As-Efficient Competitors: an analysis of the developing role for these legal creatures in assessing exclusionary conduct

I. Introduction

In August 2024, the European Commission (the “Commission”) published draft Guidelines on exclusionary abuses of dominance under Article 102 of the Treaty on the Functioning of the European Union (“Article 102”)[1]. This followed revisions to the Commission’s 2008 Guidance on enforcement priorities[2] (the “2008 Guidance”) and accompanying Policy Brief published in March 2023.

The Guidelines, on which the Commission is currently consulting, seek to reflect the EU Courts' jurisprudence on exclusionary abuses, and the Commission’s experience of the enforcement of Article 102[3]. The intention is that, once adopted, the Guidelines will improve legal certainty and result in consistent enforcement to the benefit of consumers, businesses, national competition authorities and courts[4]. As the European Competition Network (“ECN”)[5] put it in its recent joint statement[6], the Commission’s initiative to adopt guidelines is premised on the recognition that Article 102 is a guardrail against the distortion of effective competition which includes many types of behaviour, and that “a given conduct’s capability to produce exclusionary effects can be demonstrated by means of a variety of qualitative and quantitative tools, depending on the specific behaviour and circumstances at hand, in line with EU Courts’ case law”.[7] In that context, through the Guidelines, the Commission advocates for “a dynamic and workable effect-based approach to abuse of dominance”.[8]

Among the various methods of assessing abuse in Article 102 cases, the concept of the exclusion of an “as-efficient competitor” (“AEC”) appeared in the original 2008 Guidance and has featured in a number of EU cases. In those cases, the EU Courts have considered various quantitative tests which have in common the aim of assessing whether the conduct complained of is capable of causing anti-competitive, exclusionary effects, by reference to a hypothetical competitor that is as efficient as the dominant undertaking (commonly referred to as AEC tests). In essence, an AEC test involves an analysis of the price level charged by the dominant undertaking as a function of its costs, with the aim of assessing (i) whether a hypothetical AEC could profitably compete against the dominant undertaking in the circumstances; and thus (ii) whether the dominant undertaking’s pricing is potentially abusive[9].

The application of an AEC test is not legally required to prove an abuse[10], and its relevance and usefulness are dependent on the specific facts and evidence (including economic evidence) in each case. The Commission is, however, required to engage with a dominant undertaking’s analysis if the undertaking adduces evidence that the conduct in question is not capable of producing anticompetitive effects by reference to an AEC.[11] Accordingly, the AEC test continues to be considered by the EU courts where it is engaged by the proceedings in question, most recently in Intel, Google Shopping and Google AdSense. Given its variable application in EU jurisprudence, the AEC test is also a key theme in the policy debate around a workable framework for the enforcement of Article 102.

In this article, we examine the extent to which the EU Courts have endorsed the use of the AEC test in the assessment of exclusionary conduct, and the circumstances in which it is most helpful. Section II describes the use of the test in predatory pricing and margin squeeze cases. Section III examines the expansion of the test to rebates, where it was recognised by both the 2008 Guidance and the case law as a potentially useful tool, albeit not a required one, depending on the wider factual context of the case. In Section IV, we analyse recent cases where the AEC framework has been considered unhelpful given the specific characteristics of the conduct and/or the markets in question, and how the Commission has sought to reflect that recent enforcement experience in its revised Guidance and draft Guidelines. Finally, Section V offers some brief concluding remarks on the expected future role of the AEC test in the enforcement of Article 102.

II. AEC as a prominent tool in predatory pricing and margin squeeze cases

The AEC test first emerged as a so-called “price-cost” comparison test in the context of predatory pricing. The origins of the test can be traced back to predatory pricing cases in the 70s in the US and the prevalent economic literature at the time.[12]

In the EU, such a price-cost test was first applied in the AKZO[13] predatory pricing case in 1991, where the dominant undertaking had reduced its prices in retaliation against a competitor’s attempted expansion. The European Court of Justice (“ECJ”) upheld the Commission’s finding of abuse, stating that not all price competition was legitimate and establishing the principles that: (i) prices below Average Variable Costs (AVC)[14] are deemed abusive and (ii) prices above AVC but below Average Total Costs (ATC)[15] can be abusive where there is evidence of an intention on the part of the dominant firm to eliminate a competitor.[16] The rationale behind this principle was the concern that “[s]uch prices can drive from the market undertakings which are perhaps as efficient as the dominant undertaking but which, because of their smaller financial resources, are incapable of withstanding the competition waged against them.”[17] (emphasis added). The application of this test in a predatory pricing context has since remained consistent in the case law, an example being the Post Danmark I decision.[18]

The test has also been applied in margin squeeze cases, where the concern as to the effect of the conduct is similar to cases involving predatory pricing.[19] As summarised in the court’s judgment in Deutsche Telekom: “[…]such a test can establish whether [Deutsche Telekom] would itself have been able to offer its retail services to end-users otherwise than at a loss if it had first been obliged to pay its own wholesale prices [..], it was suitable for determining whether the appellant’s pricing practices had an exclusionary effect on competitors by squeezing their margins”.[20] This passage has been cited in subsequent case law on margin squeeze, including TeliaSonera.[21]

Consistent with the approach of the Courts both before and after its publication, the Commission’s original 2008 Guidance[22] discusses the AEC test in relation to price-based abuses, stating that: “the Commission will normally only intervene where the conduct concerned has already been or is capable of hampering competition from competitors which are considered to be as efficient as the dominant undertaking”.[23] In this way, and in respect of pricing conduct, the Guidance made use of the concept of foreclosure of AECs as a proxy to identify anticompetitive effects warranting intervention. It stated that “[i]n order to determine whether even a hypothetical competitor as efficient as the dominant undertaking would be likely to be foreclosed by the conduct in question, the Commission will examine economic data relating to cost and sales prices, and in particular whether the dominant undertaking is engaging in below-cost pricing”.

However, the Guidance went on to recognise that, even in the context of price-based abuses, “[…] in certain circumstances a less efficient competitor may also exert a constraint which should be taken into account when considering whether particular price-based conduct leads to anti-competitive foreclosure” and that “[t]he Commission will take a dynamic view of that constraint, given that in the absence of an abusive practice such a competitor may benefit from demand-related advantages, such as network and learning effects, which will tend to enhance its efficiency.”[24] 

Based on enforcement experience since the 2008 Guidance, the Commission has now revised the above guidance and further clarified the scope of application of the AEC framework in pricing (as well as non-pricing) abuses, as we explore further below.

III. Rebates and exclusivity obligations

The ECJ initially adopted a per se approach to exclusivity agreements and loyalty rebates: in its Hoffmann-La Roche[25] decision in 1979, it held that the firm had abused its dominant position both by entering into exclusive purchasing agreements with some of its customers, and by offering others rebates conditional upon ‘fidelity’[26], on the basis that it was simply unlawful to require a supplier to obtain all or most of its requirements from the dominant firm.[27]

Hoffmann-La Roche was heavily criticised for its formalistic approach[28] and the following decades saw a shift toward a more economic, effects-based approach to enforcement. Reflecting that shift, the 2008 Guidance contained a separate section on “exclusive dealing” (including both exclusive purchasing and conditional rebates) and set out the factors to be taken into account by the Commission in assessing such conduct. In relation to conditional rebates (but not exclusive purchasing obligations), paragraph 41 mentions the AEC test as a potentially relevant factor for consideration: “[…] the Commission intends to investigate, to the extent that the data are available and reliable, whether the rebate system is capable of hindering expansion or entry even by competitors that are equally efficient by making it more difficult for them to supply part of the requirements of individual customers. In this context the Commission will estimate what price a competitor would have to offer in order to compensate the customer for the loss of the conditional rebate if the latter would switch part of its demand (‘the relevant range’) away from the dominant undertaking.” 

The case law on rebates following the 2008 Guidance reflects this approach. In Post Danmark II[29] (which was a preliminary ruling), the ECJ ruled that the AEC test had been “specifically applied […] to low-pricing practices in the form of selective prices or predatory prices”, and that there was no obligation to apply it in the context of rebates, but that its application was also not excluded in principle.[30] It went on to add that, in situations characterised by the holding by the dominant undertaking of “a very large market share and by structural advantages conferred, inter alia, by that undertaking’s statutory monopoly” applying the AEC test “is of no relevance inasmuch as the structure of the market makes the emergence of an as-efficient competitor practically impossible.” Further, where access to the relevant market is “protected by high barriers”, the presence of a less efficient competitor “might contribute to intensifying the competitive pressure on that market and, therefore, to exerting a constraint on the conduct of the dominant undertaking.” The Court concluded that, in general, the AEC test must be regarded “as one tool amongst others for the purposes of assessing whether there is an abuse of a dominant position in the context of a rebate scheme.”[31]

As foreshadowed in Post Danmark II, there have been cases concerning rebates where the AEC test has been found to be relevant by the EU Courts. In its 2009 decision in Intel[32], the Commission found that the company had infringed Article 102 by inter alia granting rebates to certain computer manufacturers on the condition that they would buy all or most of their CPUs from Intel. It concluded that the rebates were capable of anticompetitive foreclosure because an as-efficient competitor would have had to set its prices below AAC. In its 2017 judgment on appeal, the ECJ “further clarified” the case law and held that in cases where the undertaking concerned submits, on the basis of supporting evidence, that its conduct was not capable of producing the alleged foreclosure effects, the Commission is required to analyse various factors, including the possible existence of a strategy aiming to exclude AECs from the market.[33]

Other rebates and exclusivity cases have followed, including in particular Google Android[34] and Unilever[35], which, in summary, confirm that: (i) a competition authority must engage with and test the probative value of an AEC analysis to the extent that such analysis is submitted by the dominant undertaking in question; (ii) the AEC test is otherwise only one of a number of methods for assessing whether a practice is capable of producing exclusionary effects, which “takes into consideration only price competition”; and (iii) the test may “be inappropriate in particular in the case of certain non-pricing practices, such as a refusal to supply, or where the relevant market is protected by significant barriers”.[36]

The recent General Court judgment in Google AdSense[37] adopts the above principles developed in Unilever and illustrates how they may apply in a context of exclusivity arrangements covering a large share of markets characterised by significant barriers to entry. AdSense concerned exclusivity, placement and prior authorisation clauses in Google’s contracts with third-party websites which prevented Google's competitors from placing their search adverts on those websites. In relation to the exclusivity clause, Google argued that the Commission failed to prove that an AEC could not have emerged on the market for online search advertising intermediation, or that such a competitor was capable of being excluded from that market. The Court ruled that, in circumstances where Google had not adduced a proper AEC analysis based on the AEC test within the meaning of the case law at the administrative stage, there was no legal obligation requiring a finding of abuse to be based on the AEC test, and the Commission could demonstrate the capability of the clause in question to produce a foreclosure effect by relying on several other relevant elements, such as the market coverage of the clause and the barriers to entry and expansion in the market including in the form of network effects.[38]

IV. Other types of conduct and markets

The history of the development in EU jurisprudence of the AEC test indicates that the EU Courts have, over the years, adopted a dynamic approach to the test and its relevance by reference to the specific conduct and facts in any given case. Some non-pricing abuses will concern practices where AECs are irrelevant due to the structure of the market under consideration. With its 2023 revisions to the 2008 Guidance and accompanying Policy Brief, and more recently in the draft Guidelines, the Commission has sought to reflect the flexible approach to the enforcement of Article 102 which emerges from the case law.

In the Policy Brief, the Commission summarises the position as follows: “[t]he Union Courts have also recognised first, that the notion of “as-efficient” has to be interpreted in a broad sense, and second, that, in certain instances, genuine competition may also come from undertakings that are less efficient than the dominant firm […] That may be the case in particular in markets where the emergence of as-efficient competitors may not be possible because of the “structure of the market” or where the relevant market is protected by significant barriers.” The Commission further refers to digital markets as an example of such markets, where economies of scale or network effects mean that “market challengers may not be expected to be able to achieve the same or even a similar cost structure as the incumbent”, such that “mandating evidence of foreclosure of as-efficient competitors in these scenarios would likely lead to under-enforcement”.

In accordance with the spirit of the Policy Brief, paragraphs 23 and 24 of the 2008 Guidance (referenced above in Section II) were softened to indicate that, even in pricing abuses, the Commission will now ‘generally’ (as opposed to ‘normally’) intervene where the conduct concerned has already been or is capable of hampering competition from AECs. The draft Guidelines likewise give prominence to a “price-cost” test in the context of margin squeezes, but otherwise characterises it as one of a number of possible metrics the Commission might use or, in some cases, as “not appropriate”.[39] 

The ECJ’s analysis in its recent judgment in Google Shopping[40]demonstrates an example of where the AEC framework will not be appropriate, such that the assessment of anticompetitive foreclosure must instead look at the characteristics of the market/sector in question. This was a self-preferencing case concerning the more favourable positioning and display which Google reserved, in the pages of its general search engine, for its own comparison shopping service. Given that a comparison shopping service’s ability to compete depended on traffic, the Commission found that this discriminatory conduct on Google’s part had had a significant impact on competition; the conduct had enabled Google to redirect, in favour of its own comparison shopping service, a large proportion of traffic previously existing between Google’s general results pages and comparison shopping services belonging to its competitors, without the latter being able to compensate for that loss of traffic by using other sources of traffic. On Google’s appeal of the Decision, the General Court found that an AEC test was not mandatory in the context of Article 102 and was irrelevant on the facts of the case, because it would not have been possible for the Commission to obtain objective and reliable results concerning the efficiency of Google’s competitors in the light of the specific conditions of the market in question[41].

The ECJ upheld the General Court’s judgment on this point. In so doing, it relied on the findings of the ECJ in European Superleague that “[…] conduct may be categorised as ‘abuse of a dominant position’ not only where it has the actual or potential effect of restricting competition on the merits by excluding equally efficient competing undertakings from the market(s) concerned, but also where it has been proven to have the actual or potential effect – or even the object – of impeding potentially competing undertakings at an earlier stage, through the placing of obstacles to entry or the use of other blocking measures or other means different from those which govern competition on the merits, from even entering that or those market(s) and, in so doing, preventing the growth of competition therein to the detriment of consumers, by limiting production, product or alternative service development or innovation”.[42] On that basis, the ECJ concluded that the relevant factual circumstances for the assessment also include those that concern the market(s)in question or the functioning of competition on those market(s), as well as the characteristics of the sector in question.[43] 

These findings appear to be consistent with the view expressed by the Commission in the Policy Brief in relation to the application of Article 102 in digital markets that “[i]n such fast-moving markets, often featuring strong network effects and “winner-takes-all” dynamics, it is paramount to ensure an effective and swift enforcement of Article 102 TFEU to intervene before tipping occurs and entrenched market positions are created.”[44]

V. Concluding remarks

In conclusion, there appears to be alignment across the case law of the EU Courts, and between the position of the Courts and the policy objectives of the Commission. Whilst it is not mandatory, the AEC test is an important tool in the assessment of conduct under Article 102, provided that its relevance and application are considered against the specific facts and the economic reality within which the conduct takes place. The jurisprudence suggests that there is a spectrum, with the ‘classic’ price abuses of predatory pricing and margin squeeze where the AEC test is well suited at one end, and at the other end non-price abuses on markets characterised by strong barriers to entry, where it is less helpful or even irrelevant. The final Guidelines are due to be published in 2025 – which can be expected to take into account the Courts’ most recent jurisprudence in the Google cases and Intel and represent a useful opportunity for the Commission to add practical guidance about the application of the AEC test in the particular facts and circumstances of today’s marketplaces, and the role that it expects the test will play in enforcement in future cases.

*Ginevra Bicciolo and Lisa Amrani are Associates and Simon Bishop and Luke Streatfield are Partners in London.

Footnotes

[1] Exclusionary abuses restrict fair competition, and can include refusals to supply, predatory pricing, exclusive dealing, margin squeeze, and certain forms of tying, amongst others.
[2] Communication from the Commission — Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings (2009/C 45/02).
[3] Note the Guidelines will remain subject and are without prejudice to the interpretation of Article 102 by the EU Courts – see paragraph 9 of the draft Guidelines.
[4] See the Commission’s press release ‘Commission announces Guidelines on exclusionary abuses and amends Guidance on enforcement priorities’, available at https://ec.europa.eu/commission/presscorner/detail/en/ip_23_1911.
[5] The Commission and the national competition authorities of the EU Member States cooperate with each other through the ECN. The ECN provides the Commission and the national authorities with a forum for the discussion and coordination of individual cases as well as general issues EU competition law.
[6] Available at e40591c8-bdff-4a56-be25-0b44782c0d85_en (europa.eu)
[7] Ibid.
[8] Commission, Policy Brief accompanying the Commission’s call for evidence on the adoption of the Guidelines, available at https://competition-policy.ec.europa.eu/document/download/40413680-4eda-4ba0-96b1-e3e9d4e22106_en?filename=kdak23001enn_competition_policy_brief_1_2023_Article102_0.pdf.
[9] The broad parameters of such a test are outlined in the ECJ’s judgment in Case C-680/20 Unilever at [56], as reaffirmed by the General Court judgment in CaseT‑334/19 - Google AdSense at [660]: “[The AEC] concept thus refers, in practice, to various tests which have in common the aim of assessing the ability of a practice to produce anticompetitive exclusionary effects by reference to the ability of a hypothetical competitor of the undertaking in a dominant position, which is as efficient as the dominant undertaking in terms of cost structure, to offer customers a rate which is sufficiently advantageous to encourage them to switch supplier, despite the disadvantages caused, without that causing that competitor to incur losses. That ability is generally determined in the light of the cost structure of the undertaking in a dominant position itself.”
[10] See the latest affirmation of this in the ECJ’s judgment in Case C-48/22 P - Google Shopping, at [264].
[11] See the latest affirmation of this in the ECJ’s judgment in Case C-240/22 P - Intel, at [144].
[12] The test was first proposed by Areeda and Turner in 1975 (Phillip Areeda and Donald F. Turner, ‘Predatory Pricing and Related Practices Under Section 2 of The Sherman Act’ (1975) 88(4) Harvard Law Review 697) and quickly adopted by the US courts (see for instance on the topic: Nicola Giocoli, ‘Games judges don’t play: predatory pricing and strategic reasoning in US antitrust’ (2013) 21 Supreme Court Economic Review 271).
[13] Case C-62/86.
[14] A firm’s AVC is calculated by dividing all its variable costs by the total of its actual output. This calculation indicates the average cost of each extra unit of output.
[15] A firm’s ATC is calculated by dividing both its variable costs and its fixed costs by the total of its output. It will therefore be higher than its average variable cost. As regards the types of costs likely to be taken into account by the Commission and national competition authorities today, paragraph 26 of the 2008 Guidance explains that the cost benchmarks that the Commission is likely to use are average avoidable cost (AAC) and long-run average incremental cost (LRAIC). AAC only includes fixed costs if incurred during the period under examination, while LRAIC also includes product specific fixed costs made before the period in which allegedly abusive conduct took place. The use of AAC may not be appropriate as a benchmark in industries which feature significant fixed costs as it is not plausible that fixed costs made before the period of the abuse would not need to be at least in part recovered.
[16] AKZO, at [71-72].
[17] Ibid. The same principle was applied a few years later in Tetra Pak II, where Tetra Pak was found to have sold non-aseptic cartons at a loss, which it was able to subsidise from its substantial profits on the market for aseptic cartons, where it had virtually no competition.
[18] Case C-209/10, EU:C:2012:172.
[19] See for example Industrie des poudres sphériques Industrie des Poudres Sphériques v. Commission, Case T-5/97.
[20] See [199-201] of Deutsche Telekom, which cites [72] of AKZO.
[21] Case C-52/09. See also Telefonica and Slovak Telekom which followed in the same vein in the following years.
[22] Although not a statement of the law of Article 102 and not binding on national courts, competition authorities or the EU Courts, the Guidance is still influential and a “useful point of reference”. On the non-binding effect on national courts and competition authorities see Post Danmark II at [52]. Paragraph 3 of the 2008 Guidance states that the Guidance is “without prejudice to the interpretation of Article [102] by the Court of Justice or the Court of First Instance of the European Communities”. However, Advocate General Mazak noted in TeliaSonera that it does provide a “useful point of reference” for the application of Article 102 to exclusionary behaviour.
[23] 2008 Guidance at [23] (citing AKZO [72]).
[24] At [24].
[25] Case 85/76.
[26] Note that the Court had already found in Suiker Unie (Joined cases 40 to 48, 50, 54 to 56, 111, 113 and 114-73) in 1975 that a dominant firm offering loyalty rebates to customers that purchased exclusively form was foreclosing competition in violation of Article 102.
[27] At [89].
[28] See e.g. Ridyard ‘Exclusionary Pricing and Price Discrimination Abuses under Article 82—An Economic Analysis’ (2002) 19 ECLR 286; Temple Lang and O’Donoghue ‘Defining Legitimate Competition: How to Clarify Pricing Abuses under Article 82 EC’ (2002) 26 Fordham International Law Journal 83; Kallaugher and Sher ‘Rebates Revisited: Anti-Competitive Effects and Exclusionary Abuse under Article 82’ (2004) 21 ECLR 263.
[29] Case C-23/14, ECJ judgment of 6 October 2015.
[30] Ibid. at [55-58].
[31] Ibid. at [59-61]. The ECJ’s judgment in Post-Danmark II was also very recently relied on by the UK Competition Appeal Tribunal in its certification judgment in Stopford v Google [2024] CAT 67 for the proposition that (i) an analysis in terms of an AEC does not work when the market structure prevents the emergence of an AEC at all, and (ii) less efficient competitors may have a beneficial effect on competition (see paragraph 28 of the judgment).
[32] Case COMP/C-3/37.990.
[33] Case C-413/14 P, ECJ judgment of 6 September 2017 at [138-139]. Note that the very recent, further judgment of the ECJ in Intel (judgment of 24 October 2024 in Case C‑240/22 P), which follows the referral of the case back to the General Court after the 2017 judgment, reaffirms these principles. The ECJ in this second judgment considered the quality of the evidence before it and examined the specific parameters used by the Commission in its AEC analysis, in particular the accuracy of the Commission’s calculations of the ‘disputable share’ for each hypothetical competitor of Intel, which Intel had challenged.
[34] Case T-604/18, General Court judgment of 14 September 2022.
[35] Case C-680/20, ECJ judgment of 19 January 2023.
[36] See in particular Unilever, at [57-60].
[37] Case T‑334/19, General Court judgment of 18 September 2024.
[38] Ibid. at [666].
[39] As alluded to in the introduction to this article, and for completeness, the draft Guidelines do not only concern the AEC test but a broader proposal by the Commission on the parameters for a less restrictive effects-based approach to the enforcement of Article 102. One of the key aspects of the draft Guidelines is the introduction of a presumption-based rule for certain types of conduct, including exclusivity rebates. We do not explore this further in this article but note that the draft Guidelines may require some adaptation and clarification in light of the ECJ’s latest ruling in in Intel (2024) (referred to above), which emphasises the obligation of the Commission to constructively engage with economic evidence submitted by the dominant undertaking. In particular, alignment may be needed in relation to (i) the types of cases in which a presumption of effect will apply (where the ECJ did not appear to draw a dividing line between exclusivity rebates, to which a presumption applies under the draft Guidelines, and loyalty rebates) and (ii) the scope of the Commission’s duty in cases where a presumption applies, and the nature of the burden imposed on dominant undertakings to reverse the presumption.
[40] Case C‑48/22 P, ECJ judgment of 10 September 2024.
[41] Case T‑612/17, General Court judgment of 10 November 2021. Notably, the General Court also stated at [539] that “[t]he use of that test, which involves comparing prices and costs, did not therefore make sense in the present case, since the competition issue identified was not one of pricing.”
[42] Ibid. at [167].
[43] Ibid. at [168].
[44] Policy Paper, page 2.