Abstract
New competition dynamics in the digital economy raise questions as to the normative scope of competition enforcement. The question ‘Is this a competition problem?’ has become common in the face of new business strategies, investments into new technologies, new forms of interaction with consumers, the accumulation of data, and the use of big analytics. This chapter attempts to outline the goals and values set by European Competition law and their application in promoting innovation and the digital economy. The discussion then moves on to explore the tension between the multitude of goals and economic analysis. It also reflects the different approach to state intervention rules in other jurisdictions, such as the USA and some Asian countries.
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Notes
- 1.
- 2.
The use of algorithms affects competition law in at least the following ways:
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The implementation of automated price observation and correction systems involves the risk of price agreements (cartels). It is important how these systems are implemented by the operators.
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Entrepreneurs may use the algorithms deliberately to make price agreements (cartels) or to set a prohibited resale price.
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Similarly, operators can be considered as participants in concerted practices simply by the way in which the algorithms they use operate: there are several forms of concerted practice and some of them may, according to the European Commission, take place in automated systems.
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When creating pricing algorithms, software developers need to be careful and make sure that they are not a concerted action or cartel by their nature. One thing is the competition liability of the users of the algorithms, but it should be assessed whether the person who created such software can be held liable.
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Even if previous practice has been to treat contracts concluded by people from the point of view of competition law, if the agreements are made by automated systems, this does not mean (read: should not mean) that the contracts concluded by computers (artificial intelligence) are excluded from competition law.
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The business automated systems have already led to competition law procedures in which the European Commission has analysed whether the implementation of algorithms in a certain way could constitute an abuse of a dominant position. For example, 2018 was penalised by Google for a fine of EUR 4.34 billion because it applied a so-called interconnection of products (illegal tying). In 2017, the Commission fined Google 2.42 billion euros because Google’s search engine preferred its own price comparison service (so-called Google Shopping Case). Since 2016, the procedure under which the Commission is investigating Google is that Google restricts or displays certain third-party competitors’ search ads (so-called Google AdSense Case).
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The development and use of technology has also raised questions about merger control; i.e. how to ensure that mergers that do not require the prior consent of the Competition Authority under the rules in force but that could potentially affect the product markets (reducing consumer choice or inhibiting innovation) are in the Authority’s field of vision.
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- 3.
As already pointed out, the European Commission is quite unanimous in saying that there is no need to change the EU’s primary competition rules. Articles 101 and 102 TFEU are, in substance, abstract and flexible and provide implementers sufficient flexibility to apply the rules accordingly. However, according to the Commission, it is necessary to constantly review and, if necessary, supplement or amend the so-called EU secondary law, which is the regulations and directives. For example, when Facebook acquired 19 billion for WhatsApp, which had no profit and a low sales turnover, the big question was whether the merger should be preceded by a mandatory merger control known to be based on the parties’ turnover.
- 4.
According to the study conducted by a group of researchers on the COVID-19 impact on the digital economy revealed that digital industries in Armenia, Israel, Latvia, and Estonia have shown great growth potential during the epidemic. On the other hand, adverse impacts were brought to the digital industries in Ukraine, Egypt, Turkey, and the Philippines.
- 5.
Pure or perfect competition refers to a market structure that is entirely controlled by market forces and fulfils five key criteria: (i) the market is characterised by a large number of sellers and buyers and thus none can influence the price and all are price takers; (ii) all buyers sell identical products, meaning the products are homogenous; (iii) the information of the vendors as well as customers is perfect, meaning the purchases and the relevant terms thereof are known by everyone; (iv) vendors can freely enter and exit the market (no entry barriers exists); and (v) mobility of factors of production (including capital and labour resources are mobile).
- 6.
Imperfect competition exists whenever a market is not complying with the doctrine of neoclassical pure or perfect competition.
- 7.
Paragraph 1 Section 1 of the Estonian Competition Act, accessible here https://www.riigiteataja.ee/akt/130122021012
- 8.
- 9.
- 10.
- 11.
It is interesting to note that in 2004 when the Chilean competition law was amended talks were held on whether free competition should be defined more narrowly as a right to participate in economic activities, a means of promoting economic efficiency, or a means of enhancing consumer welfare. In the end, it was decided by the legislators that the meaning of free competition, which means an effective competitive process, should be left to the Chilean Competition Tribunal’s interpretation, on a case-by-case basis.
- 12.
According to Article 2 of the Treaty of Rome, the ultimate task of the European Community is the economic welfare within the single market. Article 3(f) of the Treaty of Rome specifies this from the competition point of view, noting the goal of establishment of a system ensuring that competition in the common market is not distorted.
- 13.
Consumer welfare is often considered together with economic efficiency, whereas efficiency is considered the primary goal of competition. In short, the competition authorities should refrain from enforcing competition rules in output-increasing conduct and incriminate output-reducing. The idea is that competition authorities should look at the efficiency of companies, which is the ratio of output to input used in production. In theory, distinction is also made between allocative and productive as well as dynamic efficiency, whereas allocative and production efficiencies are seen as static concepts whilst in dynamic efficiency the potential of the whole economy or of specific sector or business is considered.
- 14.
See Articles 2 and 3 of the Treaty establishing the European Community, as well as Article 3 of the Treaty of European Union.
- 15.
Which states “Recognising that the removal of existing obstacles calls for concerted action in order to guarantee steady expansion, balanced trade and fair competition”.
- 16.
Such as the famous European Microsoft case T-20/04.
- 17.
Such as the Bayer AG v Commission case (Adalat case) T-41/96.
- 18.
As do antitrust and merger rules set out in primary and secondary EU competition law, such as Articles 101 and 102, merger regulation (139/2004), and so on.
- 19.
Cases C-142/87 Tubemeuse [1990], para 66, C-305/89 Alfa Romeo [1991] para 41, C-404/00 Commission v Spain [2003], para 41.
- 20.
Commission (EC), Industrial Policy in an Enlarged Europa (Communication) COM (2002) 714 final, 11.12.2002; Commission (EC) Fostering structural change: an industrial policy for an enlarged Europe (Communication) COM (2004) 274 final, 20.04.2004; Commission (EC) Proactive Competition Policy for Competitive Europa (Communication) COM (2004) 293 final, 20.04.2004.
- 21.
Just recently, Estonian and Finnish governments agreed to the joint leasing of a floating terminal for liquid natural gas (LNG) in order to guarantee the supply of gas during the Russian energy crisis. In fact, an LNG terminal project was also on the table in 2014 and 2017. In 2014, it was rejected because Estonia granted the right to implement the project to Finland. In 2017, the matter was again on government table, and at that time the then prime minister Jüri Ratas stated that the LNG terminal can only be built based on market logic, which should probably be understood so that the state cannot build it itself nor support private sector construction, unless there is a market failure. When Russia threatened in the spring of 2022 to turn off the pipe gas the LNG terminal matter rose again along with the question if for the state to intervene there must be a market failure, and in which circumstances the public and private sector can cooperate to tackle the matter.
- 22.
According to paragraph 30 Subsection 2 of the Estonian Competition Act.
- 23.
Regulation (EC) no 800/2008 which was repealed and replaced in 2014 with the Regulation (EU) No 651/2014 applicable until 31.12.2020.
- 24.
Means according to Article 2 (17) of GBER any aid not granted on the basis of an aid scheme.
- 25.
As provided in Annex I of GBER.
- 26.
Article 6(3) of GBER.
- 27.
Section 26 (d) of Regional aid guidelines.
- 28.
Section 36 (d) of R&D&I Framework.
- 29.
Section 27 (b) of the Environmental guidelines.
- 30.
Section 38 (d) of Rescuing and Restructuring guidelines
- 31.
See for example Eesti Pagar AS vs Ettevõtluse Arendamise Sihtasutus and Majandus- ja Kommunikatsiooniministeerium C-349/17.
- 32.
Case C-368/04, Transalpine Ölleitung in Österreich, cited above footnote 8, paragraph 45; Joined Cases C-392/04 and C-422/04, i-21 Germany, [2006] ECR I-8559, paragraph 57; and Case 33/76, Rewe, [1976] ECR 1989, paragraph 5.
- 33.
Paragraph 1 (3) 1) of the Regulation no 38 dated 13.07.2017.
- 34.
Commission hard and soft law instruments are either silent or rather modest in defining the term. Only in its State Aid Action Plan from 2005, the Commission elaborated the concept thoroughly and according to this a “market failure” is consequently a situation where the market does not lead to an economically efficient outcome. Market failures have different origins, and notably:
– Externalities: externalities exist where actors do not take full account of the consequences of their actions on other actors in society. Market players may not have to pay for the full social cost of their actions (negative externalities) like in the case of pollution through industrial activity. Market players may also be unable to reap the full benefits of their actions (positive externalities) like in the fields of research and innovation.
– Public goods: public goods are goods which are beneficial for society but which are not normally provided by the market given that it is difficult or impossible to exclude anyone from using the goods (and hence making them pay for the goods). This can be the case of national defence and some type of public broadcasting.
– Imperfect information: imperfect information may lead to transaction costs, agency costs, moral hazard, or antiselection, which in turn lead to inefficient market outcomes. A well-known example of imperfect information can be found in the financial market, where start-up firms usually face problems in finding adequate funding.
– Coordination problems: markets may also not function efficiently when there is a coordination problem between market actors. Coordination problems may exist for example in the field of standards setting, in transport infrastructures, or in the area of innovation.
– Market power: Another reason why the market may not lead to an efficient outcome is the existence of market power, for instance in a situation of monopoly.
- 35.
Framework for state aid for research and development and innovation. Official Journal C 198. 27.96.2014.
- 36.
Guidelines on state aid for rescuing and restructuring non-financial undertakings in difficulty. Official Journal C 249. 31.07.2014.
- 37.
Guidelines on state aid for environmental protection and energy 2014–2020. Official Journal C 200. 28.06.2014.
- 38.
Guidelines on regional State aid for 2014–2020. Official Journal C 209. 23.07.2013.
- 39.
Section 49 of R&D&I Framework.
- 40.
Section 36 (b) of R&D&I Framework.
- 41.
Section 26 (b) of Regional aid Guideline.
- 42.
Section 38 (b) of Rescuing and Restructuring guidelines.
- 43.
Section 36 of the Environmental guidelines.
- 44.
Section 27 (b) of the Environmental guidelines.
- 45.
But even export subsidy, although per se prohibited under WTO and EU rules, is not entirely bad from the economical point of view, as it is reported that foreign consumers will benefit from the subsidies to national undertakings.
- 46.
Today Enterprise and Innovation Foundation, https://eas.ee/eas/
- 47.
The best-known inventions of DARPA are the Internet, GPS, and Siri.
- 48.
NASA’s Small Business Innovation Research (SBIR), but also Small Business Technology Transfer (STTR) programs, provides early-stage funding for R&D, whereas they take zero equity meaning that the companies remain in control of their intellectual property.
- 49.
Usually, the private sector in the form of venture capital steps in when commercialisation becomes visible. This may happen 15–20 years after the start of the project.
- 50.
- 51.
See the Press release of the Commission from 2.6.2017, available here http://europa.eu/rapid/press-release_IP-17-1520_en.htm
- 52.
That aims to create an innovative community energy model for local communities and municipalities to prepare renewable energy projects and start producing locally renewable energy for local communities.
- 53.
The team aims to create a solution, which would make it easier for financial institutions and large companies to produce the required analyses and reports and at the same time would also be available and comprehensible to small businesses. The solution directly contributes to the necessary changes in the field of economy and climate set out in the “Estonia 2035” strategy. More specifically to the increase of cooperation between entrepreneurs and the public sector through the development of joint innovation platforms and data economy.
- 54.
Mainstream or orthodox economics presume that economy (market forces) is naturally stable and market forces (Adam Smith’s invisible hand) move economy to equilibrium where demand equals supply. In case the invisible hand does not operate optimally, e.g. in case of externalities (such as environmental pollution), public goods (a good that benefits the whole society—police, education, healthcare), asymmetries of information (imperfect information on one side of the transaction), natural monopoly, and so on, intervention by state is necessary into the marketplace. Unorthodox economics, such as Hyman P. Minsky and his followers, however, claimed that the internal dynamics of modern economy are not equilibrium-seeking, the system is not stable, and in fact there is no invisible hand working that way. Moreover, stability of the market, if by any miracle that is to happen, is destabilising because of policymaking and business opportunities. Minsky also argued that stabile marketplace is difficult for businesses to find profitable opportunities as market tends to get saturated.
- 55.
Climate change has also been in the political agendas or quite some time. We all realise it will dramatically affect humans, animal, and other natural life on earth, yet no solution seems available.
- 56.
If the notion of competition is central when developing and applying economic theories behind it, maybe we ought to understand what it is?
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Pärn-Lee, E. (2023). EU Competition Law Goals and the Digital Economy: Reflecting Estonia’s Perspective. In: Ramiro Troitiño, D., Kerikmäe, T., Hamuľák, O. (eds) Digital Development of the European Union. Springer, Cham. https://doi.org/10.1007/978-3-031-27312-4_11
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