Research Article |
Corresponding author: Yannis Katsoulacos ( yanniskatsoulacos@gmail.com ) Academic editor: Marina Sheresheva
© 2022 Yannis Katsoulacos.
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Citation:
Katsoulacos Y (2022) Why legal standards in antitrust enforcement in developing jurisdictions should differ from those in mature jurisdictions: A decision-theoretic approach. BRICS Journal of Economics 3(2): 1-19. https://doi.org/10.3897/brics-econ.3.e81036
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The appropriate choice of legal standards (LSs) in antitrust enforcement, that is, decision procedures or decision rules that provide the basis for how potentially anticompetitive conduct must be assessed in order to decide whether there is liability or not, has been hotly debated for many years. The debate has gained in intensity in recent years as a result of the concerns expressed by a significant number of academics and policy makers in many countries about the antitrust treatment of major platforms. Relying on recent developments in the literature on the choice of LSs, this article shows that the adoption of presumption-based LSs, that is, LSs that are closer to Per Se than to Effects-Based in developing jurisdictions, and the standards that would be optimal in developed jurisdictions, is consistent with the principles of minimising the costs of decision errors, and also leads to lower enforcement costs. The standards that would be optimal in developed jurisdictions, is consistent with the principles of minimising the costs of decision errors, and also leads to lower enforcement costs.
legal Standards, Effects-Based, Per Se, Rule of Reason
The appropriate choice of legal standards (LSs) in antitrust enforcement, that is, decision procedures or decision rules
There are a number of differences. To start with, the US tends to treat many more practices, even when undertaken by firms with significant market power, as presumptively legal (rather than illegal), that is, on average benign, than the EU that would treat these practices when undertaken by dominant firms as presumptively illegal. Next and related to this, in the US, the dominant opinion is that the primary objective in antitrust enforcement is to limit false convictions rather than false acquittals – a point of view that only recently started to be strongly criticised – and a point of view that is not held in the EC. As an outcome of these views, there is a strong tendency in the US to treat what is considered presumptively legal conducts using Per Se Legality (or Modified Per Se Legality, or Quick Look) LS (see below for a full explanation of these terms), an approach that leads to a high rate of acquittals and has been particularly criticised with respect to enforcement in high-tech digital markets. If, on the other hand, a practice is considered presumptively illegal in the US, then, at least in the last two decades, there has been a strong tendency to rely on the extensive use of economic analysis and evidence in case-specific investigations, that is, to rely much more on the rule of reason (or full effects-based approach). This is not the case in the EU,
The debate on the appropriate choice of LSs has gained in intensity in recent years as a result of concerns expressed by a significant number of academics and policy makers in many countries regarding the treatment of the major platforms. Even in the US, an increasing number of commentators argue that current antitrust doctrines, rules and antitrust enforcement “are too limited to protect competition adequately, making it needlessly difficult to stop anticompetitive conduct in digital markets” and growing market power (
We can refer to a large number of broad considerations influencing the choice of LSs that have been the subject of an extensive literature. The most important of them are: the desire to minimise decision errors;
Here, we focus on the consideration that has had the greatest influence on thinking in this area and that has been discussed most extensively and for a longer period than all the others: the desire to minimise the welfare costs of decision errors
To evaluate the usefulness of this approach, one can, for example, consider its application for comparing whether, when assessing tying arrangements, a Modified Per Se Illegality LS, under which, in order to reach a decision, we rely on certain contextualization tests and the existence of significant market power, is preferable (in terms of decision errors) to strict Per Se Illegality, under which there is no pre-requirement of extant market power. Also whether a Disadvantaging Rivals (truncated effects-based) LS is preferable to Modified Per Se Illegality – where, under the former, significant market power is not enough for illegality, it is also required to demonstrate that rivals are likely to be excluded (in a broad sense) from the market by their conduct; or whether a full effects-based is preferable to the Disadvantaging Rivals LS. As
To give another example, the approach can be used to clarify and make precise why it makes sense to recommend that antitrust laws should be updated in order “to recognise that under some circumstances conduct that creates a risk of substantial harm should be unlawful even if the harm cannot be shown to be more likely than not.”
Here, we rely on these recent developments in the literature on the choice of LSs to show that, generally, error-minimising LSs for reaching liability decisions in antitrust enforcement will be closer to Per Se than to effects-based in developing jurisdiction/countries (as we defined these countries above
As indicated above, a CA can decide that a conduct violates the competition law by undertaking one or more investigations, in each of which it successively examines a screen or precondition for identifying harm. Assuming here that the objective is to identify whether the conduct is harmful to consumer welfare, the CA can consider that this objective was satisfied, depending on the type of conduct investigated, in a number of ways, differing in terms of whether some or all screens are examined and which ones in particular. Specifically, to reach a liability decision, the CA’s investigations can cover one or more of the following stages, each of which is associated with the examination of a specific screen or precondition:
Stage 0: Initial characterisation of the conduct. This includes a detailed examination of all the relevant features of the conduct with a focus on those features that, according to case law and established economic theory, are considered most likely to influence the effects of the conduct. This conduct examination is often accompanied by a description of some basic market magnitudes, such as the level of sales, which are an input to stage 2 and can be also considered as part of that stage. We can refer to this as the “conduct characterisation screen.”
Stage 1: Detailed contextualization of the market(s)
Stage 2: Establishing that there is potential for significant exclusionary impact or, more generally, a competition lessening effect (by enhancing ability to exercise market power). This can be manifested through the exit of a rival or rivals or through the marginalisation of rivals (so that they cannot exploit economies of scale and/or network effects) or through the exclusion of potential entrants. We can refer to this as the “enhanced ability to exercise market power screen.”
Stage 3: Establishing that there is a potential loss for consumer welfare before accounting for efficiencies.
Stage 4: Establishing lack of potential for significant efficiencies that can benefit consumers, specifically, establishing that efficiencies are not sufficiently significant to outweigh the anticompetitive effect of the conduct. We can refer to this as the “efficiencies and balancing screen.”
Depending on the screens examined, we can distinguish the following legal standards.
We note that all LSs (1–4) are presumption-based LSs, in the sense that they all rely on some presumption about the outcome of the subsequent assessment(s), if one or more subsequent assessments were made. Only in case (5) the liability decision relies on case-specific information from all assessment steps (0–4). So, the distinguishing characteristic of this LS is that there is no reliance on presumptions when the liability decision is made.
Clearly, for all presumption-based LSs there can be either a presumption of illegality (that is, the assumption that the conduct is on average harmful) or a presumption of legality (that is, the assumption that the conduct is on average benign). To clarify, consider stage 0: in this stage the LS is that of Strict (or, for simplicity, let’s omit the word “strict”) Per Se Illegality if just on the basis of the information collected in this stage the conduct is considered presumptively illegal; or the LS is that of Per Se Legality if in this stage the conduct is considered presumptively legal. To determine this, in stage 0, following the CA’s characterisation of the conduct as being, by virtue of its specific formal features, of a particular type, of such cases
, and is considered presumptively legal (PL) if
. Clearly, knowledge about the values of these parameters need not be very precise
At present in many jurisdictions (including those of North America and the EU) only very rarely will a general conduct type identified in stage 0 be characterized as Presumptively Illegal without any additional contextualization of the circumstances under which the specific conduct is undertaken, the exception being that of horizontal hard-core cartels in the US.
Using the notation introduced above, in stage 1, the conduct will be presumptively illegal if average harm and presumptively legal if
where
is the probability that the conduct, when undertaken by dominant firms, is genuinely harmful.
is quite large, and it will be presumptively legal if H is small relative to B and/or
is quite small. It is important to note that if the conduct is presumptively legal and the Modified Per Se legality LS is chosen, all conducts will be permitted and the cost of decision errors will be equal to the costs of false acquittals,
H. If the conduct is presumptively illegal and the Modified Per Se Illegality LS is chosen, all conducts will be banned and the cost of decision errors will be equal to the costs of false convictions
is quite small.
More generally, a number of other parameters will also influence the relative value of false convictions and false acquittals.
The perception about the value of these parameters explains why, as mentioned above, there are very significant differences in the answer to the question of whether a specific conduct should be considered presumptively illegal or legal and what is the relative value of false convictions and false acquittals across different jurisdictions.
Of course, in a jurisdiction in which the dominant economic ideology places greater trust in the markets’ ability to self-correct, which tends to significantly lower the value of H (the dominant US model in the last 40 years) and puts great weight on the incentive effects of false convictions
Needless to say, in developing countries, the ability of markets to self-correct will usually be even more limited than in developed economies, as entry barriers and other market failures will be higher, and the CA decisions are unlikely to have significant adverse incentive effects.
The following analysis of the factors that determine whether an additional assessment stage (and, hence, a movement from Per Se towards effects-based) will lower decision errors also shows that in developing countries this movement is less likely to be justified than in developed countries. There are six factors that need to be taken into account. In the discussion below we assume that the conduct type is presumptively illegal in stage 1, i.e., when conduct is undertaken by firms with significant market power.
In short, with the exception of one factor, the effects of which are ambiguous, all the other factors mentioned above imply a reduced need to apply Effects-Based in developing countries than in developed countries, for reasons of minimizing errors.
The discussion above suggests that the principles of finding decision errors can be used to provide a framework for analysing the choice of legal standards in competition law enforcement in developing countries/jurisdictions and to show that the errorminimising choices in such jurisdictions are more likely to be closer to Per Se than to effects-based than in developed countries/jurisdictions.
Over the years, I have benefitted enormously from discussions on the general issues covered in this paper with Svetlana Avdasheva, Svetlana Golovanova, Frederic Jenny, Bill Kovacic, Pierre Regibeau, Patrick Rey, Thomas Ross, Jacob Seifert and David Ulph. Of course, all responsibility for errors, omissions and ambiguities lies with me. I would like to thank two reviewers for their comments, and for their assistance in conducting research I am grateful to Vasiliki Bageri, Eleni Metsiou and Galateia Makri, who contributed in the context of the ELIDEK project “Optimal Design of Competition Policy Enforcement.”
1 We recognise that a distinction is drawn by legal scholars between “rules” (a term that, in the context of antitrust, they reserve for Per Se decision procedures) and “standards” (like the “rule of reason”) – see
2 That is, the LS should be one of Per Se Illegality (in the US) or by-object restriction (in the EU). Though we recognise that these are not exactly equivalent LSs – see an extensive discussion on this in
3 Below, for convenience, we will refer to them as developing jurisdictions or developing countries. Broadly speaking, we have in mind jurisdictions that have developed relevant laws and institutions and have been active in antitrust enforcement for the last 20 years at most. However, we also have in mind here countries that are “developing” in the sense of their general economic, technological, political and socio-cultural conditions and characteristics, their governments’ policies that influence barriers to entry, trade and foreign direct investment in markets, and, more specifically, factors that contribute to a competitive environment in markets, such as, quality of physical infrastructure and provision of public goods, levels of education and health care (which determine availability and quality of human resources), and existence of missing institutions and underdeveloped financial markets. Countries can be ranked in terms of these conditions by a number of indices, such as quality of the country’s legal and judicial systems, degree of corruption, macroeconomic environment, size of the informal sector, regulatory burden – government barriers to competition, degree of trade liberalisation, quality of ICT, infrastructure and logistics in economy, degree of availability of suitable quality human resources and financial resilience. These are available from various international organisations, specifically: the WB, the WEF, the OECD, UNCTAD, the IMF, the EBRD and the WTO, and were used to construct a composite indicator by Yannis Katsoulacos and Frederic Jenny – see
4 Both at the level of the EU Commission (EC) and that of the member states. The difference is thought to be particularly pronounced in abuse of dominance cases but also many vertical restraints. For an excellent overview of the application of economics in a century of antitrust enforcement in the US, see
5 We will use the terms “effects-based” (popular in Europe along with “economics-based”) and “rule-of-reason” (used in the US) interchangeably, though, as Vickers (2007) points out, under the latter there is greater discretion afforded to an agency / court than under the former. Intermediate LSs are described in detail below.
6 See the empirical findings of Katsoulacos et al. (2021) covering France, Greece and Russia, as well as the EC.
7 “Joint Response to the House Judiciary Committee on the State of Antitrust Law and Implications for Protecting Competition in Digital Markets” by 12 of the most prominent economists and legal experts in the US.
8 For a very systematic and extensive criticism of the view that the primary objective of antitrust enforcement is to limit false convictions rather than false acquittals, which has its origins in
9
10 And, hence, on the factors that influence decision errors, to which our analysis here is dedicated. See below for additional discussion and references.
11
12
13 See below for more details.
14 Such as “protecting the competitive process” or “non-disadvantaging rivals.” See below for more details.
15 More precisely, in the words of Beckner and Salop (1999), “minimising the expected consumer welfare costs of erroneous decisions” (p. 50). For early applications of this error-cost approach to legal rules, see
16 Especially section II. They note: “It has been recognized for decades that decision theory is useful for understanding and formulating legal standards. Making legal decisions based on probability, inferences, and presumptions is consistent with a decision-theoretic approach to legal rules. Decision theory provides a methodology for information-gathering and decision-making when outcomes are uncertain, information is inherently imperfect, and information is costly to obtain. This methodology is a rational process in which a decision-maker begins with initial beliefs (i.e., presumptions) based on prior knowledge and then gathers additional information (i.e., evidence) to supplement the presumption in order to make a better, more accurate decision” (p. 16).
17 They build on the seminal contribution of Breckner and Salop (1999) and the papers of
18 4th Edition, 2017. See also the detailed discussion in Hovencamp (2018); as noted there, this was an idea discussed in all three previous editions of the Arreeda and Hovencamp treatise, p. 123).
19 Also,
20 Under this LS, tying is presumed to violate the law (i.e. it is considered presumptively illegal) when undertaken by dominant firms. See also
21 Recommendation of a group of US experts (
22 See footnote 5 for details.
23 That is, the LSs currently adopted should be closer to Per Se in the former than in the latter across different conducts that are considered potentially illegal under antitrust law in the areas of vertical restraints and monopolisation or abuse of dominance practices.
24 If, as in the tying cases, there are more than one market to consider, market power must be established in the tying and the tied market.
25 As already noted, we are assuming that the substantive or liability standard is one of the standards of consumer welfare. With a total welfare standard, an additional investigation stage would be added.
26 Concentrating on consumer choice may mean reaching decisions on the basis of effects on “competitors,” the exclusion of which may reduce consumer choice. However, this would be wrong since it is quite possible to increase consumer welfare even with less consumer choice.
27 Under this, a liability decision relies only on the information from stages 0 and 1 and sometimes on the effect to competitors assessed in stage 3, on the basis of which anticompetitive effect is inferred. This term is used essentially in discussions of the US enforcement and it signifies that the court also reviews (has a quick-look on) the efficiency defence presented by defendants (see
28 E.g., tying of products, engaging in exclusive dealing contracts, offering quantity discounts or fidelity rebates, refusing to deal with a rival firm etc. In each type, the formal characteristics of different cases are likely, of course, to be different.
29 This is what Hylton and Salinger (1999) call the “base rate” probability (p. 60).
30 Here we proceed from the fact that the substantive (or liability) standard is that of consumer welfare. This seems to be the most appropriate assumption for North America: “In US since the end of 1970s, the Courts have accepted the view that antitrust law is a “consumer welfare prescription” (Jones & Kovacic, 2017; Hyman & Kovacic, 2013). But it is worth noting that recently there have been quite a few voices that have argued that this should change, and the emphasis should return to the protection of the competitive process (e.g.,
32 In an adversarial system of enforcement, such as that of the US, estimates of the values of these parameters will be provided by the defendants and the plaintiffs.
33
34 The term Per Se is commonly and rather loosely used for a case in which the liability decision is based only on the initial characterization of the conducts in stage 0. However, in the EU, the term object-based LS is often interpreted in a similar way to categorize and reach decisions on conducts on the basis of the initial characterization and also on the initial market contextualization associated with stage 1. Further, in formal terms, no conduct is strictly Per Se Illegal in the EU, in the sense that all (including hard-core cartels) are rebuttable under article 101 (3). The closest to a (strict) Per Se LS is the one used in the US to treat hard-core horizontal cartels, though, as noted by Harrington (2020), in the US there are always defences in practice, so “in practice, there does not seem to be much difference between the US and the EU with regard to explicit agreements” (p. 10).
36 In the simplest case when the CA does not try to discriminate between harmful and benign conduct undertaken by dominant firms.
37 Adverse deterrence effects, or “chilling” effects, also mentioned above. Another important factor is the significance attributed to the potential efficiencies generated by a conduct. As an example, Hylton and Salinger consider that for the case of tying “false acquittal costs are likely to be small relative to false convictions when there are (1) market constraints on the firm’s conduct, (2) strategies other than tying that the firm could use to gain the same advantage in the market, or (3) no clear incentive to use tying in order to harm consumers. On the other hand, false conviction costs are likely to be relatively large when (1) there are substantial potential efficiencies associated with tying and (2) tying is an important competitive instrument.”
38
39 See also Fox and Gal (2014) for a closely related discussion concerning the need for enforcing competition law in developing countries. Their discussion reminds us that different jurisdictions are characterized by different degrees to which competition is workable in products and services markets in the absence of CL enforcement. As we stressed in the introduction, the degree to which competition is workable depends on the anticompetitive conduct of firms, which enforcement seeks to eliminate, as well as, and perhaps primarily, on the more general conditions mentioned in footnote 5. Also see
40 This is due to the fact that this probability is the product of two probabilities: the probability that the screen is satisfied (given previous screens were satisfied), which is reduced as additional screens are assessed, but the reduction is smaller in developing countries (see (ii) below); and the probability that, given the additional screen is satisfied, the product is genuinely benign, that is lower with the additional screen, but the reduction is likely to be larger in developing countries where the lack of contestability and other market failures imply that conduct is highly unlikely to be benign as additional screens are satisfied. For a very detailed discussion of these probabilities, see
41 Please note that our analysis in this paper focuses on minimizing decision errors rather than on welfare maximization, which would require that we also take into account deterrence effects. For an analysis of the latter, see