Ofer Eitan Says: Private damages in dominance cases: the example of Google S... - Jonathan Cartu - Advertisement & Marketing Agency.
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Ofer Eitan Says: Private damages in dominance cases: the example of Google S…

Private damages in dominance cases: the example of Google S...

Ofer Eitan Says: Private damages in dominance cases: the example of Google S…

While a plethora of damages claims are regularly filed in front of jurisdictions in various countries of the European Union related to Article 101 TFEU (think, for example, the abundance of litigation against truck manufacturers), the same is not yet true for abuse of dominance cases. Notwithstanding that the Damages Directive is equally applicable to Article 102 TFEU cases, the number of (closed) dominance litigations is fairly limited, especially the ones in which a damage estimation was carried out in court proceedings. We are only aware of a few cases, including Cardiff Bus and Albion Water in the United Kingdom; Arzneimittelpreise and Wasserpreis der Stadt Mainz in Germany (although with relatively simplistic estimations). Notably, French courts seem to be rather open to estimate (and award) damages in dominance cases. See, for example the landmark case of Orange/Digicel or smaller cases like Le Berry Républicain/Aviscom.[1]

The fact that there are few dominance damages claims in front of national courts in Europe is not surprising for at least two reasons. First, dominance cases require (more) economic analysis from the competition authorities including, at least, an assessment of whether the company investigated is dominant in certain antitrust markets.[2] Second, the damage quantification in dominance cases is less straightforward than in cartel cases. However, as we show in this post with the example of the Google Shopping case of the European Commission (‘Commission’), a clear theoretical concept can be applied.

  1. Vertical foreclosure, theoretical framework[3]

The theoretical framework underlying damage calculations in abuse of dominance cases concerning vertical foreclosure can be demonstrated as follows. First, we need to clarify that one can only expect incentives to vertically foreclose competitors if a company is active both in the upstream and in the downstream markets, and at least on one of these markets the company is dominant. In this section we assume that, similarly to the Google Shopping case, the company is dominant upstream, and vertical foreclosure takes place.

When the abuse begins, downstream competitors affected by the abuse start losing business, their margins are shrinking or even turn negative (attrition phase, see left hand side of Figure 1 below). The reduction of profits suffered by downstream competitors may lead to marginalization or a complete exit from the market. Both outcomes may lead to substantial financial damages. In this attrition phase, however, it is not clear whether there are adverse effects on consumers. If, for example, the attrition happens via the dominant company applying anti-competitively low (below-cost) prices, consumers may be better off for a while, as they pay lower prices. On the contrary, if the dominant company anti-competitively reduces rival firms’ demand by denying access to a large proportion of consumers (as it is likely in the case for Google Shopping), consumers are most likely negatively affected too. For example, consumers do not benefit from a larger number of available choices, and perhaps they become unaware of better deals.[4]

Figure 1 – Margin analysis for Article 102 TFEU damages cases, simplified framework

Source: modified version of Figure 2 in Fumagalli et. al. (2010)

The attrition phase is followed by a recoupment phase (middle part of Figure 1 above), during which the dominant company reaps the benefits of the successful foreclosure of competitors, by applying profit-maximizing monopoly prices in the downstream market (clearly harmful for consumers). By doing so, though, the dominant company encourages market entry at a later stage: this is called the phase of market growth, shown on the right hand-side of Figure 1 above. High margins may attract entry in the growth phase, but it is uncertain that the previously foreclosed competitors can re-enter or regain strength (in case they did not fully exited the market). Even so, they may not be able to supply as efficiently having lost out on profits during the preceding periods affecting, among other things, their ability to innovate or to realise economies of scale.

While it is not typical that all the three phases can be clearly distinguished in the case of an abuse of dominance, Figure 1 above represents the idea behind damages related to Article 102 TFEU cases.

Concerning damage quantification, the difference between cartel and dominance cases is also clear from Figure 1 above: while in cartel cases the counterfactual assessment focuses on but-for prices, when assessing damages in a dominance case the analysis is carried out on the counterfactual profits of the harmed competitors. Prices are still important in the context of a margin calculation, in which one can assess whether the damaged company could maintain a high enough margin to “survive” in the presence of the abusive behaviour.

  1. Application to Google Shopping

Turning to the Google Shopping case, the domains competing with Google Shopping can be entitled to damages based on the lost profits attributable to Google’s abusive behaviour (i.e., that Google’s algorithm demoted visibility of these product comparison websites). There are two main things to consider: (i) was the loss of profits attributable to Google’s anti-competitive behaviour; and (ii) what would have been the counterfactual level of profits of the competing price comparison websites?

While it is the level of margins that matters, there are other metrics that can be used as indicators of profits (or losses) from running price comparison websites. One of these metrics is the Sistrix Visibility Index (which has also been used by the Commission in the Google Shopping decision[5]).

Based on Sistrix data, we generated Figure 2 below showing the Visibility Index of certain high-volume French comparison-shopping websites (domains are selected according to Graph 5 of the Google Shopping decision, the difference is that the lines below are shown…

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