A competition policy for the digital age -

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Juridiska institutionen Vårterminen 2019

Examensarbete i konkurrensrätt 30 högskolepoäng

A competition policy for the digital age

- An analysis of the challenges posed by data-driven business models to EU competition law.

Författare: Andreas Sahlstedt

Handledare: Universitetslektor Vladimir Bastidas

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Table of Contents

ABSTRACT ... 4

ABBREVIATIONS ... 5

1. INTRODUCTION ... 6

1.1. BACKGROUND ... 6

1.2. PURPOSE AND RESEARCH QUESTIONS ... 8

1.3. DELIMITATIONS ... 8

1.4. METHODOLOGY ... 9

1.4.1. The dogmatic legal method... 9

1.4.2. The economic nature of competition law ... 10

1.4.3. European sources of law ... 10

1.5. DISPOSITION ... 12

2. THE UNDERLYING OBJECTIVES OF COMPETITION LAW ... 13

2.1. INTRODUCTION ... 13

2.2. MARKET ECONOMY ... 13

2.2.1. The neo-classical view on markets / The theory of perfect competition ... 13

2.2.2. Behavioural economics ... 15

2.3. THEORIES OF COMPETITION LAW ... 16

2.3.1. Introduction ... 16

2.3.2. The Harvard school ... 16

2.3.3. The Chicago school ... 17

2.3.4. Post-Chicago Schools ... 18

2.3.5. Ordoliberalism ... 19

2.4. EUROPEAN COMPETITION LAW ... 20

2.4.1. Background ... 20

2.4.2. Objectives found in the treaties... 21

2.4.3. The single market imperative ... 22

2.4.4. The more economic approach ... 23

2.4.5. Conclusion ... 24

3. ART. 102 TFEU AND THE MERGER REGULATION ... 25

3.1. INTRODUCTION ... 25

3.2. TO WHOM DOES IT APPLY?... 25

3.3. DOMINANT POSITION... 26

3.3.2. Defining the relevant market ... 26

3.3.3. Dominant position ... 28

3.4. ABUSE OF A DOMINANT POSITION ... 30

3.4.1. The concept of abuse ... 30

3.4.2. Exploitative abuses ... 31

3.4.3. Exclusionary abuses ... 32

3.5. DEFENCES... 32

3.6. MERGER REGULATION ... 33

3.6.2. Jurisdiction... 34

3.6.3. The substantive analysis ... 35

4. THE CHARACTERISTICS OF ONLINE PLATFORMS ... 36

4.1. TWO-SIDED AND MULTI-SIDED MARKETS ... 36

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4.2. NETWORK EFFECTS ... 37

4.3. CONSUMER BEHAVIOUR ... 38

4.4. THE ECONOMICS OF “FREE” ... 40

5. THE CHARACTERISTICS OF BIG DATA ... 42

5.1. WHAT IS BIG DATA? ... 42

5.1.2. The volume of data... 42

5.1.3. The velocity of data ... 43

5.1.4. The variety of data ... 43

5.1.5. The value of data ... 43

5.1.6. Personal data ... 44

5.2. DATA AS A CURRENCY ... 45

5.3. DATA AS AN ASSET ... 46

6. WHEN COMPETITION LAW AND DATA PROTECTION LAWS COLLIDE ... 47

6.1. DATA PROTECTION IN THE EU ... 47

6.2. CASE LAW OF THE ECJ... 49

6.3. CASE LAW OF THE COMMISSION... 50

6.4. THE BUNDESKARTELLAMT FACEBOOK INVESTIGATION ... 52

6.5. SHOULD PRIVACY CONCERNS BE ADDRESSED UNDER THE FRAMEWORK OF COMPETITION LAW? ... 55

7. BIG DATA AND MARKET POWER ... 60

7.1. ASSESSING A DOMINANT POSITION ... 60

7.1.1. The Dynamic character of data-driven markets ... 60

7.1.2. The importance of entry barriers in data-driven markets ... 62

7.1.3. Data as an entry barrier ... 64

7.2. BEHAVIOURAL ECONOMICS IN EU COMPETITION LAW ... 66

7.3. THE RISKS OF INSUFFICIENT MERGER CONTROL ... 69

8. CONCLUSION ... 71

BIBLIOGRAPHY ... 73

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Abstract

The increasing volume and value of data in online markets along with tendencies of market concentration makes it an interesting research topic in the field of competition law. The purpose of this thesis is to evaluate how EU competition law could adapt to the challenges brought on by big data, particularly in relation to Art. 102 TFEU and the EUMR. Furthermore, this thesis analyses the intersection between privacy regulations and competition law. The characteristics pertaining to online markets and data are presented in this thesis in order to accurately describe the specific challenges which arise in online markets.

By analysing previous case law of the ECJ as well as the Bundeskartellamt’s Facebook investigation, this thesis concludes that privacy concerns could potentially be addressed within a EU competition law procedure. Such an approach might be particularly warranted in markets where privacy is a key parameter of competition. However, a departure from the traditionally price-centric enforcement of competition law is required in order to adequately address privacy concerns.

The research presented in this thesis demonstrates the decreasing importance of market shares in the assessment of a dominant position in online markets, due to the dynamic character of such markets. An increased focus on entry barriers appears to be necessary, of which data can constitute an important barrier. Additionally, consumer behaviour constitutes a source of market power in online markets, which warrants a shift towards behavioural economic analysis.

The turnover thresholds of the EUMR do not appear to adequately address data-driven mergers, which is illustrated by the Facebook/WhatsApp merger. Therefore, thresholds based on other parameters are necessary. The value of data also increases the potential anticompetitive effects of vertical and conglomerate mergers, warranting an increased focus on such mergers.

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Abbreviations

CJEU Court of Justice of the European Union ECJ European Court of Justice

EEA European Economic Area

EU European Union

GDPR General Data Protection Regulation

OECD Organisation for Economic Co-operation and Development TEU Treaty on European Union

TFEU Treaty on the Functioning of the European Union

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1. Introduction

1.1. Background

The introduction of competition laws around the turn of the 19th century came as a response to tendencies of natural monopolies and collusion between competing undertakings leading to detrimental effects on competition in the market. The Sherman Act was introduced in the United States in 1890 partly as a response to the concerted practices between railroad companies and the oil company Standard Oil that were harming competition in the market for oil.¹ The competitive landscape has vastly changed since then, and while the anticompetitive conducts remain similar, competition authorities face different challenges in modern markets due to immense technological advancements.

In a speech from 2009, the former European Commissioner for Consumer Protection stated that ”Personal data is the new oil of the internet and the new currency of the digital world”.² Despite the fact that this was stated in a context of data protection and consumer rights, the quote is highly applicable to competition law today. The act of collecting, processing and analysing data has become immensely important for the success of companies in the digital age. It is vital for companies that are active in various markets for online services to be able to accumulate and process large amounts of data in order to improve their service.

Big data refers to the increased accumulation and usage of huge sets of data, which cannot be effectively managed and processed by traditional database systems.³ A commonly referred to definition of big data by the research and advisory company Gartner defines big data as “high-volume, high velocity and high-variety information assets that demand cost-effective, innovative forms of information processing for enhanced insight and decision making”.⁴ Declining costs of data gathering and an increased migration of socioeconomic activities to e-services has been a substantial driver in the shift towards a more data-driven economy, where data increases the economic

1 Massarotto, From Standard Oil to Google: How the Role of Antitrust Law has Changed, p. 395.

2 Speech of former EU Commissioner Meglena Kunova, 31 March 2009, Speech/09/153.

3 Graef, EU Competition Law, Data Protection and Online Platforms, p. 127.

4 Gartner, IT Glossary, ‘Big Data’ (available at https://www.gartner.com/it-glossary/big-data)

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competitive advantage of firms and drives innovation.⁵ This development has resulted in big data and data analytics no longer being a matter of concern exclusively for innovative tech companies. Business surveys increasingly show that firms active in more traditional markets are increasingly investing in big data and AI to maintain competitive advantages.⁶

A common phenomenon in markets for online services are tendencies of high concentration, where one company accumulates a substantive degree of market power.

These tendencies can be observed within several markets, e.g. in the market for e- commerce (Amazon), the market for search engines (Google), video services (YouTube) and social networks (Facebook). Despite the fact that the provided services are vastly different in regard to their usage, similar mechanisms are used to achieve a dominant position in the market. The rise of these tech-giants naturally attracts the interest of competitions authorities worldwide. In recent years, the Commission has fined Google for abusing its dominant position in the market for general internet search and in the market for online advertising.⁷ Furthermore, multiple high-profile mergers and acquisitions related to online markets have highlighted the competitive aspect of data. In the American market the number of mergers and acquisitions in data-heavy sectors increased from 55 in 2008 to 164 in 2012.⁸ In Europe, Facebook’s acquisition of WhatsApp and the subsequent decisions of the Commission due to Facebook providing misleading information during the merger procedure has demonstrated the complexity of acquisitions in these markets.

It is not only the prevalence of data that make these markets interesting from a competition law perspective. The markets of the new economy exhibit characteristics that distinguish them from traditional markets. The presence of two- or multisided markets, direct and indirect network effects, and the supply of products free of charge, results in online-platforms becoming more difficult to assess using the traditional tools of competition law. This is further exacerbated by the rapid technological development which makes these markets increasingly dynamic. The unique characteristics and

5 OECD, Exploring Data Driven Innovation as a New Source of Growth, p. 7.

6 NewVantage Partners LLC, Big Data Executive Survey 2019, p. 2. The survey conducted on executives of Fortune 1000 companies mainly in the financial and healthcare sectors show that many of the respondents (92%) are increasing their pace of investment in big data and AI.

7 European Commission, press release IP/19/1770 and IP/18/4581.

8 OECD, Data-Driven Innovation: Big Data for Growth and Well-Being, p. 94.

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tendencies of high concentration in these markets make it an interesting research topic within the field of competition law.

1.2. Purpose and research questions

The rapid technological development and importance of big data in online markets, combined with a limited case law makes this an interesting topic of research. The main purpose of this study is to identify the problems that might arise due to data-driven business models in online markets and how European competition law can adapt to these challenges. Thus, the main overarching research question is: how can European competition law better adapt to the challenges brought on by big data? In order to answer this question, the special characteristics of online markets are discussed, as well as an analysis of what makes data interesting from a competition law perspective. As much of the data used in data-driven business models constitutes personal data, mergers and abusive conduct in this sector affects the privacy of individuals. Another question that falls within the scope of this study is thus how the intersection of data protection regulations and competition law could be constructed. Are there compelling arguments that favour increased integration of these legal areas?

1.3. Delimitations

The scope of this work is limited to abuse of a dominant position within the meaning of Art. 102 TFEU and to the clearing of mergers within the meaning of the merger regulation. Different forms of anti-competitive conduct related to Art. 101 TFEU does not fall within the scope of this work. While it is probable that the new economy will cause challenges in the application of Art. 101 TFEU as well. This study will focus on the implications of data to Art. 102 TFEU. However, this does not mean that questions of data are of no interest to Art. 101 TFEU, as it is conceivable that undertakings form agreements and concerted practices in relation to data.

While the enforcement policies and case law of some national competition authorities will be discussed to a limited degree in this study, the main focus is the case law and enforcements policies of the CJEU and the Commission. The use of national sources will be limited to when it can contribute to the analysis of how EU competition law should develop. A more substantial analysis of national jurisdictions falls outside the scope of this thesis.

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The intersection of data protection and competition law will be analysed in this thesis in order to investigate whether data protection can be used as an aid in assessing issues of competition law. However, a more extensive analysis of the content of data protection regulations does not fall within the scope of this work.

1.4. Methodology

1.4.1. The dogmatic legal method

The basis of this work is the dogmatic legal method. This method is not entirely descriptive in its nature, nor is it entirely normative in its nature.⁹ The aim of the dogmatic legal method is to describe the state of law, while developing normative positions that are used to criticize or justify said state of law.¹⁰ However, the method’s close ties to legal sources separates it from strictly normative theories. This study will use available legal sources, such as regulations, case law and legal doctrine, in order to ascertain what constitutes the current state of law and how a certain issue of law should be solved.¹¹ While doing this, the hierarchy of legal norms in the particular branch of law has to be considered. Furthermore, an important aspect of this legal methodology is that the unique conditions and general principles that permeates the legal area of research must be taken into consideration.¹²

The ambition of this thesis is to both analyse the current state of law and what the law ought to be. As such, it does not subscribe to the strict notion of traditional legal dogmatic scholars that teleological arguments should not be used while applying the legal dogmatic method.¹³ In order to construct persuasive arguments of what the law ought to be de lege ferrenda, the underlying motives and characteristics of the relevant area of law needs to be taken into consideration. It is however essential, from a methodological point of view to not conflate these two lines of reasoning, as their aim is to answer different questions.¹⁴ A detailed account of the motives of European competition law will be given in Chapter 2 and will serve as the basis for future analysis.

9 A, Peczenik, Juridikens allmänna läror, p. 250.

10 Ibid, p. 249-250.

11 Kleineman, Rättsdogmatisk metod, in Korling & Zamboni (eds.), p. 21.

12 Ibid. p. 31.

13 Ibid. p. 37.

14 Ibid. p. 36.

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1.4.2. The economic nature of competition law

Competition law as a field of law is heavily influenced by economic theory. One of the main objectives of European competition law is economic efficiency.¹⁵ This can be observed in the case law of the CJEU in the assessment of whether an undertaking holds a dominant position. In United Brands, a dominant position was defined as a position of economic strength enjoyed by an undertaking, which enables it to prevent effective competition being maintained in the relevant market.¹⁶ It is however worth noting that economic efficiency is only one of many objectives of EU competition law, a more detailed account of these objectives can be found in Section 2.4.

The very notion that competition is something desirable that needs to be protected is a presumption that is based upon economic theories. In addition to being based to a large extent on economic policies, the practical application of competition law to a large extent requires economic considerations. In order to properly carry out an assessment of whether an undertaking enjoys a dominant position or whether an action constitutes abuse, a certain degree of conceptual economic understanding will undoubtedly be required.¹⁷ This aspect distinguishes competition law from other fields of law, in that it cannot be applied in a formalistic manner or analysed in a strictly rule-based way.¹⁸ As such, it is oftentimes necessary to adopt an external perspective in the analysis of competition law.

The purpose of this thesis is not to conduct any substantive economic research or to actively pursue or apply a particular economic theory. Nevertheless, this thesis will analyse European competition law in its economic context.

1.4.3. European sources of law

The legal framework of European competition law is composed of primary and secondary legislation, the case law of the CJEU and the Commission, as well as soft law in the form of guidelines of the Commission. In the area of EU competition law, the Commission has an integral role. European competition law is primarily enforced through public enforcement, rather than private litigation.¹⁹ In its capacity of the executive branch of the

15 Motta, Competition Policy: Theory and Practice, p. 15. Jones & Sufrin, EU Competition Law, p. 24.

16 Case 27/76, United Brands v Commission, para 65.

17 Whish & Bailey, Competition law, p. 2.

18 Ibid. p. 2.

19 Jones & Sufrin, EU Competition Law, Text, Cases, and Materials, p.94.

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EU, the Commission ensures the enforcement of the competition rules through decisions when infringements are identified and by imposing fines. This competence is shared with the national competition authorities. The fines can amount to up to 10 per cent of the total turnover of the previous business year of the undertaking. The looming threat of huge fines functions as an incentive for undertakings to comply with the competition provisions and makes the Commission an important institution in the process of enforcing and ensuring compliance with the competition rules. It follows from Art. 31 of Regulation 1/2003 that the ECJU enjoys unlimited jurisdiction to review decisions made by the Commission under the regulation.²⁰ The fact that decisions of the Commission may be referred to the Courts of the EU makes the General Court and ECJ an integral part of the development of EU competition law.

Communications and Notices (often called “Guidelines”) issued by the Commission are of importance to EU competition law. These types of quasi-legal instruments are often referred to as “soft law”, which are not legally binding, but may produce practical and legal effects.²¹ There are diverging opinions in the legal doctrine as to the exact legal effects that can be attributed to soft law, and there is limited case law on the subject. In the case of Grimaldi, the ECJ stated that national authorities and courts in some situations may be obligated to use soft law as a basis for interpretation.²² In other cases, such as in France v Commission, the ECJ has annulled soft law adopted by the Commission when it had been deemed to be more intrusive than the regulation it was intended to supplement.²³ While the full extent of the legal effects of soft law is uncertain, the case law on whether the Commission is bound by its own notices and recommendations is clearer. In multiple cases the ECJ has stated that by issuing guidelines, the Commission limits its discretion and cannot depart from the content of the notice without breaching general principles of law, such as the principles of equal treatment and legitimate expectations.²⁴ Regardless of the legal relevance of the Commission’s guidelines it is safe

20 This competence of the ECJ is also derived from Article 261 and 263 TFEU, and the provisions in Regulation 1/2003 can be viewed as an expression of the treaty provisions.

21 Whish & Cosma, Soft Law in the Field of EU Competition Policy, p. 30.

22 C-322/88 Grimaldi, para 18.

23 C-303/90 France v Commission.

24 C-226/11 Expedia v Autorité de la concurrence and Others, para 28, and joined cases C-189/02 P Dansk Rørindustri and Others v Commission, para 211.

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to assume that they have a normative effect on market actors. Since the guidelines showcase the procedures and assessments of the Commission, undertakings will adapt to these in order to avoid fines being imposed and other punitive measures, making these instruments relevant for understanding EU competition law.²⁵

The case law of the CJEU and Commission is analysed in order to ascertain how the development in the legal field is likely to progress. The focal point is to assess whether Art. 102 TFEU and the merger regulation are capable of adequately addressing anticompetitive concerns related to market power in data-driven markets. Central to this discussion is the importance of market shares and entry barriers in markets of the new economy. Additionally, merger briefs are used to a limited extent in order to analyse the Commission’s merger case law. Merger briefs are written by the staff of the Competition Directorate-General to provide background for policy discussions. They represent the authors’ views on the matter but do not bind the Commission in any way. While not binding, merger briefs can provide insight to the Commission’s reasoning in its merger decisions. This study also relies on the legal doctrine as a basis for discussing the research questions. The European legal doctrine does not have a formal legal standing within the hierarchy of norms of the EU and is not referred to by the CJEU.²⁶ It can however be useful in providing analysis of EU law and compelling arguments for how the law should develop.

The ECJ has stated that all language versions of EU legislation are equally authentic.²⁷ However, when it comes to merger decisions by the Commission, only the English version is considered authentic. Out of the available authentic language versions of legislative acts and case law, this work will be based solely on the English language versions.

1.5. Disposition

The aim of the introductory Section (2) of this thesis is to introduce the economic considerations that constitute the backdrop of competition law. Further, the main schools of thought that have influenced modern competition law will be presented, as well as an account of the development of European competition law. Section (3) describes the

25 Whish & Cosma, Soft Law in the Field of EU Competition Policy, p. 31.

26 Lehrberg, Praktisk Juridisk Metod, p. 210.

27 C-283/81 CILFIT, para 18.

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regulatory framework of Art. 102 TFEU and the EUMR. In this section the relevant criteria, such as the definition of the relevant market, assessing what constitutes a dominant position, and abuse will be presented. The purpose of Section (4) is to analyse the characteristics of data heavy markets, such as multi-sided markets, network effects, consumer behaviour and free services. Section (5) sets out to describe the characteristics of data as well as different perspectives from which data can be analysed. Section (6) concerns the intersection of data protection and competition law. The case law of the ECJ, Commission and the Bunderskartellamt will be analysed in this section, followed by a discussion of whether increased integration between the legal fields is warranted. In Section (7) the implications of big data to the market power of firms in digital markets.

The focal point is the dynamic character of data-driven markets and the increased importance of potential competition. In addition, behavioural economics in EU case law and the risks associated with insufficient merger control will be addressed. In Section (8) the content and conclusions of this work will be summarized.

2. The underlying objectives of competition law

2.1. Introduction

In order to achieve a comprehensive grasp of the concept of EU competition law, it is necessary to investigate the economic theories and the underlying rationales supporting it. Thus, Section 2.2. seeks to explain the theories behind competition as a concept, and why it should be pursued. The aim of Section 2.3. is to describe some of the influential schools of thought within the field of competition law. Finally, Section 2.4. seeks to describe and analyse the development of, and the policy rationales behind, modern day EU competition law.

2.2. Market economy

2.2.1. The neo-classical view on markets / The theory of perfect competition

As stated above, one of the main goals of competition law is economic efficiency. The theory of perfect competition, sometimes also described as neo-classical economics, seek to describe a model of a market in which economic efficiency is maximised. As a result,

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it constitutes a model in which the market cannot be improved by the intervention of competition rules.²⁸ The model of perfect competition is based on several assumptions.

The hypothetical market has a large number of buyers and sellers, which all possess perfect information.²⁹ Furthermore, the firms acting in the market are identical, there is unrestricted entry and exit to the market in question, and the quantity of purchased or sold products by any individual actor is small enough in relation to the total quantity.³⁰ Therefore, any fluctuation in individual trades leave the market unchanged. There are numerous implications to these assumptions. Since there is perfect information and no entry barriers to the market, firms active in the market will be unable to set prices above the cost of production without attracting competitors that will eventually outcompete them. This results in a price of product equal to marginal costs of production, and as a result no firms will make positive economic profits.³¹ In a state of perfect competition, maximum Pareto efficiency is achieved, meaning that it is impossible to reallocate resources to make someone better off without making someone else worse off.³² Furthermore, productive efficiency is also at its highest, as competitors cannot sell products above costs of production, they will instead compete by trying to lower costs of production.³³

At the opposite end of the spectrum from perfect competition is monopoly. A monopolist has the market power to affect the market price of product, since it is responsible for all output on the market.³⁴ If a single actor controls the supply side, it can manipulate pricing through either reducing volume of production or through raising the price of the products, resulting in allocative inefficiencies.³⁵ Another problem related to monopolies is that such an actor may not have the same incentives to innovate or improve its production procedures, due to the lack of competitive constraints.³⁶

An observant reader will notice that the assumptions made within the model of perfect competition are dissimilar to how real markets function. It is extremely rare to find

28 Jones & Sufron, EU Competition Law, p. 6.

29 Bishop & Walker, The Economics of EC Competition Law, p. 22.

30 Ibid. p. 22.

31 Ibid. p. 22-23.

32 Wish & Bailey, Competition Law, p. 5.

33 Ibid. p. 5-6.

34 Bishop & Walker, The Economics of EC Competition Law, p. 6.

35 Ibid. p. 6.

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markets characterized by perfect competition or true monopoly in practice. This has given rise to criticism of these models, which will be accounted for in the following section.

2.2.2. Behavioural economics

Many of the assumptions made under the theory of perfect competition do not translate well to the actual conditions of markets. This can be attributed to the fact that in practice, market actors are not perfectly rational agents. Both consumers and producers active in markets are rather characterized by bounded rationality, meaning that their rationality is limited by cognitive abilities, the available information, and the finite amount of time available in regards to decision making.³⁷ Due to bounded rationality, it is not certain that a rise in prices will result in substantial losses, as consumers may not have adequate information of the pricing of all firms in the market.³⁸ Furthermore it is rare that products are identical in character, in many cases firms try to differentiate their products through branding and innovation, and consumer loyalty comes into play.³⁹ Entry barriers, which are not factored into the market of perfect competition tend to make it difficult for firms to enter markets, enabling firms currently present in the market some margins in their pricing. Similarly, firms present on the market experience sunk costs that cannot be recovered if they were to exit the market.⁴⁰ Thus, there are barriers to both entry and exit in the market. Additionally, the management of firms may not always act in a way that is economically rational, opting to pursue growth of the firms rather than purely focusing on profitability.⁴¹

On the opposite side of the spectrum, pure monopolies are also rare occurrences in markets, apart from when they are imposed by a state. Real market conditions are much more likely to facilitate oligopolies, meaning that a few firms on the market obtain substantial market power.

There is merit to the criticism of the theory of perfect competition, as it is questionable whether the purpose of competition policies should be based upon an unattainable outcome. It should, however, be recognized that it only seeks to describe an ideal state of

37 Simon, A Behavioural Model of Rational Choice, p. 114.

38 Whish & Bailey, Competition Law, p. 8.

39 Ibid. p. 8.

40 Ibid. p.8.

41 Scherer & Ross, Industrial Market Structure and Economic Performance, p. 46.

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competition, which serves as a point of reference for competition policies. Alternative theories have been presented that recognise the theory’s limitations but maintain the notion that competition is something worth protecting. These alternative theories are based around concepts such as workable competition, effective competition and models based on oligopolistic markets. While the leading schools of competition policies strive to promote competition, they might be driven by different views of whether to pursue perfect competition or models based on ‘workable competition’.

2.3. Theories of competition law

2.3.1. Introduction

While there is a general consensus among economic and competition law scholars that competition is something worth pursuing, there are numerous theories prescribing different methods and rationales for competition enforcement. This section aims to present a general description of the influential schools of competition law that have formed the policies in the field of competition law. It should be noted that these schools of thoughts are far from uniform, as they encompass numerous scholars whose views differ on many topics.

2.3.2. The Harvard school

The Harvard school of industrial organization developed during the post-war years and mainly stems from work done at Harvard University. The main theory put forward by proponents of the Harvard school was the SCP paradigm. The SCP paradigm maintains that the structure of the market dictates the conduct of market actors, which in turn affects market performance.⁴² The basis for this model were empirical studies of American industries rather than purely theoretical models.⁴³ The structure of markets characterized by high concentration are especially viewed as facilitators of conduct that result in poor economic performance.⁴⁴ The recommended policy outcome of this theory thus revolves

43 Ibid. p. 13.

44 Ibid. p. 13.

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around influencing the market structure to promote conducts which leads to the desired market performance.⁴⁵

The Harvard school applied the concept of workable competition instead of perfect competition.⁴⁶ Workable competition is based on the notion that since perfect competition is unachievable, competition policy should be concerned with attaining the best practically achievable competitive conditions.⁴⁷ In doing this, the proponents of the Harvard school advocated a multi-goal approach, which could encompass both economic and non-economic policy arguments.⁴⁸

Due to its emphasis on the anticompetitive effects of market power, the Harvard school of competition policy focused on limiting concentration and high degrees of market power in markets.⁴⁹ Competition enforcers influenced by this school of thought thus aim to protect the competitive process for smaller firms and to limit the exercise of market power.⁵⁰ The Harvard school paradigm resulted in interventionalist tendencies towards the conduct of market actors, and a restrictive approach towards the approval of mergers, resulting in higher degrees of market power.

2.3.3. The Chicago school

Several scholars associated with the University of Chicago launched heavy criticism towards the Harvard school and the interventionalist tendencies of competition agencies and courts.⁵¹ This school heavily influenced competition law enforcement during the second half of the twentieth century, particularly antitrust policies in the United States during the 70s and 80s. The Chicago school prescribes laissez-faire free market capitalism through deregulation and liberalisation of markets.⁵² By subscribing to price theory analysis, the Chicago school de-emphasises the role that barriers to entry and market power plays in competition law analysis, in favour of a model that focuses on allocative

45 Budzinski, Theory Pluralism of Competition Policy Paradigms, p. 6.

46 Bastidas, Promoting innovation?, p. 53.

49 Ibid. p. 7.

50 Bastidas, Promoting Innovation?, p. 53.

51 Motta, Competition Policy: Theory and Practice, p. 8.

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efficiency.⁵³ The Chicago school dismissed the notion that competition laws should be based on other rationales than economic efficiency and that high market concentration leads to anti-competitive effects.⁵⁴

Proponents of the Chicago school are more concerned with the harm done by competition law enforcement producing false positives and considers such practices more detrimental to competition than the occurrence of false negatives.⁵⁵ One of the main reasons behind this is the perception that the market will self-correct false negatives. False positives imposed by antitrust enforcement on the other hand, run the risk of creating legal precedents that deter firms from pro-competitive practices. This sentiment provides another argument in favour of less governmental intervention within the sphere of competition. Furthermore, the Chicago school asserted that firms are unable to obtain or enhance market power through unilateral actions, without irrationally trading market power for profits.⁵⁶ If a dominant firm would behave in such a way, competitors would enter the market to gain profits and erode the monopolistic position of the dominant firm, as long as markets are free. From this perspective, it is irrational for competition authorities to focus on combating abuses of dominance by dominant firms, instead emphasis is put on counteracting cartels and horizontal mergers that raise the risk of cartels forming.

2.3.4. Post-Chicago Schools

In recent years, subsequent theories, such as the Post-Chicago and Neo-Chicago schools have emerged. These theories have their roots in the Chicago school of thought. They do however recognize some of the shortcomings and critiques that have been directed at the Chicago school. The goal of Post-Chicago scholars was to take the best features of the Chicago School antitrust policies and develop it to be more sensitive to market imperfections which were not addressed properly.⁵⁷ The Post-Chicago Schools thus have less faith in unregulated markets as such, realises the dangers of unilateral conduct by dominant firms, is more conscious of entry barriers, and has a restored faith in

53 Hawk, The American (anti-trust) revolution: lessons for the EEC, p. 59.

54 Hovenkamp, Antitrust Policy After Chicago, p. 226-228.

55 Easterbrook, The Limits of Antitrust, pp. 2-3.

56 Posner, The Chicago School of Antirust Analysis, p. 928.

57 Hovenkamp, Post-Chicago Antitrust: A Review and Critique, p. 258.

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government interventions.⁵⁸ It is difficult to speak of a uniform Post-Chicago School as it is constructed of a heterogenous group of economic theories, with different value assumptions, methodologies and results.⁵⁹ In general, the subsequent Chicago schools complements the economic analysis of price theory with additional tools such as advanced game theory, modern econometrics and transaction cost economics.⁶⁰ The result of the application of these methods are inter alia, a more critical view of oligopolies, recognition of the harmful effects of abusive conduct of dominant firms, and a recognition of potential harmful effects of vertical integration.⁶¹ One problem associated with Post- Chicago analysis is that it is heavily theoretical which makes it difficult to apply for competition law enforcers, thereby limiting its practical utility.⁶²

2.3.5. Ordoliberalism

Ordoliberalism, also referred to as the Freiburg School of Economics emerged during the inter-war period in Germany and has influenced the competition policies in European countries. The ordoliberal school of competition law argues that a competitive process regulated by the state is necessary in order to protect individual economic freedom.⁶³ Proponents of ordoliberalism recognize that competitive markets show tendencies of self- termination, as firms try to avoid the individual pressure of competition through the formation of cartels, syndicates and megacompanies, which have a negative impact on competition in general.⁶⁴ To combat this phenomenon a strong state is needed to govern economic activities, as ungoverned laissez-faire capitalism threatens individual freedom, the authority of the state, and the interests of society at large.⁶⁵ Thus, the economic theory promoted by ordoliberalism places itself between laissez-faire markets and a strictly state- planned economy, by promoting competition within an institutional framework established and governed by the state.⁶⁶

58 Ibid. p. 267.

60 Ibid. p. 11.

61 Ibid. p. 12-13.

62 Jones & Sufron, EU Competition Law, p. 20-21.

63 Anchustegui, Competition law through an Ordoliberal lens, p. 140.

66 Ibid. p. 145.

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One of the primary ideas of ordoliberals is the establishment of an economic constitution, which embeds competition into the law and limits the potential of unconstrained private market power and harmful intervention by governments in the economic system.⁶⁷ Ordoliberalism makes a distinction between the concepts of performance competition and handicap competition. Performance competition can be described as when a firm attempts to increase its competitive advantage through the improvement of its own service, e.g. through lower pricing or better quality of products.⁶⁸ The concept of handicap competition describes competitive behaviour where firms seek to gain a competitive advantage through weakening the performance of its competitors.⁶⁹ While performance competition is viewed as an entirely positive process, handicap competition is viewed as detrimental to competition, as it does not produce any genuine improvement of the services on the market. One main objective of competition policy is to deter firms from resorting to handicap competition over performance competition.

2.4. European competition law

2.4.1. Background

The dawn of a European competition policy can be traced back to the inclusion of competition provisions in the Treaty of Paris in 1951. The purpose of these regulatory measures must be seen from the context that the European integration project at the time revolved around regulating the markets of coal and steel. As such, the main purpose of the rules was to limit the potential of a resurrection of German power in the coal and steel industries.⁷⁰ However, a second reason can also be identified in the increased belief of free markets as the most effective way to promote economic efficiency.⁷¹ As the integration of the EU has deepened, the framework of competition law has become more sophisticated and an important component in the creation of the European single market.

At the time of the drafting of the Treaty of Paris and the Treaty of Rome, German competition laws were being adopted parallel to the development of European

69 Ibid. p. 19.

70 Weitbrecht, From Freiburg to Chicago and beyond, p. 82.

71 Motta, Competition Policy: Theory and Practice, p.13.

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competition policy.⁷² During this period, the German debate was heavily influenced by ordoliberal theories, and many influential German scholars participated in the drafting of the treaty provisions.⁷³ Due to these circumstances, the competition policy of the EU was initially influenced by ordoliberal thoughts, such as the concept of establishing an economic constitution.

2.4.2. Objectives found in the treaties

The Treaties contain a number of provisions that outline the general framework of EU competition law. These become relevant since every provision of EU law is to be placed in its context and interpreted in the light of the provisions of Community law as a whole.⁷⁴ As such these complimentary Treaty provisions are relevant to the application of Art. 101 and 102 TFEU and the EUMR. Art. 3(3) TEU states inter alia that the EU shall establish an internal market and work for a highly competitive social market economy.

Additionally, Protocol 27 on the internal market and competition, states that the internal market as set out in Art. 3 TEU shall include a system which ensures that competition is not distorted. Protocols have the same legal standing as the Treaties according to Art. 51 TEU. Furthermore Art. 119 TFEU provides that Member States and the institutions of the EU shall enact economic policies in accordance with the principle of an open market economy with free competition.

It is not entirely clear how the concept of a social market economy is to be reconciled with the principle of an open market economy with free competition. The social market economy is a remnant of the influences of ordoliberalism to the competition policy of the EU.⁷⁵ A social market economy was defined by ordoliberal thinkers as market freedom with social balance, which combines the pursuit of social justice with the economic prosperity that flows from a capitalist-driven economy.⁷⁶ While European competition policy has moved away from ordoliberalism, ordoliberal sentiments can sometimes be identified in the ECJU. An example of this is the opinion of Advocate General Kokott in the British Airways judgment. In her opinion Kokott claimed that the competition rules

74 C-283/81 CILFIT, para. 20.

76 Ibid. p. 149.

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of the Treaty is not designed only or primarily to protect the immediate interests of individual competitors or consumers, but to protect the structure of the market and thus competition as such (as an institution).⁷⁷ Such sentiments that the purpose of competition policy is to facilitate the competitive process and structure of the market resonate with ordoliberal ideas.⁷⁸

2.4.3. The single market imperative

An important aspect of European competition law is the single market imperative. The competition rules are applied by the Commission and CJEU as a tool to further market integration within the EU, which is a unique characteristic of EU competition law in relation to other legal systems.⁷⁹ Conduct which falls under Art. 101 and 102 TFEU which hampers the functioning of the internal market runs the risk of being heavily scrutinized and punished.⁸⁰ In GlaxoSmithKline, the ECJ found an agreement between a producer and distributor seeking to prohibit parallel imports of pharmaceuticals to have the object of restricting competition contrary to Art. 101 TFEU. The ECJ held that agreements aimed at partitioning national markets according to national borders or making the interpenetration of national markets more difficult obstructs the Treaty’s objective of achieving the integration of national markets through the establishment of a single market.⁸¹ Such agreements are therefore to be considered agreements whose object is to restrict competition within the meaning of Art. 101 TFEU. The same sentiment is echoed in the Commission’s guidance on Art. 102 enforcement priorities, which states that certain behaviour that undermines the efforts to achieve an integrated internal market is liable to infringe Art. 102 TFEU.⁸² The Commission may therefore decide to intervene in relation to such conduct , in particular where the proper functioning of the internal market cannot otherwise be adequately ensured.

77 Opinion of Advocate General Kokott in C-95/04 British Airways, para. 68.

79 Jones & Sufron, EC Competition Law, p. 35.

80 Whish & Bailey, Competition Law, p. 54.

81 C-501/06 P, GlaxoSmithKline, para 61.

82 Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 7.

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2.4.4. The more economic approach

Starting in the late 1990s the Commission adopted a more economic approach in its enforcement of competition law. Since then, the Commission appears to seek to realign the competition policy of the EU with economic theories of efficiency and welfare.⁸³ One of the main consequences of this is that the Commission adopts a more effects-based approach in its assessments, rather than applying per se rules.

Traces of the more economic approach can also be observed in the new Merger Control Regulation adopted in 2004 (the “EUMR”).⁸⁴ With the adoption of the new merger framework, the previous market dominance test was replaced by the SIEC test.⁸⁵ The assessment of whether a concentration would significantly impede effective competition in Art. 3(3) of the EUMR is now the primary test to be conducted when determining whether a concentration is incompatible with the internal market. The creation or strengthening of a dominant position has become one of many variables that could potentially cause a significant impediment of effective competition. Furthermore, efficiency gains are to be taken into consideration in the assessment and may counteract the effects on competition and potential harm to consumers.⁸⁶

There is an ongoing debate as to whether the EU competition rules adhere to a consumer welfare standard. This means that the primary purpose of the EU competition policy is to maximise the welfare of consumers, as opposed to a total welfare standard or a focus on producer surplus. This appears to be the case when looking at statements made by EU Commissioners over the years.⁸⁷ The same impression can be demonstrated by the wording of communications issued by the Commission regarding Art. 101 and 102 TFEU. In the Commission’s guidance on Art. 102 enforcement priorities it is stated that

84 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings.

85 Basedow, Introduction, p. 5. In, Basedow & Wurmnest (ed.), Structure and Effects in EU Competition Law: Studies on Exclusionary Conduct and State Aid.

86 Recital (29) of Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings.

87 Most notably, Commissioner Monti, The Future for Competition Policy in the European Union, SPEECH/01/340 “…the goals of competition policy in all its aspects, is to protect consumer welfare…Competition should lead to lower prices, a wider choice of goods, and technological innovation, all in the interest of the consumers”, and Commissioner Almunia, Competition – what’s in it for consumers?

SPEECH/11/803, “Consumer welfare is not just a catchy phrase. It is the cornerstone, the guiding principle of EU competition Policy”.

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in applying Art. 102 to exclusionary conduct by dominant undertakings, the Commission will focus on the types of conduct that are most harmful to consumers.⁸⁸ The same sentiment is echoed in the 2004 guidelines on Art. 101(3) which state that the objective of Art. 101 is to protect competition on the market as a means of enhancing consumer welfare and ensuring an efficient allocation of resources.⁸⁹ While the Commission appears to apply a consumer welfare standard in its application of competition law, the case law of the ECJ is more ambiguous as to the objectives of EU competition law. In the T-Mobile case, the ECJ stated that the competition rules of the Treaty are designed to protect not only the immediate interests of individual competitors and consumers but also to protect the structure of the market and thus competition as such.⁹⁰ In the case of TeliaSonera, the ECJ expressed that the function of the competition rules is to prevent competition from being distorted to the detriment of the public interest, individual undertakings and consumers, thereby ensuring the well-being of the European Union.⁹¹ While both of these judgments refer to the interest of consumers, they also mention other broad policy objectives, making it difficult to conclude that the ECJ has fully embraced a consumer welfare standard.

2.4.5. Conclusion

It is difficult to ascertain one single main objective that permeates European competition law. By looking at the case law of the ECJ, multiple possible objectives can be observed.

From the above sections it can be concluded that the Commission appears to wholeheartedly embrace a consumer welfare standard, however, it is not certain that the Courts acknowledge this position. Market integration is another objective that the competition rules appears to fulfil. In other cases, the ECJ refers to objectives such as protecting the market structure or competition as such.

88 Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 5.

89 Guidelines on the application of Article 81(3) of the Treaty, para 13.

90 C-8/08 T-Mobile, para. 38.

91 C-52/09 Konkurrensverket v TeliaSonera, para. 22.

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3. Art. 102 TFEU and the merger regulation

3.1. Introduction

Art. 102 TFEU is concerned with unilateral conduct by dominant undertakings or groups of undertakings which is considered abusive. The first paragraph of Art. 102 TFEU reads as follows:

Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.

The purpose of this chapter is to discuss and analyse Art. 102 and the EUMR in relation to case law, which will serve as a background to subsequent chapters.

3.2. To whom does it apply?

As can be discerned from the wording of Art. 102 TFEU, the provision is applicable to undertakings. The concept of undertaking has been defined in the same way under Art.

101 and 102 TFEU.⁹² Due to the lack of a definition of the concept of undertaking in the Treaties, it has been left to the Courts to determine a definition. In Höfner the ECJ stated that the concept of an undertaking encompasses every entity engaged in an economic activity, regardless of the legal status of the entity and the way in which it is financed.⁹³ It is clear from this that the ECJ adopts a functional approach, in which the focus lies on the nature of the activity, rather than the form of the legal entity. The effect of this approach is that a wide group of entities may constitute an undertaking, e.g. individuals, trade associations, clubs, partnerships and companies.⁹⁴ The fact that an entity is state owned does not preclude it from constituting an undertaking as long as it is engaged in an economic activity.

92 Barnard & Peers, European Union Law, p. 514.

93 C-41/90 Höfner, para. 21.

94 Ezrachi, EU Competition Law: An Analytical Guide to the Leading Cases, p. 4.

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3.3. Dominant position

3.3.1. Introduction

Art. 102 TFEU is only applicable to undertakings that enjoy a position of dominance. The assessment of whether an undertaking holds a dominant position is a two-step assessment.

As the ECJ stated in Continental Can, for the appraisal of a dominant position, the definition of the relevant market is of essential significance.⁹⁵ Thus, the first step of the assessment of a dominant position requires an appraisal of the relevant product market and relevant geographical market that the undertaking is active in. After the relevant market has been defined, follows an assessment of whether the undertaking holds a dominant position on the market in question.

3.3.2. Defining the relevant market

The process of defining the relevant market often involves a complex economic assessment of the products and services provided by the undertaking which is subject to evaluation. In Continental Can the ECJ held that the delimitation of the relevant market requires an investigation of the characteristics of the products in question by virtue of which those products are particularly apt to satisfy an inelastic need and are only to a limited extent interchangeable with other products.⁹⁶ As such, the assessment of the relevant market is concerned with the interchangeability. The case of United Brands concerned inter alia whether bananas as a product were part of the same market as other fresh fruits. The ECJ stated that in order for the banana market to be regarded as forming a market which is sufficiently differentiated from other fruit markets, it must be possible for it to be singled out by special features which distinguish it from other fruits, only to a limited extent be interchangeable with them. and only exposed to their competition in a way that is hardly perceptible.⁹⁷ The ECJ reached the conclusion that the market for bananas was distinct from other markets for fresh fruit since bananas as a product were not affected by seasonal fluctuations in demand or supply compared to other fruits, possessed certain characteristics which made it particularly attractive to certain

95 C-6/72 Continental Can, para. 32.

96 Ibid. para. 32.

97 C-27/76 United Brands, para. 22.

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consumers groups, and was affected by fluctuations in price by other fruits only to a limited extent.⁹⁸

In the Commission’s notice on the definition of the relevant market, it is stated that the objective of defining the relevant market is to identify the competitive constraints the undertaking face and the competitors capable of constraining the behaviour of the undertaking.⁹⁹ There are three types of constraints listed in the notice: demand substitutability, supply substitutability, and potential competition. Out of these, demand substitutability is the constraint which is considered most significant by the Commission when it comes to defining the relevant market.¹⁰⁰ The assessment of demand substitution involves an examination of what types of products that are considered to be substitutes to consumers. An important tool for the Commission in this assessment is the SSNIP-test, which is an abbreviation for a Small but Significant Non-transitory Increase in Price. The test examines whether the consumers of the undertaking, in the event of a hypothetical price increase of five to ten per cent, would switch to readily available substitutes, making the price increase unprofitable due to a loss in sales.¹⁰¹ If a price increase of product A results in a migration of consumers to product B, they are considered to be part of the same relevant market. The scope of the relevant product market has an important impact on whether an undertaking will be considered having dominant position.

In addition to the relevant product market, it is necessary to define the relevant geographical market of the undertaking. Whether an undertaking is active in a national market or on a pan-European level has an important effect on whether it will be considered holding a dominant position, since the assessment greatly affects the number of competitors which pose constraints on the undertaking. The Commission makes use of the SSNIP-test in order to assess the scope of the geographical market as well. The main difference is that it looks to whether a price increase will result in consumers importing the product from suppliers in a different area. In addition to pricing, other factors such as technical, practical, and legal barriers are taken into consideration in the assessment.¹⁰²

98 Ibid. paras. 23-34.

99 Commission Notice on the definition of relevant market, para. 10.

102 Whish & Bailey Competition Law, p. 40.