Understanding the WTP Principle in EU Antitrust Law: Highlighting the Need for Reform in the Context
[Aastha Bhandari and Tarusi Jain are third-year students at O.P Jindal Global Law School, Sonipat]
The consumer welfare framework is the dominant approach used by competition authorities within the European Union (“EU”); it is understood in terms of economic efficiency calculations vis-a-vis consumers in the market. In this approach the agreement would be contrary to competition law if economic costs to the consumers are greater than the benefits, with the intent being maximization of their efficiency profits. Hence, it systematically excludes non-economic benefits and interests. The place of such non-economic benefits under Article 101 of Treaty of Fundamental Rights of the European Union (“TFEU”) has been a source of debate for years. With the current discourse surrounding ‘sustainability agreements’ and the shift towards ‘collaborative eco-systems among competitors,’ the need to make such collaborative models of business more compatible with competition law is imperative. This would require acknowledging non-economic and public interest benefits (environmental and social benefits that result in the larger society’s welfare, including intergenerational welfare, for example, reduced carbon emissions and energy consumption) beyond the traditional economically efficient benefits.
In this two part series, we analyse whether such non-economic benefits have been accounted for in the law of the EU as it stands today. Further, we argue that the developing debates in the area of green antitrust should focus upon the need to move beyond the one-dimensional willingness to pay (“WTP”) principle in competition economics. We submit that the WTP model is inadequate because it subsumes non-economic benefits within economic benefits. This poses a problem for competition authorities to fulfil the requirement of passing on a “fair share “of the benefits to consumers, in the context of sustainability agreements, thereby restricting the scope of assimilating such agreements within the larger competition framework of the European Union. We analyse this tension in light of upcoming legislative frameworks in the EU, including the 2021 Dutch Authority for Consumers and Markets (“ACM”) Draft Guidelines on applying EU competition rules to agreements promoting sustainability and the recent amendment to the Austrian Federal Cartel Act of 2005. As such, we mention alternative approaches to the WTP model, which also take into consideration out-of-market benefits. Finally, we analyse the potential of the principle laid out in the Wouters’ judgement delivered by the Court of Justice of the European Union (“CJEU”) to find a middle ground to accommodate such non-economic benefits within the current competition law framework.
II. The Present WTP Framework and its shortcomings
The general route that can be used to account for non-economic interests under the current EU law is to avail the exemption to cartel prohibition under Article 101(3) of TFEU. This particular Article provides for exemptions to anti-competitive agreements under article 101(1). Article 101(3) exempts agreements which “contribute to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit.” The “fair share” requirements under the article emphasise on efficiency gains and only economic interests. However, precedentshave taken into consideration out-of-market efficiencies. For example, in the CECED Case, the European Commission (“the Commission”) granted an exemption to an agreement between domestic washing machine producers to phase out washing machines that were energy inefficient. The Commission took into account the fact that the consumers benefited from reduced energy consumption and lower CO2 emissions and held that “such environmental results for society would adequately allow consumers a fair share of the benefits even if no benefits accrued to individual purchasers of machines (para 56).” However, the Commission issued certain Guidelines in 2004 that narrowed down the above approach. This is also reflected in the Commission’s legal review of the CECED decision where only the resulting efficiency gains and individual cost savings were mentioned. The 2004 Guidelines do however mention “qualitative efficiencies” but these must always have a determinative value. Hence, non-economic benefits are only considered when they are subsumed within traditional economic benefits.
It is important to take note of the famous “Chicken of Tomorrow” case which was decided in 2015. Here, an association of supermarkets had agreed to sell sustainable broiler chicken in light of animal welfare and public health concerns. However, the ACM made use of the WTP test under the first condition of article 101(3) to deliver its verdict on the anti-competitiveness of this agreement. This test determined the willingness of the consumers to pay extra for non-economic benefits. The ACM concluded that the willingness was not enough to justify the higher price and hence the agreement was declared anticompetitive. It is due to such cases that the WTP approach has been questioned by recent scholarship in behavioural economics. In this case, the tests failed to consider the various possibilities as to why the consumers did not buy chicken and reduced this multiplicity of intentions into the lack of willingness to pay for sustainable chicken.
As such, the test assumes that the consumer’s behaviour remains consistent and fails to consider the ‘conflicting preference maps’ of consumers who are also political citizens. It is submitted that that the WTP model is a narrow framework that assigns a monetary value to all intentions and interests, further limiting the perception of what benefits actually matter to the consumer. Needless to say, this approach compromises on the need to incorporate the larger non-economic interests in its analysis. Such an approach discourages sustainability initiatives rather than encouraging them. When willingness to pay isn’t enough (which can be attributed to several reasons apart from unwillingness to pay for sustainability, as seen above), undertakings will not invest in green initiatives.
The recent 2021 Dutch Authority for Consumers and Markets (ACM) draft guidelines on applying EU competition rules to agreements promoting sustainability of 2021 are the first formal stance on the growing need to accommodate sustainability agreements under competition law. These draft guidelines divide sustainability agreements into two broad categories i.e., (a.) permitted agreements that do not restrict competition under TFEU and The Dutch Competition Act and (b.) agreements that do restrict competition and fall under the exemptions provided for under article 101(3) of TFEU and article 6 (3) of the Dutch Act and require a quantitative assessment.
Out of the agreements that fall under article 101(3), only those agreements where the benefits of sustainability are not obvious or the parties collectively cover more than 30% of the market share are required to quantify benefits of their initiative. According to the guidelines, a “fair share” of these benefits must also be passed on to the products’ consumers, with an exception of “environmental-damage agreements.” The guidelines define these “environmental-damage agreements” as those that “aim to improve production processes that cause harm to humans, the environment, and nature.” (for instance, agreements that aim to reduce carbon emissions.) The guidelines distinguish “other sustainability agreements” from “environmental-damage agreements” wherein the former has to fully compensate its users for the harm they suffer owing to the restriction to competition that such agreements impose. The latter is exempted from this as it benefits the society as a whole and it wouldn’t be fair for the parties to be expected to fully compensate its users. This isn’t coherent because reducing environmental damage is inherent in the pursuit of “other sustainability agreements” too. So, mandating full compensation for some and partial for others may be arbitrary.
This need to quantify fundamentally non-economic benefits in narrow, monetary terms and passing on a “fair share” of such benefits to only the relevant product market, when in fact the society, as a whole, benefits from such agreements, shows that the draft guidelines eventually circle back to the WTP model that’s enshrined in article 101(3) of TFEU; a qualitative assessment in itself is not sufficient. The guidelines, despite acknowledging the importance of bringing in benefits to the larger society, fails to account for the fact that several non-economic benefits may be difficult to translate into monetary terms and slow to materialise. Countries like Germany and Greece have acknowledged the failings of the WTP model and the tension between environmental economics and competition economics. Several alternative approaches like the resources approach and the capabilities approach developed by Amartya Sen and Martha Nussbaum have been proposed by economists to widely interpret the term “benefits” under Article 101(3). These could also be employed in cases involving sustainability agreements.
Part II of this article goes on to analyse the case of an amendment in the Austrian Federal Cartel Act of 2005 to include non-economic benefits for determining the passage of fair share to the consumers under competition law. However, this case may be an example of doing the right thing at a pre-mature stage. As such, there may be a better alternative to overcome the shortcomings of the WTP principles, which is explored in the latter half of the next post.