Ignoring Decision Theory, the European Commission Continues to Waste Competition Enforcement Resources on Investigations of (Almost Certainly) Efficient Conduct

Alden Abbott —  4 December 2015

This blurb published yesterday by Competition Policy International nicely illustrates the problem with the growing focus on unilateral conduct investigations by the European Commission (EC) and other leading competition agencies:

EU: Qualcomm to face antitrust complaint on predatory pricing

Dec 03, 2015

The European Union is preparing an antitrust complaint against Qualcomm Inc. over suspected predatory pricing tactics that could hobble smaller rivals, according to three people familiar with the probe.

Regulators are in the final stages of preparing a so-called statement of objections, based on a complaint by a unit of Nvidia Corp., that asked the EU to act against predatory pricing for mobile-phone chips, the people said. Qualcomm designs chipsets that power most of the world’s smartphones, licensing its technology across the industry.

Qualcomm would add to a growing list of U.S. technology companies to face EU antitrust action, following probes into Google, Microsoft Corp. and Intel Corp. A statement of objections may lead to fines, capped at 10 percent of yearly global revenue, which can be avoided if a company agrees to make changes to business behavior.

Regulators are less advanced with another probe into whether the company grants payments, rebates or other financial incentives to customers in returning for buying Qualcomm chipsets. Another case that focused on complaints that the company was charging excessive royalties on patents was dropped in 2009.

“Predatory pricing” complaints by competitors of successful innovators are typically aimed at hobbling efficient rivals and reducing aggressive competition.  If and when successful, such rent-seeking complaints attenuate competitive vigor (thereby disincentivizing innovation) and tend to raise prices to consumers – a result inimical with antitrust’s overarching goal, consumer welfare promotion.  Although I admittedly am not privy to the facts at issue in the Qualcomm predatory pricing investigation, Nvidia is not a firm that fits the model of a rival being decimated by economic predation (given its overall success and its rapid growth and high profitability in smartchip markets).  In this competitive and dynamic industry, the likelihood that Qualcomm could recoup short-term losses from predation through sustainable monopoly pricing following Nvidia’s exit from the market would seem to be infinitesimally small or non-existent (even assuming pricing below average variable cost or average avoidable cost could be shown).  Thus, there is good reason to doubt the wisdom of the EC’s apparent decision to issue a statement of objections to Qualcomm regarding predatory pricing for mobile phone chips.

The investigation of (presumably loyalty) payments and rebates to buyers of Qualcomm chipsets also is unlikely to enhance consumer welfare.  As a general matter, such financial incentives lower costs to loyal customers, and may promote efficiencies such as guaranteed purchase volumes under favorable terms.  Although theoretically loyalty payments might be structured to effectuate anticompetitive exclusion of competitors under very special circumstances, as a general matter such payments – which like alleged “predatory” pricing typically benefit consumers – should not be a high priority for investigation by competition agencies.  This conclusion applies in spades to chipset markets, which are characterized by vigorous competition among successful firms.  Rebate schemes in dynamic markets of this sort are almost certainly a symptom of creative, welfare-enhancing competitive vigor, rather than inefficient exclusionary behavior.

A pattern of investigating price reductions and discounting plans in highly dynamic and innovative industries, exemplified by the EC’s Qualcomm investigations summarized above, is troubling in at least two respects.

First, it creates regulatory disincentives to aggressive welfare-enhancing competition aimed at capturing the customer’s favor.  Companies like Qualcomm, after being suitably chastised, may well “take the cue” and decide to avoid future trouble by “playing nice” and avoiding innovative discounting, to the detriment of future consumers and industry efficiency.

Second, the dedication of enforcement resources to investigating discounting practices by successful firms that (based on first principles and industry conditions) are highly likely to be procompetitive points to a severe misallocation of resources by the responsible competition agencies.  Such agencies should seek to optimize the use of their scarce resources by allocating them to the highest-valued targets in welfare terms, such as anticompetitive government restraints on competition and hard-core cartel conduct.  Spending any resources on chasing down what is almost certainly efficient unilateral pricing conduct not only sends a bad signal to industry (see point one), it suggests that agency priorities are badly misplaced.  (Admittedly, a problem faced by the EC and many other competition authorities is that they are required to respond to third party complaints, but the nature of that response and the resources allocated could be better calibrated to the likely merit of such complaints.  Whether the law should be changed to grant such competition authorities broad prosecutorial discretion to ignore clearly non-meritorious complaints (such as the wide discretion enjoyed by U.S. antitrust enforcers) is beyond the scope of this commentary, and merits separate treatment.)

A proper application of decision theory and its error cost approach could help the EC and other competition enforcers avoid the problem of inefficiently chasing down procompetitive unilateral conduct.  Such an approach would focus intensively on highly welfare inimical conduct that lacks credible efficiencies (thus minimizing false positives in enforcement) that can be pursued with a relatively low expenditure of administrative costs (given the lack of credible efficiency justifications that need to be evaluated).  As indicated above, a substantial allocation of resources to hard core cartel conduct, bid rigging, and anticompetitive government-imposed market distortions (including poorly designed regulations and state aids) would be consistent with such an approach.  Relatedly, investigating single firm conduct, which is central to spurring a dynamic competitive process and is often misdiagnosed as anticompetitive (thereby imposing false positive costs), should be deemphasized.  (Obviously, even under a decision-theoretic framework, certain agency resources would continue to be devoted to mandatory merger reviews and other core legally required agency functions.)

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.