Price discounts and michelin: What goes around, comes around.

University Degree Business and Administrative studies

PRICE DISCOUNTS AND MICHELIN: WHAT GOES AROUND, COMES AROUND

So, 20 years on, we now have Michelin, the sequel. Those who read the first decision may not wish to dwell too long on the second--all the same analytical short-comings are present: the failure to acknowledge complexity, the apparent lack of any real understanding of the business world, the lack of any acceptance by the Commission of the need to fine-tune its regulatory intervention in the area of competition law which cries out for it more, perhaps, than any other. The issue is not whether the main Commission decisions are right or wrong; it is the lack of analysis of the real competitive context in which the impugned pricing behaviour takes place and the likely effects of that behaviour on prices and output.

The purpose of this article is to examine the Commission's position in its own terms, focusing on its purest manifestation, and suggesting that whatever the merits of, and prognosis for, the E.U. approach to the price discount area more generally, certain aspects of the Commission's approach (at the very least) are likely to change.

Michelins 1 and 2

In November 1981, the European Commission decided Michelin. [FN1] This was the second major E.C. case on discount schemes operated by dominant firms, after Hoffmann-La Roche [FN2] in the 1970s. The schemes involved a complex system of discounts to dealers in replacement tyres for trucks and buses in the Netherlands; they were prohibited, and the Commission was upheld in the European Court of Justice (ECJ) two years later. The Commission and the ECJ were criticised at the time for the lack of depth of their analysis.

On May 31, 2002, the Commission published Michelin 2. [FN3] Like the first decision, the facts involve discount schemes to dealers in new replacement tyres (and retreaded tyres) for trucks and buses, this time in France. Again, the schemes are complex and are set out by the Commission in meticulous detail. Again, however, the care devoted to this exercise is in stark contrast to the simplicity of the analysis which follows it.

It is perhaps appropriate that Michelin is about replacement tyres. One could replace Michelin 1 with Michelin 2 in the Commission's precedent bank and it would scarcely be noticed. The Commission has reminded us in this case that while a kind of revolution has been taking place in other parts of competition law (relaxation of vertical restraints policy, modernisation, economic approach to market definition and anti-competitive effects), Article 82 pricing regulation is alive and well and has not moved significantly forward in 20 years.

Commission's treatment of the Michelin schemes

My present purpose is not to provide a full commentary on the Michelin case, but it is necessary to describe some of the key factors of the schemes. Michelin appears to have had a market share in the supply of new replacement tyres for heavy vehicles in France of somewhere in the region of 60 per cent.

There were various different schemes, and different features were emphasised in respect of each one:

• The principal bonus appears to have been a quantity rebate, with the same volume thresholds applicable to all dealers. Michelin pleaded the transparency of this system, contrasting the lack of transparency of the schemes condemned in the first case, but the Commission held that lack of transparency was not a necessary ingredient of abuse. The scheme contained a feature condemned in the 1999 Virgin/British Airways decision: that payment of any rebate was to be made over all sales "rolled back to unit one", i.e. that the percentage rebate for hitting the target is paid on all sales achieved in the relevant reference period, and not just on a tranche of incremental sales.

• The "service bonus "scheme, on the other hand, was highlighted for the margin of discretion it afforded to Michelin (in the Commission's view) and the fact that, during the first year of the alleged infringement, the basis for reward was the share which Michelin represented of a dealer's sales, i.e. more of a direct reward for winning business from competitors.

• The "progress bonus" scheme was highlighted for its "year on year" basis, i.e. the reward depended on the dealer increasing his purchases of Michelin products compared to his purchases the previous year (again a feature picked out in British Airways).

Other features highlighted by the Commission included:

• the combination of low margins (3.7 per cent) and back payment of rebates, which according to the Commission meant that dealers suffered cash flow losses and uncertainty/insecurity pending payment of rebates;

• the one year reference period, i.e. the period of time over which purchases are measured against the targets; this was seen as too long (see below);

• the fact that one of the schemes involved as many as 18 "steps", where each step means another rebate, or an increased rebate, is achieved; according to the Commission in this particular passage, more steps is worse for competition;

• the "first retread" clause whereby extra bonus was earned if all Michelin tyres purchased were sent to Michelin for retreading, as although Michelin said this was not enforced in practice, it was regarded by the Commission as exclusivity; and

• the fact that more tyres were retreaded in France than were sold in France-- which the Commission saw as evidence that Michelin must be retreading competitors' tyres as well as its own.

In summary, according to the Commission, Michelin had for 20 or so years [FN4]:

pursued a commercial policy in France with regard to resellers which was based on a complex system of rebates, discounts and/or various financial benefits whose main objective was to tie resellers to it and to maintain its market shares, which must be regarded as an abuse within the meaning of Article 82. [FN5]

The Commission reserved special condemnation for the arrangements of the "Michelin Friends" club; these included certain obligations on Michelin's large dealer members, in return for additional financial payments. For example:

• they were obliged to carry a sufficient stock of Michelin products to be able to respond immediately to customer requirements; the Commission concludes that stocks would have to match Michelin's existing share of a dealer's purchases, and that this would deter dealers from increasing their purchase of competing brands;

• they agreed to disclose to Michelin certain statistics and sales forecasts which, the Commission concludes, meant that the dealer could never decide to sell competing products without Michelin being aware of this; and

• they were obliged not to divert "spontaneous demand" away from Michelin tyres; the Commission says this became in some cases an obligation effectively to maintain a certain market share (or "Michelin temperature", as it was known). [FN6]

To this the Commission adds an atmospheric observation:

the members of the Club all shared the feeling that there could be no turning back ... The commitment they had entered into could fairly be described as a lifetime one. [FN7]

Commentary on Michelin: superficial reasoning and internal contradiction

Two preliminary observations may be made. First, the precise attributes of each scheme are not catalogued in any clear way by the Commission; one has to search different parts of the decision to piece them together. This is an immediate sign that beyond a certain point the details are not particularly relevant in the Commission's eyes. Secondly, some of the features picked out by the Commission as exacerbating the loyalty effect go in the opposite direction to the one usually considered harmful to competition. Thus, back payment of rebates is condemned, and yet up-front payment is usually considered more heinous because the dealer has then, as it were, already banked the money, and is incentivised to avoid having to find it again to pay it back. Multiple steps are condemned, and yet the usual criticism is that a few steps with big jumps have a greater tying effect as the dealer approaches each step. Multiple steps start to look like a line which makes it easier for competitors to persuade a dealer to "get off" at any one point.

All of this goes to illustrate the psychology of the Commission in these cases: it is like a parent opening a door to a child's messy room: it does not like what it sees, the verdict is determined immediately and amassing the evidence to support the verdict is just a question of picking up any combination of the items on display.

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The passage on the friends club is extraordinary. The Commission makes the dealer members sound like prisoners at the mercy of their captors. The so- called "obligations" were in fact agreed in return for even greater discounts, but we learn this elsewhere in the decision; there is no mention of it in the assessment section. There is no sense that we are talking about a market for replacement tyres for heavy vehicles, lorries and the like, whose end customers are no doubt sophisticated buyers able to shop around and make their own choices as to whose tyres they buy and what they pay. Nor that the immediate customers, the dealers, might wish to be responsive to the demands of the truck companies (who are, after all, their customers). There is no sense, more particularly, of any analysis of these points; the first issue is not whether they are right, it is whether they are looked at.

At one level all the Commission's observations are atmospheric. It appears that the aim of the exercise is not to analyse the anti-competitive effects of each feature, nor of the combination of features; it is rather to build feature upon anecdote; practice upon market share trend; add a sprinkle of dealer "feeling"; until the whole edifice just "feels abusive".

One does not need to be an economist to see that we are very far from any real competition analysis here. If we now stand back and look at the Commission's practice across the area, we will see that this is part of a pattern.

An abundance of opinion and an absence of analysis

Surveying the field of Commission decisions on discounts, it is clear that they contain insufficient analysis. There is, however, no shortage of opinion from the Commission. That opinion is divided into two. On the one hand the Commission wishes to condemn exclusivity/new-exclusivity arrangements and arrangements with like effect, when practiced by a dominant firm, on the basis that they are likely to exclude other competitors and lead to consumer harm. This is what Hoffman-La Roche was about. Much more recently, it can be observed in Deutsche Post. [FN8] We may call it the "presumed exclusionary approach". Whatever the merits of the presumed exclusionary approach, the Commission is on more comfortable ground expounding it, because it has the authority of the ECJ.

The Commission's other agenda, however, is quite different. It is the pure cost-based approach which reached its high watermark in two sets of pronouncements from the Commission in 1999 [FN9]: the Virgin/British Airways decision, [FN10] and then Commissioner Karel Van Miert's statement on the launch of the current Coca-Cola investigation. [FN11] In the former, the Commission derived a:

general principle that a dominant supplier can give discounts that relate to efficiencies, for example discounts for large orders that allow the supplier to produce large batches of product, but cannot give discounts or incentives to encourage loyalty. [FN12]

The Van Miert statement is even simpler: under the banner "Fidelity bonuses by dominant companies are simply not on", it states:

the only rebates or incentives which a dominant company may grant are rebates which pass specific savings on to its customers.

This is the black and white world of efficiency and loyalty ties; there is no acceptance of the reality that most of business life takes place somewhere between the two extremes. There is no sense of what the cost efficiencies might involve: that in one sense sales which are particularly vulnerable to competition represent the marginal slice of a firm's demand and may therefore, in a high fixed cost industry, be worth making an extra investment to retain. [FN13] Put another way, there is no recognition that discounts are driven by a revenue calculation and not simply a "bottom up" computation of the cost savings resulting from an individual order which may be shared with the customer. The statements, recycled time and again in subsequent cases, including Michelin 2, have become a repetitive exercise of "cutting and pasting" that is as unsophisticated as the Commission's theory itself.

The theory also betrays a somewhat naïve vision of competition. Caricaturing it only slightly, the vision is of a world in which undertakings compete in a very simple way. They compete, every day, for each single order. And they only compete on two things: price and quality. Every day, every order, starting with a clean sheet each time.

This is of course Alice in Wonderland. If it were reality, half the sales and marketing personnel of European industry would lose their jobs, and a large part of the other half would leave of their own accord. Competition is, quite simply, more complex than that. Firms compete over a period of time. Relationships are formed. Distribution and service quality enter the piece. And all firms, whether dominant or otherwise, seek to gain and retain their customers' loyalty. One of the ways they do it is through bulk discounts. Their customers (quite understandably) expect no less.

Consequences of the Commission's failure to acknowledge complexity

The features of the schemes the Commission has examined in its published decisions are almost invariably far advanced beyond the simple volume-based system; the Commission, in other words, has never applied the pure cost-based approach. [FN14] Indeed there are older cases in which it has acted inconsistently with it. [FN15] Therefore we do not know from the decisions whether, faced with a stripped down, linear volume-based scheme today, the Commission would hold the dominant firm to the cost reductions. It is believed by some practitioners that the Commission would not. Judging the likelihood of Commission or national competition authority initiated enforcement may be the most immediate point for an individual company; determining the law is more important in the long run. And a private action on a stripped down scheme could test the Commission's resolve: faced with a request from a national court for an amicus curiae brief in the post-modernisation world, it may feel a greater duty to develop an approach that it genuinely believes in. The fact remains, however, that the pure cost-based approach is, to date, rhetoric rather than reality.

The problem is that the rhetoric means that the Commission's decisions can be read in different ways, as can the judgments of both the European courts. Hence the huge uncertainty and confusion amongst the competition community as to the boundaries of what the law permits in this area. An example of such ambiguity is the point in Michelin 2 that quantity rebates "can only correspond to the economies of scale achieved by the firm as a result of the additional purchases which consumers are induced to make". [FN16] The context of this statement makes clear that it is addressing the "roll back to unit one" element of the schemes, but even with that specificity, there is nothing to say what are the "additional purchases" we are talking about, and so the statement can bear different meanings:

• On one interpretation, it refers to sales made since the previous step. At the point in the discount matrix at which the dealer moves up a "step" one has to see whether the rebate he receives, in cash terms, reflects a cost efficiency gained as a result of these sales.

• On another interpretation, the statement refers to the last single purchase order before the step (there may be several orders in between steps), so that it effectively outlaws, pure and simple, any scheme in which the payments are "rolled back to unit one".

To illustrate: suppose a dealer pays ## 1 per unit. If at a volume level of 100 the dealer earns a 1 per cent rebate on all his purchases over the relevant period (i.e. on the full 100 units, so a rebate of ## 1), and at a volume level of 105 he earns 2 per cent on the full set of units (i.e. a rebate of a little over ## 2), then he effectively receives the 105th unit for free. This is highly unlikely to be cost justified on the second interpretation (i.e. on the 105th unit alone). But it may be cost justified on the first interpretation, if this is marginal output and we adopt a cost analysis that recognises that fact. In short, the different interpretations can produce different legal advice.

The specificity is in any event misconceived. "Roll back to unit one" simply means that rebate is payable on all units. An "all units" scheme of this kind can be expressed as an incremental scheme and an incremental scheme can be expressed as an all units scheme. It is just a question of allocation of the rebate. Indeed, the Commission's rhetoric against "roll back" is precisely because it is viewing the rebate as applying only to the incremental sales, thus confecting a "negative price". So the deeper moral to the story is that by inventing hard and fast rules for scheme structures the Commission engages in a hopeless abstract exercise. Actual numbers, the percentages involved, the competitive character of the market, empirical evidence of exclusionary effects: this is where the focus should lie.

The Commission's denial of its one area of progress

The Commission is still, even now, fighting the campaign for the pure cost- based approach. In the press release issued on adoption of the Michelin 2 decision, it said:

The Court of Justice has ruled in the first Michelin decision and consistently in more recent cases, that quantity rebates with exclusionary effects are illegal when granted by a company in a dominant position for more than three months. [FN17]

The quite incredible tactic here is the assertion of a court "ruling", mentioning a specific time period, that does not appear to have been made in any of the court judgments in this area (let alone made consistently). And yet this formed the centrepiece of the Commission's press release in this case. It is not saved by the clever insertion of the phrase "with exclusionary effects" because that phrase is quietly dropped when the point is repeated at paragraph 216 of the decision. We should expect higher standards from our public regulatory agencies.

The ironic fact is that the three-month rule is not even operated by the Commission in practice. Different time periods are allowed in different cases. Thus, schemes up to six months are allowed in the guidelines to dominant airlines issued with the British Airways decision, one year was acceptable in British Gypsum, [FN18] three months was accepted in the Italian Coca-Cola case [FN19]; and there is an unfortunate suggestion by the Commission in Irish Sugar [FN20] that only per-order discounts should be allowed, i.e. no period at all. Ignoring that last suggestion, the variability is not to be criticised; it is one of the more lucid aspects of the Commission's practice in this area. It reflects the differences between industries: different payment rhythms, different market structures. It shows a certain recognition of the need for case by case analysis. The idea that one can identify a non-cost justified volume discount scheme over three months and simply stop there and call it an abuse is surely missing the point.

The courts' more cautious approach

The three-month episode should perhaps come as no surprise. Justification by constant reference to the ECJ is a technique commonly employed by the Commission to drive through administrative policy in this area. For example, the "general principle" quoted from British Airways above is presented as an interpretation of the court judgments in Michelin and Roche; and the quotation from the Van Miert statement is similarly prefaced "[a]ccording to European Court of Justice jurisprudence ... ".

However, in the author's view, the ECJ jurisprudence does not, contrary to the Commission's view, support the pure cost-based approach. This can be seen from Michelin itself. The Commission stated in Michelin 1 [FN21] that:

any discount system (by a dominant firm) must be designed in such a way that, with the exception of short-term measures, no discount should be granted unless directly linked to a genuine reduction in the manufacturer's costs.

The ECJ, on the other hand, adopted a much more cautious approach in setting out the nature of inquiry to be conducted in analysing price discounts under Article 82 [FN22]:

In deciding whether Michelin NV abused its dominant position in applying its discount system it is therefore necessary to consider all the circumstances, particularly the criteria and rules for the grant of the discount, and to investigate whether, in providing an advantage not based on any economic service justifying it, the discount tends to remove or restrict the buyer's freedom to choose his sources of supply, to bar competitors from access to the market, to apply dissimilar conditions to equivalent transactions with other trading parties or to strengthen the dominant position by distorting competition.

Similarly the Court of First Instance (CFI) has said that exclusive purchasing commitments:

Cannot as a matter of principle, be prohibited ... it is necessary in principle, to examine the effects of such commitments on the market in their specific context. [FN23]

The courts are thus clearly closer to an effects-based approach. This conclusion is not altered by the stricter language used by the ECJ in the shipping case Compagnie Maritime Belge (Cewal) [FN24] and the aviation landing fee case Portuguese Airports, [FN25] for those cases were driven by quite specific concerns: Cewal was a case of targeting by a jointly dominant group with a near monopoly of the market concerned and the landing fee case gave rise to a discriminatory effect along national lines. The Michelin passage arguably represents a more generalised statement of the court's approach.

Explanations for the pure cost-based approach

Why has the Commission hung on to the pure cost-based approach for so long, notwithstanding its lack of actual application? The clues lie beyond the realms of competition law, in the more established goal of the European Union--the single market--and in the social sciences.

A proper study of the complex interrelation of the factors at play would be fascinating; the aim here is merely to give a flavour of some of the reasons why we are where we are:

• Discrimination--this is the first factor to appreciate because it is so central to the thinking of the European institutions. [FN26] Within the Article 82 context, Article 82(2)(c) requires an adverse effect on the downstream market, though this has famously often been skated over by the ECJ and Commission. The ignoring of that essential requirement means that any scheme based on the dealer's purchases relative to his own purchases in another period, or relative to his purchases of competitors' products, is bound to be condemned. This factor does not, however, explain the sanctioning of non-cost- related quantity rebates.

• Single market--in Michelin 2 the Commission alleged a market-partitioning effect brought about by the fact that only purchases from Michelin France counted towards the scheme; in the Commission's view, this made parallel imports more difficult and facilitated the "isolation" of the French market and thus the maintenance of Michelin's dominant position there. This is a feature of rebate schemes which has long troubled the Commission. Recently, in the revision of the motor vehicles block exemption, it took the opportunity effectively to outlaw such systems in that particular industry.

• Liberalisation--there is more than a suggestion in British Airways that part of the Commission's motivation may have been linked to the particular history of that industry as one based on state monopolies and the long process of liberalisation the Commission had sponsored. One can easily imagine that the Commission may have perceived the whole aim of the schemes as running counter to its policy goals of opening up the market to new entrants.

• "Super-dominance"--some of the recent cases have involved undertakings with extremely high market shares or natural monopolies. These have tended to be the cases in which the strictest language is used. This is unlikely to be a coincidence, and indeed the emergence of a two track approach (the dominant and the super-dominant) has been hinted at in Irish Sugar, Cewal and Portuguese Airports.

• "Fairness" [FN27]--a deeper explanation lies in the reference to the concept of fairness. The self-made Commission/Court abridged version of Article 82(2)(c) might best be seen in terms of an underlying tendency to seek to preserve an existing market structure, a kind of policy of protection towards the distributors, perhaps on the grounds that they are typically more fragmented than the suppliers in these cases. If so, this is not a policy that is connected with competition or consumer welfare; and nor is it clear why dominant firms should be singled out.

Other, more sociological, factors can be identified: it is part of the European political fabric to tolerate a greater degree of interventionism than found in the United States; some of the civil law systems apply non-discrimination laws to all firms, dominant or otherwise; and so on.

Why the objection to modifying the extreme approach is fundamentally flawed

Many of the policy issues underlying the Commission's approach have been dealt with above. But this is not how Commission officials choose to defend the institution's actions; and nor is it what the decisions say. A frequent response of Commission officials to the suggestion of an effects-based model for Article 82 is that it cannot be achieved legally because of the absolute nature of the prohibition. Unlike Article 81, they say, there is no efficiencies outlet, no second limb. It is as if to say, to adapt the U.S. Democrat party catch-phrase: "it's the Treaty, stupid".

But the great irony is the contrast between this position and what has been achieved with Article 81(1). After 40 years of a formalistic, over-broad interpretation, we finally achieved an effects-based approach to Article 81 in the late 1990s. And the focus here is the first limb of Article 81, so it is simply no argument to point to the lack of an efficiency "let-out" in Article 82. It would be no argument anyway, because the absolute quality of the prohibition does not prevent there being an appropriate test as to whether it is in fact infringed in any particular case.

The Article 81 experience makes the Commission's approach to Article 82 all the more anachronistic. It is like Sisyphus, after many false starts, finally succeeding in getting his boulder to the top of the hill, only then to notice that there is a large chunk missing from the side of the boulder; and, on looking down, seeing that this chunk is sitting at the bottom and now has to be heaved up the same hill.

The economists' approach

Economists have represented the most vociferous corner of the competition community in arguing for an effects-based standard. Most recently, in this journal, Derek Ridyard has made a powerful policy argument against a per se approach in each of several categories of price discounting, including even exclusivity discounts and pricing below avoidable costs. [FN28]

The economists rightly remind us that one needs to view discounting, discriminatory pricing and predatory pricing in the round. The discounting cases almost by definition involve pricing above the predatory "floor", otherwise they would be reasoned as predatory pricing cases which would be far less controversial. In addition, one of the main contentions of economists is that discriminatory pricing (i.e. differential pricing that is not cost-based) can be good for consumer welfare. All of this points, they argue, towards a regulatory approach based on whether discount schemes have actual harmful effects in practice.

The problem with the economists' approach and the need for a middle ground

The problem with the economists' approach (as Ridyard himself acknowledges) is that it does not sit well with a prohibitive system, which requires, by definition, ex ante regulation, rather than an ex post analysis of the actual harmfulness or otherwise of companies' behaviour. Clearly, what is required, is a test of likelihood of harm in fact flowing from the schemes; a test, in other words which requires an assessment of the factual and economic context at the time the schemes are entered into, and then subjects that assessment to a legal standard.

This is hardly revolutionary. It is what happens (or is meant to happen) in merger control and indeed in Article 81. Nor, however, is the identification of the appropriate test and level of inquiry easy. Even in the United States, this is still the subject of debate. But at least in the United States it is a more mature debate: it is common ground that harmful effect is the cornerstone of the test--nobody is arguing for a per se standard; the issue is the level of inquiry. The debate has played out most recently in the Antitrust Law Journal [FN29] between Professor Muris (arguing against a truncated inquiry) and Federal Trade Commission (FTC) officials (defending it). [FN30] Part of this debate revolves, for example, around whether the FTC looks at the linkage between the conduct and actual competitive harm. It is common ground that it should do so; the point at issue is whether it is indeed doing so adequately.

Of course, the E.U. regulators may adopt different tests to carry out their analysis. But at least there should be some inquiry. The Commission would no doubt say that it follows this approach now by considering the "inherently harmful nature" of certain types of schemes when practised by a dominant firm. But this is the "child's messy room" school of competition law referred to above; a more developed approach is required.

Towards a system of integrity

A glance at the U.S. approach to the same facts examined by the Commission in Virgin/British Airways shows how far the Commission has to go to win credibility in this area. Virgin's case was thrown out by the New York District Court of Appeals [FN31] as disclosing no case fit for trial. The judgment makes enlightening reading for any European competition practitioner; its 30 pages are devoted almost entirely to whether Virgin had produced any evidence that the British Airways schemes had had harmful effects for consumers. The contrast with the three pages devoted to abuse in the Commission decision could not be more acute. When British Airways pointed out that the period over which the discounts operated had been one of dramatic growth for Virgin Atlantic and steady decline in market share for British Airways, the response of the Commission was that Virgin would have grown even more absent the rebates. Whatever view one takes in this area, it surely cannot be that simple.

So where are we now? We are all waiting for the CFI in British Airways and the Commission in Coca-Cola. Three years into the British Airways appeal there is no sign of a hearing, let alone a judgment. The Coca-Cola investigation has proceeded over the same period. To this list we should now add the Michelin 2 CFI appeal, and one wonders whether the CFI will now try to co-ordinate this with British Airways. Perhaps the more immediate impetus will come in the form of ripples from judicial action in the merger control arena, especially if the CFI follows Airtours with another major reversal in one of the pending cases this autumn.

In a world obsessed by merger control, Michelin 2 passed almost unnoticed; drowned in the noise of the 2001-02 merger control quartet: GE/Honeywell and Airtours, Schneider/Legrand and Tetra Laval/Sidel. Yet for many businesses, Article 82 pricing control is just as important. Indeed, it affects them more immediately: in their daily operational lives rather than their corporate finance strategy. And Michelin 2--the underlying approach, not the treatment of the particular facts--comes as a stark reminder that we have not moved forward in 20 years; if anything, the most extreme position of old has been brought to the fore, hard-wired almost.

But, as the sailors say, when you get too close to the wind, it is time to tack. I make this prediction: the Commission will back down at least from the pure cost-based position it has adopted. It has "clear water" from the European Courts to do so; there is no legal excuse for intransigence. It is just a question of how long it takes, and whether it will do so of its own accord or with the encouragement of the CFI. The CFI itself has a great challenge in the two appeals: to restore some integrity into this area. But the Commission has a great challenge too--for life goes on both before and after the CFI rules. Dominant firms can best deploy their resources in helping the Commission find a way to retreat to a more secure position, and to do so with a modicum of grace and the minimum of fuss.

FN Brian Sher is a competition lawyer, currently with Linklaters; he joins Latham & Watkins as Counsel in November 2002. The views expressed in this article are personal to the author.

FN1. Michelin 1 (81/969/EEC), October 7, 1981 [1981] O.J. L353/33; [1982] 1 C.M.L.R. 643; Case C-322/81 Nederlandsche Banden Industrie Michelin NV v. European Commission [1983] E.C.R. 3461; [1985] C.M.L.R. 282.

FN2. Hoffmann-La Roche (Vitamins) (76/642/EEC), June 9, 1976 [1976] 2 C.M.L.R. D25; Case 85/76 F Hoffmann La Roche & Co. AG v. European Commission [1979] E.C.R. 461; [1979] 3 C.M.L.R. 211.

FN3. Michelin 2 (2002/405/EC), June 20, 2001 [2002] O.J. L143/1; [2002] 5 C.M.L.R. 8.

FN4. The Commission focussed its enquiries on the period 1990 to 1998, and the infringement finding is confined to those nine years.

FN5. ibid. para. 213.

FN6. It is understood that this point is contested by Michelin before the CFI.

FN7. ibid. para. 326.

FN8. Deutsche Post AG (2001/354/EC), March 20, 2001 [2001] O.J. L125/27.

FN9. The vision is not new, it has simply been brought to the fore. See n.14 below.

FN10. Virgin/British Airways (2000/74/EC), July 14, 1999 [2000] O.J. L30/1; [2000] 4 C.M.L.R. 944, on appeal T-219/99.

FN11. DN: MEMO/99/42, July 22, 1999.

FN12. Virgin/British Airways, n. 10 above, para. 101.

FN13. Ridyard argues that this translates into negotiating weakness opposite large buyers: see "Exclusionary Pricing and Price Discrimination Abuses under Article 82--An Economic Analysis" [2002] E.C.L.R. 286 at 289.

FN14. The Commission has taken the opportunity, while sanctioning more accentuated schemes, of imposing guidelines for the future which require quantitative discounts to be cost-justified, e.g. Michelin 1 and the guidelines issued to dominant airlines with the British Airways decision. But this is quite a different matter from condemning past conduct.

FN15. See, e.g. the settlement in the Italian Coca-Cola case, DNP/90/7 and the Art. 19(3) Notice in respect of the British Gypsum Super Stockist Scheme [1992] O.J. C321/9; [1993] 4 C.M.L.R. 143. In both cases, volume rebates were accepted without any suggestion that they had to be cost justified.

FN16. Michelin 2, n.3 above, para. 216.

FN17. DN: IP/01/873.

FN18. See n.15 above.

FN19. See n.15 above.

FN20. Irish Sugar v. European Commission [1997] O.J. L258/1; [1997] 5 C.M.L.R. 666, para. 153; on appeal Case T-228/97 [2001] E.C.R. I-5333; [2001] 5 C.M.L.R. 29.

FN21. Michelin 1, n.1 above, on appeal Case C-322/81.

FN22. ibid. para. 73.

FN23. Case T-65/89, BPB Industries and British Gypsum v. European Commission [1993] E.C.R. II-389; [1993] 5 C.M.L.R. 32, para. 66.

FN24. Joined cases C 395 & 396/96 Compagnie Maritime Belge Transports SA v. European Commission [2000] E.C.R. I-1365; [2000] 4 C.M.L.R. 1076

FN25. Case C-163/99 Portuguese Airports [2001] E.C.R. I-2613; [2002] 4 C.M.L.R. 31.

FN26. For an analysis of price discounting case law from this perspective, see Waelbroeck, Price Discrimination and Rebate Policies under EU Competition Law, 1995 Fordham Corporate Law Institute 147.

FN27. I am grateful to John Kallaugher for suggesting this point.

FN28. See n.13 above.

FN29. T.J. Muris, "The FTC and the law of monopolization" (2000) 67 Antitrust Law Journal 693-723.

FN30. D.A. Balto and E.A. Nagata, "Proof of competitive effects in monopolization cases: a response to Professor Muris" (2002) 68 Antitrust Law Journal 309-323.

FN31. 257 F.3D 256 (2d Cir. 2001).

ECLR 2002, 23(10), 482-489