Dg Comp's Discussion Paper on Article 82: Implications of the Proposed Framework and Antitrust Rules for Dynamically Competitive Industries

Abstract

This paper sets out our comments to DG Competition's discussion paper on the application of Article 82 of the Treaty to exclusionary abuses (the "Discussion Paper," hereinafter). We have focused our comments on the implications that the analytical framework proposed in Section 5 and the antitrust rules described in Sections 6-10 of the Discussion Paper could have on the development and growth of the high-tech and innovation industries (the so-called "dynamically competitive" industries) in the European Union.

The important contribution of these industries to the European economy has recently been acknowledged by the European Commission in its i2010 strategy. This strategy sees growth and employment in the information, communication and technology (ICT) industries as crucial for the achievement of the goals set out in the Lisbon agenda.

It is widely accepted that the growth and development of these industries requires, among other things, a stable regulatory framework that does not penalize successful firms for its own sake and promotes creativity and innovation. According to the Kok Report, prepared in response to an initiative of the European Council, "companies will only invest in innovation and R&D if they have the certainty that they will be able to reap the rewards of that investment." Because it can affect the return to innovation and investment, competition policy can have a significant impact on the development of the ICT sector and other dynamically competitive industries in Europe. To illustrate this impact, consider a few examples:

First, a tight policy regarding excessive prices will have similar effects on the introduction of an upper bound to profits. Given that profits are uncertain ex ante, a firm would only be willing to invest if the expected return on its investment exceeds the cost of capital by a significant measure. The introduction of an upper bound to prices and hence to profits may thus cause a reduction in investment and a loss of welfare.

Second, a strict policy in connection with tying and bundling may force a dominant firm that finds it efficient to integrate two previously separated features into a single product to actually produce separate versions of the product: one with both features and two with each feature separately. This may have negative implications for product innovation: the cost of developing products through technological integration grows exponentially with the number of "unbundled" versions mandated by law. As a result, innovation may be artificially stifled and the competitive process unjustifiably thwarted.

Third, competition policy interventions compelling dominant firms to license their intellectual property may disrupt the innovation process. Economists have shown that (1) compulsory licensing reduces the incentives for the whole industry to innovate in the long run; while (2) it has an ambiguous welfare effect in the short-term. Forced access may increase competition in the short term, but it may also (a) facilitate the entry of inefficient producers; (b) promote licensing arrangements that discourage potential entrants to develop products that are sufficiently different from those of the dominant company, thus reducing product variety in the marketplace; and (c) encourage licensing arrangements that help companies coordinate their respective commercial policies, leading to higher prices.

The nature and magnitude of the impact of competition policy on investment and innovation in general, and on the ICT in particular, depends crucially on the precise rules applied to the assessment of the business practices of dominant firms. This is why the Discussion Paper is so important. It "sets out possible principles for the Commission's application of Article 82 of the Treaty to exclusionary abuses" and "presents the analytical approach that could be used by the Commission" in assessing the business practices of firms with market power. Whether the application of Article 82 of the Treaty in the years to come promotes R&D investment and innovation and thus contributes to the achievement of the ambitious goals of the Lisbon agenda will largely depend on the principles and analytic approach finally adopted by DG Competition and the Commission.

The remainder of this paper is structured in five sections. In section 2, we provide an overview of the importance of the ICT sector for the European economy (employment, productivity and growth) and compare its performance with the ICT sectors of the United States and Japan. We conclude that a healthy ICT sector plays a key role for the growth of the economies of the Member States. Europe's comparatively poor growth and employment record over the last decade can be explained in part by its relatively weak commitment to the development of a strong ICT industry.

In section 3, we briefly review the main economic characteristics of dynamically competitive industries, such as the ICT industry. We focus on those features that have significant implications for the analysis of competition. Subsequent implications are discussed in section 4. Section 5 presents the core contribution of this paper. In this section we evaluate the various statements contained in the Discussion Paper. In doing so, we take into consideration the special characteristics of the dynamically competitive industries and the implications of those characteristics for antitrust law. Section 6 presents a brief conclusion.

Keywords: Commission, discussion paper, competition, dynamic industries, efficiency, abuse of dominance, rebates, tying, bundling, refusal to supply, information technology, exclusive dealing, foreclosure, aftermarkets, innovation, investment, antitrust, dynamic competition, network effects, dominance, R&D

JEL Classification: D42, D80, K21, L11, L12, L16, L22, L41, L42, L50