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USING COMPETITION LAW CASES TO TEACH ECONOMICS
Sir John Vickers
Chairman, OFT
DEBE Conference
Cambridge, 1 September 2005
Competition law and economics
competition law is fundamental to operation of market economy
cases can bring economics to life and show it at work
cases motivate research and policy debate as well as teaching
competition policy addresses market failure while guarding against regulatory failure
Competition is hot topic
competition has moved from fringes of law to centre of economic agenda
new law Competition Act 1998, Enterprise Act 2002, EC developments
independent, transparent and accountable bodies OFT, CC, CAT
numerous high-profile cases
What’s so great about competition?
efficient resource allocation
efficiency displaces inefficiency
incentives for productivity and innovation
good for consumer choice and value for money
think of the alternatives!
What does competition law deal with? anti-competitive mergers
anti-competitive agreements
abuse of dominant market positions
Merger review: overview
UK system: OFT CC (+appeals)
SLC test
main kinds of anti-competitive effect:
non-coordinated: e.g. worse Bertrand equilibrium
coordinated: more likely tacit collusion
foreclosure: to guard/extend(?) market power
Merger review: analytical steps (1)
market definition: demand and supply substitutability; product, geography
market shares: concentration measures, e.g. HHI, (mean what?)
non-coordinated effects: incentive shift?
coordinated effects: easier monitoring of collusion, deterrence of cheating, and safety from disruptive rivals?
Merger review: analytical steps (2)
conditions for entry and expansion by rivals
vertical issues
[conglomerate issues?]
efficiency defences (consumer or ‘total welfare’ standard?)
failing firm issues
if necessary … remedies
The ITV merger case
Carlton/Granada agreed merger of 2003
background of change in TV sector
commercial case for consolidated ITV
but potential competition concern about advertising airtime
OFT [advised SoS to] refer to CC
Analysis of airtime competition
relevant market? TV advertising in the UK
Carlton + Granada share c50%, declining
substitutes or (regional/temporal) complements?
overlap in London Carlton and Granada’s LWT and beyond?
did airtime capacity regulation remove SLC concern?
CC conclusion on ITV merger
SLC in airtime likely, to detriment of advertisers and public interest
minority favoured structural remedy: divest ad airtime sales houses
majority decided on behavioural remedy: contract rights renewal
none favoured prohibition
Anti-competitive agreements: overview horizontal / vertical, price / non-price
price-fixing: e.g. vitamins, auction houses, toys, replica football kit, roofing
economics of leniency
vertical agreements more economic approach to non-price agreements now than in past
influence of economics of contracts
Abuse of dominance: overview
EC Article 82, US Sherman Act s.2
law applies only to firms with dominance / market power: how to assess that?
exclusionary [and exploitative?] abuse
examples: predatory pricing, margin squeeze, tying and bundling, exclusive dealing, rebate/discount policies, refusal to supply
What is competition on the merits?
how to distinguish anti-competitive from pro-competitive conduct?
should some forms of conduct by a firm with market power be ‘per se’ illegal?
possible guiding principles:
profit sacrifice / no business sense
exclusion of as-efficient rivals
consumer harm
United States v Microsoft: overview* 1998 US brings case that MS had
monopolized markets for operating systems and browsers …
by engaging in exclusionary practices including bundling Internet Explorer with Windows OS
2000 District Court judgment: structural separation + behavioural remedies
2001 Court of Appeals judgment (see below)
2002 US and MS settle behavioural remedies* Based on Motta, Competition Policy, 2004, pp 511-523. And see JEP Spring
2001.
Microsoft case: issues
Does MS, through Windows, have market power?
How does the market power arise?
Does bundling IE maintain MS’s market power over OSs unlawfully?
Does it extend it to browsers?
Are consumers harmed?
Microsoft’s market power
parallels with past IBM cases
network effects, compatibility needs of users, switching costs
relevant market: Intel-compatible PC OS worldwide
Windows share 95+%
‘applications barrier to entry’
Windows dominant
Maintenance of Microsoft monopoly
‘middleware’ threat from Netscape browser (+ Java) to applications barrier and hence to Windows dominance
thwarted by MS integration of IE with Windows, exclusionary contract terms with PC-makers and internet access providers?
Court of Appeals reviewed anti-competitive allegations and efficiency defences
upheld some but not all monopolization charges
Microsoft remedies
District Court remedies included structural split between MS’s OS and applications businesses
pros and cons of structural remedies: may solve incentive problems but may lose scope economies; proportionality?
Appeals Court quashed break-up
US and MS then settle a package of behavioural remedies
Competition cases can teach economics competition policy now more central
competition law now more economics-oriented
interesting cases and analysis now available
can enliven and spur industrial economics
… anyway I plan to do it
USING COMPETITION LAW CASES TO TEACH ECONOMICS
Sir John Vickers, Chairman, OFT
www.oft.gov.uk