In recent years, the European Union’s (EU) administrative body, the European Commission (EC), increasingly has applied European competition law in a manner that undermines free market dynamics. In particular, its approach to “dominant” firm conduct disincentivizes highly successful companies from introducing product and service innovations that enhance consumer welfare and benefit the economy – merely because they threaten to harm less efficient competitors.
For example, the EC fined Microsoft 561 million euros in 2013 for its failure to adhere to an order that it offer a version of its Window software suite that did not include its popular Windows Media Player (WMP) – despite the lack of consumer demand for a “dumbed down” Windows without WMP. This EC intrusion into software design has been described as a regulatory “quagmire.”
In June 2017 the EC fined Google 2.42 billion euros for allegedly favoring its own comparison shopping service over others favored in displaying Google search results – ignoring economic research that shows Google’s search policies benefit consumers. Google also faces potentially higher EC antitrust fines due to alleged abuses involving android software (bundling of popular Google search and Chrome apps), a product that has helped spur dynamic smartphone innovations and foster new markets.
Furthermore, other highly innovative single firms, such as Apple and Amazon (favorable treatment deemed “state aids”), Qualcomm (alleged anticompetitive discounts), and Facebook (in connection with its WhatsApp acquisition), face substantial EC competition law penalties.
Underlying the EC’s current enforcement philosophy is an implicit presumption that innovations by dominant firms violate competition law if they in any way appear to disadvantage competitors. That presumption forgoes considering the actual effects on the competitive process of dominant firm activities. This is a recipe for reduced innovation, as successful firms “pull their competitive punches” to avoid onerous penalties.
The European Court of Justice (ECJ) implicitly recognized this problem in its September 6, 2017 decision setting aside the European General Court’s affirmance of the EC’s 2009 1.06 billion euro fine against Intel. Intel involved allegedly anticompetitive “loyalty rebates” by Intel, which allowed buyers to achieve cost savings in Intel chip purchases. In remanding the Intel case to the General Court for further legal and factual analysis, the ECJ’s opinion stressed that the EC needed to do more than find a dominant position and categorize the rebates in order to hold Intel liable. The EC also needed to assess the “capacity of [Intel’s] . . . practice to foreclose competitors which are at least as efficient” and whether any exclusionary effect was outweighed by efficiencies that also benefit consumers. In short, evidence-based antitrust analysis was required. Mere reliance on presumptions was not enough. Why? Because competition on the merits is centered on the recognition that the departure of less efficient competitors is part and parcel of consumer welfare-based competition on the merits. As the ECJ cogently put it:
[I]t must be borne in mind that it is in no way the purpose of Article 102 TFEU [which prohibits abuse of a dominant position] to prevent an undertaking from acquiring, on its own merits, the dominant position on a market. Nor does that provision seek to ensure that competitors less efficient than the undertaking with the dominant position should remain on the market . . . . [N]ot every exclusionary effect is necessarily detrimental to competition. Competition on the merits may, by definition, lead to the departure from the market or the marginalisation of competitors that are less efficient and so less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation[.]
Although the ECJ’s recent decision is commendable, it does not negate the fact that Intel had to wait eight years to have its straightforward arguments receive attention – and the saga is far from over, since the General Court has to address this matter once again. These sorts of long-term delays, during which firms face great uncertainty (and the threat of further EC investigations and fines), are antithetical to innovative activity by enterprises deemed dominant. In short, unless and until the EC changes its competition policy perspective on dominant firm conduct (and there are no indications that such a change is imminent), innovation and economic dynamism will suffer.
Even if the EC dithers, the United Kingdom’s (UK) imminent withdrawal from the EU (Brexit) provides it with a unique opportunity to blaze a new competition policy trail – and perhaps in so doing influence other jurisdictions.
In particular, Brexit will enable the UK’s antitrust enforcer, the Competition and Markets Authority (CMA), to adopt an outlook on competition policy in general – and on single firm conduct in particular – that is more sensitive to innovation and economic dynamism. What might such a CMA enforcement policy look like? It should reject the EC’s current approach. It should focus instead on the actual effects of competitive activity. In particular, it should incorporate the insights of decision theory (see here, for example) and place great weight on efficiencies (see here, for example).
Let us hope that the CMA acts boldly – carpe diem. Such action, combined with other regulatory reforms, could contribute substantially to the economic success of Brexit (see here).