Brief 59: A questions of balance: comments on a proposed new test for UK merger control 01.05.19
Digital markets are under intense scrutiny. A notable concern is that competition authorities have insufficient scope to block acquisitions of innovative potential entrants that might otherwise have become a disruptive competitive influence and a spur for increased innovation in digital markets. In one response, a recent report prepared for the UK Government by a digital competition expert panel headed by Professor Jason Furman has proposed significant reforms to the UK merger regime. These include a recommendation that the “balance of probabilities” test of harm currently applied by the UK Competition and Markets Authority (“CMA”) is replaced by a new test based on the “balance of harms”. Similar issues are also considered in a recent report commissioned by DG Competition: “Competition Policy for the Digital Era” by Jacques Crémer, Yves-Alexandre de Montjoye and Heike Schweitzer.
This latest RBB Brief discusses the merits of introducing a balance of harms test into merger control.
Brief 58: Beyond internal documents: the Commission’s recent conglomerate effects practice 10.12.18
The European Commission has shown an increasing reliance on internal documents in its recent merger practice. However, whilst findings from internal documents can be informative, the economic assessment of the market evidence available remains crucial to test any such findings and put them in context.
The importance of an economic assessment has been reflected in both Essilor/Luxottica and Qualcomm/NXP, two recent conglomerate merger cases. This Brief discusses the Commission’s review of these two cases, drawing some general conclusions on its current approach to conglomerate effects.
Brief 57: Mamma Mia! Mis-using Abba Lerner’s index to measure market power 26.11.18
In August 2018, the Federal Government released the Final Report of the Productivity Commission’s (PC) inquiry into competition in Australia’s financial system.
One of the main findings of that inquiry was that price competition in the banking system was limited and reinforced by opaque pricing and obfuscation. The basis for this finding was that all banks – large and small in Australia – exhibited pricing power and were able to use that power to keep prices above marginal costs.
That important finding was alleged to be supported by analysis undertaken by the PC using the Lerner index, which it claimed showed that all banks in Australia had market power, but that the major banks were the “dominant force in the market” and, as a result, were able to charge higher premiums above their marginal costs compared with other institutions.
This Brief explains why the use of the Lerner index to determine whether a firm has market power is flawed and casts doubt on the PC’s findings that all banks in Australia possess market power and moreover, that the major banks, in particular, have been able to set prices above competitive levels to the detriment of consumers.
Brief 56: Pfizer/Flynn vs the CMA: Misdiagnosis of excessive pricing 23.07.18
On 07 June 2018, the UK Competition Appeals Tribunal (‘CAT’) set aside the Competition and Markets Authority (‘CMA’) Decision regarding the alleged excessive pricing of phenytoin sodium (an anti-epileptic drug) by two pharmaceutical companies – Pfizer and Flynn.
While the CAT supported the CMA’s findings in relation to market definition and dominance, it was critical of the CMA’s assessment of the alleged abusive conduct. Specifically, the CAT found that the CMA “did not correctly apply the legal test for finding that prices were unfair; it did not appropriately consider what was the right economic value for the product at issue; and it did not take sufficient account of the situation of other, comparable, products, in particular of the phenytoin sodium tablet”.
In short, the CAT found that the CMA had failed to conduct a thorough economic assessment of the circumstances in which prices can be held to be excessive and identified a range of factors that need to be considered in order to robustly establish a finding of excessive pricing. The CAT Judgment therefore serves as a welcome reminder of the inherent difficulties that arise in determining whether or not a given price level can be meaningfully determined to be excessive and, perhaps more importantly, that competition authorities should not ignore crucial economic evidence in that assessment.
Brief 55: Automatic Harm to Competition? Pricing algorithms and coordination 12.02.18
In a recent speech, EU Commissioner Vestager expressed the following concerns regarding the use of pricing algorithms.
“ I think we need to make it very clear that companies can’t escape responsibility for collusion by hiding behind a computer program.”
Other competition agencies have echoed similar concerns for the risks that pricing algorithms pose for collusion. The topic has also featured in a recent OECD roundtable and in a number of academic papers. This Brief assesses the impact of different categories of pricing algorithms, identifies their links with coordination concerns, and evaluates some possible competition law enforcement responses. Pricing algorithms do raise some interesting issues, but the worst case scenarios for collusion have been overplayed, and some of the calls for increased intervention reveal a worrying gap in the understanding of the economics of oligopolistic markets.