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Bundling and Competition Law in China: Sage Comments by the Scalia Law School’s Global Antitrust Institute

Alden Abbott —  22 March 2017
  1. Introduction

For nearly two years, the Global Antitrust Institute (GAI) at George Mason University’s Scalia Law School has filed an impressive series of comments on foreign competition laws and regulations.  The latest GAI comment, dated March 19 (“March 19 comment”), focuses on proposed revisions to the Anti-Unfair Competition Law (AUCL) of the People’s Republic of China, currently under consideration by China’s national legislature, the National People’s Congress.  The AUCL “coexists” with China’s antitrust statute, the Anti-Monopoly Law (AML).  The key concern raised by the March 19 comment is that the AUCL revisions not undermine the application of sound competition law principles in the analysis of bundling (a seller’s offering of several goods as part of a single package sale).  As such, the March 19 comment notes that the best way to avoid such an outcome would be for the AUCL to avoid condemning bundling as a potential “unfair” practice, leaving bundling practices to be assessed solely under the AML.  Furthermore, the March 19 comment wisely stresses that any antitrust evaluation of bundling, whether under the AML (the preferred option) or under the AUCL, should give weight to the substantial efficiencies that bundling typically engenders.

  1. Highlights of the March 19 Comment

Specifically, the March 19 comment made the following key recommendations:

  • The National People’s Congress should be commended for having deleted Article 6 of an earlier AUCL draft, which prohibited a firm from “taking advantage of its comparative advantage position.” As explained in a March 2016 GAI comment, this provision would have undermined efficient contractual negotiations that could benefited consumer as well as producer welfare.
  • With respect to the remaining draft provisions, any provisions that relate to conduct covered by China’s Anti-Monopoly Law (AML) be omitted entirely.
  • In particular, Article 11 (which provides that “[b]usiness operators selling goods must not bundle the sale of goods against buyers’ wishes, and must not attach other unreasonable conditions”) should be omitted in its entirety, as such conduct is already covered by Article 17(5) of the AML.
  • In the alternative, at the very least, Article 11 should be revised to adopt an effect-based approach under which bundling will be condemned only when: (1) the seller has market power in one of the goods included in the bundle sufficient to enable it to restrain trade in the market(s) for the other goods in the bundle; and (2) the anticompetitive effects outweigh any procompetitive benefits.  Such an approach would be consistent with Article 17(5) of the AML, which provides for an effects-based approach that applies only to firms with a dominant market position.
  • Bundling is ubiquitous and widely used by a variety of firms and for a variety of reasons (see here). In the vast majority of cases, package sales are “easily explained by economies of scope in production or by reductions in transaction and information costs, with an obvious benefit to the seller, the buyer or both.”   Those benefits can include lower prices for consumers, facilitate entry into new markets, reduce conflicting incentives between manufacturers and their distributors, and mitigate retailer free-riding and other types of agency problems.  Indeed (see here), “bundling can serve the same efficiency-enhancing vertical control functions as have been identified in the economic literature on tying, exclusive dealing, and other forms of vertical restraints.”
  • The potential to harm competition and generate anticompetitive effects arises only when bundling is practiced by a firm with market power in one of the goods included in the bundle. As the U.S. Supreme Court explained in Jefferson Parrish v. Hyde (1984), “there is nothing inherently anticompetitive about package sales,” and the fact that “a purchaser is ‘forced’ to buy a product he would not have otherwise bought even from another seller” does not imply an “adverse impact on competition.”  Rather, for bundling to harm competition there would have to be an exclusionary effect on other sellers because bundling thwarts buyers’ desire to purchase substitutes for one or more of the goods in the bundle from those other sellers to an extent that harms competition in the markets for those products (see here).
  • Moreover, because of the widespread procompetitive use of bundling, by firms without and firms with market power, making bundling per se or presumptively unlawful is likely to generate many Type I (false positive) errors which, as the U.S. Supreme Court explained in Verizon v. Trinko (2004), “are especially costly, because they chill the very conduct the antitrust laws are designed to protect.”
  1. Conclusion

In sum, the GAI’s March 19 comment does an outstanding job of highlighting the typically procompetitive nature of bundling, and of calling for an economics-based approach to the antitrust evaluation of bundling in China.  Other competition law authorities (including, for example, the European Competition Commission) could benefit from this comment as well, when they scrutinize bundling arrangements.

In Antitrust & Competition, China, European Union, Exclusive Dealing, International, Truth on the Market, Tying, Vertical Restraints ,
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Global Antitrust Institute Comments on Chinese Draft Antitrust Guidelines Regarding Disgorgement and Fines Have Broader Implications for Sound Antitrust Enforcement Policy

Alden Abbott —  12 July 2016

The Global Antitrust Institute (GAI) at George Mason University Law School (officially the “Antonin Scalia Law School at George Mason University” as of July 1st) is doing an outstanding job at providing sound law and economics-centered advice to foreign governments regarding their proposed antitrust laws and guidelines.

The GAI’s latest inspired filing, released on July 9 (July 9 Comment), concerns guidelines on the disgorgement of illegal gains and punitive fines for antitrust violations proposed by China’s National Development and Reform Commission (NDRC) – a powerful agency that has broad planning and administrative authority over the Chinese economy.  With respect to antitrust, the NDRC is charged with investigating price-related anticompetitive behavior and abuses of dominance.  (China has two other antitrust agencies, the State Administration of Industry and Commerce (SAIC) that investigates non-price-related monopolistic behavior, and the Ministry of Foreign Commerce (MOFCOM) that reviews mergers.)  The July 9 Comment stresses that the NDRC’s proposed Guidelines call for Chinese antitrust enforcers to impose punitive financial sanctions on conduct that is not necessarily anticompetitive and may be efficiency-enhancing – an approach that is contrary to sound economics.  In so doing, the July 9 Comment summarizes the economics of penalties, recommends that the NDRD employ economic analysis in considering sanctions, and provides specific suggested changes to the NDRC’s draft.  The July 9 Comment provides a helpful summary of its analysis:

We respectfully recommend that the Draft Guidelines be revised to limit the application of disgorgement (or the confiscating of illegal gain) and punitive fines to matters in which: (1) the antitrust violation is clear (i.e., if measured at the time the conduct is undertaken, and based on existing laws, rules, and regulations, a reasonable party should expect that the conduct at issue would likely be found to be illegal) and without any plausible efficiency justifications; (2) it is feasible to articulate and calculate the harm caused by the violation; (3) the measure of harm calculated is the basis for any fines or penalties imposed; and (4) there are no alternative remedies that would adequately deter future violations of the law.  In the alternative, and at the very least, we strongly urge the NDRC to expand the circumstances under which the Anti-Monopoly Enforcement Agencies (AMEAs) will not seek punitive sanctions such as disgorgement or fines to include two conduct categories that are widely recognized as having efficiency justifications: unilateral conduct such as refusals to deal and discriminatory dealing and vertical restraints such as exclusive dealing, tying and bundling, and resale price maintenance.

We also urge the NDRC to clarify how the total penalty, including disgorgement and fines, relate to the specific harm at issue and the theoretical optimal penalty.  As explained below, the economic analysis determines the total optimal penalties, which includes any disgorgement and fines.  When fines are calculated consistent with the optimal penalty framework, disgorgement should be a component of the total fine as opposed to an additional penalty on top of an optimal fine.  If disgorgement is an additional penalty, then any fines should be reduced relative to the optimal penalty.

Lastly, we respectfully recommend that the AMEAs rely on economic analysis to determine the harm caused by any violation.  When using proxies for the harm caused by the violation, such as using the illegal gains from the violations as the basis for fines or disgorgement, such calculations should be limited to those costs and revenues that are directly attributable to a clear violation.  This should be done in order to ensure that the resulting fines or disgorgement track the harms caused by the violation.  To that end, we recommend that the Draft Guidelines explicitly state that the AMEAs will use economic analysis to determine the but-for world, and will rely wherever possible on relevant market data.  When the calculation of illegal gain is unclear due to a lack of relevant information, we strongly recommend that the AMEAs refrain from seeking disgorgement.

The lack of careful economic analysis of the implications of disgorgement (which is really a financial penalty, viewed through an economic lens) is not confined to Chinese antitrust enforcers.  In recent years, the U.S. Federal Trade Commission (FTC) has shown an interest in more broadly employing disgorgement as an antitrust remedy, without fully weighing considerations of error costs and the deterrence of efficient business practices (see, for example, here and here).  Relatedly, the U.S. Department of Justice’s Antitrust Division has determined that disgorgement may be invoked as a remedy for a Sherman Antitrust Act violation, a position confirmed by a lower court (see, for example, here).  The general principles informing the thoughtful analysis delineated in the July 9 Comment could profitably be consulted by FTC and DOJ policy officials should they choose to reexamine their approach to disgorgement and other financial penalties.

More broadly, emphasizing the importantance of optimal sanctions and the economic analysis of business conduct, the July 9 Comment is in line with a cost-benefit framework for antitrust enforcement policy, rooted in decision theory – an approach that all antitrust agencies (including United States enforcers) should seek to adopt (see also here for an evaluation of the implicit decision-theoretic approach to antitrust employed by the U.S. Supreme Court under Chief Justice John Roberts).  Let us hope that DOJ, the FTC, and other government antitrust authorities around the world take to heart the benefits of decision-theoretic antitrust policy in evaluating (and, as appropriate, reforming) their enforcement norms.  Doing so would promote beneficial international convergence toward better enforcement policy and redound to the economic benefit of both producers and consumers.

In Antitrust & Competition, Antitrust Division, China, Constitutional Law, Economic Theory, Error Costs, Exclusive Dealing, Federal Trade Commission, International, Justice Department, Resale Price Maintenance, Supreme Court, Truth on the Market, Tying, Vertical Restraints , , , , , , ,
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Chinese Competition Law Reform: Wise Guidance from the George Mason University Global Antitrust Institute

Alden Abbott —  14 December 2015

China’s Anti-Monopoly Law (AML) was enacted in 2007, and a stock-taking exercise is now appropriate.  Recently, the Chinese University of Political Science and Law released a questionnaire soliciting public comments on the possible revision of the AML.  On December 10, 2015, George Mason University Law School’s (GMULS) Global Antitrust Institute (GAI, ably managed by FTC Office of International Affairs alumna Koren Wong-Ervin, with academic input from GMULS Professors Douglas Ginsburg, Joshua Wright, and Bruce Kobayashi), submitted a very thoughtful response to the solicitation, recommending that China reform the AML by:

  • Deleting References to Use of Non-Competition Factors in Competition Analysis.  The GAI recommended that references to non-competition goals such as “promoting the healthy development of the socialist market economy,” be deleted, explaining that competition law and policy is most effective when it focuses exclusively upon competition and consumer welfare rather than attempting to achieve simultaneously multiple goals, some of which may be in conflict with others.
  • Deleting Exemptions for State-Owned Enterprises (SOEs). The GAI recommended that SOEs be fully subject to the AML, including liability and fines, explaining that conferring upon SOEs privileges and immunities that are not available to their privately-owned competitors, or based on superior performance or efficiency, distorts competition in the market between state-owned and privately-owned rivals, and that SOEs generate increased agency problems relative to privately owned firms.
  • Recognizing that Vertical Restraints are Generally Procompetitive or Benign and As Such Should Be Analyzed Under an Effects-Based Approach. The GAI recommended that, given the state of economic learning regarding the competitive effects of vertical restraints (i.e., that they rarely harm competition and often benefit consumers by reducing price, increasing demand, and/or creating a more efficient distribution channel), reliance on theoretical models alone to infer competitive harm should generally be insufficient to satisfy the heavy burden on the plaintiff to prove that a particular restraint is anticompetitive.
  • Deleting the Prohibition on Charging “Unfairly High” or Purchasing at “Unfairly Low” Prices. The GAI recommended that this prohibition be deleted in its entirety or, at the very least, revised to explicitly provide an exception for matters involving intellectual property rights.  Among other things, the GAI explained that price regulation risks punishing vigorous competition, and that government-imposed prices that are too high or too low encourage misallocation of resources, soften incentives to engage in efficient conduct, reduce incentives to innovate, and distort markets.  In addition, excessive pricing cases are considered to be among the most difficult and complex cases for competition authorities in terms of standards for assessment, analysis of data, and the design and implementation of suitable remedies.  These difficulties create a substantial risk of both Type I (false positives) and Type II (false negatives) errors.
  • Limiting the Prohibition on Refusals to Deal to Conduct that Creates or Maintains a Monopoly. The GAI explained that, without such a limitation, the prohibition could be interpreted to impose an antitrust-based duty to deal on firms, to micromanage the terms of trade between firms, and to require courts and agencies to administer a burdensome remedy with substantial risk of causing more harm to competition and to consumers than benefits.
  • Deleting the Presumptions Concerning Collective Dominance. The GAI explained that such a presumption may harm rather than promote competition and discourages more rigorous effects-based economic analyses in favor of relying upon easier to apply but less accurate forms of analysis.
  • Clarifying the Definition of Concentration of Undertakings and Exempting Transactions From the Mandatory Premerger Approval Process That Do Not Have a Material Nexus with China. Among other things, the GAI recommended clarification of the terms “control over other undertakings and the ability capable of exerting a decisive influence . . . by virtue of contract or any other means.”
  • Deleting Provisions That Limit AML Enforcement Against Administrative Agencies or Organizations. The GAI recommended the deletion of the provision that grants “superior government agencies,” as opposed to the AML agencies, the authority to remedy anticompetitive conduct by administrative agencies and seemed to except administrative agencies from fines or other AML remedies.  Among other things, the GAI noted the robust economic evidence that regulation often benefits producers and harms consumers and results in efficiency losses from rent-seeking efforts by market participants to influence regulation.
  • Limiting the Requirement that Disgorgement or a Minimum Fine Be Imposed Upon a Finding of an AML Violation and Limiting Fines to Sales Directly Obtained in the Relevant Product and Geographic Market in China Affected By the Violation.
  • Limiting Disgorgement to Naked Price-Fixing Agreements Among Competitors or, In the Case of Unilateral Conduct, to Conduct that Has No Plausible Efficiency Justification.
  • Specifying that the Legitimate Use of Intellectual Property Rights Includes the Right to Exclude.
In Antitrust & Competition, China, Exemptions, Intellectual Property, International, Truth on the Market, Vertical Restraints , , ,
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Need for Chinese Antitrust Reform (and IP and Price-Related Concerns) Spotlighted at ABA Beijing Conference

Alden Abbott —  28 May 2014

The American Bar Association’s (ABA) “Antitrust in Asia:  China” Conference, held in Beijing May 21-23 (with Chinese Government and academic support), cast a spotlight on the growing economic importance of China’s six-year old Anti-Monopoly Law (AML).  The Conference brought together 250 antitrust practitioners and government officials to discuss AML enforcement policy.  These included the leaders (Directors General) of the three Chinese competition agencies (those agencies are units within the State Administration for Industry and Commerce (SAIC), the Ministry of Foreign Commerce (MOFCOM), and the National Development and Reform Commission (NDRC)), plus senior competition officials from Europe, Asia, and the United States.  This was noteworthy in itself, in that the three Chinese antitrust enforcers seldom appear jointly, let alone with potential foreign critics.  The Chinese agencies conceded that Chinese competition law enforcement is not problem free and that substantial improvements in the implementation of the AML are warranted.

With the proliferation of international business arrangements subject to AML jurisdiction, multinational companies have a growing stake in the development of economically sound Chinese antitrust enforcement practices.  Achieving such a result is no mean feat, in light of the AML’s (Article 27) explicit inclusion of industrial policy factors, significant institutional constraints on the independence of the Chinese judiciary, and remaining concerns about transparency of enforcement policy, despite some progress.  Nevertheless, Chinese competition officials and academics at the Conference repeatedly emphasized the growing importance of competition and the need to improve Chinese antitrust administration, given the general pro-market tilt of the 18th Communist Party Congress.  (The references to Party guidance illustrate, of course, the continuing dependence of Chinese antitrust enforcement patterns on political forces that are beyond the scope of standard legal and policy analysis.)

While the Conference covered the AML’s application to the standard antitrust enforcement topics (mergers, joint conduct, cartels, unilateral conduct, and private litigation), the treatment of price-related “abuses” and intellectual property (IP) merit particular note.

In a panel dealing with the investigation of price-related conduct by the NDRC (the agency responsible for AML non-merger pricing violations), NDRC Director General Xu Kunlin revealed that the agency is deemphasizing much-criticized large-scale price regulation and price supervision directed at numerous firms, and is focusing more on abuses of dominance, such as allegedly exploitative “excessive” pricing by such firms as InterDigital and Qualcomm.  (Resale price maintenance also remains a source of some interest.)  On May 22, 2014, the second day of the Conference, the NDRC announced that it had suspended its investigation of InterDigital, given that company’s commitment not to charge Chinese companies “discriminatory” high-priced patent licensing fees, not to bundle licenses for non-standard essential patents and “standard essential patents” (see below), and not to litigate to make Chinese companies accept “unreasonable” patent license conditions.  The NDRC also continues to investigate Qualcomm for allegedly charging discriminatorily high patent licensing rates to Chinese customers.  Having the world’s largest consumer market, and fast growing manufacturers who license overseas patents, China possesses enormous leverage over these and other foreign patent licensors, who may find it necessary to sacrifice substantial licensing revenues in order to continue operating in China.

The theme of ratcheting down on patent holders’ profits was reiterated in a presentation by SAIC Director General Ren Airong (responsible for AML non-merger enforcement not directly involving price) on a panel discussing abuse of dominance and the antitrust-IP interface.  She revealed that key patents (and, in particular, patents that “read on” and are necessary to practice a standard, or “standard essential patents”) may well be deemed “necessary” or “essential” facilities under the final version of the proposed SAIC IP-Antitrust Guidelines.  In effect, implementation of this requirement would mean that foreign patent holders would have to grant licenses to third parties under unfavorable government-set terms – a recipe for disincentivizing future R&D investments and technological improvements.  Emphasizing this negative effect, co-panelists FTC Commissioner Ohlhausen and I pointed out that the “essential facilities” doctrine has been largely discredited by leading American antitrust scholars.  (In a separate speech, FTC Chairwoman Ramirez also argued against treating patents as essential facilities.)  I added that IP does not possess the “natural monopoly” characteristics of certain physical capital facilities such as an electric grid (declining average variable cost and uneconomic to replicate), and that competitors’ incentives to develop alternative and better technology solutions would be blunted if they were given automatic cheap access to “important” patents.  In short, the benefits of dynamic competition would be undermined by treating patents as essential facilities.  I also noted that, consistent with decision theory, wise competition enforcers should be very cautious before condemning single firm behavior, so as not to chill efficiency-enhancing unilateral conduct.  Director General Ren did not respond to these comments.

If China is to achieve its goal of economic growth driven by innovation, it should seek to avoid legally handicapping technology market transactions by mandating access to, or otherwise restricting returns to, patents.  As recognized in the U.S. Justice Department-Federal Trade Commission 1995 IP-Antitrust Guidelines and 2007 IP-Antitrust Report, allowing the IP holder to seek maximum returns within the scope of its property right advances innovative welfare-enhancing economic growth.  As China’s rapidly growing stock of IP matures and gains in value, it hopefully will gain greater appreciation for that insight, and steer its competition policy away from the essential facilities doctrine and other retrograde limitations on IP rights holders that are inimical to long term innovation and welfare.

In Antitrust & Competition, Cartels, China, Economic Theory, Federal Trade Commission, Intellectual Property, International, International Trade, Justice Department, Monopolization, Patent, Resale Price Maintenance , , , , , , ,
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China

Paul H. Rubin —  27 June 2011

There are many stories about unrest in China.  Many factors are blamed for this unrest, including low wages, poor working conditions, and political factors.  But there is one thing that is not generally mentioned:  demographics.  The one child policy coupled with a preference for males (due to both economic and cultural factors) means that there ar significant numbers of unmarried and probably unmarriageable males.  This leads to severe male-male competition.  However, it also means that there are large numbers of socially discontent men with little to lose.  Similar factors probably operated in the Arabic world.  In both cases, it may be difficult to maintain an open democratic society.  I discussed this in Darwinian Politics, beginning at page 118.  It is also the theme of the book Bare Branches by Valerie M. Hudson and Andrea M. den Boer.  Because of demographic factors relating both to a very peculiar age structure and the gender imbalance mentioned here, China is going to face serious difficulties in the future.  Those projecting increasing power for China do not always take these factors into account.

In Amazon, China, International, Platforms , , ,
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China land and bachelors

Paul H. Rubin —  16 April 2011

The New York Times has an interesting story about land markets in China.  In order to get married a man needs to own property and land prices are very high in China.  As it its habit, the Times blames “overeager developers who force residents out of old neighborhoods.”

In fact, the Times gets it backwards.  The information needed to understand the issue is in the story: “The marriage competition is fierce, and statistically, women hold the cards. Given the nation’s gender imbalance, an outgrowth of a cultural preference for boys and China’s stringent family-planning policies, as many as 24 million men could be perpetual bachelors by 2020, according to the report.”  So what is happening is that there is a shortage of marriageable women and it is competition for the land needed to attract these women that is driving up land prices.

This competition is one unfortunate side effect of the one child policy and the Chinese preference for boys.  These 24 million unmarriageable men are going to be a long term problem for China.  In my book Darwinian Politics I argue that a large core of perpetual bachelors makes a free and open society difficult because this core will lead to social instability; the argument is also forcefully made in Bare Branches: The Security Implications of Asia’s Surplus Male Population by  Valerie M. Hudson and Andrea M. Den Boer. 

Much has been written about the problem of China’s aging population but I don’t think we have paid enough attention to the issues of gender imbalance.  More generally, I think much of the course of world politics over the next century is going to be driven by major demographic trends, and I think these worthy of increased study.  Nicholas Eberstadt of AEI is doing this sort of work, but I think there is much more to be done.

In Amazon, China, International, Platforms , , , , ,
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