Consumer welfare & Economic efficiency

(1) Consumer welfare: the ultimate objective

“[O]ur ultimate objective is: competition policy is a tool at the service of consumers.

Consumer welfare is at the heart of our policy and its achievement drives our priorities and

guides our decisions…Our objective is to ensure that consumers enjoy the benefits of competition, a wider choice of goods, of better quality and at lower prices.”45

43 _{E.g. a dominant undertaking with a market position approaching that of a monopoly, or with a similar level of}

market power, is highly unlikely capable to justify its exclusionary conduct as the Commission considers remaining competitive pressure from the competitors is essential. See Communication from the Commission – Guidance on the

Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, [2009] OJ C45/7 (Hereinafter ‘Commission Guidance’), Para 30(4); see also DG Competition discussion paper on the application of Article 82 of the Treaty to exclusionary abuses. (Hereinafter

‘Discussion Paper’), available at http://ec.europa.eu/competition/antitrust/art82/discpaper2005.pdf, last visited on 10 Sep 2011. The comments received are available at

http://ec.europa.eu/competition/antitrust/art82/contributions.html, Para 90, 91.

44 _{See e.g. Dieter De Smet, ‘The diametrically opposed principles of US and antitrust policy’, (2008) 29(6)} European Competition Law Review 356, pp.357-358; Roberto Pardolesi and Andrea Renda, ‘The European

Commission’s Case Against Microsoft: Kill Bill?’ (2004) 27(4) World Competition 513, p565.

45 _{Speech of Commissioner Joaquín Almunia, ‘Competition and consumers: the future of EU competition policy’}

European Competition Day, Madrid, 12 May 2010, SPEECH/10/233, available at

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It has been commonly acknowledged that consumer welfare is the main driver for competition policy. As the statement above, Joaquín Almunia has attached great importance to the consumer welfare and put it at the central place of competition policy. Former Director-General of the Competition DG Philip Lowe similarly maintains that competition policy institutions must ensure that “consumers are not harmed by anti-competitive agreements, exclusionary and exploitative conduct by one or more dominant undertakings”.46 _{Sir John Vickers, former}

Chairman of Office of Fair Trading, describes the relation between consumer welfare and competition policy in this way, “[g]ood consumers and competition policies have one and the same goal – to help market work well for consumers and for the fair-dealing enterprises that serve consumers well.”47

Consumer welfare has been increasingly valued; however, it is not a wholly new concept. Since 1960s the upswing of the consumerism has brought Europe the concept of consumer welfare.48

Under the formalistic structure-based approach, consumer welfare – the prominent objective nowadays – could be regarded as a by-conduct of the protection of competition. Article 102(b) TFEU forbids unilateral abusive conducts which are to the prejudice of consumers, however, the Treaty was considered to be infringed only if such conducts cause negative effects on the competitive process and then detrimental to consumers is automatically satisfied. Insufficient attention was directly paid to the effect on the consumer welfare. This was supported by Advocate General Kokott’s opinion in British Airways case49_{, in which it was believed that}

intervention is justified when there is harm to competitive process, rather than in the situation where direct or indirect harm to the consumers has been incurred:

“Article [102 TFEU], like the other competition rules of the Treaty, is not designed only or primarily to protect the immediate interests of individual competitor or consumers, but to protect the structure of the market and thus competition as such (as an institution), which has already been weakened by the presence of the dominant undertaking on the market. In this way, consumers are also indirectly protected. Because where competition as such is damaged, disadvantage for consumers are also to be feared”.50

N&guiLanguage=en, last visited on 1 Oct 2011. (emphasis added).

46 _{Philip Lowe, ‘The design of competition policy institutions for the 21}st _{century – the experience of the European}

Commission and DG Competition’, (2008) 3 Competition Policy Newsletter 1, p6.

47 _{Sir John Vickers, opening remarks at the European Competition and Consumers Day Conference London, 15}

September 2005, available at http://ec.europa.eu/competition/publications/cpn/2005_3_49.pdf, last visited on 12 Dec 2011.

48 _{Katalin Judit Cseres, Competition Law and Consumer Protection (Kluwer Law International, 2005), p160.} 49 _{Judgment in British airways, C-95/04 P, ECLI:EU:C:2007:166.}

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Consumer welfare has been the one placed in the process of Article 102 modernisation, which could be evidenced by the statement of Neelie Kroes51 _{and the EAGCP’s report An Economic}

Approach to Article 82 EC52. A significant shift towards an effects-based approach is apparent both in the Discussion Paper and the Commission Guidance, which would examine the legitimacy of certain business practices according to their impacts on consumer welfare. The new enforcement approach, according to Joaquín Almunia, “focuses on preventing or putting an end to consumer harm, rather than protecting ‘competitors’” and bases competition investigations on “sophisticated economic analysis”, “a qualitative knowledge of the market realities” and “a good understanding of customer demands”.53

However, while the focus on the consumer welfare has never been such greater, concern arises on the uncertain boundary of this objective. Is the consumer welfare simply equal to lower prices and better quality? For the EU Commission’s part, consumer welfare includes not only lowering prices, providing better quality and more choices for consumers; what’s more, “the benefits of more dynamic efficiencies associated with innovation and increased productivity” should also be taken into consideration.54 _{The causal relationship between consumer welfare}

and refusal to license lies in that consumer welfare could apparently be prejudiced in a direct manner because as a result of a refusal, either “certain products may not put on the market”, or

51 _{See e.g. speech of Neelie Kroes, ‘Competition policy and consumers of November’, at the Fordham Corporate}

Law Institute, Brussels, 16 November 2006, SPEECH/06/691, available at

http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/06/691&format=HTML&aged=0&language=E N&guiLanguage=en, last visited on 11 Aug 2011. (“Whether we are looking at the actions of dominant companies, breaking up cartels, vetting mergers, or approving State aid – the potential harm to consumers is at the heart of what we do. We are applying this 'consumer welfare standard' through better use of economic analysis in our work.”)

52 _{See the Economic Advisory Group for Competition Policy’s report An Economic Approach to Article 82 EC (July}

2005), available at http://ec.europa.eu/dgs/competition/economist/eagcp_july_21_05.pdf, last visited on 17 Sep 2011. (“An economic approach to Article [102] focuses on improved consumer welfare. In so doing, avoids confusing the protection of competition with the protection of competitors and it stresses that the ultimate yardstick of competition policy is in the satisfaction of consumer needs.” p2)

53 _{Speech of Commissioner Joaquín Almunia, ‘The road ahead International Forum on EU Competition Law’,}

Brussels, 9 March 2010, SPEECH/10/81, available at

http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/10/81&format=HTML&aged=0&language=E N&guiLanguage=en, last visited on 1 Oct 2011. (emphasis added)

54 _{Speech of Neelie Kroes, Opening address at conference Competition and Consumers in the 21st century Brussels,}

21st October 2009, SPEECH/09/486, available at

http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/09/486&format=HTML&aged=0&language=E N&guiLanguage=en, last visited on 1 Oct 2011.

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“these products may not have to face the innovative competition from third party”;55 _the

consumer welfare would also be jeopardized in an indirect way if the dynamic competition in the entire industry is impeded due to the refusal to license.

(2) Dynamic & static efficiency

Consumer welfare and economic efficiency are often referred together, hence it is difficult to make a completely distinction between them.56 _{Neelie Kroes held that Commission’s}

protection of competition serves as an instrument for achieving the aim of “enhancing consumer welfare and ensuring an efficient allocation of resources” and “an effects-based approach, grounded in solid economics, ensures that citizens enjoy the benefits of a competitive, dynamic market economy”.57 _{However, it appears surprisingly that the Commission Guidance}

in its opening statement does not explicitly regard consumer welfare and efficiency as legal objectives of Article 102 TFEU, while the corresponding Article 101 TFEU and merger guidelines incorporate them as the ultimate goals.58

From the perspective of the competition law, the primary concern of ex post public intervention is static efficiency (allocative efficiency), namely competition in the market to offer consumers products with lower prices and better quality; IPR inter alia in those dynamically competitive industries59 _{ask for more protection on dynamic efficiency, namely competition for the market,}

such as ex ante incentives to innovate.60 _{Consumer welfare is not only influenced by the static}

55 _{Floris O.W. Vogelaar, ‘The Compulsory Licence of Intellectual Rights under EC Competition Rules: an analysis}

of the exception to the general rule of ownership immunity from competition rules’, (2009) 6(1) The Competition

Law Review 117, p134.

56 _{Consumer welfare and efficiency are not only the objectives of EU competition law, but also have to do with the}

assessment of potentially abusive practice. More discussion see chapter 3 on Microsoft I case.

57 _{Speech of Neelie Kroes, ‘European Competition Policy – Delivering Better Markets and Better Choices’, at}

European Consumer and Competition Day, London, on 15 September 2005, SPEECH/05/512, available at

http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/05/512&format=HTML&aged=0&language=E N&guiLanguage=en, last visited on 28 Aug 2011.

58 _{See Guidelines on the application of Article 81(3) of the Treaty, [2004] OJ C 101/97, Para 13; Guidelines on the}

application of Article 81 of the EC Treaty to technology transfer agreements, [2004] OJ C 101/2, Para 5; Guidelines on Vertical Restraints, [2010] OJ C 130/1, Para 7; Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, [2004] OJ C 31/5, Para 8; Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings, [2008] OJ C 265/6, Para 10.

59 _{Detailed discussions on dynamically competitive industries see infra section ‘4.2.2 Dominance in ‘dynamically}

competitive industries’.

60 _{Kelvin Hiu Fai Kwok, ‘A New Approach to Resolving Refusal to License Intellectual Property Rights Disputes’,}

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efficiency, on which the EU Commission and the European Court of Justice have traditionally focused; it is also positively affected by the dynamic efficiency, such as the incentives of the dominant undertaking to innovate as well as its competitors particularly in refusal cases.61

Therefore, in which way consumer welfare is protected could be detected from how the competition authorities and courts strike the balance between ex ante and ex post efficiencies. Compared with dynamic efficiency, static efficiency has been emphasized, or even over-emphasized by the EU, which might be problematic particularly in dynamically competitive industries. 62 _{Such an undue emphasis is due to the reason that the benefits of ex}

post efficiency are easier to measure than those of ex ante efficiency.63 _{It is apparent that the}

allocative gains, such as increased competition in the downstream market between different brands due to an order to license, is significant and identifiable in the short term, while it might be a formidable task to quantify the long term benefits on the other hand.64

Balancing ex ante and ex post efficiencies is a very difficult process. Many unpredictable factors have to be taken into consideration, which would probably result in false decisions. Thus, some scholars propose to substitute the original balancing test by comparing the welfare losses of the error of ‘false non-intervention’ and the error of ‘false intervention’ to discover which loss is relatively less.65 _{The former error results in less competition in the market and}

hence a loss in allocative efficiency, while the latter error would cause less competition for the Competition Law and US Antitrust Law (Edward Elgar 2006), pp.56-57, 83-84.

61 _{Christian Ahlborn, Vincenzo Denicolò, Damien Geradin and A Jorge Padilla, ‘DG Comp's Discussion Paper on}

Article 82: Implications of the proposed Framework and Antitrust Rules for Dynamically Competitive Industries’, available at http://ec.europa.eu/competition/antitrust/art82/057.pdf, p28.

62 _{ibid. more discussion on dynamically competitive industries see chapter 2, section 4.2.2.}

63 _{See e.g. Damien Geradin, ‘Limiting the Scope of Article 82 EC: What Can the EU Learn from the U.S. Supreme}

Court’s Judgment in Trinko in the Wake of Microsoft, IMS, and Deutsche Telekom’ (2004) 41 Common Market Law

Review 1519, p1540; Christian Ahlborn, Vincenzo Denicolò, Damien Geradin and A Jorge Padilla,, ‘DG Comp's

Discussion Paper on Article 82: Implications of the proposed Framework and Antitrust Rules for Dynamically Competitive Industries’, available at http://ec.europa.eu/competition/antitrust/art82/057.pdf, p18.

64 _{Damien Geradin, ‘Limiting the Scope of Article 82 EC: What Can the EU Learn from the U.S. Supreme Court’s}

Judgment in Trinko in the Wake of Microsoft, IMS, and Deutsche Telekom’ (2004) 41 Common Market Law Review 1519, fn 76; Christian Ahlborn, Vincenzo Denicolò, Damien Geradin and A Jorge Padilla,, ‘DG Comp's Discussion Paper on Article 82: Implications of the proposed Framework and Antitrust Rules for Dynamically Competitive Industries’, available at http://ec.europa.eu/competition/antitrust/art82/057.pdf, p18.

65 _{See e.g. David S. Evans and A Jorge Padilla, ‘Designing Antitrust Rules for Assessing Unilateral Practices, A}

Neo-Chicago Approach’, (2005) 72 University of Chicago Law Review 73; Christian Ahlborn, Vincenzo Denicolò, Damien Geradin and A Jorge Padilla, ‘DG Comp's Discussion Paper on Article 82: Implications of the proposed Framework and Antitrust Rules for Dynamically Competitive Industries’, available at

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market and lower the general level of innovation. Competition law enforcers, according to these scholars, should not intervene in IPR cases since the efficiency loss from a ‘false intervention’ is much more significant than the potential welfare loss by a ‘false non-intervention’.66 _{However, Drexl put forward his opposite opinion against this alternative}

approach, mainly arguing that this approach bases the prediction on the likely effects of a potential decision, elements of which are mostly unknown or unpredictable.67 _{Moreover, the}

assumption that IPR always produces advantage in the sense of dynamic efficiency, on which this approach relies, according to Drexl’s conclusion, is not irrebuttable as “exaggerated protection can foreclose markets to competitors who might be more innovative than incumbent right holders”.68 _{It appears that either the original balancing of ex ante and ex post efficiencies,}

or this alternative approach of comparing the welfare losses of two possible errors, should be applied with caution. One commentator concludes that such balancing should be applied in IP licensing scenario only for the purpose of examining whether the costs of compulsory license do not obviously outweigh the ex post gains.69