On September 23, 2005, the European Competition Commissioner, Ms. Neelie Kroes, delivered a speech to the Fordham Corporate Law Institute, New York, on the policy review of Article 82 of the EC Treaty. Article 82 deals with unilateral conduct by a corporation with market power which restricts competition on the market, and is the EU’s equivalent of Section 2 of the Sherman Act in the US.

The European Commission, in its policy review of Article 82, does not intend to propose a radical shift in enforcement policy, but rather to develop and explain theories of harm on the basis of a sound economic assessment for the most frequent types of abusive behavior, in order to make it easier to understand Commission policy.

Going forward, Article 82 enforcement will focus on behavior that has actual or likely restrictive effects on the market, which harm consumers. European enforcement agencies will be cautioned at the national level about intervening in the functioning of markets unless there is clear evidence that they are not functioning well. Ms. Kroes stated that national enforcement agencies don’t have unlimited resources, and need to focus their efforts on what makes a real difference.

The speech set out a number of issues that are being considered in the policy review debate. With respect to assessing dominance and market power, the Commission will conduct a detailed analysis of key issues such as the market position of the allegedly dominant company, the market position of competitors, barriers to expansion and entry, and the market position of buyers. Ms. Kroes recognizes that high market shares are not on their own sufficient to conclude that a dominant position exists and risks failing to take proper account of the degree to which competitors can constrain the behavior of the allegedly dominant companies.

The Commission’s first round policy review will focus on exclusionary abuses since exclusion is often at the basis of later exploitation of customers, and will leave exploitary abuses for the second round of its review. The Commissioner declared her philosophy as being that it is competition, and not competitors, that should be protected.

I like aggressive competition – including by dominant companies – and I don’t care if it may hurt competitors – as long as it ultimately benefits consumers. That is because the main and ultimate objective of Article 82 is to protect consumers, and this does, of course, require the protection of an undistorted competitive process on the market.

Ms. Kroes confirmed that exclusionary abuses may be both price based and non-price based. Examples of non-price based abuses include contractual tying, “naked” refusals to supply, and single-branding obligations. In these cases, the question is whether such exclusion may be characterized as anticompetitive, namely, impacting not only competitors, but also competition in the market.

Similar exclusionary effects may be achieved through pricing. High stand-alone prices in comparison to a low bundled price for two products may “tie” these two products together as effectively as contractual tying. Predatory pricing is meant to exclude competitors, but low prices and rebates will be accepted if they are beneficial to consumers. Ms. Kroes mentioned that one possible Commission approach to pricing abuses may be based on the premise that only the exclusion of “equally efficient” competitors is abusive. The benchmark for “as efficient” will be the costs of the dominant company except where it is not possible to determine such costs, or when the dominant company, for instance in a newly liberalized market, has some “first-mover advantages” that later entrants cannot be expected to match.

Finally, Ms. Kroes discussed the widely-debated issue of whether there should be an “efficiency defense” under Article 82. Currently, efficiencies are taken into account under Article 81 of the EC Treaty and under the EC Merger Regulation, but not under Article 82. The Commissioner stated her view that efficiencies should be taken into account under Article 82, and that it is for a dominant company to demonstrate that four conditions are fulfilled. First, the claimed efficiencies should be realized or be likely to be realized as a result of the conduct concerned. Second, the unilateral conduct should be indispensable to realize the efficiencies. Third, the efficiencies should outweigh the negative effects of the conduct concerned. Finally, competition in respect of a substantial part of the products concerned must not be eliminated.

The Commissioner concluded her speech by remarking that the above approach will have the advantage of being based on solid economic thinking. At the same time it will give a clear indication to companies as to when they are on safe ground, and maintain workable enforcement rules.