This presentation by Damien Neven from the Graduate Institute of Geneva was made during the discussion “Safe harbours and legal presumptions in competition law” held at the 128th meeting of the OECD Competition Committee on 5 December 2017. More papers and presentations on the topic can be found out at oe.cd/21v.

1. SAFE HARBOURS AND LEGAL PRESUMPTIONS
SOME COMMENTS FROM AN ECONOMIC PERSPECTIVE
Damien Neven (Graduate Institute, Geneva)
OECD – Paris (5/12/2017)
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2. Introduction
• Presumption : ex ante assessment that the observation of A leads
with a high probability to B.
• Both presumption of illegality : a rebate contingent on exclusivity is
very likely to lead to anti-competitive exclusion.
• And presumptions of legality : a market share below 30% is very
unlikely to lead to the exercise of market power.
• Presumptions are informed by economic theory and empirical
evidence.
• Why use presumptions in enforcement ? How does the use of
presumptions relate to procedures and institutions
• How are presumption developed and affirmed. How are theory and
evidence consolidated to form priors ? What is the process through
which these priors are used in enforcement (consistently) ?
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3. Introduction
• What is the optimal set of presumptions ? This requires the
formulation of an objective function. Only in terms of the outcome of
the case (investigation) or considering deterrence effects ?
• This presentation develops a simple “theory” of investigations in the
context of inquisitorial procedures, in which the use of presumptions
is “optimal”.
• The investigation is modelled as a sequential acquisition of
information
• This framework in consistent with principles developed in Cartes
Bancaires with respect to the distinction between restrictions by
effects and by object and with the opinion of the AG Wahl in Intel.
• We further consider a couple of issues that arise in a sequential
process of acquisition of information
– Which information should be acquired first (see also Salop (2017) ?
– Should initial decisions subject to a different (enforceable) standard
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4. Framework
• Assume that an Antitrust Agency (AA) has to decide either Prohibit an
agreement or drop the case. It is endowed with an objective function
• When faced with an agreement/conduct, the agency has a prior
distribution with respect to its consequences (F(x)), where x are the
consequences, on the horizontal axis).
• A strong presumption is associated with a “high” density over the
positive (or negative) segment and low variance
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5. Framework
• The standard of proof for a decision can be formulated in terms of
particular features of the decision.
• For instance, a standard such that it should be more likely than not
that a practice harms consumers in order to be prohibited is a
requirement that the integral of the density function (the cumulative
density function) over the negative domain should be at least 1/2 .
(f(0) > ½).
• Why should the AA do an investigation ? It could take a decision on
the basis of its prior.
• A decision to prohibit can be appealed . The AA anticipates that the
Court will review its decisions, against a particular standard
• The court, upon appeal, may find that the prior of the AA was
incorrect.
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6. Framework
• Type II errors (following the decision to drop a case) are only subject
to a general process of accountability (potentially subject to greater
noise).
• The mechanism of accountability is thus asymmetric : Type I errors (in
the context of an appeal following a prohibition decision) are subject
to potentially detailed factual scrutiny by courts.
• Hence, there may be biases. The AA does not minimize error cost
when the prospect of appeal is asymmetric
• The probability of being overturned depends on the variance of the
distribution (the review is less precise).
• Hence, the AA will search for more information to reduce the variance
of its prior (to be more confident in its assessment and hence less
likely to be overturned).
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7. Framework
• This also implies that standard of proof applied by the AA should be
seen as endogenous. It is the result of standard expressed by the
Court and the anticipation of the precision of the review by the Court.
• The acquisition of information will change the distribution function,
say from F(x) to G(x) and H(x)
• At some stage, the AA will stop the investigation (presumably
because of resource constraints but also a function of the precision of
the marginal analysis that can be performed).
• With a strong presumption (F(x) with low expected value, low
variance), it may be optimal to stop the investigation at the first stage.
• Hence, the use of presumption is optimal in this framework
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8. Presumptions and object in Cartes bancaires
• CB associates a restriction by object with a strong presumption :
– if there is a strong prior that the agreement/conduct is seriously harmful
– this prior is informed by the nature of the agreement in its economic
context
– the analysis of the context is not an analysis of effect
(56) “Only conduct whose harmful nature is proven and easily identifiable, in
the light of experience and economics, should therefore be regarded as a
restriction of competition by object, and not agreements which, having
regard to their context, have ambivalent effects on the market …”
(58) “This concept should relate only to agreements which inherently, that is
to say without the need to evaluate their actual or potential effects, have a
degree of seriousness or harm such that their negative impact on
competition seems highly likely”.
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9. But subject to an analysis of circumstances
• The Court further indicates that the prior should be informed by the
nature of the agreement in its economic context.
• And clarifies that the analysis of the context is not an analysis of
effects.
• The update of the prior will take into account the reliability of the
evidence (i.e. consider the likelihood ratio, the probability that the
evidence is observed if the conduct is anti-competitive / probability that
the conduct is observed if it is not)
• Hence, if the presumption is not weakened by the analysis of the
context, a decision can be taken (as a restriction by object).
• Otherwise, more information should be gathered.
• Hence, no decision solely on the basis of a presumption (but Dole..)
• The judgment also suggest that the standard of review (and hence the
standard of proof ex ante) will be different : the Court will check that
there was a high likelihood (and low variance) ?
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10. And also under 102 ?
• AG Wahl advocates a similar approach for 102 in Intel.
• “The assessment of capability as concerns presumptively unlawful
behaviour must be understood as seeking to ascertain that, having
regard to all circumstances, the behaviour in question does not just
have ambivalent effects on the market,…, but that its presumed
restrictive effects are in fact confirmed. Absent such a confirmation, a
fully-fledged analysis has to be performed” (§120).
• “In a somewhat similar fashion to the enforcement shortcut
concerning restrictions by object under Art 101 TFEU, the
assessment of all circumstances under Art 102 TFEU involves
examining the context of the impugned conduct to ascertain whether
it can be confirmed to have an anti-competitive effect. (§135)
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11. Procedure
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12. What information to gather first ?
• The AA could further investigate either the negative realizations or the
positive realizations. The AA will have priors about the ways in which
its distribution will change depending on what it investigates
• In principle, the AA should investigate the likelihood of the issue which
is more likely to affect (improve) its decision (and is least costly) (see
Becker and Salop, 1999)
• In some circumstances, the priority will be to investigate a particular
theory of harm.
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13. What information to gather ?
• But there are circumstances in which evidence on positive
realisations (efficiencies) is the most likely to change the decision
towards a prohibition
• For instance, for horizontal price restraints (where harm is clear and
the probability of harm is high), plausible efficiencies should be
investigated first. If the probability of significant efficiencies is low,
prohibit. If moderate, investigate the harm further.
• With respect to the vertical restraints, there may be a strong prior that
the practice is motivated by efficiencies, so that the priority is to
investigate the potential anti-competitive effects (if there is little
evidence, the case should be dropped).
• In this respect the structure imposed by 101(1) and 101(3) may be
inefficient
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14. Higher standard for initial reviews ?
• Consider merger control procedures, commonly structured in two
stages, such that a merger can be cleared after an initial review
• And such that the decision to clear in Phase I is enforceable and
subject to a higher standard of proof, namely “the absence of serious
doubt”, instead of that “balance of probabilities” as in the EU
• Unlike the decision to open a Phase II investigation which cannot be
challenged
• Phase I results in a prior distribution F(.) and absence of serious
doubt is such that F(0) < 0.1 (say)
• In Phase II, the AA obtains a signal which truncates the support of the
distribution from above (negative signal) or below (positive). The
extent to which the support is truncated represents the precision of
the investigation.
• The AA will also have beliefs at the end of Phase I regarding the
signals, i.e. the outcome of Phase II.
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15. Higher standard for initial reviews ?
• The AA will also have beliefs at the end of Phase I regarding the
signals, i.e. the outcome of Phase II.
• However, if decisions are enforceable in Phase I, the beliefs about the
signal cannot be taken into account for Phase I decisions (which need
to rely on verifiable evidence).
• In the absence of enforceability, the notion of standard of proof is
moot and the AA can maximize consumer surplus
• It is inefficient not to take into account the belief about the
investigation of Phase II. For any F(), there is a value of the threshold
probability such that a decision in Phase I such that mergers will be
cleared or investigations will be opened when it is not optimal to do
so.
• A uniform threshold probability will thus be inefficient (no one size fits
all)
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16. Higher standard for initial reviews ?
• The US procedure does not have an enforceable standard when the
authorities do not open a second request.
• Yet, leaving Phase I clearances unaccountable may not be attractive.
• Assume that there is an enforceable standard, should it be higher
than in Phase II ?
• Three cases. First, the merger is prohibited in Phase II, whatever the
signal. This arises when Phase I review concludes that the merger is
likely to be ant-competitive and the signal is imprecise. A necessary
condition is that F(0) > ½. Hence a balance of probability threshold
cannot be inefficient.
• Second, the merger is always cleared in Phase II whatever the signal.
Then a balance of probability is efficient.
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17. Higher standard for initial reviews ?
• Third, the merger is cleared when the signal of favorable but
prohibited if the signal of unfavorable, it is best to give the AA
maximum discretion with respect to the decision that is constrained by
enforceability
• This implies that the threshold should be ½.
• Hence, if there is an enforceable standard for clearance in Phase I, it
should not be different from the standard applicable in Phase II
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18. Conclusion
• The use of presumptions is dependent on the enforcement
procedures (inquisitorial vs adversarial).
• One can rationalize the use of presumptions in a framework in which
authorities acquire information sequentially .
• Following recent judgments (and opinions from the AG) the EU is
developing enforcement procedures that are consistent across
instruments and allow explicitly for the use of presumptions, subject to
a test of relevant circumstances.
• This framework can be used to analyze various aspects of
enforcement procedures.
– It is not clear that a different standard for initial reviews is desirable.
– The sequence in the evaluation of anticompetitive effects and efficiencies,
imposed by 101(3) may not be attractive.
• Main challenge : develop consistent presumptions ? Would a
decentralized process suffice ?
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19. References
• Demougin, D. and C. Fluet (2006). Preponderance of evidence.
European Economic Review 50 (4), 963–976.
• Demougin, D. and C. Fluet (2008). Rules of proof, courts, and
incentives. The RAND Journal of Economics 39(1), 20–40..
• Zamir, E. and I. Ritov (2012). Loss aversion, omission bias, and the
burden of proof in civillitigation. The Journal of Legal Studies 41(1),
165–207.
• Kaplow, L. and S. Shavell, (1994), Accuracy in the determination of
liability, The Journal of Law and Economics, 37(1), 1-15
• Rubinfeld, D. and D. Sappington, (1987), Efficient awards and
standards of proof in judicial proceedings, The Rand Journal of
Economics, 18(2), 308-315
• Talley, E., (2013), Law, Economics and the Burden(s) of Proof,
Research Handbook on the Economic Analysis of Tort Law,
• Katsoulacos, Y. and D. Ulph (2009). On optimal legal standards for
competition policy: A general welfare-based analysis. The Journal of
Industrial Economics 57(3), 410–437.
• Kaplow, L, (2012), Burden of proof, The Yale Law Journal, 738-858
05-Dec-2017 19

20. • Immordino, G. and M. Polo (2012). Antitrust in innovative industries:
the optimal legal standards. Technical report.
• Katsoulacos, Y. and D. Ulph (2011), Choice of enforcement
procedures under legal uncertainty, mimeo
• Christiansen, A. and W. Kerber, (2006), Competition policy with
optimally differentiated rules instead of per se vs rule of reason,
Journal of Competition Law and Economics, 2(2), 215-244
• Katsoulacos, Y., (2008), Optimal legal standards for refusals to
license intellectual property : a welfare-based analysis, Journal of
Competition Law and Economics, 5(2), 269-295
• Kaplow, L., (1995), A model of the optimal complexity of legal rules,
Journal of Law, Economics and Organization, 11(1), 150-163
• Beckner , C. and S. Salop, (1999), Decision theory and antitrust rules,
Antitrust Law Journal, 67(1), 41-76
• Ahlborn, C., D. Evans and J. Padilla, (2004), The antitrust economics
of tying; a farewell to per illegality, Antitrust Bulletin, 287
05-Dec-2017 20

21. No object in Maxima Latvija
• Rental contract between a shopping center and a food retailer which
gives the latter veto power over rental to other tenants (potential
competitors).
• The court (preliminary ruling, 26/11/2015)) indicates that it is not a
restriction by object.
• Hard to think about an efficiency benefit from this clause (except may
be prevention of opportunistic behavior by the shopping center)
• This highlights the fact that “a strong prior of a very serious harm”
requires more than the absence of a significant probability mass over
the positive domain of the support
• It also requires that probably mass is concentrated on significant
harm (i.e. that it can be expected in most circumstances)
• The Court notes in this regard that whether the prevention of entry
affects the competitive outcome depends on many circumstances,
including the existence of local alternatives and consumer
preferences05-Dec-2017 21