The Eighth Annual Trans- Atlantic Antitrust Dialogue Exclusionary Pricing in Article 82 Cases – A U.S. FTC Perspective Alden F. Abbott Associate Director, Bureau of Competition, FTC May 15, 2008

Introduction I am pleased to comment briefly on exclusionary pricing in Article 82 cases, applying the perspective of a U.S. lawyer. Specifically, I will draw on insights from the FTC-DOJ Single Firm Conduct Hearings in assessing such pricing conduct. The views expressed are my own and do not necessarily represent the views of the U.S. FTC or any FTC Commissioner.

Single Firm Conduct Hearings As you are undoubtedly aware, the U.S. competition agencies held Hearings on Single Firm Conduct in 2006 and We hope to issue a report but I cannot comment further on this possibility today. Presentations made in the Hearings shed light on exclusionary pricing and other issues. Below are some thoughts on sound policy re exclusionary pricing suggested by the Hearings. My interpretation only – others may disagree.

Bundled Discounts Bundled discounts ubiquitous. Efficiencies: lower prices, encourage larger orders/production, economies in packaging/shipping, encourage new product trials, facilitate efficient price discrimination, etc. Anticompetitive theories based on foreclosure of other sellers, Nalebuff et al. Don’t know how likely competitive harm is.

Bundled Discounts, continued Where competition among competing full bundle suppliers likely some would apply Brooke Group rule to total price of bundle. Where supplier sole source of one or more products in bundle, need different rule. –Foreclosure concern here. –Try AMC discount allocation safe harbor, price-cost comparison after allocating all discounts to competitive product(s) in bundle?

Bundled Discounts, continued When no competition over some bundle element(s) and pricing puts you outside safe harbor, what to do? Answer: assess actual competitive effects. Rivals’ ability to remain in market should be a significant factor in assessing harm. Where explanation for harm does not depend on exclusion of rivals, condemn bundle only where harms significantly disproportionate to benefits. (See AREEDA & HOVENKAMP ¶ 651a.)

Loyalty Discounts Unlike bundling, involves single product. Generally benefits consumers – lower prices, inducement to increased selling efforts, reduce production costs (low sales fluctuations), competition for customers. Predation story – discount structured to induce buyers to buy all needs beyond “incontestable” share from monopolist. As in bundling, harm’s likelihood unknown.

Loyalty Discounts, continued Predatory pricing approach? But case law limited, commentators disagree, need further assessment. Plaintiff should have to show discount forecloses a significant share of market and harms competition. Rivals’ ability to remain in market significant factor. When probable competitive harm, may apply significant disproportionality harm/benefits test.

Bundling and Loyalty Discounts: Overall Assessment Lack of empirical evidence key. Consult Single Firm Hearings record. Consider approaches that weigh both administrability and the need to assess fairly both procompetitive stories and anticompetitive possibilities. Stay tuned for further scholarship and case law.

Price Squeezes The Linkline case on cert. before the U.S. Supreme Court raises “price squeezes.” I cannot comment on what USG may say. But let me present a few of my thoughts. May be efficient, consumer welfare- enhancing vertical integration in the presence of preexisting market power.

Price Squeezes, continued Behavior that looks like price squeezes also may yield significant efficiencies. Also possible, of course, that particular price squeezes may involve downstream predation and harm competition. EU courts have spoken. Stay tuned for further developments in U.S. case law.

DG Comp and Pricing Abuses DG Comp approach to single firm pricing abuses shows promise. Reliance on economic reasoning helpful. Take predatory pricing, for example – DG Comp emphasis on a foreclosure effect. Desirable to read “foreclosure effect” as importing a consumer welfare standard? EU courts – no requirement that actual effects be demonstrated, will this change over time?

DG Comp – Rebates/Bonuses DG Comp stress on actual and likely foreclosure effects, effects on equally efficient competitors, seems sound. Also recognition of objective justifications/ efficiencies may help avoid chilling effects. What is future influence of holding in British Airways v. Commission?

DG Comp – Margin Squeezes Deutsche Telekom v. Commission upholds “as efficient competitor” approach. It is helpful that DG Comp is applying economic thinking here. Take into account consumer welfare, productive efficiencies in examining effects on excluded firms?

Conclusion Both U.S. agencies and DG Comp are dedicated to applying economics in single firm conduct cases – a good thing. Over time, I hope that convergence will grow, aided by empirical work and theory. I also hope that EU courts will increasingly employ economic reasoning. Thank you for your attention.