competition assessment of vertical mergers and vertical agreements in the new economy

243 Pages·2002·0.79 MB·English

Gide Loyrette Nouel November 2001
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IINN TTHHEE NNEEWW EECCOONNOOMMYY
Final Report
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TABLE OF CONTENTS
TITLE I
MAIN E-ECONOMY CHARACTERISTICS AND POTENTIAL ANTI-
COMPETITIVE IMPACTS………………………………………………….p.5
CHAPTER I.
MAIN ECONOMIC CHARACTERISTICS OF E-ECONOMY FACILITIES
AND POTENTIAL ANTI-COMPETITIVE IMPACTS OF VERTICAL
INTEGRATION STRATEGIES……………………………………………..p.5
Section I.
Main economic characteristics of the E-economy facilities……………………p.8
Section II.
Identification of potential anti-competitive effects that can result from vertical
integration into the different layers of the E-economy infrastructure………… p.25
CHAPTER II.
MAIN ECONOMIC CHARACTERISTICS OF E-ECONOMY
TRANSACTIONS AND POTENTIAL ANTICOMPETITIVE IMPACTS OF
VERTICAL DISTRIBUTION STRATEGIES……………………………...p.51
Section 1
Main economic characteristics of E-Economy Transactions…………….……..p.52
Section II.
Identification of potential anticompetitive effects that can result from e-commerce
when it constitutes a new sales channel…………………………………….…..p.77
Section III.
Identification of potential anticompetitive effects that can result from the Internet when
it constitutes a new intermediary…………………………………….…………p.98
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TITLE II
ASSESSMENT OF VERTICAL AGREEMENTS AND MERGERS IN THE NEW
ECONOMY……….………………………………………………………...…p.124
CHAPTER I.
COMPARISON AND ADEQUACY OF CURRENT ASSESSMENT OF
VERTICAL AGREEMENTS AND MERGERS IN THE NEW
ECONOMY……………………………………………………………………p.124
Section I.
Comparison of the competition policy approach toward vertical agreements and vertical
mergers and impact of these rules on the firms' strategies…………………….. p.127
Section II.
Adequacy of current competition assessment to limit anti-competitive effects of vertical
integration in the New Economy..………………………………….…………..p.142
CHAPTER II.
METHODS FOR IMPROVEMENT OF COMPETITION ASSESSMENT OF
COMPETITION CONCERNS IN THE NEW ECONOMY AND
RECOMMANDATIONS……………………………………………….…….p.186
Section I.
Comparison between the U.S. and the E.U. policy assessment of vertical mergers and
agreements……………………………………………………………………...p.186
Section II.
Identification and assessment of appropriate remedies in the New
Economy…………………………………………………………………….….p.203
Section III.
Recommandations………………………………………………………………p.223
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DETAILED TABLE OF CONTENTS
Introduction……………………………………………………………………p.1
TITLE I
MAIN E-ECONOMY CHARACTERISTICS AND POTENTIAL ANTI-
COMPETITIVE IMPACTS………………………………………………….p.5
CHAPTER I.
MAIN ECONOMIC CHARACTERISTICS OF E-ECONOMY FACILITIES
AND POTENTIAL ANTI-COMPETITIVE IMPACTS OF VERTICAL
INTEGRATION STRATEGIES……………………………………………..p.5
Section I.
Main economic characteristics of the E-economy facilities…………………p.8
1. The vertical structure of the E-economy infrastructure……………...p.8
1.1 The information/content layer…………………………………………... p.8
1.2 The network infrastructure layer…………………………………………. p.9
1.3 The access applications layer…………………………………………….. p.15
2. Network convergence. ………………………………………………….p.17
3. Dynamic nature of competition and speed of market transition……. p.20
4. Network effects…………………………………………………….…… p.23
Section II.
Identification of potential anti-competitive effects that can result from
vertical integration into the different layers of the E-economy
infrastructure………………………………………………………………….p.25
1. Overview…………………………………………………………………p.25
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2. The precondition for foreclosure: control over essential and bottleneck
facilities and/or detention of horizontal market
power…………………………………………………………………….p.26
2.1 Control over essential or other bottleneck facilities………………………p.26
2.2 Holding of market power………………………………………………… p.30
3. Potential foreclosure practices to exercise or increase market power.p.35
3.1 Exclusionary practices……………………………………………………p.36
3.2 Practices in related markets – Leveraging…………………………….….p.46
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CHAPTER II.
MAIN ECONOMIC CHARACTERISTICS OF E-ECONOMY
TRANSACTIONS AND POTENTIAL ANTICOMPETITIVE IMPACTS OF
VERTICAL DISTRIBUTION STRATEGIES……………………………..…p.51
Section 1
Main economic characteristics of E-Economy Transactions…………………p.52
1. The level of competition in electronic commerce………………………..p.52
1.1 Price levels………………………………………………………………… p.53
1.2 Price elasticity……………………………………………………………...p.54
1.3 Menu costs………………………………………………………………….p.55
1.4 Price dispersion…………………………………………………………….p.56
2. Strategies of firms in e-commerce………………………………………. p.56
2.1 Price discrimination……………………………………………………….. p.56
2.2 Bundling……………………………………………………………………p.61
2.3 Lock-in……………………………………………………………………..p.64
2.4 Brand name and confidence………………………………………………..p.66
3. The role of intermediaries in e-commerce………………………………p.69
4. Competition between firms in e-commerce…………………………… p.73
4.1 Presentation of firms involved in e-commerce……………………………..p.73
4.2 Cost structure and comparative advantages of e-commerce firms…………p.73
4.3 Cannibalisation……………………………………………………………..p.75
Section II.
Identification of potential anticompetitive effects that can result from e-
commerce when it constitutes a new sales channel………………………… p.77
1. The risk of free riding (in selective/exclusive distribution)…………….p.78
1.1 Internet retailers may free ride traditional retailers……………………….. p.78
1.2 Free ride by approved retailers of other approved retailers over the
Internet…………………………………………………………………….. p.82
1.3 Suppliers and manufacturers may decide to retail their own products……. p.83
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2. The e-commerce retailers may complain for not being supplied (in selective,
exclusive and automobile distribution)………………….……………….p.86
2.1 Concerning selective distribution…………………………………………. p.86
2.2 Concerning exclusive distribution………………………………………… p.91
2.3. The specific issue of vehicle distribution…………………………………. p.93
Section III.
Identification of potential anticompetitive effects that can result from the
Internet when it constitutes a new intermediary…………………………… p.98
1. General overview of B2B marketplaces and portals…………………... p.98
1.1 Definition………………………………………………………………….. p.98
1.2 Different forms of B2Bs…………………………………………………... p.99
1.3 The pricing mechanisms used by B2Bs…………………………………… p.100
1.4 The revenue model used by B2Bs………………………………………… p.101
1.5 Ownership structure of B2Bs………………………………………………p.102
2. Examples of B2Bs…………………………………………………………p.103
3. Efficiencies and pro-competitive effects generated by B2Bs………….. p.104
3.1 General overview of efficiencies generated by B2Bs……………………...p.104
3.2 Examples of pro-competitive gains generated by a B2Bs: Covisint……….p.106
4. Potential antitrust concerns raised by B2B marketplaces
and portals……………………………………………………………….. p.108
4.1 The risk of dominance of market place or portals………………………… p.109
4.2 Market dominance can lead to foreclosure……………………………….. p.111
4.3 The risk of monopsony power or buyer power…………………………… p.115
4.4 The risk of raising rivals' costs……………………………………………. p.118
4.5 The risk of exclusion……………………………………………………… p.119
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TITLE II
ASSESSMENT OF VERTICAL AGREEMENTS AND MERGERS IN THE
NEW ECONOMY……….…………………………………………………………….
p.124
CHAPTER I.
COMPARISON AND ADEQUACY OF CURRENT ASSESSMENT OF
VERTICAL AGREEMENTS AND MERGERS IN THE NEW
ECONOMY…………………………………………………………………….. p.124
Section I.
Comparison of the competition policy approach toward vertical agreements and
vertical mergers and impact of these rules on the firms' strategies………… p.127
1. Comparison of the competition policy approach toward vertical agreements
and vertical mergers……………………………………………………. p.127
1.1 The aim of Articles 81 and 82 is to maintain effective competition……… p.128
1.2 The aim of the merger regulation is to prevent the creation or strengthening of a
dominant position………………………………………………………….. p.130
1.3 Competition policy as applied in the telecommunications sector and the New
Economy……………………………………………………………………p.132
2. Impact of these rules on the strategies, which a firm will tend to adopt to
ensure the distribution of its products in the New Economy…………...p.135
2.1 Merger Cases……………………………………………………………….p.135
2.2 Analysis under Regulation 17………………………………………………p.137
Section II.
Adequacy of current competition assessment to limit anti-competitive effects of
vertical integration in the New Economy..…………………………………….p.142
1. Specific issues raised by electronic networks (towards a more dynamic
approach)…………………………………………………………….…… p.142
1.1 Definition of the relevant market: the adequacy of the traditional criteria…p.142
1.2 Relevance of the substitutability test?………………………………………p.146
1.3 Calculation of market share……………………………………………….. p.150
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1.4. Geographic market………………………………………………………… p.152
1.5 Barriers to entry / Foreclosure…………………………………………….. p.154
2. The specific issues raised by e-commerce, portals and marketplace…. p.159
2.1 Definition of the relevant market………………………………………….. p.159
2.2 Relevance of the substitutability test……………………………………….p.160
2.3 Relevance of the price elasticity rule ………………………………………p.161
2.4 Calculation of market share……………………………………………….. p.164
2.5 Geographic market………………………………………………………… p.167
2.6 Barriers to entry / Foreclosure…………………………………………….. p.168
3. Relevance of entirely new sets of criteria: towards a dynamic
approach…………………………………………………………………. p.173
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CHAPTER II.
METHODS FOR IMPROVEMENT OF COMPETITION ASSESSMENT OF
COMPETITION CONCERNS IN THE NEW ECONOMY AND
RECOMMANDATIONS……………………………………………….………p.183
Section I.
Comparison between the U.S. and the E.U. policy assessment of vertical mergers
and agreements………………………………………………………………….p.186
1. Evolution of U.S. and E.U. policies in merger assessment…..………... p.186
1.1 Evolution of U.S. policy……………………………………………………p.186
1.2 Evolution of E.U. policy…………………………………………………….p.187
1.3 Efficiencies as a mitigating factor in the U.S and the E.U…………………p.188
2. U.S. policy approach toward vertical agreements and differences from E.U.
policy……………………………………………………………………….p.193
2.1 The application of the per se rule and the rule of reason in U.S. law……... p.193
2.2 A limited application of the efficiency defense in E.U. law……………… p.194
3. Application of the rule of reason and the per se rule to vertical agreements
in the U.S.………………………………………………………………….p.195
4. U.S. evaluation of efficiencies regarding B2B marketplaces: an example of
application of the rule of reason………………………………………… p.198
Section II.
Identification and assessment of appropriate remedies in the New
Economy…………………………………………………………………………p.203
1. Advantages and disadvantages of structural and behavioral remedies in the
context of the New Economy……………………………………………..p.204
2. Towards behavioral remedies: the U.S. approach towards
remedies……………………………………..…………………….. ……. p.209
2.1 The importance of "up-front divestiture" as a remedy…………………….p.209
2.2 Remedies available to deal with problems of access to infrastructure……..p.210
3. Toward sophisticated packages including both structural and behavioral
remedies……………………………………………………………………p.214
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