BIICL conference: The Microsoft Judgment Bundling

BIICL conference: The Microsoft Judgment Bundling

The economics of Article 82 reform Dr Helen Jenkins, Managing Director February 8th 2008 Outline (I) - what is market power? - from form- to effects-based tests for abuse - critique of the guidelines on loyalty rebates - practical issues in applying the methodology - Microsoft 2 February 8th 2008 What is market power? no entry by competitors no switching by customers The ability to maintain

price above the competitive level must be able to maintain price > marginal cost (P > MC) over time significant impact on market price and conditions ability to foreclose The ability to exclude competitors 3 requires barriers to entry February 8th 2008 Market power is a matter of degree Differentiated product power

Appreciable effect (Chapter I) Dominance (Chapter II, mergers) Super-dominance Monopoly 4 February 8th 2008 The current form-based approach Is the company dominant? No No case to answer Yes Special responsibility

Thou shalt not - price below variable cost - offer loyalty rebates - tie products - The successful competitor, having been urged to compete, should not be turned upon when he wins - US Judge Learned Hand in Alcoa (1945) 5 February 8th 2008 Guidelines open the way for effects-based tests - dominance is not a binary state, and the degree of dominance matters for assessing abuses - a significant proportion of the market or of customers need to be affected by the alleged abusive behaviour

- to assess exclusionary behaviour, the stated benchmark is the exclusion of an as efficient competitor 6 February 8th 2008 The as efficient competitor - the AEC is a central concept in the guidelines - setting benchmark for when it is OK for a competitor to be excluded - in liberalising markets there can be justifications for weakening this benchmark (eg, adjusting for scale) - notably, the AEC concept does not enter the assessment of loyalty rebates - comparison there is between the MES of competitor and the ATC of Domcoregardless of the level of cost at the entrants MES 7

February 8th 2008 Potential situations Scenario 1: Ci > P > Ce - where the entrant is more efficient than the incumbent - can pricing below cost exclude this more efficient rival? Scenario 2: Ce > P Ci - the traditional situation, where scale effects reduce the incumbents cost - abuse in this situation ruled out by the guidelines (mostly) 8

February 8th 2008 Two-sided markets and consumer welfare What is normal competition? What enhances welfare? Commissions view Downloading is a barrier OEMs do not want to load multiple media players Alternative view OEMs often happy to pre-load more and/or downloading is easy Costs more to multi-format, but critical mass of users is small Content providers do not want to multi-format Single media player is more efficient? How should it be chosen?

9 Can sustain multiple media players, even if WMP is ubiquitous Relevant to consider if there is a foreclosing effect February 8th 2008 Market shares of media players (unique users) (%) 70% 60% 50% 40% 30%

20% 10% 0% 1998 1999 2000 Real Player 2001 2002 WMP 2003 QuickTime

2004 2005 2006 2007 (QT+iT) Source: European Commission decision of 24.03.2004 relating to a proceeding under Article 82 of the EC Treaty. (Case COMP/C-3/37.792 Microsoft), data for years 19982002; WebSiteOptimization (2007), Apple's iTunes Player Climbs Streaming Media Charts, March, data for years 200307; and Oxera analysis. 10 February 8th 2008 Use of multiple media players - according to Microsoft Fact Sheet (2006), significant increase in the number of media players pre-installed (in addition to WMP)

- EU increased from 1.4 per user in 2004 to 3.2 in 2006 - USA increased from 3.2 per user in 2004 to 3.7 in 2006 - average number of media players per user increased from 2.1 in 2004 to 2.6 in 2006 11 February 8th 2008 Streaming media player time per person (minutes) 120 100 80 60 40

20 0 2003 2004 Real Player 2005 WMP QuickTime 2006 iTunes Source: WebSiteOptimization (2007), Apple's iTunes Player Climbs Streaming Media Charts, March,

and Oxera analysis. 12 February 8th 2008 Contact: Dr Helen Jenkins +44 (0) 1865 253 035 [email protected]

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