Before I begin my review, a disclaimer is in order: one of the authors was my student – the one who was not until recently the Chief Economist of the European Commission’s DGComp –, and this paper builds on her PhD.
The paper – which can be found here – focuses on the relevance of the AEC test for the identification of abuses of a dominant position. It reads the Intel decision as creating a rebuttable presumption of illegality of exclusivity rebates, and as requiring the Commission to examine Intel’s arguments on whether the loyalty rebates could exclude an equally efficient competitor from the market. It also considers that the CJEU confirmed that the AEC test is the relevant benchmark to assess such a rebuttal.
At the same type, the authors consider that the judgment raises a number of issues: (i) whether the AEC is an appropriate conceptual benchmark to identify anticompetitive conduct; (ii) in the light of the previous question, how the analysis of potential anticompetitive rebates should proceed; (iii) what evidence that is necessary / sufficient to rebut a presumption of anti-competitive effects.
The paper is structured as follows:
- A first section is devoted to the question of whether the AEC test is an appropriate standard to identify anticompetitive pricing practices.
Economically, fidelity rebates belong to a wide range of conditional pricing practices (including exclusive dealing, tying and bundling, minimum quantity requirements, minimum market share requirements etc.) that only raise anti-competitive concerns if they induce the permanent exit of competitors and/or permanently prevent market entry. The economic literature has shown that conditional pricing practices tend to increase competition unless they lead to foreclosure; but even where foreclosure has occurred, several studies have shown that it does not always result in harm to consumers. As a result, it is hard to derive decision rules from economic theory, and it is difficult to distinguish between pro- and anti-competitive pricing practices.
To understand the analysis below, it is important to bear in mind that market ‘foreclosure’ ‘exit’ or ‘exclusion’ does not necessarily mean a complete departure of the firm from the industry, but merely a permanent reduction of a rival’s ability to compete that causally results from the investigated behaviour. Such permanent exclusion of competitors from the market with the result of persistently increased prices is called ‘anti-competitive foreclosure’ and is the only outcome that is of concern from an economic perspective.
While it is economically tempting to suggest a detailed case-by-case analysis in every instance, such an approach would be neither economically optimal nor administratively practical. This is for a number of reasons: (i) such an approach would not lead to the legal certainty and predictability necessary for competition rules to have deterrent effects; and (ii) it would detract from the ability to enforceable competition rules by making it too costly and time-consuming to obtain the evidence necessary to support a decision. As a result, a number of different tests have been developed to identify anticompetitive conduct.
The authors argue that, in Intel, the CJEU adopted the AEC as the conceptual framework of analysis for rebates when it stated that the basic question concerning loyalty rebates by a dominant firm is whether an equally efficient competitor is excluded from the market.
The rationale behind the AEC test is that competition policy should not protect inefficient competitors. In this sense, the AEC test encapsulates the idea that competition policy should protect competition and not competitors. The AEC test also maintains a relatively high degree of predictability of competition policy intervention. For example, if efficiency can be fully assessed based on the cost structure of the firm, the dominant firm only needs information about its own cost structure in order to determine whether it could itself be profitable under a proposed price structure.
On the other hand, there seems to be a significant set of circumstances where the exclusion of less efficient rivals leads to persistent market power, so that consumers could be better off if some less efficient rivals were protected. This can be the case when significant economies of scale and/or scope make it virtually impossible to achieve the same cost efficiency as the dominant firm. While in this scenario no competitor could ever be as efficient as the dominant firm, a somewhat less efficient competitor might nonetheless survive in the absence of strategies to exclude this competitor from the market, leading to competitive constraints on prices. Another criticism is that in some circumstances –such as product differentiation and two-sided markets – it may not be clear what it means to be an equally efficient competitor.
These criticisms have led to the development of alternative tests, such as the profit sacrifice test and the no-economic sense test. These tests rely on the dominant firm failing to maximize short run profits, and require a causal link between this failure to maximize profits and the expectation that the conduct leads to market foreclosure. The problem with these tests is that they sacrifice legal certainty – it will be hard for a company to assess whether its competitive response to a rival will be interpreted as a failure to maximize profit with the aim of excluding competitors. In practice, going beyond the AEC test will therefore involve a case by case detailed analysis requiring proof of a: ‘strategy to foreclose which will involve evidence that foreclosure of the competitor would be necessary for the strategy to be profitable and complementary evidence on intent’.
- A second section looks at the CJEU‘s approach to rebates in Intel.
Since the main issue for a legal test is how economic efficiency, predictability and administrative efficiency are traded-off, optimal enforcement does not require the application of a single test. Instead, the analysis of business conducts could be structured through a sequence of steps during which the burden of proof falls on different parties at different stages of the process.
The basic system envisaged by the CJEU for loyalty rebates can be interpreted as setting up exactly such a framework. First, the Commission has the burden of demonstrating that the conditions for the application of a presumption of illegality for loyalty discounts by a dominant company are met. However, this presumption is rebuttable by reference to the AEC test; this makes sense because only the investigated firm has all the information necessary to evaluate its own compliance with the test. If evidence to defeat the presumption is submitted by the dominant company, the Commission can defeat it in turn in two different ways. First, the Commission might demonstrate that the evidence provided by the dominant firm does not show that an as efficient competitor would not be excluded – i.e. that the presumption has not been rebutted. Second, the Commission can put forward evidence that anticompetitive foreclosure occurs although the AEC test is “passed” and the presumption is rebutted. To do this, the Commission must meet a high standard of proof, and provide strong evidence that the strategy of the firm was aimed at foreclosure and that it can be expected that foreclosure would lead to a persistent reduction in competition – in a way akin to the ‘no economic sense test’. This would be an economically coherent way of taking ‘all circumstances’ into account, of addressing the concerns about under-enforcement that the AEC test raises, and of aligning the Intel judgment with the enforcement framework set out in the Commission’s Art. 102 TFEU Guidance Paper.
- A third section then discusses what evidence can be used to rebut the presumption of illegality under Intel.
According to the authors, the presumption of illegality of exclusive rebates can be rebutted through the AEC test alone. However, this test cannot be conflated with a pure price-cost test. The CJEU requires: ‘evidence demonstrating that no foreclosure effects could arise in light of a broad class of theoretical mechanisms by which foreclosure through conditional pricing practices could arise‘ in order to rebut the presumption. The AEC test provides a conceptual benchmark for this: if the action cannot exclude an equally efficient competitor it cannot be considered to have foreclosure effects. In this context, a price-cost test is merely one type of evidence to verify whether the benchmark is satisfied or not. Sometimes such a test might be sufficient. In other occasions, however, exclusivity or the contracted quantity – and not price – may be instrument of exclusion. This would be the case, e.g., when the conduct prevents a competitor from achieving efficient scale, or long-term contracts are used to lock-in clients. Nonetheless, price-cost tests can be useful as additional evidence of the rival’s ability to compete for the locked-in part of the contract.
A particular difficulty arises with regard to demand considerations. If a high proportion of the consumers would never switch to competing products, then the efficiency of a potential competitor can be in doubt regardless of its cost structure. Whenever demand side considerations, i.e. substitutability, comes into the assessment, the predictability of effects under any evidentiary standard (including the modified price-cost test), will lead to significant uncertainties. The authors suggest that the solution is to make rebuttal of the presumption of illegality easier and shift the burden of proof for asymmetric demand to the Commission.
Comment: I am obviously biased, but I really liked this study. I think it provides the most plausible interpretation of the Intel decision, as may have been apparent from my comments to other papers piece. It also looks in detail at what the relevant legal test should be and how it should be applied, which are the main issues arising from the decision.
Yet, I am not fully convinced by parts of the paper – particularly the claims that the AEC test is the only way to determine whether the presumption of an exclusivity rebate is anticompetitive. I don’t see support for this conclusion in the judgment, even if the Court did seem to imply that only discounting practices that foreclose as efficient competitors are abusive. To my mind, a better reading of this part of the judgment is as a reaction to Intel’s attempt to rebut the presumption through the application of the AEC test, and to the General Court’s refusal to review the Commission’s analysis of the AEC test. In other words, I think that the decision allows defendants to refute the presumption of illegality of rebates in ways other than by reference to the AEC test – even when the test is as widely defined as it was by the authors. After all, the section on the evidence necessary to rebut the presumption of illegality is quite dense with possibilities and scenarios.
This disagreement may have to do with how widely the concept of AEC is deployed by the authors. In order to fit their interpretation of the facts, the concept of AEC is stretched to the point where it could be taken to mean ‘discounting practice with anticompetitive effects’. I’m not that this is a useful delineation of the concept, nor do I think it is necessary in the light of the Intel decision.
Despite these quibbles, for my money this is the best discussion of the Intel decision and of the applicable test for discounting practices by dominant companies in Europe since the decision was published.