- INTRODUCTION
Examples for competition law
Exclusive copyrights can also play a role in the area of competition in mergers, both in the assessment of the competitive effects of the merger and in the offers made by merging parties to mitigate the adverse competitive effects of the merger. This may involve a commitment to provide access to competitors or even to divest a business and sell it together with the intellectual property rights.
Concentrations may also serve as a means to acquire intellectual property rights. In its opinion, the European Economic and Social Committee drew attention to the practice of multinational companies in high-tech sectors to buy up innovative SMEs with a patent and copyright portfolio or to take over their engineers, rather than to acquire licences that can be transferred to competitors. The aim is to use patents and other intellectual property rights for monopolistic and anti-competitive strategies.
1.1. The latest developments in competition law
In Gombos Katalin A versenyjog legújabb fejleményei – európai uniós kitekintéssel (The latest developments in competition law – with an EU perspective) we may acquire a clear picture of the standards the EU puts forward as for competition law.
One of the most important areas of the EU’s single internal market is competition law, which sets the rules for fair competition in the market, but also includes provisions on the law of restrictions on competition. The EU’s competition policy is designed to ensure that the results achieved by dismantling Member States’ trade restrictive measures in the creation of the Single Market are not undermined by private anti-competitive behaviour or by national measures. Effective competition benefits all market players, including Member States, businesses and, in terms of the objectives pursued, consumers. The emergence of this latter ‘target audience’ has led to recent trends towards an increasing role for consumer-oriented competition law in both EU and national legislation, with the results being felt in the market.
Protocol (27)
Protocol (No 27) on the internal market and competition, recalling that the internal market, as defined in Section 3 of the Treaty on European Union, includes a system ensuring that competition is not distorted, allows the Union to adopt measures where necessary, either on the basis of a specific mandate from the Treaties or on the basis of Section 352 TFEU. Thus, measures may be taken to contribute to the functioning of the internal market, acting under the exclusive competence provided for in Section 3(1)(b) TFEU or in relation to objectives defined in Section 3(2) TFEU, inter alia necessary competition rules. Section 352 TFEU also confers on the Union, in the field of competition law, only an additional power to adopt appropriate provisions unanimously. In accordance with the case law of the Court of Justice of the European Union, Section 352 TFEU cannot serve as a basis for extending the Union’s powers beyond the general framework established by the Treaties as a whole, and in particular by the regulations defining the Union’s tasks and activities. In any event, Section 352 cannot be used to adopt provisions the effect of which would be to amend the Treaties without respecting the procedures for that purpose.
EU competition policy is one of the driving forces of the internal market and aims to ensure fair competition by influencing the structure of the market and the behaviour of market participants. EU competition law can basically be divided into two broad areas: classical antitrust law (rules applicable to undertakings) and rules applicable to Member States. Classical antitrust law includes legal rules on the prohibition of restrictive agreements, the prohibition of abuse of economic power and the control of concentrations, merger control.
Member States are also subject to EU competition law, as they themselves act as „competitors” in the market through certain activities. Therefore, the rules of EU competition law that apply to Member States include rules on State monopolies of an acquisitive nature, rules on State-owned enterprises, special undertakings with exclusive rights , and rules on the prohibition of State aid.
- 2. DIGITAL MARKETS AND COMPETITION LAW
Dr Pál Belényesi, A digitális piacok időszerű versenyjogi vonatkozásai (Rome: John Cabot University, 2015) translated into English as “The digital markets and their competition law character traits” offers us an ample disquisition on the current topic. Hereby we would like to highlight only the skeleton of competition law influences on digital markets. The following excerpts are partially or completely written by the author, yet translated into English by the writer of the present work.
The potential competition issues in digital markets can be divided into several groups. However, the problems do not affect competition law to the same extent, and it is not possible to examine all of them in the context of this study. The possible issues are:
- the restrictive effect of digital monopolies on competition and innovation,
- the aggressive behaviour of digital monopolies in new markets,
- the coercive effects of digital monopolies,
- the privacy implications of digitalisation,
- the effects of geo-blocking,
- anti-competitive use of patent rights,
- restrictions on the market dynamism of Internet Service Providers (ISPs),
- State aid for the development of broadband networks
- market distortions, spectrum tendering and allocation may create barriers to entry,
10.Market distorting effects of tax incentives
The tax advantages identified in point 10 may have market distorting effects due to tax competition between countries of residence. This means that companies will tax in a tax planning manner, paying different taxes in the country where the tax conditions are most favourable but where they carry out a minimum of economic activity. This reduces state revenues and puts less international companies in a less competitive position, but also raises the possibility of illicit state aid. This type of national tax incentives is already being seriously addressed by the European Commission. However, a sustainable long-term solution to the problem is not a competition law investigation into possible illicit state aid, but a tightening of the tax regulatory framework.
As in the case of tax competition, market foreclosure techniques often invoked in connection with spectrum auctions (point 9) and the restriction of the ability to challenge markets through long-term contracts are also competition problems, as they involve the artificial creation of entry and exit barriers. However, it may be argued that this area could also be more successfully addressed by a regulatory framework for auctioning or by sectoral regulation of the electronic communications framework that prohibits spectrum hoarding, does not allow cooperation during auctions and reserves spectrum blocks for new entrants.
The deployment of broadband networks, as mentioned in point 8, also falls within the scope of State aid44 , since a major development, as a complementary measure and not a substitute for market mechanisms, distorts the supply side of the market (leads to a reduction in capacity, potential players are prevented from entering the market, may strengthen market position). However, the limits of distortion can be defined as known from the case law of the European Court of Justice (ECJ). The strategy and regulatory framework for broadband is clearly aimed at increasing digital development and digital literacy, and as such supports public policy objectives with minimal distortive effects on competition. The various support schemes, such as the European Network Facility, national broadband development plans, aim to „address market failures” for higher economic growth, „reduce the digital divide” and „achieve a fairer market outcome”. Given these considerations, it is possible that broadband development should not be regulated primarily through ex post monitoring of competition law, but in an ex ante framework, with rigorous and comprehensive monitoring by the Commission.
The restrictions on ISPs’ ability to operate in the market (net neutrality) mentioned in point 7 can only be addressed by competition law in the short term. Blocking/throttling techniques (VoIP, deliberate slowing down and limiting P2P services) put other companies offering such services at a direct competitive disadvantage and have a negative impact on innovation. Such cases are assessed under competition law as abuses of dominant position and are either investigated under national law or under Article 102 TFEU.
The competition problems related to patent rights mentioned in point 6 are not new, in particular as regards fair, equitable and non-discriminatory access to patents (FRAND). It is well-known that the central issue in such cases is when the disposition of the right held by the patent owner, i.e. the de lege monopolistic behaviour, is considered anti-competitive (in other words, in which cases the patent owner’s licensing policy can be considered an abuse of dominance). Since patent problems are not exclusive to digital markets and their impact is felt in many areas – in particular in relation to harmonised standards (e.g. GSM) – it is believed that competition authorities can successfully address such conduct and that ex post investigations offer an effective solution to the cases that arise. Legal certainty would only be enhanced if the FRAND definition were to define the obligation to contract more precisely, leaving a narrower margin of appreciation for competition law discretion.
By using online services, we provide a range of personal data – email address, physical address, bank card number and associated secret codes- which is then protected, processed and managed by the platform. All this is hopefully done securely and with the utmost care. However, the line between the misuse of the data referred to in point 4 and the legitimate and illegitimate exercise of commercial processing and possibly selling to third parties of our online activity – search history, interests, products purchased – is not always clear, while the processing and selling of data is at the heart of many platforms’ business models. Information from any data aggregation can be a competitive advantage that can easily become a barrier to entry, especially in markets where the role of forced aggregation is prominent (e.g. Facebook, WhatsApp, Instagram). Furthermore, consumers are not always fully aware of the conditions under which the data they provide is monetised by the platform owner. Although consumer data, like traditional services and products, can be understood as an input in the service chain – and therefore relevant from a competition law perspective – their treatment is not the primary purpose of competition law. Such problems can be adequately addressed by the data protection framework.
The geo-blocking identified in point 5, i.e. the restriction of online product and service comparison and purchase (through access restrictions designed to protect intellectual property rights) on a geographical basis by technical solutions, could be prevented primarily by reforming the relevant sectoral legislation. Geo-blocking is possible by analysing the user’s IP address, postal address or credit card issuing address. This practice directly harms consumers by limiting choice, narrowing the geographic market and often only allowing access to products at a premium price. Geo-blocking is therefore another way of saying that discriminatory pricing practices in offline markets are manifested online. Given the large number of consumers affected by this issue, the Commission’s Competition DG launched an industry inquiry in May 2015 to gain a better understanding of trade-restrictive practices in international online marketplaces. The results of the inquiry are not known at the time of the closure of the study. It should be noted, however, that while competition law rules, in particular antitrust and abuse of dominance provisions, are capable of limiting harmful effects, it cannot be expected that they will fully tackle abuses arising in particular from a lack of internal market regulation. It is therefore likely that a review of sectoral rules (i.e. for e-commerce) can also adequately address this area. This also seems to be recognised in the Commission’s proposal for a Digital Single Market.
2.2. Issues requiring competition law solutions
The main issues that require the application of competition law and policy instruments are primarily related to product and geographic market definition, the assessment of the existence of dominance and its extension, the impact of firms’ conduct on competition and innovation, and the market distorting tactics of mergers. In conclusion, the list of 10 includes the restrictive effects of digital monopolies on competition and innovation, the expropriation of digital monopolies to other markets, and the coercive behaviour of digital monopolies towards consumers.
As a starting point, it is proposed to accept that the task of competition authorities in digital markets is particularly difficult, as they have to use tools developed and working well in traditional markets to investigate markets for which there are as yet no multiannual guidelines and proven measurement mechanisms.
The opportunities offered by the Internet mean that consumers are better informed than in traditional markets. Markets are more dynamic, with frequent entry and exit of businesses. Thus, making decisions on the structure of markets involves greater risk, as market structure is constantly changing and static is difficult to capture. The definition of market power in terms of percentage share is provisional, while consumer trend shifts and innovation are major market structure shapers. The familiar process of „market definition – dominance analysis – analysis of anti-competitive behaviour” arguably requires a more complex and nuanced analysis in digital markets.
The restrictive effect of digital monopolies on competition and innovation
However, where there is a systematic practice in the market as described above, competition authorities need to take a particularly considered decision in two cases: i) pre-emptive mergers, and ii) defensive leveraging. Let us look at these cases.
Pre-emptive mergers are understood to occur when a profit maximising firm preempts the acquisition of an independent firm by a third firm competing in the same market. Such behaviour is understandable from a competition point of view. It also makes sense, under certain conditions, if the acquisition temporarily leads to a situation where the welfare of the shareholders of the acquiring firm is reduced (e.g. because of an irrationally high acquisition price: i.e., the first firm has to pay more for the acquired firm than the increase in profits resulting from the acquisition). In digital markets, this manifests itself in the dominant firm acquiring a smaller and more innovative firm that could most likely have threatened it in the future in the market where the former exercises its dominance. Such acquisitions reduce innovation in the market and limit consumer choice. The assessment of these concentrations is delicate, as the authority has to decide on a future market and assess the acquirer’s intentions in relation to it. The Google/DoubleClick, Facebook/WhatsApp mergers have raised such issues in both the EU and the US.
Defensive expansion refers to the case where a dominant undertaking extends its dominance into a secondary market in order to prevent the destruction of its dominant position in the primary market (as opposed to the basic situation under expansion theory where it seeks to create a dominant position in the secondary market as well). The defensive expansion theory can be readily applied to digital markets: the first Microsoft cases were brought in relation to its dominant position in the operating systems market and its extension into related markets. Microsoft had exclusive control over applications that could be combined with Windows operating systems (e.g. group servers), which meant that only products that were compatible with the Windows OS could enter the market. This situation has been changed by the emergence of the Internet, as many applications could be delivered to users via Internet browsers, bypassing the Windows OS. The company chose to replace development by tying Internet Explorer as a commodity to another product, Windows OS (technical tying), in an attempt to extend its continued dominance in the operating systems market to the browsers market.
1.3. Quality model for self-regulation
LELAND’s [1979] article launched the model-based literature on self-regulation. It takes as its starting point the problem of counter-selection introduced by Akerlof [1970] and examines whether this is improved by the regulator or the industry setting a quality threshold.
The model itself is based on Akerlof’s model, the structure of which is as follows. Consumers value better quality products more, and better quality shifts the demand curve outwards. The quality of the product produced by each firm is exogenous, and firms that produce a higher quality product produce at a higher unit cost. The model includes an experience product, so consumers are not able to observe the quality of the product or service before purchasing. They are therefore willing to pay a price that corresponds to the average quality of the products on the market, i.e. the expected quality. This leads to counter-selection: the best quality producers do not have the incentive to enter the market, even if consumers would be willing to pay the higher cost of their high quality product, given full information.
In this framework, Leland [1979] investigates whether the resulting inefficiency can be reduced by introducing a quality threshold. This means that only producers whose quality exceeds a critical value can sell their product or service on the market. The social benefit of introducing a threshold is that the higher average quality will lead to a return to the market of higher quality producers, and the cost is that it will reduce the costs of the market, the quantity of products sold. The welfare impact depends on how consumers value higher quality relative to higher quantity.
1.4. Conclusion:
As for the aim of the current research paper is neither giving an ample disquisition of digital markets, nor showing the products and their quality model, it merely aims at scrutinising the basis of competition law on digital markets. First, I introduce my paper with a possible example, tracing back to the copyright case, then step by step showing the main frame of European competition law being utilised in Hungary also, the main concepts and ten elements of digital market competition, adding to it a quality model at the end as a possible way of regulating the products and classifying them on market. The main point I highlighted here is the twofold nature of the digital market’s byproducts, and the main steps in competition law one shall take to avoid negative effects.
Bibliography:
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