While analyzing aspects of dynamic efficiency in competition law, an essential part of this analysis is to identify the economic environment that is beneficial to this efficiency. As we recall, monopolistic competition is an economic environment that is suitable for static efficiency. That is not the case for dynamic efficiency. Its proper environment is the oligopolistic competition market.
The earlier reflections let us conclude that the most difficult issue in the dynamic efficiency analysis is the situation when an antitrust body is facing two different results of the assessment of the market behaviors of enterprises, depending on whether the results pertain to a short or long term, i.e. should they promote the immediate benefits for consumers in the context of later losses, or the other way round, the immediate benefits should be sacrificed, assuming that the limitations accepted will bring desirable behaviors and benefits to consumers in the future. In such cases it is less the law and more the goals of competition policy adopted by antitrust authorities that has a deciding voice. Taking into account the socio-economic context, the antitrust authority must decide whether it trusts market forces and development and thus chooses the assessment of a particular practice from the longer perspective, or whether it opts for short term goals, with allocative and productive efficiency not necessarily being its guide. In such a case, it would assess a particular practice as reprehensive, considering its current effects to be harmful to the market and consumers.
This kind of situation is demonstrated by the case of Microsoft, investigated by the US and EU antitrust authorities. The US Department of Justice and the European Commission accused Microsoft of abusing its market dominant position by integrating the sale of its basic product, Windows OS, exclusively with its application (Media Player in Europe and Internet Explorer in the EU and the USA). The antitrust proceedings conducted over several years on both sides of the Atlantic proved to be different in terms of the outcomes. The difference in the perception of Microsoft’s practice of integrating its operating system Windows for personal computers with the company’s other software was caused by a different assessment of the effects of Microsoft’s sales model designed for the products offered to the PC manufacturers and their users, despite the fact that the US and EU antitrust authorities applied the same standard in their assessment – consumer welfare. The Commission investigated mainly the aspects relating to the static efficiency while the American institutions, largely the courts, eventually supported effects resulting from the dynamic efficiency argument.
In its assessment of the integrated sales model of Microsoft’s products (market-dominant operating system Windows together with Media Player and Internet Explorer), the Commission classified it as a practice prohibited under Art. 102 TFEU. In issuing its decision in 2004 on the tying of Windows OS with Media Player, and in January 2009 on the sale of Windows OS together with Internet Explorer, the Commission referred to the baseline ruling of the European Court of Justice (ECJ) in the Hoffman-LaRoche case5. In its decision, the ECJ contended that, pursuant to Art. 102 TFEU, a prohibited conduct takes place when an undertaking holding a dominant position deprives clients of the opportunity to choose freely their own source of purchase while blocking access of other producers to the market by directly or indirectly tying its clients in that they are compelled to purchase products from the dominant undertaking. In 2007, this position was confirmed by the Court of First Instance (CFI) considering Microsoft’s appeal against the Commission’s decision of 2004. The CFI’s ruling established unequivocally that the tying of Media Player with the Windows PC operating system constituted an abuse of the dominant position on the market of PC operating systems6. Thus, the Commission did not entertain any more doubts when it came to the second case and decided that Microsoft abused its position by bundling Windows OS with Internet Explorer. In its Statement of Objections sent to Microsoft in January 2009, the Commission argued that Microsoft, having a 90% share of the PC operating system market, distorted competition by tying and protected its web browser Internet Explorer from other web browsers produced by competitors, which slowed the pace of innovation and hampered quality of products bought by consumers. The Commission drew a particular attention in its objections to the fact that with Internet Explorer being so wide-spread, an artificial incentive was created for suppliers and designers of computer applications to design those programs in such a way as to make them in the first place compatible with Internet Explorer, which weakened competition and innovation within the services provided to consumers7.
The Commission certainly followed the standard of consumer welfare in its first as well as the second case brought against Microsoft. However, in drawing on the potential of this standard, the Commission considered mainly the aspects of economic efficiency (allocative) resulting from the structure of the market, that is, a strong and dominant position of Microsoft on the market of PC operating systems and barriers to entry created by the tying model
5 ECJ judgment of 13.02.1979, Case 85/76 Hoffman – La Roche v Commission, ECLI:EU:C:1979:36.
6 CFI judgment of 17.09.2007, Case T-201/04 Microsoft v Commission, ECLI:EU:T:2007:289. 7 European Commission, Press Release: Commission confirms sending a Statement of
launched by Microsoft. According to the Commission’s assessment, in this way Microsoft strengthened its dominant position, generating negative effects for innovation within the market of computer software, and thus also generating negative outcomes for the users of personal computers. Yet, the Commission traced back these negative effects for dynamic efficiency, which is embodied in innovation, to structural factors, disregarding the potential arising for dynamic efficiency from the tying itself within the computer software industry. Playing down the aspects of dynamic efficiency contained in this kind of sales model within the IT industry is what makes it different from the American antitrust authorities.
The American Department of Justice began its battle against Microsoft earlier than Europe, already in 1998. In the first years of its antitrust proceedings, the Justice Department interpreted market implications of the operations of the market leader of the PC operating systems in the same manner as the Commission.
But less than 10 years from considering breaking up Microsoft, the U.S. antitrust authorities radically revised their initial legal judgment with respect to Microsoft’s bundling Windows OS with Internet Explorer, seeing it as having a positive impact on economic efficiency through the development of Microsoft’s innovation capabilities in the long run and economic benefits which consumers receive over a short period. In President G. Bush’s administration, Microsoft found a strong ally in cases it faced outside the United States. In 2004, the Department of Justice expressed critical opinion on the punishment of Microsoft by the EU for including Media Player in its Windows operating system. In December 2005 the South Korean antitrust regulator was criticized when it prohibited the bundling of the Microsoft products (Media Player and Windows OS) and fined Microsoft USD 31 million. In the letter addressed to the Korean Fair Trade Commission, the US Department of Justice wrote that antitrust policy should protect competition and not competitors and should avoid cooling off innovation and competition also when it pertained to dominant undertakings. Moreover, the regulator should eschew trying to replace the market with its own judgments in that it was now the regulator determining how products should be made available to consumers (Ponsold and David, 2007, p. 422).
The disparities present in the application of competition law in the two key world centers of its enforcement are therefore quite striking. Two identical cases and two different positions traced back to the same phenomenon, i.e. the implications for innovation and the interpretation of consumer benefits obtained from these innovations. How it came to that will be the subject of further analyses.