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)

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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)
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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)

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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)
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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)

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Another helpful categorisation is price and nonprice 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)
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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)

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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)
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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)
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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)
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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)

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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
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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
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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 CP0488-01 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)
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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]
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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)
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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
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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 (2nd Circ. 1979)]
Penalties
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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
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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
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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
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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!
geraldgregory@hotmail.co.uk