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The future of antitrust: concern for the real interests at stake, or etiquette for oligopolists? (di Francesco Denozza)

L'articolo critica il giudizio della Corte di Giustizia dell’UE sul caso Huawei per aver ignorato i diversi interessi dei consumatori coinvolti, al tempo stesso sovrastimando l’importanza delle questioni di fair play tra oligopolisti. L'autore collega questa lacuna alle teorie della scuola di Chicago dominanti (nell'ultimo mezzo secolo) che esaltano l'efficienza e la massimizzazione del benessere dei consumatori. Queste teorie ignorano i conflitti tra gli interessi dei diversi consumatori e nascondono il fatto che la maggior parte delle pratiche antitrust rilevanti hanno effetti diversi su individui diversi, senza possibilità di stabilire se la somma algebrica sia positiva o negativa. Per quanto riguarda i conflitti su come sostenere l'innovazione, possiamo facilmente immaginare che molti consumatori potrebbero preferire il modo meno costoso, anche se più lento, dell'innovazione garantito dal meccanismo della concorrenza, rispetto al più veloce (in ipotesi), ma più costoso, processo in cui l'innovazione è favorita dall'espansione della protezione dei diritti di proprietà intellettuale.

L'uso di nozioni opache e imprecise come “efficienza” e “benessere del consumatore” rende il diritto antitrust cieco alla complessità dei mercati reali e ai contesti sociali, macroeconomici e sistemici della sua applicazione. Soprattutto, nasconde il bilanciamento tra interessi diversi (spesso divergenti anche tra i consumatori) che sono alla base di ogni decisione antitrust.

The article criticizes the EU Court of Justice Judgment in Huawei for ignoring the different interests of the consumers involved, whilst overstating issues of fair play among oligopolists. The author links this shortcoming to the dominant (in the last half-century) Chicagoan theories exalting efficiency and maximization of consumer welfare. These theories ignore the conflicts between the interests of different consumers and conceal the fact that the majority of relevant anti-trust practices have different effects on different individuals, with no possibility of establishing whether the algebraic sum is positive or negative. As to the conflicts over how to support innovation, we can easily imagine that many consumers may prefer the less expensive, although slower, way of the innovation granted by the mechanism of competition, than the faster (in hypothesis), but more expensive, process in which innovation is fostered by expanding the protection of intellectual property rights.

The use of opaque and imprecise notions as “efficiency “and “consumer welfare” makes the antitrust law blind to the complexity of actual markets, and to the social, macroeconomic and systemic contexts of its enforcement. Above all, it hides the balancing between different interests (often diverging even between consumers) underpinning every antitrust decision.

KEYWORDS: Antitrust, Chicagoan theories, efficiency, consumer welfare, innovation


1. The Huawei decision and its shortcomings - 2. The antitrust goals and the “efficiency theory" - 3. The empty notion of efficiency and the problematic notions of consumer welfare and of total welfare - 4. How the efficiency theory made the antitrust myopic - 5. A “disembedded” antitrust, blind to any social consequence - 6. An antitrust blind to macroeconomic consequences - 7. An antitrust blind to systemic consequences - 8. The antitrust enforcement: not a matter of “consumer welfare”, but a matter of balancing the interests of some consumers against the interests of other consumers - 9. Concluding remarks: the main question missing in the Huawei reasoning - NOTE

1. The Huawei decision and its shortcomings

The  Huawei decision[1] is affected by a paradoxical shortcoming. I will try to explain why. The question referred to the Court concerned the possible existence of an abuse of a dominant position in the conduct of holders of FRAND - pledged standard essential patents  (patents essential to a standard developed by a standard-setting organization), applying for an injunction to stop the activity of  (unlicensed) users of their technology. A question, as it is obvious, whose answer immediately affects the possibility of a new maker entering the market and that is potentially able to influence the degree of competition from which consumers will benefit [2]. The question is obviously rooted in the context of the antitrust law, where consumers' interest should be paramount. One would therefore have expected that the starting point of the Court's reasoning would be an analysis of the problems connected with the competitiveness of the markets in which Standard Essential Patent are present and, especially, with the ways in which SEPs can harm or benefit consumers.  Nevertheless, a serious reference to the consumer interest, which should have been the pole star of the whole reasoning, is totally absent throughout the Court's opinion. Not just that. Consumer interest, in addition to being verbally ignored, seems to be totally out of the horizon of the Court's concerns.  The Court cares about delineating   the etiquette that courtly patent holders and courtly potential users ought to respect in their interaction. Nothing is said about the consumers' interest in enjoying the benefits of greater competition[3]. The result is a decision under which if the patent holder behaves rudely whilst the potential user behaves in a polite and courteous manner (by strictly complying with all the formal moves required by the etiquette established by the Court), consumers shall benefit from increased competition. In the opposite case of a polite patent holder and a rude potential user, consumers shall suffer the monopoly power of the patent owner and its licensees[4]. This is a result that I deem paradoxical: the satisfaction of the consumers' interest made dependent on the respective rudeness and politeness exhibited in the given circumstances by the two contenders, the patent holder and the potential user. In this paper I maintain that this paradoxical result is not the occasional consequence of a situation that exhibits in turn [...]

2. The antitrust goals and the “efficiency theory"

As every scholar knows (and some, as this author, remind) nearly half a century ago the traditional and, in some sense, natural goal of the antitrust law (preserving the competitive structure of the markets) was replaced by another ambiguous and rather cryptic goal, the pursuit of  "efficiency"[6]. This shift in perspective is notoriously associated with the triumph of the so called Chicago school of antitrust, whose roots date back to the fifties/ sixties of the last century [7] and whose maturity was reached in the seventies[8]. The ideas of the Chicago School, and especially the focus on efficiency[9], have had a tremendous success in the US [10], have shaped antitrust policy becoming in a way  "commonsensical"[11] , certainly influencing the evolution of  European antitrust law too[12]. In the last two decades or so, some thesis advanced by the Chicago scholars have been amended or even challenged, so we speak now of a Neo- Chicago or a Post- Chicago[13]. What exactly is implied by this transition from a tight Chicagoan orthodoxy to an evolved, or changed, theoretical perspective, seems controversial and difficult to establish[14]. However, I think that at least one feature of the original Chicago thought still dominates the economic approach (and remains in any case a key point of reference with which all the views on the goals of  antitrust law, even those less sympathetic, have to contend). I mean the belief that: a) efficiency is the main, or the sole, goal of antitrust law and b) this goal can guide the interpretation and the enforcement of antitrust law unambiguously, sheltering it from the influence of any (arbitrary) political evaluation. I intend to criticize this belief and to highlight the serious limitations of the conception (which I will refer to, from now on, as the "efficiency theory") that conceives of efficiency as the most important, if not the sole, normative objective of  antitrust law. A conception quite widespread in the U.S. and in the European scholarship, and which seems to be shared, in its general terms, even by Neo- and Post- Chicago.

3. The empty notion of efficiency and the problematic notions of consumer welfare and of total welfare

The critique to the efficiency theory can usefully start from the obvious observation that efficiency is not only a concept susceptible of multiple meanings[15] but also a substantially empty notion.  Nothing is efficient in the vacuum, abstracting from a given goal. What is efficient in reaching a given end  (say, the satisfaction of my preferences) may often be inefficient in pursuing another goal (say, the preservation of my health). So, in order to give content to the notion of efficiency we have to define a specific goal[16]. Only afterwards, can the degrees of efficiency of each of the possible ways for reaching the chosen goal be evaluated and, perhaps, measured.  With reference to antitrust law, the candidates for carrying out the function of giving content to the notion of efficiency by defining a specific goal, are two quite different ( and, in their turn, problematic) notions[17], that  of  (efficiency as) maximizing the total welfare or that of (efficiency as) maximizing the consumer welfare[18]. The theoretical difference between the two perspectives is that in the latter (consumer welfare) only the well - being of  consumers counts, whilst in the former  (more coherently, but less reasonably, as we will immediately see) what counts is the effect of the considered practice on society at large. The problem of defining the practical differences between these two notions of efficiency[19], and even more that of choosing between them, is rather complex. Both perspectives try to give  content to the notion of efficiency by recurring to the notion of "welfare maximization", and in both the crucial datum, on which the antitrust evaluation of the relevant practices  should depend, is  the fact that the practice in question increases or decreases the welfare of the individuals concerned. The reference to the goal of "maximizing welfare" is their common theoretical core. What I intend to criticize in this essay is just the idea that the goal of   maximizing  welfare can give precise content to the notion of efficiency and that the functioning of antitrust laws can be defined and limited by these two conceptual references (efficiency and welfare maximization). The criticism I will move to the idea that all antitrust ends boil down to the pursuit of something called "efficiency" applies to both theories, to that which uses the notion of consumer welfare and (in a sense,a fortiori) [...]

4. How the efficiency theory made the antitrust myopic

The above considerations show that the most important practices can usually benefit some consumers while harming others. Obviously this fact does not imply that all those practices are, form the antitrust viewpoint, equal, and that no good reason exists for prohibiting them. The point here is not that of denying that practices exist that, all things considered, are more favourable to consumers than others. The point is simply that even the practices more favourable to some consumers, may hurt a (more or less numerous, meritorious, worthy of consideration,  etc.) group of other consumers. The consequence is that the final judgment is non technical (measuring whether consumer welfare increased or decreased) but political (evaluating the group of consumers that deserves protection and why). Every judgment on the welfare effects of a practice is unavoidably political in the sense that it ends up giving more value to the gains of some and lower value to the losses of others. It is a judgment of convenience about certain expected results and of preference for the interest of some people. This does non imply the irrelevance of the welfare of consumers and of other individuals involved. The simple point is that increases and decreases of welfare cannot be calculated, but have to be evaluated according to the the size of the group of the holders of the sacrificed interest, the worthiness of such interest, the magnitude of the sacrifice imposed, the amount of benefit received by the preferred interest holders, ecc.  The efficiency theory hides the real nature of the antitrust evaluations by bragging as technical, judgments that are in fact political, and by making the antitrust blind to the most important factors which should guide its enforcement. It is rather paradoxical that the goal of maximizing consumer welfare has been ( and still is)  presented as the goal able to give to coherence and certainty to the enforcement of  antitrust law, where, instead, the notion of "consumer welfare" is undetermined. In the presence of consumers with conflicting interests the decision maker who wants to maximize  "consumer welfare" should be able not just tosum upthe increases and decreases that each decision might imply on the well- beings of the different consumers, but toweighandbalancethe consequences that each possible solution may have on that of different consumer groups. This huge problem is usually avoided by simply replacing real consumers [...]

5. A “disembedded” antitrust, blind to any social consequence

One of the most claimed virtue of the efficiency theory is that of having freed antitrust law from the influence of arbitrary evaluations, by excising "fairness from the antitrust lexicon"[34]  and  disputable political objectives (as the protection of   small business,  the containment of private economic power, the defence of an economically pluralistic society, etc.) from the list of  the goals of the law[35]. As I have already noted, the merit of having provided the enforcement of  antitrust law with neutrality and certainty is totally usurped, for efficiency is a debatable objective and the enforcement  of the law in accordance with this objective is no less uncertain and arbitrary than its enforcement  in the light of the other goals branded as "political". Apart from this, we may wonder about the consequences of  the exclusion of the "political" goals, and  whether this exclusion is in fact a virtue. From the viewpoint of the definition of the goals, the shift to the efficiency theory may be described (evoking a notion rich of theoretical implications) as a phenomenon of  "disembedding": the disembedding of antitrust law from the social structure, freeing its enforcement  from any form of social concern. I am aware that the relationship between economic and social values is in antitrust, even more than elsewhere, a very delicate matter.  A coordination between the two orders of values can prove very problematic and it may also be maintained that the coordination is not a task of the antitrust law, but a result that can be reached only through the combined intervention of many different institutions. I think, however, that a complete disembedding of the antitrust law from social values and social concerns, has huge costs that are very well illustrated by the reflections of the author to whom we owe the most famous formulation of the concepts of emebedded or disembedded economy. In his most famous work Polanyi wrote "To allow the market mechanism to be sole director of the fate of human beings and their natural environment indeed, even of the amount and use of  purchasing power, would result in the demolition of society"[36]. This judgment is based especially on the fact that the market treats as commodities some "essential elements of industry", labour, land and money, which are not commodities, in the sense that they are not produced for sale[37]. This [...]

6. An antitrust blind to macroeconomic consequences

One of the goal explicitly pursued, and largely achieved, by the proponents of the efficiency thesis, was that of decreasing the number of conducts forbidden by antitrust law[41]. In fact, many agreements and practices previously considered unlawful, were rehabilitated by the adherents to the efficiency thesis and considered as "per se" legal or subjected to a rule of reason evaluation very burdensome for the plaintiff, thereby becoming basically legal[42]. The overall result has been a marked reduction in the application of the antitrust[43]. The efficiency theory however claimed that the reduced application of  antitrust law that it was proposing, would have increased, rather than diminished, the competitiveness of the market. In a substantial reversal of the traditional conception of the function of  antitrust law, markets were imagined by the adherents to the efficiency theory as normally and naturally tendingto increased efficiency and consumer welfare[44].  In this vision, antitrust law should intervene only in the few and abnormal cases in which the spontaneous tendency of the market meets any obstruction.  According to the scholars who share this vision, out of the cases of markets abnormally obstructed by any extraordinary factor, the intervention of  antitrust  law, far from ensuring the competitiveness of the market, will end up damaging it, along with consumer interest. The paradoxical slogan, and prediction, of the efficiency theory is: less antitrust, more competition.  Restricting application of antitrust law will result (this is the promise of the efficiency theory) in having more competitive markets and a greater dissemination of  the benefits typically ensured by  competitive markets. Did the economic evolution actually occurred [45] in the recent decades of application of the efficiency theory recipe, validate this theory, along with its prediction and its promise? It does not seem to be so. We can start from a fact whose occurrence in the last decades is beyond question, the fact that in this period of time inequality increased dramatically and consumers do not seem to have become collectively richer, as promised by the efficiency theory adherents[46].  Can we establish a causal link between lax antitrust enforcement, increase in market concentration [47] and inequality rise ? [48] The first step (from lax antitrust to more concentration) can be easily [...]

7. An antitrust blind to systemic consequences

The emphasis on efficiency was accompanied by a shift of focus, from the consideration of the whole market structure, to the analysis of the effects of each specific practice. This is consistent with a more general shift of attention from the market to the individual transaction which characterizes  neoliberal law as a whole[57]. In the antitrust law field, one of the specific (and tragic) effect of this shift has been the neglect  of the general negative effects that the presence of  very big firms can have on the functioning of the market, effects that the simplistic reference to efficiency,  in the reductionist conception of maximizing welfare, is not able to grasp and to evaluate. This is not the place to dwell on all forms of inefficiency related to the size and to the market power of  business enterprises, from the so called X inefficiency[58] to the adverse impact on the incentives to innovate [59] (of the same monopolist and of the potential entrants). It is sufficient here to recall the systemic problems posed by the rising market concentration  and by the creation of firm too big to be allowed to fail. The financial crisis has shown that in a very concentrated market, the "hypothetical" existence of a strong competitive tension is not able to prevent the risks, especially in terms of lower market resilience[60], that are consequence of excessive concentration per se. [61] Confidence that a minimum level of (supposed) market competitiveness is enough to prevent any trouble, led us to a financial crisis, which has been strongly exacerbated by the presence of firms "too big to fail" whose establishment had escaped out of control in terms of antitrust law [62] (and, eventually, out of any control whatsoever). An antitrust blindly focused on the short - term impact of mergers proved unable to grasp the complexity of the phenomena[63] and  the longer - term  risks and costs posed by the increase in concentration[64].

8. The antitrust enforcement: not a matter of “consumer welfare”, but a matter of balancing the interests of some consumers against the interests of other consumers

Now we can go back to the general problems of the interpretation of  antitrust law  and to  that specific toHuawei.   The efficiency theory admits that often, especially when (as it is inHuawei) innovation is involved, the evaluation of possible anticompetitive conducts is not a  matter of calculating and adding, but a matter of balancing and weighing[65]. Today[66] is commonly accepted that antitrust interventions promoting static efficiency may erode the firms' rents that stimulate and finance innovation thereby contrasting with the goal of sustaining and promoting dynamic efficiency. In the efficiency theory vision, a balancing is needed between boosting  the so called dynamic efficiency, with the possible consequence of tolerating the exploitation of market power positions that are supposed necessary to induce innovation, and preserving the allocative efficiency, that would require the demolition (or, at least, the reduction of the profitability) of the market power positions[67].     This way of framing the relevant balancing as a balance between static v. dynamic efficiency, is rather misleading. Consistent with the flawed theoretical vision which inspires the efficiency theory, the relevant balancing is presented as if it originated from a trade-off between two different alternatives regarding  the satisfaction of the needs of just a same, unique, person. Society at large, or  consumers, are imagined as a single individual who has to goals is therefore framed as an evaluation of thedifferenteffectsthat each choice can have on theuniqueinterest of the same individual. I maintain instead that the ascertainment of antitrust violations, including the specific case of the conflict between patent and antitrust, involves a balancing not of effects but of conflicting interests pertaining to different classes of consumers.[68] The flawed assumption of the efficiency theory is that all consumers are equally interested both in encouraging innovation and in preserving competition. Given this assumption, the existence of a universally shared goal (that of having as much innovation as possible, consistent with the preservation of a given degree of competitiveness) can be imagined, and the patent/antitrust conflict can be understood as a matter of  looking for the right mix of incentives and disincentives. The assumption of a universally shared goal is in my opinion untenable. We are not all [...]

9. Concluding remarks: the main question missing in the Huawei reasoning

Influenced by a widespread culture that has concealed all material conflict of interests, the Court inHuaweithought that the description of a series of moves and countermoves were able to solve the problem, as if its task was that of dictating the rules of a ballet. So the European Court did not even address the fundamental question that should have been answered. The question here is not whether to protect the interest of Huawei (the patent holder) thereby boosting innovation,  or  of ZTE (the maker)  thereby promoting competition. The real important question is whether in this specific case the consumers who prefer less innovation, intensely competitive markets and cheaper goods, or the consumers who prefer more innovation, even at the cost of having less competitive markets and, consequently, higher prices, are more worthy of protection. Further choices, as that of ensuring the patent holder higher (lower) royalties or stiffer (more lax) protection, depend on this basic judgment.  As any judgment based on balancing even the antitrust balancing in general and that in Huaweiin particular, should be subjected to the "Law of Balancing" which, in its  simplest and more efficacious description, implies that "the greater the degree of non - satisfaction of, or detriment to, one right or principle, the greater must be the importance of satisfying the other"[78].   In the present context, correctly  defined as a field of conflicts between the two categories of consumers that we have described before (consumers preferring a fast and expensive, and others preferring a slower and cheaper,  innovation)  we should consider that  giving the patent holder the right of seeking an injunction, that can prevent the entry in the market of a new potential maker[79], carries out an extraordinary degree of non - satisfaction of  the interest of the latter group of consumers. In this hypothesis the consumers have to bear a situation of market power without even having the possibility of resorting to a second best (compared to the patented product) alternative, excluded by the fact that  it is not technically possible to make devices which comply with a standard without infringing the respective SEPs. This extreme level of non- satisfaction, if   acceptable at all,  should be permitted only in the  most exceptional cases in which the importance of satisfying the opposed interest is enormous, [...]