Abstract
In 2012–2013 the European Commission has had particularly prominent merger cases, with two prohibitions of transactions and several clearances with far-reaching remedies. In these cases economic analysis has been tightly integrated into the general argument of the Commission and became central to the outcome of the cases. Based on economic theory and supporting data, the Commission has pursued novel economic theories of harm and challenged some economically dubious “common wisdom” in merger assessment. The second area in which economic analysis has had a major impact is in state aid modernization. The new regional aid guidelines of 2013 have moved the rules much closer to economic thinking about effective regional aid and introduced requirements for economic ex-post analysis. Finally, the decisions on the e-books case reflect close cross-Atlantic cooperation with respect to the economic analysis and the design of appropriate remedies. This article reports on a number of examples for the most important cases.
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Notes
Court of Justice, Case T342/07, Ryanair v. Commission.
Case No COMP/M.6458—Universal/EMI, Commission Decision of 21 September 2012.
EMI’s publishing business was sold to a group led by Sony in a transaction that was also notified to the Commission and approved with remedies.
Case No COMP/M.1852—Time Warner/EMI; concentration abandoned.
Case No COMP/M.3333—Sony/BMG; Commission Decision of 19 July 2004.
Case No COMP/M.3333—Sony/BMG; Commission Decision of 3 October 2007.
Formally, this would be subadditivity of the profit function of a platform in the length of the product line at the platform level.
See Kühn and Padilla (2002), for a similar argument in the context of labor union bargaining.
The geographical scope of the market for physical market was considered national, in particular because consumer preferences and contractual conditions vary among Member States; for the digital market, contracts are typically negotiated across the EEA, and therefore the exact market definition was left open (and therefore the transaction was assessed both at the national and the EEA levels).
Universal’s economic consultants presented theoretical models that illustrated known ways in the literature to generate such complementarities. In one example, they assume that final consumers incur fixed costs when they use a particular platform (which may be monetary, such as the fixed subscription fee that these users pay for streaming services or non-monetary, such as the cost that a user incurs when organizing his or her music library on a platform). With such fixed costs, users would value a wider coverage of the repertoire that was offered on a platform, and therefore retail demand would be increasing in the coverage of the platform. In another setup, complementarity is created through the prevalence of uniform (retail) pricing on digital platforms such as Apple’s iTunes. Due to a lack of price differentiation at the retail level, an increase in a record company’s wholesale price will not translate into higher retail prices for the given record company’s portfolio but would instead be spread across all record companies. As a result the merger entity would have lower incentives to increase wholesale prices post transaction.
A “size” effect may also arise under other assumptions. Here we explain an intuitive setup.
Graphically, one should first consider a platform that possesses all available repertoires. Record company A, with a repertoire of one unit, can provide a relatively small additional value to the platform, since the marginal utility of the last unit of repertoire for end users and platforms is relatively low. Record company B, with repertoire of two units, can provide a greater (per unit of repertoire) additional value to the platform as the utility of the last two units of the repertoire are larger (per unit) than the utility of the last unit. Therefore a larger record company can extract better terms for its repertoire.
Advances relate to prepayments that platforms typically pay to record companies. Typically they are recoupable however they are also relatively high and represent a significant cost for new platforms as they need to take on a greater risk in case the business is not successful.
Minimum share guarantees require platforms to pay a given share of their revenues to a given record company irrespective of the sales of the latter in the platform.
MFC clauses (which are often described as “most favored nation” [MFN] clauses, following from their longstanding use in international trade) oblige digital platforms to extend any favorable conditions that are granted to a record company’s competitors also to that record company.
The framework of price competition in homogeneous products reflected certain high-level features of the industry that were emphasized by the parties, such as the high degree of supply side substitutability by EEA producers, and purchasing decisions based on price.
Although the assumption of price competition in homogeneous products likely implies an excessively high level of customer switching (by assuming that all customers would want to switch to the firm charging the lowest price) and hence likely overstated the degree of competition in the industry to some extent, the Commission considered that this framework was the most appropriate standard framework for the assessment of the parties’ argument as to the constraint from rivals once capacities of the parties and their rivals were taken into account.
Frictions may be due to, e.g., limited search or switching cost for customers; some degree of differentiation; customer multi-sourcing strategies; some costs of supply-side switching, etc.
European Commission, Case COMP/AT.39847-E-Books, Commission Decision of 12/12/2012 (the “Article 9 Decision”).
The Commission adopted an Article 9 Decision in relation to Penguin in July 2013, with substantially the same commitments as those applying to the other four publishers. We do not discuss the commitments in this article.
The European Commission and the DOJ cooperated closely during the investigation.
United States District Court, Southern District of New York, USA v. Apple, Opinion and Order, July 10 2013 (“Judge Cote’s Opinion”)
Unless otherwise stated, the factual elements included in this section of the article are based on the Commission’s Article 9 Decision, Judge Cote’s Opinion and the DOJ Proposed Findings of Fact (submitted to the court on April 26, 2013). Due to the different legal procedures that were followed in the US and in Europe, significantly more factual evidence was made public in the US, and therefore this article mainly refers to the US documents for specific pieces of evidence.
The evidence presented by the DOJ indicates that average e-book prices for the relevant publishers increased by roughly 20 % or more due to the introduction of agency (controlling for other potential effects on prices)—see DOJ Proposed Findings of Fact, paragraph 222. A price increasing effect was also present in the UK even though specific figures cannot be provided due to confidentiality restrictions (see Article 9 decision, paragraphs 62–63).
For example, an internal strategy memorandum from one of the publisher of mid-2009 stated that “...digital companies may disintermediate traditional publishers altogether” [...] “we appear to be on a collision course with Amazon. It will not be possible for any individual publisher to mount an effective response, because of both the resources necessary and the risk of retribution, so the industry needs to develop a common strategy” (DOJ Proposed Findings of Fact, paragraph 50; and Judge Cote’s Opinion, p. 18).
Judge Cote’s Opinion, pp. 18–19.
See for example the following internal quote by one of the publishers: “[o]ur goal is to force Amazon to return to acceptable sales prices through the establishment of agency contracts in the USA ... To succeed our colleagues must know that we entered the fray and follow us” (DOJ Complaint, April 2012, paragraph 50; and DOJ Proposed Findings of Fact, paragraph 67).
For example, see the internal strategy document that is quoted at footnote [25] above, and the following additional internal document by another one of the publishers, dating from Autumn 2009, in connection with a potential move to minimum retail prices: “We have always known that unless other publishers follow us, there is no chance in getting Amazon to change its pricing practices [...] without a critical mass behind us Amazon won’t negotiate, so we need to be more confident of how our fellow publishers will react” [...] “we need to gather more troops and ammunition first” (DOJ Proposed Findings of Fact, paragraph 45; and Judge Cote’s Opinion, p. 20).
Publishers bargained with Apple in order to increase the level of these caps, in order to be able to benefit from greater pricing discretion and the ability to charge higher prices.
The Apple MFC read as follows: “If, for any particular New Release in hardcover format, the then-current Customer Price at any time is or becomes higher than a customer price offered by any reseller (“Other Customer Price”), then Publisher shall designate a new, lower Customer Price to meet such lower Other Customer Price” (see Judge Cote’s Opinion, pp. 52–53).
Judge Cote’s Opinion, p. 56
The internal documentary evidence shows that both Apple and the publishers understood the commitment mechanism at work with the MFC. For example, in an internal document that is related to the European agency negotiation, an Apple executive stated that “I feel like it’s a giant win to keep pushing the MFN and forcing people off the [A]mazon model and onto ours. [...] any decent MFN forces the model” (DOJ Complaint, paragraph 78). Similarly, Apple told one of the publishers during the negotiations on the move to agency with MFN that it was “just trying to get a commitment” (Judge Cote’s Opinion, pp. 71–72). Finally, in his biography and in comments that he made at the iPad launch, Steve Jobs explained that the MFN implied that publishers “went to Amazon and said “You’re going to sign the agency contract or we’re not going to give you the books”. [...] given the situation that existed, what was best for us was to do this a[i]kido move and end up with the agency model” (Judge Cote’s Opinion, pp. 103–104).
Judge Cote’s Opinion, p. 55.
See J. Tirole, The Theory of Industrial Organisation. MIT Press, p. 316.
Judge Cote’s Opinion, p. 51.
As Judge Cote’s succinctly put it in her Opinion, “with Apple’s active encouragement and assistance, the Publisher Defendants agreed to work together to eliminate retail price competition and raise e-book prices, and again with Apple’s knowing and active participation, they brought their scheme to fruition” (p. 154).
See for example Baker and Chevalier (2013).
See the also the discussion of this point in Judge Cote’s Opinion, pp. 153–154.
References
Baker, J., & Chevalier, J. (2013). The competitive consequences of most-favored-nation provisions. Antitrust, 27(2), 20–26.
Kühn, K.-U., & Padilla, J. (2002). Union power, replacement and labour market dynamics. Economic Journal, 112, 317–343.
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We are grateful to several members of the Chief Economist Team of the Directorate General for Competition of the European Commission for many useful discussions on the issues covered in this paper. The views expressed in this paper are the authors’ own, and do not necessarily reflect those of the Directorate General for Competition or of the European Commission.
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Buettner, T., Federico, G., Kühn, KU. et al. Economic Analysis at the European Commission 2012–2013. Rev Ind Organ 43, 265–290 (2013). https://doi.org/10.1007/s11151-013-9413-9
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DOI: https://doi.org/10.1007/s11151-013-9413-9