Competition Economics and Ecosystems

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Questions and Answers

What is the definition of an eco-system in competition law/economics?

An eco-system in competition law/economics refers to a combination of goods that are often bought or used together. It is a situation where the functionality of one product depends on the availability of other products.

What are the two types of eco-systems?

Open eco-systems and Mixed eco-systems

Independent eco-systems and Self-sufficient eco-systems

Closed eco-systems and Integrated eco-systems

Closed eco-systems and Open eco-systems (correct)

When a member of an eco-system tries to restrict competition in the system, this is always considered an anti-competitive practice.

False

What are the three common drawbacks of closed eco-systems in terms of consumer welfare?

Closed eco-systems often lead to fewer choices for consumers in the form of applications, a potential lack of diversity, and potentially higher prices. Signup and view all the answers

The Chicago school view suggests that eco-system owners are always incentivized to eliminate competition in secondary markets to maximize their profits.

False Signup and view all the answers

Which of the following scenarios would be considered a foreclosure strategy according to the Chicago school view?

An eco-system owner negotiates an exclusive agreement with a secondary product manufacturer to only sell their products within the eco-system. Signup and view all the answers

The new industrial economics view argues that consumers are always aware of the full implications of choosing a closed eco-system compared to an open one.

False Signup and view all the answers

Describe two factors that play an important role in determining the consumer's decision to choose a new smartphone when faced with limitations in access to applications in a closed eco-system.

The two main factors are the cost of switching (both price and efforts involved) and the quality and variety of apps available on alternative systems. Signup and view all the answers

Define the term 'abuse shopping' in the context of competition law.

Abuse shopping refers to the practice of competition authorities strategically choosing to prioritize certain legal arguments or interpretations over others, which can lead to unfair or overly restrictive outcomes for companies involved in the eco-systems. Signup and view all the answers

Which of the following actions would NOT be considered an illicit conduct related to eco-systems?

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Study Notes

Competition Economics and Policy

Eco-systems and competition are complex, involving multiple products used together.
Competition law/economics often looks at whether an eco-system is open or closed.
Closed eco-systems: One entity controls product production, often through internalization or licensing.
Open eco-systems: No central control in the eco-system.
Eco-systems: Products are often bought or used together, like smartphones and apps, coffee machines and pods, printers and cartridges.

What are we talking about?

Products are often bought or used in combination.
This combination forms an eco-system.
Examples include smartphones and apps, coffee machines and pods, printers and cartridges, cars and car repair, shoes and laces, etc.

Typical eco-system

A typical eco-system includes a primary product market and a secondary product market.
The primary product market is the production of the primary product (e.g., manufacturing of the primary product).
The secondary product market involves products needed or frequently renewed to use the primary product (e.g., repairs, services, maintenance for the primary product, or replacement parts).
The eco-system owner controls the primary product.
Independent operators produce and provide products for the secondary market.

What is the problem?

Often, the owner of an eco-system tries to limit competition in the eco-system.
Examples include refusing to sell spare parts or refusing to license technology.
Strategies such as bundled sales or the discrimination of independent operators and denigration are also issues.

Closed systems and competition

Closed systems can restrict competition.
This can lead to less app diversity on smartphones, or limited choices in coffee pods for coffee machines.
Consumers may face higher repair prices due to a lack of competition.

Should we care?

Whether to intervene depends on the situation but this is crucial.
The answer isn't always straightforward.

Information sources

Economic analysis of closed and open systems; OECD roundtable on aftermarkets.
Links to relevant studies and reports are provided as information sources.

Section 1: Some theoretical aspects

Theory on the topic is discussed.

The intuitive view

Foreclosing competition increases the owner's profits.
All foreclosure strategies should be prohibited if the competition is not strengthened.

The less naive view (Chicago school view)

A monopolist eco-owner enjoys a primary market position with competitors in the secondary market.
Consumers benefit with combined primary and secondary product utility.
Foreclosure strategies can be evaluated and can increase profit.

The less naive view (2)

Competition on the secondary market improves prices.
The eco-system owner's profits are the same with or without this competition, implying no incentive to restrict it.
Competition among eco-systems promotes openness.
Closed eco-systems respond to efficiency concerns.

Quality effect: The owner of the eco-system will aim to determine the optimal quality level of both primary and secondary products.
Quality is unobservable, and low prices for eco-systems and high prices for secondary products will encourage sales.
The Cournot effect: If there are independent players, prices will be higher.
Discrimination between consumers: Multiple consumer types can be served through targeted pricing or specialized products.

An even less naive view

The Chicago view assumes that the monopolist will not be challenged in the secondary market.
Consumers are aware of the secondary market impact of the primary market choice.
This allows the eco-system to reap all the benefits of an open eco-system.
Consumers can be myopic, choosing the least expensive option now and potentially being reaped of in the future.

Internet browsers' market shares

Graph displaying market share trends over time for different internet browsers.

Wrap-up

Eco-system owners may be incentivized or not to restrict competition.
Competition forces eco-system openness.

Case law 1

Identifying market power with eco-systems.

A more legalistic view

Dominance in the primary or secondary market is examined.
Factors like Microsoft, Nespresso and Google are discussed as examples.
Determining maintenance market and app markets.

Reminder

Eco-system problems exist when the owner tries to limit secondary competitors.
Loss in profit may deter the manufacturer.
Profit maximization may be hampered by the loss of profits for the secondary market.

Examples

Printer manufacturers and competing cartridge manufacturers are presented as example cases.
Apple's increase of fees paid by developers for apps is presented as an example.

Two types of consumers

Understanding consumers already in the eco-system to understand consumers not yet, and their impact on the eco-system.
Identifying those who will/won't adapt to the foreclosed market.

Case law

Case Law conditions for assessing if a system's owner has power over consumers in the secondary market.
The adaptation of consumers must be quick due to frequent transactions.
Examples of case laws are presented; Pelikan, Lab/Ricoh, and EFIM.

Shortcuts to the case law / Case analysis

Maintenance costs that are hard to determine ahead are a higher risk to consumers.
For instance, car repairs are subject to regulations in Europe that help prevent the restriction of competition in the secondary market.

Shortcuts

Determining how secondary market expenses impact the consumers' understanding of the eco-system.

If fees are high, consumers will have more information.
Businesses present information to consumers to help understand the decision.

Case example: Luxury watches

An independent repairer challenged a luxury watch manufacturer's practice of refusing spare parts to maintain competition.

Reminder (2)

Key issue is eco-system closure, which may be beneficial to consumers.
Competition between eco-systems helps prevent bad closure.
Consumers may be stuck even if competition exists.
Monopolists may still close their eco-system for good reasons.

Case law 2

Identifying illicit conduct.

Varying types of conducts

Different types of conduct in relating to eco-systems exist.
Refusal to sell spare parts, patent licenses.
Tying examples: Access to product A necessitates also obtaining product B
Self-preferencing: Eco-system owner favors its own products.

Conditions for a refusal to sell

Essential facility theory: An asset owner must allow access if it's essential.
Dominant position: The owner holds a dominant position regarding the essential asset.
Reproducible asset: The asset cannot be easily replicated.
Access is compulsory: Access is essential to compete in the secondary market.
Refusal is not justified.

Conditions for refusing to sell (2)

Examples of refusals to sell that have been deemed illicit concern Apple DRM systems and Magill cases.

Tying (Principles)

Dominant position in the tying product (usually the primary product).
Distinctive products.
Customer value to the diversity of secondary products.

Tying (examples)

Nespresso cases (France, 2015) and the issue of compatibility.

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Description

Explore the intricacies of competition economics and policy, focusing on product ecosystems. This quiz examines the differences between open and closed ecosystems, providing examples like smartphones and coffee machines. Understand how these combinations influence market dynamics and competition laws.