Article 82 Discussion Paper

1. Article 82 Discussion Paper Luc Peeperkorn Rita Wezenbeek DG Competition, European Commission Rotterdam, 17 March 2006

2. Discussion paper • Published on 19th December 2005 • Public consultation until end of March • We hope for serious and wide debate on paper • Paper concerns exclusionary abuses only; exploitative abuses and discrimination follow at later stage • Depending on results Guidelines may follow.

3. Review of Article 82 • Continuation of work done in other areas • Vertical restraints BER + Guidelines • Horizontal BERs + Guidelines; • Article 81 (3) Guidelines; • Technology transfer BER+ Guidelines; • Horizontal Merger Guidelines • Effects based approach using economic principles and concepts, leading to a more systematic and consistent policy in different areas of anti-trust

4. ‘Form’vs ‘effects’ based approach • Form based approach: may provide certainty and timely enforcement but at too high a cost of false positives and false negatives • Pure effects case by case approach: may provide correct outcome in each case but risk of uncertainty and too (s)low enforcement Conclusion: • Need a combination of elements of form and effect and a fair division of the burden of proof to ensure operational rules • Rules anchored in economic principles to help consistency and predictability

5. Framework exclusionary abuses • Essential objective of 82 is to protect competition as a means to protect consumer welfare • Central concern is foreclosure that hinders competition and thereby harms consumers • Protection of competition, not protection of competitors against competition • Equal right of dominant firms and of residual competitors to compete on the merits

6. General test • Does conduct have capability to foreclose? • Investigate form and nature • Does it have a likely or actual market distorting foreclosure effect? • Actual or potential competitors are completely or partially denied profitable access to the market, entry or expansion of rivals is discouraged, maintenance or growth of competition is hindered; • Incidence; • Importance of customers or competitors in case of selective foreclosure; • Other market characteristics such as network effects; • Degree of dominance ‘Sliding scale approach’ • Exception for conduct which creates no efficiencies and only raises obstacles to residual competition.

7. Application to price based abuses Predation, loyalty rebates, mixed bundling • How to distinguish between abusive pricing which is capable to foreclose and thereby harm competition and pro-competitive pricing? • As efficient competitor test as practical proxy for consumer harm test • In general, conduct that would not exclude “as efficient competitors” but would only exclude “not as efficient competitors” is unlikely to harm competition • Such conduct also more easily identified with competition on the merits

8. As efficient competitor test • Price-cost test • Normally costs of dominant company benchmark for competition on the merits

9. Defences • Objective necessity • constraint that applies to all undertakings in the market • is the prima facie abusive conduct actually necessary on the basis of objective factors external to the dominant company? • ‘Meeting competition’ • dominant company may defend its own commercial and economic interests in the face of action taken by competitors • conduct that may seem abuse is actually a loss minimising reaction to competition from others • suitable, indispensable and proportionate • ‘Efficiencies’

10. Efficiency defence • Efficiency defense needed since same conduct can be both efficiency-enhancing and restrictive • No exemption possible: Successful efficiency defense must lead to conclusion that conduct is not abusive • Consistency required with analytical framework of Art. 81(3) and merger control • Case law (Syfait, Piau) indicates such a defence

11. Conditions for efficiency defence • Efficiencies realised or likely to be realised by conduct • Conduct indispensable to realise efficiencies • ‘Consumer pass on’ • Competition not eliminated in respect of a substantial part of the products concerned • Level of dominance above which protecting the competitive process will normally outweigh possible efficiencies: market share above 75% and no meaningful competitive pressure left from either residual or potential competitors

12. Conditional rebates on all purchases • Overall test of capability and effect • Is the dominant firm an unavoidable trading partner? • If yes, no effective ex ante competition for whole demand • Rebate may create suction effect • If no, the rebate scheme does not foreclose, unless overall predatory

13. Capability: the threshold • Authority to show that threshold is not set so low as to allow switching of customers • Share of individual customer’s requirements or individualised quantity target • It is assumed that the thresholds are well-targeted absent evidence that actual purchases far exceed the threshold • Single target or generalised grid with a certain number of steps • Targeting of steps needs to be analysed more carefully in order to assess capability to have effect

14. Capability: how to apply the as-efficient-competitor test • Close to the threshold effective price is often negative but competition not just for marginal units • The relevant range: What is the CVS on which P effective is calculated? • Capability to exclude if Price < ATC

15. Effect on the market • the dominant company applies the rebate system to a good part of its buyers and this system therefore affects, if not most, at least a substantial part of market demand, or • it applies selectively but these selected buyers are of particular importance for (potential) competitors, and • there are no clear indications of a lack of foreclosure effect such as aggressive and significant entry and/or expansion by competitors and/or switching of customers

16. Rebuttal and efficiencies • Rebuttal on capability • Rebuttal on effect • Efficiency defence Conclusion: full effects based analysis, no easy presumptions helping the authority to shift the burden of proof

17. Average Incremental Step Step Threshold Rebate Turnover Price Turnover Size Price 5000 2,5 97,5 487500 97,5 10000 3 97 970000 482500 5000 96,5 15000 3,25 96,75 1451250 481250 5000 96,25 20000 3,5 96,5 1930000 478750 5000 95,75 25000 3,65 96,35 2408750 478750 5000 95,75 30000 3,75 96,25 2887500 478750 5000 95,75 35000 3,82 96,18 3366300 478800 5000 95,76 Example 1

18. Average Effective Threshold Rebate CVA Price Price 5000 2,5 97,5 500 75 10000 3 97 1000 92,5 15000 3,25 96,75 1500 94,5 20000 3,5 96,5 2000 94,25 25000 3,65 96,35 2500 95 30000 3,75 96,25 3000 95,35 35000 3,82 96,18 3500 95,55 Example 2: CVS = 10%

19. Average Effective Threshold Rebate CVA Price Price 5000 2,5 97,5 250 50 10000 3 97 500 87,5 15000 3,25 96,75 750 92 20000 3,5 96,5 1000 91,75 25000 3,65 96,35 1250 93,5 30000 3,75 96,25 1500 94,35 35000 3,82 96,18 1750 94,85 Example 3: CVS = 5 %

20. Average Effective Threshold Rebate CVA Price Price 5000 2,5 97,5 97,5 10000 3 97 5000 96,5 15000 3,25 96,75 5000 96,25 20000 3,5 96,5 5000 95,75 25000 3,65 96,35 5000 95,75 30000 7 93 5000 76,25 35000 10 90 5000 72 Example 4

21. Average Effective Threshold Rebate CVA Price Price 5000 2,5 97,5 500 75 10000 3 97 1000 92,5 15000 3,25 96,75 1500 94,5 20000 3,5 96,5 2000 94,25 25000 3,65 96,35 2500 95 30000 7 93 3000 62,85 35000 10 90 3500 63 Example 5: CVS = 10%

22. Average Effective Threshold Rebate CVA Price Price 5000 2,5 97,5 250 50 10000 3 97 500 87,5 15000 3,25 96,75 750 92 20000 3,5 96,5 1000 91,75 25000 3,65 96,35 1250 93,5 30000 7 93 1500 29,35 35000 10 90 1750 33 Example 6: CVS = 5 %