A newly released draft of the European Union’s proposed monopolization guidelines suggest they could pose a new threat to innovative business practices that promote high-tech economic growth. The EU should scrap the draft and U.S. antitrust enforcers should likewise reject its approach.
Overregulation Harms EU Economic Growth and Innovation
The United States, not Europe, has generated the high-tech digital firms whose products and services drive online commerce, search, and networking—such as Amazon, Google, Facebook, Apple, and Microsoft. Similarly, the innovative digital-chip companies that power the internet—Nvidia, Qualcomm, and Intel, for example—are American.
This U.S. technological edge is due to its “lighter touch” regulatory and antitrust policies over the past 30 years. Government restraint has encouraged American entrepreneurship. In contrast, heavy-handed EU bureaucratic interventions have discouraged the risk taking key to innovation.
James A. Lewis, senior vice president and director of the Strategic Technologies Program at the Center for Strategic and International Studies, cites economic research for the proposition that “[r]egulation is the biggest obstacle” to innovation-driven European economic growth. Similarly, Greg Ip, chief economics commentator at the Wall Street Journal, recently explained that “Europe regulates its way to last place” and that:
From mergers to artificial intelligence, the EU’s aggressive rule making hampers its ability to compete with China and the U.S.
In short, a comparative analysis of innovation and regulation in technology demonstrates that “the U.S. invents and the EU regulates.
New Draft EU Monopolization Guidelines Would Stymie Economically Beneficial Innovation
The European Commission (the EU’s bureaucracy) on Aug. 1 released for public comment draft antitrust guidelines on “exclusionary abuses.” If adopted in full, the guidelines would discourage “dominant” firms from efficient forms of conduct that yield innovation and benefit the economy. This would be yet another form of counterproductive EU regulation.
The draft guidelines focus on “dominant companies” that are barred from “abusing” their dominant position in a market, under Article 102 of the EU Treaty. Article 102 is roughly analogous to Section 2 of the U.S. Sherman Antitrust Act, which prohibits “monopolization” and “attempted monopolization.”
As it stands, “Article 102 proscribes more conduct than does Section 2, both in the behavior it prohibits and the minimum market share (as low as 40%, compared with 50% to 70% under Section 2) a firm must have to fall within its scope.” Accordingly, the particularly aggressive enforcement approach embodied in the draft guidelines, which encourage finding Article 102 violations, poses a serious threat to innovative activity by firms deemed “dominant.”
The draft guidelines are concerned with identifying “exclusionary behavior” that is not “competition on the merits” and thus violates Article 102. One problem is that “dominance” and “collective dominance” (two or more separate firms that “act together” in a market) are rather loosely defined. This confers substantial discretionary power on Commission enforcers.
Another quite serious problem is that the guidelines reject as not “competition on the merits” key forms of business behavior that may be efficient and economically beneficial. Key targeted practices that often stimulate competition and benefit consumers include dominant firm behavior that:
- limits consumers’ choice based on the merits of the product (many consumers may benefit when a firm presents a limited array of high quality products or services);
- violates other law (such as data-protection law) (many regulatory laws may actually restrict competition, and their violation may not be anticompetitive at all);
- involves “self-preferencing” treatment (it is the essence of competition to promote one’s own product, and total bans on self-preferencing may reduce incentives for product improvement);
- involves “unjustified” termination of a business relationship (such a termination may indicate market changes that indicate a new relationship would prove more beneficial for consumers);
- strengthens a dominant position and could not be adopted by an “as efficient” competitor (such conduct may render a firm more efficient, and banning it could discourage efficiency improvements);
- involves low-pricing strategies that could disadvantage competitors (in many cases, consumers would benefit from such strategies, which typically enhance efficiency); and
- involves pricing above average total cost when it is deemed “exclusionary” based on market dynamics (this tends to discourage efficient pricing, subsidizing higher-priced, less-efficient firms that want to stay in the market, but while harming consumers).
Furthermore, the draft guidelines presume that certain other forms of conduct lead to exclusionary effects. These include:
- exclusive price or purchasing agreements (which often are efficient means to ensure supply or distribution and enhance competition);
- price rebates to buyers conditional upon an exclusive purchase arrangement (such contracts in many cases may help ensure supply and reduce prices overall);
- predatory pricing (such below-cost pricing typically benefits consumers and may enhance cost-reducing strategies by others);
- “margin squeezes” (which arise where the margin between a dominant company’s downstream retail price and the wholesale price it charges for an input to a downstream firm is too small to allow the downstream firms to survive as a retail competitor (a margin squeeze “can be an inevitable consequence of efficient, price-reducing, and consumer (and total) welfare-enhancing vertical integration”); and
- certain forms of tying (tying the purchase of one good or serve to another often allows the offering of lower cost-efficient bundles to consumers and enables efficient pricing that raises total output).
The problem with a presumption against conduct that is frequently, if not always, beneficial to competition is that the draft guidelines place a major onus on “dominant” firms to explain and justify their actions. They emphasize that “[t]he burden of proof for an objective necessity or efficiency defense is on the dominant undertaking.”
Moreover, that burden may be nearly impossible to meet; Commission regulators historically have viewed such justifications askance. Faced with that reality, a dominant firm may avoid competitively desirable pro-consumer behavior in order to avoid lawsuits and fines (which can be quite high in the EU).
