ON OPTIMAL LEGAL STANDARDS FOR COMPETITION POLICY: A GENERAL WELFARE‐BASED ANALYSIS^*

Abstract

We present a new welfare-based framework for optimally choosing legal standards (decision rules). We formalise the decision-theoretic considerations widely discussed in the existing literature by capturing the quality of the underlying analysis and information available to a regulatory authority, and we obtain a precise necessary and sufficient set of conditions for determining when an Economics or Effects-Based approach would be able to discriminate effectively between benign and harmful actions and consequently dominate per se as a decision-making procedure. We then show that in a full welfare-based approach, the choice between legal standards must additionally take into account, (i) indirect (deterrence) effects of the choice of standard on the behaviour of all firms when deciding whether or not to adopt a particular practice; and (ii) procedural effects of certain features of the administrative process in particular delays in reaching decisions; and the investigation of only a fraction of the actions taking place. We therefore derive necessary and sufficient conditions for adopting Discriminating Rules, as advocated by the Effects-Based approach. We also examine what type of Discriminating rule will be optimal under different conditions that characterise different business practices. We apply our framework to two recent landmark decisions -Microsoft vs. EU Commission (2007) and Leegin vs. PSKS (2007) -in which a change in legal standards has been proposed, and show that it can powerfully clarify and enhance the arguments deployed in these cases.

Optimal Legal Standards for Refusals to License Intellectual Property: A Welfare-Based Analysis

“…Also, "these include reasons that are likely to enhance economic efficiency" 36 , reasons that provide an objective justification for the denial 37 and reasons that relate to the desire of the IP owner to promote price discrimination (that could enhance welfare) 38 .…”

“…Careful commentators even when favoring the use of a more "economics-based approach", warn that this should not mean unlimited discretionary powers on behalf of the authority: as Vickers (2007a) points out "rules of law should (not) be replaced by discretionary decision making based on whatever is thought to be desirable in economic terms case by case……….not least for reasons of predictability and accountability". In Katsoulacos & Ulph (2007, 2008, Rule of Reason is one of many potential discriminating rule that the authority can adopt -the one with the highest discriminating quality.…”

Legal uncertainty as a welfare enhancing screen

“…Previous literature has argued that rules of reason allow differentiating competition law in a more selective way at the price of some inherent legal uncertainty, because firms sometimes do not know whether their conduct is legal. Katsoulacos and Ulph (2009) characterize conditions, such that rules of reason are welfare-enhancing compared to per-se rules. They find that the selectivity of a rule of reason often outweighs the losses due to legal uncertainty.…”

Effects of the Third Party Errors

“…It is not just that Nash equilibrium is Pareto-inefficient but it also causes backset for all the players against the situation with no enforcer to the same extent as in the situation when type-I error probability is zero and type II-error probability is one 10 . The formulae in the matrix prove that if law-abiding players only get punished, it becomes actually more profitable to violate the rules.…”