Abusive Market Behaviour [EU]

Definition of Abuse

Article 102 of the EU Treaty sets out indicative examples of abuse of a dominant position.  They include;

• directly or indirectly, imposing unfair purchase or selling prices or other unfair trading conditions;
• limiting production, markets or technical development, to the prejudice of consumers;
• applying dissimilar conditions to equivalent transactions with other trading parties thereby placing them at a competitive disadvantage;
• making the conclusion of contracts subject to acceptance by the other party of supplementary obligations, which by their nature or according to commercial usage have no connection with the subject of such contracts.

The European Courts and the Commission have taken a wide view of what might constitute an abuse. There is an objective test.  Nonetheless, intent may be relevant in terms of sanctions. The abuse need not follow from the dominance.

In broad terms, abuses of dominant position tend to be exploitative or exclusionary. The first type of abuse typically involves charging a higher price level or imposing less favourable terms and conditions than would apply, if there was free competition. The second category typically involves the misuse of market strength.

Exploitation of Monopoly

The abuse may involve the exploitation of a monopoly.  This will classically involve maximising profit by reducing output so that the price is above the level which would prevail in a competitive market. The dominant player will commonly be a price maker, rather than a price taker.  Economic theory shows that in such cases, there will commonly be a lack of efficiency in the operation of the market, whereby the dominant player maximises its profits (extracting a supernormal profit  / economic rent) to the detriment of consumers.

Pricing theory may be difficult to apply in practice. It may be difficult to ascertain what constitutes a reasonable or economic profit in the circumstances. A significant amount of information and evidence may be necessary in order to prove excessive pricing.  It can be difficult to distinguish between normal profit and economic rent. Outside of inflationary times, states have been reluctant to set prices and do not wish to use competition law to set prices through the back door.

The imposition of unfair terms and conditions may constitute an abuse of a dominant position.  Where the conditions are not necessary for the attainment of the objective, they may be shown to constitute an abuse.

The monopolist may produce further inefficiencies, by being insulated from the requirement to modernise and innovate.  The difficulty in showing whether such inaction or underinvestment is excessive, unfair and abusive, has made the authorities reluctant to allege this type of abuse.

Exclusionary Abuse

Most abuses encountered in practice, are exclusionary.  They classically involve the use of market power to or exclude market entrants or to discourage them. Competition law may require a dominant undertaking not to exclude actual and potential competitors.

The Courts have emphasised the effect rather than the intention of the dominant undertaking’s actions.  The actions need not necessarily benefit the undertaking concerned. They may constitute an abuse where they are likely to affect the structure of the market in circumstances where competition is already weakened, where they involve methods different from those applicable under normal competition or where they have the effect of hindering the maintenance and development of the market.  However, it may be difficult to identify practices and actions which diverge from those which apply under normal competition.

The EU Commission has required Microsoft to provide interoperability in order to allow competitors to develop products, which competes with its operating systems.  The absence of interoperability could foreclose secondary markets, beyond the market for the operating system itself, for secondary systems, software and products

The EU Commission has published guidance on its enforcement priorities, which identifies what it sees as the worst types of abuse. The guidance is a statement of practice and does not have the force of law. It recommends that the Commission should not challenge behaviour, which is objectively necessary or where the conduct produces efficiencies  which outweigh the  anticompetitive effects on consumers

The guidance has identified exclusionary conduct by dominant undertakings, which might foreclose competitors, as requiring particular attention.  This type of conduct is seen to be particularly adverse to consumers’ interests.  Anti-competitive foreclosure is where effective access for actual or potential competitors to supplies or markets is hampered or eliminated.  The Commission will consider the position of the dominant undertaking, the relevant market, the position of competitors, customers and suppliers, the extent of the alleged conduct and the evidence of foreclosure and exclusionary behaviour.

Export bans are generally considered abusive.  They are particularly objectionable in that they tend to prevent trade within the European Union.

Pricing

Pricing practices will radiate through the entire chain of distribution.  Pricing may be excessive or may involve predatory discounting.  Rebates and discounts may be abuses in the particular context.  A critical issue is whether there is an intention to foreclose actual or potential competition in the medium to long-term.   There may be alternative evidence of predatory intent and strategy.

Rebates and discounts may be given in order to attain objectives which are abusive.  Prices may be reduced in the short-run, but at the price of reducing longer effective competition, to the detriment of consumers.  The classic instance is under-pricing, which seeks to drive a competitor out of business or seeks to prevent a prospective competitor from becoming established.

Price discrimination by way of discounts and rebates can be an abuse.  The consumer may be dissuaded from taking supplies from a competitor.  This creates a significant and increased barrier to entry for competitors.   Loyalty rebates may be given, based on the percentage of total requirements taken from the supplier. Although this may be useful and non-objectionable in many cases,  in some cases a dominant undertaking can use them to squeeze out other market participants.

Obligations to inform suppliers about competitor\’s pricing, may, in context be abusive in itself. Heavy discounting in itself may be abusive, where it dissuades dealers and others from dealing with competitors for fear of significant economic loss. The practice may be aggravated where the discounts are discretionary, unpredictable and applied selectively on a case-by-case basis.

Discounts

The EU Commission, supported by the ECJ has taken the view that targeted discounts by a dominant undertaking may be an abuse of a dominant position, where they are aimed at tying customers closely to the dominant company.  The more sensitive the level of bonus to the change in sales levels, the more potentially objectionable it may be.

It does not follow that all discounts are necessarily abusive.  They may be objectively justifiable, based on savings made by the supplier.  Frequently, a producer or distributor may reduce costs by a making specific volume of sales.  However, they should be objectively fixed and open to all customers.  Where they are discriminatory and without objective justification, they are more likely to be found abusive and predatory. As in other aspects of completion law, an economic analysis of the position is usually required.  It may be difficult to show the position, given the complexity of the market. in a record.

A record fine of over €1 billion was imposed on Intel by the EU Commission by reason of its discounting practices, which had anticompetitive effects on the market.  The discounting was non-transparent and discretionary.  A vendor could be required to sell at a loss for a long time before it would become profitable.

The EU guidance considers whether the discount impedes competition relative to a hypothetical equally efficient competitor. The Commission will consider whether this hypothetical competitor could compete by becoming established in the market if the dominant undertaking is engaging in below-cost pricing under the scheme.  If the dominant undertaker\’s sale price, even with a discount is above cost, it is likely to be the case that an efficient competitor could enter the market and compete, so that there is no abuse of a dominant position.

The Commission looks average, avoidable and long-run incremental costs.  The latter includes all variable costs and reference costs during a fixed period.   If the undertaking is selling below this level, they are selling at a loss, as all fixed costs are not being recovered.  An equivalent competitor could not complete without suffering a loss.

The long-run average incremental cost includes product-specific fixed costs.  It may be more appropriate where the variable costs are lower, but where there were important fixed costs referable to the product, which should be recovered over its lifetime.  This may occur where there is  significant R&D or IT intellectual property components in the product\’s cost elements.

Predatory Pricing

Predatory pricing will typically involve selective reduction of prices, intended to damage a competitor.  The reduction will typically be to below-cost levels.  Using its economic strength, the dominant undertaking may be able to take losses while driving the weaker competitor out of the market.

The Court of Justice has indicated that pricing might be considered predatory, if it is below the average variable costs, thereby not covering fixed costs.  Between average variable cost and average total cost, pricing will not be presumed predatory, but it may be shown to be such, where it is part of an intentional course of conduct intended to drive out the competition.

In practice, it may be difficult to produce evidence as to the elements of costs for the above purposes and evidence of the intentions of the dominant undertaking.  It might be argued that all undertakings seek to eliminate their competitors and that in many contexts, this may constitute effective competition The circumstances will need to be examined in each case.