Question 1—Orange vs. Avatar
The following facts are purely hypothetical.
The smartphone market is an oligopolistic market with a number of major
competitors. One of them is Orange, which maintains a proprietary system of
products. It produces phones, the oPhones, an operating system, the oOS, and
offers some apps of its own such as music streaming and electronic payment apps.
The oPhones account for about 30% of overall smartphone sales in Antitrustia. Its
operating system is only available on the oPhones and has a superior use interface
and user experience. Unlike most third-party apps, Orange’s apps, such as the
oTunes and oPay, are only available on the oOS.
The remainder of the market consists of a host of smartphone manufacturers that
use the Avatar operating system. The system was developed by Froodle, a major
technology company. Avatar phones account for the remaining 70% of
smartphone sales in Antitrustia. There are three major manufacturers of Avatar
phones, Hangang, Yenisey, and Yangtze. Their market shares are similar, with
about 20% each. The remainder is split among a number of small-scale
manufacturers.
Apps on oOS are available at the oApp Store. Some of the apps are free; some of
them require a one-time payment or monthly subscription fees. Orange charges a
25% commission for every sale made on the oApp Store. This means that if the
app costs consumers A$10, Orange pockets A$2.5 as commission. Some app
developers have complained about this hefty charge. To add insult to injury, apps
on oAS can only be downloaded from the oApp Store. The oOS blocks apps
downloaded outside of the oApp Store. Orange justifies this restriction on the
grounds that it needs to scrutinize apps for their safety and data security features
to ensure that the proprietary oOS is not compromised.
Orange is a new entrant into the electronic payments market with its new app
oPay. The current market leader is Circle, which has an 80% market share. Its
superior security and anti-fraud features make it very popular with users. It
charges A$8 per month for the app, A$2 of which goes to Orange as commission
and A$4 goes to cover its development costs. When Orange introduces oPay, it
offers it for free for the first six months to help it achieve a critical mass of
customers. After the initial promotional period, Orange begins to charge A$6 per
month for the app. The development costs for oPay are roughly the same as that
for Circle.
Despite the lower price of oPay, Circle still hold an advantage from its established
customer base and wide merchant network. It is accepted by over 80% of shops
in Antitrustia. In order to give oPay a boost, Orange institutes the following
measures. First, it raises the commission on electronic payment apps on the oApp
Store to 40%. This means that Circle now pays A$3.2 as opposed to A$2 from the
monthly subscription fee of A$8 to Orange as commission. Second, oPay becomes
a default app on the oOS. oPay is preinstalled on every new oPhone and will be
added as a default app to the oOS of preexisting users through system updates.
Users cannot remove oPay from their oPhones and oPay will replace other
preexisting apps as the default electronic payments app on their phones. Other
electronic payment apps can still be used, but have become slightly more
cumbersome to use now that oPay is the default payment app. Although it is
possible to override this default setting, it requires users to trigger factory reset,
which would wipe out all the personal data and customization of their phones.
In response to Orange’s aggressive actions, Circle introduces an update to its app
that overrides the oOS setting that sets oPay as the default app. The increase in
commission by Orange puts Circle in a dilemma. Circle will need to raise its
subscription fees to remain profitable. But doing so would put off many customers.
Circle believes that it cannot raise its subscription fees while staying competitive
with oPay. Therefore, Circle introduces a new feature on its app that bypasses the
oApp Store. The monthly subscription fees for Circle are no longer paid through
the oApp Store but are paid directly through the app. With Orange’s commission
out of the picture, Circle is able to lower its monthly subscription fee to A$6 to
match the price for oPay. As soon as Orange discovers this, it blocks the software
update on Circle that is necessary to allow the app to bypass the oApp Store.
oPhones have recently become increasingly popular and its market share has gone
up to 40%. In response to this recent development, the three major Avatar phone
manufacturers decide to adopt some measures. They are aware that there is an
impending shortage of cobalt and lithium which are key materials for the lithiumion batteries used in phones. Batteries are a big part of the cost of a phone.
Together they agree to buy up the supply of cobalt and lithium in the market over
the next years. There are still some fringe suppliers left in the market. But these
are mines from more remote locations that produce more expensive minerals.
They expect their move to drive up the cost of oPhones, which hopefully would
force Orange to raise the prices of its phones.
The three manufacturers also believe that one of the reasons their phones are
losing competitiveness is because their retailers have overcharged customers. The
three of them agree to introduce a price monitoring system under which they
announce recommended retail prices for their phones. They make clear that these
prices are not mandatory but encourage dealers to report other dealers who
deviate from the recommendations. One retailer, Broadday, consistently charges
10% more than the recommended prices for Yenisey’s phones. A competing
retailer reports this to Yenisey, which promptly reduces stock supply to Broadday.
When Broadday approaches Yenisey for an explanation, Yenisey merely says that
there are short-term supply issues. When Broadday eventually reduces its prices
for Yenisey’s phones, normal supply resumes almost immediately.
Please discuss all relevant antitrust issues for the entities concerned. Assume that
U.S. law applies to this jurisdiction.
End of Question 1
Question 2—I Believe I Can Fly
The following facts are purely hypothetical.
The world has been ravaged by the Wuchovid virus over the last year. Many
countries have shut their borders as a result and international travel has ground
to a halt. Many airlines have had to put their staff on furlough and mothballed
their planes. They have been haemorrhaging cash for much of the duration of the
pandemic. With the gradual rolling out of vaccines, the number of cases has
started to fall in some countries, which are slowly reopening their borders. There
is finally light at the end of the tunnel for the airlines.
To ensure an orderly return to normalcy, the International Airlines Association
(“IAA”), which consists of all the major airlines in the world, has decided to issue
a number of rules governing the gradual resumption of normal services. First,
the IAA requires all airlines to ensure the safety of their passengers by only
allowing passengers who satisfy safety requirements to board a plane. These
requirements can be met either with proof of full vaccination of any of the WHO
approved vaccines or a PCR test for the Wuchovid virus within 72 hours of
departure by one of the approved centers. Even though there are usually
numerous commercial providers of testing service, IAA usually only approves
one or two centers in each country. They tend to be the most expensive ones that
are known for providing the most accurate test results.
Second, to ensure that the planes are adequately sterilized and staffed by
properly trained crew, the airlines have agreed to adopt a staged recovery
schedule whereby they will resume no more than 50% of their full capacity by
June 1, 2021 and 75% of their full capacity by July 15, 2021. Service will not
return to their full capacity until September 1, 2021 the earliest subject to the
progress with vaccination and the number of new infections in the origin and
destination countries of the route in question.
Third, the IAA introduces a certification scheme for the hygiene standard for
cabins. This serves as an assurance to passengers of the highest hygiene
standard. Under the certification scheme, IAA sends inspectors to inspect 10% of
all the flights offered by a particular airline on a weekly basis. Samples of the
cabin air and from the surface of the seats and the tray tables are taken for
analysis. If the samples meet the minimum standards, a star will be awarded to
the airline. There is evidence that airlines have raised their average airfare by
10% after receiving a star from IAA, although there is no evidence that there is
an agreement of any kind among the airlines to raise prices. Luftana was the first
airline to have done so after receiving the star. After that most of the major
airlines in Europe have followed suit and the practice spreads across the world.
When some passengers complain, Luftana reduces the fares by 5%. After that,
other airlines have reduced their airfares by a similar percentage along routes
where they compete with Luftana.
Fourth, IAA enters into a joint venture (“JV”) with PureAir, a Swiss air filtration
system producer, to develop the highest quality cabin air filtration system.
The system is to exceed even the standard for hospital-grade air filtration system and
can reduce the mixing of air between adjacent passengers in a plane by 95%,
thereby reducing the risk of in-flight, airborne cross-infection by 80%. The
system is hugely expensive to develop and the development costs need to be
shared by the airlines. The JV agreement requires IAA members not to enter into
a similar filtration system development agreement with another filtration
system producer for five years. The agreement also requires IAA members to
lobby their respective governments to mandate the adoption of this new
filtration system for all commercial aircraft. Finally, IAA members agree to
minimum purchase quota for the initial five years, which are to be shared among
IAA members based on their revenue. Airlines are free to purchase filtration
systems beyond their allotted quota but must meet the minimum requirement
under the scheme. Aircraft that has been installed with this new air filtration
system will be automatically awarded the highest rating for air quality under the
certification scheme.
Some countries require passengers arriving from certain other countries to go
through a hotel-based quarantine of varying lengths. IAA members agree to offer
special discounts for passengers for quarantine hotels. Passengers who book to
stay at designated hotels will get a 15% discount off their airfare when the hotel
booking is made through the airline’s websites. There is evidence, however, that
the airlines have raised the base fare by 20% for these passengers before
applying the discount. To ensure the safety of other hotel guests, most of the
participating hotels require their guests to use designated car service companies
for transportation between the airport and the hotel even though local
government rules may allow passengers to take public transport.
Many travelers make hotel reservations through hotel booking websites such as
Expedien.com, Flooking.com, and Hotelia.com. Competition is very keen and
none of them wants to be undercut by lower prices offered on a competitor’s
website. To ensure that it always offers the lowest prices, Expedien demands
hotels to guarantee that the prices they charge on Expedien are no higher than
the prices offered on Flooking and Hotelia. Hotels that are found to have violated
this clause will be delisted from the website. When Flooking and Hotelia become
aware of this clause, they too demand the same from the hotels. Once all three
websites have imposed this clause on the hotels, complete price parity emerges.
Prices for hotels have become practically identical across all three websites.
Prior to this, the three websites would occasionally offer a rebate on their
commission to induce the hotels to lower their prices. There was evidence that
such price reductions would increase booking on the website. Such rebates and
discounts have completely disappeared once all three websites have adopted the
same price parity requirement.
Some hotels, especially the international chain hotels, would occasionally offer
lower rates on their own corporate websites to entice customers to book
directly. The hotels are able to offer lower rates on their own websites because
they need not pay commission to the booking websites on direct bookings. This
attracts customer traffic away from the booking websites. After this practice
becomes more common, the booking websites start to lose business to the hotel websites.
In response, these three websites extend the lowest price guarantee
obligation to the hotels’ own websites. This means that the prices the hotels
charge on the three websites must be no higher than what they charge on their
own websites.
Please discuss all relevant antitrust issues for the entities concerned. Assume that
U.S. law applies to this jurisdiction.
End of Question 2
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