Abuse of a Dominant Position

From Max-EuP 2012

by Wolfgang Wurmnest

1. Object and goal of abuse control

All European states (see eg Art L 420-2 Code de commerce; s 18 Competition Act 1998, §§ 19, 20 Gesetz gegen Wettbewerbsbeschränkungen; Art 3 Legge antitrust), as well as the European Union (Art 102 TFEU/82 EC), subject undertakings holding a dominant position to a special ex post-behaviour control. Such a control is indispensable as dominant undertakings are subject to limited constraints by competition. Business practices used in competitive markets by smaller firms as a desired competitive tool can therefore become an anti-competitive weapon in the hands of a dominant firm. The control of abusive market practices seeks to ensure that dominant undertakings do not abuse their market position by maintaining or strengthening their market power through anti-competitive means. Alongside the prohibition of cartels (prohibition of restrictive agreements and exemptions and merger control), the prohibition of abusive business practices by dominant actors in the market represents the third pillar of modern competition law. In certain economic branches, most notably in network industries (such as telecommunications and energy), which have only been liberalized recently, abuse control is supplemented by special regulations prescribing an ex ante control of certain behaviour of the dominant firm.

The notion of a dominant position describes a position in which a firm holds a position coming close to a monopoly. A real monopoly (from Greek monos (alone) and polein (sell)) pertains to a market in which there is only one seller; if there is only one buyer one speaks of a monopsony. In economic theory, the power of monopoly is often characterized as ‘power over the price’. This is because in the world of price-theoretic modelling, a monopolist has the possibility of maximizing his profits by restricting the output. This power distinguishes its position from firms that are exposed to competition. In competitive markets firms can maximize their revenues only by reducing their costs and lowering their prices, thereby generating more sales, and not by an output restriction. In economic reality, true monopolies predominantly exist in state-protected markets. In competitive markets, they are rare. However, even when there are several undertakings in one market, an undertaking can be found dominant. This may be the case when the market possesses high barriers to entry and one firm holds a very high market share while the other firms in the same market are significantly smaller.

2. Trends of European legal development

The complexity of abuse control has forced legislatures throughout Europe to pass wide-reaching general clauses. Over the past few decades, one has, however, witnessed a gradual assimilation of national cartel laws to the prohibition of the ‘abuse of a dominant position’ enshrined in Art 102 TFEU/82 EC. In the early days of European integration, there was an expectation that legal harmonization would be initiated by the Union in order to realize a uniform European competition order. However, after Reg 17/62 conferred on the European Commission the right to enforce the European competition rules centrally, such a ‘top-down’ harmonization was no longer deemed essential. The uniform application of the European competition rules was ensured by the powers of the Commission. The co-existence of European law and national laws did not lead to a significant number of conflicts between the two legal orders, as the (then six) Member States, apart from Germany, did not have competition laws or applied existing rules only infrequently.

Over time, the idea of free competition within a single European internal market spread in Europe. In this context, many Member States passed new competition laws or reformed their existing laws in a fundamental fashion. To avoid inconsistency with European law, the national legislatures drew heavily on the text of Art 102 TFEU/82 EC. This step was, for example, taken by the Benelux States, Denmark, Greece, Great Britain, Italy, Sweden and practically all the eastern European States. Some of these legal systems further incorporated ‘a governing principles clause’, according to which national provisions have to be interpreted as far as possible in line with European law, to maintain consistency, where possible, between national competition laws and EU law. Moreover, even in states with an abuse control system differing from Art 102 TFEU/82 EC or in which there is no statutory duty to observe the decision practice of the European Court of Justice (ECJ), legal practice often takes into account the decision practice of the European Commission or the European Courts.

A legal obligation to such harmonization of national law has never existed under EU law. Even under Reg 1/2003, which superseded Reg 17/62, Member States are not prohibited from stipulating a more rigid abuse control system than laid down in Art 102 TFEU/82 EC. However, the coexistence of diverging standards leads to tension and stands in the way of the accomplishment of a truly uniform European competition order. It should therefore be expected that in a few years time the Commission will attempt to initiate a reform of Reg 1/2003 and to eliminate the parallel applicability of national laws when the behaviour of a dominant undertaking is damaging to intra-Union trade. Consequently, the applicability of national abuse control rules for dominant undertakings would be limited to purely national cases as is already the case in the area of prohibition of cartels.

The fact that the text of Art 102 TFEU/82 EC has essentially not changed for 50 years does not mean that the abuse control regime has not developed over time. This is largely due to the fact that the interpretation and application of provisions of competition law cannot take place without considering the economic aspects of the case. Shifts in mainstream economic theory have often resulted in refinements of the application and interpretation of the law. The interplay between law and economics to solve real life competition cases has further led to a heated debate in previous years on the goals of competition law in general and abuse control in particular. This debate was initiated by the plans of the European Commission to give the interpretation and application of EU competition law a stronger economic foundation (the so-called more economic approach).

The consideration of economics in the interpretation and application of EU competition rules is by no means a new development. The objective of the authorities and courts has, however, been focused on the competitive process as such. This conception of competition has some roots in the teachings of the ordoliberal Freiburg School and the thinking of Friedrich August von Hayek but is also rooted in the fact that EU law must protect the functioning of the internal market. The application of the EU competition rules therefore builds upon the idea that consumers will regularly benefit from competition if markets are kept open.

Some forces within the European Commission now plead in favour of a partial change of the interpretation and application of the European competition rules. It is argued that the law should be applied in a manner serving the maximization of consumer welfare. In the last few years, the Commission therefore started to evaluate the (short-term) consequences of the examined business practice on consumers and to take the results into account in their decision-making process. Against this background, the Commission’s Communication on its ‘enforcement priorities’ in applying Art 102 TFEU/82 EC ‘to abusive exclusionary conduct by dominant undertakings’ published in 2009 makes clear that the European Commission only intends to intervene when practices employed by dominant undertakings may lead to ‘anti-competitive foreclosure’. This is the case where ‘effective access of actual or potential competitors to supplies or markets is hampered or eliminated as a result of the conduct, whereby the dominant undertaking is likely to be in a position to profitably increase prices to the detriment of consumers’. The concept of consumer is understood in a wide sense and encompasses ‘all direct or indirect users of the products affected’ by the dominant undertaking’s conduct. In this respect the interpretation of EU competition law has become more closely aligned to US antitrust law, at least as understood by US enforcers. The Supreme Court, however, has so far not expressly affirmed that s 2 of the Sherman Act merely seeks to protect a specific group of market participants, ie consumers. Also, the ECJ has not confirmed the Commission’s policy change. Recent decisions adhere to the previous line of jurisprudence, according to which Art 102 TFEU/82 EC is aimed not only at practices which may cause prejudice to consumers directly, but also at those which are detrimental to them through their impact on an effective competition structure (ECJ Case C-95/04 P British Airways v Commission [2007] ECR I-2331 para 106; see also ECJ Case C-8/08 T-Mobile Netherlands v Raad van Bestuur [2009] ECR I-4529 para 38 (concerning Art 101 TFEU/81 EC)). The Treaty of Lisbon has not brought any changes in this regard (see ECJ Case C-52/09 Konkurrensverket v Telia Sonera Sverige AB nyr para. 20, 24).

3. Basic structure of abuse control

The assimilation ‘from the bottom’ in the field of abuse control that has taken place over the last decades has led to a quite uniform European abuse control model which can be found in most of the European legal systems. Under this model, the abuse of a dominant position on the relevant market or a part thereof by one of several undertakings is prohibited.

a) The dominant position

Individual dominant position in a given market—There is a wide consensus that only undertakings with a high degree of market power are subject to special rules of behaviour. A finding of dominance involves a two-stage procedure. The first step is to define the relevant market by looking at both the product and geographic markets. Subsequently, the degree of dominance prescribed by law on this market has to be determined.

The definition of the relevant market combines the product market and the geographic market. The relevant product market depends on the substitutability of the goods or services. Where goods or services can be regarded as interchangeable from the point of view of consumers, they are within the same product market. The relevant geographic market is the area in which consumers or businesses may acquire certain products. It comprises the area in which the firms concerned buy or sell their products or services and in which the conditions of competition are sufficiently homogeneous. The more economically oriented hypothetical monopolist test (also called the ‘small but significant and non-transitory increase in price’ (SSNIP) test), which seeks to attain a more exact definition of the relevant market on the basis of demand and price elasticity, is often inapt for the determination of market power in abuse control cases. This test uses existing market prices which are hypothetically approximated to the monopoly price. Consequently, if the existing price level does not reflect the competitive price, this test yields a blurred outcome. If, for example, a firm has exploited its dominance by charging an excessive price, the SSNIP test exaggerates the breadth of the market since consumers would—if the dominant undertaking would further increase its prices—switch to very remote substitutes (which would indicate that these products must be included in the relevant product market) that they would not regard as functionally interchangeable under normal competition conditions (so-called ‘cellophane fallacy’).

The determination of the necessary degree of dominance on the defined market is unproblematic if an undertaking is a true monopolist, ie has no competitors. Undertakings, however, are also deemed to be dominant if they can behave independently of their competitors. Whether this is the case can only be determined through an extensive analysis of the market conditions which considers criteria of market structure and to a lesser extent characteristics of the undertaking and criteria of market behaviour. For the analysis of the market structure, important indicators are the market share and the existence of high entry barriers to the market. Examples of characteristics relating to the undertaking that indicate dominance are, for example, the brand loyalty of the consumers and the degree of the structuring of production and sales. The most important characteristic relating to the behaviour of a firm is the maintenance of discriminatory pricing structures over a certain period of time.

In some legal systems, the prohibition of abuse of market power also entails relative market power. Accordingly, in Germany, France and Austria, undertakings which are vital suppliers or buyers for small or medium-sized firms for a specific type of goods or services are considered to be dominant on the market if there is not a sufficient possibility to switch to other firms or if it is unreasonable to expect smaller firms to do so. As a result, a dominant position is deemed to exist even when the firm concerned is constrained by effective horizontal competition. Furthermore, some legal systems, such as Germany or France, have significantly lowered the level indicating market power in order to be able to also subject those firms to special rules of behaviour which only have market power vis-à-vis smaller and medium-sized competitors.

Collective dominance—The abuse of a collective dominant position in the market by several undertakings is prohibited. On the one hand, firms are collectively dominant if they are structurally and contractually closely related to each other so that they are able to act as a unit on the market. This is, for example, the case for members of a cartel which was exempted according to a block exemption. On the other hand, the possibility to act as a unit on the market can be created by an oligopolistic interdependency. This may be the case if an oligopolistic market is structured in a way that each firm abstains from aggressive competition because it knows that such a move could be neutralized by its competitors and therefore behaves in a similar fashion as the other oligopolists. This scenario is likely to materialize in very transparent markets where there is a high degree of concentration on the seller’s side and a very inelastic demand.

b) Types of abuse

Since it is not possible to exhaustively legislate upon all types of anti-competitive practices that can be used by dominant undertakings, all legislatures in Europe have opted for a general clause that is complemented by a non-exhaustive list of particular types of abuses. On a very general level, the following division can be drawn: on the one hand, dominant undertakings are legally prohibited from exploiting undertakings on different levels of the supply chain, particularly by charging unreasonably high prices (so-called exploitative abuses). On the other hand, dominant undertakings are not allowed to damage competition by monopolizing a market (so-called exclusionary practices).

Exploitative abuses—For a long time, legal measures against monopolies in Europe were mainly directed against the charging of excessive prices. Aristotle had already criticized the efforts to increase the price above a ‘just level’ through the establishment of monopolies. Similarly, a number of Roman laws punished merchants for increasing prices for food and other goods by agreements or unilateral measures. Through the reception of Roman law and the teachings of Aristotle, the theory of iustum pretium evolved in medieval times. This theory was used as a justification for a number of medieval laws against usury. The aim of these prohibitions was not the protection of free competition. They were designed to ensure that the ‘reasonable’ prices fixed by the crafts, guilds and local market authorities were respected. Consequently, merchants were forbidden to buy up goods in one place in order to sell them on at a different location at an increased price. The same was true for the retention of goods with the intention of exploiting a shortage of supply. In a diluted form some of these prohibitions were retained even after the abolishment of the guild system, often in the form of criminal law.

This tradition continues to have effect today in the form of the prohibition of exploitative abuses. For this reason, the legal situation in Europe is different from the prevailing situation in US antitrust law. The Sherman Act of 1890 only prohibits the (attempted) monopolization of markets, ie the use of exclusionary practices in order to obtain or to expand market power and leaves the right of the dominant undertaking to demand the monopoly price untouched. In the application of the law, however, this transatlantic difference is hardly noticeable. Action by enforcement agencies against monopoly prices remained rare in Europe. Today, the view prevails that such price control procedures afford little help to competition and are only appropriate in markets where competition cannot function. However, such markets are usually subject to a special regime of price regulation. In markets open to competition, low prices ordered by a competition authority or a court may have anti-competitive effects. They may give a short-term price advantage to the consumer; in the long term, however, the high market prices reduce the attractiveness of entering the market for newcomers and thus contribute to the preservation of existing monopoly structures.

Exclusionary practices—Today, in all European legal systems and in the law of the European Union, the main focus of law enforcement is on the prohibition of abuses with which an undertaking with economic power seeks to constrain the already reduced degree of competition in the dominated market or a third market. The insight that the maintenance of competitive structures assists the competition process more than the prohibition of exploitative abuses could only assert itself in the late 20th century. This development significantly harkens back to the influence of the teachings of ordoliberalism. The ordoliberal thinkers recognized such forms of competitive restraints as a legal problem after German courts allowed cartels to a large extent to drive out competitors from the market that were not joining the cartel. The ordoliberal thinkers therefore demanded a stricter stand against exclusionary practices in order to protect residual competition. As in the legal traditions of most EEC Member States the focus was not on exclusionary conduct but on exploitative abuses, it was for a long time controversial whether the European abuse control system only prohibits exploitative abuses or also exclusionary practices. It was only in its landmark decision of 1973 that the ECJ clarified that Art 102 TFEU/82 EC also prohibits exclusionary conduct (ECJ Case 6/72 Continental Can Co Inc v Commission [1973] ECR 215 para 26).

The objective of driving a competitor out of the market, disciplining actual rivals, or deterring prospective ones can be achieved through a variety of business practices. Thus, a dominant undertaking in a given market can use its position to expand its market power into a downstream market or a related market (monopoly leveraging). In particular, such a transfer of market power can be brought about by tying or bundling two products. Furthermore, a dominant undertaking can dampen competition by manipulating the market structure on the supply or demand side. The latter is, for example, the case when the dominant undertaking eliminates or disciplines current competitors by charging predatory prices. The former can happen when the dominant undertaking causes an anti-competitive foreclosure effect by binding its customers, eg by long-term exclusive distribution agreements or by special retroactive conditional rebate schemes.

It is rather hard to characterize whether a given business practice of a dominant firm has pro- or anticompetitive effects. Therefore, drawing the line between aggressive but benevolent competition and exclusionary practices is usually a question of degree. Market intervention cannot therefore only be based on an assessment of the conduct in question, but also has to take into account the purpose and effects of the relevant business practice on the relevant market.

Literature

Roman Piotrowski, Cartels and Trusts, Their Origin and Historical Development from the Economic and Legal Aspect (1933); Hermann Kellenbenz, ‘Monopol’ in Handwörterbuch zur deutschen Rechtsgeschichte, vol III (1984) 634; David J Gerber, Law and Competition in Twentieth Century Europe—Protecting Prometheus (1998); Robert O’Donoghue and Jorge Padilla, The Law and Economics of Article 82 EC (2006); Einer Elhauge and Damien Geradin, Global Competition Law and Economics (2nd edn, 2011) 227; Heike Schweitzer, ‘The History, Interpretation and Underlying Principles of Section 2 Sherman Act and Article 82 EC’ in Claus-Dieter Ehlermann and Mel Marquis (eds), European Competition Law Annual 2007: A Reformed Approach to Article 82 EC (2008) 119; Ariel Ezrachi (ed), Article 82 EC: Reflections on its Recent Evolution (2009); Florian Schuhmacher, Effizienz und Wettbewerb (2011); Wolfgang Wurmnest, Marktmacht und Verdrängungsmissbrauch (2nd edn, forthcoming 2012).

Retrieved from Abuse of a Dominant Position – Max-EuP 2012 on 19 May 2022.

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