Christmas cartel

Danish competition authorities have accused the country's Christmas tree growers' association of attempting to fix prices.

End of the year

At the end, the idea of blogging from the network conference venue in Bonn did not work. Anyway, the meeting was very interesting, well attended and with a lot of debate.

Lawyers and economists did discuss together competition and regulatory issues and, after the unavoidable skirmishes and an invitation to economists to "take responsibility for decisions", the dialogue was fruitful for all.

The topics discussed varied a lot, from mergers between not-for-profit firms (to be treated more leniently by regulators?) to private enforcement of competition law (impossible to find an agreement) to the long lost soul of article 82 (found in the Archives of the 1950s negotiations around the text of the Treaty of Rome, by a researcher from the University of East Anglia).
Of course, our work on Net Neutrality was presented too.

It is not possible to report here on all papers presented there. Maybe in future posts, the authors will like to give some details.

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In the meantime, another TILEC event has taken place, i.e. the second roundtable of the "Economic Impact Group" of the CoPECL network. The aim of the group is the economic analysis of the forthcoming "European Contract Law", currently in the making. The meeting was held in Barcelona and scholars from a number of Universities in Europe were present to discuss whether the rules chosen by comparative lawyers to constitute "European" contract law are sound according to economic analysis.

A website with more info will see the light very soon.

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To all: Happy Christmas and a great 2008!

Workshop

Tomorrow and on Friday, a big bunch of TILEC members will participate to a Workshop on the Law and Economics of Competititon Policy, organised by the Max Planck Institute for Research on collective goods in Bonn, Germany (the programme in a pdf here).

My idea is to blog from there, whenever interesting points arise during the discussion. Let's see if and how it works out.

Competition and competitors

At the time the merger GE/Honeywell was blocked by the Commission, a slogan started to circulate: we Americans protect competition, you Europeans protect competitors.
A few years later, the European Commission finds that Microsoft infringed article 82, the CFI upholds the decision and some people try to recycle that slogan once again.

But something in the air has changed.
Immediately after the judgment, not less than the Economist ("Brussels rules OK") depicted European regulators as the ones playing a role in the global economy, while Uncle Sam stays at the window.

Now, discussing the Intel issue, also the NYT has contrasted the dismissive behaviour of the FTC towards big companies with the actions of European, Japanese and Korean authorities.

Is it not time for a new slogan?

Finally public

That "famous" Net Neutrality paper of ours, the one I mentioned in a couple of previous posts, is finally public. "Network Neutrality in the EU" is now an official TILEC Discussion Paper (number 2007/030) and is also available on SSRN http://ssrn.com/abstract=1018326.

Meanwhile, we managed to present it again at the IvIR (Instituut voor InformatieRecht) in Amsterdam and at the Conference of the Canadian Association of Law and Economics in Toronto.

International Gambling Conference in Tilburg

On 15 November 2007 the third international colloquium of Tilburg University will be hosted, with the title ‘The Regulation of Gambling and the Role of Crime and Addiction’. Speakers include François Trucy of the French General Assembly and Erik Vagnhammar of DG Internal Market.

For information and the registration procedure, please see http://www.tilburguniversity.nl/tilec/events/folder2007.pdf .

Live from the TILEC Retreat

TILEC members gathered today in Oisterwijk to hold their annual retreat.

Topics discussed ranged from predatory pricing to market manipulation to competition of competition laws.

Besides the academic value of the presentations, some interesting soundbites:

I could survive sweeping generalisation with an audience of only economists.

Let's assume away the problem.

Unmodelled things? Irrelevant.

If you can't make your point in one hour, you cannot make it in one hour and half.

First reactions to Microsoft

After more than 3 years, the CFI has finally ruled on the Commission's Microsoft decision.

While waiting for the next TILEC Club Med's to discuss the judgment more in detail, some TILEC comments are already available: preliminary remarks have been given by TILEC's co-director Pierre Larouche to Het Financieele Dagblad and in the original (pdf) English version.

Besides, I'd like to link also to the Commissioner's comments.

Club Med after holidays

Interesting Club Med this week on the treatment of Resale Price Maintenance (RPM) clauses. The US upreme Court in Leegin (pdf) has reversed a century-old rule treating RPM as illegal per se and has ruled that it must be now judged according to the so-called rule of reason.

The Court was split 5-4, along the (by now) familiar ideological line drawn by the recent appointment of the two new judges.

Our group, too, was split on the evaluation of the judgment. To mention just a few points that came up in the discussion: (*)

1. Civil law uneasiness: some in the group expressed their uneasiness with such an important decision being taken with almost half of the Court openly against it. McCormick was quoted: "The practice of keeping judicial argument over right and wrong behind closed doors [exists and is defended] so that the courts eventual judgment shall contribute rather to faith in the relative certainty of the law than to the revelation of its relative uncertainty."

2. On the substance of the case: economic theory is not conclusive on the welfare effects of RPM. Economic evidence is tiny and only a few empirical studies have been conducted, with divergent results. There is however a very clear risk of RPM: it can profitably be used to facilitate and reinforce horizontal cartels. All this seems to support the position that an outright per se illegality is inappropriate.

3. The new rule of reason approach is likely to produce very high costs for companies and for the legal system. RPM is likely to be often anticompetitive, hence for those cases the new rule is a net increase in the judicial costs. Moreover, the often prohibitive costs of lawsuits may discourage complaints against anticompetitive RPM clauses. In other words, while the risk of false positives is drastically reduced, the risk of false negatives seems now significant.

4. There was a certain consensus in the group that a statutory (as opposed to judicial) change from per se to rule of reason, could have provided a more satisfactory (and perhaps cost-saving) solution. A statute could have lifted the ban while at the same time filling the "void" with a (rebuttable) presumption of illegality above a certain market share, safe harbours for firms without market power, a transitory period to adjust to the new approach. A similar outcome can be achieved also by court decisions, but, probably, at much higher cost.

(*) This is just an informal summary and is not meant to represent the official views of the group

Still discussing Net Neutrality

Even if the paper mentioned in the previous post is not ready yet for publication, we have already given a few presentations about the European perspective on the network neutrality debate.

First came the Workshop on Commons Theory for Young Scholars, organised jointly by the Max Planck Institute for research on collective goods in Bonn and by the Center for Internet and Society of Stanford University. At the Workshop, Network Neutrality has been the most discussed issue of application of Commons Theory (perhaps also thanks to the presence of Larry Lessig and Tim Wu) and the participants were very interested in the peculiarities that make the European context different from the American one.

The following venue was the Symposium Netneutraliteit in The Hague, of which a report (unfortunately only in Dutch) is available here (note the nice picture at the end of the page) and another one here. An interesting point was made on the connection between Net Neutrality and ISPs liability for the content they carry: when there is no 'neutrality' and ISPs exercise control on traffic, they incur in liability. Would ISPs really want this?

Further presentations were made at the College of Europe in Bruges at the Third ELEA Symposium (European Law and Economic Analysis) and then at the Dutch Competition Authority (NMA).

Lessons learned: the topic is very technical and requires an introduction; what the problem is with network neutrality may not be so clear, hence further introduction is needed; the presentation tends to be quite long; we should hurry up with finishing the paper.

A final note: even if I cannot post the paper yet, I can show a nice picture of the authors:

Network neutrality takes off at TILEC

The network neutrality debate is regaining momentum in the US after the FCC has decided to investigate the development of broadband Internet (pdf).
Since a couple of years already, big names of the Telecom and Cyber legal world have been kept busy with the issue whether network operators should be allowed to discriminate, one way or another, among packets of data. An interesting example of the debate is the blog-style echange of opinions between a supporter and an opponent of net neutrality regulation. A group of heavyweight economists has also intervened, by signing a brief position paper opposing regulation on the matter.

Should intelligence (hence control) shift from the edges of the network to its core? Who should build the infrastructure for next-generation Internet? What will the Internet of the future look like: more as a global public network or as a bunch of privately-owned ones more or less interconnected with each other?

Leaving aside those fundamental questions for a moment, we might want to consider also a few more down to earth issues: how to make sure that market power over a bottleneck facility does not lead to abuses? How should regulators intervene (if at all) to make sure that innovation is not stifled? How to prevent that access to valuable content or applications gets blocked because of commercial (or other) reasons? Is it possible to offer prioritised services to real-time applications (online games) without making access to non-real-time ones a painful experience?

After the TILEC report (pdf) of last year on the economics of net neutrality, and after Milton Mueller's visit in February, a TILEC trio (Pierre Larouche, Ilse vd Haar and myself) is currently working on the possible European answer to some of the questions above: whether net neutrality is an actual issue to begin with, whether and in what the discussion differs from the American one, what tools already exist to help tackling the identified problems.

In a short while, we should be able to post our paper here and on SSRN.

EFTA and Gambling

Shortly after the decision of the European Court of Justice in Placanica, the EFTA Court gave its decision in Case E-1/06 on March 14^th. In considering the legality of the Norwegian legislation in question, the EFTA Court interprets particular aspects of the case-law of the ECJ in considerable detail.

The case arose out challenges to the Norwegian Act No 90 of 29 August 2003 Relating to Amendments to the Gaming and Lottery Legislation which sought to grant an exclusive right for the operation of gaming machines to the state-owned gambling operator, Norsk Tipping. Gaming machines in Norway have been subject to a licensing regime whereby they are operated by private operators on behalf of humanitarian and socially beneficial organisations, whom receive a proportion of the revenue. Since all parties agreed that the legislation amounted to a restriction to the free movement of services and the freedom of establishment, the case concentrates upon the justifications used to uphold the restrictive measures.

Among the objectives of the legislation was that of limiting the reduction in revenue which would result from the envisaged reduction in the number of gambling machines. Having recalled standing case-law to the effect that the financing of good causes cannot amount to an objective justification to a restriction on the free movement of services (para. 36), the Court noted that the introduction of the monopoly was primarily for reducing the risk of gambling addiction (para. 37). An exclusive right system would allow for this while limiting the consequent reduction in revenues. Since this limitation exercise was an ancillary objective, the overall legitimacy of the legislation remained intact (para. 40) as the restriction was justifiable on the grounds of reducing addiction and crime.

In considering whether the restrictions were consistent and suitable for the purpose (para. 42-46) the Court highlighted the need to consider the particular characteristics of the form of gambling in question, and in light of the legislation in question, the degree of addictiveness. Given the prevalence of gambling addiction in Norway which results from slot machines the Court felt that this form of gambling was not comparable with other forms offered by Norsk Tipping. Consequently, the marketing and development of other forms of gambling by the state body was deemed irrelevant for the assessment of this gambling machine specific legislation. The ECJ has yet to make a distinction in its case-law between the differing characteristics of different forms of gambling, and how this could affect the consistency, and thus proportionality of restrictions.

In assessing the necessity of the restriction the Court considered the test to be whether the introduction of the monopoly would lead to ‘a more effective achievement of the aims set than other less restrictive measures.’ (para. 49). However this part of the proportionality test relates to whether a less restrictive but equally effective provision could be used to achieve the legislative objective. By assessing this on the basis of a more effective achievement of the objectives, the Court would appear to alter the criterion by which the national measure is to be assessed. Arguably, the assessment used rests upon the effectiveness of the measure and not its restrictiveness and nor that of any alternatives.

Gambling in Luxembourg

On March 6^th the Grand Chamber of the European Court of Justice gave its judgment in the Placanica case (Joined Cases C-338/04, C-359/04 and C-360/04). The gambling (regulation) community had set its sights upon this case as a means of offering some clarity to the ECJ’s earlier case-law. Given that this case will prove decisive for the approach Brussels will take regarding this sector, state monopolists and private operators alike have been waiting with baited breathe for this judgment.

Since this is the first posting on the TILEC Blog concerning gambling, it is worth noting the following highlights from the ECJ’s earlier gambling related case-law. In Schindler (Case C-275/92) the ECJ recognized gambling constitutes a service, thus falling under the scope of Article 49EC (paras. 25-29). While discussing the possible justifications for restrictions to the freedom to provide services the ECJ noted that lotteries have a ‘peculiar nature’, which is based upon:

1. Moral, religious and cultural aspects of lotteries;
2. The high risk of crime and fraud which accompanies lotteries;
3. Damaging individual and social consequences which may arise from the fact that lotteries amount to an incitement to spend;
4. Lotteries contribute to the financing of ‘benevolent or public interest activities’.

With regards to the last factor the ECJ noted that while this could not amount to an objective justification to support a restriction it was ‘not without relevance’. Nevertheless these four factors provided Member States with a considerable degree of latitude to restrict gambling activities as they deemed fit (paras. 59-61).

The freedom to provide gambling services reappeared in Läärä (Case C-124/97) where the ECJ concluded that the assessment of particular national legislation can only be made by reference to the objectives of the provisions in question (para. 36). Different ‘systems of protection’ adopted by other Member States have no role to play in such assessments; which would appear to contradict more general case-law relating to the avoidance of double regulatory burdens. Two cases Zenatti (Case C-67/98) and Anomar (Case C-6/01) saw limited developments in the ECJ’s approach; however the most important developments, prior to Placanica, appeared in Gambelli (Case C-243/01) and Lindman (Case C-42/02).

For two principal reasons Gambelli is important. Firstly, by referring to the suitability of restrictions on the supply of gambling, the ECJ noted that such restrictions must be suitable for achieving the legislative aim. Any restrictive measures therefore had to be ‘consistent and systematic’ (para. 67) with the aim. Thus public order concerns could not enable Member States to maintain restrictions on the supply of gambling if at the same time state monopolies encouraged residents to gamble. Secondly, the ECJ recognised the importance of controls and supervision which occur in the supplier’s home Member State and required the authorities in the destination Member State to take these into consideration (para. 73).

Finally, the decision in Lindman gains its significance from the fact that the ECJ raised the importance of proving causal relationships between the concern which Member States sought to guard against and the actual dangers which their residents face (para. 26). The extent to which this amounts to an evidentiary burden is unclear, but it serves to steer Member States away from relying upon very abstract terms, such as ‘crime and fraud’, without substantiating such claims.

With all spectrums of the gambling regulation debate claiming that the Gambelli case supported their view, that of Placanica diminishes the margin of discretion which Member States enjoy in regulating gambling. Placanica does not sow the seeds for the demise of state monopolies, nor does it require the liberalisation, deregulation or harmonization of national gambling markets. However, it does provide for a level playing field for national and non-national operators where competition for the market is allowed. Concurrently Member States are required to be consistent in the execution regulatory policies if they wish to bar service providers established in other Member States from accessing their markets. The remainder of this entry will provide an overview as to how Placanica achieves this.

Having recalled its earlier (abovementioned) case-law including the fact that Member States are free to establish the objectives of their gambling policies and the level of protection sought, the ECJ considered the nature of the Italian licensing regime which was in place. With regard to licensing gambling providers, the ECJ stated that the fact that licenses were limited in number was in itself insufficient to justify a restriction to the freedom of establishment and the free movement of services (para. 51). The ECJ then explicitly separated the objective of reducing the number of gambling opportunities from that of channeling gambling into a controlled environment away from crime and fraud (para. 52.). Should the first objective have been the sole objective then it would be inconsistent for the state to allow gambling opportunities to increase. However, the objectives of the Italian legislation were to eradicate crime and fraud, and thus a policy of controlled expansion was deemed permissible. Such controlled expansion allowed for advertising, an extensive range of games and the use of new distribution methods, even where restrictions were in place upon the cross-border supply of gambling services (paras. 52-55). Perhaps as a reflection of Lindman the ECJ notes the Italian government’s evidence which portrays the significant size of the illegal gambling market in Italy. A larger illegal market could thus allow Member States more leeway in expanding state offerings of gambling services while restricting the cross-border provision of such services.
The ECJ then considered the tender procedures by which the limited number of licenses was awarded. In this regard it was found that by imposing a blanket exclusion on operators who are quoted on regulated markets in other Member States the Italian legislation was disproportionate. Such an arbitrary exclusion went beyond what was necessary to secure that this sector is free of crime and fraud in Italy (para. 62). This exclusion, which arose from shareholder transparency requirements amounted to an infringement of Articles 43 and 49 EC. This bodes well for some degree of recognition of home state control of gambling providers and the avoidance, or at least the reduction, of double regulatory burdens. Yet the degree to which Member States open themselves up to this depends upon the objectives of their policies, and the degree to which they seek to uphold such protection.

Will Placanica fuel for European Commissioner McCreevy’s drive to ensure a level playing field for all gambling service providers? My money is on that it will, and that the regulation of gambling will remain a burning issue for sometime to come.

Proust on interconnection

In a case currently before the European Court of Justice (C-64/06), the issue is under discussion of the direct effect of certain provisions of the Electronic Communication Framework (for those who like article numbers: it is art. 8.2 of directive 2002/19 and art. 16, jointly with art. 6 and art. 7, of directive 2002/21).
Basing his reasoning on the authority of Proust (not a ECJ precedent, but Marcel Proust himself), the Advocate General has concluded that there is no direct effect. Therefore, absent implementation, the Czech Authority was entitled to impose interconnection obligations without following the procedure set out in the framework (in particular, market definition and assessment).
Below, the resolutive quote:
"En réalité, le seul véritable voyage, ce ne serait pas d’aller vers de nouveaux paysages, mais d’avoir d’autres yeux, de voir l’univers avec les yeux d’un autre".

A UN style veto in Internet Governance?

After a temporary pacification due to the first meeting of the Internet Governance Forum last November, the debate is heating up again on a slippery issue in Internet Governance: "public policy" limits to the creation of new Top-level domain names or TLDs (to supplement existing .com, .info etc.). The latest policy proposal lists a few "selection criteria", among which that: "Strings should not be contrary to public policy (as set out in advice from the Governmental Advisory Committee)". The position of such Advisory Committee is that to address public policy concerns, any of its members (i.e. any government) would have a virtual veto power over TLD applications. Civil society groups have already mobilised against this.
I have two quick comments.
The first is that, until now, only very few TLDs have been created (except those representing countries) and they have not been particularly succesful with customers, who continue to register their websites under .com and/or their national TLD. I am thus wondering whether an additional restriction is likely to have any significant impact on this situation in practice. Moreover, a controversial TLD such as .xxx has already been vetoed by governments without any provision on public policy being in place. Yet, I agree that codifying a principle by virtue of which any government would be able to impose a world-wide veto (albeit only on TLD strings) is a rather scary perspective.
My second thought has to do with my old fixation for introducing more competition in the Domain Name System (DNS). More competition is beneficial for consumers and innovation, but it would help also in the case at hand. With more competing private sector operators and ICANN restricted to a technical role, it would become more difficult to impose such world-wide bans. Of course, any State would remain capable of blocking at its borders anything it does not like, but at least it will not be able to impose it on the whole of the Internet.

Commission not fond of German vacation

Yesterday, the Commission launched "fast track" infringement proceedings against Germany for "regulatory holidays" for Deutsche Telekom. After repeated warnings of the Commission, Germany surely must have seen that one coming. Germany now has (only) fifteen days to explain itself, and the Commission has already indicated that if it is not completely satisfied with the German response (i.e. withdrawal of the proposed legislation), it will immediately bring the matter before the ECJ. In a recent discussion we had at Tilec's ClubMed on this matter, our economists were not overly unreceptive towards trying out this idea of regulatory holidays. A comparison was made by them to patents, where one could argue a similar protection is given to the patent-holder, so as to encourage investment and innovation. In yet another discussion however at a WIP meeting, Hans-Theo Normann presented an empirical paper examining the exemption of a high-voltage power-cable cartel by the German antitrust authorities for eleven years. This paper not only showed that expected efficency gains did not materialize, but also that the cartel earned significantly higher profits, both during and after this 'regulatory holiday'.

From a legal perspective, we can of course argue that competition law is always there and will be likely to 'catch' this practice of regulatory holidays. However, we cannot deny that this practice squarely contradicts the main rationale underlying the current EC Communications Framework. In any event, what stands out is the timing of the Commission in this matter; is this a 'subtle way' of the Commission to influence the revision process of this Framework?

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