the latter will not be able to
  operate profitably.

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An example predation (Fumagalli-Motta, 2009)

• Two buyers, B1 and B2, who buy in sequence
  (e.g., procurement).
• An incumbent, I, is already established an
  entrant, E, still has to pay entry costs, F
• E is more efficient (cEltcI) but can cover entry
  costs F only if it serves both buyers
• If I induces B1 to buy from it, E will not enter,
  and I will be monopolist on B2.

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Example, contd

• Entrant and Incumbent will fight for B1 (who
  gets B1 also gets B2)
• If efficiency gap cI-cE small ? Exclusion
• B1 will buy from I at price below cI
  (predation), B2 at monopoly price (recoupment)
• Note exclusion is bad for welfare (I is
  productively inefficient)
• More generally, I may exclude rivals by using
  rebates, exclusive contracts, tying... to induce
  a critical number of buyers to buy from it.

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2. Practice

• Economics tells us that exclusion may take place,
  under certain conditions.
• But how to use economic insights in practice?
• - Administrability, and the needs for
  (economics-based) rules
• - Economic approach, in practice

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Administrability

• Criticism often heard too difficult, legally
  uncertain, to use economics in Art. 82 better a
  regime which de facto forbids dominant firms from
  using certain practices.
• Reply 1 same argument is used in the US to
  justify the non-interventionist approach!
• Reply 2 too costly for society to adopt a
  clear-cut rule, if the rule is wrong
• Reply 3 economics can provide simple and
  easy-to-administer rules

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Economics-based rules of law

• To say that the law on abuse of dominance should
  develop a stronger economic foundation is not to
  say that rules of law should be replaced by
  discretionary decision making based on whatever
  is thought to be desirable in economic terms case
  by case. There must be rules of law in this area
  of competition policy, not least for reasons of
  predictability and accountability. So the issue
  is not rules versus discretion, but how well the
  rules are grounded in economics.
• John Vickers, Abuse of market power, Economic
  Journal, 2005

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Pricing abuse - sorting sheep and goats

• The task is to set rules and precedents that
  can segregate the economically harmful
  price-cutting goats from the more ordinary
  price-cutting sheep, in a manner precise enough
  to avoid discouraging desirable price-cutting
  activity.
• Judge Stephen Breyer in Barry Wright (1983)

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Economics-based rules

• A safe harbour below 45-50 market share
  (conceivable, but rare, to have abuse when firm
  is borderline dominant)
• Price-cost tests (conceivable, but rare, to have
  abuse without losses)
• Look for a coherent strategy of exclusion
• Check if facts of the case fit the theory
• Analyse effects on rivals and consumers
• Allow for efficiency defences (e.g., exclusive
  clauses and fidelity rebates may protect
  investments).
• ? Structured rule of reason

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Economic approach, in practice

• It may be difficult to balance anti-competitive
  and efficiency effects, but often one will not
  even get at this final balancing step (e.g.,
  unlikely anti-competitive effects or, at the
  other extreme, efficiency claims are far-fetched)
• Judges are perfectly able to sort goats and sheep