Abuse of Dominance National Training Workshop on Competition Policy and Law Gerald Gregory (CUTS Fellow)

Introduction 3 basic elements of competition law prohibit - Anti-competitive agreements - Anti-competitive mergers - Abuse of market power Talk is from EU perspective but much less consensus between jurisdictions on what is abuse especially EU v US (which I will try to highlight)

What is Dominance? (1) The European Court defines dominance as: “A position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers” [Case 27/76 United Brands v EC Commission (1978)]

What is Dominance? (2) Essentially a lack of rivalry in the market Competitive pressure from rival firms usually 'keeps firms honest', preventing them from charging prices which are excessively above costs Without competitive pressure a dominant firm has market power and so is able to profitably raise prices and restrict output

What is Dominance? (3) The European Court also held that: “such a position does not preclude some competition...but enables the undertaking which profits by it, if not to determine, at least to have an appreciable influence under which competition will develop, and in any case to act largely in disregard of it so long as such conduct does not act to its detriment” [Case 85/76 Hoffman La Roche v EC Commission (1979)]

What is Dominance (4) A dominant position may, in part, be obtained through: a) A firm gaining market share by being more efficient than competitors and better at product and process innovations b) A firm buying out or merging with competitors c) A state owned enterprise

Abuse (1) a) is positive and part of the competitive process. The lure of greater profits is an incentive to innovate and increase market share b) can be positive or negative which is why many jurisdictions regulate merger activity So holding a dominant position is not outlawed (although it is controlled where possible) Abusing a dominant position is outlawed

Abuse (2) Article 82 of the EC Treaty is the cornerstone of European law on abuse of market power “Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common 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” Economic effect is more important than specific legal form

Abuse (3) Conduct which exploits customers or suppliers such as excessive pricing Conduct which amounts to exclusionary behaviour by: - either weakening or removing existing competition - or weakening or removing potential competition by raising barriers to entry Most cases concern exclusionary behaviour

Abuse (4) US differs from the EU as it does not prohibit exploitation In the US the view is that market power generally results from skilled competitors applying sound business acumen and efficient practices so more permissive so as not to dull incentives to innovate In the EU case law establishes that a dominant firm has a special responsibility not to allow its conduct to impair genuine undistorted competition

Abuse (5) Another helpful categorisation is price and non- price abuses (more detail later) Price abuses include: - predatory pricing, margin squeezes and loyalty discounts Non-price abuses include: - tying, bundling, exclusive dealing and refusal to supply

Assessment: Two Tests In assessing whether a firm has infringed abuse of dominance provisions in competition law there are naturally two tests: 1) Is the firm dominant? 2) If the firm is found to be dominant, has it abused that dominance? There is little point investigating an abuse which is carried out by a non-dominant firm

Assessment: Dominance (1) To assess dominance in a market, the market itself must be defined After the market is defined an assessment of the extent of market power is needed Market power should not be confused with market share. While a lack of rivalry generally requires a firm to have substantial market share, a large market share does not necessarily mean there is a lack of rivalry!

Assessment: Dominance (2) Dominance or market power is the ability to profitably raise prices above competitive levels. Market power therefore depends on the extent of rivalry or competitive constraints: - Existing competitors - Potential competitors - Buyer power A dominant position may result from a number of factors, which looked at alone may not be determinative

Existing Competitors (1) The constraint provided by existing competitors can be assessed by analysing market shares As a firm's market share increases it is less likely to face a competitive constraint from other firms Under EU Case law - Share > 70% = dominant - 70% > Share > 50% = presumed dominant - Share < 40% = dominance unlikely

Existing competitors (2) Assess relative market shares - 3 firms each with a third of the market is more likely to be competitive than 1 firm with 30% and 7 firms each with 10% Look at how market shares change over time. If market shares are volatile it could be that firms are constantly innovating to get ahead (eg. IPR) This is consistent with healthy competition. The incentive to earn higher profits by getting ahead of competitors spurs innovation

Existing competitors (3) But a persistently high market share might be due to the firm being consistently the best innovator The price responsiveness of competitors should be considered. A firm with a large market share might not be able to sustain increased prices if other firms can increase output in response However, if competitors are capacity constrained then the firm could probably sustain higher prices

Potential competitors (1) If new firms can easily enter the market then incumbent firms are less likely to be able to sustain increased prices So a firm with a large market share is less able to exploit customers if the market is 'contestable' However, it may try to raise entry barriers to remove the threat of potential competition (and this is an abuse) Growth rate of the market is also important

Potential competitors (2) The following factors can contribute to barriers to entry: - Sunk costs - Access to inputs and distribution - Regulation - Economies of scale - Network effects - Exclusionary behaviour (abuse) Even threat of the latter can deter entry

Buyer Power The following can result in buyers having a strong bargaining position versus suppliers - buyer can easily switch substantial purchases from one supplier to another - buyer could commence production itself (backward integration) or sponsor new entry - buyer is an important distribution outlet for the seller

Price abuses Predatory pricing is essentially pricing below cost to eliminate a competitor with a view to recoup losses later Margin squeeze occurs where a vertically integrated dominant firm sets wholesale price to downstream competitors close to its own retail price [See Case CP OFT v Genzyme] ‘Loyalty’ discounts and rebates with no cost justification are deemed to have a foreclosure effect so considered abusive under EU case law, but in US only deemed abusive if pricing is below cost

Predatory Pricing (1) Under European law: - Price > Average Total Cost (ATC) = No Abuse - ATC > Price > Average Variable Cost (AVC) = Abuse if intent established [Case 62/86 AKZO v Commission (1991) ECR I-3359] - Price < AVC = Abuse Probability of recoupment does not need to be established [Case C-333/94P Tetra Pak v Commission (Tetra Pak II) (1996) ECR I-5951] Under US law below cost pricing is only an abuse if: - price < AVC - a dangerous probability that alleged predator will be able to recoup losses through monopoly prices after rival has exited [Brooke Group Ltd v Brown & Williamson Tobacco Corp 509 US 940 (1993)]

Predatory Pricing (2) From a US perspective EU approach risks penalising pro-competitive behaviour and puts safe-harbour around inefficient firms, reducing incentives to innovate From an EU perspective the US approach may allow anti-competitive behaviour to 'slip through the net' resulting in an 'as-efficient' firm exiting the market Different approaches can have a material effect on markets

Non-price abuses Tying, bundling and exclusive dealing have been discussed in the vertical restraints session Vertical restraints can either occur as part of agreements or as a result of unilateral conduct by a dominant undertaking, in which case they fall under abuse of dominance Concern is that VR is an attempt by firm to use its dominance in one market to limit competition in another market US more permissive than EU [See Berkey Photo v Eastman Kodak Co., 603 F.2d 263 (2 nd Circ. 1979)]

Penalties Penalties can be: - Fines (up to 10% of worldwide turnover) set to reflect seriousness of abuse and act as deterrent to firm involved and firms considering unlawful activities - Disqualification from company management Damages claims can be brought by third parties and consumers under collective actions Enforcement can feed back to prevention via deterrence in 4:1 ratio in UK (See OFT 962 for Deloitte research)

Example – Predatory Pricing Case in the UK of Aberdeen Journals which controlled 70% of the Aberdeen newspaper market Prices of advertising dipped below ATC after entry by Herald and Post, for two months prices were below AVC, evidence of intent also found OFT found that dominance had been abused and fined Aberdeen Journals £1.3m May have been treated differently in the US

Example – Loyalty Rebate Virgin complained to OFT about BA system of extra commissions to UK travel agents for meeting or exceeding previous year's sales BA had 40% share of sales through UK travel agents, more than twice the combined share of 4 largest rivals No efficiency justification found and BA found to have abused dominance A similar case was brought by Virgin in the US but BA was not found to be an abuse

Thank you for your attention!