Abuse of dominance is probably what most people think of when they hear competition law. Article 102 covers anticompetitive, unilateral conduct performed by an undertaking with market dominance. There have been lots of high-profile Article 102 cases with huge fines, often in the billions of euros.
Article 102 is as follows:
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.
Some things to note:
- There isn't an equivalent to Article 101(3) exceptions
- But there is a judicially developed version of objective justification
- There also isn't an equivalent of Article 101(2)
- But the consequences of infringing 102 are the same as 101
- Fines
- Damages
- Injunctions
- But the consequences of infringing 102 are the same as 101
Article 101's harm is that companies get together to do less and charge more. Article 102 is similar-ish.
The main criticisms of 102 is that it doesn't protect competition, but it does protect competitors. It's also applied formalistically, so infringements exist even when there isn't any harm to competition. Moreover, Article 102's enforcement priorities don't set the limits of the law, and they aren't really guidelines either, so the Commission has to somehow distinguish normal from abnormal competition.
The basic steps in the application of Article 102:
- Market definition
- Relevant production market
- Relevant geographic market
- Relevant temporal market (this is rare)
- Dominance
- Market share
- Size
- Resources
- Barriers to entry
- etc.
- Abuse
- Exclusionary
- Exploitative
- Effect on trade between member states
This mostly applies to suppliers, but there can be dominant purchasers. Although 102 is often applied for unilateral action, it can also apply in instances of collective and joint dominance.
The court in United Brands defined 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 giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers
It is not necessary for a lack of competition to find dominance, just if an undertaking is able to act largely in disregard of other entities. The bar for market power is higher than it is in Article 101.
In AstraZeneca the General Court and Court of Justice equate dominance with the degree of market power sufficient to confer the ability to make profitable sales, while lowering quality or quantity or increasing prices or without innovating.
Even more simply, are you in a position to raise the price and the customers won't go somewhere else? If so, you're probably dominant.
There are a few ways to control market power, namely
- Public ownership (i.e., nationalisation)
- Regulation of price/output
- Prohibitions on certain conduct
Define the Market
Market definition is essential to assessing dominance. This is primarily a question of interchangeability (both in terms of the product and geography), as the goods and services have to be in the same market. It's also worth remembering that competitive constraints outside the market can limit the power that firms have within it.
Guidance on how to define a market is found in the Commission's Notice on Market Definition, although this is primarily for mergers (which are forwards looking, as opposed to backwards, as in Article 102).
The Notice also sets out that the standard approach should be to apply the SSNIP test, also known as the hypothetical monopolist test in the US Horizontal Merger Guidelines 1992.
- Identify the narrowest plausible market
- Assume the market is served by a single supplier
- Ask whether it would be profitable for that supplier to impose a Small but Signification (5-10%) Non-transitory Increase in Price (SSNIP)
- Broaden the hypothetical market until the answer to 3 is yes
Not everyone needs to switch markets for the test, just enough to make it not profitable. To assess this, you can look at consumer trends, point of sale data, historical analysis, and hiring some economists for good measure.
What the market is will depend on the question of who imposes constraints on the market. As we've seen in the pre-SSNIP case of United Brands, the court tends to define the market narrowly (bananas, rather than fruit) so it's easier to say an undertaking is dominant (and then fine them).
Undertakings can be dominant in aftermarkets, even if they aren't in the normal market, but it's not appropriate to define this if people consider the aftermarket costs in the initial purchase. (e.g., factoring in ink prices when purchasing a printer).
It's also worth remembering that the SSNIP test isn't magic. There's only so much data available, and its susceptible to the 'cellophane fallacy', which assumes the initial price is actually competitive. As a result, the courts tend to take a looser, subjective approach than the SSNIP test.
Assessing Dominance
The more market share an undertaking has, the more problems it'll run into. Market share should be interpreted in the context of relevant market conditions. A high market share is usually (but not always) indicative of dominance.
From some cases:
- AstraZeneca - 70-80% is a clear indication of dominance
- AKZO - 50% or above gives rise to the presumption of dominance
- British Airways v Commission - Dominance can be found below 50%
- Don't just think about the absolute market share, but also the relative market share (i.e. the next largest competitor)
While market share is a useful indication, it's important to also look at:
- Barriers to entry
- Conduct
- Countervailing power
- Inequality in bargaining power
- You can't be dominant if you're dealing with other dominant entities, since it constrains your ability to charge a monopoly price
Per Italian Flat Glass
There is nothing in principle, to prevent two or more independent entities from being, on a specific market, united by such economic links that, by virtue of that fact, together they hold a dominant position vis-à-vis the other operators in the same market This mostly applies in oligopolies and transparent markets
Abuse
Dominance itself isn't prohibited, but acting in certain ways is. Every case turns on its own facts. One firm can do something considered normal, but if a dominant firm does exactly the same thing, it can be abuse. There isn't anything inherently wrong in the conduct, just when it gets paired with market dominance.
Per Hoffman-La Rocche
The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.
The Standard for Intervention
The Commission's guidance on Article 102 states:
the Commission will normally only intervene where the conduct concerned has already been or is capable of hampering competition from competitors which are considered to be as efficient as the dominant undertaking
Abuse can be:
- Exclusionary
- Can the dominant firm exclude new firms from entering the market?
- Need to look at equally efficient or innovative firms getting excluded from the marketplace
- Exploitative
- Between the dominant firm and the customer
- Usually by charging too much
- Usually not addressed that much, since new firms can usually come into the marketplace
- Between the dominant firm and the customer
There are also some justifications for actions that may be considered abuse, including legal compulsion and efficiency gains (a bit like 101(3))
Refusal to Deal
Per para 74 of the Commission's 102 guidance, in general, dominant firms aren't obligated to supply their finished product to any other undertaking, especially to direct competitors. But there may be an obligation in some circumstances.
Cases seem to distinguish between supplying existing and new customers, and between licensing IP and supplying physical goods.
The Commission's 102 guidance sets three conditions for intervention
- The refusal relates to a product or service that is objectively necessary to be able to compete on a downstream market;
- The refusal is likely to lead to the elimination of effective competition in the downstream market;
- The refusal is likely to lead to consumer harm
Margin Squeeze
Margin squeezes occur when
- The supplier of the primary good is active on both the upstream and downstream markets; and
- The price at which it sells to third parties on the downstream market is such that they are unable to make a sufficient margin to be viable operators on that market.
These can be identified by considering whether a dominant firm's own retail operation could trade profitably on the basis of the wholesale prices charged to third parties and its own retail prices, or if a hypothetical reasonably efficient competitor in the downstream market could trade profitably on the basis of the wholesale prices charged to third parties and dominant firm's own retail prices.