20 Nov 2009

(by Bruce Lyons) Buried in the long and technical European Court of Justice judgment in (6 October 2009), you may not have noticed paragraph 63: “Article 81 aims to protect not only the interests of competitors…” Hang on a minute –Commissioner Neelie Kroes has spent much of the last five years proselytising the excellent message that DG Comp “protects competition, not competitors” and is concerned with consumer welfare. Although the Commission may have forgotten this message in this particular case, the CFI had been ready to step in to remind them. Has the ECJ now thrown its black coat over both the CFI and the Commission and taken us back to the 1960s?

What was the case at issue? Many pharmaceuticals retail prices are regulated by national bodies and so are set at different levels in different countries. Wholesalers purchase at a discount then add value by distributing them to pharmacies. Spanish prices tend to be regulated lower than in some other countries such as the UK, so to achieve the same wholesale margin, wholesale prices must be set lower in Spain. This opens the opportunity for arbitrage (‘parallel trade’). A Spanish wholesaler could divert supplies or buy more than it needs to supply the Spanish market then export the surplus to the UK where wholesalers are charged a higher price. Importantly, consumers would not see any benefit if the retail prices are regulated. To prevent such arbitrage, Glaxo had a ‘dual pricing’ contract with most of its Spanish wholesalers, offering a lower price for supplies sold in Spain and a higher price for re-exported product.

Glaxo claimed this price discrimination did no consumer harm while creating long-term consumer benefit by funding R&D. The Commission dismissed these arguments on the grounds that restrictions on parallel trade are necessarily anti-competitive because they undermine the concept of a single European market. On appeal, the CFI annulled much of the Commission’s decision, saying that consumer welfare should be at the heart of the analysis and that the regulatory framework was relevant. Everyone then appealed to the ECJ – the ultimate arbiter. [As it happens, the essential economic and legal arguments of the case (pre-ECJ judgement) are admirably set out in chapter 11 of my , written by and James Venit.]

Let’s get back to #63 of the ECJ decision. It says a bit more than my selective quote and makes two important points. Firstly, agreements can have an anti-competitive object even when they do not “deprive consumers of certain advantages”. So far, so good; for example, a cartel which cannot be shown to have achieved higher prices should still be illegal because it undermines the competitive process. Secondly, “like other competition rules laid down in the Treaty, Article 81 EC aims to protect not only the interests of competitors or of consumers, but also the structure of the market and, in so doing, competition as such.”

How should this be interpreted? If it is meant to apply directly to the Glaxo dual pricing case, it is certainly far from clear who the competitors are supposed to be. It was the Spanish wholesalers who joined the appeal to the ECJ but if the agreement is struck down, presumably the UK and other national wholesalers would complain about being placed at a competitive disadvantage due to price discrimination against them by Glaxo. And if it is meant to be an encompassing general statement, then as an economist it leaves me very nervous about competition law to protect competitors other than to the ultimate consumer benefit.

On a positive note, the ECJ confirmed the CFI’s position that the dual pricing agreement was eligible for potential exemption by proper consideration of the economic effects under Article 81(3).

So am I making a fuss about details that should be left to lawyers? I think not. Good competition policy requires both law and economics and it is essential for a common language to develop to avoid misunderstandings. As a final thought, the troublesome statement in paragraph 63 may have been written more appropriately if a professional economist sat as one of the team of judges in competition appeal cases.

Note: Thanks to for drawing my attention to #63.