Competition Economics Handbook 2020

European Union

Copenhagen Economics

Economics continues to increase its presence in European Union competition cases. Complicated merger filings have maintained the lion share in the use of economic analysis, while new forms of collaborations between economists and Brussels law firms are taking place to move forward the understanding of competitive dynamics in new digital markets.

For this year’s edition of the EU article, we further touched upon a number of topics that received recent attention in the European competition enforcement debate. We asked lawyers to reflect on the broader potential implication of digital competition. While the discussion is still at early stage, lawyers expect the digitalisation process of the economy to affect competition assessment also in traditional industries.

We discussed excessive pricing cases that are seen with increased frequency in pharmaceutical industry. Most lawyers agreed those remain out of the ordinary cases and are mostly driven by political and social concerns at national level.

Finally, we asked lawyers their opinion on recent political pressures to let industrial policy considerations enter the EU competition regulation framework. All lawyers expressed their worries for any interference of politics in the enforcement process. On the other side, they believe that a certain degree of flexibility within the current competition assessment system is needed.

This article is based on interviews with leading representatives of a large number of law practices based in Brussels: Allen & Overy, Arnold & Porter, Baker McKenzie, Baker Botts, Bird & Bird, Cleary Gottlieb, Daldewolf, DLA Piper, Jones Day, Luther Law Firm, Redeker Sellner Dahs, Sheppard Mullin, Shearman & Sterling, Sidley Austin, Skadden, Slaughter and May, Van Bael & Bellis, as well as with representatives of the Chief Economist Team (CET) at DG Competition.

The involvement of economists in competition cases continues to broaden

In line with findings from previous years, lawyers agree that economic analysis in competition policy is here to stay. Most law firms continue to experience an increase in the use of economists in their competition cases. This positive trend is persistent and is expected to continue growing in the coming years.

Merger assessment remains the area where competition economics is most relevant, followed by abuse cases. Compared to last year, an increased number of lawyers claimed to use economists for state aid cases, a sign that the application of economic analysis is starting to gain pace within this instrument. In general, the complexity of the cases continues to be the main factor determining the degree and type of involvement of economists. In merger cases, virtually all complicated transactions involve the work of economists, some at very early stage. Some lawyers have also experienced cases where economic evidence was brought in by complainants. However, this generally remains limited to high-profile cases with large complainants willing to invest substantial resources to influence the outcome of a transaction. Most complicated abuse cases tend to include inputs from economists as well, even though a group of lawyers remain partially sceptical on the real impact that economic analysis has on the outcomes of those cases.

Data-related work is still mentioned as the main task where economists are needed. Nonetheless, the majority of lawyers confirmed the tendency of economists to expand their role beyond data or econometric analysis. Some lawyers now brainstorm together with economists on how to position a case and how to develop the theory of harm. Economists, for example, can contribute to explaining the industry context, the flow of information and its effect on the market in cartel cases. Lawyers also expressed the need for economic thinking to understand new dynamic markets – how the businesses of digital platforms function in the presence of zero prices and high network effects.

While communication between lawyers and economists continues to further improve, as both parties are increasingly speaking the same language, there are yet margins for improvement in the way economists convey their messages. Once more, lawyers stressed the ability to deliver clear and simple arguments that they can integrate into their work remains essential for the efficient inclusion of economic analysis in competition law to continue.

Digital competition has not yet trespassed into traditional industries

The discussion on how competition policy should adapt to digitalisation and the rise of dominant digital ecosystems has continued to gain traction. This year witnessed the high-profile decision taken by the European Commission in the Google Android case, resulting in multibillion euro fine. A formal investigation has also been undertaken to look into Amazon’s allegedly abuse of dominant position in the market. These actions have been accompanied by the well-known expert’s report ‘Competition Policy for the Digital Era’ commissioned by the EU Competition Commissioner. Practitioners expect the content of the report to have a significant role in shaping the future competition agenda of the Commission. An important part of the document explores the role of data and data access in competition law. Different forms of data are generated by an increasingly higher number of digitalised devices and the machines that produce them. The information contained in these data could become an essential input for market players who want to improve their offer to consumers. The report suggests how, under certain conditions, access to this data can bring pro-competitive effects and guarantee a level playing field in the market. This has important implications for competition that go beyond what are considered purely digital industries.

In light of this, we asked lawyers and DG Competition representatives whether they see digital competition issues arising in more traditional industries too and to what extent economic thinking can play a role in providing the tools needed to assess them. In response, the interviewees agreed that digital aspects related with data access are likely to become particularly relevant in industries such as financial services, car manufacturing, industrial and medical equipment sectors. The disclosure of data possessed by players with market power may be deemed necessary to confer other companies the ability to develop and improve complementary products and services in secondary markets. However, while theoretically appealing, the debate is still in its early stage and nearly all law firms declared that they have not yet been concretely involved in such cases, though they expect to be in the near future. Potential complainants should take the initiative, yet the optimal timing to start these actions remains difficult. Collecting enough evidence to support the case may require considerable time, with the risk of dominant players to become too entrenched in the market.

While some lawyers believe that the legal tools to deal with such refusals to supply data are already in place, they also recognise the need of economic thinking to better understand what, in the process of collection and analysis of data, confers competitive advantage to a specific player. In the context of big data, the elements of substitutability and indispensability of the information gathered and processed by players also requires novel analytical tools. In this perspective, economists, side by side with industry experts, can contribute to bring forward the understanding of the broader impact of digitalisation in competition policy.

Excessive pricing is a political question with a regulatory answer

In recent years the discussion around excessive pricing, in relation mainly to the pharmaceutical industry, has experienced a renewed attention within the competition law community. This revival has followed a number of investigations from the European Commission, as well as national authorities, that led to infringement decisions in UK and Italy and other investigations that are still in the process.

We discussed with lawyers and the CET the increased attention on excessive pricing in pharma. Lawyers agree that there is an increasing political pressure to pursue high drug prices. Affordable access to medical treatment is subject to political and social concerns that tends to amplify the exposition and attention of these cases to the public. However, lawyers believe that the large majority of these cases will remain mainly confined at the national level, with only a few exceptional ones being pursued by the Commission. Under stricter fiscal policies across Europe, governments are required to contain their healthcare budgets. In this context, it is easier for authorities to find political support in going after the large multinational pharma companies. Pharma companies are perceived to possess the tools to create market dominance over certain drugs. Usually, this results from alleged misuse of regulation that grants patent protection, market exclusivity, and other extensions of protection that allow the formation of monopolies for lengthy periods. These situations can be exacerbated by increases in prices that are considered out of the ordinary when alternative treatments are not available in the market and patients depend on a specific drug. The characteristics of the pharmaceutical industry, such as a long product life cycle and large initial investments in high risk projects, need to be taken into consideration. Competition policy can have an important role in assessing the balance between dynamic and static efficiencies when looking at excessive pricing – the capacity to set high prices creates incentives to innovate and for other players to enter the market in the future.

However, competition authorities are facing difficulties in determining whether a price is excessive, what would be a fair price to accept as a remedy to mitigate competition concerns and how to monitor the implementation of the remedy. The calculation of a threshold above which prices can be considered excessive requires careful analysis of profitability and the identification of suitable comparison products. Lawyers agreed that economic analysis has a large role in the assessment of excessive prices even though its application is not necessarily straightforward. Recently, for instance, the UK Competition Appeal Tribunal has judged against the decision of the Competition and Market Authority to fine Pfizer and Flynn for unfair pricing of their epilepsy drug on the ground that the United Brand test, the current legal standard to test excessive pricing, had not been applied correctly. Therefore, further discussion is needed on new and alternative approaches to establish whether a price is abusive if other cases should be pursued.

In addition, lawyers mentioned that it remains an open question whether competition policy should be the right tool to deal with excessive pricing. Actions taken at the regulatory level should be the first choice in dealing with this issue. Drug prices are already subject to extensive regulation by health authorities and excessive pricing is likely to result from existing loopholes in the regulation system.

Industrial policy considerations can be integrated into the existing competition framework

In this new climate of trade tension between US and China and the challenge of European firms to remain globally competitive, the Commission’s approach to merger assessment has been put under increased political pressure. Political parties in favour of a more industrial policy-driven approach to competition have called for softer merger control that would allow the creation of ‘European Champions’ through mergers. Following the recent decision to block the Siemens/Alstom merger, which would have created a European champion in the railway industry, some governments have gone as far as to advocate the possibility for European political leaders to have veto power over Commission’s decisions.

We asked competition law firms about their current thinking in this regard. All competition lawyers interviewed have agreed that politics should not interfere with the work of DG Competition. It is essential for a well-functioning legal framework of competition enforcement to be clear and predictable. Moreover, any possible political override at the European level would likely create friction between EU member states with the rise of unhealthy favouritism of certain companies of more influential member states over others. Nevertheless, the large majority of lawyers still believe that there are instances where industrial policy considerations should be given due regard.

Most of all, law firms acknowledge the importance of widening the flexibility in merger control along two main directives. Firstly, the Commission should rethink relevant market definition and depart from a European focus in favour of a more global angle that would include global market players in the picture. For instance, more consideration should be included among potential competitive constraints exercised by products imported from outside the European Union. Secondly, the Commission should take a more long-term approach on competition assessment by enhancing the role of potential competition from new entrants. In this respect, several lawyers lamented a certain degree of asymmetries in the time horizon considered by the Commission to measure negative effects on innovation in previous cases compared to the time window used to assess the likelihood of new entry in the market. However, the application of a longer time horizon to evaluate possible market entry in merger assessment needs to be considered in light of the characteristics of the industry under scrutiny. Lawyers suggest that strong and specific evidence to justify this extension has to be brought to the case, otherwise the presence of high uncertainties would pave the way to speculative analysis from third parties’ complainants, which would unnecessarily complicate the review process.

In addition, some lawyers also agreed that in the future other aspects such as labour standards and environmental impacts could be included in the discussion around competition issues. Consumer protection and privacy law have already played an important role in the recent decision by the German competition authority against Facebook’s abuse of dominance, even though that will remain a standalone case according to most of the interviewees.

Generally, lawyers expressed their interest in a more open debate that would be beneficial to the (closed) world of competition policy. Views from different policy areas would help with gaining a broader understanding of other factors that can have a profound influence on the market. This can and should be encouraged while maintaining intact the legal framework of the European merger assessment.