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Nicolas Petit is Professor of Law at the University of Liege (Belgium) and Research Professor at the University of South Australia (UniSA)

This symposium offers a good opportunity to look again into the complex relation between concentration and innovation in antitrust policy. Whilst the details of the EC decision in Dow/Dupont remain unknown, the press release suggests that the issue of “incentives to innovate” was central to the review. Contrary to what had leaked in the antitrust press, the decision has apparently backed off from the introduction of a new “model”, and instead followed a more cautious approach. After a quick reminder of the conventional “appropriability v cannibalizationframework that drives merger analysis in innovation markets (1), I make two sets of hopefully innovative remarks on appropriability and IP rights (2) and on cannibalization in the ag-biotech sector (3).

Appropriability versus cannibalization

Antitrust economics 101 teach that mergers affect innovation incentives in two polar ways. A merger may increase innovation incentives. This occurs when the increment in power over price or output achieved through merger enhances the appropriability of the social returns to R&D. The appropriability effect of mergers is often tied to Joseph Schumpeter, who observed that the use of “protecting devices” for past investments like patent protection or trade secrecy constituted a “normal elemen[t] of rational management”. The appropriability effect can in principle be observed at firm – specific incentives – and industry – general incentives – levels, because actual or potential competitors can also use the M&A market to appropriate the payoffs of R&D investments.

But a merger may decrease innovation incentives. This happens when the increased industry position achieved through merger discourages the introduction of new products, processes or services. This is because an invention will cannibalize the merged entity profits in proportions larger as would be the case in a more competitive market structure. This idea is often tied to Kenneth Arrow who famously observed that a “preinvention monopoly power acts as a strong disincentive to further innovation”.

Schumpeter’s appropriability hypothesis and Arrow’s cannibalization theory continue to drive much of the discussion on concentration and innovation in antitrust economics. True, many efforts have been made to overcome, reconcile or bypass both views of the world. Recent studies by Carl Shapiro or Jon Baker are worth mentioning. But Schumpeter and Arrow remain sticky references in any discussion of the issue. Perhaps more than anything, the persistence of their ideas denotes that both touched a bottom point when they made their seminal contribution, laying down two systems of belief on the workings of innovation-driven markets.

Now beyond the theory, the appropriability v cannibalization gravitational models provide from the outset an appealing framework for the examination of mergers in R&D driven industries in general. From an operational perspective, the antitrust agency will attempt to understand if the transaction increases appropriability – which leans in favour of clearance – or cannibalization – which leans in favour of remediation. At the same time, however, the downside of the appropriability v cannibalization framework (and of any framework more generally) may be to oversimplify our understanding of complex phenomena. This, in turn, prompts two important observations on each branch of the framework.

Appropriability and IP rights

Any antitrust agency committed to promoting competition and innovation should consider mergers in light of the degree of appropriability afforded by existing protecting devices (essentially contracts and entitlements). This is where Intellectual Property (“IP”) rights become relevant to the discussion. In an industry with strong IP rights, the merging parties (and its rivals) may be able to appropriate the social returns to R&D without further corporate concentration. Put differently, the stronger the IP rights, the lower the incremental contribution of a merger transaction to innovation, and the higher the case for remediation.

This latter proposition, however, rests on a heavy assumption: that IP rights confer perfect appropriability. The point is, however, far from obvious. Most of us know that – and our antitrust agencies’ misgivings with other sectors confirm it – IP rights are probabilistic in nature. There is (i) no certainty that R&D investments will lead to commercially successful applications; (ii) no guarantee that IP rights will resist to invalidity proceedings in court; (iii) little safety to competition by other product applications which do not practice the IP but provide substitute functionality; and (iv) no inevitability that the environmental, toxicological and regulatory authorization rights that (often) accompany IP rights will not be cancelled when legal requirements change. Arrow himself called for caution, noting that “Patent laws would have to be unimaginably complex and subtle to permit [such] appropriation on a large scale”. A thorough inquiry into the specific industry-strength of IP rights that goes beyond patent data and statistics thus constitutes a necessary step in merger review.

But it is not a sufficient one. The proposition that strong IP rights provide appropriability is essentially valid if the observed pre-merger market situation is one where several IP owners compete on differentiated products and as a result wield a degree of market power. In contrast, the proposition is essentially invalid if the observed pre-merger market situation leans more towards the competitive equilibrium and IP owners compete at prices closer to costs. In both variants, the agency should thus look carefully at the level and evolution of prices and costs, including R&D ones, in the pre-merger industry. Moreover, in the second variant, the agency ought to consider as a favourable appropriability factor any increase of the merging entity’s power over price, but also any improvement of its power over cost. By this, I have in mind efficiency benefits, which can arise as the result of economies of scale (in manufacturing but also in R&D), but also when the transaction combines complementary technological and marketing assets. In Dow/Dupont, no efficiency argument has apparently been made by the parties, so it is difficult to understand if and how such issues have played a role in the Commission’s assessment.

Cannibalization, technological change, and drastic innovation

Arrow’s cannibalization theory – namely that a pre-invention monopoly acts as a strong disincentive to further innovation – fails to capture that successful inventions create new technology frontiers, and with them entirely novel needs that even a monopolist has an incentive to serve. This can be understood with an example taken from the ag-biotech field. It is undisputed that progress in crop protection science has led to an expanding range of resistant insects, weeds, and pathogens. This, in turn, is one (if not the main) key drivers of ag-tech research. In a 2017 paper published in Pest Management Science, Sparks and Lorsbach observe that:

resistance to agrochemicals is an ongoing driver for the development of new chemical control options, along with an increased emphasis on resistance management and how these new tools can fit into resistance management programs. Because resistance is such a key driver for the development of new agrochemicals, a highly prized attribute for a new agrochemical is a new MoA [method of action] that is ideally a new molecular target either in an existing target site (e.g., an unexploited binding site in the voltage-gated sodium channel), or new/under-utilized target site such as calcium channels.

This, and other factors, leads them to conclude that:

even with fewer companies overall involved in agrochemical discovery, innovation continues, as demonstrated by the continued introduction of new classes of agrochemicals with new MoAs.

Sparks, Hahn, and Garizi make a similar point. They stress in particular that the discovery of natural products (NPs) which are the “output of nature’s chemical laboratory” is today a main driver of crop protection research. According to them:

NPs provide very significant value in identifying new MoAs, with 60% of all agrochemical MoAs being, or could have been, defined by a NP. This information again points to the importance of NPs in agrochemical discovery, since new MoAs remain a top priority for new agrochemicals.

More generally, the point is not that Arrow’s cannibalization theory is wrong. Arrow’s work convincingly explains monopolists’ low incentives to invest in substitute invention. Instead, the point is that Arrow’s cannibalization theory is narrower than often assumed in the antitrust policy literature. Admittedly, Arrow’s cannibalization theory is relevant in industries primarily driven by a process of cumulative innovation. But it is much less helpful to understand the incentives of a monopolist in industries subject to technological change. As a result of this, the first question that should guide an antitrust agency investigation is empirical in nature: is the industry under consideration one driven by cumulative innovation, or one where technology disruption, shocks, and serendipity incentivize drastic innovation?

Note that exogenous factors beyond technological frontiers also promote drastic innovation. This point ought not to be overlooked. A sizeable amount of the specialist scientific literature stresses the powerful innovation incentives created by changing dietary habits, new diseases (e.g. the Zika virus), global population growth, and environmental challenges like climate change and weather extremes. In 2015, Jeschke noted:

In spite of the significant consolidation of the agrochemical companies, modern agricultural chemistry is vital and will have the opportunity to shape the future of agriculture by continuing to deliver further innovative integrated solutions. 

Words of wisdom caution for antitrust agencies tasked with the complex mission of reviewing mergers in the ag-biotech industry?

Diana L. Moss is President of the American Antitrust Institute

Innovation Competition in the Spotlight

Innovation is more and more in the spotlight as questions grow about concentration and declining competition in the U.S. economy. These questions come not only from advocates for more vigorous competition enforcement but also, increasingly, from those who adhere to the school of thought that consolidation tends to generate procompetitive efficiencies. On March 27th, the European Commission issued its decision approving the Dow-DuPont merger, subject to divestitures of DuPont’s global R&D agrichemical assets to preserve price and innovation competition.

Before we read too much into what the EU decision in Dow-DuPont means for merger review in the U.S., remember that agriculture differs markedly across regions. Europe uses very little genetically modified (or transgenic) seed, whereas row crop acreage in the U.S. is planted mostly with it. This cautions against drawing major implications of the EU’s decision across jurisdictions.

This post unpacks the mergers of Dow-DuPont and Monsanto-Bayer in the U.S. and what they mean for innovation competition.

A Troubled Landscape? Past Consolidation in Agricultural Biotechnology

If approved as proposed, the mergers of Dow-DuPont and Monsanto-Bayer would reduce the field of Big 6 agricultural biotechnology (ag-biotech) firms to the Big 4. This has raised concerns about potentially higher prices for traits, seeds, and agrichemicals, less choice, and less innovation. The two mergers would make a 3rd wave of consolidation in the industry since the mid-1980s, when transgenic technology first emerged. Past consolidation has materially affected the structure of the markets. This is particularly true in crop seed, where relative to other agricultural input sectors, the level of concentration (and increases in concentration) over time is the highest.

Growers and consumers feel the effects of these changes. Consumers pay attention to their choices at the grocery store, which have arguably diminished and for which they pay prices that have risen at rates in excess of inflation. And the states in which agriculture is a major economic activity worry about their growers and the prices they pay for transgenic seed, agrichemicals, and fertilizers. Farmers we spoke to note, for example, that weeds that are resistant to the herbicide Roundup have evolved over time, making it no longer as effective as it once was. Dependence on seed and chemical cropping systems with declining effectiveness (due to resistance) has been met by the industry with newer and more expensive traited seed and different agrichemicals. With consolidation, these alternatives have dwindled.

These are not frivolous concerns. Empirical evidence shows that “technology fees” on transgenic corn, soybean, and cotton seed make up a significant proportion of total seed costs. The USDA notes that the prices of farm inputs, led by crop seed, generally have risen faster over the last 20 years than the prices farmers have received for their commodities. Moreover, seed price increases have outpaced yield increases over time. And finally, the USDA has determined that increasing levels of concentration in agricultural input markets (including crop seed) are no longer generally associated with higher R&D or a permanent rise in R&D intensity.

Putting the Squeeze on Growers and Consumers

The “squeeze” on growers and consumers highlights the fact that ag-biotech innovation comes at an increasingly higher price – a price that many worry will increase if the Dow-DuPont and Monsanto-Bayer mergers go through. These concerns are magnified by the structure of the food supply chain where we see a lot of growers and consumers at either end but not a lot of competition in the middle. In the middle are the ag-biotech firms that innovate traits, seeds, and agrichemicals; food processors such as grain millers and meatpackers; food manufacturers; distributors; and retail grocers.

Almost every sector has been affected by significant consolidation over the last two decades, some of which has been blocked, but a lot of which has not. For example, U.S. antitrust enforcers stopped the mergers of beef packers JBS and National Beef and broadline food distributors Sysco and USFoods. But key mergers that many believed raised significant competitive concerns went through, including Tyson-Hillshire Brands (pork), ConAgra-Horizon Mills (flour), Monsanto-Delta & Pine Land (cotton), and Safeway-Albertsons (grocery).

Aside from concerns over price, quality, and innovation, consolidation in “hourglass” shaped supply chains raises other issues. For example, it is often motivated by incentives to bulk up to bargain more effectively vis-a-vis more powerful input suppliers or customers. As we have seen with health care providers and health insurers, mergers for this purpose can trigger further consolidation, creating a domino effect. A bottlenecked supply chain also decreases resiliency. With less competition, it is more exposed to exogenous shocks such as bioterrorism or food-borne disease. That’s a potential food security problem.

Innovation Competition and the Agricultural Biotechnology Mergers

The Dow-DuPont and Monsanto-Bayer merger proposals raise a number of issues. One is significant overlap in seed, likely to result in a duopoly in corn and soybeans and a dominant firm (Monsanto) in cotton. A second concern is that the mergers would create or enhance substantial vertical integration. Where some arguments for integration can carry weight in a Guidelines analysis, here there is economic evidence from soybeans and cotton indicating that prices tend to be higher under vertical integration than under cross-licensing arrangements.

Moreover, the “platforms” resulting from the mergers are likely to be engineered for the purpose of creating exclusive packages of traits, seeds, and agrichemicals that are less likely to interoperate with rival products. This could raise entry barriers for smaller innovators and reduce or cut off access to resources needed to compete effectively. Indeed, one farmer noted the constraint of being locked into a single traits-seeds-chemicals platform in a market with already limited competition “[I] can’t mix chemicals with other companies’ products to remedy Roundup resistance.”

A third concern raised by the mergers is the potential elimination of competition in innovation markets. The DOJ/FTC Horizontal Merger Guidelines (§6.4) note that a merger may diminish innovation competition through curtailment of “innovative efforts below the level that would prevail in the absence of the merger.” This is especially the case when the merging firms are each other’s close competitors (e.g., as in the DOJ’s case against Applied Materials and Tokyo Electron). Dow, DuPont, Monsanto, and Bayer are four of only six ag-biotech rivals.

Preserving Parallel Path R&D Pipelines

In contrast to arguments that the mergers would combine only complementary assets, the R&D pipelines for all four firms show overlaps in major areas of traits, seeds, and crop protection. This supports the notion that the R&D pipelines compete head-to-head for technology intended for commercialization in U.S. markets. Maintaining competition in R&D ensures incentives remain strong to continue existing and prospective product development programs. This is particularly true in industries like ag-biotech (and pharma) where R&D is risky, regulatory approvals take time, and commercial success depends on crop planning and switching costs.

Maintaining Pro-Competitive Incentives to Cross-License Traits

Perhaps more important is that innovation in ag-biotech depends on maintaining a field of rivals, each with strong pro-competitive incentives to collaborate to form new combined (i.e., “stacked”) trait profiles. Farmers benefit most when there are competing stacks to choose from. About 60% of all stacks on the market in 2009 were the result of joint venture cross-licensing collaborations across firms. And the traits innovated by Dow, DuPont, Monsanto, and Bayer account for over 80% of traits in those stacks. That these companies are important innovators is apparent in GM Crop Database data for genetic corn, soybean and cotton “events” approved in the U.S. From 1991-2014, for example, the four companies account for a significant proportion of innovation in important genetic events.

Competition maximizes the potential for numerous collaborations. It also minimizes incentives to refuse to license, to impose discriminatory restrictions in technology licensing agreements, or to tacitly “agree” not to compete. Such agreements could range from deciding which firms specialize in certain crops or traits, to devising market “rules,” such as cross-licensing terms and conditions. All of this points to the importance of maintaining multiple, parallel R&D pipelines, a notion that was central to the EU’s decision in Dow-DuPont.

Remedies or Not? Preserving Innovation Competition

The DOJ has permitted two major ag-biotech mergers in the last decade, Monsanto’s mergers with DeKalb (corn) and Delta & Pine Land (cotton). In crafting remedies in both cases, the DOJ recognized the importance of innovation markets by fashioning remedies that focused on licensing or divesting patented technologies. The proposed mergers of Dow-DuPont and Monsanto-Bayer appear to be a different animal. They would reduce an already small field of large, integrated competitors, raise competitive concerns that have more breadth and complexity than in previous mergers, and are superimposed on growing evidence that transgenic technology has come at a higher and higher a price.Add to this the fact that a viable buyer of any divestiture R&D asset would be difficult to find outside the Big 6. Such a buyer would need to be national, if not global, in scale and scope in order to compete effectively

Add to this the fact that a viable buyer of any divestiture R&D asset would be difficult to find outside the Big 6. Such a buyer would need to be national, if not global, in scale and scope in order to compete effectively post-merger. Lack of scale and scope in R&D, financing, marketing, and distribution would necessitate cobbling together a package of assets to create and potentially prop up a national competitor. While the EU managed to pull this off, it is unclear whether the fact pattern in the U.S. would support a similar outcome. What we do know is that past mergers in the food and agriculture space have squeezed growers and consumers. Unless adequately addressed, these mega-deals stand to squeeze them even more.

Since Brussels has ordered Ireland to recover 13€ billion from Apple, much ink has been spilled on the European Commission’s (EC) alleged misuse of power and breach of the “rule of law.” In the Irish Times, Professor Liza Lovdahl-Gormsen wrote that the EC has been “bending” competition law to pursue a corporate taxation agenda in disguise. Former European Commissioner Neelie Kroes went so far as to suggest that the EC was attempting to rewrite international tax rules.

Conspiracy stories sell well, all the more so when the EC administration is on display. Yet, the claim that the Apple case is not a genuine competition case is a trick often used to deride enforcement — one that papers over an old lesson of mainstream economics: that monopolists are particularly good at “acquiring” public interest legislation. Nobel Prize winner George Stigler once wrote that “the most obvious contribution that a group may seek of the government is a direct subsidy of money.”  

While this basic economic teaching is not the narrative behind the EC decision against Ireland, there are clear signs that Apple is a textbook monopolist, and that rent-seeking theory could thus assist the EC in the forthcoming appeal. Let us look closer. Year after year, Apple sits atop the rankings as the most successful company of the 21st century. It has been the world’s largest company by market capitalization for some time. It is also the most profitable company in the history of the modern economy. Its flagship product, the iPhone, is the most expensive mass-market smartphone ever sold. On each device, Apple’s earns a 69% gross margin. Last year, industry analysts were taken aback when Apple outsold Samsung.

Granted, high prices and large profits do not a monopolist make. So let us consider other metrics: among tech’s frightful five, Apple is the slacker when it comes to investing in innovation: It spent about 3.5% of its revenue on research and development in 2016. By way of comparison, Alphabet (Google) spent 16%, Microsoft spent 14%, and Facebook spent a whopping 27%. Apple didn’t even feature in the EU ranking of the top 50 highest R&D-intensive companies, trailing behind a host of less-glitzy manufacturers of telecoms infrastructure equipment like Nokia and Ericsson and even “mundane” suppliers of cars, chemicals, and agricultural products. At such low levels of R&D investment, it is even questionable that Apple can be called a “high tech” company (the minimum to be part of that league is 5-7.5%). 

Apple also features as the world champ payer of dividends and purchaser of its own shares in financial analysts’ recommendations. Instead of retaining earnings to devote to internal R&D projects as a patient capitalist, Apple returns comparatively more profits to shareholders than any of its peers. It also sits atop a mountain of unproductive capital.

Beyond financial numbers, Apple’s body language also denotes behavioural signs of monopoly power. In his best seller, “Zero to One,” Peter Thiel writes that “monopolists lie to protect themselves.” Apple is a grandmaster at this game. In a bid to reduce the prices it pays for certain inputs, Apple has routinely claimed to be an antitrust victim in proceedings in the US, the EU, and Asia, accusing upstream component suppliers and innovators such as Qualcomm and Nokia, but also rivals such as Samsung, of unlawful monopolization. To assist it, Apple enlisted the help of a former European Commission official who spent over ten years spearheading the EU’s assaults on Intel, Microsoft, Google and other high-tech firms. To the trained observer, this should come as no surprise. For monopolists, the ends justify the means – including efforts to instrumentalise the regulatory process. 

With such facts in mind, it is now much less obvious that the EC Apple tax case is not plain vanilla competition policy, and much more clear that Apple behaved as a textbook rent-seeking monopolist when it secured 13€ billion from the Irish Government. 

That monopolists expend vast resources in rent-seeking, unproductive activities aimed at capturing rents from governments is a fundamental teaching of modern economic theory.  Like theft, corruption or bribery, those resources – and those invested by governments to counter rent-seeking strategies – are pure waste; they generate no socially valuable production. The EC would be well advised to keep this narrative in mind when defending its case against allegations of unlawful tax harmonization before the EU courts. As I often tell my students, forget the legalese; go for the big picture.

A key issue raised by the United Kingdom’s (UK) withdrawal from the European Union (EU) – popularly referred to as Brexit – is its implications for competition and economic welfare.  The competition issue is rather complex.  Various potentially significant UK competition policy reforms flowing from Brexit that immediately suggest themselves are briefly summarized below.  (These are merely examples – further evaluation may point to additional significant competition policy changes that Brexit is likely to inspire.)

First, UK competition policy will no longer be subject to European Commission (EC) competition law strictures, but will be guided instead solely by UK institutions, led by the UK Competition and Markets Authority (CMA).  The CMA is a free market-oriented, well-run agency that incorporates careful economic analysis into its enforcement investigations and industry studies.  It is widely deemed to be one of the world’s best competition and consumer protection enforcers, and has first-rate leadership.  (Former U.S. Federal Trade Commission Chairman William Kovacic, a very sound antitrust scholar, professor, and head of George Washington University Law School’s Competition Law Center, serves as one of the CMA’s “Non-Executive Directors,” who set the CMA’s policies.)  Post-Brexit, the CMA will no longer have to conform its policies to the approaches adopted by the EC’s Directorate General for Competition (DG Comp) and determinations by European courts.   Despite its recent increased reliance on an “economic effects-based” analytical approach, DG-Comp still suffers from excessive formalism and an over-reliance on pure theories of harm, rather than hard empiricism.  Moreover, EU courts still tend to be overly formalistic and deferential to EC administrative determinations.  In short, CMA decision-making in the competition and consumer protection spheres, free from constraining EU influences, should (at least marginally) prove to be more welfare-enhancing within the UK post-Brexit.  (For a more detailed discussion of Brexit’s implication for EU and UK competition law, see here.)  There is a countervailing risk that Brexit might marginally worsen EU competition policy by eliminating UK pro-free market influence on EU policies, but the likelihood and scope of such a marginal effect is not readily measurable.

Second, Brexit will allow the UK to escape participation in the protectionist, wasteful, output-limiting European agricultural cartel knows as the “Common Agricultural Policy,” or CAP, which involves inefficient subsidies whose costs are borne by consumers.  This would be a clearly procompetitive and welfare-enhancing result, to the extent that it undermined the CAP.  In the near term, however, its net effects on CAP financing and on the welfare of UK farmers appear to be relatively small.

Third, the UK may be able to avoid the restrictive EU Common Fisheries Policy and exercise greater control over its coastal fisheries.  In so doing, the UK could choose to authorize the creation of a market-based tradable fisheries permit system that would enhance consumer and producer welfare and increase competition.

Fourth, Brexit will free the UK economy from one-size-fits-all supervisory regulatory frameworks in such areas as the environment, broadband policy (“digital Europe”), labor, food and consumer products, among others.  This regulatory freedom, properly handled, could prove a major force for economic flexibility, reductions in regulatory burdens, and enhanced efficiency.

Fifth, Brexit will enable the UK to enter into true free trade pacts with the United States and other nations that avoid the counterproductive bells and whistles of EU industrial policy.  For example, a “zero tariffs” agreement with the United States that featured reciprocal mutual recognition of health, safety, and other regulatory standards would avoid heavy-handed regulatory harmonization features of the Transatlantic Trade and Investment Policy agreement being negotiated between the EU and the United States.  (As I explained in a previous Truth on the Market post, “a TTIP focus on ‘harmonizing’ regulations could actually lower economic freedom (and welfare) by ‘regulating upward’ through acceptance of [a] more intrusive approach, and by precluding future competition among alternative regulatory models that could lead to welfare-enhancing regulatory improvements.”)

In sum, while Brexit’s implications for other economic factors, such as macroeconomic stability, remain to be seen, Brexit will likely prove to have an economic welfare-enhancing influence on key aspects of competition policy.

P.S.  Notably, a recent excellent study by Iain Murray and Rory Broomfield of Brexit’s implications for various UK industry sectors (commissioned by the London-based Institute of Economic Affairs) concluded “that in almost every area we have examined the benefit: cost trade-off [of Brexit] is positive. . . .  Overall, the UK will benefit substantially from a reduction in regulation, a better fisheries management system, a market-based immigration system, a free market in agriculture, a globally-focused free trade policy, control over extradition, and a shale gas-based energy policy.”

Today’s Canadian Competition Bureau (CCB) Google decision marks yet another regulator joining the chorus of competition agencies around the world that have already dismissed similar complaints relating to Google’s Search or Android businesses (including the US FTC, the Korea FTC, the Taiwan FTC, and AG offices in Texas and Ohio).

A number of courts around the world have also rejected competition complaints against the company, including courts in the US, France, the UK, Germany, and Brazil.

After an extensive, three-year investigation into Google’s business practices in Canada, the CCB

did not find sufficient evidence that Google engaged in [search manipulation, preferential treatment of Google services, syndication agreements, distribution agreements, exclusion of competitors from its YouTube mobile app, or tying of mobile ads with those on PCs and tablets] for an anti-competitive purpose, and/or that the practices resulted in a substantial lessening or prevention of competition in any relevant market.

Like the US FTC, the CCB did find fault with Google’s use of restriction on its AdWords API — but Google had already revised those terms worldwide following the FTC investigation, and has committed to the CCB to maintain the revised terms for at least another 5 years.

Other than a negative ruling from Russia’s competition agency last year in favor of Yandex — essentially “the Russian Google,” and one of only a handful of Russian tech companies of significance (surely a coincidence…) — no regulator has found against Google on the core claims brought against it.

True, investigations in a few jurisdictions, including the EU and India, are ongoing. And a Statement of Objections in the EU’s Android competition investigation appears imminent. But at some point, regulators are going to have to take a serious look at the motivations of the entities that bring complaints before wasting more investigatory resources on their behalf.

Competitor after competitor has filed complaints against Google that amount to, essentially, a claim that Google’s superior services make it too hard to compete. But competition law doesn’t require that Google or any other large firm make life easier for competitors. Without a finding of exclusionary harm/abuse of dominance (and, often, injury to consumers), this just isn’t anticompetitive conduct — it’s competition. And the overwhelming majority of competition authorities that have examined the company have agreed.

Exactly when will regulators be a little more skeptical of competitors trying to game the antitrust laws for their own advantage?

Canada joins the chorus

The Canadian decision mirrors the reasoning that regulators around the world have employed in reaching the decision that Google hasn’t engaged in anticompetitive conduct.

Two of the more important results in the CCB’s decision relate to preferential treatment of Google’s services (e.g., promotion of its own Map or Shopping results, instead of links to third-party aggregators of the same services) — the tired “search bias” claim that started all of this — and the distribution agreements that Google enters into with device manufacturers requiring inclusion of Google search as a default installation on Google Android phones.

On these key issues the CCB was unequivocal in its conclusions.

On search bias:

The Bureau sought evidence of the harm allegedly caused to market participants in Canada as a result of any alleged preferential treatment of Google’s services. The Bureau did not find adequate evidence to support the conclusion that this conduct has had an exclusionary effect on rivals, or that it has resulted in a substantial lessening or prevention of competition in a market.

And on search distribution agreements:

Google competes with other search engines for the business of hardware manufacturers and software developers. Other search engines can and do compete for these agreements so they appear as the default search engine…. Consumers can and do change the default search engine on their desktop and mobile devices if they prefer a different one to the pre-loaded default…. Google’s distribution agreements have not resulted in a substantial lessening or prevention of competition in Canada.

And here is the crucial point of the CCB’s insight (which, so far, everyone but Russia seems to appreciate): Despite breathless claims from rivals alleging they can’t compete in the face of their placement in Google’s search results, data barriers to entry, or default Google search on mobile devices, Google does actually face significant competition. Both the search bias and Android distribution claims were dismissed essentially because, whatever competitors may prefer Google do, its conduct doesn’t actually preclude access to competing services.

The True North strong and free [of meritless competitor complaints]

Exclusionary conduct must, well, exclude. But surfacing Google’s own “subjective” search results, even if they aren’t as high quality, doesn’t exclude competitors, according to the CCB and the other regulatory agencies that have also dismissed such claims. Similarly, consumers’ ability to switch search engines (“competition is just a click away,” remember), as well as OEMs’ ability to ship devices with different search engine defaults, ensure that search competitors can access consumers.

Former FTC Commissioner Josh Wright’s analysis of “search bias” in Google’s results applies with equal force to these complaints:

It is critical to recognize that bias alone is not evidence of competitive harm and it must be evaluated in the appropriate antitrust economic context of competition and consumers, rather [than] individual competitors and websites… [but these results] are not useful from an antitrust policy perspective because they erroneously—and contrary to economic theory and evidence—presume natural and procompetitive product differentiation in search rankings to be inherently harmful.

The competitors that bring complaints to antitrust authorities seek to make a demand of Google that is rarely made of any company: that it must provide access to its competitors on equal terms. But one can hardly imagine a valid antitrust complaint arising because McDonald’s refuses to sell a Whopper. The law on duties to deal is heavily circumscribed for good reason, as Josh Wright and I have pointed out:

The [US Supreme] Court [in Trinko] warned that the imposition of a duty to deal would threaten to “lessen the incentive for the monopolist, the rival, or both to invest in… economically beneficial facilities.”… Because imposition of a duty to deal with rivals threatens to decrease the incentive to innovate by creating new ways of producing goods at lower costs, satisfying consumer demand, or creating new markets altogether, courts and antitrust agencies have been reluctant to expand the duty.

Requiring Google to link to other powerful and sophisticated online search companies, or to provide them with placement on Google Android mobile devices, on the precise terms it does its own products would reduce the incentives of everyone to invest in their underlying businesses to begin with.

This is the real threat to competition. And kudos to the CCB for recognizing it.

The CCB’s investigation was certainly thorough, and its decision appears to be well-reasoned. Other regulators should take note before moving forward with yet more costly investigations.

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.)

A basic premise of antitrust law (also called competition law) is that competition among private entities enhances economic welfare by reducing costs, increasing efficiency, and spurring innovation.  Government competition agencies around the world also compete, by devising different substantive and procedural rules to constrain private conduct in the name of promoting competition.  The welfare implications of that form of inter-jurisdictional competition are, however, ambiguous.  Public choice considerations suggest that self-interested competition agency staff have a strong incentive to promote rules that spawn many investigations and cases, in order to increase their budgets and influence.  Indeed, an agency may measure its success, both domestically and on the world stage, by the size of its budget and staff and the amount of enforcement activity it generates.  That activity, however, imposes costs on the private sector, and may produce restrictive rules that deter vigorous, welfare-enhancing competition.  Furthermore, and relatedly, it may generate substantial costs due to “false positives” – agency challenges to efficient conduct that should not have been brought.  (There are also costs stemming from “false negatives,” the failure to bring welfare-enhancing enforcement actions.  Decision theory indicates an agency should seek to minimize the sum of costs due to false positives and false negatives.)  Private enforcement of competition laws, until recently largely relegated to the United States, brings additional costs and complications, to the extent it yields ill-advised lawsuits.  Thus one should cast a wary eye at any increase in the scope of enforcement authority within a jurisdiction, and not assume automatically that it is desirable on public policy grounds.

These considerations should be brought to bear in assessing the implications of the 2014 European Union (EU) Damages Actions Directive (Directive), which is expected to yield a dramatic increase in private competition law enforcement in the EU.  The Directive establishes standards EU nations must adopt for the bringing of private competition lawsuits, including class actions.  The 28 EU member states have until December 27, 2016 to adopt national laws, regulations, and administrative provisions that implement the Directive.  In short, the Directive (1) makes it easier for private plaintiffs to have access to evidence; (2) gives a final finding of violation by a national competition agency conclusive effect in private actions brought in national courts and prima facie presumptive effect in private actions brought in other EU nations; (3) establishes clear and uniform statutes of limitation; (4) allows both direct and indirect purchasers of overpriced goods to bring private actions; (5) clarifies that private victims are entitled to full compensation for losses suffered, including compensation for actual loss and for loss of profit, plus interest; (6) establishes a rebuttable presumption that cartels cause harm; and (7) provides for joint and several liability (any participant in a competition law infringement will be responsible towards the victims for the whole harm caused by the infringement, but may seek contribution from other infringers).

By facilitating the bringing of lawsuits for cartel overcharges by both direct and indirect purchasers (see here), the Directive should substantially expand private cartel litigation in Europe.  (It may also redirect some cartel-related litigation from United States tribunals, which up to now have been the favorite venues for such actions.  Potential treble damages recoveries still make U.S. antitrust courts an attractive venue, but limitations on indirect purchaser suits and Sherman Act jurisdictional constraints requiring a “direct, substantial and reasonably foreseeable effect” effect on U.S. commerce create complications for foreign plaintiffs.)  Given the fact that cartels have no redeeming features, this feature may be expected to increase disincentives for cartel conduct and thereby raise welfare.  (The degree of welfare enhancement depends on the extent to which legitimate activity may be misidentified as cartel conduct, yielding “false positive” damage actions.)

The outlook is less sanguine for non-cartel cases, however.  The Directive applies equally to vertical restraints and abuse of dominance cases, which are far more likely to yield false positives.  In my experience, EU enforcers are more comfortable than U.S. enforcers at pursuing cases based on attenuated theories of exclusionary conduct that have a weak empirical basis.  (The EU’s continued investigation of Google, based on economically inappropriate theories that were rejected by the U.S. FTC, is a prime example.)  In particular, the implementation of the Directive will raise the financial risks for “dominant” or “potentially dominant” firms operating in Europe, who may be further disincentivized from undertaking novel welfare-enhancing business practices that preserve or raise their market share.  This could further harm the vitality of the European business sector.

Hopefully, individual EU states will seek to implement the Directive in a manner that takes into account the serious risk of false positives in non-cartel cases.  The welfare implications of the Directive’s implementation are well worth further competition law scholarship.