1. 1 Economic Analysis in Competition Law – A Lawyer’s Perspective A. Douglas Melamed March 23, 2009

2. 2 The Purpose of Competition Law To promote market competition by prohibiting conduct that interferes with or impairs such competition, in order to enhance consumer welfare To that end, the law should: –Preserve competition/rivalry –Without interfering with innovation or efficiency

3. 3 Purposes of AML (Article 1) Guard against monopolistic competition Promote fair market competition Enhance economic efficiency Protect interests of consumers Promote the healthy development of the socialist market economy Most focus on competition, efficiency and consumers

4. 4 The Role of Rivalry Rivalry spurs firms to work harder to attract customers –Lower prices –Better products But rivalry is not an end in itself –Numerous small firms can be inefficient –Protecting rivals can deter innovation

5. 5 Dynamic or Temporal Considerations Markets change over time A monopoly today might be threatened or dissipated by entry or innovation Conduct that harms rivals (e.g., refusal to deal) or consumers (e.g., high prices) might actually be desirable –If it furthers efficiency (e.g., price cuts in response to competition), or –If it is reasonably necessary to create incentives to invest and innovate (e.g., assertion of IP rights)

6. 6 The Role of Economics in Competition Law Competition law is not just applied economics, i.e., not ad hoc assessment of the economic implications of conduct Instead, sound competition law requires clear principles that firms can understand and apply in their daily activities Economic analysis should thus be used –To help develop sound legal principles (e.g., prices are anticompetitive only if below cost), and –To analyze factual questions raised by those principles (e.g., whether the prices were below cost)

7. 7 How Conduct Can Injure Competition (1) Collusion –When firms that would otherwise compete agree not to compete, including horizontal mergers joint ventures among competitors naked cartels such as price fixing –But some collaborations among competitors are good (e.g., research joint ventures)

8. 8 How Conduct Can Injure Competition (2) Exclusion –When firms are forced out of the market, or entry barriers are created, so that fewer firms are able to compete effectively can be the result of unilateral conduct (e.g., pricing below cost), or agreement (e.g., tying agreement or vertical merger) –But when firm is forced out because another firm is more efficient, conduct can enhance welfare Note: both conduct by private firms and conduct by the government can injure competition

9. 9 The Role of Economics in Collusion Cases Help identify hidden collusion (e.g., infer agreement from conduct) Assess efficiency of collaboration (i.e., did it lower prices or costs or improve products) Assess impact of collaboration on market as a whole (e.g., did collaboration leave too few market rivals) Inform development of sound legal principles for collusion (e.g., collaboration is lawful if it does not impair competition that would have taken place absent collaboration)

10. 10 The Role of Economics in Exclusion Cases Assess efficiency of exclusionary conduct (i.e., whether the conduct that excluded a rival lowered prices or costs or improved products) Assess impact of exclusion on the market as a whole (e.g., did conduct leave too few market rivals) Inform development of sound legal principles for exclusion (e.g., prices are anticompetitive only if below cost)