LUISS Guido Carli

Business Law and ICT, 2023

Week I: Course presentation, goals and foundations

of Business Law

Prof. Andrea Giannaccari, LLM, PhD

LUISS Guido Carli
Italian Constitutional Court
 COURSE INSTRUCTIONS

n Contacts: agiannaccari@luiss.it
n Studying material:
→ R. Van den Bergh, A. Giannaccari, P. Camesasca, Comparative Competition Law and
Economics, Edward Elgar, 2017;

→ Course’ slides (dispatched after classes) and selected papers;

→ Other material at student’s request.

n Mid-term exam (March 16th ; May 4th):

1. True/false questions
2. Open questions
3. Case discussion

n Moot court exercise: cases persentation

Final exam
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 SOME KEY QUESTIONS

n What is business law? Protect competition in a free market…

n Any legal problem with the GAFAM?
n Are Big Data crucial in a legal perspective?
n Which are the forms of legal protection in ICT?
n Is there any interoperability between competition, IP protection, personal data?
n What is market power? Are there legal monopolies?
n Are low prices (or zero prices) illegal? And the excessive ones?
n Do you think Amazon is infringing the competition rules?
n Might there be an infringement if we, as consumers, receive services for free?

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 (follows…) SOME KEY QUESTIONS

n Is Meta violating the competition rules? And the data protection ones?
n Do you think Google is illegally reducing the consumer welfare?
n How to measure the consumer welfare? (prices, quantities…)
n Any problem with WhatsApp and its acquisition price, any privacy infringement?
n Might Apple be accused of planned obsolescence of its iPhones?
n Do we need business law? Any problem with the legal approach in business matters?
n What can economists teach us and how legal, economic and ICT sciences interact?
n What is the GAIA-X project?
n Any legal/economic problem with the NFT?

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 OVERVIEW OF TOPICS AND LECTURES IN BUSINESS LAW

n Goals of competition law: is there a commonality of ends in the different jurisdictions?

(US-UE: Microsoft; Google; Amazon e-books; General Electric-Honeywell)
n Comparative overview of substantive provisions of US antitrust law, EU competition law; the main Schools of thought (markets
v. states); the technological challenges: IP v. AT?
n Economic approaches: convergence or divergence? (from IO to behavioural economics)
n Definition of market power (SSNIP test; definition of the market)
n Abuse of dominant position/monopolization (Refusal MS, EFD, tying, predation, discounts, Big Data)
n Horizontal restraints (elements for collusion, per se v. rule of reason; E-book case)
n Vertical restraints (elements to support vertical restrictions; efficiency theories; RPM- Leegin)
n Merger control (horizontal, vertical, conglomerate, HHI, GE/Honeywell, Facebook/WhatsApp)
n Enforcement of competition law: public and private (fines, commitments, criminal sanctions)
n IPRs in the digital environment: patents, copyrights, trade secrets and trademarks in ICT, licensing (FRAND)
n Data protection of Big Data: different legal orders and issues at stake
n Online advertising: firm’s strategies, online solicitation and potential offenses in digital marketplaces
n AI: an accountable, fair and transparent environment, which legal rules?
n Contracts: evolution of contract law in international (digital) environments. The data as consideration.
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 GOAL(S) OF COMPETITION LAW

Robert Bork, The Antitrust Paradox (1978), p. 50:

“Antitrust policy cannot be made rational until we are able to give a firm answer to one question: What
is the point of the law- what are its goals? Everything else follows from the answer we give”

“Academic confusion and thoughtless judicial borrowing led to the rise of a label that 30 years later has
no clear meaning. Whatever good ends the consumer welfare phrase may have once served, antitrust
law should now lay it to rest” (Barak Orbach, Journal of Competition Law and Economics, 2010);

Jonathan Baker, Steven Salop, “Antitrust, Competition Policy, and Inequality” (104 Geo. L.J. 1-28
(2015);

Lack of clarity on goals causes uncertainty, leads to inconsistencies and creates scope for arbitrariness
and strategic use of competition rules.

→ Per se rules v. Rule of reason

→ Judicial role (US, EU): legal certainty and (economic) predictability 6
 GOALS OF COMPETITION LAW(S) ACCORDING TO THE
INTERNATIONAL COMPETITION NETWORK

n Ensuring an effective competitive process

n Promoting consumer welfare
n Enhancing efficiency
n Ensuring economic freedom
n Ensuring a level playing field for small and mid-sized enterprises
n Promoting fairness and equality
n Promoting consumer choice
n Achieving market integration
n Facilitating privatisation and market liberalisation
n Promoting competitiveness in international markets

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 LACK OF CLARITY ON THE GOALS
OF COMPETITION LAW (1/3)

120 COMPETITION LAWS WORLDWIDE:

- single economic goal (Norway)
- differentiated according to the historical period (US): medium sized business v. welfare (Peritz)
- other jurisdictions pursue also non-economic objectives (EU, China, India, South Africa)

→ Norwegian 2005 Competition Act, Section 1: “The purpose of the Act is to further competition and thereby
contribute to the efficient utilization of society’s resources. When applying this Act, special consideration
shall be given to the interests of consumers”.

→ Article 1 Anti-Monopoly Law of August 30, 2007: the law is enacted “for the purpose of preventing and
restraining monopolistic conducts, protecting fair competition in the market, enhancing economic
efficiency, safeguarding the interests of consumers and social public interest and promoting the healthy
development of the socialist market economy”.

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 LACK OF CLARITY ON THE GOALS
OF COMPETITION LAW (2/3)

US approach over time:

Senator Sherman: “If we will not endure a king as a political power we should not endure a king over the
production, transportation, and sale of any of the necessities of life. If we would not submit to an emperor we
should not submit to an autocrat of trade, with power to prevent competition and fix the price of any
commodity” (21 Cong. Rec. 2457, 1890);

Of course, some of the results of large integrated or chain operations are beneficial to consumers (..). But we
cannot fail to recognize Congress’ desire to promote competition through the protection of viable, small,
locally owned business. Congress appreciated that occasional higher costs and prices might result from the
maintenance of fragmented industries and markets. It resolved these competing considerations in favour of
decentralization”, quoted from Brown Shoe Co. v. United States, 370 US 294 (1962).

“United States primary commitment in enforcement of its antitrust laws is to serve the goal of the welfare of
consumers”, former FTC chairman R. Pitofsky, Speech held at New York, 15 October 1999.

“The opportunity to charge monopoly profits, at least for a short period, is what attracts ‘business acumen’ in
the first place: it induces risk taking that produces innovation and economic growth”, US Supreme Court,
Verizon Communications Inc. v. Trinko, LLP, 540 US 398 (2004). AT&T v. Verizon, Scalia, Efd, incentive to
innovate, antitrust-regulation.
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 LACK OF CLARITY ON THE GOALS
OF COMPETITION LAW (3/3)

European Union
“Effective competition preserves the freedom and right of initiative of the individual economic operators and it fosters the spirit of
enterprise”, European Commission, Fifteenth Annual Report on Competition Policy, 1986.

“The objective of Article 81 is to protect competition on the market as a means of enhancing consumer welfare and of ensuring an
efficient allocation of resources. Competition and market integration serve these ends since the creation and preservation of an open
single market promotes an efficient allocation of resources throughout the Community for the benefit of the consumer”, European
Commission, Guidelines on the application of Article 81(3) of the Treaty, OJ 27.4.2004, C 101, 98, at nr. 13.

“Our aim is simple: to protect competition in the market as a means of enhancing consumer welfare and ensuring an efficient allocation of
resources. An effects-based approach, grounded in solid economics, ensures that citizens enjoy the benefits of a competitive, dynamic
market economy”, Neelie Kroes, Competition Commissioner, 15 September 2005.

India
The Competition Act 2002 provides that “keeping in view of the economic development of the country, the Act establishes “a Commission
to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of
consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or
incidental thereto.”

South Africa
The South African Competition Act mentions a broad variety of economic and non-economic objectives: efficiency, competitive prices and
choices for consumers, promotion of employment and social and economic welfare, expanding opportunities for South African firms to
participate in world markets, equal opportunities for small and medium-sized enterprises and a great spread of ownership. See § 2
Competition Act of 1998 10
 TO SUM UP, ON THE LEGAL SIDE

n Single (-pluri) economic goals (consumer welfare, efficiency)

n Dispersal of economic power, dilemma of liberal democracies (G. Amato)

n Political goals: market integration, employment, protection of the smallest, right of

initiative

n A luxury good, in time of crises (Appalachian Coals, suspension in 1936, NIRA;

Japan in the 90s, EU-IT recently, Covid-19)?

n An instrument to reduce inequalities (Backer-Salop) (infra)

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 MARKET EQUILIBRIUM

Price A n Consumer surplus is the amount a buyer is

willing to pay for a product minus the amount
D the buyer actually pays. It measures the
Supply economic welfare from the consumer
perspective
Consumer
surplus
n Producer surplus is the amount a seller is
Equilibrium paid for a product minus the total variable
E
price cost of production. It is equivalent to the
Producer economic profit in the long run and measures
surplus
the economic welfare from the seller
perspective.
Demand
B
n Economic welfare is the sum of consumer
C and producer surplus

0 Equilibrium Quantity
quantity
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 MARKET POWER

n Market power is the ability of a firm to alter the market price of a good or service. A firm with
market power can raise price without losing all customers to competitors.

n When a firm has market power, it faces a downward-sloping demand curve (price increases lead
to a lower quantity demanded).

n In perfectly competitive markets, market participants have no market power.

n If the demand curve is downward sloping, then the decrease in supply as a result of the exercise
of market power creates an economic deadweight loss in comparison with a situation of perfect
competition.

n This is often viewed as socially undesirable, and as a result, many countries have antitrust
legislation with the aim of limiting the ability of firms to accrue market power.

→ in the real world firms have some degree of market power through product differentiation
→ to justify AT concerns, market power has to be significant (substantial in the US label)
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 PERFECT COMPETITION

n Model of Perfect Competition: perfect information, no barriers to entry, no transaction costs, no externalities,
several firms.

n The model of perfect competition describes a hypothetical market form in which no producer or consumer has
the market power to influence prices. According to the standard economic definition of efficiency (Pareto
efficiency), perfect competition would lead to a completely efficient outcome.

n Perfect competition requires that the following parameters be fulfilled:

→ Atomicity: There is a large number of small producers on a given market, each so small that its actions have
no significant impact on others. Firms are price takers, meaning that the market sets the price they can get;

→ Homogeneity: Goods and services are perfect substitutes; that is, there is no product differentiation;

→ Perfect and complete information: All firms and consumers know the prices set by all firms;

→ No transaction costs: All firms have access to production technologies, and resources are perfectly mobile;

→ No barriers: There is perfect freedom of entry and exit from the industry. Firms face no sunk costs that might
impede movement in and out of the market.
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 THE WELFARE LOSS FROM MONOPOLY

price OpcS = consumer surplus in a

competitive market
O
The welfare (deadweight) loss is
represented by the area of the
pm R triangle RST

PmPcTR is the consumer welfare

T S transferred to the monopolist
pc
T MC

Pm > MC and > Pc

MR

0 qm qc quantity

Law and Economics Lab

 MONOPOLY

n Monopoly is a market structure in which a single firm makes up the entire market;
n Monopoly and perfect competition can be compared/contrasted by using consumer surplus and
producer surplus (i.e. by using economic welfare/societal welfare measures);
n The monopolist will charge the maximum price consumers are willing to pay for that quantity;
n The monopolist’s equilibrium output is less and its price is higher than for a firm in a competitive
market.

n The main objections to monopoly are that:

1) Prices are higher than in competitive markets;
2) Quantities are reduced;
3) Consumers buying at prices above competitive levels create a distributive inefficiency;
4) Deadweight area estimated between 0.1 and 9% of GDP;
5) The monopolist does not have the same pressure to reduce costs (x-Inefficiency);
6) Waste of resources (lobbying, excess capacity, costs to defend the position) lead to higher
prices;
7) Some argue, contrary to Schumpeter, that monopolists do not have incentives to innovate.
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 PERFECT COMPETITION, MONOPOLY
AND COMPETITION IN THE REAL WORLD

n Monopolies (hardly ever) exist: firm’ ability and/or state regulation (highways, railways, utilities)
→ near-monopolies: when there is a monopolistic position?
→ more firms (oligopolies) jointly exerting market power

n Perfectly competitive markets hardly ever exist:

→ infinite number of firms, identical costs levels, perfect information, no economies of scale;
→ real markets lie somewhere between monopoly and perfect competition;
→ the benchmark of perfect competition is useful to measure the competitiveness of real markets;

→ these models allow to focus the attention on the crucial issue of the (sufficient) market power to
raise price above the competitive levels and keep them there.
→ The problem is how to measure how well a market is performing
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 A CATALOGUE OF ECONOMIC GOALS

n Three economic approaches (plus one):

- Efficiency
- Total welfare
- Consumer welfare
- Protection of the competitive process (freedom of competition)

n Broader set of goals:

- Market integration (EU)
- Links with other policies (social policy, cultural policy, industrial policy…).

→ In there a need to take the ‘non-economic’ goals into consideration?

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 CONFLICTING CONCEPTS OF EFFICIENCY (1/3)

nAllocative efficiency: p=MC (perfectly competitive market):

→ everyone willing to buy at the cost of production will be able to do so;
→ sellers will expand production up to the point where p=MC;
→ none of the players can be better off without someone be worse off (Pareto optimal).

nProductive efficiency: goods are produced at the lowest possible cost:

→ every firm produces at minimum costs, otherwise it will lose customers;
→ given the perfect information, cost-cutting will be copied and there will be a pressure to decrease
costs, prices (to the consumers’ benefit).

nDynamic efficiency concerns how well the market delivers innovation and technological progress, it
loosely indicate the optimal rate of technological progress:
→ innovation is better delivered by monopolists or by competitive markets?
→ is the ability to achieve market power crucial to spur innovation?
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 CONFLICTING CONCEPTS OF EFFICIENCY (2/3)

n Allocative efficiency vs. Productive efficiency:

→ firms produce using the most effective combination of inputs;
→ less efficient firms are worse-off (not a Pareto improvement);
What happens in the case of a merger inducing scale economies, but enabling previously
independent firms to collude and raise prices?;
→ therefore, gains in terms of productive efficiency, losses in terms of allocative efficiency.

nAllocative efficiency vs. Dynamic efficiency:

→ static efficiency confronted with a dynamic concept;
→ precise economic concepts confronted with a vague concept;
→ if the standard is the dynamic efficiency, less innovative firms are worse off;
→ again, no Pareto improvements!

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 CONFLICTING CONCEPTS OF EFFICIENCY (3/3)

n Use of different criteria:

- Pareto criterion v. Kaldor-Hicks (possibility of compensation between winners and loosers)

→ ex: Merger increasing prices but allowing post-merger firm to reduce production costs:
- do the authorities have to stop the concentration, relying on Pareto?
- do the authorities have to clear the operation, relying on Kaldor-Hicks?
- is the Alstom/Siemens merger revealing?

→ ex: Merger producing dynamic efficiencies, harming less efficient firms:

- short v. long-run approach;
- short term effect on prices and long term effect on innovation (pharmaceuticals)

→ Kaldor-Hicks neglects distributional effects (what happens in case of passing on?)

→ Practical problems to apply the different efficiency criteria in real cases (problems of proofs?)
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 TOTAL WELFARE AND CONSUMER WELFARE (1/2)

n Different welfare concepts: total welfare, consumer welfare

n Consumer surplus is the difference between what consumers would be willing to pay and what they
do pay;
n Producer surplus is the profit a producer makes by selling goods above the cost of production;

→ Total welfare is the sum of these two surpluses.

n The concept of consumer welfare has no direct link with economic theory (IO). Consumer surplus is
a different concept.
n The consumer label is – probably because of its rhetoric strength – very popular with competition
authorities. However, the contents of the concept (how and to what extent should consumers be
protected?) remains vague.
n Definition by Robert Lande (Hastings Law Journal, 1982): Promotion of consumer interest, either
through consumer surplus maximisation (competition law has to prevent increases in consumer
prices due to the exercise of market power), or through what is the ultimate goal of antitrust laws:
improving consumer choice.
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 TOTAL WELFARE AND CONSUMER WELFARE (2/2)

1) if consumer welfare corresponds to consumer surplus:

→ practical advantage for enforcers, much less information;
→ the inquiry can be limited to pay attention to prices;
→ the total welfare (producers’ side) is neglected;
→ attention to prices, actual or future (as in mergers);
→ why this group has to be treated more favourably (shareholders, workers)?

2) if the total welfare is taken into account:

→ the sum of the consumer and producer surplus has to be maximised;
→ What happens in case of a merger when you have productive efficiency (economies of scale), but
a decrease in allocative efficiency (deadweight loss as an effect of market power)? → Interests of
consumers and producers do not often coincide;
→ distributional effects on wealth are not taken into account (consumers may be worse off).
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 CONFLICTING ECONOMIC GOALS

n Different concepts of efficiency: allocative efficiency, productive efficiency, dynamic efficiency

n Different welfare concepts: total welfare, consumer welfare

n Trade-off between productive efficiency and allocative efficiency (Oliver Williamson, American
Economic Review, 1968). Can restrictions of competition be accepted if they lead to an increase in
welfare of producers, provided the gains exceed the ensuing losses suffered by consumers
(Kaldor-Hicks efficiency)?

n Trade-off between allocative efficiency (total welfare) and consumer welfare. How should the notion
of consumer welfare be interpreted?

n Conflicts between static efficiency (total welfare) and dynamic efficiency.

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 CONSUMER CHOICE

Besides prices, consumers might be interested in choices (R. Lande)

Consumer welfare might be linked to the concept of sovereignty

and non-price criteria (quality, safety, variety and innovation);

The case of Big Data: privacy as non-price dimension?

→ difficult to apply in practice (prices v. qualities);

→ the protection of variety may lead to the protection of competitors;
→ the antitrust risks acquiring a structuralist vein;
→ attention to the number of players;

→ criticism: lack of clarity, predictability and objectivity.

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 HOW DOES CURRENT EU COMPETITION LAW DEAL WITH THE
ABOVE TRADE-OFFS?

n Statement of Neelie Kroes, Former EU Competition Commissioner:

“Our aim is simple; to protect competition in the market as a means of enhancing consumer welfare
and ensuring an efficient allocation of resources. An effects-based approach, grounded in solid
economics, ensures that citizens enjoy the benefits of a competitive dynamic market economy”.

n Is it really that simple?

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 ANTITRUST AND INEQUALITY (1/2)

n The economic growth has been appropriated by those already well-off:

→ between 1982-2013, the income of the top 1% increased from 12.3 to 19.8%;
→ between 1982-2013, the income of the bottom 40% fell from 12.3 to 9.4%;
→ between 1982-2013, the average income of the top 1% rose by 90%;
→ between 1982-2013, the average income of bottom 60% declined by 4%;
→ between 1982-2013, the average net worth of the top 1% rose by 81.6%;
→ between 1982-2013, the average net worth of the bottom 60% declined, and that of the
bottom 40% is now negative (Stiglitz, Piketty, Hacker)

→ Market power contributes to the growing inequality (Microsoft, Google, Apple, Amazon, Facebook):
IPRs, network effects, market power raises return on capital

n Baker-Salop: rely on antitrust to respond to inequality concerns

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 ANTITRUST AND INEQUALITY (2/2)

nPossible solutions:
→ reliance on the consumer welfare standard instead of the total welfare one;
→ increase agencies budgets;
→ exercising prosecutorial discretion to prioritize cases that benefit the middle class and the less
advantaged: cases where the bulk of harm is suffered by middle class;
→ designing remedies to benefit less advantaged consumers (clear mergers, subsidizing drugs or
services to less advantaged); higher fines for infringements against lower-income consumers;
→ rebalancing towards more interventionist antitrust (place more weight on cases where market power
creates more harm; IPRs; remove regulatory impediments to competition; reduce the regulatory
capture);
→ recognizing excessive pricing by dominant firms as an antitrust offense;
→ adopting inequality as an explicit competition policy goal of the antitrust laws (conducts are illegal if
middle and lower income consumers are damaged; distributional concerns and assessments
between groups of consumers)

ex: car manufacturers agree to charge low prices for entry level models and higher prices for
luxury ones: illegal or not?
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 CONCLUSION

n Lack of consensus: different legal goals; different economic goals (and criteria);

n Different efficiencies and consumer welfare(s) (prices, qualities, choices);

n Clashes in the different groups and among them;

n Difficult trade-offs;

n Lack of a univocal approach on the enforcement side

(US-UE: Microsoft; Google; Amazon e-books; General Electric-Honeywell);

n A catalogue difficult to handle and properly reconcile;

n New and old goals for the discipline;

→ besides the different purely legal goals, there is (almost) always a reference to the
consumer welfare standard(s); Google case: protection of consumers or of competitors?
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Thanks for the attention!

agiannaccari@luiss.it

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