Abuse of Dominant Postition (EU &UK)

Rationale

Article 102 of the European Union Treaty prohibits the abuse of a dominant position with the European Union, insofar as it may affect trade between member states.  The corresponding domestic legislation focuses on abuse of dominant position within the State. The prohibition applies to actions by “undertakings” which include individuals and corporations which undertake commercial activity.

Fair competition is the fundamental part of the European Union single market.  Parties with significant market power may distort competition.  They may divide up markets within the EU to the prejudice of the internal market. The prohibition on the abuse of a dominant  position seeks to prevent serious distortion of the operation of the market by entities with monopolistic or almost monopolistic power, such that there is an absence or impairment of effective competition.

An entity with excessive market power may restrict output and increase prices.  It may seek to prevent others from entering the market by discounting in order to drive out potential competitors.  It may try to link its supply of products with other products.

Holding a dominant position in itself is not an abuse under the legislation.  There must be abuse in order for the prohibition to apply.  There is separate legislation on mergers and acquisitions which is relevant to the accumulation of market powers by reason of a merger or acquisition.

The EU Commission has significant power to apply sanctions where it finds that there has been an abuse of a dominant position.  It may impose fines up to 10 per cent of turnover worldwide. The EU Commission completed a review of its powers of sanction in February 2009, which sets out the methods by which the Commission uses its powers  proceeds in investigations.  The Commission is ultimately an administrative body and the interpretation of completion law is  ultimately one for the courts of the European Union.  However, the guidance is practical assistance.

Undertakings

Undertakings comprise all entities carrying out any kind of commercial activity.  It is not necessary that they be for-profit purposes.  It has been held that certain public officials are carrying out quasi-commercial functions, can be undertakings for this purpose.  The European Court has held bodies which provide statutory health services as an exclusively social objective are not engaged in the commercial or economic activity and accordingly are not to undertakings. Where however, the health bodies are market-based or have been privatised, they may be undertakings for the purpose of competition law.

Undertakings may comprise a group.  They may comprise separate linked companies which are a single entity for the purpose of economic activity.  This is the economic entity principle.  The principle looks at the economic and management reality of the companies or entities in terms in order to determine whether they constitute an ”undertaking” collectively.  The consequence may be that one group entity is responsible for another’s contravention of competition law.

Inter State Trade

The EU prohibition applies where there is an effect on trade between states.  Below this level both the Republic of Ireland and UK competition law have an equivalent test for abuse of a dominant position within the State which has no inter-effects.

Where there is an effect on interstate competition, national courts and their public authorities must themselves apply the EU prohibition.  Domestic law may provide for higher standards in relation to the test for “abuse” of a dominant position. Actions may have an effect in interstate trade, if it is possible to foresee with a sufficient degree of possibility, on an objective basis, that the agreement may have an influence, direct or indirect, actual or potential, on the pattern of trade between states. This is a broad  test and could potentially apply to anything that effects patterns of trade between states.

Under the structural test there may be an effect on inter-state trade, where there is a change in the structure of competition in the market occurs.  This may be so even if the undertaking is dominant in one state only, on the basis that the change in structure may lead to the division of the single market.

Dominance and the Relevant Market

Economic analysis is necessary to order to consider whether there is a dominant position.  The relevant market must be defined.  There must be significant market power.  The existence of barriers to entry is relevant.  Dominance will be relative to a particular market.  The issue market definition can be difficult.  Markets may relate to particular products, locations or periods of time.  The EU Commission has published a notice on the definition of a market.  This sets out the Commission’s practice in relation to its decision-making process in this context.

The primary consideration in defining the market is to consider the range of products in competition with those of the undertaking concerned.  The competitors may be actual or potential. If the product market is defined too narrowly,  then an entity may be deemed dominant. However, in a more broadly defined market, it may not be dominant.

The  interchangeability or the ability for substitution of the product with a competing product is a key factor. The Commission focuses on the level of demand substitution and the ease at which customers may switch from one product to the other.  The Commission applies “the small but significant non-transitory increase in price” test.  This applies a hypothetical permanent increase of the price of the order of 5 to 10 per cent.  If there is evidence that this would cause a switch to other products in consequence of such an increase, the product concerned and the substituted product are likely to be deemed to be part of the same market. The test is applied using an increasing set of competing products, until no further substitutes are found in accordance with the test.

If one single undertaking produced all the products for which there was no substitute in the above sense, there  would be a hypothetical monopoly. The Commission cannot act on the basis of hypothesis only.  It must have evidence.  Evidence may be by way of market studies and the views of  market participants. It would be difficult in practice, in smaller markets to gather sufficient evidence.

Defining the Product Market I

In principle, there is always likely to be a limit to which any monopolistic provider can increase its prices, without incurring some manner of substitution.  In practice, there is likely to be a limit to increases, so as this would otherwise cause a reduction in profits.  A wider range of products will act as substitutes at a higher price.

If the monopolistic provider has already, as may commonly be the case, raised its price to this level, then a further 5 to 10 per cent increase might cause substitution and give the illusion that there is competition. The Commission is cognisant of this possibility and will look at the entirety of the evidence to order to  gauge whether this is occurring.

The European Court of Justice follows the Commission’s approach, in broad terms.  The court  is nonetheless free to interpret the provisions of the Treaty and regulations in accordance with the law, as it sees fit.  The court has traditionally focused on a substitution/interchangeability test. It considers cross elasticity of demands.  Cross elasticity is an economic concept referable to the extent to which changes in price, effect changes in demand. The more elastic demand is at  that the price, the more changeable it is with referable to price.

Where cross elasticity is high, relatively small changes in price will have a significant effect by way of substitution of demand by the public.  In contrast, if demand is inelastic at the particular price, a significant relatively high price increase will not necessarily cause a significant amount of substitution.The substitutability of products may be considered with reference to their objective characteristic.  The more similar in nature  the products and the more similar the functions they perform, the more likely they are to act as substitutes.

The facts that products are similar does not necessarily mean that they are  part of the same market, for the purpose of competition law.  Famously the market in bananas was regarded by the courts as separate to the market in fresh fruit generally.  Because bananas were available year-round and satisfied the particular needs of young, old persons and sick persons, they were accepted as being sufficiently differentiated from other fresh fruits.

Defining the Product Market I

Questions of judgment may arise in considering whether products are in the same market.  Some products, which appear to be quite distinct, may perform the same functions so that they are sufficiently interchangeable, notwithstanding their difference in nature.

The price range of goods and services may affect the judgment of what constitutes the relevant market.  There may be a luxury end goods, which are distinct from the general market.

Products may have multiple uses.  There may be different markets relative to each type of use.  The ECJ has held that the market in respect of car tyres differs depending on the type of demand.  The original tyres fitted to vehicles during manufacturing and replacement tyres during repairs were regarded as being in separate markets.  There was found to be a significant difference in the circumstances and strength of the market power of the purchasers in each case.  In the former case, tyres were  likely to be ordered in bulk with greater quantities,  whereas in the latter case, they were likely to be ordered as required.

The supply side may be relevant.  If other suppliers and producers can switch production to substitutes which can enter the relevant market at short notice and without significant cost, they may be part of the market.  This potential competition may make a market more competitive.  The Commission has given the example of the paper market, where e different types of paper are produced, but where other producers could relatively easily enter the market, by producing that different type of paper.

The geographical market must be considered.  It will define the area in which conditions of competition apply between products.  There are cultural, practical and  legal reasons why products may only compete within a certain area.  The court considers the geographical market to be the area where objective reasons based on the above criteria apply to all products and traders.  Where radically different circumstances apply in other markets, they may not be part of the same geographic market.

Transport costs may  be a significant feature.  Perishable goods or goods that are expensive to transport will be subject to a more limited market. Some particular markets may be seasonal or temporary.

 Definition of Abuse

Article 102 of the EU Treaty sets out indicative examples of abusive  of a dominant position.  They include;

• directly or indirectly, imposing unfair purchase or selling prices or other unfair trading conditions;
• limiting production, markets or technical development, to the prejudice of consumers;
• applying dissimilar conditions to equivalent transactions with other trading parties thereby placing them at a competitive disadvantage;
• making the conclusion of contracts subject to acceptance by the other party of supplementary obligations, which by their nature or according to commercial usage have no connection with the subject of such contracts.

The European Courts and the Commission have taken a wide view of what might constitute an abuse. There is an objective test.  Nonetheless, intent may be relevant in terms of sanctions. The  abuse need not follow from the dominance.

In broad terms, abuses of dominant position tend to be exploitative or exclusionary. The first type of abuse typically involves charging a higher price level or imposing less favourable terms and conditions than would apply, if there was free competition. The second category typically involves the misuse of market strength.

Exploitation of Monopoly

The abuse may involve the exploitation of a monopoly.  This will classically involve maximising profit by reducing output so that the price is above the level which would prevail in a competitive market. The dominant player will commonly be a price maker, rather than a price taker.  Economic theory shows that in such cases, there will commonly be a lack of efficiency in the operation of the market, whereby the dominant player maximises its profits (extracting a supernormal profit  / economic rent) to the detriment of consumers.

Pricing theory may be difficult to apply in practice. It may be difficult to ascertain what constitutes a reasonable or economic profit in the circumstances. A significant amount of information and evidence may  be necessary in order to prove excessive pricing.  It can be difficult to distinguish between normal profit and economic rent. Outside of inflationary times, states have been reluctant to set prices and do not wish to use competition law to set prices through the back door.

The imposition of unfair terms and conditions may constitute an abuse of a dominant position.  Where the conditions are not necessary for the attainment of the objective, they may be  shown to constitute an abuse.

The monopolist may produce further inefficiencies, by being insulated from the requirement to modernise and innovate.  The difficulty in showing whether such inaction or underinvestment is excessive, unfair and abusive, has made the authorities reluctant to allege  this type of abuse.

Exclusionary Abuse

Most abuses encountered in practice, are exclusionary.  They classically involve the use of market power to or exclude market entrants or to discourage them. Competition law may require a dominant undertaking not to exclude actual and potential competitors.

The Courts have emphasised the effect rather than the intention of the dominant undertaking’s actions.  The actions need not necessarily benefit the undertaking concerned. They may constitute an abuse where they are likely to affect the structure of the market in circumstances where competition is already weakened, where they involve methods different from those applicable under normal competition or where they have the effect of hindering the maintenance and development of the market.  However, it may be difficult to identify practices and actions which diverge from those which apply under normal competition.

The EU Commission has required Microsoft to provide interoperability in order to allow competitors to develop products, which competes with its operating systems.  The absence of interoperability could foreclose secondary markets, beyond the market for the operating system itself, for secondary systems, software and products

The EU Commission has published guidance on its enforcement priorities, which identifies what it sees as the worst types of abuse. The guidance is a statement of practice and does not have the force of law. It recommends that the Commission should not challenge behaviour, which is objectively necessary or where the conduct produces efficiencies  which outweigh the  anticompetitive effects on consumers

The guidance has identified exclusionary conduct by dominant undertakings, which might foreclose competitors, as requiring particular attention.  This type of conduct is seen to be particularly adverse to consumers’ interests.  Anti-competitive foreclosure is where effective access for  actual or potential competitors to supplies or markets is hampered or eliminated.  The Commission will consider the position of the dominant undertaking, the relevant market, the position of competitors, customers and suppliers, the extent of the alleged conduct and the evidence of foreclosure and exclusionary behaviour.

Export bans are generally considered abusive.  They are particularly objectionable in that they tend to prevent trade within the European Union.

Pricing

Pricing practices will radiate through the entire chain of distribution.  Pricing may be excessive or may involve predatory discounting.  Rebates and discounts may be abuses in the particular context.  A critical issue is whether there is an intention to foreclose actual or potential competition in the medium to long-term.   There may be alternative evidence of predatory intent and strategy.

Rebates and discounts may be given in order to attain objectives which are abusive.  Prices may be reduced in the short-run, but at the price of reducing longer effective competition, to the detriment of consumers.  The classic instance is under-pricing, which seeks to drive a competitor out of business or seeks to prevent a prospective competitor from becoming established.

Price discrimination by way of discounts and rebates can be an abuse.  The consumer may be dissuaded from taking supplies from a competitor.  This creates a significant and increased barrier to entry for competitors.   Loyalty rebates may be given, based on the percentage of total requirements taken from the supplier. Although this may be useful and non-objectionable in many cases,  in some cases a dominant undertaking can use them to squeeze out other market participants.

Obligations to inform suppliers about competitor’s pricing, may, in context be abusive in itself. Heavy discounting in itself may be abusive, where it dissuades dealers and others from  dealing with competitors for  fear of significant economic loss. The practice may be aggravated where the discounts are discretionary, unpredictable and applied selectively on a case-by-case basis.

Discounts

The EU Commission, supported by the ECJ has taken the view that targeted discounts by a dominant undertaking may be an abuse of a dominant position, where they are aimed at tying customers closely to the dominant company.  The more sensitive the level of bonus to the change in sales levels, the more potentially objectionable it may be.

It does not follow that all discounts are necessarily abusive.  They may be objectively justifiable, based on savings made by the supplier.  Frequently, a producer or distributor may reduce costs by a making specific volume of sales.  However, they should be objectively fixed and open to all customers.  Where they are discriminatory and without objective justification, they are more likely to be found abusive and predatory. As in other aspects of completion law, an economic analysis of the position is usually required.  It may be difficult to show the position, given the complexity of the market. in a record.

A record fine of over €1 billion was imposed on Intel  by the EU Commission by reason of its discounting practices, which had  anticompetitive effects on the market.  The discounting was non-transparent and discretionary.  A vendor could be required to sell at a loss for a long time, before it would become profitable.

The EU guidance considers whether the discount impedes competition relative to a hypothetical equally efficient competitor. The Commission will consider whether this hypothetical competitor could compete by becoming established in the market, if the dominant undertaking is engaging in below-cost pricing under the scheme.  If the dominant undertaker’s sale price, even with a discount is above cost, it is likely to be the case that an efficient competitor could enter the market and compete, so that there is no abuse of a dominant position.

The Commission looks average, avoidable  and  long-run incremental costs.  The latter includes all variable costs and reference costs during a fixed period.   If the undertaking is selling below this level, they are selling at a loss, as all fixed costs are not being recovered.  An equivalent competitor could not complete without suffering a loss.

The long-run average incremental cost includes product-specific fixed costs.  It may be more appropriate where the variable costs are lower, but where there were important fixed costs referable to the product, which should be recovered over its lifetime.  This may occur where there is significant R&D or IT intellectual property components in the product’s cost elements.

Predatory Pricing

Predatory pricing will typically involve selective reduction of prices, intended to damage a competitor.  The reduction will typically be to below-cost levels.  Using its economic strength, the dominant undertaking may be able to take losses while driving the weaker competitor out of the market.

The Court of Justice has indicated that pricing might be considered predatory, if it is below the average variable costs, thereby not covering fixed costs.  Between average variable cost and average total cost, pricing will not be presumed predatory, but it may be shown to be such, where it is part of an intentional course of conduct intended to drive out the competition.

In practice, it may be difficult to produce evidence as to the elements of costs for the above purposes and evidence of the intentions of the dominant undertaking.  It might be argued that all undertakings seek to eliminate their competitors and that in many contexts, this may constitute effective competition The circumstances will need to be examined in each case.

UK Position

The Competition Act 1998 reformed UK competition law and provided parallel prohibitions on anti-competitive behaviour and abuse of a dominant position equivalent to those applicable under EU law.

The Competition Act provides that any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom.

It is intended to interlock with the EU provisions in identical terms in Article 102 of the Treaty. The Competition Act provides that in the determination of any question in the respect of the prohibition, it should be interpreted consistently with the corresponding provisions under EU law

The provisions of EU case law and interpretation is relied on by the Competition Appeal Authority.

Competition and Markets Authority

The legislation is applied and enforced in the United Kingdom by the Competition and Markets Authority. Where it has a reasonable suspicion that there is an abuse of a dominant position or the complimentary provision in respect of anti-competitive behaviour, it may conduct an investigation. The powers of investigation are parallel those of the Commission in investigations under the regulations made to give effect to Article 101 and 102.

The CMA gives persons affected by a proposed decision in relation to infringement the opportunity to make representations. It may apply interim measures. They require actions in breach of the prohibition to be changed or terminated.

The Competition Act provides a fine of up to 10% of the worldwide turnover of an undertaking which infringes the provisions.

The Competition Appeal Tribunal is the appeal tribunal in decisions made by the Competition and Markets Authority. Third parties with a sufficient interest are entitled to appeal. Further appeals are made on a point of law to the Court of Appeal and Court of Appeal (Northern Ireland)

The authorities and courts are to have regard to the case law and jurisprudence under the EU legislation. Consistency is to be achieved insofar as possible having regard to any differences between the provisions concerned. In fact, there is no significant difference