Competition Policy and Law Presentation to Study Tour for Russian Member Universities of the Virtual Institute Network 26 March 2009

2 Main topics What do Competition Authorities do? What is Abuse of Dominance? A Case Study

3 What do Competition Authorities do? Enforce a competition law –Mergers –Agreements among competitors (horizontal) –Agreements between suppliers & buyers (vertical) –Abuse of dominance or monopolization Advocate for government policies that are more pro-competitive Some also enforce consumer protection laws, and advocate for more pro-consumer government policies

4 Objectives Often unclear Vary from jurisdiction to jurisdiction Consumer welfare v. total welfare Static efficiency v. dynamic efficiency Distribution, eg SMEs, price discrimination, historically disadvantaged persons

5 Decisions by competition authorities Criteria based on objectives "Independent" - decisions in individual cases are not indicated by politicians But - always policy direction set by politicians Some systems have appeal of individual decisions to politicians Independent 2 - "All" systems have appeal of individual decisions to courts Limited by ability to get and analyze facts

6 Economics Review (Competition law is composed of economics concepts adjusted to be administrable) Markets Market power Substantial & durable market power Barriers to entry & barriers to expansion Coordination & collusion Principal - agent problems (hidden action, hidden knowledge)

7 Diagram 1: Supply Curve Price Quantity Supply

8 Diagram 2: Demand Curve Price Quantity Demand

9 Diagram 3: Supply & Demand Price Quantity Demand Supply

10 Diagram 4: Supply & Demand with Market Power Price Quantity Demand Supply

11 Diagram 5: Vertical restraints (hidden action, hidden knowledge) Retailer Brand owner ("manufacturer") Retailer Price Territory Customer Other brands

12 Main topics What do Competition Authorities do? What is Abuse of Dominance? A Case Study

13 Abuse of dominance Is the firm dominant? Is the conduct an abuse? Is there a remedy?

14 Three standards Russian Federation Art. 5 & Art. 10 European Union Art. 82 US Sherman Act §2 Of course, there are other standards

15 Russian Federation Federal Law № 135-FZ of July 26, 2006 «On Protection of Competition» Article 5 defines dominant position One or more economic entities can "have a decisive impact on the general conditions" of the market, or can exclude or prevent the entry of other economic entities onto the market. Market share presumptions Article 10 defines and prohibits abuses of dominance

16 Russia – Dominance Presumed dominant if market share > 50% (but rebuttable) Presumed not dominant if market share < 50% (but FAS can show dominance using stability of market shares, barriers to entry, or other characteristics specific to the commodity market) Cannot be found dominant if market share < 35% (with exceptions related to financial firms and collective dominance).

17 Russia - Abuses Actions or inaction of an economic entity occupying a dominant position, which result or can result in prevention, restriction or elimination of competition and (or) infringement of the interests of other persons are prohibited, including: –establish and maintain a monopolistically high or monopolistically low price for a commodity {COMMENT: " monopolistically low price" is defined in Art. 7 and seems to be intended to be an analog to "predatory pricing," but is much broader than usual} –withdrawal of a commodity from circulation, if it causes price to rise

18 Russia – abuses cont’d imposing on a counterparty terms which are unprofitable to the latter or are economically or technologically unjustified and/or not required by law unjustified (economically or technologically) cutting off production or supply refusal to contract that is unjustified (economically or technologically) charging different prices that is unjustified (economically or technologically) unjustified high or low pricing of a financial service by a financial organization creating discriminatory conditions creating barriers to entry or barriers to exit violation of the procedure of pricing established by statutory legal acts {COMMENT: aimed at firms subject to economic regulation}

19 Russia – abuses defense Items 4, 8 & 9 can be justified under Article 13. Art. 13 tells us that they can be justified if the actions (inactions) do not eliminate competition, are no more restrictive than necessary of competition, and promote economic progress and Russian competitiveness and consumers share in the benefits.

20 European Union Art. 82 "Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts."

21 EU Dominance not defined in Treaty, but in case law. Dominance must be in reference to a market. Market share is the most important indicator but not determinative. Therefore market definition is essential.

22 EU Market shares: 0%100% Dominant Unlikely dominant 30%50–70%

23 EU (recent guidelines) Dominance means substantial market power over a period of time. If can profitably maintain prices above the competitive level for a significant period of time, then generally dominant. Indicators: market shares (firm & rivals), entry and expansion by rivals, countervailing buyer power.

24 Sherman Act section 2 “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony…”

25 US A common law system, so law is court decisions. Good reference: American Bar Association, Antitrust Law Developments. “Monopolization” ≠ “abuse of dominance" –Monopolization requires more market power than dominance requires. –The conduct focus is on exclusion. Exploitation is not illegal.

26 US Market share is a starting point for determining if monopoly power >70% almost always supports inference, but rebuttable <50% almost never find monopoly Other evidence is very important –Barriers to entry - most important –Barriers to rivals' expansion - also important

27 US standard on exclusive dealing agreements: The concern is that it may be an improper means of maintaining a monopoly. 1. Must have monopoly power. 2. The exclusionary conduct must have an anti- competitive effect. 3. Even if both conditions are met, then the monopolist still retains a defense of business justification.

28 Main topics What do Competition Authorities do? What is Abuse of Dominance? A Case Study