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Politics in Competition Law

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About The Author

Matt Bogdan (Former EU & International Law Editor)

Matt graduated with an LLB (2:1) from Durham University in July 2014. Most recently, he has been assisting with research on comparative company law at the Durham Law School. Matt is primarily interested in the TMT sector, but has also been involved in matters of public international law through Durham United Nations Society.

Life has never been easy for American companies operating in the European Union’s (EU) digital sector. Exporting their services across the pond and conquering European digital markets on the horseback of globalisation, dominant companies such as Google, Intel or Microsoft have given credence to a pan-European concern over their compliance with the existing competition regulations. Or at least that is the “official” version of things. Another interpretation proposes that the European political influencers are using the EU’s competition law framework as means of protecting and supporting the relatively underdeveloped European digital businesses. While both perceptions are certainly not mutually exclusive, the latter possibility merits a more thorough discussion of the role of political pressure in competition law enforcement.

Under Pressure

One does not have to look far in order to find precedents for EU politicians seeking to turn, if not push, competition enforcers against dominant American companies. Most prominent example is that of Google, whose search engine accounts for more than 90% of the European search market and has been under regulatory scrutiny for a few years now. The company has been rather flexible (compared to, for example, Microsoft) in its negotiations with the European Commission, which resulted in three consecutive settlements where Google agreed to modify its search engine in order to comply with the law. In February 2014, Mr Joaquin Almunia, the former Commissioner for Competition, seemed rather pleased with his ‘final’ settlement with Google and defended it from criticism. Nonetheless, in September 2014 he changed his mind and decided to reopen the investigation, pushing for further concessions from Google. A significant role in this change of heart appears to have been played by political influencers, such as, among others, Germany’s Economy Minister Mr Sigmar Gabriel (who considers Google’s search to be an ‘essential facility’ under European competition law) as well as the former French Minister for Industrial Renewal, Mr Arnaud Montebourg (who declared his support for the ‘political choice of fighting the digital colony of global internet giants’, apparently with the use of competition law). 

On a more EU-level, last November the European Parliament passed a non-binding resolution on separating Google’s search engine from its other services, a move widely recognised as a symbolic message to DG Comp (a branch of the European Commission responsible for enforcing competition law), incentivising a firmer stand in enforcing competition regulations against the technology giant. Passing of this resolution is also reflective of the political sphere’s concern over the relative weakness of the EU’s digital businesses, as compared to their American counterparts. While it remains to be seen whether the current Commissioner for Competition, Ms Margrethe Vestager, will yield to the political pressures, their existence remains evident (see also further examples of politicians seeking to influence the enforcement of competition law here).

Leave Politics Out of It

When making the case for the politicisation of competition law, the notions of “freedom of expression” and “democratic process” immediately come to mind. Politicians ought to have the capacity to influence the direction of antitrust enforcement actions, particularly where the wellbeing of their electorate is at stake. Their involvement may also help align existing antitrust regulations with modern day trends, such as the influx of American companies into the European digital market due to globalisation.

Unfortunately, in practice, politics tends to be a rather messy affair with multiple factors affecting politicians’ decisions, priorities and loyalties. Contrary to politics, competition law has some relatively clearly defined goals, which could be summarised in the enhancement of consumer welfare through the pursuit of economic efficiency (while the precise goals of antitrust in Europe are debatable, it is safe to say that none of the goals argued involves winning of the next term elections). On that note, adding the potential replacement of leading political groups every few years certainly does not guarantee enough consistency for the purposes of enforcing competition law.

Other relevant considerations include the concerns over due process, whereby the potential remedies arising from competition law investigations shall be based on objective and impartial findings. It is also important not to forget about the ‘quasi-criminal’ nature of the antitrust fines, which should put competition enforcement into a “no-entry” zone for politicians.

Reviewing the Dominance

Perhaps the most intriguing argument against the politicisation of antitrust enforcement yet is the one challenging the very foundation of political concerns vis-à-vis the American digital giants. Arguably, none of the companies already mentioned in this article would ever attract the political spotlight had they not been dominant in their relevant markets. The natural question that follows is what does “being dominant” actually mean and how is it determined under competition law?

Article 102 of the Treaty on the Functioning of the European Union (TFEU) prohibits the abuse of a dominant position by an undertaking (the term “undertaking” encompasses all entities engaging in economic activity and thus includes companies). ‘Dominant position’ is understood here as a binary term: either an undertaking is dominant and thus has “special responsibilities” in respect of their actions, or is not dominant and thus attracts no Article 102 scrutiny at all (Richard Whish and David Bailey, Competition Law). The test for finding a ‘dominant position’ was described in United Brands v Commission as:

[A] position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately its consumers.

The judgment associates “dominance” with substantial market power, whereas the notion of “independence” is related to the degree of competitive restraint put on the undertaking in question (according to the Commission’s Guidance on Article 102 Enforcement Priorities (“Guidance”)). While the undertaking’s market share itself constitutes a consideration, the Guidance also identifies other relevant issues, including the constraints imposed on the undertaking by the position on the markets of its competitors and by the credible threats of a future expansion or entry into market of its competitors.

The market share is therefore merely an initial indicator and there is no set threshold level for dominance to be found. A wide range of market shares may potentially amount to dominance, with the courts going as low as 40-45% in United Brands. Consequently, it is erroneous to assume an undertaking’s dominant position solely based on the substantial market share it enjoys in the relevant market.

All of the other issues mentioned in the Guidance indicate that assessing a dominant position involves a broader consideration of the market conditions, inclusive of the situation of the undertaking’s competitors. Thus, when determining whether digital companies with substantial market shares are dominant in the competition law meaning of the word, it is imperative to consider factors such as: the existing legal barriers (i.e. ownership of IP rights may constitute barriers to market entry); any economic advantages prone to hindering the entry or expansion in the market (e.g. possession of economies of scale, essential facilities or superior technology); and any existing direct and indirect network effects constituting barriers to operating in the market.

The most fundamental distinction between the digital markets and the classic, brick and mortar ones is that the former have naturally lower barriers to market entry. This is partially because establishing digital infrastructures is far easier and cheaper than establishing physical ones (just try comparing the difficulty of entering the oil market with entering the smartphone messenger market). Not only does the Moore’s Law ensure lower costs for technology startups each year, but nowadays new companies also have access to a broad range of funding methods (e.g. crowdfunding, angel investing, venture funding) as well as to start-up incubators and accelerators (i.e. firms that specialise in boosting start-ups’ development). Neither huge economies of scale nor vast catalogues of IP rights can stop disruptive technologies, a fact attested by the existence of WhatsApp, Snapchat, Uber, Zendesk or Facebook, to name a few. Naturally, the relatively low barriers to market entry seem rather irrelevant given the tendency for established companies (e.g. Google, Facebook) to purchase many of the successful start-ups, instead of trying to compete with them. Through Mergers & Acquisitions (M&A), dominant companies are trying to protect themselves from disruptive technologies that can potentially turn the market situation upside down. On the flipside, the dynamism of significant market players and their eagerness for M&A points to the fragility of their position. Acquiring significant market share in the digital markets is relatively easy (assuming you have a excellent idea and great execution), however maintaining it is a whole different story, which contrasts with the situation of traditional dominant market players (e.g. oil companies). Finally, attributing special responsibilities under Article 102 TFEU (i.e. finding dominant position) to companies on the grounds of them having sufficient resources to purchase other competitors is simply unworkable.

Another differentiating factor is that consumers in digital markets can switch to competitors’ services with relative ease. As Judge Robert Bork points out in his defence of Google from antitrust complaints, consumers are virtually a ‘click’ away from services of Google’s competitors. This puts additional pressure on the dominant player, in this instance on Google, to improve and enhance its search algorithms in order to deliver the fastest and most reliable service to its consumers. Thus, the ease of switching between services indirectly benefits the consumers since the dominant players find themselves at a significantly weaker position than classic monopolists and therefore they are continuously pushed to innovate and improve. The most apparent counter-argument is that while switching services is indeed relatively easy, it nonetheless happens rarely since consumers prefer to stick to their service of choice. Using the earlier line of thought, this, however, appears to be a product of the dominance, rather than its result. In other words, is it the fragility of the dominant position and the consequential need to constantly improve the service that causes consumers to stick to their choices, rather than the dominant position itself.

Concluding Remarks

The European Parliament’s resolution on Google might have just marked a growing tendency for politicians to try and influence the enforcement of competition law. The problem with that lies not only in the fact that politics can only introduce uncertainty to the application of the law, but also in the general misunderstanding of the digital sector. Treating the digital markets and the companies operating in them the same way one treats cable providers or oil companies is misguided. While the market shares indeed may appear significant, the reality is that digital market are far more competitive and fragile than the traditional brick and mortar ones. Thus, the current politicisation of competition law enforcement is both misguided and misplaced.

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Tagged: Commercial Law, Competition, European Union, Technology

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