Ad-Hoc Expert Group on the Role of Competition Law and Policy in
Promoting Growth and Development
Geneva, 15 July 2008
Abuse of Dominance
by
Frederic Jenny
Professor of Economic
Co-Director, Centre Européen du Droit et de l’Economie, ESSEC
Chair OECD Competition Committee
The views expressed are those of the author and do not necessarily reflect the views of UNCTAD.
Paris, July 1st 2008
Preliminary
Comments most welcome
The “Coming Out” of Abuse of Superior Bargaining Power in
the Antitrust World1
Frederic Jenny
Professor of Economic
Co-Director, Centre Européen du Droit et de l’Economie, ESSEC
Chair OECD Competition Committee
In a recent survey2, the International Competition Network focused on the
controversial topic of abuse of superior bargaining power. Among the thirty-two countries
that participated in the survey, seven had a specific provision in their competition law
prohibiting abuse of superior buying power and two were considering the adoption of such
provisions while the other countries either considered that the provisions of their antitrust law
prohibiting abuse of dominance could be applied against firms having market power on the
buyer’s side and were sufficient to eliminate the unilateral practices which had the object or
the effect of impairing competition or considered that abuses of buying power which did not
have an anticompetitive effect should not be controlled by the competition authority and could
effectively be fought with legal instruments.
Underlying the conviction of economists and competition law enforcers that
competitive markets lead to welfare maximization is the idea that in markets, economic
operators enter into mutually beneficial transactions and that, barring exceptional
circumstances justifying government intervention or regulation (such as, for example, the
existence of externalities), if markets are competitive those mutually beneficial transactions
will lead to an efficient allocation of resources.
In this scenario, consumers and suppliers enter transactions only to the extent that their
satisfaction is enhanced by the transaction (i.e. only if they get a higher level of satisfaction
from the goods or services they acquire than they would get if they either did not buy
anything or bought other goods for the same amount of money).
1
The author wishes to thank Allen Fels and Alberto Heimler for very helpful comments on a previous draft of
this paper.
2
ICN Report on Abuse of Superior Bargaining Position Prepared by the Task Force for Abuse of Superior
Bargaining Position
The clearing prices for transactions plays a central role and send messages to
consumers on how much they want to spend for each good. They also send messages to the
firmq supplying goods and services. If the clearing price on one market is such that a very
large return on investment can be obtained on this market compared to the return on
investment that can be obtained on another market, it means that the value to consumers of the
first good is very high (compared to its cost) whereas it is not so high in the second case. If
the market for the first good is competitive, each supplier, instructed by the market clearing
price, will try to increase its profits to produce more of the good (which will eventually start
bringing down the price of the good in question). Furthermore, firms operating on the second
market, attracted by the profit opportunities on the first market will enter the first market and
intensify competition. As a result, more resources will be invested in the goods which have
the highest value for consumers (per unit of cost).
Competition law deals with some of the cases where markets fail to deliver expected
benefits. The principal case is when a single seller or a combination of sellers acting together
exercise market power and enter into anticompetitive exploitative or exclusionary practices.
From an economic perspective, the exercise of monopsonistic power can also reduce welfare.
Competitive markets can also fail to deliver expected benefits when there are
externalities. In such cases either regulation or exemptions from competition law are usually
used to correct the faulty market mechanism.
But competitive markets can also fail to deliver expected benefits in other cases and, in
particular, when the implicit assumptions of the neo-classical model are not satisfied.
For example, we know that when economic operators are not fully informed, or when
some operators suffer from information asymmetries, competition may not lead to the
expected benefit in terms of efficiency or gains to consumer surplus. In such cases, even if
consumers maximize their utility, they may be unable to reward the best suppliers and punish
underperformers. Then competition between suppliers will not necessarily lead to cost
minimization (at a given level of quality).
The definition of coercion
What is more rarely discussed in economic literature is what happens when some
operators are coerced into entering a transaction (or a type of transaction). This problem is not
completely ignored by competition enforcers who recognize that there are circumstances (for
example when an operator owns an essential facility) when the result of a transaction (for
example the price charged for the use of the essential facility) or the refusal to enter a
transaction (for example a refusal to interconnect) must be monitored to ensure that they do
not distort market competition.
But a more general question is rarely addressed in the literature on competition. What
happens when transactions (or a subset of transactions) on a competitive market are not
mutually beneficial for the parties but one party is coerced into entering the transaction ?
This general question can be subdivided into several sub-questions:
-
Can coercion be defined in an economically meaningful way ?
Can we relate superior bargaining power to coercion ?
-
Is coercion possible in structurally competitive markets ?
If coercion occurs in individual transactions or in a subset of transaction on an
otherwise competitive market, will the market adjustment process send signals
consistent with welfare maximisation ?
Until recently very little research has been devoted either by economists or by lawyers to
the question of defining bargaining power, superior bargaining power and abuses of superior
bargaining power (or abuses of dependency, as it is known in some countries).
To define coercion it is useful to turn to the writings of philosophers. Although
philosophers have been interested in the concept of coercion since ancient times, the concept
began to be redefined starting in the late Sixties through a vigorous debate among political
philosophers which continued during the Seventies and the Eighties.
In an influential essay entitled “Coercion”, published in 19693, Robert Nozick initiated the
reassessment of the concept of coercion by developing an approach of coercion which is very
familiar to business strategists or game theorists, Unlike some of his predecessors, . Nozick
does not equate coercion with an exercise of force by the coercer which forces the coercee to
follow a certain line of action, but with the more subtle exercise by the coercer of conditional
threats which are designed to alter the costs and benefits of the coercee in such a way that the
coercee will voluntarily follow the path desired by the coercer.
For Nozick, a situation of coercion can be described as a situation in which the following
elements are present:
-
A (the coercer) wants to prevent B (the coercee) from engaging in a particular
behavior, (X).
In order to achieve the desired result, A communicates a conditional threat.
The threat is that if B engages in X, then A will inflict on B some harm which will
make engaging in X for B less desirable than not engaging in X.
The threat is credible for B
B refrains from engaging into X
Part of the reason for B refraining from engaging in X is the desire to lessen the
likelihood of the threat being carried out.
One of the difficulties raised by Nozick’s definition of coercion is that although it relies
on the existence of a threat, the structure of a threat is not easily distinguishable from the
structure of a (legitimate) offer or a conditional offer.
For example, let us assume that a pharmaceutical firm conveys the message that if patients
who suffer from a certain disease are not treated with a drug produced by this pharmaceutical
firm they may die. Is this a threat, and therefore can we say that the pharmaceutical firm
coerces the patients into taking the drug, or is it an offer of treatment ?
3
Robert Nozick (1969). “Coercion.” In Philosophy, Science, and Method: Essays in Honor of
Ernest Nagel. Edited by Sidney Morgenbesser, Patrick Suppes, and Morton White. (New
York: St. Martin's Press): pp. 440-472
One must therefore carry the analysis one step further to be able to distinguish between
threats and offers.
One possibility which has been proposed by Nozick is to define the threat as an offer (of
the type if B engages in X , X will suffer from the harm that A will inflict on him but if B
does not engage in X, B will not suffer any harm) where the least preferred alternative for B
would make B worse off than would be the case under “normal” or “natural” circumstances
or “expected course of events”. In what follows we will assume that what would have been
“normal” or “ natural” or “expected” is what would have been likely to happen if the offer had
not been made.
It is interesting to relate this discussion of what a threat is and what coercion is to the
hypotheticals which were chosen by the organizers of a panel on abuse of superior bargaining
power which was held during the 2008 annual ICN conference in Kyoto4. Those hypotheticals
were simplified renditions of cases which had been dealt with by the Japanese competition
authority (JFTC).
In the first hypothetical case, small suppliers were asked by a large retailer to dispatch
their employees to assist the retailer in product display and routine stocktaking, at the
supplier’s cost and without any contract, and/or they were asked to offer monetary
contributions towards the opening of new stores by the retailer.
Although in this case the precise nature of the threat was not spelled out in the
hypotheticals, we can assume that the nature of the offer of the retailer was the following:
R (the retailer) wants S (the suppliers) to contribute financially to the cost of displaying
the products and / or the cost of opening a new store.
R communicates a conditional proposal:
A) If S does not contribute financially, R will cease (partially or completely) to carry S’s
products on its shelves.
B) If S does contribute, R will not cease to carry S’s products
Let us then assume that the supplier prefers not to be delisted and therefore chooses to
make a financial contribution. This means that the least preferred alternative for the supplier is
A. In order to decide whether the supplier(s) have been given a proposal or a threat (and
therefore have been coerced into choosing B), we must ask whether the least preferred
alternative (A) would have made tehm worse off compared to what would have been normal
(or compared to what would have happened had the offer not existed). The answer to this
question is clearly positive. The suppliers would not have expected to be delisted in normal
circumstances and the prospect of being eliminated from the shelves of R makes them worse
off than they would have been in “normal” circumstances.
Note that if the retailers had communicated a different proposal such as the following:
4
A) If S contributes it will be rewarded (through, for example, a better price in the future
or more business)
B) If S does not contribute they will not be rewarded in the future,
this proposal would not have been a threat since the least preferred alternative (let us assume
it is B) would not have made S worse off than they would have been in normal circumstances
(or if the offer had not been made to them). In this latter case, the firms would not have been
coerced (if one follows the definition of coercion proposed by Nozick).
The second hypothetical chosen by the organizers of the ICN panel on Abuse of Superior
Bargaining Power was even more closely aligned with Nozick’s definition of a threat.
In this second hypothetical, small firms (F) having a long term relationship with a bank
(B), heavily relied on this bank’s financial support, would have had difficulty getting financial
support from other banks (presumably because they had not built a credit rating with other
banks) and had purchased land and equipment because they expected financial support from B
were faced with the following proposal:
A) B will lend F the money needed only if F agree to buy from B non investment grade
bonds with a high risk of default;
B) B will handle the loan request from F in an unfavorable manner if F does not buy the
non investment grade bonds.
If we assume that the firms decided to buy the investment grade bonds in order to get the
loan, the least preferred alternative offered to F was B. In order to know whether the bank’s
offer was an offer or a threat, we must ask whether alternative B made the small firms worse
off than they would have been under normal circumstances (or if the bank had not made its
offer). The answer is positive. Under normal circumstances (or if B had not made the offer)
the firms would not have expected B, with which they had a longstanding relationship, to
handle their request in an unfavorable manner.
There have been a number of controversies and suggestions following Nozick’s
pioneering work on coercion. While it is not the purpose of this article to explain these
developments in detail, it would appear useful to mention two of them.
The first development relates to the determination of the conditions under which a threat
is successful (and therefore coercive according to the above definition). In other words, the
question is : When is a threat likely to successfully lead the target to do what the author of the
threat wants the target to do ? Some authors have suggested (see for example Wertheimer5)
that for a threat to be coercive, it is necessary that the coercee have no reasonable choice but
to succumb.
This condition for successful coercion is both familiar to antitrust enforcers and
problematic.
It is familiar, first, to competition authorities in countries whose competition laws include
a specific provision prohibiting abuses of dependency or abuses of superior bargaining power.
5
These countries generally define the situation of the dependent firm as characterized by a
lack of economic alternative and they describe the prohibited abuses of dependency or of
superior bargaining power as practices which are closely related to the concept of coercion as
we have defined it previously.
For example, in Japan the abuse of superior bargaining position refers to “a situation in
which a party makes use of its superior bargaining position relative to another party to take
unjustly, in light of normal business practices, any act specified as follows :
a) Causing the other party to purchase a commodity or service,
b) Causing the other party to provide economic benefits
c) Setting or changing transaction terms in a way disadvantageous to the other party
d) In addition to any act above, imposing a disadvantage on the other party regarding
terms or execution of a transaction;
In France, which has several provisions prohibiting the abuse of dependency, the situation
of dependency is characterized as a situation where the (dependent) firm has no economic
alternative.
The condition for successful coercion is also familiar to countries where competition law
enforcers deal with competition problems related to essential facilities.
In the case of “essential facilities” the rationale for antitrust enforcers or regulators’
intervention is precisely that the potential entrants are powerless vis-à-vis the owner of the
essential facility since they do not have any other choice besides access to the essential
facility in order to enter the market. This complete lack of alternative exposes them to the risk
of either being excluded from the market altogether, if the owner of the essential facility
refuses to give them access, or of being the victims of extortionist demands.
But, in the case of an essential facility, the lack of alternative for the potential entrants is
established by reference to the fact that there is and can be only one facility to which they
need to be connected. Thus lack of access and/or the lack of access on “fair terms” for the
entrants will mean that the owner of the essential facility will have (or rather keep) a
monopoly on the market on which the entrants are trying to enter.
The question arises of whether it is only when they are faced with a problem of access to a
(unique) essential facility that operators lack reasonable choice or alternative and therefore
can be subject to coercion.
If there are other situations where coercion is possible, as is suggested by countries which
have a specific provision against abuse of dependency or abuse of superior bargaining power,
the question is then to define what standard should be applied to establish that the coercee has
no reasonable choice but to bow to the pressure of the coercer. Is it sufficient that the coercee
believed that it did not have any alternative ? Is the lack of alternative defined by an objective
fact such as that the coercee would be worse off if it did not accept the least preferred
alternative offered by the threat maker or does one have to establish that irreparable harm
would have come to him ?
An answer suggested by the case law of countries which have provisions prohibiting
abuse of superior bargaining power or abuse of dependency is that it is not sufficient to
consider the coercee’s lack of alternative at the time when he is faced with the coercor’s
threat. Indeed, it is possible that the coercee deliberately chose to put himself at the mercy of
the coercor; in which case one can consider that, ex ante, he had alternatives. Thus it seems
necessary to distinguish between “objective” dependency and what is called “subjective”
dependency or between “ex ante” dependency and “ex post” dependency. Only in cases of
“objective” or “ex ante” dependency do the alternatives proposed by the firm having
superior bargaining power have the nature of a coercive threat.
A more complex case occurs when the coercee should have known when originally
entering into a contract with the coercor that the latter was likely to exercise threats in the
course of their contractual relationship. Such a case could happen if, for example, the coercor
had a well documented history of threatening firms with which it had entered into contractual
agreements. In such an instance, one could argue that by choosing to ignore the reputation of
the coercor the coercee deliberatedly exposed himself to the possibility of being faced with a
threat or, at the very least, did not exercise sufficient caution to avoid the threat.
Whatever the standard used to define a coercive threat, one must ask what are the possible
consequences of the exercise of coercion in order to establish whether coercion should be an
antitrust concern.
Does coercion raise efficiency concerns ?
If the consequences of coercion are purely distributional (in the sense that the coercer is
able to increase his gain from the transaction to the detriment of the coercee), one could argue
that coercion (at least when it is exercised in the context of the relationship between two
vertically related firms) should not be a concern for antitrust authorities since the generally
accepted goal of antitrust is to protect competition rather than competitors.
In the first hypothetical presented earlier, coercion is exercised by the downstream firm
(the retailer) against one or a set of upstream firms (the suppliers). In such a case, the costs of
the retailer are lower than they would have otherwise been since through coercion the retailer
will have been able to shift some of the burden of costs to the suppliers. In such a case, the
coercer-retailer will appear to be more competitive than he would have been if he had not
exercised coercion. Competition at the retail level will be intensified and consumer surplus is
likely to increase.
In the short run, at least, and if both the upward and the downward levels are competitive,
it is difficult to see how coercion exercised by the retailer against suppliers (or vertically
related firms) could reduce consumer welfare.
However, it is not so obvious that the practice of coercion previously described will have
no efficiency effect if we consider the long run and the possibility that the downward firms
are oligopolists rather than pure and perfect competitors, that they are not easily substitutable
as economic partners for the upstream firms and that the upstream firms are competitors
easily substitutable as economic partners for the downstream firms.
For example a (small) supplier cannot easily decide that he will stop dealing with a retailer
with a large market share if the retailer engages in coercive behavior toward him because final
consumers who buy in this retailer’s outlets are not necessarily going to shop elsewhere if the
product of the small supplier is not available in the large retailer’s outlets. From that
standpoint, each small supplier considers that its products need to be on the shelves of as
many retailers as possible and that those retailers are complementary rather than substitutable
in order to make their products available to final consumers.
Thus the supplier may fear that he will lose most of his business with the coercive retailer
if the latter refuse to carry his products, which is why he gives in to the threat.
It is possible to argue that in such a case the retailer would not make the threat in the first
place because even if a small number of its consumers (who particularly liked the products of
the discontinued supplier) decided to shop elsewhere, each of these consumers would take
away from the retailer the total amount of business that they did with him and not only that
related to the products of the discontinued supplier. Thus, the argument goes, even given our
assumptions, small suppliers have some bargaining power vis-à-vis large scale retailers.
Although there may be exceptional cases in which a retailer’s refusal to carry the products
of a small supplier would cause great harm to the retailer, one has to keep in mind that there is
no empirical basis for believing that in most cases there will be enough consumers likely to
switch retailers to ensure that retailers will be dissuaded from making and carrying out threats
of refusing to carry the product of suppliers who resist their (unjustified) demands. There are
numerous documented cases in several countries of large retailers delisting well-known
brands of large suppliers without experiencing significant harm. This suggests that they do not
fear massive loss of clientele even when they decide to delist large suppliers.
When the risk is limited for the retailer, he has superior bargaining power vis-à-vis each of
his suppliers and is able to coerce them into accepting transactions which they would not
accept under other circumstances. Thus, if coercion is not prohibited it may well become a
generalized practice.
This situation could have an efficiency effect in several ways.
Even though it is unlikely to occur frequently, we have to consider the possibility that the
coercee has market power. For example, a small supplier with no close competitor is faced
with the following alternative by a large retailer : either the supplier meets some unjustified
demand (such as, for example, an additional discount) or the retailer will refuse to carry the
supplier’s products. In such a case, the threat forces the supplier to lower his price. Thus,
when the coercee has market power, coercive threats may have a consumer welfare increasing
effect.
However, coercive threats may also have negative effects on efficiency
First, as mentioned earlier, through coercion retailers can shift over to suppliers the burden
of some functions that would otherwise be theirs as retailers. They have an interest in doing
so, irrespective of whether or not the suppliers are more or less efficient at providing those
functions than they are. Thus burden shifting may take place, even if it means a loss of
productive efficiency.
Second, and more importantly, when faced with the prospect that retailers will capture
their efficiency gains through additional coercive threats and demands, upstream firms will be
discouraged from seeking productivity gains, from investing or even from staying in the
industry. The only firms that will consider staying in the industry at the upstream level are
firms which for some reason (the strength of their brand , for example) have a countervailing
bargaining power. New entrants or small firms will usually not have such a countervailing
bargaining power in the initial stages of their entry on a market and will therefore be at a
disadvantage. As a result, bargaining power on the retailer side is likely to create or increase
barriers to entry in the upstream industry, and to lead to an increase in concentration and a
decrease in consumer choice and competition. There are allegations in Europe that the
increase in concentration in the European food industry is partly a response to concentration
(and buyer power) at the retail level.
It has been argued that powerful retailers are unlikely to engage in coercion since by doing
so they would promote concentration among their suppliers and thereby undermine their own
interests. But they will do so because of the externality involved. In an oligopolistic situation
in the retail sector; a large scale retail chain cannot be sure that its competitors will not engage
in coercive practices which might ultimately lead to more concentration of suppliers,
irrespective of whether or not it engages in such practices itself. Yet if the others do not
engage in such practices, each oligopolist retailer has an incentive to engage in such practices
since it will gain competitive advantage by shifting some costs to suppliers).
In this scenario, even if we assume that consumers may benefit in the short run (if, for
example, the additional advantages secured through coercion are passed on to them), they will
ultimately bear the cost of the increase in concentration (and therefore the decrease in the
intensity of competition) between the suppliers in the medium to long run.
This theory of harm is at the heart of the debate in France on the abuse of dependence
issue.
Indeed it was because coercive practices used by the five large-scale retail chains (which
together account for nearly 60% of all retail sales in France) were thought to be responsible
both for the elimination of a number of small foodstuff suppliers and for the concentration of
large suppliers that there was support for the adoption in 1986 of specific provisions to curb
abuses of buying power and for their subsequent strengthening. Additionally, it was argued
that further advantages secured by large scale retailers using coercive practices (unavailable to
small traditional retailers because they did not have superior bargaining power) artificially
increased the competitiveness of the large-scale retailers and made it even more difficult for
small traditional retailers to compete with them. The rate of small retailers going out of
business was thus thought not to reflect solely the superior efficiency of the large-scale
distributors.
If we now think about the second hypothetical mentioned above, even if many banks are
competing with one other for new customers, it may be difficult for a company which has
been dealing with one of those banks to shift to another bank if faced with a coercive threat of
the type described earlier.
It is generally acknowledged that, particularly for comparatively small customers,
switching costs are significant in the banking sector. One reason may be that the willingness
of a bank to lend money to a corporate client and the terms on which it will lend depend on
the reputation of the corporate client for credit worthiness, which itself depends on the
historical relationship of the client with the bank.
Switching banks may thus be difficult for the small corporate client. In such a case, small
corporate clients, faced with coercive threats from their banks, may be at a disadvantage
compared to larger competitors which may either have opened accounts in several banks
(which should make switching easier) or are important enough customers to the bank not to be
faced with coercion.
However, the crucial difference with the previous case is that bank clients may come from
very different sectors and therefore are not necessarily competing with one other. Let us
assume, for the sake of the argument, that bank A has many different (small) corporate clients
but that they are in different sectors. If A engages in a coercive practice with its small clients,
it is likely that the impact on product and service markets’ competition will be limited since
only one firm will be affected on each market. In this case, the practice will hurt competitors
but not necessarily competition.
The situation could be different, however, if we assume that all banks engage in such
practices. In this case, it could be that, as in the previous case, small competitors on each
market facing extra costs, due to the coercive practices of their banks, go bankrupt and leave
the industry and that concentration on those product and service markets (and barriers to
entry) increase.
Whether the fact that small competitors are faced with higher costs for capital (because of
coercion by their banks) than their larger competitors will lead to a significant decrease in
competition will depend on the structure of the product or service markets on which they
operate and on whether the small firms subjected to coercion are marginal competitors or, on
the contrary, play an important role in the competitive process.
Overall, coercive practices, which may be defined relatively easily, which always have a
distributional impact and may or may not have an effect on competition, make entry on the
market where the coerced firm operates more costly. If coercive practices have a negative
effect on competition and efficiency, it is likely to be a long-term effect rather than a shortterm effect. It is possible that even if they have a negative effect on competition and
efficiency, in the long run coercive practices may have a positive effect on consumer surplus
in the short run (if the benefits obtained through coercion are passed on to consumers by the
coercers). It is likely that the occurrence of coercive threats will be greater when the coercers
are in an oligopolistic market.
Should coercion be dealt with in the context of competition law ?
Given the fact that coercive practices do not necessarily have an effect on competition and
efficiency, that they may have contradictory short run and long run effects and that
distributional effects are often difficult to disentangle from efficiency effects, it comes as no
surprise that there are sharp differences in approach among competition authorities
concerning how to treat such practices.
An example of such sharp differences concerning the proper treatment of abuses of
superior bargaining power is given by comparing a statement on the matter from the US
antitrust authorities and a statement from the Japanese Fair Trade Commission in the ICN
report.
The United States, we are told, noted that : “the concept of an abuse of a superior
bargaining position is very vague, and that any regulation of such ‘abuse’ is likely to
introduce a great deal of uncertainty into the market regarding how best and most efficiently
to negotiate contracts with smaller counterparts. Substantial uncertainty is inherent both in
determining when a party is in a ‘superior bargaining position’ (particularly where there is no
market power requirement), and in assessing when particular contract terms would be deemed
to be ‘abusive.’ These uncertainties are likely to raise the costs of contracting, to the
detriment of parties and ultimately consumers.”
Japan, on the other hand, when explaining in concrete terms the underlying rationales for
specific provisions against “abuse of superior bargaining position,” stated that : “[t]he
underlying rationales for the regulation of ‘abuse of superior bargaining position’ as ‘Unfair
Trade Practices’ derive from the fact that ‘abuse of superior bargaining position’ infringes the
foundation of the free competition where the parties to transactions determine transaction
terms or conditions based on their free and independent business judgment. It is normal that
there exists a difference in bargaining position between the parties to transactions and thus, as
a reflection of the situation, it would not raise competition policy issues even if transaction
terms or conditions are set disadvantageously to one party over the other. However, in cases
where a party in a superior bargaining position over the other party, by making use of that
position, restrains the independent business activities of the other party and forces the other
party to accept disadvantages that it would not if the competition worked properly, its conduct
prevents the other party from competing freely and independently. The other party on whom
the disadvantages are imposed would be in the disadvantageous position in terms of condition
of competition with its competitors. On the other hand, the party imposing disadvantage on
the other party would be in the advantageous position in terms of condition of competition
through the different means from price and quality.” These are the reasons given to explain
why “abuse of superior bargaining position” needs to be regulated in Japan.
Three arguments are often invoked against the introduction of specific provisions against
abuse of superior bargaining power in antitrust laws. The concept of superior bargaining
power is vague; the alleged “abuses” of superior bargaining power in most cases do not raise
competition issues; civil courts are better equipped to deal with contractual disputes than
competition authorities.
The first argument seems to be the weakest. Indeed as we saw earlier the ability to coerce
can be defined fairly precisely. There is room for some discussion as to what standard should
be applied to assess the existence of coercion (should it be whether the least preferred
alternative is worse than what would have been the situation of the alleged victim in
“normal” circumstances or “if the proposal had not been made” or “if competition” had
prevailed? Should one consider only “ex ante” dependency ? What to do when the coercee
should have expected to be confronted with a coercive threat ? ). However, as the recent
discussion at the EU level on abuse of dominance has clearly shown, even when rigorous
analysis is applied, economists can differ on the appropriate standard to assess a particular
behavior. The assessment of economic coercion does not seem to present insuperable
problems.
The second argument (alleged abuses of superior bargaining power do not raise
competition issues in many cases) requires closer scrutiny. First, the fact that a practice does
not always restrict competition does not mean that it should not part of competition law. It is
well known that vertical restrictive agreements may in certain circumstances be
procompetitive rather than anticompetitive and the same applies to low prices by dominant
firms. Yet they typically fall within the purview of antitrust or competition laws. However,
the ambiguous effect of such practices on market competition means that these practices
should be examined under a rule of reason approach rather than being prohibited per se.
However there are some differences worth noting between vertical restraints and low
prices by a firm having a dominant position on the one hand and coercive practices on the
other hand.
Vertical restrictive agreements typically link an upstream firm with a set of downstream
firms (or vice versa) and low prices by dominant firms is a practice undertaken by firms
having market power. In both cases the presumption that such practices may have an effect on
the market is reasonable, even if the precise nature of this effect is subject to close scrutiny in
each case.
Coercion, or abuse of superior bargaining position, because it is defined purely in terms of
the ability of a firm to inflict harm on another firm seems to potentially cover a very large
number of practices, each of which is unlikely to affect market competition or efficiency,
even if one recognizes that the cumulative effect of abuses of superior bargaining power may
be to significantly lower efficiency.
Thus the argument against the inclusion of provisions against abuse of superior bargaining
power in competition laws does not rest on the fact that such abuses have no effect on
competition and efficiency but on the fact that they do not reach the threshold which would
warrant intervention by competition authorities in each case of abuse.
French legislation has tried to solve this problem by including in its 1986 competition law
a provision prohibiting abuse of dependency, only when it has the object or could have the
effect of lessening or distorting competition on the market. In other words, coercive practices
undertaken by firms which did not have a dominant position on the market (but held other
firms in their dependence) could be prohibited if it could be established they had the object or
the potential effect of lessening competition on the market. It is interesting to note that the
French Competition Council never found that an abuse of superior bargaining position had an
effect on the market, which prompted French legislators a few years later ( in 2001) to include
in the commercial code another provision which prohibited abuse of bargaining power
without having to prove an effect on the market.
The Japanese antitrust authorities take a different approach, as seen previously. In Japan,
abuse of superior bargaining power is prohibited not because each abuse has a demonstrable
effect on the market but because such abuses create a negative externality by undermining the
foundations of the competitive market system.
The Japanese position also goes beyond what has just been said because it not only
justifies the existence of provisions against abuse of superior bargaining position but also
states that such provisions should come within the purview of competition law, even if one
admits that in many cases abuses of superior bargaining positions will not have a direct and
significant effect on a market.
One of the possible difficulties with the Japanese defence of the introduction of a
prohibition against abuse of superior bargaining position in competition law is that there are a
number of other elements which may undermine the foundation of the free competition
system as a an organizing principle of a decentralized economy, such as, for example, the lack
of confidence of economic agents in contract law or in property law, and that if one follows
the logic of the Japanese argument on abuses of superior bargaining power, competition
authorities should also deal with those issues.
Another argument often invoked against the inclusion of provisions against abuses of
superior bargaining position in competition laws states that even if it is true that such abuses
may undermine the foundations of a competitive market system, civil courts are better
equipped to deal with contractual disputes than competition authorities.
The relevance of this argument must be assessed with consideration for local conditions
and the nature of coercion.
It may well be that in some countries, for example in developed countries, where the civil
court system is reasonably efficient, firms that are victims of coercive practices can
successfully argue that they were coerced into accepting contractual obligations that they
would not have accepted had they been in a position to exercise their free will and that they
should either be released from their commitments or fairly compensated for the injury they
have suffered.
Yet in other countries, particularly in some developing countries, the judicial system may
not be in a position to handle such claims effectively for a variety of reasons, such as the fact
that it is underfunded, overworked, corrupt, lacks the necessary expertise, etc. Thus, one
cannot presume that in all cases the judicial system will be more effective than competition
authorities in discouraging the abuse of superior bargaining power.
Even in countries where civil courts are well-equipped to deal with contractual disputes, it
is not obvious that abuse of superior bargaining power will be discouraged. Victims may be
reluctant to bring cases to courts precisely because they are in an inferior bargaining position
and may fear retaliation if they lodge a claim against the firm on which they are dependent.
Thus relying entirely on private right of actions in countries with well-developed civil law
systems may not be sufficient enough to deter abuses of superior bargaining power to protect
the market mechanism against the externality generated by such practices. There may be a
need for a public enforcement as well and the competition authority may be the appropriate”
institution for undertaking this task.
Abuse of superior bargaining power and developing countries.
In order to assess the relevance of the debate on abuse of superior bargaining power
for developing countries it is useful to consider three issues. Is it likely that the frequency of
such abuses is higher in developing countries than in other more developed countries, ceteris
paribus ? Are there considerations specific to developing countries which argue in favor of the
idea that negative externalities due to abuses of superior bargaining power are more or less
severe than in more developed economies ? What is the best solution for handling the
problems raised by abuse of superior bargaining powers in developing countries ?
It is useful to start by noting that in many developing countries there seems to be a
particular concern about problems associated with transactions resulting in the “exploitation”
of parties (considered rightly or wrongly as economically weak and powerless) by large
and/or powerful economic parties.
Illustrative of this concern is the following 2001 press clipping 6 : “Fish processors and
exporters in the Lake Victoria region are being heavily criticised by other stakeholders for
allegedly exploiting fishermen. Fishermen, government officials and local government chiefs
accuse the processors of forming cartels to control the industry. According to Szhabbir
Ahmed Sharkeel, the mayor of the lakeside town of Kisumu, the fish processors are making a
fortune and investing nothing back to improve the welfare of the people living around the
lake. These processors buy fish at Ksh 80 a kilo of fish and sell it at over Ksh 200 (about
US$25 ) abroad » Sharkeel said”. Similar stories are often reported to describe the
relationship between cotton farmers or tobacco growers and wholesalers throughout Africa.
Such stories do not actually indicate that any form of coercion is exercised on
fishermen, cotton farmers or tobacco growers. They could just indicate widespread
dissatisfaction with the distribution of profits between fishermen and farmers, on the one
hand, and middlemen, on the other. They are therefore insufficient to establish the existence
of widespread abuses of superior bargaining power (at least as we have defined it previously)
in the African agricultural sector.
Yet they point to the fact that in the agricultural sector in developing countries, it is
frequently the case that uneducated farmers or fishermen, with few economic opportunities to
switch to other crops or other activities and having imperfect knowledge of the value of their
crop and limited mobility, have to enter into transactions with considerably more
sophisticated downstream domestic operators, having greater ability to assess their economic
options and better access to infrastructure. In situations of that kind, it is more likely that
coercion can occur than if the negotiating powers of economic actors was more evenly
distributed.
The imbalance in bargaining power between local farmers and middlemen is of course
all the more obvious when developing countries’ crops are exported on world markets. As O.
Farfan notes7 : “In the case of most agriculture-based commodity chains, governance
structures have shaped into highly asymmetrical “buyer-driven” forms, where downstream
players such as distributors and retailers located in developed markets have increased their
bargaining power vis-à-vis producers. As a result, CDEs have been systematically reducing
their share of value added generated within the chain and becoming more dependant on
external lead players for accessing consuming markets.”
Furthermore, in many developing countries, the possibility of abuse of superior
bargaining power is enhanced by weaknesses in legal systems. The enforcement of laws such
as property laws, contract laws or bankruptcy laws is often poor due to understaffed courts
and, in certain cases, under-qualified personnel, leading to high costs for judicial proceedings,
long delays or poor quality decisions.
6
Panafrican News Agency, June 26 2001
Oscar H. Farfan Understanding and Escaping Commodity-Dependency: A Global Value Chain Perspective,
Prepared for the Investment Climate Unit International Finance Corporation, The World Bank Group, October
2005
7
In such situations, it may very well be that civil law proceedings do not constitute an
effective relief against abuses of superior bargaining power and do not allow victims of such
practices to be compensated for the harm they have incurred. The confidence of the general
public in the value of an economic system based on the freedom of economic operators to
enter into mutually beneficial transactions in a competitive environment to achieve economic
development may then be easily undermined.
The question of how the issue of abuse of bargaining power in developing countries
should be dealt with is thus quite complex. On the one hand, if competition authorities are
entrusted with the enforcement of a provision against such practices, there is a real risk that
they will be dragged into conflicts over the fairness of transactions which go beyond concern
with market efficiency. On the other hand, if there is no provision against abuse of superior
bargaining power in their competition law, there is a risk that the confidence of economic
operators in market mechanisms will be limited and that as a result advocacy of competition
by the competition authority will be misunderstood (or considered irrelevant) and will not
bring about the expected benefits in terms of economic development.
Conclusion
Even though competition authorities in developed countries have traditionally
considered that they should not deal with problems of “ abuse of dependency” or “abuse of
superior bargaining power” because such practices had a distributional effect and should,
therefore, be handled through civil courts, one must acknowledge that coercive practices may
also have at least indirect efficiency effects, both positive in the short run and negative in the
longer run, and that in certain circumstances civil courts may not be in the best position to
handle claims of coercive practices.
Unlike horizontal restraints or abuses of dominance, which happen in situations in
which the firms engaging in the practice have some individual or collective market power,
coercion can be undertaken by firms which do not have any market power.
But, if the direct effect of individual instances of coercion on efficiency may be very
weak or even insignificant, it is also true that vertical restrictive practices do not always have
an impact on competition. Yet competition authorities do not refuse to deal with vertical
restrictive practices; they use a threshold to distinguish cases which may have an impact on
competition from benign cases.
In the case of coercive practices, the problem of defining what should be the threshold
of intervention (if competition authorities are to intervene) is more complex than in the case
of vertical restraints because it is unlikely that coercive practices ever have a significant
direct effect on competition or efficiency.
There does not seem to be one obvious solution to this problem. On the one hand,
entrusting competition authorities with the task of dealing with a myriad of practices which in
themselves have a negligible effect on competition or efficiency may not be conducive to a
good allocation of their resources. On the other hand, counting on the fact that civil courts are
in the best position to deal with coercive practices may be illusory, among other reasons
because, even if the legal system involved is reasonably efficient, the victims of such
practices are unlikely to complain precisely because they are dependent on the firms inflicting
harm on them. Finally, disregarding the problem when such practices are sufficiently
frequent in a sector may, as was mentioned earlier, have a detrimental effect on efficiency
and competition at the industry level or even undermine confidence in market mechanisms.
The only sensible response to questions raised by abuses of superior bargaining power
seems to be that it is up to public authorities in each country, depending on their perception of
the extent of such practices and the importance of externalities imposed by coercive practices
and on their knowledge of the characteristics of the legal system of their country, to decide
whether or not public enforcement against such practices is warranted and whether the
competition authority should deal with those practices.
The discussion which took place in Kyoto during the ICN meeting on this topic clearly
revealed that in Japan, Korea and Indonesia (to mention only a few of the countries which
actively participated in the discussion) there is a sense that coercive practices have far
reaching effects on market mechanisms and that competition authorities have a duty to
sanction them.
The discussion initiated in Kyoto on abuse of superior bargaining power was not
meant to convince countries which have not seen fit to introduce a prohibition of such
practices in their competition law that they should.
However, it was meant to allow competition authorities of countries which either have
such a provision in their competition law or are considering adopting one to state their case
and to make other authorities understand that it was not because of a misguided desire to
intervene in distributional issues or because they ignored the basic principles of market
competition that they were concerned with abuse of superior bargaining power but because
they feared that such practices could at least indirectly undermine the market mechanism.
This “coming out” of the issue of abuse of superior bargaining power reminds us of
the fact that the scope and the design of competition laws remain, and rightly so, very much
dependent on the legal, economic and cultural environment of each country, even if the
primary goal of competition law is the same worldwide and if the best practices established in
international fora can, in areas of common interest, usefully contribute to convergence in a
rapidly globalizing world.
Finally, as the previous discussion has made clear, if the competition authority is
entrusted with the enforcement of provisions against superior bargaining power, it should
examine alleged cases of abuses of superior bargaining power or abuses of dependency with
great caution. From that standpoint, it is useful to keep in mind that:
-
Only situations of “ objective” or “ex ante” dependency should be considered;
Only situations where the alleged victims are unexpectedly faced with the prospect of
suffering harm if they do not comply with a demand can qualify as coercive threats;
Given the limited resources available to competition authorities, they should limit
themselves to investigating cases of coercive threats which are sufficiently important
or frequent in a particular sector to have a strong negative externality;
-
Where the coercees
benefits.
have market power, coercive threats may have efficiency