Tying Law in the European Union: Theory and Application Doctoral Thesis Doctorate in Philosophy (Law) Matthew Jonathan Cole September 2014 I Abstract This research investigates the theoretical foundations of EU competition tying law. While tying prohibitions have existed in the EEC Treaty since 1957 the theoretical foundations of tying are not well understood. This thesis provides crucial insight into the theory and theoretical validity of tying law. This thesis focuses on answering three questions in relation to tying: One, what was the original economic theory underlying the prohibition on tying? Two, how has this changed and on what economic principles is tying law currently based? Three, are these principles appropriately aligned with the current state of economic thinking? In order to answer these three questions this thesis considers three leading schools of thought in competition law (Ordoliberalism, the Chicago School of antitrust analysis and post-Chicago antitrust analysis) before analysing the jurisprudence of the EU Commission and courts and establishing which theory forms the foundation of EU tying law. This research makes an interdisciplinary contribution through the use of both legal-historical analysis and legal-economic analysis. This yields important results on the historical development of tying law in Europe and also provides an economic analysis of the validity of EU law, assessing whether the aims of the law are economically valid and effectively applied. Where there are failures in the application of the law, normative proposals are given in order to demonstrate how the law and its application can be improved. The result of this analysis is to establish two distinct periods of theoretical influence (the author calls these the mono- and di-theoretical periods). A novel analysis of the tying decisions made in the software market is also presented and a new theory of foreclosure proposed that explains the decisions made in that market. II DECLARATION This work has not been submitted in substance for any other degree or award at this or any other university or place of learning, nor is being submitted concurrently in candidature for any degree or other award. Signed ………………………………………… (candidate) Date ………………………… STATEMENT 1 This thesis is being submitted in partial fulfilment of the requirements for the degree of PhD Signed………………………………………… (candidate) Date ………………………… STATEMENT 2 This thesis is the result of my own independent work/investigation, except where otherwise stated. Other sources are acknowledged by explicit references. The views expressed are my own. Signed………………………………………… (candidate) Date ………………………… STATEMENT 3 I hereby give consent for my thesis, if accepted, to be available for photocopying and for inter-library loan, and for the title and summary to be made available to outside organisations. Signed………………………………………… (candidate) Date ………………………… STATEMENT 4: PREVIOUSLY APPROVED BAR ON ACCESS I hereby give consent for my thesis, if accepted, to be available for photocopying and for inter-library loans after expiry of a bar on access previously approved by the Academic Standards & Quality Committee. Signed………………………………………… (candidate) Date ………………………… III Table of Contents Introduction ...................................................................................................... 1 Chapter One: Ordoliberalism and its Influence on EU Tying Law 1.0 Introduction .......................................................................................... 12 2.0 The historical context of Ordoliberalism: the Birth of Ordoliberalism ... 15 3.0 General principles of Ordoliberalism .................................................... 18 3.1. Economic power ......................................................................... 18 3.2. Competition ................................................................................ 18 3.3. The basis of economics .............................................................. 20 3.4. Economic Constitution ................................................................ 22 3.5. The independent monopoly office .............................................. 22 4.0 Ordoliberal influence in Germany ......................................................... 24 4.1. Leading personalities in the implementation of Ordoliberalism in Germany .................................................................................................... 26 5.0 Tying law in the German legal system: the historical development ...... 28 6.0 Ordoliberal theory’s transition from German law to the EU competition law 31 6.1. Evidence in support of the Ordoliberal influence ............................... 34 6.2. The involvement of Ordoliberals in the Treaty negotiations .............. 34 6.3. German Research ............................................................................ 35 6.4. Memoirs ............................................................................................ 36 6.5. Broader European research .............................................................. 38 7.0 Conclusion ........................................................................................... 40 Chapter Two: The Chicago School of Antitrust Analysis 1.0 Introduction .......................................................................................... 43 2.0 Historical Context and Development 1880-1950 .................................. 46 2.1. Historical Context .............................................................................. 46 2.2. The Harvard School of Antitrust Analysis ......................................... 48 2.3. The Origin of the Chicago School of Antitrust Analysis ..................... 49 3.0 Substantive Elements of the Chicago School of Thought .................... 51 3.1. The Purpose of Antitrust Law ............................................................ 53 3.2. Barriers to Entry ................................................................................ 54 3.3. Cartels and Price Fixing .................................................................... 54 3.4. Resale Price Maintenance ................................................................ 55 3.5. Predatory Pricing .............................................................................. 56 IV 3.6. Vertical Integration ............................................................................ 57 3.7. Tying ................................................................................................. 57 4.0 Criticism of the Chicago School of Antitrust Analysis ........................... 59 4.1. Barriers to Entry ................................................................................ 59 4.2. Challenges to the Chicago School .................................................... 63 5.0 Conclusion ........................................................................................... 66 Chapter Three: Post-Chicago Antitrust Analysis 1.0. Introduction .......................................................................................... 69 1.1. The shifting influence from Chicago to post-Chicago ........................ 70 1.2. Challenging the principles of the Chicago School ............................. 71 2.0 General principles of Post-Chicago analysis ........................................ 72 2.1 The Post Chicago method of investigation........................................ 72 2.2 The use of game theory in predicting firms’ behaviour ..................... 73 2.3 The measure of welfare .................................................................... 74 2.4 Cartels .............................................................................................. 76 2.5 Predatory pricing ............................................................................... 76 3.0 Tying theories ...................................................................................... 78 3.1 Whinston’s model 1990 ........................................................................ 78 3.2 Choi and Stefanadis model 2001 ......................................................... 79 3.3 Nalebuff model 2005 ............................................................................ 80 3.4 Carlton and Waldman model 2002 ....................................................... 80 3.5 Evans and Salinger model 2005 ........................................................... 83 4.0 Criticism of Post-Chicago ..................................................................... 84 4.1 Concerns about government intervention ......................................... 84 4.2 Prevalence of harm and consistency of approach ............................ 85 4.3 The ability of the courts to administer post-Chicago principles ......... 86 5.0 How should tying be treated by the courts? ......................................... 90 6.0 Application in EU competition law ........................................................ 95 7.0 Conclusion ........................................................................................... 96 Chapter Four: The EU Approach to Tying: The mono-theoretical period 1.0 Introduction .......................................................................................... 99 2.0 EU Tying Law 1957-2004 ................................................................... 102 3.0 Ordoliberalism in the Approach to Tying: Customer Freedom ........... 107 3.1. The significance of the mono-theoretical period ............................. 107 V 3.2. EU Tying Commission