Topic 2 – Competition Law and Economics:
Background:
Competition law is shaped by economics
We need to use the tools developed by professional economics to understand e.g. if a merger leads to a reduction in competition
The use of basic economic concepts can assist in the formulation of legal principles and in making policy choices
Economic analysis is useful to understand the motivation behind firm conduct and to formulate practicable standards.
The role of economics in competition law
Why use economics in competition law?
It is natural to use economics:
o Economics is embedded in competition law provisions
o Key notions such as ‘dominant position’ or ‘restriction of competition’ openly invite courts and authorities to engage in an assessment of the features of the market in
which the alleged violations are taking place.
It is inevitable to use economics:
o When we are trying to figure out whether a certain practice is likely to harm competition we are inevitably going to make assumptions about the functioning of
markets, firms’ motivations or about the effects of a practice on the ability and the incentive of firms to compete
o Thus, economic analysis cannot really be avoided
Intuitions and informal economics are often wrong:
o Informal intuitions can be wrong
o The role of economics, in general, is precisely to look rigorously at business behaviour and the functioning of markets
Economics is also useful when calibrating the law:
o Not many things are inherently good or inherently bad – economists assist in crafting the law in a way that makes sense and ensures both productive and allocative
efficiency
Useful when refining the law:
o Lawyers often lose a sense of perspective – so helps to ensure that like practices are treated alike
How can economics help refine and improve legal analysis?
Step 1 – understanding the Step 2 – decide the appropriate Step 3 – refining and calibrating the case by case assessment of practices:
nature of the practice legal test for the practice:
under examination:
The criteria to Firm motivation = key Q to Economic analysis provides clear and practicable benchmarks against which the legality of business practices
determine whether a figure out the choice of the can be assessed. It offers valuable tools to ensure the consistent application of the law across all practices.
practice is likely to be relevant legal test Economics can also illuminate authorities regarding the consequences of enforcement and thus to make an
, motivated by an The use of economic tools informed choice.
anticompetitive aim provides useful insights Finally, the discipline also provides useful insights to identify the instances in which harm to competition can
are almost exclusively regarding the circumstances be expected.
economic nowadays. in which a particular
practice is likely to raise
competition concerns, and
thus provides a sketch of
the conditions that can be
subsequently refined.
Key concepts of economics and how they have transformed enforcement:
Competition law is about efficiency
2 dimensions to efficiency:
o Productive efficiency – an efficient firm is one that is able to maximise output with a given amount of resources. Because productive efficiency gains lead to lower
production costs, lower prices for consumers may follow (the cost-economies made are passed on to consumers) – a lot of what we see in competition law are
methods to increase productive efficiency – companies are constantly on a quest to increase their efficiency – and engage in all sorts of practices to try and do so.
o Allocative efficiency – refers to the distribution of resources in society. An allocatively efficient market is one in which consumers get the goods they want at the most
advantageous prices – typically unilateral practices are only problematic if they lead to allocative inefficiency (foreclosure)
Productive efficiency says much about firm motivation:
o Practices that look like anticompetitive devices are often strategies to achieve efficiency gains
o This is the single most important aspect behind the evolution of competition law in the past decades
Prohibition irrespective of effects v case-by-case analysis:
o Prohibition irrespective of effects is only appropriate if a practice is not a plausible source of productive efficiency gains
o The prima facie prohibition of efficiency-enhancing practices may deprive consumers and society, without good reason, of pro-competitive benefits
Refining the legal test:
o It is important to distinguish between ‘protecting competition’ and ‘protecting competitors’
Protecting inefficient firms penalises success and harms consumers
If inefficient firms are protected then it is difficult for firms to anticipate the law
o The ‘as efficient competitor’ test has emerged as a benchmark in recent years
If you are less efficient than your rivals then there is nothing competition law will do about it – it is in the nature of things – competition law protects competition not individual
competitors – not there to protect you
Case C-413/14 P, Intel:
o ‘133. In that respect, it must be borne in mind that it is in no way the purpose of Article 102 TFEU to prevent an undertaking from acquiring, on its own merits, the
Background:
Competition law is shaped by economics
We need to use the tools developed by professional economics to understand e.g. if a merger leads to a reduction in competition
The use of basic economic concepts can assist in the formulation of legal principles and in making policy choices
Economic analysis is useful to understand the motivation behind firm conduct and to formulate practicable standards.
The role of economics in competition law
Why use economics in competition law?
It is natural to use economics:
o Economics is embedded in competition law provisions
o Key notions such as ‘dominant position’ or ‘restriction of competition’ openly invite courts and authorities to engage in an assessment of the features of the market in
which the alleged violations are taking place.
It is inevitable to use economics:
o When we are trying to figure out whether a certain practice is likely to harm competition we are inevitably going to make assumptions about the functioning of
markets, firms’ motivations or about the effects of a practice on the ability and the incentive of firms to compete
o Thus, economic analysis cannot really be avoided
Intuitions and informal economics are often wrong:
o Informal intuitions can be wrong
o The role of economics, in general, is precisely to look rigorously at business behaviour and the functioning of markets
Economics is also useful when calibrating the law:
o Not many things are inherently good or inherently bad – economists assist in crafting the law in a way that makes sense and ensures both productive and allocative
efficiency
Useful when refining the law:
o Lawyers often lose a sense of perspective – so helps to ensure that like practices are treated alike
How can economics help refine and improve legal analysis?
Step 1 – understanding the Step 2 – decide the appropriate Step 3 – refining and calibrating the case by case assessment of practices:
nature of the practice legal test for the practice:
under examination:
The criteria to Firm motivation = key Q to Economic analysis provides clear and practicable benchmarks against which the legality of business practices
determine whether a figure out the choice of the can be assessed. It offers valuable tools to ensure the consistent application of the law across all practices.
practice is likely to be relevant legal test Economics can also illuminate authorities regarding the consequences of enforcement and thus to make an
, motivated by an The use of economic tools informed choice.
anticompetitive aim provides useful insights Finally, the discipline also provides useful insights to identify the instances in which harm to competition can
are almost exclusively regarding the circumstances be expected.
economic nowadays. in which a particular
practice is likely to raise
competition concerns, and
thus provides a sketch of
the conditions that can be
subsequently refined.
Key concepts of economics and how they have transformed enforcement:
Competition law is about efficiency
2 dimensions to efficiency:
o Productive efficiency – an efficient firm is one that is able to maximise output with a given amount of resources. Because productive efficiency gains lead to lower
production costs, lower prices for consumers may follow (the cost-economies made are passed on to consumers) – a lot of what we see in competition law are
methods to increase productive efficiency – companies are constantly on a quest to increase their efficiency – and engage in all sorts of practices to try and do so.
o Allocative efficiency – refers to the distribution of resources in society. An allocatively efficient market is one in which consumers get the goods they want at the most
advantageous prices – typically unilateral practices are only problematic if they lead to allocative inefficiency (foreclosure)
Productive efficiency says much about firm motivation:
o Practices that look like anticompetitive devices are often strategies to achieve efficiency gains
o This is the single most important aspect behind the evolution of competition law in the past decades
Prohibition irrespective of effects v case-by-case analysis:
o Prohibition irrespective of effects is only appropriate if a practice is not a plausible source of productive efficiency gains
o The prima facie prohibition of efficiency-enhancing practices may deprive consumers and society, without good reason, of pro-competitive benefits
Refining the legal test:
o It is important to distinguish between ‘protecting competition’ and ‘protecting competitors’
Protecting inefficient firms penalises success and harms consumers
If inefficient firms are protected then it is difficult for firms to anticipate the law
o The ‘as efficient competitor’ test has emerged as a benchmark in recent years
If you are less efficient than your rivals then there is nothing competition law will do about it – it is in the nature of things – competition law protects competition not individual
competitors – not there to protect you
Case C-413/14 P, Intel:
o ‘133. In that respect, it must be borne in mind that it is in no way the purpose of Article 102 TFEU to prevent an undertaking from acquiring, on its own merits, the
