Eco-systems and Competition PDF

Competition Economics and Policy Eco-systems and competition Etienne Pfister September 2023 jusqu'ici on était dans des cas simple ou il était facile d'identifier qui étaient l...

Competition Economics and Policy Eco-systems and competition Etienne Pfister September 2023 jusqu'ici on était dans des cas simple ou il était facile d'identifier qui étaient les conso et les vendeurs, mais la réalité est souvent plus complexe. What are we talking about ? Products are often bought or used in combination  Smartphone and applications  Coffee machines and coffee pods  Printers and cartridges  Lifts and lift maintenance – very frequent : watches and watch repair, cars and car repair…  Shoes and laces The combination of these goods forms an eco-system  In competition law/economics, an aspect which is very often looked at (ie., at stake in many competition issues) is whether the eco-system is « open » or « closed »  Closed eco-systems : someone controls who produces what, either through internalization, or through strict licensing schemes  Open eco-systems : there is no control…  Of course, it is all a question of degree (as always)  Typical eco-system Manufacturer Apple/Nespresso of a key /Schindler//etc. component Primary product Owner of the market eco-system celui qui a fait le produit primaire c'est la production du produit au centre de l'écosystème Secondary product market c'est les produit secondaire dont on a besoin pour utilisé le produit primaire souvent on doit les renouveler Eco-system Independent operators owner (app developers, coffee pods makers, independent repairers, etc. dans la production des produit secondaire on retrouve a la fois le producteur primaire mais aussi d'autre What is the problem ? Manufacturer Apple/Nespresso Frequently, a member of the of a key /Schindler//etc. component eco-system tries to foreclose competition in the ecosystem : Owner of the eco-system  Refusals to sell some spare parts/refusals to license some technologies…  Bundled sales or tying en même temps qu'ils vendent le produit primaire ils font en sorte qu'ils faillent un produit secondaire particulier pour faire fonctionner la produit primaire  Discrimination towards independent operators  Denigration Eco-system Independent operators owner (app developers, coffee pods makers, independent repairers, etc. What is the problem ? Closed systems imply a restriction of competition  Consumers may have fewer apps on a closed-system smartphone  Likewise, they have less diversity when choosing their coffee pods if the coffee machine is a closed system.  They can be confronted to high prices of repairs because competition is lacking…  Etc. Should we care ?  As usual, the answer is not that straightforward.  When should we care ? Information sources Economic analysis of closed and open systems – https://www.autoritedelaconcurrence.fr/fr/publications/analyse- economique-des-systemes-ouverts-et-fermes OECD roundtable on aftermarkets – http://www.oecd.org/competition/aftermarkets-competition- issues.htm Section 1 : some theoretical aspects The intuitive view Principle : Manufacturer Apple/Nespres of a key so/Schindler//e  By foreclosing competition on the tc. component secondary markets, the eco-system Owner of owner will increase its profits as it will be the eco- able to sold its secondary products at a system higher price or/and at a lower quality Consequences :  All foreclosures strategies should be prohibited  We have to be sure competition is actually strengthened. Eco- Independent operators system (app developers, coffee pods en suivant ce raisonnement tous les système fermé devrait être ouvert owner makers, independent repairers, etc. The less naive view : the Chicago school view (R. Posner) Basic framework  Consider a monopolist eco-owner : it enjoys a monopoly position on the primary market (m) and competes with other undertakins in the secondary market (c)  Consider consumers need both the primary and the secondary product, enjoying a utility of 10 when they buy both and 0 otherwise.  Assume C(m)=3, C(c)=1 and U=10 Foreclosure strategy  The eco-system owner will eliminate competitors – it will set a price of 10 for both products – its profit will be of 4. 6 The less naive view : the Chicago school view (2) No foreclosure  Thanks to competition on the secondary market, P(c) goes down to 1.  This allows to set its price at 9 on the primary market. Its profit will be of 6. c'est le même profit dans les deux cas donc pas forcement d'incentive d'empêcher la compétition dans le secondary market. This is the « single monopoly profit theory » Consequences  Having 1 monopoly instead of 2 does not worsen consumer welfare (it may even improve the situation) And if there are 2 or more eco-systems competiting, no need to worry either  Competition between eco-systems will force the eco-system owners to open their eco-systems if this is what consumers want… Closed ecosystems respond to efficiency objectives d'après ces résultat (askip) si les écosystèmes sont fermé c'est pour des question d'efficience. Efficiencies related to closed eco-systems Quality effect number 1 : the system owner has the highest incentives to propose the right quality level ex: car si y a trop de second produit de basse qualité alors les gens peuvent arrêter de consommer le bien primaire car il penseront que c'est de la d. Quality effect number 2 : quality is unobservable. To sell the system, the eco- system owner sets low prices for the eco-system and sets high prices for the secondary products c'est difficile de connaitre et d'évaluer la qualité des produit, donc pour pouvoir vendre le produit primaire sans réputation le seul moyen est de vendre le produit primaire a bas cout et d'augmenter le prix des produit secondaire. Cournot effect : if the primary product maker and the secondary product maker are independent, their prices will be too high… Si on laisse des entreprises indépendante leur choix sera de mettre un prix trop haut sur leur produit au risque de perdre les conso, alors que s'il se mettent d'accord alors il peuvent comprendre qu'ils ont intérêt s'entendre et baisser le prix, pour max leur profit car sinon ils sont en dilemme du prisonnier. Mais le soucis c'est que les authorité de la concu aime pas s'est type d'entante entre producteur et du coup les entreprises préf avoir un écosystème fermé Discrimination between consumers : imagine two type of coffee consumers – coffee addicts and occasional coffee drinkers – how to sell to both consumers while maximizing products ? Ce qu'on a vu avant était aussi un peu naif, the new industrial economics view l'est moins. An even less naive view: the new industrial economics view… Windows The Chicago view assumes the monopolist is operating not in a danger of seeing its monopoly Microsoft system contested by the undertakings on the secondary market Owner of on peut relaxe, le fait que le owner de marché n'est pas en danger quand il y a des producteur de second product, car c'est possible que the eco- c'est producteur commence a produire des produit primaire aussi system The Chicago view assumes customers can foresee what will happen on the secondary market le conso voit pas tjrs que quand il achète le produit primaire il calcule pas vraiment l'écosystème dans lequel il est et la qualité / prix des produit secondaire. Ca fonctionne dans les eco-système clos  This allows the eco-system to reap all the benefits of an open eco-system  But in practice, consumers can be myopic : they will choose the least expansive eco- Internet system and be « reaped off » later Netscape explorer – if the eco-system is closed and has market power… Eco-system owner Internet browsers’ market shares Wrap-up An eco-system owner may not be incentivized to close its eco-systems for anticompetitive reasons  Single monopoly profit theory  Competition can force eco-systems to open up if this is what consumers want… There can be some good, pro-competitive and pro-consumers, reasons to close eco- systems But there are cases where the foreclosure of an eco-system is implemented for bad reasons  Eco-systems owners may fear that undertakings on the secondary market develop a new eco-system  If there is no competition between eco-systems, the eco-system owner could seek to exploit « myopic consumers » Case law 1: identify market power with eco-systems A more legalistic view The owner of an eco-system can do whatever it wants as long as it is not Manufacturer Apple/Nespres dominant of a key so/Schindler//e double vérification de dominance component tc. Owner of the eco- Is he dominant on the market for the system primary product ?  Microsoft ? Nespresso ? Google ? Is he dominant on the secondary market ?  Maintenance markets/app markets/etc. Eco- Independent operators system (app developers, coffee pods owner makers, independent repairers, etc.  Reminder Typical eco-system problem Manufacturer Apple/Nespres  The eco-system owner wants to of a key so/Schindler//e foreclose competition on the component tc. secondary markets have to ask ourself is it good or bad d'un point eco mais aussi légal, ad est-ce qu'il y a déjà un grand pouv de marché Owner of  Think of a printer manufacturer that the eco- eliminates all independent system manufacturers of cartridges donc on se demande What could deter the manufacturer from doing this ?  A loss in profit…but where could it come from ?  This closely ressembles a market Eco- Independent operators definition exercise system (app developers, coffee pods owner makers, independent repairers, – « Would a price increase of the etc. cartridges be profitable ? »  Examples Imagine a printer manufacturer has the possibility to evict competing manufacturers of cartridges  What could prevent him of doing this ? - crédile  Existing consumers would buy a new printer – low switching costs, many manufacturers of printers, how many consumers would switch and when ? + crédible  Future consumers would buy a new printer – low information costs, many manufacturers of printers, how many consumers would switch and when ? Imagine Apple chooses to increase the fee paid by app developers to be sold on the iPhone  What would prevent him of doing this ?  Existing consumers would buy a new smartphone – switching costs are high (prices, learning costs)  Future consumers would buy a new smarphone – this is where competition may lie – but is information sufficient ? And is there competition ?  Two types of consumers Eco-system Will they take owner into account what happens Are they in the eco- stuck with system? the eco- system ? Consumers Consumers not yet already within the within the eco- eco-system system Case law Case law usually examines four conditions to assess whether a system owner has some market power over its existing consumers  Future consumers are not informed of what happens on the secondary market everything that demande maintenance  Future consumers are not attentive to what happens on the secondary market A house, on s'en fout parfois de la peinture ou du toit de la maison car proportionellement au rpix de la maison en soit c pas assez chère.  A sufficiently high number of future consumers will adapt their behavior if the secondary market is foreclosed  This adaptation will be sufficiently rapid (transactions are frequent) See cases :  Pelikan Kyocera (IV/34.330, § 61) (all see General Court and Court of Justice)  Lab /Ricoh (cas IV/E 2/36.431)  EFIM (C 3/39.391) Shortcuts to the case law/case analysis Maintenance versus consumables  Maintenance costs are hard to known in advance : the risk that existing consumers get reaped off is high  Example : car repairs – in Europe, special regulations have been implemented to ensure that competition is maintained on this secondary market… Difference between growing and declining markets Dans les declining market, il y a plus d'incetive a foreclose the market. Parce qu'il y a de moins en moins de consomateurs future et donc le marché ce focus sur les consomateurs stock avec nous, et donc il y a moins d'incentive a l'aisser le marché ouvert mais plutot a le fermé afin d'essayer de mettre en place une dicipline. Dans un marlet growing le plus important c'est les futurs consommateurs, + une difficulté a prévoir ce qui va se passer dans le future Shortcuts to the case law/case analysis The higher the expenses on the secondary market, the more future consumers will be informed about them  If costs on the secondary market are high, consumers will try to gain information about them…  Firms will even inform consumers themselves by making adverts, special offers, etc. In some instances, terms of sales on the secondary market are fixed  The consumer can not be reaped off – at least as far as prices are concerned…  Pb : prices of the eco-system may be higher because the eco-system owner wants to share part of this risk…  Example : full insurance schemes  Case example : luxury watches A independent repairer of luxury watches complains to the EC because the watch manufacturer does not sell him spare parts… le reparateur n'était pas cap de réparé car le fabriquant ne voulait pas lui vendre un outil clef. EC dismisses the case :  Future consumers will choose another watch brand if the repair prices increase  Existing consumers can resell their watch if the repair prices increase au début ici ils s'en foutaient du cas, et espérait que le cas finirait vite Court of First Instance is unimpressed and says the EC has to review the case EC reviews the case  Two separate markets : one for the sale of luxury watches, another one for the maintenance of luxury watches – Consumers do not integrate repair costs + consumers do not resell their watches  Consequence – Even though each watch maker compete with the other ones, each watch maker has a monopoly position when it comes to the market for maintenance… Reminder Key issue with eco-systems is the systems closure…  But closure can bring advantages to consumers… How to identify « good closure » ?  Competition between eco-systems can prevent « bad » closure from ever arising…  Unless consumers are stuck with a given eco-system…  But even then competition between eco-systems may still matter  Do not forget that even a monopolist eco-system can close its eco-system for good reasons… Case law 2: identify illicit conducts Varying types of conducts Refusal to sell  Spare parts, patent licenses, Tying  The customer cannot access product A without also acquiring product B (or renouncing to acquire rival products) ex: jeux exclusive sur une console en particulier  Examples ?  Contractual or technical Self-preferencing  The eco-system owner puts its own secondary products ahead in the eco-system Denigration de manière général toutes ses comportement sont illicit lorsqu'un firm est en position dominante  focus sur le refusal to sell Conditions for a refusal to sell to be illicit (principles) « Essential facility theory »  The owner of an asset has to give access to asset it owns only if this asset is essential  C1 : this asset is owned by a firm which has a dominant position  C2 : this asset cannot be reproduced under competitive conditions c'est possible de le faire mais pas rentable  C3 : access to this asset is compulsory to be able to compete on the secondary market  C4 : access to this asset is possible while the refusal to access is not justified c'est difficile de condamner une entreprise pour refusal to sell car les conditions sont difficile à réunir. en plus il y a un trad off entre la recherche et la possibilité d'accéder à un monopole limité. These conditions are hard to meet in many instances  Competition law seeks to preserve incentives to invest intellectual property law Conditions are strengthened when the asset is subjected to competition law  The competitor asking for an access must be in a position to introduce a new product du coup si le produit est innovant le refusal to sell is licit et donc pour qu'un compétteur ai accès à ce produit il doit utiliser ce produit pour apporter quelque chose de nouveau, pour que le refusal to sell soit illicit. Conditions for a refusal to sell to be illicit (examples) Apple DRM system (France, 04-D-54)  A rival platform selling music wants its titles to be readable on the iPod  The French competition authority rejects the complaint : – The iPod is only one of many devices on which to read digital music – So access to the iPod is not compulsory to compete with Apple’s platform Magill (Ireland, 1995)  In Ireland, TV viewers had to buy the TV guides of each TV channel  Magill proposed a unique TV journal – what happened ? Magill won car il voulait proposer un nouveau produit avec tout les programme réuni en 1 journal. IBM maintenance  Independent repairers of IBM mainframes won the case in court Tying (principles) 2 conditions  Dominant position in the tying product (usually the primary product)  Distinct product si oui alors tying n'est pas licit, sinon il a tendence à l'être. – Do customers value the diversity in secondary products ? If so, why is it that the eco- system owner does not encourage openness ? mais du coup se pose la question de pk le producteur qui se lie n'ouvre pas sa prod ça serait plus profitable. – Are there competitors specialized in the manufacturing of secondary products ? If so why don’t they try to build their own eco-system ? Examples  Hilti (EC, 1994) : nail-guns  Internet Explorer (EC, 2009) : commitments – failure to respect commitments le tying était entre windows internet explorer Tying (examples) Nepresso (France, 2015) – facts  Until 2015, Nespresso was the only producer of coffee pods compatible with the Nespresso machine – thanks to continuous product changes machine il a pas été jugé coupable car il a avancer que les changements de sa n'était pas pour empêcher la compét mais améliorer la machine. Du coup, l'enjeux est de prouver que l'intention etait vraiment ou non l'amélioration nécessaire de la machine.  Nespresso was dominant on the market for home-made espressos (an interesting question in itself…)  There were some specific coffee pods sold by rival manfacturers (organic coffee, organic pods, pods sold in supermarkets, etc.) Case was solved through commitments :  Nespresso committed to inform its rivals of its products changes sufficiently in advance Questions ?  Was it really tying or just product enhancement ?  Wouldn’t we prefer to have the rival coffee pods develop their own machine ? bonne question, car ça aurait développer un compétition dirctement sur le produit primaire.  What about price discrimination ? certains argue que le tying est pour avoir des prix plus bs, donc plus de tying = augmentation du prix des produis secondaire du producteur primaire. souvent les entreprise préf faire des commitments ou des arrangement et éviter les jugements même lorsqu'il pense qu'ils peuvent gager car c'est plus rapide est moins chère. Wrap-up One a dominant position is found, the conduct has to be analyzed… Two frequent examples of such conducts are tying and refusals to sells Refusal to sells are to some extent harder to condemn than tying cases… Souvent les authorités de la concu choisi du coup la qualification qui a le plus de chance de réussite car les deux pratiques sont souvent proches dans les faits. Yet to some extent, they share some similar effects (positive and négatives)… This « paradox » is known as « abuse shopping »