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Safe harbours – NEVEN – December 2017 OECD discussion


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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

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Safe harbours – NEVEN – December 2017 OECD discussion

  2. 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) ? 05-Dec-2017 2
  3. 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 05-Dec-2017 3
  4. 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 05-Dec-2017 4
  5. 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. 05-Dec-2017 5
  6. 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). 05-Dec-2017 6
  7. 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 05-Dec-2017 7
  8. 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”. 05-Dec-2017 8
  9. 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) ? 05-Dec-2017 9
  10. 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) 05-Dec-2017 10
  11. 11. Procedure 05-Dec-2017 11
  12. 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. 05-Dec-2017 12
  13. 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 05-Dec-2017 13
  14. 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. 05-Dec-2017 14
  15. 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) 05-Dec-2017 15
  16. 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. 05-Dec-2017 16
  17. 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 03/12/2017 17
  18. 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 ? 05-Dec-2017 18
  19. 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. 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. 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