Efficiency Claims in EC Competition Law and Sector-specific Regulation

Abstract:     
Many competition lawyers and economists argue that the prime of objective of competition law regimes is to promote economic efficiency. Yet, few of these regimes define what should be understood by economic efficiency. For instance, although this concept is referred to in an increasingly larger number of regulations, guidelines, etc., EC competition law does not offer any precise definition of economic efficiency. The problem is made more serious by the fact that economists do not necessarily agree on the meaning of efficiency and that, in a given proceeding, the economic consultants of both parties will often disagree over the efficiency or inefficiency of a given practice or behaviour.

This issue has become of considerable importance as economic analysis is now at the core of competition law analysis. Economic analysis does not only play a role in determining the types of agreements/mergers that create competition law concerns, but also the types of justification that can be used to justify such agreements/mergers. When asked to examine a restrictive agreement or a merger, the test to be performed by competition authorities essentially amounts to determining whether the negative effects of the agreement/transaction on competition is more than compensated by "efficiencies" taking the form of the production of new and/or better products, the realization of economies of scale or scope, etc. Such a balancing test will not necessarily be easy as parties to a proceeding will generally try to inflate the "negative" or "positive" effects of the agreement/merger in question. It should thus not come as a surprise that, in some recent documents, the Commission has tried to clarify, which type of efficiencies can be legitimately claimed by private parties.

Efficiency claims are also made in the context of the control of market dominance. First, there are circumstances in which dominant firms will try to justify a conduct that would otherwise be abusive by efficiency considerations. As will be seen below, it is clear that some practices such as rebates or tying can generate efficiencies, although such efficiencies will not necessarily be taken into account by the Commission and the European courts, which tend to consider such practices as per se contrary to Article 82 of the Treaty. Market-opening reforms in network industries are based on the idea that State monopolies were "inefficient" and that a competitive market structure would deliver better results in terms of lower prices, better quality and higher consumer satisfaction. Efficiency claims are also made with reference to the regulatory strategies that need to be designed in order to control the market power of incumbents. While, for instance, incumbents will claim that a given pricing methodology (e.g., ECPR) should be adopted to maintain their incentives to invest, new entrants will say that another pricing methodology (e.g., LRIC) is preferable because it facilitates entry on the market.

Against this background, this paper seeks to clarify the meaning, scope, and validity of "efficiency claims" in EC competition law, as well as the importance of efficiency considerations in sector-specific regulation.

Keywords: Efficiency, competition, antitrust, mergers, vertical restrictions, horizontal restrictions, welfare standards, abuse of dominance, economic regulation

JEL Classifications: K21, K23, L11, L12, L41, L42, L43, L51

Working Paper Series