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Learn about the prohibition of abuse by dominant undertakings in the internal market, market definition, and power in EU competition law.
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Administration in International OrganizationsPUBLIC COMPETITION LAWClass IV, 27th Oct 2014 Krzysztof Rokita
Abuse of a Dominant Position Article 102 TFEU Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
Abuse of a Dominant Position • Holding a dominant position as such is not prohibited by EU competition law. • Prohibition applies only to activities of dominant undertakingswhichareconsidereddetrimental to competition. However, the same detrimentalbehaviourundertaken by a firm whichis not dominant, is not prohibited by EU competition law… • …therefore, a dominant undertakinghasspecialresponsibility not to distortcompetition by itsunilateralbehaviour.
Abuse of a Dominant Position Fiveelements that must be established before the prohibition in Article 102 applies: They are: (1)an abuse; (2)by one or more undertaking; (3)of a dominant position; (4)withinthe internal market or a substantial part thereof; (5)insofaras it may affect trade between MemberStates.
Market definition and market power • Commission noticeon the definition of relevant market for the purposes of Community competition law (97/C 372/03): „Market definition is a tool to identify and define the boundaries of competition between firms. It serves to establish the framework within which competition policy is applied by the Commission.” • Defining markets is an indirect method of measuring a firm’s market power. Market power is the ability to profitably raise prices above competitive levels over a period of time (above short-run marginal cost).
Market definition and market power • A relevant market is composed of goods and services (1)in a specified geographic area(2)which are close economic substitutes and therefore operate as a competitive constraint on one another (or more specifically they operate as a competitive constraint on the behavior of suppliers of those goods and services). • “A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use”. • “The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas”.
Market definition and market power • Demand substitution is concerned with the ability of consumers of the product to switch to substitute products. It is dependent upon a numer of factorssuch as customer preference, whether customers can switch immediately or need time to adapt, whether there is similarity in quality or price. • Supply substitution relates to the ability of producers of similar products to switch to producing the relevant product. If a producer of one product can switch production to another product in short term, without significant cost or risk, then those two products form part of the same market, even though they may not be considered as substitutes by consumers.
Market definition and market power Quantitative methods ofmeasuring interchangeability/substitutability: • HypotheticalMonopolistTest(HMT) / SSNIP (Small but Significant Non-transitory Increase in Price)Test. • Asmall (5-10 per cent) increase in price of product A which has a lasting character; • Issuch a priceincreaseprofitable to the producer of product A? • Ifconsumers start to purchaseproduct B instead of product A and the priceincreasewould not be profitableitmeansthat products A and B form part of the same relevantproduct market (theyaresubstitutes). • Start the test again,but this time include products A and Btogether and assume anincrease in price. • If consumerswill switch to products C then theyalso form part of the same productmarket(priceriseis not profitable). BUTif the increase in price will be profitable - because consumerswill not purchase products Cinstead of products A and B,then products C create different market and only products A and B are part of therelevant market. Qualitative methods of measuring substitutability: products’ characteristics and intended use.
Dominant position The CJ has defined a dominant position as: “…a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers”. C-27/76 - United Brands v Commission, para 65.
Dominant position Determining whether an undertaking holds a dominant position involves two stages: • Market definition: An undertaking can hold a dominant position only in a specified product and geographic market. • Market power: Absolute market power No market power Somewhere in between: substantial market power = dominant position
Dominant position Three main factors typically to be taken into account when assessing the degree of market power (according to guidanceon the Commission'senforcement priorities inapplying Article 102, para 12): • constraints imposed by the existing supplies from, andthe position on the market of, actual competitors (themarket position of the dominant undertaking and itscompetitors), • constraints imposed by the credible threat of futureexpansion by actual competitors or entry by potentialcompetitors (expansion and entry); • constraints imposed by the bargaining strength of theundertaking's customers (countervailing buyer power).
Dominant position Themarket position of anundertaking and itscompetitors: • isindicated by their market shares; • verylargemarket shares may in themselves be evidence of the existence of a dominant position unless there are some exceptional circumstances; • in C-62/86 - AKZO v Commission the Court of Justice heldthat market shares of 50 per cent are enough to be regarded as evidence of dominant position.
Dominant position Futureexpansion by actual competitors or entry by potential competitors: • Needs to be likely, timely and sufficient. • Barriers to entry and expansionareimportant in determiningwhetheranundertakingholds a dominant position. Theyareobstacleswhichpreventthe emergence of potential competitors which would otherwise enter the marketorwhichpreventexpansion of existingcompetitorswhichwouldotherwiseexpand their business in order to provide effective competition. • Examples of barriers to entry and expansion: sunkcosts, legaland regulatory barriers, economiesof scale, privileged access to essential inputs or natural resources, important technologies, an established distribution and sales network, network effects.
Dominant position Countervailingbuyerpower • A powerful buyer is said to have bargaining strength and therefore the ability to switch to competing suppliers or to promote new entry onto the market. • Buyer power may not, however, be considered a sufficiently effective constraint if it only ensures that a particular or limited segment of customers is shielded from the market power of the dominant undertaking.
Dominant position Collective dominant position • Two or more companies may together hold a dominant position provided that from an economic point of view they present themselves or act together on a particular market as a collective entity. • Their joint policies or activities enable them together to behave to a considerable extent independently of their competitors, customers and consumers. • Suchsituationsexistwhentherearesomeeconomiclinksbetweenundertakings(e.g. agreements) orbecause the structure of the market enablesthem to tacitlycoordinatetheirbehaviour (in oligopolisticmarkets).
Dominant position Substantial part of the internal market • individual MS have been held to be a substantial part of the internal marketas well as parts of MS; • what constitutes a substantial part of the internal market may depend on the nature of the market in issue: the port of Genoa was considered to be substantial part of the internal market.
Cases C-27/76 - United Brands v Commission: • What was the relevant product and geographic market? • Why did the Court consider the products forming part of the relevant market distinct from other similar products? • Would it be beneficial (or not), from the point of view of United Brands, to decide that other fruit formed part of the relevant product market? Why? T-340/03 – France Telecom: • What was the relevant product market? • What was the decision of the Court as to the existence of demand-side substitutability between high-speed and low-speed internet access? • Why does the commentator criticize some of the conclusions of the Court? C-22/78 Hugin: • What is an aftermarket? • What was the relevant product market?
