Remedying a Refusal Means to an end or just an end?

Vian Quitaz, Lawyer

Swedish Competition Authority

The views expressed are not necessarily those of

the Swedish Competition Authority

The Presentation

• Economic Efficiency – Static vs. Dynamic

• What are the Remedies?

• General Issues – Remedying a Refusal

• Three Cases of Intervention

• Conclusions

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Economic Efficiency

Intervention to increase Consumer Welfare

• The need to strike a balance between “efficiencies”

Static Efficiency

Dynamic Efficiency

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Static Efficiency

• Both allocative and productive efficiencies are static measures: they are a snapshot of the current market situation, encompasses:

Allocative: most efficient combination of recourses

Productive: optimal use of resources of particular firms

• Granting access to competitors may increase the competitive pressure on the downstream market, by:

Potentially decreasing competitors’ costs

Resulting in more competitors on the downstream market

Potentially lowered prices and/or more varied goods/services

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Dynamic Efficiency

• Refers to the extent to which a firm develops and diffuses new products or production processes

• The prospect of increased market power is an important driving force of “competition on the merits”

It increases long-term investments and fosters innovation

• Granting access is likely to have an impact on incentives to invest

For the dominant firm

For competitors/rivals

For the entire market in question, but also the economy

• Static vs. Dynamic: if access is not mandated, the actors will work harder to find a way!

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Balancing Exercise – “Valley of Death” • Extensive R&D in developing a product

• An Incumbent Firm introduces the “Happy Pill” (patented product) into the market and makes significant profits over time

• A New Entry Firm plans to introduce the “Happy Lotion” into the market, which will be a serious contender to the “Pill”

• The Incumbent’s strategy: refuses to licence a minor patent and engages in defensive patenting

• Follow-on innovation (the lotion) is severely stifled

• The balancing exercise: risk of focusing on static efficiencies only, since dynamic efficiencies are difficult to evaluate

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Balancing Exercise – the Considerations

Intervention -

Remedy

Effects on Dynamic efficiency

Incentives to invest and innovate

Effects on Static efficiency Stronger competitive pressure with more competitors

Prior to intervention

“Ex Ante”

After intervention

“Ex Post”

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Types of Remedies

• The Search for a Right Remedy

“The preferred remedy will be the one that respects the objectives of the relevant competition regime and minimises the cost of the remedy design,

administration and supervision whilst taking into consideration the negative and chilling effects on firms’ incentives to innovate.”

• In other words, as an Enforcer, you aim to impose a proportionate and necessary remedy to bring the infringement effectively to an end.

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Prohibitory Remedy • Cease and desist

A general and often used remedy in competition enforcement

However, it does not achieve much in remedying a refusal to deal

In order to fix the problem – you need a positive conduct

• Often in combination with fines and/or in a “remedial package”

Example: prohibiting the continuation of certain actions, for instance that the Monopolist refrains from discriminating between downstream competitors (prohibitory) as well as to resume supplying a former customer (affirmative remedy).

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Affirmative Remedy

• Imposes a positive obligation

By far, the most common remedy for a refusal

Difficult to “design”

Involves the consideration and setting of access terms

Needs to strike a balance between competition vs. property rights

• Aim for a “clean” obligation where you avoid “continued supervision”

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Compulsory licensing & FRAND • Fair, reasonable and non-discriminatory (FRAND)

• Takes affirmative remedies further forward:

– A positive obligation including the right to use the patent

– Usually, commitment to give access on FRAND terms

• Meaning of FRAND:

– The non-discrimination principle

– The reasonable principle

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Structural Remedy • Changes the structure of the Firm

Are used only if behavioural remedies cannot fix the problem

Not available in some competition regimes

They are the last resort in remedying a refusal:

If the imposition of an obligation becomes to “burdensome” or is difficult to supervise

Divesture of the downstream activity may be the only way to fix the competition problem (structural factors)

• Have been utilised to ensure access to an essential input

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Access Commitments • Quasi-Structural (offered by the Firm), may involve selective divesture

• Akin to affirmative remedies in refusal to deal cases but can be more far-reaching

• Often, access commitments need to contain:

Straight-forward obligations which can be monitored with ease

Usually, provide for a dispute settlement mechanism

Even, fast track arbitration procedure

• Access commitments provide certainty to all parties

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General Issues – Remedying a Refusal

• You need to ensure that competition happens on the market

• The form of a potential remedy should always be considered early in the enforcer’s investigation:

Remedying a refusal goes to the heart of the case – the theory of harm: if you cannot remedy it, do you have a theory of harm?

If you do not have an efficient remedy, should you find liability?

• Should a “difficult remedy” be a reason for not intervening?

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Problematic Issues

• To illustrate why remedies should be central to an investigation – we will now consider three cases that highlights problematic intervention

• Cases are fictional and similarities to actual cases are coincidental!

• We are not looking at whether the case (theory of harm) is bad/good – our focus is on the remedial action that might come into play

• To intervene or not to intervene?

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The “Good” Intervention • The vertically integrated Monopolist is super dominant on the

upstream market (computer/hardware) and owns the essential input (codes for software) which is needed by the downstream competitors (software developers)

• The Monopolist refuses supplying the codes and as a result the competitors are foreclosed (limiting innovation/development)

• The Enforcer intervenes: fines the Monopolist and imposes an obligation to supply the codes to the downstream competitors

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The “Good” Intervention • The “Good” intervention:

The essential input is made available to competitors, new products are brought to the market and consumers have more choices increased consumer welfare

Make sure to remedy only what is necessary, avoid becoming a Regulator by setting and monitoring access fees and becoming the future adjudicator

Ensure that the remedy includes a “party driven” dispute resolution mechanism

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The “Bad” intervention

• The vertically integrated Monopolist controls an essential input in the upstream market (raw sugar) and sells a refined product in the downstream market (syrup)

• The Monopolist refuses to sell the essential input to competitors in the downstream market

The Monopolist could potentially control prices and margins throughout the production chain

There is no established market for the essential input , there could be difficulties in identifying a market price

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Access terms

• Basic economics: A monopolist holding an essential input, in general, can fully extract the monopoly profit by setting the price on the upstream market and therefore need not resort to foreclosing efficient competitors in the downstream market

Dominant’s Upstream

price

Down-stream

monopoly profit

Dominant’s Upstream

price

Downstream ”competitive”

proft

Monopoly price

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A Monopolist controlling the upstream price

• Will access at a potential monopoly price remedy the competition issue?

Dominant’s Upstream

price

Down-stream

monopoly profit

Dominant’s Upstream

price

Downstream ”competitive”

profit

Monopoly price

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The “Bad” Intervention • The “Bad” intervention:

An affirmative obligation to supply has little possibility of correcting the competition problems on the market:

Lack of a market price on the essential input, the enforcer would have to regulate prices in order to provide “good terms of access”

Little prospect of increasing welfare if the monopolist can increase its upstream price

Hence, the intervention would be “bad” in the sense that it would not increase consumer welfare and may do more harm than good

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The “Ugly” Intervention • The Dominant and the Complainant, jointly, sell a day-ticket which

enables the buyer to ski on all four (mountain tops) slopes (the essential facility) at a skiing resort

• The Dominant owns 3 out of the 4 slopes. The skiers prefer to vary their skiing and purchase 1, 3 or 7-day tickets to ski on all 4 slopes

• Revenues are shared between the two based on percentage of usage

• The Dominant ends the cooperation and refuses to provide any access to the Complainant

• The Enforcer intervenes by imposing an obligation on the Dominant to resume dealing with the Complainant

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The “Ugly” Intervention • The potentially “Ugly” intervention

The intervention ensures that the small competitor remains on the market (or at the skiing resort)

However, the obligation to resume supply, in effect, may function as an invitation to cartelise:

The price of the joint day-ticket can be set without constraints – the two can set price freely

The two firms could then compete to win skiers to increase “usage” on their individual slopes

Both firms can end up with higher profits

• Would an intervention benefit the consumers?

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Conclusions • The suitability and design of the potential remedy should be

considered early in the investigation

• It should aim to fix the problem with minimal continued supervision and leave “competition” to the firms on the market

• It is paramount that the remedy is confined to what is necessary and “lets the market govern itself”

• Ensure that you do not become a Regulator of any given market

• Ensure that the remedy does not cause a different competition problem – that is, you close a case of refusal to deal to open a case involving a cartel or a margin squeeze!

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