King’s College London



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King’s College London
Thesis submitted for PhD in law

Liza Nette Lovdahl Gormsen

0224334
Is there a tension between the goals of protecting economic freedom and the promotion of consumer welfare in the application of Article 82 EC?

Supervised by

Professor Richard Whish

David Bailey

London, 20 July 2007

Acknowledgements

The seeds for this thesis were sown during my LL.M. at King’s College London in 2002-2003 where I was taught competition law by Professor Richard Whish and David Bailey who later became my supervisors.


My intellectual indebtedness derives from various sources in particular my main supervisor Professor Richard Whish. His intellectual reputation is immense and it is impossible to capture the impressiveness of his capacity and logic in a few lines. In short, it would have been more difficult to write without his probing questions and rigorous criticism. On a personal level, I admire him for his integrity and fine personality.
I am also intellectually indebted to my second supervisor David Bailey who has been a helpful mentor and friend throughout the process. His meticulous corrections were always given with incredible sensitivity and intelligent understanding.
A number of friends took the time to review, discuss and improve parts of the thesis, including Dr Chris Townley, Anne Aylwin and Francesca Maria Jennings Gibbons. I am also grateful for the many and interesting discussions I have had with Professor Margaret Bloom, Dr Oke Odudu, Professor Alison Jones and all the bright people I have met on my way.
I am fortunate to have been a part of the enormous intellectual capacity surrounding the Centre for European Law at King’s College London.
Thanks to my dear friend Dr Melanie Smith for wise counselling, encouragement, emotional support and endless conversations about the Freiburg School, legitimate democracy and fundamental human rights.
I wish to acknowledge with gratitude the financial support from the Competition Law Scholar Forum and the Office of Fair Trading.
Above all, I thank my partner Fanis who has given me emotional and financial support throughout the three and a half years it has taken me to finish this project. I am grateful for his endless patience and his company. Without him the thesis would have been less fun.

Abstract


Article 82 is traditionally analysed as a tool to integrate and liberalise the European Single Market and to protect competition from distortion. As such there is no comprehensive discussion of the tensions that lie at the centre of the objective of protecting competition in the current rethinking of Article 82. With regard to exclusionary abuses, DG Competition has articulated that the main objective of Article 82 is the protection of competition in the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources. This statement may conflict with some of the case law protecting the economic freedom of the market players derived from ordoliberalism. The latter is a well respected German legal tradition that holds both that government needs to be restrained from abuse of power, and that the free market has its limits. Economic rights deserve protection and vigilance is needed to ensure economic power is not misused or abused, not only in the interests of consumer welfare, but also in the interests of the economic liberty of the individual. This thesis considers the tension between the goals of protecting economic freedom and the promotion of consumer welfare in the application of Article 82. Presupposing that economic freedom and consumer welfare are in opposition to one another, such tension is only set to intensify and must be given appropriate weight in considering the extent to which DG Competition can or should try to move to a consumer welfare standard. Changing the interpretation of protection of competition from economic freedom to consumer welfare within Article 82 can undermine a fundamental right if economic freedom is considered a fundamental right in the Community legal order. However, consumer welfare can also be seen as an opportunity, if properly debated or agreed to by the ECJ, to adopt a more economics-based approach to Article 82.


Acknowledgements 2

Abstract 4

Chapter 1 Thesis Introduction 7

Introduction 7

1. Tools Available for Reforming Article 82 13

2. Research Motivation 16

3. Research Question 25

4. The Research Puzzle 26

5. Research Approach 29

30

6. Research Method 31

7. Thesis Structure 31

PART I 34

Chapter 2 Ordoliberal Economic Freedom 37

Introduction 37

1. Ordoliberalism 37

1.1 Ordoliberal ideology 38

1.2 Ordoliberal competition policy 43

1.3 Complete competition 46

1.4 Summary 48

2. German Competition Law 49

2.1 The Ordinance against the misuse of economic power 50

2.2 The Act against restraints of competition 54

2.2.1 The Josten draft 56

2.2.2 The Government draft 57

2.3 The application of the ARC 58

2.4 Summary 62

Conclusion 64

Chapter 3 Economic Freedom in Article 82: the Early 65

Jurisprudence of the European Court of Justice 65

Introduction 65

1. Ordoliberal Influence on the EC Treaty 65

1.1 The Spaak report 66

1.2 Exploitative and exclusionary conduct 69

2. The Application of Article 82 75

2.1 Continental Can 76



2.1.1 Facts of the case 76

2.1.2 The Commission’s decision 76

2.1.3. The ECJ’s judgment 78

2.1.4 Analysis of the ECJ’s judgment 82

2.2 Commercial Solvents 83



2.2.1 Facts of the case 83

2.2.2 The Commission’s decision 84

2.2.3 The ECJ’s judgment 85

2.2.4 Analysis of the ECJ’s judgment 86

2.3 Hoffmann-La Roche 92



2.3.1 Facts of the case 92

2.3.2 The Commission’s decision 93

2.3.3 The ECJ’s judgment 94

2.3.4 Analysis of the ECJ’s judgment 96

2.4 United Brands 102



2.4.1 Facts of the case 102

2.4.2 The Commission’s decision 103

2.4.3 The ECJ’s judgment 106

2.4.4 Analysis of the ECJ’s judgment 109

2.5 Michelin I 111



2.5.1 Facts of the case 111

2.5.2 The Commission’s decision 112

2.5.3 The ECJ’s judgment 113

2.5.4 Analysis of the ECJ’s judgment 115

2.6 Summary 118



Conclusion 120

PART II 122

Chapter 4 Consumer Welfare 124

Introduction 124

1. Efficiency and the Classical Economic Models of Monopoly and Perfect Competition 126

1.1 Dynamic, allocative and productive efficiency 127

1.2 Perfect competition 131

1.3 Monopoly situation 132

1.4 The correlation between efficiency and welfare standards 134

2. The Chicago School’s Definition of Consumer Welfare 136

2.1 The theoretical foundation of the Chicago School 139

2.2 Main critique of the Chicago School 141

3. The Community Welfare Standard 143

3.1 Consumer welfare 143

3.2 The measurement of consumer harm 147

3.3 Microsoft 150



3.3.1 Facts of the case 150

3.3.2 The Commission’s decision 151

3.3.3 Analysis of Commission’s decision 153

3.4 Wanadoo 162



3.4.1 Facts of the case 162

3.4.2 The Commission’s decision 163

3.4.3 The CFI’s judgment 165

3.4.4 Analysis of CFI’s judgment 168

4. Efficiency Considerations under Article 82 170

4.1 The structure of Article 82 172

4.2 Efficiencies as a defence 175

4.3 Balancing efficiencies 178



Conclusion 181

PART III 183

Chapter 5 Economic Freedom in the Community Legal Order 185

Introduction 185

1. The Constitutionality of the EC Treaty 188

1.1 The ordoliberal economic constitution 192



2. The General Principles of the EU 195

2.1 Economic freedom as part of the general principles of the EU 199



2.1.1 Freedom of competition 201

3. The German Constitution 205

4. Summary 207

Conclusion 208

Chapter 6 The Relationship between Economic Freedom & Consumer Welfare 209

Introduction 209

1. Economic Freedom as Understood by Ordoliberals 209

2. Economic Freedom Does Not Equal Consumer Welfare 213

3. Protecting Economic Freedom Intrinsically or Instrumentally 219

3.1 Choice 223



4. Economic Freedom in the EC Treaty 226

Conclusion 232

Chapter 7 Thesis Conclusion 233

1. Summary of Findings 233

2. Elaboration of Findings 235

3. Consequences of Adopting a Consumer Welfare Standard 240

4. Guidelines 243

5. Contribution to the Article 82 Discussion 246

Bibliography 248

Chapter 1 Thesis Introduction

Introduction


Article 82 EC (formerly Article 86)1 is the mechanism used in the European Community (the ‘EC’)2 to control the abuse of a dominant position. The provision is aimed at eliminating abusive conduct by prohibiting any abuse by one or more undertakings of a dominant position in a market in so far as it affects trade between Member States. It forms part of the competition provisions established by the Treaty of Rome in 1957 (the ‘EC Treaty’),3 along with Articles 81 EC and 83-89 EC.4 Article 82 is at the pinnacle of this study, with discussion of the other provisions included only where relevant. The text of Article 82 is as follows:
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.
Article 82 is a framework provision and the central terms ‘dominance’ and ‘abuse’ are inherently vague. Neither the concept of abuse nor that of dominance is defined in the EC Treaty. The European Commission (the ‘Commission’) has not sought to publish general secondary legislation or practical guidance.5 Although the travaux préparatoires were released in the 1990s, the European Court of Justice (the ‘ECJ’) and the European Court of First Instance (the ‘CFI’)6 rarely focus on the intent of the drafters of the EC Treaty.
The meaning of the concepts of dominance and abuse has been left to emerge from the case law and practice of the Commission and the Community Courts. This allows the concepts to develop to fit the contours of a particular decision and new learning to be integrated into the case law in an ever-changing economy. A systematic approach to the interpretation of Article 82 also requires that the analysis of the provision is constantly updated, as interpretations that seemed adequate years ago may no longer be suitable. An explicit definition of each of the concepts in the EC Treaty could have a limiting effect on its interpretation, because every decision or judgment would have to fit within the definition. However, the lack of general guidance as to what does and does not constitute an abuse has led to an ad hoc process, swayed by the specific facts that come before the authorities or the courts. It is hard to see a single unifying theory underpinning the interpretation of Article 82.7 The law of Article 82 seems to be the function of the cases brought before the Community Courts. This has led to legal uncertainty resulting from the way in which the provision is being applied in practice and the way in which the legal framework is written.
This uncertainty may create a feeling of discontent amongst dominant undertakings – having to regard the special responsibility8 – resulting in less aggressive competition in the market. However, formalistic rules, as to what does and does not constitute an abuse in the market, are not helpful or desirable either. It may not be appropriate to rely on case law decided decades ago in today’s markets which are characterised by very rapid technological changes, creation and exploitation of intellectual property rights and a high degree of technical complexity.9 In general, concepts like dominance and abuse cannot be applied mechanically in today’s economic environment and many of the traditional presumptions do not hold in this context.
Article 82 is a legal provision, and one that has been shaped by the interpretation of the Community Courts. The Community is not a static legal environment and the EC Treaty is a ‘living instrument’, where the interpretation of text is always evolving. While the Community legal system has changed enormously since Article 82 was conceived, the provision itself has remained unchanged since 1957.10
At the 8th annual conference of the European University Institute in Fiesole in June 2003 Mario Monti, then the Competition Commissioner, announced that the Commission had started an internal review of its policy on abuse of a dominant position.11 One of the primary reasons for initiating the review was a greater appreciation of micro-economic theory on the part of the policy-makers and the need to ensure that the rules under Article 82 are sufficiently responsive to sound economics. One of the overall conclusions from the annual conference in Fiesole was that the concept of abuse does not lend itself easily to per se rules, and that a rule of reason approach is normally preferable. Another conclusion was that legal formalism should be abandoned in favour of the analysis and evaluation of economic effects.12 The initiation of the policy review came after growing criticism of the application of Article 82 and, in particular, the insufficient attention to economic principles and the rigour of the Commission's policy in this area of law.13 The great intellectual confusion over the proper standard of liability governing allegedly exclusionary conduct in practice and case law under Article 82,14 led DG Competition to publish its Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses in December 2005 (the ‘Discussion Paper’).15 While DG Competition published the Discussion Paper, as it is responsible for competition policy, the Commission will be responsible for applying the principles described in the Discussion Paper if these principles are later adopted in a Notice.16

The Discussion Paper sets out DG Competition’s agenda for developing and explaining theories of harm to consumers on the basis of a sound economic assessment of the most frequent types of abusive behaviour.17 The Discussion Paper focuses upon four general themes: dominance, general principles, abusive practices and defences. Through its general framework,18 DG Competition pinpoints the way in which exclusionary conduct may lead to the foreclosure of rivals, and proposes a two-step analysis for assessing whether a particular conduct is exclusionary. The specific conduct in question (1) must be capable of foreclosing the market, but (2) will only be considered abusive where it can be established that the conduct has a market-distorting foreclosure effect. The latter is a new development compared to the case law, but more importantly, DG Competition declares:19


With regard to exclusionary abuses the objective of Article 82 is the protection of competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources.
Whilst DG Competition embraces the objective of consumer welfare, its success in practice depends on whether DG Competition can reconcile the objective of consumer welfare with other possible conflicting objectives pursued under Article 82.
Besides the possible conflict with other objectives, choosing a consumer welfare standard will require the Commission to assess whether the exclusionary conduct is likely to produce anti-competitive effects in the market, which harm consumers directly or indirectly.20 Depending on the standard of proof, where it is required to demonstrate adverse effects on consumers the enforcement of Article 82 is likely to create more ‘type I errors’ or fewer ‘type II errors’.21 A type I error is where a given hypothesis, i.e. that an undertaking has committed an infringement, is rejected although it is true. A type II error is where a hypothesis is accepted, but an alternative hypothesis, i.e. that an undertaking has not committed the infringement, is true.22 In the first situation the competition authorities have substantial confidence in the robustness of markets to withstand abuse of a dominant position and do not intervene although intervention would have been justified. The boundary of public power is set as far ahead as possible to see whether the market can take care of itself and thereby accept the risk of private power. In the second situation the competition authorities have little faith in the robustness of the market and seek to prevent the risk of private power emerging – and thereby run the risk of intrusion by public power – by activating intervention in the markets earlier.23 Competition authorities intervene in circumstances where intervention is not justified. When enforcing Article 82, the Commission has been criticised for being too intrusive to prevent the risk of private power from emerging.24 In other words, the Commission has been criticised for making type II errors.




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