An Interview with Jorge Padilla – “Education is a Great Equalizer”

Dr. Jorge Padilla is Senior Managing Director and Head of Compass Lexecon in Europe. He earned M. Phil and D. Phil degrees in Economics from the University of Oxford. He is a Research Fellow at the Centro de Estudios Monetarios y Financieros (CEMFI, Madrid) and has written numerous papers on competition policy and industrial organization. Dr. Padilla has given expert testimony before the competition authorities and courts of several EU member states, as well as in cases before the European Commission. He has also given expert testimony in various civil litigation (damages), international arbitration cases, and competition cases in non-EU jurisdictions (Argentina, Chile, China, Colombia, India, Israel, Jamaica, South Africa and Turkey).

1. While you initially chose the academic path, later you decided to enter the professional world. What was your motivation for this change in your career path?

It was not entirely my choice. My parents went bankrupt and somebody had to pay the debts and provide for two families. I had a very decent academic salary, which nonetheless was insufficient to maintain two families and repay creditors. I had to look for a job outside academia to help my parents. At that time, I had no clue about what consulting was about. A former student of mine put me in touch with a consulting firm. I started working as a consultant one day a week. To my surprise, I proved to be a rather competent consultant. After two years working as a part time consultant, it became clear that I wasn’t going to be able to cope with two jobs for long. It was difficult to excel in both jobs and this was frustrating. So, I asked for a leave at CEMFI. Eventually, I became a research fellow there and we have maintained a close relationship over the years. More or less at that time, my company was approached to work in the Microsoft 2004 case. I was part of the team led by David Evans that advised Microsoft on that case. I enjoyed it tremendously because I was applying all my IO to that case. In the meantime, my consulting practice was growing; I was working on many deals and antitrust matters. I was good at what I was doing. I managed to help my parents out of their financial troubles. I became a consultant by accident but liked the job, so I decided to continue working as a consultant and leave academia behind for a few more years. When I started I was the only competition economist in my company, NERA Spain. When I was asked by NERA to create my competition group, we were three people in Madrid. Now that group works for Compass Lexecon and has 90 economists all over Europe. I feel very close to them; many of them are former students and some of my best friends work in the team. This is why I have postponed a return to the academic world, which nonetheless is likely happen in not a too distant future.

2. What are the benefits of being in a top consulting company like Compass Lexecon rather than a full time professor in an academic institution?

There is one point in common: you have to work very hard. You work as hard as an academic as you work as a consultant. The difference is that, as an academic, you have control over your time to an extent that as a consultant you don’t. There are things that you don’t control fully as an academic, such as teaching hours, but you have some control over your agenda. Your agenda as a consultant is controlled by others. Yesterday, for example, I started with a recruitment meeting at 8am, from 9am until 5pm I was in a client meeting. At 5pm I was in a conference call until I jumped on the plane to Toulouse. In the plane I was preparing the class for today. When I landed, I went to the hotel and I had a conference call at 11.30 pm, with a client from the US West Coast. This is my fourth country this week and today I will deliver the fourth seminar this week. And this is not an exceptional week. The main con of a consulting job is that you are always rushing. It is stressful. My company hired a psychologist to help me cope with stress because my productivity was suffering. You are always rushing. Sometimes you would like to have one or two more weeks to think about this or that other problem, but it is impossible because your clients need a solution now.

In academia you have more time to think about problems, more time to polish the answers, and this is more satisfactory intellectually. Consulting has also some pros. It is a well-paid job. Consulting can also be exciting. The Financial Times today reports news on many of my cases: telecom mergers, patent disputes, abuse of dominance investigations. These cases involve fascinating issues. They often pose problems for which we may not have an answer yet. It is amazing when you ind that the theoretical and econometric tools that you studied can be used to answer difficult problems in high stake matters. So, as a consultant, you get involved in very interesting cases, meet very clever people, and learn about the real economy and its complications. If you like to fight, there is nothing like being cross examined in court; your adrenaline goes incredibly high. You confront somebody that is trying to trash your work and you have to defend it. It is exhausting, but exciting.

What I have tried to do, it is to work as a consultant without losing contact with academia. I still write papers. I don’t have the time to write papers for the RAND Journal of Economics, but I have written for professional journals such as the Antitrust Law Journal. I wrote a couple of books, one on Article 102 and another on renewable energy, and I like to teach. I teach competition economics at the Barcelona Graduate School of Economics and now I am teaching here, in the Master 2 ECL programme. I like to teach because I like to be in contact with young people. Young people keep you honest. There is nothing as disarming as when a young student asks you a candid question about the position you took in a given case. Teaching also helps you understand what you did and discover ways in which you could do your job better. It is not the first time that I am speaking to a class and I find the solution to some of my own doubts. I am fortunate that I have been allowed to teach.

3. Despite your busy schedule, as you said you started teaching at the Master 2 ECL programme of TSE. Why did you choose TSE to teach? What do you think about the school?

TSE is the best research center in Industrial Organization in Europe; the people that teach and do research here are among the best in Europe. Collectively, possibly, TSE is the number one group and individually, one by one it has great people. It is widely recognized, and this year the Swedish Academy has recognized it too. It is a great opportunity for me to interact, for example, with people like Jean Tirole, Patrick Rey, Bruno Jullien, as well as many others. Having the opportunity to come and give a seminar here is really fantastic! It allows me to check if what I’m thinking is correct or absurd. It gives me the opportunity to keep learning new things. That’s super!

The other interesting thing is that this school has very good students, and my business is a human capital Qbusiness. You need to look for human capital, and you have to go to the best places to look for the best human capital. Top human capital is not abundant, it’s unique, and you have to ind it wherever you can, so having access to TSE students has a fundamental importance for me and for my business.

One more thing: I feel I have been very lucky in life. Someone one day decided to give me a grant to study in Oxford, where I did my PhD. In Oxford people like Paul Klemperer, my thesis advisor, decided to spend a little bit of his scarce time with me, teaching what he knew, instead of spending his time on his own research or on more lucrative alternatives like consulting. I believe I need to give back to society what society gave me at that time. And help others to grow. I believe that education is a great equalizer, and for that to work you need to put people in teaching positions that can help young people grow.

4. We guess that one of your usual tasks is to communicate with judges and lawyers about competition policy cases. How difficult is it to explain to them economic and econometric models? Do you identify a gap in a way of thinking and implementing competition policy between people with law and economics backgrounds? Any ideas on how we could have a convergence?

I’m in direct contact with lawyers every day because my wife is a competition lawyer. We work together sometimes and in some other cases we work against each other. Jokes apart, it is true that part of my job is to make sure that whatever we do that is technical is then understood by decision makers. And decision makers tend to be lawyers with limited knowledge of economics and relatively weak mathematical backgrounds. And even the economists that are in decision making positions tend to be applied economists
without Ph.D.s. So as part of my job I need to translate our models into non-technical narratives. But I don’t think personally that this is a worthless activity. On the contrary, I actually think it is value enhancing. Let me explain why. I’m pretty sure you don’t like your smartphones because the fantastic technologies embedded in its chipsets or the beauty of the code that is part of their operating systems. You like them because their functionality plays a fundamental role for you and they have user interfaces that are nice and easy to use. If they were hard to use, they would less valuable to you. As consultants we develop “user interfaces” that lawyers can use and understand. In doing so, when you have to explain economic theory to someone who is a complete outsider, you ind that some of the assumptions that we never challenge in economics are hard to justify.

Lawyers may not be strong in maths but they are clever. They are extremely logical. They have big decision trees in their minds. So they tend to challenge our theoretical assumptions because they are trained not to accept any premise without a good empirical reason. And then you ask yourself, but why are we making this assumption? Because lawyers will never accept an answer of the type “this is common practice in economic theory”, you are forced to re-think the foundations of economic theory. Their questions help you understand your models more deeply and, sometimes, to think outside the box and develop new models based on more realistic assumptions.

5. Even if you are not allowed to disclose specific names and details, could you describe us the most challenging competition policy case you have been involved in?

Look, I think you learn more from cases that you lose than from cases that you win. I think that for me the first case that ended up badly was the most challenging case I have ever encountered and the case in which I learned more. This was the Microsoft 2004 case. It was challenging because I was trying to deal with the complexities posed by the case as an academic. I was trying to ind the right model that would allow me to solve the issues raised by that case in an unequivocal way.

I was trying to ind the perfect theory that would explain everything and that nobody could challenge. And that was a futile exercise, because my models and theories were too abstract and missed many of the facts that were relevant to the case. What I have learned since is that, despite being trained as an economic theorist, if I want to be successful in actual cases, I need to focus on the facts and process market data using workable, parsimonious economic and econometrics models.

I need to develop testable hypothesis and confront them with the data. I need to be designing models that can yield identification theorems, as opposed to possibility or impossibility theorems which are the sort of models I developed as an academic. This is why I am now reading on identification problems in social sciences. I had approached the case from an entirely abstract perspective and then I learned that in order to be successful in competition matters what you need is: DATA, DATA, DATA. A friend of mine who is now Chief Economist of DG-Market and before that was deputy Chief economist of DG-Competition, Miguel de la Mano, once said to a client in a meeting in which I was sitting, “In God we trust, from everyone else we want data”. And I think that was a great summary of the attitude that economists need to have in competition cases. So that was the most challenging one, it was a failure, but I think I learned the lesson.

6. There is a common agreement that the introduction of the leniency program in the EU during the previous decade was a major antitrust innovation. Do you think that it is an effective tool in the fight against cartels? Do you have any policy recommendations of how to improve its efficacy? 

I think that the leniency program is working extremely well in most jurisdictions. There are some jurisdictions where it is not working as well, and I am not sure exactly that I understand why. For example, it seems to work very well in Brussels. In my own home country, Spain, it is working much better than anyone expected if we look at the number of cartels that have been uncovered. On the contrary, I am told that, in your country Brenda (Italy), the leniency program is not working as well and I am not sure why. I am concerned, however, that the leniency programs may not be stopping all cartel activity though. My sense is that the cartels that the leniency programs are uncovering are relatively old cartels, cartels that are relatively ineffective, and cartels that are denounced because a company wants to acquire another one and as part of the due diligence process the cartel is discovered and the deal cannot proceed unless the acquirer obtains immunity. I’m concerned that there may be more recent and effective cartels, where the leniency program is ineffective, and I thus wonder whether the European Commission and other jurisdictions should consider other programs.

The other point I would like to make on this is that, at the same time, now that we have leniency and it seems to be working and we have less of a problem with cartels, we need to be particularly careful with horizontal mergers, because mergers can produce very similar effects. That doesn’t mean that we adopt a maximalist position where we prohibit every merger. But we do want to understand the business rationale behind mergers, because mergers may be the substitute to cartels in a world in which cartels are hard to sustain. So I think that reinvigorating horizontal merger control is an important policy objective these days.

7. In the case of mergers, we observe that when a proposed merger is investigated, there is a focus on the potential unilateral effects that this merger may have. What about its coordinated effects? Do you think that should be taken into account? Do we lack models that could predict such effects? Could they be proven to be more harmful for competition and social welfare than the unilateral effects that people tend to focus on in merger cases?

There are few coordinated effects merger cases these days. It may seem surprising because the case law on coordinated effects is fairly well aligned with economic theory. The case law, starting with Airtours and Sony/BMG, has adopted the paradigm of dynamic game theory and is consistent with its teachings. The Commission’s guidelines on coordinated effects are consistent with the law and hence also well-grounded in economics. So it would seem that there is a good basis for enforcement in the law. But there are no cases. The problem that competition authorities face in practice is that proving the various conditions that one needs to prove in order to conclude that the merger is likely to create coordinated effects is virtually impossible. The sort of information that would be required to discharge the burden of proof is simply not there or is very difficult to collect. In other words, we have an identification problem. For example, economic theory says that one fundamental requirement for coordinated effects, is that the merger increases transparency in the market. But how do we assess whether a market is transparent? Do we have objective criteria? And how much transparency is enough? The answer to these questions is never black and white; there are various shades of grey. And transparency is just one of the conditions that competition authorities must establish. There are at least other three criteria and all them are equally challenging empirically. So, in short, we see few coordinated effects cases because it is very difficult to prove a coordinated effects theory of harm to the requisite legal standard.

by Alexia Lee Gonzalez, B. Medaglia and Georgios Petropoulos

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