2010 Inaugural Lecture in Economics
COMPETITION POLICY AND
PROPERTY RIGHTS*
John Vickers
University of Oxford
Universitat Pompeu Fabra, Barcelona
6 October 2010
*See further Economic Journal 2010, pages 375-393
A competition law duty to share property?
►
When, if ever, should competition law require a firm with
market power to share its property with its rivals?
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Case controversies
►

physical infrastructure − e.g. telecom networks

intellectual property − e.g. software

duty to supply?

if so, on what terms?
Striking trans-Atlantic divide ...
2
US Supreme Court in Trinko (2004)
►
Three evils of compelled sharing
“Firms may acquire monopoly power by establishing an
infrastructure that renders them uniquely suited to serve their
customers. Compelling such firms to share the source of their
advantage is in some tension with the underlying purpose of
antitrust law, since it may lessen the incentive for the
monopolist, the rival, or both to invest in those economically
beneficial facilities. Enforced sharing also requires antitrust
courts to act as central planners, identifying the proper price,
quantity, and other terms of dealing -- a role for which they are
ill-suited. Moreover, compelling negotiation between
competitors may facilitate the supreme evil of antitrust:
collusion”.
3
EC Commission in Holyhead port case (1993)
“An undertaking in a dominant position may not discriminate
in favour of its own activities in a related market. The owner
of an essential facility which uses its power in one market in
order to protect or strengthen its position in another related
market, in particular, by refusing to grant access to a
competitor, or by granting access on less favourable terms
than those of its own services, and thus imposing a
competitive disadvantage on its competitor, infringes [the
prohibition on abuse of dominance]”.
4
Plan of lecture
Competition policy and network access
►
►

telecommunications cases

simple price squeeze model

relation between competition law and regulation
Competition policy and innovation
5
Telecoms network access cases
►
NZ: Clear (HL 1994)
►
US: Trinko (SC 2004), linkLine (SC 2009)
►
EC: Deutsche Telekom (CFI 2008), France Télécom
(Wanadoo) (ECJ 2009), Telefónica (Cn 2007)
►
Issues:

access pricing

refusal to supply (adequate) access

margin squeeze (between retail and access prices)

predatory retail pricing
6
Simplest price squeeze model
►
►
Vertically-integrated dominant firm M faces price-taking
fringe in homogeneous-good retail competition. Fixed
coefficients
So fringe supply s(m) depends on margin m = p  a between
retail price p and access price a
►
Assume M has constant retail marginal cost c (and s(c) > 0)
►
M makes its pure monopoly profit μ(p) plus
ϕ(m) = (c  m)s(m)
►
For all p, profit-maximising m < c maximises ϕ(m)
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But productive efficiency requires m = c
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‘Efficient component pricing rule’
►
►
►
►
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Let M’s overall (wholesale + retail) marginal cost be C
Then, with standing assumptions, M’s opportunity cost of
supplying a unit of access to rivals is forgone margin (p C)
Add this to the direct cost of access (C c) to get an overall
cost of supplying access of (p c)
But a = p c is just m = c as above
Access pricing on this basis does not however bear down on
upstream monopoly profit
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Deutsche Telekom v Commission
“Having regard to the fact that [DT’s] wholesale services are thus
indispensable to enabling a competitor to enter into competition
with [DT] on the downstream market in retail access services, a
margin squeeze between [DT’s] wholesale and retail charges will in
principle hinder the growth of competition in the downstream
markets. If [DT’s] retail prices are lower than its wholesale charges,
or if the spread between [DT’s] wholesale and retail charges is
insufficient to enable an equally efficient competitor to cover its
product-specific costs of supplying retail access services, a potential
competitor who is just as efficient as [DT] would not be able to
enter the retail access services market without suffering losses.”
 CFI judgment, 2008, para 237 (emphasis added)
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Deutsche Telekom v Commission
CFI rejected DT defence that the national telecoms regulator
had authorised its charges and not found price squeeze
►

DT could influence authorised charges

European Commission not be bound by the view of a
national regulator
►
DT has appealed to ECJ
►
This is a very different view of the relationship between
antitrust and regulation than that advanced by US Supreme
Court Justices ...
10
Verizon v Trinko
►
Trinko (a law firm) sued NY local exchange carrier Verizon
for failing to provide adequate network access to rivals
►
The 1996 Telecommunications Act imposed a regulatory duty
to provide such access
►
And made clear that antitrust law was not disapplied
►
But was there an antitrust duty to supply on those terms?
►
►
In general, a trader has the right “freely to exercise his own
independent discretion as to parties with whom he will deal”
Aspen Skiing (1985) exception “at or near the outer boundary”
of liability
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Trinko decision
►
►
►
Trinko’s “complaint alleging breach of an incumbent LEC’s
1996 Act duty to share its network with competitors does not
state a claim under §2 of the Sherman Act”
“a firm with no antitrust duty to deal with its rivals has no
obligation to provide those rivals with a ‘sufficient’ level of
service”
Three of the Justices found against Trinko on the prior ground
that the plaintiff lacked standing to bring the action  any
injury was too indirect
12
Pacific Bell (AT&T) v linkLine et al
►
Complaint from ISPs that Californian incumbent AT&T had
unlawfully squeezed their margins to maintain monopoly
power in the DSL market
►
Supreme Court unanimous for AT&T but with two different
lines of reasoning:


“A price-squeeze claim cannot be brought under §2 when
the defendant has no antitrust duty to deal with the plaintiff
at wholesale” (majority view)
“A purchaser from a regulated firm cannot win an antitrust
case simply by showing that it is ‘squeezed’... When a
regulatory structure exists, the costs of antitrust
enforcement are likely to exceed the benefits” (Breyer et al)
13
What cost benchmark in predatory pricing case?
►
In line with ECPR logic, should the wholesale margin
opportunity cost [a  (C c)] to M of competing retail units
away from rivals be factored into the cost benchmark?
►
Then price squeeze is like the predation cost test because
p ≥ C + [a  (C c)] = a + c
►
►
In the US also need to prove “dangerous probability of
recoupment” − compare the ECJ in Wanadoo (2009)
But the linkLine Court said of the similar ‘transfer price test’:
“whether or not that test is administrable, it lacks any
grounding in our antitrust jurisprudence”
14
Trans-Atlantic institutional differences
United States
►

the forum is the courts

most non-merger cases brought by private plaintiffs (treble
damages)
Europe
►

most cases involve public authority decisions, which may
be appealed to the courts

few private actions yet and no treble damages

many regulated industries were state-owned monopolies

use of competition law to roll back regulation
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Plan of lecture
►
Competition policy and network access
►
Competition policy and innovation


why stronger IPRs may not promote sequential − especially
follow-on − innovation
The European IBM and Microsoft cases
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Competition policy and innovation incentives
“Unfortunately, the effects of antitrust policy on innovation are
poorly understood” − Segal & Whinston (AER 2007)
Intellectual ‘property’  physical property
►
One-shot models: stronger IPRs → bigger prize → more
innovative effort
►
Sequential models: ambiguous effects
►

front-loading effect

neck-and-neck effect

follow-on innovations
17
A tale of two cases
►
Large US computer company
►
Dominant by virtue of proprietary de facto standard and
‘applications barrier’ to entry
►
European Commission case following action brought by US
Justice Department
►
Refusal to supply interface information to enable
interoperability
►
Technological tying and bundling issues too
18
The EC IBM case of the 1980s
►
1980 Statement of Objections
►
1982 US drop case
►
1984 EC settlement: IBM undertook to

disclose System/370 interface information

offer its System/370 CPUs without main memory
►
No decision, no fine, no appeal, no disturbing precedents
►
Events soon showed merits of IBM’s dominance defence
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Competition law ‘versus’ intellectual property law?
Obligation under EC Article 102 [was 82] to license IP in
►


Magill (1995) − TV listings
IMS Health (2004) − geographical grid for pharmaceutical
distribution in Germany
►
Weird cases with peculiar facts? IP as a by-product? Not
‘real’ innovation?
►
What principles limit competition law duties to share IP?
►
(NB this is a separate question from whether IP rights are
generally too broad or too readily granted)
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Four-part test for ‘exceptional circumstances’: indispensability
of IP, elimination of all competition, new product or services
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not offered by IP owner, lack of objective justification
EC Microsoft case
March 2004 Commission decision (and €497m fine) that MS
had abused dominance in market for PC operating systems by
►

refusing to supply inter-operability to rival server software
suppliers (interface information remedy)

tying media player software with Windows OS (unbundling remedy)
►
Dec 2004: Court rejects MS request for remedy suspension
►
Sept 2007: Court judgment upholds Commission decision
►
2009: Further case (settled) about tying Explorer to Windows
21
European Commission decision on interoperability
►
Abusive refusal to disclose specifications and allow their use
for the development of compatible products
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Analyse the entirety of the circumstances, including



disruption of a previous level of supply ...of software
interoperability information
Microsoft’s rapid rise to dominance in server OS software
Microsoft can impose de facto standard for work group
computing of which PCs are a key component, so
interoperability essential to compete in server OS software
(link to monopoly maintenance theory)
22
The Court’s reasoning
►
Microsoft failed to show that interoperability information is
not indispensable
►
No manifest error in finding risk of elimination of [effective]
competition on work group server OS market
►
►
Not manifestly incorrect to find that Microsoft’s refusal limits
technical development to the prejudice of consumers, so the
new product test is met
Microsoft did not demonstrate any objective justification, in
particular that the impact on its incentives to innovate
outweighed the exceptional circumstances
23
The right result by an unfortunate route?
►
So the Court found that elements of the four-part test for
‘exceptional circumstances’ were all met with (remarkable?)
ease
►
Even those broadly content with the particular result may now
wonder what are the limits on dominant firm duties to supply
and sustain rivals, including with IP
►
Will the Article 102 Guidance achieve discipline and balance?
►
Implications for private actions in Europe?
24
IBM revisited
In July 2010 the Commission announced investigations into
►

claims by emulator software vendors that IBM is abusively
tying its mainframe hardware products to its mainframe
operating system

concerns that IBM may have foreclosed the market for
maintenance services for that hardware
►
Dominance?
►
Abuse?
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Conclusions
►
Network infrastructure and IP cases show major trans-Atlantic
differences of approach − part of a wider divide on single-firm
conduct − both substantively and institutionally with respect to
how competition law and regulation work together.
►
In my view EC should not import US jurisprudence on
antitrust in regulated industries
►
But needs to develop much more discipline in the application
of competition law to dominant firms
►
Economic principles are vital to that discipline, but in Europe
we remain far from economics-anchored competition law
towards abuse of dominance, unlike other elements of
European competition law
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Postscript
►
Remember the ‘supreme evil’  collusion?
►
In 2000, the 32 NFL teams authorised the NFL to grant an
exclusive licence to produce and sell trade-marked headwear
for all 32 teams
►
Is such licensing of intellectual property outside the scope of
antitrust on the grounds that the NFL is a single entity?
►
In May 2010 the US Supreme Court unanimously said No
►
The first victory in the Supreme Court for an antitrust plaintiff
since 1992
27