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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

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slide1

USING COMPETITION LAW CASES TO TEACH ECONOMICS

Sir John Vickers

Chairman, OFT

DEBE Conference

Cambridge, 1 September 2005

slide2

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
slide3

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
slide4

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!
slide5

What does competition law deal with?

  • anti-competitive mergers
  • anti-competitive agreements
  • abuse of dominant market positions
slide6

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

slide7

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?
slide8

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
slide9

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
slide10

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?
slide11

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
slide12

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
slide13

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
slide14

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

slide15

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.

slide16

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?
slide17

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
slide18

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
slide19

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
slide20

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
slide21

USING COMPETITION LAW CASES TO TEACH ECONOMICS

Sir John Vickers, Chairman, OFT

www.oft.gov.uk