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Aftermarkets in EU competition law Who should make business decisions in a market economy?

Aftermarkets in EU competition law Who should make business decisions in a market economy?. Paul.nihoul@uclouvain.be. M1. M2. Business model. Maximize return How to do it in a market economy ? Not by competing But by building monopoly positions Keep competitors away

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Aftermarkets in EU competition law Who should make business decisions in a market economy?

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  1. Aftermarkets in EU competition lawWho should make business decisions in a market economy? Paul.nihoul@uclouvain.be

  2. M1 M2

  3. Business model • Maximize return • How to do it in a marketeconomy? • Not by competing • But by building monopoly positions • Keepcompetitorsaway • How? Barriers to entry • Innovation • Economies of scale or scope > lowerprice • Branding • …

  4. Application to Aftermarkets • On M1 • Develop innovative technologies • Sell them at low prices • Once you have an installed base • Concentrate an ancillary markets • There keep competitors away bundling • Consumers are then locked in • You can charge higher tariffs … • … within limits • Consumer loyalty, reputation of firm, …

  5. Should society react? • Innovators • Reward them • Let them free • Sometimes more efficient in production • Competitors • Sometimes more efficient in production • Consumers • Freedom to choose • Have the best bargain

  6. Should society react? Innovator Competitor Consumer

  7. Leading case : Hilti • 102 – possibly merger – not really 101 • Commission + ECJ • Often cited • Old enough, never questioned

  8. Marketdefinition M1 M2 M3

  9. Market structure

  10. Abusive behaviour Maintain dominance on M1 Secure it on M2, Extendit to M3 On M3 : excludecompetitors … … and prevent consumer choice

  11. Acceptable justification? • Behaviour can be justified if • legitimate objective • acceptable means (proportionality) • Conditions not fulfilled here • Objective legitimate, safe usage • Means not acceptable, not proportionate

  12. Should society react? Firm Competitor Consumer

  13. Rich case law • Consumables • Platform • Ex. Microsoft • M1 = OS (Windows), M2 = applications (Windows Multimedia) • M1 dominant position, abusive tying • General case law • Prohibition on extension of dominant position • 102 but also Merger Control • Ex. General Electric & Honeywell v Commission

  14. « Big guy » scenario = Whatwe have seen • Dominance on M1 • Extension on ancillarymarkets • Examples : Microsoft, Hilti, etc. • Degree of choice • insufficient on M1 • a fortiori on M2 • Clear solution

  15. « Anybody » scenario But another scenario is possible • No dominance on M1 • On thatmarket, choiceissufficient • Dominance on M2 • The producerdominates the market for the products to beusedwithits main equipment • Oftenthoughbundling • Technicalwherever possible • Otherwise commercial practices, cfr. Hilti • On thatancillarymarket, the choice open to customersislimited • Shouldweintervene?

  16. Case law • EU : Renault, Volvo • M1 = cars NO DP, M2 = spare parts DP • ECJ, abusive • EU : Hugin • M1 = cash registrars NO DP, M2 = spare parts • Commission, abusive – quid ECJ? • US : Eastman Kodak • US : Virtual Maintenance

  17. Should society react? Firm Competitor Consumer

  18. New narrative • Give producers more say • Whoevercustomersmaybe : B2B, B2C • Leegin in discussion on RPM • In aftermarkets, J. Temple Lang • Freedom for firms • Spreading innovation • Equity - pay for use • No risk of abuse • Not “rational” for firms to abuse their M2 position • Consumers “take into account” M2 costs

  19. New concept • Competition • Not between products • But between systems • Composed, complex products

  20. Legal strategy • Arg 1 – market definition • Arg 2 – dominance (even if separate markets) • Arg 3 – behaviour (even if separate markets and domination) • The firm has not abused its dominant position

  21. Arg. 1 = “No separate market”Info Lab v Ricoh, 1997 Info-Lab requests access to Ricoh empty cartridges

  22. Hilti, EC decision, par. 55.- …Hilti-compatible cartridge strips and Hilti-compatible nails … are separate markets, because, from the supply side, nails and cartridge strips are produced (a) with totally different technologies and (b) often by different firms.

  23. (par. 55 ctd) … On the demand side it is true that a user needs an equal complement of nails and cartridges, but they are not necessarily purchased together in identical quantities.

  24. (57) … On the demand side, … the purchase of a nail gun is a capital investment which … is used and amortized over a relatively long period. Cartridge strips and nails constitute current expenditure … and are purchased in line with current requirements. Nail guns and consumables are not purchased together; indeed the decision depends on a different set of considerations.

  25. Microsoft (EC, CFI) • Separate demand • Consumers may want to choose P2 they like • Some do want Windows without WMP • Operating system vs application • Competing applications can be downloaded • Separate supply • Specific application manufacturers • Other versions of multimedia players, meant for other OS • WMP can be downloaded independent of Windows • Specific marketing campaigns

  26. IMS Health, 43 and 44.- … It is sufficient that a potential market or even hypothetical market can be identified. Such is the case (a) where the products or services are indispensable in order to carry on a particular business and (b) where there is an actual demand for them on the part of undertakings which seek to carry on the business for which they are indispensable.

  27. Ricoh, 14.- A market for empty toner cartridges compatible with Ricoh copiers … does not exist. No producer or dealer sells empty cartridges compatible with Ricoh copiers. Aside from Ricoh, no company can produce these toner cartridges, since they are protected by intellectual property rights held by Ricoh, which so far has no licensed its design rights. No does Ricoh sell empty toner cartridges to other companies or end-users.

  28. Ricoh, 15.- At the retail level there is no demand for empty cartridges either. Cartridge and powder are sold together as single product. … Powder and cartridge have therefore to be considered as a single product

  29. Ricoh, 18 – … there is no demand for empty cartridges at the retail level, since cartridge and powder are sold together as a single product

  30. Legal strategy • Arg 1 – market definition • M2 is not a separate product • There is a single market • The market share is the one held by the firm on M1 • No domination

  31. Arg. 2 : “No dominance”Pelikan v. Kyocera 1992 and v. HP e.a. 2009 Pelikan wants to sell cartridges for use on Kyocera printers

  32. Market definition, 55 – “There exists a separate structure of supply and demand for Kyocera consumables, independent of the market structure for the supply of the primary equipment. The demand consists of the installed based of all those users who have bought a Kyocera printer … Supply consists … not only of Kyocera itself, but also of Pelikan as an independent supplier.

  33. Market structure Information - Customers can make informed choices combining M1 and M2 - They are likely to make that choice accordingly Alternatives - If prices are abusive on M2, they will to M1 alternatives … - … within a reasonable time  Anticipation - The firm anticipates the possibility of an M1 exodus - - It refrains from charging excessive M2 prices

  34. Really? • Professional vs private users • Difficult to anticipate cost • First consumable free, evolution of usage, information depending on firm, duration of consumables, limited memory of past experiences • Limitation of choice and access • Generic products : no guarantee of compatibility • Transaction cost : time + energy necessary to collect info and go beyond inaction

  35. Legal strategy • Arg 1 – market definition • Arg 2 – dominance (even if separate markets) • The firm cannot behave independently on M1 • Limited market share • Nor on M2 • The possibility of a shift on M1 product in case of M2 abuse prevents the acquisition of an M2 dominant position

  36. Arg 3 – « no abuse »Same Kyocera cases • Kyocera denies guarantee if printers used with cartridges made by independent manufacturer • Hilti : abuse of dominant position • Here : • Supposing markets are different, and Kyocera dominates M2 • The behaviour is not abusive

  37. Should society react? Firm Competitor Consumer

  38. Luxury watches • Luxury watches (M1), repair and maintenance (M2) • 2008 – decision by the Commission • Abuse on M2 or M3? • Customers can shift to other watch manufacturers on M1 • In the future : installed base • Now : prospective buyers informing themselves about feeling of current users • That limits the ability of the firm to behave independently • 2010 – Judgment by the General Court • No demonstration

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