Category: Essential Economics for Business: Ch 09

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What do ticket resellers and parents have in common?

Examples of rent seeking in economic theory

In March 2024, two people were convicted of running a business that used dishonest and illegal methods to buy and sell tickets for popular live events such as Ed Sheeran, Lady Gaga and Little Mix concerts. Between June 2015 and December 2017, this business purchased 47 000 tickets using 127 names and 187 different e-mail addresses.

Economists refer to these actions as examples of rent seeking. However, many rent-seeking activities are not illegal.

What is rent seeking?

Rent seeking in economic theory refers to costly actions taken by people (i.e. they involve effort and expertise) to try to gain a greater share of a given level of profit /surplus. These actions do not generate any extra surplus or value for society and typically involve people trying to game or manipulate a situation or system for their own personal gain.

In many cases, the opportunity cost of these actions can be considerable. In this case, the opportunity cost is the surplus for society that could have been gained if this effort/expertise had been used to carry out more productive tasks.

A widely cited example of rent seeking is where firms exert time and effort to try to influence government policy through lobbying. Most lobbying activities in the UK are not illegal.

Non-price allocation

When prices are set below the market-clearing rate, by either the government or a private organisation, the quantity demanded of the good/service will exceed the quantity supplied. Therefore, non-price allocation must play a role. In other words, some method other than willingness to pay the price, must be used to determine which consumers receive the goods.

In some instances, such as visits to the GP or places at state schools, the good or service has a zero monetary price. In these cases. non-price allocation methods completely replace the role of the price in determining which consumers obtain the goods/services.

In other examples, a positive monetary price is set, but below the market-clearing rate. In these cases, the price partly determines who get the good/service (i.e. people must be willing to pay the non-market-clearing price), but non-price allocation also plays a role. The further below the market-clearing level the price is set, the greater the potential role for non-price methods.

Some common methods of non-price allocation include:

  • First-come first served. This typically results in some type of queueing, either in person or online (a virtual queue).
  • A random selection process. For example, some goods/services are allocated via a lottery, with names of consumers being randomly drawn.
  • The government or other public bodies in charge of allocating the good develop a set of rules to determine which consumers/people get the good. For example, when allocating places at popular state schools, priority is often given to children who live close to the school (i.e. in the catchment area) or who live in families with certain religious beliefs.

Examples of rent seeking

When non-price methods of allocation are implemented, can consumers engage in activities that increase their chances of getting hold of the good/service? Can they manipulate the system for their own advantage and gain a greater share of any surplus? This is rent seeking.

A survey carried out in January 2025 provides some interesting evidence of rent-seeking actions taken by parents to try to secure a place for their child at a popular school. Twenty-seven per cent of the respondents admitted they had tried to manipulate the system to get their child into their preferred school. Out of those who admitted attempting to manipulate the system:

  • 30 per cent registered a child at either another family member’s or friend’s address that was closer to a popular school.
  • 25 per cent exaggerated religious beliefs and attended church services to try to secure a school place.
  • 9 per cent temporarily rented a second home inside the catchment area for the school.
  • 7 per cent moved into the catchment area for the application, only to move out once their child’s place was secured.

Some of these actions may be dishonest but are not illegal.

Rent-seeking activities in the ticketing market for live events

In the primary market for tickets, prices for popular live events are often set below market-clearing levels. Therefore, non-price methods, such as first come, first served, are used to allocate the tickets. This typically results in some type of queueing. Rent-seeking activities include actions taken by consumers to increases their chances of getting nearer to the front of the queue.

If the tickets are being sold from a physical outlet (i.e. a sales kiosk), then some consumers may start queueing many hours before the kiosk opens – in some cases camping overnight. An example is the ‘The Queue’ for Wimbledon tennis matches. Rather than queueing themselves, some people might pay others to queue on their behalf.

People who are paid to queue are sometimes referred to as a ‘line stander’, ‘queue stander’, ‘line sitter’ or ‘queue professional’. Line standers offer their services via market platforms, such as TaskRabbit.

When tickets are sold online, non-market allocation includes both queuing and random selection. Typically, people have to create an account with the primary market ticketing website (Ticketmaster, See Tickets, Eventbrite or AXS) before the sale begins. Then, using this account, they can enter an online waiting room around 15 minutes before the tickets are available to purchase. There is thus an element of first come, first served. When the sale starts, people in the waiting room are randomly allocated a place in the online queue. Once they reach the front of the online queue, the event organiser normally places limits on the number of tickets they can purchase.

What can people do to manipulate this system and so increase their chances of purchasing tickets? In other words, what are the possible rent-seeking activities? One possibility is to create multiple accounts using the details of friends/family and then join the waiting room with each of these accounts using separate devices. Professional resellers often try to use specialist software, called bots, that can create thousands of fake accounts and so significantly increase the chances of getting to the front of the queue. Once they get to the front of the queue, an account created by a bot can proceed through the purchasing process much faster than a person can. The tickets can then be sold for a profit in the uncapped secondary market via websites such as Stubhub and Viagogo.

The UK government passed a law in 2017 that made the use of bots to circumvent ticket purchase limits an illegal activity. The use of ticket bots in the EU became illegal in 2022. Primary market ticketing websites have also invested in technology that tries to detect and block the use of this type of software.

Government policy in the resale of tickets

Should the government prohibit the resale of tickets or implement a resale price cap to try to deter this rent-seeking activity?

Many economists would oppose this policy because of the benefits of the secondary market. For example, resale helps to reallocate tickets to those consumers with the highest willingness to pay. Therefore, the secondary-ticketing market can have a positive impact on allocative efficiency, but it comes at a cost – rent-seeking activities.

Research by economists published more than ten years ago found that the positive impact of the resale market on allocative efficiency outweighed the rent-seeking costs. However, developments in technology have increased the level of rent seeking in recent years, making it easier and less costly for professional resellers to purchase large amounts of tickets in the primary market. Therefore, it is possible that the rent-seeking cost of the secondary market now exceeds its positive impact on allocative efficiency. A case can thus be made for greater intervention by the government.

Recent accusations have also been made about possible rent-seeking activities by sellers in the primary ticketing market too, adding to concerns.

Some of the problems of implementing a resale price cap were discussed in a previous post: Ticket resales – is it time to introduce a price cap?

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Questions

  1. Compare and contrast the meaning of the word ‘rent’ in everyday language with its use in economic theory.
  2. Give examples of some policies that a business might lobby the government to implement. What arguments might the business make to justify each of these policies?
  3. Outline some of the non-price methods that are used to allocate health care in the UK.
  4. Draw a demand and supply diagram to illustrate the incentives for rent-seeking activities when prices are set below market-clearing levels.
  5. Outline some potential rent-seeking activities by sellers in the primary ticketing market.
  6. Discuss some of the opportunity costs of rent-seeking activity in the market for tickets.
  7. Explain why the growing use of paid line standers might increase the demand for a good/service.
  8. Explain why the percentage of tickets for popular live events purchased by professional resellers has increased in the past 10 years.
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Ticket resales – is it time to introduce a price cap?

Following the controversary over the sale of tickets for popular live events such as Taylor Swift’s Eras tour and the Oasis Live ’25 Tour, the government launched a consultation exercise in January 2025 on the resale of tickets. Titled, ‘putting fans first’, the exercise sought the views of individuals and organisations on a range of policy proposals. One of these was the implementation of a cap on the resale price of tickets.

The government is not only considering whether to implement a cap but also the level at which it might be set. The following question was included in the consultation exercise.

What is the maximum uplift that you think should be applied if ticket resales were to be subject to a price cap? Please state the reason for your selection.
 • no uplift at all
 • 10% or less
 • between 10 and 20%
 • between 20 and 30%
 • other – please state

Some platforms such as Twickets and Ticketswap already cap resale prices on their platforms at between 5 and 10 per cent above the face value of the ticket. They are, therefore, less likely to be affected by any new price regulation unless the ‘no uplift at all’ option is chosen. On other platforms, such as Viagogo and Stubhub, resellers are free to list tickets at whatever price they choose. This is often referred to as the uncapped market, and tickets for the Oasis tour with a face value of £150 were listed on these websites for £14 000. The implementation of a price cap is likely to have a big impact on this part of the resale market. The chief executive of StubHub stated in June 2025 that the business would probably have to exit the UK if a cap was introduced.

Although many fans dislike the uncapped secondary ticketing market, most economists take a more positive view. They see them as a way of facilitating mutually beneficial trade and helping to reallocate tickets to those with the highest willingness to pay. This reduces levels of allocative inefficiency/deadweight welfare loss in the market.

Economists also tend to argue against the use of price controls in competitive markets because of their negative impact on supply. If price controls reduce the available returns to sellers, they have an incentive to do something else with their time/resources i.e. switch to supplying other goods and services in markets not subject to price controls. This reduces supply in the regulated market and so could have a negative impact on consumer surplus.

What are the issues with the secondary market?

Given the benefits outlined by economists of having an uncapped secondary ticketing, why is the government considering the implementation of a price cap? One potential issue of having an uncapped secondary ticketing market is that developments in technology make it easier for professional resellers to buy very large quantities of tickets. This makes it increasingly difficult for fans who want to attend the event from being able to purchase a ticket.

Reports also suggest that professional resellers use illegal methods to both mass purchase and resell tickets. For example, to overcome any limits on sales imposed by the sellers in the primary market, some use automated software, fake IDs and multiple credit cards. Two people convicted of fraudulent trading in 2024 were found to have bought 47 000 tickets over a 212-year period, using 127 names and 187 different e-mail addresses.

Some resellers have also acted in ways that do not comply with consumer law when advertising tickets for sale. For example, not providing information such as the ticket number and other details about where the seat is located i.e. the block/area and row.

These rent seeking activities by professional resellers could outweigh the positive impact of uncapped secondary market on allocative efficiency.

Implementing a resale price cap would reduce the incentives for professional resellers to purchase large quantities of tickets and engage in these rent-seeking activities. However, in the consultation document the government recognises that the implementation of a resale price cap would be a ‘significant and complex intervention’.

An important implementation issue

To calculate the resale price cap for any live event, the original price of the ticket in the primary market needs to be known. This raises an interesting question – should the cap apply to the initial face value of the ticket or the total price the customer pays?

The face value of the ticket may only represent a proportion of the actual cost of buying a ticket because of the widespread use of drip pricing. This is the practice of applying additional fees as the consumer proceeds through the online purchasing process. These fees can sometimes add around 25 per cent and more to the price of a ticket. In the consultation document, the government suggested that the cap should apply to the face value of the ticket plus all compulsory fees.

One issue raised in the response to the consultation by the Competition and Markets Authority is that these fees are not always made clear by sellers in the primary market in a clear and transparent way. Therefore, for the policy to be effective, primary market sellers would have to make information on both ticket prices and any fees clearly and easily available. Recent changes to the law that prohibit drip pricing might help to address this issue.

The potential impact of a resale price cap on fraud

To avoid the price cap, there is a danger that increasing numbers of buyers and sellers stop using capped secondary ticket platforms, where activity is easier to observe/regulate, and switch to other non-specialist platforms where detection of illegal behaviour and enforcement of consumer law is more difficult. Examples of non-specialist platforms where sales might increasingly take place include Facebook Marketplace, Instagram Shop, X (formerly Twitter) and internet forums. With lower levels of consumer protection and the greater difficulty of detecting illegal behaviour, sales via these non-specialist platforms are more vulnerable to scams and fraud.

When referring to the impact of a resale price cap, the chief executive of StubHub argued that:

It will have a massive negative impact on consumers. It’s not like the demand is going to go away, it’s just going to move somewhere else, and that somewhere else is going to be the black market [where] consumers aren’t protected.

To test the hypothesis that price controls lead to greater incidences of fraud, one study used polling data to compare ticket fraud rates in the UK with Victoria, Australia and Ireland. In 2009, the state government of Victoria made it illegal for tickets to be resold for more than 10 per cent of their face, while the Irish government introduced the Sale of Ticket Act in 2021 that prohibited the resale of tickets above their original price. The study found that the proportion of respondents who reported being victims of ticket fraud over the previous two years was around four times higher in Victoria and Ireland than the UK. The most common sales channel where consumers experienced ticket fraud in all three countries were social media platforms.

Another example of the potential impact of the price cap in Ireland on fraud relates to the first ever regular-season NFL game that is being played in Dublin on 28 September 2025 between the Pittsburgh Steelers and the Minnesota Vikings. The online bank, Revolut, reported an 80 per cent increase in the number of ticket scams when tickets for this game went on sale.

In response to the consultation exercise, the Competition and Markets Authority backed the implementation of a resale price. It will be interesting to see if the government goes through with the measure in the next few months.

Consultation

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Questions

  1. Why might event organisers set ticket prices below the market clearing rate? Illustrate the impact of setting prices below market clearing rates on consumer, producer and total surplus in the primary market for tickets.
  2. Using a demand and supply diagram, explain how the uncapped secondary ticket market could reduce deadweight welfare loss. Discuss any assumptions you have made about the allocation of tickets among potential buyers in the primary market (i.e. sorting).
  3. Is it possible for professional resellers to continue making a profit if tickets are sold at market clearing rates in the primary market? Explain your answer.
  4. Under what circumstances would a maximum price set below the market clearing rate in a competitive market have a negative impact on consumer surplus? Draw a diagram to illustrate your answer.
  5. Using examples, explain what is meant by ‘rent seeking’ in economic theory.
    Outline some of the recent updates to the law on pricing information that businesses must show customers.
  6. What policies, other than a resale price cap, could the government introduce to try to address some of the issues with the ticketing market for live events?
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Rising UK energy prices

The UK energy regulator, Ofgem, has announced that the UK energy price cap will rise in October by an average of 2%. The energy price cap sets the maximum prices for electricity and gas that can be charged by suppliers to households. For those paying by direct debit, the maximum electricity price per kilowatt-hour (kWh) will rise from 25.73p to 26.35p, with the maximum daily standing charge rising from 51.37p to 53.68p. As far as gas is concerned, the maximum price per kWh will fall slightly from 6.33p to 6.29p, with the maximum daily standing charge rising from 29.82p to 34.03p. Ofgem estimates that this will mean that the capped cost to the average household will rise from £1720 to £1755.

The average capped cost is now much lower than the peak of £4279 from January to March 2023. This followed the huge increase in international gas prices in the aftermath of the invasion of Ukraine and the cutting off of gas supplies from Russia. Note that although the suppliers received these capped prices, average consumers’ bills were limited to £2500 from October 2022 to March 2024 under the government’s Energy Price Guarantee scheme, with suppliers receiving a subsidy from the government to make up the shortfall. But despite today’s cap being much lower than at the peak, it is still much higher than the cap of £1277 prior to Russia’s invasion of Ukraine: see Chart 1 (click here for a PowerPoint).

So is the capped price purely a reflection of the international price of gas, or is it more complicated? The picture is slightly different for gas and electricity.

Gas prices

As far as gas prices are concerned, the price does largely reflect the international price: see Chart 2 (click here for a PowerPoint).

The UK is no longer self-sufficient in gas and relies in part on imported gas, with the price determined in volatile international markets. It also has low gas storage capacity compared with most other European countries. This leaves it highly reliant on volatile global markets in periods of prolonged high demand, like a cold winter. Is such cases, the UK often has to purchase more expensive liquefied natural gas (LNG) from global suppliers.

Additionally, taxes, environmental levies and the costs of the nationwide gas distribution network contribute to the overall price for consumers. Changes in these costs affect gas prices. These are itemised below in the case of electricity.

With electricity pricing, the picture is more complex.

Electricity prices

Electricity generation costs vary considerably with the different methods. Renewable sources like wind and solar have the lowest marginal costs, while natural gas plants have the highest, although gas prices fluctuate considerably.

So how are consumer electricity prices determined? And how is the electricity price cap determined? The price cap for electricity per kWh and the daily standing charge for electricity are shown in Chart 3 (click here for a PowerPoint).

Marginal cost pricing.  The wholesale price of electricity in the UK market is set by the most expensive power source needed to meet demand on a day-by-day basis. This is typically gas. This means that even when cheaper renewables (wind, solar, hydro) or nuclear power generate most of the electricity, high gas prices can increase the cost for all electricity. The wholesale price accounts for around 41% of the retail price paid by households.

It also means that profits for low-marginal-cost producers could increase significantly when gas prices rise. To prevent such (low-carbon) suppliers making excess profits when the wholesale price is high and possibly making a loss when it is low, the actual prices that they receive is negotiated in advance and a contract is signed. These contracts are known as Contracts for Difference (CfDs). CfDs provide a fixed ‘strike price’ to low-carbon generators. The strike price is set so as to allow low-carbon generators to recoup capital costs and is thus set above the typical level of marginal cost. If the wholesale price is below the strike price, payments to generators to cover the difference are funded by amounts collected from electricity suppliers in advance using the CfD Supplier Obligation Levy. If the wholesale price is above the strike price, the difference is returned to consumers in terms of lower electricity bills.

Policy costs.  Electricity bills include an element to fund various social and environmental objectives. This element is also included in the cap. From October to December 2025, this element of the cap will be 11.3%. The money helps to subsidise low-carbon energy generation and fund energy efficiency schemes. It also funds the Warm Home Discount (WHD). In the October to December 2025 price cap, this amounted to a discount for eligible low-income and vulnerable households of £150 per annum on their electricity bills. The WHD element is included in the standing charge in the price cap. From October 2025, more generous terms will mean that the number of households receiving WHD will increase from 3.4 million to 6.1 million households. This is the main reason for the £35 increase in the cap.

Network costs.  These include the cost of building, maintaining and repairing the pipes and wires that deliver gas and electricity to homes. From October to December 2025, this element of the cap will be 22.6%.

Supplier business costs.  These include operating costs (billing, metering, office costs, etc.) and servicing debt. From October to December 2025, this element of the cap will be 15.4%.

Profit Allowance.  A small percentage is added to the price cap for energy suppliers’ profits. This is known as the Earnings Before Interest and Tax (EBIT) allowance and is around 2.4%. This has a fixed component that does not change when the overall price cap is updated and a variable component that rises or falls with changes in the cap.

Reliance on gas, low gas storage facilities, marginal cost pricing and the commitment to invest in low-carbon electricity and home heating all add to the costs of energy in the UK, making UK electricity prices among the highest in the world.

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Questions

  1. Why are the UK’s energy prices among the highest in the world?
  2. What are the arguments for and against subsidising wind power?
  3. What is the Contracts for Difference scheme in low-carbon energy. What CfDs have been awarded? Assess the desirability of the scheme.
  4. Is the capping of gas and electricity prices the best way of providing support for low-income and vulnerable consumers?
  5. How are externalities relevant in determining the optimal pricing of electricity?
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The European Commission’s latest battle with Apple – The interoperability obligation of the Digital Markets Act

The Digital Markets Act (DMA) outlines a new regulatory approach that the European Commission (EC) is taking to address concerns over the lack of competition in digital platform markets. The DMA complements existing European Union competition law and officially came into force on 1st November 2022.

In the first stage of this new regulatory approach, the EC identified ten core platform services (CPS). Examples include search engines, online social networking services, video sharing services, cloud computing services, web browsers and operating systems. These services act as important gateways for large numbers of businesses and consumers to interact with one another. They also have some important economic characteristics, such as large economies of scale and very strong network effects.

The next stage of the regulatory process was to assess which of the large established businesses should be designated as ‘gatekeepers’ of these CPS. To be judged as a gatekeeper, a business had to meet three qualitative criteria. Using quantitative thresholds as a guide to see if these qualitative criteria had been met, the following six companies were designated as gatekeepers by the EC in September 2023: Alphabet (Google’s parent company), Amazon, Apple, ByteDance (owner of TikTok), Meta (owner of Facebook) and Microsoft. Individual companies can be gatekeeper for more than one CPS. For example, Apple was judged to be a gatekeeper for both web browsers (Safari) and operating systems (iOS and iPadOS).

Rules and compliance

Once a business has been designated as a gatekeeper for one or more CPS, the DMA imposes a set of rules on its future conduct. Some of these rules refer to conduct that the business must follow, while others refer to types of behaviour that are prohibited. The EC sometimes refer to these rules as a list of “do’s” and “don’ts”.

One of the rules refers to interoperability. This is the degree to which different (a) software, (b) devices and (c) other applications can work seamlessly together (i.e. share functionality/data) without requiring any actions by the user (i.e. how compatible they are with one another).

For example, consider the degree of interoperability between the operating system of a gatekeeper, such as Apple, and other hardware/software services. One of the requirements of the DMA is for the gatekeeper to provide the same degree of interoperability for the hardware/software services provided by rival businesses as they do for similar hardware/software services they supply. This is sometimes referred to as the interoperability obligation.

Once a business is designated as a gatekeeper, it has 6 months to submit a compliance report to the EC that demonstrates how it is meeting the rules set out in the DMA. This should include descriptions of any changes the company has had to make to its conduct to meet the new requirements. Further compliance reports must then be submitted on an annual basis.

If, after assessing a compliance report, the EC suspects that a gatekeeper is still acting in ways that do not comply with the DMA, then it can launch either a non-compliance or specification procedure.

The case of Apple

Apple submitted its first compliance report on 7 March 2024. It was far less extensive than those completed by other designated gatekeepers and adopted a very different tone: it directly challenged the EC’s view that the DMA rules would have a positive impact on consumer welfare.

In September 2024, the EC launched its first two specification proceedings that focused on Apple’s compliance with the interoperability obligation.

The first of these proceedings opened a formal discussion with Apple over the interoperability between the iPhone operating system (iOS) and connected devices such as smartwatches and headphones. The proceeding identified nine features that gave the iOS greater functional compatibility with connected devices produced by Apple than with those made by other businesses. For example:

  • Only users of connected devices produced by Apple can (a) receive iOS notifications that contain images or other attachments and (b) select the iOS notifications they want to appear on the device.
  • Only users of Apple’s wireless headphones have intelligent audio switching functionality that allows them to switch automatically to the device playing the most relevant audio.
  • The Airdrop function, which enables users to share files wirelessly between devices, only works if they are both produced by Apple.
  • Only connected devices made by Apple have the functionality for high-bandwidth data transfer from an iPhone without having to rely on network or cellular connection. This is useful for gaming and AI services.

The second specification proceeding focused on the process developed by Apple to deal with requests from other businesses that wanted to develop hardware or software services that are compatible with the iOS.

On 18th December 2024, the EC informed Apple of its preliminary specification decisions and opened a consultation exercise with other interested parties about the suitability of its proposals. Once this process was completed, the EC informed Apple of its final specification decisions on 19 March 2025.

The EC’s decisions

The first decision included a set of measures that Apple must take to improve the interoperability of connected devices produced by other businesses with the iOS. The EC stated that:

The interoperability solutions for third parties will have to be equally effective to those available to Apple and must not require more cumbersome system setting or additional user friction.

The second decision outlined measures that Apple had to take to improve the process of dealing with requests for greater compatibility with the iOS. For example, it should provide outside businesses with more (a) access to technical documentation, (b) predictable timelines for the reviews and (c) timely updates.

Apple argued that being forced to introduce these measures will (a) create significant additional costs, (b) limit its ability to develop products that work seamlessly with one another and (c) lead to its having to share sensitive customer information with its rivals.

On 30th May 2025, Apple filed an appeal against the EC’s specification decisions to the General Court of the European Union. It will be interesting to see what judgment is made on this case by the General Court and the implications this has for the enforcement of the DMA.

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  1. Identifying core platform services is similar to defining relevant markets in standard competition policy but takes a more legalistic approach. Discuss some of the problems of defining a relevant market for a digital platform.
  2. Outline the three qualitative criteria and the quantitative thresholds that are used by the EC to designate a digital platform as a gatekeeper of a core platform service.
  3. Find an example of a digital platform that met the quantitative thresholds but did not meet the qualitative criteria and so was not designated as a gatekeeper.
  4. Find an example of a digital platform that did not meet the quantitative thresholds but did meet the qualitative criteria and so was designated as a gatekeeper.
  5. Interoperability is a type of conduct that is sometimes referred to as self-preferencing: i.e. behaviour by a digital platform that gives its own products/services preferential treatment over those provided by other firms that use the same platform. What other types of conduct are possible examples of self-preferencing?
  6. What is the difference between a non-compliance procedure and a specification procedure? Find some recent examples of non-compliance procedures that have been undertaken by the EC to enforce the DMA.
  7. What are the potential advantages and disadvantages for consumer welfare of the specification decisions made by the EC?
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Competition policy – the evolving approach towards firms that misuse market power

The enforcement of Article 102 of the Treaty on the Functioning of the European Union (TFEU) by the European Commission (EC) tends to focus on exclusionary abuses by firms with significant market power. Exclusionary abuses are actions that limit or prevent competition, as opposed to exploitative abuses that directly harm the consumer, such as charging high prices.

The treatment of exclusionary abuses has evolved over time. Initially, the approach towards enforcement was form-based (i.e. the nature of the abuses), but this changed when the EC produced new guidelines in 2009 which signalled a move to a more effects-based approach.

The EC plans to produce a new set of guidelines in 2025 and published a draft version in August 2024 as part of the consultation process with businesses and other stakeholders. These draft guidelines indicate a partial shift back to a form-based approach. Any moves in this direction made by the EC are likely to influence both national-level competition authorities and the courts.

The form-based approach to policy enforcement

A form-based approach to the enforcement of Article 102 assumes that certain types of business conduct are inherently anti-competitive except in very exceptional circumstances. In other words, there is a presumption that the characteristics or form of the behaviour mean that it must have a negative impact on competition and consumer welfare in virtually all real-world cases.

With a form-based approach to enforcement there is no requirement for the authorities to carry out detailed case-specific analyses of business conduct as part of an investigation. This had been the approach adopted by the EC before 2009. It is possible, however, that the same form of business conduct could have anti-competitive effects in some market situations but pro-competitive effects in others. The EC was criticised for not making enough allowance for the chances of this happening.

The effects-based approach to policy enforcement

In response to this criticism the European Union published a new set of guidelines in 2009 which signalled that the enforcement of Article 102 was moving to a more effects-based approach. The effects-based approach uses economic analysis to assess the impact of a dominant firm’s conduct on a case-by-case basis. Context-specific evidence is examined by the competition authorities to see if the behaviour effectively excludes rival businesses from the market that are just as efficient as the dominant firm.

The use of economics in this effects-based approach gradually increased over time. Initially, the analysis was predominately based on theoretical arguments, but increasingly cases included sophisticated analysis of market-specific evidence using econometric models and market simulations. This, however, led to the following issues.

  • The increasing use of complex economic analysis makes it more difficult to meet the evidentiary standards of the courts and prove a case. As the effects-based approach places a greater burden on the competition authorities to meet these evidentiary standards (i.e. provide evidence of case-specific anti-competitive effects of the conduct) it disproportionality affects their ability to prove cases.
  • Businesses with significant market power are more likely to make large profits and so have access to greater resources than government-funded competition authorities. Therefore, they will be able to employ more economic consultants with the relevant technical expertise to (a) carry out the analysis and (b) communicate the findings effectively in a court case

This led to concerns that the competition authorities were losing cases where there was strong evidence of exclusionary conduct by the dominant firm.

In response to these concerns, the EC announced in 2023 that it would be revising its 2009 guidelines to improve enforcement of Article 102.

The draft guidelines

The draft guidelines published in August 2024 split different types of potentially anti-competitive conduct by dominant firms into three categories.

The first category includes types of conduct where there is a strong presumption of anti-competitive effects: i.e. the sole purpose of the business behaviour is to restrict competition. These types of conduct are referred to as a ‘naked restriction’ and the documentation provides the following three examples:

  • making payments to customers (typically other businesses) on the condition that they cancel or postpone the launch of a product that uses inputs produced by the dominant firm’s rivals;
  • threatening to withdraw discounts offered to suppliers unless they agree to supply the dominant firm’s product in place of a similar product produced by a rival firm;
  • actively dismantling infrastructure used by a rival firm.

The guidelines indicate a form-based approach will be taken when investigating these types of conduct as the EC will not have to provide any case-specific evidence of anti-competitive effects. A business under investigation can challenge the presumption of anti-competitive effects with appropriate evidence, but the guidelines make it clear that this would only succeed in exceptional circumstances. In other words, it is highly unlikely that the conduct could ever be justified on pro-competitive grounds.

The second category of anti-competitive conduct includes actions that are also presumed to have a negative impact on competition. The presumption, however, is not as strong as with naked restrictions, so firms have a better chance of proving pro-competitive effects.

There is a form-based element towards this second category of conduct as the EC will not have to provide any initial case specific evidence of anti-competitive effects. But, if a business under investigation does submit evidence to challenge the presumption of anti-competitive effects, the EC must demonstrate that (a) it has fully assessed this evidence and (b) the evidence is insufficient to prove that the conduct does have pro-competitive effects. As part of this process, the EC can provide its own case-specific evidence. Therefore, for this second category of conduct, the initial burden of proof effectively shifts from the competition authority to the firm under investigation, making it more of a form-based approach. However, if the firm uses relevant evidence to appeal its case, the burden shifts back to the competition authority and becomes a more effects-based approach.

The third category includes types of conduct where the EC must initially provide case-specific evidence that it reduces competition. For this category of conduct, the approach towards enforcement remains the same as in the 2009 guidelines and an effects-based approach is adopted.

It will be interesting to see the extent to which the final guidelines (a) follow the approach outlined in the draft guidance and (b) influence the enforcement of Article 102 by the EC and other national-level competition authorities.

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Questions

  1. What exactly does it mean if a firm has ‘significant’ market power?
  2. What methods do competitions authorities use to assess whether a firm has a dominant market position?
  3. Explain the difference between conduct by dominant firm that is (a) an exploitative abuse of its market power and (b) an exclusionary abuse of its market power.
  4. Explain why a form-based approach towards the enforcement of competition policy is more likely to lead to Type 1 errors (false positives), whereas an effects-based approach is more likely to lead to Type 2 errors (false negatives).
  5. Provide some examples of exclusionary abuses that are not considered to be naked restrictions.
  6. Competition policy guidance documents commonly refer to ‘competition on the merits’. What is the precise meaning of this term?