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The incompatibility of the EU’s consumer welfare standard with online
platforms in the context of Article 102 cases
Anais Cella Negulescu
Master track:
European Competition Law and Regulation (International and European Law)
Supervisor: Or Brook
Date of submission: 25.07.2018
2 ABSTRACT
The issue of online platforms is highly relevant in today’s public sphere. From a competition law standpoint, online platforms are disruptive technologies which raise questions about the applicability of EU competition law in abuse of dominance cases. This paper assesses whether the consumer welfare standard as applied in the EU is compatible with one of the characteristics of online platforms, namely the tendency of these markets to be highly concentrated, with one overarching dominant undertaking. To this end, by comparing two similar cases (against Microsoft) in two jurisdictions (the U.S. and the EU), the first important conclusion of this paper is that in practice, European authorities apply the consumer welfare standard with a view to ensuring the availability of consumer choice. The U.S., on the other hand, focuses solely on economic considerations in their antitrust decisions, which has led to the discrepancies between the different judgments. Because of the highly concentrated nature of markets on which online platforms operate, if the EU competition authorities continue to focus on consumer choice as opposed to overall consumer welfare, they might baselessly interfere with the competitive process and the exercise of a consumer’s actual choice. Therefore, an effective application of EU competition law to online platform cases in the context of Article 102 TFEU must refrain from considering consumer welfare through the prism of consumer choice.
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Table of Contents
1. Introduction ... 4
1.2. Competition concerns ... 5
1.2.3. Methodology ... 7
2. Practical implications of EU and U.S. competition authorities’ application of the consumer welfare standard in Article 102 cases ... 8
2.1. EU approach ... 10
2.1.1. Criticism against the EU’s emphasis on consumer choice ... 11
2.1.2. An economics-oriented welfarist approach precludes consumer choice ... 13
2.2. U.S. approach ... 14
2.3. Conclusion ... 16
3. The emphasis of consumer choice in Article 102 cases is incompatible with competition concerns associated with online platforms ... 16
4. Conclusion ... 19
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1. Introduction
In recent years, following the advent and popularisation of the Internet, there has been a marked increase in online businesses. The most popular business model employed by these new undertakings is the online platform business model. The ride-sharing app Uber, for instance, can be characterised as a matching platform because it serves to connect prospective riders with those offering transportation services. Alternatively, Facebook can be
characterised as an audience providing platform, in the business of capturing the attention of the end-user with free services which are then subsidized by selling advertising spaces. These fall under the category of multi-sided markets.
1.1. Multi-sided markets and online platforms
Multi-sided markets create difficulties for competition analysis because, as their name makes clear, they involve activities on two or more interrelated markets. A multi-sided market is a “market in which one firm acts as the platform and sells different products to different groups of consumers, while recognising that demand from one group of consumers depends on the demand from the other group”1
. In the online environment, multi-sided markets exhibit some unique and interesting characteristics which are liable to disrupt traditional competition analysis.
The key characteristic of online platforms is the presence of network effects as the most important driver of a platform’s viability. In short, the platform business model relies on the perpetuation of network effects for the growth of its user base. Network effects occur in markets which gain more utility as a direct result of having more end-users. Until a platform reaches a certain number of users, it will not be a viable competitor. The tipping point at which a platform becomes viable has been called by Evans and Schmalensee (2012) as the point at which the platform has achieved critical mass2.
1 Pike, C. “Introduction and Key Findings” from the OECD Report “Rethinking Antitrust Tools for Multi-Sided
Platforms”, 2018. Accessed at: http://www.oecd.org/daf/competition/Rethinking-antitrust-tools-for-multi-sided-platforms-2018.pdf
2 Evans, D., Schmalensee, R. “The Antitrust Analysis of Multi-Sided Platform Businesses”, Chicago Institute
for Law and Economics Working Paper No. 623 (2D Series). Page 29.The Law School University of Chicago. December 2012. Accessed at: http://www.law.uchicago.edu/Lawecon/index.html
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In order to reach the point of critical mass, online platforms generally offer their services on at least one side of the market for free. These very low switching costs3 ensure that
consumers are free to actively participate on multiple competing platforms, acting as the driver of competition between them as well contributing towards achieving critical mass. The ability of a consumer to simultaneously use two competing platforms is called multi-homing. The phenomenon of multi-homing does not necessarily guarantee the presence of a high number of competitors on a given market. If anything, multi-homing may contribute to the high levels of concentration4 present in multi-sided, online markets. A good practical
example of this is the social media platform Facebook: its use is free for the consumer and it doesn’t preclude the use of competing social networks; and yet, it has consistently held high market shares and a position of dominance on both the European and American markets. Facebook’s overwhelming dominance stems from the fact that its utility rises with the number of consumers it has. After reaching the point of critical mass, users had incentive to multi-home away from competing platforms and make the move towards Facebook to rake in the benefits stemming from a large user base as well as constant technological innovation. Therefore, competition in these markets is driven by two things: first, the ability of
consumers to multi-home, and second, the ability of an undertaking to keep up with the ever-more demanding technological standards that users have come to expect. Online platforms are thus disruptive technologies which give rise to some new competition enforcement concerns.
1.2. Competition concerns
Online platforms are unlike traditional markets in a few key ways. First of all, as mentioned previously, multi-homing is an important phenomenon which ensures that competition in these markets is driven by technological innovation reflected in the experience of the end-user. In spite of the user’s ability to multi-home, online platforms are highly concentrated, with one key player at the top. Second of all, online platforms often use tactics which would traditionally be considered anticompetitive behaviours, but which have economic rationales
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Low switching costs in terms of monetary expenses – other switching costs which are arguably less important stem from the consumer needing time and some effort to get used to a competitor’s product (learning costs); switching costs might also be higher if we consider that data on one platform might not be made available to its competitor. See the joint report “Competition Law and Data” of 10th May, 2016. Autorité de la concurrence and
the Bundeskartellamt, page 28.
4
Ibid, page 13. “the economic sectors where the collection and use of data is often seen as particularly important […] are often particularly concentrated, with a few operators already holding very high U.S.er shares.”
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behind them and which offer advantages to the end users. For example, tying behaviours are very common: Facebook’s tying of its social media with the Facebook Messenger app and the Messenger app with differing functionalities, such as instant messaging, video calling, and voice calling. Other examples include YouTube, which has recently implemented a
messaging service within its mobile app. Undoubtedly, while these factors might contribute to an undertaking’s dominance and might be regarded as conduct falling within the scope of Article 102 TFEU, it is clear that end-users enjoy and make use of these tied services. This leads to the third point, namely that online platforms compete “in the development of new business models”5
. Because digital undertakings constantly tie differing services to the main use of their platform, the competitive landscape of the digital market keeps shifting. These factors make the analysis of competition difficult enough that economists are now looking for ways in which to adapt the existing analytical tools to suit the demands of the digital
economy6. With traditional economic tools failing to satisfy, competition authorities need to take caution when conducting competition analyses, or be at risk of misunderstanding the nature of online platforms and the tools they use to innovate, and how that translates into a benefit for the consumer7.
This is where the problem arises. Both U.S. and EU authorities claim to use economics based rationales in their assessment of competition, both through the prism of the consumer welfare standard. In theory, this should mean that outcomes in competition law cases are very similar – an economic approach, with a view that the consumer will receive a suitable amount of economic benefits. There are, however, divergences, which will be further explained in sections 2.1. and 2.2. of this paper. One conclusion this paper comes to is that in practice, the application of the consumer welfare standard by EU authorities is represented by an emphasis on consumer choice. This view is incompatible with online platforms, and more specifically with the fact that a limitation of choice in the case of online platforms will likely bring more benefits to the consumer.
The biggest concern is therefore that the EU’s approach to the consumer welfare standard, if it is not adapted to these new disruptive technologies, will interfere with the natural
5 Competition Development in Key Sectors, Romanian Competition Council, Synthesis of the Report prepared
by the Research Directorate and approved in the Competition Council’s Plenum meeting on November 7th
, 2017.
6
OECD (2018) Rethinking Antitrust Tools for Multi-Sided Platforms.
http://www.oecd.org/competition/rethinking-antitrust-tools-for-multi-sided-platforms.htm
7 More on the ways in which benefits are brought to the consumer will be discussed at chapter 2.1 by
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competitive structure in these markets and will stifle innovation and benefits brought to the consumer.
To this end, this paper attempts to answer the following question: is the EU’s consumer choice oriented approach for analysing Article 102 TFEU cases compatible to address the competition concerns arising out of the characteristics of online platforms?
1.2.3. Methodology
The objective of this paper is to determine whether the European competition authorities’ focus on consumer choice is compatible to address the competition concerns arising out of online platforms – specifically focusing on online markets’ tendency of being highly
concentrated. The online platforms dominating the markets are all U.S.-based; for this reason, the approach in the paper focuses on comparing two similar cases – the Microsoft cases – to try and find out why the two jurisdictions have come to different conclusions. Moreover, the EU’s approach to competition enforcement is modelled after the U.S.’, as is the welfarist approach which has its origins in the Chicago School and which relies on an economics-oriented focus. A comparative assessment of the two cases has led to the conclusion that, while the U.S. can rely on the rule of reason doctrine to curb enforcers’ tendency to over-regulate, the EU does not employ the same doctrine, which has led to an emphasis on consumer choice as an important driver of competition. In the Microsoft cases, this was incompatible with the European Commission’s own statements that competition enforcement should focus on consumer welfare and the more economic approach, since the importance placed on consumer choice has actually led to a lowering of the surplus received by the consumer.
The paper then applies this conclusion to the characteristics of online markets. Because online markets are highly concentrated, trying to enforce the availability of consumer choice would not only undermine the competitive structure of those markets, but more importantly, it would undermine the exercise of a consumer’s actual choice, which leads to the high concentration levels. Thus, the European Commission’s focus on consumer choice is incompatible with the characteristics of online markets.
There are limitations to this methodology. It focuses on just the Microsoft cases and does not consider others. The justification for using the Microsoft cases as examples are twofold: first, one of the EU’s proceedings against the tech giant is very similar to the U.S.’, leading to an
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easier comparative analysis. Second, Microsoft shares similarities to online platforms, the most important of which is that for both online platforms and tech companies technological innovation is a key component of what drives them to succeed. In the context of online platforms, technological innovation can take the form of bundling two different services together, conduct which, in the EU Microsoft cases, was considered anticompetitive. Therefore, the paper is split into two parts. The first part contains an overview of the policy goals of competition law in the EU and U.S. and how they’ve changed over time, in the case of the EU, as well as a look into how these policy goals are applied in practice, as compared with U.S. application of the consumer welfare standard through the prism of their focus. on economic effects. This will raise questions regarding the emphasis of European authorities on consumer choice as opposed to overall consumer welfare. Following on from this conclusion, the second part will underline the fact that this approach is incompatible with online
platforms as a result of their characteristics. This will lead to the conclusion that European competition enforcement’s policy goals, as they are applied in practice, are incompatible with the characteristics of online markets.
2. Practical implications of EU and U.S. competition authorities’ application of the consumer welfare standard in Article 102 cases
The early 2000s saw a ‘revolution’ in EU competition law, when the Commission established its desire to follow a more economic approach to its competition analysis. This was a
departure from an approach influenced by ordoliberal thought in which the protection of individual economic freedom was seen as the primary objective of EU competition law8. The ordoliberal approach was defended by Commissioner Sir Leo Brittan as such: “Chicago [referring to the Chicago School of thought] does not need to worry about creating a single market. Rather, it presupposes the existence of an integrated market.”9 From this, we can understand that the purpose of protecting individual economic freedom stemmed from the Community’s desire to achieve an integrated internal market.
Times have changed, however, and so has the thinking. Consumer welfare became the standard by which competition authorities should analyse possible violations of competition
8 Lowe, P. “Consumer Welfare and Efficiency – New Guiding Principles of Competition Policy?” 13th
International Competition and 14th European Competition Day, Munich, 27 March 2007. Accessed at:
http://ec.europa.eu/competition/speeches/text/sp2007_02_en.pdf Last accessed: 09 July 2018.
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law, as evidenced by the Court of First Instance’s rulings in British Airways10
and in
GlaxoSmithKline11; in the latter, the Court of First Instance stated that the “object assigned to Article 81(1) […] is to prevent undertakings, by restricting competition […], from reducing the welfare of the final consumer of the products in question”12. Therefore, the ‘ultimate aim’ of European competition policy is the protection of consumer welfare, “as an outcome of the competitive process”13
. This approach was not fully accepted by the CJEU, however14. In the T-Mobile15 case, the CJEU considered that a direct link between the conduct at issue and consumer prices is unnecessary. This points towards a problem that, while there is a general desire to move towards a more effects-oriented approach, in practice, competition cases do not wholly reflect the consumer welfare standard that has been stated16 by the Commission as the policy goal of EU competition law.
The European Union is not the only jurisdiction relying on a consumer welfare standard. United States antitrust enforcement also covets the policy goal of consumer welfare17, and yet despite the similarities in the approach, there have been divergent outcomes as regards
actions about unilateral conduct. If the stated desired outcomes in both jurisdictions is consumer welfare, what might be the explanation for the wildly different judgments for conducts falling under Article 102 TFEU?
While the disparities might be explained away as a result of structural and administrative differences, I propose that, while European competition authorities claim that consumer welfare is the desired policy outcome, in practice – at least, to some extent – it is more likely that ‘consumer welfare’ actually becomes synonymous with ‘consumer choice’. In the United
10 Case T-219/99 British Airways PLC v Commission ECR II-5917
11 Case T-168/01 GlaxoSmithKline Services Unlimited v Commission [2006] ECR II-2969 12
Judgment of the Court of First Instance in Case T-168/01, paragraph 118. Accessed at:
http://curia.europa.eu/juris/showPdf.jsf?text=&docid=64827&pageIndex=0&doclang=EN&mode=lst&dir=&oc c=first&part=1&cid=232336 Last accessed: 09 July 2018.
13
Lowe, P. “Consumer Welfare and Efficiency – New Guiding Principles of Competition Policy?” 13th International Competition and 14th European Competition Day, Munich, 27 March 2007.
14 “Article 81 EC aims to protect […] the structure of the market, and in doing so competition as such” Case
C-501 GlaxoSmithKline Service Unlimited v Commission [2010] 4 CMLR 2 [63]. This view was reflected in the EU’s Microsoft cases, discussed below, and let to a finding of anticompetitive conduct. In that case, as will be established in this paper, this led to Microsoft being punished for innovating.
15 Case C-8/08 T-Mobile Netherlands BV v Raad van Bestuur van de Nederlandse Mededingingsautoriteit
[2009] 5 CLMR 11 [43]
16 European Commission press release, “Antitrust: consumer welfare at heart of Commission fight against
abuses by dominant undertakings”, Brussels, 3rd December 2008, IP/08/1877. Accessed at: http://europa.eu/rapid/press-release_IP-08-1877_en.htm Last accessed: 14 July 2018.
17 Kolasky, W. “U.S. and EU Competition Policy: Cartels, Mergers, and Beyond”, Friday, January 25th, 2002.
Before the Council for the United States and Italy, Bi-Annual Conference, New York, NY. Accessed at:
https://www.justice.gov/atr/speech/US-and-eu-competition-policy-cartels-mergers-and-beyond Last accessed: 09 July 2018.
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States, all antitrust actions are undertaken under the rule of reason doctrine, which requires an effects-based economic analysis to determine exactly how the consumer is affected. This chapter will comparatively assess antitrust actions against Microsoft – firstly, from the point of view of European authorities and secondly, from the point of view of American
authorities. 2.1. EU approach
As mentioned previously, according to the Commission, the EU’s approach to competition enforcement focuses on achieving consumer welfare. In recent case law, however, the Commission’s approach focused not so much on consumer welfare as it did on consumer choice. This chapter will discuss the EU’s cases against Microsoft. Here, the Commission’s assessments focus on consumer choice. Following an overview of the issues in the case and the Commission’s justifications, this chapter will determine that out of all the factors
considered by the Commission, consumer choice stands out as their primary concern. This is at odds with their stated welfarist approach, and thus the final part of this chapter will focus on the incompatibilities between consumer choice and consumer welfare in the Microsoft cases. In this respect, the paper assesses two different views as to what consumer welfare should achieve, and underlines that in a more economics-oriented view, consumer choice is not a requirement for the consumer welfare standard.
The Commission initiated its first proceedings against Microsoft18 and argued that, among other anticompetitive behaviours, it had engaged in illegal tying practices by bundling its media player, Windows Media Player (WMP) to its operating system, Windows. The
Commission found that this behaviour was anticompetitive due to the fact that it changed the competitive landscape of the market for operating systems: other OS providers, while they may have included media player applications in the purchase price of their OS, the
applications were not developed by them19. Interestingly, however, this was not the first instance of Microsoft engaging in this strategy. Previously, it had tied its old media player (which was decidedly lower in quality20) with Windows, and yet no competition claims were brought against them. The Commission, however, came to the conclusion that the bundling of WMP with Windows was anticompetitive, and the Court later agreed.
18 Case T-201/04 Microsoft Corp v Commission of the European Communities
19 For instance, the Linux operating system had the media player RealPlayer tied to it, but it was not developed
by them. Commission Decision of 24.03.2004 relating to a proceeding under Article 82 of the EC Treaty (Case COMP/C-3/37.792 Microsoft), recital 5.3.2.1.2.2, paragraph 822.
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The Commission’s second proceeding against Microsoft related to Microsoft’s tying of the Internet Explorer web browser to Windows. Here, the Commission sent a Statement of Objections21 claiming that the practice harmed competition between web browsers,
undermined innovation, and reduced consumer choice. In response, Microsoft agreed to ship Windows 7 without Internet Explorer22. Eventually, the case was settled with Microsoft agreeing to give the consumer a choice regarding their web browser via what the Commission called a “choice screen”23
; the effectiveness of this solution is uncertain, considering that, following Windows 7’s first update, the so-called “choice screen” disappeared, and as a result the Commission fined Microsoft24.
In the Microsoft cases, therefore, the Commission argued that the tying conducts were anticompetitive for a number of reasons: they changed the competitive landscape of the market; they harmed competition between web browsers; they undermined innovation; and they reduced consumer choice. Out of all of these factors, I would argue that the one the Commission valued the most was consumer choice.
2.1.1. Criticism against the EU’s emphasis on consumer choice
To begin this discussion, I would like to first address a common criticism of European competition law by U.S. regulators and scholars: EU competition law is often accused of seeking to protect competitors, instead of competition25. I would argue, however, that, rather than protecting competitors, EU competition law protects consumer choice, which may lead to the impression that competitors are the ones being protected.
Firstly, there is the issue that, although Microsoft had been in the practice of tying its media player since the days of NetShow (their less functional media player), the Commission did
21 European Commission press release, “Antitrust: Commission confirms sending a Statement of Objections to
Microsoft on the tying of Internet Explorer to Windows”. MEMO/09/15, 17th January 2009. Accessed at: http://europa.eu/rapid/press-release_MEMO-09-15_en.htm?locale=en Last accessed: 02 July 2018.
22 BBC News, “No IE onboard Windows 7 in Europe”, 12 June 2009. Accessed at: http://news.bbc.co.uk/2/hi/technology/8096701.stm Last accessed: 02 July 2018.
23
European Commission press release, “Antitrust: Commission accepts Microsoft commitments to give users browser choice”. IP/09/1941, 16th December 2009. Accessed at: http://europa.eu/rapid/press-release_IP-09-1941_en.htm Last accessed: 02 July 2018.
24BBC News, “Microsoft fined by European Commission over web browser”, 6 March 2013. Accessed at: https://www.bbc.com/news/technology-21684329 Last accessed: 02 July 2018.
25 Brunswick Corp. v Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977). In the context of this as a criticism of
EU competition law, see Kovacic, W. “Competition Policy in the European Union and the United States: Convergence or Divergence?” Bates White Fifth Annual AntitrU.S.t Conference, Washington D.C., June 2, 2008. Accessed at: https://www.ftc.gov/sites/default/files/documents/public_statements/competition-policy-european-union-and-united-states-convergence-or-divergence/080602bateswhite.pdf Last accessed: 01 July 2018.
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not express its concern over this action. To this end, I would argue that the Commission cannot rely on the argument that bundling WMP to Windows changed the competitive landscape of the market, since the competitive landscape was changed prior to the tying of WMP to Windows. When Microsoft improved its media player and users began preferring using it over others, which is when the problem arose.
The Commission’s finding of an abuse of dominance punished Microsoft for innovating its media player. Moreover, the Commission did not seem to consider the consumer welfare implications of tying WMP to the Windows OS. Arguably, the Commission’s (and, by osmosis, the Court’s) decision, while seeking to limit any potential foreclosure effects26
arising from Microsoft undermining the competitive structure27 of the media player market28, were too concerned about consumer choice, and less so about consumer welfare. Comparable media players (quality wise) were often sold as separate products, with separate markets, and at full price; why would the consumer be at a disadvantage if he was offered a quality product related to his purchased OS? It’s very difficult to claim, I would argue, that consumer welfare was decreased as a result of Microsoft’s tying actions.
Secondly, the European Commission’s preference of consumer choice over overall consumer welfare is even more evident from the Statement of Objections sent to Microsoft about its tying of Internet Explorer to Windows. While that case never reached the courts, the phrase “choice screen” is telling, as is the fact that while Internet Explorer did hold a high degree of market shares, it faced growing competition from other browsers, such as Firefox, or Opera (see Table 1 below), without requiring antitrust intervention. Competition was not repressed by Microsoft’s bundling and foreclosure of the market was not imminent. Additionally, Microsoft’s actions did not change the competitive structure of the market, as Microsoft was hardly the only one adopting the same strategy: Apple, for instance, tied its browser Safari to both its PCs and its mobile phones. It is fairly safe to say, then, following the Microsoft case, that consumer choice has become the guiding principle for the application of the consumer welfare standard. In these cases, the desire for consumers to have a wide variety of choices came at the cost of overall consumer welfare.
26 Commission Decision of 24.03.2004 relating to a proceeding under Article 82 of the EC Treaty (Case
COMP/C-3/37.792 Microsoft), recital 5.3.2.1.2.3, paragraph 832.
27 Argument which, as we’ve seen, is debatable. 28 Ibid.
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Table 1: Browser market shares from 2004-200929
Period of time Internet Explorer
Firefox Safari Chrome Opera
July 2004 93.08% 2.91% - - 0.99% November 2004 89.47% 5.51% - - 1.01% June 2005 85.10% 10.11% 1.34% - 1.21% July 2007 77.5% 15.5% 1.6% - 0.9% Q4 2009 63.6% 26.7% 3.6% 2.8% 1.7%
2.1.2. An economics-oriented welfarist approach precludes consumer choice
The EU’s emphasis on consumer choice is at odds with the concept of consumer welfare. The purpose of competition law, as stated by Monti (2001), “is to protect consumer welfare by maintaining a high degree of competition in the common market. Competition should lead to lower prices, a wider choice of goods, and technological innovation, all in the interest of the consumer”30
. According to Cseres (2007), however, consumer welfare has as its goal the prevention of increases in consumer prices, the restriction of output or deterioration of quality as a result of a dominant firm’s actions31
. Monti places the “wider choice of goods” as a desired result of competition enforcement, whereas Cseres speaks in more economic terms, and makes no mention of the consumer choice requirement.
The concepts of consumer welfare and consumer choice are arguably interrelated, and as Monti seems to claim, healthy competition should ensure low prices, a variety of choices, and innovation. The decisions in the Microsoft case, however, seem to suggest that the consumer choice outcome does not necessarily go hand in hand with lower prices or the encouragement of innovation. As we have seen in the discussion at 2.1.1, Microsoft’s tying strategy made the media player service free for the end-user. If we were to apply Monti’s reasoning, then this should not have been the case. With consumer choice lowered32, there should have been an increase in price. In reality, there was no price increase, just an extra service offered free of charge. Alternatively, were we to apply Cseres’ more economics-oriented view of the role of
29 Retrieved from Wikipedia, “Usage share of web browsers”; 4.10 ADTECH (Europe, 2004 to 2009) Europe
usage share data from ADTECH’s press releases, an ad serving company. Accessed at:
https://en.wikipedia.org/wiki/U.S.age_share_of_web_browsers#Older_reports Last accessed: 02 July 2018.
30 Also reflected in Monti, M. “The Future of Competition Policy in the European Union”, address at Merchant
Taylor’s Hall, London (July 9, 2001).
31 Cseres, Kati. (2007). “The Controversies of the Consumer Welfare Standard”. Page 124.
32 Consumer choice was only lowered because consumers hardly wanted to pay extra for a service they could
receive for free; but otherwise there was nothing else stopping a determined consumer from going ahead of purchasing a competitor’s media player.
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the consumer welfare standard, there would no longer be such an impasse. It is possible that, following Microsoft’s bundling of WMP with Windows, other competing media players would have lowered their prices so as to attract more consumers. Furthermore, Microsoft did not restrict output, nor did it deteriorate the quality of the services it offered. If anything, WMP was higher in quality than its predecessor, and its tying with Windows might have even encouraged competitors to work on increasing the quality of their media players, thus driving innovation. The main difference between Monti’s and Cseres’ view of the consumer welfare standard is that, in Cseres’ case, there is a clear use of economic language which reduces uncertainty.
In U.S. antitrust proceedings, there is also a very strong focus on the economics, as part of their rule of reason doctrine. The following part will look at a similar proceeding by U.S. antitrust authorities against Microsoft.
2.2. U.S. approach
The United States is host to the most dominant and innovative digital undertakings. As regards EU competition enforcement, critics of the EU’s approach to competition law have claimed that it is not conducive to innovation33, pointing out that the most successful digital undertakings, like Google, Amazon, Facebook, and Apple all call the United States home. As we have seen previously, the EU’s actions against Microsoft’s tying actions could be considered to have punished Microsoft’s innovative business strategies to the detriment of the consumer. Since none of these large companies are based in the EU, U.S. antitrust enforcement seems more suited to analyse digital markets than its European counterpart.
The only action by the Department of Justice against a U.S. digital firm has been the case against Microsoft. The proceedings related, in part, to a concern that Microsoft was tying its internet browser to Windows, similarly to the Commission’s concerns. While the Court of Appeal upheld that Microsoft had illegally maintained its monopoly illegally under section 2
33 Ciriani, S., Lebourges, M. “The Market Dominance of U.S. Digital Platforms: Antitrust Implications for the
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of the Sherman Act, it also made clear that the actual tying of the browser to the operating system did not cause the anticompetitive effects34.
Clearly, the two jurisdictions did not reach the same conclusions, even though they both claim to be following the consumer welfare standard. What might explain this divergence? Similarly to the EU, U.S. antitrust doctrines have evolved throughout the years. In the words of Douglas Ginsburg (2010), in the past, “the U.S. Supreme Court simply did not know what it was doing in antitrust cases”35, and that translated into a “hodgepodge of social and
political goals”36. This changed following Robert Bork’s ‘revolutionary’ analysis of the
Sherman Act37, leading to a more economic approach to U.S. antitrust in the case of Continental T.V., Inc. v GTE Sylvania Inc38, which widened the scope of the rule of reason doctrine – doctrine which focuses on economic rationales rather than social consequences39. In their paper, Wright and Ginsburg (2013) make a strong case for why a consumer choice standard would be incompatible with the economics-focused approach of the U.S., and reject Averitt and Lande’s (1998) claim that consumer choice is the most practical standard by which competition law should be assessed40. According to Wright and Ginsburg (2013), the “fatal flaw in the consumer choice standard is that it (…) rejects economic analysis of
consumer preferences as the fundamental guiding principles of antitrust analysis (…) the role of antitrust is to protect the competitive process as one that produces desirable outputs (i.e. consumer welfare)”41
. This argument is unmistakably reflected in this paper’s criticism of the EU’s conclusions on the Microsoft cases. The focus on the diversity of consumer choice led to punishing Microsoft for offering additional, quality services for free to the end consumer. Thanks to the U.S.’ focus on economic rationales, this mistake was avoided.
Therefore, the divergence between the two jurisdictions can be explained by two things
34
United States v Microsoft Corporation. Final Judgments accessed at: https://www.jU.S.tice.gov/atr/case-document/review-final-judgments-united-states-and-new-york-group Last accessed: 02 July 2018.
35
Ginsburg, D. “Originalism and Economic Analysis: Two Case Studies of Consistency and Coherence in
Supreme Court Decision Making”, 33 HARV. J.L. & PUB. POL’Y 217, 217 (2010.)
36 Wright, J., Ginsburg, D., “The Goals of Antitrust: Welfare Trumps Choice”, 81 Fordham L. Rev. 2405 (2013).
Accessed at: https://www.ftc.gov/sites/default/files/documents/public_statements/goals-antitrust-welfare-trumps-choice/130320goalsofantitrustbp4.pdf
37 Robert H. Bork, “Legislative Intent and the Policy of the Sherman Act”, 9 J.L. & ECON. 7 (1966) 38
Continental Television Inc. v GTE Sylvania Inc., 433 U.S. 36 (1977)
39 Standard Oil Co. of New Jersey v United States, 175 U.S. 211 (1899).
40 Averitt, N., Lande, R., “Consumer Choice: The Practical Reason for Both Antitrust and Consumer Protection
Law”, 10 Loy, Consumer L. Rev. 44 (1998)
41
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cumulatively: the application of the consumer welfare standard, in combination with the U.S.’ rule of reason approach. The U.S. approach seems to have recognized that the choice standard would “produce antitrust decisions uninformed by the contribution of modern industrial organization economics”42
, and has thus relied on solely economic methods and outcomes.
2.3. Conclusion
While both the U.S. and EU authorities employ the consumer welfare standard, the one key difference which might explain why, in practice, their judgments differ, is the U.S.’ focus on the rule of reason approach. European competition analysis, while it does focus on economic aspects, tends to focus on other aspects as well which are not economic in nature at all, such as the availability of a variety of choices. This has led to the judgments in the Microsoft cases, which put the notion of consumer welfare at odds with the notion of consumer choice. Indeed, while they do not necessarily preclude each other, consumer choice does not
necessarily mean consumer welfare.
Thus far, the EU’s approach has not had any disastrous consequences. The rise of the disruptive technologies of online platforms might change that, however, because with them come new characteristics which are incompatible with the Commission’s tendency of focusing on consumer choice.
3. The emphasis of consumer choice in Article 102 cases is incompatible with competition concerns associated with online platforms
In the first chapter, at 1.2., it was explained how multi-homing serves an important role in the competitive structure of markets on which platforms operate. Multi-homing is really just a fancy term for the ability of consumers to freely move across and use competing platforms: it is a manifestation of a consumer’s freedom of choice. There are no other markets where consumers are as encouraged or have as much leeway in terms of their choice. Perhaps ironically, the presence of the consumer’s freedom of choice has led to one of the defining
42
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characteristic of online platforms, namely the presence of one, overarching dominant undertaking.
As this paper earlier observed, the Commission’s actions against Microsoft punished it for innovating and changing the market structure, in favour of ensuring that competing media players and web browsers had a fair shot at gaining market power. Reiterating what was previously discussed, the argument as regarded the web browsers fell short since Internet Explorer was already facing growing competition from its competitors. As for the case discussing media players, the decision was made seemingly not considering the direct financial benefit brought to the consumer. These aspects, as well as the language used by the Commission in describing the problem and the remedy, points towards the fact that too much emphasis was placed on ensuring a wide availability of consumer choice and not enough consideration was given to the fact that consumers would directly benefit, both financially and in terms of learning costs, from Microsoft’s tying actions.
In the discussion at 2.2, it was established that much like the EU, the U.S. approach to antitrust developed over time, and now it relies on solely economic concerns in its analysis, foregoing social outcomes. This was reflected in the U.S.’ conclusion in its proceeding against Microsoft, where the tying behaviour itself was not considered anticompetitive, suggesting that the U.S.’ rule of reason approach recognised that the end-users benefitted from what the EU’s more interventionist approach saw as conduct falling within the scope of Article 102. The diverging decisions in the Microsoft cases pointed to the fact that while technically both jurisdictions apply the consumer welfare standard, only the U.S. focuses on economic rationales, whereas the EU seems to have – in spite of stated intentions – overly focused on the diversity of consumer choice at the expense of a quantifiable financial gain of the consumer. As was established in the discussion at 2.2, a focus on consumer choices precludes a solely economic analysis – and when it comes to online platforms, such a focus could prove to lead to even more harmful effects for the end-user.
This is because the consumer choice standard does not suit the characteristics of online platforms for two entwined reasons. First, multi-homing is the driver of a consumer’s choice, which means that a consumer can freely choose between competing platforms. Second, because online platforms rely on the perpetuation of network effects in order to go past the point of critical mass, become profitable, and then innovate and improve upon their services,
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it is likely that only a few resourceful undertakings will succeed past the point of dominance. The reinforcing nature of the business model comes in when new end-users freely choose the undertaking with the most enjoyable platform. That is not to say that once a platform has achieved dominance, no competitor will be able to overtake them. Drops in quality – which could be design changes43 or privacy failures44 - can become an undertaking’s own undoing.
The biggest problem with the EU’s consumer welfare/choice standard in online platforms is twofold: first of all, a focus on consumer choice precludes solely economic analyses, which is an issue in online platforms largely because their business models are disruptive and require careful economic considerations in order to be able to determine the relevant product market, the undertaking’s market power and the possible effects of traditionally anticompetitive conduct, considering that tools which are traditionally used seem to no longer be sufficient45. The second problem arising out of the application of the EU’s consumer welfare/choice standard is that, should the Commission persist in its consumer choice approach, then it will begin interfering in the natural competitive process of online platforms. The availability of consumer choice is not an important factor at all in the case of online platforms, since, because those markets are characterised by network effects, the consumer will naturally drift towards the most dominant undertaking, reinforcing its dominance. The problem is not that there are not enough choices for the consumers, but rather that the exercise of the consumer’s choice has led to the limitation of those very choices – which is arguably not even an issue, considering that if a dominant online platform should attempt to increase prices (or rather, introduce prices) or decrease quality of their services, there are plenty of other new
incumbents on the market eager for consumers to swing by their way and bring them to the point of critical mass.
43
As was the case of Snapchat: their market shares plummeted after a disastrous redesign, and since then it has failed to grow its user growth, losing three million users. Failed redesign at:
https://www.theguardian.com/technology/2018/may/02/shares-snapchat-owner-plummet-redesign-hits-results
Growth stats at: https://www.statista.com/chart/7951/snapchat-user-growth/
44
After the now infamous Analytica Scandal, a quarter of polled users stated they were using the app less, stopped using it entirely, or deleted their account. Trust in the firm has, however, dropped by 66%. Cambridge Analytica scandal at: http://fortune.com/2018/04/10/facebook-cambridge-analytica-what-happened/ User poll at:
https://www.reuters.com/article/us-facebook-privacy-poll/three-quarters-facebook-users-as-active-or-more-since-privacy-scandal-reuters-ipsos-poll-idUSKBN1I7081 Trust in Facebook at:
https://www.nbcnews.com/business/consumer/trust-facebook-has-dropped-51-percent-cambridge-analytica-scandal-n867011
45 OECD (2018) Rethinking Antitrust Tools for Multi-Sided Platforms.
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Taking this into consideration, it is tempting to suggest that competition in online markets will correct itself as a result of the consumer’s ability to freely abandon one platform in favour of another. While the EU is generally regarded as more interventionist in its approach to competition enforcement, online platforms might call for a less interventionist approach which reflects American thinking about the role of antitrust and tools it needs to use.
Economic-based analysis must be at the forefront of the competition analysis undertaken by EU authorities in order to determine if a conduct is truly damaging to the consumer’s welfare, or if it is simply an innovative business strategy which might put its competitors into
difficulty because it raises the consumer’s expectations of a final product. New economic papers focused on online markets also emphasize the growing need for an economics-based approach.
The Commission’s emphasis on consumer choice is therefore incompatible with the
characteristics of online platforms. To this end, for a proper analysis of competition on online platforms, European competition authorities need to assess competition in online markets by taking into consideration only economic factors that are highly valued by their American counterparts, dismissing the availability of consumer choice as an important factor. Not only would this contribute towards a correct analysis of the benefits received by the consumer, but it will also serve to ensure that EU competition law protects competition, and not
competitors.
4. Conclusion
The European authorities’ emphasis on consumer choice is incompatible with the characteristics of online platforms, and specifically with online markets’ tendency to be highly concentrated.
This paper first outlined the stated policy outcomes of EU competition law and its desire to mirror the U.S. effects-based welfarist approach. Following that, the paper assessed the European Commission’s actions against Microsoft, out of which arose the primary concern that EU competition authorities considered the availability of consumer choice as one of the most important factors in their assessment. This approach was then discussed and concluded to be incompatible with an economics-focused view of what consumer welfare should seek to achieve. American antitrust enforcement, by virtue of their rule-of-reason doctrine, have not reached the same conclusion as EU authorities regarding the tying behaviour of Microsoft.
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This leads us to believe that part of the reason for this divergence lies in the difficulties European authorities have in focusing solely on the economics.
The paper then determined that due to the highly concentrated nature of the markets on which online platforms operate, an emphasis on consumer choice would undermine the exercise of a consumer’s actual choice. The capacity of the consumer to multi-home has ensured that the consumer is freely able to choose, and yet, there is a distinct lack of truly viable competitors for the most dominant online platforms. In these markets, the exercise of a consumer’s choice leads to one dominant undertaking.
Therefore, the paper concludes that, as concerns online platforms, EU competition authorities need to put in practice their stated objective of an effects-based welfarist approach, which does not take into account considerations regarding the availability of consumer choice.
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